<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:
MARCH 31, 1999
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.)
</TABLE>
<TABLE>
<S> <C>
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, 1999, 307,563,348 shares of the registrant's common stock, $5
par value, were outstanding.
----------------
This Form 10-Q has 30 pages. The Exhibit Index is included on page 29.
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<PAGE>
BB&T CORPORATION
FORM 10-Q
March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <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 13
Analysis of Financial Condition 13
Market Risk Management 16
Capital Adequacy and Resources 20
Analysis of Results of Operations 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
EXHIBIT 11 Calculation of Earnings Per Share 10
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)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 863,829 $ 997,245
Interest-bearing deposits with banks 7,014 8,925
Federal funds sold and securities purchased under
resale agreements or similiar arrangements 245,591 103,216
Trading securities 114,376 60,422
Securities available for sale 9,793,227 8,737,936
Securities held to maturity (approximate market
values of $113,077 at March 31, 1999, and $179,444
at December 31, 1998) 110,320 174,735
Loans held for sale 751,439 1,035,668
Loans and leases, net of unearned income 24,224,640 23,682,800
Allowance for loan and lease losses (337,983) (330,615)
----------- -----------
Loans and leases, net 23,886,657 23,352,185
----------- -----------
Premises and equipment, net 485,961 471,780
Other assets 1,533,076 1,446,218
----------- -----------
Total assets $37,791,490 $36,388,330
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits $ 3,352,359 $ 3,465,362
Savings and interest checking 1,698,423 1,783,491
Money rate savings 7,080,509 7,021,556
Other time deposits 11,402,439 11,349,083
Foreign deposits 880,405 638,676
----------- -----------
Total deposits 24,414,135 24,258,168
----------- -----------
Short-term borrowed funds 4,668,966 3,707,333
Long-term debt 5,187,639 4,964,797
Accounts payable and other liabilities 572,393 534,144
----------- -----------
Total liabilities 34,843,133 33,464,442
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $5 par, 500,000,000 shares
authorized; 307,297,316 issued and outstanding at
March 31, 1999, and 306,963,976 at December 31,
1998 1,536,487 1,534,820
Additional paid-in capital 148,255 177,098
Retained earnings 1,233,878 1,151,010
Unearned income -- (14)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of $18,256 at
March 31, 1999, and $38,366 at December 31, 1998 29,737 60,974
----------- -----------
Total shareholders' equity 2,948,357 2,923,888
----------- -----------
Total liabilities and shareholders' equity $37,791,490 $36,388,330
=========== ===========
</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)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
Interest Income
Interest and fees on loans and leases $ 526,972 $ 500,229
Interest and dividends on securities 138,727 136,519
Interest on short-term investments 1,457 3,376
------------- -------------
Total interest income 667,156 640,124
------------- -------------
Interest Expense
Interest on deposits 209,759 209,292
Interest on short-term borrowed funds 46,262 54,594
Interest on long-term debt 66,758 56,898
------------- -------------
Total interest expense 322,779 320,784
------------- -------------
Net Interest Income 344,377 319,340
Provision for loan and lease losses 20,000 23,438
------------- -------------
Net Interest Income After Provision for Loan
and Lease Losses 324,377 295,902
------------- -------------
Net Interest Income
Service charges on deposit accounts 47,624 42,458
Mortgage banking income 32,798 15,397
Trust income 12,714 8,731
Agency insurance commissions 16,882 14,057
Other insurance commissions 2,846 3,016
Other nondeposit fees and commissions 30,078 25,513
Securities gains, net 61 2,501
Other noninterest income 18,181 13,751
------------- -------------
Total noninterest income 161,184 125,424
------------- -------------
Noninterest Expense
Personnel expense 141,193 123,671
Occupancy and equipment expense 48,140 38,934
Amortization of intangibles and mortgage
servicing rights 15,836 10,262
Other noninterest expense 76,639 72,149
------------- -------------
Total noninterest expense 281,808 245,016
------------- -------------
Earnings
Income before income taxes 203,753 176,310
Provision for income taxes 65,330 55,865
------------- -------------
Net income $ 138,423 $ 120,445
============= =============
Per Common Share
Net income:
Basic $ .45 $ .40
============= =============
Diluted $ .44 $ .39
============= =============
Cash dividends paid $ .175 $ .155
============= =============
Average Shares Outstanding
Basic 306,466,263 304,867,015
============= =============
Diluted 312,553,659 311,282,640
============= =============
</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, 1999 and 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Common Paid-In Earnings Changes in Shareholders'
Stock Stock Capital and Other* Equity Equity
----------- ---------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997, as restated 151,965,992 $ 759,830 $215,041 $1,555,563 $52,071 $2,582,505
Add (Deduct)
Nonshareholder
changes in equity:**
Net income -- -- -- 120,445 -- 120,445
Unrealized holding
gains (losses)
arising during the
period -- -- -- -- (871) (871)
Less:
reclassification
adjustment, net of
tax of $989 -- -- -- -- (1,512) (1,512)
----------- ---------- -------- ---------- ------- ----------
Net unrealized gains
(losses) on
securities -- -- -- -- (2,383) (2,383)
----------- ---------- -------- ---------- ------- ----------
Total nonshareholder
changes in equity -- -- -- 120,445 (2,383) 118,062
----------- ---------- -------- ---------- ------- ----------
Common stock issued 1,187,257 5,936 39,283 -- -- 45,219
Redemption of common
stock (814,580) (4,073) (48,734) -- -- (52,807)
Cash dividends
declared on common
stock -- -- -- (47,636) -- (47,636)
Other -- -- -- 237 -- 237
----------- ---------- -------- ---------- ------- ----------
Balance, March 31,
1998 152,338,669 $ 761,693 $205,590 $1,628,609 $49,688 $2,645,580
=========== ========== ======== ========== ======= ==========
Balance, December 31,
1998, as restated 306,963,976 $1,534,820 $177,098 $1,150,996 $60,974 $2,923,888
Add (Deduct)
Nonshareholder
changes in equity:**
Net income -- -- -- 138,423 -- 138,423
Unrealized holding
gains (losses)
arising during the
period -- -- -- -- (31,200) (31,200)
Less:
reclassification
adjustment, net of
tax of $24 -- -- -- -- (37) (37)
----------- ---------- -------- ---------- ------- ----------
Net unrealized gains
(losses) on
securities -- -- -- -- (31,237) (31,237)
----------- ---------- -------- ---------- ------- ----------
Total nonshareholder
changes in equity -- -- -- 138,423 (31,237) 107,186
----------- ---------- -------- ---------- ------- ----------
Common stock issued 4,612,940 23,065 115,447 -- -- 138,512
Redemption of common
stock (4,279,600) (21,398) (144,290) -- -- (165,688)
Cash dividends
declared on common
stock -- -- -- (56,088) -- (56,088)
Other -- -- -- 547 -- 547
----------- ---------- -------- ---------- ------- ----------
Balance, March 31,
1999 307,297,316 $1,536,487 $148,255 $1,233,878 $29,737 $2,948,357
=========== ========== ======== ========== ======= ==========
</TABLE>
- - --------
* Other includes unearned income, 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, 1999 and 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 138,423 $ 120,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 20,000 23,438
Depreciation of premises and equipment 18,098 17,729
Amortization of intangibles and mortgage servicing
rights 15,836 10,262
Accretion of negative goodwill (1,560) (1,561)
Amortization of unearned stock compensation 14 237
Discount accretion and premium amortization on
securities, net (281) 164
Net decrease (increase) in trading account securities (41,929) (39,394)
Loss (gain) on sales of securities, net (61) (2,501)
Loss (gain) on sales of loans and mortgage loan
servicing rights, net (11,233) (6,030)
Loss (gain) on disposals of premises and equipment,
net (746) (1,360)
Proceeds from sales of loans held for sale 1,348,845 558,990
Purchases of loans held for sale (368,446) (285,214)
Origination of loans held for sale, net of principal
collected (684,937) (671,660)
Decrease (increase) in:
Accrued interest receivable (13,136) (20,434)
Other assets 12,995 6,930
Increase (decrease) in:
Accrued interest payable 18,012 13,271
Accounts payable and other liabilities 46,327 5,236
Other, net 607 (975)
---------- ----------
Net cash provided by (used in) operating activities 496,828 (272,427)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 10,023 544,218
Proceeds from maturities, calls and paydowns of
securities available for sale 793,189 563,782
Purchases of securities available for sale (1,860,391) (1,521,234)
Proceeds from maturities, calls and paydowns of
securities held to maturity 17,258 25,373
Purchases of securities held to maturity -- (11,830)
Leases made to customers (29,924) (23,327)
Principal collected on leases 17,012 16,012
Loan originations, net of principal collected (547,535) (127,938)
Purchases of loans (2,030) (96,904)
Net cash acquired in transactions accounted for under
the purchase method 140,814 22,690
Purchases and originations of mortgage servicing
rights (19,574) (11,461)
Proceeds from disposals of premises and equipment 16,595 4,394
Purchases of premises and equipment (41,914) (17,504)
Proceeds from sales of foreclosed property 6,839 8,200
Proceeds from sales of other real estate held for
development or sale 4,955 15
Other -- (358)
---------- ----------
Net cash used in investing activities (1,494,683) (625,872)
---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 155,967 (115,950)
Net increase (decrease) in short-term borrowed funds 835,566 790,823
Proceeds from long-term debt 409,215 528,783
Repayments of long-term debt (186,373) (285,980)
Net proceeds from common stock issued 9,210 28,003
Redemption of common stock (165,688) (52,807)
Cash dividends paid on common stock (52,994) (45,572)
---------- ----------
Net cash provided by financing activities 1,004,903 847,300
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 7,048 (50,999)
Cash and Cash Equivalents at Beginning of Period 1,109,386 1,267,253
---------- ----------
Cash and Cash Equivalents at End of Period $1,116,434 $1,216,254
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 307,405 $ 282,858
Income taxes 389 8,222
Noncash financing and investing activities:
Transfer of securities held to maturity to available
for sale 47,265 --
Transfer of loans to foreclosed property 8,005 3,595
Transfer of other real estate owned to fixed assets 1,151 --
Transfer of fixed assets to other real estate owned 287 2,221
Tax benefit from exercise of stock options 6,214 --
</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, 1999
(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, 1999 and December 31, 1998; the consolidated statements of income for
the three months ended March 31, 1999 and 1998; the consolidated statements of
changes in shareholders' equity for the three months ended March 31, 1999 and
1998; and the consolidated statements of cash flows for the three months ended
March 31, 1999 and 1998.
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 April 30, 1999, should be referred to in
connection with the reading of these unaudited interim consolidated financial
statements. Certain prior year amounts have been reclassified to conform to
statement presentations for 1999. The reclassifications had no effect on
shareholders' equity or net income.
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend paid
August 3, 1998. Accordingly, all per share data and weighted average shares
have been restated as appropriate to reflect the split.
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Forward-Looking Statements
This report contains forward-looking statements with respect to the financial
condition, results of operations and business of BB&T. These forward-looking
statements involve risks and uncertainties and are based on the beliefs and
assumptions of the management of BB&T, and on the information available to
management at the time that these disclosures were prepared. 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 pressures among depository and other financial institutions may
increase significantly; (2) changes in the interest rate environment may reduce
margins; (3) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and / or a reduced demand for credit; (4)
legislative or regulatory changes, including changes in accounting standards,
may adversely affect the businesses in which BB&T is engaged; (5) costs or
difficulties related to the integration of the businesses of BB&T and its
merger partners may be greater than expected; (6) expected cost savings
associated with pending mergers may not be fully realized or realized within
the expected time frame; (7) deposit attrition, customer loss or revenue loss
following pending mergers may be greater than expected; (8) the Year 2000 issue
may not be effectively corrected (see additional discussion following under
First Quarter 1999 Year 2000 Readiness Disclosure); (9) competitors may have
greater financial resources and develop products that enable such competitors
to compete more successfully than BB&T; and (10) adverse changes may occur in
the securities markets.
6
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. Nature of Operations
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T principally conducts its operations in North Carolina, South
Carolina, Virginia, Maryland and the metropolitan Washington, D.C. area through
its commercial banking subsidiaries and, to a lesser extent, through its other
subsidiaries. BB&T's principal 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 market areas outlined above. Subsidiaries of the commercial
banks offer lease financing to commercial businesses and municipal governments,
investment services, (including discount brokerage services, annuities, mutual
funds and government and municipal bonds), life insurance, 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, full-service securities brokerage, investment banking and
corporate finance services.
C. New Accounting Pronouncements
On January 1, 1998, BB&T adopted Statement of Financial Accounting Standards
("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.
The standard does not address issues of recognition or measurement of
comprehensive income; therefore, the implementation of the statement did not
have an impact on BB&T's consolidated financial position or consolidated
results of operations.
On January 1, 1998, BB&T adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which established
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. The standard did
not address issues of recognition or measurement; therefore, the implementation
of the statement did not have an impact on the consolidated financial position
or consolidated results of operations of BB&T.
On January 1, 1998, BB&T adopted the provisions of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revised
the disclosure requirements for pensions and other postretirement benefit
plans. SFAS No. 132 did not address issues of recognition or measurement and,
therefore, the implementation of the statement did not have an impact on the
consolidated financial position or consolidated results of operations of BB&T.
On January 1, 1999, BB&T adopted the American Institute of Certified Public
Accountants' 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
implementation of SOP 98-1 did not have a material effect on BB&T's
consolidated financial position or consolidated results of operations.
7
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The statement is effective for fiscal years
beginning after June 15, 1999, and cannot be applied retroactively. Management
has not yet quantified the impact of adopting SFAS No. 133 and has not
determined the timing of or method of adoption of the statement. However, the
statement could increase volatility in earnings and other comprehensive income.
On January 1, 1999, BB&T adopted the American Institute of Certified Public
Accountants' 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 adoption of the
statement did not have a material impact on BB&T's consolidated financial
position or consolidated results of operations.
On January 1, 1999, BB&T adopted the provisions of SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The
implementation of the statement did not 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 11.6 million shares of common stock in
exchange for all of the outstanding shares of Life common stock.
On March 10, 1998, BB&T completed its acquisition of Regency Financial
Shares, Incorporated ("Regency") of Richmond, Virginia, in a transaction
accounted for as a pooling of interests. In conjunction with the merger, BB&T
issued approximately 801,000 shares of common stock in exchange for all of the
outstanding shares of Regency.
On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc.
("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to
commercial, agricultural, municipal and consumer users for the purchase of lawn
care equipment. The acquisition was accounted for using the purchase method of
accounting and, therefore, the accompanying consolidated financial statements
include the operating results of DCI only since the date of acquisition. In
conjunction with the transaction, BB&T recorded $9.3 million of goodwill, which
is being amortized using the straight-line method over 15 years.
8
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company
Inc., and its affiliated companies, (collectively, "Stanley"), an actuarial and
benefits consulting and administration firm located in Greensboro, North
Carolina. In conjunction with the acquisition, which was accounted for as a
purchase, BB&T recorded $10.3 million of goodwill, which is being amortized
using the straight-line method over 15 years.
On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc.
("Franklin") of Washington, D.C., in a stock transaction accounted for as a
pooling of interests. Approximately 4.9 million shares of BB&T common stock
were issued in exchange for all of the Franklin common stock outstanding.
On July 7, 1998, BB&T completed a merger with Ballston Bancorp, Inc.
("Ballston") of Washington, D.C., in a transaction accounted for as a pooling
of interests. In conjunction with the merger, BB&T issued approximately 824,000
shares of common stock in exchange for all of the outstanding shares of
Ballston.
On September 30, 1998, BB&T completed its acquisition of Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a transaction
accounted for as a purchase. In conjunction with the merger, BB&T issued 8.7
million shares of BB&T common stock in exchange for all of the outstanding
shares of Maryland Federal common stock. BB&T recorded $158.8 million of
goodwill, which is being amortized using the straight-line method over a period
of 15 years.
On March 5, 1999, BB&T completed a merger with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction
was accounted for as a pooling of interests. BB&T issued approximately 16.8
million shares of BB&T common stock in exchange for all of the outstanding
shares of MainStreet.
On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. The transaction was accounted for as a purchase. In
conjunction with the acquisition, BB&T issued 3.6 million shares of BB&T common
stock in exchange for all of the outstanding shares of Scott & Stringfellow
common stock. BB&T recorded goodwill totaling $72.8 million, which is being
amortized using the straight-line method over a period of 15 years.
Under the provisions of SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchase Enterprises," BB&T typically provides an allocation
period, not to exceed one year, to identify and quantify the assets acquired
and liabilities assumed in purchase business combinations. Management currently
does not anticipate any material adjustments to the assigned values of the
assets and liabilities of acquired companies.
Pending Mergers and Acquisitions
On January 27, 1999, BB&T announced plans to merge with First Citizens
Corporation ("First Citizens"), of Newnan, Georgia. The transaction is expected
to be accounted for as a pooling of interests. First Citizens' shareholders
will receive 1.0789 shares of BB&T common stock in exchange for each share of
First Citizens common stock held. The merger is expected to be completed in the
third quarter of 1999.
On January 28, 1999, BB&T announced plans to merge with Mason-Dixon
Bancshares, Inc. ("Mason-Dixon") of Westminster, Maryland. The transaction is
expected to be accounted for as a
9
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pooling of interests. Mason-Dixon's shareholders will receive 1.30 shares of
BB&T common stock in exchange for each share of Mason-Dixon common stock held.
The merger is expected to be completed in the third quarter of 1999.
On February 25, 1999, BB&T announced plans to acquire Matewan BancShares,
Inc. ("Matewan") of Williamson, West Virginia. On April 27, 1999, BB&T and
Matewan approved amendments to the merger agreement that provide for Matewan
shareholders to receive .67 shares of BB&T common stock for each share of
Matewan common stock held and to receive .8375 shares of BB&T common stock for
each share of Matewan Series A convertible preferred stock held. The
transaction is expected to be completed in the third quarter of 1999 and
accounted for as a purchase.
On April 28, 1999, BB&T announced plans to merge with First Liberty Financial
Corp. ("First Liberty") of Macon, Georgia. First Liberty's shareholders will
receive between .85 and .87 shares of BB&T common stock for each share of First
Liberty stock held. The transaction is expected to be completed in the fourth
quarter of 1999 and accounted for as a pooling of interests.
E. Calculation of Earnings Per Common Share
BB&T's basic and diluted earnings per common share amounts were calculated as
follows (amounts retroactively adjusted for the 2-for-1 stock split effective
August 3, 1998):
COMPUTATION OF EARNINGS PER SHARE
For the Periods as Indicated
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Basic Earnings Per Share:
Weighted average number of common shares outstanding
during
the period 306,466,263 304,867,015
=========== ===========
Net income $ 138,423 $ 120,445
=========== ===========
Basic earnings per share $ .45 $ .40
=========== ===========
Diluted Earnings Per Share:
Weighted average number of common shares outstanding
during
the period 306,466,263 304,867,015
Add-
Dilutive effect of outstanding options (as determined
by application of treasury stock method) 6,087,396 6,415,625
----------- -----------
Weighted average number of common shares, as adjusted 312,553,659 311,282,640
=========== ===========
Net income $ 138,423 $ 120,445
=========== ===========
Diluted earnings per share $ .44 $ .39
=========== ===========
</TABLE>
10
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. Segment Disclosures
BB&T's operations are divided into six reportable business segments: the
Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment
Banking and Brokerage and Treasury. These operating segments have been
identified based primarily on BB&T's existing organizational structure. The
segments require unique technology and marketing strategies and offer different
products and services. While BB&T is managed as an integrated organization,
individual executive managers are held accountable for the operations of the
business segments that report to them.
BB&T emphasizes revenue growth by focusing on client service, client
relationships and sales effectiveness. The segment results presented herein are
based on internal management accounting policies that support these strategic
objectives. Unlike financial accounting, there is no comprehensive
authoritative body of guidance for management accounting equivalent to
generally accepted accounting principles. Therefore, the performance of the
segments is not necessarily comparable with BB&T's consolidated results or with
similar information presented by any other financial institution. Additionally,
because of the interrelationships of the various segments, the information
presented is not necessarily indicative of the segments' financial performance
if they operated as independent entities.
BB&T's internal reporting system was significantly modified during 1998, and,
as a result, prior periods have not been reported because it is not practicable
to restate prior period results to conform to the current reporting methods.
Also, BB&T has completed various mergers and acquisitions accounted for as
poolings of interests, which present additional practical limitations to the
presentation of comparable prior period information.
Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's
Current Report on Form 8-K, filed on April 30, 1999, for a description of
internal accounting policies and the basis of segmentation, including a
description of the segments presented in the accompanying table. There have
been no significant changes in the format presented in those documents.
The following table discloses selected financial information for BB&T's
reportable business segments:
11
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
------------------------------------------------------------------------------------------------------------
Investment Other
Banking All Total Revenues
Banking Mortgage Trust Agency and Other Segment and
Network Banking Services Insurance Brokerage Treasury Segments(/1/) Results Expenses(/2/)
----------- ---------- -------- --------- ---------- ----------- ------------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income (expense)
from external
customers $ 182,113 $ 110,794 $(8,186) $ 2,749 $ 255 $ 40,033 $ 49,999 $ 377,757 $ 16,729
Net intersegment
interest income
(expense) 72,688 (79,113) 9,800 -- -- (4,491) -- (1,116) (3,606)
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
Net interest
income 254,801 31,681 1,614 2,749 255 35,542 49,999 376,641 13,123
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
Provision for
loan and lease
losses 21,738 713 -- 978 -- 22 4,110 27,561 551
Noninterest
income from
external
customers 103,222 32,844 11,359 16,796 16,316 1,354 6,259 188,150 2,992
Intersegment
noninterest
income 13,594 1,313 161 -- -- 142 -- 15,210 130
Noninterest
expense 124,547 15,351 7,429 13,540 10,875 1,073 12,009 184,824 63,487
Intersegment
noninterest
expense 58,796 4,679 629 769 448 2,459 1,384 69,164 (14,095)
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
Income before
income taxes and
the charge for
capital 166,536 45,095 5,076 4,258 5,248 33,484 38,755 298,452 (33,698)
Provision for
income taxes 62,539 17,024 1,916 1,607 2,059 10,802 5,209 101,156 (15,538)
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
Net income
before the
charge for
capital 103,997 28,071 3,160 2,651 3,189 22,682 33,546 197,296 (18,160)
Charge for
capital 30,895 2,983 364 -- -- 323 -- 34,565 297
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
Net income after
charge for
capital $ 73,102 $ 25,088 $ 2,796 $ 2,651 $ 3,189 $ 22,359 $ 33,546 $ 162,731 $ (18,457)
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
Identifiable
segment assets $19,277,573 $5,911,572 $14,953 $99,170 $525,448 $10,711,170 $2,553,201 $39,093,087 $2,189,664
----------- ---------- ------- ------- -------- ----------- ---------- ----------- ----------
<CAPTION>
Reconciling
Items
& Consolidated
Eliminations Totals
------------------- ------------
<S> <C> <C> <C>
Net interest
income (expense)
from external
customers $ (50,109)(/4/) $ 344,377
Net intersegment
interest income
(expense) 4,722 (/3/) --
------------------- ------------
Net interest
income (45,387) 344,377
------------------- ------------
Provision for
loan and lease
losses (8,112)(/4/) 20,000
Noninterest
income from
external
customers (29,958)(/4/) 161,184
Intersegment
noninterest
income (15,340)(/3/) --
Noninterest
expense 33,497 (/4/) 281,808
Intersegment
noninterest
expense (55,069)(/3/) --
------------------- ------------
Income before
income taxes and
the charge for
capital (61,001) 203,753
Provision for
income taxes (20,288)(/4/) 65,330
------------------- ------------
Net income
before the
charge for
capital (40,713) 138,423
Charge for
capital (34,862)(/3/) --
------------------- ------------
Net income after
charge for
capital $ (5,851) $ 138,423
------------------- ------------
Identifiable
segment assets $(3,491,261)(/4/) $37,791,490
------------------- ------------
</TABLE>
- - ----
(1) Financial data for segments below the quantitative thresholds requiring
disclosure are attributable to a number of smaller operating segments.
Those segments include a sub-prime auto lender, a factoring operation, a
commercial lawn care finance company, a home equity finance company and a
leasing company.
(2) Other revenues and expenses include amounts incurred by BB&T's support
functions not allocated to the various segments. Amounts include any
unallocated provision for loan and lease losses and unallocated general
corporate expenses, as well as costs associated with BB&T's Year 2000
compliance efforts.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of the internal management accounting practices.
These adjustments include the elimination of the Funds Transfer Pricing
credits and charges, the elimination of intersegment capital credits and
charges, the elimination of the intersegment noninterest revenues and the
elimination of overhead expenses allocated to the various segments. See
BB&T's Annual Report on Form 10-K for a description of these internal
accounting practices.
(4) To reflect elimination entries necessary to consolidated the segment
data.
12
<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, 1999, were $37.8 billion, a $1.4 billion
increase from the balance at December 31, 1998. The balance sheet categories
that accounted for most of the increase were loans and leases, including loans
held for sale, which grew $257.6 million, securities available for sale, which
increased $1.1 billion, Federal funds sold and securities purchased under
resale agreements or similar arrangements, which increased $142.4 million, and
other assets, which grew $86.9 million compared to year-end 1998. These
increases were partially offset by declines in cash and due from banks, which
decreased $133.4 million and securities held to maturity, which decreased $64.4
million.
Total deposits increased $156.0 million, short-term borrowed funds increased
$961.6 million and long-term debt increased $222.8 million during the first
quarter of 1999. Total shareholders' equity increased $24.5 million during the
same time frame.
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 was strong during the first quarter of 1999, with
end of period loans, including loans held for sale, increasing 4.2% on an
annualized basis since year-end 1998. Average loans increased 8.9% on an
annualized basis in the first quarter of 1999 compared to the same period in
1998. The overall growth in loans was reduced by a significant decline in loans
held for sale during the first quarter. At March 31, 1999, loans held for sale
totaled $751.4 million, down $284.2 million, or 111% on an annualized basis,
from the December 31, 1998 balance. Loans held for sale are subject to
significant fluctuations from quarter to quarter based on the volume of
mortgage loan production. Excluding the decrease in loans held for sale,
annualized loan growth from December 31, 1998, to March 31, 1999, was 9.3%.
BB&T continues to focus lending efforts on commercial and consumer loans,
which are generally more profitable than mortgages. BB&T's acquisition strategy
in recent years has resulted in mergers with a number of thrift institutions,
which created a concentration of mortgage loans in the portfolio. Through
securitizations and sales of fixed rate mortgage loans, management has changed
the mix of loans to improve the profitability of the overall portfolio. During
the first quarter of 1999, average mortgage loans decreased 5.5%, on an
annualized basis, compared to the fourth quarter of 1998 and were up 5.8% for
the first three months of 1999 compared to the first three months of 1998.
Average commercial loans, including leasing, increased 15.8% in this year's
first quarter compared to the first quarter of 1998 and 17.3% on an annualized
basis for the first quarter compared to the fourth quarter of 1998. Average
consumer loans, which includes sales finance, revolving credit and direct
retail, increased 7.6% in the first quarter of 1999 compared to the same period
in 1998, and 7.5% on an annualized basis comparing the first quarter of 1999
and the last three months of 1998. The slower growth in consumer lending has
been affected by refinancing of mortgage loans as BB&T's clients, in some
cases, pay down credit card and home equity lines with proceeds from mortgage
refinancing.
The 1999 loan growth rates include the effects of loans that were acquired
through purchase accounting transactions. BB&T acquired $1.0 billion in loans
during 1998 through the purchases of DCI, Stanley and Maryland Federal.
Excluding the impact of these purchase accounting transactions, average
"internal" loan growth for the three months ended March 31, 1999, was 6.7%
compared to
13
<PAGE>
the first quarter of 1998. By category, excluding these purchase accounting
transactions, average mortgage loans decreased 7.7% for the quarter, commercial
loans grew 11.9%, revolving credit increased 3.6% and direct retail loans were
up 3.7% compared to the first quarter of 1998.
The average annualized yields on commercial, consumer and mortgage loans for
the first quarter of 1999 were 8.64%, 9.88%, and 7.48%, respectively, resulting
in an average yield on the total loan portfolio of 8.68%. This reflects a
decrease of 49 basis points from the 9.17% earned on total average loans during
the first quarter of 1998.
Securities
Securities available for sale, which totaled $9.8 billion, increased $1.1
billion from December 31, 1998. These securities had net unrealized gains, net
of deferred income taxes, of $29.7 million at March 31, 1999, compared to $61.0
million at December 31, 1998. Securities held to maturity totaled $110.3
million, down $64.4 million from year-end 1998. The annualized average yield on
the total securities portfolio for the first three months of 1999 was 6.59%,
down 24 basis points from the net yield earned in the first three months of
1998.
Other Interest-Earnings Assets
Federal funds sold and securities purchased under resale agreements or
similar arrangements increased $142.4 million during the first three months of
1999, or 137.9%, on an annualized basis, compared to December 31, 1998. The
average yield on other interest-earning assets for the first three months of
1999 was 4.68%, down from 5.83% earned during the first three months of 1998.
Other Assets
BB&T's other noninterest-earning assets, excluding premises and equipment,
increased $86.9 million from December 31, 1998, to March 31, 1999. The increase
results primarily from higher goodwill, which increased $77.8 million during
the three months principally because of the acquisition of Scott &
Stringfellow. In addition, capitalized mortgage servicing rights increased
$15.5 million over the same time frame.
Deposits
Total deposits increased $156.0 million from December 31, 1998 to March 31,
1999. Certificates of deposit and other time deposits led the increase by
growing $295.1 million, an annualized rate of 10.0%. Money rate savings
accounts grew $59.0 million, or 3.4% on an annualized basis. Noninterest-
bearing deposits decreased $113.0 million during the first three months, an
annualized rate of 13.2%. Savings and interest checking decreased $85.1
million, or 19.3% on an annualized basis.
The growth in overall deposits primarily results from purchase accounting
transactions and from the ongoing promotion of BB&T's "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 first quarter balance of investor
deposit accounts totaled $3.1 billion, compared to a first quarter 1998 average
of $2.1 billion, which reflects a 50.7% growth rate.
BB&T acquired $813.3 million of deposits on September 30, 1998, through the
purchase of Maryland Federal. Excluding the impact of this acquisition, BB&T's
average quarterly deposits would have been $23.3 billion, 5.4% greater than the
average balance for the first quarter of 1998.
The annualized average cost for total interest-bearing deposits during the
first three months of 1999 was 4.08%, down 34 basis points from the comparable
period of 1998.
14
<PAGE>
Short-term Borrowed Funds
As a result of asset growth rates significantly higher than deposit growth
rates in recent years, combined with the availability of cost-effective
alternative funding sources, management has increasingly utilized nondeposit
funding sources, such as Federal Home Loan Bank ("FHLB") advances, master
notes, purchases of Federal funds and sales of securities under repurchase
agreements.
During the first quarter, end of period short-term borrowed funds increased
$961.6 million, or 25.9%, compared to year-end 1998. However, on average,
short-term borrowed funds decreased $157.2 million for the three months ended
March 31, 1999, compared to the same period in 1998, to a balance of $4.0
billion. The average annualized rate paid on short-term borrowed funds was
4.70% for the first three months of 1999, down from 5.34% for the same period
in 1998.
Long-term Debt
Long-term debt consists primarily of FHLB advances, medium term bank notes
and corporate subordinated debt. These borrowings are currently being utilized
because they are relatively cost-effective long-term funding sources and
provide BB&T with the flexibility to structure funding needs to aid in the
management of interest rate risk and liquidity. Long-term debt totaled $5.2
billion at March 31, 1999, an increase of $222.8 million, or 4.5%, from the
balance at December 31, 1998. On average, long-term debt increased $1.1 billion
for the first three months of 1999 compared to the first three months of 1998.
Long-term debt has been utilized for a variety of funding needs, including the
repurchase of shares of BB&T's common stock in conjunction with various
acquisitions.
Asset Quality
Nonperforming assets (composed of foreclosed assets, nonaccrual loans and
restructured loans) totaled $116.5 million at March 31, 1999, compared to
$118.3 million at December 31, 1998. Nonperforming assets, as a percentage of
loan-related assets, were .47% at March 31, 1999, compared to .48% at December
31, 1998. Loans 90 days or more past due and still accruing interest totaled
$40.9 million compared to a year-end 1998 balance of $54.2 million.
Net charge-offs totaled $12.6 million and amounted to .21% of average loans
and leases, on an annualized basis, in the first quarter of 1999 compared to
$15.8 million, or .29% of average loans and leases, in the corresponding period
in 1998. The decrease in net charge-offs as a percentage of average loans and
leases results from improved overall asset quality and lower charge-offs at
Regional Acceptance Corporation, BB&T's nonstandard automobile finance company.
The allowance for loan and lease losses was $338.0 million, or 1.35% of loans
and leases, at March 31, 1999, compared to $330.6 million, or 1.34% of loans
and leases, at December 31, 1998. The provision for loan and lease losses for
the first quarter of 1999 was $20.0 million, compared to $23.4 million in the
first quarter of 1998. The lower provision results from lower net charge-offs
during 1999 and positive trends in nonaccrual loans and leases and other
nonperforming assets.
15
<PAGE>
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance For Loan & Lease
Losses
Beginning balance $330,615 $328,244 $308,968 $301,191 $292,667
Allowance for acquired
loans -- -- 15,542 1,269 858
Provision for loan and
lease losses 20,000 22,765 21,229 23,038 23,438
Net charge-offs (12,632) (20,394) (17,495) (16,530) (15,772)
-------- -------- -------- -------- --------
Ending balance $337,983 $330,615 $328,244 $308,968 $301,191
======== ======== ======== ======== ========
Risk Assets
Nonaccrual loans and leases $ 86,457 $ 88,847 $ 89,067 $ 84,062 $ 97,938
Foreclosed real estate 18,969 17,428 21,778 20,761 17,072
Other foreclosed property 10,539 11,548 11,669 14,189 14,878
Restructured loans 520 522 525 528 --
-------- -------- -------- -------- --------
Total nonperforming assets $116,485 $118,345 $123,039 $119,540 $129,888
======== ======== ======== ======== ========
Loans 90 days or more past
due and still accruing $ 40,948 $ 54,226 $ 51,107 $ 52,881 $ 46,864
======== ======== ======== ======== ========
Asset Quality Ratios
Nonaccrual loans and leases
as a percentage of total
loans and leases .35% .36% .37% .36% .43%
Total nonperforming assets
as a percentage of:
Total assets .31 .33 .34 .35 .38
Loans and leases plus
foreclosed property .47 .48 .51 .51 .57
Net charge-offs as a
percentage of average loans
and leases .21 .33 .30 .29 .29
Allowance for loan and lease
losses as a percentage of
loans and leases 1.35 1.34 1.36 1.32 1.32
Ratio of allowance for loan
and lease losses to:
Net charge-offs 6.60x 4.09x 4.73x 4.66x 4.71x
Nonaccrual and restructured
loans and leases 3.89 3.70 3.66 3.65 3.08
</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 primary 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 this process is the development of appropriate maturity and
repricing opportunities in those accounts to produce consistent earnings 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.
16
<PAGE>
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the ALCO to determine and achieve the most
appropriate volume and mix of earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to interest rate risk
exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate
risk and liquidity positions in relation to present and prospective market and
business conditions, and adopts funding and balance sheet management strategies
that are intended to ensure that the potential impact on earnings and liquidity
as a result of fluctuations in interest rates is within acceptable standards.
The majority of assets and liabilities of financial institutions are monetary
in nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Fluctuations in interest rates and the efforts of the Board of Governors of the
Federal Reserve System ("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 model that incorporates current volumes and
rates, maturities, repricing opportunities and anticipated growth of asset and
liability portfolios. The model calculates an earnings estimate based on
current and projected portfolio balances and interest rates. This level of
detail is needed to 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 performance goals.
The following table represents the interest sensitivity position of BB&T as
of March 31, 1999. 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.
17
<PAGE>
Interest Sensitivity Simulation Analysis
<TABLE>
<CAPTION>
Interest Annualized
Rate Hypothetical
Scenario Percentage
-------- Change in
Prime Net Interest
Linear Rate Income
------ ----- ------------
<S> <C> <C>
+3.00% 10.75% -3.70%
+1.50 9.25 -2.63
-1.50 6.25 -.07
-3.00 4.75 -.40
</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 three 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, 1999, 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, 1999,
BB&T had outstanding interest rate swaps, caps, floors and collars with
notional amounts totaling $3.3 billion. The estimated fair value of open
contracts used for risk management purposes reflected net unrealized gains of
$26.4 million at March 31, 1999.
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.
18
<PAGE>
A derivative is a financial instrument that derives its cash flows, and
therefore its value, from 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, 1999.
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 March 31, 1999:
Interest Rate Swaps, Caps, Floors and Collars
March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Notional Receive Pay Net Unrealized
Type Amount Rate Rate Gains (Losses)
- - ---- ----------- ---------- ------------------ --------------
<S> <C> <C> <C> <C>
Receive fixed swaps $ 770,000 6.35% 4.99% $ 27,270
Pay fixed swaps 1,197,893 5.00 5.67 (1,168)
Basis swaps 50,000 4.95 4.97 (3)
Caps, floors & collars 1,247,250 -- -- 349
---------- ---------- ---------- ----------
Total $3,265,143 5.51% 5.39% $ 26,448
========== ========== ========== ==========
<CAPTION>
Receive Pay Fixed Basis Swaps, Caps,
Year-to-date Activity Fixed Swaps Swaps Floors & Collars Total
- - --------------------- ----------- ---------- ------------------ --------------
<S> <C> <C> <C> <C>
Balance, December 31,
1998 $1,266,200 $1,180,146 $1,297,250 $3,743,596
Additions 15,000 29,904 -- 44,904
Maturities/amortizations (511,200) (12,157) -- (523,357)
Terminations -- -- -- --
---------- ---------- ---------- ----------
Balance, March 31, 1999 $ 770,000 $1,197,893 $1,297,250 $3,265,143
========== ========== ========== ==========
<CAPTION>
One Year One to After Five
Maturity Schedule* or Less Five Years Years Total
- - ------------------ ----------- ---------- ------------------ --------------
<S> <C> <C> <C> <C>
Receive fixed swaps $ 200,000 $ 295,000 $ 275,000 $ 770,000
Pay fixed swaps 1,001,646 108,954 87,293 1,197,893
Basis swaps 50,000 -- -- 50,000
Caps, floors & collars 500,000 747,250 -- 1,247,250
---------- ---------- ---------- ----------
Total $1,751,646 $1,151,204 $ 362,293 $3,265,143
========== ========== ========== ==========
</TABLE>
- - --------
* Maturities are based on full contract extensions.
19
<PAGE>
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 $2.9 billion at both March 31, 1999 and
December 31, 1998. BB&T's book value per common share at March 31, 1999, was
$9.59 compared to $9.53 at December 31, 1998.
The ratios of Tier 1 capital (total shareholders' equity excluding unrealized
gains or losses on securities available for sale, net of taxes, and
nonqualifying intangible assets) and total capital (Tier 1 capital, a
qualifying portion of the allowance for loan and lease losses and qualifying
subordinated debt) to risk-weighted assets are defined by Federal Bank
Regulatory guidelines. An 8.00% minimum of total capital to risk-weighted
assets is required. One-half of the 8.00% minimum must consist of Tier 1
capital under regulatory guidelines. The Tier 1 leverage ratio, established by
Federal Bank Regulatory guidelines, measures Tier 1 capital to average total
assets less nonqualifying intangibles. The regulatory minimum for the leverage
ratio is 3.00% to 5.00% depending upon Federal bank regulatory agency
evaluation of an organization's overall safety and soundness. These capital
ratios relative to the last five quarters are presented in the accompanying
table:
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
1999 1998
------- -------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital 9.7% 10.3% 10.5% 10.5% 10.8%
Total capital 14.2 15.0 15.3 15.6 14.3
Tier 1 leverage ratio 6.9 7.0 7.3 7.0 7.3
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the first quarter of 1999 totaled $138.4 million, an increase
of 14.9% over the $120.4 million earned during the first quarter of 1998. On a
diluted per share basis, earnings for the three months ended March 31, 1999
were $.44, compared to $.39 for the same period in 1998, an increase of 12.8%.
BB&T's operating results for the first quarter of 1999 produced an annualized
return on average assets of 1.53% and an annualized return on average
shareholders' equity of 19.11% compared to prior year ratios of 1.47% and
18.43%, respectively.
BB&T's earnings for the first quarters of 1999 and 1998 were adversely
affected by costs of a nonrecurring nature principally associated with
consummating mergers and acquisitions. During the first quarter of 1998, BB&T
recorded $6.0 million in after-tax expenses primarily associated with the Life
merger. These charges included professional fees, as well as costs in
connection with the reduction of staffing levels, early retirement packages and
other personnel-related expenses. During the first quarter of 1999, $10.4
million in after-tax charges were recorded in conjunction with completing the
MainStreet merger. These costs included professional fees, personnel-related
expenses and occupancy and equipment costs.
Excluding the impact of these merger-related charges on operating results,
BB&T would have had first quarter 1999 net income of $148.8 million, an
increase of 17.7%, compared to the $126.5 million earned in the first quarter
of 1998. On a diluted per share basis, first quarter earnings excluding these
changes were $.48, compared to $.41 earned in the first quarter last year, an
increase
20
<PAGE>
of 17.1%. Earnings before nonrecurring expenses for the first three months of
1999 produced an annualized return on average assets of 1.65% and a return on
average equity of 20.54%, compared to prior year ratios of 1.54% and 19.35%,
respectively.
BB&T's growth in recurring earnings resulted from three principal factors.
First, BB&T's noninterest income continues to grow at a very strong pace,
increasing 28.5% for the three months ended March 31, 1999, compared to the
same period in 1998. Second, as discussed above, BB&T has experienced positive
growth in loans and securities during the first quarter, which resulted in an
8.3% increase in net interest income on a fully taxable equivalent ("FTE")
basis in the first quarter of 1999, compared to the first quarter of 1998.
Third, BB&T has continued to effectively manage the growth of noninterest
expenses. Excluding the effect of acquisitions accounted for by the purchase
method of accounting, recurring noninterest expense increased 6.9% in the first
quarter of 1999 compared to the same period in 1998.
Net Interest Income and Net Interest Margin
Net interest income on an FTE basis was $362.6 million for the first quarter
of 1999 compared to $334.9 million for the same period in 1998, a 8.3%
increase. For the three months ended March 31, 1999, average interest-earning
assets increased $3.0 billion, or 9.6%, to $34.1 billion over the first quarter
of 1998, while average interest-bearing liabilities increased by $2.6 billion.
During the same time period, the net interest margin decreased from a first
quarter 1998 rate of 4.33% to a rate of 4.28% in the current quarter. The 5
basis point decline in margin was primarily the result of increased funding
costs associated with BB&T's share repurchase program, which resulted in a
reduction in margin of 7 basis points during the quarter, and the acquisition
of Maryland Federal, which resulted in a 5 basis point decline in the net
interest margin.
The following table sets forth the major components of net interest income
and the related yields for the first quarter of 1999 compared to the first
quarter of 1998, and the variances between the periods caused by changes in
interest rates versus changes in volumes.
21
<PAGE>
Net Interest Income and Rate / Volume Analysis For the Three Months Ended
March 31, 1999 and 1998
<TABLE>
<CAPTION>
Average Balances Yield / Rate Income / Expense Change due to
----------------------- -------------- ----------------- Increase ----------------
Fully Taxable Equivalent
- - - (Dollars in thousands) 1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume
- - ------------------------ ----------- ----------- ------ ------ -------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Securities(1):
U.S. Treasury,
government and other (5) $ 8,780,620 $ 8,272,961 6.53% 6.76% $143,349 $139,842 $ 3,507 $(4,819) $ 8,326
States and political
subdivisions 365,515 238,528 7.72 8.44 7,051 5,033 2,018 (457) 2,475
----------- ----------- ------ ------ -------- -------- ------- ------- -------
Total securities (5) 9,146,135 8,511,489 6.59 6.83 150,400 144,875 5,525 (5,276) 10,801
Other earning assets (2) 126,241 236,579 4.68 5.83 1,457 3,403 (1,946) (579) (1,367)
Loans and leases, net
of unearned income
(1)(3)(4)(5) 24,838,412 22,382,333 8.68 9.17 533,480 507,411 26,069 (27,631) 53,700
----------- ----------- ------ ------ -------- -------- ------- ------- -------
Total earning assets 34,110,788 31,130,401 8.11 8.50 685,337 655,689 29,648 (33,486) 63,134
----------- ----------- ------ ------ -------- -------- ------- ------- -------
Non-earning assets 2,499,747 2,162,144
----------- -----------
Total assets $36,610,535 $33,292,545
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking $ 1,784,789 $ 2,052,704 1.64 1.96 7,228 9,912 (2,684) (1,484) (1,200)
Money rate savings 6,848,137 5,443,807 2.82 3.03 47,640 40,728 6,912 (3,015) 9,927
Other time deposits 12,203,097 11,705,378 5.15 5.50 154,891 158,652 (3,761) (10,335) 6,574
----------- ----------- ------ ------ -------- -------- ------- ------- -------
Total interest-bearing
deposits 20,836,023 19,201,889 4.08 4.42 209,759 209,292 467 (14,834) 15,301
Short-term borrowed
funds 3,988,764 4,145,971 4.70 5.34 46,262 54,594 (8,332) (6,321) (2,011)
Long-term debt 4,973,629 3,890,169 5.41 5.89 66,758 56,898 9,860 (4,980) 14,840
----------- ----------- ------ ------ -------- -------- ------- ------- -------
Total interest-bearing
liabilities 29,798,416 27,238,029 4.39 4.77 322,779 320,784 1,995 (26,135) 28,130
----------- ----------- ------ ------ -------- -------- ------- ------- -------
Noninterest-bearing
deposits 3,283,300 2,904,866
Other liabilities 590,981 499,206
Shareholders' equity 2,937,838 2,650,444
----------- -----------
Total liabilities and
shareholders' equity $36,610,535 $33,292,545
=========== ===========
Average interest rate
spread 3.72 3.73
Net yield on earning
assets 4.28% 4.33% $362,558 $334,905 $27,653 $(7,351) $35,004
====== ====== ======== ======== ======= ======= =======
Taxable equivalent
adjustment $ 18,181 $ 15,565
======== ========
</TABLE>
(1) Yields related to securities, loans and leases wholly or partially exempt
from income taxes 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.
22
<PAGE>
Noninterest Income
Noninterest income for the three months ended March 31, 1999, was $161.2
million compared to $125.4 million for the same period in 1998, an increase of
28.5%. Excluding the impact of purchase accounting acquisitions, BB&T's
noninterest income would have increased 25.8% in the first quarter of 1999
compared to 1998.
BB&T experienced growth in all significant areas of noninterest income.
Service charges on deposits, mortgage banking revenues, agency insurance
commissions and other fees and commissions 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) derived from
noninterest income, was 30.8% for the three months ended March 31, 1999, up
from 26.8% for the first quarter of 1998.
Service charges on deposits increased $5.2 million, or 12.2%, for the first
quarter of 1999, compared to the first quarter of 1998. The primary factor
contributing to this growth was an increase in the number of accounts subject
to service charges. The largest components of the growth within service charges
on deposits included account analysis fees on commercial transaction accounts,
service charges on commercial and personal accounts and overdraft charges.
Trust income increased $4.0 million, or 45.6%, for the three months ended
March 31, 1999, from the same period a year ago. Approximately 15% of the
increase resulted from the acquisition of W.E. Stanley at the end of the second
quarter of 1998. Also, assets under management have increased to $9.5 billion,
an increase of approximately 6% from the first quarter of 1998. The remaining
increase reflects internal growth, driven principally by increased estate fees
and higher fees from the administration of the North Carolina State 401-k plan,
which is the nation's largest state-sponsored 401-k retirement plan.
Agency insurance commissions increased $2.8 million, or 20.1%, in the first
quarter of 1999 compared to the same three-month period of 1998. This resulted
from growth 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. Over the past several
quarters, the network has expanded the types of products offered to include
group health, surety bonds, title insurance and life insurance.
Income from mortgage banking activities increased $17.4 million, or 113.0%,
for the three months ended March 31, 1999, compared to the same period in 1998.
The dramatic increase resulted from significantly higher volumes of mortgage
loans originated in 1998 and sold during the first quarter of 1999. Mortgage
banking operations also benefited from higher mortgage loan servicing fee
income and underwriting fee income, as well as a significant increase in gains
on mortgage loans sold.
Other nondeposit fees and commissions increased by $4.6 million, or 17.9%, to
a level of $30.1 million for the three months ended March 31, 1999, compared
with $25.5 million for the first quarter of 1998. The components generating the
increase in nondeposit fees and commissions were revenues from investment
services, up $1.3 million, bankcard-related fees, up $1.4 million and growth in
fee income of $1.2 million at Craigie, Inc., BB&T's investment banking and
brokerage subsidiary.
Other income increased $4.4 million, or 32.2%, in the first quarter of 1999
compared to 1998 primarily as a result of growth in income from Craigie, which
was up $2.5 million compared to the first quarter of 1998. BB&T also
experienced increases in income from corporate owned life insurance policies
and revenues from check sales.
23
<PAGE>
Noninterest Expense
Noninterest expenses totaled $281.8 million for the first quarter of 1999
compared to $245.0 million for the same period a year ago, an increase of
15.0%. Noninterest expense for 1999 includes $15.8 million of nonrecurring
expenses associated with the acquisition of MainStreet, while the first three
months of 1998 include $7.8 million of costs resulting from the merger with
Life Bancorp. Excluding these merger costs from both years, noninterest
expenses increased $28.8 million, or 12.1%. Excluding the effects of business
combinations accounted for as purchases that have been completed since March
31, 1999, noninterest expense for the first quarter of 1999 would have
increased 6.9% from the first quarter of 1998. BB&T's efficiency ratio, which
measures the percentage of recurring expenses to total revenues on an FTE
basis, was 50.7% for the first quarter of 1999, improved from the 51.6% in the
first three months of 1998.
Personnel expense, the largest component of noninterest expense, was $141.2
million for the first quarter of 1999 compared to $123.7 million for the same
period in 1998, an increase of $17.5 million, or 14.2%. Personnel expense for
1999 includes $5.5 million of the costs related to the acquisition of
MainStreet, while the prior year expense includes $2.4 million of expenses
associated with the Life merger. Excluding these costs, personnel expense would
have totaled $135.7 million for the first quarter of 1999 and $121.2 million
for the first quarter last year, an increase of $14.5 million. This growth
results from annual salary adjustments, which typically begin in April, higher
incentive compensation costs and the effect of acquisitions accounted for as
purchases completed since March 31, 1998.
Occupancy and equipment expense for the three months ended March 31, 1999,
totaled $48.1 million, an increase of $9.2 million, or 23.6%, compared to 1998.
Excluding the nonrecurring charges discussed above from 1999 and 1998,
occupancy and equipment expense would have totaled $44.2 million, up $5.4
million, or 14.0%, compared to the first quarter of 1998. 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.
The amortization of intangible assets and mortgage servicing rights totaled
$15.8 million for the three months ended March 31, 1999, a $5.6 million, or
54.3%, increase from the amount incurred in the first quarter of 1998. This
increase was the result of a $1.9 million increase in amortization of mortgage
loan servicing rights and increased amortization of goodwill due to
acquisitions consummated using purchase accounting. Total goodwill and other
intangibles have increased from $231.8 million at March 31, 1998 to $477.6
million at March 31, 1999.
Other noninterest expenses for the first quarter of 1999 totaled $76.6
million, an increase of $4.5 million, or 6.2%, compared to 1998. Excluding the
impact of the nonrecurring charges discussed above from both 1999 and 1998,
other noninterest expense would have totaled $70.3 million for the first
quarter, up $3.3 million, or 5.0%. This increase was primarily due to purchase
accounting acquisitions and higher expenses at Craigie and Regional Acceptance.
Provision for Income Taxes
The provision for income taxes totaled $65.3 million for the first quarter of
1999, an increase of $9.5 million, or 16.9%, compared to the first three months
of 1998. Excluding the tax benefits associated with the nonrecurring charges
detailed above, the provision for income taxes for the first quarter would have
been $70.8 million, an increase of $13.1 million, or 22.8%. The effective tax
rates on recurring pretax income were 32.2% and 31.3% for the three months
ended March 31, 1999 and 1998, respectively.
24
<PAGE>
PROFITABILITY MEASURES
<TABLE>
<CAPTION>
1999 1998
------- -------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.53% 1.45% 1.54% 1.50% 1.47%
Return on average common equity 19.11 17.90 19.96 19.52 18.43
Net interest margin 4.28 4.28 4.36 4.25 4.33
Efficiency ratio (taxable equivalent)* 50.7 52.5 51.6 52.3 51.6
</TABLE>
- - --------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
First Quarter 1999 Year 2000 Readiness Disclosure
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 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 strategy in 1996. Management determined
that it would be required to modify or replace significant portions of BB&T's
information technology platform and other systems in order for them to be Year
2000 ready. Computer systems that have the ability to process dates before,
during and after January 1, 2000, without malfunction are considered to be
"Year 2000 Ready." In early 1997, BB&T formed a Year 2000 Program Office, which
operates as a joint effort between BB&T and outside service providers. The
mission of the Program Office is to address Year 2000 issues affecting BB&T's
various systems. The program office management committee meets regularly to
review and document the progress of the Year 2000 project.
Year 2000 Project
BB&T's Year 2000 strategy is divided into five major phases: inventory,
assessment, remediation, testing and change / clean management ("Year 2000
Project"). During the inventory and assessment phases, BB&T identified all
specific systems that required modification or replacement and assessed the
steps necessary to remediate the Year 2000 Issue. In the remediation phase, the
systems requiring remediation were replaced, modified or retired, as
appropriate. The testing phase includes internal and external testing with
third parties to ensure that the remediated systems will accurately process
dates and date data before, on and after January 1, 2000. Finally, the change /
clean management phase includes placing the remediated systems back into
production, and the implementation of processes and procedures to monitor and
to protect remediated systems from alterations that might affect Year 2000
readiness.
In order to carry out the Year 2000 project, BB&T divided its internal and
external systems into three major categories: core business systems,
distributed business systems and non-information technology systems. The core
business systems are those systems that run on BB&T's mainframe. The
distributed systems are those systems that do not run on the mainframe. The
non-information technology systems are those systems that have embedded
microchips or microprocessors controlling the function of equipment; such as
elevators, fire and security systems, etc. These three categories
25
<PAGE>
are further broken down into mission-critical and non-mission-critical systems.
BB&T prioritized its systems for remediation based on their overall importance
to the operations of BB&T. Mission-critical systems are those systems that are
critical to the operations of BB&T and / or vital to the business continuity of
BB&T. While the Year 2000 Project will address all internal and external
systems used by BB&T to conduct its business, the highest priority was given to
mission-critical systems.
State of Readiness
BB&T's current state of readiness as of May 14, 1999, is as follows:
Core business systems mission-critical and non-mission critical: The
inventory, assessment and remediation phases have been completed and the
testing phase is substantially complete. BB&T has placed 100% of remediated
core business systems back into production.
Distributed business systems mission-critical: The inventory, assessment and
remediation phases have been completed and the testing phase is substantially
complete. BB&T has placed 96% of remediated mission-critical distributed
business systems back into production.
Distributed business systems non-mission-critical: The inventory and
assessment phases are complete and the majority of the remediation phase is
complete. Management anticipates that remediation and testing for these systems
will be completed by June 30, 1999.
Non-information technology systems mission-critical: Embedded technology
controls certain building security and operations, such as power management,
elevators and security systems. All facilities, including buildings, equipment
and other infrastructure using embedded technology are being evaluated. We
expect that those facilities in which critical processes are performed will be
confirmed as Year 2000 ready by June 30, 1999.
As BB&T has completed testing for each of the above systems, the change /
clean management phase has been implemented. Change / clean management will be
an ongoing process that will continue into the Year 2000. Management
anticipates that BB&T will be substantially complete with all phases of the
Year 2000 project by June 30, 1999, in accordance with Federal guidelines.
BB&T's Year 2000 readiness plans and status have been reviewed during
compliance audits by various state and Federal regulators. These reviews have
not resulted in any significant findings of deficiency by regulators and BB&T
has not failed to meet any important deadlines during the Year 2000 project.
Risks
The failure to correct a mission-critical Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities and
operations. Such failures could materially and adversely affect BB&T's
financial condition or results of operations. Management presently believes
that with modifications to existing systems and, in certain circumstances,
conversions to new systems, the effects of the Year 2000 issue on BB&T will be
minimized.
Third Party Assessments
BB&T relies on numerous third parties and conducts formal communications on
an ongoing basis with these third parties to determine the extent to which BB&T
may be vulnerable to their failure to remediate their own Year 2000 issues.
These third parties include providers of core and distributed systems-related
products and services; external agents, which include government agencies and
26
<PAGE>
other agents requiring systems interfaces; infrastructure-related third
parties, including utilities and telecommunications providers, landlords and
miscellaneous suppliers; and capital markets partners, which includes any third
parties requiring financial settlement. During the fourth quarter of 1998 and
early in 1999, BB&T mailed in excess of 2,500 surveys to these third parties in
order to assess the status of their Year 2000 readiness. These surveys included
more than 200 third parties considered mission-critical to BB&T's operations.
Information has been obtained from 92% of these mission-critical third parties.
Risk assessments have been completed on the mission-critical third parties, and
appropriate measures to minimize risk to the extent possible are being
undertaken with those vendors that have been determined to represent high
levels of risk to BB&T. Among those that have responded, management has
determined that approximately 5% represent a high risk to BB&T. For these third
parties, appropriate contingency plans have been developed and are constantly
being monitored and revised accordingly. However, BB&T has no viable
alternative for certain suppliers, such as utilities and telecommunications
providers. Also, as with all financial institutions, BB&T places a high degree
of reliance on the systems of other institutions, including governmental
agencies, to settle transactions.
BB&T also relies on clients to make preparations for the Year 2000 to protect
their business operations from interruptions that could threaten their ability
to honor their financial commitments. During 1998, BB&T developed and
implemented revised underwriting policies to address Year 2000 issues for our
large commercial clients and new commercial clients. Adherence to these
policies is required for credits in excess of $1 million and encouraged for
other significant clients. BB&T distributed in excess of 3,000 questionnaires
to clients in order to assess the state of their Year 2000 readiness. Lenders
were required to follow up with their clients to ensure the accuracy of the
responses to the questionnaires. Based on the results of these questionnaires,
clients were assigned a Year 2000 "risk grade", which is considered in the
calculation of the allowance for loan and lease losses. Among these lending
relationships, BB&T rated approximately 3.4% of the commercial loan portfolio
as representing a high risk to BB&T, and the remaining clients were determined
to represent low risk to BB&T. For clients that were judged to represent
significant risks to BB&T, the allowance for loan and lease losses has been
evaluated for adequacy. These risk assessments are updated quarterly for larger
clients and potential new clients.
BB&T is also assessing potential Year 2000 risks associated with its
fiduciary activities. When making investment decisions or recommendations, BB&T
considers Year 2000 issues in our analyses, and may take certain steps to
investigate Year 2000 readiness in assessing assets held in trust.
Despite these efforts, because of the general uncertainty inherent in the
Year 2000 issue, there can be no assurance that the systems of other
organizations upon which BB&T's operations rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with BB&T's systems, would not have a materially adverse effect on
BB&T. In view of the uncertainties surrounding the impact of the Year 2000
issue, management considers BB&T's most reasonably likely worst case scenario
to be the loss of basic infrastructure services, such as utilities and
telecommunications.
Contingency Business and Event Planning
Management is enhancing BB&T's existing business resumption plans to address
various Year 2000 scenarios in the event that efforts to remediate BB&T's
systems are not fully successful or are not completed in accordance with
current expectations. Each line of business has significant involvement in the
preparation of Year 2000 contingency plans designed to address specific
business functions. The contingency plans include the use of third party
service providers, alternative
commercial vendors, alternative data security, redundant facilities and other
contingency service suppliers. For mission-critical systems, these contingency
plans have been completed. BB&T expects
27
<PAGE>
to complete its contingency planning for non-mission-critical systems by June
30, 1999. These plans will be amended as BB&T continues to obtain information
relating to its own systems and the systems of its significant suppliers and
large clients. BB&T will continually test and revise the contingency plans as
the Year 2000 approaches.
Costs
The projected total incremental cost of the Year 2000 project is currently
estimated at approximately $30 million and is being funded through operating
cash flows. As of March 31, 1999, a cumulative total of approximately $22.7
million had been spent on the assessment of and efforts in connection with the
Year 2000 project, of which $3.7 million represented internal personnel and
other costs.
Information about BB&T's Year 2000 Project, other than historical
information, should be considered forward looking in nature and subject to
various risks, uncertainties and assumptions. The costs of the project and the
date on which BB&T plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the inability to control third party vendor and customer
modification plans, the ability of BB&T to implement suitable contingency
plans, Congressional legislation, regulatory action and similar uncertainties.
28
<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) Current Reports on Form 8-K
On January 14, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to
report the results of operations for the fourth quarter and twelve months of
1998. On January 27, 1999, BB&T filed a Current Report on Form 8-K under Item 5
to report that BB&T had entered into a definitive agreement to acquire First
Citizens Corporation of Newnan, Georgia. On January 27, 1999, BB&T filed a
Current Report on Form 8-K under Item 5 to report that the Board of Directors
had authorized the repurchase of up to 1.6 million shares of BB&T common stock
in connection with the acquisition of MainStreet. On January 28, 1999, BB&T
filed a Current Report on Form 8-K under Item 5 to report that BB&T had entered
into a definitive agreement to acquire Mason-Dixon Bancshares of Westminster,
Maryland. On February 25, 1999, BB&T filed a Current Report on Form 8-K under
Item 5 to report that BB&T had entered into a definitive agreement to acquire
Matewan BancShares of Williamson, West Virginia. On April 9, 1999, BB&T filed a
Current Report on Form 8-K under Item 5 to announce that BB&T and Matewan had
agreed to extend the due diligence period associated with their proposed merger
through April 28, 1999. On April 12, 1999, BB&T filed a Current Report on Form
8-K under Item 5 to report the results of operations for the first quarter of
1999. On April 28, 1999, BB&T filed an amendment to the Form 8-K, originally
filed February 25, 1999, to disclose renegotiated terms of the proposed
acquisition of Matewan by BB&T. On April 28, 1999, BB&T filed a Current Report
on Form 8-K under Item 5 to report that the Board of Directors had authorized
the repurchase of up to 10 million shares of BB&T common stock in connection
with specific business combinations to be accounted for as purchases. On April
28, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that
BB&T had entered into a definitive agreement to acquire First Liberty Financial
Corp. of Macon, Georgia. On April 30, 1999, BB&T filed a Current Report on Form
8-K under Item 5 to restate BB&T's Annual Report on Form 10-K for the accounts
of MainStreet, which was acquired on March 5, 1999, and accounted for as a
pooling of interests.
29
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