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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
SEPTEMBER 30, 1998
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
NORTH CAROLINA 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
At October 31, 1998, 290,968,400 shares of the registrant's common stock,
$5 par value, were outstanding.
---------------
This Form 10-Q has 25 pages. The Exhibit Index is included on page 24.
<PAGE>
BB&T CORPORATION
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) ............................................... 3
Consolidated Financial Statements .............................................. 3
Notes to Consolidated Financial Statements ...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Analysis of Financial Condition ................................................. 10
Market Risk Management .......................................................... 13
Capital Adequacy and Resources .................................................. 16
Analysis of Results of Operations ............................................... 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................. 24
Item 6. Exhibits and Reports on Form 8-K ............................................... 24
SIGNATURES ............................................................................... 25
EXHIBIT 11 Calculation of Earnings Per Share ............................................. 24
EXHIBIT 27 Financial Data Schedule -- Included with electronically-filed document only.
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................................... $ 709,538 $ 890,003
Interest-bearing deposits with banks .................................................. 66,282 77,622
Federal funds sold and securities purchased under resale agreements or similiar
arrangements ........................................................................ 175,503 225,245
Trading securities .................................................................... 66,393 67,878
Securities available for sale ......................................................... 8,077,062 7,296,128
Securities held to maturity (market value: $131,072 at September 30, 1998, and
$233,636 at December 31, 1997)....................................................... 127,394 230,257
Loans held for sale ................................................................... 685,348 509,141
Loans and leases, net of unearned income .............................................. 22,452,870 20,724,729
Allowance for loan and lease losses ................................................. (313,769) (279,596)
----------- -----------
Loans and leases, net .............................................................. 22,139,101 20,445,133
----------- -----------
Premises and equipment, net ........................................................... 433,165 434,260
Other assets .......................................................................... 1,396,002 1,114,580
----------- -----------
TOTAL ASSETS ....................................................................... $33,875,788 $31,290,247
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits .......................................................... $ 3,026,236 $ 2,973,151
Savings and interest checking ......................................................... 1,574,944 1,741,215
Money rate savings .................................................................... 5,979,472 5,352,973
Other time deposits ................................................................... 10,728,611 9,923,003
Foreign deposits ...................................................................... 788,392 1,385,633
----------- -----------
Total deposits ..................................................................... 22,097,655 21,375,975
----------- -----------
Short-term borrowed funds ............................................................. 4,087,763 3,493,199
Long-term debt ........................................................................ 4,386,201 3,534,203
Accounts payable and other liabilities ................................................ 565,697 447,760
----------- -----------
TOTAL LIABILITIES .................................................................. 31,137,316 28,851,137
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding...... -- --
Common stock, $5 par, 500,000,000 shares authorized, 290,805,799 issued and
outstanding at September 30, 1998, and 144,084,061 at December 31, 1997 ............. 1,454,029 720,420
Additional paid-in capital ............................................................ 186,512 171,791
Retained earnings ..................................................................... 1,006,082 1,498,493
Loan to employee stock ownership plan and unvested restricted stock ................... (623) (962)
Accumulated other nonshareholder changes in equity, net of deferred income taxes of
$59,733 at September 30, 1998 and $31,881 at December 31, 1997....................... 92,472 49,368
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ......................................................... 2,738,472 2,439,110
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $33,875,788 $31,290,247
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases ................ $ 502,766 $ 455,849 $ 1,470,045 $ 1,327,039
Interest and dividends on securities ................. 118,164 119,599 361,903 349,237
Interest on short-term investments ................... 2,040 789 7,802 3,341
------------ ------------ ------------ ------------
Total interest income .............................. 622,970 576,237 1,839,750 1,679,617
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits ................................. 202,862 197,722 602,732 587,235
Interest on short-term borrowed funds ................ 46,501 40,353 147,962 108,087
Interest on long-term debt ........................... 59,756 46,120 167,313 119,761
------------ ------------ ------------ ------------
Total interest expense ............................. 309,119 284,195 918,007 815,083
------------ ------------ ------------ ------------
NET INTEREST INCOME ................................... 313,851 292,042 921,743 864,534
Provision for loan and lease losses .................. 20,015 21,845 64,310 68,015
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND
LEASE LOSSES ......................................... 293,836 270,197 857,433 796,519
------------ ------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts .................. 42,854 37,087 126,574 112,412
Mortgage banking activities .......................... 22,485 13,439 60,436 37,002
Trust revenue ........................................ 8,997 8,498 24,822 23,860
Agency insurance commissions ......................... 12,346 9,775 38,562 30,484
Other insurance commissions .......................... 2,798 2,696 8,987 9,600
Other nondeposit fees and commissions ................ 29,760 22,870 82,054 62,234
Securities gains, net ................................ 2,064 1,016 5,712 1,883
Other noninterest income ............................. 15,787 55,382 41,823 69,220
------------ ------------ ------------ ------------
Total noninterest income ........................... 137,091 150,763 388,970 346,695
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Personnel expense .................................... 123,616 126,361 359,281 338,981
Occupancy and equipment expense ...................... 40,486 55,169 117,713 121,719
Amortization of intangibles and mortgage servicing
rights ............................................. 11,058 6,129 32,252 16,986
Other noninterest expense ............................ 69,205 127,307 202,476 247,492
------------ ------------ ------------ ------------
Total noninterest expense .......................... 244,365 314,966 711,722 725,178
------------ ------------ ------------ ------------
EARNINGS
Income before income taxes ........................... 186,562 105,994 534,681 418,036
Provision for income taxes ........................... 59,354 39,759 169,349 147,058
------------ ------------ ------------ ------------
Net income ........................................... $ 127,208 $ 66,235 $ 365,332 $ 270,978
============ ============ ============ ============
PER COMMON SHARE
Net income:
Basic .............................................. $ .45 $ .23 $ 1.28 $ .94
============ ============ ============ ============
Diluted ............................................ $ .44 $ .23 $ 1.25 $ .93
============ ============ ============ ============
Cash dividends paid ................................ $ .175 $ .155 $ .485 $ .425
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING
Basic ................................................ 284,261,612 285,456,768 286,410,415 288,114,906
============ ============ ============ ============
Diluted .............................................. 289,997,773 290,857,220 292,505,930 292,933,116
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF
COMMON COMMON
STOCK STOCK
--------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE, DECEMBER 31, 1996, AS
PREVIOUSLY REPORTED ....................... 142,608,032 $ 713,040
Pooling-of-interests merger with
Franklin Bancorporation, Inc. ........... 2,270,080 11,351
----------- ----------
BALANCE, DECEMBER 31, 1996, AS
RESTATED .................................. 144,878,112 724,391
Add (Deduct)
Nonshareholder changes in equity:**
Net income ................................ -- --
Net unrealized gain on securities
available for sale, net of deferred
income taxes ............................ -- --
----------- ----------
Total nonshareholder changes in
equity ..................................
Common stock issued ....................... 3,434,391 17,171
Redemption of common stock ................ (5,979,252) (29,896)
Cash dividends declared on common
stock ................................... -- --
Other ..................................... -- --
----------- ----------
BALANCE, SEPTEMBER 30, 1997 ............... 142,333,251 $ 711,666
=========== ==========
BALANCE, DECEMBER 31, 1997, AS
PREVIOUSLY REPORTED ....................... 141,763,220 $ 708,816
Pooling-of-interests merger with
Franklin Bancorporation, Inc. ........... 2,320,841 11,604
----------- ----------
BALANCE, DECEMBER 31, 1997, AS
RESTATED .................................. 144,084,061 720,420
Add (Deduct)
Nonshareholder changes in equity:**
Net income ................................ -- --
Net unrealized gain on securities
available for sale, net of deferred
income taxes ............................ -- --
----------- ----------
Total nonshareholder changes in
equity ..................................
Common stock issued ....................... 9,868,761 49,344
Redemption of common stock ................ (5,464,480) (27,322)
2-for-1 stock split effective August 3,
1998 .................................... 142,317,457 711,587
Cash dividends declared on common
stock ................................... -- --
Other ..................................... -- --
----------- ----------
BALANCE, SEPTEMBER 30, 1998 ................ 290,805,799 $1,454,029
=========== ==========
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL RETAINED NONSHAREHOLDER
PAID-IN EARNINGS CHANGES
CAPITAL AND OTHER* IN EQUITY TOTAL
------------- -------------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996, AS
PREVIOUSLY REPORTED ....................... $ 209,368 $1,286,390 $13,707 $2,222,505
Pooling-of-interests merger with
Franklin Bancorporation, Inc. ........... 10,258 10,488 (204) 31,893
----------- ---------- ------- ----------
BALANCE, DECEMBER 31, 1996, AS
RESTATED .................................. 219,626 1,296,878 13,503 2,254,398
Add (Deduct)
Nonshareholder changes in equity:**
Net income ................................ -- 270,978 -- 270,978
Net unrealized gain on securities
available for sale, net of deferred
income taxes ............................ -- -- 29,930 29,930
----------- ---------- ------- ----------
Total nonshareholder changes in
equity .................................. 300,908
Common stock issued ....................... 99,004 -- -- 116,175
Redemption of common stock ................ (236,935) -- -- (266,831)
Cash dividends declared on common
stock ................................... -- (124,654) -- (124,654)
Other ..................................... -- 807 -- 807
----------- ---------- ------- ----------
BALANCE, SEPTEMBER 30, 1997 ............... $ 81,695 $1,444,009 $43,433 $2,280,803
=========== ========== ======= ==========
BALANCE, DECEMBER 31, 1997, AS
PREVIOUSLY REPORTED ....................... $ 161,018 $1,481,075 $48,918 $2,399,827
Pooling-of-interests merger with
Franklin Bancorporation, Inc. ........... 10,773 16,456 450 39,283
----------- ---------- ------- ----------
BALANCE, DECEMBER 31, 1997, AS
RESTATED .................................. 171,791 1,497,531 49,368 2,439,110
Add (Deduct)
Nonshareholder changes in equity:**
Net income ................................ -- 365,332 -- 365,332
Net unrealized gain on securities
available for sale, net of deferred
income taxes ............................ -- -- 43,104 43,104
----------- ---------- ------- ----------
Total nonshareholder changes in
equity .................................. 408,436
Common stock issued ....................... 286,313 -- -- 335,657
Redemption of common stock ................ (271,592) -- -- (298,914)
2-for-1 stock split effective August 3,
1998 .................................... -- (711,587) -- --
Cash dividends declared on common
stock ................................... -- (146,156) -- (146,156)
Other ..................................... -- 339 -- 339
----------- ---------- ------- ----------
BALANCE, SEPTEMBER 30, 1998 ................ $ 186,512 $1,005,459 $92,472 $2,738,472
=========== ========== ======= ==========
</TABLE>
- ---------
* Other includes the stock dividend distributable, unvested restricted stock
and a loan to the employee stock ownership plan.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 365,332 $ 270,978
Adjustments to reconcile net income to net cash providedby operating activities:
Provision for loan and lease losses ............................................... 64,310 68,015
Depreciation of premises and equipment ............................................ 48,093 44,587
Amortization of intangibles and mortgage servicing rights ......................... 32,252 16,986
Accretion of negative goodwill .................................................... (4,682) (4,678)
Amortization of unearned stock compensation ....................................... 339 (182)
Discount accretion and premium amortization on securities, net .................... (1,428) (625)
Net decrease in trading account securities ........................................ 1,485 --
Loss (gain) on sales of securities, net ........................................... (5,712) (1,883)
Loss (gain) on sales of loans and mortgage loan servicing rights, net ............. (22,262) (10,398)
Loss (gain) on sales of premises and equipment, net ............................... (5,568) 35,687
Proceeds from sales of loans held for sale ........................................ 3,236,218 1,062,434
Purchases of loans held for sale .................................................. (1,282,475) (446,036)
Origination of loans held for sale, net of principal collected .................... (2,107,688) (723,432)
Decrease (increase) in:
Accrued interest receivable ...................................................... (20,495) (1,004)
Other assets ..................................................................... (73,541) (8,235)
Increase (decrease) in:
Accrued interest payable ......................................................... 22,012 8,918
Accounts payable and other liabilities ........................................... 113,670 74,723
Other, net ........................................................................ 566 2,535
------------ ------------
Net cash provided by operating activities ....................................... 360,426 388,390
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ............................... 1,045,667 1,323,273
Proceeds from maturities, calls and paydowns of securities available for sale ...... 1,683,300 1,069,474
Purchases of securities available for sale ......................................... (2,970,000) (2,518,861)
Proceeds from maturities of securities held to maturity ............................ 27,955 166,642
Purchases of securities held to maturity ........................................... (13,604) (216,546)
Leases made to customers ........................................................... (69,000) (51,185)
Principal collected on leases ...................................................... 48,192 41,078
Loan originations, net of principal collected ...................................... (940,533) (943,516)
Purchases of loans ................................................................. (104,079) (155,187)
Net cash acquired in transactions accounted for under the purchase method .......... 75,992 22,210
Purchases and originations of mortgage servicing rights ............................ (56,766) (19,461)
Proceeds from disposals of premises and equipment .................................. 45,653 1,506
Purchases of premises and equipment ................................................ (100,415) (89,747)
Proceeds from sales of foreclosed property ......................................... 20,501 10,020
Proceeds from sales of other real estate held for development or sale .............. 14,464 4,914
------------ ------------
Net cash used in investing activities ........................................... (1,292,673) (1,355,386)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ................................................ (91,647) 75,858
Net increase in short-term borrowed funds .......................................... 560,378 122,693
Proceeds from long-term debt ....................................................... 2,154,459 3,536,101
Repayments of long-term debt ....................................................... (1,518,452) (2,640,003)
Net proceeds from common stock issued .............................................. 21,019 18,037
Redemption of common stock ......................................................... (298,914) (266,831)
Cash dividends paid on common stock ................................................ (136,143) (115,661)
------------ ------------
Net cash provided by financing activities ....................................... 690,700 730,194
------------ ------------
Net Decrease in Cash and Cash Equivalents ........................................... (241,547) (236,802)
CASH AND CASH EQUIVALENTS at beginning of period .................................... 1,192,870 1,032,892
------------ ------------
CASH AND CASH EQUIVALENTS at end of period .......................................... $ 951,323 $ 796,090
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .......................................................................... $ 895,812 $ 815,280
Income taxes ...................................................................... 108,686 93,167
Noncash financing and investing activities:
Transfer of securities from held to maturity to available for sale ................ 88,396 --
Transfer of fixed assets to other real estate owned ............................... 17,774 1,668
Transfer of loans to foreclosed property .......................................... 17,557 10,015
Securitization of mortgage loans .................................................. 277,208 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated balance
sheets of BB&T Corporation and subsidiaries ("BB&T" or the "Corporation")
as of September 30, 1998 and December 31, 1997; the consolidated statements
of income for the three and nine months ended September 30, 1998 and 1997;
the consolidated statements of changes in shareholders' equity for the nine
months ended September 30, 1998 and 1997; and the consolidated statements
of cash flows for the nine months ended September 30, 1998 and 1997.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the
footnotes included in BB&T's latest annual report on Form 10-K, as restated
in BB&T's Current Report on Form 8-K filed on September 18, 1998, should be
referred to in connection with the reading of these unaudited interim
consolidated financial statements. Certain 1997 amounts have been
reclassified to conform to statement presentations for 1998. The
reclassifications have no effect on shareholders' equity or net income as
previously reported.
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend
paid August 3, 1998. Accordingly, all per share data (and weighted average
shares) have been restated to reflect the split.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated
by such forward-looking statements include, among others, the following
possibilities: (1) competitive pressure in the banking industry increases
significantly; (2) changes in the interest rate environment reduce margins;
(3) general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration
in credit quality; (4) changes occur in the regulatory environment; (5)
changes occur in business conditions and inflation; (6) expected cost
savings associated with pending mergers cannot be fully realized; (7)
deposit attrition, customer loss or revenue loss following pending mergers
is greater than expected; (8) required operational divestitures associated
with pending mergers are greater than expected; (9) changes occur in the
securities markets; and (10) the Year 2000 issue is not effectively
corrected.
B. NATURE OF OPERATIONS
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina,
Virginia, Maryland and the metropolitan Washington, D.C. area primarily
through its commercial banking subsidiaries and, to a lesser extent,
through its other subsidiaries. The banking subsidiaries, Branch Banking
and Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South
Carolina ("BB&T-SC"), Branch Banking and Trust Company of Virginia
("BB&T-VA"), Franklin National Bank of Washington, D.C. ("FNB") and
Maryland Federal Bank provide a wide range of traditional banking services
to individuals and commercial customers, including small and mid-size
businesses, public agencies and local governments. Substantially all of
BB&T's loans are to businesses and individuals in the market area outlined
above. Subsidiaries of the commercial banking subsidiaries offer lease
financing to commercial businesses and municipal governments, investment
services, (including discount brokerage services, annuities, mutual funds
and government and municipal bonds), life and
7
<PAGE>
property and casualty insurance on an agency basis and insurance premium
financing. Other subsidiaries of BB&T provide services such as automobile
lending, equipment financing, factoring, investment banking and corporate
finance services.
C. NEW ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure
of Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing
and amending existing standards. The statement was effective for financial
statements for periods ending after December 15, 1997. BB&T adopted the
provisions of the statement effective December 31, 1997, however management
determined that BB&T was in compliance with the disclosure requirements of
SFAS No. 129 prior to its adoption. Therefore, the implementation of the
statement did not affect the capital structure disclosures made by BB&T.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements.
Comprehensive income is the nonshareholder related change in equity (net
assets) of a company during a period from transactions and other events.
BB&T adopted the provisions of the statement effective January 1, 1998,
including retroactive application to prior periods. The standard does not
address issues of recognition or measurement of comprehensive income;
therefore, the implementation of the statement did not have a material
impact on BB&T's consolidated financial position or consolidated results of
operations.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the
way that business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is effective
for periods beginning after December 15, 1997, and requires restatement of
all prior periods presented. The standard does not address issues of
recognition or measurement; therefore, the implementation of the statement
will not have an impact on the consolidated financial position or
consolidated results of operations of BB&T, but will require additional
disclosures.
In March, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises the disclosure
requirements for pensions and other postretirement benefit plans. SFAS No.
132 is effective for periods beginning after December 15, 1997, and
requires restatement of all prior periods presented. The statement does not
address issues of recognition or measurement and, therefore, the
implementation of the statement will not have a material impact on the
consolidated financial position or consolidated results of operations of
BB&T, but will require additional disclosures.
During the first quarter of 1998, the American Institute of Certified
Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 requires capitalization of computer software costs that meet certain
criteria. The statement is effective for fiscal years beginning after
December 15, 1998. Management does not expect the implementation of SOP
98-1 to have a material effect on BB&T's consolidated financial position or
consolidated results of operations.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. The statement is effective for fiscal years
beginning after June 15, 1999, and cannot be applied retroactively.
Management has not yet quantified the impact of adopting SFAS No. 133 and
has not determined the timing of or method of adoption of the statement.
However, the statement could increase volatility in earnings and other
comprehensive income.
During the third quarter of 1998, the American Institute of Certified
Public Accountants issued SOP 98-5, "Accounting for Start-up Costs." SOP
98-5 provides guidance on the financial reporting of start-up costs and
organization costs, requiring start-up costs to be expensed as incurred.
The SOP is effective for fiscal years beginning after December 15,
8
<PAGE>
1998. Adoption of the statement is not expected to have a material impact
on BB&T's consolidated financial position or consolidated results of
operations.
During October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The
provisions of the statement are effective for the first quarter of 1999.
Management does not anticipate that the adoption of the statement will have
a material impact on BB&T's consolidated financial position or consolidated
results of operations.
D. MERGERS AND ACQUISITIONS
COMPLETED MERGERS AND ACQUISITIONS
On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc.
("Life") of Norfolk, Virginia. This transaction was accounted for as a
pooling of interests, and, accordingly, the accompanying consolidated
financial statements have been restated to reflect the accounts of Life. In
conjunction with the merger, BB&T issued approximately 5.8 million shares
of common stock (11.6 million shares on a post-split basis) in exchange for
all of the outstanding shares of Life common stock.
On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc.
("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit
to commercial, agricultural, municipal and consumer users for the purchase of
lawn care equipment. The acquisition was accounted for using the purchase
method of accounting and, therefore, the accompanying consolidated financial
statements include the operating results of DCI only since the date of
acquisition. In conjunction with the transaction, BB&T recorded $10.1 million
of goodwill, which is being amortized using the straight-line method over 15
years.
On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company
Inc., and its affiliated companies, (collectively, "Stanley"), located in
Greensboro, North Carolina. Stanley, the largest actuarial, consulting and
administration firm headquartered in the Carolinas, primarily manages
retirement plans for companies and has more than 700 clients located mostly
in the Carolinas, Virginia, Maryland and Tennessee. The merger was
accounted for as a purchase and, therefore, the accompanying consolidated
financial statements include the operating results of Stanley only since
the date of the acquisition. In conjunction with the acquisition, BB&T
recorded $10.3 million of goodwill, which is being amortized using the
straight-line method over 15 years.
On July 1, 1998, BB&T completed its merger with Franklin Bancorporation
Inc. ("Franklin") of Washington, D.C., in a stock transaction accounted for
as a pooling of interests. Under the terms of the merger agreement,
Franklin shareholders received .70 shares of BB&T stock for each share of
Franklin stock held. Approximately 2.5 million shares of BB&T common stock
(4.9 million shares on a post-split basis) were issued in exchange for all
of the Franklin common stock outstanding.
On September 30, 1998, BB&T completed its acquisition of Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a
transaction accounted for as a purchase. In conjunction with the merger,
BB&T issued 8.7 million shares of BB&T common stock in exchange for all of
the outstanding shares of Maryland Federal common stock. BB&T recorded
$158.8 million of goodwill, which is being amortized using the
straight-line method over a period of 15 years.
Under the provisions of SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchase Enterprises," BB&T typically provides an
allocation period, not to exceed one year, to identify and quantify the
assets acquired and liabilities assumed in purchase business combinations.
Management currently does not anticipate any material adjustments to the
assigned values of the assets and liabilities of acquired companies.
PENDING MERGERS AND ACQUISITIONS
On August 10, 1998, BB&T announced plans to acquire Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based
in Richmond, Virginia. The transaction will be accounted for as a purchase.
Scott & Stringfellow shareholders will receive one share of BB&T common
stock in exchange for each share of Scott & Stringfellow common stock held.
The acquisition is expected to be completed during the first quarter of
1999.
On August 26, 1998, BB&T announced plans to merge with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The
transaction will be accounted for as a pooling of interests. MainStreet
shareholders will
9
<PAGE>
receive 1.18 shares of BB&T common stock in exchange for each share of
MainStreet common stock held. The merger is expected to be completed during
the first quarter of 1999.
E. CALCULATION OF EARNINGS PER COMMON SHARE
BB&T's basic and diluted earnings per common share amounts were calculated
as follows (amounts adjusted for the impact of the 2-for-1 stock split
effective August 3, 1998):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common shares
outstanding during the period ................... 284,261,612 285,456,768 286,410,415 288,114,906
=========== =========== =========== ===========
Net income ........................................ $ 127,208 $ 66,235 $ 365,332 $ 270,978
============= ============= ============= =============
Basic earnings per share .......................... $ .45 $ .23 $ 1.28 $ .94
============= ============= ============= =============
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common shares
outstanding during the period ................... 284,261,612 285,456,768 286,410,415 288,114,906
Add-
Dilutive effect of outstanding options (as
determined by application of treasury stock
method) ........................................ 5,736,161 5,326,156 6,095,515 4,721,553
Issuance of additional shares under share
repurchase agreement, contingent upon market
price .......................................... -- 74,296 -- 96,657
------------- ------------- ------------- -------------
Weighted average number of common shares, as
adjusted ........................................ 289,997,773 290,857,220 292,505,930 292,933,116
============= ============= ============= =============
Net income ........................................ $ 127,208 $ 66,235 $ 365,332 $ 270,978
============= ============= ============= =============
Diluted earnings per share ........................ $ .44 $ .23 $ 1.25 $ .93
============= ============= ============= =============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at September 30, 1998, were $33.9 billion, a $2.6
billion increase from the balance at December 31, 1997. The balance sheet
categories that accounted for most of the increase were loans and leases,
including loans held for sale, which grew $1.9 billion, securities available
for sale, which increased $780.9 million, and other assets, which increased
$281.4 million compared to year-end 1997. These increases were partially offset
by declines in cash and due from banks, which decreased $180.5 million,
interest-bearing deposits with banks, down $11.3 million, Federal funds sold
and securities purchased under resale agreements or similar arrangements, which
decreased $49.7 million and securities held to maturity, which decreased $102.9
million.
Total deposits increased $721.7 million, short-term borrowed funds
increased $594.6 million and long-term debt increased $852.0 million during the
first nine months of 1998. Total shareholders' equity increased $299.4 million.
The factors causing the fluctuations in these balance sheet categories are
further discussed in the following paragraphs.
LOANS AND LEASES
BB&T's overall loan growth continued at a healthy pace during the third
quarter of 1998, with end of period loans, including loans held for sale,
increasing 15.0% compared to September 30, 1997, and 12.0% on an annualized
basis since year-end 1997. Average loans increased 11.4% in the third quarter
of 1998 and 12.1% in the nine months ended September 30, 1998, compared to the
same periods in 1997.
While BB&T's overall loan growth has remained strong, the mix of the loan
portfolio has changed in 1998 compared to 1997 and the growth rates of the
various categories of loans reflect this change in mix. As a result of declines
in interest
10
<PAGE>
rates, mortgage loans increased 23.1% on average in the current quarter
compared to the third quarter of 1997 and were up 28.4% for the first nine
months of 1998 compared to the first nine months of 1997. BB&T's other loan
categories experienced growth at a slower pace. Average commercial loans,
including leasing, increased 10.4% in this year's third quarter compared to
last year's third quarter and 9.2% for the first nine months of 1998 compared
to the same period in 1997. Average consumer loans, which includes sales
finance, revolving credit and direct retail, increased 3.7% comparing the third
quarters of 1998 and 1997, and 4.0% comparing the nine month periods ended
September 30, 1998 and 1997. The slower growth in retail lending has been
affected by refinancing of mortgage loans as BB&T's clients, in some cases, pay
down credit card and home equity lines with proceeds from mortgage refinancing.
The 1998 growth rates include the effects of loans that were divested in
connection with the 1997 merger with United Carolina Bancshares Corporation
("UCB") and the purchase accounting transactions completed in 1997. BB&T
divested $232.3 million of loans in conjunction with the UCB merger and
acquired $1.0 billion in loans from the purchases of Fidelity Financial
Bankshares Corporation ("Fidelity"), Phillips Factors Corporation ("Phillips"),
Refloat, Inc. ("Refloat") and Virginia First Financial Corporation ("Virginia
First"). Excluding the impact of the UCB merger-related divestiture and the
purchase accounting transactions, average "internal" loan growth for the three
months and nine months ended September 30, 1998, was 4.9% and 6.3%,
respectively, compared to the third quarter and first nine months of 1997. By
category, excluding the divestiture and the purchase accounting transactions,
mortgage loans increased 12.4% for the quarter and 17.2% for the nine months,
commercial loans grew 7.5% for the quarter and 7.3% for the nine months,
revolving credit loans increased 6.0% for the quarter and 6.9% for the nine
months and direct retail loans were up 1.5% for the third quarter and up 2.7%
for the nine months than the comparable periods in 1997.
The change in the overall mix of the loan portfolio, which principally
resulted from the rapid growth in mortgages, negatively affected the net
interest margin in the second quarter. However, the net interest margin for the
third quarter improved to 4.40% from the second quarter margin of 4.29%. The
average yield on mortgage loans for the nine months ended September 30, 1998,
was 7.69%, down 18 basis points from the yield from the first nine months of
1997. Over the same time frame, the yields from commercial loans and consumer
loans increased 4 basis points to 9.16% and decreased 3 basis points to 10.34%,
respectively. The yield on the total loan portfolio decreased 10 basis points
to 9.09% for the first nine months of 1998 compared to 1997.
BB&T is the largest originator of mortgage loans and home equity loans in
the Carolinas and is the thirteenth largest home equity lender in the U.S. BB&T
typically sells fixed-rate mortgage loans in the secondary market while
retaining the servicing on all loans. The total mortgage servicing portfolio
exceeded $15 billion at September 30, 1998.
SECURITIES
Securities available for sale, which totaled $8.1 billion, increased
$780.9 million from December 31, 1997. These securities had net unrealized
gains, net of deferred income taxes, of $92.5 million at September 30, 1998,
compared to $49.4 million at December 31, 1997. Securities held to maturity
totaled $127.4 million, down $102.9 million from year-end 1997. The increase in
total securities holdings, excluding trading securities, includes the effect of
the securitization of $277.2 million of mortgage loans which were transferred
to the securities portfolio in the form of collateralized mortgage obligations
(CMO's). Management securitized the loans in an effort to improve the net yield
from the securities portfolio, with higher-yielding CMO's. The average yield on
the securities portfolio for the first nine months was 6.79%, unchanged from
the net yield earned in the first nine months of 1997.
OTHER INTEREST-EARNINGS ASSETS
Federal funds sold and securities purchased under resale agreements or
similar arrangements decreased $49.7 million during the first nine months of
1998, or 22.1%. The decrease was due to lower investments in overnight funds.
The average yield on other interest-earning assets for the first nine months of
1998 was 5.64%, up from 5.62% earned during the first nine months of 1997.
OTHER ASSETS
BB&T's other noninterest-earning assets increased $281.4 million from
December 31, 1997, to September 30, 1998. The increase results primarily from
goodwill, which increased $181.3 million during the nine months because of the
acquisitions of DCI, Stanley and Maryland Federal. In addition, capitalized
mortgage servicing rights increased $29.7 million over the same time frame,
resulting from the substantial increase in mortgage loan activity.
11
<PAGE>
DEPOSITS
Total deposits increased $721.7 million during the first nine months of
the year. Certificates of deposit and other time deposits led the increase by
growing $804.6 million, or 8.1%. Money rate savings accounts grew $626.5
million, or 11.7%, and noninterest-bearing deposits increased $53.1 million.
These increases were partially offset by a $596.2 million decrease in foreign
deposits and a $166.3 million decrease in savings and interest checking. The
shift from foreign deposits to certificate accounts reflects an effort to
diversify short-term funding into institutional certificate accounts.
The growth in overall deposits primarily results from purchase accounting
and from the promotion of an "Investor Deposit Account," which is a money rate
savings account that provides greater flexibility than traditional certificate
accounts and is more cost effective than certificates of deposit. On average,
the third quarter balance of investor deposit accounts totaled $2.5 billion,
compared to a third quarter 1997 average of $1.5 billion, which reflects a
73.0% growth rate. Compared to the average balance for the second quarter of
1998, investor deposit accounts increased $252.3 million, an annualized growth
rate of 44.2%.
On August 15, 1997, BB&T divested $505.8 million of deposits in
conjunction with the merger with UCB. BB&T also acquired $893.1 million of
deposits during 1997 through the purchases of Fidelity and Virginia First. In
1998, BB&T acquired $813.3 million of deposits through the purchase acquisition
of Maryland Federal. Excluding the impact of the divestiture and the purchase
accounting transactions, BB&T's average quarterly deposits would have been
$21.2 billion, 2.6% greater than the average balance, excluding the impact of
the divestiture, for the third quarter of 1997.
The average cost for total interest-bearing deposits during the first nine
months of 1998 was 4.39%, down 3 basis points from the comparable period in
1997.
SHORT-TERM BORROWED FUNDS
As a result of asset growth rates significantly higher than deposit growth
rates in recent years, combined with the availability of cost-effective
alternative funding sources, management has increasingly utilized nondeposit
funding sources, such as Federal Home Loan Bank ("FHLB") advances, master
notes, purchases of Federal funds and sales of securities under repurchase
agreements.
During the third quarter, short-term borrowed funds increased $594.6
million, or 17.0%, compared to year-end 1997. On average, short-term borrowed
funds increased $962.1 million for the nine months ended September 30, 1998,
compared to the same period in 1997, to a balance of $3.7 billion. Balances of
short-term borrowed funds can fluctuate substantially from day to day based on
specific funding needs. The average rate paid on short-term borrowed funds was
5.30% for the first nine months of 1998, up from 5.22% for the same period in
1997.
LONG-TERM DEBT
Long-term debt consists primarily of FHLB advances, medium term bank notes
and corporate subordinated debt. These borrowings are utilized because they are
a cost-effective long-term funding source and provide BB&T with the flexibility
to structure the debt to manage interest rate risk and liquidity. Long-term
debt totaled $4.4 billion at September 30, 1998, an increase of $852.0 million,
or 24.1%, from the balance at December 31, 1997. The largest component of the
increase was the issuance of $350 million of corporate subordinated notes on
June 30, 1998. On average, long-term debt increased $1.1 billion for the first
nine months of 1998 compared to the first nine months of 1997. Long-term debt
has been for a variety of funding needs, including the repurchase of shares of
BB&T's common stock in conjunction with various acquisitions accounted for by
the purchase method.
ASSET QUALITY
Nonperforming assets (composed of foreclosed assets, nonaccrual loans and
restructured loans) totaled $116.0 million at September 30, 1998, compared to
$136.2 million at December 31, 1997. Nonperforming assets, as a percentage of
loan-related assets, were .50% at September 30, 1998, compared to .64% at
December 31, 1997. Loans 90 days or more past due and still accruing interest
totaled $46.9 million compared to a year-end 1997 balance of $44.4 million.
Net charge-offs totaled $16.0 million and amounted to .29% of average
loans and leases in the third quarter of 1998 compared to $18.3 million, or
.36% of average loans and leases, in the corresponding period in 1997. For the
nine months ended September 30, 1998, net charge-offs totaled $46.9 million, or
.29% of average loans and leases, compared to $47.0 million, or .32% of average
loans and leases, during 1997. The decrease in net charge-offs as a percentage
of average loans and leases results from improved overall asset quality and
lower charge-offs at Regional Acceptance Corporation, BB&T's nonstandard
automobile finance company. BB&T has also experienced higher recoveries during
1998.
12
<PAGE>
The allowance for loan and lease losses was $313.8 million, or 1.36% of
loans and leases, at September 30, 1998, compared to $279.6 million, or 1.32%
of loans and leases, at December 31, 1997. The provision for loan and lease
losses for the third quarter of 1998 was $20.0 million, compared to $21.8
million in the third quarter of 1997. For the nine months ended September 30,
1998, the provision totaled $64.3 million, down from the $68.0 million recorded
in the first nine months of 1997. The lower provision results from lower net
charge-offs during 1998 and positive trends in nonaccrual loans and leases and
other nonperforming assets since year-end 1997.
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
AS OF/FOR THE QUARTER ENDED
----------------------------------------------------------------
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance ......................................... $294,226 $ 286,742 $ 279,596 $ 270,068 $ 264,826
Allowance for acquired loans .............................. 15,542 1,269 -- 12,012 1,690
Provision for loan and lease losses ....................... 20,015 21,955 22,340 29,995 21,845
Net charge-offs ........................................... (16,014) (15,740) (15,194) (32,479) (18,293)
--------- --------- --------- --------- ---------
Ending balance .......................................... $313,769 $294,226 $286,742 $279,596 $270,068
========= ========= ========= ========= =========
RISK ASSETS
Nonaccrual loans and leases ............................... $ 83,623 $ 78,919 $ 92,971 $ 99,938 $ 74,735
Foreclosed real estate .................................... 20,570 19,476 15,477 20,937 16,531
Other foreclosed property ................................. 11,322 13,911 14,603 13,986 13,914
Restructured loans ........................................ 525 528 -- 1,377 1,532
--------- --------- --------- --------- ---------
Nonperforming assets .................................... $116,040 $112,834 $123,051 $136,238 $106,712
========= ========= ========= ========= =========
Loans 90 days or more past due and still accruing ......... $ 46,873 $ 48,947 $ 42,257 $ 44,362 $ 40,075
========= ========= ========= ========= =========
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total
loans and leases .......................................... .36 % .35 % .43 % .47 % .37 %
Nonperforming assets as a percentage of:
Total assets .............................................. .34 .35 .38 .44 .37
Loans and leases plus foreclosed property ................. .50 .51 .56 .64 .53
Net charge-offs as a percentage of average loans and
leases .................................................... .29 .29 .29 .63 .36
Allowance for loan and lease losses as a percentage of
loans and leases .......................................... 1.36 1.32 1.31 1.32 1.34
Ratio of allowance for loan and lease losses to:
Net charge-offs ........................................... 4.94 X 4.66 x 4.65 x 2.17 x 3.72 x
Nonaccrual loans and leases ............................... 3.73 3.70 3.08 2.76 3.54
</TABLE>
All items referring to loans and leases include loans held for sale and
are net of unearned income. Applicable ratios are annualized.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, BB&T's basic market risk
exposure is interest rate risk. A prime objective in interest rate risk
management is to minimize the effect that changes in interest rates on
interest-sensitive assets and interest-sensitive liabilities have on net
interest income. Management uses active balance sheet management as an
efficient and cost-effective means of controlling interest rate risk. This is
accomplished through strategic pricing of asset and liability accounts. The
expected result of strategic pricing is the development of appropriate maturity
and repricing opportunities in those accounts to produce consistent net income
during changing interest rate environments. The Asset / Liability Management
Committee ("ALCO") monitors loan, investment and liability portfolios to ensure
comprehensive management of interest rate risk. These portfolios are analyzed
for proper fixed-rate and variable-rate "mixes" under various interest rate
scenarios.
13
<PAGE>
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the ALCO to determine and achieve the most
appropriate volume and mix of earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to interest rate risk
exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate
risk and liquidity positions in relation to present and prospective market and
business conditions, and adopts funding and balance sheet management strategies
that are intended to ensure that the potential impact on earnings and liquidity
as a result of fluctuations in interest rates is within acceptable standards.
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in interest rates and the efforts of the Board of
Governors of the Federal Reserve ("FRB") to regulate money and credit
conditions have a greater effect on a financial institution's profitability
than do the effects of higher costs for goods and services. Through its balance
sheet management function, BB&T is positioned to respond to changing interest
rates and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of earnings to changes in interest rates. Simulation
takes into account the current contractual agreements that BB&T has made with
its customers on deposits, borrowings, loans, investments and any commitments
to enter into those transactions. Management monitors BB&T's interest
sensitivity by means of a computer-based asset/liability model that
incorporates current volumes and rates, maturities, repricing opportunities and
anticipated growth of asset and liability portfolios. The model calculates an
earnings estimate based on current and projected portfolio balances and
interest rates. This level of detail is needed to correctly simulate the effect
that changes in interest rates and portfolio balances will have on the earnings
of BB&T. This method is subject to the accuracy of the assumptions that
underlie the process, but it provides a better illustration of true earnings
potential than other analyses such as static or dynamic gap.
The asset/liability management process involves various analyses.
Management determines the most likely outlook for the economy and interest
rates by analyzing environmental factors including regulatory changes, monetary
and fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance are
all considered, given the current environmental situation. This data is
combined with various interest rate scenarios to provide management with
information necessary to analyze interest sensitivity and to aid in the
development of strategies to reach specific performance goals.
The following table represents the interest sensitivity position of BB&T
as of September 30, 1998. This position can be modified by management within a
relatively short time period if necessary through the use of various
techniques, including securitizing assets, changing funding and investment
strategies and utilizing derivative financial instruments. Key assumptions in
the preparation of the table include prepayment speeds of mortgage-related
assets; cash flows and maturities of derivative financial instruments; changes
in market conditions, loan and deposit volumes and pricing; customer
preferences; and capital plans. This tabular data does not reflect the impact
of any changes in the credit quality of BB&T's assets. To attempt to quantify
the potential change in net interest income, given a change in interest rates,
various interest rate scenarios are applied to projected balances of assets and
liabilities incorporating the projected effect of maturities and repricing
opportunities. The resulting change in net interest income reflects the level
of sensitivity that net interest income has in relation to changing interest
rates.
INTEREST SENSITVITY SIMULATION ANALYSIS
<TABLE>
<CAPTION>
ANNUALIZED
INTEREST HYPOTHETICAL
RATE PERCENTAGE
SCENARIO CHANGE IN
- ----------------- PRIME NET INTEREST
LINEAR RATE INCOME
- ----------------- ----------- -------------
<S> <C> <C>
+3.00% 11.00% -1.59%
+1.50 9.50 -1.47
-1.50 6.50 -1.06
-3.00 5.00 -1.24
</TABLE>
14
<PAGE>
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
parallel change in interest rates over nine months from the most likely
interest rate scenario, and a maximum of 6% for a 300 basis point change over
12 months. It is management's ongoing objective to effectively manage the
impact of changes in interest rates and minimize the resulting effect on
earnings as evidenced by the preceding table. At September 30, 1998, the
sensitivity of BB&T's net interest income to changes in interest rates was
within management's targets, as indicated in the accompanying table.
DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
BB&T utilizes a variety of derivative financial instruments to manage
various financial risks. These instruments include financial forward and
futures contracts, options written and purchased, interest rate caps and floors
and interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose BB&T to interest rate
risk or price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
Many of BB&T's derivative contracts are written in amounts referred to as
notional amounts. Notional amounts do not represent amounts to be exchanged
between parties and are not a measure of financial risks, but only provide the
basis for calculating payments between the counterparties. On September 30,
1998, BB&T had outstanding interest rate swaps, caps, floors and collars with
notional amounts totaling $3.6 billion. The estimated fair value of open
contracts used for risk management purposes reflected net unrealized gains of
$46.1 million at September 30, 1998.
BB&T uses derivative contracts to hedge specified assets or groups of
assets, liabilities or groups of liabilities, forward commitments and
anticipated transactions. BB&T's derivatives are primarily used to hedge
variable rate commercial loans, adjustable rate mortgage loans, retail
certificates of deposit and fixed rate notes.
The net interest payable or receivable on interest rate swaps and floors
that are designated as hedges is accrued and recognized as an adjustment to the
interest income or expense of the related asset or liability. For interest rate
forwards, futures and options qualifying as a hedge, gains and losses are
deferred and are recognized in income as an adjustment of yield. Gains and
losses from early terminations of derivatives are deferred and amortized as
yield adjustments over the shorter of the remaining term of the hedged asset or
liability or the remaining term of the derivative instrument. Upon disposition
or settlement of the asset or liability being hedged, deferral accounting is
discontinued and any gains or losses are recognized in income. Derivative
financial instruments that fail to qualify as a hedge are carried at fair value
with gains and losses recognized in current earnings.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.
All of the interest rate swaps, caps and floors to which BB&T is a party settle
monthly, quarterly or semiannually. Accordingly, the amount of off-balance
sheet credit exposure to which BB&T is exposed at any time is immaterial.
Further, BB&T has netting agreements with the dealers with which it does
business. Because of these netting agreements, BB&T had a minimal amount of
off-balance sheet credit exposure at September 30, 1998.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments," requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. The following tables set forth
certain information concerning BB&T's interest rate swaps, caps, floors and
collars at September 30, 1998:
15
<PAGE>
INTEREST RATE SWAPS, CAPS, FLOORS AND COLLARS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NOTIONAL RECEIVE PAY UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
- ------------------------------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Receive fixed swaps ................. $1,110,600 6.45% 5.64% $ 52,283
Pay fixed swaps ..................... 1,104,298 5.66 5.71 (6,420)
Basis swaps ......................... 100,000 5.77 5.59 (1)
Caps, floors & collars .............. 1,247,250 -- -- 258
---------- ---- ---- -----------
Total ............................... $3,562,148 6.04% 5.67% $ 46,120
========== ==== ==== ===========
BASIS SWAPS,
RECEIVE PAY FIXED CAPS, FLOORS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS & COLLARS TOTAL
- -------------------------------------- --------------- ---------- ------------- -----------
Balance, December 31, 1997 .......... $1,301,000 $ 351,930 $ 776,000 $2,428,930
Additions ........................... 10,000 858,978 797,250 1,666,228
Maturities/amortizations ............ (200,400) (106,610) (61,000) (368,010)
Terminations ........................ -- -- (165,000) (165,000)
----------- ----------- ------------ -----------
Balance, September 30, 1998 ......... $1,110,600 $1,104,298 $1,347,250 $3,562,148
=========== =========== ============ ===========
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
- -------------------------------------- --------------- ---------- ----------- -----------
Receive fixed swaps ................. $ 550,600 $ 300,000 $ 260,000 $1,110,600
Pay fixed swaps ..................... 1,010,600 62,820 30,878 1,104,298
Basis swaps ......................... 100,000 -- -- 100,000
Caps, floors & collars .............. 500,000 747,250 -- 1,247,250
----------- ----------- ------------ -----------
Total ............................... $2,161,200 $1,110,070 $ 290,878 $3,562,148
=========== =========== ============ ===========
</TABLE>
* Maturities are based on full contract extensions.
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Capital adequacy is monitored on an ongoing basis by management. BB&T's
principal capital planning goals are to provide an adequate return to
shareholders while retaining a sufficient base to support future growth and
comply with all regulatory standards.
Total shareholders' equity was $2.7 billion at September 30, 1998, and
$2.4 billion at December 31, 1997. BB&T's book value per common share at
September 30, 1998, was $9.42 compared to $8.46 at December 31, 1997.
Tier 1 capital (total shareholders' equity less goodwill and other
disallowed intangible assets), total risk-based capital and the leverage ratios
at September 30, 1998, were estimated to be 10.0%, 14.8% and 7.1%,
respectively. The comparable ratios at the end of 1997 were 10.3%, 13.9% and
7.3%, respectively. The Tier 1 and total capital ratios measure capital
relative to risk-weighted assets as defined by FRB guidelines. An 8.00% minimum
of total capital to risk-weighted assets is required. One-half of the 8.00%
minimum must consist of tangible common shareholders' equity (Tier 1 capital)
under regulatory guidelines. The leverage ratio, established by the FRB,
measures Tier 1 capital to average total assets less goodwill and must be
maintained in conjunction with the risk-based capital standards. The regulatory
minimum for the leverage ratio is 3.00% to 5.00% based on evaluation.
16
<PAGE>
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ----------------------
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios
Tier 1 capital ......... 10.0% 10.2% 10.5% 10.3% 10.1%
Total capital .......... 14.8 15.5 14.0 13.9 13.7
Leverage ratio .......... 7.1 6.8 7.1 7.3 7.2
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the third quarter of 1998 totaled $127.2 million, an
increase of 92.1% over the $66.2 million earned during the third quarter of
1997. On a diluted per share basis, earnings for the three months ended
September 30, 1998, were $.44 compared to $.23 for the same period in 1997, an
increase of 91.3%. BB&T's operating results for the third quarter of 1998
produced an annualized return on average assets of 1.58% and an annualized
return on average shareholders' equity of 20.62% compared to prior year ratios
of .90% and 11.43%, respectively.
For the first nine months of 1998, net income totaled $365.3 million, an
increase of 34.8% over the net income earned in the comparable period of 1997.
On a diluted per share basis, net income was $1.25, an increase of 34.4%
compared to the first nine months of 1997.
BB&T's earnings for the third quarter and the first nine months of 1998
and the comparable periods of 1997 were adversely affected by nonrecurring,
merger-related charges. During the first quarter of 1998, BB&T recorded $6.0
million in after-tax expenses primarily associated with the Life merger. These
charges included costs associated with professional fees, the reduction of
staffing levels, early retirement packages and other personnel-related
expenses. During the third quarter of 1998, an additional $4.9 million in
after-tax charges were recorded in conjunction with the Franklin merger. These
costs included professional fees, personnel-related expenses and occupancy and
equipment costs.
During the first nine months of 1997, BB&T incurred $42.7 million in net
after tax charges primarily relating to the merger with UCB. These charges were
recorded during the third quarter of 1997.
Excluding the impact of the nonrecurring merger-related charges on 1998
and 1997 operating results, BB&T would have had third quarter net income of
$132.1 million, an increase of 21.3% compared to the $108.9 million earned in
the third quarter of 1997. On a diluted per share basis, third quarter earnings
excluding these changes were $.46, compared to $.37 earned in the third quarter
last year, an increase of 24.3%.
BB&T's recurring earnings for the first nine months of 1998 totaled $376.3
million, compared to $313.7 million in the prior year, an increase of 20.0%. On
a diluted per share basis, earnings for the first nine months of 1998,
excluding nonrecurring charges, totaled $1.29, up 20.6% from the prior year
earnings per share of $1.07. Earnings before nonrecurring expenses for the
first nine months of 1998 produced an annualized return on average assets of
1.58% and a return on average equity of 20.37%, compared to prior year ratios
of 1.47% and 18.23%, respectively.
BB&T's growth in recurring earnings resulted from three principal factors.
First, BB&T's noninterest income continues to grow at a very strong pace,
increasing 33.1% on a recurring basis for the three months ended September 30,
1998, compared to the same period in 1997, and 30.1% for the nine months ended
September 30, 1998, compared to the first nine months of 1997. Second, as
discussed above, BB&T has experienced positive growth in loans and has seen
improvement in the net interest margin during the third quarter, which resulted
in a 7.7% increase in net interest income on a fully taxable equivalent ("FTE")
basis in the third quarter of 1998, compared to the third quarter of 1997.
Third, BB&T has continued to effectively manage the growth of noninterest
expenses. Excluding acquisitions accounted for by the purchase method of
accounting, recurring noninterest expense increased 7.7% in the third quarter
compared to the same period in 1997, and 6.2% during the nine months ended
September 30, 1998, compared to the first nine months of 1997.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income on an FTE basis was $330.0 million for the third
quarter of 1998 compared to $306.3 million for the same period in 1997, a 7.7%
increase. For the three months ended September 30, 1998, average
interest-earning assets increased $2.4 billion, or 8.9%, to $29.9 billion over
the third quarter of 1997, while average interest-bearing liabilities increased
by $2.2 billion. During the same time period, the net interest margin decreased
from a third quarter 1997 rate of 4.45% to a rate of 4.40% in the current
quarter. The 5 basis point decline in margin was primarily the result of
increased
17
<PAGE>
funding costs associated with BB&T's share repurchase program, which resulted
in a reduction in margin of 10 basis points during the quarter, the 1997
divestiture associated with the UCB merger, which resulted in a 5 basis point
decline, and the changes in loan mix discussed above.
For the nine months ended September 30, 1998, FTE net interest income was
$968.8 million, an increase of 7.4% from the prior year balance of $902.5
million. Total average earning assets increased $2.8 billion, or 10.6%,
compared to the first nine months of 1997, while average interest-bearing
liabilities increased $2.7 billion, or 11.5%.
The following tables demonstrate fluctuations in net interest income and
the related yields for the third quarter of 1998 and the first nine months of
1998 compared to the comparable periods in 1997, and detail the portions of
these changes caused by changes in rates versus changes in volumes.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
AVERAGE BALANCES YIELD/RATE
--------------------------- ---------------------
FULLY TAXABLE EQUIVALENT 1998 1997 1998 1997
- ----------------------------------- ------------- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government
and other (5) ................... $ 7,275,157 $ 7,197,354 6.77% 6.82%
States and political
subdivisions .................... 186,547 186,298 8.31 8.36
----------- ----------- ----- -----
Total securities (5) ............ 7,461,704 7,383,652 6.80 6.86
Other earning assets (2) .......... 149,583 62,546 5.43 5.07
Loans and leases, net of
unearned income (1)(3)(4)(5)...... 22,271,025 19,989,459 9.10 9.21
----------- ----------- ----- -----
Total earning assets ............ 29,882,312 27,435,657 8.51 8.57
----------- ----------- ----- -----
Non-earning assets .............. 2,070,437 1,689,338
----------- -----------
TOTAL ASSETS .................. $31,952,749 $29,124,995
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and interest-
checking ........................ $ 1,617,263 $ 2,098,023 1.74 1.76
Money rate savings ............... 5,785,865 4,773,401 3.19 3.14
Time deposits .................... 10,981,136 10,849,509 5.41 5.51
----------- ----------- ----- -----
Total interest-bearing
deposits ...................... 18,384,264 17,720,933 4.38 4.43
Short-term borrowed funds ......... 3,488,026 3,031,576 5.29 5.28
Long-term debt .................... 4,167,594 3,068,112 5.71 5.98
----------- ----------- ----- -----
Total interest-bearing
liabilities ................... 26,039,884 23,820,621 4.71 4.74
----------- ----------- ----- -----
Noninterest-bearing
deposits ...................... 2,933,474 2,679,346
Other liabilities ............... 531,278 326,116
Shareholders' equity ............ 2,448,113 2,298,912
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ............. $31,952,749 $29,124,995
=========== ===========
Average interest rate spread ...... 3.80 3.83
Net yield on earning assets ....... 4.40% 4.45%
===== =====
Taxable equivalent adjustment .....
<CAPTION>
INCOME/EXPENSE CHANGE DUE TO
----------------------- INCREASE -----------------------
FULLY TAXABLE EQUIVALENT 1998 1997 (DECREASE) RATE VOLUME
- ----------------------------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government
and other (5) ................... $123,142 $122,737 $ 405 $ (926) $ 1,331
States and political
subdivisions .................... 3,877 3,893 (16) (21) 5
-------- -------- -------- --------- --------
Total securities (5) ............ 127,019 126,630 389 (947) 1,336
Other earning assets (2) .......... 2,048 799 1,249 64 1,185
Loans and leases, net of
unearned income (1)(3)(4)(5)...... 510,077 463,098 46,979 (4,042) 51,021
-------- -------- -------- --------- --------
Total earning assets ............ 639,144 590,527 48,617 (4,925) 53,542
-------- -------- -------- --------- --------
Non-earning assets ..............
TOTAL ASSETS ..................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and interest-
checking ........................ 7,087 9,293 (2,206) (99) (2,107)
Money rate savings ............... 46,429 37,786 8,643 631 8,012
Time deposits .................... 149,346 150,643 (1,297) (2,695) 1,398
-------- -------- -------- --------- --------
Total interest-bearing
deposits ...................... 202,862 197,722 5,140 (2,163) 7,303
Short-term borrowed funds ......... 46,501 40,353 6,148 174 5,974
Long-term debt .................... 59,756 46,120 13,636 (2,080) 15,716
-------- -------- -------- --------- --------
Total interest-bearing
liabilities ................... 309,119 284,195 24,924 (4,069) 28,993
-------- -------- -------- --------- --------
Noninterest-bearing
deposits ......................
Other liabilities ...............
Shareholders' equity ............
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............
Average interest rate spread ......
Net yield on earning assets ....... $330,025 $306,332 $ 23,693 $ (856) $ 24,549
======== ======== ======== ========= ========
Taxable equivalent adjustment ..... $ 16,174 $ 14,290
======== ========
</TABLE>
- ---------
(1) Yields related to securities, loans and leases exempt from both Federal and
state income taxes, Federal income taxes only or state income taxes only are
stated on a taxable equivalent basis using statutory tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale agreements
or similar arrangements.
(3) Loan fees, which are not material for the periods shown, are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances.
(5) Includes assets held for sale or available for sale at amortized cost and
trading securities at estimated fair value.
18
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
AVERAGE BALANCES YIELD/RATE
--------------------------- ---------------------
FULLY TAXABLE EQUIVALENT 1998 1997 1998 1997
- ----------------------------------- ------------- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government
and other (5) .................. $ 7,431,608 $ 7,048,676 6.74% 6.74%
States and political
subdivisions ................... 185,140 190,553 8.48 8.53
----------- ----------- ----- -----
Total securities (5) ........... 7,616,748 7,239,229 6.79 6.79
Other earning assets (2) .......... 186,068 80,520 5.64 5.62
Loans and leases, net of
unearned
income (1)(3)(4)(5) .............. 21,924,505 19,566,542 9.09 9.19
----------- ----------- ----- -----
Total earning assets ............. 29,727,321 26,886,291 8.48 8.53
----------- ----------- ----- -----
Non-earning assets ............... 2,053,849 1,631,284
----------- -----------
TOTAL ASSETS ..................... $31,781,170 $28,517,575
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and interest-
checking ....................... $ 1,707,190 $ 2,148,117 1.78 1.78
Money rate savings ............... 5,563,072 4,683,375 3.06 3.08
Time deposits .................... 11,086,618 10,938,110 5.46 5.51
----------- ----------- ----- -----
Total interest-bearing
deposits ...................... 18,356,880 17,769,602 4.39 4.42
Short-term borrowed funds ......... 3,732,965 2,770,875 5.30 5.22
Long-term debt .................... 3,858,294 2,727,802 5.79 5.86
----------- ----------- ----- -----
Total interest-bearing
liabilities ................... 25,948,139 23,268,279 4.73 4.68
----------- ----------- ----- -----
Noninterest-bearing
deposits ...................... 2,846,159 2,617,205
Other liabilities .............. 517,403 331,311
Shareholders' equity ........... 2,469,469 2,300,780
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ............. $31,781,170 $28,517,575
=========== ===========
Average interest rate spread ...... 3.75 3.85
Net yield on earning assets ....... 4.35% 4.48%
===== =====
Taxable equivalent adjustment .....
<CAPTION>
INCOME/EXPENSE CHANGE DUE TO
--------------------------- INCREASE -----------------------
FULLY TAXABLE EQUIVALENT 1998 1997 (DECREASE) RATE VOLUME
- ----------------------------------- ------------- ------------- ----------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government
and other (5) .................. $ 375,651 $ 356,198 $ 19,453 $ 96 $ 19,357
States and political
subdivisions ................... 11,777 12,197 (420) (76) (344)
----------- ----------- -------- --------- --------
Total securities (5) ........... 387,428 368,395 19,033 20 19,013
Other earning assets (2) .......... 7,846 3,385 4,461 10 4,451
Loans and leases, net of
unearned
income (1)(3)(4)(5) .............. 1,491,580 1,345,755 145,825 (14,738) 160,563
----------- ----------- -------- --------- --------
Total earning assets ............. 1,886,854 1,717,535 169,319 (14,708) 184,027
----------- ----------- -------- --------- --------
Non-earning assets ...............
TOTAL ASSETS .....................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and interest-
checking ....................... 22,754 28,557 (5,803) 74 (5,877)
Money rate savings ............... 127,233 107,992 19,241 (885) 20,126
Time deposits .................... 452,745 450,686 2,059 (4,027) 6,086
----------- ----------- -------- --------- --------
Total interest-bearing
deposits ...................... 602,732 587,235 15,497 (4,838) 20,335
Short-term borrowed funds ......... 147,962 108,087 39,875 1,768 38,107
Long-term debt .................... 167,313 119,761 47,552 (1,489) 49,041
----------- ----------- -------- --------- --------
Total interest-bearing
liabilities ................... 918,007 815,083 102,924 (4,559) 107,483
----------- ----------- -------- --------- --------
Noninterest-bearing
deposits ......................
Other liabilities ..............
Shareholders' equity ...........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............
Average interest rate spread ......
Net yield on earning assets ....... $ 968,847 $ 902,452 $ 66,395 $ (10,149) $ 76,544
=========== =========== ======== ========= ========
Taxable equivalent adjustment ..... $ 47,104 $ 37,918
=========== ===========
</TABLE>
- ---------
(1) Yields related to securities, loans and leases exempt from both Federal and
state income taxes, Federal income taxes only or state income taxes only are
stated on a taxable equivalent basis using statutory tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale agreements
or similar arrangements.
(3) Loan fees, which are not material for the periods shown, are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances.
(5) Includes assets held for sale or available for sale at amortized cost and
trading securities at estimated fair value.
19
<PAGE>
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 1998 was
$137.1 million, compared to $150.8 million for the same period in 1997, a
decrease of 9.1%. The prior period noninterest income includes a gain of $47.8
million from the divestiture of deposits in conjunction with the UCB merger.
Excluding the impact of this gain, noninterest income would have increased
$34.1 million, or 33.1%, in the third quarters of 1998 compared to 1997. For
the first nine months of the year, total noninterest income was $389.0 million,
an increase of 30.1% compared to the noninterest income for the first nine
months of 1997 excluding the gain from the deposit divestiture. Excluding the
impact of the Virginia First, Craigie, Inc. ("Craigie"), Phillips and Refloat
purchase acquisitions as well as the nonrecurring gain from the divestiture of
deposits, BB&T's noninterest income would have increased 25.4% in the third
quarter of 1998 compared to 1997.
BB&T experienced positive development in all significant areas of
noninterest income. Service charges on deposits, mortgage banking revenues,
agency insurance commissions and other income all showed strong gains on a
recurring basis during the period. The percentage of total revenues
(tax-equivalent net interest income plus noninterest income excluding
securities gains or losses and nonrecurring items) derived from noninterest
income, was 29.0% for the three months ended September 30, 1998, up from 25.0%
for the third quarter of 1997.
Service charges on deposits increased $5.8 million, or 15.5%, for the
third quarter of 1998, compared to the third quarter of 1997. The primary
factor contributing to this growth was an increase in the fee schedule on
deposit services that became effective in the first quarter of 1998. The
largest components of the growth within service charges on deposits included
account analysis fees on commercial transaction accounts, service charges on
personal accounts and overdraft charges. For the first nine months of 1998,
service charges on deposits totaled $126.6 million, a $14.2 million, or 12.6%
increase from the first half of 1997.
Trust income increased $499,000, or 5.9%, for the three months ended
September 30, 1998, from the same period a year ago. BB&T administers the
largest government-sponsored 401(k) plan in the country, which has assets of
$1.5 billion and represents approximately 17% of BB&T's $9 billion in total
trust assets under management. BB&T was awarded a new contract to administer
the plan during 1997 with fee concessions in early years to be recovered
through increased transaction volume and increased participation in the plan in
future years under the contract. The smaller increase in trust revenues for the
third quarter of 1998 reflects lower fees related to the administration of the
above-mentioned 401(k) plan. For the nine months ended September 30, 1998,
trust income increased $962,000, or 4.0%, compared to the first nine months of
1997.
Agency insurance commissions increased $2.6 million, or 26.3%, in the
third quarter of 1998 compared to the same three month period of 1997. The
growth in agency insurance commissions resulted from increases in property and
casualty insurance commissions, contingent insurance commissions and the
purchase of additional agencies. BB&T has the largest independent insurance
agency system in the Carolinas, and one of the largest bank-owned agency
systems in the country. The network has expanded the types of products offered
to include group health, surety bonds, title insurance and life insurance in
recent quarters. For the first nine months of 1998, agency insurance
commissions increased $8.1 million, or 26.5%, compared to the same period in
1997.
Income from mortgage banking activities increased $9.0 million, or 67.3%,
for the three months ended September 30, 1998, compared to the same period in
1997. The dramatic increase resulted from significantly higher volumes of
mortgage loans originated and sold during the third quarter, higher mortgage
loan servicing fees and underwriting fees, an increase in gains on mortgage
loans during the quarter and purchase accounting transactions. For the nine
months ended September 30, 1998, income from mortgage banking activities
increased $23.4 million, or 63.3%, compared to the first nine months of 1997.
Other nondeposit fees and commissions increased by $6.9 million, or 30.1%,
to a level of $29.8 million for the three months ended September 30, 1998,
compared with $22.9 million for the third quarter of 1997. The components
generating the increase in nondeposit fees and commissions were revenues from
investment services, ATM fees, point-of-sale fees and bankcard income
(primarily merchant interchange fees) and purchase accounting transactions
during 1997. For the nine months ended September 30, 1998, other nondeposit
fees and commissions increased $19.8 million, or 31.8%, compared to the
comparable period in 1997.
Other income decreased $39.6 million, or 71.5%, in the third quarter of
1998 compared to 1997 primarily as a result of the gain on the divestiture of
loans and deposits made necessary by the merger with UCB. The divestiture
occurred in the third quarter of 1997, and this large nonrecurring gain
inflates the other noninterest income from last year. Excluding this gain,
which totaled $47.8 million, other income would have increased $8.2 million, or
107.8%, primarily as a result of
20
<PAGE>
income from additional investments in corporate owned life insurance policies
and purchase accounting transactions occurring after the third quarter last
year, principally Craigie. For the nine months ended September 30, 1998, other
income on a recurring basis increased $20.4 million, or 95.1%, compared to the
first nine months of 1997.
NONINTEREST EXPENSE
Noninterest expenses totaled $244.4 million for the third quarter of 1998
compared to $315.0 million for the same period a year ago, a decrease of 22.4%.
For the first nine months of 1998, noninterest expenses totaled $711.7 million,
compared to $725.2 million in 1997, a decrease of 1.9%. These decreases
resulted from nonrecurring charges, which were incurred in both 1998 and 1997.
During the nine-month period of 1998, $14.4 million of pretax nonrecurring
charges were recorded, $6.5 million of which were incurred in the third
quarter. During 1997, BB&T recorded $106.1 million of nonrecurring charges on a
pretax basis related to the merger with UCB. Excluding the effect of all of
these merger-related expenses, noninterest expenses would have been $237.8
million for the third quarter, up 13.9% from the third quarter of 1997. For the
nine months, noninterest expenses, excluding the above described nonrecurring
charges, totaled $697.4 million, up 12.6% from the prior year. Excluding the
effects of purchase accounting transactions as well as the nonrecurring merger
costs, noninterest expense would have increased 7.7% for the third quarter and
6.2% for the nine months, compared to the same periods in 1997.
Personnel expense, the largest component of noninterest expense, was
$123.6 million for the third quarter of 1998 compared to $126.4 million for the
same period in 1997, a decrease of $2.7 million, or 2.2%. The decrease during
the quarter resulted from merger-related charges recorded in 1998 and 1997.
Excluding these costs, personnel expense would have totaled $120.1 million for
the third quarter of 1998 and $106.3 million for the third quarter last year.
This generates an increase of $13.8 million, or 13.0%. This growth results from
annual salary adjustments, which typically begin in April, higher incentive
compensation costs and the effect of acquisitions accounted for as purchases
completed since September 30, 1997. For the nine months ended September 30,
1998, total personnel expense, on a recurring basis, increased $34.4 million,
or 10.8%.
Occupancy and equipment expense for the three months ended September 30,
1998, totaled $40.5 million, a decrease of $14.7 million, or 26.6%, compared to
1997. Excluding the nonrecurring charges discussed above from 1998 and 1997,
occupancy and equipment expense would have totaled $39.5 million, up $4.0
million, or 11.1% compared to the third quarter of 1997. This increase was
principally due to acquisitions accounted for as purchases, costs associated
with the maintenance of computer equipment and other furniture and equipment
costs. For the first nine months of 1998, occupancy and equipment expense, on a
recurring basis, totaled $116.6 million, an increase of $14.5 million, or
14.2%, compared to 1997.
The amortization of intangible assets and mortgage servicing rights
totaled $11.1 million for the three months ended September 30, 1998, a $4.9
million, or 80.4%, increase from the amount incurred in the same quarter of
1997. This was the result of a $2.2 million increase in amortization of
mortgage loan servicing rights and increased amortization of goodwill due to
acquisitions consummated using purchase accounting. Total goodwill and other
intangibles has increased from $118.8 million at September 30, 1997 to $394.5
million at September 30, 1998. For the nine months ended September 30, 1998,
amortization of intangibles and mortgage servicing rights totaled $32.3
million, an increase of $15.3 million, or 89.9%, compared to the same period in
1997.
Other noninterest expenses for the third quarter of 1998 totaled $69.2
million, a decrease of $58.1 million, or 45.6%, compared to 1997. For the nine
months ended September 30, 1998, other noninterest expense totaled $202.5
million, a decrease of $45.0 million, or 18.2%. Excluding the impact of the
nonrecurring charges discussed above from both 1998 and 1997, other noninterest
expense would have totaled $66.9 million for the third quarter, up $6.8
million, or 11.2%. For the nine months, recurring other noninterest expenses
would have been $193.5 million, which is $14.8 million, or 8.3% higher than the
prior year. This increase was primarily due to purchase accounting acquisitions
and a $2.2 million increase in professional services expense, all of which
relates to costs necessary to upgrade BB&T's systems to make them Year 2000
compliant (as discussed below).
THIRD QUARTER YEAR 2000 UPDATE
The Year 2000 Issue is pervasive and presents both technical and business
risks affecting most, if not all, of BB&T's business activities. The "Year 2000
Issue" is a general term used to describe the various problems that may result
from the improper processing of dates and date-sensitive calculations by
computers and equipment with embedded microchips as the Year 2000 approaches.
These problems generally arise because most of the world's computer hardware
and software has historically used only two digits to identify the applicable
year. Any of BB&T's computer programs that have date-sensitive
21
<PAGE>
software may recognize a date using "00" as the year 1900 rather than the year
2000. These problems may also arise from other sources as well, such as the use
of special codes and conventions in software that make use of the date field.
If not corrected, this could result in system errors or failures causing
disruptions of normal business operations.
BB&T began planning its Year 2000 strategy in 1996. Management determined
that it would be required to modify or replace significant portions of BB&T's
information technology platform and other systems in order for it to properly
utilize data before, during and after the Year 2000. In early 1997, BB&T formed
a Year 2000 Program Office, which is a joint effort between BB&T and outside
service providers. The mission of the Program Office is to address Year 2000
issues affecting BB&T's various systems. The program office management
committee meets regularly to review and document the progress of the Year 2000
project.
YEAR 2000 PROJECT
BB&T's Year 2000 strategy is divided into five major phases: inventory,
assessment, remediation, testing and clean management ("Year 2000 Project").
During the inventory and assessment phases, BB&T identified all specific
systems that required modification or replacement and assessed the steps
necessary to remediate the Year 2000 Issue. In the remediation phase, the
systems requiring remediation will be replaced, modified or retired. During the
testing phase, BB&T will perform internal and external testing with third
parties to ensure that the remediated systems accurately process dates and date
data before, on and after January 1, 2000. Finally, in the clean management
phase, BB&T will implement processes and procedures to monitor continued Year
2000 readiness and to protect remediated systems from alterations that might
affect Year 2000 readiness.
In order to carry out the Year 2000 Project, BB&T divided its internal and
external systems into three major categories: core business systems,
distributed business systems and non-information technology systems. The core
business systems are those systems that run on BB&T's mainframe. The
distributed systems are those systems that do not run on the mainframe. The
non-information technology systems are those systems that have embedded
microchips or microprocessors controlling the function of equipment, such as
elevators, fire and security systems, etc. These three categories are further
broken down into mission-critical and non-mission-critical systems. BB&T has
prioritized its systems for remediation based on their overall importance to
the operations of BB&T. Mission-critical systems are those systems which are
critical to the operations of BB&T and / or vital to the business continuity of
BB&T. While the Year 2000 Project will address all internal and external
systems used by BB&T to conduct its business, the highest priority is given to
mission-critical systems.
STATE OF READINESS
CORE BUSINESS SYSTEMS -- MISSION-CRITICAL: The inventory, assessment and
remediation phases have been completed and the testing phase is expected to be
completed by December 31, 1998.
CORE BUSINESS SYSTEMS -- NON-MISSION-CRITICAL: The inventory and
assessment phases are complete, the remediation phase is substantially complete
and the majority of the testing phase is complete. Management anticipates that
remediation and testing for these systems will be completed by December 31,
1998.
DISTRIBUTED BUSINESS SYSTEMS -- MISSION-CRITICAL: The inventory and
assessment phases are complete, the remediation phase is substantially complete
and the majority of the testing phase is complete. Management anticipates that
the remediation and testing for these systems will be completed by December 31,
1998.
DISTRIBUTED BUSINESS SYSTEMS -- NON-MISSION-CRITICAL: The inventory and
assessment phases are complete and the majority of the remediation phase is
complete. Management anticipates that remediation and testing for these systems
will be completed by June 30, 1999.
NON-INFORMATION TECHNOLOGY SYSTEMS -- MISSION-CRITICAL: For
non-information technology systems that may be affected by the Year 2000 Issue,
the inventory phase is complete and the assessment phase is underway.
As BB&T completes testing for each of the above systems, the clean
management phase will be implemented. Clean management will be an ongoing
process that will continue into the Year 2000 and beyond.
RISKS
The failure to correct a mission-critical Year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities and
operations. Such failures could materially and adversely affect BB&T's
financial condition or results of operations. Management presently believes
that with modifications to existing systems and, in certain circumstances,
conversions to new systems, the effects of the Year 2000 Issue on BB&T will be
minimized.
22
<PAGE>
BB&T conducts formal communications on an on-going basis with all of its
significant suppliers and large clients to determine the extent to which BB&T
may be vulnerable to those third parties' failure to remediate their own Year
2000 Issue. BB&T continually pursues and receives updates on the progress of
these suppliers and clients and reviews the responses to determine the degree
of risk associated with each of these parties. For third parties that are
judged to represent significant risks to BB&T, appropriate contingency plans
are being developed, including the consideration of any necessary adjustments
to the allowance for loan losses. For critical third party providers, such as
utilities and telecommunications providers, management has met and continues to
meet with representatives of these third parties to review their remediation
plans in order to evaluate their readiness for the Year 2000.
Despite these efforts, because of the general uncertainty inherent in the
Year 2000 Issue, there can be no assurance that the systems of other
organizations upon which BB&T's operations rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with BB&T's systems, would not have a materially adverse effect on
BB&T.
CONTINGENCY BUSINESS AND EVENT PLANNING
Management is enhancing BB&T's existing business resumption plans to
address various Year 2000 scenarios in the event that efforts to remediate
BB&T's systems are not fully successful or are not completed in accordance with
current expectations. Each line of business has significant involvement in the
preparation of Year 2000 contingency plans designed to address specific
business functions. The contingency plans include the use of third party
service providers, alternative commercial vendors, alternative data security,
redundant facilities and other contingency service suppliers. For mission-
critical systems, these contingency plans are complete. BB&T expects to
complete its contingency planning for non-mission-critical systems by March 31,
1999. These plans will be amended as BB&T continues to obtain information
relating to its own systems and the systems of its significant suppliers and
large clients. BB&T will continually test and revise the contingency plans as
the Year 2000 approaches.
COSTS
The projected total incremental cost of the Year 2000 Project is currently
estimated at approximately $30 million and is being funded through operating
cash flows. As of September 30, 1998, a cumulative total of approximately $15.2
million had been spent on the assessment of and efforts in connection with the
Year 2000 Project, of which $1.8 million represented internal personnel and
other costs.
Information about BB&T's Year 2000 Project, other than historical
information, should be considered forward looking in nature and subject to
various risks, uncertainties and assumptions. The costs of the project and the
date on which BB&T plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance 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, the inability to control third party modification plans and
similar uncertainties.
PROVISION FOR INCOME TAXES
The provision for income taxes totaled $59.4 million for the third quarter
of 1998, an increase of $19.6 million, or 49.3%. For the nine months ended
September 30, 1998, the provision for income taxes totaled $169.3 million, an
increase of $22.3 million, or 15.2%, compared to the first nine months of 1997.
Excluding the tax benefits associated with the nonrecurring charges detailed
above, the provision for income taxes for the third quarter would have been
$61.0 million, an increase of $5.6 million, or 10.0%. For the nine months, the
provision for income taxes based on recurring results totaled $172.8 million,
compared to $162.7 million for 1997. The effective tax rates on recurring
pretax income were 31.6% and 33.7% for the three months ended September 30,
1998 and 1997, respectively, and 31.5% and 34.2% for the nine months ended
September 30, 1998 and 1997, respectively. The lower effective tax rates in
1998 reflect positive results from BB&T's ongoing tax minimization strategies.
23
<PAGE>
PROFITABILITY MEASURES
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Return on average assets ................ 1.58% 1.53% 1.50% 1.19% .90%
Return on average equity ................ 20.62 19.97 18.75 15.27 11.43
Net interest margin (taxable equivalent) 4.40 4.29 4.37 4.37 4.45
Efficiency ratio (taxable equivalent)* .. 51.1 52.0 51.3 50.6 51.0
</TABLE>
- ---------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the business of BB&T's banking subsidiaries ordinarily
results in a certain amount of litigation. The subsidiaries of BB&T are
involved in various legal proceedings, all of which are considered incidental
to the normal conduct of business. Management believes that the liabilities
arising from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 -- "Computation of Earnings Per Share" is included herein
as Note E.
Exhibit 27 -- "Financial Data Schedule" is included in the
electronically-filed document as required.
(b) On July 7, 1998, BB&T filed a Form 8-K under Item 5 to report the
consummation of an underwritten public offering of $350 million of 6.375%
subordinated debt. On July 13, 1998, BB&T filed a Form 8-K under Item 5 to
report its financial condition and the results of operations for the second
quarter of 1998. On August 10, 1998, BB&T filed a Form 8-K under Item 5 to
announce plans to acquire Scott & Stringfellow Financial, Inc., based in
Richmond, Virginia. On August 11, 1998, BB&T filed a Form 8-K under Item 5 to
report 30 days of combined operations following the merger of Franklin
Bancorporation, Inc., on July 1, 1998. On August 27, 1998, BB&T filed a Form
8-K under Item 5 to report plans to acquire MainStreet Financial Corporation,
of Martinsville, Virginia. On September 18, 1998, BB&T filed a Form 8-K under
Item 5 to restate the 1997 Form 10-K for the accounts of Franklin
Bancorporation. On October 14, 1998, BB&T filed a Form 8-K under Item 5 to
report its financial condition and results of operations for the third quarter
of 1998.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T CORPORATION
(Registrant)
<TABLE>
<CAPTION>
<S> <C>
Date: November 13, 1998 By: /s/ SCOTT E. REED
-----------------------------------------------
SCOTT E. REED, SENIOR EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
Date: November 13, 1998 By: /s/ SHERRY A. KELLETT
-----------------------------------------
SHERRY A. KELLETT, SENIOR EXECUTIVE VICE
PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<CASH> 709,538
<INT-BEARING-DEPOSITS> 66,282
<FED-FUNDS-SOLD> 175,503
<TRADING-ASSETS> 66,393
<INVESTMENTS-HELD-FOR-SALE> 8,077,062
<INVESTMENTS-CARRYING> 127,394
<INVESTMENTS-MARKET> 131,072
<LOANS> 23,138,218
<ALLOWANCE> 313,769
<TOTAL-ASSETS> 33,875,788
<DEPOSITS> 22,097,655
<SHORT-TERM> 4,087,763
<LIABILITIES-OTHER> 565,697
<LONG-TERM> 4,386,201
0
0
<COMMON> 1,454,029
<OTHER-SE> 1,284,443
<TOTAL-LIABILITIES-AND-EQUITY> 33,875,788
<INTEREST-LOAN> 1,470,045
<INTEREST-INVEST> 361,903
<INTEREST-OTHER> 7,802
<INTEREST-TOTAL> 1,839,750
<INTEREST-DEPOSIT> 602,732
<INTEREST-EXPENSE> 918,007
<INTEREST-INCOME-NET> 921,743
<LOAN-LOSSES> 64,310
<SECURITIES-GAINS> 5,712
<EXPENSE-OTHER> 711,722
<INCOME-PRETAX> 534,681
<INCOME-PRE-EXTRAORDINARY> 534,681
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365,332
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 4.35
<LOANS-NON> 83,623
<LOANS-PAST> 46,873
<LOANS-TROUBLED> 525
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 279,596
<CHARGE-OFFS> 62,683
<RECOVERIES> 15,735
<ALLOWANCE-CLOSE> 313,769
<ALLOWANCE-DOMESTIC> 313,769
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50,203
</TABLE>
