<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BB&T CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
NORTH CAROLINA 6060 56-0939887
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(336) 733-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JERONE C. HERRING, ESQ.
200 WEST SECOND STREET, 3RD FLOOR
WINSTON-SALEM, NORTH CAROLINA 27101
(336) 733-2180
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF
ALL COMMUNICATIONS TO:
DOUGLAS A. MAYS CHARLES A. SWEET
WOMBLE CARLYLE SANDRIDGE & RICE, PLLC WILLIAMS & CONNOLLY
3300 ONE FIRST UNION CENTER 725 TWELFTH STREET, N.W.
CHARLOTTE, NORTH CAROLINA 28202-6025 WASHINGTON, D.C. 20005
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$5.00 per share(1)..... 2,815,558 (2) $172,070,188(3) $16,745.41(4)
</TABLE>
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- -------------------------------------------------------------------------------
(1) Each share of the registrant's common stock includes one preferred share
purchase right.
(2) Not applicable.
(3) Computed in accordance with Rule 457(f) based on the average of the high
($23.00) and low ($22.75) sales price of the common stock of Franklin
Bancorporation, Inc. on May 18, 1998 as reported on The Nasdaq SmallCap
Market.
(4) Pursuant to Rule 457(b), the registration fee has been reduced by an
amount equal to the fee of $34,015.30 paid upon the filing with the
Commission of the preliminary proxy materials of Franklin Bancorporation,
Inc. on April 10, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
LOGO
FRANKLIN BANCORPORATION
1722 I (EYE) STREET, N.W., WASHINGTON, DC 20006
May 19, 1998
Dear Shareholders:
You are cordially invited to attend a special meeting of shareholders (the
"Meeting") of Franklin Bancorporation, Inc. ("Franklin"), to be held at
Franklin's principal executive offices, located at 1722 I (Eye) Street, N.W.,
Washington, D.C. 20006, on Wednesday, June 24, 1998 at 4:00 p.m., Eastern Time.
At the Meeting, you will be asked to consider and vote on the Agreement and
Plan of Reorganization, dated as of December 16, 1997, as amended and restated
(the "Reorganization Agreement"), between Franklin and BB&T Corporation, a
North Carolina corporation ("BB&T"), and a related Plan of Merger (the "Plan of
Merger"). Pursuant to the Reorganization Agreement and the Plan of Merger,
Franklin will merge with and into BB&T (the "Merger"), and each share of common
stock of Franklin, par value $0.10 per share ("Franklin Common Stock"), (other
than shares held by dissenting shareholders) will be converted into the right
to receive between 0.35 and 0.3743 shares of common stock of BB&T, par value
$5.00 per share ("BB&T Common Stock"), and cash in lieu of any fractional
share. BB&T will be the surviving corporation in the Merger, and shareholders
of Franklin (other than dissenting shareholders) will become shareholders of
BB&T. It is a condition to the Merger that the exchange of BB&T Common Stock
solely for shares of Franklin Common Stock will be tax free to the shareholders
of Franklin for federal income tax purposes.
The Merger has been approved by your Board of Directors and is recommended by
the Board to you for approval. The Board believes that the Merger is in the
best interests of Franklin and its shareholders. Completion of the Merger is
subject to certain conditions, including approval of the Reorganization
Agreement and the Plan of Merger by the Franklin shareholders, approval of the
Merger by various regulatory agencies, and satisfaction or waiver of certain
other contractual conditions.
THE ENCLOSED NOTICE OF SPECIAL MEETING AND PROXY STATEMENT/PROSPECTUS CONTAIN
IMPORTANT INFORMATION CONCERNING THE MEETING AND THE PROPOSED MERGER, INCLUDING
DETAILS AS TO THE DETERMINATION OF THE CONSIDERATION TO BE RECEIVED IN THE
MERGER. PLEASE CAREFULLY READ THESE MATERIALS AND THOROUGHLY CONSIDER THE
INFORMATION CONTAINED IN THEM.
Whether or not you plan to attend the Meeting, you are urged to complete,
sign, date and promptly return the enclosed proxy card to assure that your
shares will be voted at the Meeting. If you attend the Meeting, you may vote in
person regardless of whether you have previously submitted a proxy.
THE BOARD OF DIRECTORS OF FRANKLIN UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE PLAN OF MERGER AND BELIEVES THAT THE MERGER IS FAIR TO, AND
IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF FRANKLIN. ACCORDINGLY, THE BOARD
OF DIRECTORS OF FRANKLIN UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF FRANKLIN
VOTE "FOR" APPROVAL OF THE REORGANIZATION AGREEMENT AND THE PLAN OF MERGER.
Sincerely,
/s/ Joseph R. Schuble, Sr.
-------------------------------------
Joseph R. Schuble, Sr.
Chairman of the Board
/s/ Robert P. Pincus
-------------------------------------
Robert P. Pincus
President and Chief Executive Officer
<PAGE>
LOGO
FRANKLIN BANCORPORATION
1722 I (EYE) STREET, N.W., WASHINGTON, DC 20006
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 24, 1998
----------------
TO THE SHAREHOLDERS OF FRANKLIN BANCORPORATION, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Meeting")
of Franklin Bancorporation, Inc., a Delaware corporation ("Franklin"), will be
held at Franklin's principal executive offices, located at 1722 I (Eye) Street,
N.W., Washington, D.C. 20006, on Wednesday, June 24, 1998 at 4:00 p.m., Eastern
Time, for the following purposes:
1. Merger. To consider and vote upon a proposal to approve the Agreement and
Plan of Reorganization, dated as of December 16, 1997, as amended and
restated (the "Reorganization Agreement"), between Franklin and BB&T
Corporation, a North Carolina corporation ("BB&T"), and a related Plan of
Merger (the "Plan of Merger"), pursuant to which Franklin will merge with
and into BB&T and each share of common stock of Franklin, par value $0.10
per share (other than shares held by dissenting shareholders), will be
converted into the right to receive between 0.35 and 0.3743 shares of common
stock of BB&T, par value $5.00 per share, and cash in lieu of any fractional
share. A copy of the Reorganization Agreement and the Plan of Merger set
forth therein is attached to the accompanying Proxy Statement/Prospectus as
Appendix I.
2. Other Business. To transact such other business as may be properly brought
before the Meeting or at any and all adjournments or postponements thereof.
Shareholders of Franklin who do not vote in favor of approval and adoption of
the Reorganization Agreement and who otherwise comply with the provisions of
Section 262 of the Delaware General Corporation Law will have the right, if the
Merger is completed, to dissent and to seek appraisal of the fair market value
of their shares. See "THE MERGER--Rights of Dissenting Shareholders" in the
accompanying Proxy Statement/Prospectus and Appendix III thereto for a
description of the procedures required to be followed in order to exercise
properly dissenters' rights.
Shareholders of Franklin of record at the close of business on May 11, 1998
are entitled to notice of and to vote at the Meeting. You are cordially invited
to attend the Meeting in person; however, whether or not you plan to attend, we
urge you to complete, date and sign the accompanying proxy card and to return
it promptly in the enclosed postage prepaid envelope.
By Order of the Board of Directors
/s/ Diane M. Begg
_______________________________________
Diane M. Begg Executive Vice
President, Chief Financial Officer
and Assistant Secretary
Washington, DC
May 19, 1998
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY WHETHER
OR NOT YOU PLAN TO BE PRESENT AT THE MEETING. PLEASE DO NOT SEND IN ANY
CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
AVAILABLE INFORMATION
BB&T and Franklin are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements, and other information
with the Commission. The reports, proxy statements, and other information
filed with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the following Regional Offices of the
Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including BB&T and Franklin.
Shares of BB&T Common Stock and Franklin Common Stock are, respectively,
listed on the NYSE and traded on the Nasdaq SmallCap Market, and proxy
statements, reports and other information concerning BB&T and Franklin can
also be inspected and copied at the offices of the NYSE, 20 Broad Street, New
York, New York 10005 and the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006, respectively.
BB&T has filed a Registration Statement on Form S-4 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement") with
the Commission under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of BB&T Common Stock to be issued in the
Merger. This Proxy Statement/Prospectus does not include all of the
information set forth in the Registration Statement, as permitted by the rules
and regulations of the Commission. The Registration Statement, including any
amendments, schedules, and exhibits filed or incorporated by reference as a
part thereof, is available for inspection and copying as set forth above.
Statements contained in this Proxy Statement/Prospectus or in any document
incorporated herein by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, and
each such statement shall be deemed qualified in its entirety by such
reference.
The information contained herein with respect to BB&T has been provided by
BB&T, and the information contained herein with respect to Franklin before the
Merger has been provided by Franklin.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING
OF SECURITIES MADE HEREBY OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY BB&T OR FRANKLIN. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES COVERED BY THIS PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A
PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF BB&T OR
FRANKLIN SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by BB&T with the Commission under
the Exchange Act are incorporated herein by reference:
(a) BB&T's Annual Report on Form 10-K for the fiscal year ended December 31,
1997;
(b) BB&T's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1998;
i
<PAGE>
(c) BB&T's Current Reports on Form 8-K, dated January 15, 1998, February 26,
1998, February 27, 1998, April 13, 1998, and May 13, 1998;
(d) BB&T's Registration Statement on Form 8-A, dated January 10, 1997, with
respect to the adoption of its shareholder rights plan; and
(e) The description of BB&T Common Stock in BB&T's registration statement
filed under the Exchange Act with respect to BB&T Common Stock, including all
amendments and reports filed for the purpose of updating such description.
All documents filed by BB&T pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement/Prospectus and
before the Meeting shall be deemed to be incorporated by reference into this
Proxy Statement/Prospectus and to be a part hereof from the date of the filing
of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded. In particular, reference is made
to BB&T's Current Report on Form 8-K dated May 13, 1998, which includes
supplemental consolidated financial statements giving effect to the
acquisition of Life Bancorp, Inc. completed March 1, 1998 and accounted for as
a pooling of interests. See "INFORMATION ABOUT BB&T--Acquisitions."
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE HEREIN) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL
REQUEST BY ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF FRANKLIN COMMON
STOCK, TO WHOM THIS PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED. REQUESTS
FOR DOCUMENTS SHOULD BE DIRECTED TO INVESTOR RELATIONS, BB&T CORPORATION, 223
WEST NASH STREET, WILSON, NORTH CAROLINA 27893 OR TELEPHONE: (919) 246-4219.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD
BE RECEIVED BY JUNE 17, 1998.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ i
SUMMARY.................................................................... 1
Special Meeting of Shareholders.......................................... 1
Parties to the Merger.................................................... 1
The Merger............................................................... 2
Comparative Market Prices and Dividends.................................. 6
Selected Consolidated Financial Data..................................... 7
Comparative per Share Data............................................... 10
SPECIAL MEETING OF SHAREHOLDERS............................................ 11
General.................................................................. 11
Record Date, Voting Rights, and Vote Required............................ 11
Voting and Revocation of Proxies......................................... 11
Solicitation of Proxies.................................................. 12
Recommendation of Franklin Board......................................... 12
THE MERGER................................................................. 13
General.................................................................. 13
Background of the Merger................................................. 13
Reasons for the Merger................................................... 15
Opinion of Franklin's Financial Advisor.................................. 15
Exchange Ratio........................................................... 19
Exchange of Franklin Common Stock Certificates........................... 23
The Reorganization Agreement............................................. 24
Interests of Certain Persons in the Merger............................... 29
Rights of Dissenting Shareholders........................................ 32
Regulatory Considerations................................................ 34
Certain Federal Income Tax Consequences of the Merger.................... 36
Accounting Treatment..................................................... 37
The Option Agreement..................................................... 37
Effect on Employees, Employee Benefit Plans and Stock Options............ 40
Restrictions on Resales by Affiliates.................................... 41
INFORMATION ABOUT BB&T..................................................... 42
General.................................................................. 42
Subsidiaries............................................................. 42
Acquisitions............................................................. 43
Capital.................................................................. 44
Deposit Insurance Assessments............................................ 44
INFORMATION ABOUT FRANKLIN................................................. 45
Business................................................................. 45
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 50
Security Ownership of Certain Beneficial Owners and Management........... 67
DESCRIPTION OF BB&T CAPITAL STOCK.......................................... 68
General.................................................................. 68
BB&T Common Stock........................................................ 68
BB&T Preferred Stock..................................................... 68
Shareholder Rights Plan.................................................. 69
Certain Provisions of the NCBCA, BB&T Articles and BB&T Bylaws........... 71
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
COMPARISON OF SHAREHOLDERS' RIGHTS.......................................... 71
Authorized Capital Stock.................................................. 72
Directors................................................................. 72
Dividends and Other Distributions......................................... 73
Notice of Shareholder Nominations and Shareholder Proposals............... 73
Exculpation and Indemnification........................................... 74
Mergers, Share Exchanges and Sales of Assets.............................. 74
Anti-takeover Statutes.................................................... 75
Amendments to Articles of Incorporation and Bylaws........................ 76
Shareholders' Rights of Dissent and Appraisal............................. 76
Liquidation Rights........................................................ 77
LEGAL MATTERS............................................................... 78
EXPERTS..................................................................... 78
FRANKLIN FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ F-1
Appendix I--Agreement and Plan of Reorganization and the Plan of Merger
Appendix II--Opinion of Friedman, Billings, Ramsey & Co., Inc.
Appendix III--Section 262 of the Delaware General Corporation Law
</TABLE>
iv
<PAGE>
PROXY STATEMENT
FRANKLIN BANCORPORATION, INC.
----------------
PROSPECTUS
BB&T CORPORATION
COMMON STOCK
This Proxy Statement/Prospectus is being furnished to the holders of the
common stock of Franklin Bancorporation, Inc., a Delaware corporation
("Franklin"), in connection with the solicitation of proxies by the Board of
Directors of Franklin (the "Franklin Board") for use at a special meeting of
shareholders of Franklin, or any adjournment or postponement thereof (the
"Meeting"), to be held at Franklin's principal executive offices, located at
1722 I (Eye) Street, N.W., Washington, D.C. 20006, on Wednesday, June 24, 1998
at 4:00 p.m., Eastern Time. At the Meeting, the shareholders of Franklin will
be asked to consider and vote upon a proposal to approve an Agreement and Plan
of Reorganization, dated as of December 16, 1997, as amended and restated (the
"Reorganization Agreement"), between Franklin and BB&T Corporation, a North
Carolina corporation ("BB&T"), and a related Plan of Merger (the "Plan of
Merger"). A copy of the Reorganization Agreement and the Plan of Merger set
forth therein is attached hereto as Appendix I.
The Reorganization Agreement and the Plan of Merger provide for the merger
of Franklin with and into BB&T (the "Merger"). As a result of the Merger, each
issued and outstanding share of common stock, par value $0.10 per share, of
Franklin ("Franklin Common Stock") (other than shares held by dissenting
shareholders) will be converted into and exchanged for shares of common stock,
par value $5.00 per share, of BB&T ("BB&T Common Stock") and cash in lieu of
any fractional share. As described herein, each such share of Franklin Common
Stock will be converted into the right to receive between 0.35 and 0.3743
shares of BB&T Common Stock, depending on the average reported price of BB&T
Common Stock during a 20-day period shortly before the Merger (the "Exchange
Ratio"). The Exchange Ratio is adjustable upward in excess of 0.3743 only if
certain conditions are met concerning the reported price of BB&T Common Stock,
and then only with the concurrence of BB&T. The Franklin Board has the right
to elect to terminate the Reorganization Agreement if such conditions should
occur, in which case the board of directors of BB&T (the "BB&T Board") would
be required to determine whether to proceed with the Merger at a higher
Exchange Ratio. See "THE MERGER--Exchange Ratio."
This Proxy Statement/Prospectus also constitutes a prospectus of BB&T with
respect to up to 2,815,558 shares of BB&T Common Stock to be issued to holders
of the outstanding shares of Franklin Common Stock (other than dissenting
shareholders) in the Merger. BB&T Common Stock is listed for trading on the
New York Stock Exchange, Inc. (the "NYSE") under the trading symbol "BBK." On
May 18, 1998, the last sale price of BB&T Common Stock as reported on the NYSE
was $66.81. Franklin Common Stock is quoted on the Nasdaq SmallCap Market
under the trading symbol "FNBC." On May 18, 1998, the last sale price of
Franklin Common Stock as reported on the Nasdaq SmallCap Market was $22.88. On
December 15, 1997, the last trading day before Franklin announced that it had
entered into the Reorganization Agreement, the last reported sale price of
Franklin Common Stock on the Nasdaq SmallCap Market was $18.50.
This Proxy Statement/Prospectus, the Notice of Special Meeting, and the
accompanying proxy card are first being mailed to the shareholders of Franklin
on or about May 26, 1998.
----------------
NEITHER THE MERGER NOR THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE SHARES OF BB&T COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF BB&T
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
----------------
The date of this Proxy Statement/Prospectus is May 19, 1998.
<PAGE>
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
Appendices hereto and the documents incorporated by reference or otherwise
referred to herein. Shareholders are urged to review carefully this entire
Proxy Statement/Prospectus, including the Appendices hereto.
SPECIAL MEETING OF SHAREHOLDERS
The Meeting will be held on Wednesday, June 24, 1998 at 4:00 p.m. Eastern
Time at Franklin's principal executive offices, located at 1722 I (Eye) Street,
N.W., Washington, D.C. 20006. At the Meeting, the shareholders of Franklin will
vote upon a proposal to approve the Reorganization Agreement and the Plan of
Merger attached hereto as Appendix I. On May 11, 1998, the record date for the
Meeting (the "Record Date"), there were approximately 450 holders of record of
the 6,840,601 shares of Franklin Common Stock then outstanding and entitled to
vote at the Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of Franklin Common Stock is required to approve the Reorganization Agreement
and the Plan of Merger. As of the Record Date, directors and executive officers
of Franklin and their affiliates beneficially owned 1,339,358 outstanding
shares or 19.58% of the Franklin Common Stock entitled to vote at the Meeting,
all of which are expected to be voted in favor of the Reorganization Agreement
and the Plan of Merger. The directors and executive officers of BB&T and their
affiliates beneficially owned, as of the Record Date, a total of less than 1%
of the outstanding shares of Franklin Common Stock. On the Record Date, BB&T
and its subsidiaries owned and intended to vote on their own account or in
fiduciary capacities a total of less than 1% of the outstanding shares of
Franklin Common Stock.
FAILURE OF A HOLDER OF FRANKLIN STOCK TO VOTE HIS OR HER SHARES WILL HAVE THE
SAME EFFECT AS A VOTE "AGAINST" THE REORGANIZATION AGREEMENT AND THE MERGER.
PARTIES TO THE MERGER
BB&T
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. BB&T's bank subsidiaries are Branch
Banking and Trust Company ("BB&T-NC"), a North Carolina chartered bank that
currently operates 353 banking offices throughout North Carolina; Branch
Banking and Trust Company of South Carolina ("BB&T-SC"), a South Carolina
chartered bank that currently operates 95 banking offices throughout South
Carolina; Branch Banking and Trust Company of Virginia ("BB&T-VA"), a Virginia
chartered bank that currently operates 52 banking offices in the Hampton Roads
and Richmond areas and the south, central and southwestern regions of Virginia;
and Life Savings Bank, F.S.B. ("LSB"), a federally chartered savings bank that
currently operates 20 banking offices in the Hampton Roads region of Virginia.
The mailing address and telephone number of BB&T's principal executive
offices are 200 West Second Street, Winston-Salem, North Carolina 27101, (336)
733-2000. Additional information with respect to BB&T and its subsidiaries is
included elsewhere in this Proxy Statement/Prospectus and in documents
incorporated by reference in this Proxy Statement/Prospectus. See "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"INFORMATION ABOUT BB&T."
1
<PAGE>
Franklin
Franklin is a Delaware corporation that serves as the holding company of one
banking subsidiary, Franklin National Bank of Washington, D.C. ("FNB"), and one
non-banking subsidiary, Franklin Community Development Corporation ("Franklin
CDC"). Franklin is headquartered in Washington, D.C. and conducts its
operations primarily through FNB, which currently operates nine banking
offices: six in the District of Columbia, two in Northern Virginia and one in
Bethesda, Maryland.
The mailing address and telephone number of Franklin's principal executive
offices are 1722 I (Eye) Street, N.W., Washington, D.C. 20006, (202) 429-9888.
Additional information with respect to Franklin is contained in Franklin's
filings with the Commission and included elsewhere in this Proxy
Statement/Prospectus. See "AVAILABLE INFORMATION," "INFORMATION ABOUT FRANKLIN"
and "FRANKLIN FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
THE MERGER
General
At the effective time of the Merger (the "Effective Time"), Franklin will be
merged with and into BB&T, and BB&T will be the surviving corporation in the
Merger. It is expected that FNB will be merged into BB&T-NC during the first
quarter of 1999, with BB&T-NC as the surviving entity (the "FNB Bank Merger").
Exchange Ratio
Upon completion of the Merger, each share of Franklin Common Stock
outstanding at the Effective Time (other than shares held by dissenting
shareholders) will be converted into the right to receive between 0.35 and
0.3743 shares of BB&T Common Stock, subject to possible upward adjustment as
described in the following paragraph. The Exchange Ratio will be determined by
reference to the average closing price of BB&T Common Stock on the NYSE for the
20 trading days immediately preceding the tenth calendar day preceding the
Effective Time (the "Closing Value"). If the Closing Value is $54.50 or less,
the Exchange Ratio will be 0.3743 shares of BB&T Common Stock for each share of
Franklin Common Stock. If the Closing Value is $65.00 or more, the Exchange
Ratio will be 0.35 shares of BB&T Common Stock for each share of Franklin
Common Stock. If the Closing Value is between $54.50 and $65.00, the Exchange
Ratio will be determined by reference to the following table, which sets forth
the applicable Exchange Ratio for each Closing Value and the approximate
implied value of the BB&T Common Stock that would be received per share of
Franklin Common Stock. (For purposes of applying this table, the Closing Value
will be rounded to the nearest half or whole dollar figure, and any Closing
Value at the midpoint between two Closing Values listed below (e.g., $57.25)
will be rounded to the nearest whole dollar figure.)
<TABLE>
<CAPTION>
APPROXIMATE IMPLIED VALUE OF BB&T COMMON STOCK PER
CLOSING VALUE EXCHANGE RATIO SHARE OF FRANKLIN COMMON STOCK
- ------------- -------------- --------------------------------------------------
<S> <C> <C>
$54.50 0.3743 $20.40
$55.00 0.3731 $20.52
$55.50 0.3720 $20.65
$56.00 0.3708 $20.77
$56.50 0.3696 $20.88
$57.00 0.3685 $21.01
$57.50 0.3673 $21.12
$58.00 0.3662 $21.24
$58.50 0.3650 $21.35
$59.00 0.3638 $21.46
$59.50 0.3627 $21.58
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE IMPLIED VALUE OF BB&T COMMON STOCK PER
CLOSING VALUE EXCHANGE RATIO SHARE OF FRANKLIN COMMON STOCK
- ------------- -------------- --------------------------------------------------
<S> <C> <C>
$60.00 0.3615 $21.69
$60.50 0.3603 $21.80
$61.00 0.3592 $21.91
$61.50 0.3580 $22.02
$62.00 0.3568 $22.12
$62.50 0.3557 $22.23
$63.00 0.3545 $22.33
$63.50 0.3534 $22.44
$64.00 0.3522 $22.54
$64.50 0.3510 $22.64
$65.00 0.3500 $22.75
</TABLE>
In the event that both:
(1) the Closing Value is less than $51.00, and
(2) (i) the amount obtained by dividing the Closing Value by $63.75 (the
closing price of BB&T Common Stock on December 15, 1997) is less than (ii)
85% of the amount obtained by dividing the weighted average of the closing
prices of a specified index of 14 bank stocks on the tenth calendar day
preceding the date designated by BB&T as the closing date of the Merger by
the weighted average of the closing prices of such stocks on December 16,
1997,
then Franklin would have the right to terminate the Reorganization Agreement
unless BB&T elects to increase the Exchange Ratio so that holders of Franklin
Common Stock would receive consideration having an implied market value (based
on the Closing Value) equal to the consideration they would have received if
the Closing Value had been $51.00, or approximately $19.09 per share of
Franklin Common Stock. Under no circumstances would the Exchange Ratio be less
than 0.35 shares of BB&T Common Stock for each share of Franklin Common Stock.
No fractional shares of BB&T Common Stock will be issued in the Merger.
Holders of Franklin Common Stock otherwise entitled to a fractional share will
be paid an amount in cash determined by multiplying the fractional part of such
share of BB&T Common Stock by the closing price of BB&T Common Stock on the
last trading day before the Effective Time. See "THE MERGER--Exchange Ratio."
Effective Date and Time of the Merger
The Merger will be effective on the date and at the time specified in the
Certificate of Merger to be filed with the Delaware Department of State, upon
the filing of that Certificate of Merger and the filing of Articles of Merger
with the Office of the Secretary of State of North Carolina. Assuming the
Reorganization Agreement and the Plan of Merger are approved by Franklin
shareholders at the Meeting, it is currently anticipated that the filing of the
Certificate of Merger and the Articles of Merger and the completion of the
Merger will occur on or about July 1, 1998. See "THE MERGER--The Reorganization
Agreement--Effective Date and Time of the Merger."
Recommendation of Franklin Board; Reasons for the Merger
The Franklin Board has unanimously approved the Reorganization Agreement and
the Plan of Merger and the transactions contemplated thereby. The Franklin
Board believes that the Merger is in the best interests of Franklin and its
shareholders and unanimously recommends that the shareholders of Franklin vote
"FOR" approval of the Reorganization Agreement and the Plan of Merger. For
further discussion of the factors
3
<PAGE>
considered by the Franklin Board in reaching its conclusions, see "THE MERGER--
Background of the Merger" and "--Reasons for the Merger."
Opinion of Franklin's Financial Advisor
Franklin has retained Friedman, Billings, Ramsey & Co., Inc. ("FBR") to act
as its financial advisor in connection with the Merger, and FBR has rendered
its opinion to the Franklin Board that, as of the date of such opinion, the
consideration to be received in the Merger is fair to the shareholders of
Franklin from a financial point of view. The full text of the FBR opinion,
dated as of the date hereof, is set forth as Appendix II to this Proxy
Statement/Prospectus and should be read in its entirety with respect to the
assumptions made, matters considered and qualifications and limitations on the
review undertaken by FBR in rendering such opinion. See "THE MERGER--Opinion of
Franklin's Financial Advisor."
Conditions to the Merger
The completion of the Merger is subject to various conditions, including the
approval of the Reorganization Agreement and the Plan of Merger by the
shareholders of Franklin, receipt of necessary regulatory approvals, receipt of
a legal opinion regarding the tax consequences of the Merger, an accountant's
opinion to the effect that the Merger will qualify for pooling-of-interests
accounting treatment, and other customary conditions to closing. See "THE
MERGER--The Reorganization Agreement--Conditions to the Merger."
Waiver; Amendment; Termination; Expenses
Before the Effective Time, any provision of the Reorganization Agreement
(except with respect to any required regulatory approval) may be (a) waived by
the party benefited by the provision or (b) amended or modified at any time, by
mutual agreement of the parties, except that after the Meeting the
consideration to be received by the Franklin shareholders for each share of
Franklin Common Stock may not be decreased.
The Reorganization Agreement may be terminated and the Merger abandoned (a)
at any time prior to the Effective Time by the mutual consent of the parties,
(b) by either party if the other party materially breaches any of its covenants
or agreements contained in the Reorganization Agreement and fails to cure by
the earlier of 30 days after notice of such breach and the Effective Time, (c)
by either party in the event of an inaccuracy of any representation or warranty
of the other party contained in the Reorganization Agreement that would provide
the nonbreaching party the ability to refuse to complete the Merger under the
applicable standard set forth in the Reorganization Agreement (see "THE
MERGER--The Reorganization Agreement--Conditions to the Merger") and such
inaccuracy has not been cured by the earlier of 30 days after notice of such
inaccuracy and the Effective Time, (d) by either party if the Merger is not
completed by October 31, 1998 and the party seeking to terminate has not
breached its representations, warranties, covenants or undertakings in the
Reorganization Agreement, or (e) by either party, if (i) any of the regulatory
approvals required for completion of the Merger and the other transactions
contemplated by the Reorganization Agreement have been denied and the time
period for appeals and requests for reconsideration have run, (ii) the required
shareholder approval is not obtained or (iii) any of the other conditions
precedent to the obligations of the other party cannot be satisfied or
fulfilled before the scheduled date of the closing of the transactions
contemplated by the Reorganization Agreement (the "Closing Date") and the party
seeking to terminate has not breached its representations, warranties,
covenants or undertakings in the Reorganization Agreement. In addition, the
Reorganization Agreement may be terminated by the Franklin Board if certain
conditions concerning the trading price of BB&T Common Stock are met, unless
BB&T in turn determines to increase the Exchange Ratio. See "THE MERGER--
Exchange Ratio."
Each party to the Reorganization Agreement will bear all expenses incurred by
it in connection with the Reorganization Agreement and the transactions
contemplated thereby, except that printing expenses incurred in connection with
this Proxy Statement/Prospectus and the Registration Statement will be borne
50% by BB&T
4
<PAGE>
and 50% by Franklin. See "THE MERGER--The Reorganization Agreement--Waiver;
Amendment; Termination; Expenses."
Interests of Certain Persons in the Merger
Pursuant to the Reorganization Agreement, Robert P. Pincus, President and
Chief Executive Officer of Franklin and of FNB, and eight other members of the
management of Franklin and FNB will enter into employment agreements with BB&T
and BB&T-NC on the Effective Date that provide for severance payments and other
benefits under certain circumstances. The Reorganization Agreement also
provides that with the consent of the regional president of BB&T's Metropolitan
Region the directors of FNB will serve as members of BB&T's metropolitan
Washington regional board after the Merger for a period of up to 3 years for
the same cash compensation as they received as directors of FNB. The
Reorganization Agreement further obligates BB&T to indemnify the directors and
officers of Franklin and any Franklin subsidiary after the Merger against
certain liabilities arising before the Merger and to obtain directors' and
officers' liability insurance for the benefit of Franklin's directors and
officers covering periods before and after the Merger. See "THE MERGER--
Interests of Certain Persons in the Merger."
Rights of Dissenting Shareholders
Under Delaware law, shareholders who do not vote in favor of the Merger and
who file demands for appraisal prior to the shareholder vote on the
Reorganization Agreement, upon the completion of the Merger, have the right to
obtain a cash payment for the "fair value" of their shares of Franklin Common
Stock (excluding any element of value arising from the accomplishment or
expectation of the Merger). In order to exercise such rights, a shareholder
must comply with all of the procedural requirements of Section 262 ("Section
262") of the Delaware General Corporation Law (the "DGCL"), the full text of
which is attached to this Proxy Statement/Prospectus as Appendix III. Such
"fair value" would be determined in judicial proceedings, the result of which
cannot be predicted. Failure to take any of the steps required under Section
262 may result in a loss of such dissenters' rights. See "THE MERGER--Rights of
Dissenting Shareholders."
Regulatory Considerations
The Merger must be approved by the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the Bank Holding Company Act and the
Federal Reserve's Regulation Y thereunder and by the District of Columbia
Office of Banking and Financial Institutions (the "D.C. Office") under the D.C.
Code. BB&T must also provide notice of the Merger to the Bureau of Financial
Institutions of the State Corporation Commission of the Commonwealth of
Virginia (the "BFI") under the Code of Virginia. The FNB Bank Merger, which is
expected to occur during the first quarter of 1999, must be approved by the
Federal Deposit Insurance Corporation (the "FDIC") under the Bank Merger Act
and by the North Carolina Commissioner of Banks (the "N.C. Commissioner") under
the North Carolina General Statutes. In addition, notice of the FNB Bank Merger
must be provided to the D.C. Office under the D.C. Code. The required
applications and notices relating to the Merger were submitted to the
appropriate regulatory authorities in March 1998, and it is anticipated that
the required applications relating to the FNB Bank Merger will be submitted to
the appropriate regulatory authorities during June or July of 1998. See "THE
MERGER--Regulatory Considerations."
Certain Federal Income Tax Consequences
The Merger has been structured to qualify as a nontaxable transaction under
the Internal Revenue Code of 1986, as amended (the "Code"). It is a condition
to the Merger that Franklin and BB&T receive an opinion from Womble Carlyle
Sandridge & Rice, PLLC, counsel to BB&T, to the effect that the Merger will
constitute one or more reorganizations under Section 368 of the Code and that
no gain or loss will be recognized by reason of the Merger by the holders of
Franklin Common Stock to the extent that such shareholders exchange shares of
5
<PAGE>
Franklin Common Stock solely for shares of BB&T Common Stock (gain or loss will
be recognized with respect to cash received in lieu of a fractional share). See
"THE MERGER--Certain Federal Income Tax Consequences of the Merger."
Accounting Treatment
The Merger is intended to be accounted for as a pooling of interests under
generally accepted accounting principles. It is a condition to the Merger that
BB&T receive letters from Arthur Andersen LLP to the effect that the Merger
will qualify for pooling-of-interests accounting treatment. See "THE MERGER--
Accounting Treatment."
Comparison of Shareholders' Rights
The rights of the shareholders of Franklin currently are determined by the
DGCL, the Certificate of Incorporation of Franklin (the "Franklin Certificate
of Incorporation") and the Bylaws of Franklin (the "Franklin Bylaws"). At the
Effective Time, the shareholders of Franklin will become shareholders of BB&T.
Their rights as shareholders will then be determined by the North Carolina
Business Corporation Act (the "NCBCA"), the Articles of Incorporation of BB&T
(the "BB&T Articles") and the Bylaws of BB&T (the "BB&T Bylaws"). See
"DESCRIPTION OF BB&T CAPITAL STOCK" and "COMPARISON OF SHAREHOLDERS' RIGHTS."
Option Agreement
As a condition to BB&T's entering into the Reorganization Agreement and to
increase the probability that the Merger will be completed, BB&T and Franklin
entered into a Stock Option Agreement, dated as of December 16, 1997 (the
"Option Agreement"), pursuant to which BB&T was granted an option to purchase
up to 1,319,564 shares of Franklin Common Stock (approximately 19.9% of the
number of shares of Franklin Common Stock currently outstanding), subject to
adjustment, at an exercise price of $18 per share (the "Option"). The exercise
of the Option is permitted only upon the occurrence of certain events that
generally relate to an acquisition of control of Franklin, or the public offer
or announcement of such an acquisition of control, by a party other than BB&T,
or upon the acquisition by a third party of, or an offer or an announcement of
an intention by a third party to acquire, a significant interest in the equity
or assets of Franklin. The Option is not presently exercisable. See "THE
MERGER--The Option Agreement."
Effect on Employees, Employee Benefit Plans and Stock Options
Each employee of Franklin or any of its subsidiaries at the time of the
Merger will be offered employment after the Merger with BB&T or one of its
subsidiaries and will be eligible to receive benefits comparable to those
provided to similarly situated employees of BB&T or the subsidiary in question.
BB&T will merge the 401(k) plan of Franklin with the 401(k) plan maintained by
BB&T and its subsidiaries, and the account balances of the employees who are
participants in the Franklin plan will be transferred to accounts under the
BB&T 401(k) plan. At the time of the Merger, all rights with respect to
Franklin Common Stock outstanding at the Effective Time pursuant to stock
options granted by Franklin, whether or not exercisable, will be converted into
and become options with respect to BB&T Common Stock on a basis that reflects
the Exchange Ratio. See "THE MERGER--Exchange Ratio" and "--Effect on
Employees, Employee Benefit Plans and Stock Options."
COMPARATIVE MARKET PRICES AND DIVIDENDS
BB&T Common Stock is listed on the NYSE under the symbol "BBK." Franklin
Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "FNBC."
The following table sets forth, for the periods indicated, the high and low
closing sales price of BB&T Common Stock and Franklin Common Stock on the NYSE
Composite Transactions List and the Nasdaq SmallCap Market, respectively, and
cash dividends paid per
6
<PAGE>
share of BB&T Common Stock. Franklin has never paid a cash dividend on Franklin
Common Stock. The prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
BB&T FRANKLIN
---------------------- -------------
CASH
HIGH LOW DIVIDEND HIGH LOW
------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
Quarter Ended
March 31, 1998........................... $67.69 $58.06 $ .31 $23.13 $19.75
June 30, 1998 (through May 18)........... 68.13 64.56 .31 23.50 22.00
Quarter Ended
March 31, 1997........................... 40.75 35.25 .27 12.25 10.13
June 30, 1997............................ 47.13 35.75 .27 12.50 10.25
September 30, 1997....................... 55.13 45.31 .31 15.50 12.50
December 31, 1997........................ 65.00 51.94 .31 21.63 14.00
For year 1997.......................... 65.00 35.25 1.16 21.63 10.13
Quarter Ended
March 31, 1996........................... 29.75 25.88 .23 8.25 7.50
June 30, 1996............................ 31.75 28.88 .23 8.38 7.50
September 30, 1996....................... 33.88 28.63 .27 8.13 7.25
December 31, 1996........................ 36.75 33.38 .27 10.75 7.75
For year 1996.......................... 36.75 25.88 1.00 10.75 7.25
</TABLE>
The following table sets forth the last reported sales price for shares of
BB&T Common Stock and Franklin Common Stock on December 15, 1997, the last
trading day before the public announcement of the proposed Merger, and May 18,
1998, on the NYSE Composite Transactions List and the Nasdaq SmallCap Market,
respectively. The Franklin Equivalent represents the last sales prices of a
share of BB&T Common Stock on those dates multiplied by the Exchange Ratio that
would be applicable if the price in question were the Closing Value. The
Exchange Ratio may be subject to upward adjustment under certain circumstances.
See "THE MERGER--Exchange Ratio."
<TABLE>
<CAPTION>
DATE BB&T FRANKLIN FRANKLIN EQUIVALENT
- ---- ------ -------- -------------------
<S> <C> <C> <C>
December 15, 1997........................... $63.75 $18.50 $22.45
May 18, 1998................................ 66.81 22.88 23.38
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain consolidated financial data of BB&T
and Franklin for the five years ended December 31, 1997 and the three months
ended March 31, 1998 and March 31, 1997. The consolidated financial data for
BB&T has been restated to include the accounts of Life Bancorp, Inc. ("Life")
and its subsidiaries, which merged into BB&T Financial Corporation of Virginia
("BB&T Financial-VA") on March 1, 1998 in a transaction accounted for as a
pooling of interests. The following historical financial information has been
derived from historical consolidated financial statements of BB&T and Life and
of Franklin, respectively, and is qualified in its entirety by, and should be
read in conjunction with, such historical consolidated financial statements,
and the notes thereto, which are incorporated herein by reference or included
herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "FRANKLIN
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Results of BB&T and Franklin for
the three months ended March 31, 1998 are not necessarily indicative of results
expected for the entire year. All adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of results of interim
periods have been included.
7
<PAGE>
Selected Consolidated Financial Data--BB&T
<TABLE>
<CAPTION>
AS OF/FOR THE THREE
MONTHS ENDED
MARCH 31, AS OF/FOR THE TWELVE MONTHS ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income........ $ 592,225 $ 526,983 $ 2,229,621 $ 2,029,703 $ 1,957,182 $ 1,643,532 $ 1,480,194
Interest expense....... 296,129 252,914 1,092,628 987,799 997,105 713,990 622,740
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income.... 296,096 274,069 1,136,993 1,041,904 960,077 929,542 857,454
Provision for loan and
lease losses.......... 22,000 21,120 97,526 62,246 42,378 25,161 60,544
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan and lease
losses................ 274,096 252,949 1,039,467 979,658 917,699 904,381 796,910
Noninterest income..... 121,097 98,149 455,901 339,489 255,279 269,939 267,699
Noninterest expense.... 228,998 198,674 954,831 814,710 818,318 742,519 803,108
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes................. 166,195 152,424 540,537 504,437 354,660 431,801 261,501
Provision for income
taxes................. 52,477 52,346 186,087 165,648 118,244 150,010 97,328
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before
cumulative effect of
changes in accounting
principles............ 113,718 100,078 354,450 338,789 236,416 281,791 164,173
Less: cumulative
effect of changes in
accounting
principles, net of
income taxes.......... -- -- -- -- -- -- (32,629)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income........... $ 113,718 $ 100,078 $ 354,450 $ 338,789 $ 236,416 $ 281,791 $ 131,544
=========== =========== =========== =========== =========== =========== ===========
PER COMMON SHARE
Average shares
outstanding (000's)
Basic................. 142,066 142,347 141,062 141,550 141,829 139,972 134,911
Diluted............... 145,078 144,828 143,798 144,561 147,871 146,199 141,748
Basic earnings
Income before
cumulative effect.... $ 0.80 $ 0.70 $ 2.51 $ 2.39 $ 1.63 $ 1.98 $ 1.18
Less: cumulative
effect............... -- -- -- -- -- -- (0.24)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income........... $ 0.80 $ 0.70 $ 2.51 $ 2.39 $ 1.63 $ 1.98 $ 0.94
=========== =========== =========== =========== =========== =========== ===========
Diluted earnings
Income before
cumulative effect.... $ 0.78 $ 0.69 $ 2.46 $ 2.34 $ 1.60 $ 1.93 $ 1.16
Less: cumulative
effect............... -- -- -- -- -- -- (0.23)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income........... $ 0.78 $ 0.69 $ 2.46 $ 2.34 $ 1.60 $ 1.93 $ 0.93
=========== =========== =========== =========== =========== =========== ===========
Cash dividends
declared.............. $ 0.31 $ 0.27 $ 1.16 $ 1.00 $ 0.86 $ 0.74 $ 0.64
Shareholders' equity... 17.22 15.83 16.93 15.58 14.81 13.26 11.86
AVERAGE BALANCE SHEETS
Securities at carrying
value................. $ 7,543,626 $ 6,838,454 $ 7,124,652 $ 6,802,133 $ 6,803,072 $ 6,468,094 $ 5,686,306
Loans and leases*...... 20,807,833 18,494,122 19,308,577 17,538,038 16,736,054 15,089,645 13,562,910
Other assets........... 2,391,132 1,842,772 1,956,015 1,725,086 1,741,841 1,775,937 1,689,903
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets......... $30,742,591 $27,175,348 $28,389,244 $26,065,257 $25,280,967 $23,333,676 $20,939,119
=========== =========== =========== =========== =========== =========== ===========
Deposits............... $20,524,967 $19,770,969 $20,051,207 $19,280,809 $18,289,320 $17,888,784 $16,777,490
Total borrowed funds... 7,283,363 4,817,444 5,699,452 4,315,393 4,602,388 3,337,830 2,233,639
Other liabilities...... 477,640 329,358 367,038 331,906 338,747 292,634 244,725
Common shareholders'
equity................ 2,456,621 2,257,577 2,271,547 2,121,990 1,978,167 1,740,285 1,609,122
Preferred
shareholders'
equity................ -- -- -- 15,159 72,345 74,143 74,143
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders'
equity.............. $30,742,591 $27,175,348 $28,389,244 $26,065,257 $25,280,967 $23,333,676 $20,939,119
=========== =========== =========== =========== =========== =========== ===========
PERIOD END BALANCES
Total assets........... $31,535,710 $27,921,399 $30,642,799 $27,127,408 $25,768,277 $24,494,732 $23,043,669
Deposits............... 20,794,808 20,337,283 20,948,177 19,735,662 18,928,847 18,046,347 18,123,340
Total borrowed funds... 7,808,722 4,977,697 6,851,694 4,860,802 4,329,919 4,153,846 2,457,621
Shareholders' equity... 2,440,046 2,256,287 2,399,827 2,222,505 2,186,053 1,952,399 1,734,386
SELECTED PERFORMANCE
RATIOS
Rate of return on:
Average total
assets............... 1.50% 1.49% 1.25% 1.30% 0.94% 1.21% 0.63%
Average common
shareholders'
equity............... 18.77 17.98 15.60 15.94 11.69 15.89 7.85
Dividend payout........ 38.75 38.57 46.22 41.84 52.76 37.37 68.09
Average equity to
average assets........ 7.99 8.31 8.00 8.20 8.11 7.78 8.04
</TABLE>
- --------
* Loans and leases are net of unearned income and the allowance for losses.
Amounts include loans held for sale.
8
<PAGE>
Selected Consolidated Financial Data--Franklin
<TABLE>
<CAPTION>
AS OF/FOR THE THREE
MONTHS ENDED
MARCH 31, AS OF/FOR THE TWELVE MONTHS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income........ $ 10,822 $ 8,294 $ 35,867 $ 29,340 $ 22,464 $ 15,652 $ 12,525
Interest expense....... 4,603 3,223 14,335 11,050 8,181 5,168 4,245
--------- --------- --------- --------- --------- --------- ---------
Net interest income.... 6,219 5,071 21,532 18,290 14,283 10,484 8,280
Provision for loan
losses................ 340 130 484 27 181 365 1,081
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses........... 5,879 4,941 21,048 18,263 14,102 10,119 7,199
Noninterest income..... 641 526 2,447 1,770 1,461 1,050 771
Noninterest expense.... 3,757 3,200 13,915 12,652 9,856 7,682 6,910
--------- --------- --------- --------- --------- --------- ---------
Income before taxes.... 2,763 2,267 9,580 7,381 5,707 3,487 1,060
Provision for income
taxes................. 1,040 884 3,612 2,858 2,324 1,056 (166)
--------- --------- --------- --------- --------- --------- ---------
Net income........... $ 1,723 $ 1,383 $ 5,968 $ 4,523 $ 3,383 $ 2,431 $ 1,226
========= ========= ========= ========= ========= ========= =========
PER COMMON SHARE
Average shares
outstanding (000's)
Basic................. 6,692 6,488 6,533 6,337 6,095 5,615 4,442
Diluted............... 7,167 6,888 6,962 6,621 6,306 5,615 4,442
Basic earnings
Net income........... $ 0.26 $ 0.21 $ 0.91 $ 0.71 $ 0.56 $ 0.43 $ 0.28
========= ========= ========= ========= ========= ========= =========
Diluted earnings
Net income........... $ 0.24 $ 0.20 $ 0.86 $ 0.68 $ 0.54 $ 0.43 $ 0.28
========= ========= ========= ========= ========= ========= =========
Cash dividends
declared.............. -- -- -- -- -- -- --
Shareholders' equity... 6.25 5.01 5.92 4.92 4.20 3.52 3.34
AVERAGE BALANCE SHEETS
Securities at carrying
value................. $ 182,974 $ 168,678 $ 174,792 $ 137,230 $ 107,807 $ 101,991 $ 81,794
Loans and leases*...... 295,172 228,785 246,265 192,205 147,145 105,265 88,691
Other assets........... 124,583 64,644 65,785 74,464 37,788 32,696 34,783
--------- --------- --------- --------- --------- --------- ---------
Total assets......... $ 602,729 $ 462,107 $ 486,842 $ 403,899 $ 292,740 $ 239,952 $ 205,268
========= ========= ========= ========= ========= ========= =========
Deposits............... $ 425,864 $ 338,509 $ 352,477 $ 314,104 $ 235,483 $ 197,910 $ 170,880
Other liabilities...... 136,402 91,187 99,309 61,298 33,521 22,637 21,098
Common shareholders'
equity................ 40,463 32,411 35,056 28,497 23,736 19,405 13,290
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
shareholders'
equity.............. $ 602,729 $ 462,107 $ 486,842 $ 403,899 $ 292,740 $ 239,952 $ 205,268
========= ========= ========= ========= ========= ========= =========
PERIOD END BALANCES
Total assets........... $ 658,976 $ 484,963 $ 647,448 $ 497,817 $ 367,031 $ 263,995 $ 231,126
Deposits............... 433,617 351,310 427,798 363,427 302,435 212,533 167,333
Shareholders' equity... 42,515 32,480 39,283 31,893 26,385 19,745 18,743
SELECTED PERFORMANCE
RATIOS
Rate of return on:
Average total
assets............... 1.16% 1.21% 1.23% 1.12% 1.16% 1.01% 0.60%
Average common
shareholders'
equity............... 17.27 17.30 17.11 16.03 14.36 12.53 9.22
Average equity to
average assets........ 6.71 7.01 7.17 7.00 8.11 8.09 6.47
</TABLE>
- --------
* Loans and leases are net of unearned income and the allowance for losses.
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth: (a) selected comparative per share data for
each of BB&T and Franklin on an historical basis; (b) selected unaudited pro
forma comparative per share data assuming the Merger had been effective at the
beginning of the periods presented for BB&T and Franklin combined; and (c)
Franklin pro forma equivalent amounts. The pro forma combined information has
been calculated based on the prices of BB&T Common Stock as of the periods
presented, resulting in Exchange Ratios of 0.3545 for March 31, 1998, 0.3615
for December 31, 1997 and 0.3743 for each of December 31, 1996 and December 31,
1995. See "THE MERGER--Exchange Ratio." The unaudited pro forma data has been
prepared giving effect to the Merger as a pooling of interests. For a
description of the effect of pooling-of-interests accounting on the Merger and
the historical financial statements of BB&T, see "THE MERGER--Accounting
Treatment." The comparative per share data presented are based on and derived
from, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of each of BB&T and Franklin
incorporated by reference herein. Results of each of BB&T and Franklin for the
three months ended March 31, 1998, are not necessarily indicative of results
expected for the entire year, nor are pro forma amounts necessarily indicative
of results of operations or combined financial position that would have
resulted had the Merger been completed at the beginning of the period
indicated. All adjustments, consisting of only normal adjustments, necessary
for a fair statement of results of interim periods have been included.
<TABLE>
<CAPTION>
AS OF/FOR THE YEAR ENDED
AS OF/FOR THE THREE DECEMBER 31,
MONTHS ENDED --------------------------
MARCH 31, 1998 1997 1996 1995
------------------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE
Basic
BB&T historical.............. 0.80 2.51 2.39 1.63
Franklin historical.......... 0.26 0.91 0.71 0.56
Pro forma combined........... 0.80 2.51 2.38 1.63
Franklin pro forma
equivalent.................. 0.28 0.91 0.89 0.61
Diluted
BB&T historical.............. 0.78 2.46 2.34 1.60
Franklin historical.......... 0.24 0.86 0.68 0.54
Pro forma combined........... 0.78 2.46 2.33 1.60
Franklin pro forma
equivalent.................. 0.28 0.89 0.87 0.60
CASH DIVIDENDS DECLARED
BB&T historical............... 0.31 1.16 1.00 0.86
Franklin historical........... -- -- -- --
Pro forma combined............ 0.31 1.16 1.00 0.86
Franklin pro forma
equivalent................... 0.11 0.42 0.37 0.32
SHAREHOLDERS' EQUITY PER COMMON
SHARE
BB&T historical............... 17.22 16.93 15.58 14.81
Franklin historical........... 6.25 5.92 4.92 4.20
Pro forma combined............ 17.23 16.92 15.54 14.75
Franklin pro forma
equivalent................... 6.11 6.12 5.82 5.52
</TABLE>
10
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
GENERAL
This Proxy Statement/Prospectus is being furnished to the shareholders of
Franklin as of the Record Date and is accompanied by a form of proxy that is
solicited by the Franklin Board for use at the Meeting to be held on
Wednesday, June 24, 1998 at 4:00 p.m., Eastern time at Franklin's principal
executive offices, located at 1722 I (Eye) Street, N.W., Washington, D.C.
20006. At the Meeting, the shareholders of Franklin will vote upon a proposal
to approve the Reorganization Agreement and the Plan of Merger attached hereto
as Appendix I. Proxies may be voted on such other matters as may properly come
before the Meeting at the discretion of the proxy holders named therein. The
Franklin Board knows of no such other matters except matters incidental to the
conduct of the Meeting.
Holders of Franklin Common Stock are requested to complete, date, and sign
the accompanying proxy and return it promptly to Franklin in the enclosed
postage prepaid envelope.
RECORD DATE, VOTING RIGHTS, AND VOTE REQUIRED
Only the holders of Franklin Common Stock on the Record Date (May 11, 1998)
are entitled to receive notice of and to vote at the Meeting. On the Record
Date, there were 6,840,601 shares of Franklin Common Stock outstanding, which
were held by approximately 450 holders of record. Each share of Franklin
Common Stock outstanding on the Record Date is entitled to one vote as to each
of the matters submitted at the Meeting.
Approval of the Reorganization Agreement and the Plan of Merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Franklin Common Stock. FAILURE OF A HOLDER OF FRANKLIN COMMON STOCK TO VOTE
HIS OR HER SHARES WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE
REORGANIZATION AGREEMENT AND THE PLAN OF MERGER.
As of the Record Date, the directors and executive officers of Franklin and
their affiliates beneficially owned a total of 1,339,358 outstanding shares,
or 19.58% of the issued and outstanding shares of Franklin Common Stock, all
of which are expected to be voted in favor of the Reorganization Agreement and
the Plan of Merger. The directors and executive officers of BB&T and their
affiliates beneficially owned, as of the Record Date, a total of less than 1%
of the outstanding shares of Franklin Common Stock. On the Record Date, BB&T
and its subsidiaries owned and intended to vote on their own account or in
fiduciary capacities a total of less than 1% of the outstanding shares of
Franklin Common Stock.
VOTING AND REVOCATION OF PROXIES
The shares of Franklin Common Stock represented by properly completed
proxies received at or prior to the time for the Meeting will be voted as
directed by the shareholders unless revoked as described below. If no
instructions are given, executed proxies will be voted "FOR" approval of the
Reorganization Agreement and the Plan of Merger. Shares held in street name
that have been designated by brokers on proxy cards as not voted ("Broker
Shares") will not be counted as votes cast. Shares with respect to which
proxies have been marked as abstentions will not be counted as votes cast.
Shares with respect to which proxies have been marked as abstentions and
Broker Shares, however, will be treated as shares present for purposes of
determining whether a quorum is present. If any other matters are properly
presented at the Meeting and may be properly voted on, the proxies solicited
hereby will be voted on such matters at the discretion of the proxy holders
named therein. However, in such event, voting authority will be exercised only
to the extent permissible under the applicable federal securities laws. The
Franklin Board is not aware of any other business to be presented at the
Meeting, other than matters incidental to the conduct of the Meeting. This
proxy is being solicited for the Meeting called to consider the Reorganization
Agreement and the Plan of Merger and will not be used for any other meeting of
the shareholders of Franklin.
11
<PAGE>
The presence of a shareholder at the Meeting will not automatically revoke
such shareholder's proxy. A shareholder may, however, revoke a proxy at any
time prior to its exercise by filing a written notice of revocation with, or
by delivering a duly executed proxy bearing a later date to, the Secretary of
Franklin at Franklin's principal executive offices prior to the Meeting, or by
attending the Meeting and voting in person. The proxy will not be revoked by
the death or incapacity of the shareholder executing it unless, before the
shares are voted, notice of such death or incapacity is filed with the
Secretary of Franklin or other person authorized to tabulate the votes.
BECAUSE APPROVAL OF THE REORGANIZATION AGREEMENT AND THE PLAN OF MERGER
REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF
FRANKLIN COMMON STOCK, ABSTENTIONS AND BROKER SHARES WILL HAVE THE SAME EFFECT
AS NEGATIVE VOTES. ACCORDINGLY, THE FRANKLIN BOARD URGES ITS SHAREHOLDERS TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE.
SOLICITATION OF PROXIES
BB&T and Franklin will each bear 50% of the cost of printing this Proxy
Statement/Prospectus, and Franklin will bear all other costs of soliciting
proxies. In addition to the use of the mails, proxies may be solicited
personally or by telephone or facsimile by directors, officers and other
employees of Franklin, who will not be specially compensated for such
solicitation activities. Franklin presently intends to utilize the services of
Morrow & Co., Inc. in connection with the solicitation of proxies for the
Meeting, at an estimated cost of $6,000.00. Banks, brokerage houses and other
institutions, nominees and fiduciaries will be requested to forward the proxy
materials to beneficial owners and to obtain authorization for the execution
of proxies. Franklin will, upon request, reimburse such parties for their
reasonable expenses in forwarding proxy materials to beneficial owners.
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this Proxy
Statement/Prospectus and, if given or made, such information or representation
should not be relied upon as having been authorized by Franklin, BB&T or any
other person. The delivery of this Proxy Statement/Prospectus will not, under
any circumstances, create any implication that there has been no change in the
affairs of Franklin or BB&T since the date of this Proxy Statement/Prospectus.
RECOMMENDATION OF FRANKLIN BOARD
The Franklin Board has adopted the Reorganization Agreement and the Plan of
Merger and believes that the proposed transaction is fair to and in the best
interests of Franklin and its shareholders. The Franklin Board recommends that
Franklin's shareholders vote "FOR" approval of the Reorganization Agreement
and the Plan of Merger. See "THE MERGER--Background of the Merger" and "--
Reasons for the Merger."
SHAREHOLDERS SHOULD NOT SEND IN STOCK CERTIFICATES WITH THEIR PROXY CARDS.
See "THE MERGER--Exchange of Franklin Common Stock Certificates."
12
<PAGE>
THE MERGER
The following information describes the material aspects of the Merger. This
description does not purport to be complete and is qualified in its entirety
by reference to the Appendices hereto, including the Reorganization Agreement
and the Plan of Merger, which are attached to this Proxy Statement/Prospectus
as Appendix I and incorporated herein by reference. All shareholders are urged
to read the Appendices in their entirety.
GENERAL
In the Merger, Franklin will be merged with and into BB&T, and BB&T will be
the surviving corporation in the Merger. Shareholders of Franklin (other than
dissenting shareholders) will receive shares of BB&T Common Stock and cash in
exchange for their shares of Franklin Common Stock as described below. It is
expected that the FNB Bank Merger, in which FNB will be merged into BB&T-NC,
with BB&T-NC as the surviving entity, will take place in the first quarter of
1999.
BACKGROUND OF THE MERGER
Franklin's business strategy under its current management team has been to
compete with the large, super-regional bank holding companies that recently
have dominated the greater Washington, D.C. regional banking market by
focusing primarily on providing commercial banking products and services to
business and professional customers and by emphasizing superior and responsive
service. As a result of this strategy, Franklin has grown dramatically, from
approximately $40 million in total assets in 1991 (when the current management
team began to join Franklin) to approximately $647 million in 1997. However,
the financial services industry is experiencing rapid consolidation due to
excess capacity and the technological advances dominating the way commercial
banks offer and deliver products and services. By early 1997, Franklin's
management had come to believe that the investments required to remain
sufficiently competitive in this environment to diversify its customer base
and better serve its existing customers would be enormous. Therefore,
Franklin's management concluded that its rapid growth made it desirable to
affiliate with a larger financial institution with a broader array of products
and services and access to upgraded technology. In management's view, the
ideal strategic partner also would allow Franklin to continue to provide its
customers with local autonomy and decision-making; would use Franklin's
current management team, boards of directors, advisory boards and employees to
represent it in the metropolitan Washington, D.C. area; and most importantly,
would offer a fair price to Franklin's shareholders.
Commencing in early May, 1997, management held informal discussions with
various investment bankers in order to assess the likelihood of finding a
strategic partner that met Franklin's needs. Initially, the universe of
potential acquirors suggested to management was small. However, bank merger
and acquisition activity in the mid-Atlantic region accelerated throughout the
year, and in late October FBR informed management that there were now
potential acquirors who it believed would be receptive to the possibility of a
strategic alliance with Franklin. Franklin subsequently executed
confidentiality agreements and exchanged financial information with a number
of bank holding companies, including BB&T. Shortly thereafter, these companies
submitted indications of interest, including preliminary proposed prices and
other deal terms, to FBR. On November 19, FBR met with Franklin management and
certain Franklin Board members to evaluate these offers. Based on a careful
evaluation of the prospective acquirors and their proposed terms, including
price, Franklin decided to first pursue more detailed discussions with BB&T.
On November 26, representatives from BB&T met with representatives of
Franklin's management, certain Franklin Board members and FBR. After lengthy
discussions, the parties agreed in principle to a tax-free exchange of stock
at a price of $20.40 for each share of Franklin Common Stock. At that point,
based on the strength of this price and the fact that BB&T fit much more
closely with Franklin's other needs than did the other potential acquirors,
Franklin decided to proceed in merger discussions exclusively with BB&T. Over
the next several days, Franklin, FBR and BB&T discussed various pricing and
exchange ratios to formalize their agreement in principle as to price, finally
settling on a fixed exchange ratio of 0.3743 shares of BB&T Common Stock for
each share of Franklin Common Stock.
13
<PAGE>
On December 3, 1997, BB&T was selected to join the S&P 500 index, and its
stock price rose $8.94, or 15.9%, closing at $65.00. The sudden and dramatic
increase in BB&T's share price led to a renegotiation of the price and
structure of the proposed Franklin/BB&T transaction. On December 9, 1997,
representatives of Franklin management, FBR and Franklin's special counsel,
Williams & Connolly, met in Winston-Salem, North Carolina with representatives
of BB&T and its regular outside counsel, Womble Carlyle Sandridge & Rice PLLC,
to continue their discussions on the pricing structure and to negotiate more
detailed terms for the Reorganization Agreement and the Plan of Merger. On
December 11, 1997, BB&T and Franklin agreed to a floating exchange ratio of
between 0.3500 and 0.3743 shares of BB&T Common Stock per share of Franklin
Common Stock, subject to certain potential adjustments and other terms and
conditions, including price "collars" on the number of shares of BB&T Common
Stock to be received for each share of Franklin Common Stock. Shortly
thereafter, Franklin, BB&T and their respective counsel finalized proposed
drafts of the Reorganization Agreement, the Plan of Merger, the Option
Agreement and the various employment agreements to be entered into among BB&T,
BB&T-NC and certain executive officers of Franklin. These drafts incorporated
the agreed-upon price terms as well as the other terms that had been
negotiated. Franklin provided copies of these drafts to each member of the
Franklin Board.
The Franklin Board held a special meeting to consider the proposed
transaction on December 16, 1997, with representatives of both FBR and
Williams & Connolly in attendance. The meeting included a detailed discussion
of the proposed transaction and the proposed Reorganization Agreement, Plan of
Merger, Option Agreement and employment agreements. Robert P. Pincus,
President and Chief Executive Officer of Franklin, described in detail the
reasons why management decided to seek a strategic partner and the history of
Franklin's search for a strategic partner, including the negotiations with
BB&T. FBR presented a financial analysis of the transaction and its written
opinion that the transaction was fair from a financial point of view to the
stockholders of Franklin. FBR described the various factors it considered in
reaching this conclusion. These included, among other things: the current and
potential long-term value of the BB&T Common Stock to be received from BB&T;
prevailing economic, market and monetary conditions; the reasonableness and
achievability of Franklin's internal financial and operating forecasts (and
the assumptions and bases therefor); Franklin's future prospects as an
independent institution; the future financial and operating prospects of BB&T
after giving effect to a business combination involving an acquisition of
Franklin; and the preliminary proposed terms submitted by the other potential
acquirors. Williams & Connolly discussed various other legal matters,
including: the other terms of the proposed Reorganization Agreement, Option
Agreement and employment agreements; regulatory aspects of the proposed
Merger; and the fiduciary duties of the members of the Franklin Board to its
shareholders. The Franklin Board engaged in an extended discussion of a
variety of legal, financial and other business questions arising from these
presentations.
Based on these presentations and discussions, and their consideration of the
proposed Reorganization Agreement, Plan of Merger, Option Agreement and
employment agreements, the Franklin Board unanimously determined that the
proposed Merger was in the best interests of its stockholders, approved the
Merger, approved and adopted the Reorganization Agreement, the Plan of Merger
and the Option Agreement, and recommended to Franklin's shareholders that they
vote in favor of the Merger, the Reorganization Agreement and the Plan of
Merger. The BB&T Board also met and unanimously approved the Merger, the
Reorganization Agreement and the Plan of Merger and the Option Agreement on
December 16, 1997.
As originally contemplated in the Reorganization Agreement, Franklin would
have merged into BB&T Financial-VA, which is a wholly owned subsidiary of BB&T
that is the holding company for BB&T-VA. In May 1998 the parties agreed to
restructure the Merger so that Franklin will merge into BB&T, and executed an
amended and restated version of the Reorganization Agreement to provide for
this. The amended and restated Reorganization Agreement also included
provisions (a) specifying the basis on which options to acquire Franklin
Common Stock that are outstanding at the Effective Time will be converted into
rights to acquire BB&T Common Stock and (b) acknowledging expressly that
certain of such options have been granted other than pursuant to Franklin's
formal stock option plans.
14
<PAGE>
REASONS FOR THE MERGER
BB&T
BB&T management believes that the metropolitan Washington area represents a
growing and promising market and that BB&T's entry into the region is a
natural extension of its efforts to build a statewide franchise in Virginia.
Management believes that Franklin is a quality institution and that its
acquisition will permit BB&T to enter the District of Columbia, northern
Virginia and suburban Maryland market with a strong emphasis on providing
outstanding customer service.
Franklin
The terms of the Reorganization Agreement, including the consideration to be
paid to Franklin stockholders, were the result of arm's length negotiations
between representatives of Franklin and BB&T. Among the factors considered by
the Franklin Board in deciding to approve, adopt and recommend the Merger, the
Reorganization Agreement, the Plan of Merger and the Option Agreement were:
(a) the consideration to be paid to Franklin stockholders in relation to the
market value, book value, earnings per share and dividend rates of Franklin
Common Stock and BB&T Common Stock; (b) information concerning the financial
condition, results of operations, capital levels, asset quality and prospects
of Franklin and BB&T; (c) the anticipated short and long-term impact that the
Merger is likely to have on BB&T's consolidated results of operations,
including anticipated cost savings resulting from consolidations in certain
areas, and the strategic fit between the parties; (d) the general structure of
the proposed Merger; (e) the likelihood of receiving the requisite regulatory
approvals in a timely manner; (f) the general tax-free nature of the Merger to
stockholders of Franklin; (g) industry and economic conditions, including
trends in the consolidation of the financial services industry; (h) the impact
of the Merger on the depositors, employees, customers and communities served
by Franklin through expanded consumer and commercial banking products and
services; (i) the compatibility of the respective business and management
philosophies between BB&T and Franklin; (j) the prospect that Franklin will be
able to continue to provide its customers with local autonomy and decision-
making; (k) the expectation that BB&T would continue to use Franklin's current
management team, boards of directors, other boards and employees to represent
it in the metropolitan Washington, D.C. area; (l) the anticipated broader
array of products and services and access to upgraded technology that BB&T can
offer to Franklin's customers; (m) the alternative strategic courses available
to Franklin, including remaining independent and exploring alternative
acquisition transactions; and (n) the opinion of Franklin's financial advisor
as to the fairness, from a financial point of view, of the consideration to be
paid to Franklin stockholders.
After considering these factors, among other things, the Franklin Board
unanimously determined that the proposed Merger was in the best interests of
its stockholders, approved the Merger, approved and adopted the Reorganization
Agreement, the Plan of Merger and the Option Agreement, and voted to recommend
to Franklin's shareholders that they vote in favor of the Merger, the
Reorganization Agreement and the Plan of Merger. ACCORDINGLY, THE FRANKLIN
BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF FRANKLIN VOTE FOR
APPROVAL OF THE MERGER, THE REORGANIZATION AGREEMENT AND THE PLAN OF MERGER.
OPINION OF FRANKLIN'S FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of November 26, 1997 (the "FBR
Agreement"), Franklin retained FBR to act as its financial advisor in
connection with the proposed Merger. At the meeting of the Franklin Board held
on December 16, 1997, FBR delivered its oral and written opinion to the
Franklin Board to the effect that as of such date, a floating exchange ratio
of between 0.3500 and 0.3743 shares of BB&T Common Stock, subject to certain
potential adjustments and other terms and conditions, including price
"collars" on the number of shares of BB&T Common Stock to be received for each
share of Franklin Common Stock, was fair, from a financial point of view, to
the holders of Franklin Common Stock. FBR has reconfirmed its December 16,
1997 opinion by delivery of its written opinion (the "FBR Opinion") to the
Franklin Board, dated the date of this Proxy Statement/Prospectus, stating
that as of the date hereof, based on the matters set forth in such opinion and
15
<PAGE>
pursuant to the Reorganization Agreement, consideration to be received by the
holders of Franklin Common Stock in the Merger (i.e., the Exchange Ratio) is
fair to the holders of Franklin Common Stock from a financial point of view.
THE FULL TEXT OF THE FBR OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS APPENDIX II TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE DESCRIPTION OF THE FBR OPINION SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX II. FRANKLIN
STOCKHOLDERS ARE URGED TO READ THE FBR OPINION IN ITS ENTIRETY. FBR'S OPINION
IS ADDRESSED ONLY TO THE FRANKLIN BOARD AND DIRECTED ONLY TO THE CONSIDERATION
TO BE RECEIVED IN THE MERGER BY THE HOLDERS OF FRANKLIN COMMON STOCK AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE SPECIAL MEETING.
FBR is a nationally recognized investment banking firm and was selected by
Franklin based on the firm's reputation and experience in investment banking
in general, its recognized expertise in the valuation of banking businesses
and its familiarity with Franklin. FBR, as part of its investment banking
business, is frequently engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with rendering the opinions dated December 16, 1997 and the
date hereof, FBR, among other things: (i) reviewed the Reorganization
Agreement; (ii) reviewed the Annual Reports to Stockholders of Franklin for
the fiscal years ended December 31, 1996 and 1997 and the Annual Reports of
Franklin on Form 10-K filed with the Commission for the fiscal years ended
December 31, 1996 and 1997, as well as Quarterly Reports of Franklin on Form
10-Q filed with the Commission for the three month periods ended March 31,
1997, June 30, 1997, September 30, 1997 and March 31, 1998; (iii) reviewed the
Annual Reports to Shareholders of BB&T for the fiscal years ended December 31,
1996 and 1997 and Annual Reports of BB&T on Form 10-K filed with the
Commission for the fiscal years ended December 31, 1995, 1996 and 1997,
reviewed the Proxy Statement of BB&T dated March 19, 1997 relating to BB&T's
1997 annual meeting of shareholders, as well as Quarterly Reports of BB&T on
Form 10-Q filed with the Commission for the three month periods ended March
31, 1997, June 30, 1997, September 30, 1997 and March 31, 1998 and BB&T's
Current Reports on Form 8-K dated August 15, 1997 and May 13, 1998 containing
restated consolidated financial statements of BB&T; (iv) reviewed the
unaudited financial statements of Franklin for the eleven months ended
November 30, 1997; (v) reviewed the reported market prices and trading
activity for BB&T Common Stock for the period January 1994 through December
15, 1997; (vi) discussed the financial condition, results of operations,
earnings projections, business and prospects of Franklin and BB&T with the
managements of Franklin and BB&T; (vii) compared the results of operations and
financial condition of Franklin and BB&T with those of certain publicly-traded
financial institutions (or their holding companies) that FBR deemed to be
reasonably comparable to Franklin or BB&T, as the case may be; (viii) reviewed
the financial terms, to the extent publicly available, of certain acquisition
transactions that FBR deemed to be reasonably comparable to the Merger; (ix)
reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions previously entered into by BB&T; and (x) performed
such other analyses and reviewed and analyzed such other information as FBR
deemed appropriate.
In connection with rendering the FBR Opinion, as set forth herein, FBR
assumed and relied upon, without independent verification, the accuracy and
completeness of all the financial information, analyses and other information
reviewed by and discussed with it, and did not make an independent evaluation
or appraisal of the specific assets, the collateral securing assets or the
liabilities of BB&T, Franklin or any of their respective subsidiaries, or the
collectability of any such assets (relying, where relevant, on the analyses
and estimates of BB&T and Franklin). With respect to the financial projections
reviewed with each company's management, FBR assumed that they reflect the
best currently available estimates and judgments of the respective managements
of the respective future financial performances of each of BB&T and Franklin
and of the combined company, and that such performances will be achieved. FBR
also assumed that there has been no material change in BB&T's
16
<PAGE>
or Franklin's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements noted above.
Finally, FBR assumed without independent verification that the aggregate
consolidated allowances for loan losses for Franklin and BB&T were adequate to
cover such losses, and that the conditions precedent in the Reorganization
Agreement are not waived.
The forecasts and projections furnished to FBR by Franklin were prepared by
the management of Franklin. As a matter of policy, Franklin does not publicly
disclose internal management forecasts, projections or estimates of the type
furnished to FBR in connection with its analysis of the Merger, and such
forecasts, projections and estimates were not prepared with a view towards
public disclosure. These forecasts, projections and estimates were based on
numerous variables and assumptions which are inherently uncertain and which
may not be within the control of management including, without limitation,
general economic, regulatory and competitive conditions. Accordingly, actual
results could vary materially from those set forth in such forecasts,
projections and estimates. See "INFORMATION ABOUT FRANKLIN--Business--Forward-
Looking and Cautionary Statements."
The Franklin Board imposed no limitations on FBR with respect to the
investigation made or procedures followed by FBR in rendering the FBR Opinion.
In connection with rendering such fairness opinion to the Franklin Board, FBR
performed a variety of financial analyses. The following is a summary of the
material financial analyses performed by FBR, but does not purport to be a
complete description of FBR's analyses or presentation at the December 16,
1997 meeting of the Franklin Board. FBR believes that its analyses must be
considered as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors and analyses,
could create an incomplete view of the analyses and the processes underlying
the FBR Opinion. The preparation of a fairness opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analyses or summary description. In its analyses, FBR made numerous
assumptions with respect to industry performance, business and economic
conditions and various other matters, many of which are beyond the control of
Franklin and BB&T. Any estimates contained in FBR's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of values of companies
do not purport to be appraisals or necessarily reflect the prices at which the
companies or their securities may actually be sold.
Summary of Terms of Proposed Transactions
FBR reviewed the terms of the proposed Merger, including the Exchange Ratio,
the form of consideration, and the percentage of premium to Franklin's market
price at December 15, 1997. Based on the Exchange Ratio and a price per share
of $63.75 for BB&T Common Stock (the closing price for such stock on December
15, 1997), the amount of consideration on December 16, 1997 was $22.45 per
share of Franklin Common Stock. As of December 16, 1997, the Exchange Ratio
represented a percentage of premium to the current market price per share of
$18.50 for Franklin Common Stock (the closing price for such stock on December
15, 1997) of 21.4%.
Based on the closing share price of BB&T Common Stock as of December 15,
1997, the Exchange Ratio represented a multiple of (i) 28.5x Franklin's
earnings per share for the twelve months ended September 30, 1997; (ii) 26.8x
management's estimate of Franklin's 1997 earnings per share; (iii) 4.31x
Franklin's book value per share as of September 30, 1997 and (iv) 4.43x
Franklin's tangible book value per share as of September 30, 1997. The
Exchange Ratio also represented a tangible book premium to core deposits of
35.47% based on Franklin's tangible book value at September 30, 1997.
Comparable Transaction Analysis
FBR reviewed certain information relating to transactions announced since
January 1, 1997 involving the acquisition of banks nationwide ("Nationwide
Transactions"); banks in the mid-Atlantic region including the District of
Columbia, Maryland, North Carolina, South Carolina, and Virginia ("Mid-
Atlantic Region Transactions"); banks nationwide in which the seller's return
on average equity ("ROAE") is between 16% and 18% ("Seller's ROAE Comparable
Transactions"); and banks nationwide with assets between $250 million
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and $750 million (the "Asset Comparable Transactions" and, collectively, the
"Comparable Groups"). In conjunction with its analysis, FBR reviewed valuation
multiples based on price to book value, price to tangible book value, price to
latest twelve months earnings per share and the premium over tangible book
value as a percentage of core deposits. FBR compared BB&T's pending
acquisition of Franklin to transactions involving the Comparable Groups over
the period from January 1, 1997 through December 15, 1997. FBR computed the
foregoing ratios for the Merger based on the Exchange Ratio and a price per
share of $63.75 for BB&T Common Stock (the closing price for such stock on
December 15, 1997), indicating a price per share of Franklin Common Stock at
announcement of the Merger of $22.45. The Comparable Groups included the
following numbers of transactions: Nationwide Transactions (280); the Mid-
Atlantic Region Transactions (21); Seller's ROAE Comparable Transactions (31);
and Asset Comparable Transactions (42). FBR's computations yielded the
following median multiples at announcement for the Nationwide Transactions,
the Mid-Atlantic Region Transactions, the Seller's ROAE Comparable
Transactions and the Asset Comparable Transactions, respectively, as compared
with the following indicated multiples for Franklin at announcement of the
Merger: (i) price to book value multiples of 2.19x, 2.76x, 2.54x and 2.53x,
compared with 4.31x for the Merger; (ii) price to tangible book value
multiples of 2.24x, 2.77x, 2.53x and 2.52x, compared with 4.43x for the
Merger; (iii) price to latest twelve months earnings multiples of 18.9x,
21.2x, 17.4x and 20.6x, compared with 28.5x for the Merger; and (iv) core
deposit premiums of 14.35%, 21.93%, 18.92% and 19.76%, compared with an
indicated deposit premium in the Merger of 35.47%.
Discounted Earnings Stream and Terminal Value Analysis
Using a discounted earnings stream and terminal value analysis, FBR
estimated the future stream of earnings flows that Franklin could be expected
to produce through the year 2001, under various circumstances, assuming
Franklin performed in accordance with the earnings forecasts of Franklin
management. To approximate the terminal value of the Franklin Common Stock at
the end of a four-year period (December 31, 2001), FBR applied price to
earnings multiples ranging from 18.0 to 20.5, applied multiples of book value
ranging from 300% to 325% and applied premiums over tangible book value as a
percentage of core deposits of 20.0% to 25.0%. The net income streams,
dividend streams and terminal values were then discounted to present values
using a discount rate of 15%. When a 15% discount rate was applied to median
merger multiples based on the price to tangible book value multiples of 300%
to 325%, the analysis indicated a reference range between $17.00 and $19.76
per share of Franklin Common Stock. When the same discount rate of 15% was
applied to merger market multiples based on price to earnings per share
multiples of 18.0 times to 20.5 times, the analysis indicated a reference
range between $17.65 and $20.91 per share of Franklin Common Stock. When the
same discount rate of 15% was applied to merger market multiples based on
tangible book premium to core deposits of 20.0% to 25.0%, the analysis
indicated a reference range between $15.99 and $17.49 per share of Franklin
Common Stock.
Pro Forma Merger Analysis
FBR performed pro forma merger analyses that combined Franklin's and BB&T's
current and projected income statements and balance sheets based on earnings
forecasts of Franklin and BB&T, respectively. Assumptions and analyses of the
accounting treatment, acquisition adjustments, operating efficiencies and
other adjustments were made to arrive at a base case pro forma analysis to
determine the effect of the Merger on BB&T. FBR noted that, based on the
Exchange Ratio and the net impact of merger related charges and other one-time
expenses, the impact of the Merger on BB&T's earnings per share and tangible
book value per share based on such earnings forecasts did not appear to be
material. The actual results achieved by the combined company will vary from
the projected results, and such variations may be material.
Analysis of Selected Publicly Traded Companies
In preparing its presentation, FBR used publicly available information to
compare selected financial and market trading information, including book
value, tangible book value, earnings, asset quality ratios, loan loss reserve
levels, profitability and capital adequacy, for BB&T and selected other
publicly traded regional
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commercial banks located in the mid-Atlantic region of the United States. This
peer group consisted of commercial bank holding companies with total assets
between $10 billion and $50 billion in the mid-Atlantic and southeast regions
of the United States. FBR reviewed the historical financial information for
BB&T and the peer group between December 31, 1994 and September 30, 1997.
According to the analysis, BB&T compared favorably to the peer group when
looking at asset quality, earnings performance and operating efficiency.
In connection with rendering the FBR Opinion, FBR confirmed the
appropriateness of its reliance on the analyses used to render its December
16, 1997 opinion by performing procedures to update certain of such analyses
and by reviewing the assumptions upon which such analyses were based and the
factors considered in connection therewith. The FBR Opinion is necessarily
based on economic, market and other conditions as in effect on, and the
information made available to it as of, the date of such opinion. Events
occurring after the date of the FBR Opinion could materially affect the
assumptions used in preparing such opinion.
Pursuant to the FBR Agreement, Franklin retained FBR to act as its
independent financial advisor in connection with the Merger. In the event the
Merger is consummated, Franklin is to pay FBR a success fee (the "Success
Fee") equal to one percent (1.00%) of the fair market value of the aggregate
consideration received by Franklin's shareholders as of the closing of the
Merger. The Success Fee shall be payable as follows: (A) 25% of the
anticipated Success Fee was paid at the signing of the Reorganization
Agreement, which amount shall be returned to Franklin if the Merger is not
consummated for any reason other than the breach of the agreement of sale by
Franklin; and (B) the remainder of such Success Fee shall be due to FBR in
immediately available funds at the closing of the Merger. For purposes of
calculating the fair market value of the aggregate consideration, any
outstanding stock options or other stock based employee plans shall be deemed
fully accelerated to the extent not extinguished in the Merger with an
appropriate reduction to fair market value for the exercise or base price of
outstanding stock options. Franklin also has agreed to reimburse FBR for its
reasonable out-of-pocket expenses in connection with its engagement and to
indemnify FBR and its affiliates and their respective partners, directors,
officers, employees, agents and controlling persons against certain expenses
and liabilities, including liabilities under applicable securities laws.
FBR has advised Franklin that, in the ordinary course of its business as a
full-service securities firm, FBR may, subject to certain restrictions,
actively trade the equity securities of Franklin and/or BB&T for its own
account or for the accounts of its customers, and, accordingly, may at any
time hold a long or short position in such securities.
EXCHANGE RATIO
Upon completion of the Merger, each share of Franklin Common Stock
outstanding at the Effective Time (other than shares held by dissenting
shareholders) will be converted into the right to receive between 0.35 and
0.3743 shares of BB&T Common Stock, subject to possible upward adjustment as
described in the following paragraph. The Exchange Ratio will be determined by
reference to the average closing price of BB&T Common Stock on the NYSE for
the 20 trading days immediately preceding the tenth calendar day preceding the
Effective Time (the "Closing Value"). If the Closing Value is $54.50 or less,
the Exchange Ratio will be 0.3743 shares of BB&T Common Stock for each share
of Franklin Common Stock. If the Closing Value is $65.00 or more, the Exchange
Ratio will be 0.35 shares of BB&T Common Stock for each share of Franklin
Common Stock. If the Closing Value is between $54.50 and $65.00, the Exchange
Ratio will be determined by reference to the following table, which sets forth
the applicable Exchange Ratio for each Closing Value and the approximate
implied value of the BB&T Common Stock that would be received per share of
Franklin Common Stock. (For purposes of applying this table, the Closing Value
will be rounded to the nearest half or whole dollar figure, and any Closing
Value at the midpoint between two Closing Values listed below (e.g., $57.25)
will be rounded to the nearest whole dollar figure.)
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<TABLE>
<CAPTION>
APPROXIMATE IMPLIED VALUE OF BB&T COMMON STOCK PER
CLOSING VALUE EXCHANGE RATIO SHARE OF FRANKLIN COMMON STOCK
- ------------- -------------- --------------------------------------------------
<S> <C> <C>
$54.50 0.3743 $20.40
$55.00 0.3731 $20.52
$55.50 0.3720 $20.65
$56.00 0.3708 $20.77
$56.50 0.3696 $20.88
$57.00 0.3685 $21.01
$57.50 0.3673 $21.12
$58.00 0.3662 $21.24
$58.50 0.3650 $21.35
$59.00 0.3638 $21.46
$59.50 0.3627 $21.58
$60.00 0.3615 $21.69
$60.50 0.3603 $21.80
$61.00 0.3592 $21.91
$61.50 0.3580 $22.02
$62.00 0.3568 $22.12
$62.50 0.3557 $22.23
$63.00 0.3545 $22.33
$63.50 0.3534 $22.44
$64.00 0.3522 $22.54
$64.50 0.3510 $22.64
$65.00 0.3500 $22.75
</TABLE>
Under certain circumstances, the Exchange Ratio could be adjusted further
upward pursuant to the Reorganization Agreement. Under no circumstances would
the Exchange Ratio be less than 0.35 shares of BB&T Common Stock for each
share of Franklin Common Stock. An upward adjustment to the Exchange Ratio in
excess of 0.3743 could occur only if Franklin should elect to terminate the
Reorganization Agreement as described below, and if BB&T then elects to avoid
termination of the Reorganization Agreement by adjusting the Exchange Ratio.
Franklin may elect to terminate the Reorganization Agreement and abandon the
Merger if the circumstances in both (1) and (2) exist:
(1) the Closing Value is less than $51.00, and
(2) (i) the amount obtained by dividing the Closing Value by $63.75 (the
closing price of BB&T Common Stock on December 15, 1997) is less than (ii)
85% of the amount obtained by dividing the Index Price on the Determination
Date by the Index Price on the Starting Date (as these terms are defined
below).
Franklin may refuse to complete the Merger pursuant to this provision by
giving written notice to BB&T during the five-day period beginning two
business days after the Determination Date. BB&T will thereafter have a five-
day period in which it may elect to increase the Exchange Ratio so that
holders of Franklin Common Stock would receive consideration having an implied
market value (based on the Closing Value) equal to the consideration they
would have received if the Closing Value had been $51.00, or approximately
$19.09 per share of Franklin Common Stock. BB&T WOULD HAVE NO OBLIGATION TO
ELECT TO INCREASE THE EXCHANGE RATIO. Such an election would be made by giving
notice to Franklin of the election and the revised Exchange Ratio, whereupon
Franklin would be required to proceed with the Merger with the adjusted
Exchange Ratio in accordance with all other terms of the Reorganization
Agreement. Franklin may withdraw its notice of termination at any time before
the Effective Time, and could elect to proceed with the Merger at the Exchange
Ratio of 0.3743 if BB&T were to determine not to adjust the Exchange Ratio.
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For purposes of the rights of termination and adjustment described above,
the following terms are defined as follows:
"Determination Date" means the tenth calendar day before the date
designated by BB&T as the Closing Date.
"Index Group" means 14 bank holding companies designated in the
Reorganization Agreement, the common stocks of all of which must be
publicly traded and as to which there may not have been, since the Starting
Date and before the Determination Date, any public announcement of a
proposal for such company to be acquired or for such company to acquire
another company or companies in transactions with a value exceeding 25% of
the acquiror's market capitalization. In the event that any such company or
companies are removed from the Index Group, the weights (which have been
determined based upon the number of shares of outstanding common stock)
will be redistributed proportionately for purposes of determining the Index
Price. If any company belonging to the Index Group, or BB&T, declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction between the Starting
Date and the Determination Date, the prices for the common stock of such
company or BB&T will be appropriately adjusted for the purposes of applying
the provision set forth above.
"Index Price" on a given date means the weighted average (weighted in
accordance with the factors listed above) of the closing sales prices of
the companies composing the Index Group.
"Starting Date" means December 16, 1997.
These conditions reflect the parties' agreement that Franklin's shareholders
will assume certain risks of decline in the value of BB&T Common Stock. If the
value of BB&T Common Stock were to decline so that the Closing Value was below
$51.00, but the Closing Value did not reflect a decline in the price of BB&T
Common Stock from $63.75 (the closing price of BB&T Common Stock on December
15, 1997, which was the date the parties agreed upon the Exchange Ratio) (the
"Starting Price") of more than 15% in comparison to the stock prices of the
group of comparable bank holding company stocks (the Index Group referenced
above) as measured from December 16, 1997 to the Determination Date, then
Franklin's shareholders would continue to assume the risk of decline in the
value of BB&T Common Stock. Franklin has the right to terminate the
Reorganization Agreement only when both (a) the Closing Value of BB&T Common
Stock is less than $51.00 and (b) the decline from the value of the Starting
Price to the Closing Value exceeds by more than 15% the decline in value for
the group of comparable bank holding companies from December 16, 1997 to the
Determination Date.
If the Franklin Board elects to terminate the Reorganization Agreement
because of a decline in the price of BB&T Common Stock, BB&T may avoid
termination by increasing the Exchange Ratio. In deciding whether to increase
the Exchange Ratio, the principal factors BB&T would consider include, without
limitation, the projected effect of the Merger on BB&T's pro forma earnings
and book value per share and whether BB&T's assessment of Franklin's earning
potential as part of BB&T justifies the issuance of a greater number of shares
of BB&T Common Stock. If BB&T should decline to adjust the Exchange Ratio,
Franklin may elect to withdraw its election to terminate and to proceed with
the Merger without adjustment. In making this determination, the principal
factors the Franklin Board would consider include, without limitation, whether
the Merger remains in the best interest of Franklin and its shareholders,
despite a decline in the BB&T Common Stock price, and whether the
consideration to be received by the holders of Franklin Common Stock remains
fair from a financial point of view.
In the event BB&T should decline to adjust the Exchange Ratio and Franklin
should determine to proceed without adjustment, BB&T and Franklin intend to
review the circumstances prevailing at that time to determine whether to
resolicit the Franklin shareholders, although the terms of the Reorganization
Agreement do not specifically require the parties to effect a resolicitation
of the Franklin shareholders.
The operation of the Exchange Ratio and the adjustment mechanism can be
illustrated by five scenarios. (For purposes of the numerical examples, the
Index Price, as of December 16, 1997, is deemed to be $100.)
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<PAGE>
(a) The first scenario is that the Closing Value of the BB&T Common Stock
is not less than $65.00. Under this scenario, the Exchange Ratio would be
0.35 and there would be no potential adjustment to the Exchange Ratio and
no right on the part of Franklin to terminate the Reorganization Agreement
due to a decline in the price of BB&T Common Stock. The implied market
value (based on the Closing Value) of the consideration to be received by
Franklin shareholders would be not less than $22.75.
(b) The second scenario is that the Closing Value is between $54.50 and
$65.00. Under this scenario, the Exchange Ratio would be determined based
on the table set forth above, and there would be no right on the part of
Franklin to terminate the Reorganization Agreement. The approximate implied
market value (based on the Closing Value) of the consideration to be
received by Franklin shareholders would be between $20.40 and $22.75.
(c) The third scenario is that the Closing Value is at least $51.00 and
less than $54.50. Under this scenario, the Exchange Ratio would be 0.3743
and there would be no right on the part of Franklin to terminate the
Reorganization Agreement due to a decline in the value of BB&T Common Stock
and therefore no potential adjustment to the Exchange Ratio, even though
the implied market value of the consideration to be received by Franklin
shareholders could have fallen from a pro forma $22.45 as of December 15,
1997 to $19.09 per share (based on a Closing Value of $51.00) as of the
Determination Date, assuming that the value at the Determination Date
equals the Closing Value.
(d) The fourth scenario is that the Closing Value is less than $51.00 but
the BB&T Ratio is equal to or above the Index Ratio. In this case, the
Exchange Ratio would be 0.3743 and there would be no right on the part of
Franklin to terminate the Reorganization Agreement due to the decline in
the value of BB&T Common Stock and therefore no potential adjustment to the
Exchange Ratio, even though the implied market value of the consideration
to be received by Franklin shareholders would have fallen from a pro forma
$22.45 as of December 15, 1997 to less than $19.09 per share. For example,
if the Closing Value were $45.00 and the Index Price were $80.00, the BB&T
Ratio would be 0.706 ($45.00 / $63.75) and the Index Ratio would be 0.68
(0.85 X ($80.00 / $100.00)). Based upon the assumed $45.00 Closing Value,
the consideration to be received by Franklin shareholders would have an
implied market value of $16.84 per share.
(e) The fifth scenario is that both the Closing Value is less than $51.00
and the BB&T Ratio is less than the Index Ratio. In this case, Franklin
would have the right to terminate the Reorganization Agreement based on the
decline in BB&T's stock price. BB&T would have the right, but not the
obligation, to reinstate the Reorganization Agreement by adjusting the
Exchange Ratio so that Franklin shareholders would receive shares of BB&T
Common Stock having an implied market value (based upon the Closing Value)
equal to $19.09 per share. For example, if the Closing Value were $45.00
and the Index Price were $85.00, the BB&T Ratio would be 0.706 ($45.00 /
$63.75) and the Index Ratio would be 0.7225 (0.85 X ($85.00 / $100.00)).
Based upon the assumed $45.00 Closing Value, the consideration to be
received by Franklin shareholders would have an implied market value of
$16.84 per share. If the Franklin Board elected to terminate the
Reorganization Agreement, BB&T would have the right, but not the
obligation, to reinstate the Reorganization Agreement by increasing the
Exchange Ratio within five days to 0.4242, which represents $19.09 divided
by the Closing Value. Based upon the assumed $45.00 Closing Value, the new
Exchange Ratio would represent a value to Franklin shareholders of $19.09
per share.
Franklin shareholders should be aware that the actual market value of a
share of BB&T Common Stock at the Effective Time and at the time certificates
for those shares are delivered following surrender and exchange of
certificates for shares of Franklin Common Stock may be more or less than the
Closing Value. FRANKLIN SHAREHOLDERS ARE URGED TO OBTAIN INFORMATION ON THE
TRADING VALUE OF BB&T COMMON STOCK THAT IS MORE RECENT THAN THAT PROVIDED IN
THIS PROXY STATEMENT/PROSPECTUS. See "SUMMARY--Comparative Market Prices and
Dividends."
No fractional shares of BB&T Common Stock will be issued in the Merger.
Holders of Franklin Common Stock otherwise entitled to a fractional share will
be paid an amount in cash determined by multiplying the
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<PAGE>
fractional part of such share of BB&T Common Stock by the closing price of
BB&T Common Stock on the last trading day before the Effective Time.
EXCHANGE OF FRANKLIN COMMON STOCK CERTIFICATES
At the Effective Time, by virtue of the Merger and without any action on the
part of Franklin or the holders of Franklin Common Stock, each share of
Franklin Common Stock issued and outstanding immediately before the Effective
Time (other than shares held by dissenting shareholders) will be converted
into and will represent solely the right to receive, upon surrender of the
certificate representing such share of Franklin Common Stock as described
below, whole shares of BB&T Common Stock and cash in lieu of any fractional
share (the "Merger Consideration"). Promptly after the Effective Time, BB&T
will deliver or mail to each Franklin shareholder a form of letter of
transmittal and instructions for use in effecting the surrender of the
certificates that, immediately before the Effective Time, represented any
shares of Franklin Common Stock in exchange for the Merger Consideration. Upon
surrender of such certificates or other sufficient evidence of ownership,
together with such letter of transmittal duly executed and completed in
accordance with its instructions and such other documents as may be reasonably
requested, BB&T will promptly transfer the Merger Consideration to the persons
entitled to receive it. For a discussion of certain anticipated federal tax
consequences of the Merger to the shareholders of Franklin, see "--Certain
Federal Income Tax Consequences of the Merger."
HOLDERS OF FRANKLIN COMMON STOCK SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
UNTIL THEY RECEIVE TRANSMITTAL FORMS AND INSTRUCTIONS.
Until surrendered as described above, each outstanding certificate that
prior to the Effective Time represented one or more shares of Franklin Common
Stock (other than certificates that represented shares held by dissenting
shareholders) will be deemed upon the Effective Time for all purposes to
represent only the right to receive the Merger Consideration. No interest will
be paid or accrued on the Merger Consideration upon the surrender of the
certificate or certificates representing shares of Franklin Common Stock. With
respect to any certificate for Franklin Common Stock that has been lost or
destroyed, BB&T will pay the Merger Consideration attributable to such
certificate upon receipt of a surety bond or other adequate indemnity as
required in accordance with BB&T's standard policy and evidence reasonably
satisfactory to BB&T of ownership of the shares in question. After the
Effective Time, no transfer of the shares of Franklin Common Stock outstanding
immediately before the Effective Time will be made on the stock transfer books
of BB&T.
BB&T will pay any dividends or other distributions with a record date before
the Effective Time that have been declared or made by Franklin in respect of
shares of Franklin Common Stock in accordance with the terms of the
Reorganization Agreement and that remain unpaid at the Effective Time. To the
extent permitted by law, former shareholders of record of Franklin will be
entitled to vote after the Effective Time at any meeting of BB&T shareholders
the number of whole shares of BB&T Common Stock into which their respective
shares of Franklin Common Stock are converted, regardless of whether such
holders have exchanged their certificates representing Franklin Common Stock
for certificates representing BB&T Common Stock. Whenever a dividend or other
distribution is declared by BB&T on the BB&T Common Stock, the record date for
which is at or after the Effective Time, the declaration will include
dividends or other distributions on all shares of BB&T Common Stock issuable
pursuant to the Reorganization Agreement, but after the Effective Time no
dividend or other distribution payable to the holders of record of BB&T Common
Stock as of any time subsequent to the Effective Time will be delivered to the
holder of any certificate representing Franklin Common Stock until such holder
surrenders such certificate for exchange described above. Upon surrender of
such certificate, both the BB&T Common Stock certificate and any undelivered
dividends and cash payments payable hereunder (without interest) will be
delivered and paid with respect to each share represented by such certificate.
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<PAGE>
THE REORGANIZATION AGREEMENT
Effective Date and Time of the Merger
The Reorganization Agreement provides that the closing of the transactions
contemplated therein will take place on the last business day of the month (or
the first business day of the next month) that is at least ten days after the
satisfaction of the conditions to the completion of the Merger, or such later
date as the parties may otherwise agree. The Effective Time will occur at the
time and date specified in the Certificate of Merger to be filed with the
Delaware Department of State, upon the filing of that Certificate of Merger
and the filing of Articles of Merger with the Office of the Secretary of State
of North Carolina. It is currently anticipated that the filing of the
Certificate of Merger and the Articles of Merger will take place as soon as
practicable following the date on which the Plan of Merger is approved by the
Franklin shareholders and all other conditions to the respective obligations
of BB&T and Franklin to complete the Merger have been satisfied. If the Merger
is approved at the Meeting on June 24, 1998, it is currently anticipated that
the filing of the Certificate of Merger and the Articles of Merger and the
Effective Time will occur on or about July 1, 1998.
Conditions to the Merger
The respective obligations of BB&T and Franklin to carry out the Merger and
the other transactions contemplated by the Reorganization Agreement are
subject to satisfaction (or, if permissible, waiver) of the following
conditions at or before the Effective Time: (a) all corporate action necessary
to authorize the execution, delivery and performance of the Reorganization
Agreement and the Plan of Merger must have been duly and validly taken,
including the approval of the shareholders of Franklin of the Reorganization
Agreement and the Plan of Merger; (b) the Registration Statement (including
any post-effective amendments) must be effective under the Securities Act,
BB&T shall have received all state securities or "Blue Sky" permits or
authorizations, or confirmations as to the availability of an exemption from
registration requirements as may be necessary, no proceedings may be pending
or threatened by the Commission or any state securities administration to
suspend the effectiveness of the Registration Statement and the BB&T Common
Stock to be issued in the Merger must either have been registered or be
subject to exemption from registration under applicable state securities laws;
(c) all approvals of the transactions contemplated in the Reorganization
Agreement from the Federal Reserve and any other state or federal agency that
are necessary for the completion of the Merger must have been received and all
waiting periods with respect to such approvals must have expired; (d) neither
BB&T nor Franklin nor any of their respective subsidiaries may be subject to
any order, decree or injunction of a court or agency of competent jurisdiction
that enjoins or prohibits completion of the transactions contemplated by the
Reorganization Agreement; (e) Franklin and BB&T must have received an opinion
of BB&T's legal counsel, Womble Carlyle Sandridge & Rice, PLLC, in form and
substance satisfactory to Franklin and BB&T, substantially to the effect that
the Merger will constitute one or more reorganizations under Section 368 of
the Code and that the shareholders of Franklin will not recognize any gain or
loss to the extent that they exchange shares of Franklin Common Stock for
shares of BB&T Common Stock; and (f) BB&T must have received letters, dated as
of the date of filing of the Registration Statement with the Commission and as
of the Effective Time, in form and substance reasonably satisfactory to BB&T,
from Arthur Andersen LLP to the effect that the Merger will qualify for
pooling-of-interests accounting treatment.
The obligations of Franklin to carry out the transactions contemplated by
the Reorganization Agreement are also subject to the satisfaction of the
following additional conditions at or before the Effective Time, unless waived
by Franklin: (a) BB&T must have performed in all material respects all
obligations and complied in all material respects with all covenants required
by the Reorganization Agreement; (b) the shares of BB&T Common Stock to be
issued in the Merger must have been approved for listing on the NYSE, subject
to official notice of issuance; and (c) Franklin must have received certain
closing certificates and legal opinions from BB&T and its counsel.
In addition, all representations and warranties of BB&T will be evaluated as
of the date of the Reorganization Agreement and as of the Effective Time as
though made on and as of the Effective Time (or on
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<PAGE>
the date designated, in the case of any representation and warranty that
specifically relates to an earlier date), except as otherwise contemplated by
the Reorganization Agreement or consented to in writing by Franklin. The
representations and warranties of BB&T concerning (a) its capitalization; (b)
its and its subsidiaries' organization and authority to conduct business; (c)
its authorization, and the binding nature, of the Reorganization Agreement;
(d) the absence of any conflict between the transactions contemplated by the
Reorganization Agreement and the BB&T Articles, the BB&T Bylaws, BB&T's
subsidiaries' organizational documents, agreements to which BB&T is party or
any applicable laws or orders; (e) the need for regulatory approvals of the
transactions contemplated in the Reorganization Agreement; and (f) its
forbearance from taking any actions that would negatively affect the pooling-
of-interest or tax-free elements of the Merger or the receipt of necessary
regulatory approvals must be in each case true and correct (except for
inaccuracies that are de minimis in amount). Moreover, there must not exist
inaccuracies in any of the representations and warranties of BB&T set forth in
the Reorganization Agreement such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a material adverse effect
on BB&T.
The obligations of BB&T to carry out the transactions contemplated by the
Reorganization Agreement are also subject to satisfaction of the following
additional conditions at or before the Effective Time, unless, where
permissible, waived by BB&T: (a) no regulatory approval may have imposed any
condition or requirement that, in the reasonable opinion of the BB&T Board,
would so materially adversely affect the business or economic benefits to BB&T
of the transactions contemplated by the Reorganization Agreement as to render
their completion inadvisable or unduly burdensome (although BB&T must have
used reasonable efforts to cause any such conditions or requirements to be
removed or modified); (b) Franklin must have performed in all material
respects all obligations and complied in all material respects with all
covenants required by the Reorganization Agreement; (c) BB&T must have
received written agreements from certain affiliates of Franklin concerning the
shares of BB&T Common Stock to be received by them; and (d) BB&T must have
received certain closing certificates and legal opinions from Franklin and its
counsel.
In addition, all representations and warranties of Franklin will be
evaluated as of the date of the Reorganization Agreement and as of the
Effective Time as though made on and as of the Effective Time (or on the date
designated, in the case of any representation and warranty that specifically
relates to an earlier date), except as otherwise contemplated by the
Reorganization Agreement or consented to in writing by BB&T. The
representations and warranties of Franklin concerning (a) its capitalization,
(b) its and its subsidiaries' organization and authority to conduct business,
(c) its ownership of its subsidiaries, (d) its authorization, and the binding
nature, of the Reorganization Agreement, (e) the absence of conflict between
the transactions contemplated by the Reorganization Agreement and the Franklin
Certificate of Incorporation or the Franklin Bylaws, (f) its forbearance from
taking any actions that would negatively affect the pooling-of-interests or
tax-free elements of the Merger or the receipt of necessary regulatory
approvals and (g) actions taken to exempt the Merger from Delaware anti-
takeover laws must in each case be true and correct (except for inaccuracies
that are de minimis in amount). Moreover, there must not exist inaccuracies in
any of the representations and warranties of Franklin set forth in the
Reorganization Agreement such that the effect of such inaccuracies
individually or in the aggregate has, or is reasonably likely to have, a
material adverse effect on Franklin and Franklin's subsidiaries taken as a
whole.
Franklin has agreed in the Reorganization Agreement that before the
Effective Time, and except with the prior written consent of BB&T, it will
not, and will cause each of its subsidiaries not to:
(a) carry on its business other than in the usual, regular and ordinary
course in substantially the same manner as previously conducted, or
establish or acquire any new subsidiary or engage in any new activity;
(b) declare, set aside, make or pay any dividend or other distribution in
respect of its capital stock;
(c) issue any shares of its capital stock, except pursuant to its stock
option plans and the Option Agreement;
(d) issue, grant or authorize any rights to acquire Franklin Common Stock
or effect any recapitalization, reclassification, stock dividend, stock
split or like change in capitalization;
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(e) amend the Franklin Certificate of Incorporation or the Franklin
Bylaws; impose or permit imposition, of any lien, charge or encumbrance on
any share of stock held by it in any subsidiary, or permit any such lien,
charge or encumbrance to exist; or waive or release any material right or
cancel or compromise any debt or claim, in each case other than in the
ordinary course of business;
(f) merge with any other entity or permit any other entity to merge into
it, or consolidate with any other entity; acquire control over any other
entity; or liquidate, sell or otherwise dispose of any assets or acquire
any assets, other than in the ordinary course of its business consistent
with past practices;
(g) fail to comply in any material respect with any laws, regulations,
ordinances or governmental actions applicable to it and to the conduct of
its business;
(h) increase the rate of compensation of any of its directors, officers
or employees, or pay or agree to pay any bonus to, or provide any other
employee benefit or incentive to, any of its directors, officers or
employees, except (i) for normal merit increases in the ordinary course of
business consistent with past practices for employees below the level of
its executive management committee, (ii) with respect to officers at the
level of the executive management committee: (A) salary increases granted
in the ordinary course of business consistent with past practices (not to
exceed, with respect to any such officer, 6.5% of the officer's base salary
level for 1997); (B) bonuses payable for 1997 in the ordinary course of
business consistent with past practices; and (C) stock options granted at
fair market value in accordance with the formula for such grants currently
in effect and applied in past years; and (iii) with respect to directors,
grants of options in January 1998, at fair market value pursuant to the
Nondiscretionary Stock Option Plan in accordance with the formula for such
grants currently in effect and applied in past years;
(i) enter into or substantially modify (except as may be required by
applicable law or regulation) any pension, retirement, stock option, stock
purchase, stock appreciation right, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees;
(j) solicit or encourage inquiries or proposals with respect to, furnish
any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a substantial
portion of the assets of, or a substantial equity interest in, Franklin or
any subsidiary or any business combination with Franklin or any subsidiary
other than as contemplated by the Reorganization Agreement; or authorize
any officer, director, agent or affiliate of Franklin or any subsidiary to
do any of the above; or fail to notify BB&T promptly (within 24 hours) if
any such inquiries or proposals are received, any such information is
requested or required, or any such negotiations or discussions are sought
to be initiated, except that this provision does not apply to furnishing
information, negotiations or discussions following an unsolicited offer if,
as a result of such offer, Franklin is advised in writing by legal counsel
that in its opinion the failure so to furnish information or negotiate
would reasonably likely constitute a breach of the fiduciary duties of the
Franklin Board to its stockholders;
(k) enter into (i) any material agreement, arrangement or commitment not
made in the ordinary course of business except a three-year commitment to
sponsor the Franklin National Bank Classic Basketball Tournament, (ii) any
agreement, indenture or other instrument not made in the ordinary course of
business relating to the borrowing of money by Franklin or a subsidiary or
guarantee by Franklin or a subsidiary of any obligation, (iii) any
agreement, arrangement or commitment relating to the employment or
severance of a consultant or the employment, severance, election or
retention in office of any present or former director, officer or employee
(except that this clause does not apply to the election of directors by
stockholders or the election of officers by directors in the normal course)
except to the extent otherwise provided in an agreement, arrangement or
commitment previously disclosed to BB&T or terminable by Franklin or its
subsidiaries without penalty on written notice of no more than thirty days;
or (iv) any contract, agreement or understanding with a labor union;
(l) change its lending, investment or asset liability management policies
in any material respect, except as may be required by applicable law,
regulation, or directives, and except that after approval of the
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Reorganization Agreement and the Plan of Merger by its stockholders
Franklin will cooperate in good faith with BB&T to adopt policies,
practices and procedures consistent with those utilized by BB&T, effective
on or before the Closing Date;
(m) change its methods of accounting in effect at December 31, 1996,
except as required by changes in U.S. generally accepted accounting
principles concurred in by BB&T's independent certified public accountants,
which concurrence may not be unreasonably withheld, conditioned or delayed,
or change any of its methods of reporting income and deductions for federal
income tax purposes from those employed in the preparation of its federal
income tax returns for the year ended December 31, 1996, except as required
by changes in law or regulation;
(n) incur any commitments for capital expenditures or obligation to make
capital expenditures in excess of $50,000, for any one expenditure, or
$150,000, in the aggregate;
(o) incur any indebtedness other than deposits from customers, advances
from the Federal Home Loan Bank or Federal Reserve Bank and reverse
repurchase arrangements in the ordinary course of business;
(p) take any action that would or could reasonably be expected to (i)
cause the Merger not to be accounted for as a pooling of interests or not
to constitute a reorganization under Section 368 of the Code as determined
in good faith by BB&T, (ii) result in any inaccuracy of a representation or
warranty herein which would allow for a termination of the Reorganization
Agreement, or (iii) cause any of the conditions precedent to the
transactions contemplated by the Reorganization Agreement to fail to be
satisfied;
(q) dispose of any material assets other than in the ordinary course of
business; or
(r) agree to do any of the foregoing.
BB&T has agreed in the Reorganization Agreement that before the Effective
Time, and except with the prior written consent of Franklin, which consent may
not be arbitrarily or unreasonably withheld, neither it nor any of its
subsidiaries will take any action that would or might be expected to (a) cause
the Merger not to be accounted for as a pooling of interests or not to
constitute a tax-free reorganization under Section 368 of the Code; (b) result
in any inaccuracy of a representation or warranty in the Reorganization
Agreement that would allow for termination of the Reorganization Agreement;
(c) cause any of the conditions precedent to the transactions contemplated by
the Reorganization Agreement to fail to be satisfied; (d) exercise the Option
Agreement other than in accordance with its terms, or dispose of the shares of
Franklin Common Stock issuable upon exercise of the option rights conferred
thereby other than as permitted or contemplated by the terms thereof; or (e)
fail to comply in any material respect with any laws, regulations, ordinances
or governmental actions applicable to it and to the conduct of its business.
Waiver; Amendment; Termination; Expenses
Except with respect to any required regulatory approval, BB&T or Franklin
may at any time (whether before or after approval of the Reorganization
Agreement and the Plan of Merger by the Franklin shareholders) extend the time
for the performance of any of the obligations or other acts of the other party
and may waive (a) any inaccuracies of the other party in the representations
or warranties contained in the Reorganization Agreement, the Plan of Merger or
any document delivered pursuant thereto, (b) compliance with any of the
covenants, undertakings or agreements of the other party, or satisfaction of
any of the conditions precedent to its obligations, contained in the
Reorganization Agreement or in the Plan of Merger or (c) the performance by
the other party of any of its obligations set out therein. No such extension
or waiver, or amendment or supplement executed after approval by the Franklin
shareholders of the Reorganization Agreement and the Plan of Merger, however,
may reduce either the number of shares of BB&T Common Stock into which each
share of Franklin Common Stock will be converted in the Merger or the payment
terms for fractional interests. Subject to the foregoing limitation, the
Reorganization Agreement or the Plan of Merger may be amended or supplemented
at any time in writing by mutual agreement of BB&T and Franklin.
In the event of nonfulfillment of any of the conditions to the obligation of
either party to complete the Merger, such party will consider the materiality
of such nonfulfillment. In the case of the nonfulfillment of a
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condition to Franklin's obligations, Franklin will, if appropriate under the
circumstances, resolicit shareholder approval of the Reorganization Agreement
and the Plan of Merger and in connection therewith provide appropriate
information concerning such nonfulfillment.
The Reorganization Agreement may be terminated, and the Merger may be
abandoned:
(a) at any time before the Effective Time, by the mutual consent in
writing of BB&T and Franklin;
(b) at any time before the Effective Time, by either party (i) in the
event of a material breach by the other party of any covenant or agreement
contained in the Reorganization Agreement or (ii) in the event of an
inaccuracy of any representation or warranty of the other party contained
in the Reorganization Agreement that would provide the nonbreaching party
the ability to refuse to complete the Merger under the applicable standard
set forth in the Reorganization Agreement (see "--Conditions to the
Merger"); and, in the case of (i) or (ii), if such breach or inaccuracy has
not been cured by the earlier of 30 days following written notice of such
breach to the party committing such breach or inaccuracy or the Effective
Time;
(c) at any time before the Effective Time, by either party in writing, if
any of the conditions precedent to the obligations of the other party to
complete the transactions contemplated in the Reorganization Agreement
cannot be satisfied or fulfilled before the Closing Date, and the party
giving the notice is not in breach of any of its representations,
warranties, covenants or undertakings;
(d) at any time, by either party in writing, if any of the applications
for prior regulatory approval are denied, and the time period for appeals
and requests for reconsideration has run;
(e) at any time, by either party in writing, if the shareholders of
Franklin do not approve the Reorganization Agreement and the Plan of
Merger;
(f) at any time following October 31, 1998, by either party in writing,
if the Effective Time has not occurred by the close of business on such
date and the party giving the notice is not in breach of any of its
representations, warranties, covenants or undertakings; or
(g) by Franklin, pursuant to the provisions of the Reorganization
Agreement described above under "--Exchange Ratio."
If the Reorganization Agreement and the Plan of Merger are terminated
pursuant to any of the provisions described above, both the Reorganization
Agreement and the Plan of Merger will become void and have no effect, except
that (a) provisions in the Reorganization Agreement relating to
confidentiality and expenses will survive any such termination and (b) a
termination for an uncured breach of a covenant, agreement or understanding or
inaccuracy in a representation or warranty will not relieve the breaching
party from liability for that breach or inaccuracy giving rise to the
termination. The Option Agreement is governed by its own terms. See "--Option
Agreement."
If either party refuses to complete the transactions contemplated by the
Reorganization Agreement notwithstanding the satisfaction in all material
respects of the conditions precedent to its obligation to close, or if any
default under or breach of any representation, warranty or covenant on the
part of a party has occurred that results (after all opportunities to cure) in
the failure to complete the transactions contemplated thereby, the non-
defaulting party will be entitled to seek and obtain, without limitation,
specific performance of the Reorganization Agreement or to seek and obtain
monetary damages from the defaulting party plus any fees and expenses,
including reasonable attorneys' and other professionals' fees, in connection
with the pursuit of such remedies. As a condition to seeking specific
performance, BB&T would not be required to have tendered the Merger
Consideration, but must be ready, willing and able to do so. Any disputes
under the Reorganization Agreement not settled within 30 days will be resolved
by binding arbitration.
Each party to the Reorganization Agreement will bear all expenses incurred
by it in connection with the Reorganization Agreement and the transactions
contemplated thereby, except that printing expenses incurred in connection
with this Proxy Statement/Prospectus and the Registration Statement will be
borne 50% by BB&T and 50% by Franklin.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Franklin's management, including all of its directors,
have certain interests in the Merger that are in addition to their interests
as shareholders of Franklin generally.
Employment Agreements
In connection with the Merger, BB&T-NC will enter into an employment
agreement with Mr. Pincus, who is 51, potentially providing for employment
until he reaches age 65; a four-year employment agreement with each of Albert
A. D'Alessandro, David G. Fleming and Joseph B. Head; a three-year employment
agreement with Diane M. Begg; and a two-and-a-half year employment agreement
with each of Kim Ray, J. Mercedes Alvarez, Susan J. Schumacher and Ronald P.
Gudbrandsen (referred to herein individually as an "Executive" and
collectively as the "Executives"). The employment agreements will provide for
the employment of Mr. Pincus as Regional President of the Metropolitan
Washington Region and each of the remaining Executives as either a Senior Vice
President or a Vice President of BB&T-NC.
The employment agreement for each of the Executives provides that the
Executive will receive a base salary at least equal to the base salary
received by that Executive from Franklin or its subsidiaries as of January 1,
1998 (plus, in the case of Mr. Pincus, an additional $5,000 per year as
compensation for lost benefits), with an annual increase each year based on
BB&T-NC's performance review procedures and compensation practices for
similarly situated employees and the Executive's performance. Each Executive
will be entitled to participate in any bonus or incentive plan, whether it
provides for awards in cash or securities, made available to officers of BB&T-
NC similarly situated to the Executive, or such other similar plans for which
the Executive may become eligible and designated a participant. Each Executive
also will be entitled to receive, on the same basis as other officers of BB&T-
NC, employee pension and welfare benefits and group employee benefits such as
sick leave, vacation, group disability and health, dental, life and accident
insurance, stock option plan and similar indirect compensation that BB&T-NC
may from time to time extend to its similarly situated officers. The
employment agreement with Mr. Pincus provides that his anticipated opportunity
level with respect to stock options will be 60% of his base salary rather than
the normal opportunity level for similarly situated employees in effect from
time to time.
In addition to the foregoing, BB&T-NC will maintain for the benefit of Mr.
Pincus the current deferred compensation plan between Mr. Pincus and FNB
through December 20, 2002 and the current split-dollar life insurance
agreement among Mr. Pincus, the Robert P. Pincus Family Trust and FNB. Also,
in the case of the employment agreement with each of Messrs. Pincus and Head,
BB&T-NC will assume Franklin's liability and obligations with respect to the
automobile lease currently in effect for such individual's benefit for the
remainder of the existing lease term.
Each Executive's employment agreement provides that BB&T-NC may terminate
his or her employment for reasons other than disability or for cause. The
employment agreements also provide that the Executive may terminate the
agreement on the basis of his or her duties or scope of responsibility being
materially reduced or on the basis of an unremedied material breach of the
agreement by BB&T-NC (or, in the case of Mr. Pincus, based on an involuntary
relocation of more than 25 miles). Upon termination under either of these sets
of circumstances, the Executive will, if he or she complies with certain
noncompetition provisions, be entitled to receive an annual salary for the
remainder of what would otherwise have been the term of the agreement equal to
the highest amount of annual cash compensation (including bonuses) received
during any of the preceding three calendar years ("Termination Compensation").
In the case of the employment agreement with Mr. Pincus, the remainder of the
term of the agreement would be the lesser of three years from the time of
termination or Mr. Pincus' 65th birthday. In addition, each Executive would
continue to receive health insurance coverage from BB&T-NC on the same terms
as were in effect before the termination, either under BB&T-NC's plans or
comparable coverage, during the time payments of Termination Compensation are
made. In addition, the employment agreement with Mr. Pincus provides that if
he resigns after the four-year anniversary of the date of the agreement
because of a material reduction in the geographic area of the Metropolitan
Washington Region, as
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that phrase is defined in his agreement, then at the time of termination he
may elect not to receive the Termination Compensation, and would be released
from the noncompetition provisions of his agreement.
The employment agreement with each Executive provides that if he or she were
to elect to resign from employment after the two-year anniversary (one year in
the case of Ms. Begg, Schumacher and Alvarez and Messrs. Ray and Gudbrandsen)
of the date of the agreement other than for "Good Reason" (defined below) or
on account of disability or grounds that would give rise to Termination
Compensation as described above, he or she would be entitled to receive an
annual amount for the remainder of what would otherwise have been the
remainder of the term of the agreement equal to 70% (100% in the case of Ms.
Begg) of his or her annual base salary then in effect.
Each of the employment agreements provides that, in the event of a "Change
of Control" (defined below) of BB&T-NC or BB&T, the Executive may voluntarily
terminate employment with BB&T-NC up until twelve months after the Change of
Control (or in the case of Mr. Pincus the second anniversary of his agreement,
if later) for Good Reason and (a) be entitled to receive in a lump sum (i) any
compensation due but not yet paid through the date of termination and (ii) in
lieu of any further salary payments from the date of termination to the end of
the term of the agreement, an amount equal to the Termination Compensation
times 2.99, and (b) continue to participate in the same group hospitalization
plan, health care plan, dental care plan, life or other insurance or death
benefit plan, and any other present or future similar group employee benefit
plan or program for which similarly situated officers of BB&T-NC generally are
eligible, or comparable plans or coverage, for a period of three years
following termination of employment by the Executive, on the same terms as
were in effect either (A) at the date of termination, or (B) if such plans and
programs in effect before the Change of Control of BB&T-NC or BB&T were,
considered together as a whole, materially more generous to similarly situated
officers of BB&T-NC than at the date immediately preceding the Change of
Control, such plan or program as in effect immediately prior to the Change of
Control. If total payments to any Executive would constitute a "parachute
payment" as that phrase is defined in the Code, total payments will be reduced
by the smallest amount necessary to ensure that no portion of the total
payment would be a "parachute payment."
"Good Reason" means the occurrence of any of the following events without
the Executive's express written consent: (a) the assignment to the Executive
of duties inconsistent with the position and status of the Executives'
positions with BB&T-NC held before the Change of Control; (b) a reduction by
BB&T-NC in the Executive's pay grade or base salary as then in effect, or the
exclusion of the Executive from participation in BB&T-NC's benefit plans in
which he or she previously participated, or BB&T-NC's failure to increase
(within twelve months of the Executive's last increase in base salary) the
Executive's base salary in an amount at least equal, on a percentage basis, to
the average percentage increase in base salary for all executives entitled to
participate in BB&T-NC's executive incentive plans for which the Executive was
eligible in the preceding twelve months; (c) an involuntary relocation of the
Executive more than 100 miles (25 miles in the case of Mr. Pincus) from the
location where the Executive worked immediately before the Change of Control
or the breach by BB&T-NC of any material provision of the employment
agreement; or (d) any purported termination of the employment of the Executive
by BB&T-NC that is not effected in accordance with the employment agreement.
A "Change of Control" would be deemed to occur if (a) any person or group of
persons (as defined in the Exchange Act) together with its affiliates,
excluding employee benefit plans of BB&T-NC or BB&T, is or becomes the
beneficial owner of securities of BB&T-NC or BB&T representing 20% or more of
the combined voting power of BB&T-NC's or BB&T's then outstanding securities;
(b) as a result of a tender offer or exchange offer for the purchase of
securities of BB&T-NC or BB&T (other than an offer by BB&T for its own
securities), or as a result of a proxy contest, merger, consolidation or sale
of assets, or as a result of any combination of the foregoing, individuals who
at the beginning of any two-year period constitute the BB&T Board, plus new
directors whose election or nomination for election by BB&T's shareholders is
approved by a vote of at least two-thirds of the directors still in office who
were directors at the beginning of the two-year period, cease for any reason
during the two-year period to constitute at least two-thirds of the members of
the BB&T Board; (c) the shareholders of BB&T approve a merger or consolidation
of BB&T with any other corporation or entity regardless of which entity is the
survivor, other than a merger or consolidation that would result in the voting
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securities of BB&T outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or being converted into voting
securities of the surviving entity) at least 60% of the combined voting power
of the voting securities of BB&T or the other surviving entity outstanding
immediately after the merger or consolidation; (d) the shareholders of BB&T
approve a plan of complete liquidation or winding-up of BB&T or an agreement
for the sale or disposition by BB&T of all or substantially all of BB&T's
assets; or (e) any other event occurs that the BB&T Board determines should
constitute a Change of Control.
The employment agreements with each of the Executives provide that upon
termination by reason of disability, the Executive would, during the first six
months of the period of disability, continue to earn all compensation
(including bonuses and incentive compensation) and enjoy all benefits to which
he or she would have been entitled absent disability, inclusive of any
compensation received pursuant to any applicable disability insurance plan of
BB&T-NC or BB&T. Thereafter, the Executive would receive the compensation to
which he or she was entitled under any applicable disability insurance plan of
BB&T-NC or BB&T. The employment agreements for the Executives provide in each
case that the agreement would terminate upon the Executive's death.
The Executives' employment agreements with BB&T will supersede any of their
existing employment agreements and change of control arrangements with
Franklin and FNB.
Board of Directors of FNB
After the Merger, members of the board of directors of FNB (which currently
includes all members of the Franklin Board) will have the right, with the
consent of the regional president, to serve as members of BB&T's metropolitan
Washington regional board for a minimum of three years. The annual directors
fees payable during this three-year period to these individuals will equal the
directors fees payable under the fee arrangement in effect for FNB directors
immediately before the Effective Time. Following this three-year period, fees
payable to directors of BB&T's metropolitan Washington regional board will be
as determined by BB&T in accordance with BB&T's standard policies. Also, those
members of the local advisory boards of FNB will have the right, with the
consent of the regional president, to remain on such local boards for three
years after the Effective Time, although such members will be compensated in
accordance with BB&T's standard policies. The stock option plan currently in
effect for members of the Franklin Board will be discontinued before the
Effective Time. BB&T will have no obligation to continue the plan or to
implement any successor plan, although any options granted thereunder prior to
the Effective Time will be treated in the same manner as other outstanding
options to purchase Franklin Common Stock. See "--Effect on Employees,
Employee Benefit Plans and Stock Options."
Indemnification of Directors and Officers
The Reorganization Agreement provides that BB&T or one of its subsidiaries
will purchase and keep in force for a period of three years after the
Effective Time directors' and officers' liability insurance providing coverage
to directors and officers of Franklin for acts or omissions occurring before
the Effective Time. This insurance will provide at least the same coverage and
amounts as contained in Franklin's policy on the date of the Reorganization
Agreement, except that in no event need the annual premium on this policy
exceed 150% of the annual premium payments on Franklin's policy then in effect
(the "Maximum Amount"). If the amount of the premiums necessary to maintain or
procure this insurance coverage exceeds the Maximum Amount, BB&T will use its
reasonable efforts to maintain the most advantageous policies of directors'
and officers' liability insurance obtainable for a premium equal to the
Maximum Amount. In addition, BB&T has agreed in the Reorganization Agreement
to indemnify and hold harmless all individuals who are or have been officers
or directors of Franklin or its subsidiaries before the Effective Time from
any liability for acts or omissions in any capacity undertaken at the
direction of Franklin before the Effective Time, to the fullest extent that
such indemnification is provided pursuant to the Franklin Certificate of
Incorporation and is permitted under the DGCL. See "COMPARISON OF
SHAREHOLDERS' RIGHTS--Exculpation and Indemnification--Franklin."
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RIGHTS OF DISSENTING SHAREHOLDERS
The following summary does not purport to be a complete statement of the
provisions of Delaware law relating to the appraisal rights of shareholders
and is qualified in its entirety by reference to the provisions of Section 262
of the DGCL set forth in full as Appendix III to this Proxy
Statement/Prospectus.
Holders of record of shares of Franklin Common Stock who comply with the
applicable procedures summarized herein will be entitled to dissent and
appraisal rights under Section 262. A person having a beneficial interest in
shares of Franklin Common Stock held of record in the name of another person,
such as a broker or nominee, must act promptly to cause the record holder to
follow the steps summarized below properly and in a timely manner to perfect
appraisal rights.
ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "SHAREHOLDER" ARE TO
THE RECORD HOLDER OF SHARES AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. VOTING
AGAINST, ABSTAINING FROM VOTING OR FAILING TO VOTE ON APPROVAL AND ADOPTION OF
THE REORGANIZATION AGREEMENT WILL NOT CONSTITUTE A DEMAND FOR APPRAISAL WITHIN
THE MEANING OF SECTION 262.
Shareholders who follow the procedures set forth in Section 262 may receive,
in lieu of the Merger Consideration, a cash payment equal to the "fair value"
of their shares of Franklin Common Stock, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, as determined by such court. Such fair value
would be determined by judicial appraisal and could be more than, the same as,
or less than, the Merger Consideration. The statutory right of appraisal
granted by Section 262 is subject to strict compliance with the procedures set
forth below. Failure to follow any of these procedures may result in a
termination or waiver of appraisal rights under Section 262.
To be entitled to receive payment of the fair value of the shares of
Franklin Common Stock, a shareholder (i) must file a written demand for
appraisal of his or her shares with Franklin prior to the voting by Franklin's
shareholders on the Reorganization Agreement and the Plan of Merger at the
Meeting (the demand must reasonably inform Franklin of the identity of the
shareholder and that the shareholder intends thereby to demand an appraisal of
his or her shares of Franklin Common Stock); (ii) must not vote his or her
shares of Franklin Common Stock in favor of approval of the Reorganization
Agreement and the Plan of Merger; and (iii) must have his or her shares of
Franklin Common Stock valued in an appraisal proceeding, as described below. A
proxy or vote against approval and adoption of the Reorganization Agreement
and the Plan of Merger will not satisfy the requirement that a shareholder
file a written demand for appraisal as set forth above. The requirement of a
written demand is separate from, and should not be confused with, the
requirement that a shareholder not vote in favor of approval of the
Reorganization Agreement and the Plan of Merger. A failure to vote on the
Reorganization Agreement and the Plan of Merger will not be construed as a
vote in favor of approval of the Reorganization Agreement and the Plan of
Merger and will not constitute a waiver of a shareholder's rights of
appraisal. A shareholder who returns a signed proxy indicating that he or she
abstains from voting will similarly not waive his or her rights of appraisal.
However, because a proxy signed and left blank will, unless properly revoked,
be voted in favor of approval of the Reorganization Agreement and the Plan of
Merger, a shareholder who returns a signed proxy left blank will waive his or
her rights of appraisal. Therefore, a shareholder electing to exercise
appraisal rights who votes by proxy must not leave his or her proxy blank, but
must either vote against approval of the Reorganization Agreement and the Plan
of Merger or abstain from voting on such matter.
A holder of shares of Franklin Common Stock wishing to exercise his or her
appraisal rights must be the record holder of such shares on the date the
written demand for appraisal is made and must continue to hold the shares of
record until the Effective Time. Accordingly, a holder of shares of Franklin
Common Stock who is the record holder of such shares on the date the written
demand for appraisal is made, but who thereafter transfers such shares prior
to the Effective Time of the Merger, will lose any right to appraisal in
respect of such shares.
Only a holder of record of shares of Franklin Common Stock is entitled to
assert appraisal rights for the shares registered in that holder's name. A
demand for appraisal should be executed by or on behalf of the holder
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of record, fully and correctly, as the holder's name appears on his or her
stock certificates. If the shares of Franklin Common Stock are owned of record
in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in that capacity, and if the shares of
Franklin Common Stock are owned of record by more than one person as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including an agent for two or
more joint owners, may execute a demand for appraisal on behalf of a holder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the agent is agent
for such owner or owners. A record holder such as a broker who holds shares of
Franklin Common Stock as nominee for several beneficial owners may exercise
appraisal rights with respect to shares held for one or more beneficial owners
while not exercising such rights with respect to the shares held for other
beneficial owners; in this case, the written demand should set forth the
number of shares as to which appraisal is sought, and where no number of
shares is expressly mentioned the demand will be presumed to cover all shares
held in the name of the record owner. Shareholders who hold their shares of
Franklin Common Stock in brokerage accounts or other nominee forms and who
wish to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal
by such a nominee.
If the Reorganization Agreement is approved by the shareholders, BB&T will
send a notice of the actual Effective Time, within ten days thereafter, to
each shareholder who has filed an adequate written demand for appraisal with
Franklin and who has not voted in favor of approval of the Reorganization
Agreement and the Plan of Merger. Within 120 days after the Effective Time,
BB&T or any shareholder properly seeking appraisal rights may file a petition
in the Delaware Court of Chancery demanding a determination of the value of
the shares of all shareholders seeking appraisal rights. BB&T is under no
obligation, and has no present intention, to file such a petition, and all
shareholders seeking to exercise appraisal rights should initiate all
necessary action with respect to the perfection of their appraisal rights
within the time periods and in the manner prescribed in Section 262. Within
120 days after the Effective Time, any shareholder who has complied with the
provisions of Section 262, upon written request, shall be entitled to receive
from BB&T a statement setting forth the aggregate number of shares of Franklin
Common Stock not voted in favor of approval of the Reorganization Agreement
and the Plan of Merger and with respect to which demands for appraisal have
been received and the aggregate number of record holders of such shares. Such
written statement must be mailed to any such shareholder within ten days after
his or her written request for such a statement is received by BB&T or within
ten days after the vote on the Reorganization Agreement and the Plan of Merger
at the meeting, whichever is later.
If a petition for appraisal is timely filed, the Court of Chancery will
conduct a hearing on such petition to determine whether the shareholders
seeking appraisal rights have complied with Section 262 and have thereby
become entitled to appraisal rights. The Court of Chancery will then determine
the fair value of the shares of Franklin Common Stock exclusive of any element
of value arising from the expectation or accomplishment of the Merger, but
including a fair rate of interest, if any, to be paid on the amount determined
to be the fair value. In determining fair value, the Court of Chancery is to
take into account all relevant factors. Shareholders considering appraisal
should bear in mind that the fair market value of their shares determined
under Section 262 could be more than, the same as, or less than, the
consideration they will receive pursuant to the Reorganization Agreement if
they do not seek appraisal of their shares, and that the written opinion of
FBR set forth as Appendix II hereto is not necessarily an opinion regarding
fair value under Section 262. The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court"
should be considered in the appraisal proceedings.
The Chancery Court will determine the amount of interest, if any, to be paid
upon the amounts to be received by persons whose shares of Franklin Common
Stock have been appraised. The costs of the appraisal proceeding may be
assessed against one or more parties to the proceeding as the Court of
Chancery considers equitable. Upon application by a shareholder, the Court of
Chancery may order all or a portion of the expenses incurred by any
shareholder in connection with the appraisal proceedings (including, without
limitation,
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reasonable attorneys' fees and the fees and expenses of experts) to be charged
pro rata against the value of all of the shares entitled to an appraisal.
A shareholder will fail to perfect his or her right of appraisal if (i) he
or she does not deliver a written demand for appraisal to Franklin prior to
the vote for approval of the Reorganization Agreement and the Plan of Merger,
(ii) he or she votes his or her shares of Franklin Common Stock in favor of
approval of the Reorganization Agreement and the Plan of Merger, (iii) no
dissenting shareholder files a petition for appraisal within 120 days after
the Effective Time, or (iv) he or she delivers to Franklin both a written
withdrawal of his or her demand for appraisal and an acceptance of the terms
of the Reorganization Agreement, except that any such attempt to withdraw such
demand not made within 60 days after the Effective Time requires the written
approval of BB&T. If any shareholder who properly demands appraisal of his or
her shares under Section 262 fails to perfect, or effectively withdraws or
loses, his or her right to appraisal as provided in (iii) or (iv) above, the
shares of such shareholder will be converted into the right to receive the
Merger Consideration receivable with respect to the shares in accordance with
the Reorganization Agreement.
If an appraisal proceeding is properly instituted, it may not be dismissed
as to any shareholder who has perfected his or her right of appraisal without
the approval of the Court of Chancery, and any such approval may be
conditioned on such terms as the Court of Chancery deems just.
After the Effective Time, no shareholder who has demanded appraisal rights
will be entitled to vote his or her shares of Franklin Common Stock for any
purpose or to receive dividends on, or other distributions in respect of, such
shares (except dividends or distributions payable to shareholders as of a
record date prior to the Effective Time).
Holders of record of shares of Franklin Common Stock should note that cash
paid to dissenting shareholders in satisfaction of the fair value of their
shares will be taxable. See "--Certain Federal Income Tax Consequences of the
Merger."
FAILURE BY A SHAREHOLDER TO FOLLOW THE STEPS REQUIRED BY DELAWARE LAW FOR
PERFECTING RIGHTS OF APPRAISAL MAY RESULT IN THE LOSS OF SUCH RIGHTS. IN VIEW
OF THE COMPLEXITY OF THESE PROVISIONS OF THE DGCL, SHAREHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND EXERCISING THEIR RIGHTS UNDER SECTION 262 SHOULD CONSULT THEIR
LEGAL ADVISORS.
All written communications from shareholders with respect to the exercise of
appraisal rights should be mailed before the Effective Time to Franklin
Bancorporation, Inc., 1722 I (Eye) Street, N.W., Washington, DC 20006,
Attention: Secretary, and after the Effective Time to BB&T Corporation, 200
West Second Street, Winston-Salem, North Carolina 27101, Attention: Secretary.
REGULATORY CONSIDERATIONS
Bank holding companies (such as BB&T and Franklin) and their depository
institution subsidiaries (including BB&T-NC and FNB) are highly regulated
institutions, with numerous federal and state laws and regulations governing
their activities. Among these laws and regulations are requirements of prior
approval by applicable government regulatory authorities in connection with
acquisition and merger transactions such as the Merger, as summarized below.
In addition, these institutions are subject to ongoing supervision,
regulation, and periodic examination by various federal and state financial
institution regulatory agencies. Detailed discussions of such ongoing
regulatory oversight and the laws and regulations under which it is carried
out can be found elsewhere in this Proxy Statement/Prospectus and in the
Annual Report on Forms 10-K of BB&T incorporated by reference herein. See
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"INFORMATION ABOUT FRANKLIN." Those summaries are
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qualified in their entirety by the actual language of the laws and
regulations, which are subject to change based on possible future legislation
and action by regulatory agencies.
The Merger and the FNB Bank Merger are subject to certain regulatory
approvals, as set forth below. To the extent that the following information
describes statutes and regulations, it is qualified in its entirety by
reference to those particular statutes and regulations.
The Merger
The Merger is subject to approval by the Federal Reserve under Section 3 of
the Bank Holding Company Act ("BHC Act"). In considering the approval of a
transaction such as the Merger, the BHC Act requires the Federal Reserve to
review the financial and managerial resources and future prospects of the bank
holding companies and the banks concerned and the convenience and needs of the
communities to be served. The Federal Reserve is also required to evaluate
whether the Merger would result in a monopoly or would be in furtherance of
any combination or conspiracy or attempt to monopolize the business of banking
in any part of the United States or otherwise would substantially lessen
competition or tend to create a monopoly or which in any manner would be in
restraint of trade, unless it finds the anti-competitive effects of the
proposed transaction are clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served.
Where a transaction, such as the Merger, is the acquisition by a bank
holding company of a bank located in a state other than the home state of the
bank holding company (in this case North Carolina), the BHC Act authorizes the
Federal Reserve to approve the transaction without regard to whether such
transaction is prohibited under the laws of any state, provided the bank
holding company is adequately capitalized and adequately managed and certain
other limitations are not exceeded. BB&T is considered well-capitalized and
well-managed under the Federal Reserve's Regulation Y, and the transaction
does not exceed the other limitations.
The Merger also is subject to approval by the D.C. Office under Section 26-
804 of the D.C. Code, which permits a regional bank holding company, such as
BB&T, to acquire a District of Columbia bank holding company, such as
Franklin, if the D.C. Office approves the transaction. In its review of the
Merger, the D.C. Office is required to consider, among other things, the
financial and managerial resources of BB&T and its subsidiaries, and Franklin
and its subsidiaries, the adequacy of the proposed community development
program and whether the acquisition would result in an undue concentration of
resources or a substantial decrease of competition in the District of
Columbia.
BB&T is also required to provide notice to the BFI under Section 6.1-406 of
the Code of Virginia, which permits an out-of-state bank holding company that
controls a Virginia bank, such as BB&T, to acquire directly or indirectly more
than twenty-five percent (25%) of the voting shares of a bank outside of
Virginia, such as FNB, if the BFI approves the transaction. The BFI is
required to approve the proposed transaction if it determines the transaction
would not be detrimental to the safety and soundness of the bank holding
company's Virginia bank.
The FNB Bank Merger
Although not required by the terms of the Reorganization Agreement or the
Plan of Merger, BB&T expects to effect the FNB Bank Merger during the first
quarter of 1999. The FNB Bank Merger is subject to approval of the FDIC under
the Bank Merger Act. In granting its approval under the Bank Merger Act, the
FDIC must consider the financial and managerial resources and future prospects
of the existing and proposed institutions and the convenience and needs of the
communities to be served. Further, the FDIC may not approve the FNB Bank
Merger if it would result in a monopoly, if it would be in furtherance of any
combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States, if the effect of the FNB
Bank Merger in any section of the country may be substantially to lessen
competition or to tend to create a monopoly or if it would be in any other
manner in restraint of trade, unless the FDIC finds that the
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anticompetitive effects of the FNB Bank Merger are clearly outweighed in the
public interest by the probable effect of such merger in meeting the
convenience and needs of the communities to be served. In addition, the FDIC
must take into account the record of performance of the existing and proposed
institution under the Community Reinvestment Act in meeting the credit needs
of the entire community, including low- and moderate-income neighborhoods,
served by such institution. Applicable regulations also require publication of
notice of the application for approval of the FNB Bank Merger and an
opportunity for the public to comment on the application in writing and to
request a hearing.
The N.C. Commissioner must approve the FNB Bank Merger under Section 53-12
of the North Carolina General Statutes, which authorizes an interstate bank
merger transaction in which a North Carolina chartered bank is the resulting
bank, when, among other things, the N.C. Commissioner determines that the
interests of depositors, creditors and shareholders of each institution are
protected and the merger is for legitimate purposes.
Pursuant to Section 26-857 of the D.C. Code, upon notice, the D.C. Office
will permit an interstate bank merger where the resulting bank is not a
District of Columbia bank. The resulting bank may maintain and operate
branches in the District of Columbia.
All of the required applications and notices for the Merger have been
submitted to the appropriate regulatory agencies, and BB&T anticipates that
the regulatory approvals described herein will be obtained in time to allow
completion of the Merger by July 1, 1998. However, there can be no assurance
that other regulatory approvals will be obtained so as to permit completion of
the Merger or that such approvals will not be conditioned upon matters that
would cause BB&T to abandon the Merger. There likewise is no assurance that a
state attorney general will not challenge the Merger or the FNB Bank Merger,
or, if such a challenge is made, as to the results thereof.
BB&T and Franklin are not aware of any other governmental approvals or
actions that are required for completion of the Merger or the FNB Bank Merger,
except as described above. Should any other approval or action be required, it
is contemplated presently that such approval or action would be sought. There
can be no assurance that any such approval or action, if needed, could be
obtained, would not delay completion of the Merger or would not be conditioned
in a manner that would cause BB&T to abandon the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary description of certain anticipated federal income
tax consequences of the Merger to the shareholders of Franklin and to BB&T and
Franklin. This summary is not intended to be a complete description of all of
the federal income tax consequences of the Merger. No information is provided
with respect to the tax consequences of the Merger under any other tax laws,
including applicable state, local and foreign tax laws. In addition, the
following discussion may not be applicable with respect to certain specific
categories of shareholders, including but not limited to persons who are
corporations, trusts, dealers in securities, financial institutions, insurance
companies, or tax exempt organizations; persons who are not United States
citizens or resident aliens or domestic entities (partnerships or trusts);
persons who are subject to alternative minimum tax (to the extent that tax
affects the tax consequences of the Merger) or are subject to the "golden
parachute" provisions of the Code (to the extent that tax affects the tax
consequences of the Merger); persons who acquired Franklin Common Stock
pursuant to employee stock options or otherwise as compensation if such shares
are subject to any restriction related to employment; persons who do not hold
their shares as capital assets; or persons who hold their shares as part of a
"straddle" or "conversion transaction." The federal income tax laws are
complex, and a shareholder's individual circumstances may affect the tax
consequences to the shareholder. Consequently, each Franklin shareholder is
urged to consult his or her own tax advisor regarding the tax consequences of
the Merger. No ruling has been or will be requested from the IRS with respect
to the tax effects of the Merger.
In the opinion of Womble Carlyle Sandridge & Rice, PLLC, counsel to BB&T:
(a) the Merger will constitute a reorganization under Section 368 of the Code;
(b) no gain or loss will be recognized by BB&T or
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Franklin by reason of the Merger; (c) the shareholders of Franklin will
recognize no gain or loss for federal income tax purposes to the extent solely
BB&T Common Stock is received in the Merger in exchange for Franklin Common
Stock; (d) a shareholder of Franklin who receives cash in lieu of a fractional
share of BB&T Common Stock will recognize gain or loss as if the shareholder
received the fractional share and it was then redeemed for cash in an amount
equal to the amount paid by BB&T in respect of such fractional share; (e) the
tax basis in the BB&T Common Stock received by a shareholder (including any
fractional share interest deemed received) will be the same as the tax basis
in the Franklin Common Stock surrendered in exchange therefor; and (f) the
holding period for BB&T Common Stock received (including any fractional share
interest deemed received) in exchange for shares of Franklin Common Stock will
include the period during which the shareholder held the shares of Franklin
Common Stock surrendered in the exchange, provided that the Franklin Common
Stock was held as a capital asset at the Effective Time.
The receipt of cash for shares of Franklin Common Stock by a shareholder
pursuant to exercise of dissenters' rights under the DGCL will be a taxable
transaction. Any holder of Franklin Common Stock considering the exercise of
such rights should consult a tax advisor about the tax consequences of doing
so.
The completion of the Merger is conditioned upon the receipt by BB&T and
Franklin of the legal opinion of Womble Carlyle Sandridge & Rice, PLLC,
counsel to BB&T, dated as of the Closing Date to the effect of items (a) and
(c) as described above.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a pooling-of-
interests transaction under generally accepted accounting principles. Under
this accounting method, holders of Franklin Common Stock will be deemed to
have combined their existing voting common stock interest with that of holders
of BB&T Common Stock by exchanging their shares for shares of BB&T Common
Stock. Accordingly, the book value of the assets, liabilities and
shareholders' equity of Franklin, as reported on its consolidated balance
sheet, will be carried over to the consolidated balance sheet of BB&T and no
goodwill will be created. BB&T will be able to include in its consolidated
income the consolidated income of Franklin for the entire fiscal year in which
the Merger occurs; however, certain expenses incurred to effect the Merger
must be treated by BB&T as current charges against income rather than
adjustments to its balance sheet. The unaudited pro forma financial
information contained in this Proxy Statement/Prospectus has been prepared
using the pooling-of-interests method of accounting.
BB&T's and Franklin's respective obligations to complete the Merger are
conditioned upon the receipt by BB&T of letters from Arthur Andersen LLP,
BB&T's independent certified public accountants, dated as of the date of
filing of the Registration Statement with the Commission and as of the
Effective Time, to the effect that the Merger qualifies for pooling-of-
interests accounting treatment. For the Merger to qualify as a pooling of
interests, among other criteria, substantially all (90% or more) of the
outstanding Franklin Common Stock must be exchanged for BB&T Common Stock.
Accordingly, the Merger will fail to qualify as a pooling of interests if the
holders of more than 10% of the outstanding shares of Franklin Common Stock
dissent from the Merger. See "--Rights of Dissenting Shareholders."
THE OPTION AGREEMENT
General
As a condition to BB&T entering into the Reorganization Agreement, Franklin
(as issuer) entered into the Option Agreement with BB&T (as grantee), pursuant
to which Franklin granted the Option to BB&T to purchase from Franklin up to
1,319,564 shares of Franklin Common Stock (subject to adjustment in certain
circumstances, but in no event to exceed 19.9% of the shares of Franklin
Common Stock outstanding upon any exercise of the Option) at a price of $18.00
per share (subject to adjustment under certain circumstances, as described
below) (the "Purchase Price"). The purchase of any shares of Franklin Common
Stock pursuant to the Option is subject
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to compliance with applicable law, including the receipt of necessary
approvals under the Bank Holding Company Act. See "--Regulatory
Considerations."
The Option Agreement is intended to increase the likelihood that the Merger
will be completed in accordance with the terms set forth in the Reorganization
Agreement. Consequently, certain aspects of the Option Agreement may have the
effect of discouraging persons who might now, or before the Effective Time, be
interested in acquiring all of or a significant interest in Franklin from
considering or proposing such an acquisition, even if they were prepared to
offer to pay consideration to shareholders of Franklin with a higher current
market price than the shares of BB&T Common Stock to be received for each
share of Franklin Common Stock pursuant to the Reorganization Agreement.
The Option Agreement is filed as an exhibit to the Registration Statement,
and reference is made thereto for the complete terms of the Option Agreement
and the Option. The following discussion is qualified in its entirety by
reference to the Option Agreement. See "AVAILABLE INFORMATION."
Exercisability
If BB&T is not in material breach of the Option Agreement or its covenants
and agreements contained in the Reorganization Agreement and if no injunction
or other court order against delivery of the shares covered by the Option is
in effect, BB&T may generally exercise the Option, in whole or in part, at any
time and from time to time, following the happening of either of the following
events (each a "Purchase Event"):
(a) without BB&T's prior written consent, Franklin's authorizing,
recommending, publicly proposing (or publicly announcing an intention to
authorize, recommend or propose) or entering into an agreement with any
third party to effect any of the following (each an "Acquisition
Transaction"): (i) a merger, consolidation or similar transaction involving
Franklin or any of its subsidiaries, (ii) the sale, lease, exchange or
other disposition of 15% or more of the consolidated assets of Franklin and
its subsidiaries (other than certain transactions in the normal course of
business) or (iii) the issuance, sale or other disposition of securities
representing 15% or more of the voting power of Franklin or any of its
subsidiaries; or
(b) any third party or group of third parties acquiring or having the
right to acquire beneficial ownership of securities representing 15% or
more of the outstanding shares of Franklin Common Stock.
Termination
The Option will terminate upon the earliest to occur of the following
events: (a) the Effective Time; (b) the termination of the Reorganization
Agreement prior to the occurrence of a Purchase Event or Preliminary Purchase
Event (as defined below) (other than a termination by BB&T based on either a
material breach by Franklin of a covenant or agreement in the Reorganization
Agreement or an inaccuracy in Franklin's representations or warranties in the
Reorganization Agreement of a nature entitling BB&T to terminate (a "Default
Termination")); (c) 18 months after a Default Termination; (d) 18 months after
termination of the Reorganization Agreement (other than a Default Termination)
following the occurrence of a Purchase Event or a Preliminary Purchase Event;
or (e) 12 months after a termination of the Reorganization Agreement based on
the failure of the shareholders of Franklin to approve the Reorganization
Agreement and the Plan of Merger.
A "Preliminary Purchase Event" is defined as either of the following:
(a) the commencement by any third party of a tender or exchange offer
such that it would thereafter own 15% or more of the outstanding shares of
Franklin Common Stock or the filing of a registration statement with
respect to such an offer, or
(b) the failure of the shareholders of Franklin to approve the
Reorganization Agreement, the failure of the Meeting to have been held, the
cancellation of the Meeting prior to the termination of the Reorganization
Agreement or the Franklin Board having withdrawn or modified in any manner
adverse to BB&T its recommendations with respect to the Reorganization
Agreement, in any case after a third party: (i) proposes
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to engage in an Acquisition Transaction, (ii) commences a tender offer or
files a registration statement under the Securities Act with respect to an
exchange offer such that it would thereafter own 15% or more of the
outstanding shares of Franklin Common Stock or (iii) files an application
or notice under federal or state statutes relating to the regulation of
financial institutions or their holding companies to engage in an
Acquisition Transaction.
To the knowledge of BB&T and Franklin, no Purchase Event or Preliminary
Purchase Event has occurred as of the date of this Proxy Statement/Prospectus.
Adjustments
The Option Agreement provides for certain adjustments in the Option in the
event of any change in Franklin Common Stock by reason of a stock dividend,
stock split, split-up, recapitalization, combination, exchange of shares or
similar transaction or in the event of the issuance of any additional shares
of Franklin Common Stock before termination of the Option.
Repurchase Rights
At the request of the holder of the Option any time during the 24 months
immediately following the first occurrence of a Repurchase Event (as defined
below), Franklin must, if the Option has not terminated and there are no
regulatory prohibitions, repurchase from the holder (a) the Option and (b) all
shares of Franklin Common Stock purchased by the holder pursuant to the Option
with respect to which the holder then has beneficial ownership. The repurchase
will be at an aggregate price equal to the sum of:
(a) the aggregate Purchase Price paid by the holder for any shares of
Franklin Common Stock acquired pursuant to the Option with respect to which
the holder then has beneficial ownership, plus
(b) the excess, if any, of (i) the Applicable Price (as defined in the
Option Agreement) for each share of Franklin Common Stock over the Purchase
Price, multiplied by (ii) the number of shares of Franklin Common Stock
with respect to which the Option has not been exercised, plus
(c) the excess, if any, of (i) the Applicable Price over the Purchase
Price paid or payable by the holder for each share of Franklin Common Stock
with respect to which the Option has been exercised and with respect to
which the holder then has beneficial ownership, multiplied by (ii) the
number of such shares.
A "Repurchase Event" occurs if: (a) any third party acquires actual
ownership or control of, or any group is formed that has acquired actual
ownership or control of, 50% or more of the then outstanding shares of
Franklin Common Stock, or (b) any of the merger or other business combination
transactions described in subsections (a) through (d) in the paragraph below
describing substitute options is completed.
Substitute Options
If, before the termination of the Option Agreement, Franklin enters into an
agreement:
(a) to consolidate with or merge into any third party and would not be
the continuing or surviving corporation of the consolidation or merger;
(b) to permit any third party to merge into Franklin with Franklin as the
continuing or surviving corporation, but the then outstanding shares of
Franklin Common Stock would be changed into or exchanged for stock or other
securities of Franklin or any other person or cash or any other property,
or the outstanding shares of Franklin Common Stock immediately prior to the
merger would represent less than 50% of the outstanding shares and share
equivalents of the merged company;
(c) to permit any third party to acquire all of the outstanding shares of
Franklin Common Stock pursuant to a statutory share exchange; or
(d) to sell or otherwise transfer all or substantially all of its assets
or deposits to any third party,
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then the agreement must provide that the Option will be converted into or
exchanged for an option (a "Substitute Option") to purchase shares of common
stock of, at the holder's option, either (x) the continuing or surviving
corporation of a merger or consolidation or the transferee of all or
substantially all of Franklin assets or (y) any person controlling the
continuing or surviving corporation or transferee. The number of shares
subject to the Substitute Option and the exercise price per share would be
determined in accordance with a formula in the Option Agreement. To the extent
possible, the Substitute Option would contain terms and conditions that are
the same as those in the Option Agreement.
Registration Rights
The Option Agreement grants to BB&T and any permitted transferee of the
Option certain rights to require Franklin to prepare and file a registration
statement under the Securities Act if registration is necessary in order to
permit the sale or other disposition of any or all shares of Franklin Common
Stock or other securities acquired or issuable upon exercise of the Option.
EFFECT ON EMPLOYEES, EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
Employees
Each employee of Franklin at the Effective Time will be offered employment
by BB&T or one of its subsidiaries (a "BB&T Employer"), and each employee of
Franklin who becomes an employee of a BB&T Employer immediately after the
Effective Time will be eligible to participate in severance, group
hospitalization, medical, life, disability and other welfare benefit plans and
programs, and bonus and incentive plans and programs available to similarly
situated employees of the BB&T Employer, subject to the terms of such plans
and programs. In applying these plans and programs, service with Franklin will
be deemed to be service with the BB&T Employer for the purpose of determining
eligibility to participate. Former employees of Franklin who were participants
in Franklin's group hospitalization and medical plans immediately before the
Effective Time will become participants in the BB&T Employer's corresponding
plans immediately upon becoming employed by the BB&T Employer at the Effective
Time. Notwithstanding the foregoing, in no event will any BB&T Employer be
obligated to continue employment of any former employee of Franklin for any
specified term or period, except to the extent otherwise provided in the
employment agreements to be entered into with certain members of Franklin
management. See "--Interests of Certain Persons in the Merger."
401(k) Plan
BB&T will cause the 401(k) plan of Franklin to be merged with the 401(k)
plan maintained by BB&T and its subsidiaries, and the account balances of
former employees of Franklin or its subsidiaries who are participants in the
Franklin plan will be transferred to the accounts of such employees under the
BB&T 401(k) plan. Following this merger and transfer, these accounts will be
governed and controlled by the terms of the BB&T 401(k) plan as in effect from
time to time (and subject to BB&T's right to terminate such plan). In
administering both the 401(k) plan and BB&T's defined benefit pension plan,
service with Franklin and its subsidiaries will be deemed to be service with
BB&T or its subsidiaries for participation and vesting purposes, but not for
purposes of benefit accrual.
Stock Options
At the Effective Time, each stock option ("Stock Option") granted under
Franklin's Second Amended and Restated Stock Option Plan, 1997 Employee Stock
Option Plan or Nondiscretionary Stock Option Plan or under other arrangements
(collectively, the "Stock Option Plans") then outstanding (and that by its
terms does not lapse on or before the Effective Time), whether or not then
exercisable, will be converted into and become rights with respect to BB&T
Common Stock. BB&T will assume each Stock Option, in accordance with the terms
of the Stock Option Plan and stock option agreement, or other agreement, by
which it is evidenced, except that after the Effective Time (a) BB&T and its
Compensation Committee will be substituted for Franklin and the
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committee of the Franklin Board administering the Stock Option Plans, (b) each
Stock Option assumed by BB&T may be exercised solely for shares of BB&T Common
Stock, (c) the number of shares of BB&T Common Stock subject to each such
Stock Option will be the number of whole shares of BB&T Common Stock (omitting
any fractional share) determined by multiplying the number of shares of
Franklin Common Stock subject to such Stock Option immediately prior to the
Effective Time by the Exchange Ratio, and (d) the per share exercise price
under each such Stock Option will be adjusted by dividing the per share
exercise price under each such Stock Option by the Exchange Ratio and rounding
up to the nearest cent.
At its election, BB&T may substitute as of the Effective Time options under
the BB&T Corporation 1995 Omnibus Stock Incentive Plan (the "BB&T Option
Plan") for all or a part of the Stock Options, subject to the following
conditions: (a) the requirements of (c) and (d) in the preceding paragraph
must be met; (b) such substitution may not constitute a modification,
extension or renewal of any of the Stock Options which are incentive stock
options; and (c) the substituted options must continue in effect on the same
terms and conditions as provided in the Stock Options and the Stock Option
Plan granting each Stock Option.
As soon as practicable following the Effective Time, BB&T will deliver to
the participants in the Stock Option Plans an appropriate notice setting forth
such participant's rights pursuant thereto. BB&T has reserved and will
continue to reserve adequate shares of BB&T Common Stock for delivery upon
exercise of any converted or substitute options. BB&T has also agreed to use
reasonable efforts to maintain an effective registration statement under the
Securities Act with respect to shares of BB&T Common Stock issuable upon the
exercise of converted or substitute options after the Effective Time to the
extent that Franklin has a registration statement in effect or an obligation
to file a registration statement with respect to the Stock Options.
Options to purchase an aggregate of 677,793 shares of Franklin Common Stock
are expected to be outstanding at the Effective Time. Any shares of Franklin
Common Stock issued pursuant to the exercise of options under the plan before
the Effective Time (other than shares held by dissenting shareholders) will be
converted into shares of BB&T Common Stock and cash in the same manner as
other outstanding shares of Franklin Common Stock (other than shares held by
dissenting shareholders).
RESTRICTIONS ON RESALES BY AFFILIATES
All shares of BB&T Common Stock issuable in the Merger will be registered
under the Securities Act and will be freely transferable, except that any such
shares received by "persons" who are deemed to be "affiliates" (as such terms
are defined under the Securities Act) of Franklin at the Effective Time may be
resold by them only in transactions registered under the Securities Act or
permitted by the resale provisions of Rule 145 under the Securities Act or as
otherwise permitted by the Securities Act. Those who may be deemed affiliates
of Franklin generally include individuals or entities that directly, or
indirectly through one or more intermediaries, control, are controlled by or
are under common control with Franklin and include certain executive officers
and directors of Franklin. The restrictions on resales by an affiliate extend
also to certain related parties of the affiliate, including his or her spouse,
relatives and spouse's relatives who in each case have the same home as the
affiliate.
The Reorganization Agreement requires Franklin to use commercially
reasonable efforts to cause each of its affiliates to deliver to BB&T a
written agreement to the effect that such person will not offer or otherwise
dispose of any shares of BB&T Common Stock issued to that person in the Merger
except (a) in compliance with the Securities Act and the rules and regulations
promulgated thereunder and (b) after such time as BB&T publishes financial
statements reflecting at least one month of combined operations with Franklin,
which restriction is necessary to obtain pooling-of-interests accounting
treatment.
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INFORMATION ABOUT BB&T
GENERAL
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts operations in North Carolina, South Carolina and
Virginia primarily through its commercial banking subsidiaries and, to a
lesser extent, through its other subsidiaries. Substantially all of BB&T's
loans are to businesses and individuals in the Carolinas and Virginia. BB&T's
bank subsidiaries are BB&T-NC, a North Carolina chartered bank; BB&T-SC, a
South Carolina chartered bank; BB&T-VA, a Virginia chartered bank; and LSB, a
federally chartered savings bank. The principal assets of BB&T are all of the
issued and outstanding shares of common stock of BB&T-NC, BB&T Financial
Corporation of South Carolina, Greenville, South Carolina, which in turn owns
all of the issued and outstanding shares of BB&T-SC, and BB&T Financial-VA,
Virginia Beach, Virginia, which in turn owns all of the issued and outstanding
shares of BB&T-VA and LSB.
SUBSIDIARIES
BB&T-NC, BB&T's largest subsidiary, is the oldest bank in North Carolina and
currently operates through 353 banking offices throughout North Carolina.
BB&T-NC provides a wide range of banking services in its local market for
retail and commercial customers, including small and mid-size businesses,
public agencies and local governments, trust customers, and individuals. BB&T
Leasing Corporation, a wholly owned subsidiary of BB&T-NC, located in
Charlotte, North Carolina, offers lease financing to commercial businesses and
municipal governments. BB&T Investment Services, Inc., also a wholly owned
subsidiary of BB&T-NC, located in Charlotte, North Carolina, offers customers
investment alternatives, including discount brokerage services, fixed-rate and
variable-rate annuities, mutual funds, and government and municipal bonds.
BB&T Insurance Services, Inc., located in Raleigh, North Carolina, is also a
subsidiary of BB&T-NC and offers life, property and casualty and title
insurance on an agency basis. Additional subsidiaries of BB&T-NC include Prime
Rate Premium Finance Corporation, Inc., which provides insurance premium
financing and services to customers in Virginia and the Carolinas.
BB&T-SC serves South Carolina through 95 banking offices. BB&T-SC provides a
wide range of banking services in its local market for retail and commercial
customers, including small and mid-size businesses, public agencies, local
governments, trust customers and individuals. BB&T-SC's subsidiaries include
BB&T Investment Services of South Carolina, Inc., which is licensed as a
general broker/dealer of securities and is currently engaged in retailing of
mutual funds, U.S. Government securities, municipal securities, fixed and
variable insurance annuity products and unit investment trusts.
BB&T-VA offers a full range of commercial and retail banking services
through 52 banking offices in the Hampton Roads and Richmond areas and the
southern, central and southwestern regions of Virginia.
LSB was acquired on March 1, 1998, upon the merger of its parent company,
Life, with and into BB&T Financial-VA. LSB operates 20 banking offices in the
Hampton Roads region of Virginia.
Regional Acceptance Corporation ("RAC"), of Greenville, North Carolina, was
acquired on September 1, 1996. RAC, which has 28 branch offices in North
Carolina, South Carolina, Tennessee and Virginia, specializes in indirect
financing for consumer purchases of mid-model and late-model used automobiles.
Craigie Incorporated ("Craigie"), which was acquired on October 1, 1997, is
a registered broker-dealer that specializes in the origination, trading and
distribution of fixed income securities and equity products. Phillips Factors
Corporation, which buys and manages account receivables primarily in the
furniture, textiles and home furnishings-related industries, and Sheffield
Financial Corp., which specializes in loans to small commercial lawn care
businesses across the country, are other subsidiaries of BB&T.
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ACQUISITIONS
BB&T's profitability and market share have been enhanced through both
internal growth and acquisitions during recent years. Specifically, BB&T has
expanded by both the acquisition of financial institutions (including thrift
institutions) and the purchase of deposits and assets from the Resolution
Trust Corporation in federally assisted transactions.
On March 1, 1997, BB&T completed the acquisition of Fidelity Financial
Bankshares Corporation, which was a Virginia corporation that served as the
holding company for Fidelity Federal Savings Bank ("FFSB"), in a transaction
accounted for as a purchase. Effective April 17, 1998, FFSB, which operated
seven banking offices in the Richmond, Virginia area, was merged into BB&T-VA.
Effective July 1, 1997, United Carolina Bancshares Corporation ("UCB")
merged with and into BB&T. Each share of UCB common stock issued and
outstanding at the effective time of this merger was converted into and
exchanged for 1.135 shares of BB&T Common Stock. Approximately 27.7 million
shares of BB&T Common Stock were issued in the acquisition of UCB. The merger
with UCB constituted a tax-free transaction under the Code, and has been
accounted for as a pooling of interests. Through its two bank subsidiaries,
United Carolina Bank and United Carolina Bank of South Carolina, UCB operated
153 banking offices in 89 communities in North Carolina and South Carolina.
Effective September 19, 1997, United Carolina Bank and United Carolina Bank of
South Carolina were merged into BB&T-NC and BB&T-SC, respectively.
On October 1, 1997, BB&T completed the acquisition of the investment banking
firm Craigie, of Richmond, Virginia. With offices in Richmond and Charlotte,
North Carolina, Craigie specializes in the origination, trading and
distribution of fixed-income securities and equity products in both the public
and private capital markets. Craigie's public finance department provides
investment banking services, financial advisory services and municipal bond
financing to a variety of regional tax-exempt issuers. The firm's corporate
finance department specializes in raising capital for corporate clients and
has an active mergers and acquisitions practice. Established in 1929, Craigie
continues to operate as a subsidiary of BB&T.
On December 1, 1997, BB&T completed the acquisition of Virginia First
Financial Corporation, which was a Virginia corporation that served as the
holding company for Virginia First Savings Bank, F.S.B. ("VFSB"), in a
transaction accounted for as a purchase. Effective April 17, 1998, VFSB, which
operated 23 banking offices in the south, central and southwestern areas of
Virginia, was merged into BB&T-VA.
On March 1, 1998, BB&T completed the acquisition of Life, which was a
Virginia corporation that served as the holding company for LSB, in a
transaction accounted for as a pooling of interests. BB&T intends to effect
the merger of LSB, which is currently a wholly owned subsidiary of BB&T
Financial-VA, with and into BB&T-VA during 1998.
On February 25, 1998, BB&T announced that it will acquire Maryland Federal
Bancorp, Inc. ("MFB") of Hyattsville, Maryland, in a stock transaction valued
at $265.3 million based on the closing price of BB&T Common Stock of $62.00 on
February 24, 1998. The acquisition will be accounted for as a purchase. MFB,
with approximately $1.2 billion in assets, operates 28 branches in 24 cities
as offices of Maryland Federal Bank, its only subsidiary. It ranks by deposits
as the 11th largest financial institution in Maryland. Directors of MFB will
become members of BB&T's regional board for the new Maryland region. The
merger, which is subject to the approval of the shareholders of MFB and
federal and state banking regulators, is expected to be completed in the third
quarter of 1998.
BB&T expects to continue to take advantage of the consolidation of the
financial services industry by further developing its franchise through the
acquisition of financial institutions. Such acquisitions may entail the
payment by BB&T of consideration in excess of the book value of the underlying
net assets acquired, may result in the issuance of additional shares of BB&T
capital stock or the incurring of an additional indebtedness by BB&T, and
could have a dilutive effect on the per share earnings or book value of BB&T
Common Stock.
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Moreover, such acquisitions sometimes result in significant front-end charges
against earnings, although cost savings, especially incident to in-market
acquisitions, also are frequently anticipated.
CAPITAL
The Federal Reserve has established a minimum requirement for a bank holding
company's ratio of capital to risk-weighted assets (including certain off-
balance-sheet activities, such as standby letters of credit) of 8%. At least
half of the total capital is required to be composed of common equity,
retained earnings, and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock, and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At March 31,
1998, BB&T's Tier 1 and total capital ratios were 10.4% and 14.1%,
respectively. Effective January 1, 1997, with mandatory compliance as of
January 1, 1998, the Federal Reserve also is requiring certain bank holding
companies that engage in trading activities to adjust their risk-based capital
to take into consideration market risk that may result from movements in
market prices of covered trading positions in trading accounts, or from
foreign exchange or commodity positions, whether or not in trading accounts,
including changes in interest rates, equity prices, foreign exchange rates or
commodity prices. Any capital required to be maintained pursuant to these
provisions may consist of new "Tier 3 capital" consisting of certain short
term subordinated debt. In addition, the Federal Reserve has issued a policy
statement, pursuant to which a bank holding company that is determined to have
weaknesses in its risk management processes or a high level of interest rate
risk exposure may be required, among other things, to hold additional capital.
The Federal Reserve also has established minimum leverage ratio requirements
for bank holding companies. These requirements provide for a minimum leverage
ratio of Tier 1 capital to adjusted average quarterly assets ("leverage
ratio") equal to 3% for bank holding companies that meet certain specified
criteria, including that they have the highest regulatory rating. All other
bank holding companies will generally be required to maintain a leverage ratio
of from at least 100 to 200 basis points above the stated minimum. BB&T's
leverage ratio at March 31, 1998 was 7.1%. Bank holding companies experiencing
internal growth or making acquisitions are expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the requirements
indicate that the Federal Reserve will continue to consider a "tangible Tier 1
leverage ratio" (deducting all intangibles) in evaluating proposals for
expansion or new activity.
The FDIC has adopted minimum risk-based and leverage ratio regulations to
which BB&T's bank subsidiaries are subject that are substantially similar to
those requirements established by the Federal Reserve described above. Under
federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including, in the most
severe cases, the termination of deposit insurance by the FDIC and placing the
institution into conservatorship or receivership. The capital ratios of each
of BB&T's bank subsidiaries exceeded all minimum regulatory capital
requirements as of March 31, 1998.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each of BB&T's bank subsidiaries are insured by the FDIC up
to the limits set forth under applicable law. A majority of the deposits of
the banks are subject to the deposit insurance assessments of the Bank
Insurance Fund ("BIF") of the FDIC. However, approximately 40% of the deposits
of BB&T-NC and BB&T-SC and a portion of the deposits of BB&T-VA (related to
the banks' acquisition of various savings associations) are subject to
assessments imposed by the Savings Association Insurance Fund ("SAIF") of the
FDIC.
Pursuant to budget reconciliation legislation enacted in 1996, the FDIC
imposed a special assessment on SAIF-assessable deposits of 65.7 basis points
per $100 of SAIF-assessable deposits in order to increase the SAIF's net worth
to 1.25 percent of SAIF-insured deposits as of October 1, 1996. This special
assessment was
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applied by the FDIC to the amount of SAIF-assessable deposits held by
institutions as of March 31, 1995. Certain institutions that engaged in thrift
acquisitions, including BB&T-NC, received a 20 percent discount on the
assessment. As a result, the pre-tax impact of the special assessment on BB&T
was approximately $34 million, and was recorded as an expense as of September
30, 1996.
The FDIC also lowered the assessment rates for SAIF-insured deposits,
effective January 1, 1997, to the same levels as the assessment rates
currently applicable to BIF-insured deposits. Thus, for the semi-annual period
beginning January 1, 1997, the effective rate of assessments imposed on all
FDIC deposits for deposit insurance ranges from 0 to 27 basis points per $100
of insured deposits, depending on the institution's capital position and other
supervisory factors. However, because the 1996 legislation requires that both
SAIF-insured and BIF-insured deposits pay a pro rata portion of the interest
due on the obligations issued by the Financing Corporation, the FDIC is
currently assessing BIF-insured deposits an additional 1.24 basis points per
$100 of deposits, and SAIF-insured deposits an additional 6.22 basis points
per $100 of deposits, in each case on an annualized basis, to cover those
obligations.
INFORMATION ABOUT FRANKLIN
BUSINESS
Franklin is a Delaware corporation incorporated on October 31, 1988 and
registered as a bank holding company under the BHCA. At December 31, 1997,
Franklin had consolidated total assets of approximately $647 million, total
deposits of approximately $428 million and total stockholders' equity of
approximately $39 million. Franklin is headquartered in Washington, D.C. and
owns all of the outstanding stock of its two subsidiaries, FNB and Franklin
CDC.
FNB is a national banking association chartered under the laws of the United
States. It was incorporated in 1983 as National Enterprise Bank, became First
Interstate Bank of Washington, D.C. in 1987 under a franchise agreement and
was acquired by Franklin in 1989, changing its name to Franklin National Bank
of Washington, D.C. at that time.
Franklin CDC is a non-banking subsidiary, incorporated in 1997 to provide
economic development opportunities through loans or equity investments for
low-to-moderate income neighborhoods within the metropolitan Washington area.
In April 1995, Franklin acquired The George Washington Banking Corporation,
the holding company of The George Washington National Bank of Alexandria,
Virginia, which was re-named Franklin National Bank of Virginia. In August
1996, Franklin National Bank of Virginia was merged with and into FNB.
Market Area
FNB was formed to service the financial needs of the small to medium sized
businesses and professionals in the metropolitan Washington, D.C. community
while providing a limited array of quality services to consumers within its
primary service area.
FNB's primary service area includes the District of Columbia and suburban
Virginia and Maryland, with a focus on the cities of Arlington and Alexandria
and portions of Fairfax and Montgomery Counties.
FNB operates nine full service branch offices; six in the District of
Columbia, two in Northern Virginia and one in Bethesda, Maryland. FNB offers
eight 24-hour automated teller machines ("ATMs") which are linked with other
automated teller machines regionally through MOST and nationally through PLUS
and CIRRUS. FNB also offers 24-hour telephone banking, with inquiry and
transfer capabilities, and PC banking with bill paying capabilities.
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Banking Services
FNB provides a wide variety of commercial banking services to its commercial
customers. In the commercial lending area, FNB offers short and medium term
loans, including lines of credit, inventory and accounts receivable financing
and real estate loans. FNB also provides Small Business Administration ("SBA")
loans when applicable. In addition, FNB makes loans designed to assist in the
development of economically disadvantaged and under-served neighborhoods in
the District of Columbia, Northern Virginia and portions of southern Maryland.
In the commercial depository area, FNB offers business checking accounts,
tiered money market accounts, certificates of deposit and customer repurchase
agreements. Cash management services are offered; these include sweep
accounts, balance reporting, account reconciliation, wire transfers, payroll
processing, credit card depository and Automated Clearing House origination.
FNB also offers a range of consumer banking services as an accommodation to
its existing customers, including checking accounts, savings and certificates
of deposit programs, Individual Retirement Accounts, VISA(R) check cards,
lending services including auto and other installment and term loans,
overdraft lines of credit, sales of travelers' checks, safe deposit box
rentals, night depository and ATM services. Deposits with FNB are insured by
the FDIC up to prescribed limits and FNB is a member of the Federal Reserve
System and the Federal Home Loan Bank of Atlanta.
In 1996, FNB opened an International Banking department, which provides
products and services to support the needs of individuals from foreign
countries and those in the metropolitan Washington area who frequently travel
internationally. Products offered include depository accounts, direct loans
and letters of credit. In conjunction with this department, FNB offers foreign
currency exchange services facilitating the buying and selling of foreign
currencies and drafts and negotiating foreign transfers to and from most
countries. In 1997, FNB expanded the department to include embassy banking to
provide Franklin's personalized service to the diplomatic community in the
Washington area.
Lending Activities
FNB's loan portfolio is distributed into several categories, each with
different risk factors and underwriting criteria. As of December 31, 1997, the
portfolio distribution was real estate loans, 34%; commercial loans, 61%; and
consumer loans, 5% (including home equity loans). The following discussion
briefly outlines the risk and underwriting criteria that FNB uses to evaluate
the individual portfolios.
Real Estate Loans. FNB's underwriting criteria is such that very few
speculative properties have been underwritten. Also, because of FNB's size,
real estate loans involve smaller properties, with loan size generally between
$300 thousand and $3 million. Tenants and rent rolls are analyzed, and loan
amortizations range from 7 years to 20 years. These loans generally carry
personal guarantees of individuals whose ability to support the loan, if
needed, has been evaluated. The types of real estate in this portfolio are
small office buildings, retail shopping centers, multi-family residential
properties and a limited number of warehouse/industrial properties and hotels.
FNB also finances a limited number of residential construction projects. Only
a few projects are funded at any one time, starts ahead of sales are
restricted, and in some cases pre-sold units are required. The borrowers
generally are well-known and experienced, and these loans generally carry low
loan-to-value ratios.
Commercial Loans. This category comprises the bulk of FNB's loan portfolio,
reflecting its market niche among small businesses and professionals. The
loans are to a variety of firms operating in the metropolitan area. Collateral
typically consists of accounts receivable, inventory and equipment; in many
instances it is supplemented by junior liens on residences of the principals.
In nearly all cases, these loans carry the personal guarantees of the owners.
FNB's underwriting criteria generally require: full amortization in the 3 to
7 year range; adequate business and personal collateral to support the credit;
minimal lending to start-up operations; lending primarily to established and
experienced business people, many of whom have a long and satisfactory banking
history;
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lending only to companies within the metropolitan Washington area where
borrowers can be monitored; and personal guarantees and secondary sources of
repayment. Unsecured lending is controlled and limited to the most
creditworthy borrowers.
Consumer Loans. Home equity loans constitute a small percentage of FNB's
loan portfolio. These loans are secured by first or second trusts on the
borrower's primary residence. Home equity loans are offered to existing
customers, but since FNB does not specialize in consumer lending, this is not
likely to be a major product segment. Similarly, since FNB is not a long-term
residential mortgage lender, there are a limited number of first trust
mortgages. These tend to be short amortization and balloon maturity loans to
customers wishing to fully retire the debt in a shorter time frame. There also
are a number of mortgages generated as part of FNB's Community Reinvestment
Act initiatives. Consumer loans are a small segment of the lending activities
and include auto loans, debt consolidation, and overdraft protection.
Risk of Non-Payment. The risk of non-payment (or deferred payment) of loans
is inherent in commercial banking. FNB's marketing focus on professionals,
small to medium-sized businesses, trade associations, and nonprofit
organizations theoretically could result in the assumption by FNB of certain
risks that are somewhat greater than those associated with loans to larger
business entities which may have more resources or assets available and whose
liquidity may be greater. However, management believes that the theoretical
possibility of such risks is more than offset by the greater diversity of
borrowers resulting from a lower average loan amount per borrower and FNB's
loan underwriting procedures. While management attempts to minimize the credit
risk exposure through loan application evaluation and approval and monitoring
procedures, there can be no assurance that such procedures can significantly
reduce such lending risks. Franklin's gross loans outstanding increased from
approximately $233 million at December 31, 1996 to approximately $301 million
at December 31, 1997, an increase of approximately $68 million, or 29%.
Management believes that the risks associated with the small business segment
of the market are offset by a higher asset quality resulting from the
underwriting, approval, and monitoring procedures put into place over the past
seven years. Management believes that, based on existing information, the
allowance for possible loan losses of approximately $4.2 million as of
December 31, 1997, is sufficient to provide for losses which may be sustained
on the current loan portfolio. Management believes that, through its specific
reserves and its general portfolio allocations, the current loan portfolio has
adequate reserves.
Competition
The market for banking and bank-related services, particularly within
Franklin's service area of greater metropolitan Washington, D.C., is highly
competitive. FNB competes for deposits and loans with other providers of
financial services such as commercial and savings banks, credit unions, money
market and other mutual fund providers and other financial institutions.
Numerous mergers and acquisitions involving Washington, D.C., Virginia and
Maryland banks have recently occurred, intensifying competition in Franklin's
geographic market. Many of FNB's competitors possess greater financial
resources or have significantly higher lending limits.
Interstate banking laws enacted in 1994 added to the competitive pressure.
Federal law provides that: (1) bank holding companies are permitted, subject
to certain conditions, to acquire banks and bank holding companies across
state lines without regard to whether such acquisition is prohibited by state
law; and (2) effective June 1, 1997, sooner if both states opt-in to
interstate branching, banks are permitted to merge across state lines provided
neither state has opted-out of interstate branching. Maryland, Virginia and
the District of Columbia opted-in to allow mergers across state lines.
FNB competes by focusing on a defined segment of the market, small to mid-
size local businesses, and providing high quality service that endeavors to
meet or exceed its customers' expectations.
Supervision and Regulation
The information contained in this section summarizes portions of the
applicable laws and regulations governing the supervision and regulation of
Franklin and FNB. These summaries do not purport to be complete, and they are
qualified in their entirety by reference to the particular statues and
regulations described.
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Bank Holding Company Regulations. Franklin, as a bank holding company
registered under the BHCA, is required to file with the FRB quarterly and
annual reports, and such additional information as the FRB may require, and is
subject to regular examinations by the staff of the FRB of Richmond.
The BHCA requires that a bank holding company obtain the prior approval of
the FRB before it may merge or consolidate with any other bank holding
company, or acquire substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition, it
will own or control, directly or indirectly, more than 5% of the voting shares
of such bank.
The BHCA also generally prohibits a bank holding company from engaging in,
or from acquiring direct or indirect control of voting shares of any company
engaged in, activities other than banking and the management of banking
organizations, and any non-banking activities which the FRB may find, by order
or regulation, to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. The approval of the FRB is generally
required prior to engaging in permissible non-banking activities.
FNB. As a national bank chartered under the laws of the United States, FNB
is a member of the Federal Reserve System and is subject to certain provisions
of the Federal Reserve Act and regulations issued by the Board of Governors.
FNB is subject to regulation, supervision and regular examination by its
primary regulator, the Office of the Comptroller of the Currency (the "OCC").
Deposits, reserves, investments, loans, consumer law compliance, issuance of
securities, payment of dividends, mergers and consolidations, electronic funds
transfers, management practices and other aspects of FNB's operations are
subject to regulation. The approval of the appropriate bank regulatory agency
is required for the establishment of additional branch offices by FNB.
The deposits of FNB are insured by the FDIC. Some of the aspects of the
lending and deposit business of FNB which are subject to regulation by the FRB
or the FDIC include disclosure requirements in connection with personal and
mortgage loans, interest on deposits and reserve requirements. In addition,
FNB is subject to numerous federal, state and local laws which set forth
specific restrictions and requirements with respect to extensions of credit,
credit practices, disclosure of credit terms and discrimination in credit
transactions.
As a consequence of the extensive regulation of the commercial banking
industry, the business of FNB is particularly susceptible to changes in
Federal and state legislation and regulations which may increase the cost of
doing business.
FDIC Improvement Act. On December 19, 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") was enacted. Among other
things, FDICIA provides increased funding for the FDIC's BIF and provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies. The following is a brief summary of certain
provisions of FDICIA.
Pursuant to FDICIA, the FRB, the OCC and the FDIC have adopted regulations,
setting forth a five-tier scheme for measuring the capital adequacy of the
financial institutions they supervise. Under the regulations, an institution
is placed in one of the following capital categories: (1) well capitalized (an
institution that has a total risk-based capital ratio of at least 10%, a Tier
1 risk-based capital ratio of at least 6% and a leverage ratio of at least
5%); (2) adequately capitalized (a total risk-based capital ratio of at least
8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio of
at least 4%); (3) undercapitalized (a total risk-based capital ratio of under
8% or a Tier 1 risk-based capital ratio under 4% or a leverage ratio under
4%); (4) significantly undercapitalized (a total risk-based capital ratio of
under 6% or a Tier 1 risk-based capital ratio under 3% or a leverage ratio
under 3%); and (5) critically undercapitalized (a ratio of tangible equity to
total assets of 2% or less). The regulations permit the appropriate Federal
banking regulator to downgrade an institution to the next lower category if
the regulator determines: (1) after notice and opportunity for hearing or
response, that the institution is in an unsafe or unsound condition or (2)
that the institution has received (and not corrected) a less-than-satisfactory
rating for any of the categories of asset quality, management, earnings,
liquidity or sensitivity to market risks in its most recent exam. All
institutions are generally prohibited from declaring a dividend, making any
other capital distribution or paying a management fee to a controlling person,
if such payment would
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cause the institution to become undercapitalized. As of December 31, 1997, FNB
met the requirements of a "well-capitalized" institution.
The FDIC issued a rule regarding the ability of depository institutions to
accept brokered deposits. Under the rule, (1) an undercapitalized institution
is prohibited from accepting, renewing or rolling over brokered deposits, (2)
an adequately capitalized institution must obtain a waiver from the FDIC
before accepting, renewing or rolling over brokered deposits and (3) a well
capitalized institution may accept, renew or roll over brokered deposits
without restrictions. In addition, both undercapitalized and adequately
capitalized institutions are subject to restrictions on the rates of interest
they may pay on any deposits.
The FDIC has also issued regulations implementing a system of risk-based
FDIC insurance premiums. Under this system, each depository institution is
assigned to one of nine risk classifications based upon certain capital and
supervisory measures and, depending upon its classification is assessed
premiums per $100 of domestic deposits. The deposits of FNB are subject to the
deposit insurance assessments of the BIF. The FDIC originally set premiums
ranging from 23 basis points to 31 basis points per $100 of domestic deposits
and lowered the range to 4 basis points to 23 basis points effective June 30,
1995. Effective January 1, 1996, the FDIC further reduced premiums to 0 basis
points to 27 basis points per $100 of deposits with a minimum assessment
payment for a 6 month period of $1,000 per institution. FNB carries the lowest
risk rating and therefore benefitted from the reduced premium assessments in
1996.
For 1997 and the first six months of 1998, the FDIC maintained the premium
ranges in effect during 1996 and eliminated the minimum assessment payment.
The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation
("FICO") to levy assessments on BIF-insured deposits to pay a pro-rata portion
of the interest due on the obligations issued by FICO. The FICO premium
assessment is not based on the FDIC risk classification. Accordingly, the FDIC
is currently assessing BIF-insured deposits an additional 1.26 basis points
per $100 of deposits, on an annualized basis, to cover those obligations. This
additional assessment will not have a material effect on Franklin's results of
operations.
Distributions. Although Franklin's funds for any cash distributions to its
shareholders could be derived from a variety of sources, the primary source of
funds would be dividends received from FNB. FNB is subject to various
statutory requirements and general regulatory policies and regulations
relating to the payment of dividends, including requirements to maintain
capital above regulatory minimums and that income and retained income meet
certain thresholds. Under certain circumstances, FNB could not pay dividends
without regulatory approval, or the regulators could prohibit payment of
dividends.
In addition, the ability of FNB to pay dividends may be affected by the
various minimum capital requirements and the capital and non-capital standards
established by FDICIA, as described above.
The FRB and OCC have issued guidelines that require bank holding companies
and national banks to evaluate continuously the level of cash dividends in
relation to the organization's net income, capital needs, asset quality and
overall financial condition. FNB could pay dividends to Franklin as of
December 31, 1997; however, to date, no dividends have been paid to or by
Franklin to ensure the availability of adequate capital for future expansion.
Monetary Policy. FNB and therefore Franklin is affected by monetary policies
of regulatory authorities, including the FRB, which regulate the national
money supply in order to mitigate recessionary and inflationary pressures.
Among the techniques available to the FRB are engaging in open market
transactions in U.S. Government securities, changing the discount rate on bank
borrowings, and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth
and distribution of bank loans, investments, and deposits. Their use may also
affect interest rates charged on loans or paid on deposits. The effect of
governmental monetary policies on the earnings of Franklin cannot be
predicted.
49
<PAGE>
Forward-Looking and Cautionary Statements
Certain statements in this Proxy Statement/Prospectus that are not
historical are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "estimate," "project," "intend,"
"expect," "believe," "plan" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve known and
unknown risks and uncertainties. Many factors could cause the actual results,
performance or achievements of Franklin to be materially different from those
expressed or implied in any forward-looking statements. Such factors include
the following.
There can be no assurance that the planned merger with BB&T will be approved
by Franklin's shareholders and consummated, or that thereafter BB&T will be
able to successfully integrate Franklin's management and information systems
so as to provide the anticipated benefits of the merger.
The business and profitability of a financial services organization such as
Franklin is influenced by prevailing economic conditions and governmental
policies. The actions and policy directives of the Federal Reserve Board
determine to a significant degree the cost and availability of funds obtained
from money market sources for lending and investing. Federal Reserve Board
policies and regulations also influence, directly and indirectly, the rates of
interest paid by commercial banks on their interest-bearing deposits and may
also impact the value of financial instruments held by Franklin. The nature
and impact on Franklin of future changes in economic and market conditions and
monetary and fiscal policies, are not predictable and are beyond Franklin's
control. In addition, these conditions and policies can impact Franklin's
customers and counter parties, which may increase the risk of default on their
obligations to Franklin.
As part of its ongoing business, Franklin assumes financial exposures to
interest rates, currencies, equities and other financial products. In doing
so, Franklin is subject to unforeseen events which may not have been
anticipated or which may have effects which exceed those assumed within its
risk management processes.
As with any financial institution, Franklin is also subject to the risk of
litigation and to an unexpected or adverse outcome in such litigation.
Competitive pressures in the marketplace and unfavorable or adverse publicity
and news coverage can have the effect of lessening customer demand for
Franklin's services. Ultimately, Franklin's business and its success is
dependent on Franklin's ability to attract and retain high quality employees.
Employees
As of December 31, 1997, Franklin employed 140 full-time equivalent
employees through its subsidiaries. Management of Franklin considers relations
with its employees to be satisfactory.
Properties
The principal office of Franklin and its subsidiaries is located at 1722 I
(Eye) Street, N.W., Washington, D.C. FNB leases the space occupied at this
location, as well as the space for FNB's administrative offices and five
additional branches located in the District of Columbia. FNB also leases the
space for the branches located in Alexandria and Tysons Corner, Virginia and
Bethesda, Maryland. FNB's internal Operations, Accounting, Credit
Administration and International Banking departments are housed at Franklin's
principal office in the District of Columbia. Additional information regarding
FNB's operating leases can be found in Note 13 to the consolidated financial
statements.
Legal Proceedings
There are no material legal proceedings pending against Franklin or its
subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following analysis of Franklin's financial condition and results of
operations as of and for the years ended December 31, 1997, 1996 and 1995 and
for the quarters ended March 31, 1998 and 1997 should be read
50
<PAGE>
in conjunction with the Consolidated Financial Statements of Franklin and
statistical data presented elsewhere in this Proxy Statement/Prospectus.
Years Ended December 31, 1997, 1996 and 1995
Overview. Franklin, a bank holding company headquartered in Washington,
D.C., currently operates one banking subsidiary, FNB, which conducts business
from nine banking offices in the District of Columbia, Northern Virginia and
suburban Maryland. Through FNB, Franklin offers a full range of commercial
banking services to its business and professional customers, as well as a
limited array of customary consumer banking services within the greater
metropolitan Washington, D.C. community. Services include various types of
deposit accounts and instruments; commercial, commercial real estate, SBA and
consumer loans; cash management; payroll services; and access to ATM networks.
In 1997, Franklin introduced imaged bank statements and PC banking for both
commercial and retail customers, taking advantage of technology to improve
information delivery to Franklin's customers. Franklin expanded its
International Banking Division to add embassy banking to its international
private banking and foreign exchange products. Franklin also operates one non-
banking subsidiary, Franklin CDC, which was organized in 1997 to provide
economic development opportunities through loans or equity investments for
low-to-moderate income neighborhoods within the Washington metropolitan area.
Merger Activity. On December 16, 1997, Franklin announced plans to be
acquired in a tax-free merger with BB&T Financial-VA. Under the amended and
restated Reorganization Agreement, Franklin will merge directly with BB&T.
BB&T is a multi-bank holding company with approximately $29 billion in assets
operating throughout the Carolinas and Virginia. Based upon BB&T's closing
stock price of $63.75 on December 15, 1997, the transaction is valued at
approximately $165.1 million, or $22.45 per share of Franklin Common Stock.
Franklin shareholders would receive 0.3522 shares of BB&T Common Stock based
on that December 15, 1997 stock price. The exchange ratio will fluctuate
between BB&T stock prices of $54.50 and $65.00. Below $54.50 and above $65.00,
the exchange ratio is fixed at 0.3743 and 0.35 shares, respectively. Any
adjustment to the exchange ratio will be based on the average BB&T stock price
for a specified twenty day period prior to closing. The acquisition, which
will be accounted for as a pooling of interests, is expected to be completed
on or about the end of the second quarter of 1998.
This transaction will give BB&T its first entry into the metropolitan
Washington area and is expected to provide expanded products and services to
Franklin's existing customer base. BB&T, the leading business lender in the
Carolinas, expects to capitalize on Franklin's growing commercial base by
providing substantially higher levels of credit and resources in the
metropolitan Washington market. Under the Reorganization Agreement, Franklin
will become part of BB&T's regional banking network, which emphasizes autonomy
and local decision-making. Accordingly, Franklin's current management team
will represent BB&T in most of the metropolitan Washington area.
Financial Summary. Franklin recorded net income of $6.0 million for the
year ended December 31, 1997, compared to $4.5 million for the year ended
December 31, 1996. This 32% increase represents Franklin's sixth consecutive
year of record earnings. Earnings per share increased 28% to $0.91 per share
for 1997, compared to $0.71 per share in 1996. Earnings per share, assuming
dilution, increased 26% to $0.86 per share for 1997, compared to $0.68 per
share in 1996. Franklin's return on average assets and return on average
equity for 1997 were 1.23% and 17.11%, respectively, compared to 1.12% and
16.03% for 1996. The increase in earnings from 1996 to 1997 is primarily the
result of significant loan growth, which Franklin was able to fund internally
through substantial growth in customer deposits and customer repurchase
agreements. During 1997, Franklin also increased net interest income and
service charge and fee income. The improvement in earnings was partially
offset by increases in the provision for loan losses, employee related
expenses, other overhead costs and income tax expenses.
51
<PAGE>
Total assets at December 31, 1997 were $647 million, an increase of $149
million, or 30%, from 1996 year end assets of $498 million. Loans, net of
unearned income, increased $67 million, or 29%, to $300 million at December
31, 1997 from $233 million one year ago. Securities increased $15 million, or
9%, to $179 million at December 31, 1997 from $164 million one year ago. The
balance of the asset increase was cash and short-term investments, which grew
$66 million, or 70%, from $94 million at December 31, 1996 to $160 million at
December 31, 1997.
This significant increase in total assets was funded through the outstanding
growth in deposits and customer repurchase agreements which increased $141
million, or 30%, to $604 million at December 31, 1997 from $463 million one
year ago. Non-interest bearing demand deposits grew $17 million to $140
million at December 31, 1997, a 14% increase over year end 1996. As of
December 31, 1997, non-interest bearing deposits represented 23% of total
deposits and customer repurchase agreements.
Earning Assets. Over the last six fiscal years, Franklin has experienced
significant growth in average earning assets. During 1997, Franklin's average
earning assets grew $80.9 million, or 21%, to $458.5 million for the year
ended December 31, 1997. This compares to average balances of $377.6 million
and $275 million and growth rates of 37% and 22%, respectively, for the years
ended December 31, 1996 and 1995. Average Statements of Condition, along with
interest income and expense and related yields and rates, for each of the last
three fiscal years are set forth in Table 1.
The 1997 growth in earning assets occurred primarily in loans, Franklin's
highest yielding asset. Average loans grew $54.1 million, or 28%, from $196.1
million during 1996 to $250.2 million in 1997. Average securities increased
$37.6 million, or 27%, from $137.2 million during 1996 to $174.8 million for
1997. Only average short-term investments, such as Federal funds sold and
securities purchased under resale agreements, decreased during 1997, from
$44.3 million during 1996 to $33.5 million, a decrease of $10.8 million, or
24%. This activity is in keeping with management's intent to increase the
percentage of loans in the total asset mix while maintaining strong credit
quality standards.
52
<PAGE>
TABLE 1
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION
INTEREST INCOME/EXPENSE AND YIELDS/RATES
(DOLLARS IN THOUSANDS)
FULLY TAXABLE EQUIVALENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCES EXPENSE RATE BALANCES EXPENSE RATE BALANCES EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Commercial loans........ $146,341 $13,412 9.17% $120,031 $11,328 9.44% $ 92,620 $ 9,615 10.38%
Real estate loans....... 88,341 8,728 9.88% 63,285 6,300 9.96% 45,580 4,840 10.62%
Consumer loans.......... 15,558 1,499 9.64% 12,736 1,210 9.50% 12,163 853 7.01%
Securities available-
for-sale(1)(2)......... 95,885 6,162 6.43% 73,722 4,716 6.40% 41,599 2,657 6.39%
Securities held-to-
maturity(2)............ 78,907 4,625 5.86% 63,508 3,397 5.35% 66,208 3,525 5.32%
Federal funds sold and
securities with resale
agreements............. 33,501 1,860 5.55% 44,339 2,389 5.39% 16,799 974 5.80%
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total interest earning
assets................ 458,533 $36,286 7.91% 377,621 $29,340 7.77% 274,969 $22,464 8.17%
Cash and due from
banks.................. 19,903 19,232 12,924
Other assets(1)......... 12,381 10,893 8,065
Allowance for loan
losses................. (3,975) (3,847) (3,218)
-------- -------- --------
Total Average Assets... $486,842 $403,899 $292,740
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST BEARING
LIABILITIES
DEPOSITS
Money manager accounts.. $ 26,190 $ 522 1.99% $ 28,161 $ 614 2.18% $ 22,446 $ 524 2.33%
Money market accounts... 110,533 4,019 3.64% 108,674 3,966 3.65% 81,719 3,016 3.69%
Savings accounts........ 3,429 91 2.66% 3,658 98 2.69% 3,952 114 2.88%
Certificates less than
$100,000............... 14,575 681 4.67% 15,605 785 5.03% 15,031 798 5.31%
Certificates of $100,000
and over............... 95,242 4,950 5.20% 60,961 3,133 5.14% 45,394 2,511 5.53%
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total deposits......... 249,969 10,263 4.11% 217,059 8,596 3.96% 168,542 6,963 4.13%
-------- ------- ---- -------- ------- ---- -------- ------- -----
Federal funds purchased
and repurchase
agreements............. 94,891 4,072 4.29% 58,040 2,454 4.23% 31,682 1,218 3.85%
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total interest bearing
liabilities............ 344,860 14,335 4.16% 275,099 11,050 4.02% 200,224 8,181 4.09%
Non-interest bearing
deposits............... 102,508 97,045 66,941
Other liabilities....... 4,418 3,258 1,839
Stockholders'
equity(1).............. 35,056 28,497 23,736
-------- -------- --------
Total Average
Liabilities and
Stockholders' Equity.. $486,842 $403,899 $292,740
======== ======== ========
Net interest
income/spread.......... $ 21,951 3.75% $ 18,290 3.75% $ 14,283 4.08%
======== ==== ======== ==== ======== =====
Net interest margin on
earning assets......... 4.79% 4.84% 5.19%
==== ==== =====
</TABLE>
- --------
(1) Excludes adjustments for unrealized gains (losses) on securities
available-for-sale
(2) Yields stated on a tax equivalent basis
53
<PAGE>
Loans. Management monitors the mix of earning assets on a continuous basis
in an effort to react to interest rate movements and to maximize return on
earning assets. As noted, management's focus in 1997 was to achieve growth in
Franklin's loan portfolio and maintain or improve the credit quality of the
portfolio while meeting the credit needs of the local business community.
Franklin's loan origination volume increased significantly in 1997; it not
only offset loan repayment activity, but also increased average loan balances
so that average loans for 1997 improved to 55% of total average earning assets
as compared to 52% in 1996.
The commercial loan portfolio increased $43.8 million, or 31%, from $140.5
million on December 31, 1996 to $184.4 million on December 31, 1997 and
represents the largest component of total gross loans at 61%. The real estate
loan portfolio experienced almost the same rate of growth at 29%, increasing
$23 million from $78.1 million on December 31, 1996 to $101.1 million on
December 31, 1997. The commercial real estate portion of the real estate
portfolio experienced the largest volume increase from 1996 levels, $15.1
million, or 34%, while residential mortgages increased $11.8 million, or 63%.
Only the construction and development loan portfolio decreased during 1997
from $15.2 million to $11.3 million, a decline of 26%. The real estate loan
portfolio, representing 34% of total gross loans, was Franklin's highest
yielding asset at 9.88% for 1997. Franklin's consumer loan portfolio increased
$1 million during 1997 from $14.3 million to $15.3 million, an increase of 7%.
Table 2 details Franklin's loan portfolio distribution at the end of each of
the last five years.
TABLE 2
LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real Estate
Commercial................. $ 59,278 $ 44,136 $ 26,818 $ 24,255 $ 8,166
Construction and
development............... 11,336 15,243 9,394 4,799 4,142
Residential mortgage....... 30,571 18,768 20,638 3,025 1,622
-------- -------- -------- -------- --------
Total.................... 101,185 78,147 56,850 32,079 13,930
Commercial and Industrial.... 184,360 140,544 111,110 88,759 71,841
Consumer..................... 15,372 14,326 14,083 5,074 6,131
-------- -------- -------- -------- --------
300,917 233,017 182,043 125,912 91,902
Unearned income.............. (476) (436) (393) (217) (101)
-------- -------- -------- -------- --------
Loans, net of unearned
income...................... $300,441 $232,581 $181,650 $125,695 $ 91,801
======== ======== ======== ======== ========
</TABLE>
In an effort to mitigate the impact of changes in interest rates on
earnings, management's strategic plan focuses on funding adjustable rate
loans. However, due to 1997's declining interest rate environment, competitive
market pressures and an increase in the demand for fixed rate loans,
Franklin's adjustable rate loans increased $32 million, from $175 million at
December 31, 1996 to $207 million at December 31, 1997, while fixed rate loans
increased $36 million, from $58 million at December 31, 1996 to $94 million at
December 31, 1997. Franklin's adjustable rate loan portfolio is still at a
high level, comprising 70% of Franklin's total average loan portfolio in 1997
as compared to 74% in 1996. Management intends to continue to seek adjustable
rate loan opportunities to protect FNB from being adversely impacted by
fluctuating interest rate environments, but will also continue to seek fixed
rate loans of moderate duration that meet Franklin's credit quality standards.
1996 was also a year of significant loan growth for Franklin. Loans
outstanding at December 31, 1996 were $232.6 million, an increase of $51
million, or 28%, over year end 1995 loan balances of $181.6 million. Average
loans increased $45.7 million, or 30%, compared to 1995 levels, with the
largest rate of increase occurring in the
54
<PAGE>
real estate portfolio. Management's focus in 1996 was to achieve asset growth
through the loan portfolio while meeting the credit needs of Franklin's
expanding community.
The internal controls, systems and procedures put in place in an effort to
insure support for growth are continuously monitored and strengthened where
necessary. It is on this foundation that management achieved its loan growth
in 1996 and 1997. Management intends to continue to enhance and strengthen
this foundation to provide the support for future expansion and growth.
Asset Quality. While total loans increased significantly in 1997, overall
credit quality ratios continue to be strong. Non-performing loans are 0.35% of
total loans and Franklin holds no foreclosed property. This compares to non-
performing loans at December 31, 1996 of 0.39% of total loans. Management
believes that efforts to strengthen credit administration policies, procedures
and controls have been productive and have permitted Franklin to grow its loan
portfolio significantly without impairing credit quality.
Non-performing loans increased slightly to $1 million at December 31, 1997,
as compared to $908 thousand one year ago. Table 3 details non-performing
loans as of the end of each of the last five years. All non-performing loans
at December 31, 1997 are considered impaired. Additional information regarding
the accounting for impaired loans can be found in Note 5 of the consolidated
financial statements. Loans 90 days or more past due and still accruing
interest remained low at $149 thousand at December 31, 1997 as compared to
$128 thousand as of December 31, 1996. Loans past due over 30 days, including
non-performing loans, were $4.7 million, which represents 1.56% of total loans
at December 31, 1997, as compared to $2.8 million or 1.23% of total loans at
December 31, 1996.
TABLE 3
NON-PERFORMING LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ---- ------
<S> <C> <C> <C> <C> <C>
Non-performing loans......................... $1,047 $ 908 $1,594 $521 $1,129
Accruing loans 90 days past due.............. 149 128 44 -- --
------ ------ ------ ---- ------
Total.................................... $1,196 $1,036 $1,638 $521 $1,129
====== ====== ====== ==== ======
Income that would have been recorded in
accordance with original terms.............. $ 79 $ 80 $ 75 $ 55 $ 153
Income actually recorded..................... 22 15 46 5 4
------ ------ ------ ---- ------
Loss of income........................... $ 57 $ 65 $ 29 $ 50 $ 149
====== ====== ====== ==== ======
</TABLE>
Franklin experienced net loan charge-offs of $134 thousand in 1997 as
compared to net recoveries of $372 thousand and $279 thousand in 1996 and
1995, respectively. Total loans charged-off in 1997 declined to $382 thousand
as compared to $509 thousand and $370 thousand in 1996 and 1995, respectively.
Total recoveries for 1997 were $248 thousand, representing collections on
loans charged-off in prior years. This compares to recoveries of $881 thousand
and $649 thousand in 1996 and 1995, respectively. Recoveries have slowed as
successful efforts have been realized where possible on loans that were
previously charged-off, while current year charge-offs have remained at low
levels. Table 4 summarizes Franklin's loan loss experience for each of the
last five years.
The allowance for loan losses of $4.2 million at December 31, 1997
represents 1.4% of total loans, compared to $3.8 million, or 1.7% of total
loans, at December 31, 1996. Franklin's loan loss allowance to non-
55
<PAGE>
performing loans ratio remains strong at 400% on December 31, 1997 down
slightly from 423% at December 31, 1996. As of December 31, 1997, the
allowance for loan losses is deemed to be more than adequate based on
management's analysis and overall methodology for measuring the adequacy of
the allowance. Management believes it has the processes in place to sustain
this high level of credit quality as Franklin continues to expand.
Table 4 presents an allocation of the allowance for loan losses to
significant loan categories as of the end of each of the last five years.
TABLE 4
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1................ $3,842 $3,443 $2,404 $ 2,110 $ 2,653
Allowance of acquired bank........ -- -- 579 -- --
Charge-offs:
Real Estate..................... -- (54) (145) -- (50)
Commercial...................... (345) (274) (198) (268) (1,428)
Consumer........................ (37) (181) (27) (23) (284)
------ ------ ------ ------- -------
Total......................... (382) (509) (370) (291) (1,762)
------ ------ ------ ------- -------
Recoveries:
Real Estate..................... 107 106 -- -- --
Commercial...................... 131 765 625 194 103
Consumer........................ 10 10 24 26 35
------ ------ ------ ------- -------
Total......................... 248 881 649 220 138
------ ------ ------ ------- -------
Net (charge-offs) recoveries...... (134) 372 279 (71) (1,624)
Provision for loan losses......... 484 27 181 365 1,081
------ ------ ------ ------- -------
BALANCE, DECEMBER 31.............. $4,192 $3,842 $3,443 $ 2,404 $ 2,110
====== ====== ====== ======= =======
Net charge-offs to average loans.. 0.1% (0.2)% (0.2)% 0.0% 1.8%
Allowance for loan losses to
period end loans................. 1.4% 1.7 % 1.9 % 1.9% 2.3%
</TABLE>
ALLOCATIONS OF THE ALLOWANCE FOR LOAN LOSSES TO MAJOR LOAN CATEGORIES AS OF
DECEMBER 31 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Real Estate.................................. $ 932 $ 860 $ 609 $ 335 $ 368
Commercial................................... 2,636 1,952 2,453 1,498 1,297
Consumer..................................... 376 162 102 116 130
Unallocated.................................. 248 868 279 455 315
------ ------ ------ ------ ------
Total.................................... $4,192 $3,842 $3,443 $2,404 $2,110
====== ====== ====== ====== ======
</TABLE>
The provision for loan losses is the annual cost of providing an allowance
or reserve for anticipated future losses on loans. Management deemed it
prudent to increase the provision for loan losses during 1997 due to the
significant increase in total loans rather than to any known deterioration in
asset quality. Provisions for 1997 were $484 thousand as compared to $27
thousand and $181 thousand for 1996 and 1995, respectively.
Securities. Franklin purchases securities from time to time to serve as a
source of liquidity, to assist in the management of interest rate sensitivity
and to augment net interest income. Securities, consisting of U.S. treasuries
and obligations of agencies and states and political subdivisions, were $179.4
million at December 31,
56
<PAGE>
1997 compared to $164.1 million at year end 1996. Securities of states and
political subdivisions were added to the portfolio in the latter part of 1996
and increased by $16 million during 1997 in order to alleviate some of the
impact of income tax expenses on net earnings.
Securities additions in 1997 were made primarily in the securities held-to-
maturity portfolio as management deemed the available-for sale portfolio, at
$96.9 million, more than adequate to insure liquidity for anticipated future
loan growth or deposit withdrawals. The average maturity of the total
securities portfolio decreased to 38 months at December 31, 1997 from 47 months
at December 31, 1996. The total tax equivalent yield on the securities
portfolio increased to 6.17% for 1997 as compared to 5.91% for 1996 primarily
due to the addition of securities of states and political subdivisions.
During 1996, the securities portfolio grew $55 million, or 50%, from $109.1
million at December 31, 1995 to $164.1 million at December 31, 1996. This
growth rate was due to 1996's significant deposit growth of $124 million
exceeding 1996 loan growth of $51 million, necessitating the growth of
available-for-sale securities to insure future liquidity. The average maturity
of the total securities portfolio increased slightly to 47 months at December
31, 1996 from 41 months at December 31, 1995.
Franklin maintains a securities available-for-sale portfolio, comprising 54%
of total securities as of December 31, 1997, which may be used to meet
liquidity or asset/liability management needs. These securities are carried at
fair value with unrealized gains or losses, net of tax, recorded as a separate
component of stockholders' equity. At December 31, 1997, securities available-
for-sale had an aggregate amortized cost of $96.2 million and a fair value of
$96.9 million. At December 31, 1996, securities available-for-sale had an
aggregate amortized cost of $97.6 million and a fair value of $97.2 million.
The balance of Franklin's securities have been designated securities held-to-
maturity and are recorded at amortized cost, which at December 31, 1997 was
$82.5 million with a fair value of $82.1 million. At December 31, 1996,
securities held-to-maturity had an aggregate amortized cost of $67 million and
a fair value of $65.4 million. Management has the positive intent and ability
to continue to hold the securities designated held-to-maturity to their
maturity dates.
All securities have fixed maturities and exhibit no permanent impairments.
Table 6 details the maturities of Franklin's securities portfolios as of
December 31, 1997.
Liquidity Management and Funding. Liquidity is a company's ability to
maintain sufficient cash flows to fund operations and meet existing and future
obligations, including loan commitments, maturing liabilities and depositors'
withdrawals. The asset portion of the balance sheet provides liquidity through
Federal funds sold, securities purchased under resale agreements and maturities
and repayments of loans and securities. Liability liquidity is provided through
Franklin's ability to attract and maintain sufficient deposits and to access
available funding markets. Franklin maintains levels of liquidity that it
considers adequate to meet its current needs and has structured loan and
security maturities to cover projected future needs. Loan and security
maturities as of December 31, 1997 are set forth in Tables 5 and 6.
57
<PAGE>
TABLE 5
LOAN MATURITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
1-
WITHIN 1 YEAR 5 YEARS AFTER 5 YEARS TOTAL
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Real Estate....................... $ 30,018 $ 64,935 $ 6,232 $101,185
Commercial........................ 93,845 77,576 12,939 184,360
Consumer.......................... 6,995 7,805 572 15,372
-------- -------- ------- --------
Total......................... $130,858 $150,316 $19,743 $300,917
======== ======== ======= ========
SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
LOANS DUE AFTER ONE YEAR
Fixed interest rate.................................. $ 58,234 $ 5,847 $ 64,081
Adjustable interest rate............................. 92,082 13,896 105,978
-------- ------- --------
Total............................................ $150,316 $19,743 $170,059
======== ======= ========
</TABLE>
TABLE 6
SECURITIES MATURITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS
---------------- ---------------- ---------------- ----------------
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. treasury
securities............. $ -- -- $18,773 6.46% $ 5 8.24% $ -- --
U.S. government
agencies............... 5,101 6.29% 39,213 6.36% 12,698 6.48% -- --
Step-up and structured
notes.................. -- -- 5,950 5.63% -- -- -- --
States and political
subdivisions(2)........ -- -- 1,715 6.59% 8,398 6.63% -- --
Mortgage-backed
securities............. 61 8.08% 855 5.36% -- -- 1,210 6.46%
------- ---- ------- ---- ------- ---- ------- ----
$ 5,162 6.31% $66,506 6.32% $21,101 6.52% $ 1,210 6.46%
HELD-TO-MATURITY
U.S. treasury
securities............. $12,989 5.08% $ 2,971 6.51% $ -- -- $ -- --
U.S. government
agencies............... 1,996 5.22% 3,481 6.88% 9,949 6.68% -- --
States and political
subdivisions(2)........ -- -- 10,245 6.69% 7,277 6.92% -- --
Mortgage-backed
securities............. 2,044 5.00% 16,228 5.28% 2,154 5.64% 13,124 6.07%
------- ---- ------- ---- ------- ---- ------- ----
$17,029 5.09% $32,925 6.00% $19,380 6.65% $13,124 6.07%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- --------
(1) Yields are based on amortized cost
(2) Yields are included on a taxable-equivalent basis using a 34% tax rate
58
<PAGE>
Franklin's liquidity needs have been met primarily through growth of stable
deposit relationships. Franklin's deposit base grew 30% in 1997, with total
deposits and customer repurchase agreements at $603.5 million at December 31,
1997 compared to $462.5 million one year previously. Franklin experienced a
large surge in deposits during the fourth quarter of 1997, with total customer
deposits increasing by approximately $110 million. That increase accounts for
the significant holdings of cash and cash equivalents at year-end of
approximately $160 million. Franklin has experienced this type of year-end
growth in prior years and management has deemed it prudent to assure
sufficient liquidity for withdrawals by investing these funds in short-term
investments until the stability of these funds is assured.
Average customer deposits and customer repurchase agreements have grown
steadily over the last three years; from $267.2 million during 1995, to $372.1
million during 1996, to $446.8 million during 1997, exhibiting growth rates of
39% and 20%, respectively. This continued rate of deposit growth has provided
the funding for Franklin's asset growth without requiring Franklin to access
its available borrowing capabilities. Franklin maintains borrowing lines with
the Federal Home Loan Bank of Atlanta and a number of larger regional banking
institutions.
Management attributes Franklin's dramatic increase in total funding
primarily to the local corporate community's desire to bank with a responsive,
locally-managed bank. With so many other investment alternatives available to
depositors, Franklin's ability to continue deposit growth during 1997's
competitive financial services environment, speaks to FNB's ability to service
customers' needs and retain core deposit relationships. With the 29% growth in
loans during 1997, totaling $67.9 million, deposit growth lagged slightly,
growing by $64.4 million, resulting in Franklin's loan to deposit ratio, a key
measure of liquidity, increasing from 64% on December 31, 1996 to 70% on
December 31, 1997. In the opinion of management, nearly all of the customer
repurchase agreements represent stable deposit relationships. If added to
deposits, Franklin's liquidity ratio would be 50% as of both December 31, 1997
and 1996. In management's view, these ratios indicate that Franklin is well
positioned to fund future liquidity needs. At December 31, 1997, cash, cash
equivalents and securities available-for-sale represent 40% of total assets
and 42% of total liabilities.
Market Risk Management. The effective management of market risk is essential
to achieving Franklin's financial goals. As a financial institution,
Franklin's primary market risk exposure is interest rate risk. The nature of
the banking business, which involves paying interest on deposits at varying
rates and terms and charging interest on loans at other rates and terms,
creates interest rate risk. As a result, earnings are subject to fluctuations
that arise due to changes in the level and direction of interest rates.
Management's objective is to minimize this risk.
Measuring and managing interest rate risk is a dynamic process that is
performed regularly as a component of management's analysis of the impact on
earnings of changes in asset and liability portfolios. Management does not
attempt to anticipate changes in interest rates. Its principal objective is to
maintain interest margins in periods of both rising and falling rates.
Franklin's objective is to reduce the sensitivity of its earnings to
interest rate fluctuations by diversifying its sources of funds, controlling
its mix of adjustable and fixed rate assets, improving the ratio of earning
assets to interest bearing liabilities and planning the maturities of its
assets and liabilities. Board and management asset/liability committees
monitor both the liquidity and interest rate sensitivity of FNB on a
continuing basis.
As of December 31, 1997, Franklin's interest sensitive liabilities exceeded
interest sensitive assets within a one-year period by approximately 4% of
assets. This is a relatively low percentage, indicating Franklin is almost
neutrally positioned with slightly more liabilities than assets subject to
repricing over the next twelve months. This gap represents a position at one
particular point in time and assumes that assets and liabilities with similar
re-pricing characteristics will reprice to the same degree. Such a static gap
position is not necessarily indicative of the impact on earnings of changes in
interest rates.
59
<PAGE>
Such traditional interest sensitivity gap analyses alone do not adequately
measure an institution's exposure to changes in interest rates because gap
models are not sensitive to changes in the relationship between interest rates
charged or paid and do not incorporate balance sheet trends and management
actions. Each of these factors can affect an institution's earnings.
Accordingly, in addition to performing gap analysis, management also evaluates
the impact of different interest rates on net interest income using an
earnings simulation model. The model incorporates the factors not captured by
gap analysis by projecting income over a twelve-month horizon under a variety
of interest rate scenarios.
Under simulation modeling scenarios, Franklin's net interest income would
improve with rising interest rates primarily due to the magnitude of
Franklin's adjustable rate loan portfolio. Franklin's loan portfolio, 70% of
which consists of adjustable rate loans, provides significant protection
during periods of rising interest rates. Management uses the securities
portfolio, which consists of only 11% floating rate securities and is of
longer duration, to provide stability during periods of falling interest
rates.
Franklin's deposit base is structured comparably to its asset base, with
significant deposits subject to fluctuations in interest rates. During 1997,
management had the ability to reset the rates paid on 65% of its total average
interest bearing liabilities as required to react to changes in market
interest rates. Time deposits, issued with fixed maturity dates, represented
35% of total average interest bearing liabilities during 1997. At December 31,
1997, only 8% of total time deposits had maturities of over twelve months.
While financial institutions may enter into agreements that provide interest
rate risk protection, Franklin's management believes effective interest rate
sensitivity management can best be achieved through careful monitoring and
redeployment of its underlying assets and liabilities. FNB has never engaged
in interest rate futures or options transactions or interest rate swap
agreements and has no current intent to do so in the future.
Capital Adequacy. Management believes that a strong equity position is
critical for any financial institution to compete effectively in today's
market. Stockholders' equity provides a source of permanent funding, allows
for future growth and assists FNB in withstanding unforeseen adverse
developments. Over the last three years, Franklin's increasing profitability
has continued to contribute to an improvement in its capital base. Franklin's
stockholders' equity stood at $39.3 million at December 31, 1997 as compared
to $31.9 million and $26.4 million as of December 31, 1996 and 1995,
respectively.
The growth in stockholders' equity in 1997 is the result of 1997's strong
earnings of $6 million, new shares issued through Franklin's stock option
plans, which resulted in additional equity of approximately $768 thousand, and
a change in unrealized gains and losses on securities available-for-sale from
a loss of $204 thousand at December 31, 1996 to a gain of $450 thousand at
December 31, 1997.
The growth in stockholders' equity in 1996 was attributable to $4.5 million
in earnings and $1.3 million from shares issued through Franklin's stock
option plans and a limited offering of 125,000 non-registered, restricted
shares of common stock. The increase in equity was partially offset by the
reduction in unrealized gains on securities available-for-sale of $347
thousand.
Franklin is well capitalized as evidenced by its capital ratios at December
31, 1997. Franklin maintained leverage and risk-based capital ratios of 7.73%
and 11.92%, respectively, as compared to 7.62% and 13.00% as of December 31,
1996. The increase in the leverage ratio is attributable to the increase in
Franklin's Tier I capital due to the retention of earnings. The decline in the
risk-based capital ratio is due to the increase in loans outstanding as of
December 31, 1997, which carry a higher regulatory risk rating than other
asset types, such as securities or Federal funds sold.
Capital remains well above the minimum regulatory requirements of 4% and 8%,
respectively, for leverage and risk-based capital. This strong capital base
allows Franklin to take advantage of profitable business opportunities while
helping to protect it against the risks inherent in the banking industry.
60
<PAGE>
Net Interest Income. Net interest income is Franklin's primary source of
earnings and represents the margin or spread between interest and amortized
fee income generated from earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and composition changes in earning assets and interest bearing liabilities
affect net interest income.
Net interest income on a fully taxable equivalent ("FTE") basis for 1997 was
$22 million, an increase of $3.7 million, or 20%, over 1996's net interest
income of $18.3 million. This growth is attributable to volume increases in
total average earning assets of $80.9 million during 1997 compared to
increases of $69.8 million in total average interest-bearing liabilities over
the same period.
Tables 1 and 7 illustrate the effects of volume and interest rate changes on
net interest income. The increase of $6.9 million in total FTE interest income
from $29.3 million in 1996 to $36.2 million in 1997 is entirely attributable
to volume increases in interest earning assets. Volume increases occurred in
every earning asset type, with the exception of Federal funds sold and
securities purchased under resale agreements. Interest rate declines in
commercial and real estate loans, caused by competitive market pressures, were
offset by rate increases in securities and Federal funds sold and other short-
term investments.
The $3.3 million increase in total interest expense from $11 million in 1996
to $14.3 million in 1997 was also related to volume increases in interest
bearing liabilities, with significant increases in certificates of deposit of
$100,000 and over and customer repurchase agreements. These two account types
also accounted for the only rate increases among interest bearing liabilities,
again due to competitive market pressures.
Net interest income for 1996 at $18.3 million was an increase of $4 million,
or 28%, over 1995's net interest income of $14.3 million. That increase was
also attributable to average earning assets increasing $102.7 million while
average interest bearing liabilities increased to a lesser extent, $74.9
million, over the same period.
Expressed as a percentage of average earning assets, Franklin's net interest
margin for 1997 decreased to 4.79% from 4.84% in 1996. The decrease in margin
is due to the growth in Franklin's highest-cost deposit types, certificates of
deposit and customer repurchase agreements, which also were at increasing
rates while the increase in earning assets occurred in loans at declining
yields.
In 1996, Franklin's net interest margin decreased to 4.84% from 5.19% in
1995. That decrease was the result of 1996's growth in customer deposits and
repurchase agreements outpacing the growth in loans. Excess funds were
invested in lower yielding assets, such as securities and Federal funds sold,
thereby reducing the overall net interest margin.
61
<PAGE>
TABLE 7
A SUMMARY OF THE CHANGE IN INTEREST EARNED AND INTEREST PAID RESULTING FROM
CHANGES IN VOLUMES AND RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
------------------------- ------------------------
FULLY TAXABLE EQUIVALENT CHANGE DUE TO CHANGE DUE TO
- ------------------------ ------------------------- ------------------------
VOLUME (1) RATE(1) TOTAL VOLUME(1) RATE(1) TOTAL
---------- ------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME(2)
Commercial loans......... $2,418 $(334) $2,084 $2,648 $(935) $1,713
Real estate loans........ 2,477 (49) 2,428 1,779 (319) 1,460
Consumer loans........... 272 17 289 42 315 357
Securities available-for-
sale(3)................. 1,424 22 1,446 2,055 4 2,059
Securities held-to-
maturity(3)............. 954 274 1,228 (145) 17 (128)
Federal funds sold and
securities with resale
agreements.............. (600) 71 (529) 1,488 (73) 1,415
------ ----- ------ ------ ----- ------
Total interest
income.............. $6,945 $ 1 $6,946 $7,867 $(991) $6,876
====== ===== ====== ====== ===== ======
INTEREST EXPENSE
DEPOSITS
Money manager accounts... $ (59) $ (33) $ (92) $ 126 $ (36) $ 90
Money market accounts.... 68 (15) 53 984 (34) 950
Savings accounts......... (6) (1) (7) (8) (8) (16)
Certificates less than
$100,000................ (99) (5) (104) 30 (43) (13)
Certificates of $100,000
and over................ 1,782 35 1,817 811 (189) 622
------ ----- ------ ------ ----- ------
Total deposits....... 1,686 (19) 1,667 1,943 (310) 1,633
------ ----- ------ ------ ----- ------
Federal funds purchased
and repurchase
agreements.............. 1,581 37 1,618 1,104 132 1,236
------ ----- ------ ------ ----- ------
Total interest expense... $3,267 $ 18 $3,285 $3,047 $(178) $2,869
------ ----- ------ ------ ----- ------
Net interest income...... $3,678 $ (17) $3,661 $4,820 $(813) $4,007
====== ===== ====== ====== ===== ======
</TABLE>
- --------
(1) Changes due to both volume and rate have been allocated to volume or rate
changes in proportion to the absolute dollar amounts of the change in
each.
(2) Non-accrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(3) Yields are stated on a tax equivalent basis.
62
<PAGE>
Non-interest Income. During 1997, total non-interest income increased by
$677 thousand, or 38%, to $2.4 million from $1.8 million in 1996. Excluding
securities gains, non-interest income increased $659 thousand from $1.7
million in 1996 to $2.4 million in 1997, also an increase of 38%.
Approximately $316 thousand, or 47%, of that increase is due to service
charges and other fees generated from the increased volume of deposit accounts
and a 33% increase in Franklin's ATM facilities. The remaining increase of
$361 thousand is the result of expanding fee based products introduced in
1996, such as foreign exchange which increased its annual fees generated by
222% to $221 thousand since the department's inception in September, 1996.
Fees generated from increased loan activity rose by 30% to $395 thousand for
1997 as compared to $303 thousand for 1996.
Net securities gains were $49 thousand in 1997 compared to $31 thousand in
1996. The sales activity in 1997 and 1996 was transacted to take advantage of
changes in market interest rates and other general asset and liability
management considerations.
Non-interest income increased 21% in 1996, from $1.5 million in 1995 to $1.8
million in 1996. Excluding securities gains, non-interest income increased
$332 thousand, or 24%, from $1.4 million in 1995 to $1.7 million in 1996. This
improvement was due to the increased volume of both loan and deposit accounts
as well as the introduction of new fee based products and bringing certain fee
income producing services, such as payroll processing, in-house.
Non-interest Expense. While achieving significant asset growth of 30%, with
loans increasing 29% and customer deposits and repurchase agreements
increasing 30%, and improving information delivery services to customers
through image processing and image statements and the introduction of PC
banking, Franklin was able to contain total non-interest expense growth to
10%. Management's focus on the containment of overhead expenses, while
significantly increasing both net and non-interest income, accounts for the
improvement in Franklin's productivity ratio which was 63% in both 1995 and
1996 and improved to 58% in 1997.
Employee related costs, occupancy and other overhead expenses totalled $13.9
million for 1997, as compared to $12.7 million for 1996. The largest component
of non-interest expense, compensation and employee benefits, grew by $832
thousand, or 13%, from $6.5 million in 1996 to $7.3 million in 1997, as
Franklin provided for qualified, experienced personnel necessary to continue
to provide operational support to FNB's growing customer base and implemented
new products and services. This increase in compensation expense accounted for
66% of the 1997 increase in non-interest expense.
Franklin's occupancy and furniture and equipment expense increased by $406
thousand, or 16%, from $2.6 million in 1996 to $3 million in 1997. This
increase is due to the technology improvements made during 1997 to improve
Franklin's product delivery system and properly manage our transaction volume
growth. The increase in all other non-interest expense for 1997 was minimal at
only $25 thousand, or less than 1%.
Non-interest expense increased 28% to $12.7 million in 1996 from $9.9
million in 1995. Compensation and employee benefits increased $1.6 million, or
33%, to $6.5 million in 1996 from $4.9 million in 1995. The additional expense
was incurred to staff two new branches, Tysons Corner and Bethesda, and to
employ qualified, experienced personnel to continue to provide operational
support to FNB's growing customer base. This increase in compensation expense
accounted for 57% of 1996's increase in non-interest expense. Franklin's
occupancy and furniture and equipment expense increased $668 thousand, or 35%,
from $1.9 million in 1995 to $2.6 million in 1996. That increase was also due
to the branch expansion and the technology improvements made to enhance
product delivery services. The increase in other non-interest expense for 1996
was $530 thousand, or 17%, from $3.1 million in 1995 to $3.6 million in 1996.
That increase was primarily due to technology and data processing
enhancements, as well as Franklin's increased commitment as sponsor of the
Franklin National Bank Classic.
Impact of the Year 2000 Issue. The Year 2000 issue has arisen as the result
of computer programs that use two digits rather than four to define the
applicable year. Any computer programs that have data-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a
63
<PAGE>
system failure or miscalculations causing disruptions in operations,
including, among other things, a temporary inability to process transactions.
Franklin currently uses a third party processor for the majority of its data
processing requirements. Franklin is working with this servicer as well as
with all of Franklin's other significant suppliers of data processing software
and hardware to identify and implement solutions for areas of concern.
Franklin currently believes that timely modifications to existing software
and/or hardware will successfully address the Year 2000 issue.
Franklin will use both internal and external resources to reprogram or
replace, where necessary, and test the software for Year 2000 modifications.
Franklin plans to complete the Year 2000 project by December 31, 1998. The
total cost of the Year 2000 project is not expected to exceed $100 thousand
and is not expected to have a material effect on the results of operations.
The costs of the project and the date on which Franklin plans to complete
Year 2000 modifications are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. The acquisition of Franklin by BB&T is not expected to materially
change Franklin's cost estimates or time frame for addressing the Year 2000
issue. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Income Taxes. Franklin's provision for income taxes includes both federal
and local income taxes. The increase in income tax expense to $3.6 million for
1997, from $2.9 million in 1996 and $2.3 million in 1995, is attributable to
the significant increase in Franklin's net income and the annual limitations
placed on the utilization of Franklin's available tax loss carryforwards.
Franklin's effective tax rate for 1997 was 37% compared to 39% for 1996. A
reconciliation of the effective tax rate to the 1997 federal statutory rate of
34% can be found in Note 10 of the consolidated financial statements.
1998 Outlook. 1998 will be a year of change and increased opportunities for
Franklin. Franklin's acquisition by BB&T will provide an affiliation with a
larger financial institution that has more advanced technology and delivery
systems to provide the expanded products and services sought by our existing
customers and prospective new customers. This partnership is expected to
provide a compatibility of cultures with a strong belief in local decision-
making and the effective servicing of customer needs with local staff.
Management intends to expand Franklin's presence in the metropolitan
Washington area under the BB&T name.
BB&T hopes to accomplish its goal of expanding its presence in Virginia and
extending its market into the District of Columbia and suburban Maryland will
be accomplished by utilizing the knowledge and expertise of Franklin's current
management team, directors, advisory board members and staff. Management
intends to offer BB&T's broader array of products and services such as
mortgage lending, leasing, factoring, insurance, trust and investment
products, credit cards and enhanced international banking capabilities to both
existing and prospective Franklin customers.
Franklin expects to have the opportunity and BB&T plans to offer the
financial strength, technological support and broad array of financial service
products to truly serve the needs of local consumers and businesses within the
metropolitan Washington community.
64
<PAGE>
Quarters Ended March 31, 1998 and 1997
Financial Summary. Net income for the three months ended March 31, 1998,
increased by 25% to $1.72 million or $0.24 per share compared to $1.38 million
or $0.20 per share for the same period in 1997. Returns on average assets and
average equity for the first quarter of 1998 were 1.16% and 17.27%,
respectively, compared to 1.21% and 17.30% for the same period in 1997.
Contributing to the increase in earnings for the first quarter of 1998 were
improvements in net interest income and growth in service charges and other
fees. The earnings improvement was partially offset by increases in loan loss
provisions, compensation and other non-interest expenses and income tax
expenses.
Franklin's total assets increased to $659 million at March 31, 1998 compared
to $647 million at December 31, 1997, an increase of $12 million or 2%. In
prior years, Franklin's assets have typically declined slightly during the
first quarter after experiencing a significant increase during the fourth
quarter of the preceding year. However, in 1998, Franklin was able to sustain
and improve slightly on its 1997 fourth quarter asset growth which totalled
approximately $140 million. As compared to March 31, 1997, total assets
increased 36% from $485 million to $659 million.
The increase in assets during the first quarter of 1998 occurred primarily
in the loan and securities portfolios. Loans outstanding at March 31, 1998
totaled $307 million, a 2% increase over loans at year end 1997 of $300
million. Franklin's loan to deposit ratio, a key measure of liquidity, remains
conservative at 71% as compared to 70% on December 31, 1997. In the opinion of
management, nearly all of the customer repurchase agreements represent stable
deposit relationships. If added to deposits, Franklin's liquidity ratio would
be 50% as of both March 31, 1998 and December 31, 1997. In management's view,
these ratios indicate that Franklin is well positioned to fund future
liquidity needs.
Total securities were $190 million as of March 31, 1998, an increase of $11
million, or 6%, over total securities of $179 million at December 31, 1997.
Additions were made almost equally in the available-for-sale and the held-to-
maturity securities portfolios.
Total deposits and customer repurchase agreements were $610 million at March
31, 1998 compared to $604 million at December 31, 1997, representing an
increase of 1%. Franklin's deposit mix at March 31, 1998 included $133 million
in non-interest bearing deposits, representing 22% of total deposits and
customer repurchase agreements, as compared to 23% at December 31, 1997.
Stockholders' equity at March 31, 1998 totaled $43 million compared to $39
million at December 31, 1997. Book value per share of common stock on March
31, 1998 was $6.25 per share compared to $5.92 per share at December 31, 1997.
The increase in equity was attributable to the retention of earnings and new
shares issued through Franklin's stock option plans.
Earnings Analysis. Net interest income is Franklin's primary source of
earnings and represents the difference between interest and amortized fee
income generated from earning assets and the interest expense paid on deposits
and other interest bearing liabilities. Net interest income totaled $6.2
million for the first three months of 1998 compared to $5.1 million for the
same period of 1997, an increase of 22%. The improvement in net interest
income was primarily attributable to the fact that volume increases in total
average earning assets of $137 million exceeded the volume increases of $107
million in total average interest-bearing liabilities.
Total interest income increased $2.5 million, or 30%, to $10.8 million for
the first three months of 1998 as compared to $8.3 million for the same period
of 1997, with 60%, or $1.5 million, of 1998's increase occurring in interest
and fees on loans. Total average earning assets increased 31% to $571 million
for the three months
65
<PAGE>
ended March 31, 1998 as compared to $434 million for the three months ended
March 31, 1997. Of that growth, 49% occurred in Franklin's loan portfolio, its
highest yielding asset, 42% occurred in short-term investments, such as
Federal funds sold, and 9% occurred in the securities portfolios.
Interest expense increased $1.4 million, or 43%, to $4.6 million for the
first three months of 1998 as compared to $3.2 million for the same period of
1997. The increase is primarily due to volume increases in average interest
bearing liabilities which grew 33% to $435 million for the three months ended
March 31, 1998 as compared to $327 million for the same period in 1997.
Expressed as a percentage of average earning assets, Franklin's net interest
margin for the three months ended March 31, 1998 decreased to 4.53% as
compared to 4.80% for the same period one year ago. The decline is due to the
growth in Franklin's interest-bearing liabilities occurring in its highest-
cost deposit types, certificates of deposit and customer repurchase
agreements, while a significantly high percentage of growth in earning assets
occurred in Franklin's short-term investments, its lowest yielding asset.
Non-interest income increased $115 thousand, or 22%, from $526 thousand for
the three months ending March 31, 1997 to $641 thousand for the same period
ending March 31, 1998. The increases are a result of Franklin's growing
customer base as well as the continued expansion of commercial deposit product
offerings, such as cash management and payroll processing services, foreign
currency exchange and ATM services.
Total non-interest expense of $3.8 million for the three months ended March
31, 1998 increased $557 thousand, or 17%, compared to $3.2 million for the
same period in 1997. The components of this increase were as follows:
compensation and employee benefits of $180 thousand, or 32% of the increase;
occupancy and furniture and equipment expense of $19 thousand, or 4%; and
other operating expense of $358 thousand, or 64%. The increase in compensation
expense is primarily due to overall salary and benefit increases deemed
necessary by management to attract and retain qualified personnel to more
effectively manage Franklin's growth. The increase in other operating expenses
is primarily due to Franklin's community involvement efforts which include
expansion of charitable contributions and program sponsorships.
Asset Quality. While asset quality continues to be strong, Franklin has
deemed it prudent to increase provisions for loan losses to $340 thousand for
the three months ended March 31, 1998 as compared to $130 thousand for the
same period one year ago. For the three months ended March 31, 1998, Franklin
recognized net loan charge-offs of $208 thousand, as compared to first quarter
1997 net loan recoveries of $57 thousand. At March 31, 1998, the allowance for
loan losses represented 1.41% of total loans as compared to 1.40% at December
31, 1997.
Non-performing assets decreased to $704 thousand at March 31, 1998 from $1
million at December 31, 1997, representing 0.23% of total loans on March 31,
1998 as compared to 0.35% of total loans on December 31, 1997. The allowance
for loan losses as a percentage of non-performing assets increased from 400%
on December 31, 1997 to 614% on March 31, 1998. Management believes that all
major loan portfolio deficiencies have been identified and adequate reserves
have been established.
Recent Accounting Developments. Effective January 1, 1998, Franklin adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" which requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the beneficial ownership of Franklin Common Stock
as of May 11, 1998 by all directors, the Chief Executive Officer and the four
other executive officers of Franklin (determined at the end of the last fiscal
year) whose annual salary and bonus for the last completed fiscal year was at
least $100,000, and all directors and executive officers of Franklin as a
group. To management's knowledge, no person or group beneficially owns more
than five percent of the issued and outstanding shares of Franklin Common
Stock. Unless otherwise indicated and subject to applicable community property
and similar statutes, all persons listed below have sole voting and investment
power over all shares of Franklin Common Stock beneficially owned. Share
ownership has been computed in accordance with Commission rules and does not
necessarily indicate beneficial ownership for any other purpose.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------ -------------------- ----------------
<S> <C> <C>
Diane M. Begg(1)........................ 48,500 0.64
George Chopivsky, Jr.(2)................ 214,575 2.85
Albert A. D'Alessandro(3)............... 126,960 1.69
David G. Fleming(4)..................... 55,000 0.73
Joseph B. Gildenhorn(5)................. 248,932 3.31
Stephen S. Haas(6)...................... 37,790 0.50
Joseph B. Head(7)....................... 154,750 2.06
Susan B. Hepner(8)...................... 217,391 2.89
H. Peter Larson, III(9)................. 44,533 0.59
Robert P. Pincus(10).................... 268,111 3.56
Gant Redmon(11)......................... 5,780 0.08
Joseph R. Schuble, Sr.(12).............. 313,418 4.17
James C. Stearns(13).................... 6,761 0.09
All directors and officers as a group
(16 persons)(14)....................... 1,831,301 24.35
</TABLE>
- --------
(1) Includes vested options to purchase 42,000 shares of Franklin Common
Stock and 500 shares owned through her retirement account.
(2) Includes 10,000 shares held by the Chopivsky Family Partnership, of which
Mr. Chopivsky is a general partner, 29,000 shares held by the Chopivsky
Family Foundation, of which Mr. Chopivsky is president, and vested
options to purchase 5,000 shares of Franklin Common Stock.
(3) Includes vested options to purchase 108,210 shares of Franklin Common
Stock and 18,750 shares owned through his retirement account.
(4) Includes vested options to purchase 27,733 shares of Franklin Common
Stock.
(5) Includes vested options to purchase 8,000 shares of Franklin Common
Stock.
(6) Includes vested options to purchase 7,500 shares of Franklin Common
Stock.
(7) Includes vested options to purchase 135,000 shares of Franklin Common
Stock.
(8) Includes 203,391 shares held by Professional Associates of which Ms.
Hepner is a general partner, and vested options to purchase 14,000 shares
of Franklin Common Stock.
(9) Includes 2,000 shares owned by his spouse, 2,100 shares owned by his
children, 14,088 shares owned through various retirement accounts and
vested options to purchase 15,500 shares of Franklin Common Stock.
(10) Includes 1,111 shares owned by his son and vested options to purchase
30,000 shares of Franklin Common Stock.
(11) Includes 2,640 shares owned by his spouse and vested options to purchase
500 shares of Franklin Common Stock.
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(12) Includes 141,432 shares held by Essex Investments Limited Partnership of
which Mr. Schuble is a general partner, 157,986 shares held by Schuble
Family Investment Limited Partnership of which Mr. Schuble is a general
partner, and vested options to purchase 11,500 shares of Franklin Common
Stock.
(13) Includes vested options to purchase 1,000 shares of Franklin Common
Stock.
(14) Includes vested options to purchase 491,943 shares of Franklin Common
Stock.
DESCRIPTION OF BB&T CAPITAL STOCK
GENERAL
The authorized capital stock of BB&T consists of 500,000,000 shares of BB&T
Common Stock and 5,000,000 shares of preferred stock, par value $5.00 per
share (the "BB&T Preferred Stock"). As of March 31, 1998, there were
141,681,441 shares of BB&T Common Stock issued and outstanding. There were no
shares of BB&T Preferred Stock issued and outstanding as of such date,
although 2,000,000 shares of BB&T Preferred Stock have been designated as
Junior Participating Preferred Stock (the "BB&T Junior Preferred Stock") and
are reserved for issuance in connection with BB&T's shareholder rights plan.
See "--Shareholder Rights Plan." Based on the number of shares of Franklin
Common Stock outstanding at the Record Date, if the Closing Value is $66.81,
it is estimated that approximately 2,394,210 shares of BB&T Common Stock would
be issued in the Merger.
BB&T COMMON STOCK
Each share of BB&T Common Stock is entitled to one vote on all matters
submitted to a vote at any meeting of shareholders. Holders of BB&T Common
Stock are entitled to receive dividends when, as, and if declared by the BB&T
Board out of funds legally available therefor and, upon liquidation, to
receive pro rata all assets, if any, of BB&T available for distribution after
the payment of necessary expenses and all prior claims. Holders of BB&T Common
Stock have no preemptive rights to subscribe for any additional securities of
any class that BB&T may issue, nor any conversion, redemption or sinking fund
rights. Holders of BB&T Common Stock have no right to cumulate votes in the
election of directors. The rights and privileges of holders of BB&T Common
Stock are subject to any preferences provided for by resolution of the BB&T
Board for any series of BB&T Preferred Stock that BB&T may issue in the
future. The terms of the BB&T Junior Preferred Stock reserved for issuance in
connection with BB&T's shareholders rights plan provide that holders of such
shares will have rights and privileges that are substantially identical to
those of holders of BB&T Common Stock.
The transfer agent and registrar for BB&T Common Stock is BB&T-NC. The
Company intends to apply for the listing on the NYSE, subject to official
notice of issuance, of the shares of BB&T Common Stock to be issued in the
Merger.
BB&T PREFERRED STOCK
Under the BB&T Articles, BB&T may issue shares of BB&T Preferred Stock in
one or more series as may be determined by the BB&T Board or a duly authorized
committee. The BB&T Board or committee may also establish, from time to time,
the number of shares to be included in each series and may fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof, and may increase
or decrease the number of shares of any series without any further vote or
action by the shareholders. Any BB&T Preferred Stock issued may rank senior to
the BB&T Common Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up of BB&T, or both. In addition, any
shares of BB&T Preferred Stock may have class or series voting rights. Under
certain circumstances, the issuance of BB&T Preferred Stock or the existence
of the unissued BB&T Preferred Stock may tend to discourage or render more
difficult a merger or other change in control of BB&T. See "--Shareholder
Rights Plan."
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SHAREHOLDER RIGHTS PLAN
BB&T has adopted a shareholder rights plan pursuant to which holders of
shares of BB&T Common Stock also hold rights to purchase securities or other
property that may be exercised upon the occurrence of certain "triggering
events." Shareholder rights plans such as BB&T's plan are intended to
encourage potential hostile acquirors of a "target" corporation to negotiate
with the board of directors of the target corporation in order to avoid
occurrence of the "triggering events" specified in such plans. Shareholder
rights plans are intended to give the directors of a target corporation the
opportunity to assess the fairness and appropriateness of a proposed
transaction in order to determine whether or not it is in the best interests
of the corporation and its shareholders. Notwithstanding these purposes and
intentions of shareholder rights plans, such plans, including that of BB&T,
could have the effect of discouraging a business combination that shareholders
believe to be in their best interests. The provisions of BB&T's shareholder
rights plan are discussed below.
On December 17, 1996, the BB&T Board declared a dividend distribution of one
right (a "Right," and collectively the "Rights") for each outstanding share of
BB&T Common Stock to shareholders of record at the close of business on
January 17, 1997. One Right will also be distributed for each share of BB&T
Common Stock issued between January 17, 1997 and the occurrence of a
"Distribution Date" (described in the next paragraph). Each Right entitles the
registered holder to purchase from BB&T a unit consisting of one-hundredth of
a share (a "Unit") of BB&T Junior Preferred Stock at a Purchase Price of
$145.00 per Unit, subject to adjustment, or, under certain circumstances,
other securities or property. The description and terms of the Rights are set
forth in the Rights Agreement, dated as of December 17, 1996, between BB&T and
BB&T-NC in the capacity of Rights Agent (the "Rights Agreement").
Initially, the Rights will be attached to all BB&T Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. A "Distribution Date" will occur, and the Rights will separate
from shares of BB&T Common Stock, upon the earliest of (a) 10 business days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
BB&T Common Stock (the "Stock Acquisition Date"), (b) 10 business days
following the commencement of a tender offer or exchange offer that would if
completed result in a person or group beneficially owning 20% or more of such
outstanding shares of BB&T Common Stock or (c) 10 business days after the BB&T
Board declares any Person to be an "Adverse Person," as described in the
following paragraph.
The BB&T Board will declare a person to be an Adverse Person upon its
determinations (a) that such person, alone or together with its affiliates and
associates, has or will become the beneficial owner of 10% or more of the
outstanding shares of BB&T Common Stock (provided that any such determination
will not be effective until such person has in fact become the beneficial
owner of 10% or more of the outstanding shares of BB&T Common Stock) and (b)
following consultation with such persons as the BB&T Board deems appropriate,
that (i) such beneficial ownership by such person is intended to cause, is
reasonably likely to cause or will cause BB&T to repurchase the BB&T Common
Stock beneficially owned by such person or to cause pressure on BB&T to take
action or enter into a transaction or series of transactions intended to
provide such person with short-term financial gain under circumstances where
the BB&T Board determines that the best long-term interests of BB&T and its
shareholders would not be served by taking such action or entering into such
transactions or series of transactions at that time or (ii) such beneficial
ownership is causing or is reasonably likely to cause a material adverse
impact (including, but not limited to, impairment of relationships with
customers or impairment of BB&T's ability to maintain its competitive
position) on the business or prospects of BB&T or (iii) such beneficial
ownership otherwise is determined to be not in the best interests of BB&T and
its shareholders, employees, customers and communities in which BB&T and its
subsidiaries do business.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on December 31, 2006, subject to extension by the
BB&T Board, or unless earlier redeemed by BB&T as described below.
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As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of BB&T Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except for certain issuances in
connection with outstanding options and convertible securities and as
otherwise determined by the BB&T Board, only shares of BB&T Common Stock
issued before the Distribution Date will be issued with Rights.
In the event that the BB&T Board determines that a person is an Adverse
Person or, at any time following the Distribution Date, a person becomes the
beneficial owner of 25% or more of the then-outstanding shares of BB&T Common
Stock, each holder of a Right will thereafter have the right to receive at the
time specified in the Rights Agreement, (a) upon exercise and payment of the
exercise price, BB&T Common Stock (or, in certain circumstances, cash,
property or other securities of BB&T) having a value equal to two times the
exercise price of the Right or (b) at the discretion of the BB&T Board, upon
exercise and without payment of the exercise price, BB&T Common Stock (or, in
certain circumstances, cash, property or other securities of BB&T) having a
value equal to the difference between the exercise price of the Right and the
value of the consideration that would be payable under clause (a).
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by
any Acquiring Person or Adverse Person will be null and void. Rights will not
become exercisable following the occurrence of either of the events set forth
above, however, until such time as the Rights are no longer redeemable by BB&T
as set forth below.
For example, at an exercise price of $145.00 per Right, each Right not owned
by an Acquiring Person or an Adverse Person (or by certain related parties)
following an event set forth in the preceding paragraph would entitle its
holder to purchase $290.00 worth of BB&T Common Stock (or other consideration,
as noted above) for $145.00. Assuming that the BB&T Common Stock had a per
share value of $72.50 at such time, the holder of each valid Right would be
entitled to purchase four shares of BB&T Common Stock for $145.00.
Alternatively, at the discretion of the BB&T Board, each Right following an
event set forth in the preceding paragraph, without payment of the exercise
price, would entitle its holder to BB&T Common Stock (or other consideration,
as noted above) worth $145.00.
In the event that, at any time following the Stock Acquisition Date, (a)
BB&T is acquired in a merger, statutory share exchange or other business
combination transaction in which BB&T is not the surviving corporation or (b)
50% or more of BB&T's assets or earning power is sold or transferred, each
holder of a Right (except Rights that previously have been voided as set forth
above) will thereafter have the right to receive, upon exercise, common stock
of the acquiring company having a value equal to two times the exercise price
of the Right. The Purchase Price payable, and the number of Units of BB&T
Junior Preferred Stock or other securities or property issuable, upon exercise
of the Rights are subject to adjustment from time to time to prevent dilution
in the event of certain events.
In general, BB&T may redeem the Rights in whole, but not in part, at a price
of $0.01 per Right at any time until 10 business days following the earlier of
the Stock Acquisition Date or the effective date of any declaration by the
BB&T Board that any person is an Adverse Person. After the redemption period
has expired, BB&T's right of redemption may be reinstated if an Acquiring
Person or Adverse Person reduces his beneficial ownership to less than 10% of
the outstanding shares of BB&T Common Stock in a transaction or series of
transactions not involving BB&T and if there are no other Acquiring Persons or
Adverse Persons.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of BB&T, including, without limitation, the right to vote or
to receive dividends. While the distribution of the Rights will not be taxable
to shareholders or to BB&T, shareholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for stock (or other consideration) of BB&T or for common stock of
the acquiring company as set forth above.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
BB&T Board before the Distribution Date. After the Distribution
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Date, the provisions of the Rights Agreement may be amended by the BB&T Board
in order to cure any ambiguity, to make changes that do not adversely affect
the interests of holders of Rights (excluding the interests of any Acquiring
Person or Adverse Person) or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust the time
period governing redemption may be made when the Rights are not redeemable.
The Rights Agreement is filed as an exhibit to a Registration Statement on
Form 8-A dated January 10, 1997 that has been filed by BB&T with the
Commission. This registration statement and the Rights Agreement are
incorporated by reference in this Proxy Statement/Prospectus, and reference is
made to them for the complete terms of the Rights Agreement and the Rights.
The foregoing discussion is qualified in its entirety by reference to the
Rights Agreement. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
CERTAIN PROVISIONS OF THE NCBCA, BB&T ARTICLES AND BB&T BYLAWS
Certain provisions of the NCBCA, the BB&T Articles and the BB&T Bylaws deal
with matters of corporate governance and the rights of shareholders. Certain
of these provisions, as well as the ability of the BB&T Board to issue shares
of BB&T Preferred Stock and to set the voting rights, preferences and other
terms thereof, may be deemed to have an anti-takeover effect and may delay or
prevent takeover attempts not first approved by the BB&T Board. These
provisions also could delay or deter the removal of incumbent directors or the
assumption of control by shareholders. BB&T believes that these provisions are
appropriate to protect the interests of BB&T and all of its shareholders. The
following describes the principal provisions of the NCBCA applicable to BB&T,
the BB&T Articles and BB&T Bylaws that may be deemed to have anti-takeover
effects.
Control Share Act
The Control Share Acquisition Act of the NCBCA may make an unsolicited
attempt to gain control of BB&T more difficult by restricting the right of
certain shareholders to vote newly acquired large blocks of stock. For a
description of this statute, see "COMPARISON OF SHAREHOLDERS' RIGHTS--Anti-
takeover Statutes."
Provisions Regarding the BB&T Board
The provisions of the BB&T Articles and the BB&T Bylaws with respect to the
classification of the BB&T Board and the removal of directors only for cause
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of BB&T. For
a description of such provisions, see "COMPARISON OF SHAREHOLDERS' RIGHTS--
Directors."
Meeting of Shareholders; Shareholders' Nominations and Proposals
Under the BB&T Bylaws, meetings of the shareholders may be called by the
Chief Executive Officer or the BB&T Board. Shareholders of BB&T may not
request that a special meeting of shareholders be called. This provision could
have the effect of delaying until the next annual shareholders' meeting
shareholder actions that are favored by the holders of a majority of the
outstanding voting securities of BB&T.
Certain procedures governing the submission of nominations for directors and
other proposals by shareholders may have some deterrent effect on shareholder
actions designed to result in change of control in BB&T. See "COMPARISON OF
SHAREHOLDERS' RIGHTS--Notice of Shareholder Nominations and Shareholder
Proposals."
COMPARISON OF SHAREHOLDERS' RIGHTS
At the Effective Date, holders of Franklin Common Stock will become
shareholders of BB&T. The following is a summary of material differences
between the rights of holders of BB&T Common Stock and
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holders of Franklin Common Stock. Since BB&T is organized under the laws of
the State of North Carolina and Franklin is organized under the laws of the
State of Delaware, differences in the rights of holders of BB&T Common Stock
and those of holders of Franklin Common Stock arise from differing provisions
of the NCBCA and the DGCL in addition to differing provisions of their
respective charter documents and bylaws.
The following summary does not purport to be a complete statement of the
provisions affecting, and differences between, the rights of holders of BB&T
Common Stock and holders of Franklin Common Stock. The identification of
specific provisions or differences is not meant to indicate that other equally
or more significant differences do not exist. This summary is qualified in its
entirety by reference to the NCBCA and DGCL and the governing corporate
instruments of BB&T and Franklin, to which the shareholders of Franklin are
referred.
AUTHORIZED CAPITAL STOCK
BB&T
BB&T's authorized capital stock consists of 500,000,000 shares of BB&T
Common Stock and 5,000,000 shares of BB&T Preferred Stock. The BB&T Articles
authorize the BB&T Board to issue shares of BB&T Preferred Stock in one or
more series and to fix the designation, powers, preferences, and rights of the
shares of BB&T Preferred Stock in each such series. As of March 31, 1998,
141,681,441 shares of BB&T Common Stock were outstanding. No shares of BB&T
Preferred Stock were issued and outstanding as of such date, although
2,000,000 shares of BB&T Preferred Stock have been designated as BB&T Junior
Preferred Stock and are reserved for issuance in connection with BB&T's
shareholder rights plan. See "DESCRIPTION OF BB&T CAPITAL STOCK--Shareholder
Rights Plan."
Franklin
Franklin's authorized capital stock consists of 25,000,000 shares of
Franklin Common Stock. As of the Record Date, 6,840,601 shares of Franklin
Common Stock were outstanding.
DIRECTORS
BB&T
The BB&T Articles and the BB&T Bylaws provide for a board of directors
having not less than three nor more than 30 members as determined from time to
time by vote of a majority of the members of the BB&T Board or by resolution
of the shareholders of BB&T. Currently, the BB&T Board consists of 22
directors. The BB&T Board is divided into three classes, with directors
serving staggered three-year terms. Under the BB&T Articles and the BB&T
Bylaws, BB&T directors may be removed only for cause and only by the vote of a
majority of the outstanding shares entitled to vote in the election of
directors. Holders of BB&T Common Stock do not have cumulative voting rights
in the election of directors.
Franklin
The Franklin Certificate of Incorporation and the Franklin Bylaws provide
for a board of directors having one or more members, as determined from time
to time by vote of a majority of the members of the Franklin Board or by vote
of the holders of a majority of the outstanding Franklin Common Stock entitled
to vote in an election of directors. Currently, the Franklin Board consists of
nine directors, each of whom serves a one-year term. Under the Franklin
Certificate of Incorporation and the Franklin Bylaws, Franklin directors may
be removed at any meeting of shareholders by vote of a majority of the
outstanding Franklin Common Stock entitled to vote at an election of
directors, either with or without cause. Holders of Franklin Common Stock do
not have cumulative voting rights in the election of directors.
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DIVIDENDS AND OTHER DISTRIBUTIONS
BB&T
The NCBCA prohibits a North Carolina corporation from making any
distributions to shareholders, including the payment of cash dividends, that
would render it insolvent or unable to meet its obligations as they become due
in the ordinary course of business. BB&T is not subject to other express
regulatory restrictions on payments of dividends and other distributions. The
ability of BB&T to pay distributions to the holders of BB&T Common Stock will
depend, however, to a large extent upon the amount of dividends its bank
subsidiaries, which are subject to restrictions imposed by regulatory
authorities, pay to BB&T. In addition, the Federal Reserve could oppose a
distribution by BB&T if it determined that such a distribution would harm
BB&T's ability to support its bank subsidiaries. There can be no assurances
that dividends will be paid in the future. The declaration, payment and amount
of any such future dividends would depend on business conditions, operating
results, capital, reserve requirements and the consideration of other relevant
factors by the BB&T Board.
Franklin
Pursuant to the DGCL, Franklin may declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which
the dividend is declared and/or for the preceding fiscal year as long as the
amount of capital of the corporation following the declaration and payment of
the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon
the distribution of assets. In addition, Franklin may, under the DGCL, redeem
or repurchase its shares only if such redemption or repurchase would not
impair the capital of the corporation. Franklin is not subject to other
express regulatory restrictions on payments of dividends and other
distributions. The ability of Franklin to pay distributions to the holders of
Franklin Common Stock will depend, however, upon the amount of dividends its
national bank subsidiary, which is subject to the restrictions imposed by
regulatory authorities, pays to Franklin. Franklin has not paid any cash
dividends on Franklin Common Stock, and there can be no assurances that any
dividends would be paid in the future if the Merger is not completed. The
declaration, payment and amount of any such future dividends would depend on
business conditions, operating results, capital, reserve requirements and the
consideration of other relevant factors by the Franklin Board.
NOTICE OF SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
BB&T
The BB&T Bylaws establish advance notice procedures for shareholder
proposals and the nomination, other than by or at the direction of the BB&T
Board or a committee thereof, of candidates for election as directors. The
BB&T Bylaws provide that a shareholder wishing to nominate a person as a
candidate for election to the BB&T Board must submit such nomination in
writing to the Secretary of BB&T not later than 60 days before one year after
the date of the immediately preceding annual meeting of shareholders, together
with biographical information about the candidate and the shareholder's name
and shareholdings. Nominations not made in accordance with the foregoing
provisions may be ruled out of order by the presiding officer or the chairman
of the meeting.
Similarly, a shareholder must notify the Secretary of BB&T in writing not
later than 60 days before one year after the date of the immediately preceding
annual meeting of shareholders of the shareholder's intention to make a
proposal for consideration at the next annual meeting. The notice must
contain: (a) a brief description of the proposal, (b) the name and
shareholdings of the shareholder submitting the proposal and (c) any material
interest of the shareholder in such proposal.
Franklin
The Franklin Bylaws provide that the chair of any shareholder meeting shall
determine the order of business and procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as
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seem to be in order. This would include any determination as to whether or not
a shareholder proposal or the nomination, other than by or at the direction of
the Franklin Board or a committee thereof, of candidates for election as
directors, will be considered and voted on at the meeting.
EXCULPATION AND INDEMNIFICATION
BB&T
The NCBCA requires that a director of a North Carolina corporation discharge
the duties as a director (a) in good faith, (b) with the care an ordinarily
prudent person in a like position would exercise under similar circumstances
and (c) in a manner the director reasonably believes to be in the best
interests of the corporation. The NCBCA expressly provides that a director
facing a change of control situation shall not be subject to any different
duties or a higher standard of care. The BB&T Articles provide that, to the
fullest extent permitted by applicable law, no director of BB&T will have any
personal liability for monetary damage for breach of a duty as a director. The
NCBCA does not permit the elimination of liability with respect to (a) acts or
omissions the director knew or believed were clearly in conflict with the best
interests of BB&T, (b) any liability under the NCBCA for unlawful
distributions by BB&T, or (c) any transaction from which the director derived
an improper personal benefit. The BB&T Bylaws require BB&T to indemnify its
directors and officers against liabilities arising out of such person's status
as such, excluding any liability relating to activities that were at the time
taken known or believed by such person to be clearly in conflict with the best
interests of BB&T.
Franklin
The DGCL permits Delaware corporations to provide indemnification for a
director, officer, employee or agent of the corporation if such person acted
in good faith and in a manner reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was
unlawful; for actions by or in the right of the corporation, no
indemnification may be made if he or she is adjudged liable unless the court
determines that, despite such adjudication, he or she is fairly and reasonably
entitled to indemnity in view of the circumstances. The DGCL also permits
Delaware corporations to eliminate personal liability for directors for
actions other than (a) breaches of the director's duty of loyalty to the
corporation or its stockholders, (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions, or (d)
transactions in which the director received an improper personal benefit.
The Franklin Certificate of Incorporation provides that the liability of
Franklin's directors to Franklin or its stockholders shall be eliminated to
the full extent provided by the DGCL. The Franklin Certificate of
Incorporation and the Franklin Bylaws require Franklin to indemnify any
director or officer to the fullest extent permitted by law, including the
DGCL.
MERGERS, SHARE EXCHANGES AND SALES OF ASSETS
BB&T
The NCBCA generally requires that any merger, share exchange or sale of
substantially all the assets of a corporation not in the ordinary course of
business be approved by the affirmative vote of the majority of the issued and
outstanding shares of each voting group entitled to vote. Approval of a merger
by the shareholders of the surviving corporation is not required in certain
instances, however, including (as in the case of the Merger) a merger in which
the number of voting shares outstanding immediately after the merger, plus the
number of voting shares issuable as a result of the merger, does not exceed by
more than 20% the number of voting shares outstanding immediately before the
merger. BB&T is also subject to certain statutory anti-takeover provisions.
See "--Anti-takeover Statutes."
74
<PAGE>
Franklin
The DGCL generally requires that any merger, share exchange or sale of
substantially all of the assets of a corporation not in the ordinary course of
business be approved by holders of a majority of the voting shares of the
corporation. Franklin also is subject to certain statutory anti-takeover
provisions. See "--Anti-takeover Statutes."
ANTI-TAKEOVER STATUTES
BB&T
The North Carolina Control Share Acquisition Act (the "Control Share Act")
applies to BB&T. The Control Share Act is designed to protect shareholders of
publicly owned North Carolina corporations based within the state against
certain changes in control and to provide shareholders with the opportunity to
vote on whether to afford voting rights to certain shareholders.
The Control Share Act is triggered upon the acquisition by a person of
shares of voting stock of a covered corporation that, when added to all other
shares beneficially owned by the person, would result in that person holding
one-fifth, one-third or a majority of the voting power in the election of
directors. Under the Control Share Act, the shares acquired that result in the
crossing of any of these thresholds ("Control Shares") have no voting rights
until such rights are conferred by the affirmative vote of the holders of a
majority of all outstanding voting shares, excluding those shares held by any
person involved or proposing to be involved in the acquisition of Control
Shares, any officer of the corporation and any employee of such corporation
who is also a director of such corporation. If voting rights are conferred on
Control Shares, all shareholders of such corporation have the right to require
that their shares be redeemed at the highest price paid per share by the
acquiror for any Control Shares.
In accordance with the provisions of such statute, BB&T has elected not to
be governed by the North Carolina Shareholder Protection Act.
Franklin
Section 203 of the DGCL prohibits a Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for three years
following the date that such person becomes an interested stockholder. With
certain exceptions, an "interested stockholder" is a person or group who owns
15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option or warrant or any other
agreement, arrangement or understanding, or upon the exercise of conversion or
exchange rights, and including stock with respect to which the person has
voting rights only), or is an affiliate or associate of the corporation and
was the owner of 15% or more of such voting stock at any time within the
previous three years. For purposes of Section 203, the term "business
combination" is defined broadly to include (a) mergers with or caused by the
interested stockholder, (b) sales or other dispositions to the interested
stockholder (except proportionately with the other stockholders) of assets of
the corporation or a subsidiary equal to 10% or more of the aggregate market
value of the corporation's consolidated assets or its outstanding stock, (c)
the issuance or transfer by the corporation or a subsidiary of stock of the
corporation or such subsidiary to the interested stockholder (except for
certain specified transfers that do not increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock), (d) any transaction involving the corporation or a
subsidiary that increases the interested stockholder's proportionate ownership
of any class or series of the corporation's or such subsidiary's stock or (e)
receipt by the interested stockholder (except proportionately as a
stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation or
a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if:
(a) prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business combination
or the transaction which resulted in the person becoming an interested
stockholder;
75
<PAGE>
(b) the interested stockholder owns at least 85% of the corporation's
voting stock upon completion of the transaction which made him an
interested stockholder (excluding from the 85% calculation shares owned by
directors who are also officers of the target corporation and shares held
by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or
(c) on or after the date such person becomes an interested stockholder,
the board approves the business combination and it is also approved at a
stockholder meeting by 66 2/3% of the voting stock not owned by the
interested stockholder.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
BB&T
The NCBCA provides generally that a North Carolina corporation's articles of
incorporation may be amended if the amendment is affirmatively approved by a
majority of the votes cast within each voting group entitled to vote. The BB&T
Articles and BB&T Bylaws also require the affirmative vote of two thirds of
the outstanding shares entitled to vote to approve an amendment to the BB&T
Articles or BB&T Bylaws amending, altering or repealing the portions of such
articles or bylaws relating to classification and staggered terms of the
board, removal of directors or any requirement for a supermajority vote on
such an amendment. The BB&T Articles authorize the BB&T Board to amend the
BB&T Bylaws.
Franklin
The DGCL generally requires that any amendment to a Delaware corporation's
articles of incorporation be approved by holders of a majority of the voting
shares of the corporation. The Franklin Certificate of Incorporation provides
that Franklin may amend the Franklin Certificate of Incorporation in any
manner prescribed by statute.
The DGCL provides generally that the authority to adopt, amend or repeal the
bylaws of a Delaware corporation is reserved to its shareholders unless the
corporation's certificate of incorporation gives such authority also to the
board of directors. The Franklin Certificate of Incorporation does so
authorize the Franklin Board to amend the Franklin Bylaws. The Franklin Bylaws
provide that an amendment thereof requires either the vote of a majority of
the Franklin Board or the vote of a majority of the voting power of the shares
represented at an annual meeting or a special meeting called for that purpose.
The Franklin Bylaws also provide that the Franklin Board may not amend the
provisions of the Franklin Bylaws providing for indemnification of officers
and directors (see "--Exculpation and Indemnification--Franklin") except to
increase the indemnification provided for, and that only the shareholders may
amend the provisions of the Franklin Bylaws dealing with amendments to the
Franklin Bylaws.
SHAREHOLDERS' RIGHTS OF DISSENT AND APPRAISAL
BB&T
Under the NCBCA, a shareholder of a North Carolina corporation is entitled
to dissent from, and obtain payment of the "full value" of his shares in the
event of, any of the following corporate transactions: (a) completion of a
plan of merger to which the corporation is a party, unless (i) the corporation
is a parent merging with a subsidiary pursuant to a particular NCBCA provision
for such transactions; (ii) the merger is subject to an NCBCA provision that
exempts from the shareholder approval requirement certain mergers that do not
result in a substantial change to the corporation or the rights of its
shareholders; or (iii) the shares in question are then redeemable by the
corporation at a price not greater than the cash to be received for such
shares; (b) completion of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, unless such shares
are then redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares; (c) completion of a sale or exchange
of all or substantially all of the property of the corporation other than in
the regular course of business, including a sale in dissolution but not
including a sale
76
<PAGE>
pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds are to be distributed in cash to
shareholders within one year; (d) an amendment to the articles of
incorporation that materially and adversely affects rights in respect of a
dissenter's shares because it (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the redemption
or repurchase, of the shares; (iii) alters or abolishes a preemptive right of
the holder of the shares to acquire shares or other securities; (iv) excludes
or limits the right of shares to vote on any matter; (v) reduces the number of
shares owned by the shareholder to a fraction of a share if the fractional
share so created is to be acquired for cash; or (vi) changes the corporation
into a nonprofit corporation or cooperative organization; or (e) any corporate
action taken pursuant to a shareholder vote to the extent the articles of
incorporation, bylaws or a resolution of the board of directors provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
With respect to corporations that have a class or series of shares either
listed on a national securities exchange or held by more than 2,000 record
shareholders, dissenters' rights are not available to the holders of these
shares by reason of a merger, share exchange or sale or exchange of property
unless (a) the articles of incorporation of the corporation that issued the
shares provide otherwise or (b) in the case of a merger or share exchange, the
holders of the shares are required to accept anything other than (i) cash,
(ii) shares in another corporation that are either listed on a national
securities exchange or held by more than 2,000 record shareholders or (iii) a
combination of cash and such shares.
A shareholder who has the right to dissent from a transaction and receive
payment of the "fair value" of his shares must follow specific procedural
requirements as set forth in the NCBCA in order to maintain such right and
obtain such payment.
Franklin
Section 262 provides for dissent and appraisal rights only in the case of a
merger or consolidation of the corporation where the petitioning shareholder
does not consent to the transaction. No appraisal rights are available where
the corporation is to be the surviving corporation and a vote of its
shareholders is not required under Section 251(f) or (g) of the DGCL. There
also are no appraisal rights, unless otherwise provided in a corporation's
certificate of incorporation, for shares of stock listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held by more than 2,000 holders of record, unless such
shareholders would be required to accept anything other than (a) shares of
stock of the surviving corporation, (b) shares of another corporation so
listed or designated or held by such number of holders of record, (c) cash in
lieu of fractional shares of such stock or (d) any combination thereof. If
provided in a corporation's certificate of incorporation, under Delaware law
shareholders may be entitled to appraisal rights in certain other
circumstances, including a sale of all or substantially all of the assets of
the corporation not made in the usual and regular course of its business. The
Franklin Certificate of Incorporation does not provide for any such additional
circumstances.
Franklin shareholders are entitled to dissenters' rights with respect to the
Merger; the exception described above is not applicable because Franklin
Common Stock is traded on the Nasdaq SmallCap Market, as opposed to the Nasdaq
National Market. See "THE MERGER--Rights of Dissenting Shareholders."
LIQUIDATION RIGHTS
BB&T
In the event of the liquidation, dissolution or winding-up of the affairs of
BB&T, holders of outstanding shares of BB&T Common Stock are entitled to
share, in proportion to their respective interests, in BB&T's assets and funds
remaining after payment, or provision for payment, of all debts and other
liabilities of BB&T.
77
<PAGE>
Because BB&T is a bank holding company, its rights, the rights of its
creditors and of its shareholders, including the holders of the shares of any
BB&T Preferred Stock that may be issued, to participate in the assets of any
subsidiary upon the latter's liquidation or recapitalization may be subject to
the prior claims of the subsidiary's creditors except to the extent that BB&T
may itself be a creditor with recognized claims against the subsidiary and any
interests in the liquidation accounts established by savings associations or
savings banks acquired by BB&T for the benefit of eligible account holders in
connection with conversion of such savings associations to stock form.
Franklin
The rights of holders of Franklin Common Stock upon liquidation are
virtually identical to those of holders BB&T Common Stock.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon by Womble
Carlyle Sandridge & Rice, PLLC, Charlotte, North Carolina, as counsel to BB&T.
As of the date of this Proxy Statement/Prospectus, certain members of Womble
Carlyle Sandridge & Rice, PLLC owned a total of approximately 19,000 shares of
BB&T Common Stock.
EXPERTS
The consolidated financial statements of BB&T Corporation and its
subsidiaries which are incorporated by reference in this Proxy
Statement/Prospectus from BB&T's Current Report on Form 8-K dated May 13,
1998, which restates the consolidated financial statements that are
incorporated by reference from BB&T's Annual Report on Form 10-K for the year
ended December 31, 1997, to reflect the acquisition of Life Bancorp, Inc. by
BB&T on March 1, 1998, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said report.
The consolidated financial statements of Franklin as of December 31, 1997
and 1996 and for the three years in the period ended December 31, 1997
included herein have been audited by Coopers & Lybrand L.L.P., independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
78
<PAGE>
FRANKLIN FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition as of December 31, 1997
and 1996................................................................ F-2
Consolidated Statements of Income for the Years ended December 31, 1997,
1996 and 1995........................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1997, 1996 and 1995.................................. F-4
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995..................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
Independent Auditors' Report............................................. F-25
Quarterly Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of March 31, 1998 and
December 31, 1997....................................................... F-26
Consolidated Statements of Income for the Three Months ended March 31,
1998 and 1997........................................................... F-27
Consolidated Statements of Cash Flows for the Three Months ended March
31, 1998 and 1997....................................................... F-28
Notes to Consolidated Financial Statements............................... F-29
</TABLE>
F-1
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 38,590 $ 22,468
Federal funds sold and securities purchased under resale
agreements................................................ 122,000 71,800
Securities available-for-sale.............................. 96,930 97,160
Securities held-to-maturity................................ 82,458 66,956
-------- --------
Total securities......................................... 179,388 164,116
Loans, net of unearned income.............................. 300,441 232,581
Less: allowance for loan losses........................... (4,192) (3,842)
-------- --------
Total loans, net......................................... 296,249 228,739
Accrued interest receivable................................ 4,274 3,305
Premises and equipment, net................................ 2,628 2,504
Goodwill, net.............................................. 989 1,115
Other assets............................................... 3,330 3,770
-------- --------
Total Assets............................................. $647,448 $497,817
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities
Non-interest bearing deposits.............................. $139,913 $123,197
Interest bearing deposits.................................. 287,885 240,230
-------- --------
Total deposits........................................... 427,798 363,427
Securities sold under repurchase agreements................ 175,708 99,093
Accrued interest payable................................... 1,871 997
Other liabilities.......................................... 2,788 2,407
-------- --------
Total liabilities........................................ 608,165 465,924
-------- --------
Commitments and contingencies
Stockholders' Equity
Common Stock, $0.10 par value, 25,000,000 shares
authorized; 6,630,975 and 6,485,944 shares issued and
outstanding, respectively................................. 663 649
Capital surplus............................................ 21,714 20,960
Retained earnings.......................................... 16,456 10,488
Unrealized gain (loss) on securities available-for-sale,
net....................................................... 450 (204)
-------- --------
Total stockholders' equity............................... 39,283 31,893
-------- --------
Total Liabilities and Stockholders' Equity............... $647,448 $497,817
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS--EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans............................ $23,639 $18,838 $15,308
Interest and dividends on securities.................. 10,368 8,113 6,182
Interest on federal funds sold and securities
purchased under resale agreements.................... 1,860 2,389 974
------- ------- -------
Total interest income............................... $35,867 29,340 22,464
------- ------- -------
Interest Expense
Interest on deposits.................................. 10,263 8,596 6,963
Interest on securities sold under repurchase
agreements........................................... 4,072 2,454 1,218
------- ------- -------
Total interest expense.............................. 14,335 11,050 8,181
------- ------- -------
Net interest income................................... 21,532 18,290 14,283
Provision for loan losses............................. 484 27 181
------- ------- -------
Net interest income after provision for loan losses... 21,048 18,263 14,102
------- ------- -------
Non-Interest Income
Service charges on deposits........................... 1,412 1,096 960
Other fee income...................................... 986 643 447
Gains on sales of securities, net..................... 49 31 54
------- ------- -------
Total non-interest income........................... 2,447 1,770 1,461
------- ------- -------
Non-Interest Expense
Compensation and employee benefits.................... 7,313 6,481 4,883
Occupancy............................................. 1,961 1,717 1,231
Furniture and equipment............................... 1,007 845 663
Other................................................. 3,634 3,609 3,079
------- ------- -------
Total non-interest expense.......................... 13,915 12,652 9,856
------- ------- -------
Income before income tax expense...................... 9,580 7,381 5,707
Income tax expense.................................... 3,612 2,858 2,324
------- ------- -------
Net Income............................................ $ 5,968 $ 4,523 $ 3,383
======= ======= =======
Earnings Per Share
Net Income............................................ $ 0.91 $ 0.71 $ 0.56
Earnings Per Share--Assuming Dilution
Net Income............................................ $ 0.86 $ 0.68 $ 0.54
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED UNREALIZED
SHARES STOCK SURPLUS EARNINGS GAIN (LOSS) TOTAL
--------- ------ ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 5,614,877 $562 $17,421 $ 2,582 $(820) $19,745
Common stock issued on
the merger with The
George Washington
Banking Corporation.... 630,180 63 2,067 -- -- 2,130
Common stock issued
under stock option
plan................... 38,000 3 161 -- -- 164
Net income.............. -- -- -- 3,383 -- 3,383
Change in unrealized
loss on securities
available-for-sale..... -- -- -- -- 963 963
--------- ---- ------- ------- ----- -------
Balance, December 31,
1995................... 6,283,057 628 19,649 5,965 143 26,385
Proceeds from issuance
of common stock........ 125,000 13 988 -- -- 1,001
Common stock issued
under stock option
plan................... 77,887 8 323 -- -- 331
Net income.............. -- -- -- 4,523 -- 4,523
Change in unrealized
gain on securities
available-for-sale..... -- -- -- -- (347) (347)
--------- ---- ------- ------- ----- -------
Balance, December 31,
1996................... 6,485,944 649 20,960 10,488 (204) 31,893
Common stock issued
under stock option
plan................... 145,031 14 754 -- -- 768
Net income.............. -- -- -- 5,968 -- 5,968
Change in unrealized
loss on securities
available-for-sale..... -- -- -- -- 654 654
--------- ---- ------- ------- ----- -------
Balance, December 31,
1997................... 6,630,975 $663 $21,714 $16,456 $ 450 $39,283
========= ==== ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income..................................... $ 5,968 $ 4,523 $ 3,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses...................... 484 27 181
Depreciation and amortization.................. 809 802 779
Gains on sales of securities, net.............. (49) (31) (54)
Change in accrued interest receivable and other
assets........................................ (983) (456) (2,449)
Change in accrued interest payable and other
liabilities................................... 1,255 1,062 1,095
-------- --------- --------
Net cash provided by operating activities...... 7,484 5,927 2,935
-------- --------- --------
Cash Flows From Investing Activities
Purchases of securities held-to-maturity....... (19,165) (18,741) --
Proceeds from maturities/principal paydowns of
securities held-to-maturity................... 3,722 16,120 3,663
Purchases of securities available-for-sale..... (21,424) (82,763) (11,607)
Proceeds from sales of securities available-
for-sale...................................... 5,477 7,049 4,430
Proceeds from maturities/principal paydowns of
securities available-for-sale................. 17,510 22,968 8,196
Net increase in loans receivable............... (68,170) (50,891) (36,983)
Proceeds from sale of other real estate owned.. 176 332 62
Cash provided by merger........................ -- -- 2,495
Additions to premises and equipment, net....... (1,042) (967) (1,088)
-------- --------- --------
Net cash used in investing activities.......... (82,916) (106,893) (30,832)
-------- --------- --------
Cash Flows From Financing Activities
Net increase in deposits....................... 64,371 60,992 64,481
Net increase in federal funds purchased and
securities sold under repurchase agreements... 76,615 63,224 4,893
Proceeds from issuance of common stock......... 768 1,332 164
-------- --------- --------
Net cash provided by financing activities...... 141,754 125,548 69,538
-------- --------- --------
Net increase in cash and cash equivalents...... 66,322 24,582 41,641
Cash and cash equivalents at beginning of
year.......................................... 94,268 69,686 28,045
-------- --------- --------
Cash and cash equivalents at end of year....... $160,590 $ 94,268 $ 69,686
======== ========= ========
Supplemental Disclosures
Interest paid.................................. $ 13,461 $ 10,977 $ 7,670
Income taxes paid.............................. 3,486 2,585 2,498
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS--EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY:
The consolidated financial statements include the accounts of Franklin and
its wholly-owned subsidiaries, FNB (hereinafter referred to as "the Bank") and
Franklin CDC. Significant intercompany accounts and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS:
Franklin operates nine branches in the Washington metropolitan area.
Franklin's primary source of revenue is derived from loans to customers.
BASIS OF PRESENTATION:
The accounting and reporting policies of Franklin are in accordance with
generally accepted accounting principles and conform to prevailing practice
within the commercial banking industry. Certain reclassifications have been
made to prior year financial statements to conform with current year
presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 these estimates.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, certificates of deposit held for investment
with maturity dates of three months or less, federal funds sold and securities
purchased under resale agreements. Generally, federal funds are sold for one
to seven day periods and securities purchased under resale agreements are
purchased for one to fourteen days.
SECURITIES:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, securities are classified into one of three categories: trading,
available-for-sale or held-to-maturity.
Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities classified as held-to-maturity are
purchased with the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or call date, if applicable, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization or accretion is included in interest income on securities.
F-6
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gains and losses on disposition of securities are based on the net proceeds
and the adjusted carrying amount of the securities sold, using the specific
identification method.
LOANS:
Loans are stated at the principal amount outstanding, net of unearned
income. Interest on loans is computed and recognized based upon the principal
amounts outstanding and their applicable rates. Loan fees, net of related
direct origination costs, are deferred and amortized as an adjustment of yield
over the life of the loan.
The accrual of interest income on loans is discontinued based on delinquency
status, an evaluation of the related collateral and the financial strength of
the borrower. Generally, loans are placed on non-accrual status when the loans
are in default in either principal or interest for 90 days or more, or earlier
if collection is uncertain based upon an evaluation of the net realizable
value of the collateral and the financial strength of the borrower. When loans
are placed on non-accrual status, interest accrued and unpaid is charged
against interest income. Loans may be reinstated to accrual status when, in
the opinion of management, collection of the remaining balance can reasonably
be expected.
ALLOWANCE FOR LOAN LOSSES:
In accordance with SFAS No. 114 and SFAS No. 118, a loan is considered
impaired, based on current information and events, if it is probable that
Franklin will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest
rate, except that all collateral dependent loans are measured for impairment
based on the fair value of the collateral. Interest income on impaired loans
is recognized on a cash basis.
Impaired loans do not include large groups of smaller balance homogeneous
loans that are evaluated collectively for impairment, such as consumer
installment loans. Reserves for probable future credit losses related to these
loans are included in the allowance for loan losses applicable to other than
impaired loans.
The allowance for loan losses is maintained at a level believed by
management to be adequate to absorb potential losses inherent in the loan
portfolio. Management's determination of the adequacy of the allowance is
based on a periodic evaluation of the portfolio with consideration given to
the overall loss experience; current economic conditions; volume, growth, and
composition of the loan portfolio; financial condition of the borrowers; and
other relevant factors that, in management's judgement, warrant recognition in
providing an adequate allowance.
The allowance is increased by provisions for loan losses charged to expense.
Loan principal considered to be uncollectible by management is charged against
the allowance for loan losses.
Changes in the allowance are recorded periodically as conditions change or
as more information becomes available. Increases and decreases in the
allowance include changes in the measurement of impaired loans.
PREMISES AND EQUIPMENT:
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets or, for leasehold improvements, the shorter of the estimated useful
life or the term of the underlying lease. These estimated lives range from two
to fifteen years. Expenditures for repairs and maintenance are charged to
other operating expenses as incurred. Expenditures for improvements that
extend the life of an asset are capitalized and amortized over the individual
asset's remaining useful life or the lease term, if shorter.
F-7
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GOODWILL:
The excess of the purchase price paid over the fair value of the net assets
acquired is amortized over fifteen years using the straight-line method. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that impairment may exist. If the review indicates that goodwill will not be
recoverable, as based on the estimated undiscounted future cash flows of the
entity acquired over the remaining amortization period, Franklin's carrying
value of goodwill would be reduced to the estimated discounted future cash
flows.
INCOME TAXES:
Franklin files a consolidated Federal income tax return with its
subsidiaries. Current taxes payable represent the estimated amounts currently
payable to taxing authorities. Deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities.
Substantially all of the deferred tax asset relates to the expected
utilization of net operating loss carryforwards and the temporary difference
between financial and taxable income as it relates to the provision for loan
losses.
EARNINGS PER SHARE:
Effective December 31, 1997, Franklin adopted SFAS No. 128, "Earnings per
Share." Under the new standards, earnings per share is computed by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding during the period.
Earnings per share, assuming dilution, is computed by dividing net income
available to common stockholders by the weighted average common shares
outstanding and the additional common shares that would have been outstanding
if any dilutive potential common shares had been issued.
SIGNIFICANT ACCOUNTING PRONOUNCEMENTS:
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was issued in June 1996 and provides
accounting and financial reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for secured borrowing and
collateral transactions, and for extinguishments of liabilities. SFAS No. 125
changes the criteria for determining whether a transfer of financial assets
represents a sale of the assets or a collateralized borrowing arrangement. The
Statement is effective for transactions occurring after December 31, 1996,
however, the effective date relative to certain provisions, including
securities lending and repurchase agreement transactions, has been deferred to
1998. The adoption of SFAS No. 125 is not expected to have a significant
effect on the consolidated financial statements.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
establishes requirements for the disclosure and presentation of comprehensive
income and its components in full sets of financial statements. Comprehensive
income is defined as transactions and other occurrence which are the result of
non-owner changes in equity. Non-owner equity changes, such as unrealized
gains or losses on debt securities for example, will be accumulated with net
income in determining comprehensive income. This statement is effective for
years beginning after December 15, 1997 and reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management does not believe that the implementation of the statement will have
a material impact on the consolidated financial statements but additional
disclosures will be required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was also issued in June 1997 and provides standards for reporting
information on the operating segments of public businesses in
F-8
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
their annual and interim reports to shareholders. SFAS No. 131 requires that
selected financial information be provided for segments meeting specific
criteria. This statement becomes effective for all periods beginning after
December 15, 1997. Management does not believe that the implementation of the
statement will have a material impact on the consolidated financial statements
but additional disclosures may be required.
NOTE 2--ACQUISITION ACTIVITY
On June 23, 1989, Franklin acquired 63.9% of the outstanding common stock of
the Bank by contributing approximately $3 million, excluding expenses, in
capital. During 1991, Franklin acquired an additional 20.7% of the outstanding
common stock of the Bank by contributing approximately $7 million in capital.
On July 6, 1992, the Bank's stockholders approved the Merger Agreement Plan
(the "Plan") which consisted of an offer to exchange one share of Franklin
common stock for each share of the Bank's common stock not owned by Franklin.
The Plan was approved by the stockholders and regulatory agencies, and the
merger was effective November 6, 1992. All acquisitions of common stock have
been accounted for under the purchase method of accounting. The consolidated
financial statements reflect the results of the Bank's operations beginning at
the initial acquisition in 1989. Goodwill of $663 thousand, $730 thousand and
$380 thousand which resulted from the 1992, 1991 and 1989 transactions,
respectively, is being amortized over 15 years.
On April 1, 1995, Franklin completed the acquisition of The George
Washington Banking Corporation ("GWBC"), the holding company of The George
Washington National Bank of Alexandria, Virginia. The merger was accounted for
as a purchase with the GWBC stockholders receiving a combination of $237
thousand in cash and 630,180 shares of Franklin stock for a total purchase
price of $2.9 million, of which $519 thousand represents merger related costs.
The merger resulted in the acquisition of assets of $28.8 million, including
goodwill of $941 thousand to be amortized over a period of fifteen years, and
the assumption of $25.9 million of liabilities. Upon consummation of the
merger, The George Washington National Bank was re-named Franklin National
Bank of Virginia. Unaudited pro forma combined results of operations of
Franklin for the year ended December 31, 1995 is presented below. Such pro
forma presentation has been prepared assuming the acquisition was made as of
the beginning of 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Net interest income.................................... $14,664
Net income............................................. 3,292
Earnings per share:
Net income............................................. $ 0.54
Earnings per share, assuming dilution:
Net income............................................. $ 0.52
</TABLE>
The unaudited pro forma information is not necessarily indicative of what
actual results of operations of Franklin would have been assuming such
transactions had been completed as of the beginning of 1995, nor does it
purport to represent the results of operations for future periods.
On August 7, 1996, Franklin received regulatory approval to merge Franklin
National Bank of Virginia ("Franklin-VA") with and into the Bank. The merger
resulted in the immediate recognition of net operating loss carryforwards of
approximately $1 million which had been fully reserved against at the time of
the acquisition of GWBC.
On December 16, 1997, Franklin announced it had entered into an Agreement
and Plan of Reorganization with BB&T Financial Corporation of Virginia ("BB&T
Virginia") and BB&T Corporation ("BB&T"), which provides that BB&T will
acquire Franklin in a stock transaction. Based upon BB&T's closing stock price
of
F-9
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$63.75 on December 15, 1997, the transaction is valued at $165.1 million, or
$22.45 per share of Franklin common stock. Franklin shareholders will receive
a minimum of 0.35 shares to a maximum of 0.3743 shares of BB&T common stock
for each share of Franklin common stock held, based on BB&T's average stock
price for a period prior to closing. The acquisition, which will be accounted
for as a pooling, is expected to be completed on or about the end of the
second quarter of 1998.
NOTE 3--CASH AND DUE FROM BANKS
Under Federal Reserve Bank ("FRB") regulations, banks are required to
maintain cash reserves based upon average deposits. Assets qualified to meet
these reserve requirements consist of vault cash and balances on deposit with
the FRB. The Bank's reserve requirements for the periods ending December 31,
1997 and 1996, respectively, were $8.9 million and $8.4 million.
NOTE 4--SECURITIES
SECURITIES AVAILABLE-FOR-SALE:
The amortized cost and market value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. treasury securities............... $18,778 $392 $ -- $19,170
U.S. government agencies............... 57,012 447 (31) 57,428
Step-up and structured notes........... 5,950 48 (160) 5,838
Mortgage-backed securities............. 2,126 2 (52) 2,076
States and political subdivisions...... 10,113 92 -- 10,205
Equity securities...................... 2,213 -- -- 2,213
------- ---- ----- -------
$96,192 $981 $(243) $96,930
======= ==== ===== =======
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. treasury securities............... $19,712 $196 $ (1) $19,907
U.S. government agencies............... 67,393 241 (564) 67,070
Step-up and structured notes........... 5,928 51 (262) 5,717
Mortgage-backed securities............. 2,643 2 (57) 2,588
Equity securities...................... 1,878 -- -- 1,878
------- ---- ----- -------
$97,554 $490 $(884) $97,160
======= ==== ===== =======
</TABLE>
The remaining contractual maturity distribution of debt securities
available-for-sale at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
DUE: COST VALUE GAIN (LOSS)
- ---- --------- ------- -----------
<S> <C> <C> <C>
Within one year................................... $ 5,101 $ 5,102 $ 1
After 1 year through 5 years...................... 65,651 66,181 530
After 5 years through 10 years.................... 21,101 21,358 257
Mortgage-backed securities........................ 2,126 2,076 (50)
------- ------- ----
$93,979 $94,717 $738
======= ======= ====
</TABLE>
F-10
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The mortgage-backed securities have contractual maturities ranging from 1 to
25 years but repayments will vary from the contractual maturities.
Securities available-for-sale with a fair value of $65.9 million and $67.2
million at December 31, 1997 and 1996, respectively, were pledged as
collateral for securities sold under repurchase agreements and other customer
deposits. All repurchase agreements have maturity dates of less than 1 year.
Proceeds from sales and calls of securities available-for-sale were $19.5
million, $21.1 million and $11.4 million in 1997, 1996 and 1995, respectively.
Gross gains and losses on sales of securities for the years ended December
31 were realized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross gains............................................... $ 49 $ 31 $ 54
Gross losses.............................................. -- -- --
---- ---- ----
Net gains................................................. $ 49 $ 31 $ 54
==== ==== ====
</TABLE>
SECURITIES HELD-TO-MATURITY:
The amortized cost and market value of securities held-to-maturity are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. treasury securities............... $15,960 $ 82 $ (41) $16,001
U.S. government agencies............... 15,426 244 (13) 15,657
Mortgage-backed securities............. 33,550 71 (982) 32,639
States and political subdivisions...... 17,522 236 -- 17,758
------- ---- ------- -------
$82,458 $633 $(1,036) $82,055
======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. treasury securities............... $12,975 $ -- $ (135) $12,840
U.S. government agencies............... 4,983 -- (62) 4,921
Mortgage-backed securities............. 37,248 63 (1,297) 36,014
States and political subdivisions...... 11,750 11 (89) 11,672
------- ----- ------- -------
$66,956 $ 74 $(1,583) $65,447
======= ===== ======= =======
</TABLE>
The remaining contractual maturity distribution of securities held-to-
maturity on December 31, 1997 is as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
DUE: COST VALUE GAIN (LOSS)
- ---- --------- ------- -----------
<S> <C> <C> <C>
Within one year................................... $14,984 $14,931 $ (53)
After 1 year through 5 years...................... 16,697 16,923 226
After 5 years through 10 years.................... 17,227 17,562 335
Mortgage-backed securities........................ 33,550 32,639 (911)
------- ------- -----
$82,458 $82,055 $(403)
======= ======= =====
</TABLE>
F-11
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The mortgage-backed securities have contractual maturities ranging from 1 to
29 years, but repayments will vary from the contractual maturities.
Securities held-to-maturity with an amortized cost of $62.7 million and
$52.8 million at December 31, 1997 and 1996, respectively, were pledged as
collateral for securities sold under repurchase agreements and other customer
deposits. All repurchase agreements have maturity dates of less than 90 days.
For the years ended December 31, 1997 and 1996, there were no sales of, or
transfers from, securities held-to-maturity.
NOTE 5--LOANS
LOAN PORTFOLIO:
Major categories of loans included in the loan portfolio at December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Real Estate
Commercial............................................. $ 59,278 $ 44,136
Construction and development........................... 11,336 15,243
Residential mortgage................................... 30,571 18,768
-------- --------
Total................................................ 101,185 78,147
Commercial and Industrial................................ 184,360 140,544
Consumer
Consumer............................................... 10,848 9,800
Home equity............................................ 4,524 4,526
-------- --------
Total................................................ 15,372 14,326
300,917 233,017
Unearned income.......................................... (476) (436)
-------- --------
Loans, net of unearned income............................ $300,441 $232,581
======== ========
</TABLE>
Primarily all of Franklin's loan portfolio at December 31, 1997 and 1996
consists of loans made within the Washington, D.C. area. This includes real
estate loans made for acquisition, renovation or development for which a deed
of trust on the subject property is the primary collateral.
ALLOWANCE FOR LOAN LOSSES:
While management uses available information to recognize losses on loans,
future additions to the allowance for existing loans may be necessary based on
changes in economic and borrower conditions. Management believes that adequate
allowances have been established to reflect possible losses on loans as of
December 31, 1997, 1996 and 1995.
Changes in the allowance for loan losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance, January 1................................. $3,842 $3,443 $2,404
Provision for loan losses.......................... 484 27 181
Loans charged off.................................. (382) (509) (370)
Recoveries......................................... 248 881 649
Allowance applicable to loans purchased through
merger............................................ -- -- 579
------ ------ ------
Balance, December 31............................... $4,192 $3,842 $3,443
====== ====== ======
</TABLE>
F-12
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Various regulatory agencies, as an integral part of the examination process,
periodically review the allowance based on their judgements about information
available to them at the time of their examination.
IMPAIRED LOANS:
Impaired loans included in the loan portfolio at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Measured using:
Present value of expected future cash flows................... $ 311 $445
Fair value of underlying collateral........................... 736 463
------ ----
Total impaired loans........................................ $1,047 $908
Corresponding valuation allowance............................... $ 407 $186
</TABLE>
The loans deemed to be impaired were primarily commercial loans.
The average recorded investment in impaired loans, the interest income due
under their original terms and the interest income recorded for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Average recorded investment in impaired loans.............. $716 $812 $1,120
Income due under original terms............................ 79 80 75
Income recorded............................................ 22 15 46
</TABLE>
At December 31, 1997, Franklin had no other loans on non-accrual other than
those deemed to be impaired loans. There were two loans totalling $149
thousand which were 90 days or more past due which were still accruing
interest and were not deemed to be impaired.
RELATED PARTY LOANS:
The Bank, in the normal course of business, makes loans to executive
officers, directors and stockholders, as well as to companies and individuals
affiliated with those officers and directors. In the opinion of management,
these loans are consistent with sound banking practices, are within regulatory
lending limits, and do not involve more than normal risk of collectibility.
Activity in such loans is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Balance, January 1......................................... $ 5,427 $ 9,319
------- -------
New loans.................................................. 11,378 4,415
Repayments................................................. (1,378) (8,307)
------- -------
Balance, December 31....................................... $15,427 $ 5,427
======= =======
</TABLE>
There were no loans to directors, officers or other related parties that
were classified as impaired as of December 31, 1997 and 1996.
NOTE 6--PREMISES AND EQUIPMENT
Investments in premises and equipment at December 31 are:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Leasehold improvements..................................... $ 2,485 $ 2,167
Furniture and equipment.................................... 4,106 3,449
------- -------
6,591 5,616
Accumulated depreciation and amortization.................. (3,963) (3,112)
------- -------
Total premises and equipment............................... $ 2,628 $ 2,504
======= =======
</TABLE>
F-13
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization expense was $917 thousand, $797 thousand and
$605 thousand for 1997, 1996 and 1995, respectively.
NOTE 7--DEPOSITS
Major classifications of deposits at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Non-interest bearing deposits............................. $139,913 $123,197
-------- --------
Interest bearing deposits
Savings accounts........................................ 3,364 4,121
Money manager accounts.................................. 29,194 38,822
Money market accounts................................... 111,918 117,857
IRA certificates........................................ 1,684 1,965
Certificates less than $100,000......................... 11,477 12,708
Certificates of $100,000 and over....................... 130,248 64,757
-------- --------
Total interest bearing deposits....................... 287,885 240,230
-------- --------
Total deposits........................................ $427,798 $363,427
======== ========
</TABLE>
Interest expense on certificates of deposit of $100,000 or more for the
years ended December 31, 1997, 1996 and 1995 was approximately $5.0 million,
$3.1 million and $2.6 million, respectively. At December 31, 1997 and 1996,
there were no brokered deposits included in total deposits.
At December 31, 1997, certificates of deposit in amounts of $100,000 or more
have maturities as follows:
<TABLE>
<S> <C>
Three months or less........................................... $ 85,249
Over three months to six months................................ 17,462
Over six months to twelve months............................... 15,961
Over twelve months............................................. 11,576
--------
$130,248
========
</TABLE>
NOTE 8--SHORT-TERM BORROWINGS
Short-term borrowings with maturities of less than one year are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
-------------- -------------
AMOUNT RATE AMOUNT RATE
-------- ----- ------- -----
<S> <C> <C> <C> <C>
Average for the Year:
Securities sold under
repurchase agreements.. $ 94,314 4.28% $58,040 4.23%
-------- ----- ------- -----
At Year-End:
Securities sold under
repurchase agreements.. $175,708 4.32% $99,093 4.19%
-------- ----- ------- -----
Maximum Month-End Balance:
Securities sold under
repurchase agreements.. $175,708 $99,093
-------- -------
</TABLE>
Securities sold under repurchase agreements are entered into primarily as
accommodations to the Bank's large commercial deposit customers. Several of
these customer relationships in the aggregate exceed 10% of
F-14
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Franklin's stockholders' equity. All of the collateral provided under these
agreements is maintained under Franklin's control.
Securities sold under repurchase agreements at December 31, 1997, by due
date, are as follows:
<TABLE>
<CAPTION>
LESS THAN 30-90 OVER
OVERNIGHT 30 DAYS DAYS 90 DAYS TOTAL
--------- --------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities:
Securities sold:
Carrying value.................. $ 16,992 $1,100 $4,532 $2,672 $ 25,296
Market value.................... 17,059 1,099 4,531 2,672 25,361
U.S. Government Agencies:
Securities sold:
Carrying value.................. 55,723 5,228 1,282 770 63,003
Market value.................... 55,910 5,268 1,282 770 63,230
Mortgage-Backed Securities:
Securities sold:
Carrying value.................. 22,572 1,130 -- -- 23,702
Market value.................... 21,874 1,053 -- -- 22,927
Securities Purchased Under Resale
Agreements:
Securities sold:
Carrying value.................. 67,607 -- -- -- 67,607
Market value.................... 68,500 -- -- -- 68,500
Repurchase Agreements............. 159,971 7,197 5,256 3,284 175,708
</TABLE>
NOTE 9--STOCKHOLDERS' EQUITY
LIMITED OFFERING:
During 1996, Franklin issued a limited offering pursuant to Regulation D,
Rule 505 under a stock subscription agreement. The minimum acceptable
investment from accredited investors under the offering was $1 million.
As a result of the offering, Franklin issued 125,000 non-registered,
restricted shares resulting in an increase in capital of approximately $1
million.
STOCK OPTION PLANS AND AGREEMENTS:
Under various stock option plans and agreements, Franklin has authorized the
issuance of stock options to purchase 1,610,537 shares of Franklin's common
stock. Options are granted at exercise prices equal to fair market value on
the option grant date and generally expire ten years from the date of grant.
Franklin applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for
Franklin's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, Franklin's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C> <C>
Net income........................................ As reported $5,968 $4,523
Pro forma 5,066 4,075
Earnings per share................................ As reported $ 0.91 $ 0.71
Pro forma 0.72 0.62
Earnings per share, assuming dilution............. As reported $ 0.86 $ 0.68
Pro forma 0.72 0.62
</TABLE>
F-15
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FIXED STOCK OPTION PLANS:
At December 31, 1997, Franklin has three stock-based compensation plans.
Under the 1991 Employee Stock Option Plan, Franklin may grant options to its
employees for up to 800,000 shares of common stock. Under the 1997 Stock
Option Plan, Franklin may grant options to its executive officers and key
employees for up to 500,000 shares of common stock. Under the 1996 Directors
Stock Option Plan, Franklin may grant options to its Directors based on the
achievement of annually stipulated goals for referrals of deposits and loans
for up to 100,000 options. Under the plans, the exercise price of each option
equals the market price of Franklin's stock on the date of grant, each option
vests on date of grant and an option's maximum term is 10 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: zero dividend
yield for all years; expected volatility of 27% for all years; risk-free
interest rates of 6.1% and 6.3%; and expected lives of 7 years for all years.
The following summarizes activity relating to Franklin's fixed stock option
plans as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1.. 678 $ 4.80 642 $4.12 475 $ 3.52
Granted................. 190 10.71 126 7.91 140 6.25
Conversion of GWBC
options................ -- -- -- -- 66 4.18
Exercised............... (145) 5.30 (78) 4.26 (38) 4.33
Forfeited............... (1) 14.25 (12) 4.96 (1) 11.00
---- --- ---
Outstanding, December
31..................... 722 6.24 678 4.80 642 4.12
==== === ===
Options exercisable at
year-end............... 722 $ 6.24 678 $4.80 642 $ 4.12
Weighted-average fair
value of options
granted during the
year................... $ 5.17 $3.56 $ 2.73
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3 to $5............................ 359,534 4.6 years $ 3.54
5 to 8.............................. 167,009 7.2 7.18
8 to 11............................. 163,776 7.8 9.88
11 to 16............................ 31,600 9.5 13.04
------- --- ------
$3 to $16........................... 721,919 6.6 $ 6.24
</TABLE>
Stock appreciation rights may be granted with the employee options whereby
the employee is entitled, upon exercise of the option and approval of the
Board of Directors, to receive, in cash or other consideration, an amount
equal to the difference between the exercise price of the option and the
market value of the shares covered. During 1997, 1996 and 1995, no stock
appreciation rights were outstanding, approved or exercised.
F-16
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--INCOME TAXES
The provision for income taxes for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current Taxes
Federal............................................. $2,810 $2,335 $1,808
Local............................................... 746 636 429
------ ------ ------
Total current taxes............................... 3,556 2,971 2,237
====== ====== ======
Deferred Taxes
Federal............................................. 45 123 83
Local............................................... 11 (3) 4
------ ------ ------
Total deferred taxes.................................. 56 120 87
====== ====== ======
Change in valuation allowance......................... -- (233) --
------ ------ ------
Total provision................................... $3,612 $2,858 $2,324
====== ====== ======
</TABLE>
The following is a reconciliation of the federal statutory rate to the
consolidated effective tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate.................................... 34% 34% 34%
--- --- ---
Increase (decrease) resulting from:
Non-deductible items....................................... (2) -- --
Local tax.................................................. 6 6 5
Change in valuation allowance.............................. -- (3) --
Other...................................................... (1) 2 2
--- --- ---
Effective tax rate......................................... 37% 39% 41%
=== === ===
</TABLE>
Deferred tax assets and liabilities are composed of the following at December
31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryfowards............................. $1,453 $1,503
Book bad debt reserves...................................... 1,701 1,559
Unearned income............................................. 193 177
Net unrealized loss on securities available-for-sale........ -- 160
Other....................................................... 151 224
------ ------
Total deferred tax assets................................. 3,498 3,623
====== ======
Deferred Tax Liabilities:
Tax bad debt reserves....................................... 676 731
Net unrealized gain on securities available-for-sale........ 300 --
------ ------
Total deferred tax liabilities............................ 976 731
====== ======
Net deferred tax assets....................................... $2,522 $2,892
====== ======
</TABLE>
F-17
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Note 2, the valuation allowance established against the net
operating loss carryforwards acquired through the purchase of GWBC was
eliminated at the time of the merger of Franklin-VA with the Bank. The benefit
derived from the elimination of the valuation allowance was applied first to
the remaining goodwill related to the GWBC acquisition in the amount of $797
thousand and then to reduce income tax expense of approximately $233 thousand.
Franklin has approximately $5.3 million of net operating loss carryforwards
at December 31, 1997 for federal income tax purposes. However, these net
operating losses are limited to $3.6 million of amounts available as a result
of ownership changes in the stock of the Bank. The amounts and expiration
dates of future carryforwards for future years are as follows:
<TABLE>
<CAPTION>
AVAILABLE
EXPIRATION DATE NET OPERATING LOSS
--------------- ------------------
<S> <C>
2005................................................. $ 28
2006................................................. 2,157
2007................................................. 626
2008................................................. 523
2009................................................. 122
2010................................................. 123
------
Cumulative............................................ $3,579
======
</TABLE>
NOTE 11--EARNINGS PER SHARE
Effective December 31, 1997, Franklin adopted SFAS No. 128, "Earnings per
Share". The following is a reconciliation of the numerators and the
denominators of the earnings per share and the earnings per share assuming
dilution computations for net income for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------- ----------------------------------- -----------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings per
share:
Income available
to
stockholders... $5,968 6,533,470 $0.91 $4,523 6,337,322 $0.71 $3,383 6,095,273 $0.56
Effect of
dilutive
securities:
Options......... -- 428,877 -- 283,948 -- 210,665
------ --------- ------ --------- ------ ---------
Earnings per
share, assuming
dilution:
Income available
to stockholders
plus assumed
conversions.... $5,968 6,962,347 $0.86 $4,523 6,621,270 $0.68 $3,383 6,305,938 $0.54
</TABLE>
NOTE 12--BENEFIT PLANS
Franklin has a qualified 401(k) plan which allows substantially all
employees to participate in this contributory savings plan after satisfaction
of service requirements. The plan provides for an employee salary reduction
feature pursuant to section 401(k) of the Internal Revenue Code. Employee
contributions are voluntary, and the employee can elect to defer up to 15% of
their compensation, subject to certain limitations. The Bank provides a 100%
matching contribution upon the first 4% of the employee's salary. For the
years ended
F-18
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1997, 1996 and 1995, Franklin contributed approximately $151
thousand, $127 thousand and $110 thousand, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments, legal
proceedings, and contingencies. In the opinion of management, based on its
review with counsel of these matters to date, disposition of all matters will
not materially effect the consolidated financial position or results of
operations of Franklin.
The Bank leases facilities under operating leases with unaffiliated third
parties which have expiration dates ranging from 1998 through 2009. Several of
the leases have one or more renewal options. The leases require payment by the
Bank of its proportionate share of real estate taxes and insurance on the
leased properties. One lease agreement requires Franklin to pledge a
certificate of deposit for $200,000 to the lessor as a security deposit.
Rental expense aggregated $1.6 million, $1.4 million and $1.0 million in 1997,
1996 and 1995, respectively.
Total future minimum annual rental payments under these agreements as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $1,368
1999.............................................................. 1,202
2000.............................................................. 1,246
2001.............................................................. 1,290
2002.............................................................. 844
Thereafter........................................................ 3,426
------
$9,376
======
</TABLE>
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Franklin is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement Franklin has in particular
classes of financial instruments.
Franklin's exposure to credit loss in the event of non-performance by the
other parties to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. Franklin uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to lend are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.............................. $85,563 $84,776
Standby letters of credit................................. 12,851 10,576
</TABLE>
Collateral in the form of restricted cash accounts totalling $3.3 million
and $5.9 million as of December 31, 1997 and 1996, respectively, are
maintained by Franklin with respect to these letters of credit. Primarily all
of Franklin's outstanding commitments to lend have been issued at variable
interest rates.
F-19
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Different assumptions could
significantly affect these estimates of fair value. Accordingly, the net
realizable value could be materially different from the estimates presented
and should not be considered an indication of the fair value of Franklin taken
as a whole.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS: The
carrying amount approximates fair value.
SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY: For U.S. treasury
securities, agencies, municipal and mortgage-backed securities, fair values
are based on quoted market prices or dealer quotes. If a quoted market price
is not readily available, as is the case for the equity securities such as
Federal Reserve Bank stock, management believes that the carrying amount
approximates fair value.
LOANS: Fair values are estimated for categories of loans with similar
financial characteristics. The fair value of loans is estimated by discounting
expected future cash flows using the current rates at which similar loans
would be made to borrowers with comparable credit ratings and for similar
remaining maturities.
ACCRUED INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount
approximates fair value.
DEPOSITS: The fair value of demand deposits is the amount payable on demand
exclusive of any value derived from retaining those deposits for an expected
future period of time. This component of fair value is commonly referred to as
a core deposit intangible and is neither considered in the fair value amounts
nor is it recorded as an intangible asset in the statement of financial
condition.
NON-INTEREST BEARING DEPOSITS: The fair value of these deposits is the
amount payable on demand at the reporting date.
INTEREST BEARING DEPOSITS: The fair value of savings, money manager and
money market accounts is the amount payable on demand at the reporting
date. The fair value of certificates of deposit is estimated by discounting
the future cash flows using the current rates at which similar deposits
would be accepted.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS: For these short-term
instruments, the carrying amount approximates fair value.
OFF-BALANCE SHEET INSTRUMENTS: The fair value of commitments to extend
credit and letters of credit, both standby and commercial, is assumed to equal
the carrying value, which is immaterial. Extensions of credit under these
commitments, if exercised, would result in loans priced at market terms.
F-20
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of Franklin's financial instruments at December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks................... $ 38,590 $ 38,590 $ 22,468 $ 22,468
Federal funds sold and securities
purchased under resale agreements........ 122,000 122,000 71,800 71,800
Securities available-for-sale............. 96,930 96,930 97,160 97,160
Securities held-to-maturity............... 82,458 82,055 66,956 65,447
Loans, net of allowance................... 296,249 292,907 228,739 228,526
Accrued interest receivable............... 4,274 4,274 3,305 3,305
FINANCIAL LIABILITIES:
Non-interest bearing deposits............. $139,913 $139,913 $123,197 $123,197
Interest bearing deposits................. 287,885 288,155 240,230 240,615
Securities sold under repurchase
agreements............................... 175,708 175,708 99,093 99,093
Accrued interest payable.................. 1,871 1,871 997 997
</TABLE>
NOTE 16--REGULATORY REQUIREMENTS
Franklin and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Franklin's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Franklin
and the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Franklin's and the Bank's
capital amounts and classification are also subject to qualitative judgements
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Franklin and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1997, that Franklin and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
F-21
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Franklin's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- -------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk
Weighted Assets)
Franklin................. $42,036 11.9% ^$ 28,210 ^8.0% n/a n/a
Bank..................... 38,705 11.0% ^28,204 ^8.0% ^$ 35,255 ^10.0%
Tier I Capital (to Risk
Weighted Assets)
Franklin................. $37,844 10.7% ^$ 14,105 ^4.0% n/a n/a
Bank..................... 34,513 9.8% ^14,102 ^4.0% ^$ 21,153 ^6.0%
Tier I Capital (to Average
Assets)
Franklin................. $37,844 7.7% ^$ 19,591 ^4.0% n/a n/a
Bank..................... 34,513 7.1% ^19,589 ^4.0% ^$ 24,487 ^5.0%
As of December 31, 1996
Total Capital (to Risk
Weighted Assets)
Franklin................. $34,286 13.0% ^$ 21,104 ^8.0% n/a n/a
Bank..................... 31,634 12.0% ^21,104 ^8.0% ^$ 26,381 ^10.0%
Tier I Capital (to Risk
Weighted Assets)
Franklin................. $30,982 11.7% ^$ 10,552 ^4.0% n/a n/a
Bank..................... 28,329 10.7% ^10,552 ^4.0% ^$ 15,828 ^6.0%
Tier I Capital (to Average
Assets)
Franklin................. $30,982 7.6% ^$ 16,270 ^4.0% n/a n/a
Bank..................... 28,329 7.0% ^16,270 ^4.0% ^$ 20,337 ^5.0%
</TABLE>
Franklin may not declare or pay any cash dividends except as directed by
policies of the Federal Reserve System. Certain restrictions exist regarding
the ability of the Bank to transfer funds to Franklin in the form of
dividends, advances and loans. No such dividends, advances or loans have been
made to Franklin.
NOTE 17--FRANKLIN BANCORPORATION, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL STATEMENTS
Presented below are the parent company only condensed financial statements.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Assets
Cash and cash equivalents.................................... $ 3,105 $ 2,703
Investment in subsidiaries................................... 35,214 28,126
Goodwill, net................................................ 989 1,115
Other assets................................................. 1 --
------- -------
Total Assets............................................... $39,309 $31,944
======= =======
Liabilities and Stockholders' Equity
Liabilities.................................................. $ 26 $ 51
------- -------
Stockholders' Equity
Common stock................................................. 663 649
Capital surplus.............................................. 21,714 20,960
Retained earnings............................................ 16,456 10,488
Unrealized gain (loss) in subsidiaries securities available-
for-sale, net............................................... 450 (204)
------- -------
Total stockholders' equity................................. 39,283 31,893
------- -------
Total Liabilities and Stockholders' Equity................. $39,309 $31,944
======= =======
</TABLE>
F-22
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income.................................... $ -- $ -- $ --
------- ------- -------
Amortization of goodwill........................... 126 126 126
Other expenses..................................... 122 251 149
------- ------- -------
Total expense.................................... 248 377 275
------- ------- -------
Loss before income tax benefit and equity in net
income of subsidiaries............................ (248) (377) (275)
Income tax benefit................................. 31 64 42
Equity in net income of subsidiaries............... 6,185 4,836 3,616
------- ------- -------
Net Income......................................... $ 5,968 $ 4,523 $ 3,383
======= ======= =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income......................................... $ 5,968 $ 4,523 $ 3,383
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization..................................... 126 126 126
Net income of subsidiaries....................... (6,185) (4,836) (3,616)
Change in other assets........................... (1) 1 65
Change in liabilities............................ (24) 40 4
------- ------- -------
Net cash used in operating activities.............. (116) (146) (38)
------- ------- -------
Cash Flows from Investing Activities
Investment in Franklin Community Development
Corporation....................................... (250) -- --
------- ------- -------
Acquisition of The George Washington Banking
Corporation....................................... -- -- (756)
------- ------- -------
Net cash used in investing activities.............. (250) -- (756)
------- ------- -------
Cash Flows from Financing Activities
Proceeds from issuance of common stock............. 768 1,332 164
------- ------- -------
Net cash provided by financing activities.......... 768 1,332 164
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 402 1,186 (630)
Cash and cash equivalents at beginning of year..... 2,703 1,517 2,147
------- ------- -------
Cash and cash equivalents at end of year........... $ 3,105 $ 2,703 $ 1,517
======= ======= =======
</TABLE>
F-23
<PAGE>
FRANKLIN BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly financial results for Franklin are as follows:
<TABLE>
<CAPTION>
1997--THREE MONTHS ENDED,
-----------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income..................... $9,916 $9,016 $8,641 $8,294
Interest expense.................... 4,096 3,521 3,495 3,223
------ ------ ------ ------
Net interest income................. 5,820 5,495 5,146 5,071
------ ------ ------ ------
Provision for loan losses........... 199 100 55 130
Gains on sales of securities........ 24 25 -- --
Non-interest income................. 653 638 581 526
Non-interest expense................ 3,834 3,544 3,337 3,200
------ ------ ------ ------
Income before income tax expense.... 2,464 2,514 2,335 2,267
Income tax expense.................. 841 973 914 884
------ ------ ------ ------
Net income.......................... $1,623 $1,541 $1,421 $1,383
------ ------ ------ ------
Net income per share................ $ 0.25 $ 0.24 $ 0.22 $ 0.21
------ ------ ------ ------
Net income per share, assuming
dilution........................... $ 0.23 $ 0.22 $ 0.21 $ 0.20
====== ====== ====== ======
<CAPTION>
1996--THREE MONTHS ENDED,
-----------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income..................... $8,167 $7,957 $6,736 $6,480
Interest expense.................... 3,144 2,939 2,520 2,447
------ ------ ------ ------
Net interest income................. 5,023 5,018 4,216 4,033
------ ------ ------ ------
Provision for loan losses........... -- -- -- 27
Gains on sales of securities........ -- -- 31 --
Non-interest income................. 554 437 394 354
Non-interest expense................ 3,373 3,607 2,898 2,774
------ ------ ------ ------
Income before income tax expense.... 2,204 1,848 1,743 1,586
Income tax expense.................. 918 627 691 622
------ ------ ------ ------
Net income.......................... $1,286 $1,221 $1,052 $ 964
------ ------ ------ ------
Net income per share................ $ 0.20 $ 0.19 $ 0.17 $ 0.15
------ ------ ------ ------
Net income per share, assuming
dilution........................... $ 0.19 $ 0.18 $ 0.16 $ 0.15
====== ====== ====== ======
</TABLE>
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Franklin Bancorporation
We have audited the accompanying consolidated statements of financial
condition of Franklin Bancorporation and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Franklin
Bancorporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
February 6, 1998
F-25
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 28,718 $ 38,590
Federal funds sold and securities purchased under
resale agreements.................................... 127,000 122,000
Securities available-for-sale......................... 101,410 96,930
Securities held-to-maturity........................... 88,409 82,458
-------- --------
Total securities.................................... 189,819 179,388
Loans, net of unearned income......................... 306,853 300,441
Less: allowance for loan losses...................... (4,324) (4,192)
-------- --------
Total loans, net.................................... 302,529 296,249
Accrued interest receivable........................... 3,833 4,274
Premises and equipment, net........................... 2,465 2,628
Goodwill, net......................................... 957 989
Other assets.......................................... 3,655 3,330
-------- --------
TOTAL ASSETS.......................................... $658,976 $647,448
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits......................... $133,087 $139,913
Interest bearing deposits............................. 300,530 287,885
-------- --------
Total deposits...................................... 433,617 427,798
Securities sold under repurchase agreements........... 175,980 175,708
Accrued interest payable.............................. 2,097 1,871
Other liabilities..................................... 4,767 2,788
-------- --------
Total liabilities................................... 616,461 608,165
-------- --------
Stockholders' Equity:
Common Stock, $0.10 par value, 25,000,000 shares
authorized; 6,798,311 and 6,630,975 shares issued and
outstanding, respectively............................ 680 663
Capital surplus....................................... 23,246 21,714
Retained earnings..................................... 18,179 16,456
Accumulated other comprehensive income................ 410 450
-------- --------
Total stockholders' equity.......................... 42,515 39,283
-------- --------
Total Liabilities and Stockholders' Equity.......... $658,976 $647,448
======== ========
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
F-26
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans............................... $ 6,856 $ 5,329
Interest and dividends on securities..................... 2,715 2,514
Interest on federal funds sold and securities purchased
under resale agreements................................. 1,251 451
--------- --------
Total interest income.................................. 10,822 8,294
--------- --------
INTEREST EXPENSE
Interest on deposits..................................... 3,207 2,314
Interest on securities sold under repurchase agreements.. 1,396 909
--------- --------
Total interest expense................................. 4,603 3,223
--------- --------
Net interest income...................................... 6,219 5,071
Provision for loan losses................................ 340 130
--------- --------
Net interest income after provision for loan losses...... 5,879 4,941
--------- --------
NON-INTEREST INCOME
Service charges on deposits.............................. 376 332
Other fee income......................................... 265 194
--------- --------
Total non-interest income.............................. 641 526
--------- --------
NON-INTEREST EXPENSE
Compensation and employee benefits....................... 1,942 1,762
Occupancy................................................ 471 469
Furniture and equipment.................................. 242 225
Other.................................................... 1,102 744
--------- --------
Total non-interest expense............................. 3,757 3,200
--------- --------
Income before income tax expense......................... 2,763 2,267
Income tax expense....................................... 1,040 884
--------- --------
NET INCOME............................................... $ 1,723 $ 1,383
========= ========
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during period........ (40) (811)
Less: reclassification adjustment for losses included
in net income......................................... -- --
--------- --------
Other comprehensive income............................... (40) (811)
--------- --------
COMPREHENSIVE INCOME..................................... $ 1,683 $ 572
========= ========
EARNINGS PER SHARE
Net Income............................................... $ 0.26 $ 0.21
EARNINGS PER SHARE--ASSUMING DILUTION
Net Income............................................... $ 0.24 $ 0.20
========= ========
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
F-27
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 1,723 $ 1,383
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 340 130
Depreciation and amortization........................... 154 182
Change in accrued interest receivable and other assets.. 189 (145)
Change in accrued interest payable and other
liabilities............................................ 2,562 599
--------- ---------
Net cash provided by operating activities............... 4,968 2,149
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale.............. (16,119) (7,307)
Proceeds from maturities/principal paydowns of
securities available-for-sale.......................... 11,657 4,126
Purchases of securities held-to-maturity................ (6,913) (12,766)
Proceeds from maturities/principal paydowns of
securities held-to-maturity............................ 975 705
Net increase in loans receivable........................ (6,620) (2,966)
Additions to premises and equipment, net................ (57) (171)
--------- ---------
Net cash used in investing activities................... (17,077) (18,379)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................. 5,819 (12,117)
Net change in securities sold under repurchase
agreements............................................. 272 (1,923)
Proceeds from issuance of common stock.................. 1,146 15
--------- ---------
Net cash provided by (used in) financing activities..... 7,237 (14,025)
--------- ---------
Net decrease in cash and cash equivalents............... (4,872) (30,255)
Cash and cash equivalents at beginning of period........ 160,590 94,268
--------- ---------
Cash and cash equivalents at end of period.............. $ 155,718 $ 64,013
========= =========
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
F-28
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 1998
(UNAUDITED) (DOLLARS IN TABLES IN THOUSANDS)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION.
The interim financial statements of Franklin Bancorporation, Inc.
("Franklin") have been prepared pursuant to the requirements for reporting on
Form 10-Q and reflect all adjustments (consisting only of normal recurring
adjustments) which were, in the opinion of management, necessary for a fair
statement of the results of the periods presented. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. Accordingly, these unaudited statements should be read in
conjunction with the audited financial statements and related notes in
Franklin's most current annual report. The current period's results of
operations are not necessarily indicative of results which ultimately may be
achieved for the year.
2. SECURITIES.
The amortized cost and market value of securities are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
AMORTIZED MARKET AMORTIZED MARKET
SECURITIES AVAILABLE-FOR-SALE COST VALUE COST VALUE
- ----------------------------- --------- -------- --------- -------
<S> <C> <C> <C> <C>
U.S. treasury securities.................. $ 18,795 $ 19,161 $18,778 $19,170
U.S. government agencies.................. 61,553 61,921 57,012 57,428
Step-up and structured notes.............. 4,002 3,863 5,950 5,838
Mortgage-backed securities................ 1,968 1,953 2,126 2,076
States and political subdivisions......... 11,753 11,850 10,113 10,205
Equity securities......................... 2,662 2,662 2,213 2,213
-------- -------- ------- -------
Total..................................... $100,733 $101,410 $96,192 $96,930
======== ======== ======= =======
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
AMORTIZED MARKET AMORTIZED MARKET
SECURITIES HELD-TO-MATURITY COST VALUE COST VALUE
- ---------------------------- --------- -------- --------- -------
<S> <C> <C> <C> <C>
U.S. treasury securities.................. $ 15,964 $ 16,017 $15,960 $16,001
U.S. government agencies.................. 21,438 21,591 15,426 15,657
Mortgage-backed securities................ 32,580 31,871 33,550 32,639
States and political subdivisions......... 18,427 18,678 17,522 17,758
-------- -------- ------- -------
Total..................................... $ 88,409 $ 88,157 $82,458 $82,055
======== ======== ======= =======
</TABLE>
F-29
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 1998--
(CONTINUED)
3. LOANS.
Major categories of loans are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Real Estate
Commercial...................................... $ 58,001 $ 59,278
Construction and development.................... 10,392 11,336
Residential mortgage............................ 29,734 30,571
-------- --------
Total Real Estate............................. 98,127 101,185
Commercial and Industrial......................... 194,478 184,360
Consumer
Consumer........................................ 9,973 10,848
Home equity..................................... 4,783 4,524
-------- --------
Total Consumer................................ 14,756 15,372
Total............................................. 307,361 300,917
-------- --------
Unearned income................................... (508) (476)
-------- --------
Loans, net of unearned income..................... $306,853 $300,441
======== ========
</TABLE>
At March 31, 1998, impaired loans totaled $704 thousand with a corresponding
valuation allowance of $381 thousand. The loans deemed to be impaired were
primarily commercial loans.
For the quarter ended March 31, 1998, the average recorded investment in
impaired loans was approximately $961 thousand. Had all of these loans
performed in accordance with their original terms, interest income of
approximately $44 thousand would have been recorded during the first three
months of 1998. Franklin recognized $18 thousand in interest on impaired loans
during the quarter.
At March 31, 1998, Franklin had no other loans on non-accrual other than
those deemed to be impaired loans. Loans 90 days or more past due which were
still accruing interest totaled $337 thousand.
F-30
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 1998--
(CONTINUED)
Changes in the allowance for loan losses for the three months ended March
31, 1998 are as follows:
<TABLE>
<S> <C>
Balance, January 1................................................ $4,192
Charge-offs:
Real Estate..................................................... (105)
Commercial...................................................... (170)
Consumer........................................................ (10)
------
Total............................................................. (285)
------
Recoveries:
Real Estate..................................................... 3
Commercial...................................................... 73
Consumer........................................................ 1
------
Total............................................................. 77
------
Net charge-offs................................................... (208)
Provision for loan losses......................................... 340
Balance, March 31................................................. $4,324
======
Net charge-offs to average loans.................................. 0.07%
</TABLE>
Franklin National Bank, in the normal course of business, makes loans to
executive officers, directors and stockholders, as well as to companies and
individuals affiliated with those officers and directors. In the opinion of
management, these loans are consistent with sound banking practices, are
within regulatory lending limits and do not involve more than normal risk of
collectibility.
Activity in such loans is summarized as follows:
<TABLE>
<S> <C>
Balance, January 1, 1998....................................... $15,427
New loans.................................................... 863
Repayments................................................... (720)
-------
Balance, March 31, 1998........................................ $15,570
=======
</TABLE>
There were no loans to directors, officers or other related parties that
were classified as impaired as of March 31, 1998.
4. CERTIFICATES OF DEPOSIT, INCLUDING IRA'S, ARE AS FOLLOWS:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Certificates less than $100,000....................... $ 13,282 $ 11,477
Certificates of $100,000 or more...................... 137,728 130,248
</TABLE>
F-31
<PAGE>
FRANKLIN BANCORPORATION, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 1998--
(CONTINUED)
5. COMPUTATION OF EARNINGS PER SHARE AND EARNINGS PER SHARE, ASSUMING DILUTION
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
-----------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(DOLLARS IN THOUSANDS--EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Earnings per share:
Income available to
stockholders......... $1,723 6,692,244 $0.26 $1,383 6,487,577 $0.21
Effect of dilutive
securities:
Options............... 474,952 399,992
Earnings per share
assuming dilution:
Income available to
stockholders plus
assumed conversions.. $1,723 7,167,176 $0.24 $1,383 6,887,569 $0.20
</TABLE>
F-32
<PAGE>
APPENDIX I
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
FRANKLIN BANCORPORATION, INC.
BB&T FINANCIAL CORPORATION OF VIRGINIA
AND
BB&T CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I
DEFINITIONS.............................................................. I-1
ARTICLE II
THE MERGER............................................................... I-5
2.1 Merger.............................................................. I-5
2.2 Filing; Plan of Merger.............................................. I-5
2.3 Effective Time...................................................... I-5
2.4 Closing............................................................. I-5
2.5 Effect of Merger.................................................... I-5
2.6 Further Assurances.................................................. I-5
2.7 Merger Consideration................................................ I-6
2.8 Conversion of Shares; Payment of Merger Consideration............... I-6
2.9 Conversion of Stock Options......................................... I-7
2.10 Merger of Subsidiary................................................ I-8
2.11 Anti-Dilution....................................................... I-8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FRANKLIN............................... I-8
3.1 Capital Structure................................................... I-8
3.2 Organization, Standing and Authority................................ I-8
3.3 Ownership of Subsidiaries........................................... I-9
3.4 Organization, Standing and Authority of the Subsidiaries............ I-9
3.5 Authorized and Effective Agreement.................................. I-9
3.6 Securities Filings; Statements True................................. I-10
3.7 Minute Books........................................................ I-10
3.8 Adverse Change; Absence of Undisclosed Liabilities.................. I-10
3.9 Labor Relations..................................................... I-10
3.10 Properties.......................................................... I-11
3.11 Environmental Matters............................................... I-11
3.12 Loans; Allowance for Loan Losses.................................... I-11
3.13 Tax Matters......................................................... I-12
3.14 Employees; Compensation; Benefit Plans.............................. I-12
3.15 Certain Contracts................................................... I-15
3.16 Legal Proceedings; Regulatory Approvals............................. I-15
3.17 Compliance with Laws; Filings....................................... I-16
3.18 Brokers and Finders................................................. I-16
3.19 Repurchase Agreements; Derivatives.................................. I-16
3.20 Deposit Accounts.................................................... I-17
3.21 Related Party Transactions.......................................... I-17
3.22 Certain Information................................................. I-17
3.23 Accounting; Tax and Regulatory Matters.............................. I-17
3.24 State Takeover Laws................................................. I-17
3.25 Fairness Opinion.................................................... I-17
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BB&T................................... I-17
4.1 Capital Structure of BB&T........................................... I-17
4.2 Organization, Standing and Authority of BB&T........................ I-18
</TABLE>
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
("Agreement"), dated as of May 19, 1998, is among FRANKLIN BANCORPORATION,
INC. ("Franklin"), a Delaware corporation having its principal office at
Washington, D.C., BB&T FINANCIAL CORPORATION OF VIRGINIA, a Virginia
corporation having its principal office at Virginia Beach, Virginia ("BB&T
Financial"), and BB&T CORPORATION ("BB&T"), a North Carolina corporation
having its principal office at Winston-Salem, North Carolina;
RECITALS:
By Agreement and Plan of Reorganization dated December 16, 1997 (the "1997
Merger Agreement"), Franklin agreed to be merged with and into BB&T Financial.
The parties have determined that it is in their best interest to clarify
certain provisions of the 1997 Merger Agreement relating to stock options and
restructure the merger contemplated in the 1997 Merger Agreement to provide
that Franklin shall be merged with and into BB&T, and BB&T Financial shall no
longer be a party to such transaction. Accordingly, the parties desire to
amend and restate the 1997 Merger Agreement such that Franklin shall be merged
with and into BB&T (said transaction being hereinafter referred to as the
"Merger") pursuant to a plan of merger (the "Plan of Merger") substantially in
the form set forth in Articles of Merger attached as Annex A hereto ("Articles
of Merger"), and the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, the parties hereto agree to amend and
restate the 1997 Merger Agreement in its entirety as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS
When used herein, the capitalized terms set forth below shall have the
following meanings:
"Bank Holding Company Act" shall mean the Federal Bank Holding Company Act
of 1956, as amended.
"BB&T Common Stock" shall mean the shares of voting common stock, par value
$5.00 per share, of BB&T, with rights attached issued pursuant to Rights
Agreement dated December 17, 1996 between BB&T and Branch Banking and Trust
Company, Rights Agent.
"BB&T Option Agreement" shall mean the Stock Option Agreement dated as of
December 16, 1997 under which BB&T has an option to purchase shares of
Franklin, as amended from time to time, which shall be executed immediately
following execution of this Agreement.
"BB&T Subsidiaries" shall mean all Subsidiaries of BB&T at the Effective
Time which are bank holding companies, banks or savings banks.
"Business Day" shall mean all days other than Saturdays, Sundays and Federal
Reserve holidays.
"Closing Date" shall mean the date specified pursuant to Section 2.4 as the
date on which the parties hereto shall close the transactions contemplated
herein.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
<PAGE>
"Commission" shall mean the Securities and Exchange Commission.
"CRA" shall mean the Community Reinvestment Act of 1977, as amended.
"DGCL" shall mean the Delaware General Corporation Law.
"Disclosed" shall mean disclosed in the Franklin Disclosure Memorandum,
referencing the Section number herein pursuant to which such disclosure is
being made.
"Effective Time" shall mean the time specified in Section 2.3 as the
Effective Time of the Merger.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup or
remediation costs, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) arising out of, based upon,
or resulting from a violation of the Environmental Laws or the presence or
release into the environment of any Materials of Environmental Concern.
"Environmental Laws" means all written applicable federal, state and local
laws and regulations, as amended, relating to pollution or protection of human
health or the environment (including ambient air, surface water, ground water,
land surface, or subsurface strata) and which are administered, interpreted,
or enforced by the United States Environmental Protection Agency and state and
local agencies with jurisdiction over and including common law in respect of,
pollution or protection of the environment, including the Comprehensive
Environmental Response Compensation and Liability Act, as amended, 42 U.S.C.
9601 et seq., the Resource Conservation and Recovery Act, as amended, 42
U.S.C. 6901 et seq., and other laws and regulations relating to emissions,
discharges, releases, or threatened releases of any Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of any Materials of
Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"Financial Statements" shall mean (a) with respect to BB&T, (i) the
consolidated balance sheets (including related notes and schedules, if any) of
BB&T as of December 31, 1996, 1995, and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows (including related
notes and schedules, if any) for each of the three years ended December 31,
1996, 1995, and 1994, as filed by BB&T in Securities Documents and (ii) the
consolidated balance sheets of BB&T (including related notes and schedules, if
any) and the related consolidated statements of income, shareholders' equity
and cash flows (including related notes and schedules, if any) included in
Securities Documents filed by BB&T with respect to periods ended subsequent to
December 31, 1996, and (b) with respect to Franklin, (i) the consolidated
balance sheets (including related notes and schedules, if any) of Franklin as
of December 31, 1996, 1995, and 1994, and the related consolidated statements
of income, changes in shareholders' equity and cash flows (including related
notes and schedules, if any) for each of the three years ended December 31,
1996, 1995, and 1994 as filed by Franklin in Securities Documents and (ii) the
consolidated balance sheets of Franklin (including related notes and
schedules, if any) and the related consolidated statements of income, changes
in shareholders' equity and cash flows (including related notes and schedules,
if any) included in Securities Documents filed by Franklin with respect to
periods ended subsequent to December 31, 1996.
"Franklin Common Stock" shall mean the shares of voting common stock, par
value $0.10 per share, of Franklin.
I-2
<PAGE>
"Franklin Disclosure Memorandum" shall mean the written information in one
or more documents, each of which is entitled "Franklin Disclosure Memorandum"
and dated on or before the date of this Agreement and delivered not later than
fifteen days after the execution of this Agreement by Franklin to BB&T, and
describing in reasonable detail the matters contained therein. Each disclosure
made therein shall be in existence on the date of this Agreement and shall
specifically reference each Section of this Agreement under which such
disclosure is made.
"Franklin Subsidiaries" shall mean the Subsidiaries of Franklin, which shall
include any corporation, bank, savings association, or other organization
acquired as a Subsidiary of Franklin in the future and held as a Subsidiary by
Franklin at the Effective Time.
"Material Adverse Effect" on BB&T or Franklin shall mean an event, change,
or occurrence which, individually or together with any other event, change or
occurrence, (i) has a material adverse effect on the financial condition,
results of operations, business or business prospects of BB&T and the BB&T
Subsidiaries taken as a whole, or Franklin and the Franklin Subsidiaries taken
as a whole, or (ii) materially impairs the ability of BB&T or Franklin to
perform its obligations under this Agreement or to consummate the Merger and
the other transactions contemplated by this Agreement; provided that "Material
Adverse Effect" shall not be deemed to include the impact of (a) actions and
omissions of BB&T or Franklin taken with the prior informed consent of the
other in contemplation of the transactions contemplated hereby, and (b) the
direct effects of compliance with this Agreement on the operating performance
of the parties, including expenses incurred by the parties in consummating the
transactions contemplated by this Agreement.
"Materials of Environmental Concern" means pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other materials
regulated under Environmental Laws.
"NCBCA" shall mean the North Carolina Business Corporation Act, as amended.
"NYSE" shall mean the New York Stock Exchange, Inc.
"OCC" shall mean the Office of the Comptroller of the Currency.
"Proxy Statement/Prospectus" shall mean the proxy statement and prospectus,
together with any supplements thereto, sent to shareholders of Franklin to
solicit their votes in connection with this Agreement and the Plan of Merger.
"Registration Statement" shall mean the registration statement of BB&T with
respect to the BB&T Common Stock to be issued in the Merger as declared
effective by the Commission under the Securities Act.
"Rights" shall mean warrants, options, rights, convertible securities and
other arrangements or commitments which obligate an entity to issue or dispose
of any of its capital stock or other ownership interests (other than rights
pursuant to the Rights Agreement described under the definition of "BB&T
Common Stock"), and stock appreciation rights, performance units and similar
stock-based rights whether or not they obligate the issuer thereof to issue
stock or other securities or to pay cash.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, proxy statements,
registration statements and all similar documents filed, or required to be
filed, pursuant to the Securities Laws, including but not limited to periodic
and other reports filed pursuant to Section 13 of the Exchange Act.
"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of
1940, as amended; the Trust Indenture Act of 1939 as amended; and the rules
and regulations of the Commission promulgated thereunder.
I-3
<PAGE>
"Stock Option" shall mean, collectively, any option granted under the Stock
Option Plans and unexercised on the date hereof to acquire shares of Franklin
Common Stock, aggregating 721,919 shares.
"Stock Option Plans" shall mean (a) Franklin's Second Amended and Restated
Stock Option Plan, 1997 Employee Stock Option Plan and Nondiscretionary Stock
Option Plan, and (b) those predecessor plans and other agreements and
arrangements pursuant to which options to acquire 110,200 shares of Franklin
Common Stock have been issued and are outstanding on the date hereof.
"Subsidiaries" shall mean all those corporations, associations, or other
business entities of which the entity in question either owns or controls 50%
or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (in
determining whether one entity owns or controls 50% or more of the outstanding
equity securities of another, equity securities owned or controlled in a
fiduciary capacity shall be deemed owned and controlled by the beneficial
owner).
"TILA" shall mean the Truth in Lending Act, as amended.
1.2 TERMS DEFINED ELSEWHERE
The capitalized terms set forth below are defined in the following sections:
<TABLE>
<S> <C>
Agreement Introduction
Articles of Merger Recitals
BB&T Introduction
BB&T Financial Introduction
BB&T Option Plan Section 2.9
Closing Section 2.4
Closing Date Section 2.4
Closing Value Section 7.1(h)
Constituent Corporations Section 2.1
Determination Date Section 7.1(h)
Effective Time Section 2.3
Employment Agreements Section 5.10
Exchange Ratio Section 2.7
Franklin Introduction
Index Group Section 7.1(h)
Index Price Section 7.1(h)
Merger Recitals
Merger Consideration Section 2.7
1997 Merger Agreement Recitals
PBGC Section 3.14(b)(iv)
Plan Section 3.14(b)(i)
Plan of Merger Recitals
Starting Date Section 7.1(h)
Surviving Corporation Section 2.1(a)
</TABLE>
I-4
<PAGE>
ARTICLE II
THE MERGER
2.1 MERGER
BB&T and Franklin are constituent corporations (the "Constituent
Corporations") to the Merger as contemplated by the DGCL. At the Effective
Time:
(a) Franklin shall be merged with and into BB&T in accordance with the
applicable provisions of the DGCL and the NCBCA, with BB&T being the surviving
corporate entity (hereinafter sometimes referred to as the "Surviving
Corporation").
(b) The separate existence of Franklin shall cease and the Merger shall in
all respects have the effect provided in Section 2.5.
(c) The Articles of Incorporation of BB&T at the Effective Time shall become
the Articles of Incorporation of the Surviving Corporation.
(d) The Bylaws of BB&T at the Effective Time shall become the Bylaws of the
Surviving Corporation.
2.2 FILING; PLAN OF MERGER
The Merger shall not become effective unless this Agreement and the Plan of
Merger are duly adopted by the respective Boards of Directors of the
Constituent Corporations and approved by shareholders holding the requisite
number of shares of Franklin. Upon fulfillment or waiver of the conditions
specified in Article VI and provided that this Agreement has not been
terminated pursuant to Article VII, the Constituent Corporations will cause an
appropriate certificate of merger to be certified, executed, acknowledged and
filed with the Delaware Department of State as provided in Section 8-252 of
the DGCL, and the Articles of Merger to be certified, executed, acknowledged
and filed with the Office of the Secretary of State of North Carolina as
provided in Section 55-11-05 of the NCBCA. The Plan of Merger is incorporated
herein by reference, and adoption of this Agreement by the Boards of Directors
of the Constituent Corporations and approval by the shareholders of Franklin
shall constitute adoption and approval of the Plan of Merger.
2.3 EFFECTIVE TIME
The Merger shall be effective at the day and hour specified in the Articles
of Merger filed with the Delaware Department of State (herein sometimes
referred to as the "Effective Time").
2.4 CLOSING
The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Womble Carlyle Sandridge & Rice,
PLLC, Winston-Salem, North Carolina, at 10:00 a.m. on the last Business Day of
the month (or first Business Day of the next month) which next follows by at
least ten days the satisfaction of the conditions to Closing set forth in
Article VI, or such later date as the parties may otherwise agree (the
"Closing Date").
2.5 EFFECT OF MERGER
From and after the Effective Time, the Merger shall have the effect
described in Section 8-259 of the DGCL.
2.6 FURTHER ASSURANCES
If, at any time after the Effective Time, the Surviving Corporation shall
consider or be advised that any further deeds, assignments or assurances in
law or any other actions are necessary, desirable or proper to vest, perfect
or confirm of record or otherwise, in the Surviving Corporation, the title to
any property or rights of the Constituent Corporations acquired or to be
acquired by reason of, or as a result of, the Merger, the Constituent
Corporations agree that such Constituent Corporations and their proper
officers and directors shall and will
I-5
<PAGE>
execute and deliver all such proper deeds, assignments and assurances in law
and do all things necessary, desirable or proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation and otherwise to
carry out the purpose of this Agreement, and that the proper officers and
directors of the Surviving Corporation are fully authorized and directed in
the name of the Constituent Corporations or otherwise to take any and all such
actions.
2.7 MERGER CONSIDERATION
As used herein, the term "Merger Consideration" shall mean the whole shares
of BB&T Common Stock to be exchanged for each share of Franklin Common Stock
issued and outstanding as of the Effective Time and cash (without interest) to
be payable in exchange for any fractional share of BB&T Common Stock which
would otherwise be exchanged for a share of Franklin Common Stock, determined
as follows:
(a) The number of shares of BB&T Common Stock to be issued in exchange for
each issued and outstanding share of Franklin Common Stock shall be in the
ratio as set forth on Exhibit "A" (the "Exchange Ratio") attached hereto and
incorporated herein by reference based on the Closing Value as defined in
Section 7.1(h).
(b) The amount of cash payable with respect to any fractional share of BB&T
Common Stock shall be determined by multiplying the fractional part of such
share by the closing price per share of BB&T Common Stock on the NYSE
Composite Transactions List (as reported by The Wall Street Journal--Eastern
Edition) of the last trade of BB&T Common Stock on the trading day immediately
preceding the Effective Time. No person will be entitled to dividends, voting
rights or any other rights as a BB&T shareholder in respect of any fractional
share.
2.8 CONVERSION OF SHARES; PAYMENT OF MERGER CONSIDERATION
(a) At the Effective Time, by virtue of the Merger and without any action on
the part of Franklin or the holders of record of Franklin Common Stock, each
share of Franklin Common Stock issued and outstanding immediately prior to the
Effective Time shall be converted into and shall represent the right to
receive, upon surrender of the certificate representing such share of Franklin
Common Stock (as provided in paragraph (d) below), the Merger Consideration.
(b) Each share of the common stock of BB&T issued and outstanding
immediately prior to the Effective Time shall continue to be issued and
outstanding.
(c) Until surrendered, each outstanding certificate which prior to the
Effective Time represented one or more shares of Franklin Common Stock shall
be deemed upon the Effective Time for all purposes to represent only the right
to receive the Merger Consideration. No interest will be paid or accrued on
the Merger Consideration upon the surrender of the certificate or certificates
representing shares of Franklin Common Stock. With respect to any certificate
for Franklin Common Stock that has been lost or destroyed, BB&T shall pay the
Merger Consideration attributable to such certificate upon receipt of a surety
bond or other adequate indemnity as required in accordance with BB&T's
standard policy, and evidence reasonably satisfactory to BB&T of ownership of
the shares represented thereby. After the Effective Time, no transfer of the
shares of Franklin Common Stock outstanding immediately prior to the Effective
Time shall be made on the stock transfer books of the Surviving Corporation.
(d) Promptly after the Effective Time, BB&T shall cause to be delivered or
mailed to each Franklin shareholder a form of letter of transmittal and
instructions for use in effecting the surrender of the certificates which,
immediately prior to the Effective Time, represented any shares of Franklin
Common Stock in exchange for the Merger Consideration. Upon surrender of such
certificates or other evidence of ownership meeting the requirements of
Section 2.8(c), together with such letter of transmittal duly executed and
completed in accordance with the instructions thereto, and such other
documents as may be reasonably requested, BB&T shall promptly cause the
transfer to the persons entitled thereto of the Merger Consideration.
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(e) The Surviving Corporation shall pay any dividends or other distributions
with a record date prior to the Effective Time which have been declared or
made by Franklin in respect of shares of Franklin Common Stock in accordance
with the terms of this Agreement and which remain unpaid at the Effective
Time. To the extent permitted by law, former shareholders of record of
Franklin shall be entitled to vote after the Effective Time at any meeting of
BB&T shareholders the number of whole shares of BB&T Common Stock into which
their respective shares of Franklin Common Stock are converted, regardless of
whether such holders have exchanged their certificates representing Franklin
Common Stock for certificates representing BB&T Common Stock in accordance
with the provisions of this Agreement. Whenever a dividend or other
distribution is declared by BB&T on the BB&T Common Stock, the record date for
which is at or after the Effective Time, the declaration shall include
dividends or other distributions on all shares of BB&T Common Stock issuable
pursuant to this Agreement, but after the Effective Time no dividend or other
distribution payable to the holders of record of BB&T Common Stock as of any
time subsequent to the Effective Time shall be delivered to the holder of any
certificate representing Franklin Common Stock until such holder surrenders
such certificate for exchange as provided in this Section 2.8. Upon surrender
of such certificate, both the BB&T Common Stock certificate and any
undelivered dividends and cash payments payable hereunder (without interest)
shall be delivered and paid with respect to each share represented by such
certificate.
2.9 CONVERSION OF STOCK OPTIONS
At the Effective Time, each Stock Option then outstanding (and which by its
terms does not lapse on or before the Effective Time), whether or not then
exercisable, shall be converted into and become rights with respect to BB&T
Common Stock and BB&T shall assume each Stock Option, in accordance with the
terms of the Stock Option Plan and stock option agreement, or other agreement,
by which it is evidenced, except that from and after the Effective Time (i)
BB&T and its Compensation Committee shall be substituted for Franklin and the
Committee of Franklin's Board of Directors administering the Stock Option
Plans, (ii) each Stock Option assumed by BB&T may be exercised solely for
shares of BB&T Common Stock, (iii) the number of shares of BB&T Common Stock
subject to each such Stock Option shall be the number of whole shares of BB&T
(omitting any fractional share) determined by multiplying the number of shares
of Franklin Common Stock subject to such Stock Option immediately prior to the
Effective Time by the Exchange Ratio, and (iv) the per share exercise price
under each such Stock Option shall be adjusted by dividing the per share
exercise price under each such Stock Option by the Exchange Ratio and rounding
up to the nearest cent. Notwithstanding the foregoing, BB&T may at its
election substitute as of the Effective Time options under the BB&T
Corporation 1995 Omnibus Stock Incentive Plan (the 'BB&T Option Plan') for all
or a part of the Stock Options, subject to the following conditions: (A) the
requirements of (iii) and (iv) above shall be met; (B) such substitution shall
not constitute a modification, extension or renewal of any of the Stock
Options which are incentive stock options; and (C) the substituted options
shall continue in effect on the same terms and conditions as provided in the
Stock Options and the Stock Option Plan granting each Stock Option. Each grant
of a converted or substitute option to any individual who subsequent to the
Merger will be a director or officer of BB&T as construed under Rule 16b-3
shall, as a condition to such conversion or substitution, be approved in
accordance with the provisions of Rule 16b-3. Each Stock Option which is an
incentive stock option shall be adjusted as required by Section 424 of the
Code, and the Regulations promulgated thereunder, so as to continue as an
incentive stock option under Section 424(a) of the Code, and so as not to
constitute a modification, extension, or renewal of the option within the
meaning of Section 424(h) of the Code. BB&T and Franklin agree to take all
necessary steps to effectuate the foregoing provisions of this Section 2.9. As
soon as practicable following the Effective Time, BB&T shall deliver to the
participants in the Stock Option Plans an appropriate notice setting forth
such participant's rights pursuant thereto. BB&T has reserved and shall
continue to reserve adequate shares of BB&T Common Stock for delivery upon
exercise of any converted or substitute options. As soon as practicable after
the Effective Time, if it has not already done so, and to the extent Franklin
shall have a registration statement in effect or an obligation to file a
registration statement, BB&T shall file a registration statement on Form S-3
or Form S-8, as the case may be (or any successor or other appropriate forms),
with respect to the shares of BB&T Common Stock subject to converted or
substitute options and shall use its reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status
of the prospectus or prospectuses contained therein) for so
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long as such converted or substitute options remain outstanding. With respect
to those individuals, if any, who subsequent to the Merger may be subject to
the reporting requirements under Section 16(a) of the Exchange Act, BB&T shall
administer the Stock Option Plans assumed pursuant to this Section 2.9 (or the
BB&T Option Plan, if applicable) in a manner that complies with Rule 16b-3
promulgated under the Exchange Act to the extent necessary to preserve for
such individuals the benefits of Rule 16b-3 to the extent such benefits were
available to them prior to the Effective Time. Franklin hereby represents that
each of the Stock Option Plans in its current form complies with Rule 16b-3 to
the extent, if any, required as of the date hereof.
2.10 MERGER OF SUBSIDIARY
In the event that BB&T shall request, Franklin shall take such actions, and
shall cause the Franklin Subsidiaries to take such actions, as may be required
in order to effect, at the Effective Time, the merger of one or more of the
Franklin Subsidiaries with and into, in each case, one of the BB&T
Subsidiaries.
2.11 ANTI-DILUTION
In the event BB&T changes the number of shares of BB&T Common Stock issued
and outstanding prior to the Effective Time as a result of a stock split,
stock dividend or other similar recapitalization, and the record date thereof
(in the case of a stock dividend) or the effective date thereof (in the case
of a stock split or similar recapitalization for which a record date is not
established) shall be prior to the Effective Time, the Merger Consideration
and the number of shares of BB&T Common Stock into which any Stock Option is
converted (as provided in Section 2.9) shall be proportionately adjusted.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FRANKLIN
Except as otherwise Disclosed, Franklin represents and warrants to BB&T as
follows (no representation or warranty herein of Franklin shall be deemed to
be inaccurate unless the inaccuracy would permit BB&T to refuse to consummate
the Merger under the applicable standard set forth in Section 6.3(a)):
3.1 CAPITAL STRUCTURE
The authorized capital stock of Franklin consists of 25,000,000 shares of
Franklin Common Stock, par value $0.10 per share. No other classes of capital
stock of Franklin are authorized. As of the date hereof, 6,631,475 shares of
Franklin Common Stock are issued and outstanding, and no other shares of
capital stock of Franklin, common or preferred, are issued and outstanding.
All outstanding shares of Franklin Common Stock have been duly authorized and
are validly issued, fully paid and nonassessable. No shares of capital stock
have been reserved for any purpose, except for (i) shares of Franklin Common
Stock reserved in connection with the Stock Option Plans, and (ii) 1,319,564
shares of Franklin Common Stock in connection with the BB&T Option Agreement.
Franklin has granted options to acquire 721,919 shares of Franklin Common
Stock under the Stock Option Plans. Except as set forth herein, there are no
Rights authorized, issued or outstanding with respect to the capital stock of
Franklin. Holders of Franklin Common Stock do not have preemptive rights.
3.2 ORGANIZATION, STANDING AND AUTHORITY
Franklin is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with full corporate power
and authority to carry on its business as now conducted and to own, lease and
operate its assets. Franklin is qualified to do business in the District of
Columbia, and Franklin has not failed to qualify to do business in any other
state of the United States or foreign jurisdiction where such failure would
have a Material Adverse Effect.
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3.3 OWNERSHIP OF SUBSIDIARIES
Section 3.3 of the Franklin Disclosure Memorandum lists all of the Franklin
Subsidiaries and, with respect to each, its jurisdiction of organization,
jurisdictions in which it is qualified or otherwise licensed to conduct
business, the number of shares or ownership interests owned by Franklin
(directly or indirectly), and the percentage ownership interest so owned by
Franklin. The outstanding shares of capital stock or other equity interests of
the Franklin Subsidiaries are validly issued and outstanding, fully paid and
nonassessable, and all such shares are directly or indirectly owned by
Franklin free and clear of all liens, claims and encumbrances or preemptive
rights of any person. No Rights are authorized, issued or outstanding with
respect to the capital stock or other equity interests of the Franklin
Subsidiaries, and there are no agreements, understandings or commitments
relating to the right of Franklin to own, to vote or to dispose of said
interests. None of the shares of capital stock or other equity interests of
the Franklin Subsidiaries has been issued in violation of the preemptive
rights of any person. Section 3.3 of the Franklin Disclosure Memorandum also
lists all shares of capital stock or other securities or ownership interests
of any corporation, partnership, joint venture, or other organization owned by
Franklin, directly or indirectly (except for securities owned in a fiduciary
capacity).
3.4 ORGANIZATION, STANDING AND AUTHORITY OF THE SUBSIDIARIES
Each Franklin Subsidiary which is a depository institution is a federally
chartered national banking association and its deposits are insured by the
FDIC. Each of the Franklin Subsidiaries is validly existing and in good
standing under the laws of its jurisdiction of organization. Each of the
Franklin Subsidiaries has full power and authority to carry on its business as
now conducted, and is duly qualified to do business in each jurisdiction
Disclosed with respect to it except where the failure to be so qualified would
not have a Material Adverse Effect. No Franklin Subsidiary is required to be
qualified to do business in any other jurisdiction, or is engaged in any
activities that have not been Disclosed except where the failure to be so
qualified would not have a Material Adverse Effect.
3.5 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) Franklin has all requisite corporate power and authority to enter into
and (subject to receipt of all necessary governmental approvals and the
receipt of approval of the Franklin shareholders of this Agreement and the
Plan of Merger) to perform all of its obligations under this Agreement, the
Articles of Merger and the BB&T Option Agreement. The execution and delivery
of this Agreement, the Articles of Merger and the BB&T Option Agreement, and
consummation of the transactions contemplated hereby and thereby, have been
duly and validly authorized by all necessary corporate action in respect
thereof except, in the case of this Agreement and the Plan of Merger, the
approval of Franklin shareholders pursuant to and to the extent required by
applicable law. This Agreement and the Plan of Merger constitute legal, valid
and binding obligations of Franklin, and each is enforceable against Franklin
in accordance with its terms, in each such case subject to (i) bankruptcy,
fraudulent transfer, insolvency, moratorium, reorganization, conservatorship,
receivership, or other similar laws from time to time in effect relating to or
affecting the enforcement of rights of creditors of FDIC insured institutions
or the enforcement of creditors' rights generally; and (ii) general principles
of equity (whether applied in a court of law or in equity), and except that
the availability of equitable remedies or injunctive relief is within the
discretion of the appropriate court.
(b) Neither the execution and delivery of this Agreement, the Articles of
Merger or the BB&T Option Agreement, nor consummation of the transactions
contemplated hereby or thereby, nor compliance by Franklin with any of the
provisions hereof or thereof, shall (i) conflict with or result in a breach of
any provision of the articles of incorporation or by-laws of Franklin or
similar organizational instruments of any Franklin Subsidiary, (ii) constitute
or result in a breach of any term, condition or provision of, or constitute a
default under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any lien, charge or
encumbrance upon any property or asset of Franklin or any Franklin Subsidiary
pursuant to, any note,
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bond, mortgage, indenture, license, permit, contract, agreement or other
instrument or obligation, or (iii) subject to receipt of all required
governmental approvals, violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Franklin or any Franklin Subsidiary.
(c) Other than filings contemplated by Section 2.2 and consents required
from regulatory authorities as provided in Section 5.4(b), no notice to,
filing with, or consent of, any public body or authority is necessary for the
consummation by Franklin of the Merger and the other transactions contemplated
in this Agreement.
3.6 SECURITIES FILINGS; STATEMENTS TRUE
(a) Franklin has timely filed all Securities Documents required by the
Securities Laws since January 1, 1994. Franklin shall Disclose to BB&T a true
and complete copy of each Securities Document filed by Franklin with the
Commission after January 1, 1994 and prior to the date hereof, which are all
of the Securities Documents that Franklin was required to file during such
period. As of their respective dates of filing, such Securities Documents
complied with the Securities Laws as then in effect, and did not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) The Financial Statements of Franklin fairly present or will fairly
present, as the case may be, the consolidated financial position of Franklin
and the Franklin Subsidiaries as of the dates indicated and the consolidated
results of operations, changes in shareholders' equity and statements of cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to the absence of notes and to normal year-end audit adjustments
that are not material in amount or effect) in conformity with U.S. generally
accepted accounting principles applicable to financial institutions applied on
a consistent basis.
(c) No statement, certificate, instrument or other writing furnished or to
be furnished hereunder by Franklin or any Franklin Subsidiary to BB&T contains
or will contain any untrue statement of material fact or will omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.7 MINUTE BOOKS
The minute books of Franklin and each of the Franklin Subsidiaries contain
or will contain at Closing legally sufficient records of all meetings and
other corporate actions of its shareholders and Board of Directors (including
committees of its Board of Directors).
3.8 ADVERSE CHANGE; ABSENCE OF UNDISCLOSED LIABILITIES
Since December 31, 1996, Franklin and the Franklin Subsidiaries have not
incurred any liability except as disclosed in the most recent Franklin
Financial Statements, or entered into any transactions with affiliates, in
each case other than in the ordinary course of business consistent with past
practices, nor has there been any adverse change or any event involving a
prospective adverse change in the business, financial condition or results of
operations of Franklin or any of the Franklin Subsidiaries. All liabilities
(including contingent liabilities) of Franklin and the Franklin Subsidiaries
are disclosed in the most recent Financial Statements of Franklin or were
incurred in the ordinary course of its business since the date of Franklin's
most recent Financial Statements.
3.9 LABOR RELATIONS
Neither Franklin nor any Franklin Subsidiary is the subject of any claim or
allegation that it has committed an unfair labor practice (within the meaning
of the National Labor Relations Act or comparable state law) or seeking to
compel it to bargain with any labor organization as to wages or conditions of
employment, nor is Franklin or any Franklin Subsidiary party to any collective
bargaining agreement. There is no strike or other
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labor dispute involving Franklin or any Franklin Subsidiary, pending or
threatened, or to the best knowledge of Franklin, is there any activity
involving any employees of Franklin or any Franklin Subsidiary seeking to
certify a collective bargaining unit or engaging in any other organization
activity.
3.10 PROPERTIES
(a) Franklin and the Franklin Subsidiaries have good and marketable title,
free and clear of all liens, encumbrances, charges, defaults or equitable
interests, to all of the properties and assets, real and personal, reflected
on the consolidated balance sheet included in the Financial Statements of
Franklin as of December 31, 1996 or acquired after such date, except (i) liens
for current taxes not yet due and payable, (ii) pledges to secure deposits and
other liens incurred in the ordinary course of banking business, (iii) such
imperfections of title, easements and encumbrances, if any, as are not
material in character, amount or extent, (iv) dispositions and encumbrances
for adequate consideration in the ordinary course of business and (v) capital
leases reflected on the most recent Franklin Financial Statements or entered
into thereafter in the ordinary course of business.
(b) All leases and licenses pursuant to which Franklin or any Franklin
Subsidiary, as lessee or licensee, leases or licenses rights to real or
personal property, are valid and enforceable in accordance with their
respective terms.
3.11 ENVIRONMENTAL MATTERS
(a) Franklin and the Franklin Subsidiaries are in compliance with all
Environmental Laws. Neither Franklin nor any Franklin Subsidiary has received
any written communication alleging that Franklin or the Franklin Subsidiary is
not in such compliance, and there are no present circumstances that would
prevent or interfere with the continuation of such compliance.
(b) Neither Franklin nor any Franklin Subsidiary has received written notice
of any pending, there are no pending, and to the best knowledge of Franklin
there are no conditions or facts existing which might reasonably be expected
to result in, legal, administrative, arbitral or other proceedings asserting
Environmental Claims or other claims, causes of action or governmental
investigations of any nature arising under any Environmental Laws upon (i)
Franklin or any Franklin Subsidiary, (ii) any person or entity whose liability
for any Environmental Claim Franklin or any Franklin Subsidiary has retained
or assumed, either contractually or by operation of law, (iii) any real or
personal property owned or leased by Franklin or any Franklin Subsidiary, or
any real or personal property which Franklin or any Franklin Subsidiary has
managed or supervised or participated in the management of, or (iv) any real
or personal property in which Franklin or any Franklin Subsidiary holds a
security interest securing a loan recorded on the books of Franklin or any
Franklin Subsidiary. Neither Franklin nor any Franklin Subsidiary is subject
to any agreement, order, judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability.
(c) Franklin and the Franklin Subsidiaries are in compliance with all
recommendations contained in all environmental audits, analyses and surveys,
if any, known to Franklin relating to all real and personal property owned or
leased by Franklin or any Franklin Subsidiary and all real and personal
property which Franklin or any Franklin Subsidiary has or is judged to have
managed or supervised or participated in the management thereof.
3.12 LOANS; ALLOWANCE FOR LOAN LOSSES
(a) All of the loans on the books of Franklin and the Franklin Subsidiaries
are valid and properly documented, and were made in the ordinary course of
business. Neither the terms of such loans, nor any of the loan documentation,
nor the manner in which such loans have been administered and serviced,
violates any federal, state or local law, rule, regulation or ordinance
applicable thereto, including without limitation, the TILA, Regulations O and
Z of the Federal Reserve Board, the CRA, the Equal Credit Opportunity Act, as
amended, and state laws, rules and regulations relating to consumer
protection, installment sales and usury.
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(b) The allowances for loan losses reflected on the consolidated balance
sheets included in the Financial Statements of Franklin are, or will be in the
opinion of Franklin's management adequate as of their respective dates under
the requirements of U.S. generally accepted accounting principles and
applicable regulatory requirements and guidelines as they apply to banks and
bank holding companies, to provide for losses on outstanding loans (including
accrued interest receivable) net of recoveries.
3.13 TAX MATTERS
(a) Franklin and the Franklin Subsidiaries and each of their predecessors
have timely filed (or requests for extensions have been timely filed and any
such extensions have been granted and have not expired) all federal, state and
local (and, if applicable, foreign) tax returns required by applicable law to
be filed by them (including, without limitation, estimated tax returns, income
tax returns, information returns, and withholding and employment tax returns)
and have paid, or where payment is not required to have been made, have set up
an adequate reserve or accrual for the payment of, all taxes required to be
paid in respect of the periods covered by such returns and, as of the
Effective Time, will have paid, or where payment is not required to have been
made, will have set up an adequate reserve or accrual for the payment of, all
taxes for any subsequent periods ending on or prior to the Effective Time.
Neither Franklin nor any Franklin Subsidiary will have any liability for any
such taxes in excess of the amounts so paid or reserves or accruals so
established. Franklin and the Franklin Subsidiaries have paid, or where
payment is not required to have been made have set up an adequate reserve or
accrual for payment of, all taxes required to be paid or accrued for the
preceding or current fiscal year for which a return is not yet due.
(b) Except as Disclosed, all federal, state and local (and, if applicable,
foreign) tax returns filed by Franklin and the Franklin Subsidiaries are
complete and accurate. Neither Franklin nor any Franklin Subsidiary is
delinquent in the payment of any tax, assessment or governmental charge. No
deficiencies for any tax, assessment or governmental charge have been
proposed, asserted or assessed (tentatively or otherwise) against Franklin or
any Franklin Subsidiary which have not been settled and paid. There are
currently no agreements in effect with respect to Franklin or any Franklin
Subsidiary to extend the period of limitations for the assessment or
collection of any tax. No audit examination or deficiency or refund litigation
with respect to such returns is pending.
(c) Deferred taxes have been provided for in accordance with U.S. generally
accepted accounting principles consistently applied.
(d) Neither Franklin nor any of the Franklin Subsidiaries is a party to any
tax allocation or sharing agreement, and none has been a member of an
affiliated group filing a consolidated federal income tax return (other than a
group the common parent of which was Franklin) or has any liability for taxes
of any person (other than Franklin and the Franklin Subsidiaries) under
Treasury Regulation Section 1.1502-6 (or any similar provision of state, local
or foreign law) as a transferee or successor or by contract or otherwise.
(e) Each of Franklin and the Franklin Subsidiaries is in compliance with,
and its records contain all information and documents (including properly
completed IRS Forms W-9) necessary to comply with, all applicable information
reporting and tax withholding requirements under federal, state, and local tax
laws, and such records identify with specificity all accounts subject to
backup withholding under Section 3406 of the Code.
(f) None of Franklin or the Franklin Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any contract that could
obligate it to make any payments that would be disallowed as a deduction under
Section 280G or 162(m) of the Code.
3.14 EMPLOYEES; COMPENSATION; BENEFIT PLANS
(a) COMPENSATION. Franklin shall have Disclosed a complete and correct list
of the name, age, position, rate of compensation and any incentive
compensation arrangements, bonuses or commissions or fringe or other benefits,
whether payable in cash or in kind, of each director, shareholder, independent
contractor, consultant
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and agent of Franklin and of each Franklin Subsidiary and each other person
(other than an employee as such) to whom Franklin or any Franklin Subsidiary
pays or provides, or has an obligation, agreement (written or unwritten),
policy or practice of paying or providing, retirement, health, welfare or
other benefits of any kind or description whatsoever.
(b) EMPLOYEE BENEFIT PLANS.
(i) Franklin shall have Disclosed an accurate and complete list of
all Plans, as defined below, contributed to, maintained or sponsored by
Franklin or any Franklin Subsidiary, to which Franklin or any Franklin
Subsidiary is obligated to contribute or has any liability or potential
liability, whether direct or indirect, including all Plans contributed
to, maintained or sponsored by each member of the controlled group of
corporations, within the meaning of Sections 414(b), 414(c), 414(m) and
414(o) of the Code, of which Franklin or any Franklin Subsidiary is a
member. For purposes of this Agreement, the term "Plan" shall mean a
plan, arrangement, agreement or program described in the foregoing
provisions of this Section 3.14(b)(i) and which is: (A) a profit-
sharing, deferred compensation, bonus, stock option, stock purchase,
pension, retainer, consulting, retirement, severance, welfare or
incentive plan, agreement or arrangement, whether or not funded and
whether or not terminated, (B) an employment agreement, (C) a personnel
policy or fringe benefit plan, policy, program or arrangement providing
for benefits or perquisites to current or former employees, officers,
directors or agents, whether or not funded, and whether or not
terminated, including without limitation benefits relating to
automobiles, clubs, vacation, child care, parenting, sabbatical, sick
leave, severance, medical, dental, hospitalization, life insurance and
other types of insurance, or (D) any other employee benefit plan as
defined in Section 3(3) of ERISA, whether or not funded and whether or
not terminated.
(ii) Except as Disclosed, neither Franklin nor any Franklin
Subsidiary contributes to, has an obligation to contribute to or
otherwise has any liability or potential liability with respect to (A)
any multiemployer plan as defined in Section 3(37) of ERISA, (B) any
plan of the type described in Sections 4063 and 4064 of ERISA or in
section 413 of the Code (and regulations promulgated thereunder), or
(C) any plan which provides health, life insurance, accident or other
"welfare-type" benefits to current or future retirees or former
employees or directors, their spouses or dependents, other than in
accordance with Section 4980B of the Code or applicable state
continuation coverage law.
(iii) Except as Disclosed, none of the Plans obligates Franklin or
any Franklin Subsidiary to pay separation, severance, termination or
similar-type benefits solely as a result of any transaction
contemplated by this Agreement or solely as a result of a "change in
control," as such term is used in Section 280G of the Code (and
regulations promulgated thereunder).
(iv) Each Plan has been maintained, funded and administered in
compliance in all respects with its own terms and in compliance in all
respects with all applicable laws and regulations, including but not
limited to ERISA and the Code. No actions, suits, claims, complaints,
charges, proceedings, hearings, examinations, investigations, audits or
demands with respect to the Plans (other than routine claims for
benefits) are pending or threatened in writing, and there are no facts
which could give rise to or be expected to give rise to any actions,
suits, claims, complaints, charges, proceedings, hearings,
examinations, investigations, audits or demands. No Plan that is
subject to the funding requirements of Section 412 of the Code or
Section 302 of ERISA has incurred any "accumulated funding deficiency"
as such term is defined in such Sections of ERISA and the Code, whether
or not waived, and each Plan has always fully met the funding standards
required under Title I of ERISA and Section 412 of the Code. No
liability to the Pension Benefit Guaranty Corporation ("PBGC") (except
for routine payment of premiums) has been or is expected to be incurred
with respect to any Plan that is subject to Title IV of ERISA, no
reportable event (as such term is defined in Section 4043 of ERISA) has
occurred with respect to any such Plan, and the PBGC has not commenced
or threatened the
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termination of any Plan. None of the assets of Franklin or any Franklin
Subsidiary is the subject of any lien arising under Section 302(f) of
ERISA or Section 412(n) of the Code, neither Franklin nor any Franklin
Subsidiary has been required to post any security pursuant to Section
307 of ERISA or Section 401(a)(29) of the Code, and there are no facts
which could be expected to give rise to such lien or such posting of
security. No event has occurred and no condition exists that would
subject Franklin or any Franklin Subsidiary to any tax under Sections
4971, 4972, 4977 or 4979 of the Code or to a fine or penalty under
Section 502(c) of ERISA.
(v) Each Plan that is intended to be qualified under Section 401(a)
of the Code, and each trust (if any) forming a part thereof, has
received a favorable determination letter from the Internal Revenue
Service as to the qualification under the Code of such Plan and the tax
exempt status of such related trust, and nothing has occurred since the
date of such determination letter that could adversely affect the
qualification of such Plan or the tax exempt status of such related
trust.
(vi) No underfunded "defined benefit plan" (as such term is defined
in Section 3(35) of ERISA) has been, during the five years preceding
the Closing Date, transferred out of the controlled group of
corporations (within the meaning of Sections 414(b), (c), (m) and (o)
of the Code) of which Franklin or any Franklin Subsidiary is a member
or was a member during such five-year period.
(vii) As of the Closing Date, the fair market value of the assets of
each Plan that is a tax qualified defined benefit plan equals or
exceeds the present value of all vested and non-vested liabilities
thereunder determined in accordance with reasonable actuarial methods,
factors and assumptions applicable to a defined benefit plan on an
ongoing basis. With respect to each Plan that is subject to the funding
requirements of Section 412 of the Code and Section 302 of ERISA, all
required contributions for all periods ending prior to or as of the
Closing Date (including periods from the first day of the then-current
plan year to the Closing Date and including all quarterly contributions
required in accordance with Section 412(m) of the Code) shall have been
made. With respect to each other Plan, all required payments, premiums,
contributions, reimbursements or accruals for all periods ending prior
to or as of the Closing Date shall have been made.
(viii) No prohibited transaction (which shall mean any transaction
prohibited by Section 406 of ERISA and not exempt under Section 408 of
ERISA or Section 4975 of the Code, whether by statutory, class or
individual exemption) has occurred with respect to any Plan which would
result in the imposition, directly or indirectly, of any excise tax,
penalty or other liability under Section 4975 of the Code or Section
409 or 502(i) of ERISA. Neither Franklin nor, to the best knowledge of
Franklin, any Franklin Subsidiary; any trustee, administrator or other
fiduciary of any Plan; or agent of any of the foregoing has engaged in
any transaction or acted or failed to act in a manner which could
subject Franklin or any Franklin Subsidiary to any liability for breach
of fiduciary duty under ERISA or any other applicable law.
(ix) With respect to each Plan, all reports and information required
to be filed with any government agency or distributed to Plan
participants and their beneficiaries have been duly and timely filed or
distributed.
(x) Franklin and each Franklin Subsidiary has been and is presently
in compliance with all of the requirements of Section 4980B of the
Code.
(xi) Neither Franklin nor any Franklin Subsidiary has a liability
under any Plan that, to the extent disclosure is required under U.S.
generally accepted accounting principles, is not reflected on the
consolidated balance sheet included in the most recent Financial
Statements of Franklin or otherwise Disclosed.
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(xii) Neither the consideration nor implementation of the
transactions contemplated under this Agreement will increase (A)
Franklin's or any Franklin Subsidiary's obligation to make
contributions or any other payments to fund benefits accrued under the
Plans as of the date of this Agreement or (B) the benefits accrued or
payable with respect to any participant under the Plans (except to the
extent benefits may be deemed increased by accelerated vesting or by
the conversion of all stock options in accordance with Section 2.9).
(xiii) With respect to each Plan, Franklin has Disclosed or made
available, at the same time as the Franklin Disclosure Memorandum,
true, complete and correct copies of (A) all documents pursuant to
which the Plans are maintained, funded and administered, including
summary plan descriptions, (B) the three most recent annual reports
(Form 5500 series) filed with the Internal Revenue Service (with
attachments), (C) the three most recent actuarial reports, if any, (D)
the three most recent financial statements, (E) all governmental
filings for the calendar years 1994, 1995 and 1996, including without
limitation, excise tax returns and reportable events filings, and (F)
all governmental rulings, determinations, and opinions (and pending
requests for governmental rulings, determinations, and opinions) during
the years 1994, 1995 and 1996.
3.15 CERTAIN CONTRACTS
(a) Neither Franklin nor any Franklin Subsidiary is a party to, is bound or
affected by, or receives benefits under (i) any agreement, arrangement or
commitment, written or oral, the default of which would have a Material
Adverse Effect, whether or not made in the ordinary course of business (other
than loans or loan commitments made or certificates or deposits received in
the ordinary course of the banking business), or any agreement restricting its
business activities, including without limitation agreements or memoranda of
understanding with regulatory authorities, (ii) any agreement, indenture or
other instrument, written or oral, relating to the borrowing of money by
Franklin or any Franklin Subsidiary or the guarantee by Franklin or any
Franklin Subsidiary of any such obligation, which cannot be terminated within
less than 30 days after the Closing Date by Franklin or any Franklin
Subsidiary (without payment of any penalty or cost, except with respect to
Federal Home Loan Bank or Federal Reserve Bank advances), (iii) any agreement,
arrangement or commitment, written or oral, relating to the employment of a
consultant, independent contractor or agent, or the employment, election or
retention in office of any present or former director or officer, which cannot
be terminated within less than 30 days after the Closing Date by Franklin or
any Franklin Subsidiary (without payment of any penalty or cost), or that
provides benefits which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction involving Franklin of the nature
contemplated by this Agreement or the BB&T Option Agreement, or (iv) any
agreement or plan, written or oral, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the BB&T Option Agreement or the value of
any of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement or the BB&T Option Agreement. Each
matter Disclosed pursuant to this Section 3.15(a) is in full force and effect.
(b) Neither Franklin nor any Franklin Subsidiary is in default under any
agreement, commitment, arrangement, lease, insurance policy, or other
instrument, whether entered into in the ordinary course of business or
otherwise and whether written or oral, and there has not occurred any event
that, with the lapse of time or giving of notice or both, would constitute
such a default.
3.16 LEGAL PROCEEDINGS; REGULATORY APPROVALS
There are no actions, suits, claims, governmental investigations or
proceedings instituted, pending or, to the best knowledge of Franklin,
threatened against Franklin or any Franklin Subsidiary or against any asset,
interest, plan or right of Franklin or any Franklin Subsidiary, or against any
officer, director or employee of any of them relating to or arising out of
such person's relationship with Franklin or any Franklin Subsidiary. There are
no
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actions, suits or proceedings instituted, pending or, to the best knowledge of
Franklin, threatened against any present or former director or officer of
Franklin or any Franklin Subsidiary that would reasonably be expected to give
rise to a claim against Franklin or any Franklin Subsidiary for
indemnification. There are no actual or, to the best knowledge of Franklin,
threatened actions, suits or proceedings which present a claim to restrain or
prohibit the transactions contemplated herein or in the BB&T Option Agreement.
To the best knowledge of Franklin, no fact or condition relating to Franklin
or any Franklin Subsidiary exists (including without limitation noncompliance
with the CRA) that would prevent Franklin or BB&T from obtaining all of the
federal regulatory approvals contemplated herein.
3.17 COMPLIANCE WITH LAWS; FILINGS
Each of Franklin and each Franklin Subsidiary is in compliance with all
statutes and regulations (including, but not limited to, the CRA, TILA and
regulations promulgated thereunder, and other consumer banking laws), and has
obtained and maintained all permits, licenses and registrations applicable to
the conduct of its business, and neither Franklin nor any Franklin Subsidiary
has received written notification that has not lapsed, been withdrawn or
abandoned by any agency or department of federal, state or local government
(i) asserting a violation or possible violation of any such statute or
regulation, (ii) threatening to revoke any permit, license, registration, or
other government authorization, or (iii) restricting or in any way limiting
its operations. Neither Franklin nor any Franklin Subsidiary is subject to any
regulatory or supervisory cease and desist order, agreement, directive,
memorandum of understanding or commitment, and none of them has received any
written communication requesting that it enter into any of the foregoing.
Franklin and each of the Franklin Subsidiaries has filed all reports,
registrations, notices and statements, and any amendments thereto, that it was
required to file with federal and state regulatory authorities, including
without limitation the OCC, FDIC and Federal Reserve Board. Each such report,
registration, notice and statement, and each amendment thereto, has complied
with applicable legal requirements and none has contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.18 BROKERS AND FINDERS
Neither Franklin nor any Franklin Subsidiary, nor any of their respective
officers, directors or employees, has employed any broker, finder or financial
advisor or incurred any liability for any fees or commissions in connection
with the transactions contemplated herein, in the Plan of Merger or in the
BB&T Option Agreement, except for fees to accountants and lawyers and an
obligation to Friedman, Billings, Ramsey & Co., Inc., the nature and extent of
which have been Disclosed, for investment banking services.
3.19 REPURCHASE AGREEMENTS; DERIVATIVES
(a) With respect to all agreements currently outstanding pursuant to which
Franklin or any Franklin Subsidiary has purchased securities subject to an
agreement to resell, Franklin or the Franklin Subsidiary has a valid,
perfected first lien or security interest in the securities or other
collateral securing such agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby. With respect to all agreements
currently outstanding pursuant to which Franklin or any Franklin Subsidiary
has sold securities subject to an agreement to repurchase, neither Franklin
nor the Franklin Subsidiary has pledged collateral materially in excess of the
amount of the debt secured thereby. Neither Franklin nor any Franklin
Subsidiary has pledged collateral materially in excess of the amount required
under any interest rate swap or other similar agreement currently outstanding.
(b) Neither Franklin nor any Franklin Subsidiary is a party to or has agreed
to enter into an exchange- traded or over-the-counter swap, forward, future,
option, cap, floor, or collar financial contract, or any other interest rate
or foreign currency protection contract not included on its balance sheets in
the Financial Statements, which is a financial derivative contract (including
various combinations thereof), except for options and forwards entered into in
the ordinary course of its mortgage lending business consistent with past
practice and current policy.
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3.20 DEPOSIT ACCOUNTS
The deposit accounts of the Franklin Subsidiaries that are insured
depository institutions are insured by the FDIC to the maximum extent
permitted by federal law, and the Franklin Subsidiaries have paid all premiums
and assessments and filed all reports required to have been paid or filed
under the Federal Deposit Insurance Act.
3.21 RELATED PARTY TRANSACTIONS
Franklin has Disclosed all transactions, investments and loans, including
loan guarantees, to which Franklin or any Franklin Subsidiary is a party with
any director, executive officer or 5% shareholder of Franklin or any person,
corporation, or enterprise controlling, controlled by or under common control
with any of the foregoing. All such transactions, investments and loans are on
terms no less favorable to Franklin than could be obtained from unrelated
parties.
3.22 CERTAIN INFORMATION
When the Proxy Statement/Prospectus is mailed, and at the time of the
meeting of shareholders of Franklin to vote upon the Plan of Merger, the Proxy
Statement/Prospectus and all amendments or supplements thereto, with respect
to all information set forth therein provided by Franklin, (i) shall comply
with the applicable provisions of the Securities Laws, and (ii) shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
3.23 ACCOUNTING; TAX AND REGULATORY MATTERS
Neither Franklin nor any Franklin Subsidiary has taken or agreed to take any
action which would or could reasonably be expected to (i) cause the Merger not
to be accounted for as a pooling-of-interests or not constitute a
reorganization under Section 368 of the Code, or (ii) materially impede or
delay receipt of any consents of regulatory authorities referred to in Section
5.4(b) or result in failure of the condition in Section 6.3(b), in each case
except to the extent actions taken pursuant to this Agreement could have such
effect.
3.24 STATE TAKEOVER LAWS
Franklin and each Franklin Subsidiary have taken all necessary action to
exempt the transactions contemplated by this Agreement from any applicable
moratorium, fair price, business combination, control share or other anti-
takeover laws, including without limitation the provisions of Section 8-203 of
the DGCL.
3.25 FAIRNESS OPINION
Franklin has received from Friedman, Billings, Ramsey & Co., Inc. an opinion
that, as of the date hereof, the Merger Consideration is fair to the
shareholders of Franklin from a financial point of view.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BB&T
BB&T represents and warrants to Franklin as follows (no representation or
warranty herein of BB&T shall be deemed to be inaccurate unless the inaccuracy
would permit Franklin to refuse to consummate the Merger under the applicable
standard set forth in Section 6.2(a)):
4.1 CAPITAL STRUCTURE OF BB&T
The authorized capital stock of BB&T consists of (i) 5,000,000 shares of
preferred stock, par value $5.00 per share, of which 2,000,000 shares have
been designated as Series B Junior Participating Preferred Stock and the
remainder are undesignated, and none of which shares are issued and
outstanding, and (ii) 300,000,000 shares
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of BB&T Common Stock, of which 134,308,475 shares were issued and outstanding
on September 30, 1997. No other shares of BB&T capital stock, common or
preferred, are authorized or are issued and outstanding. All outstanding
shares of BB&T Common Stock have been duly authorized and are validly issued,
fully paid and nonassessable. The shares of BB&T Common Stock reserved as
provided in Section 5.3 are free of any Rights and have not been reserved for
any other purpose, and such shares are available for issuance as provided
pursuant to the Plan of Merger. Holders of BB&T Common Stock do not have
preemptive rights.
4.2 ORGANIZATION, STANDING AND AUTHORITY OF BB&T
BB&T is a corporation duly organized, validly existing and in good standing
under the laws of the State of North Carolina, with full corporate power and
authority to carry on its business as now conducted and to own, lease and
operate its assets, and is duly qualified to do business in the states of the
United States where its ownership or leasing of property or the conduct of its
business requires such qualification. BB&T is registered as a bank holding
company under the Bank Holding Company Act.
4.3 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) BB&T has all requisite corporate power and authority to enter into and
(subject to receipt of all necessary government approvals) perform all of its
obligations under this Agreement, the Plan of Merger and the BB&T Option
Agreement, as applicable. The execution and delivery of this Agreement, the
Plan of Merger and the BB&T Option Agreement, as applicable, and consummation
of the transactions contemplated hereby and thereby, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of BB&T. This Agreement and the Plan of Merger constitute legal, valid
and binding obligations of BB&T, and each is enforceable against BB&T in
accordance with its terms, in each case subject to (i) bankruptcy, insolvency,
moratorium, reorganization, conservatorship, receivership or other similar
laws in effect from time to time relating to or affecting the enforcement of
the rights of creditors; and (ii) general principles of equity (whether
applied in a court of law or in equity), and except that the availability of
equitable remedies or injunctive relief is within the discretion of the
appropriate court.
(b) Neither the execution and delivery of this Agreement, the Plan of Merger
or the BB&T Option Agreement, as applicable, nor consummation of the
transactions contemplated hereby and thereby, nor compliance by BB&T with any
of the provisions hereof or thereof shall (i) conflict with or result in a
breach of any provision of the articles of incorporation or bylaws of BB&T or
any BB&T Subsidiary, (ii) constitute or result in a breach of any term,
condition or provision of, or constitute a default under, or give rise to any
right of termination, cancellation or acceleration with respect to, or result
in the creation of any lien, charge or encumbrance upon any property or asset
of BB&T or any BB&T Subsidiary pursuant to any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation, or (iii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to BB&T or any BB&T Subsidiary.
(c) Other than filings contemplated by Section 2.2 and consents required
from regulatory authorities as provided in Section 5.4(b), no notice to,
filing with, or consent of, any public body or authority is necessary for the
consummation by BB&T of the Merger and the other transactions contemplated in
this Agreement.
4.4 ORGANIZATION, STANDING AND AUTHORITY OF BB&T SUBSIDIARIES
Each of the BB&T Subsidiaries is duly organized, validly existing and in
good standing under applicable laws. Each of the BB&T Subsidiaries (i) has
full power and authority to carry on its business as now conducted and (ii) is
duly qualified to do business in the states of the United States and foreign
jurisdictions where its ownership or leasing of property or the conduct of its
business requires such qualification.
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4.5 SECURITIES DOCUMENTS; STATEMENTS TRUE
BB&T has timely filed all Securities Documents required by the Securities
Laws since January 1, 1994. As of their respective dates of filing, such
Securities Documents complied with the Securities Laws as then in effect, and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. No statement, certificate, instrument or other writing
furnished or to be furnished hereunder by BB&T or any BB&T Subsidiary to
Franklin contains or will contain any untrue statement of material fact or
will omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
4.6 FINANCIAL STATEMENTS
The Financial Statements of BB&T fairly present or will fairly present, as
the case may be, the consolidated financial position of BB&T and the BB&T
Subsidiaries as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity and changes in cash flows for the
periods then ended (subject, in the case of unaudited interim statements, to
the absence of any notes and to normal year-end audit adjustments that are not
material in amount or effect) in conformity with U.S. generally accepted
accounting principles applicable to financial institutions applied on a
consistent basis.
4.7 ADVERSE CHANGE
Since December 31, 1996, BB&T and the BB&T Subsidiaries have not incurred
any liability except as disclosed on the most recent BB&T Financial
Statements, or entered into any transactions with affiliates, in each case
other than in the ordinary course of business consistent with past practices,
nor has there been any adverse change or any event involving a prospective
adverse change in the business, financial condition or results of operations
of BB&T or any of the BB&T Subsidiaries.
4.8 ABSENCE OF UNDISCLOSED LIABILITIES
All liabilities (including contingent liabilities) of BB&T and the BB&T
Subsidiaries are disclosed in the most recent Financial Statements of BB&T or
were incurred in the ordinary course of business since the date of BB&T's most
recent Financial Statements.
4.9 COMPLIANCE WITH LAWS; FILINGS
Each of BB&T and the BB&T Subsidiaries is in compliance with all statutes
and regulations (including, but not limited to, the CRA, TILA and regulations
promulgated thereunder and other consumer banking laws) applicable to the
conduct of its business, and neither BB&T nor any of the BB&T Subsidiaries has
received any written notification that has not lapsed, been withdrawn or
abandoned from any agency or department of federal, state or local government
(i) asserting a violation or possible violation of any such statute or
regulation, (ii) threatening to revoke any license, franchise, permit or
government authorization, or (iii) restricting or in any way limiting its
operations. Neither BB&T nor any of the BB&T Subsidiaries is subject to any
regulatory or supervisory cease and desist order, agreement, directive or
memorandum of understanding, and none of them has received any written
communication requesting that they enter into any of the foregoing. BB&T and
each of the BB&T Subsidiaries has filed all reports, registrations, notices
and statements, and any amendments thereto, that it was required to file with
federal and state regulatory authorities, including without limitation the
OCC, FDIC, Office of Thrift Supervision and Federal Reserve Board. Each such
report, registration, notice and statement, and each amendment thereto, has
complied with applicable legal requirements and none has contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
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4.10 CERTAIN INFORMATION
When the Proxy Statement/Prospectus is mailed, and at all times subsequent
to such mailing up to and including the time of the meeting of shareholders of
Franklin to vote on the Merger, the Proxy Statement/Prospectus and all
amendments or supplements thereto, with respect to all information set forth
therein relating to BB&T and the BB&T Subsidiaries, (i) shall comply with the
applicable provisions of the Securities Laws, and (ii) shall not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading.
4.11 ACCOUNTING; TAX AND REGULATORY MATTERS
Neither BB&T nor the BB&T Subsidiaries have taken or agreed to take any
action which would or could reasonably be expected to (i) cause the Merger not
to be accounted for as a pooling-of-interests or not to constitute a
reorganization under Section 368 of the Code, or (ii) materially impede or
delay receipt of any consents of regulatory authorities referred to in Section
5.4(b) or result in failure of the condition in Section 6.3(b), in each case
except to the extent actions taken pursuant to the terms of this Agreement
would have such effect.
4.12 SHARE OWNERSHIP
As of the date of this Agreement, none of BB&T or any BB&T Subsidiary or
other entity controlled, directly or indirectly, by BB&T owns (except in a
fiduciary capacity) any shares of Franklin Common Stock.
4.13 REGULATORY APPROVALS
There are no actions, suits or proceedings instituted, pending or, to the
best knowledge of BB&T, threatened against any present or former director of
officer of BB&T or any BB&T Subsidiary that would reasonably be expected to
give rise to a claim against BB&T or any BB&T Subsidiary for indemnification.
There are no actual or, to the best knowledge of BB&T threatened actions,
suits or proceedings which present a claim to restrain or prohibit the
transactions contemplated herein. To the best knowledge of BB&T, no fact or
condition relating to BB&T or any BB&T Subsidiary exists (including without
limitation noncompliance with the CRA) that would prevent Franklin or BB&T
from obtaining all of the federal regulatory approvals contemplated herein.
ARTICLE V
COVENANTS
5.1 FRANKLIN SHAREHOLDER MEETING
Franklin shall submit this Agreement and the Plan of Merger to its
shareholders for approval at a meeting to be held as soon as practicable, and
by approving execution of this Agreement the Board of Directors of Franklin
agrees that it shall, at the time the Proxy Statement/Prospectus is mailed to
the shareholders of Franklin, recommend that Franklin's shareholders vote for
such approval; provided, that the Board of Directors of Franklin may withdraw
or refuse to make such recommendation only if the Board of Directors shall
determine in good faith that such recommendation would violate its fiduciary
duty to Franklin's shareholders after consideration of (i) written advice of
legal counsel that in its opinion making such recommendation or the failure to
withdraw or modify such recommendation would reasonably likely constitute a
breach of the fiduciary duties of such Board to shareholders of Franklin, and
(ii) either (A) the withdrawal by Friedman, Billings, Ramsey & Co., Inc. in
writing of its opinion referred to in Section 3.25 or (B) the delivery to the
Franklin Board of Directors of written advice from Friedman, Billings, Ramsey
& Co., Inc. that the Merger Consideration is either not fair or is inadequate
to the shareholders of Franklin from a financial point of view.
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5.2 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS
As promptly as practicable after the date hereof, BB&T shall prepare and
file the Registration Statement with the Commission. Franklin will furnish to
BB&T the information required to be included in the Registration Statement
with respect to its business and affairs before it is filed with the
Commission and again before any amendments are filed, and shall have the right
to review, comment and consult with BB&T on the form of, and any
characterizations of such information included in, the Registration Statement
prior to the filing with the Commission. BB&T shall use its reasonable best
efforts to cause such Registration Statement to be declared effective under
the Securities Act. Such Registration Statement, at the time it becomes
effective and on the Effective Time, shall in all material respects conform to
the requirements of the Securities Act and the applicable rules and
regulations of the Commission. BB&T shall take all actions required to
register or obtain exemptions from such registration for the BB&T Common Stock
to be issued in connection with the transactions contemplated by this
Agreement and the Plan of Merger under applicable state "Blue Sky" securities
laws, as appropriate. The Registration Statement shall include the form of
Proxy Statement/Prospectus. BB&T and Franklin shall use their best efforts to
cause the Proxy Statement/Prospectus to be approved by the SEC for mailing to
the Franklin shareholders, and such Proxy Statement/Prospectus shall, on the
date of mailing, conform in all material respects to the requirements of the
Securities Laws and the applicable rules and regulations of the SEC
thereunder. Franklin shall cause the Proxy Statement/Prospectus to be mailed
to its shareholders of record in accordance with all applicable notice
requirements under the Securities Laws and the DGCL.
5.3 PLAN OF MERGER; RESERVATION OF SHARES
At the Effective Time, the Merger shall be effected in accordance with the
Plan of Merger. In this connection, BB&T undertakes and agrees to pay or cause
to be paid when due the Merger Consideration to be distributed pursuant to
Section 2.7. BB&T has reserved for issuance such number of shares of BB&T
Common Stock as shall be necessary to pay the portion of the Merger
Consideration to be distributed in the form of BB&T Common Stock. If at any
time the aggregate number of shares of BB&T Common Stock available for
issuance hereunder shall not be sufficient to effect the Merger, BB&T shall
take all appropriate action as may be required to increase the amount of the
authorized BB&T Common Stock.
5.4 ADDITIONAL ACTS
(a) Franklin agrees to take such actions as may be reasonably necessary to
modify the structure of, or to substitute parties to (so long as such
substitute is BB&T or a BB&T Subsidiary) the transactions contemplated hereby,
provided that such modifications do not change the Merger Consideration or
abrogate the covenants and other agreements contained in this Agreement.
(b) As promptly as practicable after the date hereof, BB&T and Franklin
shall submit notice or applications for prior approval of the transactions
contemplated herein to the Federal Reserve Board, the OCC, and any other
federal, state or local government agency, department or body to which notice
is required or from which approval is required for consummation of the Merger
and the other transactions contemplated hereby. Franklin and BB&T each
represents and warrants to the other that all information included (or
submitted for inclusion) concerning it, its Subsidiaries, and any of its
directors, officers and shareholders, shall be true, correct and complete in
all material respects as of the date presented.
5.5 BEST EFFORTS
Each of BB&T and Franklin shall use, and shall cause each of their
respective Subsidiaries to use, its best efforts in good faith to (i) furnish
such information as may be required in connection with and otherwise cooperate
in the preparation and filing of the documents referred to in Sections 5.2 and
5.4 or elsewhere herein, and (ii) take or cause to be taken all action
necessary or desirable on its part to fulfill the conditions in Article VI and
to consummate the transactions herein contemplated at the earliest practicable
date. Neither BB&T nor Franklin shall take, or cause, or to the best of its
ability permit to be taken, any action that would substantially delay or
impair the prospects of completing the Merger pursuant to this Agreement and
the Plan of Merger.
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5.6 CERTAIN ACCOUNTING MATTERS
Franklin shall reasonably cooperate with BB&T concerning accounting and
financial matters necessary or appropriate to facilitate the Merger (taking
into account BB&T's policies, practices and procedures), including without
limitation issues arising in connection with record keeping, loan
classification, valuation adjustments, levels of loan loss reserves and other
accounting practices.
5.7 ACCESS TO INFORMATION
Franklin, on the one hand, and BB&T, on the other hand, will each keep the
other advised of all material developments relevant to its business and the
businesses of its Subsidiaries, and to consummation of the Merger, and each
shall provide to the other, upon request, reasonable details of any such
development. Upon reasonable notice, Franklin shall afford to representatives
of BB&T access, during normal business hours during the period prior to the
Effective Time, to all of the properties, books, contracts, commitments and
records of Franklin and the Franklin Subsidiaries and, during such period,
shall make available all information concerning their business as may be
reasonably requested. No investigation pursuant to this Section 5.7 shall
affect or be deemed to modify any representation or warranty made by, or the
conditions to the obligations hereunder of, either party hereto. Each party
hereto shall, and shall cause each of its directors, officers, attorneys and
advisors to, maintain the confidentiality of all information obtained
hereunder which is not otherwise publicly disclosed by the other party, and
shall not, and shall cause each of its directors, officers, attorneys and
advisors not to, use any such information except for the purposes of
evaluating, negotiating or consummating the transactions contemplated by this
Agreement, said undertakings with respect to confidentiality to survive any
termination of this Agreement pursuant to Section 7.1. In the event of the
termination of this Agreement, each party shall return to the other party upon
request all confidential information previously furnished, however recorded,
including any notes, memoranda, reports or other materials containing or based
upon such information, in connection with the transactions contemplated by
this Agreement.
5.8 PRESS RELEASES
BB&T and Franklin shall agree with each other as to the form and substance
of any press release related to this Agreement and the Plan of Merger or the
transactions contemplated hereby and thereby, and consult with each other as
to the form and substance of other public disclosures related thereto;
provided, that nothing contained herein shall prohibit either party, following
notification to the other party, from making any disclosure which in the
opinion of its counsel is required by law.
5.9 FORBEARANCES OF FRANKLIN
Except with the prior written consent of BB&T, between the date hereof and
the Effective Time, Franklin shall not, and shall cause each of the Franklin
Subsidiaries not to:
(a) carry on its business other than in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted, or establish
or acquire any new Subsidiary or engage in any new activity;
(b) declare, set aside, make or pay any dividend or other distribution in
respect of its capital stock;
(c) issue any shares of its capital stock, except pursuant to the Stock
Option Plans and the BB&T Option Agreement;
(d) issue, grant or authorize any Rights or effect any recapitalization,
reclassification, stock dividend, stock split or like change in
capitalization;
(e) amend its articles of incorporation or bylaws; impose or permit
imposition, of any lien, charge or encumbrance on any share of stock held by
it in any Franklin Subsidiary, or permit any such lien, charge or
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encumbrance to exist; or waive or release any material right or cancel or
compromise any debt or claim, in each case other than in the ordinary course
of business;
(f) merge with any other entity or permit any other entity to merge into it,
or consolidate with any other entity; acquire control over any other entity;
or liquidate, sell or otherwise dispose of any assets or acquire any assets,
other than in the ordinary course of its business consistent with past
practices;
(g) fail to comply in any material respect with any laws, regulations,
ordinances or governmental actions applicable to it and to the conduct of its
business;
(h) increase the rate of compensation of any of its directors, officers or
employees, or pay or agree to pay any bonus to, or provide any other employee
benefit or incentive to, any of its directors, officers or employees, except
(i) for normal merit increases in the ordinary course of business consistent
with past practices for employees below the level of the Executive Management
Committee, (ii) with respect to officers at the level of the Executive
Management Committee: (A) salary increases granted in the ordinary course of
business consistent with past practices (not to exceed, with respect to any
such officer, 6.5% of the officer's base salary level for 1997); (B) bonuses
payable for 1997 in the ordinary course of business consistent with past
practices; and (C) stock options granted at fair market value in accordance
with the formula for such grants currently in effect and applied in past
years; and (iii) with respect to directors, grants of options in January 1998,
at fair market value pursuant to the Nondiscretionary Stock Option Plan in
accordance with the formula for such grants currently in effect and applied in
past years;
(i) enter into or substantially modify (except as may be required by
applicable law or regulation) any pension, retirement, stock option, stock
purchase, stock appreciation right, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees;
(j) solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations or discussions
concerning, any acquisition or purchase of all or a substantial portion of the
assets of, or a substantial equity interest in, Franklin or any Franklin
Subsidiary or any business combination with Franklin or any Franklin
Subsidiary other than as contemplated by this Agreement; or authorize any
officer, director, agent or affiliate of Franklin or any Franklin Subsidiary
to do any of the above; or fail to notify BB&T promptly (within 24 hours) if
any such inquiries or proposals are received, any such information is
requested or required, or any such negotiations or discussions are sought to
be initiated; provided, that this paragraph (j) shall not apply to furnishing
information, negotiations or discussions following an unsolicited offer if, as
a result of such offer, Franklin is advised in writing by legal counsel that
in its opinion the failure so to furnish information or negotiate would
reasonably likely constitute a breach of the fiduciary duties of Franklin's
Board of Directors to its shareholders;
(k) enter into (i) any material agreement, arrangement or commitment not
made in the ordinary course of business except a three-year commitment to
sponsor the Franklin National Bank Classic Basketball Tournament, (ii) any
agreement, indenture or other instrument not made in the ordinary course of
business relating to the borrowing of money by Franklin or a Franklin
Subsidiary or guarantee by Franklin or a Franklin Subsidiary of any
obligation, (iii) any agreement, arrangement or commitment relating to the
employment or severance of a consultant or the employment, severance, election
or retention in office of any present or former director, officer or employee
(this clause shall not apply to the election of directors by shareholders or
the election of officers by directors in the normal course) except to the
extent otherwise provided in an agreement, arrangement or commitment
previously Disclosed or terminable by Franklin or the Franklin Subsidiaries
without penalty on written notice of no more than thirty days; or (iv) any
contract, agreement or understanding with a labor union;
(l) change its lending, investment or asset liability management policies in
any material respect, except as may be required by applicable law, regulation,
or directives, and except that after approval of the Agreement and
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the Plan of Merger by its shareholders Franklin shall cooperate in good faith
with BB&T to adopt policies, practices and procedures consistent with those
utilized by BB&T, effective on or before the Closing Date;
(m) change its methods of accounting in effect at December 31, 1996, except
as required by changes in U.S. generally accepted accounting principles
concurred in by BB&T's independent certified public accountants, which
concurrence shall not be unreasonably withheld, conditioned or delayed, or
change any of its methods of reporting income and deductions for federal
income tax purposes from those employed in the preparation of its federal
income tax returns for the year ended December 31, 1996, except as required by
changes in law or regulation;
(n) incur any commitments for capital expenditures or obligation to make
capital expenditures in excess of $50,000, for any one expenditure, or
$150,000, in the aggregate;
(o) incur any indebtedness other than deposits from customers, advances from
the Federal Home Loan Bank or Federal Reserve Bank and reverse repurchase
arrangements in the ordinary course of business;
(p) take any action which would or could reasonably be expected to (i) cause
the Merger not to be accounted for as a pooling-of-interests or not to
constitute a reorganization under Section 368 of the Code as determined in
good faith by BB&T, (ii) result in any inaccuracy of a representation or
warranty herein which would allow for a termination of this Agreement, or
(iii) cause any of the conditions precedent to the transactions contemplated
by this Agreement to fail to be satisfied;
(q) dispose of any material assets other than in the ordinary course of
business; or
(r) agree to do any of the foregoing.
5.10 EMPLOYMENT AGREEMENTS
BB&T (or its specified banking subsidiary) shall enter into an employment
agreement substantially in the form of Annex B1 with Robert P. Pincus, in the
form of Annex B2 with each of Albert A. D'Alessandro, David G. Fleming and
Joseph B. Head, in the form of Annex B3 with Diane M. Begg, and in the form of
Annex B4 with each of Linda B. Johnson, Kim Ray, Susan J. Schumacher, J.
Mercedes Alvarez, and Ronald P. Gudbrandsen (the "Employment Agreements") in
each case effective as of the Closing Date.
5.11 AFFILIATES
Franklin shall use its best efforts to cause all persons who are affiliates
of Franklin to deliver to BB&T promptly following this Agreement a written
agreement providing that such person will not dispose of BB&T Common Stock
received in the Merger except in compliance with the Securities Act and the
rules and regulations promulgated thereunder and except as consistent with
qualifying the transactions contemplated hereby for pooling-of-interests
accounting treatment, and in any event shall cause such affiliates to deliver
to BB&T such written agreement prior to the Effective Time.
5.12 SECTION 401(K) PLAN; EMPLOYEE BENEFITS
(a) BB&T shall cause the 401(k) plan of Franklin to be merged with the
401(k) plan maintained by BB&T and the BB&T Subsidiaries, and the account
balances of former employees of Franklin or the Franklin Subsidiaries who are
participants in the Franklin plan shall be transferred to the accounts of such
employees under the BB&T 401(k) plan. Following such merger and transfer, such
accounts shall be governed and controlled by the terms of the BB&T 401(k) plan
as in effect from time to time (and subject to BB&T's right to terminate such
plan). For purposes of administering both the 401(k) plan and BB&T's defined
benefit pension plan, service with Franklin and the Franklin Subsidiaries
shall be deemed to be service with BB&T or the BB&T Subsidiaries for
participation and vesting purposes, but not for purposes of benefit accrual.
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(b) Each employee of Franklin at the Effective Time shall be offered
employment by BB&T or by an entity controlled by BB&T, and each such employee
of Franklin who becomes an employee of BB&T or a BB&T Subsidiary ("Employer
Entity") immediately following the Effective Time shall be eligible to
participate in severance, group hospitalization, medical, life, disability and
other welfare benefit plans and programs, and bonus and incentive plans and
programs available to similarly situated employees of the Employer Entity,
subject to the terms of such plans and programs. In applying all such plans
and programs, service with Franklin shall be deemed to be service with the
Employer Entity for the purpose of determining eligibility to participate in
such welfare plans and programs; provided, that former employees of Franklin
who were participants in Franklin's group hospitalization and medical plans
immediately preceding the Effective Time shall become participants in the
Employer Entity's corresponding plans immediately upon becoming employed by
the Employer Entity at the Effective Time. Notwithstanding the foregoing, in
no event shall the Employer Entity be obligated to continue employment of any
former employee of Franklin for any specified term or period, except to the
extent otherwise provided in the Employment Agreements described in Section
5.10.
5.13 DIRECTORS AND OFFICERS PROTECTION
BB&T or a BB&T Subsidiary shall purchase and keep in force for a period of
three years after the Effective Time directors' and officers' liability
insurance providing coverage to directors and officers of Franklin for acts or
omissions occurring prior to the Effective Time. Such insurance shall provide
at least the same coverage and amounts as contained in Franklin's policy on
the date hereof; provided, that in no event shall the annual premium on such
policy exceed 150% of the annual premium payments on Franklin's policy in
effect as of the date hereof (the "Maximum Amount"). If the amount of the
premiums necessary to maintain or procure such insurance coverage exceeds the
Maximum Amount, BB&T shall use its reasonable efforts to maintain the most
advantageous policies of directors' and officers' liability insurance
obtainable for a premium equal to the Maximum Amount. Notwithstanding the
foregoing, BB&T further agrees to indemnify and hold harmless all individuals
who are or have been officers and directors of Franklin or any Franklin
Subsidiary prior to the Effective Time from any liability for acts or
omissions in such capacities (or in any other capacity undertaken at the
direction of Franklin) prior to the Effective Time, to the fullest extent that
such indemnification is provided pursuant to the Articles of Incorporation of
Franklin and is permitted under the DGCL.
5.14 FORBEARANCES OF BB&T
Except with the prior written consent of Franklin, which consent shall not
be arbitrarily or unreasonably withheld, between the date hereof and the
Effective Time, neither BB&T nor any BB&T Subsidiary shall take any action
which would or might be expected to (i) cause the business combination
contemplated hereby not to be accounted for as a pooling-of-interests or not
to constitute a reorganization under Section 368 of the Code; (ii) result in
any inaccuracy of a representation or warranty herein which would allow for
termination of this Agreement; (iii) cause any of the conditions precedent to
the transactions contemplated by this agreement to fail to be satisfied; (iv)
exercise the Option Agreement other than in accordance with its terms, or
dispose of the shares of Franklin Common Stock issuable upon exercise of the
option rights conferred thereby other than as permitted or contemplated by the
terms thereof; or (v) fail to comply in any material respect with any laws,
regulations, ordinances or governmental actions applicable to it and to the
conduct of its business.
5.15 REPORTS
Each of Franklin and BB&T shall file (and shall cause the Franklin
Subsidiaries and the BB&T Subsidiaries, respectively, to file), between the
date of this Agreement and the Effective Time, all reports required to be
filed by it with the Commission and any other regulatory authorities having
jurisdiction over such party, and shall deliver to BB&T or Franklin, as the
case may be, copies of all such reports promptly after the same are filed. If
financial statements are contained in any such reports filed with the
Commission, such financial statements will fairly present the consolidated
financial position of the entity filing such statements as of the dates
indicated and the consolidated results of operations, changes in shareholders'
equity, and cash flows for the periods then ended
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in accordance with U.S. generally accepted accounting procedures (subject in
the case of interim financial statements to the absence of notes and to normal
recurring year-end adjustments that are not material). As of their respective
dates, such reports filed with the Commission will comply in all material
respects with the Securities Laws and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to a regulatory authority other than
the Commission shall be prepared in accordance with requirements applicable to
such reports.
5.16 EXCHANGE LISTING
BB&T shall use its reasonable efforts to list, prior to the Effective Time,
on the NYSE, subject to official notice of issuance, the shares of BB&T Common
Stock to be issued to the holders of Franklin Common Stock pursuant to the
Merger, and BB&T shall give all notices and make all filings with the NYSE
required in connection with the transactions contemplated herein.
5.17 BOARD FOR METROPOLITAN WASHINGTON REGION
After the Closing, the individuals who are members of the board of directors
of Franklin National Bank as of the Effective Time shall have the right, with
the consent of the regional president of such region, to serve as members of
BB&T's Metropolitan Washington Regional advisory board for a minimum period of
three years following the Effective Time. The annual directors fees payable
for such three-year period to such individuals who shall serve as directors
shall equal the directors fees payable under the fee arrangement in effect for
Franklin National Bank directors immediately preceding the Effective Time.
Following the initial three-year period, fees payable to directors of BB&T's
Metropolitan Washington Regional advisory board shall be as determined by BB&T
in accordance with BB&T's standard policies as in effect from time to time.
The stock option plan currently in effect for Franklin directors shall be
discontinued prior to the Effective Time, and BB&T shall have no obligation to
continue such plan or to implement any successor plan, but any options granted
thereunder prior to the Effective Time shall be subject to Section 2.9. In
addition, those members of the local advisory boards of Franklin National Bank
shall have the right, with the consent of the regional president of the
Metropolitan Washington Region, to remain on such local boards for three years
following the Effective Time, but such members shall be compensated in
accordance with BB&T's standard policies.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS PRECEDENT--BB&T AND FRANKLIN
The respective obligations of BB&T and Franklin to effect the transactions
contemplated by this Agreement shall be subject to satisfaction or waiver of
the following conditions at or prior to the Effective Time:
(a) All corporate action necessary to authorize the execution, delivery and
performance of this Agreement and the Plan of Merger, and consummation of the
transactions contemplated hereby and thereby, shall have been duly and validly
taken, including without limitation the approval of the shareholders of
Franklin of the Agreement and the Plan of Merger set forth in Section 2.2;
(b) The Registration Statement (including any post-effective amendments
thereto) shall be effective under the Securities Act, and BB&T shall have
received all state securities or "Blue Sky" permits or other authorizations,
or confirmations as to the availability of an exemption from registration
requirements as may be necessary, and no proceedings shall be pending or to
the knowledge of BB&T threatened by the Commission or any state "Blue Sky"
securities administration to suspend the effectiveness of such Registration
Statement; and
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the BB&T Common Stock to be issued as contemplated in the Plan of Merger shall
have either been registered or be subject to exemption from registration under
applicable state securities laws;
(c) All approvals of the transactions contemplated herein from the Federal
Reserve Board and any other state or federal government agency, department or
body, the approval of which is required for the consummation of the Merger,
shall have been received and all waiting periods with respect to such
approvals shall have expired;
(d) None of BB&T, any of the BB&T Subsidiaries, Franklin or any of the
Franklin Subsidiaries shall be subject to any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
consummation of the transactions contemplated by this Agreement;
(e) Franklin and BB&T shall have received an opinion of BB&T's legal
counsel, in form and substance satisfactory to Franklin and BB&T,
substantially to the effect that the Merger will constitute one or more
reorganizations under Section 368 of the Code and that the shareholders of
Franklin will not recognize any gain or loss to the extent that such
shareholders exchange shares of Franklin Common Stock for shares of BB&T
Common Stock; and
(f) BB&T shall have received letters, dated as of the date of filing of the
Registration Statement with the Commission and as of the Effective Time,
addressed to BB&T, in form and substance reasonably satisfactory to BB&T, from
Arthur Andersen, LLP to the effect that the Merger will qualify for pooling-
of-interests accounting treatment.
6.2 CONDITIONS PRECEDENT--FRANKLIN
The obligations of Franklin to effect the transactions contemplated by this
Agreement shall be subject to the satisfaction of the following additional
conditions at or prior to the Effective Time, unless waived by Franklin
pursuant to Section 7.5:
(a) All representations and warranties of BB&T shall be evaluated as of the
date of this Agreement and as of the Effective Time as though made on and as
of the Effective Time (or on the date designated in the case of any
representation and warranty which specifically relates to an earlier date),
except as otherwise contemplated by this Agreement or consented to in writing
by Franklin. The representations and warranties of BB&T set forth in Sections
4.1, 4.2, 4.3, 4.4 and 4.11 shall be true and correct (except for inaccuracies
which are de minimis in amount). There shall not exist inaccuracies in the
representations and warranties of BB&T set forth in this Agreement (including
the representations and warranties set forth in Sections 4.1, 4.2, 4.3, 4.4
and 4.11) such that the aggregate effect of such inaccuracies has, or is
reasonably likely to have, a Material Adverse Effect on BB&T; provided that,
for purposes of this sentence only, those representations and warranties which
are qualified by references to "material" or "Material Adverse Effect" shall
be deemed not to include such qualifications.
(b) BB&T shall have performed in all material respects all obligations and
complied in all material respects with all covenants required by this
Agreement.
(c) BB&T shall have delivered to Franklin a certificate, dated the Closing
Date and signed by its Chairman or President or an Executive Vice President,
to the effect that the conditions set forth in Sections 6.1(a), 6.1(b),
6.1(c), 6.2(a) and 6.2(b), to the extent applicable to BB&T, have been
satisfied and that there are no actions, suits, claims, governmental
investigations or procedures instituted, pending or, to the best of such
officer's knowledge, threatened that reasonably may be expected to have a
Material Adverse Effect on BB&T or that present a claim to restrain or
prohibit the transactions contemplated herein or in the Plan of Merger.
(d) Franklin shall have received opinions of counsel to BB&T in the form
reasonably acceptable to Franklin's legal counsel, which form shall be
presented to Franklin's legal counsel within thirty days following the date
hereof.
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(e) The shares of BB&T Common Stock issuable pursuant to the Merger shall
have been approved for listing on the NYSE, subject to official notice of
issuance.
6.3 CONDITIONS PRECEDENT--BB&T
The obligations of BB&T to effect the transactions contemplated by this
Agreement shall be subject to satisfaction of the following additional
conditions at or prior to the Effective Time, unless waived by BB&T pursuant
to Section 7.5:
(a) All representations and warranties of Franklin shall be evaluated as of
the date of this Agreement and as of the Effective Time as though made on and
as of the Effective Time (or on the date designated in the case of any
representation and warranty which specifically relates to an earlier date),
except as otherwise contemplated by this Agreement or consented to in writing
by BB&T. The representations and warranties of Franklin set forth in Sections
3.1, 3.2 (except the last sentence thereof), 3.3 (except the last sentence
thereof), 3.4 (except the last sentence thereof), 3.5(a), 3.5(b)(i), 3.23 and
3.24 shall be true and correct (except for inaccuracies which are de minimis
in amount). There shall not exist inaccuracies in the representations and
warranties of Franklin set forth in this Agreement (including the
representations and warranties set forth in the Sections designated in the
preceding sentence) such that the effect of such inaccuracies individually or
in the aggregate has, or is reasonably likely to have, a Material Adverse
Effect on Franklin and the Franklin Subsidiaries taken as a whole; provided
that, for purposes of this sentence only, those representations and warranties
which are qualified by references to "material" or "Material Adverse Effect"
shall be deemed not to include such qualifications.
(b) No regulatory approval shall have imposed any condition or requirement
which, in the reasonable opinion of the Board of Directors of BB&T, would so
materially adversely affect the business or economic benefits to BB&T of the
transactions contemplated by this Agreement as to render consummation of such
transactions inadvisable or unduly burdensome; provided that BB&T shall have
used reasonable efforts to cause such conditions or requirements to be removed
or modified as appropriate.
(c) Franklin shall have performed in all material respects all obligations
and complied in all material respects with all covenants required by this
Agreement.
(d) Franklin shall have delivered to BB&T a certificate, dated the Closing
Date and signed by its Chairman or President, to the effect that the
conditions set forth in Sections 6.1(a), 6.1(c), 6.3(a) and 6.3(c), to the
extent applicable to Franklin, have been satisfied and that there are no
actions, suits, claims, governmental investigations or procedures instituted,
pending or, to the best of such officer's knowledge, threatened that
reasonably may be expected to have a Material Adverse Effect on Franklin or
that present a claim to restrain or prohibit the transactions contemplated
herein or in the Plan of Merger.
(e) BB&T shall have received opinions of counsel to Franklin in the form
reasonably acceptable to BB&T's legal counsel, which form shall be presented
by Franklin's legal counsel within thirty days following the date hereof.
(f) BB&T shall have received the written agreements from affiliates as
specified in Section 5.11 to the extent necessary, in the reasonable judgment
of BB&T, to ensure that the Merger will be accounted for as a pooling-of-
interests under GAAP, and to promote compliance with Rule 145 promulgated by
the Commission.
ARTICLE VII
TERMINATION, DEFAULT, WAIVER AND AMENDMENT
7.1 TERMINATION
This Agreement may be terminated:
(a) At any time prior to the Effective Time, by the mutual consent in
writing of the parties hereto.
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(b) At any time prior to the Effective Time, by either party (i) in the
event of a material breach by the other party of any covenant or agreement
contained in this Agreement, or (ii) in the event of an inaccuracy of any
representation or warranty of the other party contained in this Agreement,
which inaccuracy would provide the nonbreaching party the ability to refuse to
consummate the Merger under the applicable standard set forth in Section
6.2(a) in the case of Franklin and Section 6.3(a) in the case of BB&T; and, in
the case of (i) or (ii), if such breach or inaccuracy has not been cured by
the earlier of thirty days following written notice of such breach to the
party committing such breach or the Effective Time.
(c) At any time prior to the Effective Time, by either party hereto in
writing, if any of the conditions precedent to the obligations of the other
party to consummate the transactions contemplated hereby cannot be satisfied
or fulfilled prior to the Closing Date, and the party giving the notice is not
in breach of any of its representations, warranties, covenants or undertakings
herein.
(d) At any time, by either party hereto in writing, if any of the
applications for prior approval referred to in Section 5.4 are denied, and the
time period for appeals and requests for reconsideration has run.
(e) At any time, by either party hereto in writing, if the shareholders of
Franklin do not approve the Agreement and the Plan of Merger.
(f) At any time following October 31, 1998 by either party hereto in
writing, if the Effective Time has not occurred by the close of business on
such date, and the party giving the notice is not in breach of any of its
representations, warranties, covenants or undertakings herein.
(g) At any time prior to 11:59 p.m. on January 30, 1998 by BB&T in writing,
if BB&T determines in its sole good faith judgment, through review of
information Disclosed by Franklin, or otherwise, that the financial condition,
results of operations, business or business prospects of Franklin and of the
Franklin Subsidiaries, taken as a whole, are materially adversely different
from BB&T's reasonable expectations with respect thereto on the date of
execution of this Agreement; provided that BB&T shall inform Franklin upon
such termination as to the reasons for BB&T's determination. The fact that
Franklin has Disclosed information shall not prevent BB&T from terminating
this Agreement pursuant to this Section 7.1(g) on account of such information.
(h) By Franklin at any time during the five-calendar-day period commencing
two Business Days after the Determination Date if both of the following
conditions are satisfied:
(1) the Closing Value shall be less than $51.00; and
(2) (i) the quotient obtained by dividing the Closing Value by $63.75
(such number being referred to herein as the "BB&T Ratio") shall be less
than (ii) eighty-five percent of the quotient obtained by dividing the
Index Price on the Determination Date by the Index Price on the Starting
Date;
subject, however, to the following three sentences. If Franklin determines not
to consummate the Merger pursuant to this Section 7.1(h), it shall give prompt
written notice of its election to terminate to BB&T, which notice may be
withdrawn at any time prior to the Effective Time. During the five-day period
commencing with its receipt of such notice, BB&T shall have the option, in the
case of satisfaction of the condition in clause (1), to elect to increase the
Exchange Ratio (rounded to the nearest thousandth) to a number such that the
value (based on the Closing Value) of the portion of a share of BB&T Common
Stock to be received in the Merger in exchange for each share of Franklin
Common Stock shall equal the value (based on the Closing Value) that would
have been received if the Closing Value were $51.00. The election contemplated
by the preceding sentence shall be made by giving notice to Franklin of such
election and the revised Exchange Ratio, whereupon no termination shall have
occurred pursuant to this Section 7.1(h), and this Agreement shall remain in
effect in accordance with its terms (except as the Exchange Ratio shall have
been so modified), and any references in this Agreement to "Exchange Ratio"
shall thereafter be deemed to refer to the Exchange Ratio as adjusted pursuant
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to this Section 7.1(h). If the Closing Date shall occur during the five-day
period such option is in effect, the Closing Date shall be extended until the
fifth Business Day following the close of such five-day period.
For purposes of this Section 7.1(h), the following terms shall have the
meanings indicated:
"Closing Value" shall mean the average closing price per share of BB&T
Common Stock on the NYSE Composite Transactions List (as reported by The Wall
Street Journal--Eastern Edition) on the twenty trading days (determined by
excluding days on which the NYSE is closed) immediately preceding the tenth
calendar day preceding the Effective Time (the tenth day to be determined by
counting the day preceding the Effective Time as the first day).
"Determination Date" shall mean the tenth calendar day preceding the date
designated by BB&T as the Closing Date.
"Index Group" shall mean the 14 bank holding companies listed below, the
common stocks of all of which shall be publicly traded and as to which there
shall not have been, since the Starting Date and before the Determination
Date, any public announcement of a proposal for such company to be acquired or
for such company to acquire another company or companies in transactions with
a value exceeding 25% of the acquiror's market capitalization. In the event
that any such company or companies are removed from the Index Group, the
weights (which have been determined based upon the number of shares of
outstanding common stock as reflected on the last quarterly report on Form 10-
Q for each respective company) shall be redistributed proportionately for
purposes of determining the Index Price. The 14 bank holding companies and the
weights attributed to them are as follows:
<TABLE>
<CAPTION>
%
BANK HOLDING COMPANIES WEIGHTING
- ---------------------- ---------
<S> <C>
Wachovia Corp......................................................... 8.99
Fifth Third Bancorp................................................... 8.83
Comerica Inc.......................................................... 6.00
Summit Bancorp........................................................ 10.02
Mercantile Bancorp.................................................... 7.43
Northern Trust Corp................................................... 6.36
Huntington Bancshares Inc............................................. 10.89
Firstar Corp.......................................................... 8.25
Crestar Financial Corp................................................ 6.28
SouthTrust Corp....................................................... 5.69
Regions Financial Corp................................................ 7.77
Marshall & Ilsley Corp................................................ 5.07
AmSouth Bancorp....................................................... 4.60
Union Planters Corp................................................... 3.83
------
Total............................................................... 100.00%
======
</TABLE>
"Index Price" on a given date shall mean the weighted average (weighted in
accordance with the "% Weighting" listed above) of the closing sales prices of
the companies composing the Index Group (determined as provided with respect
to the Closing Value).
"Starting Date" shall mean the date of this Agreement.
If any company belonging to the Index Group or BB&T declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares, or similar transaction between the Starting Date and the
Determination Date, the prices for the common stock of such company or BB&T
shall be appropriately adjusted for the purposes of applying this Section
7.1(h).
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7.2 EFFECT OF TERMINATION
In the event this Agreement and the Plan of Merger is terminated pursuant to
Section 7.1, both this Agreement and the Plan of Merger shall become void and
have no effect, except that (i) the provisions hereof relating to
confidentiality and expenses set forth in Sections 5.7 and 8.1, respectively,
shall survive any such termination and (ii) a termination pursuant to Section
7.1(b) shall not relieve the breaching party from liability for an uncured
breach of the covenant, agreement, understanding, representation or warranty
giving rise to such termination. The BB&T Option Agreement shall be governed
by its own terms.
7.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants in this Agreement or the Plan
of Merger or in any instrument delivered pursuant hereto or thereto shall
expire on, and be terminated and extinguished at, the Effective Time, other
than covenants that by their terms are to be performed after the Effective
Time, provided that no such representations, warranties or covenants shall be
deemed to be terminated or extinguished so as to deprive BB&T or Franklin (or
any director, officer or controlling person thereof) of any defense at law or
in equity which otherwise would be available against the claims of any person,
including, without limitation, any shareholder or former shareholder of either
BB&T or Franklin, the aforesaid representations, warranties and covenants
being material inducements to consummation by BB&T and Franklin of the
transactions contemplated herein.
7.4 DEFAULT; REMEDIES
(a) This Section 7.4 shall apply in the event that either party refuses to
consummate the transactions contemplated by this Agreement notwithstanding the
satisfaction in all material respects of the conditions precedent to its
obligation to close, or if any default under or breach of any representation,
warranty or covenant of this Agreement ("Default") on the part of a party
("Defaulting Party") shall have occurred that results (after all opportunities
to cure) in the failure to consummate the transactions contemplated hereby. In
such event the non-defaulting party shall be entitled to seek and obtain,
without limitation, specific performance pursuant to subsection (b) of this
Section 7.4, or to seek and obtain monetary damages from the Defaulting Party
plus any fees and expenses, including reasonable attorneys' and other
professionals' fees and disbursements, in connection with the pursuit of the
remedies hereunder.
(b) In the event of Default, the Non-Defaulting Party may seek to obtain, in
addition to other remedies at law or in equity, an order of specific
performance against the Defaulting Party from a court of competent
jurisdiction. In addition, the Non-Defaulting Party shall be entitled to
obtain from the Defaulting Party court costs and reasonable attorneys' and
other professionals' fees and disbursements incurred by it in enforcing its
rights hereunder. As a condition to seeking specific performance hereunder,
BB&T shall not be required to have tendered the Merger Consideration, but
shall be ready, willing and able to do so.
7.5 WAIVER
Except with respect to any required regulatory approval, each party hereto,
by written instrument signed by an executive officer of such party, may at any
time (whether before or after approval of the Agreement and the Plan of Merger
by the Franklin shareholders) extend the time for the performance of any of
the obligations or other acts of the other party hereto and may waive (i) any
inaccuracies of the other party in the representations or warranties contained
in this Agreement, the Plan of Merger or any document delivered pursuant
hereto or thereto, (ii) compliance with any of the covenants, undertakings or
agreements of the other party, or satisfaction of any of the conditions
precedent to its obligations, contained herein or in the Plan of Merger, or
(iii) the performance by the other party of any of its obligations set out
herein or therein; provided that no such extension or waiver, or amendment or
supplement pursuant to this Section 7.5, executed after approval by the
Franklin shareholders of this Agreement and the Plan of Merger, shall reduce
either the number of shares of BB&T Common Stock into which each share of
Franklin Common Stock shall be converted in the Merger or the payment terms
for fractional interests.
I-31
<PAGE>
7.6 AMENDMENT OR SUPPLEMENT
This Agreement or the Plan of Merger may be amended or supplemented at any
time in writing by mutual agreement of BB&T and Franklin, subject to the
proviso to Section 7.5.
ARTICLE VIII
MISCELLANEOUS
8.1 EXPENSES
Each party hereto shall bear and pay all costs and expenses incurred by it
in connection with the transactions contemplated by this Agreement, including
fees and expenses of its own financial consultants, accountants and counsel;
provided, however, that the printing costs incurred in connection with the
Registration Statement and the Proxy Statement/Prospectus shall be borne 50%
by BB&T and 50% by Franklin.
8.2 ENTIRE AGREEMENT
This Agreement and the BB&T Option Agreement contain the entire agreement
between the parties with respect to the transactions contemplated hereunder
and thereunder and supersede all arrangements or understandings with respect
thereto, written or oral, entered into on or before the date hereof, other
than documents referred to herein or therein. The terms and conditions of this
Agreement and the BB&T Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and thereto and their respective successors.
Nothing in this Agreement or the BB&T Option Agreement, expressed or implied,
is intended to confer upon any party, other than the parties hereto and
thereto, and their respective successors, any rights, remedies, obligations or
liabilities, except for rights of directors, officers and employees of
Franklin to enforce rights in Sections 5.13 and 5.17 applicable to them.
Notwithstanding anything herein to the contrary, nothing in this Agreement
shall prohibit accurate disclosure by either party of information that is
required to be disclosed by applicable federal law or regulations or rules of
the NASD or NYSE.
8.3 NO ASSIGNMENT
Neither of the parties hereto may assign any of its rights or obligations
under this Agreement to any other person, except upon the prior written
consent of the other party.
8.4 NOTICES
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent
by nationally recognized overnight express courier or by facsimile
transmission with receipt confirmed, addressed or directed as follows:
If to Franklin:
Robert P. Pincus
Franklin Bancorporation, Inc.
1722 Eye Street, N.W.
Washington, DC 20006
Fax: 202-872-0512
With a required copy (not itself constituting notice) to:
Jerry L. Shulman
Williams & Connolly
725 Twelfth Street, N.W.
Washington, D.C. 20005
Telephone: 202-434-5510
Fax: 202-434-5029
I-32
<PAGE>
If to BB&T:
Scott E. Reed
150 South Stratford Road
4th Floor
Winston-Salem, North Carolina 27104
Telephone: 910-733-0340
Fax: 910-733-2296
With a required copy (not itself constituting notice) to:
William A. Davis, II
Womble Carlyle Sandridge & Rice, PLLC
200 West Second Street
Winston-Salem, North Carolina 27102
Telephone: 910-721-3624
Fax: 910-733-8364
Any party may by notice change the address to which notice or other
communications to it are to be delivered. Notice shall be deemed received upon
actual receipt or upon tender and rejection by the intended recipient.
8.5 CAPTIONS
The captions contained in this Agreement are for reference only and are not
part of this Agreement.
8.6 COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
8.7 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of North Carolina applicable to agreements made and entirely
to be performed within such jurisdiction, without regard to any otherwise
applicable provisions of conflict of laws, except to the extent the DGCL and
federal law may be applicable.
8.8 STATE LAW AND DISTRICT OF COLUMBIA
Any reference in this Agreement to state law, rules and regulations shall
include the laws, rules and regulations of the District of Columbia.
8.9 ARBITRATION OF DISPUTES
If any claim shall arise under this Agreement which has not been resolved by
the parties within thirty days following notice by the claiming party or
parties ("Claimant") to the other party or parties ("Recipient"), either the
Claimant or the Recipient may submit the claim for resolution by binding
arbitration in accordance with the Federal Arbitration Act (or, if not
applicable, applicable state law). Arbitration shall be by one arbitrator or a
panel of three arbitrators experienced in the matters at issue and selected in
accordance with the Rules for Non-Administered Arbitration of Business
Disputes (the "Rules") of the Center for Public Resources, New York, New York.
If the Claimant and Recipient cannot agree on the number of arbitrators, a
panel of three arbitrators shall be used. Arbitration will be held in
Richmond, Virginia, and shall be conducted in accordance with the Rules. The
decision of the arbitrator(s) shall be final and binding upon the parties. The
determination of which
I-33
<PAGE>
party (or combination thereof) shall bear the costs and expenses incurred in
connection with any such arbitration proceedings shall be determined by the
arbitrator(s). Any decision of the arbitrator(s) and satisfaction thereof may
be enforced by the party entitled thereto in any court having jurisdiction
over the subject matter or the parties. All unresolved claims arising under
this Agreement shall be exclusively resolved pursuant to the terms of this
Section 8.9.
8.10 1997 MERGER AGREEMENT
Effective as of December 16, 1997 (the date of execution of the 1997 Merger
Agreement), this Agreement amends and supersedes in its entirety the 1997
Merger Agreement, and following execution hereof the 1997 Merger Agreement
shall have no further force and effect. All references in this Agreement to
"the date hereof" shall mean December 16, 1997, and all agreements, covenants,
representations and warranties set forth in this Agreement shall be deemed to
have been made on December 16, 1997.
8.11 BB&T OPTION AGREEMENT
The parties acknowledge that this Agreement represents ongoing consideration
for the BB&T Option Agreement, and that the BB&T Option Agreement shall
continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed in counterparts by their
duly authorized officers, all as of the day and year first above written.
BB&T CORPORATION
By: /s/ John A. Allison
---------------------------------
Title: Chairman and Chief Executive
Officer
--------------------------------
BB&T FINANCIAL CORPORATION OF
VIRGINIA
By: /s/ Kelly S. King
---------------------------------
Title: Senior Executive Vice
President
--------------------------------
FRANKLIN BANCORPORATION, INC.
By: /s/ Robert P. Pincus
---------------------------------
Title: President and Chief Executive
Officer
--------------------------------
I-34
<PAGE>
EXHIBIT "A"
EXCHANGE RATIO
The Exchange Ratio shall be the ratio set forth below to the right of the
Closing Value (as defined in Section 7.1(h)).
<TABLE>
<CAPTION>
EXCHANGE
CLOSING VALUE* RATIO
- -------------- --------
<S> <C>
Less than $54.50....................................................... 0.3743
$54.50............................................................... 0.3743
$55.00............................................................... 0.3731
$55.50............................................................... 0.3720
$56.00............................................................... 0.3708
$56.50............................................................... 0.3696
$57.00............................................................... 0.3685
$57.50............................................................... 0.3673
$58.00............................................................... 0.3662
$58.50............................................................... 0.3650
$59.00............................................................... 0.3638
$59.50............................................................... 0.3627
$60.00............................................................... 0.3615
$60.50............................................................... 0.3603
$61.00............................................................... 0.3592
$61.50............................................................... 0.3580
$62.00............................................................... 0.3568
$62.50............................................................... 0.3557
$63.00............................................................... 0.3545
$63.50............................................................... 0.3534
$64.00............................................................... 0.3522
$64.50............................................................... 0.3510
$65.00............................................................... 0.3500
Greater than $65.00.................................................... 0.3500
</TABLE>
- --------
* For purposes of this Exhibit "A," the Closing Value shall be rounded to the
nearest half or whole dollar figure, and any Closing Value at the midpoint
between two Closing Values listed above (e.g., $63.25) shall be rounded to
the nearest whole dollar figure.
<PAGE>
ANNEX A
ARTICLES OF MERGER
OF
FRANKLIN BANCORPORATION, INC.
WITH AND INTO
BB&T CORPORATION
Pursuant to the provisions of Section 55-11-05 of the General Statutes of
North Carolina, BB&T Corporation, a North Carolina corporation ("BB&T"), the
surviving corporation, submits these Articles of Merger for the purpose of
merging Franklin Bancorporation, Inc., a Delaware corporation ("Franklin")
into BB&T (the "Merger").
ARTICLE I
The Plan of Merger attached hereto as Annex A and incorporated herein by
reference (the "Plan of Merger") was duly approved in the manner prescribed by
law by the shareholders of Franklin on the day of , 1998, pursuant to
the terms of the Amended and Restated Agreement and Plan of Reorganization,
dated as of December 16, 1997, with BB&T and Franklin as parties thereto.
ARTICLE II
Approval of the Plan of Merger by the shareholders of BB&T was not required.
ARTICLE III
The merger shall become effective at .m. on , 1998.
This the day of , 1998.
BB&T CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
--------------------------------
FRANKLIN BANCORPORATION, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
--------------------------------
<PAGE>
ANNEX A
PLAN OF MERGER
OF
FRANKLIN BANCORPORATION, INC.
WITH AND INTO
BB&T CORPORATION
SECTION 1. CORPORATIONS PROPOSING TO MERGE AND SURVIVING
CORPORATION. Franklin Bancorporation, Inc., a Delaware corporation
("Franklin"), shall be merged (the "Merger") with and into BB&T Corporation, a
North Carolina corporation ("BB&T"), pursuant to the terms and conditions of
this Plan of Merger (the "Plan of Merger") and of the Amended and Restated
Agreement and Plan of Reorganization, dated as of December 16, 1997, (the
"Agreement"), by and among Franklin, BB&T and BB&T Financial Corporation of
Virginia. The effective time for the Merger (the "Effective Time") shall be
set forth in the Articles of Merger to be filed with the Office of the
Secretary of State of North Carolina and the Certificate of Merger to be filed
with the Delaware Department of State. BB&T shall continue as the surviving
corporation (the "Surviving Corporation") in the Merger and the separate
corporate existence of Franklin shall cease. The name of the surviving
corporation shall be BB&T Corporation.
SECTION 2. EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 8-259 of the General Corporation Law of the State of Delaware
(the "DGCL") and in Section 55-11-06 of the North Carolina Business
Corporation Act (the "NCBCA").
SECTION 3. ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and the Bylaws of BB&T as in effect immediately prior to the
Effective Time shall remain in effect as the Articles of Incorporation and
Bylaws of the Surviving Corporation following the Effective Time until changed
in accordance with their terms and the NCBCA.
SECTION 4. CONVERSION OF SHARES.
(a) At the Effective Time, each share of common stock, par value $0.10, of
Franklin ("Franklin Common Stock") outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into and become the right to receive
shares of common stock, $5.00 par value per share, of BB&T ("BB&T Common
Stock") as described in Section 5.
(b) At the Effective Time, each share of the common stock of BB&T issued and
outstanding immediately prior to the Effective Time shall continue to be
issued and outstanding.
SECTION 5. MERGER CONSIDERATION. As used herein, the term "Merger
Consideration" shall mean the whole shares of BB&T Common Stock to be
exchanged for each share of Franklin Common Stock issued and outstanding as of
the Effective Time and cash (without interest) to be payable in exchange for
any fractional share of BB&T Common Stock which would otherwise be exchanged
for a share of Franklin Common Stock, determined as follows:
(a) The number of shares of BB&T Common Stock to be issued in exchange for
each issued and outstanding share of Franklin Common Stock shall be in the
ratio as set forth on Exhibit "A" (the "Exchange Ratio") attached hereto and
incorporated herein by reference based on the Closing Value. "Closing Value"
shall mean the average closing price per share of BB&T Common Stock on the
NYSE Composite Transactions List (as reported by The Wall Street Journal--
Eastern Edition) on the twenty trading days (determined by excluding days on
which the NYSE is closed) immediately preceding the tenth calendar day
preceding the Effective Time (the tenth day to be determined by counting the
day preceding the Effective Time as the first day).
(b) The amount of cash payable with respect to any fractional share of BB&T
Common Stock shall be determined by multiplying the fractional part of such
share by the closing price per share of BB&T Common
<PAGE>
Stock on the NYSE Composite Transactions List (as reported by The Wall Street
Journal--Eastern Edition) of the last trade of BB&T Common Stock on the
trading day immediately preceding the Effective Time. No person will be
entitled to dividends, voting rights or any other rights as a BB&T shareholder
in respect of any fractional share.
SECTION 6. CONVERSION OF STOCK OPTIONS. At the Effective Time, each Stock
Option, as defined hereinbelow, then outstanding (and which by its terms does
not lapse on or before the Effective Time), whether or not then exercisable,
shall be converted into and become an option under the BB&T 1995 Omnibus Stock
Incentive Plan or successor plan thereto (the "BB&T Option Plan"), and shall
be governed by the terms and conditions of the BB&T Option Plan. In making
such conversion, (i) the number of shares of BB&T Common Stock subject to each
such Stock Option shall be the number of whole shares of BB&T (omitting any
fractional share) determined by multiplying the number of shares of Franklin
Common Stock subject to such Stock Option immediately prior to the Effective
Time by the Exchange Ratio, and (ii) the per share exercise price under each
such Stock Option shall be adjusted by dividing the per share exercise price
under each such Stock Option by the Exchange Ratio and rounding up to the
nearest cent. In addition, each such Stock Option which is an "incentive stock
option" shall be adjusted as required by Section 424 of the Code, and the
Regulations promulgated thereunder, so as to continue as an incentive stock
option under Section 424(a) of the Code, and so as not to constitute a
modification, extension, or renewal of the option, within the meaning of
Section 424(h) of the Code. BB&T and Franklin agree to take all necessary
steps to effectuate the foregoing provisions of this Section 6. Each grant of
a converted option to any individual who subsequent to the Merger will be a
director or officer of BB&T as construed under Rule 16b-3 shall, as a
condition to such conversion, be approved in accordance with the provisions of
Rule 16b-3. As soon as practicable following the Effective Time, BB&T shall
deliver to the participants receiving converted options under the BB&T Option
Plan an appropriate notice setting forth such participant's rights pursuant
thereto. BB&T has reserved and shall continue to reserve under the BB&T Option
Plan adequate shares of BB&T Common Stock for delivery upon exercise of any
such converted options. As soon as practicable after the Effective Time, if it
has not already done so, BB&T shall file a registration statement on Form S-3
or Form S-8, as the case may be (or any successor or other appropriate forms),
with respect to the shares of BB&T Common Stock subject to Stock Options and
shall use its reasonable efforts to maintain the effectiveness of such
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain
outstanding. With respect to those individuals who subsequent to the Merger
will be subject to the reporting requirements under Section 16(a) of the
Exchange Act, where applicable, BB&T shall administer the Stock Option Plans,
as defined hereinbelow, assumed pursuant to this Section 6 in a manner that
complies with Rule 16b-3 promulgated under the Exchange Act to the extent
necessary to preserve for such individuals the benefits of Rule 16b-3 to the
extent such benefits were available to them prior to the Effective Time.
Franklin hereby represents that the Stock Option Plans in their current form
comply with Rule 16b-3 to the extent, if any, required as of the date hereof.
"Stock Option" shall mean, collectively, any option granted under the Stock
Option Plans and unexercised on the date of the Agreement to acquire shares of
Franklin Common Stock, aggregating 721,919 shares.
"Stock Option Plans" shall mean Franklin's Second Amended and Restated Stock
Option Plan, 1997 Employee Stock Option Plan and Nondiscretionary Stock Option
Plan.
SECTION 7. NO FRACTIONAL SHARES. Notwithstanding any other term or provision
hereof, no fraction of a share of BB&T Common Stock, and no certificates or
script therefor or other evidence of ownership thereof, will be issued in
connection with the conversion of Franklin Common Stock in the Merger, and no
right to receive cash in lieu thereof shall entitle the holder thereof to any
voting or other rights of a holder of shares or fractional share interests of
the Surviving Corporation. In lieu of such fractional shares, any holder of
shares who would otherwise be entitled to fractional shares of BB&T Common
Stock will, upon receipt by the Surviving Corporation of the Instruction
Letter and other documents described in Section 2.8(d) of the Agreement, be
paid the cash value of each such fraction, computed in accordance with the
ratio set forth in Section 5 above.
<PAGE>
SECTION 8. AMENDMENT. At any time before the Effective Time, this Plan of
Merger may be amended, provided that: (i) any such amendment is approved by the
Boards of Directors of Franklin and BB&T; and (ii) no such amendment made
subsequent to the submission of this Plan of Merger to the shareholders of
Franklin shall have any of the effects specified in Section 8-251(d) of the
DGCL without the approval of the shareholders affected thereby.
<PAGE>
EXHIBIT "A"
EXCHANGE RATIO
The Exchange Ratio shall be the ratio set forth below to the right of the
Closing Value.
<TABLE>
<CAPTION>
EXCHANGE
CLOSING VALUE* RATIO
- -------------- --------
<S> <C>
Less than $54.50....................................................... 0.3743
$54.50............................................................... 0.3743
$55.00............................................................... 0.3731
$55.50............................................................... 0.3720
$56.00............................................................... 0.3708
$56.50............................................................... 0.3696
$57.00............................................................... 0.3685
$57.50............................................................... 0.3673
$58.00............................................................... 0.3662
$58.50............................................................... 0.3650
$59.00............................................................... 0.3638
$59.50............................................................... 0.3627
$60.00............................................................... 0.3615
$60.50............................................................... 0.3603
$61.00............................................................... 0.3592
$61.50............................................................... 0.3580
$62.00............................................................... 0.3568
$62.50............................................................... 0.3557
$63.00............................................................... 0.3545
$63.50............................................................... 0.3534
$64.00............................................................... 0.3522
$64.50............................................................... 0.3510
$65.00............................................................... 0.3500
Greater than $65.00.................................................... 0.3500
</TABLE>
- --------
* For purposes of this Exhibit "A," the Closing Value shall be rounded to the
nearest half or whole dollar figure, and any Closing Value at the midpoint
between two Closing Values listed above (e.g., $63.25) shall be rounded to
the nearest whole dollar figure.
<PAGE>
APPENDIX II
LOGO
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
May 19, 1998
Board of Directors
Franklin Bancorporation, Inc.
1722 I (Eye) Street, N.W.
Washington, D.C. 20006
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR"), provide
you with its opinion as to the fairness, from a financial point of view, to
holders of common stock ("Stockholders") of Franklin Bancorporation, Inc.
("Franklin" or the "Company") of the Exchange Ratio (as hereinafter defined) to
be received by such holders pursuant to the Agreement and Plan of
Reorganization between Franklin and BB&T Corporation ("BB&T"), dated as of
December 16, 1997, as amended and restated (the "Merger Agreement"), pursuant
to which Franklin will be merged with and into BB&T (the "Merger"). The Merger
Agreement provides, among other things, that each issued and outstanding share
of common stock of Franklin shall be converted into the right to receive that
number of shares of BB&T common stock set forth on Exhibit A to the Merger
Agreement corresponding to the "Closing Value" of BB&T Common Stock as set
forth on such Exhibit A (the "Exchange Ratio"), subject to certain terms and
conditions including pricing "collars" on the number of shares of BB&T common
stock to be received by the Stockholders. Additionally, each option to purchase
shares of Franklin common stock shall be converted into an option to purchase
BB&T common stock, subject to certain terms and conditions. The Merger
Agreement will be considered at a meeting of the Stockholders of Franklin. The
terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
In delivering this opinion, FBR has completed the following tasks:
1. reviewed BB&T Reports to Stockholders for the fiscal years ended December
31, 1996 and 1997 and BB&T Annual Reports on Form 10-K filed with the
Securities and Exchange Commission (the "SEC") for the fiscal years ended
December 31, 1995, 1996 and 1997; reviewed the Annual Proxy Statement dated
March 19, 1997; reviewed BB&T Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997, September 30, 1997 and March
31, 1998 filed with the SEC; reviewed BB&T Current Reports on Form 8-K dated
August 15, 1997 and May 13, 1998;
2. reviewed Franklin Annual Reports to Stockholders for the fiscal years ended
December 31, 1996 and 1997 and Franklin Annual Reports on Form 10-K filed
with the SEC for the fiscal years ended December 31, 1996 and 1997; reviewed
Franklin Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997, June 30, 1997, September 30, 1997 and March 31, 1998 filed with the
SEC;
3. reviewed the reported market prices and trading activity for the BB&T common
stock for the period March 1, 1995 through May 18, 1998;
<PAGE>
LOGO
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
Board of Directors
Franklin Bancorporation, Inc.
May 19, 1998
Page 2
4. discussed the financial condition, results of operations, earnings
projections, business and prospects of Franklin and BB&T with the
managements of Franklin and BB&T;
5. compared the results of operations and financial condition of Franklin and
BB&T with those of certain publicly-traded financial institutions (or their
holding companies) that FBR deemed to be reasonably comparable to Franklin
or BB&T, as the case may be;
6. reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions that FBR deemed to be reasonably comparable to the
Merger;
7. reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions entered into by BB&T;
8. reviewed a copy of the Merger Agreement; and
9. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other
information concerning Franklin and BB&T furnished to it by Franklin or BB&T,
or the publicly-available financial and other information regarding Franklin,
BB&T and other financial institutions (or their holding companies). FBR has
assumed that all such information is accurate and complete but has no reason
to believe otherwise. FBR has further relied on the assurances of management
of Franklin and BB&T that they are not aware of any facts that would make such
financial or other information relating to such entities inaccurate or
misleading. With respect to financial forecasts for Franklin provided to FBR
by its management, FBR has assumed, for purposes of this opinion, that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of such management at the time of preparation as to
the future financial performance of Franklin. FBR has assumed that there has
been no undisclosed material change in Franklin's assets, financial condition,
result of operations, business or prospects since September 30, 1997. FBR did
not undertake an independent appraisal of the assets or liabilities of
Franklin nor was FBR furnished with any such appraisals. FBR is not an expert
in the evaluation of allowances for loan losses, was not requested to and did
not review such allowances, and was not requested to and did not review any
individual credit files of Franklin. FBR's conclusions and opinion are
necessarily based upon economic, market and other conditions and the
information made available to FBR as of the date of this opinion. FBR
expresses no opinion on matters of a legal, regulatory, tax or accounting
nature related to the Merger.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the
evaluation of transactions in connection with mergers and acquisitions of
commercial banks, savings institutions and financial institution holding
companies, initial and secondary offerings, mutual-to-stock conversions of
savings institutions, as well as business valuations for other corporate
purposes for financial institutions and real estate related companies. FBR has
experience in, and knowledge of, the valuation of bank and thrift securities
in the District of Columbia, Virginia, North Carolina and the rest of the
United States.
FBR has acted as a financial advisor to Franklin in connection with the Merger
and will receive a fee for services rendered which is contingent upon the
consummation of the Merger. In the ordinary course of FBR's business, it may
effect transactions in the securities of Franklin or BB&T for its own account
and/or for the accounts of its customers and, accordingly, may at any time
hold long or short positions in such securities. From time to time, principals
and/or employees of FBR may also have positions in the securities.
<PAGE>
LOGO
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
Board of Directors
Franklin Bancorporation, Inc.
May 19, 1998
Page 3
Based upon and subject to the foregoing, as well as any such other matters as
we consider relevant, it is FBR's opinion, as of the date hereof, that the
Exchange Ratio is fair, from a financial point of view, to the Stockholders of
Franklin.
This letter is solely for the information of the Board of Directors and
Stockholders of Franklin and may not be relied upon by any other person or
used for any other purpose, reproduced, disseminated, quoted from or referred
to without FBR's prior written consent; provided, however, this letter may be
referred to and reproduced in its entirety in proxy materials sent to the
Stockholders in connection with the solicitation of approval for the Merger.
Very truly yours,
LOGO
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC.
<PAGE>
APPENDIX III
SECTION 262
OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
(S) 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S) 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
"stock" and "share" mean and include what is ordinarily meant by those words
and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251 (other than a merger effected pursuant to
(S) 251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or
(S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depositary receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
is sent more than 20 days following the sending of the first notice, such
second notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the
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<PAGE>
notice is given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the notice is
given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
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<PAGE>
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the North Carolina Business Corporation
Act contain specific provisions relating to indemnification of directors and
officers of North Carolina corporations. In general, such sections provide
that: (i) a corporation must indemnify a director or officer who is wholly
successful in his defense of a proceeding to which he is a party because of
his status as such, unless limited by the articles of incorporation, and (ii)
a corporation may indemnify a director or officer if he is not wholly
successful in such defense if it is determined as provided by statute that the
director or officer meets a certain standard of conduct, except that when a
director or officer is liable to the corporation or is adjudged liable on the
basis that personal benefit was improperly received by him, the corporation
may not indemnify him. A director or officer of a corporation who is a party
to a proceeding may also apply to a court for indemnification, and the court
may order indemnification under certain circumstances set forth in statute. A
corporation may, in its articles of incorporation or bylaws or by contract or
resolution of the board of directors, provide indemnification in addition to
that provided by statute, subject to certain conditions.
The registrant's bylaws provide for the indemnification of any director or
officer of the registrant against liabilities and litigation expenses arising
out of his status as such, excluding: (i) any liabilities or litigation
expenses relating to activities that were at the time taken known or believed
by such person to be clearly in conflict with the best interest of the
registrant and (ii) that portion of any liabilities or litigation expenses
with respect to which such person is entitled to receive payment under any
insurance policy.
The registrant's articles of incorporation provide for the elimination of
the personal liability of each director of the registrant to the fullest
extent permitted by law.
The registrant maintains directors' and officers' liability insurance that,
in general, insures: (i) the registrant's directors and officers against loss
by reason of any of their wrongful acts and (ii) the registrant against loss
arising from claims against the directors and officers by reason of their
wrongful acts, all subject to the terms and conditions contained in the
policy.
Certain rules of the Federal Deposit Insurance Corporation limit the ability
of certain depository institutions, their subsidiaries and their affiliated
depository institution holding companies to indemnify affiliated parties,
including institution directors. In general, subject to the ability to
purchase directors and officers liability insurance and to advance
professional expenses under certain circumstances, the rules prohibit such
institutions from indemnifying a director for certain costs incurred with
regard to an administrative or enforcement action commenced by any federal
banking agency that results in a final order or settlement pursuant to which
the director is assessed a civil money penalty, removed from office,
prohibited from participating in the affairs of an insured depository
institution or required to cease and desist from or take an affirmative action
described in Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. (S)
1818(b)).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as exhibits to this registration
statement on Form S-4:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2 Amended and Restated Agreement and Plan of Reorganization, dated
as of December 16, 1997, between BB&T Corporation and Franklin
Bancorporation, Inc. ("Franklin") (included as Appendix I to the
Proxy Statement/Prospectus)
3(a) Amended and Restated Articles of Incorporation of BB&T
Corporation, as amended (incorporated herein by reference to
Exhibit No. 3(a) to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 and Exhibit No.
3(a)(ii) to the registrant's Annual Report on Form 10-K to the
fiscal year ended December 31, 1997)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3(b) Articles of Amendment to Articles of Incorporation of BB&T
Corporation
3(c) Bylaws of BB&T Corporation (incorporated herein by reference to
Exhibit No. 3(b) to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
3(d) Certificate of Incorporation (as amended) and Bylaws of Franklin(1)
5 Opinion of Womble Carlyle Sandridge & Rice, PLLC
8 Opinion of Womble Carlyle Sandridge & Rice, PLLC
10(a) Employment Agreement dated April 17, 1991 between Franklin,
Franklin National Bank of Washington, D.C. ("Franklin Bank") and
Robert P. Pincus(1)
10(b) Employment Agreement dated April 22, 1991 between Franklin,
Franklin Bank and Albert A. D'Alessandro(1)
10(c) Employment Agreement dated April 22, 1991 between Franklin,
Franklin Bank and Joseph B. Head(1)
10(d) Lease dated September 22, 1982 between Sidley & Austin and
Franklin Bank re: 1722 I (Eye) Street, N.W.(2)
10(e) Letter agreement dated April 22, 1993 between Sidley & Austin and
the Franklin Bank amending lease re: 1722 I (Eye) Street, N.W.(2)
10(f) First Amendment to Lease dated December 27, 1984 between Sidley &
Austin and Franklin Bank re: 1722 I (Eye) Street, N.W.(2)
10(g) Second Amendment to Lease dated September 15, 1992 between Sidley
& Austin and Franklin Bank re: 1722 I (Eye) Street, N.W.(2)
10(h) Lease dated March 20, 1989 between Second National Federal Savings
Bank and Rhode Island & M Associates re: 1730 Rhode Island Avenue,
N.W.(2)
10(i) Agreement dated June 12, 1992 between Second National Federal
Savings Bank and Rhode Island & M Associates re: 1730 Rhode Island
Avenue, N.W.(2)
10(j) Lease Assignment and Assumption Agreement dated June 12, 1992
among Second National Federal Savings Bank, the Bank, and Rhode
Island & M Associates re: 1730 Rhode Island Avenue, N.W.(2)
10(k) Note dated June 12, 1992 from the Bank to Second National Federal
Savings Bank re: 1730 Rhode Island Avenue, N.W.(2)
10(l) Bill of Sale dated June 12, 1992 from Second National Federal
Savings Bank to Franklin Bank re: 1730 Rhode Island Avenue, N.W.(2)
10(m) Supplement to Lease dated June 13, 1992 between Franklin Bank and
Rhode Island & M Associates re: 1730 Rhode Island Avenue, N.W.(2)
10(n) Lease Agreement dated as of November 30, 1992 between GLN
Associates and Franklin Bank re: 1300 Wisconsin Avenue, N.W., with
Unconditional Guarantee by Franklin(2)
10(o) Lease Agreement dated November 2, 1994 between Northend Associated
Limited Partnership and Franklin Bank re: 1316 and U Street,
N.W.(3)
10(p) Computer Service Agreement dated February 22, 1995 between M&I
Data Services, Inc. and Franklin Bank re: Data Processing(3)
10(q) Agreement and Plan of Merger dated July 13, 1994 between Franklin
and George Washington Banking Corporation ("GWBC")(4)
10(r) Release, Assumption, Assignment and Amendment Agreement dated
March 6, 1995 between NationsBank, N.A., Franklin Bank and 601
Thirteenth Street, N.W. Associates Limited Partnership re: 601
13th Street, N.W.(6)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10(s) Lease Agreement dated August 30, 1995 between 5301 Wisconsin
Avenue Associates Limited Partnership and the Franklin Bank re:
5301 Wisconsin Avenue, N.W.(6)
10(t) Lease Agreement dated November 17, 1995 between Tysons II
Development Co. Limited Partnership and Franklin Bank re: 1650
Tysons Boulevard(6)
10(u) Franklin Nondiscretionary Stock Option Plan (7)
10(v) Stock Subscription Agreement dated December 27, 1996 by and among
Franklin Bank, Rock Creek Corporation and Elias F. Aburdene(7)
10(w) Lease Agreement dated May 28, 1996 between Bay Limited Partnership
and Franklin Bank re: 7200 Wisconsin Avenue(7)
10(x) Agreement of Sublease dated March 29, 1996 between Thomas Cook
Currency Services, Inc. and Franklin Bank re: 1800 K Street, N.W.,
Suite 929(7)
10(y) Letter Agreement dated September 15, 1995 between Franklin and
William J. Ridenour re: GWBC options(5)
10(z) Letter Agreement dated September 27, 1995 between Franklin and
Leslie T. Proctor re: GWBC options(5)
10(aa) 1997 Franklin Stock Option Plan(8)
10(bb) Deferred Compensation Agreement dated July 1, 1997 between
Franklin Bank and Robert P. Pincus(9)
10(cc) Split-Dollar Life Insurance Agreement dated December 20, 1996
between Franklin Bank and The Robert P. Pincus Family Trust(9)
10(dd) Third Amendment to Lease dated March 19, 1997 between Sidley &
Austin and Franklin Bank re: 1722 I Street, N.W.(10)
10(ee) Fourth Amendment to Lease dated December 22, 1997 between Sidley &
Austin and Franklin Bank re: 1722 I Street, N.W.(10)
10(ff) Lease Assignment, Assumption and Modification Agreement dated
January 13, 1998 between 1800 K Investors, L.P., Thomas Cook
Currency Services, Inc. and Franklin Bank re: 1800 K Street, N.W.,
Suite 929(10)
10(gg) Second Amended and Restated Franklin Stock Option Plan(10)
23(a) Consent of Womble Carlyle Sandridge & Rice, PLLC (included in
Exhibits 5 and 8)
23(b) Consent of Arthur Andersen LLP
23(c) Consent of Coopers & Lybrand L.L.P.
23(d) Consent of Friedman, Billings, Ramsey & Co., Inc.
24 Power of Attorney
99(a) Form of Franklin Proxy Card
99(b) Option Agreement, dated December 16, 1997, between BB&T
Corporation and Franklin
</TABLE>
- --------
(1) Incorporated by reference from Franklin's Form S-4 Registration Statement,
Registration No. 33-46835, filed on March 30, 1992.
(2) Incorporated by reference from Franklin's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, filed on April 15, 1993, File No.
000-20880.
(3) Incorporated by reference from Franklin's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, filed on March 30, 1995.
(4) Incorporated by reference from Franklin's Form S-4 Registration Statement,
Registration No. 33-83220, filed on August 24, 1994.
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<PAGE>
(5) Incorporated by reference from Franklin's Form S-8 Registration Statement,
Registration No. 33-03711, filed on May 14, 1996.
(6) Incorporated by reference from Franklin's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, filed on March 29, 1996.
(7) Incorporated by reference from Franklin's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, filed on March 31, 1997.
(8) Incorporated by reference from Proxy Statement for Franklin's 1997 annual
meeting of stockholders, filed on May 5, 1997 and re-filed on December 17,
1997.
(9) Incorporated by reference from Franklin's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997, filed on November 14,
1997.
(10) Incorporated by reference from Franklin's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, filed on March 30, 1998.
(b) Financial statement schedules: Not applicable.
ITEM 22. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. The undersigned registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
D. The registrant undertakes that every prospectus (i) that is filed
pursuant to Paragraph (C) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is
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<PAGE>
used in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
E. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
F. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
G. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF WINSTON-SALEM, STATE OF NORTH CAROLINA, ON MAY 19, 1998.
BB&T Corporation
/s/ Jerone C. Herring
By: _________________________________
Name: Jerone C. Herring
Title: Executive Vice President
and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT ON FORM S-4 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED ON MAY 19, 1998.
/s/ John A. Allison IV* /s/ Scott E. Reed*
_____________________________________ _____________________________________
Name: John A. Allison IV Name: Scott E. Reed
Title: Chairman of the Board and Title: Senior Executive Vice
Chief Executive Officer President and Chief Financial
(principal executive officer) Officer (principal financial
officer)
/s/ Sherry A. Kellett* /s/ Paul B. Barringer*
_____________________________________ _____________________________________
Name: Sherry A. Kellett Name: Paul B. Barringer
Title: Executive Vice President and Title: Director
Controller (principal
accounting officer)
/s/ W. R. Cuthbertson, Jr.*
_____________________________________
/s/ Alfred E. Cleveland* Name: W. R. Cuthbertson, Jr.
_____________________________________ Title: Director
Name: Alfred E. Cleveland
Title: Director Title:
/s/ A. J. Dooley, Sr.*
_____________________________________
/s/ Ronald E. Deal* Name: A. J. Dooley, Sr.
_____________________________________ Title: Director
Name: Ronald E. Deal
Title: Director /s/ Paul s. Goldsmith*
_____________________________________
/s/ Tom D. Efird* Name: Paul S. Goldsmith
_____________________________________ Title: Director
Name: Tom D. Efird
Title: Director /s/ Ernest F. Hardee*
_____________________________________
/s/ L. Vincent Hackley* Name: Ernest F. Hardee
_____________________________________ Title: Director
Name: L. Vincent Hackley
Title: Director
II-6
<PAGE>
/s/ Jane P. Helm*
_____________________________________
Name: Jane P. Helm
Title: Director
/s/ Richard Janeway, M.D.*
/s/ J. Ernest Lathem, M.D.* _____________________________________
_____________________________________ Name: Richard Janeway, M.D.
Name: J. Ernest Lathem, M.D. Title: Director
Title: Director
/s/ James H. Maynard*
/s/ Joseph A. McAleer, Jr.* _____________________________________
_____________________________________ Name: James H. Maynard
Name: Joseph A. McAleer, Jr. Title: Director
Title: Director
/s/ Albert O. McCauley*
/s/ Richard L. Player, Jr.* _____________________________________
_____________________________________ Name: Albert O. McCauley
Name: Richard L. Player, Jr. Title: Director
Title: Director
/s/ C. Edward Pleasants, Jr.*
/s/ Nido R. Qubein* _____________________________________
_____________________________________ Name: C. Edward Pleasants, Jr.
Name: Nido R. Qubein Title: Director
Title: Director
/s/ E. Rhone Sasser*
/s/ Jack E. Shaw* _____________________________________
_____________________________________ Name: E. Rhone Sasser
Name: Jack E. Shaw Title: Director
Title: Director
/s/ Harold B. Wells*
/s/ Jerone C. Herring _____________________________________
*By: ________________________________ Name: Harold B. Wells
Jerone C. Herring Title: Director
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT 3(b)
ARTICLES OF AMENDMENT
OF BB&T CORPORATION
The undersigned corporation hereby submits these Articles of Amendment for
the purpose of amending its Articles of Incorporation:
1. The name of the corporation is BB&T Corporation.
2. The following amendment to the Articles of Incorporation of the
corporation was adopted by its shareholders on the 28th day of April, 1998, in
the manner prescribed by law:
Delete the first sentence of Article IV and substitute therefor the
following:
"The Corporation shall have authority to issue 500,000,000 shares of
Common Stock, par value $5 each, and 5,000,000 shares of Preferred
Stock, par value $5 each."
2. The above amendment is effective upon filing.
This the 1st day of May, 1998.
BB&T CORPORATION
By: /s/ Jerone C. Herring
------------------------------------
Jerone C. Herring, Secretary
<PAGE>
EXHIBIT 5
May 19, 1998
BB&T Corporation
200 West Second Street
Winston-Salem, North Carolina 27101
Re: Registration Statement on Form S-4 (the "Registration Statement")
with respect to shares to be issued pursuant to the Amended and
Restated Agreement and Plan of Reorganization by and between BB&T
Corporation ("BB&T") and Franklin Bancorporation, Inc. dated as of
December 16, 1997 (the "Reorganization Agreement")
Ladies and Gentlemen:
We have acted as counsel to BB&T in connection with the registration of
2,815,558 shares of its Common Stock, par value $5.00 per share (the "Common
Stock"), issuable pursuant to the Reorganization Agreement, as set forth in the
Registration Statement that is being filed on the date hereof by BB&T with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"). This opinion is provided
pursuant to the requirements of Item 21(a) of Form S-4 and Item 601(b)(5) of
Regulation S-K.
In connection with the foregoing, we have examined such records, documents,
and proceedings as we have deemed relevant as a basis for the opinion expressed
herein, and we have relied upon an officer's certificate as to certain factual
matters.
Based on the foregoing, we are of the opinion that when (1) the
Registration Statement shall have been declared effective by order of the
Commission and (2) the shares of Common Stock have been issued upon the terms
and conditions set forth in the Reorganization Agreement and in accordance with
the Registration Statement, then the shares of Common Stock will be legally
issued, fully paid, and nonassessable.
We hereby consent to be named in the Registration Statement under the
heading "LEGAL MATTERS" as attorneys who passed upon the validity of the shares
of Common Stock and to the filing of a copy of this opinion as Exhibit 5 to the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act or other rules and regulations of the Commission thereunder.
Very truly yours,
WOMBLE CARLYLE SANDRIDGE & RICE,
A Professional Limited Liability Company
By: /s/ Garza Baldwin, III
----------------------------------------
Garza Baldwin, III
<PAGE>
EXHIBIT 8
May 19, 1998
BB&T Corporation
200 West Second Street
Winston-Salem, North Carolina 27101
Re: Registration Statement on Form S-4 (the "Registration Statement")
with respect to shares to be issued pursuant to the Amended and
Restated Agreement and Plan of Reorganization, dated as of December
16, 1997 (the "Reorganization Agreement"), by and between Franklin
Bancorporation, Inc., a Delaware corporation ("Franklin"), and BB&T
Corporation, a North Carolina corporation ("BB&T")
Ladies and Gentlemen:
We have acted as counsel to BB&T in connection with the registration of
2,815,558 shares of its Common Stock, par value $5.00 per share (the "BB&T
Common Stock"), issuable pursuant to the Reorganization Agreement, as set forth
in the Registration Statement that is being filed on the date hereof by BB&T
with the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"). This opinion is
provided pursuant to the requirements of Item 21(a) of Form S-4 and
Item 601(b)(8) of Regulation S-K. All capitalized terms not otherwise defined
herein shall have the meanings given to them in the Reorganization Agreement.
In the Merger, Franklin will merge into BB&T pursuant to North Carolina and
Delaware law, and each outstanding share of Franklin Common Stock (the only
class outstanding) is to be converted into a number of shares of BB&T Common
Stock determined under a formula in the Reorganization Agreement. Also, cash
will be paid in lieu of issuance of fractional shares. Franklin shareholders
are entitled by state law to dissent from the Merger.
In giving this opinion we have reviewed, and with your permission we have
relied upon the representations and warranties contained in or the facts
described in, the Reorganization Agreement, the Registration Statement, and
certificates dated May 18, 1998 and May 19, 1998 in which officers of Franklin
and officers of BB&T make certain representations on behalf of Franklin and BB&T
regarding the Merger (the "Tax Certificates"). We also have reviewed such other
documents as we have considered necessary and appropriate for the purposes of
this opinion.
In giving this opinion we have with your permission assumed that the
statements in the Tax Certificates are correct as of the date of this opinion,
and any representation or statement made "to the best of knowledge" or similarly
qualified is correct without such qualification. As to all matters in which a
person or entity has represented that such person or entity either is not a
party to, or does not have, or is not aware of, any plan or intention,
understanding or agreement, we have assumed that there is in fact no such plan,
intention, understanding or agreement. We also assume that (a) the Merger will
be consummated in accordance with the Reorganization Agreement, (b) Franklin's
only outstanding stock (as that term is used in Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code")) is the Franklin Common Stock, and
(c) the Rights attached to the shares of BB&T Common Stock issued in the Merger
will not be exchanged by BB&T for any part of the value of the Franklin Common
Stock, and such Rights will have no ascertainable fair market value at the
Effective Time.
Based on the foregoing, and subject to the limitations herein, we are of
the opinion that under existing law, upon consummation of the Merger in
accordance with the Reorganization Agreement, for federal income tax purposes:
(1) The Merger will constitute a "reorganization" within the
meaning of Section 368 of the Code.
<PAGE>
(2) No gain or loss will be recognized by Franklin or BB&T by
reason of the Merger.
(3) No gain or loss will be recognized by the shareholders of
Franklin upon the receipt of BB&T Common Stock (including any
fractional share interest to which they may be entitled) solely
in exchange for their shares of Franklin Common Stock.
(4) A shareholder of Franklin who receives cash in lieu of a
fractional share of BB&T Common Stock will recognize gain or
loss as if the fractional share has been received and then
redeemed for cash equal to the amount paid by BB&T in respect
of such fractional share, subject to the provisions and
limitations of Section 302 of the Code.
(5) The tax basis in the BB&T Common Stock received by a Franklin
shareholder (including any fractional share interest deemed
received) will be the same as the tax basis in the Franklin
Common Stock surrendered in exchange therefor.
(6) The holding period for BB&T Common Stock received (including
any fractional share interest deemed received) in exchange for
shares of Franklin Common Stock will include the period during
which the shareholder held the shares of Franklin Common Stock
surrendered in the exchange, provided that the Franklin Common
Stock was held as a capital asset at the Effective Time.
We express no opinion as to the laws of any jurisdiction other than the
United States of America. Further, our opinion is limited to the specific
conclusions set forth above, and no other opinions are expressed or implied.
The opinions stated with respect to shares of Franklin Common Stock do not apply
to any stock rights, warrants or options to acquire Franklin Common Stock. The
opinions stated as to Franklin shareholders are general in nature and do not
necessarily apply to any particular Franklin shareholder, and, for example, may
not apply to shareholders who are corporations, trusts, dealers in securities,
financial institutions, insurance companies or tax exempt organizations; or to
persons who are not United States citizens or resident aliens or domestic
entities (partnerships or trusts), are subject to the alternative minimum tax
(to the extent that tax affects the tax consequences), or are subject to the
"golden parachute" provisions of the Code (to the extent that tax affects the
tax consequences); or to shareholders who acquired Franklin Common Stock
pursuant to employee stock options or otherwise as compensation if such shares
are subject to any restriction related to employment, who do not hold their
shares as capital assets, or who hold their shares as part of a "straddle" or
"conversion transaction."
This opinion represents our best legal judgment, but it has no binding
effect or official status of any kind. Changes to the Code or in regulations or
rulings thereunder, or changes by the courts in the interpretation of the
authorities relied upon, may be applied retroactively and may affect the
opinions expressed herein. Any material defect in any assumption or
representation on which we have relied would adversely affect our opinion.
We furnish this opinion to you solely to support the discussion set forth
under the headings "SUMMARY--The Merger--Certain Federal Income Tax
Consequences," "THE MERGER--The Reorganization Agreement--Conditions to the
Merger," "THE MERGER--Certain Federal Income Tax Consequences of the Merger" and
"LEGAL MATTERS" in the Registration Statement, and we do not consent to its use
for any other purpose. We hereby consent to be named in the Registration
Statement under the foregoing headings and to the filing of a copy of this
opinion as Exhibit 8 to the Registration Statement. In giving this consent, we
do not admit that we are within the category of persons whose consent is
required by Section 7 of the Securities Act or the rules and regulations of the
Commission thereunder.
Very truly yours,
WOMBLE CARLYLE SANDRIDGE & RICE,
A Professional Limited Liability Company
By: /s/ Jasper L. Cummings, Jr.
----------------------------------------
Jasper L. Cummings, Jr.
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated May 13, 1998,
included in BB&T Corporation's Form 8-K dated May 13, 1998, and to all
references to our firm included in this registration statement. Our report dated
January 14, 1998, included in BB&T Corporation's financial statements previously
filed on Form 10-K and incorporated by reference in this registration statement
is no longer appropriate since restated financial statements have been presented
giving effect to a business combination accounted for as a pooling-of-interests.
/s/ Arthur Andersen LLP
Charlotte, North Carolina
May 19, 1998.
<PAGE>
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
(File No. ________) of our report dated February 6, 1998, on our audits of the
consolidated financial statements on Franklin Bancorporation and Subsidiaries.
We also consent to the references to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
---------------------------------------
Coopers & Lybrand L.L.P.
Washington, D.C.
May 14, 1998
<PAGE>
EXHIBIT 23(d)
CONSENT OF FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
May 19, 1998
BB&T Corporation
200 West Second Street
Winston-Salem, NC 27101
Ladies and Gentlemen:
This letter will constitute our consent to the inclusion of our opinion
regarding the acquisition of Franklin Bancorporation, Inc. ("Franklin") by BB&T
Corporation ("BB&T"), in BB&T's registration statement on Form S-4 (the
"Registration Statement") and to the inclusion of the summary of such opinion
and the use of our name in the Registration Statement. In giving the foregoing
consent, we do no admit that we come within the category of persons whose
consent is required by Section 7 of the Securities Act of 1933, as amended (the
"Securities Act"), or the rules and regulations of the Securities and Exchange
Commission (the "Commission") with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
and the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
/s/ Friedman, Billings, Ramsey & Co., Inc.
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned, being a director and/or officer of BB&T Corporation
(the "Company"), hereby nominates, constitutes and appoints John A. Allison,
Scott E. Reed and Jerone C. Herring, or any one of them severally, to be his
or her true and lawful attorney-in-fact and to sign in his or her name and on
his or her behalf in any and all capacities stated below, and to file with the
Securities and Exchange Commission (the "Commission"), a Registration
Statement on Form S-4 (the "Registration Statement") relating to the issuance
of shares of the Company's common stock, $5.00 par value per share, in
connection with the acquisition by the Company of Franklin Bancorporation,
Inc., a Delaware corporation, and to file any and all amendments, including
post-effective amendments, to the Registration Statement, making such changes
in the Registration Statement as such attorney-in-fact deems appropriate, and
generally to do all such things on his or her behalf in any and all capacities
stated below to enable the Company to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Commission.
This Power of Attorney has been signed by the following persons in the
capacities indicated on February 24, 1998.
/s/ John A. Allison IV /s/ Scott E. Reed
- ------------------------------------- -------------------------------------
Name: John A. Allison IV Name: Scott E. Reed
Title: Chairman of the Board Title: Senior Executive Vice
and Chief Executive President and Chief Financial
Officer (principal executive Officer (principal financial
officer) officer)
/s/ Sherry A. Kellett /s/ Paul B. Barringer
- ------------------------------------- -------------------------------------
Name: Sherry A. Kellett Name: Paul B. Barringer
Title: Executive Vice President and Title: Director
Controller (principal
accounting officer)
/s/ Alfred E. Cleveland /s/ W. R. Cuthbertson, Jr.
- ------------------------------------- -------------------------------------
Name: Alfred E. Cleveland Name: W. R. Cuthbertson, Jr.
Title: Director Title: Director
/s/ Ronald E. Deal /s/ A. J. Dooley, Sr.
- ------------------------------------- -------------------------------------
Name: Ronald E. Deal Name: A. J. Dooley, Sr.
Title: Director Title: Director
/s/ Tom D. Efird /s/ Paul S. Goldsmith
- ------------------------------------- -------------------------------------
Name: Tom D. Efird Name: Paul S. Goldsmith
Title: Director Title: Director
/s/ L. Vincent Hackley /s/ Ernest F. Hardee
- ------------------------------------- -------------------------------------
Name: L. Vincent Hackley Name: Ernest F. Hardee
Title: Director Title: Director
/s/ Jane P. Helm /s/ Richard Janeway, M.D.
- ------------------------------------- -------------------------------------
Name: Jane P. Helm Name: Richard Janeway, M.D.
Title: Director Title: Director
<PAGE>
/s/ J. Ernest Lathem, M.D. /s/ James H. Maynard
- ------------------------------------- --------------------------------------
Name: J. Ernest Lathem, M.D. Name: James H. Maynard
Title: Director Title: Director
/s/ Joseph A. McAleer, Jr. /s/ Albert O. McCauley
- ------------------------------------- --------------------------------------
Name: Joseph A. McAleer, Jr. Name: Albert O. McCauley
Title: Director Title: Director
/s/ L. Glenn Orr, Jr. /s/ Richard L. Player, Jr.
- ------------------------------------- --------------------------------------
Name: L. Glenn Orr, Jr. Name: Richard L. Player, Jr.
Title: Director Title: Director
/s/ C. Edward Pleasants, Jr. /s/ Nido R. Qubein
- ------------------------------------- --------------------------------------
Name: C. Edward Pleasants, Jr. Name: Nido R. Qubein
Title: Director Title: Director
/s/ E. Rhone Sasser /s/ Jack E. Shaw
- ------------------------------------- --------------------------------------
Name: E. Rhone Sasser Name: Jack E. Shaw
Title: Director Title: Director
/s/ Harold B. Wells
- -------------------------------------
Name: Harold B. Wells
Title: Director
<PAGE>
EXHIBIT 99(a)
FRONT
[LOGO]
P R O X Y
FRANKLIN BANCORPORATION, INC.
SPECIAL MEETING ON JUNE 24, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert P. Pincus, Albert A. D'Alessandro and
Joseph B. Head, and each of them, with full power of substitution, the proxies
of the undersigned to vote all shares of Common Stock of Franklin
Bancorporation, Inc. ("Franklin") which the undersigned is entitled to vote at
the Special Meeting of Shareholders of Franklin to be held at Franklin's
principal executive offices, located at 1722 I (Eye) Street, N.W., Washington,
D.C. 20006, on June 24, 1998 at 4:00 p.m., Eastern Time, and at any adjournments
or postponements thereof, with the same force and effect as the undersigned
might or could do if personally present thereat:
1. To approve an Agreement and Plan of Reorganization, dated as of
December 16, 1997, as amended and restated (the "Reorganization Agreement"),
between Franklin and BB&T Corporation, a North Carolina corporation ("BB&T"),
and a related Plan of Merger (the "Plan of Merger"), pursuant to which each
share of common stock of Franklin will be converted into the right to receive
shares of common stock of BB&T and cash in lieu of any fractional share, in
amounts to be determined as described in the accompanying Proxy
Statement/Prospectus. A copy of the Reorganization Agreement and the Plan of
Merger set forth therein is attached to the Proxy Statement/Prospectus as
Appendix I.
[_] FOR [_] AGAINST [_] ABSTAIN
The Board of Directors of Franklin recommends a vote "FOR" this proposal.
2. Any other matter that may be submitted to a vote of shareholders at
the Special Meeting.
(continued on other side)
<PAGE>
BACK
[LOGO]
FRANKLIN BANCORPORATION, INC.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED. THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL ON THE REVERSE SIDE IF
NO DIRECTION IS MADE. IF ANY OTHER BUSINESS IS PRESENTED AT THE SPECIAL
MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATION OF
MANAGEMENT.
The undersigned hereby ratifies and confirms all that said proxies, or any of
them or their substitutes may lawfully do or cause to be done by virtue hereof,
and acknowledges receipt of the notice of the Special Meeting and the Proxy
Statement/Prospectus accompanying it.
Dated ________ ___, 1998
---------------------------------
---------------------------------
Please insert date of signing. Sign exactly as name appears at left. Where
stock is issued in two or more names, all should sign. If signing as attorney,
administrator, executor, trustee or guardian, give full title as such. A
corporation should sign by an authorized officer and affix seal.
(YOU ARE REQUESTED TO COMPLETE, SIGN AND RETURN THIS PROXY PROMPTLY)
<PAGE>
EXHIBIT 99(b)
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of
December 16, 1997, by and between FRANKLIN BANCORPORATION, INC., a Delaware
corporation ("Issuer"), and BB&T CORPORATION, a North Carolina corporation
("Grantee").
WHEREAS, Grantee and Issuer have entered into that certain Agreement and Plan
of Reorganization, dated this date (the "Merger Agreement"), providing for,
among other things, the merger of Issuer with and into BB&T Financial
Corporation of Virginia ("BB&T Financial"), a wholly-owned subsidiary of
Grantee, with the result that Issuer will become a wholly-owned subsidiary of
Grantee, with BB&T Financial as the surviving entity; and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has required that Issuer agree, and Issuer has agreed, to
grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, and intending to be legally bound hereby, Issuer and Grantee agree as
follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 1,319,564 shares [19.9% of outstanding Issuer stock], as adjusted as set
forth herein (the "Option Shares," which shall include the Option Shares before
and after any transfer of such Option Shares), of common stock of Issuer, $0.10
par value per share ("Issuer Common Stock"), at a purchase price per Option
Share (subject to adjustment as set forth herein, the "Purchase Price") equal to
$18.00.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder (as hereinafter defined), as
applicable, shall not be in material breach of its agreements or covenants
contained in this Agreement or the Merger Agreement, and (ii) no preliminary or
permanent injunction or other order against the delivery of shares covered by
the Option issued by any court of competent jurisdiction in the United States
shall be in effect, Holder may exercise the Option, in whole or in part, at any
time and from time to time following the occurrence of a Purchase Event;
provided that the Option shall terminate and be of no further force and effect
upon the earliest to occur of (A) the Effective Time, (B) subject to clause (E)
below, termination of the Merger Agreement in accordance with the terms thereof
prior to the occurrence of a Purchase Event or a Preliminary Purchase Event
(other than a termination of the Merger Agreement by Grantee pursuant to Section
7.1(b) thereof (a "Default Termination")), (C) 18 months after a Default
Termination, (D) 18 months after any termination of the Merger Agreement (other
than a Default Termination) following the occurrence of a Purchase Event or a
Preliminary Purchase Event, and (E) subject to clause (D) above, 12 months after
termination of the Merger Agreement pursuant to Section 7.1(e) thereof; provided
further, that any purchase of shares upon exercise of the Option shall be
subject to compliance with applicable law, including, without limitation, the
Bank Holding Company Act (the "BHC Act"). The term "Holder" shall mean the
holder or holders of the Option from time to time, including initially Grantee.
The rights set forth in Section 8 shall terminate when the rights to exercise
the Option terminates (other than as a result of a complete exercise of the
Option) as set forth herein.
(b) As used herein, a "Purchase Event" means any of the following events
subsequent to the date of this Agreement:
(i) without Grantee's prior written consent, Issuer shall have
authorized, recommended, publicly proposed or publicly announced an intention
to authorize, recommend or propose, or entered into an agreement with any
person (other than Grantee or any Subsidiary of Grantee) to effect an
Acquisition Transaction (as
<PAGE>
defined below). As used herein, the term "Acquisition Transaction" shall mean
(A) a merger, consolidation or similar transaction involving Issuer or any of
its Subsidiaries (other than transactions solely between Issuer and one or
more of its Subsidiaries, or between one or more of Issuer's Subsidiaries),
(B) the disposition, by sale, lease, exchange or otherwise, of assets of
Issuer or any of its Subsidiaries representing in either case 15% or more of
the consolidated assets of Issuer and its Subsidiaries (other than a sale of
loan receivables in a financing transaction or in any repurchase or reverse
repurchase agreements, in each case in the normal course of business
consistent with past practices), or (C) the issuance, sale or other
disposition of (including by way of merger, consolidation, share exchange or
any similar transaction) securities representing 15% or more of the voting
power of Issuer or any of its Subsidiaries; or
(ii) any person (other than Grantee or any Subsidiary of Grantee)
shall have acquired beneficial ownership (as such term is defined in Rule
13d-3 promulgated under the Exchange Act) of or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act), other than a group of which Grantee or any of the Subsidiaries
of Grantee is a member, shall have been formed which beneficially owns or has
the right to acquire beneficial ownership of, 15% or more of the then-
outstanding shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee or any Subsidiary of Grantee)
shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), or shall have filed a registration statement under the
Securities Act with respect to, a tender offer or exchange offer to purchase
any shares of Issuer Common Stock such that, upon consummation of such offer,
such person would own or control 15% or more of the then-outstanding shares
of Issuer Common Stock (such an offer being referred to herein as a "Tender
Offer" or an "Exchange Offer," respectively); or
(ii) the holders of Issuer Common Stock shall not have approved the
Merger Agreement at the meeting of such shareholders held for the purpose of
voting on the Merger Agreement, such meeting shall not have been held or
shall have been canceled prior to termination of the Merger Agreement, or
Issuer's Board of Directors shall have withdrawn or modified in a manner
adverse to Grantee the recommendation of Issuer's Board of Directors with
respect to the Merger Agreement, in each case after any person (other than
Grantee or any Subsidiary of Grantee) shall have (A) made, or disclosed an
intention to make, a proposal to engage in an Acquisition Transaction, (B)
commenced a Tender Offer or filed a registration statement under the
Securities Act with respect to an Exchange Offer, or (C) filed an application
(or given a notice), whether in draft or final form, under any federal or
state statute or regulation (including an application or notice filed under
the BHC Act, the Bank Merger Act, the Home Owner's Loan Act or the Change in
Bank Control Act of 1978) seeking the consent to an Acquisition Transaction
from any federal or state governmental or regulatory authority or agency.
As used in this Agreement, "person" shall have the meaning specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
(d) In the event Holder wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise and (ii) a place and date not earlier than
three business days nor later than 15 business days from the Notice Date for the
closing (the "Closing") of such purchase (the "Closing Date"). If prior consent
of any governmental or regulatory agency or authority is required in connection
with such purchase, Issuer shall cooperate with Holder in the filing of the
required notice or application for such consent and the obtaining of such
consent, and the Closing shall occur not earlier than three business days nor
later than 15 business days following receipt of such consents (and expiration
of any mandatory waiting periods).
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option
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Shares to be purchased on such Closing Date, and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer specified in Section 12(f)
hereof.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a), (i)
Issuer shall deliver to Holder (A) a certificate or certificates representing
the Option Shares to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of any kind
whatsoever and subject to no pre-emptive rights, and (B) if the Option is
exercised in part only, an executed new agreement with the same terms as this
Agreement evidencing the right to purchase the balance of the shares of Issuer
Common Stock purchasable hereunder, and (ii) Holder shall deliver to Issuer a
letter containing customary representations given by a purchaser of securities
in a private transaction and agreeing that Holder shall not offer to sell or
otherwise dispose of such Option Shares in violation of applicable federal and
state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be endorsed
with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF DECEMBER
16, 1997. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF
WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Holder shall have delivered
to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel
in form and substance reasonably satisfactory to Issuer and its counsel, to the
effect that such legend is not required for purposes of the Securities Act.
5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals referred to herein, to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Issuer. This
Agreement has been duly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate and other action to
authorize and reserve and to permit it to issue, and, at all times from the date
hereof until the obligation to deliver Issuer Common Stock upon the exercise of
the Option terminates, will have reserved for issuance, upon exercise of the
Option, the number of shares of Issuer Common Stock necessary for Holder to
exercise the Option, and Issuer will take all necessary corporate action to
authorize and reserve for issuance all additional shares of Issuer Common Stock
or other securities which may be issued pursuant to Section 7 upon exercise of
the Option. The shares of Issuer Common Stock to be issued upon due exercise of
the Option, including all additional shares of Issuer Common Stock or other
securities which may be issuable pursuant to Section 7, upon issuance pursuant
hereto, shall be duly and validly issued, fully paid, and nonassessable, and
shall be delivered free and clear of all liens, claims, charges, and
encumbrances of any kind or nature whatsoever, including any preemptive rights
of any shareholder of Issuer.
6. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby represents and
warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or consents referred to herein, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
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(b) This Option is not being, and any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be, acquired with a
view to the public distribution thereof and will not be transferred or otherwise
disposed of except in a transaction registered or exempt from registration under
the Securities Laws.
7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by reason of a
stock dividend, stock split, split-up, recapitalization, combination, exchange
of shares or similar transaction, the type and number of shares or securities
subject to the Option and the Purchase Price therefor shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Holder shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that Holder would
have received in respect of Issuer Common Stock if the Option had been exercised
immediately prior to such event, or the record date therefor, as applicable. If
any additional shares of Issuer Common Stock are issued after the date of this
Agreement (other than pursuant to an event described in the first sentence of
this Section 7(a)), the number of shares of Issuer Common Stock subject to the
Option shall be adjusted so that, after such issuance, it, together with any
shares of Issuer Common Stock previously issued pursuant hereto, equals 19.9% of
the number of shares of Issuer Common Stock then issued and outstanding, without
giving effect to any shares subject to or issued pursuant to the Option.
(b) In the event that Issuer shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Grantee or one of its
Subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger; (ii) to permit any person, other than Grantee or one of
its Subsidiaries, to merge into Issuer and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer Common Stock shall be changed into or exchanged for stock or
other securities of Issuer or any other person or cash or any other property or
the outstanding shares of Issuer Common Stock immediately prior to such merger
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company; (iii) to permit any person, other than
Grantee or one of its Subsidiaries, to acquire all of the outstanding shares of
Issuer Common Stock pursuant to a statutory share exchange; or (iv) to sell or
otherwise transfer all or substantially all of its assets to any person, other
than Grantee or one of its Subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provisions so that the
Option shall, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of Grantee, of either (x) the
Acquiring Corporation (as defined below), (y) any person that controls the
Acquiring Corporation, or (z) in the case of a merger described in clause (ii),
the Issuer (in each case, such person being referred to as the "Substitute
Option Issuer").
(c) The Substitute Option shall have the same terms as the Option,
provided that, if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to Grantee. The Substitute Option Issuer shall also
enter into an agreement with the then-holder or holders of the Substitute Option
in substantially the same form as this Agreement, which shall be applicable to
the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of the Substitute Common Stock (as hereinafter defined) as is equal to the
Assigned Value (as hereinafter defined) multiplied by the number of shares of
the Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of
the Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Purchase Price multiplied by a
fraction in which the numerator is the number of shares of the Issuer Common
Stock for which the Option was theretofore exercisable and the denominator is
the number of shares for which the Substitute Option is exercisable.
(e) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than Issuer),
Issuer in a merger in which Issuer is the continuing or surviving person, the
corporation that shall acquire all of the outstanding shares of Issuer Common
Stock
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pursuant to a statutory share exchange, or the transferee of all or any
substantial part of the Issuer's assets (or the assets of its Subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per
share of the Issuer Common Stock at which a Tender Offer or Exchange Offer
therefor has been made by any person (other than Grantee or any of its
Subsidiaries), (y) the price per share of the Issuer Common Stock to be paid
by any person (other than the Grantee) pursuant to an agreement with Issuer,
and (z) the highest closing sales price per share of Issuer Common Stock
quoted on the Nasdaq Stock Market within the six-month period immediately
preceding the agreement; provided, that in the event of a sale of less than
all of Issuer's assets, the Assigned Value shall be the sum of the price paid
in such sale for such assets and the current market value of the remaining
assets of Issuer as determined by a nationally recognized investment banking
firm selected by Grantee (or by a majority in interest of the Grantees if
there shall be more than one Grantee (a "Grantee Majority")), divided by the
number of shares of the Issuer Common Stock outstanding at the time of such
sale. In the event that an Exchange Offer is made for the Issuer Common
Stock or an agreement is entered into for a merger or consolidation involving
consideration other than cash, the value of the securities or other property
issuable or deliverable in exchange for the Issuer Common Stock shall be
determined by a nationally recognized investment banking firm mutually
selected by Grantee and Issuer (or if applicable, Acquiring Corporation).
(If there shall be more than one Grantee, any such selection shall be made by
a Grantee Majority.)
(iv) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding the
consolidation, merger, share exchange or sale in question, but in no event
higher than the closing price of the shares of the Substitute Common Stock on
the day preceding such consolidation, merger, share exchange or sale;
provided that if Issuer is the issuer of the Substitute Option, the Average
Price shall be computed with respect to a share of common stock issued by
Issuer, the person merging into Issuer or by any company which controls or is
controlled by such merger person, as Grantee may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the aggregate of the shares of Substitute Common Stock
but for this clause (f), the Substitute Option Issuer shall make a cash payment
to Grantee equal to the excess of (i) the value of the Substitute Option without
giving effect to the limitation in this clause (f) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (f). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by Grantee (or a Grantee Majority).
(g) Issuer shall not enter into any transaction described in subsection
(b) of this Section 7 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder and take all other actions that may be necessary so that the
provisions of this Section 7 are given full force and effect (including, without
limitation, any action that may be necessary so that the shares of Substitute
Common Stock are in no way distinguishable from or have lesser economic value
than other shares of common stock issued by the Substitute Option Issuer).
(h) The provisions of Sections 8, 9, 10 and 11 shall apply, with
appropriate adjustments, to any securities for which the Option becomes
exercisable pursuant to this Section 7 and, as applicable, references in such
sections to "Issuer," "Option," "Purchase Price" and "Issuer Common Stock" shall
be deemed to be references to "Substitute Option Issuer," "Substitute Option,"
"Substitute Purchase Price" and "Substitute Common Stock," respectively.
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8. REPURCHASE AT THE OPTION OF HOLDER.
(a) Subject to the last sentence of Section 3(a), at the request of
Holder at any time commencing upon the first occurrence of a Repurchase Event
(as defined in Section 8(d)) and ending 24 months immediately thereafter, Issuer
shall repurchase from Holder the Option and all shares of Issuer Common Stock
purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 8 Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Holder for any shares of
Issuer Common Stock acquired by Holder pursuant to the Option with respect to
which Holder then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined
below) for each share of Issuer Common Stock over (y) the Purchase Price
(subject to adjustment pursuant to Section 7), multiplied by the number of
shares of Issuer Common Stock with respect to which the Option has not been
exercised; and
(iii) the excess, if any, of the Applicable Price over the Purchase
Price (subject to adjustment pursuant to Section 7) paid (or, in the case of
Option Shares with respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Holder for each share of Issuer
Common Stock with respect to which the Option has been exercised and with
respect to which Holder then has beneficial ownership, multiplied by the
number of such shares.
(b) If Holder exercises its rights under this Section 8, Issuer shall,
within ten business days after the Request Date, pay the Section 8 Repurchase
Consideration to Holder in immediately available funds, and contemporaneously
with such payment Holder shall surrender to Issuer the Option and the
certificates evidencing the shares of Issuer Common Stock purchased thereunder
with respect to which Holder then has beneficial ownership, and Holder shall
warrant that it has sole record and beneficial ownership of such shares and that
the same are then free and clear of all liens, claims, charges and encumbrances
of any kind whatsoever. Notwithstanding the foregoing, to the extent that prior
notification to or consent of any governmental or regulatory agency or authority
is required in connection with the payment of all or any portion of the Section
8 Repurchase Consideration, Holder shall have the ongoing option to revoke its
request for repurchase pursuant to Section 8, in whole or in part, or to require
that Issuer deliver from time to time that portion of the Section 8 Repurchase
Consideration that it is not then so prohibited from paying and promptly file
the required notice or Application for consent and expeditiously process the
same (and each party shall cooperate with the other in the filing of any such
notice or Application and the obtaining of any such consent). If any
governmental or regulatory agency or authority disapproves of any part of
Issuer's proposed repurchase pursuant to this Section 8, Issuer shall promptly
give notice of such fact to Holder. If any governmental or regulatory agency or
authority prohibits the repurchase in part but not in whole, then Holder shall
have the right (i) to revoke the repurchase request or (ii) to the extent
permitted by such agency or authority, determine whether the repurchase should
apply to the Option and/or Option Shares and to what extent to each, and Holder
shall thereupon have the right to exercise the Option as to the number of Option
Shares for which the Option was exercisable at the Request Date less the sum of
the number of shares covered by the Option in respect of which payment has been
made pursuant to Section 8(a)(ii) and the number of shares covered by the
portion of the Option (if any) that has been repurchased. Holder shall notify
Issuer of its determination under the preceding sentence within five business
days of receipt of notice of disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of Holder's
rights under this Section 8 shall terminate on the date of termination of this
Option pursuant to Section 3(a).
(c) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Issuer Common Stock paid for any
such share by the person or groups described in Section 8(d)(i), (ii) the price
per share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii), 7(b)(iii) or 7(b)(iv), or (iii) the highest
closing sales price per share of Issuer Common Stock quoted on the Nasdaq
National Market (or if Issuer Common Stock is not quoted on the Nasdaq National
Market, the highest bid price per share as quoted on the principal trading
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market or securities exchange on which such shares are traded as reported by a
recognized source chosen by Holder) during the 60 business days preceding the
Request Date; provided, however, that in the event of a sale of less than all of
Issuer's Assets, the Applicable Price shall be the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
Issuer as determined by an independent nationally recognized investment banking
firm selected by Holder and reasonably acceptable to Issuer (which determination
shall be conclusive for all purposes of this Agreement), divided by the number
of shares of the Issuer Common Stock outstanding at the time of such sale. If
the consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm selected by Holder and reasonably acceptable
to Issuer, which determination shall be conclusive for all purposes of this
Agreement.
(d) As used herein, "Repurchase Event" shall occur if (i) any person
(other than Grantee or any Subsidiary of Grantee) shall have acquired actual
ownership or control, or any "group" (as such term is defined under the Exchange
Act) shall have been formed which shall have acquired actual ownership or
control, of 50% or more of the then-outstanding shares of Issuer Common Stock,
or (ii) any of the transactions described in Section 7(b)(i), 7(b)(ii),
7(b)(iii) or 7(b)(iv) shall be consummated.
(e) Notwithstanding the foregoing provisions of this Section 8, in no
event shall Issuer be obligated to repurchase the Option or any shares of Issuer
Common Stock pursuant to this Section 8 if (and only to the extent that) the
repurchase is prohibited by any rules, regulations or order of the Federal
Reserve Board or of any principal federal or state regulatory agency having
jurisdiction over Issuer's Subsidiary bank.
9. REGISTRATION RIGHTS.
(a) Following termination of the Merger Agreement, Issuer shall, subject
to the conditions of subparagraph (c) below, if requested by any Holder,
including Grantee and any permitted transferee ("Selling Holder"), as
expeditiously as possible prepare and file a registration statement under the
Securities Laws if necessary in order to permit the sale or other disposition of
any or all shares of Issuer Common Stock or other securities that have been
acquired by or are issuable to Selling Holder upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by
Holder in such request, including, without limitation, a "shelf" registration
statement under Rule 415 under the Securities Act or any successor provision,
and Issuer shall use its best efforts to qualify such shares or other securities
for sale under any applicable state securities laws.
(b) If Issuer at any time after the exercise of the Option proposes to
register any shares of Issuer Common Stock under the Securities Laws in
connection with an underwritten public offering of such Issuer Common Stock,
Issuer will promptly give written notice to Holder of its intention to do so
and, upon the written request of Holder given within 30 days after receipt of
any such notice (which request shall specify the number of shares of Issuer
Common Stock intended to be included in such underwritten public offering by
Selling Holder), Issuer will cause all such shares, the holders of which shall
have requested participation in such registration, to be so registered and
included in such underwritten public offering; provided, that Issuer may elect
to cause any such shares not to be so registered (i) if the underwriters in good
faith object for a valid business reason, or (ii) in the case of a registration
solely to implement a dividend reinvestment or similar plan, an employee benefit
plan or a registration filed on Form S-4 or any successor form, or a
registration filed on a form which does not permit registration of resales;
provided, further, that such election pursuant to clause (i) may be made only
one time. If some but not all the shares of Issuer Common Stock, with respect to
which Issuer shall have received requests for registration pursuant to this
subparagraph (b), shall be excluded from such registration, Issuer shall make
appropriate allocation of shares to be registered among Selling Holders and any
other person (other than Issuer or any person exercising demand registration
rights in connection with such registration) who or which is permitted to
register their shares of Issuer Common Stock in connection with such
registration pro rata in the proportion that the number of shares requested to
be registered by each Selling Holder bears to the total number of shares
requested to be registered by all persons then desiring to have Issuer Common
Stock registered for sale.
(c) Issuer shall use all reasonable efforts to cause each registration
statement referred to in subparagraph (a) above to become effective and to
obtain all consents or waivers of other parties which are required therefor and
to keep such registration statement effective, provided, that Issuer may delay
any registration of Option Shares required
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pursuant to subparagraph (a) above for a period not exceeding 120 days provided
Issuer shall in good faith determine that any such registration would adversely
affect an offering or contemplated offering of other securities by Issuer, and
Issuer shall not be required to register Option Shares under the Securities Laws
pursuant to subparagraph (a) above:
(i) prior to the earliest of (A) termination of the Merger
Agreement pursuant to Section 7.1 thereof, (B) failure to obtain the
requisite shareholder approval of the holders of Issuer Common Stock pursuant
to Section 5.1 of the Merger Agreement, and (C) a Purchase Event or a
Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 120 days after the effective date of a registration
referred to in subparagraph (b) above pursuant to which the Selling Holders
concerned were afforded the opportunity to register such shares under the
Securities Laws and such shares were registered as requested; and
(v) unless a request therefor is made to Issuer by Selling Holders
holding at least 25% or more of the aggregate number of Option Shares then
outstanding.
In addition to the foregoing, Issuer shall not be required to maintain
the effectiveness of any registration statement after the expiration of the
earlier of (y) completion of the public offering by Selling Holders and (z) nine
months from the effective date of such registration statement. Issuer shall use
all reasonable efforts to make any filings, and take all steps, under all
applicable state securities laws to the extent necessary to permit the sale or
other disposition of the Option Shares so registered in accordance with the
intended method of distribution for such shares, provided, that Issuer shall not
be required to consent to general jurisdiction or qualify to do business in any
state where it is not otherwise required to so consent to such jurisdiction or
to so qualify to do business.
(d) Except where applicable state law prohibits such payments, Issuer
will pay all reasonable and documented expenses (including without limitation
registration fees, qualification fees, blue sky fees and expenses (including the
fees and expenses of counsel), accounting expenses, legal expenses, including
reasonable fees and expenses of one counsel to the Holders whose Option Shares
are being registered, printing expenses, expenses of underwriters, excluding
discounts and commissions but including liability insurance if Issuer so desires
or the underwriters so require, and the reasonable fees and expenses of any
necessary special experts) in connection with each registration pursuant to
subparagraph (a) or (b) above (including the related offerings and sales by
Selling Holders) and all other qualifications, notifications or exemptions
pursuant to subparagraph (a) or (b) above. Underwriting discounts and
commissions relating to Option Shares and any other expenses incurred by such
Selling Holders in connection with any such registration shall be borne by such
Selling Holders.
(e) In connection with any registration under subparagraph (a) or (b)
above Issuer hereby indemnifies the Selling Holders, and each underwriter
thereof, including each person, if any, who controls such holder or underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such expenses, losses,
claims, damages or liabilities of such indemnified party are caused by any
untrue statement or alleged untrue statement that was included by Issuer in any
such registration statement or prospectus or notification or offering circular
(including any amendments or supplements thereto) or preliminary prospectus in
reliance upon and in conformity with, information furnished in writing to Issuer
by such indemnified party expressly for use therein, and Issuer and each
officer, director and controlling person of Issuer shall be indemnified by such
Selling Holder, or by such underwriter, as the case may be, for all such
expenses, losses, claims, damages and liabilities caused by any untrue, or
alleged untrue, statement, that was included by Issuer in any such registration
statement or prospectus or notification or offering circular (including any
amendments or supplements thereto) or preliminary prospectus in reliance upon,
and in conformity with, information furnished in writing to Issuer by such
holder or such underwriter, as the case may be, expressly for such use.
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Promptly upon receipt by a party indemnified under this subparagraph
(e) of notice of the commencement of any action against such indemnified party
in respect of which indemnity or reimbursement may be sought against any
indemnifying party under this subparagraph (e), such indemnified party shall
notify the indemnifying party in writing of the commencement of such action, but
the failure so to notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
subparagraph (e) except to the extent of actual prejudice resulting solely from
such failure. In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and reasonably satisfactory
to such indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (i) the
indemnifying party agrees to pay them, (ii) the indemnifying party fails to
assume the defense of such action with counsel satisfactory to the indemnified
party, or (iii) the indemnified party has been advised by counsel that one or
more legal defenses may be available to the indemnifying party that may be
contrary to the interest of the indemnified party, in which case the
indemnifying party shall be entitled to assume the defense of such action
notwithstanding its obligation to bear fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement entered into without its
consent, which consent may not be unreasonably withheld.
If the indemnification provided for in this subparagraph (e) is
unavailable to a party otherwise entitled to be indemnified in respect of any
expenses, losses, claims, damages or liabilities referred to herein, then the
indemnifying party, in lieu of indemnifying such party otherwise entitled to be
indemnified, shall contribute to the amount paid or payable by such party to be
indemnified as a result of such expenses, losses, claims, damages or liabilities
in such proportion as is appropriate to reflect the relative benefits received
by Issuer, all Selling Holders and the underwriters from the offering of the
securities and also the relative fault of Issuer, all Selling Holders and the
underwriters in connection with the statements or omissions which resulted in
such expenses, losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as a
result of the expenses, losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim; provided, that in no case shall any Selling Holder be responsible, in
the aggregate, for any amount in excess of the net offering proceeds
attributable to its Option Shares included in the offering. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Any obligation by any holder to
indemnify shall be several and not joint with other holders.
In connection with any registration pursuant to subparagraph (a) or
(b) above, Issuer and each Selling Holder (other than Grantee) shall enter into
an agreement containing the indemnification provisions of this subparagraph (e).
(f) Issuer shall comply with all reporting requirements and will do all
such other things as may be necessary to permit the expeditious sale at any time
of any Option Shares by Holder in accordance with and to the extent permitted by
any rule or regulation promulgated by the Commission from time to time,
including, without limitation, Rules 144 and 144A. Issuer shall at its expense
provide Holder with any information necessary in connection with the completion
and filing of any reports or forms required to be filed by them under the
Securities Laws, or required pursuant to any state securities laws or the rules
of any stock exchange.
(g) Issuer will pay all stamp taxes in connection with the issuance and
the sale of the Option Shares and in connection with the exercise of the Option,
and will save Holder harmless, without limitation as to time, against any and
all liabilities, with respect to all such taxes.
10. QUOTATION; LISTING. If Issuer Common Stock or any other securities to be
acquired upon exercise of the Option are then authorized for quotation or
trading or listing on the Nasdaq National Market or any other securities
exchange or any automated quotations system maintained by a self-regulatory
organization, Issuer will promptly file an application, if required, to
authorize for quotation or trading or listing the shares of Issuer Common Stock
or other securities to be acquired upon exercise of the Option on the Nasdaq
National Market or any other securities exchange
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or any automated quotations system maintained by a self-regulatory organization
and will use its best efforts to obtain approval, if required, of such quotation
or listing as soon as practicable.
11. DIVISION OF OPTION. This Agreement (and the Option granted hereby) is
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
12. MISCELLANEOUS.
(A) EXPENSES. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(B) WAIVER AND AMENDMENT. Any provision of this Agreement may be waived
at any time by the party that is entitled to the benefits of such provision.
This Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(C) ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARY; SEVERABILITY. This
Agreement, together with the Merger Agreement and the other documents and
instruments referred to herein and therein, between Grantee and Issuer (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (b) is not intended to confer upon any person other
than the parties hereto (other than any transferees of the Option Shares or any
permitted transferee of this Agreement pursuant to Section 12(h)) any rights or
remedies hereunder. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or a federal or state
governmental or regulatory agency or authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Option does not permit Holder to acquire,
or does not require Issuer to repurchase, the full number of shares of Issuer
Common Stock as provided in Sections 3 and 8 (as adjusted pursuant to Section
7), it is the express intention of Issuer to allow Holder to acquire or to
require Issuer to repurchase such lesser number of shares as may be permissible
without any amendment or modification hereof.
(D) GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina without
regard to any otherwise applicable conflicts of law rules, except to the extent
that the federal laws of the United States shall govern.
(E) DESCRIPTIVE HEADINGS. The descriptive headings contained herein are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(F) NOTICES. All notices and other communications hereunder shall be in
writing and shall be delivered and deemed received as provided in Section 8.4 of
the Merger Agreement.
(G) COUNTERPARTS. This Agreement and any amendments hereto may be
executed in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed, it
being understood that both parties need not sign the same counterpart.
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(H) ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Grantee may assign this
Agreement to a wholly owned subsidiary of Grantee and Grantee may assign its
rights hereunder in whole or in part after the occurrence of a Purchase Event.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and permitted assigns.
(I) FURTHER ASSURANCES. In the event of any exercise of the Option by
Holder, Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(J) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement
may be enforced by either party through specific performance, injunctive relief
and other equitable relief. Both parties further agree to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
FRANKLIN BANCORPORATION, INC.
By: /s/ Robert P. Pincus
---------------------------------------------
Name: Robert P. Pincus
--------------------------------------
Title: President and Chief Executive Officer
--------------------------------------
BB&T CORPORATION
By: /s/ John A. Allison
-------------------------------------------
Name: John A. Allison
------------------------------------
Title: Chairman and Chief Executive Officer
------------------------------------
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