<PAGE>
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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:
JUNE 30, 1998
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
NORTH CAROLINA 56-0939887
<S> <C>
(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 July 31, 1998, 143,105,057 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.
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<PAGE>
BB&T CORPORATION
FORM 10-Q
JUNE 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 4. Submission of Matters to a Vote of Security Holders ............................ 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>
JUNE 30, DECEMBER 31,
1998 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................................... $ 786,291 $ 851,971
Interest-bearing deposits with banks .................................................. 7,926 77,065
Federal funds sold and securities purchased under resale agreements or similiar
arrangements ......................................................................... 128,618 103,245
Trading securities .................................................................... 71,156 67,878
Securities available for sale ......................................................... 7,134,865 7,199,198
Securities held to maturity (approximate market values of $132,331 at June 30,
1998, and $151,581 at December 31, 1997) ............................................. 128,817 147,799
Loans held for sale ................................................................... 959,465 509,141
Loans and leases, net of unearned income .............................................. 21,010,495 20,424,288
Allowance for loan and lease losses .................................................. (289,310) (275,404)
------------ ------------
Loans and leases, net ............................................................... 20,721,185 20,148,884
------------ ------------
Premises and equipment, net ........................................................... 430,494 431,631
Other assets .......................................................................... 1,174,708 1,105,987
------------ ------------
TOTAL ASSETS ........................................................................ $ 31,543,525 $ 30,642,799
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing deposits .......................................................... $ 2,849,103 $ 2,833,238
Savings and interest checking ......................................................... 1,553,341 1,708,657
Money rate savings .................................................................... 5,619,631 5,241,055
Other time deposits ................................................................... 10,548,908 9,779,594
Foreign deposits ...................................................................... 559,057 1,385,633
------------ ------------
Total deposits ...................................................................... 21,130,040 20,948,177
------------ ------------
Short-term borrowed funds ............................................................. 3,355,421 3,276,177
Long-term debt ........................................................................ 4,146,008 3,575,517
Accounts payable and other liabilities ................................................ 491,118 443,101
------------ ------------
TOTAL LIABILITIES ................................................................... 29,122,587 28,242,972
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding ..... -- --
Common stock, $5 par, 500,000,000 shares authorized, 140,504,072 issued and
outstanding at June 30, 1998, and 141,763,220 at December 31, 1997 ................... 702,520 708,816
Stock dividend distributable .......................................................... 702,520 --
Additional paid-in capital ............................................................ 47,216 161,018
Retained earnings ..................................................................... 920,139 1,482,037
Loan to employee stock ownership plan and unvested restricted stock ................... (623) (962)
Accumulated other nonshareholder changes in equity, net of deferred income taxes
of $30,134 at June 30, 1998, and $31,593 at December 31, 1997......................... 49,166 48,918
------------ ------------
TOTAL SHAREHOLDERS' EQUITY .......................................................... 2,420,938 2,399,827
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................................... $ 31,543,525 $ 30,642,799
============ ============
</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 SIX MONTHS ENDED
JUNE 30, JUNE 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 ............................. $ 482,703 $ 443,113 $ 953,072 $ 860,237
Interest and dividends on securities .............................. 118,502 115,392 238,227 224,438
Interest on short-term investments ................................ 2,060 956 4,191 1,769
------------ ------------ ------------ ------------
Total interest income ........................................... 603,265 559,461 1,195,490 1,086,444
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits .............................................. 198,295 196,134 393,304 384,706
Interest on short-term borrowed funds ............................. 52,310 35,856 99,571 65,822
Interest on long-term debt ........................................ 53,698 39,265 107,557 73,641
------------ ------------ ------------ ------------
Total interest expense .......................................... 304,303 271,255 600,432 524,169
------------ ------------ ------------ ------------
NET INTEREST INCOME ................................................ 298,962 288,206 595,058 562,275
Provision for loan and lease losses ............................... 21,000 24,865 43,000 45,985
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES ............................................................ 277,962 263,341 552,058 516,290
------------ ------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts ............................... 41,866 37,993 82,956 74,653
Mortgage banking income ........................................... 22,688 11,093 37,951 23,563
Trust income ...................................................... 8,006 8,504 15,825 15,362
Agency insurance commissions ...................................... 12,180 9,316 26,216 20,709
Other insurance commissions ....................................... 3,210 3,347 6,189 6,904
Other nondeposit fees and commissions ............................. 27,099 20,470 51,671 38,904
Securities gains (losses), net .................................... 1,188 (933) 3,648 867
Other noninterest income .......................................... 13,346 7,065 26,224 14,042
------------ ------------ ------------ ------------
Total noninterest income ........................................ 129,583 96,855 250,680 195,004
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Personnel expense ................................................. 116,064 104,084 231,606 209,098
Occupancy and equipment expense ................................... 39,064 33,821 75,846 65,764
Amortization of intangibles and mortgage servicing rights ......... 10,996 5,720 21,131 10,796
Other noninterest expense ......................................... 63,286 61,555 129,825 118,196
------------ ------------ ------------ ------------
Total noninterest expense ....................................... 229,410 205,180 458,408 403,854
------------ ------------ ------------ ------------
EARNINGS
Income before income taxes ........................................ 178,135 155,016 344,330 307,440
Provision for income taxes ........................................ 56,087 53,155 108,564 105,501
------------ ------------ ------------ ------------
Net income ........................................................ $ 122,048 $ 101,861 $ 235,766 $ 201,939
============ ============ ============ ============
PER COMMON SHARE
Net income:
Basic ........................................................... $ .43 $ .36 $ .83 $ .71
============ ============ ============ ============
Diluted ......................................................... $ .42 $ .35 $ .82 $ .70
============ ============ ============ ============
Cash dividends paid ............................................. $ .155 $ .135 $ .31 $ .27
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING
Basic ............................................................. 281,390,386 283,572,628 282,753,606 284,129,878
============ ============ ============ ============
Diluted ........................................................... 287,341,256 288,680,778 288,740,700 289,165,330
============ ============ ============ ============
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF ADDTIONAL
COMMON COMMON PAID-IN
STOCK STOCK CAPITAL
--------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996, AS
PREVIOUSLY REPORTED .................... 136,896,865 $ 684,484 $ 145,704
Pooling-of-interests merger with
Life Bancorp, Inc. ................... 5,711,167 28,556 63,664
----------- --------- ----------
BALANCE, DECEMBER 31, 1996, AS
RESTATED ............................... 142,608,032 713,040 209,368
Add (Deduct)
Nonshareholder changes in
equity:**
Net income ............................. -- -- --
Net unrealized appreciation on
securities available for sale, net
of deferred income taxes ............. -- -- --
----------- --------- ----------
Total nonshareholder changes in
equity ...............................
Common stock issued .................... 2,611,211 13,057 76,175
Redemption of common stock ............. (4,089,542) (20,448) (145,171)
Cash dividends declared on
common stock ......................... -- -- --
Other .................................. -- -- --
----------- --------- ----------
BALANCE, JUNE 30, 1997 .................. 141,129,701 $ 705,649 $ 140,372
=========== ========= ==========
BALANCE, DECEMBER 31, 1997, AS
PREVIOUSLY REPORTED .................... 136,051,623 $ 680,258 $ 85,185
Pooling-of-interests merger with
Life Bancorp, Inc. ................... 5,711,597 28,558 75,833
----------- --------- ----------
BALANCE, DECEMBER 31, 1997 .............. 141,763,220 708,816 161,018
Add (Deduct)
Nonshareholder changes in
equity:**
Net income ............................. -- -- --
Net unrealized appreciation on
securities available for sale, net
of deferred income taxes ............. -- -- --
----------- --------- ----------
Total nonshareholder changes in
equity ...............................
Common stock issued .................... 1,390,332 6,951 48,171
Redemption of common stock ............. (2,649,480) (13,247) (161,973)
Cash dividends declared on
common stock ......................... -- -- --
Other .................................. -- -- --
----------- --------- ----------
BALANCE, JUNE 30, 1998 .................. 140,504,072 $ 702,520 $ 47,216
=========== ========= ==========
<CAPTION>
ACCUMULATED
OTHER
RETAINED NONSHAREHOLDER TOTAL
EARNINGS CHANGES SHAREHOLDERS'
AND OTHER* IN EQUITY EQUITY
--------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996, AS
PREVIOUSLY REPORTED .................... $ 1,229,640 $11,739 $ 2,071,567
Pooling-of-interests merger with
Life Bancorp, Inc. ................... 56,750 1,968 150,938
----------- ------- -----------
BALANCE, DECEMBER 31, 1996, AS
RESTATED ............................... 1,286,390 13,707 2,222,505
Add (Deduct)
Nonshareholder changes in
equity:**
Net income ............................. 201,939 -- 201,939
Net unrealized appreciation on
securities available for sale, net
of deferred income taxes ............. -- 8,069 8,069
----------- ------- -----------
Total nonshareholder changes in
equity ............................... 210,008
Common stock issued .................... -- -- 89,232
Redemption of common stock ............. -- -- (165,619)
Cash dividends declared on
common stock ......................... (82,072) -- (82,072)
Other .................................. 676 -- 676
----------- ------- -----------
BALANCE, JUNE 30, 1997 .................. $ 1,406,933 $21,776 $ 2,274,730
=========== ======= ===========
BALANCE, DECEMBER 31, 1997, AS
PREVIOUSLY REPORTED .................... $ 1,427,292 $44,902 $ 2,237,637
Pooling-of-interests merger with
Life Bancorp, Inc. ................... 53,783 4,016 162,190
----------- ------- -----------
BALANCE, DECEMBER 31, 1997 .............. 1,481,075 48,918 2,399,827
Add (Deduct)
Nonshareholder changes in
equity:**
Net income ............................. 235,766 -- 235,766
Net unrealized appreciation on
securities available for sale, net
of deferred income taxes ............. -- 248 248
----------- ------- -----------
Total nonshareholder changes in
equity ............................... 236,014
Common stock issued .................... -- -- 55,122
Redemption of common stock ............. -- -- (175,220)
Cash dividends declared on
common stock ......................... (95,144) -- (95,144)
Other .................................. 339 -- 339
----------- ------- -----------
BALANCE, JUNE 30, 1998 .................. $ 1,622,036 $49,166 $ 2,420,938
=========== ======= ===========
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 235,766 $ 201,939
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses ................................................. 43,000 45,985
Depreciation of premises and equipment .............................................. 30,849 26,377
Amortization of intangibles and mortgage servicing rights ........................... 21,131 10,796
Accretion of negative goodwill ...................................................... (3,121) (3,118)
Amortization of unearned stock compensation ......................................... 339 133
Discount accretion and premium amortization on securities, net ...................... 105 (336)
Net increase in trading account securities .......................................... (3,278) --
Loss (gain) on sales of securities, net ............................................. (3,648) (867)
Loss (gain) on sales of loans, net .................................................. (11,528) (5,059)
Loss (gain) on disposals of premises and equipment, net ............................. (4,553) 65
Loss (gain) on foreclosed property and other real estate, net ....................... 754 428
Proceeds from sales of loans held for sale .......................................... 1,941,507 681,617
Purchases of loans held for sale .................................................... (944,815) (263,017)
Origination of loans held for sale, net of principal collected ...................... (1,435,488) (439,565)
Decrease (increase) in:
Accrued interest receivable ........................................................ (16,721) (3,647)
Other assets ....................................................................... (12,619) (23,646)
Increase (decrease) in:
Accrued interest payable ........................................................... 20,281 6,653
Accounts payable and other liabilities ............................................. (22,384) 19,136
------------ ------------
Net cash (used in) provided by operating activites ................................ (164,423) 253,874
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ................................. 866,421 1,052,509
Proceeds from maturities, call and paydowns of securities available for sale ......... 1,008,348 918,357
Purchases of securities available for sale ........................................... (1,756,960) (2,414,285)
Proceeds from maturities of securities held to maturity .............................. 23,175 101,604
Purchases of securities held to maturity ............................................. (4,318) (5,962)
Leases made to customers ............................................................. (45,869) (33,286)
Principal collected on leases ........................................................ 31,120 26,645
Loan originations, net of principal collected ........................................ (476,805) (1,037,059)
Purchases of loans ................................................................... (91,483) (108,606)
Net cash (paid) acquired in transactions accounted for under the purchase method ..... (7,593) 39,426
Purchases and originations of mortgage servicing rights .............................. (33,717) (13,160)
Proceeds from disposals of premises and equipment .................................... 14,388 3,774
Purchases of premises and equipment .................................................. (41,119) (40,498)
Proceeds from sales of foreclosed property ........................................... 9,856 9,009
Proceeds from sales of other real estate held for development or sale ................ 7,632 3,757
Other, net ........................................................................... -- 9,075
------------ ------------
Net cash used in investing activities ............................................. (496,924) (1,488,700)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................................................. 181,863 800,136
Net increase in short-term borrowed funds ............................................ 79,244 64,463
Proceeds from long-term debt ......................................................... 933,645 2,224,640
Repayments of long-term debt ......................................................... (401,151) (1,675,751)
Net proceeds from common stock issued ................................................ 20,785 8,190
Redemption of common stock ........................................................... (175,220) (165,619)
Cash dividends paid on common and preferred stock .................................... (87,265) (70,056)
------------ ------------
Net cash provided by financing activities ......................................... 551,901 1,186,003
------------ ------------
Net Decrease in Cash and Cash Equivalents ............................................. (109,446) (48,823)
CASH AND CASH EQUIVALENTS at beginning of period ...................................... 1,032,281 938,624
------------ ------------
CASH AND CASH EQUIVALENTS at end of period ............................................ $ 922,835 $ 889,801
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................................ $ 579,968 $ 518,314
Income taxes ........................................................................ 67,333 95,854
Noncash financing and investing activities:
Transfer of loans to foreclosed property ............................................ 8,815 6,289
Transfer of fixed assets to other real estate owned ................................. 2,221 989
</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
JUNE 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 June 30, 1998 and December 31, 1997; the consolidated statements of
income for the three and six months ended June 30, 1998 and 1997; the
consolidated statements of changes in shareholders' equity for the six
months ended June 30, 1998 and 1997; and the consolidated statements of
cash flows for the six months ended June 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 May 13, 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 with 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. All per share amounts presented herein have been
restated for the impact of the stock 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 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"), Life
Savings Bank, FSB ("Life") and Franklin National Bank of Washington, D.C.
("Franklin") 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,
7
<PAGE>
(including discount brokerage services, annuities, mutual funds and
government and municipal bonds), life and property and casualty insurance
on an agency basis and insurance premium financing. 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 of 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 of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements.
Comprehensive income is the 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 of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
the way that business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
is effective for periods beginning after December 15, 1997, and requires
restatement of all prior periods presented. 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 to be made beginning in BB&T's Form 10-Q for the period ending
March 31, 1999.
In March of 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. Adoption of SOP 98-1 is not expected 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 our adoption of the
statement. However, the statement could increase volatility in earnings and
other comprehensive income.
During the second 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.
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 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 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 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 $10.1 million of goodwill, which is being amortized using the
straight-line method over 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.
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
were issued in exchange for all of the Franklin common stock outstanding.
It is expected that BB&T will incur approximately $6.5 million in pretax
costs during the third quarter of 1998 in connection with this transaction.
PENDING MERGERS AND ACQUISITIONS
On February 25, 1998, BB&T announced plans to acquire Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a
transaction to be accounted for as a purchase. Maryland Federal
shareholders will receive no less than 1.195 shares and no greater than
1.2204 shares of BB&T common stock, subject to possible upward adjustment
under certain circumstances, in exchange for each share of Maryland Federal
common stock held. The acquisition is expected to be completed by the end
of the third quarter.
On August 10, 1998, BB&T announced plans to merge with Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), based in Richmond, Virginia. The
transaction will be accounted for as a pooling of interests. 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 by the end of 1998.
9
<PAGE>
E. CALCULATION OF EARNINGS PER SHARE
BB&T's basic and diluted earnings per 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARES)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted average number of common shares
outstanding during the period .......................... 281,390,386 283,572,628 282,753,606 284,129,878
=========== =========== =========== ===========
Net income ............................................... $ 122,048 $ 101,861 $ 235,766 $ 201,939
============= ============= ============= =============
Basic earnings per share ................................. $ .43 $ .36 $ .83 $ .71
============= ============= ============= =============
DILUTED EARNINGS PER SHARE:
Weighted average number of common shares
outstanding during the period .......................... 281,390,386 283,572,628 282,753,606 284,129,878
Add-
Dilutive effect of outstanding options (as
determined by application of treasury stock
method) ............................................... 5,950,870 4,972,388 5,987,094 4,943,194
Issuance of additional shares under share repurchase
agreement, contingent upon market price ............... -- 135,762 -- 92,258
------------- ------------- ------------- -------------
Weighted average number of common shares, as
adjusted ............................................... 287,341,256 288,680,778 288,740,700 289,165,330
============= ============= ============= =============
Net income ............................................... $ 122,048 $ 101,861 $ 235,766 $ 201,939
============= ============= ============= =============
Diluted earnings per share ............................... $ .42 $ .35 $ .82 $ .70
============= ============= ============= =============
</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 June 30, 1998, were $31.5 billion, a $900.7 million
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 $1.0 billion, Federal funds sold and securities
purchased under resale agreements or similar arrangements, which increased
$25.4 million, and other assets, which increased $68.7 million compared to
year-end 1997. These increases were partially offset by declines in cash and
due from banks, which decreased $65.7 million, interest-bearing deposits with
banks, down $69.1 million, and securities, which decreased $80.0 million.
On the liability side of the balance sheet, total deposits increased
$181.9 million, short-term borrowed funds increased $79.2 million and long-term
debt increased $570.5 million during the first six months of 1998. Total
shareholders' equity increased $21.1 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 second
quarter of 1998, with end of period loans increasing 11.0% compared to June 30,
1997. Average loans increased 11.8% in the second quarter of 1998 and 12.2% in
the six months ended June 30, 1998, compared to the same periods in 1997.
The mix of the loan portfolio has changed somewhat in 1998 compared to
1997 and the growth rates of the various categories of loans reflect this
change in mix. Mortgage loans, driven by lower interest rates, continued their
fast pace of growth, up 32.6% on average for the quarter compared to the second
quarter of 1997 and up 31.2% for the six months compared to the first half of
1997. BB&T's other loan categories experienced growth at a slower pace. Average
commercial loans, including leasing, increased 6.9% compared to the second
quarter of last year and 8.1% compared to the first six
10
<PAGE>
months of 1997, while average consumer loans, which includes sales finance,
revolving credit and direct retail, increased 3.6% comparing the second
quarters of 1998 and 1997, and 4.1% comparing the six month periods ended June
30, 1998 and 1997.
These growth rates include the effects of loans that were divested in
connection with the 1997 United Carolina Bancshares Corporation ("UCB") merger
and 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 this divestiture and the purchase accounting
transactions, average "internal" loan growth for the three months and six
months ended June 30, 1998, was 9.1% and 9.4%, respectively, compared to the
second quarter and first six months of 1997. By category, excluding the
divestiture and the purchase accounting transactions, mortgage loans increased
21.3% for the quarter and 19.7% for the six months, commercial loans grew 5.4%
for the quarter and 6.6% for the six months and consumer loans were 4.1%
greater for the second quarter and 4.3% higher for the six 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, has negatively affected the net
interest margin. The average yield on mortgage loans for the six months ended
June 30, 1998, was 7.68%, down 12 basis points from the yield from the first
six months of 1997. Over the same time frame, the yields from commercial loans
and consumer loans increased 1 basis point each, to 9.12% and 10.40%,
respectively. The yield on the total loan portfolio decreased 10 basis points
to 9.08% for the first six months of 1998 compared to 1997.
BB&T remains 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 servicing portfolio exceeded
$13 billion at June 30, 1998.
SECURITIES
Securities available for sale, which totaled $7.1 billion, decreased $64.3
million from December 31, 1997. These securities had net unrealized gains, net
of deferred income taxes, of $49.2 million compared to net unrealized gains,
net of deferred income taxes, of $48.9 million at December 31, 1997. Securities
held to maturity totaled $128.8 million, down $19.0 million from year-end 1997.
The decrease in securities holdings, excluding trading securities, totaled
$83.3 million, which resulted because of the current interest rate environment
and the timing of certain securities transactions, which occurred close to the
end of the second quarter. Presently, risk-adjusted returns on investments in
U.S. Treasuries and agency securities are less attractive than those available
from lending and short-term investments. The average yield on the securities
portfolio for the first six months was 6.79%, up slightly from the 6.76% earned
in the first half of 1997.
OTHER INTEREST-EARNINGS ASSETS
Federal funds sold and securities purchased under resale agreements or
similar arrangements increased $25.4 million during the first six months of
1998, or 24.6%. The increase was due to investments in overnight funds, which
are currently yielding approximately the same return as U.S. Treasuries.
Therefore, a portion of the decrease in investment securities has been
reinvested in other interest-earning assets. The average yield on other
interest-earning assets for the first six months of 1998 was 5.78%, down from
6.00% earned during the first six months of 1997.
OTHER ASSETS
BB&T's other noninterest-earning assets increased $68.7 million from
December 31, 1997, to June 30, 1998. The increase results partially from
goodwill, which increased $28.6 million during the six months primarily because
of the previously discussed acquisitions of DCI and Stanley. In addition,
mortgage servicing rights increased $18.7 million over the same time frame,
resulting from the substantial increase in mortgage loan activity.
DEPOSITS
Total deposits increased $181.9 million during the first half of the year.
Certificates of deposit and other time deposits increased $769.3 million, money
rate savings accounts grew $378.6 million and noninterest-bearing deposits
increased $15.9 million. These increases were partially offset by an $826.6
million decrease in foreign deposits and a $155.3 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.
11
<PAGE>
The growth in overall deposits continues to result 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 second quarter
balance of investor deposit accounts totaled $2.2 billion, compared to a second
quarter 1997 average of $1.2 billion, which reflects an 84.7% growth rate.
Compared to the average balance for the first quarter of 1998, investor deposit
accounts increased $193.4 million, an annualized growth rate of 38.8%.
On August 15, 1997, BB&T divested $505.8 million of deposits in
conjunction with the merger with UCB. Excluding the impact of the divestiture,
total deposits would have been $21.6 billion, which is 3.3% higher than total
deposits at December 31, 1997. BB&T also acquired $893.1 million of deposits
during 1997 through the purchases of Fidelity and Virginia First. Excluding the
average impact of the divestiture and the purchase accounting transactions,
BB&T's average quarterly deposits would have been $20.8 billion, 2.2% greater
than the average balance for the second quarter of 1997.
The average cost for total deposits during the first six months of 1998
was 4.40%, down 2 basis points from the comparable period in 1997.
SHORT-TERM BORROWED FUNDS
Slower deposit growth in recent years, combined with the availability of
cost-effective alternative funding sources, caused management to increasingly
utilize 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 second quarter, short-term borrowed funds increased $79.2
million, or 2.4%, compared to year-end 1997. On average, short-term borrowed
funds increased $1.2 billion 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
5.42% for the first six months of 1998, up from 5.28% 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. Such borrowings are heavily utilized because
they are the most cost-effective long-term funding source and provide BB&T with
the flexibility to structure the debt to manage interest rate risk and
liquidity. Long-term debt totaled $4.1 billion at June 30, 1998, an increase of
$570.5 million, or 16.0%, 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 $1.2
billion for the first six months of 1998 compared to the first six months of
1997. Long-term debt has been used to supplement funding needs because of the
availability of cost-effective long-term funds and specifically to repurchase
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 $112.3 million at June 30, 1998, compared to $135.2
million at December 31, 1997, and $95.1 million at June 30, 1997. Nonperforming
assets as a percentage of loan-related assets were .51% at June 30, 1998,
compared to .64% at December 31, 1997, and .48% at June 30, 1997. Loans 90 days
or more past due and still accruing interest totaled $48.4 million compared to
a year-end 1997 balance of $44.2 million. The increase in loans 90 days or more
past due since December 31, 1997, reflects the conversion of Virginia First to
BB&T's asset quality standards. The increase in loans 90 days or more past due
is not considered to be an indicator of higher future loan losses because the
increase relates almost entirely to mortgage loans, where BB&T has historically
experienced very low loss ratios.
Net charge-offs totaled $15.4 million and amounted to .28% of average
loans and leases in the second quarter of 1998 compared to $16.1 million, or
.33% of average loans and leases, in the corresponding period in 1997. For the
six months ended June 30, 1998, net charge-offs totaled $30.3 million, or .29%
of average loans and leases, compared to $28.6 million, or .30% of average
loans and leases, during 1997. The decrease in net charge-offs as a percentage
of average loans and leases results from lower charge-offs at Regional
Acceptance Corporation, BB&T's nonstandard automobile finance company, and
higher recoveries across the board during 1998.
The allowance for loan and lease losses was $289.3 million, or 1.32% of
loans and leases, at June 30, 1998, compared to $275.4 million, or 1.32%, at
December 31, 1997, and $261.0 million, or 1.32%, at June 30, 1997. The
provision for loan and lease losses for the second quarter of 1998 was $21.0
million, compared to $24.9 million in the second quarter of 1997. For the six
months ended June 30, 1998, the provision totaled $43.0 million, down from the
$46.0 million recorded in the
12
<PAGE>
first six 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 and the first quarter of 1998.
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
---------------------------------------------------------------
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance ......................................... $ 282,418 $ 275,404 $ 266,078 $ 260,968 $ 252,245
Allowance for acquired loans .............................. 1,269 -- 12,012 1,690 --
Provision for loan and lease losses ....................... 21,000 22,000 29,796 21,745 24,865
Net charge-offs ........................................... (15,377) (14,986) (32,482) (18,325) (16,142)
---------- --------- --------- --------- ---------
Ending balance .......................................... $ 289,310 $ 282,418 $ 275,404 $ 266,078 $ 260,968
========== ========= ========= ========= =========
RISK ASSETS ................................................
Nonaccrual loans and lease ................................ $ 78,373 $ 92,267 $ 98,891 $ 74,372 $ 64,858
Foreclosed real estate .................................... 19,476 15,477 20,937 16,531 15,476
Other foreclosed property ................................. 13,911 14,603 13,986 13,914 13,262
Restructured loans ........................................ 528 -- 1,377 1,532 1,551
---------- --------- --------- --------- ---------
Nonperforming assets .................................... $ 112,288 $ 122,347 $ 135,191 $ 106,349 $ 95,147
---------- --------- --------- --------- ---------
Loans 90 days or more past due and still accruing ......... $ 48,356 $ 41,919 $ 44,213 $ 39,958 $ 37,361
========== ========= ========= ========= =========
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total
loans and leases .......................................... .36% .43% .47% .37% .33%
Nonperforming assets as a percentage of:
Total assets .............................................. .36 .39 .44 .37 .33
Loans and leases plus foreclosed property ................. .51 .57 .64 .53 .48
Net charge-offs as a percentage of average loans and
leases .................................................... .28 .29 .64 .37 .33
Allowance for loan and lease losses as a percentage of
loans and leases .......................................... 1.32 1.31 1.32 1.34 1.32
Ratio of allowance for loan and lease losses to:
Net charge-offs ........................................... 4.69X 4.65x 2.14x 3.66x 4.03x
Nonaccrual loans and leases ............................... 3.67 3.06 2.75 3.51 3.93
</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.
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricings and interest rate sensitivities of earning assets,
deposits and borrowed funds. It is the responsibility of the ALCO to determine
and achieve the most appropriate volume and mix of earning assets and
interest-bearing liabilities, as well as ensure an adequate level of liquidity
and capital, while achieving
13
<PAGE>
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 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 June 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 SENSITIVITY SIMULATION ANALYSIS
<TABLE>
<CAPTION>
ANNUALIZED
INTEREST HYPOTHETICAL
RATE PERCENTAGE
SCENARIO CHANGE IN
- - ----------------- PRIME NET INTEREST
LINEAR RATE INCOME
- - ----------------- ----------- -------------
<S> <C> <C>
+3.00% 11.50% -2.44%
+1.50 10.00 -1.80
-1.50 7.00 .35
-3.00 5.50 .54
</TABLE>
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 six months from the most likely interest
rate scenario, and a maximum of 6% for a 300 basis point change over 12 months.
It is management's ongoing objective to effectively manage the impact of
changes in interest rates and minimize the resulting effect on earnings as
evidenced by
14
<PAGE>
the preceding table. At June 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 June 30, 1998,
BB&T had outstanding interest rate swaps, caps, floors and collars with
notional amounts totaling $3.1 billion. The estimated fair value of open
contracts used for risk management purposes at June 30, 1998, reflected net
unrealized gains of $29.1 million.
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 June 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 June 30, 1998:
15
<PAGE>
INTEREST RATE SWAPS, CAPS, FLOORS AND COLLARS
JUNE 30, 1998
<TABLE>
<CAPTION>
NOTIONAL RECEIVE PAY NET UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
- - ------------------------------------ --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Receive fixed swaps ................ $ 1,311,000 6.39% 5.69% $ 28,672
Pay fixed swaps .................... 1,082,146 5.68 5.71 (740)
Basis swaps ........................ 100,000 5.77 5.69 27
Caps, floors & collars ............. 607,250 -- -- 1,167
----------- ---- ---- -----------
Total .............................. $ 3,100,396 6.06% 5.70% $ 29,126
=========== ==== ==== ===========
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 .......................... 10,000 835,000 97,250 942,250
Maturities/amortizations ........... -- (104,784) (61,000) (165,784)
Terminations ....................... -- -- (105,000) (105,000)
----------- ------------- ----------- -----------
Balance, June 30, 1998 ............. $ 1,311,000 $ 1,082,146 $ 707,250 $ 3,100,396
=========== ============= =========== ===========
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
- - ------------------------------------- --------------- ------------- ---------- -----------
Receive fixed swaps ................ $ 751,000 $ 300,000 $ 260,000 $ 1,311,000
Pay fixed swaps .................... 1,011,000 63,946 7,200 1,082,146
Basis swaps ........................ 100,000 -- -- 100,000
Caps, floors & collars ............. 250,000 357,250 -- 607,250
----------- ------------- ----------- -----------
Total .............................. $ 2,112,000 $ 721,196 $ 267,200 $ 3,100,396
=========== ============= =========== ===========
</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 $2.4 billion at June 30, 1998, and December
31, 1997. BB&T's book value per common share at June 30, 1998, was $8.62 on a
post-split basis, versus $8.47 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 June 30, 1998, were 10.5%, 16.0% and 6.8%, respectively. The comparable
ratios at the end of 1997 were 10.3%, 14.0% and 7.2%, 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%.
As reflected in the following table, the leverage ratio has declined from
year-end 1997. This decrease resulted from repurchase of 2.6 million shares of
BB&T common stock, which were subsequently issued (or are to be issued) in
effecting acquisitions accounted for (or to be accounted for) as purchases. A
significant portion of the shares have been repurchased for reissuance in
connection with the acquisition of Maryland Federal, which is expected to be
completed in the third quarter.
16
<PAGE>
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------------------
SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios
Tier 1 capital ......... 10.5% 10.4% 10.3% 10.1% 10.9%
Total capital .......... 16.0 14.1 14.0 13.7 14.8
Leverage ratio .......... 6.8 7.1 7.2 7.2 7.5
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the second quarter of 1998 totaled $122.0 million, an
increase of 19.8% over the $101.9 million earned during the second quarter of
1997. On a diluted per share basis, earnings for the three months ended June
30, 1998, were $.42 compared to $.35 for the same period in 1997, an increase
of 20.0%. BB&T's operating results for the second quarter of 1998 produced an
annualized return on average assets of 1.56% and an annualized return on
average shareholders' equity of 20.23% compared to prior year ratios of 1.44%
and 17.92%, respectively.
For the first six months of 1998, net income totaled $235.8 million, an
increase of 16.8% over the net income earned in the comparable period of 1997.
On a diluted per share basis, net income was $.82, an increase of 17.1%
compared to the first six months of 1997.
BB&T's earnings for the first six months of 1998 were adversely affected
by nonrecurring charges. During the first quarter of 1998, BB&T recorded $7.8
million in pretax 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.
Excluding the impact of the nonrecurring merger-related charges on 1998
operating results, BB&T would have had net income for the first six months of
1998 totaling $241.8 million, compared to $201.9 million in the prior year, an
increase of 19.7%. On a diluted per share basis, earnings for the first half of
1998, excluding nonrecurring charges, totaled $.84, up 20.0% from the prior
year earnings per share of $.70. Earnings before nonrecurring expenses for the
first half of 1998 produced an annualized return on average assets of 1.57% and
a return on average equity of 20.00%, compared to prior year ratios of 1.47%
and 17.95%, respectively.
BB&T's growth in recurring earnings resulted from three principal factors.
First, BB&T's noninterest income increased 33.8% for the three months ended
June 30, 1998, compared to the same period in 1997. This robust rate of growth
demonstrates the successful execution of the BB&T Sales Management System.
Second, as discussed above, BB&T has experienced positive growth in loans
resulting in a 4.4% increase in net interest income on a fully taxable
equivalent ("FTE") basis in the second quarter of 1998, compared to the second
quarter of 1997. Third, BB&T has controlled the growth of recurring noninterest
expenses. Excluding acquisitions accounted for by the purchase method of
accounting, noninterest expense increased 5.3% in the second quarter compared
to the same period in 1997.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income on an FTE basis was $314.5 million for the second
quarter of 1998 compared to $301.2 million for the same period in 1997, a 4.4%
increase. For the three months ended June 30, 1998, average interest-earning
assets increased $2.8 billion, or 10.4%, to $29.5 billion over the second
quarter of 1997, while average interest-bearing liabilities increased by $2.6
billion. During the same time period, the net interest margin decreased from a
second quarter 1997 rate of 4.52% to a current quarter rate of 4.27%. The 25
basis point decline in margin was driven by the funding costs associated with
BB&T's share repurchase program, which resulted in a reduction in margin of 9
basis points, the 1997 divestiture associated with the UCB merger, which
resulted in a 5 basis point decline, and the changes in loan mix discussed
earlier.
For the six months ended June 30, 1998, net interest income FTE was $625.6
million, an increase of 6.8% from the prior year balance of $585.7 million.
Total average earning assets increased $2.9 billion, or 11.2%, compared to the
first six months of 1997, while average interest-bearing liabilities increased
$2.8 billion, or 12.5%.
The following tables demonstrate fluctuations in net interest income and
the related yields for the second quarter of 1998 and the first six 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.
17
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED JUNE 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) ................... $ 7,385,123 $ 6,985,069 6.70% 6.74%
States and political
subdivisions .................... 148,414 172,082 8.89 8.79
----------- ----------- ----- -----
Total securities (5) ............ 7,533,537 7,157,151 6.74 6.80
Other earning assets (2) .......... 147,973 60,720 5.61 6.45
Loans and leases, net of
unearned income (1)(3)(4)(5)...... 21,792,721 19,487,514 9.01 9.26
----------- ----------- ----- -----
Total earning assets ............ 29,474,231 26,705,385 8.41 8.59
----------- ----------- ----- -----
Non-earning assets .............. 2,003,501 1,599,618
----------- -----------
TOTAL ASSETS .................. $31,477,732 $28,305,003
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and interest-
checking ........................ $ 1,666,173 $ 2,155,767 1.79 1.79
Money rate savings ............... 5,471,633 4,631,089 2.92 3.09
Time deposits .................... 11,019,324 10,971,696 5.50 5.52
----------- ----------- ----- -----
Total interest-bearing
deposits ...................... 18,157,130 17,758,552 4.38 4.43
Short-term borrowed funds ......... 3,866,271 2,676,482 5.43 5.37
Long-term debt .................... 3,766,879 2,709,641 5.71 5.80
----------- ----------- ----- -----
Total interest-bearing
liabilities ................... 25,790,280 23,144,675 4.73 4.70
----------- ----------- ----- -----
Noninterest-bearing
deposits ...................... 2,734,932 2,549,196
Other liabilities ............... 532,348 330,939
Shareholders' equity ............ 2,420,172 2,280,193
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ............. $31,477,732 $28,305,003
=========== ===========
Average interest rate spread ...... 3.68 3.89
Net yield on earning assets ....... 4.27% 4.52%
===== =====
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) ................... $123,622 $117,727 $ 5,895 $ (804) $ 6,699
States and political
subdivisions .................... 3,298 3,780 (482) 42 (524)
-------- -------- -------- --------- --------
Total securities (5) ............ 126,920 121,507 5,413 (762) 6,175
Other earning assets (2) .......... 2,070 977 1,093 (143) 1,236
Loans and leases, net of
unearned income (1)(3)(4)(5)...... 489,784 450,016 39,768 (12,304) 52,072
-------- -------- -------- --------- --------
Total earning assets ............ 618,774 572,500 46,274 (13,209) 59,483
-------- -------- -------- --------- --------
Non-earning assets ..............
TOTAL ASSETS ..................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and interest-
checking ........................ 7,423 9,614 (2,191) (10) (2,181)
Money rate savings ............... 39,835 35,659 4,176 (2,025) 6,201
Time deposits .................... 151,037 150,861 176 (478) 654
-------- -------- -------- --------- --------
Total interest-bearing
deposits ...................... 198,295 196,134 2,161 (2,513) 4,674
Short-term borrowed funds ......... 52,310 35,856 16,454 360 16,094
Long-term debt .................... 53,698 39,265 14,433 (648) 15,081
-------- -------- -------- --------- --------
Total interest-bearing
liabilities ................... 304,303 271,255 33,048 (2,801) 35,849
-------- -------- -------- --------- --------
Noninterest-bearing
deposits ......................
Other liabilities ...............
Shareholders' equity ............
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............
Average interest rate spread ......
Net yield on earning assets ....... $314,471 $301,245 $ 13,226 $ (10,408) $ 23,634
======== ======== ======== ========= ========
Taxable equivalent adjustment ..... $ 15,509 $ 13,039
======== ========
</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 any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans is included as income.
(5) Includes assets held for sale or available for sale at amortized cost and
trading securities at estimated fair value.
18
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE SIX MONTHS ENDED JUNE 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) .............................. $ 7,354,093 $ 6,813,374 6.74% 6.71%
States and political subdivisions ....... 154,436 178,102 8.93 8.78
----------- ----------- ----- -----
Total securities (5) ................... 7,508,529 6,991,476 6.79 6.76
Other earning assets (2) ................. 147,606 60,584 5.78 6.00
Loans and leases, net of unearned
income (1)(3)(4)(5) ..................... 21,442,151 19,115,392 9.08 9.18
----------- ----------- ----- -----
Total earning assets .................... 29,098,286 26,167,452 8.47 8.53
----------- ----------- ----- -----
Non-earning assets ...................... 2,013,907 1,575,844
----------- -----------
TOTAL ASSETS ............................ $31,112,193 $27,743,296
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits: ...............
Savings and interest-checking ........... $ 1,719,300 $ 2,141,802 1.80 1.78
Money rate savings ...................... 5,331,542 4,524,814 2.97 3.04
Time deposits ........................... 10,985,115 10,885,433 5.50 5.51
----------- ----------- ----- -----
Total interest-bearing deposits ........ 18,035,957 17,552,049 4.40 4.42
Short-term borrowed funds ................ 3,704,908 2,515,564 5.42 5.28
Long-term debt ........................... 3,754,315 2,587,790 5.75 5.72
----------- ----------- ----- -----
Total interest-bearing liabilities ..... 25,495,180 22,655,403 4.75 4.66
----------- ----------- ----- -----
Noninterest-bearing deposits ........... 2,673,572 2,488,792
Other liabilities ...................... 505,145 330,154
Shareholders' equity ................... 2,438,296 2,268,947
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY .................................. $31,112,193 $27,743,296
=========== ===========
Average interest rate spread ............. 3.72 3.87
Net yield on earning assets .............. 4.32% 4.49%
===== =====
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) .............................. $ 247,658 $ 228,586 $ 19,072 $ 859 $ 18,213
States and political subdivisions ....... 6,896 7,816 (920) 126 (1,046)
----------- ----------- -------- -------- --------
Total securities (5) ................... 254,554 236,402 18,152 985 17,167
Other earning assets (2) ................. 4,228 1,803 2,425 (70) 2,495
Loans and leases, net of unearned
income (1)(3)(4)(5) ..................... 967,294 871,705 95,589 (9,468) 105,057
----------- ----------- -------- -------- --------
Total earning assets .................... 1,226,076 1,109,910 116,166 (8,553) 124,719
----------- ----------- -------- -------- --------
Non-earning assets ......................
TOTAL ASSETS ............................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits: ...............
Savings and interest-checking ........... 15,321 18,938 (3,617) 147 (3,764)
Money rate savings ...................... 78,642 68,174 10,468 (1,458) 11,926
Time deposits ........................... 299,341 297,594 1,747 (972) 2,719
----------- ----------- -------- -------- --------
Total interest-bearing deposits ........ 393,304 384,706 8,598 (2,283) 10,881
Short-term borrowed funds ................ 99,571 65,822 33,749 1,831 31,918
Long-term debt ........................... 107,557 73,641 33,916 500 33,416
----------- ----------- -------- -------- --------
Total interest-bearing liabilities ..... 600,432 524,169 76,263 48 76,215
----------- ----------- -------- -------- --------
Noninterest-bearing deposits ...........
Other liabilities ......................
Shareholders' equity ...................
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ..................................
Average interest rate spread .............
Net yield on earning assets .............. $ 625,644 $ 585,741 $ 39,903 $ (8,601) $ 48,504
=========== =========== ======== ======== ========
Taxable equivalent adjustment ............ $ 30,586 $ 23,466
=========== ===========
</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 any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans is included as income.
(5) Includes assets held for sale or available for sale at amortized cost and
trading securities at estimated fair value.
19
<PAGE>
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 1998 was $129.6
million, compared to $96.9 million for the same period in 1997, an increase of
33.8%. For the first six months of the year, total noninterest income was
$250.9 million, an increase of 28.6% compared to the first six months of 1997.
Excluding the impact of purchase acquisitions, including Virginia First,
Craigie, Inc. ("Craigie"), Phillips and Refloat, BB&T's noninterest income
would have increased at a rate of 22.9% in the second quarter compared to 1997.
BB&T experienced positive development in all significant areas of
noninterest income except non-agency insurance commissions and trust revenue.
Service charges on deposits, mortgage banking revenues, agency insurance
commissions and other income all showed strong gains during the period. The
percentage of total revenues, (tax-equivalent net interest income FTE plus
noninterest income excluding securities gains or losses and nonrecurring
items), derived from noninterest income, was 29.0% for the three months ended
June 30, 1998, up from 24.5% for the second quarter of 1997. This fee income
ratio represents a record high percentage for BB&T.
Service charges on deposits increased $3.9 million, or 10.2%, for the
second quarter of 1998, compared to the second 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 six months of 1998,
service charges on deposits totaled $83.0 million, an $8.3 million, or 11.1%,
increase from the first half of 1997.
Trust income decreased $498,000, or 5.9%, for the three months ended June
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 decrease in trust revenues for the second quarter
of 1998 reflects lower fees related to the administration of the
above-mentioned 401(k) plan. For the six months ended June 30, 1998, trust
income increased $463,000, or 3.0%, compared to the first half of 1997.
Agency insurance commissions increased $2.9 million, or 30.7%, in the
second 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 six months of 1998, agency insurance commissions
increased $5.5 million, or 26.6%, compared to the same period in 1997.
Income from mortgage banking activities increased $11.6 million, or
104.5%, for the three months ended June 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 second quarter, higher mortgage
loan servicing fees and underwriting fees, an increase in gains on mortgage
loans during the quarter, purchase accounting transactions and a decrease in
the provision for mortgage servicing rights. For the six months ended June 30,
1998, income from mortgage banking activities increased $14.4 million, or
61.1%, compared to the first six months of 1997.
Other nondeposit fees and commissions increased by $6.6 million, or 32.4%,
to a level of $27.1 million for the three months ended June 30, 1998, compared
with $20.5 million for the second 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 six
months ended June 30, 1998, other nondeposit fees and commissions increased
$12.8 million, or 32.8%, compared to the comparable period in 1997.
Other income increased $6.3 million, or 88.9%, in the second quarter of
1998 compared to 1997 primarily as a result of income from additional
investments in corporate owned life insurance policies and purchase accounting
transactions occurring after the second quarter last year. For the six months
ended June 30, 1998, other income increased $12.2 million, or 86.8%, compared
to the first six months of 1997.
20
<PAGE>
NONINTEREST EXPENSE
Noninterest expenses totaled $229.4 million for the second quarter of 1998
compared to $205.2 million for the same period a year ago, an increase of
11.8%. For the first six months of 1998, noninterest expenses totaled $458.4
million, compared to $403.9 million in 1997, an increase of 13.5%. Excluding
the $7.8 million of pretax nonrecurring charges recorded in the first quarter
of 1998, noninterest expenses would have been $450.6 million for the six
months, up 11.6%, from the prior year. An explanation for the increase follows
in the accompanying paragraphs.
Personnel expense, the largest component of noninterest expense, was
$116.1 million for the second quarter of 1998 compared to $104.1 million for
the same period in 1997, an increase of $12.0 million, or 11.5%. The increase
during the quarter resulted from annual salary adjustments, which typically
begin in April, higher incentive compensation costs and acquisitions accounted
for as purchases completed since June 30, 1997. For the six months ended June
30, 1998, total personnel expense increased $22.5 million, or 10.8%. The
increase was partially caused by $2.4 million in nonrecurring merger-related
charges in the form of severance pay, termination of employment contracts,
early retirement packages and other related benefits. Excluding these costs,
personnel expense increased $20.1 million, or 9.6%.
Occupancy and equipment expense for the three months ended June 30, 1998,
totaled $39.1 million, an increase of $5.2 million, or 15.5%, compared to 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 six months of 1998, occupancy and equipment
expense totaled $75.8 million, an increase of $10.1 million, or 15.3%, compared
to 1997.
The amortization of intangible assets and mortgage servicing rights
totaled $11.0 million for the three months ended June 30, 1998, a $5.3 million,
or 92.2%, increase from the amount incurred in the same quarter of 1997. This
was the result of a $2.6 million increase in amortization of mortgage loan
servicing rights and increased amortization of goodwill due to acquisitions
consummated using purchase accounting. For the six months ended June 30, 1998,
amortization of intangibles and mortgage servicing rights totaled $21.1
million, an increase of $10.3 million, or 95.7%, compared to the same period in
1997.
Other noninterest expenses for the second quarter of 1998 totaled $63.3
million, an increase of $1.7 million, or 2.8%, over 1997. For the six months
ended June 30, 1998, other noninterest expense totaled $129.8 million, an
increase of $11.6 million, or 9.8%. The 1998 expenses include $5.2 million of
nonrecurring expenses related to the Life merger, which were recorded during
the first quarter. Excluding the impact of these charges, other noninterest
expense would have totaled $124.6 million for the six months, an increase of
$6.4 million, or 5.4%. This increase was primarily due to purchase accounting
acquisitions and a $6.1 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).
YEAR 2000 ISSUE
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 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 remediation strategy in 1996 and has
formed a project committee that meets regularly to review the progress of
remediation efforts. Based on the assessments of this committee, BB&T
determined that it would be required to modify or replace significant portions
of its information technology platform and other systems so that they will
properly utilize data before, during and after the Year 2000. Efforts to
complete and test these modifications are currently underway and progressing.
BB&T is utilizing both internal and external resources to reprogram, replace,
and test software and other components of its systems for Year 2000
modifications. Systems have been scheduled for modification based on a
risk-adjusted priority to ensure that mission-critical systems are completed in
time to allow for extended testing.
For BB&T's core business systems (those systems which run on BB&T's
mainframe), the inventory and assessment phases of the process have been
completed and the remediation and testing phases are underway. For distributed
systems (those systems which do not run on the mainframe) and non-critical
business applications, the inventory phase is complete
21
<PAGE>
and efforts are underway in most departments to assess the steps necessary to
remediate the Year 2000 Issue. Remediation has begun for some mission-critical
distributed systems. For non-information technology systems (those systems
which have embedded technology such as microprocessors), the inventory phase is
complete and the assessment phase is underway.
During the inventory and assessment phases, BB&T identified all specific
systems that require modification or replacement and assessed the steps
necessary to remediate the Year 2000 Issue. In the remediation phase, BB&T will
replace, modify or delete the systems as required. BB&T has targeted December
31, 1998 as a completion date for remediation of mission-critical business
applications. During the testing phase, BB&T will perform internal and external
testing with third parties to ensure that the remediated systems accurately
process dates. Testing of internal and external systems upon which BB&T relies
will be performed in various stages. BB&T has established a goal to complete
all stages of testing for mission-critical applications by June 1999. Finally,
in the clean management phase, BB&T will implement processes to ensure that the
remediated systems will continue to process dates properly.
Management presently believes that with modifications to existing systems
and, in certain circumstances, conversions to new systems, the effects of the
Year 2000 Issue will be minimized. However, if such modifications and
conversions are not made, or are not completed on a timely basis, the Year 2000
Issue could have a material impact on the operations of BB&T, which in turn
could have a materially adverse effect on BB&T's results of operations and
financial condition.
BB&T has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which BB&T is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. However, there can be no assurance that the systems of other
organizations upon which BB&T's operations rely, including essential utilities
and telecommunications providers, 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.
Management is currently developing contingency plans in the event that
efforts to remediate BB&T's systems are not fully successful or are not
completed in accordance with current expectations. The contingency plans
represent an enhancement of BB&T's existing business resumption plans to
safeguard BB&T under various Year 2000 scenarios. The contingency plans are
being designed to address any failure to remediate BB&T's internal systems and
to address failures of systems outside BB&T. The contingency plans include the
use of third party service providers, alternative commercial vendors,
alternative data security and other contingency service suppliers.
The projected total cost of the Year 2000 project is currently estimated
at approximately $29 million and is being funded through operating cash flows.
As of June 30, 1998, a cumulative total of approximately $8.6 million had been
spent on the assessment of and efforts in connection with the Year 2000 project
and the development and implementation of the remediation plan. 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 $56.1 million for the second
quarter of 1998, an increase of $2.9 million, or 5.5%. For the six months ended
June 30, 1998, the provision for income taxes totaled $108.6 million, an
increase of $3.1 million, or 2.9%, compared to the first six months of 1997.
Excluding the tax benefits associated with the nonrecurring charges detailed
above, the provision for income taxes would have been $110.4 million, an
increase of $4.9 million, or 4.6%. Effective tax rates on pretax income were
31.5% and 34.3% for the three months ended June 30, 1998 and 1997,
respectively, and also 31.5% and 34.3% for the six months ended June 30, 1998
and 1997, respectively. The lower effective tax rates in 1998 reflect positive
results from BB&T's ongoing tax minimization strategies.
22
<PAGE>
PROFITABILITY MEASURES
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------------------
SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Return on average assets ....................... 1.56% 1.50% 1.18% .90% 1.44%
Return on average common equity ................ 20.23 18.77 15.25 11.34 17.92
Net interest margin ............................ 4.27 4.36 4.36 4.44 4.52
Efficiency ratio (taxable equivalent)* ......... 51.7 51.3 50.5 50.9 51.2
</TABLE>
- - ---------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
23
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
BB&T held its annual meeting of the shareholders on April 28, 1998, to
consider and vote upon the following matters:
(1) To elect seven Directors for three-year terms expiring in 2001, three
Directors for two-year terms expiring in 2000 and two Directors for one-year
terms expiring in 1999. Of shares represented by proxy, votes in favor were
102,753,223; votes opposed were 167,072; and abstentions were 623,963.
(2) To approve an amendment to the Corporation's Articles of Incorporation
to increase the authorized Common Stock from 300,000,000 shares to 500,000,000
shares. Of shares represented by proxy, votes in favor were 98,615,144; votes
opposed were 4,040,548; and abstentions were 888,497.
(3) To ratify the reappointment of Arthur Andersen LLP as the
Corporation's independent auditors for 1998. Of shares represented by proxy,
votes in favor were 102,760,851; votes opposed were 323,214; and abstentions
were 460,125.
(4) To transact such other business as may properly come before the
meeting. Of shares represented by proxy, votes in favor were 88,734,771; votes
opposed were 7,295,063; and abstentions were 7,514,351.
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 January 15, 1998, BB&T filed a Form 8-K under Item 5 to report its
financial condition and the results of operations for the fourth quarter of
1997. On February 26, 1998, BB&T filed a Form 8-K under Item 5 to announce
plans to acquire Maryland Federal Bancorp, Inc. of Hyattsville, Maryland. On
February 27, 1998, BB&T filed a Form 8-K under Item 5 to announce a new share
repurchase plan. On April 13, 1998, BB&T filed a Form 8-K under Item 5 to
report its financial condition and the results of operations for the first
quarter of 1998. On May 13, 1998, BB&T filed a Form 8-K under Item 5 to restate
the 1997 Form 10-K for the accounts of Life Bancorp, Inc. On June 23, 1998,
BB&T filed a Form 8-K under Item 5 to report the declaration of a 2-for-1 stock
split to be effected as a 100% stock dividend payable on August 3, 1998, and to
report an increase in the quarterly cash dividend to $.175, on a post-split
basis. 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.
24
<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.
<TABLE>
<S> <C>
BB&T CORPORATION
(Registrant)
Date: August 13, 1998 By: /s/ SCOTT E. REED
-----------------------------------
SCOTT E. REED, SENIOR EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
Date: August 13, 1998 By: /s/ SHERRY A. KELLETT
-----------------------------------
SHERRY A. KELLETT, SENIOR EXECUTIVE VICE
PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<CASH> 786,291
<INT-BEARING-DEPOSITS> 7,926
<FED-FUNDS-SOLD> 128,618
<TRADING-ASSETS> 71,156
<INVESTMENTS-HELD-FOR-SALE> 7,134,865
<INVESTMENTS-CARRYING> 128,817
<INVESTMENTS-MARKET> 132,331
<LOANS> 21,969,960
<ALLOWANCE> 289,310
<TOTAL-ASSETS> 31,543,525
<DEPOSITS> 21,130,040
<SHORT-TERM> 3,355,421
<LIABILITIES-OTHER> 491,118
<LONG-TERM> 4,146,008
0
0
<COMMON> 702,520
<OTHER-SE> 1,718,418
<TOTAL-LIABILITIES-AND-EQUITY> 31,543,525
<INTEREST-LOAN> 953,072
<INTEREST-INVEST> 238,227
<INTEREST-OTHER> 4,191
<INTEREST-TOTAL> 1,195,490
<INTEREST-DEPOSIT> 393,304
<INTEREST-EXPENSE> 600,432
<INTEREST-INCOME-NET> 595,058
<LOAN-LOSSES> 43,000
<SECURITIES-GAINS> 3,648
<EXPENSE-OTHER> 458,408
<INCOME-PRETAX> 344,330
<INCOME-PRE-EXTRAORDINARY> 108,564
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,766
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 4.32
<LOANS-NON> 78,373
<LOANS-PAST> 48,356
<LOANS-TROUBLED> 528
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</TABLE>
