- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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:
March 31, 1998
Commission file number : 1-10853
BB&T Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At April 30, 1998, 141,186,661 shares of the registrant's common stock, $5
par value, were outstanding.
---------------
This Form 10-Q has 21 pages. The Exhibit Index is included on page 20.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
BB&T CORPORATION
FORM 10-Q
March 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) ..................................................... 2
Consolidated Financial Statements .................................................... 2
Notes to Consolidated Financial Statements ........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Analysis of Financial Condition ...................................................... 10
Market Risk Management ............................................................... 12
Capital Adequacy and Resources ....................................................... 14
Analysis of Results of Operations .................................................... 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 20
Item 6. Exhibits and Reports on Form 8-K ..................................................... 20
SIGNATURES ...................................................................................... 21
EXHIBIT 11 Calculation of Earnings Per Share .................................................... 9
EXHIBIT 27 Financial Data Schedule -- Included with electronically-filed document only.
</TABLE>
1
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- ---------------
(Dollars in thousands, except
per share data)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................. $ 833,356 $ 851,971
Interest-bearing deposits with banks .................................................... 13,396 77,065
Federal funds sold and securities purchased under resale agreements or similiar
arrangements .......................................................................... 114,960 103,245
Trading securities ...................................................................... 107,272 67,878
Securities available for sale ........................................................... 7,531,753 7,199,198
Securities held to maturity (approximate market values of $144,694 at March 31, 1998,
and $151,581 at December 31, 1997)..................................................... 140,722 147,799
Loans held for sale ..................................................................... 911,254 509,141
Loans and leases, net of unearned income ................................................ 20,621,071 20,424,288
Allowance for loan and lease losses ................................................... (282,418) (275,404)
----------- -----------
Loans and leases, net ................................................................ 20,338,653 20,148,884
----------- -----------
Premises and equipment, net ............................................................. 425,568 431,631
Other assets ............................................................................ 1,118,776 1,105,987
----------- -----------
TOTAL ASSETS ........................................................................ $31,535,710 $30,642,799
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits .......................................................... $ 2,773,106 $ 2,833,238
Savings and interest checking ......................................................... 1,758,768 1,708,657
Money rate savings .................................................................... 5,359,565 5,241,055
Other time deposits ................................................................... 9,907,292 9,779,594
Foreign deposits ...................................................................... 996,077 1,385,633
----------- -----------
Total deposits ...................................................................... 20,794,808 20,948,177
----------- -----------
Short-term borrowed funds ............................................................... 4,040,166 3,276,177
Long-term debt .......................................................................... 3,768,556 3,575,517
Accounts payable and other liabilities .................................................. 492,134 443,101
----------- -----------
TOTAL LIABILITIES ................................................................... 29,095,664 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, 141,681,441 issued and
outstanding at March 31, 1998, and 141,763,220 at December 31, 1997 .................. 708,407 708,816
Additional paid-in capital ............................................................ 134,535 161,018
Retained earnings ..................................................................... 1,550,116 1,482,037
Loan to employee stock ownership plan and unvested restricted stock ................... (724) (962)
Accumulated other nonshareholder changes in equity, net of deferred income
taxes of $30,822 at March 31, 1998 and $31,593 at December 31, 1997................... 47,712 48,918
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .......................................................... 2,440,046 2,399,827
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................................... $31,535,710 $30,642,799
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------
1998 1997
--------------- ---------------
(Dollars in thousands, except
per share data)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases ....................... $ 470,369 $ 417,124
Interest and dividends on securities ........................ 119,725 109,046
Interest on short-term investments .......................... 2,131 813
------------ ------------
Total interest income ..................................... 592,225 526,983
------------ ------------
INTEREST EXPENSE
Interest on deposits ........................................ 195,009 188,572
Interest on short-term borrowed funds ....................... 47,261 29,966
Interest on long-term debt .................................. 53,859 34,376
------------ ------------
Total interest expense .................................... 296,129 252,914
------------ ------------
NET INTEREST INCOME .......................................... 296,096 274,069
Provision for loan and lease losses ......................... 22,000 21,120
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 274,096 252,949
------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts ......................... 41,090 36,660
Mortgage banking income ..................................... 15,263 12,470
Trust income ................................................ 7,819 6,858
Agency insurance commissions ................................ 14,036 11,393
Other insurance commissions ................................. 2,979 3,557
Other nondeposit fees and commissions ....................... 24,572 18,434
Securities gains, net ....................................... 2,460 1,800
Other noninterest income .................................... 12,878 6,977
------------ ------------
Total noninterest income .................................. 121,097 98,149
------------ ------------
NONINTEREST EXPENSE
Personnel expense ........................................... 115,542 105,014
Occupancy and equipment expense ............................. 36,782 31,943
Amortization of intangibles and mortgage servicing rights ... 10,135 5,076
Other noninterest expense ................................... 66,539 56,641
------------ ------------
Total noninterest expense ................................. 228,998 198,674
------------ ------------
EARNINGS
Income before income taxes................................... 166,195 152,424
Provision for income taxes .................................. 52,477 52,346
------------ ------------
Net income .................................................. $ 113,718 $ 100,078
============ ============
PER COMMON SHARE
Net income:
Basic ..................................................... $ .80 $ .70
============ ============
Diluted ................................................... $ .78 $ .69
============ ============
Cash dividends declared ..................................... $ .31 $ .27
============ ============
AVERAGE SHARES OUTSTANDING
Basic ....................................................... 142,065,987 142,346,658
============ ============
Diluted ..................................................... 145,077,846 144,827,632
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Common Paid-In Earnings Changes Shareholders'
Stock Stock Capital and Other* in Equity Equity
--------------- ------------ ------------ -------------- ---------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996, AS
PREVIOUSLY REPORTED ................. 136,896,865 $ 684,484 $ 145,704 $1,229,640 $ 11,739 $2,071,567
Pooling-of-interests merger with
Life Bancorp, Inc. ................ 5,711,167 28,556 63,664 56,750 1,968 150,938
----------- --------- --------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1996, AS
RESTATED ............................ 142,608,032 713,040 209,368 1,286,390 13,707 2,222,505
Add (Deduct)
Nonshareholder changes in equity**:
Net income ........................ -- -- -- 100,078 -- 100,078
Net unrealized depreciation on
securities available for sale,
net of deferred income taxes ..... -- -- -- -- (19,600) (19,600)
----------
Total nonshareholder changes in
equity............................. 80,478
----------
Common stock issued ............... 2,008,235 10,041 60,526 -- -- 70,567
Redemption of common stock ........ (2,087,442) (10,437) (71,880) -- -- (82,317)
Cash dividends declared on
common stock ..................... -- -- -- (35,035) -- (35,035)
Other ............................. -- -- -- 89 -- 89
----------- --------- --------- ---------- --------- ----------
BALANCE, MARCH 31, 1997 .............. 142,528,825 $ 712,644 $ 198,014 $1,351,522 $ (5,893) $2,256,287
=========== ========= ========= ========== ========= ==========
BALANCE, DECEMBER 31, 1997, AS
PREVIOUSLY REPORTED ................. 136,051,623 $ 680,258 $ 85,185 $1,427,292 $ 44,902 $2,237,637
Pooling-of-interests merger with
Life Bancorp, Inc. ................ 5,711,597 28,558 75,833 53,783 4,016 162,190
----------- --------- --------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1997, AS
RESTATED ............................ 141,763,220 708,816 161,018 1,481,075 48,918 2,399,827
Add (Deduct)
Nonshareholder changes in equity**:
Net income ........................ -- -- -- 113,718 -- 113,718
Net unrealized depreciation on
securities available for sale,
net of deferred income taxes ..... -- -- -- -- (1,206) (1,206)
----------
Total nonshareholder changes in
equity............................. 112,512
----------
Common stock issued ............... 732,801 3,664 22,251 -- -- 25,915
Redemption of common stock ........ (814,580) (4,073) (48,734) -- -- (52,807)
Cash dividends declared on
common stock ..................... -- -- -- (45,638) -- (45,638)
Other ............................. -- -- -- 237 -- 237
----------- --------- --------- ---------- --------- ----------
BALANCE, MARCH 31, 1998 .............. 141,681,441 $ 708,407 $ 134,535 $1,549,392 $ 47,712 $2,440,046
=========== ========= ========= ========== ========= ==========
</TABLE>
- - ---------
* Other includes 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.
4
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 113,718 $ 100,078
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses ................................................ 22,000 21,120
Depreciation of premises and equipment ............................................. 16,975 12,486
Amortization of intangibles and mortgage servicing rights .......................... 10,135 5,076
Accretion of negative goodwill ..................................................... (1,561) (1,559)
Amortization of unearned stock compensation ........................................ 237 89
Discount accretion and premium amortization on securities, net ..................... (391) (151)
Net increase in trading account securities ......................................... (39,394) --
Loss (gain) on sales of securities, net ............................................ (2,460) (1,800)
Loss (gain) on sales of loans, net ................................................. (6,030) (2,972)
Loss (gain) on disposals of premises and equipment, net ............................ (1,360) 157
Proceeds from sales of loans held for sale ......................................... 546,346 296,253
Purchases of loans held for sale ................................................... (285,214) (90,575)
Origination of loans held for sale, net of principal collected ..................... (657,215) (243,607)
Decrease (increase) in:
Accrued interest receivable ....................................................... (22,310) 11,032
Other assets ...................................................................... 6,731 6,990
Increase (decrease) in:
Accrued interest payable .......................................................... 13,271 4,247
Accounts payable and other liabilities ............................................ 13,002 48,913
------------ ------------
Net cash (used in) provided by operating activities ................................ (273,520) 165,777
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ................................ 538,967 350,248
Proceeds from maturities, calls and paydowns of securities available for sale ....... 500,751 676,792
Purchases of securities available for sale .......................................... (1,346,709) (1,117,025)
Proceeds from maturities of securities held to maturity ............................. 8,724 47,007
Purchases of securities held to maturity ............................................ (1,715) (4,823)
Leases made to customers ............................................................ (23,327) (14,093)
Principal collected on leases ....................................................... 16,012 14,096
Loan originations, net of principal collected ....................................... (111,145) (503,667)
Purchases of loans .................................................................. (96,904) (43,325)
Net cash acquired in transactions accounted for under the purchase method ........... -- 12,005
Purchases and originations of mortgage servicing rights ............................. (11,461) (4,653)
Proceeds from disposals of premises and equipment ................................... 4,151 383
Purchases of premises and equipment ................................................. (15,924) (17,354)
Proceeds from sales of foreclosed property .......................................... 8,200 3,863
Proceeds from sales of other real estate held for development or sale ............... -- 1,240
Other, net .......................................................................... -- 5,002
------------ ------------
Net cash used in investing activities .............................................. (530,380) (594,304)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ................................................. (153,369) 344,853
Net increase (decrease) in short-term borrowed funds ................................ 763,989 (160,524)
Proceeds from long-term debt ........................................................ 453,869 744,164
Repayments of long-term debt ........................................................ (260,830) (509,821)
Net proceeds from common stock issued ............................................... 25,915 4,883
Redemption of common stock .......................................................... (52,807) (82,317)
Cash dividends paid on common and preferred stock ................................... (43,436) (35,035)
------------ ------------
Net cash provided by financing activities .......................................... 733,331 306,203
------------ ------------
Net Decrease in Cash and Cash Equivalents ............................................ (70,569) (122,324)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................................... 1,032,281 938,624
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... $ 961,712 $ 816,300
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................................................... $ 282,858 $ 249,575
Income taxes ....................................................................... 8,222 6,019
Noncash financing and investing activities:
Transfer of loans to foreclosed property ........................................... 3,595 5,184
Transfer of fixed assets to other real estate owned ................................ 2,221 834
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 1998 and December 31, 1997; the consolidated statements of
income for the three months ended March 31, 1998 and 1997; the consolidated
statements of changes in shareholders' equity for the three months ended
March 31, 1998 and 1997; and the consolidated statements of cash flows for
the three months ended March 31, 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 12, 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.
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
and Virginia primarily through its commercial banking subsidiaries and, to
a lesser extent, through its other subsidiaries. The commercial banking
subsidiaries, Branch Banking and Trust Company ("BB&T-NC"), Branch Banking
and Trust Company of South Carolina ("BB&T-SC") and Branch Banking and
Trust Company of Virginia ("BB&T-VA"), provide a wide range of traditional
banking services 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
Carolinas and Virginia. Subsidiaries of the commercial banking subsidiaries
offer lease financing to commercial businesses and municipal governments,
investment services, (including discount brokerage services, annuities,
mutual funds and government and municipal bonds), life and property and
casualty insurance on an agency basis and insurance premium financing.
Other subsidiaries of BB&T provide additional services, such as sub-prime
lending, factoring and investment banking.
6
<PAGE>
C. New Accounting Pronouncements
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing
and amending existing standards. The statement was effective for financial
statements for periods ending after December 15, 1997. Management has
determined that BB&T is currently is compliance with the disclosure
requirements of SFAS No. 129, and, therefore, the implementation of the
statement 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-K for the period ending
December 31, 1998.
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 to be made.
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 the BB&T's consolidated financial position or consolidated results
of operations.
D. Mergers and Acquisitions
Completed Acquisitions
On March 1, 1997, BB&T completed the acquisition of Fidelity Financial
Bankshares Corporation of Richmond, Virginia ("Fidelity") in a transaction
accounted for as a purchase. Under the terms of the agreement, Fidelity's
shareholders received .7137 shares of BB&T common stock in exchange for
each share of Fidelity stock held, which resulted in the issuance of
approximately 1.6 million shares. In conjunction with the acquisition, BB&T
recorded $37.9 million in goodwill, which is being amortized over 15 years
using the straight-line method.
On May 20, 1997, BB&T completed its acquisition of Phillips Factors
Corporation ("Phillips"), and its subsidiaries, Phillips Financial
Corporation and Phillips Acceptance Corporation, all of High Point, North
Carolina. Phillips purchases and manages accounts receivable primarily in
the furniture, textiles, home furnishings-related and temporary staffing
industries. The acquisition of Phillips was accounted for as a purchase. In
conjunction with the acquisition, BB&T recorded $11.1 million of goodwill,
which is being amortized over 15 years using the straight-line method.
On July 1, 1997, BB&T completed its merger with United Carolina Bancshares
Corporation ("UCB") of Whiteville, North Carolina, in a transaction
accounting for as a pooling of interests. BB&T issued approximately 27.7
million shares of common stock in exchange for all of the shares of UCB
common stock outstanding.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial
Corp. (collectively, "Refloat"), a financial company that specializes in
loans to small commercial lawn care businesses across the country. Under
the terms of the agreement, Refloat shareholders received approximately
375,000 shares of BB&T common stock in exchange for all Refloat shares
outstanding. In conjunction with the acquisition, which was accounted for
as a purchase, BB&T recorded $3.0 million of goodwill, which is being
amortized over 15 years using the straight-line method.
7
<PAGE>
On October 1, 1997, BB&T completed the acquisition of Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia,
through the issuance of approximately 410,000 shares of BB&T common stock.
Craigie specializes in the origination, trading and distribution of
fixed-income securities and equity products in both the public and private
capital markets. Craigie also has a public finance department that provides
investment banking services, financial advisory services and municipal bond
financing to a variety of regional tax-exempt issuers. In conjunction with
the acquisition, which was accounted for as a purchase, BB&T recorded $6.9
million of goodwill, which is being amortized over 25 years using the
straight-line method.
On December 1, 1997, BB&T completed its acquisition of Virginia First
Financial Corporation of Petersburg, Virginia ("VFFC"). The acquisition,
which was accounted for as a purchase, was consummated through the issuance
of approximately 1.9 million shares of BB&T common stock and the payment of
$44.8 million. In conjunction with the transaction, BB&T recorded $92.0
million in goodwill, which is being amortized using the straight-line
method over a period of 15 years.
On March 1, 1998, BB&T completed its pooling-of-interests merger with Life
Bancorp, Inc. ("Life") of Norfolk, Virginia. Accordingly, all amounts
presented herein 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.
BB&T typically provides a one-year allocation period for the determination
of goodwill following an acquisition accounted for under the purchase
method of accounting. Management currently does not anticipate any material
adjustments to assigned values of the assets and liabilities of acquired
companies.
Pending Mergers and Acquisitions
On December 16, 1997, BB&T announced plans to acquire Franklin
Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction
to be accounted for under the pooling-of-interests method of accounting.
Franklin shareholders will receive between .35 and .3743 shares of BB&T
common stock in exchange for each share of Franklin common stock held.
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 .5975 and no greater than .6102
shares of BB&T common stock in exchange for each share of Maryland Federal
common stock held.
8
<PAGE>
E. Calculation of Earnings Per Share
BB&T's basic and diluted earnings per share amounts were calculated as
follows:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
1998 1997
---------------- ----------------
(Dollars in thousands, except per
share data)
<S> <C> <C>
Basic Earnings Per Share:
Weighted average number of common shares
outstanding during the period ....................... 142,065,987 142,346,658
=========== ===========
Net income ........................................... $ 113,718 $ 100,078
============= =============
Basic earnings per share ............................. $ .80 $ .70
============= =============
Diluted Earnings Per Share:
Weighted average number of common shares
outstanding during the period ....................... 142,065,987 142,346,658
Add --
Dilutive effect of outstanding options (as determined
by application of treasury stock method) ........... 3,011,859 2,472,167
Issuance of additional shares under share repurchase
agreement, contingent upon market price ............ -- 8,807
------------- -------------
Weighted average number of common shares, as
adjusted ............................................ 145,077,846 144,827,632
============= =============
Net income ........................................... $ 113,718 $ 100,078
============= =============
Diluted earnings per share ........................... $ .78 $ .69
============= =============
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at March 31, 1998 were $31.5 billion, an $892.9
million increase from the balance at December 31, 1997. The principal
components of the increase were loans and leases, including loans held for
sale, which grew $598.9 million and securities available for sale, which
increased $332.6 million compared to year-end 1997. These increases were
partially offset by declines in other short-term investments of $52.0 million
and cash and due from banks, which decreased $18.6 million. The factors causing
the fluctuations in these asset categories are further discussed in the
following paragraphs.
BB&T's loan growth continued at a healthy pace during the first quarter of
1998, increasing 12.0% compared to March 31, 1997. Compared to year-end 1997,
loans increased at an annualized rate of 11.6%. Average loans for the first
quarter of 1998 increased 12.5% compared to the quarter ended March 31, 1997
and growth was strong in all categories, with mortgage loans increasing at a
rate of 28.6%, commercial loans growing by 9.3% and average consumer loans
increasing at a rate of 5.4%.
These growth rates take into account the impact of a divestiture 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, Phillips, Refloat and VFFC. Excluding
the impact of this divestiture and the purchase accounting transactions,
average loans for the three months ended March 31, 1998, grew at a rate of 9.7%
compared to the first quarter of 1997. By category, excluding the divestiture
and the purchase accounting, mortgage loans increased 18.1%, commercial loans
grew 7.9% and consumer loans were 4.5% greater than the comparable quarter in
1997.
Management attributes the growth in loans to the successful execution of
the BB&T Sales Management System, which utilizes extensive planning and
monitoring procedures and includes incentives for employees to pursue a healthy
volume of high-quality, profitable loans.
At March 31, 1998, securities available for sale, which totaled $7.5
billion, had unrealized gains, net of deferred income taxes, of $47.7 million
compared to unrealized gains, net of deferred income taxes, of $48.9 million at
December 31, 1997.
Significant fluctuations in liabilities included short-term borrowed
funds, which increased $764.0 million, or 23.3%, from December 31, 1997;
deposits, which decreased $153.4 million, or .7%; and long-term debt, which
rose $193.0 million, or 5.4%, over the same time frame. 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 at March 31, 1998,
would have been $352.4 million, or 1.7%, 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 VFFC.
Fluctuations in deposits included continued growth in money rate savings
accounts, which increased $118.5 million, or 2.3%, during the first quarter of
1998. The substantial growth in money rate savings reflects the continued
special promotion of an "Investor Deposit Account," which is more flexible than
traditional money rate savings accounts and less costly to BB&T than
certificates of deposit.
Slower deposit growth in recent years, combined with the availability of
cost-effective alternative funding sources, caused management to increasingly
utilize nondeposit funding sources, such as Federal Home Loan Bank ("FHLB")
advances and purchases of Federal funds. In order to supplement slower deposit
growth, management is currently focusing on nontraditional funding sources, as
well as transaction, savings and money market deposits, which are often more
cost-effective than certificates of deposit.
The significant growth in short-term borrowed funds includes a greater
reliance on Federal funds purchased and securities sold under repurchase
agreements. These balances can fluctuate substantially overnight based on
specific funding needs.
The growth in long-term debt resulted from increased borrowings from the
FHLB.
FHLB advances composed 51.5% of total long-term debt at March 31, 1998.
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.
10
<PAGE>
Asset Quality
Nonperforming assets (composed of foreclosed assets, nonaccrual loans and
restructured loans) totaled $122.3 million at March 31, 1998, compared to
$135.2 million at December 31, 1997. Nonperforming assets as a percentage of
loan-related assets were .57% at March 31, 1998, compared to .64% at December
31, 1997. Loans 90 days or more past due and still accruing interest totaled
$41.9 million compared to a prior year-end balance of $44.2 million. Net
charge-offs totaled $15.0 million and amounted to .29% of average loans and
leases in the first quarter of 1998 compared to $12.4 million, or .27% of
average loans and leases, in the corresponding period in 1997. While net
charge-offs have increased from last year, management considers the current
charge-off level to be within reasonable norms from an historical perspective.
The allowance for loan and lease losses was $282.4 million, or 1.31% of
loans and leases, at March 31, 1998, compared to $275.4 million at December 31,
1997. The increase in the allowance was the result of provisions for loan and
lease losses that are in excess of actual net losses charged against the
allowance.
The provision for loan and lease losses for the first quarter of 1998 was
$22.0 million, compared to $21.1 million in the first quarter of 1997. The
small increase in the provision reflects higher net charge-offs.
Regional Acceptance Corporation ("Regional Acceptance"), BB&T's
nonstandard automobile finance subsidiary, has experienced higher-than-expected
net charge-offs in recent quarters which is indicative of the current nature of
the used automobile financing industry. Management believes that there are
long-term benefits to be realized from the acquisition of Regional Acceptance
and that asset quality will improve in the future. The current level of net
charge-offs at Regional Acceptance is not expected to have a material effect on
BB&T's consolidated financial condition or consolidated results of operations.
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
Asset Quality Analysis
<TABLE>
<CAPTION>
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
------------ ------------ ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance ............................................. $ 275,404 $ 266,078 $ 260,968 $ 252,245 $ 239,726
Allowance for acquired loans .................................. -- 12,012 1,690 -- 3,811
Provision for loan and lease losses ........................... 22,000 29,796 21,745 24,865 21,120
Net charge-offs ............................................... (14,986) (32,482) (18,325) (16,142) (12,412)
--------- --------- --------- --------- ---------
Ending balance .............................................. $ 282,418 $ 275,404 $ 266,078 $ 260,968 $ 252,245
========= ========= ========= ========= =========
RISK ASSETS
Nonaccrual loans and leases ................................... $ 92,267 $ 98,891 $ 74,372 $ 64,858 $ 63,926
Foreclosed real estate ........................................ 15,477 20,937 16,531 15,476 16,126
Other foreclosed property ..................................... 14,603 13,986 13,914 13,262 16,046
Restructured loans ............................................ -- 1,377 1,532 1,551 2,429
--------- --------- --------- --------- ---------
Nonperforming assets ........................................ $ 122,347 $ 135,191 $ 106,349 $ 95,147 $ 98,527
========= ========= ========= ========= =========
Loans 90 days or more past due and still accruing ............. $ 41,919 $ 44,213 $ 39,958 $ 37,361 $ 40,021
========= ========= ========= ========= =========
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total loans
and leases .................................................... .43% .47% .37% .33% .33%
Nonperforming assets as a percentage of:
Total assets .................................................. .39 .44 .37 .33 .35
Loans and leases plus foreclosed property ..................... .57 .64 .53 .48 .51
Net charge-offs as a percentage of average loans and leases .... .29 .64 .37 .33 .27
Allowance for loan and lease losses as a percentage of loans
and leases .................................................... 1.31 1.32 1.34 1.32 1.31
Ratio of allowance for loan and lease losses to:
Net charge-offs ............................................... 4.65x 2.14x 3.66x 4.03x 5.01x
Nonaccrual loans and leases ................................... 3.06 2.75 3.51 3.93 3.80
</TABLE>
- - ---------
All items referring to loans and leases include loans held for sale and are
net of unearned income.
Applicable ratios are annualized.
11
<PAGE>
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 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 March 31, 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 condition, 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.
12
<PAGE>
Interest Sensitivity Simulation Analysis
Annualized
Interest Hypothetical
Rate Percentage
Scenario Change in
Prime Net Interest
Linear Rate Income
- - ----------------- ----------- -------------
+3.00% 11.50 % -2.33 %
+1.50 10.00 -1.91
Flat 8.50 -.20
-1.50 7.00 .56
-3.00 5.50 .70
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 the preceding table. At March 31, 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 March 31, 1998,
BB&T had outstanding interest rate swaps, caps and floors with notional amounts
totaling $2.3 billion. The estimated fair value of open contracts used for risk
management purposes at March 31, 1998, reflected net unrealized gains of $25.2
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 March 31, 1998.
13
<PAGE>
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 and floors at
March 31, 1998:
Interest Rate Swaps, Caps and Floors
March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Notional Receive Pay Net Unrealized
Type Amount Rate Rate Gains (Losses)
- - ----------------------------- ------------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Receive fixed swaps ......... $1,301,000 6.39% 5.68% $24,406
Pay fixed swaps ............. 349,043 5.68 5.59 (410)
Basis swaps ................. 50,000 5.83 5.69 40
Caps & floors ............... 571,000 -- -- 1,150
---------- ---- ---- -------
Total ....................... $2,271,043 6.23% 5.66% $25,186
========== ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Receive Pay Fixed Basis Swaps
Year-to-date Activity Fixed Swaps Swaps Caps and Floors Total
- - ------------------------------------ ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 ......... $1,301,000 $351,930 $ 776,000 $2,428,930
Additions .......................... -- -- -- --
Maturities/amortizations ........... -- (2,887) (50,000) (52,887)
Terminations ....................... -- -- (105,000) (105,000)
---------- -------- ---------- ----------
Balance, March 31, 1998 ............ $1,301,000 $349,043 $ 621,000 $2,271,043
========== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
One Year One to Five After Five
Maturity Schedule* or Less Years Years Total
- - ----------------------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Receive fixed swaps ......... $751,000 $ 50,000 $500,000 $1,301,000
Pay fixed swaps ............. 111,490 230,053 7,500 349,043
Basis swaps ................. 50,000 -- -- 50,000
Caps & floors ............... 11,000 500,000 60,000 571,000
-------- -------- -------- ----------
Total ....................... $923,490 $780,053 $567,500 $2,271,043
======== ======== ======== ==========
</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 March 31, 1998 and December
31, 1997. BB&T's book value per common share at March 31, 1998, was $17.22,
versus $16.93 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 March 31, 1998, were 10.4%, 14.1% and 7.1%, 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 Tier 1 capital ratio and the
leverage ratio have declined somewhat from the first quarter of 1997. These
modest declines reflect significant acquisition activity during 1997 resulting
in rapid growth in intangible assets, which decreases tangible equity. Also,
management has undertaken a program to repurchase BB&T common
14
<PAGE>
stock to utilize in effecting acquisitions accounted for as purchases. This
program resulted in the repurchase of 814,580 shares of common stock at an
aggregate cost of $52.8 million through the first three months of 1998.
Capital Adequacy Ratios
<TABLE>
<CAPTION>
1998 1997
--------- ----------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital .......... 10.4% 10.3% 10.1% 10.9% 11.1%
Total capital ........... 14.1 14.0 13.7 14.8 13.7
Leverage ratio ........... 7.1 7.2 7.2 7.5 7.8
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the first three months of 1998 totaled $113.7 million, an
increase of 13.6% over the $100.1 million earned during the first quarter of
1997. On a diluted per share basis, earnings for the three months ended March
31, 1998, were $.78 compared to $.69 for the same period in 1997, an increase
of 13.0%. BB&T's operating results for the first quarter of 1998 produced an
annualized return on average assets of 1.50% and an annualized return on
average shareholders' equity of 18.77% compared to prior year ratios of 1.49%
and 17.98%, respectively.
BB&T's earnings in 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
operations, BB&T would have had net income for the first three months of 1998
of $119.7 million, compared to earnings in the prior year of $100.1 million, an
increase of 19.6%. On a diluted per share basis, earnings, excluding
nonrecurring charges, totaled $.83, up 20.3% from the prior year earnings per
share of $.69. Earnings before nonrecurring expenses for the first quarter of
1998 produced an annualized return on average assets of 1.58% and a return on
average equity of 19.77%, compared to prior year ratios of 1.49% and 17.98%,
respectively.
BB&T's growth in recurring earnings resulted from three principal factors.
First, as discussed above, BB&T has experienced an excellent growth rate in
loans resulting in an 8.0% increase in net interest income in the first quarter
of 1998, compared to the first quarter of 1997. Second, BB&T's noninterest
income increased 23.4% for the three months ended March 31, 1998, compared to
the same period in 1997. This robust rate of growth demonstrates the successful
execution of the BB&T Sales Management System. Third, BB&T has controlled the
growth of recurring noninterest expenses and emphasized operating efficiency.
These efforts can be measured by the efficiency ratio (recurring noninterest
expenses as a percentage of total recurring revenues on a fully tax equivalent
basis), which improved from 51.9% to 51.3% for the three months ended March 31,
1997 and 1998, respectively.
Net Interest Income
Net interest income on a fully taxable equivalent ("FTE") basis was $311.2
million for the first three months of 1998 compared to $284.5 million for the
same period in 1997, a 9.4% increase. For the three months ended March 31, 1998
and 1997, average interest-earning assets increased $3.1 billion, or 11.6%, to
$29.4 billion, while average interest-bearing liabilities also increased by
$3.0 billion. During the same time period, the net interest margin decreased
from a first quarter 1997 rate of 4.46% to a current quarter rate of 4.36%. The
10 basis point decline in margin was primarily driven by the funding costs
associated with BB&T's share repurchase program, which resulted in a reduction
in margin of 6 basis points and the 1997 divestiture, which resulted in the
remaining 4 basis point decline.
The taxable equivalent yield on the loan portfolio was 9.16% for the first
quarter compared to 9.10% for the first quarter of 1997 and 9.12% for the
fourth quarter of 1997. This increase results from a more profitable mix of
loans and is a basic driver of BB&T's growth in revenues during recent
quarters.
The taxable equivalent yield on the securities portfolio during the first
quarter was 6.84%, up from 6.73% for the first quarter of 1997 and down
slightly from 6.90% for the fourth quarter of 1997. The improvement in the
overall yield on securities was primarily the result of achieving higher
returns on U.S. Treasuries and other government agencies during the quarter.
15
<PAGE>
The average rate paid on interest-bearing deposits during the first
quarter of 1998 was 4.41%, unchanged from the rate paid during the first
quarter a year ago and down slightly from the 4.43% rate paid during the fourth
quarter of 1997, which was 4.43%.
The average rate paid on short-term borrowed funds during the first
quarter was 5.41%, up from 5.17% paid in the first quarter of 1997 and up
slightly from the 5.40% paid during the fourth quarter of 1997.
The rate paid on long-term debt during the first quarter was 5.80%, up
from 5.62% paid during the first quarter of 1997.
The following table demonstrates fluctuations in net interest income and
the related yields for the first quarter compared to the comparable period last
year, and details the portions of these changes caused by changes in rates
versus changes in volumes.
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Average Balances Yield/Rate
Fully Taxable Equivalent - --------------------------- ---------------------
(Dollars in thousands) 1998 1997 1998 1997
- - --------------------------------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government and
other (5) .......................... $ 7,322,718 $ 6,639,772 6.78% 6.68%
States and political
subdivisions ....................... 160,525 184,189 8.97 8.76
----------- ----------- ----- -----
Total securities (5) ............... 7,483,243 6,823,961 6.84 6.73
Other earning assets (2) ............. 147,235 60,446 5.94 5.54
Loans and leases, net of unearned
income (1)(3)(4)(5) ................. 21,087,685 18,739,135 9.16 9.10
----------- ----------- ----- -----
Total earning assets ............... 28,718,163 25,623,542 8.54 8.46
----------- ----------- ----- -----
Non-earning assets ................. 2,024,428 1,551,806
----------- -----------
TOTAL ASSETS ...................... $30,742,591 $27,175,348
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and
MRS sweeps ......................... $ 1,773,017 $ 2,127,682 1.81 1.78
Money rate savings .................. 5,189,894 4,417,358 3.03 2.99
Time deposits ....................... 10,950,526 10,798,211 5.49 5.51
----------- ----------- ----- -----
Total interest-bearing deposits..... 17,913,437 17,343,251 4.41 4.41
Short-term borrowed funds ............ 3,541,752 2,352,858 5.41 5.17
Long-term debt ....................... 3,741,611 2,464,586 5.80 5.62
----------- ----------- ----- -----
Total interest-bearing
liabilities ....................... 25,196,800 22,160,695 4.76 4.62
----------- ----------- ----- -----
Demand deposits .................... 2,611,530 2,427,718
Other liabilities .................. 477,640 329,358
Shareholders' equity ............... 2,456,621 2,257,577
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY .............................. $30,742,591 $27,175,348
=========== ===========
Average interest rate spread ......... 3.78 3.84
Net yield on earning assets .......... 4.36% 4.46%
===== =====
Taxable equivalent adjustment ........
<CAPTION>
Income/Expense Change due to
Fully Taxable Equivalent - ----------------------- Increase --------------------
(Dollars in thousands) 1998 1997 (Decrease) Rate Volume
- - --------------------------------------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government and
other (5) .......................... $124,036 $110,859 $ 13,177 $1,607 $ 11,570
States and political
subdivisions ....................... 3,598 4,036 (438) 83 (521)
-------- -------- -------- ------ --------
Total securities (5) ............... 127,634 114,895 12,739 1,690 11,049
Other earning assets (2) ............. 2,158 826 1,332 64 1,268
Loans and leases, net of unearned
income (1)(3)(4)(5) ................. 477,510 421,689 55,821 2,656 53,165
-------- -------- -------- ------ --------
Total earning assets ............... 607,302 537,410 69,892 4,410 65,482
-------- -------- -------- ------ --------
Non-earning assets .................
TOTAL ASSETS ......................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and
MRS sweeps ......................... 7,898 9,324 (1,426) 152 (1,578)
Money rate savings .................. 38,807 32,515 6,292 523 5,769
Time deposits ....................... 148,304 146,733 1,571 (493) 2,064
-------- -------- -------- ------ --------
Total interest-bearing deposits..... 195,009 188,572 6,437 182 6,255
Short-term borrowed funds ............ 47,261 29,966 17,295 1,493 15,802
Long-term debt ....................... 53,859 34,376 19,483 1,134 18,349
-------- -------- -------- ------ --------
Total interest-bearing
liabilities ....................... 296,129 252,914 43,215 2,809 40,406
-------- -------- -------- ------ --------
Demand deposits ....................
Other liabilities ..................
Shareholders' equity ...............
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ..............................
Average interest rate spread .........
Net yield on earning assets .......... $311,173 $284,496 $ 26,677 $1,601 $ 25,076
======== ======== ======== ====== ========
Taxable equivalent adjustment ........ $ 15,077 $ 10,427
======== ========
</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 assuming 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 has been included as income.
(5) Includes assets which were held for sale or available for sale at amortized
cost and trading securities at estimated fair value.
16
<PAGE>
Noninterest Income
Noninterest income for the three months ended March 31, 1998 was $121.1
million, compared to $98.1 million for the same period in 1997, an increase of
23.4%.
BB&T experienced positive development in all significant areas of
noninterest income except non-agency insurance commissions. Service charges on
deposits, mortgage banking revenues, agency insurance commissions and trust
income all showed strong gains during the period. The percentage of total
revenues (tax-equivalent net interest income plus noninterest income excluding
securities gains or losses and nonrecurring items) derived from noninterest
income for the three months ended March 31, 1998, was 27.6%, up from 25.3% for
the first three months of 1997.
Service charges on deposits increased $4.4 million, or 12.1%, for the
first three months in 1998, compared to the first 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.
Trust income grew $961,000, or 14.0%, for the three months ended March 31,
1998, compared to the same period in 1997. This increase reflects expanded
services and a growing trust customer base, as well as an increase in income
from assets under management.
Agency insurance commissions increased significantly, up $2.6 million, or
23.2%, in the first three months 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, purchase accounting
transactions and insurance fees and charges. A portion of the first quarter
increase reflects seasonality for certain contingent commissions. BB&T has the
largest independent insurance agency system in the Carolinas. The network has
expanded the types of products offered to include group health, surety bonds
and title insurance in recent quarters. Management anticipates continued growth
in agency insurance commissions and will continue to pursue acquisitions of
quality independent agencies.
Income from mortgage banking activities increased $2.8 million, or 22.4%,
for the three months ended March 31, 1998, compared to the same period in 1997.
The increase resulted from higher mortgage loan servicing fees and underwriting
fees, an increase in gains on mortgage loans during the quarter. These
increases were offset to an extent by a $3.2 million addition to the valuation
reserve for mortgage servicing rights.
Other nondeposit fees and commissions increased by $6.1 million, or 33.3%,
to a level of $24.6 million for the three months ended March 31, 1998, compared
with $18.4 million for the first three months of 1997. The basic components
generating the increase in nondeposit fees and commissions were revenues from
investment services, which increased $1.5 million, ATM and Point-of-Sale fees,
which increased $628,000 and bankcard income (primarily net merchant
interchange fees), which increased $1.0 million. Also, BB&T acquired four
companies using the purchase accounting method during 1997. These acquisitions
resulted in $2.3 million of the increase in other nondeposit fees and
commissions.
Other income increased $5.9 million for the first three months of 1998
primarily as a result of a $1.5 million increase in income from additional
investments in life insurance products and $3.9 million earned by companies
acquired in purchase accounting transactions after the first quarter last year.
Noninterest Expense
Noninterest expenses totaled $229.0 million for the first three months of
1998 compared to $198.7 million for the same period a year ago. The 15.3%
increase resulted in part from the merger-related nonrecurring charges
previously discussed. Excluding the $7.8 million of pretax nonrecurring charges
recorded in 1998, noninterest expenses would have been $221.2 million for the
quarter, up 11.3% from the prior year. An explanation for the increase follows
in the accompanying paragraphs.
Personnel expense, the largest component of noninterest expense, was
$115.5 million for the first three months of 1998 compared to $105.0 million
for the same period in 1997, an increase of $10.5 million, or 10.0%. The
increase was partly 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 $8.1 million, or 7.7%. This increase resulted
almost entirely because of acquisitions accounted for as purchases completed
subsequent to the first quarter of 1997.
17
<PAGE>
Occupancy and equipment expense for the three months ended March 31, 1998,
totaled $36.8 million, an increase of $4.8 million, or 15.1%, compared to 1997.
This increase was principally due to purchase accounting transactions, which
resulted in an increase of $1.1 million, and communications expense, which
increased $1.6 million.
The amortization of intangible assets and mortgage servicing rights
totaled $10.1 million for the three months ended March 31, 1998, a 99.7%
increase from the amount incurred in the same quarter of 1997. This was the
result of a $2.8 million increase in amortization of mortgage loan servicing
rights and increased amortization of goodwill from various purchase accounting
transactions, including Virginia First, which had $1.5 million of goodwill
amortization and Fidelity, which had $427,000 of goodwill amortization.
Other noninterest expenses for the first three months of 1998 totaled
$66.5 million, an increase of $9.9 million, or 17.5%, over 1997. The 1998
expenses include $5.2 million of nonrecurring expenses related to the Life
merger. Excluding the impact of these charges, other noninterest expense would
have totaled $61.3 million for the three months, an increase of $4.7 million,
or 8.3%. This increase was primarily due to purchase accounting acquisitions,
which resulted in $3.3 million of increased expenses and a $2.1 million
increase in professional services expense, which includes $1.9 million in costs
to make the necessary modifications 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 other machinery 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 has
determined that it will be required to modify or replace significant portions
of its information technology platform and other systems so that they will
properly utilize data as the Year 2000 approaches and is reached. These efforts
are currently underway. Management presently believes that with modifications
to existing systems and conversions to new systems, the effects of the Year
2000 Issue will be corrected. 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 has developed a communications plan for its 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
guarantee that the systems of other organizations on which BB&T's systems rely,
or BB&T's operations depend, 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.
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. BB&T has targeted a completion date of December 31, 1998, for
Year 2000 project work on critical business applications. System applications
have been scheduled for modification based on a risk-adjusted priority to
ensure that critical programs are adequately completed in time to allow for
extended testing. The projected remaining cost of the Year 2000 project is
currently estimated at $25 million and is being funded through operating cash
flows. As of March 31, 1998, a cumulative total of approximately $5 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 guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the inability to control third
party modification plans, and similar uncertainties.
18
<PAGE>
Provision for Income Taxes
The provision for income taxes totaled $52.5 million for the first three
months of 1998, an increase of $131,000 million, or .3%. Excluding the tax
benefits associated with the nonrecurring charges detailed above, the provision
for income taxes totaled $54.3 million, an increase of $1.9 million, or 3.7%.
Effective tax rates on recurring pretax income were 31.2% and 34.3% for the
three months ended March 31, 1998 and 1997, respectively. The lower effective
tax rate for the first quarter of 1998 reflects positive results from BB&T's
ongoing tax minimization strategies.
Profitability Measures
<TABLE>
<CAPTION>
1998 1997
--------- ----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Return on average assets ....................... 1.50 % 1.18 % .90 % 1.44 % 1.49 %
Return on average common equity ................ 18.77 15.25 11.34 17.92 17.98
Net interest margin ............................ 4.36 4.36 4.44 4.52 4.46
Efficiency ratio (taxable equivalent)* ......... 51.3 50.5 50.9 51.2 51.9
</TABLE>
- - ---------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily
results in a certain amount of litigation. The subsidiaries of BB&T are
involved in various legal proceedings, all of which are considered incidental
to the normal conduct of business. Management believes that the liabilities
arising from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- "Computation of Earnings Per Share" is included herein 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.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T CORPORATION
(Registrant)
Date: May 14, 1998 By: /s/ SCOTT E. REED
------------------------------------
Scott E. Reed, Senior Executive Vice President
and Chief Financial Officer
Date: May 14, 1998 By: /s/ SHERRY A. KELLETT
------------------------------------
Sherry A. Kellett, Senior Executive Vice President and
Controller (Principal Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 833,356
<INT-BEARING-DEPOSITS> 13,396
<FED-FUNDS-SOLD> 114,960
<TRADING-ASSETS> 107,272
<INVESTMENTS-HELD-FOR-SALE> 7,531,753
<INVESTMENTS-CARRYING> 140,722
<INVESTMENTS-MARKET> 144,694
<LOANS> 21,532,325
<ALLOWANCE> 282,418
<TOTAL-ASSETS> 31,535,710
<DEPOSITS> 20,794,808
<SHORT-TERM> 4,040,166
<LIABILITIES-OTHER> 492,134
<LONG-TERM> 3,768,556
0
0
<COMMON> 708,407
<OTHER-SE> 1,731,639
<TOTAL-LIABILITIES-AND-EQUITY> 31,535,710
<INTEREST-LOAN> 470,369
<INTEREST-INVEST> 119,725
<INTEREST-OTHER> 2,131
<INTEREST-TOTAL> 592,225
<INTEREST-DEPOSIT> 195,009
<INTEREST-EXPENSE> 296,129
<INTEREST-INCOME-NET> 296,096
<LOAN-LOSSES> 22,000
<SECURITIES-GAINS> 2,460
<EXPENSE-OTHER> 228,998
<INCOME-PRETAX> 166,195
<INCOME-PRE-EXTRAORDINARY> 166,195
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113,718
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 4.36
<LOANS-NON> 92,267
<LOANS-PAST> 41,919
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 275,404
<CHARGE-OFFS> 20,396
<RECOVERIES> 5,410
<ALLOWANCE-CLOSE> 282,418
<ALLOWANCE-DOMESTIC> 282,418
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 45,187
</TABLE>
