-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U7WF2OThWi+xdZ6heTjNSO+kaD8GGwnXUY+EpGQYNECJ+X90718b83GcpBkiG5JK iLL9VYM+hCy8paDEjjLbsA== 0000950109-99-000901.txt : 19990322 0000950109-99-000901.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950109-99-000901 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BB&T CORP CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10853 FILM NUMBER: 99568456 BUSINESS ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 BUSINESS PHONE: 3367332000 MAIL ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1998 Commission File Number: 1-10853 ---------------- BB&T CORPORATION (Exact name of Registrant as specified in its Charter) North Carolina 56-0939887 (State of Incorporation) (I.R.S. Employer Identification No.) 200 West Second Street 27101 Winston-Salem, North Carolina (Zip Code) (Address of principal executive offices) ---------------- (336) 733-2000 (Registrant's telephone number, including area code) ---------------- Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $5 par value New York Stock Exchange Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. 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 [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant at January 31, 1999, was approximately $10.9 billion. The number of shares of the Registrant's Common Stock outstanding on January 31, 1999, was 289,973,890. No shares of preferred stock were outstanding at January 31, 1999. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 27, 1999, are incorporated by reference in Part III of this report. The Exhibit Index begins on page 89 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (b) Current Report on Form 8-K filed during the fourth quarter of 1998.
Type Date Filed Reporting Purpose ---- ---------- ----------------- Item 5. October 14, 1998 Report results of operations and financial condition for the 3rd Quarter of 1998.
---------------------------------------------------------------------- * The information required by Item 10 is incorporated herein by reference to the information that appears under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders. The information required by Item 11 is incorporated herein by reference to the information that appears under the headings "Compensation of Executive Officers", "Retirement Plans" and "Compensation Committee Report on Executive Compensation" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders. The information required by Item 12 is incorporated herein by reference to the information that appears under the headings "Security Ownership of Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders. The information required by Item 13 is incorporated herein by reference to the information that appears under the headings "Compensation Committee Interlocks and Insider Participation" and "Transactions with Executive Officers and Directors" in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders. 3 DESCRIPTION OF BUSINESS General BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations in North Carolina, South Carolina, Virginia, Maryland and Washington, D.C. primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. At December 31, 1998, the principal assets of BB&T included all of the outstanding shares of common stock of Branch Banking and Trust Company, headquartered in Winston-Salem, North Carolina; BB&T Financial Corporation of South Carolina, based in Greenville, South Carolina, which in turn owns all the outstanding shares of Branch Banking and Trust Company of South Carolina; BB&T Financial Corporation of Virginia, located in Virginia Beach, Virginia, which in turn owns all the outstanding shares of Branch Banking and Trust Company of Virginia; and Franklin National Bank of Washington, D.C. BB&T also owns all of the outstanding shares of common stock of Regional Acceptance Corporation of Greenville, North Carolina; Craigie Incorporated of Richmond, Virginia; Refloat Incorporated of Mount Airy, North Carolina; and Phillips Factors Corporation of High Point, North Carolina. Significant Subsidiaries Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was chartered in 1872 and is the oldest bank in North Carolina. At December 31, 1998, BB&T-NC operated through 347 banking offices throughout North Carolina and 28 offices in Maryland. BB&T-NC's principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North Carolina, which specializes in lease financing to commercial businesses; BB&T Investment Services, Inc., located in Charlotte, North Carolina, which offers nondeposit investment alternatives, including discount brokerage services, fixed-rate and variable-rate annuities, mutual funds and government and municipal bonds; BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which, according to a report published by Business Insurer Magazine, is the 16th largest independent insurance agency network in the country; and W.E. Stanley & Company, Inc., an actuarial and employee benefits consulting firm headquartered in Greensboro, North Carolina. BB&T-NC has a number of additional subsidiaries, including Prime Rate Premium Finance Corporation, Inc. ("Prime Rate"), located in Florence, South Carolina, which provides insurance premium financing and services to customers in Virginia and the Carolinas; and Farr Associates, Inc., a behavioral science consulting firm located in High Point, North Carolina, that provides employee development and leadership training services to businesses. BB&T-NC also owns 51% of AutoBase Information Systems, Inc., ("AutoBase") a Charlotte, North Carolina-based company that uses advanced technologies to simplify the car- buying and selling process for consumers and automotive dealers. Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 90 banking offices at December 31, 1998. Branch Banking and Trust Company of Virginia ("BB&T-VA") operated 59 banking offices in Virginia at December 31, 1998. Franklin National Bank ("Franklin"), acquired on July 1, 1998, operates nine branch offices in the metropolitan Washington, D.C. area. Craigie Incorporated ("Craigie"), an investment banking firm headquartered in Richmond, Virginia, specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Craigie also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional tax-exempt issuers. The primary services offered by BB&T's subsidiaries include: .small business lending .commercial middle market lending .secured and unsecured consumer lending .factoring .asset-based lending 4 .sales finance .home equity lending .mortgage lending .leasing .trust services .agency insurance .cash management and other treasury services .brokerage services .mutual fund products .capital markets .international services .merchant processing .credit card and revolving credit products - ------------------------------------------------------------------------------- The following table discloses selected financial information related to BB&T's banking subsidiaries: Table 1 Selected Financial Data of Banking Subsidiaries As of / For the Years Ended December 31, 1998, 1997 and 1996
BB&T-NC BB&T-SC BB&T-VA ----------------------------------- -------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Total assets.... $25,985,004 $22,530,009 $20,652,519 $4,641,393 $4,364,982 $4,213,458 $3,473,368 $3,529,844 $2,209,614 Securities...... 6,531,178 5,392,894 4,962,941 783,727 1,020,554 1,034,385 578,224 887,381 883,771 Loans and leases, net of unearned income*........ 17,414,700 15,402,775 14,149,983 3,266,871 3,052,755 2,901,930 2,341,767 2,287,651 1,180,681 Deposits........ 17,275,566 15,931,795 15,683,080 3,702,383 3,401,236 3,336,711 2,320,244 2,333,873 1,422,785 Shareholder's equity......... 2,124,446 1,771,589 1,601,950 429,572 374,871 399,965 457,600 435,248 194,884 Net interest income......... 871,515 842,745 773,019 201,132 184,341 173,235 121,030 59,122 43,822 Provision for loan and lease losses......... 44,227 53,533 44,675 13,455 14,109 8,405 3,122 3,400 2,584 Noninterest income......... 455,760 436,607 333,119 71,945 70,916 57,729 41,671 16,149 11,811 Noninterest expense........ 776,574 809,599 689,969 119,224 135,018 134,200 98,452 47,349 30,129 Net income...... 361,058 278,536 250,956 89,653 68,024 56,489 36,738 15,388 14,542 Franklin National Bank -------------------------- 1998 1997 1996 -------- -------- -------- Total assets.... $800,786 $647,448 $497,817 Securities...... 175,386 179,388 164,116 Loans and leases, net of unearned income*........ 390,086 300,441 232,581 Deposits........ 536,586 427,798 363,427 Shareholder's equity......... 40,848 39,283 31,893 Net interest income......... 27,257 21,532 18,290 Provision for loan and lease losses......... 1,885 484 27 Noninterest income......... 2,771 2,447 1,770 Noninterest expense........ 21,512 13,915 12,652 Net income...... 4,299 5,968 4,523
- ------- *Includes loans held for sale. - ------------------------------------------------------------------------------- Merger Strategy BB&T's profitability and market share have been enhanced by both internal growth and acquisitions in recent years. The acquisition strategy of BB&T is focused on three primary objectives: . to pursue in-market acquisitions of high-quality banks and thrifts with assets in the $250 million to $10 billion range, . to acquire companies in niche markets that provide products or services that can be offered to BB&T's current customer base, and . to consider strategic acquisitions in new markets that are economically feasible and provide positive long-term benefits. 5 BB&T expects to continue to participate in the consolidation of the financial services industry and expand and enhance its franchise through mergers and acquisitions. Mergers and acquisitions will generally be consummated through the issuance of additional shares of BB&T common stock and/or additional debt. The consideration paid to complete these transactions may entail payments in excess of the book value of the underlying net assets acquired. These actions could have a dilutive effect on earnings per share or book value. In addition, such transactions sometimes result in significant front-end charges against earnings. However, cost savings, especially incident to in-market acquisitions, are also frequently anticipated. Competition The banking industry is highly competitive and continues to experience dynamic change. The banking subsidiaries of BB&T compete actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies and insurance companies. Competition for financial products continues to grow as customers select from a variety of traditional and nontraditional financial institutions. The industry continues to consolidate at a fast pace, which affects competition by eliminating some regional and local institutions. For additional information concerning markets, BB&T's competitive position and business strategies, see "Market Area" and "Lending Activities" below. Market Area BB&T's primary geographic market area consists of North and South Carolina, Virginia, Maryland and Washington, D.C. The area's employment base is diverse and consists of manufacturing, general services, agricultural, wholesale/retail, high tech and financial services. BB&T believes its current market area is economically strong and will support future growth in assets and deposits. Even so, management expects to continue to employ growth strategies designed to enhance BB&T's franchise, including expansion in both neighboring states and current market areas. Management believes that maintaining a community bank approach to customer service as asset size and available services grow strengthens the Corporation's ability to move into new markets and to target consumers and small to mid-sized commercial customers in these markets. Lending Activities The primary goal of BB&T's lending function is to help clients achieve their financial goals and secure their financial futures on terms that are fair to the clients and profitable to the Corporation. BB&T's philosophy of lending is to attempt to meet all legitimate business and consumer credit needs within defined market segments where standards of safety, profitability and liquidity can be met. BB&T focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and other consumer loans. Typically, fixed-rate residential mortgage loans are sold in the secondary mortgage market and adjustable-rate residential mortgages are retained in the portfolio. A portion of mortgage loans have also been securitized during recent years and held in the investment portfolio. Servicing rights on all residential mortgage loans are typically retained by BB&T. BB&T conducts the majority of its lending activities within the context of the Corporation's community banking network structure, with lending decisions made as close to the customer as practicable. 6 Table 2 Composition of Loan and Lease Portfolio*
December 31, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Loans: Commercial, financial and agricultural..... $ 3,443,674 $ 3,196,973 $ 2,855,907 $ 2,506,194 $ 3,029,868 Real estate-- construction and land development.......... 2,223,439 2,165,430 1,567,804 1,194,522 903,589 Real estate-- mortgage............. 13,301,235 12,050,763 10,704,737 10,659,368 9,621,085 Consumer.............. 2,786,572 2,756,554 2,841,540 2,556,373 2,440,768 ----------- ----------- ----------- ----------- ----------- Loans held for investment......... 21,754,920 20,169,720 17,969,988 16,916,457 15,995,310 Loans held for sale............... 1,029,697 509,141 228,333 261,364 141,676 ----------- ----------- ----------- ----------- ----------- Total loans....... 22,784,617 20,678,861 18,198,321 17,177,821 16,136,986 Leases.................. 1,620,326 788,462 576,991 376,152 304,544 ----------- ----------- ----------- ----------- ----------- Total loans and leases........... $24,404,943 $21,467,323 $18,775,312 $17,553,973 $16,441,530 =========== =========== =========== =========== ===========
- -------- * Balances include unearned income. - ------------------------------------------------------------------------------- Mortgage Banking BB&T engages in mortgage loan originations by offering fixed- and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale or securitization of substantially all fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and private mortgage insurance. BB&T also purchases mortgage loans from other originators and subjects them to the same underwriting and risk management criteria as loans originated internally. Commercial Lending BB&T's commercial lending program is generally targeted to serve small to middle-market businesses with annual sales of $250 million or less, although loan policies allow lending to larger customers, including national customers who have reasonable business connections with the Corporation's geographically-served markets. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Commercial loan pricing, while driven largely by competition, is usually tied to market indexes, such as the prime rate, LIBOR or rates on Treasury securities. Construction Lending Real estate construction loans include loans with twelve-month contractual maturities, which are intended to convert to permanent residential mortgage loans upon completion of the construction. BB&T also originates commercial construction loans. Commercial construction loans are usually made to in- market developers, businesses, individuals or real estate investors for the construction of commercial structures in the Corporation's market area. They are made for purposes of constructing industrial facilities, apartments, shopping centers, office buildings, hotels, warehouses and other commercial properties. The properties may be for sale, lease or owner-occupancy. Consumer Lending BB&T offers a wide variety of consumer loan products. Both secured and unsecured loans are marketed to qualifying, existing clients and to other creditworthy candidates in BB&T's market area. Numerous forms of 7 unsecured loans, including revolving lines of credit (e.g. credit cards, DDA overdraft protection and personal lines of credit) are provided, while a variety of secured credit including home equity loans and various installment loan products, such as vehicle loans, are offered. Through the acquisition of Regional Acceptance, BB&T expanded the sales finance function by making loans to customers with a higher credit risk profile than the traditional BB&T customer. These loans are extended through automobile dealers to finance purchases of mid- to late-model used automobiles, and bear interest at rates higher than BB&T's normal grade consumer loans based on the higher level of risk associated with these borrowers. Leasing BB&T provides commercial leasing products and services through BB&T Leasing Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases for vehicles, rolling stock and tangible personal property. Leasing provides lease-related services for small to medium-sized commercial customers. BB&T provides leasing services to municipalities in North and South Carolina directly through its subsidiary banks. - ------------------------------------------------------------------------------- Table 3 Selected Loan Maturities and Interest Sensitivity *
December 31, 1998 ------------------------------------ Commercial, Financial and Real Estate: Agricultural Construction Total ------------ ------------ ---------- (Dollars in thousands) Fixed rate: 1 year or less (2)...................... $ 272,739 $ 342,632 $ 615,371 1-5 years............................... 681,847 168,759 850,606 After 5 years........................... 181,826 -- 181,826 ---------- ---------- ---------- Total................................. 1,136,412 511,391 1,647,803 ---------- ---------- ---------- Variable rate: 1 year or less (2)...................... 1,176,703 1,147,072 2,323,775 1-5 years............................... 1,038,268 564,976 1,603,244 After 5 years........................... 92,291 -- 92,291 ---------- ---------- ---------- Total................................. 2,307,262 1,712,048 4,019,310 ---------- ---------- ---------- Total loans and leases (1).......... $3,443,674 $2,223,439 $5,667,113 ========== ========== ==========
- -------- * Balances include unearned income. Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T's credit policy does not permit automatic renewals of loans. At the scheduled maturity date (including balloon payment date), the customer must request a new loan to replace the matured loan and execute a new note with rate, terms and conditions negotiated at that time. (1) The table excludes:
(Dollars in thousands) ------------ (i)consumer loans to individuals for household, family and other personal expenditures........................................... $ 2,786,572 (ii)real estate mortgage loans.................................. 13,301,235 (iii)loans held for sale......................................... 1,029,697 (iv)leases....................................................... 1,620,326 ------------ $ 18,737,830 ============ (2) Includes loans due on demand.
- ------------------------------------------------------------------------------- 8 Allowance for Loan and Lease Losses The allowance for loan and lease losses is established through a provision for loan and lease losses charged against earnings. The level of the allowance for loan and lease losses is based on management's evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity. This evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans' risk grades, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant consideration in determining an adequate allowance. The allowance is composed of various elements. Management stratifies the loan portfolio into the various loan types based on the purpose of the loans. For commercial loans, specific reserves are determined based on the evaluation of management's "watch list" of commercial loans in excess of $1 million, nonperforming or problem loans. General reserves are assigned based on the risk grade of all other loans. BB&T utilizes ten "risk grades" to evaluate the repayment capacity of commercial borrowers. Each risk grade is allocated an appropriate percentage of the general allowance based on the outstanding balances of each risk grade. For all other loan types, including direct retail, sales finance, revolving credit and mortgage, BB&T provides general reserves based on a percentage of the outstanding loan balances. These percentages are determined based on actual loan losses for the past three years, with a greater weight assigned to more recent loss trends. By weighting recent loss experience more heavily, any variances between estimated and actual loan losses are corrected over time. An additional unallocated portion of the allowance is determined based on management's consideration of economic conditions in BB&T's market areas, trends in loan losses, changes in the composition of BB&T's loan portfolio and other factors. BB&T's objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to reduce overall credit risk by minimizing the adverse impact of any single event or combination of related events. Although management believes that the best information available is used to determine the adequacy of the allowance, the nature of the process by which management determines the appropriate allowance for loan and lease losses requires the exercise of considerable judgment. Unforeseen market conditions could result in adjustments in the allowance that could have a material impact on earnings. Future additions to BB&T's allowance will be the result of periodic loan, property and collateral reviews as well as projected changes in overall economic and real estate markets. 9 The following table sets an allocation of the allowance for loan and leases losses at the end of each of the past five years. The allowance has been allocated on an approximate basis and is not necessarily indicative of future losses. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. - ------------------------------------------------------------------------------- Table 4 Allocation of Allowance for Loan and Lease Losses by Category
December 31, ----------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ----------------- ----------------- ----------------- ----------------- % Loans % Loans % Loans % Loans % Loans in each in each in each in each in each Amount category Amount category Amount category Amount category Amount category -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Balance at end of period applicable to: Commercial, financial and agricultural....... $ 40,331 14% $ 42,109 15% $ 41,652 15% $ 46,553 14% $ 41,799 18% Real estate: Construction and land development........... 31,841 9 24,063 10 17,356 9 19,951 7 17,914 6 Mortgage............... 106,135 59 106,276 58 91,984 58 88,118 62 79,121 59 -------- ---- -------- ---- -------- ---- -------- ---- -------- --- Real estate--total..... 137,976 68 130,339 68 109,340 67 108,069 69 97,035 65 -------- ---- -------- ---- -------- ---- -------- ---- -------- --- Consumer................ 21,227 11 20,052 13 17,356 15 8,313 15 7,464 15 Leases.................. 12,736 7 8,021 4 5,207 3 3,325 2 2,986 2 Unallocated............. 102,117 -- 79,075 -- 70,013 -- 60,673 -- 73,022 -- -------- ---- -------- ---- -------- ---- -------- ---- -------- --- Total.................. $314,387 100% $279,596 100% $243,568 100% $226,933 100% $222,306 100% ======== ==== ======== ==== ======== ==== ======== ==== ======== ===
- ------------------------------------------------------------------------------- The following table sets forth information with respect to BB&T's allowance for loan and lease losses for the most recent five years. Table 5 Analysis of Allowance for Loan and Lease Losses
December 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Balance, beginning of period................. $ 279,596 $ 243,568 $ 226,933 $ 222,306 $ 218,090 Charge-offs: Commercial, financial and agricultural...... (10,708) (16,358) (10,452) (11,378) (12,156) Real estate............ (9,522) (14,068) (11,774) (12,481) (9,700) Consumer............... (61,667) (66,732) (48,017) (29,749) (16,687) Lease receivables...... (1,167) (671) (768) (614) (647) ----------- ----------- ----------- ----------- ----------- Total charge-offs..... (83,064) (97,829) (71,011) (54,222) (39,190) ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial, financial and agricultural...... 7,540 5,795 7,487 6,085 7,692 Real estate............ 3,545 5,038 6,338 3,737 3,643 Consumer............... 9,224 7,269 6,227 5,494 5,131 Lease receivables...... 425 232 136 395 295 ----------- ----------- ----------- ----------- ----------- Total recoveries...... 20,734 18,334 20,188 15,711 16,761 ----------- ----------- ----------- ----------- ----------- Net charge-offs......... (62,330) (79,495) (50,823) (38,511) (22,429) ----------- ----------- ----------- ----------- ----------- Provision charged to expense............... 80,310 98,010 62,273 42,559 25,526 ----------- ----------- ----------- ----------- ----------- Allowance of loans acquired in purchase transactions.......... 16,811 17,513 5,185 579 1,119 ----------- ----------- ----------- ----------- ----------- Balance, end of period.. $ 314,387 $ 279,596 $ 243,568 $ 226,933 $ 222,306 =========== =========== =========== =========== =========== Average loans and leases *...................... $22,266,058 $19,817,354 $17,961,260 $17,106,917 $15,405,158 =========== =========== =========== =========== =========== Net charge-offs as a percentage of average loans and leases....... .28% .40% .28% .23% .15% =========== =========== =========== =========== ===========
- -------- * Loans and leases are net of unearned income and include loans held for sale. 10 Nonperforming Assets and Classified Assets Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessions. It is BB&T's policy to place commercial loans and leases on nonaccrual status when full collection of principal and interest becomes doubtful, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period and any prior year interest is charged off against the allowance for loan and lease losses. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Mortgage loans and other consumer loans are also placed on nonaccrual status when full collection of principal and interest becomes doubtful, or they become delinquent for a specified period of time that varies depending on the type of loan. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer considered doubtful. Investment Activities Bank holding companies and their subsidiary banks are allowed to purchase, sell, deal in and hold certain investment securities as prescribed by bank regulations. These investments include U.S. Treasury securities, obligations of U.S. government agencies, obligations of state and political subdivisions, various types of corporate debt, mutual funds and equity securities (subject to certain limitations) and certain derivative securities. BB&T's investment activities are governed internally by a written, board- approved investment policy. Investment policy is carried out by the Corporation's Asset / Liability Management Committee ("ALCO") which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities, which are discussed in "Market Risk Management", in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Investment strategies are established by the ALCO in consideration of the interest rate cycle, balance sheet mix, actual and anticipated loan demand, actual and projected deposit growth and availability of other funding sources and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner consistent with the attainment of the following goals: (i) to provide sufficient liquidity to cover unanticipated deposit and loan fluctuations, seasonal funds flow variations and overall funds management objectives; (ii) to provide eligible securities to secure public funds and trust deposits as prescribed by law; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii). 11 The following table provides information regarding the composition of BB&T's securities portfolio at the end of each of the past three years. BB&T's trading securities, reflected in the accompanying table, are principally owned by Craigie, a wholly-owned broker-dealer subsidiary acquired in 1997. - ------------------------------------------------------------------------------- Table 6 Composition of Securities Portfolio
December 31, -------------------------------- 1998 1997 1996 ---------- ---------- ---------- (Dollars in thousands) Trading Securities (at estimated fair value)...................................... $ 60,422 $ 67,878 $ -- Securities held to maturity (at amortized cost): U.S. Treasury, government and agency obligations............................... 23,821 46,338 24,241 States and political subdivisions.......... 103,649 150,369 176,275 Mortgage-backed securities................. -- 33,550 178,222 ---------- ---------- ---------- Total securities held to maturity........ 127,470 230,257 378,738 ---------- ---------- ---------- Securities available for sale (at estimated fair value): U.S. Treasury, government and agency obligations............................... 3,583,277 4,425,087 4,077,475 States and political subdivisions.......... 153,939 47,346 23,977 Mortgage-backed securities................. 3,092,425 2,396,854 2,318,699 Other securities........................... 1,141,733 426,841 300,144 ---------- ---------- ---------- Total securities available for sale...... 7,971,374 7,296,128 6,720,295 ---------- ---------- ---------- Total securities....................... $8,159,266 $7,594,263 $7,099,033 ========== ========== ==========
- ------------------------------------------------------------------------------- Sources of Funds Deposits are the primary source of funds for lending and investing activities. The amortization and scheduled payment of loans and maturities of investment securities also provide predictable sources of funds. Federal Home Loan Bank ("FHLB") advances, foreign deposits, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental funding sources. Deposits Customer deposits are attracted principally from within BB&T's market area through the offering of a broad selection of deposit instruments including various types of checking accounts, money market and savings accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required and the time period the funds must remain on deposit. Interest rates paid on specific deposit types are set by the ALCO and are determined based on (i) the interest rates offered by competitors, (ii) anticipated needs for funding and the timing of the cash flow needs offset by the availability of more cost-effective funding sources and (iii) anticipated future economic conditions and interest rates. Customer deposits are attractive sources of liquidity because of their stability, cost and the ability to generate fee income through the cross-sale of other services to the depositors. 12 - ------------------------------------------------------------------------------- Table 7 Scheduled Maturities of Time Deposits Time Deposits $100,000 and Over December 31, 1998 (Dollars in Thousands) ------------------------------------------------------
Maturity Schedule ----------------- Less than three months...................................... $1,306,895 Three through six months.................................... 687,651 Seven through twelve months................................. 481,198 Over twelve months.......................................... 739,157 ---------- Total....................................................... $3,214,901 ==========
Total Time Deposits ------------------------------------------------------
Time Deposits Due to Mature by ------------------------------ 1999....................................................... $ 8,519,629 2000....................................................... 2,272,295 2001....................................................... 274,114 2002....................................................... 204,852 2003....................................................... 113,963 2004 and later............................................. 13,906 ----------- Total.................................................... $11,398,759 ===========
- ------------------------------------------------------------------------------- Short-Term Borrowed Funds BB&T's ability to borrow significant funds through nondeposit sources provides additional flexibility in meeting the liquidity needs of customers. Components of short-term borrowed funds at year end were master notes, securities sold under repurchase agreements, FHLB advances, Federal funds purchased and U.S. Treasury tax and loan depository note accounts. The following table summarizes certain pertinent information regarding BB&T's short-term borrowed funds for the past three years: - ------------------------------------------------------------------------------- Table 8 Short-Term Borrowed Funds
1998 1997 1996 ---------- ---------- ---------- (Dollars in thousands) Maximum outstanding at any month-end during the year.......................... $4,855,377 $3,493,199 $2,737,629 Average outstanding during the year....... 3,741,501 2,907,657 2,345,750 Average interest rate during the year..... 5.20% 5.23% 5.28% Average interest rate at end of year...... 4.89 5.44 4.88
13 Employees At December 31, 1998, BB&T had approximately 10,400 full-time-equivalent employees. Properties BB&T and its significant subsidiaries occupy headquarters facilities that are either owned or operated under long-term leases and also own freestanding operations centers in Wilson, Charlotte and Lumberton, North Carolina. BB&T also owns or leases significant office space in Winston-Salem, North Carolina, which serves as the Corporation's headquarters. At December 31, 1998, BB&T and its subsidiary banks operated 534 banking offices in the Carolinas, Virginia, Maryland and Washington, D.C. Branch office locations are variously owned or leased. Management believes that the premises occupied by BB&T and its subsidiaries are well located and suitably equipped to serve as financial services facilities. See Note F. "Premises and Equipment" of the "Notes to Consolidated Financial Statements" in this report for additional disclosures related to BB&T's properties and other fixed assets. Executive Officers BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr. Allison is 50 and has 28 years of service with the Corporation. Henry G. Williamson, Jr. is the Chief Operating Officer of BB&T Corporation and is responsible for the Corporate Group. Mr. Williamson is 51 and has 27 years of service with the Corporation. Kelly S. King is the President of BB&T Corporation and is responsible for the Branch Banking Network. Mr. King is 50 and has 27 years of service with the Corporation. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 50 and has served the Corporation for 26 years. W. Kendall Chalk is a Senior Executive Vice President of the Corporation responsible for the Lending Group. Mr. Chalk is 53 and has served the Corporation for 24 years. Morris D. Marley is the Senior Executive Vice President for the Funds Management Group. Mr. Marley is 48 and has served the Corporation for 27 years. Scott E. Reed is a Senior Executive Vice President and the Corporation's Chief Financial Officer. Mr. Reed is 50 and has 27 years of service with the Corporation. Sherry A. Kellett is a Senior Executive Vice President and the Corporation's Controller. Ms. Kellett is 54 and has 14 years of service with the Corporation. 14 REGULATORY CONSIDERATIONS General As a bank holding company, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the "BHCA") and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities. As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the "State-Chartered Banks") are subject to regulation, supervision and examination by state bank regulatory authorities in their respective home states. These authorities include the North Carolina Commissioner of Banks, in the case of BB&T-NC, the South Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia State Corporation Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of the State-Chartered Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC"). Franklin National Bank, a subsidiary of BB&T Corporation, is a Federally- chartered bank and, as such, is subject to regulation, supervision and examination by the U.S. Office of the Comptroller of the Currency (the "OCC") (References herein to the "Banks" include Franklin National Bank and the State-Chartered Banks). State and Federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks' operations. The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management polices, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which BB&T and the Banks are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. Payment of Dividends BB&T is a legal entity separate and distinct from its banking and other subsidiaries. The majority of BB&T's revenues are from dividends paid to BB&T by its banking subsidiaries. BB&T's banking subsidiaries are subject to laws and regulations that limit the amount of dividends they can pay. In addition, both BB&T and its banking subsidiaries are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. BB&T does not expect that any of these laws, regulations or policies will materially affect the ability of the Banks to pay dividends. During the year ended December 31, 1998, the Banks declared $389.7 million in dividends payable to BB&T. Capital The Federal Reserve Board, the FDIC and the OCC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements, BB&T and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At 15 least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance ("Tier 2 capital" which, together with Tier 1 capital, composes "total capital"). The ratios of Tier 1 capital and total capital to risk-adjusted assets for BB&T and the subsidiary banks as of December 31, 1998, are show in the following table. In addition, each of the Federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. These requirements provide for a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to Federal Bank regulatory evaluation of an organization's overall safety and soundness. The leverage ratios of BB&T and the subsidiary banks as of December 31, 1998, are reflected in the accompanying table. - ------------------------------------------------------------------------------- Table 9 Capital Ratios for BB&T Corporation and Banking Subsidiaries
Franklin Regulatory BB&T- BB&T- BB&T- National Minimums BB&T NC SC VA Bank ---------- ---- ----- ----- ----- -------- Risk-based capital ratios: Tier 1 capital (1)................ 4.0% 10.0% 10.9% 12.7% 15.3% 8.5% Total risk-based capital (2)...... 8.0 14.8 12.2 13.9 16.5 9.7 Tier 1 leverage ratio (3)........... 3.0 6.8 7.2 9.3 10.0 5.3
- -------- (1) Shareholders' equity less nonqualifying intangible assets; as a percentage of risk-weighted assets, as defined in the risk-based capital guidelines. (2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt as a percentage of risk-weighted assets as defined in the risk-based capital guidelines. (3) Tier 1 capital as a percentage of fourth quarter average assets less nonqualifying intangibles. - ------------------------------------------------------------------------------- The risk-based capital standards of the Federal Reserve Board, the FDIC and the OCC explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank's capital adequacy. Deposit Insurance Assessments The deposits of the Banks are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC. However, a portion of the Banks' deposits (relating to the acquisitions of various savings associations) are subject to assessments imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. Legislation was enacted in 1996 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"). The FDIC is currently assessing, effective for the first quarter of 1999, BIF-insured deposits totaling an additional 1.22 basis points per $100 of deposits, and SAIF-insured deposits of an additional 6.10 basis points per $100 of deposits, to cover those obligations. 16 Other Safety and Soundness Regulations There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the "cross- guarantee" provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the insolvency of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC's claim for reimbursement is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The Federal banking agencies also have broad powers under current Federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law. As of December 31, 1998, BB&T and each of the Banks were classified as well capitalized. State regulatory authorities and the OCC also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of North Carolina) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner also has the authority to take possession of a state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock. Interstate Banking and Branching Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion and analysis of the consolidated financial condition and results of operations of BB&T Corporation and subsidiaries ("BB&T" or the "Corporation") for each of the three years in the period ended December 31, 1998, and related financial information are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T's 1998 performance. 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 is not effectively corrected (see additional discussion following under Year 2000 Project); (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. Stock Split On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the Corporation's common stock effected in the form of a 100% stock dividend paid August 3, 1998. All references to the number of common shares and all per share amounts contained herein have been adjusted, as appropriate, to retroactively reflect the stock split. Reclassifications Certain prior period information has been restated to conform with 1998 presentation. 1998 Mergers and Acquisitions On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life") of Norfolk, Virginia, in a transaction accounted for as a pooling of interests. 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 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 as a purchase 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. On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company Inc., and its affiliated companies, (collectively, "Stanley"), located in Greensboro, North Carolina. Stanley, the largest actuarial 18 administration firm headquartered in the Carolinas, has more than 700 clients located mostly in the Carolinas, Virginia, Maryland and Tennessee. The merger was accounted for as a purchase and, therefore, the accompanying consolidated financial statements include the operating results of Stanley only since the date of the acquisition. In conjunction with the acquisition, BB&T recorded $10.3 million of goodwill, which is being amortized using the straight-line method over 15 years. On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc. ("Franklin") of Washington, D.C. in a transaction accounted for as a pooling of interests. Under the terms of the merger agreement, Franklin shareholders received .70 shares of BB&T stock for each share of Franklin stock held. Approximately 4.9 million shares of BB&T common stock were issued in exchange for all of the Franklin common stock outstanding. On September 30, 1998, BB&T completed its acquisition of Maryland Federal Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a transaction accounted for as a purchase. To effect 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. In conjunction with the acquisition, BB&T recorded $158.8 million of goodwill, which is being amortized using the straight-line method over a period of 15 years. BB&T's Insurance Agency Network expanded through the purchase of three independent insurance agencies during 1998, and a fourth in early 1999. DeJarnette & Paul Inc., based in Richmond, Virginia, was acquired on January 2, 1998. W.C. Brown Insurance Services, Inc., headquartered in Rocky Mount, Virginia, was acquired on March 3, 1998, and McPhail, Bray, Murphy & Allen Inc., a Charlotte, North Carolina, agency was purchased April 30, 1998. The acquisition of Blue Ridge Burke Insurance Agency, Inc., of Mount Airy and Winston-Salem, North Carolina, was consummated January 4, 1999. Also, on October 1, 1998, BB&T acquired a portion of the Charlotte, North Carolina personal lines of business and an agency in Morganton, North Carolina from another Charlotte-based company. Pending Mergers and Acquisitions On August 10, 1998, BB&T announced plans to acquire Scott & Stringfellow Financial Inc. ("Scott & Stringfellow"), an investment banking firm based in Richmond, Virginia. The transaction will be accounted for as a purchase. Scott & Stringfellow shareholders will receive one share of BB&T common stock in exchange for each share of Scott & Stringfellow common stock held. The acquisition is expected to be completed during the first quarter of 1999. On August 26, 1998, BB&T announced plans to merge with MainStreet Financial Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction was completed on March 5, 1999, and was accounted for as a pooling of interests. MainStreet shareholders received 1.18 shares of BB&T common stock in exchange for each share of MainStreet common stock held. On January 27, 1999, BB&T announced plans to merge with First Citizens Corporation ("First Citizens"), based in 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 ("Mason-Dixon") headquartered in Westminster, Maryland. The transaction is expected to be accounted for as a 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"), headquartered in Williamson, West Virginia. The transaction is expected to be accounted for as a purchase. 19 Matewan's shareholders will receive .9333 shares of BB&T common stock for each share of Matewan common stock held subject to adjustment prior to the merger. The merger is expected to be completed in the third quarter of 1999. Analysis of Financial Condition Average assets totaled $32.4 billion for the year ended December 31, 1998, an increase of 12.1% over the 1997 average of $28.9 billion. Average assets in 1997 increased 9.1% compared to the 1996 average of $26.5 billion. The major components of the increase in average assets during 1998 were loans and leases, which increased $2.4 billion, or 12.4%, for the year; securities, which increased $505.3 million, or 6.9% during the year; and non-earning assets, which increased $460.9 million, or 27.3%. The compound rate of growth in average assets was 8.9% for the five years ended December 31, 1998. Over the same five-year period, the compound annual growth rates based on average balances were 10.0% for loans and leases, 6.6% for securities and 4.9% for deposits. All growth rates have been enhanced by acquisitions accounted for as purchases. Among management's primary strategic objectives is the careful management of assets and liabilities to maximize revenues and earnings per share. The various components of assets and liabilities, the fluctuations of these accounts during 1998 and the strategies surrounding the management of the balance sheet are discussed below. Securities The securities portfolios provide earnings and liquidity, as well as providing an effective tool in managing interest rate risk. Management has historically emphasized investments with a maturity of five years or less because of the changing interest rate environment and to provide greater flexibility in balance sheet management. U.S. Treasury securities and U.S. government and agency obligations comprise 44.2% of the portfolio at December 31, 1998, and provide adequate current yields with minimal risk and maturities structured to address liquidity concerns. Mortgage-backed securities, which composed 37.9% of the total investment portfolio at year-end 1998, have higher yields and longer maturities. Total securities increased 7.4% in 1998 to a total of $8.2 billion at the end of the year. Craigie, a registered broker / dealer acquired by BB&T on October 1, 1997, holds trading securities as a normal part of its operations. At December 31, 1998, Craigie had trading securities totaling $59.7 million that are reflected on BB&T's consolidated balance sheet. Market valuation gains and losses in BB&T's trading portfolio are reflected in current earnings. Securities held to maturity made up only 1.6% of the total portfolio at December 31, 1998, and are primarily composed of investments in obligations of states and municipalities. Securities held to maturity are carried at amortized cost and totaled $127.5 million at December 31, 1998 compared to $230.3 million outstanding at the end of 1997. Market valuation gains and losses in the Corporation's held-to-maturity category affect neither earnings nor capital. The held-to-maturity portfolio had a net unrealized gain of $3.4 million at December 31, 1998. Securities available for sale totaled $8.0 billion at year end and are carried at estimated fair value. The available-for-sale portfolio is primarily composed of investments in U.S. Treasuries and government and agency obligations, including mortgage-backed securities. The available-for-sale portfolio also contains investments in obligations of states and municipalities, which composed less than 2% of the portfolio, and equity and other securities, which comprised 14% of the portfolio. The percentage of holdings in state and municipal bonds did not significantly change from the prior year. 20 Table 10 Securities
December 31, 1998 -------------------- Carrying Average Value Yield (3) ---------- --------- (Dollars in thousands) U.S. Treasury, government and agency obligations (1): Within one year......................................... $ 757,580 6.27% One to five years....................................... 2,812,786 6.12 Five to ten years....................................... 417,060 6.45 After ten years......................................... 2,712,097 6.65 ---------- ---- Total................................................. 6,699,523 6.37 ---------- ---- States and political subdivisions: Within one year......................................... 24,101 8.86 One to five years....................................... 119,511 8.57 Five to ten years....................................... 49,190 7.73 After ten years......................................... 64,786 7.52 ---------- ---- Total................................................. 257,588 8.17 ---------- ---- Other securities: Within one year......................................... 30 6.38 One to five years....................................... 33,917 7.44 Five to ten years....................................... 5,188 7.20 After ten years......................................... 206,047 6.59 ---------- ---- Total................................................. 245,182 6.72 ---------- ---- Securities with no stated maturity........................ 956,973 6.45 ---------- ---- Total securities (2).................................. $8,159,266 6.45% ========== ====
- -------- (1) Included in U.S. Treasury, government and agency obligations are mortgage-backed securities totaling $3.1 billion classified as available for sale and disclosed at estimated fair value. These securities are included in each of the categories based upon final stated maturity dates. The original contractual lives of these securities range from five to 30 years; however, a more realistic average maturity would be substantially shorter because of the monthly return of principal on certain securities. (2) Includes securities held to maturity of $127.5 million disclosed at amortized cost and securities available for sale and trading securities disclosed at estimated fair values of $8.0 billion and $60.4 million, respectively. (3) Taxable equivalent basis as applied to amortized cost. - ------------------------------------------------------------------------------- The available-for-sale portfolio composed 97.7% of total securities. Management believes that the high concentration of securities in the available-for-sale portfolio allows greater flexibility in the day-to-day management of the overall portfolio than the held-to-maturity classification. The market value of the available-for-sale portfolio at year-end 1998 was $100.3 million greater than the amortized cost of these securities. At December 31, 1998, BB&T's available-for-sale portfolio had net unrealized appreciation, net of deferred income taxes, of $61.6 million, which is reported as a separate component of shareholders' equity. This compares to net unrealized appreciation of $49.4 million at December 31, 1997. The unrealized gains and losses in the available-for-sale portfolio at the end of 1998 and 1997 were considered by management to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations. 21 The fully taxable equivalent ("FTE") yield on the total securities portfolio was 6.77% for the year ended December 31, 1998, compared to 6.81% for the prior year. The decline in FTE yield principally resulted from substantially lower yields earned from mortgage-backed securities. The yield on U.S. Treasury and U.S. government and agency obligations improved from 6.41% in 1997 to 6.71% in 1998, while the yield on mortgage-backed securities decreased from 7.44% to 6.79% and the FTE yield on state and municipal securities decreased from 8.55% last year to 8.40% in the current year. Loans and Leases Loans and leases, including loans held for sale, totaled $23.7 billion at the end of 1998, an increase of $2.5 billion, or 11.6%, from 1997. Average loans and leases for the year ended December 31, 1998, increased $2.4 billion, or 12.4%, over the prior year. The 1998 growth includes the effects of a mortgage loan securitization program totaling $465.3 million during the year, BB&T's divestiture of $232.3 million in loans in connection with the UCB merger in 1997 and $1.0 billion of loans acquired through purchase accounting transactions in both 1998 and 1997. Excluding the impact of these items, BB&T' "internal" growth rate in average loans for 1998 was 8.9% compared with 1997. By category, excluding the securitizations, the UCB divestiture and the purchase accounting transactions, average mortgage loans increased 14.0% during 1998, average commercial loans grew 7.9%, average revolving credit loans increased 5.9% and average direct retail loans were up 2.4%. While BB&T's overall loan growth has remained strong, the mix of the loan portfolio has changed in 1998 compared to 1997 and the growth rates of the various categories of loans reflect this change in mix. As a result of declines in interest rates, mortgage lending activities have increased dramatically. BB&T originated $5.6 billion in mortgage loans during 1998, an increase of 186% compared to 1997. Total mortgage loans retained in the portfolio, including loans held for sale, increased 25.8% on average in 1998. BB&T's other loan categories experienced growth at a slower pace during the year. Average commercial loans, including leases, increased 10.5% in 1998 compared to 1997, while average consumer loans, which includes sales finance, revolving credit and direct retail, increased 4.7% over the same time frame. A factor contributing to the slower growth in retail lending was customers' repaying credit card loans and home equity lines as they refinanced their mortgages. The change in the overall mix of the loan portfolio, which principally resulted from the rapid growth in mortgages, negatively affected the yields earned on total loans and the overall net interest margin. The FTE yield on loans decreased from 9.17% for the twelve months ended December 31, 1997 to 9.02% for 1998. The average yield on mortgage loans was 7.62%, down 24 basis points from the yield for 1997. Over the same time frame, the yields from commercial loans decreased 1 basis point to 9.10% and consumer loan yields decreased 8 basis points to 10.27%. Asset Quality BB&T's asset quality remains excellent compared to industry norms. Nonperforming assets totaled $113.4 million at year end, a decrease of $22.8 million, or 16.7%, compared to 1997. As a percentage of total assets, nonperforming assets were .33% at December 31, 1998, compared to .44% at the end of 1997. As a percentage of loans plus foreclosed properties, nonperforming assets totaled .48% at December 31, 1998, compared to .64% at the end of 1997. The allowance for loan and lease losses, as a percentage of loans and leases, was 1.33% at December 31, 1998, compared to 1.32% at year- end 1997. Loans 90 days or more past due and still accruing interest increased to $50.0 million at year-end 1998 compared to $44.4 million at December 31, 1997. Net charge-offs as a percentage of average loans and leases also improved during 1998, decreasing to .28% from .40% in 1997. The improvements in credit quality measures during 1998 are partially the result of the negative impact that purchase accounting transactions had on year-end 1997 credit quality data and an aggressive effort during 1997 to charge-off problem loans originated by BB&T's nonstandard auto financing subsidiary, Regional Acceptance Corporation ("Regional Acceptance"). BB&T acquired Virginia First Financial Corporation ("Virginia First") on December 1, 1997, and this acquisition added $17.3 million in nonperforming assets and $4.0 million in loans 22 90 days past due and still accruing interest to BB&T's year-end 1997 totals. Also, the efforts at Regional Acceptance resulted in net charge-offs totaling $18.0 million, or 24.5% of BB&T's consolidated net charge-offs for 1997, compared to $12.9 million, or 20.7%, of the total in 1998. The following table reflects relevant asset quality information for BB&T for the past three years. - ------------------------------------------------------------------------------- Table 11 Asset Quality
December 31, ----------------------------- 1998 1997 1996 -------- -------- ------- (Dollars in thousands) Nonaccrual loans and leases*................... $ 84,968 $ 99,938 $65,648 Restructured loans............................. 522 1,377 2,464 Foreclosed property............................ 27,952 34,923 29,147 -------- -------- ------- Nonperforming assets......................... $113,442 $136,238 $97,259 ======== ======== ======= Loans 90 days or more past due and still accruing.................................... $ 49,971 $ 44,362 $41,870 ======== ======== ======= Asset Quality Ratios: Nonaccrual loans and leases as a percentage of loans and leases......................... .36% .47% .35% Nonperforming assets as a percentage of: Total assets............................... .33 .44 .35 Loans and leases plus foreclosed property.. .48 .64 .52 Net charge-offs as a percentage of average loans and leases............................ .28 .40 .28 Allowance for losses as a percentage of loans and leases.................................. 1.33 1.32 1.31 Ratio of allowance for losses to: Net charge-offs............................ 5.04 x 3.52 x 4.79 x Nonaccrual and restructured loans and leases.................................... 3.68 2.76 3.58
- -------- NOTE: Items referring to loans and leases are net of unearned income, gross of the allowance and include loans held for sale. *Includes $ 23.9 million, $ 32.5 million and $ 28.4 million of impaired loans at December 31, 1998, 1997 and 1996, respectively. See Note D in the "Notes to Consolidated Financial Statements." - ------------------------------------------------------------------------------- Allowance for Loan and Lease Losses The allowance for loan and lease losses is evaluated for adequacy on a quarterly basis. Specific allowances are allocated to identified problem commercial loans of $1 million or more, based on management's assessment of the probable loss exposure applicable to the specific loans. All other commercial loans are segregated into one of ten risk categories according to the relative strength of the borrower and the repayment sources. Allowance allocations are determined by multiplying outstandings in each category by factors assigned to each risk grade. Allowance allocations are derived for consumer loans based on product type, such as mortgage, retail, bankcard, etc. Allocations are determined by applying historical loss ratios to outstanding loans, with adjustments made for current and anticipated business conditions. BB&T's allowance for loan losses totaled $314.4 million at December 31, 1998, compared to $279.6 million at the end of 1997. As a percentage of loans and leases, the allowance rose slightly from 1.32% at December 31, 1997 to 1.33% at the end of 1998. The ratio of the allowance to net charge-offs increased from 3.52 times for 1997 to 5.04 times during 1998 because of lower net charge-offs in the current year. The increase in the 23 allowance resulted primarily because fewer loans were charged-off against the allowance during 1998 compared to the prior year. There were no significant variations in the percentages used to calculate the components of the allowance during 1998 compared to 1997, except an increase from 10% to 15% in the allocation factor applied to commercial loans categorized as substandard. The outstanding balances of all loan types increased over 1997, producing an increased allowance, however management does not believe that the level of risk inherent in the categories of the portfolio changed substantially compared to year-end 1997. There was little change in the calculation factors derived from historical charge-off experience or in the fundamental assumptions or estimation methods used to calculate the allowance during 1998. The improvements in asset quality ratios during 1998, together with lower levels of net charge-offs, reduced the percentage of the allowance allocated to specific loan types and, conversely, increased the portion of the allowance not allocated to specific loan types. Deposits and Other Borrowings Management's primary objective for funding balance sheet activity is to attract adequate, stable and cost-effective sources of funds. Core deposits compose BB&T's primary funding source, despite trends in recent years away from transaction and savings accounts by depositors. As depositors have sought greater returns, growth rates for deposits have typically not kept pace with asset growth and financial institutions, including BB&T, have increasingly used nondeposit sources to fund balance sheet growth. BB&T's total deposits at December 31, 1998, were $23.0 billion, an increase of $1.7 billion, or 7.8%, compared to year-end 1997. The increase in deposits was driven by a 28.4% increase in money rate savings accounts, an 8.4% increase in certificates of deposit and a 9.2% increase in noninterest-bearing deposits. On average, total deposits were $21.5 billion, an increase of $1.1 billion, or 5.6%, compared to 1997. This increase was led by a 9.9% increase in noninterest-bearing deposits and a 19.7% increase in money rate savings accounts. These increases were offset somewhat by a 22.1% decrease in average savings account balances and a 7.6% decrease in interest checking accounts. Other time deposits, including individual retirement accounts and certificates of deposit, increased 1.8% on average and remain BB&T's largest single component of average deposits at 48.0%. Foreign deposits totaled $872.1 million at December 31, 1998, an increase of $113.4 million from the prior year average balance. The average rates paid on interest-bearing deposits decreased during 1998 to 4.34% from 4.42% in 1997. The decrease resulted from lower rates paid on all categories of deposit accounts. The average cost of certificates of deposit and other time deposits decreased from 5.51% to 5.42%; the cost of interest checking decreased from 1.47% to 1.43%; savings deposits decreased from 1.91% to 1.89% and money rate savings accounts decreased from 3.07% to 3.00%. BB&T focused its deposit gathering efforts during 1998 on continuing to restructure the composition of deposits toward more cost-effective noninterest-bearing deposits and money rate savings accounts. Over the years, BB&T has acquired a significant number of thrift institutions, resulting in a higher percentage of deposits comprised of certificates of deposit than many of BB&T's peers. The restructuring is intended to reduce that concentration and, thereby, reduce the overall cost of deposits. As part of this strategy, BB&T has been promoting an "Investor Deposit Account," which is more flexible than traditional money rate savings accounts and less costly to BB&T than certificates of deposit. The success of this promotion is evident from the growth in money rate savings accounts noted above. Management also uses various other short-term borrowed funds to supplement deposits to fulfill funding needs. Among these are Federal funds purchased, which composed 28.7% of total short-term borrowed funds and securities sold under repurchase agreements, which comprised 39.7% of short-term borrowed funds at year-end 1998. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank notes and short-term Federal Home Loan Bank ("FHLB") advances are also utilized to supplement short-term funding needs. In certain circumstances, management also uses foreign deposits and, to a lesser degree, brokered certificates of deposit as sources of funds. Average short-term borrowed funds increased $833.8 million, or 28.7%, during 1998, while 24 short-term borrowed funds at year-end 1998 were $3.4 billion, a decrease of $124.1 million, or 3.6%, compared to year-end 1997. The rates paid on average short-term borrowed funds decreased slightly from 5.23% in 1997 to 5.20% during 1998. This resulted from decreases in the Federal funds rate due to actions by the Federal Reserve Board of Governors. Management also employs long-term debt for additional funding, and management significantly increased reliance on longer-term funding sources during 1998. BB&T's total outstanding long-term debt at December 31, 1998 totaled $4.7 billion, an increase of $1.2 billion, or 34.0%, from year-end 1997. On average, long-term debt increased $1.1 billion, or 39.4%, in 1998 compared to the average for 1997. BB&T's long-term debt consists primarily of FHLB advances, which composed 52.6% of total outstanding long-term debt at December 31, 1998, and medium-term bank notes, which composed 28.9% of the year-end balance. FHLB advances are cost-effective long-term funding sources that provide BB&T the flexibility to structure the debt in a manner that aids in the management of interest rate risk and liquidity. In an effort to diversify long-term funding sources and to take advantage of favorable interest rates, BB&T has issued significant amounts of long-term debt, including $2 billion in senior and subordinated bank note programs. Also, in June 1997, BB&T issued $250 million of subordinated notes due in 2007 and in June 1998, BB&T issued an additional $350 million of subordinated corporate debt that is puttable to BB&T in 2005. The proceeds of these two issuances were used to repurchase shares of BB&T's common stock subsequently issued in connection with mergers and acquisitions and for advances to subsidiaries, as discussed in the "Stock and Dividends" section. An additional $200 million of medium term bank notes were issued during 1997 for general funding purposes. The average rate paid on long-term debt decreased from 5.90% during 1997 to 5.72% during 1998. BB&T continually considers liquidity needs in evaluating funding sources. BB&T's strategy is to maintain funding flexibility, in order for the Corporation to react rapidly to opportunities, which may become available in the marketplace. Management will continue to focus on traditional core funding strategies, including targeting growth in noninterest-bearing deposits and money rate savings accounts. Also, because attractive interest rates are currently available, additional long-term funding may be pursued. Analysis of Results of Operations Consolidated net income for 1998 totaled $501.8 million, which generated basic earnings per share of $1.75 and diluted earnings per share of $1.71. Net income for 1997 was $360.4 million and net income for 1996 totaled $343.3 million. Basic earnings per share were $1.25 in 1997 and $1.19 in 1996, while diluted earnings per share were $1.23 and $1.17, respectively. BB&T incurred significant expenses related principally to the consummation of mergers and acquisitions during 1998 and 1997, which are reflected in reported earnings. During 1998, BB&T recorded $11.0 million in after-tax nonrecurring charges primarily associated with the mergers of Life and Franklin. These charges included costs associated with the consolidation of branch offices and bank operating functions, personnel-related and other expenses. Excluding the effects of these charges, BB&T's net income for 1998 would have been $512.8 million, or $1.75 per diluted share. In 1997, BB&T incurred $68.1 million in net after-tax charges primarily incurred in conjunction with the United Carolina Bancshares Corporation ("UCB") merger. These expenses included personnel-related expenses, such as staff relocation, early retirement packages and contract settlements; occupancy, furniture and equipment expenses including branch consolidation; and other costs, such as operational charge-offs, professional fees, etc. These costs were partially offset by a gain from the divestiture of 23 branch locations, including $505.8 million in deposits and $232.3 million in loans, in order to comply with anti-trust regulations. Excluding the net effects of these items, BB&T's net income for 1997 would have totaled $428.5 million, or $1.47 per diluted share. 25 During 1996, a one-time assessment by the FDIC was charged to all financial institutions with deposits insured by the SAIF. BB&T's assessment was $38.2 million, or $24.4 million after related income tax benefits. Excluding the impact of the assessment, BB&T's net income for 1996 would have been $367.7 million, or $1.25 per diluted share. Excluding the effect of the above nonrecurring items, BB&T's net income for 1998 increased $84.2 million, or 19.7%, compared to 1997, while diluted earnings per share increased $.28, or 19.0%. Net income for 1997, excluding nonrecurring items, increased $60.8 million, or 16.5%, while diluted earnings per share increased $.22, or 17.6%, compared to 1996. Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and return on equity (net income as a percentage of average common shareholders' equity). The returns on average assets produced by BB&T's earnings, excluding the nonrecurring charges discussed above, were 1.58% for 1998, 1.48% for 1997 and 1.39% for 1996. BB&T's returns on average equity, excluding the nonrecurring charges, were 20.16%, 18.58% and 17.07%, for the years ended December 31, 1998, 1997 and 1996, respectively. Net Interest Income Net interest income is BB&T's primary source of revenue. Net interest income is influenced by a number of factors, including the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on earning assets and the interest rates paid to obtain funding to support the assets. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the "FTE" adjustment) and the cost of the supporting funds is measured by the net interest spread. The accompanying table presents the dollar amount of changes in interest income and interest expense and distinguishes between the changes related to average outstanding balances of interest-earning assets and interest-bearing liabilities (volume) and the changes related to average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately. 26 Table 12 FTE Net Interest Income and Rate/Volume Analysis For the Years Ended December 31, 1998, 1997 and 1996
Average Balances Yield/Rate Income/Expense ----------------------------------- ---------------- -------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- (Dollars in thousands) Assets Securities (1): U.S. Treasury, government and other (5)....... $ 7,590,071 $ 7,086,567 $ 6,644,731 6.73% 6.77% 6.55% $ 510,706 $ 479,517 $ 435,493 States and political subdivisions.... 192,245 190,450 204,164 8.40 8.55 8.98 16,147 16,285 18,333 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total securities (5)............. 7,782,316 7,277,017 6,848,895 6.77 6.81 6.63 526,853 495,802 453,826 Other earning assets (2)....... 181,018 93,543 135,808 5.64 5.50 5.37 10,214 5,146 7,291 Loans and leases, net of unearned income (1)(3)(4)(5)..... 22,266,058 19,817,354 17,961,260 9.02 9.17 9.10 2,008,908 1,817,817 1,634,072 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total earning assets.......... 30,229,392 27,187,914 24,945,963 8.42 8.53 8.40 2,545,975 2,318,765 2,095,189 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Non-earning assets.......... 2,149,061 1,688,172 1,523,193 ----------- ----------- ----------- Total assets.... $32,378,453 $28,876,086 $26,469,156 =========== =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking........ $ 1,684,252 $ 2,052,088 $ 2,234,269 1.74 1.78 1.90 29,363 36,611 42,349 Money rate savings......... 5,734,490 4,791,693 4,008,368 3.00 3.07 2.85 172,091 146,877 114,044 Other time deposits........ 11,205,356 10,908,018 10,817,991 5.42 5.51 5.55 607,622 601,066 600,356 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total interest- bearing deposits........ 18,624,098 17,751,799 17,060,628 4.34 4.42 4.44 809,076 784,554 756,749 Short-term borrowed funds... 3,741,501 2,907,657 2,345,750 5.20 5.23 5.28 194,436 152,202 123,896 Long-term debt... 4,025,428 2,886,686 2,027,683 5.72 5.90 5.83 230,266 170,207 118,204 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total interest- bearing liabilities..... 26,391,027 23,546,142 21,434,061 4.67 4.70 4.66 1,233,778 1,106,963 998,849 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Noninterest- bearing deposits........ 2,915,369 2,651,885 2,534,285 Other liabilities..... 528,657 371,456 335,164 Shareholders' equity.......... 2,543,400 2,306,603 2,165,646 ----------- ----------- ----------- Total liabilities and shareholders' equity.......... $32,378,453 $28,876,086 $26,469,156 =========== =========== =========== Average interest rate spread...... 3.75% 3.83% 3.74% ==== ==== ==== Net yield on earning assets... 4.34% 4.46% 4.39% $1,312,197 $1,211,802 $1,096,340 ==== ==== ==== ========== ========== ========== Taxable equivalent adjustment....... $ 64,793 $ 53,277 $ 36,146 ========== ========== ========== 1998 v. 1997 1997 v. 1996 ------------------------------ ---------------------------- Change due to Change due to Increase ------------------- Increase ----------------- (Decrease) Rate Volume (Decrease) Rate Volume ---------- --------- --------- ---------- -------- -------- Assets Securities (1): U.S. Treasury, government and other (5)....... $ 31,189 $ (2,704) $ 33,893 $ 44,024 $14,435 $29,589 States and political subdivisions.... (138) (291) 153 (2,048) (851) (1,197) ---------- --------- --------- ---------- -------- -------- Total securities (5)............. 31,051 (2,995) 34,046 41,976 13,584 28,392 Other earning assets (2)....... 5,068 135 4,933 (2,145) 176 (2,321) Loans and leases, net of unearned income (1)(3)(4)(5)..... 191,091 (30,270) 221,361 183,745 13,591 170,154 ---------- --------- --------- ---------- -------- -------- Total earning assets.......... 227,210 (33,130) 260,340 223,576 27,351 196,225 ---------- --------- --------- ---------- -------- -------- Non-earning assets.......... Total assets.... Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking........ (7,248) (818) (6,430) (5,738) (2,403) (3,335) Money rate savings......... 25,214 (3,134) 28,348 32,833 9,308 23,525 Other time deposits........ 6,556 (9,667) 16,223 710 (4,264) 4,974 ---------- --------- --------- ---------- -------- -------- Total interest- bearing deposits........ 24,522 (13,619) 38,141 27,805 2,641 25,164 Short-term borrowed funds... 42,234 (1,106) 43,340 28,306 562 27,744 Long-term debt... 60,059 (5,221) 65,280 52,003 (238) 52,241 ---------- --------- --------- ---------- -------- -------- Total interest- bearing liabilities..... 126,815 (19,946) 146,761 108,114 2,965 105,149 ---------- --------- --------- ---------- -------- -------- Noninterest- bearing deposits........ Other liabilities..... Shareholders' equity.......... Total liabilities and shareholders' equity.......... Average interest rate spread...... Net yield on earning assets... $100,395 $(13,184) $113,579 $115,462 $24,386 $91,076 ========== ========= ========= ========== ======== ======== Taxable equivalent adjustment.......
- ---- (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. 27 For 1998, net interest income on an FTE adjusted basis totaled $1.3 billion, compared with $1.2 billion in 1997 and $1.1 billion in 1996. The increase in net interest income during 1998 resulted from increased interest income from investment securities, up $31.1 million, and from loans, up $191.1 million. During the same period, higher volumes of funding sources, partially offset by lower interest rates, resulted in an increase of $126.8 million in total interest expense. The FTE-adjusted net interest margin is the primary measure used in evaluating the effectiveness of the management of earning assets and funding liabilities. The FTE adjusted net interest margin was 4.34% in 1998, 4.46% in 1997 and 4.39% in 1996. The 12 basis point decrease in margin during 1998 resulted from three factors. First, BB&T has had a very active common stock repurchase program in recent years. For acquisitions accounted for under the purchase method of accounting, it is BB&T's policy to reacquire the shares of its common stock issued to consummate those transactions, as allowed under generally accepted accounting standards. During 1998, BB&T acquired 10.2 million shares of common stock at a cost of $344.2 million, which reduced the FTE adjusted net interest margin by 6 basis points. Second, BB&T divested $232.3 million in loans and $505.8 million in deposits in conjunction with the 1997 merger with UCB. This transaction reduced BB&T's 1998 net interest margin by 3 basis points compared to 1997. Third, BB&T's thrift acquisitions during late 1997 and 1998 diluted BB&T's net interest margin by 2 basis points in 1998. Excluding the effects of all of these events, BB&T's net interest margin for 1998 would have decreased by only 1 basis point from 1997. Provision for Loan and Lease Losses A provision for loan and lease losses is charged against earnings in order to maintain the allowance for loan and lease losses at a level that reflects management's evaluation of the risk inherent in the portfolios. The amount of the provision is based on continuing assessments of nonperforming and "watch list" loans, analytical reviews of loan loss experience in relation to outstanding loans, and management's judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The provision for loan and lease losses recorded by BB&T in 1998 was $80.3 million, compared with $98.0 million in 1997 and $62.3 million in 1996. The decrease in the current year provision for loan and lease losses resulted from improved asset quality, as discussed in the "Asset Quality" section, and lower net charge-offs during the year. Net charge-offs were .28% of average loans and leases for 1998 compared to .40% during 1997. The allowance for loan and lease losses was 1.33% of loans and leases outstanding and was at 3.68 times total nonaccrual and restructured loans and leases at year-end 1998, compared to 1.32% and 2.76 times during 1997. Noninterest Income Noninterest income includes service charges on deposit accounts, trust revenues, mortgage banking income, insurance commissions, gains and losses on securities transactions and other commissions and fees derived from bank- related activities. Noninterest income for 1998 totaled $528.0 million, compared with $458.0 million in 1997 and $341.3 million in 1996. During 1997, BB&T recorded a gain from the divestiture of branch offices related to the UCB merger totaling $47.5 million, which is included in the noninterest income totals reflected above. Excluding this gain, which was nonrecurring, noninterest income would have increased $117.2 million, or 28.5%, during 1998, which was the result of growth in all major categories of fee-generating activities. The percentage of total revenues (calculated as FTE-adjusted net interest income plus recurring noninterest income excluding securities gains or losses) derived from noninterest (fee-based) income for 1998 was 28.4%, up from 25.2% in 1997 and 23.6% during 1996. Service charges on deposit accounts represent the largest single category of noninterest income. Such revenues totaled $170.8 million in 1998, an increase of $20.5 million, or 13.7%, compared to 1997. Service charges during 1997 totaled $150.3 million, an increase of $16.4 million, or 12.2%, compared to 1996. The primary factor contributing to the significant growth in service charges on deposit accounts during 1998 and 1997 related to pricing changes implemented during the first quarter of both years. Deposit services are typically reviewed for potential repricing annually in an attempt to reflect current costs and competitive factors. 28 Mortgage banking income (which includes servicing fees and gains and losses from the origination and sale of mortgage loans) totaled $78.6 million, an increase of $28.2 million, or 56.1%, compared to 1997. Mortgage banking income totaled $50.4 million in 1997, an increase of $10.2 million, or 25.3%, compared to $40.2 million realized in 1996. The primary components of the 1998 increase were servicing fees on loans sold, which increased $16.5 million, and net gains on sales of mortgage loans, which increased $26.9 million compared to 1997. These increases were partially offset by a $15.1 million increase in the valuation allowance for capitalized mortgage servicing rights recorded during 1998. Agency insurance commissions, which are composed of commissions generated through BB&T's extensive agency network, totaled $52.0 million during 1998, an increase of $11.9 million, or 29.6%, compared to 1997. Agency insurance commissions totaled $40.1 million in 1997, an increase of $12.6 million, or 45.8%, compared to the $27.5 million in 1996. According to a report in the July 20, 1998 issue of Business Insurer Magazine, BB&T's insurance agency network ranked as the 16th largest independent insurance agency in the nation. During 1998, BB&T acquired three insurance agencies. These acquisitions, accounted for as purchases, resulted in a significant portion of the increase in agency insurance commissions during the past year. Expansion into additional products and the continued development of new products during the year also generated higher revenues. The product line of the agency network has been expanded to include group health insurance, title insurance and surety bonds. BB&T intends to continue to expand its insurance agency operations through both acquisitions and internally generated growth. Other insurance commissions, which are principally composed of credit- related products offered through the banking network, totaled $12.4 million in 1998, $13.2 million in 1997 and $12.8 million in 1996. Revenue from corporate and personal trust services totaled $36.9 million in 1998. This was an increase of $4.9 million, or 15.4%, over income of $32.0 million in 1997, which was an increase of $3.2 million, or 11.0%, over 1996. Managed assets totaled $9.6 billion at the end of 1998. BB&T is the manager of the nation's largest government-sponsored 401(k) plan, which has assets in excess of $1.9 billion. BB&T also offers its own family of mutual funds and manages fourteen mutual funds with total assets of approximately $1.8 billion, which provide investment alternatives both for trust clients and for other customers. The broker / dealer subsidiaries are the principal marketing agents of BB&T's proprietary mutual funds. Other nondeposit fees and commissions, including bankcard fees, totaled $110.1 million for 1998, an increase of $23.1 million, or 26.6%, compared to 1997. During 1997, other nondeposit fees and commissions, including bankcard fees, totaled $87.0 million, an increase of $20.4 million, or 30.6%, from the 1996 total of $66.6 million. Major sources of nondeposit fees and commissions generating increases include merchant discounts and other bankcard income, up $6.4 million, or 28.2%, from the 1997 balance; investment brokerage commissions, which increased $5.6 million during 1998 to $25.5 million; and ATM and point of sale fees, which totaled $21.4 million and increased $4.1 million, or 23.6%, during the year. At December 31, 1998, BB&T had 770 ATMs, with 473 located in branches and the remaining 297 at non-branch locations. As part of BB&T's strategy to increase fee income, the number of ATMs at non- branch sites were significantly increased during 1998. BB&T also experienced significant growth in other nondeposit fees and commissions as a result of the 1997 acquisitions of Sheffield Financial, Craigie Incorporated and Phillips Factors, which were accounted for as purchases. These companies were owned by BB&T for all of 1998 and accounted for $3.6 million of the current year increase in revenue. Other noninterest income, excluding securities gains and losses, totaled $59.4 million in 1998, a decrease of $22.4 million compared to the $81.9 million recorded in 1997 because of a $47.5 million premium realized from the divestiture of 23 branch locations and the related loans and deposits, required by bank regulators as a condition for their approval of the UCB merger. Excluding this gain, other noninterest income would have increased $25.1 million, or 72.9%, in 1998, primarily because of the purchase acquisitions of Craigie and Phillips discussed above. During 1998, Craigie and Phillips provided $17.2 million in other noninterest income, compared to $3.9 million in 1997. BB&T also realized higher income from life insurance contracts owned by the bank, which increased $5.8 million, and net revenues from sales of checks to depositors, which increased $2.5 million. Other noninterest income in 1996 totaled $21.5 million. 29 The ability to generate significant amounts of noninterest revenues in the future will be very important to the ultimate success of BB&T. Through its subsidiaries, BB&T will continue to focus on mortgage banking, trust, insurance, investment and brokerage activities, as well as growing other fee- related products and services. BB&T will continue to pursue acquisitions of additional insurance agencies and explore strategic acquisitions of other nonbank entities as a means of continuing to expand fee-based revenues. Also, among BB&T's principal strategic objectives following the acquisition of a financial institution is the cross-sell of noninterest-income generating products and services to the acquired institution's client base. BB&T will continue to focus on this strategy in the future. The following table provides additional information on BB&T's noninterest income: - ------------------------------------------------------------------------------- Table 13 Noninterest Income
Years Ended December 31, % Change -------------------------- ------------------------- 1998 1997 1996 1998 v. 1997 1997 v. 1996 -------- -------- -------- ------------ ------------ (Dollars in thousands) Service charges on deposits................ $170,802 $150,256 $133,905 13.7% 12.2% Mortgage banking income.. 78,627 50,383 40,218 56.1 25.3 Trust income............. 36,866 31,957 28,794 15.4 11.0 Agency insurance commissions............. 52,018 40,148 27,541 29.6 45.8 Other insurance commissions............. 12,387 13,164 12,822 (5.9) 2.7 Securities gains, net.... 7,752 3,213 3,210 141.3 -- Bankcard fees and merchant discounts...... 29,247 22,805 18,511 28.2 23.2 Investment brokerage commissions............. 25,508 19,908 17,069 28.1 16.6 Other service fees and commissions............. 55,348 44,250 27,821 25.1 59.1 International income..... 4,563 3,685 3,206 23.8 14.9 Amortization of negative goodwill................ 6,243 6,180 6,238 1.0 (.9) Other noninterest income.................. 48,641 72,028 21,924 (32.5) 228.5 -------- -------- -------- ----- ----- Total noninterest income................ $528,002 $457,977 $341,259 15.3% 34.2% ======== ======== ======== ===== =====
- ------------------------------------------------------------------------------- Noninterest Expense Noninterest expense totaled $961.4 million during 1998, $968.4 million in 1997 and $827.4 million in 1996. Certain material nonrecurring items associated primarily with completing mergers and acquisitions affected noninterest expenses during 1998 and 1997. BB&T recorded $14.4 million in pretax noninterest expenses during 1998 primarily associated with the mergers of Life and Franklin. These costs were mainly composed of personnel-related expenses and other merger costs, including professional fees and operational charge-offs. In 1997, BB&T recorded $136.0 million of pretax noninterest expenses principally related to the completion of the UCB merger. During 1996, BB&T incurred a special, $38.2 million assessment levied by the FDIC on all financial institutions that had SAIF-insured deposits. Excluding the impact of the nonrecurring items from all three years, noninterest expense would have increased $114.7 million, or 13.8%, in 1998 compared to 1997 and $43.2 million, or 5.5%, in 1997 compared to 1996. The control of noninterest expenses is a management priority. The primary measure of noninterest expense management used by the financial services industry is the efficiency ratio (total noninterest expenses divided by the sum of FTE-adjusted net interest income plus noninterest income). For 1998, BB&T's efficiency ratio, excluding nonrecurring costs and other nonoperating items, was 51.6%, placing BB&T in the top 14% of the 30 largest 50 banks in the country, based on information provided by SNL Securities. The 1998 ratio deteriorated slightly from the efficiency ratio for 1997, which was 51.2%. Both ratios were improved over the 1996 efficiency of 54.8%. Total personnel expense, the largest component of noninterest expense, totaled $485.2 million during 1998, an increase of $18.4 million, or 3.9%, compared to 1997. Personnel expense totaled $466.8 million in 1997 and $404.3 million in 1996. Total personnel expense includes salaries and wages, as well as pension and other employee benefits. Personnel expenses during 1998 reflect $5.9 million of nonrecurring costs associated with mergers. Similar expenses during 1997 totaled $39.1 million. These costs included severance pay, termination of employment contracts, early retirement packages and other related benefits. Excluding these nonrecurring charges, total personnel expense for 1998 would have increased $51.6 million, or 12.1%, compared to 1997. The increase in recurring personnel costs reflects higher costs for incentive-related compensation, purchase accounting transactions and normal annual adjustments. Net occupancy and equipment expense totaled $154.6 million in 1998. This represented a decrease of $8.1 million, or 5.0%, compared to the expense of $162.7 million incurred in 1997. Net occupancy and equipment expense totaled $127.7 million in 1996. The 1998 fluctuations include the impact of $1.1 million of nonrecurring charges relating to branch closings and the consolidation of bank operations and systems associated with mergers. During 1997, BB&T incurred $24.5 million in similar expenses associated principally with the UCB merger. Excluding nonrecurring items, net occupancy and equipment expense for 1998 totaled $153.5 million, an increase of $15.2 million, or 11.0%, compared to $138.2 million in 1997. Depreciation, maintenance and rent expenses associated with data processing equipment purchased in connection with implementing mergers and acquisitions, equipment related to new technology initiatives and computer-related hardware and software expenses associated with Year 2000 compliance efforts were the major components of the 1998 increase. Amortization expense associated with intangibles assets, primarily goodwill, and the amortization of mortgage servicing rights totaled $48.7 million in 1998, an increase of $24.2 million, or 98.9%, compared to 1997, which reflected an increase of $9.1 million, or 59.3%, compared to 1996. The significant current year increase reflects substantially higher levels of goodwill resulting from purchase accounting transactions completed during 1998 and 1997 and a $11.3 million increase in amortization of mortgage servicing rights. During 1998, BB&T acquired DCI, Stanley, Maryland Federal and four insurance agencies, which were accounted for as purchase transactions. These transactions resulted in a $185.1 million increase in goodwill at December 31, 1998, compared to the prior year and accounted for $4.0 million of the increase in amortization expense. All other noninterest expenses totaled $272.8 million, a decrease of $41.6 million from 1997 to 1998, primarily because of $72.2 million in nonrecurring costs associated with the UCB merger recorded in 1997. These expenses included losses on disposals of fixed assets, operational charge-offs, branch and departmental supplies, donations, legal fees, accounting fees, printing costs, regulatory filing fees and other professional services. Excluding the impact of these charges, as well as $7.3 million of charges related to the Life and Franklin mergers recorded in 1998, other noninterest expenses would have increased $23.3 million, or 9.6%. This increase was driven by higher advertising and marketing expenditures, higher professional fees and costs associated with the upgrade of BB&T's systems to make them Year 2000 compliant. All other noninterest expenses for 1997 reflected an increase of $34.5 million, or 12.3%, compared to 1996. 31 The following table presents a breakdown of BB&T's noninterest expenses for the past three years: Table 14 Noninterest Expense
Years Ended December 31, % Change -------------------------- ------------------------- 1998 1997 1996 1998 v. 1997 1997 v. 1996 -------- -------- -------- ------------ ------------ (Dollars in thousands) Salaries and wages....... $397,187 $372,745 $327,222 6.6% 13.9% Pension and other employee benefits....... 88,044 94,062 77,104 (6.4) 22.0 Net occupancy expense on bank premises........... 59,476 79,135 59,379 (24.8) 33.3 Furniture and equipment expense................. 95,122 83,540 68,335 13.9 22.3 Federal deposit insurance premiums................ 4,316 5,138 49,999 (16.0) (89.7) Foreclosed property expense................. 2,037 3,279 2,531 (37.9) 29.6 Amortization of intangibles and mortgage servicing rights........ 48,717 24,496 15,378 98.9 59.3 Software................. 9,945 14,219 11,074 (30.1) 28.4 Telephone................ 20,292 18,483 16,154 9.8 14.4 Donations................ 6,065 6,815 6,079 (11.0) 12.1 Advertising and public relations............... 25,751 26,540 24,345 (3.0) 9.0 Travel and transportation.......... 10,176 8,729 7,404 16.6 17.9 Professional services.... 47,358 46,705 26,567 1.4 75.8 Supplies................. 16,152 15,572 14,630 3.7 6.4 Loan and lease expense... 24,291 41,335 32,248 (41.2) 28.2 Deposit related expense.. 14,721 16,820 14,299 (12.5) 17.6 Other noninterest expenses................ 91,724 110,762 74,614 (17.2) 48.4 -------- -------- -------- ----- ----- Total noninterest expense............... $961,374 $968,375 $827,362 (0.7)% 17.0% ======== ======== ======== ===== =====
- ------------------------------------------------------------------------------- Year 2000 Project The Year 2000 issue is pervasive and presents both technical and business risks affecting most, if not all, of BB&T's business activities. The "Year 2000 Issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and equipment with embedded microchips as the Year 2000 approaches. These problems generally arise because most of the world's computer hardware and software has historically used only two digits to identify the applicable year. Any of BB&T's computer programs that have date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. If not corrected, this could result in system errors or failures causing disruptions of normal business operations. BB&T began planning its Year 2000 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 clean management ("Year 2000 Project"). During the inventory and assessment phases, BB&T identified 32 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 clean management phase includes placing the remediated systems back into production, and the implementation of processes and procedures to monitor continued Year 2000 readiness and to protect remediated systems from alterations that might affect Year 2000 readiness. In order to carry out the Year 2000 project, BB&T divided its internal and external systems into three major categories: core business systems, distributed business systems and non-information technology systems. The core business systems are those systems that run on BB&T's mainframe. The distributed systems are those systems that do not run on the mainframe. The non-information technology systems are those systems that have embedded microchips or microprocessors controlling the function of equipment; such as elevators, fire and security systems, etc. These three categories are further broken down into mission-critical and non-mission-critical systems. BB&T has prioritized its systems for remediation based on their overall importance to the operations of BB&T. Mission-critical systems are those systems 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 is given to mission-critical systems. State of Readiness BB&T's current state of readiness as of March 19, 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 97% 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 91% 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 clean management phase has been implemented. 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 33 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 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 76% 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 approximately 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 the Year 2000 issue 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 34 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 to complete its contingency planning for non-mission-critical systems by March 31, 1999. These plans will be amended as BB&T continues to obtain information relating to its own systems and the systems of its significant suppliers and large clients. BB&T will continually test and revise the contingency plans as the Year 2000 approaches. Costs The projected total incremental cost of the Year 2000 project is currently estimated at approximately $30 million and is being funded through operating cash flows. As of December 31, 1998, a cumulative total of approximately $19.4 million had been spent on the assessment of and efforts in connection with the Year 2000 project, of which $2.8 million represented internal personnel and other costs. Information about BB&T's Year 2000 Project, other than historical information, should be considered forward looking in nature and subject to various risks, uncertainties and assumptions. The costs of the project and the date on which BB&T plans to complete Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the inability to control third party vendor and customer modification plans, the ability of BB&T to implement suitable contingency plans, Congressional legislation, regulatory action and similar uncertainties. Provision for Income Taxes BB&T's provision for income taxes for 1998 increased $42.2 million, or 22.2%, compared to 1997 and totaled $231.9 million. The provision for income taxes totaled $189.7 million in 1997 and $168.5 million in 1996. Excluding the income tax effect related to the nonrecurring items discussed previously, BB&T's tax provision would have been $235.3 million in 1998, $218.3 million in 1997 and $182.3 million in 1996. Excluding the tax effect related to the nonrecurring items, BB&T's effective tax rates for the years ended December 31, 1998, 1997 and 1996 were 31.5%, 33.7% and 33.1%, respectively. Market Risk Management The effective management of market risk is essential to achieving the Corporation's objectives. As a financial institution, BB&T's primary market risk exposure is interest rate risk. A primary objective in interest rate risk management is the avoidance of wide fluctuations in net interest income through balancing the effect of changes in interest rates on interest- sensitive assets and interest-sensitive liabilities. Management uses balance sheet repositioning as an efficient and cost-effective means of managing interest rate risk. This is accomplished through the 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 balance sheet management of interest rate risk. Asset/liability management activities are also designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities and interest rate sensitivities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital. The ALCO also sets policy guidelines and establishes long-term strategies with respect to 35 interest rate exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate and liquidity risk exposures 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 of fluctuations in interest rates is within acceptable standards. BB&T also uses off-balance sheet financial instruments to manage interest rate sensitivity and net interest income. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, financial forward and futures contracts and options written and purchased. 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. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. Credit risk arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with strong credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the derivatives contracts 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 December 31, 1998. Derivatives 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 December 31, 1998, BB&T had interest rate swaps, caps and floors outstanding with notional amounts totaling $3.7 billion. The estimated fair value of open contracts used for risk management purposes at December 31, 1998, reflected pretax net unrealized gains of $38.5 million. BB&T uses these derivatives as synthetic instruments 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 floating rate notes. These hedges contributed net interest income of $878,100 in 1998, compared with net interest income of $1.1 million in 1997 and net interest expense of $154,200 in 1996. BB&T utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. BB&T also utilizes over-the-counter purchased put options and written call options in its mortgage banking activities. Purchased put options are used to hedge the mortgage pipeline against increasing interest rates. Written call options are used to reduce the premiums paid for purchased put options thereby reducing the cost of the hedge. 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. See Note Q, "Derivatives and Off-Balance Sheet Financial Instruments" for the required quantitative disclosures. BB&T's interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions at December 31, 1998, and is not necessarily reflective of positions throughout each year. The carrying amounts of interest-rate-sensitive assets and liabilities and the notional amounts of swaps and other derivative financial instruments are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are included in the table based on estimated rather than contractual maturity dates. 36 Table 15 Interest Rate Sensitivity Gap Analysis December 31, 1998
Expected Repricing or Maturity Date ------------------------------------------------------------- Within One One to Three to After Five Year Three Years Five Years Years Total ----------- ----------- ---------- ---------- ----------- (Dollars in thousands) Assets Securities*........... $ 1,893,946 $ 2,031,867 $2,840,321 $1,292,823 $ 8,058,957 Federal funds sold and securities purchased under resale agreements or similar arrangements......... 103,210 -- -- -- 103,210 Loans and leases**.... 14,387,903 4,635,728 2,667,032 2,004,113 23,694,776 Other interest-earning assets............... 4,792 -- -- -- 4,792 ----------- ----------- ---------- ---------- ----------- Total interest-earning assets................. 16,389,851 6,667,595 5,507,353 3,296,936 31,861,735 ----------- ----------- ---------- ---------- ----------- Liabilities Savings and interest checking***.......... -- 917,501 305,834 305,831 1,529,166 Money rate savings***........... 3,436,017 3,436,016 -- -- 6,872,033 Other time deposits... 7,902,860 2,475,587 250,464 131,172 10,760,083 Foreign deposits...... 638,676 -- -- -- 638,676 Federal funds purchased and securities sold under repurchase agreements or similar arrangements......... 2,307,084 -- -- -- 2,307,084 Long-term debt and other borrowings..... 2,861,458 759,632 445,253 1,732,608 5,798,951 ----------- ----------- ---------- ---------- ----------- Total interest-bearing liabilities............ 17,146,095 7,588,736 1,001,551 2,169,611 $27,905,993 ----------- ----------- ---------- ---------- =========== Asset-liability gap..... (756,244) (921,141) 4,505,802 1,127,325 ----------- ----------- ---------- ---------- Derivatives affecting interest rate sensitivity: Pay fixed interest rate swaps........... 169,946 (7,633) (98,236) (64,077) Receive fixed interest rate swaps........... (740,000) 175,000 305,000 260,000 Caps, floors and collars.............. (747,250) 500,000 247,250 -- ----------- ----------- ---------- ---------- (1,317,304) 667,367 454,014 195,923 ----------- ----------- ---------- ---------- Interest rate sensitivity gap........ $(2,073,548) $(253,774) $4,959,816 $1,323,248 =========== =========== ========== ========== Cumulative interest rate sensitivity gap........ $(2,073,548) $(2,327,322) $2,632,494 $3,955,742 =========== =========== ========== ==========
- -------- * Securities based on amortized cost. ** Loans and leases include loans held for sale and are net of unearned income. *** Projected runoff of deposits that do not have a contractual maturity date was computed based upon decay rate assumptions developed by bank regulators to assist banks in addressing FDICIA rule 305. - ------------------------------------------------------------------------------- Liquidity, Inflation and Changing Interest Rates 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. 37 Management uses Interest Sensitivity Simulation Analysis ("Simulation") to measure the sensitivity of projected 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, scheduled maturities and projected payments, repricing opportunities and anticipated growth. The model projects earnings based on current and projected portfolio balances and rates. This level of detail is needed to correctly simulate the effect that changes in interest rates and portfolio balances will have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better illustration of the sensitivity of earnings to changes in interest rates 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 December 31, 1998. This position can be modified by management within a short time period if necessary. Key assumptions in the preparation of the table include prepayment speeds on mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market condition, loan volumes and pricing; deposit sensitivity; customer preferences; and capital plans. This tabular data does not reflect the impact of a change in the credit quality of BB&T's assets and liabilities. 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, 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. - ------------------------------------------------------------------------------- Table 16 Interest Sensitivity Simulation Analysis
Interest Rate Scenario ------------- Annualized Hypothetical Percentage Linear Prime Rate Change in Net Interest Income ------ ---------- ---------------------------------- 3.00% 10.75% -2.29% 1.50 9.25 -.96 (1.50) 6.25 -.25 (3.00) 4.75 -.18
- ------------------------------------------------------------------------------- Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over six months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to its level of liquid assets, many other factors affect a bank's ability to meet liquidity needs, including access to a variety of funding sources, capital position and general market conditions. Traditional sources of liquidity include proceeds from maturity of securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements, FHLB advances and other short-term borrowed funds, as well as long-term debt instruments, supplement these traditional sources. Management believes liquidity obtainable from these sources is adequate to meet current requirements. 38 Capital Adequacy and Resources The maintenance of appropriate levels of capital is a management priority. BB&T's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to support future growth and compliance with all regulatory standards. Shareholders' equity grew 13.1% in 1998 principally as a result of earnings retained after dividends, share issuances made in connection with merger and acquisition activity and shares issued under employee benefit and stock option plans. These increases were partially offset by the repurchase of 10.2 million shares of common stock at a total cost of $344.2 million that were subsequently reissued in conjunction with business combinations. Bank holding companies and their subsidiaries are subject to various capital requirements mandated and monitored by Federal banking agencies. Risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risk. The risk-weighted values of both balance sheet and off-balance sheet items are determined in accordance with risk factors specified by Federal Bank regulatory authorities. Tier 1 capital (common shareholders' equity excluding unrealized gains or losses on securities available for sale, net of taxes, and nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (the sum of Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk-weighted assets. The Tier 1 capital ratio for BB&T at the end of 1998 was 10.0%, and the total capital ratio was 14.8%. At the end of 1997, those ratios were 10.3% and 13.9%, respectively. In addition to risk-based capital ratios, bank holding companies and their subsidiaries are subject to minimum leverage capital requirements. Management views the Tier 1 leverage ratio, calculated as Tier 1 capital as a percentage of quarterly average tangible assets, as the principal indicator of capital strength. The minimum regulatory required leverage ratio ranges from 3% to 5%, depending upon Federal bank regulatory agency evaluation of an organization's overall safety and soundness. BB&T's regulatory capital and ratios are set forth in the following table. - ------------------------------------------------------------------------------- Table 17 Capital--Components and Ratios
December 31, ---------------------- 1998 1997 ---------- ---------- (Dollars in thousands) Tier 1 capital........................................ $2,302,400 $2,153,212 Tier 2 capital........................................ 1,106,501 756,351 ---------- ---------- Total regulatory capital.............................. $3,408,901 $2,909,563 ========== ========== Risk-based capital ratios: Tier 1 capital...................................... 10.0% 10.3% Total regulatory capital............................ 14.8 13.9 Tier 1 leverage ratio................................. 6.8 7.3
- ------------------------------------------------------------------------------- Common Stock and Dividends BB&T's ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution. BB&T's ability to generate liquid assets for distribution is primarily dependent on the ability of the banking subsidiaries to pay dividends to BB&T. Historically, BB&T's payment of cash dividends has been based on management's goals to retain sufficient 39 capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to shareholders. BB&T's common dividend payout ratio, computed by dividing dividends paid per common share by basic earnings per common share, was 37.7% in 1998. Excluding the impact of the nonrecurring charges discussed in "Analysis of Results of Operations," the dividend payout ratio would have been 37.1%. BB&T's annual cash dividend per common share was increased 13.8% during 1998 to $.66 per common share for the year. This increase marked the 26th consecutive year that BB&T's cash dividend has been increased. A discussion of dividend restrictions is included in Note N.--"Regulatory Requirements and Other Restrictions." BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "BBT". BB&T's common stock was held by 57,087 shareholders of record at December 31, 1998. The accompanying table, "Quarterly Common Stock Summary," sets forth the quarterly high, low and last sales prices for the common stock based on the daily closing price and the dividends paid per share of common stock for each of the last eight quarters. - ------------------------------------------------------------------------------- Table 18 Quarterly Common Stock Summary
1998 1997 ------------------------------ ------------------------------ Sales Prices Sales Prices -------------------- Dividends -------------------- Dividends High Low Last Paid High Low Last Paid ------ ------ ------ --------- ------ ------ ------ --------- Quarter Ended: March 31....... $33.84 $29.03 $33.84 $.155 $20.38 $17.63 $18.63 $.135 June 30........ 34.06 32.03 33.81 .155 23.56 17.88 22.50 .135 September 30... 36.03 28.00 29.94 .175 27.56 22.66 26.72 .155 December 31.... 40.63 27.31 40.31 .175 32.50 25.97 32.03 .155 ----- ----- Year......... 40.63 27.31 40.31 .66 32.50 17.63 32.03 .58 ===== =====
- ------------------------------------------------------------------------------- Fourth Quarter Results Net income for the fourth quarter of 1998 was $136.5 million, compared to earnings of $89.4 million for the comparable period of 1997. On a per share basis, diluted net income was $.46 for the quarter compared to $.31 a year ago. Annualized returns on average assets and average equity were 1.59% and 19.60%, respectively, for the fourth quarter of 1998. The fourth quarter of 1997 included $25.4 million of after-tax nonrecurring charges primarily associated with the completion of mergers and acquisitions. If these items are excluded from 1997 results, net income for the fourth quarter of 1998 would have increased $21.6 million, or 18.8%, compared to the fourth quarter of 1997 and would have increased 17.9% on a diluted per share basis. Net interest income on an FTE basis amounted to $343.4 million for the fourth quarter of 1998, an increase of 11.0% compared to $309.4 million for the same period of 1997. Noninterest income totaled $139.0 million for the fourth quarter of 1998, up 24.9% from $111.3 million earned during the fourth quarter of 1997. BB&T's noninterest expense totaled $249.7 million, up 2.7% from the $243.2 million recorded in the fourth quarter of the prior year. Excluding the merger-related charges from the 1997 results as discussed above, noninterest expense for the fourth quarter of 1998 would have increased 17.1% over this time frame. The fourth quarter 1998 provision for loan and lease losses decreased compared to the prior year because of lower net charge-offs and overall improved levels of asset quality. The provision totaled $16.0 million for the fourth quarter of 1998 compared to $30.0 million for the fourth quarter of 1997. The accompanying table, "Quarterly Financial Summary--Unaudited," presents condensed information relating to eight quarters in the period ended December 31, 1998. 40 Table 19 Quarterly Financial Summary--Unaudited
1998 1997 ----------------------------------------------- ------------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except per share data) Consolidated Summary of Operations: Net interest income FTE................... $ 343,350 $ 330,025 $ 321,270 $ 317,552 $ 309,350 $ 306,332 $ 306,487 $ 289,633 FTE adjustment......... 17,689 16,174 15,692 15,238 15,359 14,290 13,135 10,493 Provision for loan and lease losses.......... 16,000 20,015 21,955 22,340 29,995 21,845 24,920 21,250 Securities gains (losses), net......... 2,040 2,064 1,188 2,460 1,330 1,016 (933) 1,800 Other noninterest income................ 136,992 135,027 129,048 119,183 109,952 149,747 98,275 96,790 Noninterest expense.... 249,652 244,365 234,698 232,659 243,197 314,966 208,423 201,789 Provision for income taxes................. 62,548 59,354 56,478 53,517 42,641 39,759 54,069 53,230 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income............. $ 136,493 $ 127,208 $ 122,683 $ 115,441 $ 89,440 $ 66,235 $ 103,282 $ 101,461 =========== =========== =========== =========== =========== =========== =========== =========== Diluted earnings per share................. $ .46 $ .44 $ .42 $ .39 $ .31 $ .23 $ .35 $ .34 =========== =========== =========== =========== =========== =========== =========== =========== Selected Average Balances: Assets................. $34,150,825 $31,952,749 $32,068,458 $31,315,298 $29,939,928 $29,124,995 $28,773,928 $27,637,455 Securities, at amortized cost........ 8,273,621 7,461,704 7,725,496 7,665,281 7,389,149 7,383,652 7,336,677 6,993,068 Loans and leases *..... 23,279,579 22,271,025 22,105,607 21,387,170 20,561,612 19,989,459 19,727,117 18,971,864 Total earning assets... 31,719,233 29,882,312 30,032,124 29,260,696 28,082,946 27,435,657 27,148,775 26,059,316 Deposits............... 22,537,780 21,317,738 21,336,517 20,950,830 20,453,770 20,400,279 20,647,455 20,109,492 Short-term borrowed funds................. 3,766,831 3,488,026 4,029,351 3,683,668 3,313,540 3,031,576 2,803,201 2,471,697 Long-term debt......... 4,521,380 4,167,594 3,700,977 3,701,186 3,358,158 3,068,112 2,675,310 2,433,006 Total interest-bearing liabilities........... 27,705,249 26,039,884 26,198,417 25,601,297 24,370,675 23,820,621 23,481,806 22,487,763 Shareholders' equity... 2,762,782 2,448,113 2,463,748 2,497,084 2,323,200 2,298,912 2,313,691 2,290,331
- -------- * Loans and leases are net of unearned income and include loans held for sale. - -------------------------------------------------------------------------------- 41 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS (Dollars in thousands, except per share data)
As of / For the Years Ended December 31, ----------------------------------------------------------------------------- Compound 1998 1997 1996 1995 1994 1993 Growth Rate ------------ ----------- ----------- ----------- ----------- ----------- ----------- Summary of Operations Interest income........ $ 2,481,182 $ 2,265,488 $ 2,059,043 $ 1,979,646 $ 1,659,184 $ 1,492,719 10.7% Interest expense....... 1,233,778 1,106,963 998,849 1,005,286 719,158 626,985 14.5 ------------ ----------- ----------- ----------- ----------- ----------- ---- Net interest income.... 1,247,404 1,158,525 1,060,194 974,360 940,026 865,734 7.6 Provision for loan and lease losses.......... 80,310 98,010 62,273 42,559 25,526 61,625 5.4 ------------ ----------- ----------- ----------- ----------- ----------- ---- Net interest income after provision for loan and lease losses................ 1,167,094 1,060,515 997,921 931,801 914,500 804,109 7.7 Noninterest income..... 528,002 457,977 341,259 256,740 270,989 268,470 14.5 Noninterest expense.... 961,374 968,375 827,362 828,174 750,201 810,018 3.5 ------------ ----------- ----------- ----------- ----------- ----------- ---- Income before income taxes................. 733,722 550,117 511,818 360,367 435,288 262,561 22.8 Provision for income taxes................. 231,897 189,699 168,506 120,568 151,066 97,162 19.0 ------------ ----------- ----------- ----------- ----------- ----------- ---- Income before cumulative effect of changes in accounting principles............ 501,825 360,418 343,312 239,799 284,222 165,399 24.9 Less: cumulative effect of changes in accounting principles, net of income taxes........ -- -- -- -- -- (32,629) NM ------------ ----------- ----------- ----------- ----------- ----------- ---- Net income............. $ 501,825 $ 360,418 $ 343,312 $ 239,799 $ 284,222 $ 132,770 30.5 ============ =========== =========== =========== =========== =========== ==== Per Common Share Average shares outstanding (000's): Basic................ 287,428 287,481 287,535 287,925 283,875 272,931 1.0 Diluted.............. 293,571 292,470 293,757 300,156 296,329 286,605 0.5 Basic earnings: Income before cumulative effect... $ 1.75 $ 1.25 $ 1.19 $ 0.82 $ 0.98 $ 0.59 24.3 Less: cumulative effect -- -- -- -- -- (0.12) NM ------------ ----------- ----------- ----------- ----------- ----------- ---- Net income........... $ 1.75 $ 1.25 $ 1.19 $ 0.82 $ 0.98 $ 0.47 30.0 ============ =========== =========== =========== =========== =========== ==== Diluted earnings: Income before cumulative effect... $ 1.71 $ 1.23 $ 1.17 $ 0.80 $ 0.96 $ 0.58 24.3 Less: cumulative effect -- -- -- -- -- (0.11) NM ------------ ----------- ----------- ----------- ----------- ----------- ---- Net income........... $ 1.71 $ 1.23 $ 1.17 $ 0.80 $ 0.96 $ 0.47 29.6 ============ =========== =========== =========== =========== =========== ==== Cash dividends paid.... $ .66 $ .58 $ .50 $ .43 $ .37 $ .32 15.6 Shareholders' equity... 9.51 8.46 7.78 7.38 6.61 5.91 10.0 Average Balance Sheets Securities, at amortized cost........ $ 7,782,316 $ 7,277,017 $ 6,848,895 $ 6,809,077 $ 6,476,343 $ 5,641,778 6.6 Loans and leases *..... 22,266,058 19,817,354 17,961,260 17,106,917 15,405,158 13,842,651 10.0 Other assets........... 2,330,079 1,781,715 1,659,001 1,657,713 1,692,127 1,659,958 7.0 ------------ ----------- ----------- ----------- ----------- ----------- ---- Total assets......... $ 32,378,453 $28,876,086 $26,469,156 $25,573,707 $23,573,628 $21,144,387 8.9 ============ =========== =========== =========== =========== =========== ==== Deposits............... $ 21,539,467 $20,403,684 $19,594,913 $18,524,803 $18,086,694 $16,948,370 4.9 Other liabilities...... 4,270,158 3,279,113 2,680,914 3,670,664 2,782,404 1,766,415 19.3 Long-term debt......... 4,025,428 2,886,686 2,027,683 1,303,992 870,697 733,047 40.6 Common shareholders' equity................ 2,543,400 2,306,603 2,150,487 2,001,903 1,759,690 1,622,412 9.4 Preferred shareholders' equity................ -- -- 15,159 72,345 74,143 74,143 NM ------------ ----------- ----------- ----------- ----------- ----------- ---- Total liabilities and shareholders' equity.............. $ 32,378,453 $28,876,086 $26,469,156 $25,573,707 $23,573,628 $21,144,387 8.9 ============ =========== =========== =========== =========== =========== ==== Period End Balances Total assets........... $ 34,427,227 $31,290,247 $27,625,225 $26,135,308 $24,758,727 $23,274,795 8.1 Deposits............... 23,046,907 21,375,974 20,099,089 19,231,282 18,258,880 18,290,673 4.7 Long-term debt......... 4,736,934 3,534,203 2,320,978 1,542,064 1,095,781 1,010,168 36.2 Shareholders' equity... 2,758,548 2,439,110 2,254,398 2,212,438 1,972,144 1,753,129 9.5 Selected Performance Ratios Rate of return on: Average total assets.............. 1.55% 1.25% 1.30% 0.94% 1.21% 0.63% Average common shareholders' equity.............. 19.73 15.63 15.94 11.72 15.86 7.86 Dividend payout........ 37.71 46.40 42.02 52.44 37.76 68.02 Average equity to average assets........ 7.86 7.99 8.18 8.11 7.78 8.02
- ------- * Loans and leases are net of unearned income and include loans held for sale. NM--Not meaningful. 42 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of BB&T is responsible for the preparation of the financial statements, related financial data and other information in this Annual Report on Form 10-K. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this Annual Report on Form 10-K is consistent with the financial statements. BB&T's accounting system, which records, summarizes and reports financial transactions, is supported by an internal control structure which provides reasonable assurance that assets are safeguarded and that transactions are recorded in accordance with BB&T's policies and established accounting procedures. As an integral part of the internal control structure, BB&T maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure. The Audit Committee of BB&T's Board of Directors, composed solely of outside directors, meets regularly with BB&T's management, internal auditors and independent public accountants to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent public accountants and the internal auditors have access to the Audit Committee with or without management present. The financial statements have been audited by Arthur Andersen LLP, independent public accountants, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which BB&T's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing the internal control structure to determine the timing and scope of audit procedures and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects. John A. Allison Scott E. Reed Sherry A. Kellett Chairman and Chief Financial Officer Controller Chief Executive Officer 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To BB&T Corporation: We have audited the accompanying consolidated balance sheets of BB&T Corporation (a North Carolina corporation), and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BB&T Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP Charlotte, North Carolina, January 29, 1999. 44 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands, except per share data)
1998 1997 ----------- ----------- Assets Cash and due from banks............................. $ 938,797 $ 890,003 Interest-bearing deposits with banks................ 4,792 77,622 Federal funds sold and securities purchased under resale agreements or similar arrangements.......... 103,210 225,245 Trading securities.................................. 60,422 67,878 Securities available for sale....................... 7,971,374 7,296,128 Securities held to maturity (market value: $130,820 at December 31, 1998 and $233,636 at December 31, 1997).............................................. 127,470 230,257 Loans held for sale................................. 1,029,697 509,141 Loans and leases, net of unearned income............ 22,665,079 20,724,729 Allowance for loan and lease losses................ (314,387) (279,596) ----------- ----------- Loans and leases, net............................ 22,350,692 20,445,133 ----------- ----------- Premises and equipment, net......................... 453,092 434,260 Other assets........................................ 1,387,681 1,114,580 ----------- ----------- Total assets..................................... $34,427,227 $31,290,247 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing deposits....................... $ 3,246,949 $ 2,973,151 Savings and interest checking...................... 1,529,166 1,741,215 Money rate savings................................. 6,872,033 5,352,973 Other time deposits................................ 10,760,083 9,923,003 Foreign deposits................................... 638,676 1,385,632 ----------- ----------- Total deposits................................... 23,046,907 21,375,974 Short-term borrowed funds........................... 3,369,101 3,493,199 Long-term debt...................................... 4,736,934 3,534,203 Accounts payable and other liabilities.............. 515,737 447,761 ----------- ----------- Total liabilities................................ 31,668,679 28,851,137 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding at December 31, 1998 and 1997........................ -- -- Common stock, $5 par, 500,000,000 shares authorized, issued and outstanding, 290,210,766 at December 31, 1998 and 144,084,061 at December 31, 1997.............................................. 1,451,054 720,420 Additional paid-in capital......................... 154,034 171,791 Retained earnings.................................. 1,091,875 1,498,493 Loan to employee stock ownership plan and unvested restricted stock.................................. -- (962) Accumulated other nonshareholder changes in equity, net of deferred income taxes of $38,724 at December 31, 1998 and $31,881 at December 31, 1997.............................................. 61,585 49,368 ----------- ----------- Total shareholders' equity....................... 2,758,548 2,439,110 ----------- ----------- Total liabilities and shareholders' equity....... $34,427,227 $31,290,247 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 45 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---------- ---------- ---------- (Dollars in thousands, except per share data) Interest Income Interest and fees on loans and leases....... $1,980,119 $1,791,663 $1,622,516 Interest and dividends on securities........ 490,892 468,741 429,275 Interest on short-term investments.......... 10,171 5,084 7,252 ---------- ---------- ---------- Total interest income...................... 2,481,182 2,265,488 2,059,043 ---------- ---------- ---------- Interest Expense Interest on deposits........................ 809,076 784,554 756,749 Interest on short-term borrowed funds....... 194,436 152,202 123,896 Interest on long-term debt.................. 230,266 170,207 118,204 ---------- ---------- ---------- Total interest expense..................... 1,233,778 1,106,963 998,849 ---------- ---------- ---------- Net Interest Income.......................... 1,247,404 1,158,525 1,060,194 Provision for loan and lease losses......... 80,310 98,010 62,273 ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses............................ 1,167,094 1,060,515 997,921 ---------- ---------- ---------- Noninterest Income Service charges on deposits................. 170,802 150,256 133,905 Mortgage banking income..................... 78,627 50,383 40,218 Trust income................................ 36,866 31,957 28,794 Agency insurance commissions................ 52,018 40,148 27,541 Other insurance commissions................. 12,387 13,164 12,822 Bankcard fees and merchant discounts........ 29,247 22,805 18,511 Other non deposit fees and commissions...... 80,856 64,158 48,096 Securities gains, net....................... 7,752 3,213 3,210 Other income................................ 59,447 81,893 28,162 ---------- ---------- ---------- Total noninterest income................... 528,002 457,977 341,259 ---------- ---------- ---------- Noninterest Expense Personnel expense........................... 485,231 466,807 404,326 Occupancy and equipment expense............. 154,598 162,675 127,714 Federal deposit insurance expense........... 4,316 5,138 49,999 Amortization of intangibles and mortgage servicing rights........................... 48,717 24,496 15,378 Advertising and public relations expense.... 25,751 26,540 24,345 Professional services....................... 47,358 46,705 26,567 Other expense............................... 195,403 236,014 179,033 ---------- ---------- ---------- Total noninterest expense.................. 961,374 968,375 827,362 ---------- ---------- ---------- Earnings Income before income taxes.................. 733,722 550,117 511,818 Provision for income taxes.................. 231,897 189,699 168,506 ---------- ---------- ---------- Net Income.................................. 501,825 360,418 343,312 Preferred dividend requirements............. -- -- 610 ---------- ---------- ---------- Income applicable to common shares......... $ 501,825 $ 360,418 $ 342,702 ========== ========== ========== Per Common Share Net income: Basic..................................... $ 1.75 $ 1.25 $ 1.19 ========== ========== ========== Diluted................................... $ 1.71 $ 1.23 $ 1.17 ========== ========== ========== Cash dividends paid........................ $ .66 $ .58 $ .50 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 46 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Accumulated Other Shares of Additional Retained Nonshareholder Total Common Preferred Common Paid-in Earnings Changes Shareholders' Stock Stock Stock Capital and Other* in Equity Equity ----------- --------- ---------- ---------- ---------- -------------- ------------- (Dollars in thousands) Balance, December 31, 1995.................... 145,075,281 $3,669 $ 725,377 $363,564 $1,083,796 $36,032 $2,212,438 Add (Deduct): Nonshareholder changes in equity:** Net income............. -- -- -- -- 343,312 -- 343,312 Unrealized holding losses arising during the period............ -- -- -- -- -- (19,319) (19,319) Less: reclassification adjustment............ -- -- -- -- -- (3,210) (3,210) ----------- ------ ---------- -------- ---------- ------- ---------- Net unrealized losses on securities.......... -- -- -- -- -- (22,529) (22,529) ----------- ------ ---------- -------- ---------- ------- ---------- Total nonshareholder changes in equity...... -- -- -- -- 343,312 (22,529) 320,783 ----------- ------ ---------- -------- ---------- ------- ---------- Common stock issued.... 2,859,596 -- 14,297 58,155 1,386 -- 73,838 Redemption of common stock.................. (7,391,457) -- (36,957) (185,614) 2 -- (222,569) Preferred stock cancellations and conversions............ 4,334,692 (3,669) 21,674 (18,005) -- -- -- Cash dividends declared: Common Stock........... -- -- -- -- (131,981) -- (131,981) Preferred stock........ -- -- -- -- (610) -- (610) Other.................. -- -- -- 1,526 973 -- 2,499 ----------- ------ ---------- -------- ---------- ------- ---------- Balance, December 31, 1996.................... 144,878,112 -- 724,391 219,626 1,296,878 13,503 2,254,398 Add (Deduct): Nonshareholder changes in equity:** Net income............. -- -- -- -- 360,418 -- 360,418 Unrealized holding gains arising during the period............ -- -- -- -- -- 39,078 39,078 Less: reclassification adjustment............ -- -- -- -- -- (3,213) (3,213) ----------- ------ ---------- -------- ---------- ------- ---------- Net unrealized gains on securities............. -- -- -- -- -- 35,865 35,865 ----------- ------ ---------- -------- ---------- ------- ---------- Total nonshareholder changes in equity...... -- -- -- -- 360,418 35,865 396,283 ----------- ------ ---------- -------- ---------- ------- ---------- Common stock issued.... 6,149,101 -- 30,745 240,598 5,495 -- 276,838 Redemption of common stock.................. (6,943,152) -- (34,716) (286,508) -- -- (321,224) Cash dividends declared on common stock........ -- -- -- -- (168,340) -- (168,340) Other.................. -- -- -- (1,925) 3,080 -- 1,155 ----------- ------ ---------- -------- ---------- ------- ---------- Balance, December 31, 1997.................... 144,084,061 -- 720,420 171,791 1,497,531 49,368 2,439,110 Add (Deduct): Nonshareholder changes in equity:** Net income............. -- -- -- -- 501,825 -- 501,825 Unrealized holding gains arising during the period............ -- -- -- -- -- 19,969 19,969 Less: reclassification adjustment............ -- -- -- -- -- (7,752) (7,752) ----------- ------ ---------- -------- ---------- ------- ---------- Net unrealized gains on securities............. -- -- -- -- -- 12,217 12,217 ----------- ------ ---------- -------- ---------- ------- ---------- Total nonshareholder changes in equity...... -- -- -- -- 501,825 12,217 514,042 ----------- ------ ---------- -------- ---------- ------- ---------- Common stock issued.... 10,525,328 -- 52,627 292,673 -- -- 345,300 Redemption of common stock.................. (6,716,080) -- (33,580) (310,430) -- -- (344,010) 2-for-1 stock split effective August 3, 1998................... 142,317,457 -- 711,587 -- (711,587) -- -- Cash dividends declared on common stock........ -- -- -- -- (196,856) -- (196,856) Other.................. -- -- -- -- 962 -- 962 ----------- ------ ---------- -------- ---------- ------- ---------- Balance, December 31, 1998.................... 290,210,766 $ -- $1,451,054 $154,034 $1,091,875 $61,585 $2,758,548 =========== ====== ========== ======== ========== ======= ==========
- ----- * Other includes unvested restricted stock and a loan to the employee stock ownership plan. ** Comprehensive income as defined by SFAS No. 130. The accompanying notes are an integral part of these consolidated financial statements. 47 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
1998 1997 1996 ----------- ---------- ---------- Cash Flows From Operating Activities: Net income............................... $ 501,825 $ 360,418 $ 343,312 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses.... 80,310 98,010 62,273 Depreciation of premises and equipment............................. 64,092 59,030 46,398 Amortization of intangibles and mortgage servicing rights............. 48,717 24,496 15,378 Accretion of negative goodwill......... (6,243) (6,180) (6,238) Amortization of unearned stock compensation.......................... 962 8,111 2,450 Discount accretion and premium amortization on securities, net....... (1,447) 2,193 6,507 Net decrease (increase) in trading account securities.................... 7,456 (25,688) -- Loss (gain) on sales of securities, net................................... (7,752) (3,213) (3,210) Loss (gain) on sales of loans and mortgage loan servicing rights, net... (31,337) (15,992) (9,061) Loss (gain) on disposals of premises and equipment, net.................... (6,383) 30,660 331 Proceeds from sales of loans held for sale.................................. 4,277,900 1,562,944 1,349,010 Purchases of loans held for sale....... (1,745,442) (734,727) (429,523) Origination of loans held for sale, net of principal collected................ (3,021,677) (996,943) (880,376) Decrease (increase) in: Accrued interest receivable........... (15,194) 2,650 18,875 Other assets.......................... (64,049) (192,136) (110,068) Increase (decrease) in: Accrued interest payable.............. 15,333 5,458 5,661 Accounts payable and other liabilities.......................... 76,664 96,881 (8,920) Other, net............................. 240 1,138 4,122 ----------- ---------- ---------- Net cash provided by operating activities........................... 173,975 277,110 406,921 ----------- ---------- ---------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale...................... 1,254,711 1,565,877 612,841 Proceeds from maturities, calls and paydowns of securities available for sale.................................... 2,034,413 1,550,682 2,732,459 Purchases of securities available for sale.................................... (3,284,839) (3,445,535) (2,601,682) Proceeds from maturities, calls and paydowns of securities held to maturity................................ 30,113 40,922 195,543 Purchases of securities held to maturity................................ (16,115) (33,681) (320,133) Leases made to customers................. (94,615) (74,420) (72,390) Principal collected on leases............ 65,186 57,581 48,222 Loan originations, net of principal collected............................... (1,345,913) (1,215,324) (1,762,800) Purchases of loans....................... (110,090) (205,232) (232,236) Net cash acquired in transactions accounted for under the purchase method.................................. 75,067 95,205 (4,187) Purchases and originations of mortgage servicing rights........................ (74,086) (39,093) (26,356) Proceeds from disposals of premises and equipment............................... 22,815 14,512 8,769 Purchases of premises and equipment...... (105,265) (148,012) (71,128) Proceeds from sales of foreclosed property................................ 28,902 15,917 16,156 Proceeds from sales of other real estate held for development or sale............ 17,415 9,787 9,293 Other, net............................... (277) 5,699 (3,818) ----------- ---------- ---------- Net cash used in investing activities........................... (1,502,578) (1,805,115) (1,471,447) ----------- ---------- ---------- Cash Flows From Financing Activities: Net increase in deposits................. 857,605 381,395 801,018 Net increase (decrease) in short-term borrowed funds.......................... (158,284) 464,883 (81,117) Proceeds from long-term debt............. 2,519,872 5,598,914 1,586,766 Repayments of long-term debt............. (1,533,132) (4,303,648) (919,657) Net proceeds from common stock issued.... 27,522 23,351 51,068 Redemption of common stock............... (344,010) (321,224) (225,569) Cash dividends paid on common and preferred stock......................... (187,041) (155,688) (127,771) ----------- ---------- ---------- Net cash provided by financing activities........................... 1,182,532 1,687,983 1,084,738 ----------- ---------- ---------- Net (Decrease) Increase in Cash and Cash Equivalents.............................. (146,071) 159,978 20,212 Cash and Cash Equivalents at Beginning of Year..................................... 1,192,870 1,032,892 1,012,680 ----------- ---------- ---------- Cash and Cash Equivalents at End of Year.. $ 1,046,799 $1,192,870 $1,032,892 =========== ========== ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest............................... $ 1,218,262 $1,056,508 $ 967,804 Income taxes........................... 130,169 140,681 166,532 Noncash financing and investing activities: Transfer of securities from held to maturity to available for sale........ 88,396 -- 36,646 Transfer of securities from available for sale to held to maturity.......... -- -- 240 Transfer of loans to foreclosed property.............................. 21,845 17,136 25,119 Transfer of fixed assets to other real estate owned.......................... 10,351 13,761 10,466 Restricted stock issued................ -- 74 88 Securitization of mortgage loans....... 465,341 -- 817,268
The accompanying notes are an integral part of these consolidated financial statements. 48 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 BB&T Corporation ("BB&T" or "Parent Company"), formerly Southern National Corporation, is a bank holding company organized under the laws of North Carolina and registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Branch Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T-SC"), Branch Banking and Trust Company of Virginia ("BB&T-VA"), and Franklin National Bank of Washington, D.C. ("Franklin") (collectively, the "Banks"), Regional Acceptance Corporation ("Regional Acceptance") and Craigie Incorporated ("Craigie") comprise BB&T's direct principal subsidiaries. The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The following is a summary of the more significant policies. NOTE A. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of BB&T include the accounts of the Parent Company and its subsidiaries. In consolidation, all significant intercompany accounts and transactions have been eliminated. Prior period financial statements have been restated to include the accounts of companies acquired in material transactions accounted for as poolings of interests (See Note B). Results of operations of companies acquired in transactions accounted for as purchases are included from the dates of acquisition. Certain amounts for prior years have been reclassified to conform to statement presentations for 1998. The reclassifications have no effect on either shareholders' equity or net income as previously reported. Nature of Operations BB&T is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations in North Carolina, South Carolina, Virginia, Maryland and the metropolitan Washington, D.C. area primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. BB&T's subsidiaries provide a full range of traditional commercial banking services and additional services including investment brokerage, investment banking, trust services, agency insurance, credit-related insurance and leasing. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest-bearing bank balances, Federal funds sold and securities purchased under resale agreements or similar arrangements. Generally, both cash and cash equivalents are considered to have maturities of three months or less. Accordingly, the carrying amount of such instruments is considered a reasonable estimate of fair value. Securities BB&T classifies investment securities in one of three categories: held to maturity, available for sale and trading. Debt securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost. Gains or losses realized from the sale of securities held to maturity, if any, are determined by specific identification and are included in noninterest income. 49 Securities, which may be used to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or unforeseen changes in market conditions, including interest rates, market values or inflation rates, are classified as available for sale. Securities available for sale are reported at estimated fair value, with unrealized gains and losses reported as a separate component of shareholders' equity, net of deferred income tax. Gains or losses realized from the sale of securities available for sale are determined by specific identification and are included in noninterest income. Trading account securities are selected according to fundamental and technical analyses that identify potential market movements. Trading account securities are positioned to take advantage of such movements and are reported at fair value. Market adjustments, fees and gains or losses earned on trading account securities are included in noninterest income. Interest income on trading account securities is included in other interest income. Gains or losses realized from the sale of trading securities are determined by specific identification. During 1996 and 1998, BB&T transferred securities with an amortized cost of $36.6 million and $88.4 million, respectively, from the held-to-maturity portfolio to the available-for-sale portfolio. These securities were previously classified as held-to-maturity by entities acquired under the pooling-of-interests method of accounting. BB&T transferred these amounts pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," to conform the combined investment portfolios to BB&T's existing interest rate risk position. Loans Held for Sale Loans held for sale are reported at the lower of cost or market value on an aggregate loan basis. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Any resulting deferred premium or discount is amortized, as an adjustment of servicing income, over the estimated lives of the loans using the level-yield method. Loans and Leases Loans and leases that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances adjusted for any deferred fees or costs and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees, including commitment fees and certain direct costs associated with the lending process, are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate level-yield, with adjustments for prepayments as they occur. If the loan commitment expires unexercised, the income is recognized upon expiration of the commitment. Discounts and premiums are amortized to interest income over the estimated life of the loans using methods that approximate level-yield. Commercial loans and substantially all installment loans accrue interest on the unpaid balance of the loans. Lease receivables consist primarily of direct financing leases on rolling stock, equipment and real property. Lease receivables are stated at the total amount of lease payments receivable plus guaranteed residual values, less unearned income. Recognition of income over the lives of the lease contracts approximates the level-yield method. As of January 1, 1995, BB&T adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. A loan is impaired when, based on current information and events, it is probable that BB&T will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the estimated realizable value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. BB&T had previously measured the allowance for credit losses using methods similar to those prescribed in SFAS No. 114. As a result of adopting these statements, no additional allowance for loan losses was required as of January 1, 1995. 50 BB&T's policy is to disclose all commercial loans greater than $250,000 that are on nonaccrual status as impaired loans. Substantially all other loans made by BB&T are excluded from the scope of SFAS No. 114 as they are large groups of smaller balance homogeneous loans (residential mortgage and consumer installment) that are collectively evaluated for impairment. Allowance for Loan and Lease Losses The provision for loan and lease losses is the estimated amount required to maintain the allowance for loan and lease losses at a level adequate to cover estimated inherent losses related to loans and leases currently outstanding. The primary factors considered in determining the allowance are the distribution of loans by risk class, the amount of the allowance specifically allocated to nonperforming loans and other problem loans, prior years' loan loss experience, economic conditions in BB&T's market areas and the growth of the credit portfolio. Management stratifies the loan portfolio based on the purpose of the loan. For commercial loans, specific reserves are assigned to "watch list" credits of $1 million or more. General reserves on commercial loans are determined based on the risk grades assigned to the credits. For all other loan types, general reserves are established based on a weighted average of actual historical loan loss experience for the loan type and based on the risk grades of the loans. An additional general reserve is established to address broader economic conditions in BB&T's market areas and possible unforeseen losses in the portfolio. While management uses the best information available in establishing the allowance for losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. Nonperforming Assets Nonperforming assets include loans and leases on which interest is not being accrued and foreclosed property. Foreclosed property consists of real estate and other assets acquired through customers' loan defaults. Commercial and unsecured consumer loans and leases are generally placed on nonaccrual status when concern exists that principal or interest is not fully collectible, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. Mortgage loans and most other consumer loans past due 90 days or more may remain on accrual status if management determines that concern over the collectibility of principal and interest is not significant. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance when concern exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of principal or interest. Assets acquired as a result of foreclosure are valued at the lower of cost or fair value, and carried thereafter at the lower of cost or fair value less estimated costs to sell the asset. Cost is the sum of unpaid principal, accrued but unpaid interest and acquisition costs associated with the loan. Any excess of unpaid principal over fair value at the time of foreclosure is charged to the allowance for losses. Generally, such properties are appraised annually and the carrying value, if greater than the fair value, less costs to sell, is adjusted with a charge to income. Routine maintenance costs, declines in market value and net losses on disposal are included in other noninterest expense. 51 Premises and Equipment Premises, equipment, capital leases and leasehold improvements are stated at cost less accumulated depreciation or amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements. Capitalized leases are amortized by the same methods as premises and equipment over the estimated useful lives or the lease term, whichever is lesser. Obligations under capital leases are amortized using the interest method to allocate payments between principal reduction and interest expense. Income Taxes BB&T and its subsidiaries file a consolidated Federal income tax return. Each subsidiary pays its calculated portion of Federal income taxes to BB&T to the extent that tax benefits are realized. Deferred income taxes have been provided where different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes. Deferred tax assets and liabilities are recognized based on future tax consequences of the differences arising from their carrying values and respective tax bases. In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Institutions acquired during the current fiscal year file separate Federal income tax returns for the periods prior to consummation of the acquisitions. Derivatives and Off-Balance Sheet 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. The net interest payable or receivable on interest rate swaps, caps 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. BB&T utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. Fees received are deferred and recognized in noninterest income upon exercise or expiration. Written options are carried at estimated fair value. Unrealized and realized gains and losses on written call options are included with securities gains and losses. BB&T also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. These options are used to hedge the mortgage warehouse and pipeline against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. Net unrealized gains and losses on purchased put options and net purchased put options are carried with loans held for sale at 52 the lower of cost or market on an aggregate basis. Realized gains and losses on purchased put options and net purchased put options are included in mortgage banking income. Per Share Data Effective December 31, 1997, BB&T adopted the provisions of SFAS No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computation previously found in Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share," making them more comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS (which replaces the former fully diluted EPS) for all entities with complex capital structures. The EPS information reported herein reflects the implementation of SFAS No. 128. Prior periods have been restated to include the provisions of the statement. Basic net income per common share has been computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the years presented. Diluted net income per common share has been computed by dividing net income, as adjusted for the interest expense related to convertible debt in prior years, by the weighted average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding. Other potentially dilutive securities include the number of shares issuable upon conversion of preferred stock. Restricted stock grants are considered as issued for purposes of calculating net income per share. Weighted average numbers of shares were as follows:
1998 1997 1996 ----------- ----------- ----------- Basic.................................... 287,427,644 287,480,712 287,535,321 Diluted.................................. 293,571,251 292,470,468 293,756,819
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 stock split in the Corporation's common stock effected in the form of a 100% stock dividend paid August 3, 1998. All per share amounts presented herein and the weighted average shares reflected above have been restated as appropriate to retroactively reflect the stock split. Intangible Assets BB&T's intangible assets consist of the cost in excess of the fair value of net assets acquired in transactions accounted for as purchases (goodwill), premiums paid on acquisitions of deposits (core deposit intangibles) and other identifiable intangible assets. Such assets are included in other assets in the "Consolidated Balance Sheets." Intangible assets are being amortized on straight-line or accelerated bases over periods ranging from 5 to 25 years. At December 31, 1998, BB&T had $382.3 million recorded as goodwill and $7.4 million as core deposit base premiums and other intangibles, net of amortization. Negative goodwill is created when the fair value of the net assets purchased exceeds the purchase price. Such balances are included in other liabilities in the "Consolidated Balance Sheets" and are being amortized over periods ranging from 10 to 15 years. At December 31, 1998, BB&T had negative goodwill totaling $26.7 million, net of amortization. Mortgage Servicing Rights Amounts paid to acquire the right to service certain mortgage loans are capitalized and amortized over the estimated lives of the loans to which they relate. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." This statement was superseded by SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which BB&T adopted on January 1, 1997. SFAS No. 122, as superseded by SFAS No. 125, requires that mortgage banking enterprises recognize, as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. The statement further requires 53 mortgage banking enterprises to assess their capitalized mortgage servicing rights for impairment based on the fair value of those rights. At December 31, 1998, BB&T had capitalized mortgage servicing rights totaling $101.3 million. Changes in Accounting Principles and Effects of New Accounting Pronouncements In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for such transactions based on consistent application of a financial components approach. This approach recognizes the financial and servicing assets an entity controls and the liabilities it has incurred, as well as derecognizes financial assets when control has been surrendered and liabilities when they are extinguished. The statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This statement allows the implementation of certain provisions of SFAS No. 125 to be deferred for one year. BB&T adopted SFAS No. 125, as amended by SFAS No. 127, effective January 1, 1997. The adoption of these statements did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share," as discussed above. The statement was effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior periods presented. Accordingly, BB&T adopted the provisions of the statement effective December 31, 1997, including retroactive restatement of prior periods. The implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In February of 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which establishes standards for disclosing information about an entity's capital structure by continuing and amending existing standards. The statement was effective for financial statements for periods ending after December 15, 1997. Management determined that BB&T was and is in compliance with the disclosure requirements of SFAS No. 129, and, therefore, the implementation of the statement did not affect the capital structure disclosures made by BB&T. In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income (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. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, including interim periods, and requires restatement of all prior periods presented. BB&T adopted the provisions of the statement effective January 1, 1998, including retroactive application to prior periods. The standard does not address issues of recognition or measurement of comprehensive income; therefore, the implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. BB&T adopted the provisions of the statement effective December 31, 1998. The standard does 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. See Note S. in the "Notes to Consolidated Financial Statements" for disclosures related to the implementation of this statement. 54 In March of 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises the disclosure requirements for pensions and other postretirement benefit plans. BB&T adopted the provisions of this statement effective December 31, 1998, including restatement of all prior periods presented. The statement does not address issues of recognition or measurement and, therefore, the implementation of the statement did not have an impact on BB&T's consolidated financial position or consolidated results of operations. See Note L. in the "Notes to Consolidated Financial Statements" for disclosures related to the implementation of this statement. During the first quarter of 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 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. BB&T adopted the provisions of this statement effective January 1, 1999. This implementation of the SOP did not have a material effect on BB&T's consolidated financial position or consolidated results of operations. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The statement is effective for fiscal years beginning after June 15, 1999, and cannot be applied retroactively. Management has not yet quantified the impact of adopting SFAS No. 133 and has not determined the timing of or method of our adoption of the statement. However, the statement could increase volatility in earnings and other comprehensive income. During the second quarter of 1998, the American Institute of Certified Public Accountants issued SOP 98-5, "Accounting for Start-up Costs." SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs requiring start-up costs to be expensed as incurred. BB&T adopted the provisions of the SOP effective January 1, 1999. The adoption of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. During October, 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." BB&T adopted the provisions of the statement effective January 1, 1999. The implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. Supplemental Disclosures of Cash Flow Information As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired assets and assumed liabilities in transactions accounted for under the purchase method of accounting. The fair values of these assets acquired and liabilities assumed, at acquisition, were as follows:
1998 1997 1996 ---------- ---------- --------- (Dollars in thousands) Fair value of net assets acquired....... $ 98,468 $ 129,719 $ 4,994 Purchase price.......................... (277,591) (276,483) (31,056) ---------- ---------- --------- Excess of purchase price over net assets acquired............................... $ (179,123) $ (146,764) $ (26,062) ========== ========== =========
During the first quarter of 1996, BB&T redeemed all outstanding shares of Convertible Preferred Stock. This transaction, a noncash financing activity, resulted in the conversion of 733,869 shares of preferred stock into 4,334,692 shares of common stock. Income and Expense Recognition Items of income and expense are recognized using the accrual basis of accounting, except for some immaterial amounts. 55 NOTE B. Acquisitions and Mergers Completed Mergers and Acquisitions Purchase Transactions On June 30, 1996, BB&T completed the purchase of certain fixed assets and expiration rights to outstanding insurance policies from the James R. Lingle Agency of Florence, South Carolina. In conjunction with the purchase, BB&T recorded expiration rights totaling $1.7 million, which are being amortized using the straight-line method over 15 years. On August 28, 1996, BB&T became a majority shareholder of AutoBase Information Systems, Inc., ("AutoBase") through the purchase of 51% of AutoBase's outstanding common stock. In conjunction with this investment, BB&T recorded $1.2 million in goodwill, which is being amortized using the straight-line method over 15 years. During November 1996, BB&T completed the acquisitions of three insurance agencies in South Carolina. On November 7, 1996, BB&T completed the acquisition of the William Goldsmith Agency Inc. of Greenville, South Carolina through the issuance of 70,207 shares of common stock (140,414 shares on a post-split basis). On November 13, 1996, BB&T completed the acquisition of the C. Dan Joyner Insurance Agency based in Greenville, South Carolina through the issuance of 48,120 shares of common stock (96,240 shares on a post-split basis). Boyle-Vaughan Associates, Inc. based in Columbia, South Carolina, was acquired on November 22, 1996 through the issuance of 492,063 shares of common stock (984,126 shares on a post-split basis). In conjunction with the purchase of these agencies, BB&T recorded $17.9 million in goodwill, which is being amortized using the straight-line method over 15 years. On January 31, 1996, BB&T acquired Seaboard Bancorp, Inc. ("Seaboard Bancorp") of Virginia Beach, Virginia, in a transaction accounted for as a purchase. The acquisition was accomplished through the payment of $8.8 million in cash. In conjunction with the purchase, BB&T recorded $5.2 million in goodwill, which is being amortized using the straight-line method over 15 years. On March 1, 1997, BB&T completed its acquisition of Fidelity Financial Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction accounted for as a purchase. BB&T issued 1.6 million shares (3.2 million shares on a post-split basis) for all of the shares of Fidelity's common stock outstanding. In conjunction with the acquisition, BB&T recorded $37.9 million in goodwill, which is being amortized using the straight-line method over 15 years. On May 20, 1997, BB&T purchased Phillips Factors Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips purchases and manages receivables in the temporary staffing industry nationwide. It also provides payroll processing services to that industry. Phillips also buys and manages account receivables primarily in the furniture, textiles and home furnishings- related industries. In conjunction with the acquisition, BB&T recorded $11.1 million of goodwill, which is being amortized using the straight-line method over 15 years. On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp. (collectively, "Refloat"), a financial company that specializes in loans to small commercial lawn care businesses across the country. The acquisition, which was completed through the issuance of 375,000 shares of common stock (750,000 shares on a post-split basis), was accounted for as a purchase. BB&T recorded $3.0 million of goodwill, which is being amortized using the straight-line method over 15 years in conjunction with this transaction. On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated ("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Craigie also has a public finance department that provides investment banking services, financial advisory services and municipal 56 bond financing to a variety of regional tax-exempt issuers. The acquisition, which was accounted for as a purchase, was accomplished through the issuance of approximately 463,000 shares of BB&T's common stock (926,000 shares on a post-split basis). In conjunction with the acquisition, BB&T recorded $6.8 million of goodwill, which is being amortized using the straight-line method over a period of 25 years. On December 1, 1997, BB&T completed its acquisition of Virginia First Financial Corporation of Petersburg, Virginia ("Virginia First"), a financial institution with $822.9 million in assets at the time of purchase. The merger, which was accounted for under the purchase method of accounting, was consummated through the issuance of 1.9 million shares of BB&T's common stock (3.8 million shares on a post-split basis) and the payment of $44.8 million. In conjunction with the acquisition, BB&T recorded $89.5 million in goodwill, which is being amortized using the straight-line method over a period of 15 years. 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. 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. On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company Inc., and its subsidiaries, (collectively, "Stanley"), located in Greensboro, North Carolina. Stanley, the largest actuarial, consulting and administration firm headquartered in the Carolinas, primarily manages retirement plans for companies and has more than 700 clients located mostly in the Carolinas, Virginia, Maryland and Tennessee. In conjunction with the acquisition, BB&T recorded $10.3 million of goodwill, which is being amortized using the straight-line method over 15 years. On September 30, 1998, BB&T completed its acquisition of Maryland Federal Bancorp, Inc. ("Maryland Federal") located in Hyattsville, Maryland. 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. The above-discussed acquisitions were accounted for under the purchase method of accounting, and, therefore, the financial information contained herein includes data relevant to the acquirees since the date of acquisition. The following unaudited presentation reflects key line items on a Pro Forma basis as if these purchase transactions had been acquired as of the beginning of the years presented:
For the Years Ended --------------------- 1998 1997 ---------- ---------- (Dollars in thousands, except per share data) Total revenues......................................... $1,805,585 $1,715,784 ========== ========== Net income............................................. $ 498,175 $ 352,083 ========== ========== Basic EPS.............................................. $ 1.73 $ 1.22 ========== ========== Diluted EPS............................................ $ 1.70 $ 1.20 ========== ==========
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. Pooling of Interests Transactions Effective January 25, 1996, BB&T consummated a merger with Seaboard Savings Bank, Inc. ("Seaboard"), headquartered in Plymouth, North Carolina. BB&T issued 475,158 shares of common stock (950,316 shares on 57 a post-split basis) for all of the outstanding shares of Seaboard common stock. The transaction was accounted for as a pooling of interests. Effective March 29, 1996, BB&T consummated a merger with Triad Bank ("Triad") headquartered in Greensboro, North Carolina. BB&T issued 1.8 million shares of common stock (3.6 million shares on a post-split basis) for all of the outstanding shares of Triad common stock. The transaction was accounted for as a pooling of interests. On August 30, 1996, BB&T issued 42,135 shares of common stock (84,270 shares on a post-split basis) to complete the acquisition of Tomlinson Insurers, Inc., a general insurance agency in Fayetteville, North Carolina. The transaction was accounted for under the pooling-of-interests method of accounting. On September 1, 1996, BB&T completed a merger with Regional Acceptance Corporation of Greenville, N.C. ("Regional Acceptance") in a transaction accounted for as a pooling of interests. BB&T issued 5.85 million shares (11.7 million shares on a post-split basis) in exchange for all of the outstanding stock of Regional Acceptance. On July 1, 1997, BB&T completed its merger with United Carolina Bancshares Corporation ("UCB") of Whiteville, North Carolina, in a stock transaction accounted for as a pooling of interests. BB&T issued 27.7 million shares of common stock (55.4 million shares on a post-split basis) in exchange for all of the shares of UCB common stock outstanding. On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life") of Norfolk, Virginia. The transaction was accounted for as a pooling of interests. In conjunction with the merger, BB&T issued 5.8 million shares of common stock (11.6 million shares on a post-split basis) in exchange for all of the shares of Life common stock outstanding. On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction accounted for under the pooling-of-interests method of accounting. In conjunction with the merger, BB&T issued 2.5 million shares of common stock (4.9 million shares on a post- split basis) in exchange for all of the shares of Franklin common stock outstanding. Pending Acquisitions On August 10, 1998, BB&T announced plans to merge with Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in Richmond, Virginia. The transaction will be accounted for as a purchase. Scott & Stringfellow shareholders will receive one share of BB&T common stock in exchange for each share of Scott & Stringfellow common stock held. The merger is expected to be completed in the first quarter of 1999. On August 26, 1998, BB&T announced plans to merge with MainStreet Financial Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction will be accounted for as a pooling of interests. MainStreet shareholders will receive 1.18 shares of BB&T common stock in exchange for each share of MainStreet stock held. The merger was completed effective March 5, 1999. 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 ("Mason-Dixon") of Westminster, Maryland. The transaction is expected to be accounted for as a 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 purchase Matewan BancShares Inc. ("Matewan"), of Williamson, West Virginia. The transaction is expected to be accounted for as a purchase. Matewan's shareholders will receive .9333 shares of BB&T stock (based on the February 23, 1999, BB&T closing price) in exchange for each share of Matewan common stock held. The merger is expected to be completed in the third quarter of 1999. 58 NOTE C. Securities The amortized costs and approximate fair values of securities held to maturity and available for sale were as follows:
December 31, 1998 December 31, 1997 -------------------------------------- ------------------------------------ Gross Gross Unrealized Unrealized ---------------- -------------- Estimated Estimated Amortized Fair Amortized Fair Cost Gains Losses Value Cost Gains Losses Value ---------- -------- ------- ---------- ---------- ------- ------ ---------- (Dollars in thousands) Securities held to maturity: U.S. Treasury, government and agency obligations........... $ 23,821 $ 8 $ 2 $ 23,827 $ 46,338 $ 326 $ 84 $ 46,580 Mortgage-backed securities............ -- -- -- -- 33,550 71 982 32,639 States and political subdivisions.......... 103,649 3,348 4 106,993 150,369 4,120 72 154,417 ---------- -------- ------- ---------- ---------- ------- ------ ---------- Total securities held to maturity........... 127,470 3,356 6 130,820 230,257 4,517 1,138 233,636 ---------- -------- ------- ---------- ---------- ------- ------ ---------- Securities available for sale: U.S. Treasury, government and agency obligations........... 3,530,506 55,212 2,441 3,583,277 4,397,252 33,408 5,573 4,425,087 Mortgage-backed securities............ 3,067,154 33,623 8,352 3,092,425 2,356,469 43,515 3,130 2,396,854 Equity and other securities............ 1,122,362 20,045 674 1,141,733 414,260 12,583 2 426,841 States and political subdivisions.......... 151,043 2,896 -- 153,939 46,898 479 31 47,346 ---------- -------- ------- ---------- ---------- ------- ------ ---------- Total securities available for sale.... 7,871,065 111,776 11,467 7,971,374 7,214,879 89,985 8,736 7,296,128 ---------- -------- ------- ---------- ---------- ------- ------ ---------- Total securities....... $7,998,535 $115,132 $11,473 $8,102,194 $7,445,136 $94,502 $9,874 $7,529,764 ========== ======== ======= ========== ========== ======= ====== ==========
Securities with a book value of approximately $4.4 billion and $3.8 billion at December 31, 1998 and 1997, respectively, were pledged to secure municipal deposits, securities sold under agreements to repurchase, Federal Reserve discount window borrowings and for other purposes as required by law. At December 31, 1998 and 1997, there was no concentration of investments in obligations of states and political subdivisions that were secured by or payable from the same taxing authority or revenue source and that exceeded ten percent of shareholders' equity. Trading securities totaling $60.4 million are excluded from the accompanying tables. Proceeds from sales of securities during 1998, 1997 and 1996 were $1.3 billion, $1.6 billion and $612.8 million, respectively. Gross gains of $7.9 million, $6.8 million and $5.5 million and gross losses of $167,000, $3.6 million and $2.3 million were realized on those sales in 1998, 1997 and 1996, respectively. The amortized cost and estimated fair value of the securities portfolio at December 31, 1998, by contractual maturity, are shown in the accompanying table. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted average contractual maturities of underlying collateral.
December 31, 1998 ----------------------------------------- Held to Maturity Available for Sale ------------------- --------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- ---------- ---------- (Dollars in thousands) Debt Securities: Due in one year or less........ $ 46,310 $ 46,472 $ 730,593 $ 735,401 Due after one year through five years......................... 69,954 72,507 2,848,573 2,896,260 Due after five years through ten years..................... 9,012 9,410 456,232 462,426 Due after ten years............ 2,194 2,431 2,939,116 2,980,736 -------- -------- ---------- ---------- Total debt securities........ $127,470 $130,820 $6,974,514 $7,074,823 ======== ======== ========== ==========
59 NOTE D. Loans and Leases Loans and leases were composed of the following:
December 31, ------------------------- 1998 1997 ------------ ------------ (Dollars in thousands) Loans: Commercial, financial and agricultural......... $ 3,443,674 $ 3,196,973 Real estate--construction and land development................................... 2,223,439 2,165,430 Real estate--mortgage.......................... 13,301,235 12,050,763 Consumer....................................... 2,786,572 2,756,554 ------------ ------------ Loans held for investment.................... 21,754,920 20,169,720 ------------ ------------ Leases........................................... 1,620,326 788,462 ------------ ------------ Total loans and leases..................... 23,375,246 20,958,182 Less: unearned income.................... 710,167 233,453 ------------ ------------ Loans and leases, net of unearned income... $ 22,665,079 $ 20,724,729 ============ ============
The net investment in direct financing leases was $981.9 million and $616.3 million at December 31, 1998 and 1997, respectively. BB&T had loans held for sale at December 31, 1998 and 1997 totaling $1.0 billion and $509.1 million, respectively. BB&T's only significant concentration of credit at December 31, 1998 occurred in loans secured by real estate, which totaled $16.6 billion. However, this amount was not concentrated in any specific market or geographic area other than the Banks' primary markets. The following table sets forth certain information regarding BB&T's impaired loans as defined under SFAS No. 114.
December 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands) Total recorded investment--impaired loans.......... $ 23,897 $ 32,470 ----------- ----------- Total recorded investment with related valuation allowance......................................... 23,897 32,470 Valuation allowance assigned to impaired loans..... 4,040 3,493 ----------- ----------- Net carrying value--impaired loans............... $ 19,857 $ 28,977 =========== =========== Average balance of impaired loans.................. $ 28,521 $ 24,012 =========== =========== Cash basis interest income recognized on impaired loans............................................. $ -- $ 211 =========== ===========
The following table provides an analysis of loans made to directors, executive officers and their interests, which in the aggregate exceeded $60,000 at any time during 1998. All amounts shown represent loans made by BB&T's subsidiary banks in the ordinary course of business at the Banks' normal credit terms, including interest rate and collateralization prevailing at the time for comparable transactions with other persons.
(Dollars in thousands) Balance, December 31, 1997............................... $ 188,929 Additions.............................................. 41,270 Reductions............................................. (82,567) --------- Balance, December 31, 1998............................... $ 147,632 =========
60 NOTE E. Allowance for Loan and Lease Losses An analysis of the allowance for loan and lease losses is presented in the following table:
For the Years Ended December 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (Dollars in thousands) Beginning Balance.............................. $ 279,596 $ 243,568 $ 226,933 Provision for losses charged to expense...... 80,310 98,010 62,273 Allowances of purchased companies............ 16,811 17,513 5,185 --------- --------- --------- 376,717 359,091 294,391 --------- --------- --------- Total charge-offs............................ (83,064) (97,829) (71,011) Recoveries................................... 20,734 18,334 20,188 --------- --------- --------- Net charge-offs............................ (62,330) (79,495) (50,823) --------- --------- --------- Ending Balance................................. $ 314,387 $ 279,596 $ 243,568 ========= ========= =========
At December 31, 1998, 1997 and 1996, loans not currently accruing interest totaled $85.0 million, $99.9 million and $65.6 million, respectively. Loans 90 days or more past due and still accruing interest totaled $50.0 million, $44.4 million and $41.9 million, at December 31, 1998, 1997 and 1996, respectively. The gross interest income that would have been earned during 1998 if the outstanding nonaccrual loans and leases had been current in accordance with the original terms and had been outstanding throughout the period (or since origination, if held for part of the period) was approximately $6.6 million. Foreclosed property was $28.0 million, $34.9 million and $29.1 million at December 31, 1998, 1997 and 1996, respectively. NOTE F. Premises and Equipment
December 31, ----------------- 1998 1997 -------- -------- (Dollars in thousands) Land and land improvements............................... $ 78,635 $ 74,617 Buildings and building improvements...................... 318,601 313,800 Furniture and equipment.................................. 382,111 344,983 Capitalized leases on premises and equipment............. 3,946 3,647 -------- -------- Subtotal............................................... 783,293 737,047 Less--accumulated depreciation and amortization.......... 330,201 302,787 -------- -------- Net premises and equipment............................. $453,092 $434,260 ======== ========
Depreciation expense, which is included in occupancy and equipment expense, was $64.1 million, $59.0 million and $46.4 million in 1998, 1997 and 1996, respectively. 61 BB&T has noncancellable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $29.1 million, $46.5 million and $29.9 million for 1998, 1997 and 1996, respectively. Future minimum lease payments for operating and capitalized leases for years subsequent to 1998 are as follows:
Leases --------------------- Operating Capitalized --------- ----------- (Dollars in thousands) Years ended December 31: 1999............................................... $ 26,001 $ 450 2000............................................... 24,901 450 2001............................................... 23,520 450 2002............................................... 20,583 450 2003............................................... 17,732 427 2004 and years later............................... 87,623 4,116 -------- ------ Total minimum lease payments......................... $200,360 6,343 ======== Less--amount representing interest................... 3,033 ------ Present value of net minimum payments on capitalized leases (Note I)..................................... $3,310 ======
NOTE G. Loan Servicing The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization and adjustments necessary to present the balances at the lower of cost or estimated fair value, which are included in the "Consolidated Balance Sheets:"
Capitalized Mortgage Servicing Rights ----------------- 1998 1997 -------- ------- (Dollars in thousands) Balance, January 1,....................................... $ 68,780 $41,891 Amount capitalized...................................... 74,086 39,093 Amortization expense.................................... (25,359) (9,561) Change in valuation allowance........................... (16,230) (2,643) -------- ------- Balance, December 31,..................................... $101,277 $68,780 ======== =======
Capitalized mortgage servicing rights are being amortized on a disaggregated loan basis using an accelerated method over the estimated life of the servicing income. The servicing rights portfolio is analyzed each quarter to identify possible impairment using a disaggregated discounted cash flow methodology that is stratified by predominant risk characteristics. These characteristics include stratification based on interest rates in intervals of 150 basis points, type of loan and maturity of loan. Following is an analysis of the aggregate changes in the valuation allowances for mortgage servicing rights in 1998 and 1997:
Valuation Allowance for Mortgage Servicing Rights ---------------------- (Dollars in thousands) Balance, January 1, 1997.............................. $ 715 Additions........................................... 3,257 Reductions.......................................... (614) ------- Balance, December 31, 1997............................ 3,358 ------- Additions........................................... 16,503 Reductions.......................................... (273) ------- Balance, December 31, 1998............................ $19,588 =======
62 Mortgage loans serviced for others are not included in the accompanying "Consolidated Balance Sheets." The unpaid principal balances of mortgage loans serviced for others were $10.1 billion and $8.2 billion at December 31, 1998 and 1997, respectively. NOTE H. Short-Term Borrowed Funds
December 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands) Federal funds purchased............................. $ 942,935 $ 898,160 Term Federal funds purchased........................ 25,000 -- Securities sold under agreements to repurchase...... 1,339,149 1,434,221 Master notes........................................ 675,141 638,325 U.S. Treasury tax and loan deposit notes payable.... 177,306 105,851 Short-term Federal Home Loan Bank advances.......... 87,049 197,124 Short-term bank notes............................... 73,181 208,079 Other short-term borrowed funds..................... 49,340 11,439 ----------- ----------- Total short-term borrowed funds................... $ 3,369,101 $ 3,493,199 =========== ===========
Federal funds purchased represent unsecured borrowings from other banks and generally mature daily. Term Federal funds purchased are identical to Federal funds; however, maturities vary and are greater than one day. Securities sold under agreements to repurchase are borrowings collateralized by securities of the U.S. Government or its agencies and have maturities ranging from one to ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon demand to the U.S. Treasury. Master notes are unsecured, non-negotiable obligations of BB&T (variable rate commercial paper). Short-term Federal Home Loan Bank advances are typically unsecured and generally mature daily. Short- term bank notes are unsecured borrowings issued by the banking subsidiaries that generally mature in less than one year. 63 NOTE I. Long-Term Debt
December 31, --------------------- 1998 1997 ---------- ---------- (Dollars in thousands) Capitalized leases, varying maturities to 2028 with rates from 8.11% to 12.65%. Balance represents the unamortized amounts due on leases of various facilities............. $ 3,310 $ 3,291 Medium-term bank notes, unsecured, varying maturities to 2001 with variable rates from 5.279% to 5.714%.......... 1,369,890 1,024,833 Advances from Federal Home Loan Bank, varying maturities to 2018 with rates from 1.00% to 8.75%.................. 2,491,538 1,997,186 Subordinated Notes, unsecured, dated May 21, 1996, June 3, 1997 and June 30, 1998; maturing May 23, 2003, June 15, 2007 and June 30, 2025; with interest rates of 7.05%, 7.25% and 6.375%, respectively. /1/,/2......../.. 858,303 495,589 CMO Bonds, secured by investments, dated 1985, callable July 1, 2001, with an interest rate of 11.25%........... 10,558 8,112 Other mortgage indebtedness.............................. 3,335 5,192 ---------- ---------- Total long-term debt................................... $4,736,934 $3,534,203 ========== ==========
- -------- Excluding the capitalized leases set forth in Note F, future debt maturities total $4.7 billion and are $833.3 million, $866.0 million, $449.0 million, $264.2 million and $431.1 million for the next five years. The maturities for 2004 and later years are $1.9 billion. /1 /Subordinated notes qualify under the risk-based capital guidelines as Tier 2 supplementary capital. /2 /Consists of three issuances of BB&T Corporation debt. During 1998, BB&T issued $350 million of debt, which is mandatorally puttable to BB&T on June 30, 2005, and contains a remarketing option that allows the debt to be reissued to the stated maturity date of June 30, 2025. 64 NOTE J. Shareholders' Equity The authorized capital stock of BB&T consists of 500,000,000 shares of common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At December 31, 1998, 290,210,766 shares of common stock and no shares of preferred stock were issued and outstanding. Stock Option Plans At December 31, 1998, BB&T had the following stock-based compensation plans: the 1994 and 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan ("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors' Plan"), which are described below. BB&T accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined based on the fair value at the grant dates for awards under those plans granted after December 31, 1994, consistent with the method described by SFAS No. 123, BB&T's pro forma net income and pro forma earnings per share would have been as follows:
For the Years Ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands, except per share data) Net income applicable to common shares: As reported....................................... $501,825 $360,418 $342,702 Pro Forma......................................... 490,915 351,325 339,214 Basic EPS: As reported....................................... 1.75 1.25 1.19 Pro Forma......................................... 1.71 1.22 1.18 Diluted EPS: As reported....................................... 1.71 1.23 1.17 Pro Forma......................................... 1.67 1.20 1.16
The SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995; therefore, the weighted average fair value of options granted prior to that date has not been calculated. The fair value of each option grant was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 2.5% in 1998, 2.8% in 1997 and 2.5% in 1996; expected volatility of 23% in 1998, 21% in 1997 and 22% in 1996; risk free interest rates of 5.7%, 6.2% and 6.4% for 1998, 1997 and 1996, respectively; and expected lives of 6.1 years, 6.2 years and 6.7 years for 1998, 1997 and 1996, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. In April, 1994 and February, 1995, the shareholders approved the Omnibus Plans which cover the award of incentive stock options, non-qualified stock options, shares of restricted stock, performance shares and stock appreciation rights. In April 1996, the shareholders approved an amendment to the 1995 Omnibus Plan that increased the maximum number of shares issuable under the terms of the plan to 12,000,000 shares. The combined shares issuable under both Omnibus Plans, after giving effect to the August 3, 1998, 2-for-1 stock split, is 20,000,000. The Omnibus Plans are intended to allow BB&T to recruit and retain employees with ability and initiative and to associate the employees' interests with those of BB&T and its shareholders. At December 31, 1998, 7,119,150 qualified stock options at prices ranging from $4.29 to $33.485 and 3,471,811 non-qualified stock options at prices ranging from $.005 to $30.45 were outstanding. The stock options generally vest over 3 years and have a 10-year term. 65 The ISOP and the NQSOP were established to retain key officers and key management employees and to offer them the incentive to use their best efforts on behalf of BB&T. The plans, which expire on December 19, 2000, further provide for up to 2,202,000 shares of common stock to be reserved for the granting of options, which have a four year vesting schedule and must be exercised within ten years from the date granted. Incentive stock options granted must have an exercise price equal to at least 100% of the fair market value of common stock on the date granted, and the non-qualified stock options must have an exercise price equal to at least 85% of the fair market value on the date granted. At December 31, 1998, options to purchase 153,788 shares of common stock at prices ranging from $4.75 to $8.375 were outstanding pursuant to the NQSOP. At December 31,1998, options to purchase 133,832 shares of common stock at an exercise price of $9.8885 were outstanding pursuant to the ISOP. The Directors' Plan is intended to provide incentives to non-employee directors to remain on the Board of Directors and share in the profitability of BB&T. The plan creates a deferred compensation system for participating non-employee directors. Each non-employee director may elect to defer 0%, 50% or 100% of the annual retainer fee for each calendar year and apply that percentage toward the grant of options to purchase BB&T common stock. Such elections are required to be in writing and are irrevocable for each calendar year. The exercise price at which shares of BB&T common stock may be purchased shall be equal to 75% of the market value of the common stock as of the date of grant. Options are vested in six months and may be exercised anytime thereafter until the expiration date, which is 10 years from the date of grant. The Directors' Plan provides for the reservation of up to 1,800,000 shares of BB&T common stock. At December 31, 1998, options to purchase 794,746 shares of common stock at prices ranging from $6.3578 to $28.8719 were outstanding pursuant to the Directors' Plan. BB&T also has options outstanding from companies acquired in prior years. These options, which have not been included in the plans described above, totaled 230,164 as of December 31, 1998, with option prices ranging from $1.3334 to $11.8535. A summary of the status of the Company's stock option plans at December 31, 1998, 1997 and 1996 and changes during the years then ended is presented below:
1998 1997 1996 --------------------- --------------------- --------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year................ 12,429,353 $11.24 12,842,059 $ 9.33 13,908,434 $8.91 Granted............... 2,477,827 26.30 2,204,348 18.49 328,447 12.29 Exercised............. (2,886,585) 9.10 (2,480,928) 7.64 (1,285,180) 5.73 Forfeited or Expired.. (117,104) 20.53 (136,126) 13.74 (109,642) 7.85 ---------- ------ ---------- ------ ---------- ----- Outstanding at end of year................... 11,903,491 $14.80 12,429,353 $11.24 12,842,059 $9.33 ========== ====== ========== ====== ========== ===== Options exercisable at year-end............... 9,094,342 $10.60 10,186,861 $ 9.72 10,000,171 $8.55
The weighted average fair value of options granted was $7.97, $4.83 and $3.78 per option at December 31, 1998, 1997 and 1996, respectively. 66 The following table summarizes information about the options outstanding at December 31, 1998:
Options Outstanding Options Exercisable -------------------------------- -------------------- Weighted Average Weighted Weighted Options Remaining Average Options Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/98 Life Price at 12/31/98 Price --------------- ----------- ----------- -------- ----------- -------- $0.01................. 998 4.0 yrs $ 0.01 998 $ 0.01 $1.33 to $1.84........ 13,678 5.1 1.33 13,678 1.33 $2.46 to $3.52........ 11,202 4.4 3.23 11,202 3.23 $3.72 to $5.54........ 217,366 3.0 4.68 217,366 4.68 $5.86 to $8.75........ 2,291,029 3.2 7.41 2,291,029 7.26 $9.06 to $13.38....... 5,540,321 6.0 11.50 5,514,583 10.98 $13.94 to $20.19...... 1,952,367 8.1 19.11 913,434 15.90 $20.36 to $29.11...... 203,476 9.3 25.74 105,248 26.05 $30.45 to $33.49...... 1,673,054 9.2 31.01 26,804 31.44 ---------- --- ------ --------- ------ 11,903,491 6.3 yrs $14.80 9,094,342 $10.60 ========== === ====== ========= ======
Shareholder Rights Plan On January 17, 1997, pursuant to the Rights Agreement approved by the Board of Directors, BB&T distributed to shareholders one preferred stock purchase right for each share of BB&T's common stock then outstanding. Subsequent to this date, all shares issued are accompanied by a stock purchase right. Initially, the rights, which expire in 10 years, are not exercisable and are not transferable apart from the common stock. The rights will become exercisable only if a person or group acquires 20% or more of BB&T's common stock, or BB&T's Board of Directors determines, pursuant to the terms of the Rights Agreement, that any person or group that has acquired 10% or more of BB&T's common stock is an "Adverse Person." Each right would then enable the holder to purchase 1/100th of a share of a new series of BB&T preferred stock at an initial exercise price of $145.00. The Board of Directors will be entitled to redeem the rights at $.01 per right under certain circumstances specified in the Rights Agreement. Under the terms of the Rights Agreement, if any person or group becomes the beneficial owner of 25% or more of BB&T's common stock, with certain exceptions, or if the Board of Directors determines that any 10% or more stockholder is an "Adverse Person," each right will entitle its holder (other than the person triggering exercisability of the rights) to purchase, at the right's then-current exercise price, shares of BB&T's common stock having a value of twice the right's exercise price. In addition, if after any person or group has become a 20% or more stockholder, BB&T is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right's then-current exercise price, shares of common stock of such other person having a value of twice the right's exercise price. NOTE K. Income Taxes The provision for income taxes was composed of the following:
Years Ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Current expense: Federal....................................... $170,095 $194,049 $159,331 State......................................... 9,925 9,830 5,413 -------- -------- -------- 180,020 203,879 164,744 Deferred expense (benefit)...................... 51,877 (14,180) 3,762 -------- -------- -------- Provision for income taxes...................... $231,897 $189,699 $168,506 ======== ======== ========
67 The reasons for the difference between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
Years Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Federal income taxes at statutory rates of 35%.......................................... $256,803 $192,541 $179,136 Tax-exempt income from securities, loans and leases less related non-deductible interest expense...................................... (11,026) (10,077) (8,190) State income taxes, net of Federal tax benefit...................................... 8,249 5,506 3,963 Other, net.................................... (22,129) 1,729 (6,403) -------- -------- -------- Provision for income taxes.................... $231,897 $189,699 $168,506 ======== ======== ======== Effective income tax rate..................... 31.6% 34.5% 32.9% ======== ======== ========
The tax effects of temporary differences that gave rise to significant portions of the net deferred tax assets (liabilities) in the "Consolidated Balance Sheets" were:
December 31, -------------------- 1998 1997 --------- --------- Deferred tax assets: (Dollars in thousands) Allowance for loan and lease losses.............. $ 118,402 $ 108,032 Deferred compensation............................ 29,895 28,033 Postretirement benefits other than pensions...... 18,256 16,850 Expense accruals................................. 8,077 16,115 Other............................................ 24,047 28,842 --------- --------- Total tax deferred assets...................... 198,677 197,872 --------- --------- Deferred tax liabilities: Depreciation..................................... (16,521) (27,139) Net unrealized appreciation on securities available for sale.............................. (38,724) (31,881) Lease financing.................................. (75,933) (19,193) Other............................................ (27,103) (45,169) --------- --------- Total tax deferred liabilities................. (158,281) (123,382) --------- --------- Net deferred tax asset......................... $ 40,396 $ 74,490 ========= =========
The deferred tax assets have been determined to be realizable, and, accordingly, a valuation allowance was not required. At December 31, 1998, there were no income tax credits or alternative minimum tax credit carryforwards. Securities transactions resulted in income tax expense of $3.0 million, $1.3 million and $1.3 million related to securities gains (losses) for the years ended December 31, 1998, 1997 and 1996, respectively. 68 NOTE L. Benefit Plans BB&T provides various employee benefit plans to existing employees and employees of acquired entities. Employees of acquired entities typically participate in existing BB&T plans upon consummation of the acquisitions. Credit is usually given to these employees for years of service at the acquired institution. The combination of actuarial information for the benefit plans of acquired entities is typically not meaningful because the benefits offered in those plans and assumptions used in the calculations related to those plans are superseded by the benefits offered in the BB&T plans and the assumptions used in the BB&T calculations. Accordingly, the actuarial information presented for retirement plans and postretirement benefits in the accompanying tables is that of BB&T as originally presented. The following table discloses expenses relating to employee benefit plans restated for transactions accounted for as poolings of interests.
1998 1997 1996 ------- ------- ------- (Dollars in thousands) Defined benefit plans.................................. $ 9,121 $13,246 $12,494 Defined contribution and ESOP plans.................... 15,060 27,537 13,295 ------- ------- ------- Total expense related to benefit plans............... $24,181 $40,783 $25,789 ======= ======= =======
Retirement Plans BB&T provides a retirement plan that covers substantially all employees. Benefits are based on years of service, age at retirement and the employee's compensation during the five highest consecutive years of earnings within the last ten years of employment. BB&T's contributions to the plan are in amounts between the minimum required for funding standard account purposes and the maximum deductible for Internal Revenue Service purposes. Supplemental retirement benefits are provided to certain key officers under supplemental executive retirement plans, which are not qualified under the Internal Revenue Code. Although technically unfunded plans, insurance policies on the lives of the covered employees partially fund future benefits. 69 The tables below summarize data relative to the plans for the years as indicated:
Net Periodic Pension Cost 1998 1997 1996 - ------------------------- ---------- ---------- ---------- (Dollars in thousands) Service cost......................................... $ 13,681 $ 12,412 $ 11,488 Interest cost........................................ 19,022 17,971 16,253 Estimated return on plan assets...................... (21,873) (17,987) (24,260) Net amortization and other........................... (1,504) 790 8,833 ---------- ---------- ---------- Net periodic pension cost.......................... $ 9,326 $ 13,186 $ 12,314 ========== ========== ========== Plans for which Plans for which assets exceed accumulated benefits accumulated benefits exceed assets* ---------------------- ---------------------- Change in Projected Benefit Obligation 1998 1997 1998 1997 - -------------------------------------- ---------- ---------- ---------- ---------- (Dollars in thousands) Projected benefit obligation, January 1,............. $ 234,396 $ 221,697 $ 24,188 $ 17,668 Service cost....................................... 12,554 11,668 1,127 744 Interest cost...................................... 17,022 16,513 2,000 1,458 Actuarial loss..................................... 26,047 11,607 6,190 3,877 Benefits paid...................................... (10,098) (9,593) (685) (515) Change in plan provisions.......................... -- (17,990) -- -- Other, net......................................... 4,829 494 -- 956 ---------- ---------- ---------- ---------- Projected benefit obligation, December 31,........... $ 284,750 $ 234,396 $ 32,820 $ 24,188 ========== ========== ========== ========== Change in Plan Assets 1998 1997 1998 1997 - --------------------- ---------- ---------- ---------- ---------- (Dollars in thousands) Fair value of plan assets, January 1,................ $ 273,922 $ 221,394 $ -- $ -- Actual return on plan assets....................... 35,276 42,875 -- -- Employer contributions............................. 4,749 19,247 685 516 Benefits paid...................................... (10,098) (9,594) (685) (516) Other, net......................................... 5,757 -- -- -- ---------- ---------- ---------- ---------- Fair value of plan assets, December 31,.............. $ 309,606 $ 273,922 $ -- $ -- ========== ========== ========== ========== Net Amount Recognized 1998 1997 1998 1997 - --------------------- ---------- ---------- ---------- ---------- (Dollars in thousands) Funded status........................................ $ 24,856 $ 39,527 $ (32,820) $ (24,188) Unrecognized transition asset (liability)............ (5,436) (6,523) 234 277 Unrecognized prior service cost...................... (20,824) (23,201) 3,114 3,964 Unrecognized net loss................................ 19,259 6,615 11,215 6,583 Other, net........................................... -- -- -- (490) ---------- ---------- ---------- ---------- Net amount recognized................................ $ 17,855 $ 16,418 $ (18,257) $ (13,854) ========== ========== ========== ========== Reconciliation of Net Pension Asset (Liability) 1998 1997 1998 1997 - ----------------------------------------------- ---------- ---------- ---------- ---------- (Dollars in thousands) Prepaid pension cost, January 1,..................... $ 16,418 $ 6,065 $ (13,854) $ (10,037) Contributions...................................... 4,749 19,247 685 516 Net periodic pension cost.......................... (4,239) (8,894) (5,057) (2,908) Other, net......................................... 927 -- (31) (1,425) ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost, December 31,......... $ 17,855 $ 16,418 $ (18,257) $ (13,854) ========== ========== ========== ========== December 31, ---------------------- Weighted Average Assumptions 1998 1997 - ---------------------------- ---------- ---------- Weighted average assumed discount rate............... 6.75% 7.25% Weighted average expected long-term rate of return on plan assets......................................... 8.00 8.00 Assumed rate of annual compensation increases........ 5.50 5.50
- -------- * 1998 reflects the inclusion of a nonqualified plan not reflected in 1997 actuarial date. The added plan information is effective January 1, 1998. 70 Plan assets consist primarily of investments in mutual funds consisting of equity investments, obligations of the U.S. Treasury and Federal agencies and corporations. Plan assets included $26.8 million, $20.3 million and $11.2 million of BB&T common stock at December 31, 1998, 1997 and 1996, respectively. The market value of total plan assets was $309.6 million and $273.9 million at December 31, 1998 and 1997, respectively. Postretirement Benefits BB&T revised its retiree health care plans in preparation for the implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other Than Pensions." Effective January 1, 1996, the plans of BB&T and BB&T Financial Corporation were merged into a single plan. The new plan covers employees retiring after December 31, 1995 who are eligible for participation in the BB&T pension plan and have at least ten years of service. The plan requires retiree contributions, with a subsidy by BB&T based upon years of service of the employee at the time of retirement. The subsidy is periodically reviewed for adjustment. The plan provides flexible benefits to retirees or their dependents. The following tables set forth the components of the retiree benefit plan and the amount recognized in the consolidated financial statements at December 31, 1998, 1997 and 1996.
Net Periodic Postretirement Benefit Cost: 1998 1997 1996 - ----------------------------------------- ----------- ----------- ------ (Dollars in thousands) Service cost.................................. $ 1,550 $ 733 $ 834 Interest cost................................. 3,422 2,586 2,667 Amortization and other........................ 519 (37) 344 ----------- ----------- ------ Total expense............................... $ 5,491 $ 3,282 $3,845 =========== =========== ====== Change in Projected Benefit Obligation 1998 1997 - -------------------------------------- ----------- ----------- (Dollars in thousands) Projected benefit obligation, January 1,........ $ 38,342 $ 38,552 Service cost.................................. 1,550 733 Interest cost................................. 3,422 2,586 Plan participants' contributions.............. 475 272 Actuarial loss (gain)......................... 4,958 (1,949) Benefits paid................................. (1,859) (1,852) Other, net.................................... 6,742 -- ----------- ----------- Projected benefit obligation, December 31,...... $ 53,630 $ 38,342 =========== =========== Change in Plan Assets 1998 1997 - --------------------- ----------- ----------- (Dollars in thousands) Fair value of plan assets, January 1,........... $ -- $ -- Actual return on plan assets.................. -- -- Employer contributions........................ 1,384 1,581 Plan participants' contributions.............. 475 272 Benefits paid................................. (1,859) (1,853) ----------- ----------- Fair value of plan assets, December 31,......... $ -- $ -- =========== =========== Net Amount Recognized 1998 1997 - --------------------- ----------- ----------- (Dollars in thousands) Funded status................................... $(53,630) $(38,342) Unrecognized prior service cost................. 6,223 -- Unrecognized net loss (gain).................... 600 (4,358) ----------- ----------- Net amount recognized........................... $(46,807) $(42,700) =========== ===========
71
Reconciliation of Net Pension Asset (Liability) 1998 1997 - ----------------------------------------------- ----------- ----------- (Dollars in thousands) Prepaid (accrued) pension cost, January 1,........... $(42,700) $(28,977) Contributions...................................... 1,384 1,581 Net periodic pension cost.......................... (5,491) (3,282) Other, net......................................... -- (12,022) ----------- ----------- Prepaid (accrued) pension cost, December 31,......... $(46,807) $(42,700) =========== =========== December 31, -------------------------- Weighted Average Assumptions 1998 1997 - ---------------------------- ----------- ----------- Weighted average assumed discount rate............... 6.75% 7.25% Medical trend rate-initial year...................... 9.00 10.00 Medical trend rate-ultimate.......................... 5.00 5.00 Select period........................................ 4yrs 5yrs 1% 1% Increase Decrease ----------- ----------- Impact of a 1% change in assumed health care cost on: Service and interest costs....................... 2.36% (1.81)% Accumulated postretirement benefit obligation.... 2.29 (1.97)
401-k Savings Plan Prior to 1996, BB&T had an Employee Stock Ownership Plan that allowed all employees to acquire BB&T common stock by contributing up to 15% of their salaries to the plan. BB&T matched 100% of each employee's contributions, up to a maximum of 6% of the employee's salary. BB&T Financial Corporation provided a Savings and Thrift Plan permitting eligible employees to make contributions up to 16% of base compensation, with matching contributions up to 4% of the employee's base compensation. Effective January 1, 1996, BB&T's Employee Stock Ownership Plan was merged into the former BB&T Financial Corporation Savings and Thrift Plan to form the BB&T Corporation 401-k Savings Plan. The new plan permits employees to contribute up to 16% of their compensation. BB&T matches up to 6% of the employee's compensation with a 100% matching contribution. Settlement Agreements In connection with recent significant mergers, three executive officers of merged institutions agreed to retire during 1995 and 1997. BB&T entered into settlement and noncompetition agreements with these executive officers to settle existing employment contracts and to require them not to compete with BB&T. One of the agreements provides for annual payments of $1,655,000 less the company-provided portion of certain benefits payable under existing benefit plans. The payments continue for the life of the executive and his current wife but in no event for a period of less than fifteen years. The executive has agreed not to compete in a defined geographic area for fifteen years and to serve as a consultant to BB&T for five years. A second agreement provides for annual payments of $312,000 for ten years or until death. The third settlement agreement provides for annual payments of $769,392 (to be adjusted annually in accordance with the Consumer Price Index) until the executive reaches the age of 65 in 2002, at which time the annual payments will be reduced to 70% of the amount paid during the final year pursuant the agreement, estimated to be approximately $623,000, less the company-provided portion of benefits payable under certain existing benefit plans. The reduced payments will continue for the life of the executive. If the executive's current wife survives him, payments will continue to her in the annual amount equal to 35% of the amount paid to the executive during the final year pursuant to the agreement. The executive officer has agreed not to compete in a defined geographic area for ten years. Other There are various other employment contracts, deferred compensation arrangements and covenants not to compete with selected members of management and certain retirees. 72 NOTE M. Commitments and Contingencies BB&T is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, options written, standby letters of credit and financial guarantees, interest rate caps and floors written, interest rate swaps and forward and futures contracts. BB&T's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. BB&T uses the same credit policies in making commitments and conditional obligations as it does for on- balance sheet instruments.
Contract or Notional Amount at December 31, --------------------- 1998 1997 ---------- ---------- (Dollars in thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend, originate or purchase credit............................................ $9,837,164 $7,922,157 Standby letters of credit and financial guarantees written........................................... 356,193 288,200 Commercial letters of credit....................... 36,201 35,915 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Commitments to sell loans and securities........... $1,076,502 $ 555,722 Foreign exchange contracts......................... 136,628 145,855
Commitments to extend credit are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BB&T evaluates each customer's creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by BB&T upon extension of credit, is based on management's evaluation of the creditworthiness of the counterparty. Standby letters of credit and financial guarantees written are conditional commitments issued by BB&T to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers, and letters of credit are collateralized when necessary. Forward commitments to sell mortgage loans and mortgage-backed securities are contracts for delayed delivery of securities in which BB&T agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' values and interest rates. 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. 73 NOTE N. Regulatory Requirements and Other Restrictions BB&T's subsidiary banks are required by the Board of Governors of the Federal Reserve System to maintain reserve balances based on certain percentages of deposit types subject to various adjustments. At December 31, 1998, the net reserve requirement amounted to $203.5 million. Subject to restrictions imposed by state laws and federal regulations, the Boards of Directors of the subsidiary banks could have declared dividends from their retained earnings up to $1.4 billion at December 31, 1998. The subsidiary banks are prohibited from paying dividends from their capital stock and additional paid-in capital accounts and are required by regulatory authorities to maintain minimum capital levels. BB&T was in compliance with these requirements at December 31, 1998. BB&T is subject to various regulatory capital requirements mandated and monitored by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on BB&T's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of BB&T's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. BB&T's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require BB&T to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets.
December 31, 1998 December 31, 1997 ----------------------------- ----------------------------- For Minimum For Minimum Actual Capital Actual Capital ----------------- Adequacy ----------------- Adequacy Ratio Amount Purposes Ratio Amount Purposes ----- ---------- ----------- ----- ---------- ----------- (Dollars in thousands) Tier 1 Capital BB&T.................. 10.0% $2,302,400 $ 924,271 10.3% $2,153,246 $ 835,300 BB&T--NC.............. 10.9 1,834,215 673,725 11.0 1,672,558 606,912 BB&T--SC.............. 12.7 421,891 133,225 12.2 368,256 121,094 BB&T--VA.............. 15.3 332,579 87,128 14.6 300,179 81,986 Franklin National Bank................. 8.5 38,810 18,222 9.8 34,513 14,102 Total Capital BB&T.................. 14.8% $3,408,901 $1,848,542 13.9% $2,909,598 $1,670,601 BB&T--NC.............. 12.2 2,053,215 1,347,450 12.3 1,862,258 1,213,824 BB&T--SC.............. 13.9 463,895 266,451 13.4 406,120 242,188 BB&T--VA.............. 16.5 359,957 174,256 15.6 319,334 163,971 Franklin National Bank................. 9.7 43,992 36,444 11.0 38,705 28,204 Tier 1 Leverage Capital BB&T.................. 6.8% $2,302,400 $1,010,330 7.2% $2,153,246 $ 900,236 BB&T--NC.............. 7.2 1,834,215 762,111 7.6 1,672,558 656,147 BB&T--SC.............. 9.3 421,891 135,789 8.5 368,256 129,748 BB&T--VA.............. 10.0 332,579 99,972 8.6 300,179 104,192 Franklin National Bank................. 5.3 38,810 21,908 7.1 34,513 19,589
N/A--not applicable. 74 NOTE O. Parent Company Financial Statements Condensed Balance Sheets December 31, 1998 and 1997
1998 1997 ----------- ----------- Assets (Dollars in thousands) Cash and due from banks................................ $ 6,951 $ 5,853 Interest-bearing bank balances......................... 602,094 605,319 Securities............................................. 13,992 13,824 Investment in banking subsidiaries..................... 3,056,104 2,631,737 Investment in other subsidiaries....................... 170,855 109,850 Advances to subsidiaries............................... 331,000 185,504 Premises and equipment, net............................ 5,366 5,537 Receivables from subsidiaries and other assets......... 180,814 81,768 ----------- ----------- Total assets......................................... $ 4,367,176 $ 3,639,392 =========== =========== Liabilities and Shareholders' Equity Short-term borrowed funds.............................. $ 675,141 $ 638,325 Dividends payable...................................... 50,804 42,173 Accounts payable and accrued liabilities............... 24,130 23,529 Long-term debt......................................... 858,553 496,255 ----------- ----------- Total liabilities.................................... 1,608,628 1,200,282 ----------- ----------- Total shareholders' equity .......................... 2,758,548 2,439,110 ----------- ----------- Total liabilities and shareholders' equity .......... $ 4,367,176 $ 3,639,392 =========== ===========
75 Condensed Income Statements For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------- --------- --------- Income (Dollars in thousands) Dividends from subsidiaries.................. $389,684 $ 248,294 $ 142,854 Interest and other income from subsidiaries.. 77,074 61,649 36,627 Interest on investment securities............ 1,162 1,739 2,936 Other income................................. 2,196 722 7,835 -------- --------- --------- Total income............................... 470,116 312,404 190,252 -------- --------- --------- Expenses Interest expense............................. 71,440 53,161 33,845 Occupancy expense............................ 171 249 171 Other expenses............................... 11,403 14,537 11,704 -------- --------- --------- Total expenses............................. 83,014 67,947 45,720 -------- --------- --------- Income before income tax benefit and equity in undistributed earnings of subsidiaries........ 387,102 244,457 144,532 Income tax (benefit) expense................... (784) (52) 597 -------- --------- --------- Income before equity in undistributed earnings of subsidiaries............................... 387,886 244,509 143,935 Net income of subsidiaries in excess of dividends from subsidiaries................... 113,939 115,909 199,377 -------- --------- --------- Net income..................................... $501,825 $ 360,418 $ 343,312 ======== ========= =========
76 Condensed Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------- -------- -------- (Dollars in thousands) Cash Flows From Operating Activities: Net income....................................... $501,825 $360,418 $343,312 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries less than (in excess of) dividends from subsidiaries............... (113,939) (115,909) (199,377) Depreciation of premises and equipment......... 171 272 214 Amortization of unearned compensation.......... 962 8,111 2,450 Discount accretion and premium amortization.... -- 396 192 Loss (gain) on sales of securities............. (37) -- (9) (Increase) decrease in other assets............ (99,136) (23,258) 125,920 Increase (decrease) in accounts payable and accrued liabilities........................... 601 (2,008) 2,333 -------- -------- -------- Net cash provided by operating activities.... 290,447 228,022 275,035 -------- -------- -------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale.......................................... 68 -- 14 Proceeds from maturities, calls and paydowns of securities available for sale................. -- 35,482 49,347 Purchases of securities available for sale..... (237) (8,717) (52,324) Investment in subsidiaries..................... (36,545) (733) (68,625) Advances to subsidiaries....................... (676,032) (430,897) (306,857) Repayment of advances to subsidiaries.......... 530,536 369,375 182,875 Net cash received in purchase accounting transactions.................................. (6,051) (45,852) -- -------- -------- -------- Net cash (used in) provided by investing activities.................................. (188,261) (81,342) (195,570) -------- -------- -------- Cash Flows From Financing Activities: Net increase (decrease) in long-term debt...... 362,400 246,873 247,629 Net increase in short-term borrowed funds...... 36,816 72,100 169,952 Net proceeds from common stock issued.......... 27,522 23,351 51,068 Redemption of common stock..................... (344,010) (321,224) (225,569) Cash dividends paid on common and preferred stock......................................... (187,041) (155,688) (127,771) -------- -------- -------- Net cash (used in) provided by financing activities.................................. (104,313) (134,588) 115,309 -------- -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents..................................... (2,127) 12,092 194,774 Cash and Cash Equivalents at Beginning of Year... 611,172 599,080 404,306 -------- -------- -------- Cash and Cash Equivalents at End of Year......... $609,045 $611,172 $599,080 ======== ======== ========
77 NOTE P. Disclosures about Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires BB&T to disclose the estimated fair value of its on- and off-balance sheet financial instruments. A financial instrument is defined by SFAS No. 107 as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. Because no readily available market exists for a significant portion of BB&T's financial instruments, fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used by BB&T in estimating the fair value of its financial instruments at December 31, 1998 and 1997: Cash and cash equivalents: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values. Securities: Fair values for securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. The carrying amounts of accrued interest approximate fair values. Deposit liabilities: The fair values for demand deposits, interest-checking accounts, savings accounts and certain money market accounts are, by definition, equal to the amount payable on demand at the reporting date, i.e., their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. Short-term borrowed funds: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements, master notes and other short-term borrowed funds approximate their fair values. Long-term debt: The fair values of long-term debt are estimated based on quoted market prices for similar instruments or by using discounted cash flow analyses, based on BB&T's current incremental borrowing rates for similar types of instruments. Interest rate swap agreements: The fair values of interest rate swaps (used for hedging purposes) are the estimated amounts that BB&T would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Commitments to extend credit, standby letters of credit and financial guarantees written: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair values also consider the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are estimated based on fees currently charged for similar agreements. 78 Other off-balance sheet instruments: The fair values for off-balance sheet instruments (futures, forwards, options, and commitments to sell or purchase financial instruments) are estimated based on quoted prices, if available. For instruments for which there are no quoted prices, fair values are estimated using current settlement values or pricing models.
1998 1997 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- (Dollars in thousands) Financial assets: Cash and cash equivalents............. $ 1,046,799 $ 1,046,799 $ 1,192,870 $ 1,192,870 Trading securities....... 60,422 60,422 67,878 67,878 Securities available for sale.................... 7,971,374 7,971,374 7,296,128 7,296,128 Securities held to maturity................ 127,470 130,820 230,257 233,636 Loans and leases: Loans.................. 22,074,450 23,293,939 20,617,568 20,853,513 Leases................. 1,620,326 N/A 616,302 N/A Allowance for losses... (314,387) N/A (279,596) N/A ----------- ----------- Net loans and leases.............. $23,380,390 $20,954,274 =========== =========== Financial liabilities: Deposits................. $23,046,907 23,128,155 $21,375,974 21,409,413 Short-term borrowed funds................... 3,369,101 3,369,101 3,493,199 3,451,885 Long-term debt........... 4,733,624 4,789,095 3,530,912 3,868,116 Capitalized leases....... 3,310 N/A 3,291 N/A Notional/ Notional/ Contract Fair Contract Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Off balance sheet financial instruments: Interest rate swaps...... $ 2,496,346 $ 37,835 $ 2,428,930 $ 25,570 Commitments to extend, originate or purchase credit.................. 9,837,164 (19,379) 7,922,157 (14,835) Standby and commercial letters of credit and financial guarantees written................. 392,394 (5,886) 324,115 (4,495) Commitments to sell loans and securities.......... 1,075,000 (1,038) 555,722 (2,925) Foreign exchange contracts............... 136,628 319 145,855 326 Option contracts purchased............... 35,000 623 55,000 (303) Option contracts written................. 1,267,250 (257) 55,000 -- Futures contracts........ 1,502 (7) 8,486 --
- -------- N/A--not applicable. 79 NOTE Q. Derivatives and Off-Balance Sheet Financial Instruments BB&T utilizes interest rate swaps, caps and floors in the management of interest rate risk. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to transform the repricing characteristics of an asset or liability from a fixed to a floating rate, a floating rate to a fixed rate, or one floating rate to another floating rate. The underlying principal positions are not affected. Swap terms generally range from one year to ten years depending on the need. At December 31, 1998, derivatives with a total notional value of $3.7 billion, with terms ranging up to fourteen years, were outstanding. The following tables set forth certain information concerning BB&T's interest rate swaps at December 31, 1998: Interest Rate Swaps, Caps, Floors and Collars December 31, 1998
Notional Receive Pay Fair Amount Rate Rate Value ---------- ---------- ------------------ ---------- Type - ---- (Dollars in thousands) Receive fixed swaps....... $1,266,200 6.24% 5.30% $ 43,369 Pay fixed swaps........... 1,180,146 5.34 5.67 (5,503) Basis swaps............... 50,000 4.95 5.34 (31) Caps, Floors & Collars.... 1,247,250 -- -- 623 ---------- ---------- ---------- ---------- Total..................... $3,743,596 5.79% 5.48% $ 38,458 ========== ========== ========== ========== Receive Fixed Pay Fixed Basis Swaps, Caps, Year-to-date Activity Swaps Swaps Floors & Collars Total - --------------------- ---------- ---------- ------------------ ---------- Balance, December 31, 1997..................... $1,301,000 $ 351,930 $ 776,000 $2,428,930 Additions................. 205,000 936,673 797,250 1,938,923 Maturities/amortizations.. (239,800) (108,457) (111,000) (459,257) Terminations.............. -- -- (165,000) (165,000) ---------- ---------- ---------- ---------- Balance, December 31, 1998..................... $1,266,200 $1,180,146 $1,297,250 $3,743,596 ========== ========== ========== ========== One to One Year Five Five to 10 Maturity Schedule or Less Years Years Total - ----------------- ---------- ---------- ------------------ ---------- Receive fixed swaps....... $ 561,200 $ 445,000 $ 260,000 $1,266,200 Pay fixed swaps........... 1,010,200 105,869 64,077 1,180,146 Basis swaps............... 50,000 -- -- 50,000 Caps, Floors & Collars.... 500,000 747,250 -- 1,247,250 ---------- ---------- ---------- ---------- Total..................... $2,121,400 $1,298,119 $ 324,077 $3,743,596 ========== ========== ========== ==========
As of December 31, 1998, deferred losses from new swap transactions initiated during 1998 were $3.3 million. There were no unamortized deferred gains or losses from terminated transactions remaining at year end. Active transactions resulted in pretax net income of $878,100. In addition to interest rate swaps, BB&T utilizes written covered over-the- counter call options on specific securities in the available-for-sale portfolio in order to enhance returns. During 1998, options were written on 80 securities totaling $1.9 billion. Option fee income was $3.2 million for 1998. There were no unexercised options outstanding at December 31, 1998 or 1997. BB&T also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. These options are used to hedge the mortgage warehouse and pipeline against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. At December 31, 1998, net purchased put option contracts with a notional value of $15.0 million were outstanding. The $3.7 billion of derivatives used in interest rate risk management are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and fixed rate notes. BB&T does not utilize derivatives for trading purposes. Although off-balance sheet derivative financial instruments do not expose BB&T to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. Such risk is minimized based on the quality of the counterparties and the consistent monitoring of these agreements. The counterparties to these transactions were large commercial banks and investment banks. Annually, the counterparties are reviewed for creditworthiness by BB&T's credit policy group. Where appropriate, master netting agreements are arranged or collateral is obtained in the form of rights to securities. At December 31, 1998, BB&T's interest rate swaps, caps, floors and collars reflected an unrealized gain of $38.5 million. Other risks associated with interest-sensitive derivatives include the impact on fixed positions during periods of changing interest rates. Indexed amortizing swaps' notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall the notional amounts decline more rapidly, and as rates increase notional amounts decline more slowly. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result from an environment of rising interest rates in which derivatives produce negative cash flows while being offset by increased cash flows from variable rate loans. Such risk is considered insignificant due to the relatively small derivative positions held by BB&T. At December 31, 1998, BB&T had no indexed amortizing swaps outstanding. 81 NOTE R. Calculations of Earnings Per Share The basic and diluted earnings per share calculations are presented in the following table:
Years Ended December 31, -------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (Dollars in thousands, except per share data) Basic Earnings Per Share: Weighted average number of common shares outstanding during the period............................... 287,427,644 287,480,712 287,535,321 ------------ ------------ ------------ Net income............................ $ 501,825 $ 360,418 $ 343,312 Less--Preferred dividend requirement.. -- -- 610 ------------ ------------ ------------ Income available for common shares.... $ 501,825 $ 360,418 $ 342,702 ============ ============ ============ Basic earnings per share.............. $ 1.75 $ 1.25 $ 1.19 ============ ============ ============ Diluted Earnings Per Share: Weighted average number of common shares............................... 287,427,644 287,480,712 287,535,321 Add-- Shares issuable assuming conversion of convertible preferred stock..... -- -- 1,877,304 Dilutive effect of outstanding options (as determined by application of treasury stock method)............................ 6,143,607 4,845,168 4,140,158 Issuance of additional shares under share repurchase agreement, contingent upon market price....... -- 144,588 204,036 ------------ ------------ ------------ Weighted average number of common shares, as adjusted.................. 293,571,251 292,470,468 293,756,819 ============ ============ ============ Net income............................ $ 501,825 $ 360,418 $ 343,312 ============ ============ ============ Diluted earnings per share............ $ 1.71 $ 1.23 $ 1.17 ============ ============ ============
NOTE S. Operating Segments 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 measures and presents information for internal reporting purposes in a variety of different ways, including reportable segments based on organizational structure, products, services and customer relationships. The internal reporting system presently utilized by management in the planning and measuring of operating activities, as well as the system to which most managers are held accountable, is based on organizational structure. 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, which 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 82 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 prior periods have not been reported to reflect the new system because it is not practicable to restate prior period results in order to do so. 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. The management accounting process uses various estimates and allocation methodologies to measure the performance of the operating segments. To determine financial performance for each segment, BB&T allocates capital, funding charges and credits, an economic provision for loan and lease losses, certain noninterest expenses and income tax provisions to each segment, as applicable. Also, to promote revenue growth, certain revenues of Mortgage Banking, Trust Services, Agency Insurance and Investment Banking and Brokerage segments are allocated to the Banking Network and are reflected in intersegment noninterest revenues. The estimates and allocations are subject to periodic adjustment as the internal management accounting system is revised and business or product lines within the segments change. Also, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised. BB&T's overall objective is to maximize shareholder value by optimizing return on equity and limiting risk. Allocations of capital and the economic provision for loan and lease losses are designed to address this objective. Capital is assigned to each segment on an economic basis, using management's assessment of the inherent risks associated with the segment. Required economic capital allocations are made to cover the following risk categories: credit risk, funding risk, interest rate risk, option risk, basis risk, market risk and operational risk. Each segment is evaluated based on a risk-adjusted return on capital. Capital assignments are not equivalent to regulatory capital guidelines and the total amount assigned to all segments may vary from consolidated shareholders' equity. All unallocated capital is retained in the Treasury segment. The economic provision for loan and lease losses is also allocated to the relevant segments based on management's assessment of the segments' risks as described above. Unlike the provision for loan and lease losses recorded pursuant to generally accepted accounting principles, the economic provision adjusts for the impact of expected credit losses over the effective lives of the related loans and leases. Any unallocated provision for loan and lease losses is retained in the Corporate Office, reflected in the accompanying table as "other revenues and expenses." BB&T has implemented an extensive noninterest expense allocation process to support organizational and product profitability. BB&T allocates expenses to the reportable segments based on various cost allocation methodologies, including the number of items processed, overall percentage of time spent, full-time equivalent employees assigned to functions, functional position surveys and activity-based costing. A portion of corporate overhead expenses is not allocated, but is retained in corporate accounts reflected as other expenses in the accompanying table. Income taxes are allocated to the various segments using effective tax rates. BB&T utilizes a funds transfer pricing ("FTP") system to eliminate the effect of interest rate risk from the segments' net interest income because such risk is centrally managed within the Treasury segment. The FTP system credits or charges the segments with the true value or cost of the funds the segments create or use. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The net FTP charge or credit is reflected as net intersegment interest income (expense) in the accompanying table. Banking Network BB&T's Banking Network, which consists of 534 full-service banking offices in North Carolina, South Carolina, Virginia, Maryland and Washington, D.C., serves commercial and retail clients by offering a variety of loan and deposit products and other financial services. The Banking Network is primarily responsible for client relationships, and, therefore, is credited with revenue from the Mortgage Banking, Trust Services, Agency 83 Insurance and Investment Banking and Brokerage segments, which is reflected in intersegment noninterest revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion of the functions of the banking network. Mortgage Banking The Mortgage Banking segment retains mortgage loans originated by the Banking Network and purchased from various correspondents. Mortgage loan products include fixed- and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Fixed-rate mortgage loans are typically sold to government and private investors with servicing rights retained, while adjustable rate loans are typically held in the portfolio. The Mortgage Banking segment earns interest on loans held in the warehouse and portfolio, fee income from the origination and servicing of mortgage loans and reflects gains or losses from the sale of mortgage loans. The Mortgage Banking segment is charged and the Banking Network receives a corresponding credit for the origination of loans and servicing. Trust Services BB&T's Trust Services segment provides personal trust administration and estate planning, investment counseling and management, employee benefits services, and corporate trust services to individuals, corporations, institutions, foundations and government entities. The Banking Network receives an interoffice credit for trust fees in the initial year the account is referred, with the corresponding charge remaining in the Corporate Office. Insurance Services BB&T has the largest independent insurance agency network in the Carolinas and represents many of the nation's top-rated insurance carriers. BB&T Insurance Services provides property and casualty, life and health insurance to businesses and to individuals, provides small business and corporate products, such as workers compensation and professional liability, and provides surety and title insurance. The Banking Network receives credit for insurance commissions on referred accounts, with the corresponding charge retained in the Corporate Office. Investment Banking and Brokerage BB&T's Investment Banking and Brokerage segment offers customers investment alternatives, including discount brokerage services, fixed-rate and variable- rate annuities, mutual funds and government and municipal bonds and various other investment products. Investment Banking and Brokerage also provides personal financial planning services to individuals. The Investment Banking and Brokerage segment includes Craigie, Incorporated, an investment banking firm located in Richmond, Virginia. Craigie specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Craigie also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional tax-exempt issuers. The Banking Network is credited for investment service revenues on referred accounts, with the corresponding charge retained in the Corporate Office. Treasury BB&T's Treasury segment is responsible for the management of the securities portfolios, funding and liquidity requirements, and management of interest rate risk through the use of balance sheet repositioning and derivative financial instruments. See the Market Risk Management section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information about the responsibilities of the Treasury segment. 84 The following table discloses selected financial information for BB&T's reportable business segments:
For the Year Ended December 31, 1998 -------------------------------------------------------------------------------------------------------------- Investment All Total Banking Mortgage Trust Agency Banking Other Segment Other Revenues Network Banking Services Insurance and Brokerage Treasury Segments/1/ Results and Expenses/2/ ----------- ---------- -------- --------- ------------- ---------- ----------- ----------- --------------- (dollars in thousands) Net interest income (expense) from external customers......... $ 672,190 $ 409,944 $(33,714) $11,419 $ 1,127 $ 126,762 $ 195,860 $ 1,383,588 $ 59,802 Net intersegment interest income (expense)......... 228,085 (274,934) 37,427 -- -- (1,013) -- (10,435) (12,724) ----------- ---------- -------- ------- -------- ---------- ---------- ----------- ---------- Net interest income............ 900,275 135,010 3,713 11,419 1,127 125,749 195,860 1,373,153 47,078 ----------- ---------- -------- ------- -------- ---------- ---------- ----------- ---------- Provision for loan and lease losses.. 85,199 3,851 -- 4,173 -- 103 17,994 111,320 1,829 Noninterest income from external customers......... 401,974 76,491 36,422 51,291 48,604 11,631 23,082 649,495 (30,172) Intersegment noninterest income............ 58,735 4,761 563 -- -- 878 -- 64,937 486 Noninterest expense........... 421,210 56,211 22,956 44,991 37,472 4,325 43,363 630,528 265,921 Intersegment noninterest expense........... 209,820 16,207 1,986 11,263 8,948 5,383 7,279 260,886 (55,464) ----------- ---------- -------- ------- -------- ---------- ---------- ----------- ---------- Income before income taxes and the charge for capital........... 644,755 139,993 15,756 2,283 3,311 128,447 150,306 1,084,851 (194,894) Provision for income taxes.... 243,996 52,847 5,948 862 1,294 46,415 9,990 361,352 (71,359) ----------- ---------- -------- ------- -------- ---------- ---------- ----------- ---------- Net income before the charge for capital........... 400,759 87,146 9,808 1,421 2,017 82,032 140,316 723,499 (123,535) Charge for capital......... 112,952 9,154 1,082 -- -- 1,689 -- 124,877 942 ----------- ---------- -------- ------- -------- ---------- ---------- ----------- ---------- Net income after charge for capital........... $ 287,807 $ 77,992 $ 8,726 $ 1,421 $ 2,017 $ 80,343 $ 140,316 $ 598,622 $ (124,477) =========== ========== ======== ======= ======== ========== ========== =========== ========== Identifiable segment assets.... $16,944,158 $6,274,100 $ 6,168 $92,554 $237,429 $9,417,056 $2,368,956 $35,340,421 $1,651,609 =========== ========== ======== ======= ======== ========== ========== =========== ========== Reconciling Items & Consolidated Eliminations Totals ---------------- ------------ Net interest income (expense) from external customers......... $ (195,986)/4/ $ 1,247,404 Net intersegment interest income (expense)......... 23,159 /3/ -- ---------------- ------------ Net interest income............ (172,827) 1,247,404 ---------------- ------------ Provision for loan and lease losses.. (32,839)/4/ 80,310 Noninterest income from external customers......... (91,321)/4/ 528,002 Intersegment noninterest income............ (65,423)/3/ -- Noninterest expense........... 64,925 /4/ 961,374 Intersegment noninterest expense........... (205,422)/3/ -- ---------------- ------------ Income before income taxes and the charge for capital........... (156,235) 733,722 Provision for income taxes.... (58,096)/4/ 231,897 ---------------- ------------ Net income before the charge for capital........... (98,139) 501,825 Charge for capital......... (125,819)/3/ -- ---------------- ------------ Net income after charge for capital........... $ 27,680 $ 501,825 ================ ============ Identifiable segment assets.... $(2,564,803)/4/ $34,427,227 ================ ============
- ---- (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 FTP credits and charges, the elimination of intersegment capital credits and charges, the elimination of the intersegment noninterest revenues described above and the elimination of overhead expenses allocated to the various segments. (4) To reflect elimination entries necessary to consolidate the segment data. 85 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, as of March 19, 1999: BB&T Corporation (Registrant) /s/ John A. Allison, IV By: _________________________________ John A. Allison, IV Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 19, 1999. /s/ John A. Allison, IV _____________________________________ John A. Allison, IV Chairman of the Board and Chief Executive Officer /s/ Scott E. Reed _____________________________________ Scott E. Reed Senior Executive Vice President and Chief Financial Officer /s/ Sherry A. Kellett _____________________________________ Sherry A. Kellett Senior Executive Vice President and Controller 86 A Majority of the Directors of the Registrant are included. /s/ Paul B. Barringer _____________________________________ Paul B. Barringer Director /s/ Alfred E. Cleveland _____________________________________ Alfred E. Cleveland Director /s/ W. R. Cuthbertson, Jr. _____________________________________ W. R. Cuthbertson, Jr. Director /s/ Ronald E. Deal _____________________________________ Ronald E. Deal Director /s/ A. J. Dooley, Sr. _____________________________________ A. J. Dooley, Sr. Director /s/ Tom D. Efird _____________________________________ Tom D. Efird Director /s/ Paul S. Goldsmith _____________________________________ Paul S. Goldsmith Director /s/ Lloyd Vincent Hackley _____________________________________ Lloyd Vincent Hackley Director /s/ Jane P. Helm _____________________________________ Jane P. Helm Director 87 /s/ Richard Janeway, M.D. _____________________________________ Richard Janeway, M.D. Director /s/ J. Ernest Lathem, M.D. _____________________________________ J. Ernest Lathem, M.D. Director /s/ James H. Maynard _____________________________________ James H. Maynard Director /s/ Joseph A. McAleer, Jr. _____________________________________ Joseph A. McAleer, Jr. Director /s/ Albert O. McCauley _____________________________________ Albert O. McCauley Director /s/ Richard L. Player, Jr. _____________________________________ Richard L. Player, Jr. Director /s/ C. Edward Pleasants, Jr. _____________________________________ C. Edward Pleasants, Jr. Director /s/ Nido R. Qubein _____________________________________ Nido R. Qubein Director /s/ E. Rhone Sasser _____________________________________ E. Rhone Sasser Director /s/ Jack E. Shaw _____________________________________ Jack E. Shaw Director /s/ Harold B. Wells _____________________________________ Harold B. Wells Director 88 EXHIBIT INDEX
Exhibit No. Description Location ------- ----------- -------- 2(a) Agreement and Plan of Reorganization dated Incorporated herein by reference to as of July 29, 1994 and amended and Registration No. 33-56437. restated as of October 22, 1994 between the Registrant and BB&T Financial Corporation. 2(b) Plan of Merger as of July 29, 1994 as Incorporated herein by amended and restated on October 22, 1994 reference to Registration between the Registrant and BB&T Financial No. 33-56437. Corporation. 2(c) Agreement and Plan of Reorganization dated Incorporated herein by as of November 1, 1996 between the reference to Exhibit 3(a) Registrant and United Carolina Bancshares filed in the Annual Corporation, as amended. Report on Form 10-K, filed March 17, 1997. 2(d) Agreement of Plan of Reorganization dated Incorporated herein by as of October 29, 1997 between the reference to Registration Registrant and Life Bancorp, Inc. No. 33-44183. 3(a)(i) Amended and Restated Articles of Incorporated herein by Incorporation of the Registrant, as reference to Exhibit 3(a) amended. filed in the Annual Report on Form 10-K, filed March 17, 1997. 3(a)(ii) Articles of Amendment of Articles of Incorporated herein by Incorporation. reference to Exhibit 3(a) (ii) filed in the Annual Report on Form 10-K, filed March 18, 1998. 3(b) Bylaws of the Registrant, as amended. Incorporated herein by reference to Exhibit 3(b) filed in the Annual Report on Form 10-K, filed March 18, 1998. 4(a) Articles of Amendment to Amended and Incorporated herein by Restated Articles of Incorporation of the reference to Exhibit 3(a) Registrant related to Junior Participating filed in the Annual Preferred Stock. Report on Form 10-K, filed March 17, 1997. 4(b) Rights Agreement dated as of December 17, Incorporated herein by 1996 between the Registrant and Branch reference to Exhibit 1 filed Banking and Trust Company, Rights Agent. under Form 8-A, filed January 10, 1997. 4(c) Subordinated Indenture (including Form of Incorporated herein by Subordinated Debt Security) between the reference to Exhibit 4(d) of Registrant and State Street Bank and Trust Registration Company, Trustee, dated as of May 24, 1996. No. 333-02899. 4(d) Senior Indenture (including Form of Senior Incorporated herein by Debt Security) between the Registrant and reference to Exhibit 4(c) of State Street Bank and Trust company, Registration No. 333-02899. Trustee, dated as of May 24, 1996. 10(a)* Death Benefit Only Plan, Dated April 23, Incorporated herein by 1990, by and between Branch Banking and reference to Registration Trust Company (as successor to Southern No. 33-33984. National Bank of North Carolina) and L. Glenn Orr, Jr.
89 10(b)* BB&T Corporation Non-Employee Directors' Incorporated herein by Deferred Compensation and Stock Option Plan reference to Exhibit 10(b) of the Annual Report on Form 10-K, filed March 17, 1997. 10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by Incentive Plan. reference to Registration No. 33-57865. 10(d)* Settlement and Non-Compete Agreement, dated Incorporated herein by February 28, 1995, by and between the reference to Registration Registrant and L. Glenn Orr, Jr. No. 33-56437. 10(e)* Settlement Agreement, Waiver and General Incorporated herein by Release dated September 19, 1994, by and reference to Registration between the Registrant, Branch Banking and No. 33-56437. Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton. 10(f) BB&T Corporation Savings and Thrift Plan. Incorporated herein by reference to Registration No. 33-57867. 10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by Incentive Plan. reference to Exhibit 10(g) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(h)* Form of Branch Banking and Trust Company Incorporated by reference to Long-Term Incentive Plan. the identified exhibit under the Quarterly Report on Form 10-Q, filed May 14, 1991. 10(i)* Form of Branch Banking and Trust Company Incorporated by reference to Executive Incentive Compensation Plan. the identified exhibit under the Annual Report on Form 10-K, filed February 22, 1985. 10(j)* Deferred Compensation Plan for Key Incorporated herein by Employees. reference to Exhibit 10(j) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by reference to Exhibit 10(k) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(l)* BB&T Corporation Special Supplemental Incorporated herein by Retirement Plan. reference to Exhibit 10(l) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(m)* Settlement and Noncompetition Agreement, Incorporated herein by dated July 1, 1997, by and between the reference to Exhibit 10(m) Registrant and E. Rhone Sasser. filed in the Annual Report on Form 10-K, filed March 18, 1998.
90 11 Statement re Computation of Earnings Per Filed herewith as Note R. of Share. the "Notes to Consolidated Financial Statements." 21 Subsidiaries of the Registrant. Filed herewith. 22 Proxy Statement for the 1999 Annual Meeting Future filing incorporated of Shareholders, dated April 27, 1999. by reference pursuant to the General Instruction G(3). 23(a) Consent of Independent Public Accountants. Filed herewith. 23(b) Opinion of Independent Public Accountants. Filed herewith. 27 Financial Data Schedule. Filed as an exhibit to the electronically-filed document as required.
* Management compensatory plan or arrangement. 91 EX-21 2 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT BB&T Corporation, a North Carolina corporation, is a multi-bank holding company. The table below sets forth all of BB&T's subsidiaries as to State or Jurisdiction of Organization and Percentage of Voting Securities Owned as well as their relationship to BB&T. All of the subsidiaries listed below are included in the consolidated financial statements, and no separate financial statements are submitted for any subsidiary.
State or Percentage Jurisdiction of of Voting Subsidiary Organization Shares Owned - ---------- ---------------- ------------ Branch Banking and Trust Company.............. North Carolina 100% BB&T Financial Corporation of South Carolina.. South Carolina 100% Branch Banking and Trust Company of South Carolina..................................... South Carolina 100%(1) BB&T Financial Corporation of Virginia........ Virginia 100% Regional Acceptance Corporation............... North Carolina 100% Money 24, Inc................................. North Carolina 100% Craigie, Incorporated......................... Virginia 100% Phillips Factors Corporation.................. North Carolina 100% Refloat, Incorporated......................... North Carolina 100% Unified Investors Life Insurance Company...... Arizona 100% Franklin National Bank of Washington, D.C..... Washington, D.C. 100% BB&T Bankcard Corporation..................... Georgia 100% Grey Hawk, Inc................................ Nevada 100% BB&T Leasing Corporation...................... North Carolina 100%(2) BB&T Investment Services, Inc................. North Carolina 100%(2) BB&T Insurance Services, Inc.................. North Carolina 100%(2) Grey Eagle, Inc............................... Delaware 100%(2) BB&T Realty Investments, Inc.................. Virginia 100%(2) Prime Rate Premium Finance Corporation, Inc... South Carolina 100%(2) Agency Technologies, Inc...................... South Carolina 100%(2) 150 Corporation............................... North Carolina 100%(2) Farr Associates, Inc.......................... North Carolina 100%(2) AutoBase Information Systems, Inc............. North Carolina 51%(2) W.E. Stanley, Inc............................. North Carolina 100%(2) Workmen's Service Corporation................. North Carolina 100%(2,12) First Savings Service Corporation............. North Carolina 100%(2,12) Fay-Charl Corporation......................... North Carolina 100%(2,12) Peoples Service Corporation of Thomasville.... North Carolina 100%(2,12) Guaranty Financial Services................... North Carolina 100%(2,12) North Carolina Trustee Company................ North Carolina 100%(2,12) Davidson Financial, Inc....................... North Carolina 100%(2,12) BT Financial Corporation...................... North Carolina 100%(2,12) MASSLA Corporation............................ Maryland 100%(2,12) Investor Services, Inc........................ South Carolina 100%(3,12) FICORP of South Carolina...................... South Carolina 100%(3,12) BB&T Realty Corporation....................... North Carolina 100%(3,12) Branch Banking and Trust Company of Virginia.. Virginia 100%(4) Nexus Software, Inc........................... North Carolina 51%(5) BB&T Real Estate Investment Trust, Inc........ North Carolina 100%(6) Regional Acceptance Investment Corporation of Nevada....................................... Nevada 100%(7)
Rega Insurance Services, Inc................ North Carolina 100%(7) Greenville Car Mart, Inc.................... North Carolina 100%(7) Regional Fidelity Reinsurance Limited....... British Virgin Islands 99%(7) Mountain Financial Corporation.............. Virginia 100%(8) Phillips Financial Corporation.............. North Carolina 100%(9) Sheffield Financial Corporation............. North Carolina 100%(10) Freedom Financial Services, Inc............. Virginia 100%(11) Southside Services Corp..................... Virginia 100%(11,12) Century Mortgage Inc........................ Virginia 100%(11,12) Virginia First Investment Corp.............. Virginia 100%(11,12) Colony Financial............................ Virginia 100%(11,12) Fidelity Service Corporation................ Virginia 100%(11,12) Life Financial Services Corporation......... Virginia 100%(11,12) Southern International Corporation.......... North Carolina 100%(12) BB&T Savings Corporation.................... North Carolina 100%(12) Franklin Community Development Corporation.. Washington, D.C. 100%(12)
- -------- (1)Owned by BB&T Financial Corporation of South Carolina (2)Owned by Branch Banking and Trust Company (North Carolina) (3)Owned by Branch Banking and Trust Company of South Carolina (4)Owned by BB&T Financial Corporation of Virginia (5)Owned by 150 Corporation (6)Owned by BB&T Realty Investments, Inc. (7)Owned by Regional Acceptance Corporation (8)Owned by Craigie, Inc. (9)Owned by Phillips Factors Corporation (10)Owned by Refloat, Inc. (11)Owned by Branch Banking and Trust Company of Virginia (12)Inactive EX-23 3 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 8-K into BB&T Corporation's previously filed Registration Statement File Nos. 33-52367, 33-57865, 33-57867, 333-03989 and 333-50035 filed on Form S-8 and Registration Statement File Nos. 33-57859, 33- 57861, 33-57871 and 333-02899 filed on Form S-3. Arthur Andersen LLP Charlotte, North Carolina, March 19, 1999. EX-27 4 EXHIBIT 27
9 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 938,797 4,972 103,210 60,422 7,971,374 127,470 130,820 23,694,776 314,387 34,427,227 23,046,907 3,369,101 515,737 4,736,934 0 0 1,451,054 1,307,494 34,427,227 1,980,119 490,892 10,171 2,481,182 809,076 1,233,778 1,247,404 80,310 7,752 961,374 733,722 501,825 0 0 501,825 1.75 1.71 4.34 84,968 49,971 522 0 279,596 83,064 20,734 314,387 314,387 0 102,117
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