-----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, GKP2062hJYRkSeEuP6RGyOahI4eH/EuAL1F7vBnzAu88/Z23ThFj1NT3nyEsl+cg mCxV6ugLM3lfBOf6oRreeg== 0000950109-99-001662.txt : 19990503 0000950109-99-001662.hdr.sgml : 19990503 ACCESSION NUMBER: 0000950109-99-001662 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990430 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990430 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: 8-K SEC ACT: SEC FILE NUMBER: 001-10853 FILM NUMBER: 99607036 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 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 April 30, 1999 Date of Report (Date of earliest event recorded) BB&T Corporation (Exact name of registrant as specified in its charter) Commission file number : 1-10853 North Carolina 56-0939887 (State of Incorporation) (I.R.S. Employer Identification No.) 200 West Second Street Winston-Salem, North Carolina 27101 (Address of Principal Executive Offices) (Zip Code) (336) 733-2000 (Registrant's Telephone Number, Including Area Code) -------- This Form 8-K has 81 pages. Item 5. Other Events On March 5, 1999, BB&T Corporation completed its merger with MainStreet Financial Corporation ("MainStreet"), of Martinsville, Virginia. To consummate the transaction, MainStreet's shareholders received 1.18 shares of BB&T common stock in exchange for each share of MainStreet common stock held, resulting in the issuance of 16.8 million shares of BB&T common stock. The transaction was accounted for as a pooling-of-interests. Accordingly, the consolidated financial statements (including notes to consolidated financial statements), and supplemental financial information contained in BB&T's Annual Report on Form 10-K for the years ended December 31, 1998, 1997 and 1996, restated for the accounts of MainStreet, are included in this Current Report on Form 8-K. Item 7. Financial Statements and Exhibits
Exhibit Description ------- ----------- 11 Computation of Earnings Per Share. Filed herewith as Note R. of the "Notes to Consolidated Financial Statements." 23 Consent of Independent Public Accountants. Filed herewith on page 4. 27 Financial Data Schedule. Filed herewith as an exhibit to the electronically filed document as required. 99.1 Report of Independent Public Accountants. Filed herewith on page 6. 99.2 BB&T's restated audited financial statements and Filed herewith beginning on notes thereto, including the accounts of MainStreet. page 7. 99.3 BB&T's restated Securities Act Guide 3 statistical Filed herewith beginning on page 62. disclosures, including the accounts of MainStreet.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BB&T CORPORATION (Registrant) By: /S/ SHERRY A. KELLETT --------------------------- Sherry A. Kellett Senior Executive Vice President and Controller (Principal Accounting Officer) Date: April 30, 1999. EX-23 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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, April 30, 1999. EX-27 3 FINANCIAL DATA SCHEDULE
9 EFFECTIVE DECEMBER 31, 1997, BB&T ADOPTED SFAS NO. 128, "EARNINGS PER SHARE" THE LINES LABELED EPS-PRIMARY AND EPS-FULLY DILUTED ON THIS EXHIBIT ACTUALLY REFLECT EPS-BASIC AND EPS-DILUTED, RESPECTIVELY, AS DETERMINED UNDER SFAS NO. 128. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 997,245 8,925 103,216 60,422 8,737,936 174,735 179,444 24,718,468 330,615 36,388,330 24,258,168 3,707,333 534,144 4,964,797 0 0 1,534,820 1,389,068 36,388,330 2,074,467 547,897 11,043 2,633,407 854,115 1,316,278 1,317,129 90,470 7,682 1,019,920 750,368 513,021 0 0 513,021 1.69 1.65 4.30 88,847 54,226 522 0 292,667 91,621 21,430 330,615 330,615 0 113,167
EX-99.1 4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 99.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of 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, April 30, 1999. EX-99.2 5 RESTATED AUDITED FINANCIAL STATEMENTS Exhibit 99.2 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 $ 997,245 $ 940,184 Interest-bearing deposits with banks 8,925 80,605 Federal funds sold and securities purchased under resale agreements or similar arrangements 103,216 246,464 Trading securities 60,422 67,878 Securities available for sale 8,737,936 7,993,934 Securities held to maturity (market value: $179,444 at December 31, 1998 and $320,444 at December 31, 1997) 174,735 314,783 Loans held for sale 1,035,668 512,189 Loans and leases, net of unearned income 23,682,800 21,691,741 Allowance for loan and lease losses (330,615) (292,667) ------------ ------------ Loans and leases, net 23,352,185 21,399,074 ------------ ------------ Premises and equipment, net 471,780 451,862 Other assets 1,446,218 1,158,168 ------------ ------------ Total assets $ 36,388,330 $ 33,165,141 ============ ============ Liabilities and Shareholders' Equity Deposits: Noninterest-bearing deposits $ 3,465,362 $ 3,135,687 Savings and interest checking 1,783,491 1,991,768 Money rate savings 7,021,556 5,474,046 Other time deposits 11,349,083 10,517,617 Foreign deposits 638,676 1,385,632 ------------ ------------ Total deposits 24,258,168 22,504,750 Short-term borrowed funds 3,707,333 3,862,727 Long-term debt 4,964,797 3,750,484 Accounts payable and other liabilities 534,144 464,675 ------------ ------------ Total liabilities 33,464,442 30,582,636 ------------ ------------ 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, 306,963,976 at December 31, 1998 and 151,965,992 at December 31, 1997 1,534,820 759,830 Additional paid-in capital 177,098 215,041 Retained earnings 1,151,010 1,556,701 Loan to employee stock ownership plan and unvested restricted stock (14) (1,138) Accumulated other nonshareholder changes in equity, net of deferred income taxes of $38,366 at December 31, 1998 and $33,964 at December 31, 1997 60,974 52,071 ------------ ------------ Total shareholders' equity 2,923,888 2,582,505 ------------ ------------ Total liabilities and shareholders' equity $ 36,388,330 $ 33,165,141 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 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 $2,074,467 $1,881,108 $1,705,080 Interest and dividends on securities 547,897 504,980 454,196 Interest on short-term investments 11,043 6,366 8,870 ---------- ---------- ---------- Total interest income 2,633,407 2,392,454 2,168,146 ---------- ---------- ---------- Interest Expense Interest on deposits 854,115 826,898 796,070 Interest on short-term borrowed funds 218,617 168,785 130,508 Interest on long-term debt 243,546 175,113 121,658 ---------- ---------- ---------- Total interest expense 1,316,278 1,170,796 1,048,236 ---------- ---------- ---------- Net Interest Income 1,317,129 1,221,658 1,119,910 Provision for loan and lease losses 90,470 102,680 65,795 ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses 1,226,659 1,118,978 1,054,115 ---------- ---------- ---------- Noninterest Income Service charges on deposits 174,847 154,729 137,972 Mortgage banking income 79,670 50,628 40,494 Trust income 40,937 35,378 31,781 Agency insurance commissions 52,186 40,148 27,541 Other insurance commissions 12,599 13,697 13,288 Bankcard fees and merchant discounts 30,140 23,955 19,292 Other nondeposit fees and commissions 82,805 66,619 46,903 Securities gains, net 7,682 4,139 3,820 Other income 62,763 83,161 32,316 ---------- ---------- ---------- Total noninterest income 543,629 472,454 353,407 ---------- ---------- ---------- Noninterest Expense Personnel expense 514,546 491,400 426,720 Occupancy and equipment expense 161,876 169,270 134,188 Federal deposit insurance expense 4,464 5,274 50,067 Amortization of intangibles and mortgage servicing rights 49,473 24,734 15,629 Advertising and public relations expense 26,569 27,082 25,016 Professional services 50,807 49,271 28,317 Other expense 212,185 247,846 189,184 ---------- ---------- ---------- Total noninterest expense 1,019,920 1,014,877 869,121 ---------- ---------- ---------- Earnings Income before income taxes 750,368 576,555 538,401 Provision for income taxes 237,347 198,268 176,953 ---------- ---------- ---------- Net Income 513,021 378,287 361,448 Preferred dividend requirements -- -- 610 ---------- ---------- ---------- Income applicable to common shares $ 513,021 $ 378,287 $ 360,838 ========== ========== ========== Per Common Share Net income: Basic $ 1.69 $ 1.25 $ 1.19 ========== ========== ========== Diluted $ 1.65 $ 1.23 $ 1.17 ========== ========== ========== Cash dividends paid $ .66 $ .58 $ .50 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Shares of Additional Common Preferred Common Paid-In Stock Stock Stock Capital ------------ ------------ ------------ ------------ (Dollars in thousands) Balance, December 31, 1995, as previously reported 145,075,281 $ 3,669 $ 725,377 $ 363,564 Merger with MainStreet Financial Corporation, accounted for under the pooling-of-interests method 7,807,425 -- 39,037 42,391 ------------ ------------ ------------ ------------ Balance, December 31, 1995, restated 152,882,706 3,669 764,414 405,955 ------------ ------------ ------------ ------------ Add (Deduct): Nonshareholder changes in equity:** Net income -- -- -- -- Unrealized holding losses arising during the period -- -- -- -- Less: reclassification adjustment -- -- -- -- ------------ ------------ ------------ ------------ Net unrealized losses on securities -- -- -- -- ------------ ------------ ------------ ------------ Total nonshareholder changes in equity -- -- -- -- ------------ ------------ ------------ ------------ Common stock issued 2,859,797 -- 14,298 59,484 Redemption of common stock (7,391,457) -- (36,957) (185,614) Preferred stock cancellations and conversions 4,334,692 (3,669) 21,674 (18,005) Cash dividends declared: Common stock -- -- -- -- Preferred stock -- -- -- -- Other -- -- -- (378) ------------ ------------ ------------ ------------ Balance, December 31, 1996 152,685,738 -- 763,429 261,442 Add (Deduct): Nonshareholder changes in equity:** Net income -- -- -- -- Unrealized holding gains arising during the period -- -- -- -- Less: reclassification adjustment -- -- -- -- ------------ ------------ ------------ ------------ Net unrealized gains on securities -- -- -- -- ------------ ------------ ------------ ------------ Total nonshareholder changes in equity -- -- -- -- ------------ ------------ ------------ ------------ Common stock issued 6,223,406 -- 31,117 242,032 Redemption of common stock (6,943,152) -- (34,716) (286,508) Cash dividends declared on common stock -- -- -- -- Other -- -- -- (1,925) ------------ ------------ ------------ ------------ Balance, December 31, 1997 151,965,992 -- 759,830 215,041 Add (Deduct): Nonshareholder changes in equity:** Net income -- -- -- -- Unrealized holding gains arising during the period -- -- -- -- Less: reclassification adjustment -- -- -- -- ------------ ------------ ------------ ------------ Net unrealized gains on securities -- -- -- -- ------------ ------------ ------------ ------------ Total nonshareholder changes in equity ------------ ------------ ------------ ------------ Common stock issued 11,514,675 -- 57,573 308,857 Redemption of common stock (6,716,080) -- (33,580) (310,430) 2-for-1 stock split effective August 3, 1998 150,199,389 -- 750,997 (39,410) Cash dividends declared on common stock -- -- -- -- Other -- -- -- 3,040 ============ ============ ============ ============ Balance, December 31, 1998 306,963,976 $ -- $ 1,534,820 $ 177,098 ============ ============ ============ ============ Accumulated Other Retained Nonshareholder Total Earnings Changes Shareholders' and Other* in Equity Equity ----------- ----------- ----------- (Dollars in thousands) Balance, December 31, 1995, as previously reported $ 1,083,796 $ 36,032 $ 2,212,438 Merger with MainStreet Financial Corporation, accounted for under the pooling-of-interests method 35,341 (502) 116,267 ----------- ----------- ----------- Balance, December 31, 1995, restated 1,119,137 35,530 2,328,705 ----------- ----------- ----------- Add (Deduct): Nonshareholder changes in equity:** Net income 361,448 -- 361,448 Unrealized holding losses arising during the period -- (18,053) (18,053) Less: reclassification adjustment -- (3,820) (3,820) ----------- ----------- ----------- Net unrealized losses on securities -- (21,873) (21,873) ----------- ----------- ----------- Total nonshareholder changes in equity 361,448 (21,873) 339,575 ----------- ----------- ----------- Common stock issued 1,290 -- 75,072 Redemption of common stock 2 -- (222,569) Preferred stock cancellations and conversions -- -- -- Cash dividends declared: Common stock (137,961) -- (137,961) Preferred stock (610) -- (610) Other 677 -- 299 ----------- ----------- ----------- Balance, December 31, 1996 1,343,983 13,657 2,382,511 Add (Deduct): Nonshareholder changes in equity:** Net income 378,287 -- 378,287 Unrealized holding gains arising during the period -- 42,553 42,553 Less: reclassification adjustment -- (4,139) (4,139) ----------- ----------- ----------- Net unrealized gains on securities -- 38,414 38,414 ----------- ----------- ----------- Total nonshareholder changes in equity 378,287 38,414 416,701 ----------- ----------- ----------- Common stock issued 5,495 -- 278,644 Redemption of common stock -- -- (321,224) Cash dividends declared on common stock (175,376) -- (175,376) Other 3,174 -- 1,249 ----------- ----------- ----------- Balance, December 31, 1997 1,555,563 52,071 2,582,505 Add (Deduct): Nonshareholder changes in equity:** Net income 513,021 -- 513,021 Unrealized holding gains arising during the period -- 16,585 16,585 Less: reclassification adjustment -- (7,682) (7,682) ----------- ----------- ----------- Net unrealized gains on securities -- 8,903 8,903 ----------- ----------- ----------- Total nonshareholder changes in equity 513,021 8,903 521,924 ----------- ----------- ----------- Common stock issued -- -- 366,430 Redemption of common stock -- -- (344,010) 2-for-1 stock split effective August 3, 1998 (711,587) -- -- Cash dividends declared on common stock (205,319) -- (205,319) Other (682) -- 2,358 =========== =========== =========== Balance, December 31, 1998 $ 1,150,996 $ 60,974 $ 2,923,888 =========== =========== ===========
- --------------- * 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. 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 ................................................................... $ 513,021 $ 378,287 $ 361,448 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses ..................................... 90,470 102,680 65,795 Depreciation of premises and equipment .................................. 66,822 61,655 49,117 Amortization of intangibles and mortgage servicing rights ............... 49,473 24,734 15,629 Accretion of negative goodwill .......................................... (6,243) (6,180) (6,238) Amortization of unearned stock compensation ............................. 1,124 8,111 2,450 Discount accretion and premium amortization on securities, net .......... 1,984 3,598 6,201 Net decrease (increase) in trading account securities ................... 7,456 (25,688) -- Loss (gain) on sales of securities, net ................................. (7,682) (4,139) (3,820) 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 .............................. 4,344,135 1,583,793 1,362,991 Purchases of loans held for sale ........................................ (1,745,442) (734,727) (429,523) Origination of loans held for sale, net of principal collected .......... (3,090,835) (1,020,098) (893,319) Decrease (increase) in: Accrued interest receivable .......................................... (15,194) 2,678 18,843 Other assets ......................................................... (68,221) (197,913) (112,716) Increase (decrease) in: Accrued interest payable ............................................. 17,132 7,029 6,703 Accounts payable and other liabilities ............................... 74,611 101,152 (9,642) Other, net .............................................................. 763 1,138 4,100 ----------- ----------- ----------- Net cash provided by operating activities ............................ 195,654 300,778 429,289 ----------- ----------- ----------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale ......................... 1,389,111 1,793,585 737,286 Proceeds from maturities, calls and paydowns of securities available for sale 2,247,730 1,680,926 2,788,988 Purchases of securities available for sale ................................... (3,683,893) (4,136,669) (2,910,349) Proceeds from sales of securities held to maturity ........................... -- 26,170 -- Proceeds from maturities, calls and paydowns of securities held to maturity .. 55,811 44,340 232,093 Purchases of securities held to maturity ..................................... (16,196) (33,836) (336,728) 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 ................................ (1,338,660) (1,265,167) (1,889,906) Purchases of loans ........................................................... (110,090) (205,232) (232,236) Net cash acquired (paid) in transactions accounted for under the purchase method 97,757 95,205 (4,187) Purchases and originations of mortgage servicing rights ...................... (74,086) (39,093) (26,356) Proceeds from disposals of premises and equipment ............................ 23,058 14,577 8,769 Purchases of premises and equipment .......................................... (108,844) (151,551) (75,927) Proceeds from sales of foreclosed property ................................... 28,902 16,562 16,321 Proceeds from sales of other real estate held for development or sale ........ 18,751 9,787 9,296 Other, net ................................................................... (1,375) 4,304 (18,147) ----------- ----------- ----------- Net cash used in investing activities ................................... (1,501,453) (2,162,931) (1,725,251) ----------- ----------- ----------- Cash Flows From Financing Activities: Net increase in deposits ..................................................... 849,067 446,663 858,586 Net increase (decrease) in short-term borrowed funds ......................... (413,919) 600,680 27,506 Proceeds from long-term debt ................................................. 2,752,628 5,743,485 1,657,154 Repayments of long-term debt ................................................. (1,533,557) (4,304,498) (920,157) Net proceeds from common stock issued ........................................ 33,227 25,225 52,358 Redemption of common stock ................................................... (344,010) (321,224) (222,569) Cash dividends paid on common and preferred stock ............................ (195,504) (162,724) (133,751) Other, net ................................................................... -- (12) (5,298) ----------- ----------- ----------- Net cash provided by financing activities ............................... 1,147,932 2,027,595 1,313,829 ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents ........................... (157,867) 165,442 17,867 Cash and Cash Equivalents at Beginning of Year ................................. 1,267,253 1,101,811 1,083,944 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year ....................................... $ 1,109,386 $ 1,267,253 $ 1,101,811 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 1,298,632 $ 1,118,870 $ 1,016,096 Income taxes 137,818 150,002 176,707 Noncash financing and investing activities: Transfer of securities from held to maturity to available for sale 106,819 -- 36,646 Transfer of securities from available for sale to held to maturity -- -- 240 Transfer of loans to foreclosed property 21,845 20,836 28,408 Transfer of fixed assets to other real estate owned 10,351 13,761 10,466 Restricted stock issued -- 74 575 Securitization of mortgage loans 465,341 -- 817,268
The accompanying notes are an integral part of these consolidated financial statements. 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"); Franklin National Bank of Washington, D.C. ("Franklin National Bank"); BB&T Financial Corporation of South Carolina, parent company of Branch Banking and Trust Company of South Carolina ("BB&T-SC"); BB&T Financial Corporation of Virginia, parent company of Branch Banking and Trust Company of Virginia ("BB&T- VA"), Piedmont Trust Bank of Martinsville, Virginia; Commerce Bank of College Park, Maryland; MainStreet Bank of Mechanicsville, Virginia; Bank of Carroll of Hillsville, Virginia; Bank of Ferrum, Virginia; The First Bank of Stuart, Virginia; First National Bank of Clifton Forge, Virginia; The First Community Bank of Saltville, Virginia; Tysons National Bank of McLean, Virginia; MainStreet Trust Company N.A., of Martinsville, Virginia; and The Bank of Northern Virginia of Arlington, Virginia; (collectively, the "Banks"), Regional Acceptance Corporation ("Regional Acceptance") Scott & Stringfellow Financial, Inc., ("Scott & Stringfellow") 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. Results of operations of companies acquired in transactions accounted for as purchases are included from the dates of acquisition. (See Note B) 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. 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 $106.8 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 policies. 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 measure 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. 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 collectability 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 collectability 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. 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 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 303,923,429 303,174,462 303,209,770 Diluted 310,109,165 308,210,488 309,506,279 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 $391.9 million recorded as goodwill and $7.8 million as core deposit 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 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. 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 $ 106,801 $ 129,719 $ 4,994 Purchase price (295,268) (276,483) (31,056) -------- -------- ------- Excess of purchase price over net assets acquired $ (188,467) $ (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. 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. On November 7, 1996, BB&T completed the acquisition of the William Goldsmith Agency Inc. of Greenville, South Carolina through the issuance of 140,414 shares of common stock. 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 96,240 shares of common stock. Boyle-Vaughan Associates, Inc. based in Columbia, South Carolina, was acquired on November 22, 1996 through the issuance of 984,126 shares of common stock. 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 3.2 million shares 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 finance company that specializes in loans to small commercial lawn care businesses across the country. The acquisition, which was completed through the issuance of 750,000 shares of common stock, 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 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 926,000 shares of BB&T's common stock. 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 the merger was consummated. The merger, which was accounted for under the purchase method of accounting, was effected through the issuance of 3.8 million shares of BB&T's common stock 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 February 28, 1998, BB&T completed the acquisition of Tysons Financial Corporation ("Tysons") of McLean, Virginia. Tysons, with $102.1 million in assets, was acquired through the issuance of 721,187 shares of BB&T common stock. In conjunction with the acquisition, BB&T recorded $9.3 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. On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in Richmond, Virginia. The transaction was accounted for as a purchase. In conjunction with the acquisition, BB&T issued 3.6 million shares of BB&T common stock in exchange for all of the outstanding shares of Scott & Stringfellow common stock. BB&T recorded goodwill totaling $72.8 million, which is being amortized using the straight-line method over a period of 15 years. 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 1,995,451 $ 1,896,455 ============ ============= Net income 508,369 $ 370,340 ============ ============= Basic EPS 1.67 $ 1.22 ============ ============= Diluted EPS 1.64 $ 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 business combinations accounted for as purchases. 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 950,316 shares of common stock 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 3.6 million shares of common stock 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 84,270 shares of common stock 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 11.7 million shares in exchange for all of the outstanding stock of Regional Acceptance. On September 27, 1996, BB&T completed its acquisition of The First National Bank of Clifton Forge ("Clifton Forge"), of Clifton Forge, Virginia. The transaction was accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 1.7 million shares of common stock in exchange for all of the outstanding common stock of Clifton Forge. On November 13, 1996, BB&T acquired Hanover Bank ("Hanover") of Hanover, Virginia, in a transaction accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 1.4 million shares of common stock in exchange for all of the outstanding common stock of Hanover. 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 55.4 million shares of common stock in exchange for all of the shares of UCB common stock outstanding. On December 1, 1997, BB&T completed its acquisition of Commerce Bank Corporation ("Commerce") in a transaction accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 676,000 shares of common stock in exchange for all of the outstanding common stock of Commerce. 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 11.6 million shares of common stock in exchange for all of the shares of Life common stock outstanding. On March 10, 1998, BB&T completed its acquisition of Regency Financial Shares, Incorporated ("Regency") of Richmond, Virginia, in a transaction accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 801,000 shares of common stock in exchange for all of the shares of Regency. 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 4.9 million shares of common stock in exchange for all of the shares of Franklin common stock outstanding. On July 7, 1998, BB&T completed a merger with Ballston Bancorp, Inc. of Washington, D.C., in a transaction accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 824,000 shares of common stock in exchange for all of the outstanding common stock of Ballston. On March 5, 1999, BB&T completed a merger with MainStreet Financial Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction was accounted for as a pooling of interests. BB&T issued approximately 16.8 million shares of BB&T common stock in exchange for all of the outstanding shares of MainStreet. The following presentation reflects key line items on an historical basis for BB&T and MainStreet and on a pro forma combined basis assuming the merger was effective as of and for the periods presented.
Historical Basis -------------------------------- BB&T BB&T Mainstreet restated ------------------------------------------------------ (Dollars in thousands, except per share data) As of / For the Year Ended December 31, 1998 ------------------ Net interest income $ 1,247,404 $ 69,725 $ 1,317,129 Net income 501,825 11,196 513,021 Net earnings per share Basic 1.75 0.80 1.69 Diluted 1.71 0.80 1.65 Assets 34,427,227 1,983,589 36,388,330 Deposits 23,046,907 1,211,261 24,258,168 Shareholders' equity 2,758,548 165,888 2,923,888 As of / For the Year Ended December 31, 1997 ----------------- Net interest income $ 1,158,525 $ 63,133 $ 1,221,658 Net income 360,418 17,869 378,287 Net earnings per share Basic 1.25 1.34 1.25 Diluted 1.23 1.34 1.23 Assets 31,290,247 1,874,578 33,165,141 Deposits 21,375,974 1,128,776 22,504,750 Shareholders' equity 2,439,110 143,982 2,582,505
Pending Acquisitions On January 27, 1999, BB&T announced plans to merge with First Citizens Corporation ("First Citizens"), of Newnan, Georgia. The transaction is expected to be accounted for as a pooling of interests. First Citizens' shareholders will receive 1.0789 shares of BB&T common stock in exchange for each share of First Citizens common stock held. The merger is expected to be completed in the third quarter of 1999. On January 28, 1999, BB&T announced plans to merge with Mason-Dixon Bancshares ("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 acquire Matewan BancShares, Inc. ("Matewan") of Williamson, West Virginia. On April 27, 1999, BB&T and Matewan approved amendments to the merger agreement that provide for Matewan shareholders to receive .67 shares of BB&T common stock for each share of Matewan common stock held and to receive .8375 shares of BB&T common stock for each share of Matewan Series A convertible preferred stock held. The transaction is expected to be completed in the third quarter of 1999 and accounted for as a purchase. On April 28, 1999, BB&T announced plans to merge with First Liberty Financial Corp. ("First Liberty") of Macon, Georgia. First Liberty's shareholders will receive between .85 and .87 shares of BB&T common stock for each share of First Liberty stock held. The transaction is expected to be completed in the fourth quarter of 1999 and accounted for as a pooling of interests. 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 -------------------------------------------------------------------------- Gross Unrealized Estimated Amortized -------------------------------------- Fair Cost Gains Losses Value ---------------- ---------------- ------------------ ------------------ (Dollars in thousands) Securities held to maturity: U.S. Treasury, government and agency obligations $ 24,810 $ 45 $ 2 $ 24,853 Mortgage-backed securities 17,404 377 - 17,781 States and political subdivisions 132,521 4,305 16 136,810 ---------------- ---------------- ------------------ ------------------ Total securities held to maturity 174,735 4,727 18 179,444 ---------------- ---------------- ------------------ ------------------ Securities available for sale: U.S. Treasury, government and agency obligations 3,583,884 55,588 2,542 3,636,930 Mortgage-backed securities 3,665,958 36,907 12,482 3,690,383 Equity and other securities 1,219,581 21,518 3,234 1,237,865 States and political subdivisions 169,173 3,599 14 172,758 ---------------- ---------------- ------------------ ------------------ Total securities available for sale 8,638,596 117,612 18,272 8,737,936 ---------------- ---------------- ------------------ ------------------ Total securities $ 8,813,331 $ 122,339 $ 18,290 $ 8,917,380 ================ ================ ================== ================== December 31, 1997 --------------------------------------------------------------------- Gross Unrealized Estimated Amortized --------------------------------- Fair Cost Gains Losses Value ----------------- ---------------- ------------- ---------------- (Dollars in thousands) Securities held to maturity: U.S. Treasury, government and agency obligations $ 64,789 $ 1,139 $ 143 $ 65,785 Mortgage-backed securities 62,491 692 1,073 62,110 States and political subdivisions 187,503 5,137 91 192,549 ----------------- ---------------- ------------- ---------------- Total securities held to maturity 314,783 6,968 1,307 320,444 ----------------- ---------------- ------------- ---------------- Securities available for sale: U.S. Treasury, government and agency obligations 4,459,126 33,657 5,784 4,486,999 Mortgage-backed securities 2,922,352 47,646 3,861 2,966,137 Equity and other securities 464,805 13,388 18 478,175 States and political subdivisions 61,616 1,038 31 62,623 ----------------- ---------------- ------------- ---------------- Total securities available for sale 7,907,899 95,729 9,694 7,993,934 ----------------- ---------------- ------------- ---------------- Total securities $ 8,222,682 $ 102,697 $ 11,001 $ 8,314,378 ================= ================ ============= ================
Securities with a book value of approximately $4.9 billion and $4.3 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 $1.4 billion, $1.8 billion and $737.3 million, respectively. Gross gains of $7.9 million, $7.7 million and $6.1 million and gross losses of $218,000, $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 ---------------- ---------------- ------------------ ------------------ Debt Securities: (Dollars in thousands) Due in one year or less $ 55,041 $ 55,365 $ 1,005,386 $ 1,011,590 Due after one year through five years 95,316 98,562 3,081,236 3,130,044 Due after five years through ten years 17,676 18,510 507,514 513,964 Due after ten years 6,702 7,007 3,139,413 3,177,087 - - - - ============= =========== ============= ============= Total debt securities $ 174,735 $ 179,444 $ 7,733,549 $ 7,832,685 ================ =========== ============= =============
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 $ 3,637,633 $ 3,387,582 Real estate - construction and land development 2,266,024 2,206,987 Real estate - mortgage 13,890,100 12,597,971 Consumer 2,986,225 2,954,154 ------------------ ------------------- Loans held for investment 22,779,982 21,146,694 Leases: 1,620,326 788,462 ------------------ ------------------- Total loans and leases 24,400,308 21,935,156 Less: unearned income (717,508) (243,415) ------------------ ------------------- Loans and leases, net of unearned income $ 23,682,800 $ 21,691,741 ================== ===================
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 $512.2 million, respectively. BB&T had $17.2 billion in loans secured by real estate at December 31, 1998. However, these loans were 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 $ 27,154 $ 36,070 ------------------ ------------------- Total recorded investment with related valuation allowance 27,154 36,070 Valuation allowance assigned to impaired loans 4,862 4,093 ------------------ ------------------- Net carrying value - impaired loans $ 22,292 $ 31,977 ================== =================== Average balance of impaired loans $ 32,296 $ 28,212 ================== =================== Cash basis interest income recognized on impaired loans $ -- $ 231 ================== ===================
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 $ 217,876 Additions 53,219 Reductions (105,230) ------------------- Balance, December 31, 1998 $ 165,865 =================== 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 $ 292,667 $ 255,771 $ 237,808 Provision for losses charged to expense 90,470 102,680 65,795 Allowances of purchased companies 17,669 17,513 5,185 Loans and leases charged-off (91,621) (102,457) (74,322) Recoveries of previous charge-offs 21,430 19,160 21,305 ---------------- -------------- ------------- Net loans and leases charged-off (70,191) (83,297) (53,017) ---------------- -------------- ------------- Ending Balance $ 330,615 $ 292,667 $ 255,771 ================ ============== =============
At December 31, 1998, 1997 and 1996, loans not currently accruing interest totaled $88.8 million, $104.1 million and $69.1 million, respectively. Loans 90 days or more past due and still accruing interest totaled $54.2 million, $48.3 million and $45.2 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 $7.0 million. Foreclosed property was $29.0 million, $37.1 million and $31.3 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 $ 81,569 $ 77,132 Buildings and building improvements 335,761 330,110 Furniture and equipment 404,486 366,303 Capitalized leases on premises and equipment 4,089 3,840 --------------- ----------------- Subtotal 825,905 777,385 Less - accumulated depreciation and amortization 354,125 325,523 --------------- ----------------- Net premises and equipment $ 471,780 $ 451,862 =============== =================
Depreciation expense, which is included in occupancy and equipment expense, was $66.8 million, $61.7 million and $49.1 million in 1998, 1997 and 1996, respectively. BB&T has noncancellable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $30.5 million, $48.0 million and $31.3 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 $ 27,255 $ 513 2000 25,582 513 2001 23,972 498 2002 20,863 450 2003 17,906 427 2004 and years later 87,769 4,116 --------------- ----------------- Total minimum lease payments $ 203,347 6,517 =============== Less - amount representing interest 3,055 ----------------- Present value of net minimum payments on capitalized leases (Note I) $ 3,462 =================
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 --------------------------- 1998 1997 -------- -------- (Dollars in thousands) Balance, January 1, $ 3,358 $ 715 Additions 16,503 3,257 Reductions (273) (614) ======== ======== Balance, December 31, $ 19,588 $ 3,358 ======== ======== 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 Short-term borrowed funds are summarized as follows: December 31, ---------------------------- 1998 1997 ------------- ------------- (Dollars in thousands) Federal funds purchased $ 920,157 $ 936,160 Term Federal funds purchased 25,000 - Securities sold under agreements to repurchase 1,642,613 1,653,982 Master notes 675,141 638,325 U.S. Treasury tax and loan deposit notes payable 181,641 126,423 Short-term Federal Home Loan Bank advances 87,049 258,124 Short-term bank notes 73,181 208,079 Other short-term borrowed funds 102,551 41,634 ------------- ------------- Total short-term borrowed funds $ 3,707,333 $ 3,862,727 ============= ============= 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. NOTE I. Long-Term Debt
Long-term debt is summarized as follows: 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. $ 3,462 $ 3,489 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%. 2,669,249 2,099,803 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 Corporation-obligated mandatorily redeemable capital securities, dated November 19, 1997, maturing November 19, 2027, with interest at 8.9%.3 50,000 50,000 Repurchase Agreements, all maturing on 2002 with interest rates ranging from 5.51% to 5.66%. - 63,466 Other mortgage indebtedness 3,335 5,192 --------------- ---------------- Total long-term debt $ 4,964,797 $ 3,750,484 =============== ================
- -------------------------------------------------------- Excluding the capitalized leases set forth in Note F, future debt maturities total $5.0 billion and are $833.3 million, $893.4 million, $494.0 million, $289.7 million and $431.6 million for the next five years. The maturities for 2004 and later years are $2.0 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 a new maturity date of June 30, 2025. 3 Securities qualify under the risk-based capital guidelines as Tier 1 capital. 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, 306,963,976 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 $ 513,021 $ 378,287 $ 360,838 Pro Forma 502,111 369,194 357,350 Basic EPS: As reported 1.69 1.25 1.19 Pro Forma 1.65 1.22 1.18 Diluted EPS: As reported 1.65 1.23 1.17 Pro Forma 1.62 1.20 1.15
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 2.2%-2.5% in 1998, 2.2%-2.8% in 1997 and 2.2%-2.5% in 1996; expected volatility of 23%-29% in 1998, 21%-29% in 1997 and 22%-29% in 1996; risk free interest rates of 5.7%, 5.7%-6.2% and 5.7%-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, 7,193,402 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. 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 that were granted by acquired companies. 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 12,663,141 $ 11.22 13,125,482 $ 9.28 14,292,113 $ 8.85 Granted 2,569,474 26.16 2,285,355 18.40 342,279 12.23 Exercised (3,136,333) 9.32 (2,610,737) 7.62 (1,371,256) 5.69 Forfeited or Expired (118,539) 20.58 (136,959) 13.73 (137,654) 8.16 --------------- ------------- ---------------- ---------------- ----------------- -------------- Outstanding at end of year 11,977,743 $ 14.83 12,663,141 $ 11.22 13,125,482 $ 9.28 =============== ============= ================ ================ ================ ============== Options exercisable at year-end 9,168,594 $ 11.23 10,369,213 $ 9.69 10,359,571 $ 8.46 - -----------------------------------------------------------------------------------------------------------------------------------
The weighted average fair value of options granted was $8.55, $5.22 and $4.06 per option at December 31, 1998, 1997 and 1996, respectively. The following table summarizes information about the options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------- ------------------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number 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 7.41 $8.90 to $12.68 3,745,366 5.6 10.69 3,719,628 10.70 $13.19 to $18.75 2,277,241 7.2 13.71 2,263,129 13.68 $19.35 to $24.78 1,664,929 8.3 20.47 557,172 20.48 $28.22 to $33.49 1,755,934 9.2 30.88 94,392 29.14 ============= ============ ============ ============== =========== 11,977,743 6.3 yrs $ 14.83 9,168,594 $ 11.23 ============= ============ ============ ============== ===========
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 $ 178,877 $ 203,445 $ 168,256 State 9,937 9,830 5,418 ---------------- --------------- ---------------- 188,814 213,275 173,674 Deferred expense (benefit) 48,533 (15,007) 3,279 ---------------- --------------- ---------------- Provision for income taxes $ 237,347 $ 198,268 $ 176,953 ================ =============== ================
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% $ 262,628 $ 201,795 $ 118,440 Tax-exempt income from securities, loans and leases less related non-deductible interest expense (11,982) (10,986) (9,132) State income taxes, net of Federal tax benefit 8,257 5,506 3,963 Other, net (21,556) 1,953 (6,318) ---------------- --------------- ---------------- Provision for income taxes $ 237,347 $ 198,268 $ 106,953 ================ =============== ================ Effective income tax rate 31.6 % 34.4 % 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 $ 124,175 $ 112,872 Deferred compensation 29,895 28,254 Postretirement benefits other than pensions 18,474 16,850 Expense accruals 9,528 17,352 Other 26,044 29,949 ---------------- --------------- Total tax deferred assets 208,116 205,277 ---------------- --------------- Deferred tax liabilities: Depreciation (16,866) (27,507) Net unrealized appreciation on securities available for sale (38,366) (33,964) Lease financing (75,933) (19,193) Other (28,194) (45,466) ---------------- --------------- Total tax deferred liabilities (159,359) (126,130) ---------------- --------------- Net deferred tax asset $ 48,757 $ 79,147 ================ ===============
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, $1.7 million and $1.5 million related to securities gains for the years ended December 31, 1998, 1997 and 1996, respectively. 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 $ 14,085 $ 13,289 Defined contribution and ESOP plans 19,220 $ 27,756 13,454 ---------- --------- --------- Total expense related to benefit plans $ 28,341 $ 41,841 26,743 ========== ========= ========= 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. 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 ---------------------------------- ----------------------------------- 1998 1997 1998 1997 ---------------- ---------------- ---------------- ----------------- (Dollars in thousands) Change in Projected Benefit Obligation - ------------------------------------------------------ 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 (gain) 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 1, $ 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 (liability) asset (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) ============== ================ ================ ============== Weighted Average Assumptions December 31, - ------------------------------------------------------- ---------------------- 1998 1997 -------- -------- Weighted average assumed discount rate 6.75% 7.25% Weighted average expected longterm rate of return on plan assets 8.00 8.00 Assumed rate of annual compensation increases 5.50 5.50
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 ======== ======= ======== 1998 1997 --------------- ------------ (Dollars in thousands) Change in Projected Benefit Obligation - -------------------------------------- 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 (gain) loss 600 (4,358) ------------ ------------ Net amount recognized $ (46,807) $ (42,700) ============ ============
Reconciliation of Net Pension Asset (Liability) 1998 1997 - ----------------------------------------------------------- ------------- ------------- (Dollars in thousands) Prepaid 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) ============= ============= Weighted Average Assumptions December 31, - ---------------------------------------------------------- --------------------------- 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 4 yrs 5 yrs 1% Increase 1% 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. 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 $ 10,039,791 $ 8,100,491 Standby letters of credit and financial guarantees written 367,394 298,604 Commercial letters of credit 36,277 35,991 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. 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 $216.7 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 $1.5 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 administered 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. The following table provides summary information regarding regulatory capital for BB&T and its significant banking subsidiaries as of December 31, 1998 and 1997:
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 10.3 % $ 2,508,490 $ 969,886 10.7 % $ 2,342,982 $ 876,847 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 8.5 38,810 18,222 9.8 34,513 14,102 Piedmont Trust 12.2 46,393 15,214 11.6 42,370 14,586 --------------------------------------------------------------------------------------------------------------------------- Total Capital BB&T 15.0 % $ 3,629,292 $1,939,772 14.2 % $ 3,112,291 $ 1,753,694 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 9.7 43,992 36,444 11.0 38,705 28,204 Piedmont Trust 13.4 51,155 30,428 12.9 46,932 29,172 --------------------------------------------------------------------------------------------------------------------------- Leverage Capital BB&T 7.0 % $ 2,508,490 $1,070,072 7.5 % $ 2,342,982 $ 937,741 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 5.3 38,810 21,908 7.1 34,513 19,589 Piedmont Trust 8.3 46,393 16,776 7.7 42,370 16,562
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 $ 16,304 $ 13,326 Interest-bearing bank balances 602,094 605,319 Securities 199,301 210,008 Investment in banking subsidiaries 3,222,141 2,774,649 Investment in other subsidiaries 170,855 109,850 -------------------- -------------------- Total investments in subsidiaries 3,392,996 2,884,499 -------------------- -------------------- Advances to subsidiaries 331,000 185,504 Premises and equipment 7,436 7,402 Receivables from subsidiaries and other assets 189,358 87,234 -------------------- -------------------- Total assets $ 4,738,489 $ 3,993,292 ==================== ==================== Liabilities and Shareholders' Equity Short-term borrowed funds $ 821,322 $ 793,572 Dividends payable 50,804 42,173 Accounts payable and accrued liabilities 83,770 78,589 Long-term debt 858,705 496,453 -------------------- -------------------- Total liabilities 1,814,601 1,410,787 -------------------- -------------------- Total shareholders' equity 2,923,888 2,582,505 -------------------- -------------------- Total liabilities and shareholders' equity $ 4,738,489 $ 3,993,292 ==================== ====================
Condensed Income Statements For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------------- ----------------- --------------- Income (Dollars in thousands) Dividends from subsidiaries $ 397,683 $ 257,964 $ 151,346 Interest and other income from subsidiaries 92,195 74,218 46,309 Interest on investment securities 971 1,692 3,415 Other income 16,642 2,103 8,368 ----------------- ----------------- --------------- Total income 507,491 335,977 209,438 ----------------- ----------------- --------------- Expenses Interest expense 84,907 54,392 33,886 Occupancy expense 171 249 171 Other expenses 34,512 28,178 23,785 ----------------- ----------------- --------------- Total expenses 119,590 82,819 57,842 ----------------- ----------------- --------------- Income before income taxes and equity in undistributed earnings of subsidiaries 387,901 253,158 151,596 Income tax (benefit) expense (2,775) (207) 138 ----------------- ----------------- --------------- Income before equity in undistributed earnings of subsidiaries 390,676 253,365 151,458 Equity in undistributed earnings of subsidiaries 122,345 124,922 209,990 ----------------- ----------------- --------------- Net income $ 513,021 $ 378,287 $ 361,448 ================= ================= ===============
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 $ 513,021 $ 378,287 $ 361,448 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries less than (in excess of) dividends from subsidiaries (122,345) (124,922) (209,990) Depreciation of premises and equipment 171 272 214 Amortization of unearned compensation 1,124 8,111 2,450 Discount accretion and premium amortization - 396 192 Loss (gain) on sales of securities (37) - (9) Loss on disposals of other real estate owned 191 47 - (Increase) decrease in other assets (103,148) (26,769) 119,678 Increase (decrease) in accounts payable and accrued liabilities 5,181 163 5,091 ------------ ------------ ------------ Net cash provided by operating activities 294,158 235,585 279,074 ------------ ------------ ------------ Cash Flows From Investing Activities: Proceeds from sales of securities available for sale 55,706 - 866 Proceeds from maturities, calls and paydowns of securities available for sale - 35,482 49,347 Purchases of securities available for sale (45,836) (204,043) (52,324) Investment in subsidiaries (36,545) (733) (68,625) Advances to subsidiaries (676,032) (436,844) (308,640) 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 investing activities (178,222) (282,615) (196,501) ------------ ------------ ------------ Cash Flows From Financing Activities: Net increase (decrease) in long-term debt 362,354 361,841 247,629 Net increase in short-term borrowed funds 27,750 161,581 169,952 Net proceeds from common stock issued 33,227 25,225 52,358 Redemption of common stock (344,010) (321,224) (222,569) Cash dividends paid on common and preferred stock (195,504) (162,724) (133,751) ------------ ------------ ------------ Net cash (used in) provided by financing activities (116,183) 64,699 113,619 ------------ ------------ ------------ Net (Decrease) Increase in Cash and Cash Equivalents (247) 17,669 196,192 Cash and Cash Equivalents at Beginning of Year 618,645 600,976 404,784 ------------ ------------ ------------ Cash and Cash Equivalents at End of Year $ 618,398 $ 618,645 $ 600,976 ============ ============ ============
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. 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. The following is a summary of the carrying amounts and fair values of BB&T's financial assets and liabilities as of the periods indicated:
1998 1997 ----------------------------------- ----------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- (Dollars in thousands) Financial assets: Cash and cash equivalents $ 1,109,386 $ 1,109,386 $ 1,267,253 $ 1,267,253 Trading securities 60,422 60,422 67,878 67,878 Securities available for sale 8,737,936 8,737,936 7,993,934 7,993,934 Securities held to maturity 174,735 179,444 314,783 320,444 Loans and leases: Loans 23,736,602 24,332,066 21,587,628 21,828,123 Leases 981,866 N/A 616,302 N/A Allowance for losses (330,615) N/A (292,667) N/A ------------- ------------- Net loans and leases $ 24,387,853 $ 21,911,263 ============= ============= Financial liabilities: Deposits $ 24,258,168 24,340,106 $ 22,504,750 22,540,172 Short-term borrowed funds 3,707,333 3,707,333 3,862,727 3,862,727 Long-term debt 4,961,487 5,022,603 3,747,193 4,067,825 Capitalized leases 3,310 N/A 3,291 N/A
- -------------------------------------------------------------------------------- The following is a summary of the notional or contractual amounts and fair values of BB&T's off-balance sheet financial instruments as of the periods indicated:
1998 1997 ------------------------------------ ----------------------------------- Notional/ Notional/ Contract Fair Contract Fair Amount Value Amount Value --------------- ------------- ------------- ------------- (Dollars in thousands) Off balance sheet financial intruments: Interest rate swaps, caps and floors $ 2,496,346 $ 37,835 $ 2,428,930 $ 25,570 Commitments to extend, originate or purchase 10,039,791 (19,379) 8,100,491 (14,835) credit Standby and commercial letters of credit and financial guarantees written 403,671 (5,886) 334,595 (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 NOTE Q. Derivatives and Off-Balance Sheet Financial Instruments BB&T utilizes interest rate swaps, caps, floors and collars 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 Pay Fixed Basis Swaps, Caps, Year-to-date Activity Fixed 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 Year One to 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 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. 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 303,923,429 303,174,462 303,209,770 ---------------- --------------- --------------- Net income $ 513,021 $ 378,287 $ 361,448 Less: Preferred dividend requirement -- -- 610 ---------------- --------------- --------------- Income available for common shares $ 513,021 $ 378,287 $ 360,838 ================ =============== =============== Basic earnings per share $ 1.69 $ 1.25 $ 1.19 ================ =============== =============== Diluted Earnings Per Share: Weighted average number of common shares 303,923,429 303,174,462 303,209,770 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) 6,185,736 4,891,438 4,215,169 Issuance of additional shares under share repurchase agreement, contingent upon market price -- 144,588 204,036 ---------------- --------------- --------------- Weighted average number of common shares, as adjusted 310,109,165 308,210,488 309,506,279 ================ =============== =============== Net income $ 513,021 $ 378,287 $ 361,448 ================ =============== =============== Diluted earnings per share $ 1.65 $ 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 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 583 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 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" in BB&T's Annual Report on Form 10-K for the year ended December 31, 1998, for additional discussion concerning 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. Trust Services includes the accounts of MainStreet Trust Company N.A. 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 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. The following table discloses selected financial information for BB&T's reportable business segments: - --------------------------------------------------------------------------------
For the Year Ended December 31, 1998 --------------------------------------------------------------------------- Investment Banking Mortgage Trust Agency Banking Network Banking Services Insurance and Brokerage ------------ ------------ ------------ ------------ ------------- (dollars in thousands) Net interest income (expense) from external customers $ 742,025 $ 409,944 $ (33,824) $ 11,419 $ 1,127 Net intersegment interest income (expense) 228,085 (274,934) 37,427 -- -- ------------ ------------ ------------ ------------ ------------ Net interest income 970,110 135,010 3,603 11,419 1,127 ------------ ------------ ------------ ------------ ------------ Provision for loan and lease losses 95,359 3,851 -- 4,173 -- Noninterest income from external customers 413,367 76,491 40,656 51,291 48,604 Intersegment noninterest income 58,735 4,761 563 -- -- Noninterest expense 476,052 56,211 26,660 44,991 37,472 Intersegment noninterest expense 209,820 16,207 1,986 11,263 8,948 Income before income taxes and the charge ------------ ------------ ------------ ------------ ------------ for capital 660,981 139,993 16,176 2,283 3,311 Provision for income taxes 249,287 52,847 6,107 862 1,294 ------------ ------------ ------------ ------------ ------------ Net income before the charge for capital 411,694 87,146 10,069 1,421 2,017 Charge for capital 112,952 9,154 1,082 -- -- ------------ ------------ ------------ ------------ ------------ Net income after charge for capital $ 298,742 $ 77,992 $ 8,987 $ 1,421 $ 2,017 ============ ============ ============ ============ ============ Identifiable segment assets $ 18,897,321 $ 6,274,100 $ 14,108 $ 92,554 $ 238,622 ============ ============ ============ ============ ============ For the Year Ended December 31, 1998 --------------------------------------------------------------- All Total Other Other Segment Revenues Treasury Segments /1/ Results and Expenses /2/ ------------ ------------- ------------ ---------------- (dollars in thousands) Net interest income (expense) from external customers $ 126,762 $ 195,860 $ 1,453,313 $ 59,802 Net intersegment interest income (expense) (1,013) -- (10,435) (12,724) ------------ ------------ ------------ ------------ Net interest income 125,749 195,860 1,442,878 47,078 ------------ ------------ ------------ ------------ Provision for loan and lease losses 103 17,994 121,480 1,829 Noninterest income from external customers 11,631 23,082 665,122 (30,172) Intersegment noninterest income 878 -- 64,937 486 Noninterest expense 4,325 43,363 689,074 265,921 Intersegment noninterest expense 5,383 7,279 260,886 (55,464) Income before income taxes and the charge ------------ ------------ ------------ ------------ for capital 128,447 150,306 1,101,497 (194,894) Provision for income taxes 46,415 9,990 366,802 (71,359) ------------ ------------ ------------ ------------ Net income before the charge for capital 82,032 140,316 734,695 (123,535) Charge for capital 1,689 -- 124,877 389 ------------ ------------ ------------ ------------ Net income after charge for capital $ 80,343 $ 140,316 $ 609,818 $ (123,924) ============ ============ ============ ============ Identifiable segment assets $ 9,417,056 $ 2,327,184 $ 37,260,945 $ 1,651,609 ============ ============ ============ ============ For the Year Ended December 31, 1998 ------------------------------------ Reconciling Items & Consolidated Eliminations Totals -------------- ------------- (dollars in thousands) Net interest income (expense) from external customers $ (195,986) $ 1,317,129 Net intersegment interest income (expense) 23,159(3) -- ------------ ------------ Net interest income (172,827) 1,317,129 ------------ ------------ Provision for loan and lease losses (32,839) 90,470 Noninterest income from external customers (91,321) 543,629 Intersegment noninterest income (65,423) -- Noninterest expense 64,925(4) 1,019,920 Intersegment noninterest expense (205,422) -- Income before income taxes and the charge ------------ ------------ for capital (156,235) 750,368 Provision for income taxes (58,096) 237,347 ------------ ------------ Net income before the charge for capital (98,139) 513,021 Charge for capital (125,266) -- ------------ ------------ Net income after charge for capital $ 27,127 $ 513,021 ============ ============ Identifiable segment assets $ (2,524,224)(4) $ 36,388,330 ============ ============
- -------------------------------------------------------------------------------- (1) Financial data from 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. EX-99.3 6 EXHIBIT 99_3 Exhibit 99.3 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS (Dollars in thousands, except per share data)
As of / For the Years Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 ----------- ----------- ----------- ----------- Summary of Operations Interest income $ 2,633,407 $ 2,392,454 $ 2,168,146 $ 2,075,176 Interest expense 1,316,278 1,170,796 1,048,236 1,047,786 ----------- ----------- ----------- ----------- Net interest income 1,317,129 1,221,658 1,119,910 1,027,390 Provision for loan and lease losses 90,470 102,680 65,795 44,492 ----------- ----------- ----------- ----------- Net interest income after provision for loan and lease losses 1,226,659 1,118,978 1,054,115 982,898 Noninterest income 543,629 472,454 353,407 266,277 Noninterest expense 1,019,920 1,014,877 869,121 866,736 ----------- ----------- ----------- ----------- Income before income taxes 750,368 576,555 538,401 382,439 Provision for income taxes 237,347 198,268 176,953 127,184 ----------- ----------- ----------- ----------- Income before cumulative effect of changes in accounting principles 513,021 378,287 361,448 255,255 Less: cumulative effect of changes in accounting principles, net of income taxes - - - - ----------- ----------- ----------- ----------- Net income $ 513,021 $ 378,287 $ 361,448 $ 255,255 =========== =========== =========== =========== Per Common Share Average shares outstanding (000's): Basic 303,923 303,174 303,210 302,673 Diluted 310,109 308,210 309,506 316,215 Basic earnings: Income before cumulative effect $ 1.69 $ 1.25 $ 1.19 $ 0.83 Less: cumulative effect - - - - ----------- ----------- ----------- ----------- Net income $ 1.69 $ 1.25 $ 1.19 $ 0.83 =========== =========== =========== =========== Diluted earnings: Income before cumulative effect $ 1.65 $ 1.23 $ 1.17 $ 0.81 Less: cumulative effect - - - - ----------- ----------- ----------- ----------- Net income $ 1.65 $ 1.23 $ 1.17 $ 0.81 =========== =========== =========== =========== Cash dividends paid $ .66 $ .58 $ .50 $ .43 Shareholders' equity 9.53 8.50 7.80 7.39 Average Balances Securities, at amortized cost $ 8,668,520 $ 7,853,664 $ 7,250,145 $ 7,149,293 Loans and leases * 23,291,306 20,764,382 18,820,307 17,850,309 Other assets 2,461,715 1,884,488 1,750,535 1,743,872 ----------- ----------- ----------- ----------- Total assets $34,421,541 $30,502,534 $27,820,987 $26,743,474 =========== =========== =========== =========== Deposits $22,743,052 $21,492,886 $20,616,743 $19,502,585 Other liabilities 4,730,562 3,600,627 2,827,742 3,755,825 Long-term debt 4,236,980 2,965,271 2,087,998 1,310,658 Common shareholders' equity 2,710,947 2,443,750 2,273,345 2,102,061 Preferred shareholders' equity - - 15,159 72,345 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $34,421,541 $30,502,534 $27,820,987 $26,743,474 =========== =========== =========== =========== Period End Balances Total assets $36,388,330 $33,165,141 $29,134,267 $27,396,168 Deposits 24,258,168 22,504,750 21,162,597 20,238,043 Long-term debt 4,964,797 3,750,484 2,392,688 1,544,236 Shareholders' equity 2,923,888 2,582,505 2,382,511 2,328,706 Selected Performance Ratios Rate of return on: Average total assets** 1.49% 1.24% 1.30% 0.95% Average common shareholders' equity** 18.92 15.48 15.87 11.90 Dividend payout** 39.05 46.40 42.02 51.81 Average equity to average assets 7.88 8.01 8.23 8.13 As of / For the Years Ended December 31, --------------------------------------- Compound 1994 1993 Growth Rate ----------- ----------- ------------------- Summary of Operations Interest income $ 1,740,647 $ 1,569,404 10.9% Interest expense 752,444 659,234 14.8 ----------- ----------- Net interest income 988,203 910,170 7.7 Provision for loan and lease losses 29,359 64,019 7.2 ----------- ----------- Net interest income after provision for loan and lease losses 958,844 846,151 7.7 Noninterest income 273,679 276,234 14.5 Noninterest expense 787,890 846,363 3.8 ----------- ----------- Income before income taxes 444,633 276,022 22.1 Provision for income taxes 152,603 100,564 18.7 ----------- ----------- Income before cumulative effect of changes in accounting principles 292,030 175,458 23.9 Less: cumulative effect of changes in accounting principles, net of income taxes - (31,972) NM ----------- ----------- Net income $ 292,030 $ 143,486 29.0 =========== =========== Per Common Share Average shares outstanding (000's): Basic 298,190 287,150 1.1 Diluted 312,016 302,154 0.5 Basic earnings: Income before cumulative effect $ 0.96 $ 0.59 23.4 Less: cumulative effect - (0.11) NM ----------- ----------- Net income $ 0.96 $ 0.48 28.7 =========== =========== Diluted earnings: Income before cumulative effect $ 0.94 $ 0.58 23.3 Less: cumulative effect - (0.11) NM ----------- ----------- Net income $ 0.94 $ 0.47 28.6 =========== =========== Cash dividends paid $ .37 $ .32 15.6 Shareholders' equity 6.59 5.94 9.9 Average Balances Securities, at amortized cost $ 6,796,950 $ 5,939,578 7.9 Loans and leases * 16,073,888 14,462,267 10.0 Other assets 1,787,281 1,756,293 7.0 ----------- ----------- Total assets $24,658,119 $22,158,138 9.2 =========== =========== Deposits $19,032,049 $17,835,005 5.0 Other liabilities 2,822,320 1,797,381 21.4 Long-term debt 879,864 742,441 41.7 Common shareholders' equity 1,849,743 1,709,168 9.7 Preferred shareholders' equity 74,143 74,143 NM ----------- ----------- Total liabilities and shareholders' equity $24,658,119 $22,158,138 9.2 =========== =========== Period End Balances Total assets $25,868,138 $24,341,966 8.4 Deposits 19,222,773 19,213,065 4.8 Long-term debt 1,104,699 1,019,362 37.3 Shareholders' equity 2,059,666 1,843,764 9.7 Selected Performance Ratios Rate of return on: Average total assets** 1.18 % 0.79 % Average common shareholders' equity** 15.51 9.96 Dividend payout** 38.54 54.24 Average equity to average assets 7.80 8.05
- ------------------------------------------------------ * Loans and leases are net of unearned income and include loans held for sale. ** Based on income before cumulative effect of changes in accounting principles, net of income taxes NM Not meaningful. Table 1 Selected Financial Data of Significant Banking Subsidiaries As of / For the Years Ended December 31, 1998, 1997 and 1996
Piedmont BB&T-NC BB&T-SC BB&T-VA Franklin Trust ----------------- ----------------- ------------------ ---------------- ---------------- 1998 (Dollars in thousands) Total assets $ 25,985,004 $ 4,641,393 $ 3,473,368 $ 800,786 $ 564,748 Securities 6,531,178 783,727 578,224 175,386 161,107 Loans and leases, net of unearned income* 17,414,700 3,266,871 2,341,767 390,086 340,993 Deposits 17,275,566 3,702,383 2,320,244 536,586 336,323 Shareholder's equity 2,124,446 429,572 457,600 40,848 45,713 Net interest income 871,515 201,132 121,030 27,257 21,588 Provision for loan and lease losses 44,227 13,455 3,122 1,885 3,875 Noninterest income 455,760 71,945 41,671 2,771 4,955 Noninterest expense 776,574 119,224 98,452 21,512 12,835 Net income 361,058 89,653 36,738 4,299 6,748 - -------------------------------------------------------------------------------------------------------------------------------- 1997 Total assets $ 22,530,009 $ 4,364,982 $ 3,529,844 $ 647,448 $ 552,601 Securities 5,392,894 1,020,554 887,381 179,388 153,407 Loans and leases, net of unearned income* 15,402,775 3,052,755 2,287,651 300,441 347,555 Deposits 15,931,795 3,401,236 2,333,873 427,798 332,524 Shareholder's equity 1,771,589 374,871 435,248 39,283 42,907 Net interest income 842,745 184,341 59,122 21,532 21,516 Provision for loan and lease losses 53,533 14,109 3,400 484 1,925 Noninterest income 436,607 70,916 16,149 2,447 4,535 Noninterest expense 809,599 135,018 47,349 13,915 13,047 Net income 278,536 68,024 15,388 5,968 7,529 - -------------------------------------------------------------------------------------------------------------------------------- 1996 Total assets $ 20,652,519 $ 4,213,458 $ 2,209,614 $ 497,817 $ 495,542 Securities 4,962,941 1,034,385 883,771 164,116 113,883 Loans and leases, net of unearned income* 14,149,983 2,901,930 1,180,681 232,581 337,849 Deposits 15,683,080 3,336,711 1,422,785 363,427 317,564 Shareholder's equity 1,601,950 399,965 194,884 31,893 38,249 Net interest income 773,019 173,235 43,822 18,290 20,280 Provision for loan and lease losses 44,675 8,405 2,584 27 1,808 Noninterest income 333,119 57,729 11,811 1,770 6,448 Noninterest expense 689,969 134,200 30,129 12,652 13,477 Net income 250,956 56,489 14,542 4,523 7,708
* Includes loans held for sale. Table 2 Composition of Loan and Lease Portfolio*
December 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ---------- ------------ ----------- (Dollars in thousands) Loans: Commercial, financial and agricultural $ 3,637,633 $ 3,387,582 $ 3,034,507 $ 2,648,561 $ 3,300,474 Real estate - construction and land development 2,266,024 2,206,987 1,610,324 1,222,619 905,772 Real estate - mortgage 13,890,100 12,597,971 11,169,569 10,996,330 9,768,443 Consumer 2,986,225 2,954,154 3,042,729 2,705,878 2,606,187 ----------- ----------- ----------- ----------- ----------- Loans held for investment 22,779,982 21,146,694 18,857,129 17,573,388 16,580,876 Loans held for sale 1,035,668 512,189 229,075 263,144 141,676 ----------- ----------- ----------- ----------- ----------- Total loans 23,815,650 21,658,883 19,086,204 17,836,532 16,722,552 Leases 1,620,326 788,462 576,991 376,152 304,544 ----------- ----------- ----------- ----------- ----------- Total loans and leases $25,435,976 $22,447,345 $19,663,195 $18,212,684 $17,027,096 =========== =========== =========== =========== ===========
- -------------- * Balances include unearned income. 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) $ 288,101 $ 349,194 $ 637,295 1-5 years 720,251 171,991 892,242 After 5 years 192,067 - 192,067 --------------------- -------------------- -------------------- Total 1,200,419 521,185 1,721,604 --------------------- -------------------- -------------------- Variable rate: 1 year or less (2) 1,242,979 1,169,042 2,412,021 1-5 years 1,096,746 575,797 1,672,543 After 5 years 97,489 - 97,489 --------------------- -------------------- -------------------- Total 2,437,214 1,744,839 4,182,053 --------------------- -------------------- -------------------- Total loans and leases (1) $ 3,637,633 $ 2,266,024 $ 5,903,657 ===================== ==================== ====================
- ------------------ * 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.
(Dollars in (1) The table excludes: thousands) ------------------ (i) consumer loans to individuals for household, family and other personal expenditures $ 2,986,225 (ii) real estate mortgage loans 13,890,100 (iii) loans held for sale 1,035,668 (iv) leases 1,620,326 ------------------ $ 19,532,319 ==================
(2) Includes loans due on demand. Table 4 Allocation of Allowance for Loan and Lease Losses by Category
December 31, ---------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ --------------------------- ----------------------------- % Loans % Loans % Loans in each in each in each Amount category Amount category Amount category ---------------- ------------ ------------- ------------ -------------- ------------ (Dollars in thousands) Balance at end of period applicable to: Commercial, financial and agricultural $ 42,661 14% $ 45,517 15% $ 44,743 15% Real estate: Construction and land development 32,266 9 24,403 10 17,651 8 Mortgage 107,026 59 107,026 58 93,164 58 ---------------- ------------ ------------- ------------ -------------- ------------ Real estate - total 139,292 68 131,429 68 110,815 66 ---------------- ------------ ------------- ------------ -------------- ------------ Consumer 22,759 12 21,596 13 19,123 16 Leases 12,736 6 8,021 4 5,207 3 Unallocated 113,167 -- 86,104 -- 75,883 -- ---------------- ------------ ------------- ------------ -------------- ------------ Total $ 330,615 100% $ 292,667 100% $ 255,771 100% ================ ============ ============= ============ ============== ============ December 31, ------------------------------------------------------------- 1995 1994 ---------------------------- ---------------------------- % Loans % Loans in each in each Amount category Amount category -------------- ------------ -------------- ------------ Balance at end of period applicable to: Commercial, financial and agricultural $ 50,351 15% $ 47,959 19% Real estate: Construction and land development 21,122 7 19,625 5 Mortgage 89,302 61 80,185 59 -------------- ------------ -------------- ------------ Real estate - total 110,424 68 99,810 64 -------------- ------------ -------------- ------------ Consumer 13,035 15 9,167 15 Leases 3,325 2 2,986 2 Unallocated 60,673 -- 73,022 -- -------------- ------------ -------------- ------------ Total $ 237,808 100% $ 232,944 100% ============== ============ ============== ============
Table 5 Composition of Allowance for Loan and Lease Losses
December 31, ----------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ------------------ ------------------ ------------------ ---------------- (Dollars in thousands) Balance, beginning of period $ 292,667 $ 255,771 $ 237,808 $ 232,944 $ 228,412 -------------- -------------- -------------- -------------- --------------- Charge-offs: Commercial, financial and agricultural (14,188) (18,260) (11,673) (12,401) (15,141) Real estate (11,655) (14,192) (11,882) (12,660) (10,092) Consumer (64,611) (69,334) (49,999) (30,680) (17,454) Lease receivables (1,167) (671) (768) (614) (647) -------------- -------------- -------------- -------------- --------------- Total charge-offs (91,621) (102,457) (74,322) (56,355) (43,334) -------------- -------------- -------------- -------------- --------------- Recoveries: Commercial, financial and agricultural 7,698 6,271 8,247 6,271 8,054 Real estate 3,551 5,038 6,339 3,743 3,669 Consumer 9,756 7,619 6,583 5,739 5,430 Lease receivables 425 232 136 395 295 -------------- -------------- -------------- -------------- --------------- Total recoveries 21,430 19,160 21,305 16,148 17,448 -------------- -------------- -------------- -------------- --------------- Net charge-offs (70,191) (83,297) (53,017) (40,207) (25,886) -------------- -------------- -------------- -------------- --------------- Provision charged to expense 90,470 102,680 65,795 44,492 29,299 -------------- -------------- -------------- -------------- --------------- Allowance of loans acquired in purchase transactions 17,669 17,513 5,185 579 1,119 -------------- -------------- -------------- -------------- --------------- Balance, end of period $ 330,615 $ 292,667 $ 255,771 $ 237,808 $ 232,944 ============== ============== ============== ============== =============== Average loans and leases * $ 23,291,306 $ 20,764,382 $ 18,820,307 $ 17,850,309 $ 16,073,888 Net charge-offs as a percentage of average loans and leases .30 % .40 % .28 % .23 % .16 % ================ ============== ================ ================ ===============
- ---------- * Loans and leases are net of unearned income and include loans held for sale. 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 24,810 64,789 61,622 States and political subdivisions 132,521 187,503 217,426 Mortgage-backed securities 17,404 62,491 213,188 ----------------- ---------------- --------------- Total securities held to maturity 174,735 314,783 492,236 ----------------- ---------------- --------------- Securities available for sale (at estimated fair value): U.S. Treasury, government and agency obligations 3,636,930 4,486,999 4,136,538 States and political subdivisions 172,758 62,623 33,689 Mortgage-backed securities 3,690,383 2,966,137 2,588,605 Other securities 1,237,865 478,175 323,107 ----------------- ---------------- --------------- Total securities available for sale 8,737,936 7,993,934 7,081,939 ----------------- ---------------- --------------- Total securities $ 8,973,093 $ 8,376,595 $ 7,574,175 ================= ================ ================
Table 7 Scheduled Maturities of Time Deposits December 31, 1998 (dollars in thousands) - -------------------------------------------------------------------------------- Time Deposits $100,000 and Over - -------------------------------------------------------------------------------- Maturity Schedule Less than three months $ 1,347,706 Three through six months 718,354 Seven through twelve months 524,142 Over twelve months 783,067 --------------- Total $ 3,373,269 =============== Total Time Deposits - -------------------------------------------------------------------------------- Time Deposits Due to Mature by December 31, 1999 $ 8,913,624 2000 2,372,065 2001 319,564 2002 226,087 2003 135,760 2004 and later 20,659 --------------- Total $ 11,987,759 =============== Table 8 Short-Term Borrowed Funds The following information summarizes certain pertinent information for the past three years on short-term borrowed funds:
1998 1997 1996 ------------------------ ------------------------ ----------------------- (Dollars in thousands) Maximum outstanding at any month-end during the year $ 5,356,787 $ 3,863,630 $ 2,984,580 Average outstanding during the year 4,183,312 3,214,577 2,481,662 Average interest rate during the year 5.23 % 5.25 % 5.26 % Average interest rate at end of year 4.83 5.46 4.92
Table 9 Capital Adequacy for BB&T Corporation and Principal Banking Subsidiaries
Regulatory BB&T- BB&T- BB&T- Piedmont Minimums BB&T NC SC VA Franklin Trust ------------ -------- ---------- --------- -------- ------------ -------------- Risk-based capital ratios: Tier 1 capital (1) 4.0 % 10.3 % 10.9 % 12.7 % 15.3 % 8.5 % 12.2 % Total risk-based capital (2) 8.0 15.0 12.2 13.9 16.5 9.7 13.4 Tier 1 leverage ratio (3) 3.0 7.0 7.2 9.3 10.0 5.3 8.3
- ----------------------------- (1) Shareholders' equity less nonqualifying intangible assets; computed as a ratio of risk- weighted assets, as defined in the risk-based capital guidelines. (2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets as defined in the risk-based capital guidelines. (3) Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles. Table 10 Securities
December 31, 1998 -------------------------------------------------------- Carrying Value Average Yield (3) ------------------------- -------------------------- (Dollars in thousands) U.S. Treasury, government and agency obligations (1): Within one year $ 1,009,740 6.35 % One to five years 3,050,177 6.15 Five to ten years 468,389 6.45 After ten years 2,841,221 6.64 ------------------------- -------------------------- Total 7,369,527 6.38 ------------------------- -------------------------- States and political subdivisions: Within one year 28,075 8.72 One to five years 136,941 8.47 Five to ten years 57,600 7.72 After ten years 82,663 7.49 ------------------------ -------------------------- Total 305,279 8.09 ------------------------- -------------------------- Other securities: Within one year 28,816 5.12 One to five years 38,242 7.48 Five to ten years 5,651 7.34 After ten years 259,905 6.71 ------------------------- -------------------------- Total 332,614 6.67 ------------------------- -------------------------- Securities with no stated maturity 965,673 6.39 ------------------------- -------------------------- Total securities (2) $ 8,973,093 6.45 % ========================= ==========================
- -------------------- (1) Included in U.S. Treasury, government and agency obligations are mortgage-backed securities totaling $3.7 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 $174.7 million carried at amortized cost and securities available for sale and trading securities carried at estimated fair values of $8.7 billion and $60.4 million, respectively. (3) Taxable equivalent basis as applied to amortized cost. Table 11 Asset Quality
December 31, ----------------------------------------------- 1998 1997 1996 ----------- ------------ ----------- (Dollars in thousands) Nonaccrual loans and leases* $ 88,847 $ 104,083 $ 69,062 Restructured loans 522 1,377 2,464 Foreclosed property 28,976 37,146 31,345 ----------- ------------ ----------- Nonperforming assets $ 118,345 $ 142,606 $ 102,871 =========== ============ =========== Loans 90 days or more past due and still accruing $ 54,226 $ 48,324 $ 45,203 =========== ============ =========== 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 .43 .35 Loans and leases plus foreclosed property .48 .64 .53 Net charge-offs as a percentage of average loans and leases .30 .40 .28 Allowance for losses as a percentage of loans and leases 1.34 1.32 1.31 Ratio of allowance for losses to: Net charge-offs 4.71 x 3.51 x 4.82 x Nonaccrual and restructured loans and leases 3.70 2.77 3.57
- ------------------------ NOTE: Items referring to loans and leases are net of unearned income and include loans held for sale. * Includes $27.2 million, $36.1 million and $31.7 million of impaired loans at December 31, 1998, 1997 and 1996, respectfully. See Note D in the "Notes to Consolidated Financial Statements." Table 12 FTE Net Interest Income and Rate / Volume Analysis For the Years Ended December 31, 1998, 1997 and 1996
Average Balances Yield/Rate - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Assets Securities (1): U.S. Treasury, government and other (5) $ 8,428,290 $ 7,624,939 $ 7,001,091 6.70 % 6.74 % 6.55% States and political subdivisions 240,230 228,725 249,054 8.26 8.31 8.51 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities (5) 8,668,520 7,853,664 7,250,145 6.75 6.79 6.62 Other earning assets (2) 195,477 109,351 161,059 5.67 5.88 5.53 Loans and leases, net of unearned income (1)(3)(4)(5) 23,291,306 20,764,382 18,820,307 9.03 9.19 9.12 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 32,155,303 28,727,397 26,231,511 8.40 8.52 8.41 - ------------------------------------------------------------------------------------------------------------------------------------ Non-earning assets 2,266,238 1,775,137 1,589,476 - ----------------------------------------------------------------------------------------------------- Total assets $34,421,541 $30,502,534 $27,820,987 ===================================================================================================== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest-checking $ 1,934,723 $ 2,289,089 $ 2,474,422 1.91 1.88 1.98 Money rate savings 5,888,292 4,903,414 4,115,579 3.00 3.09 2.87 Other time deposits 11,806,049 11,491,842 11,342,502 5.43 5.50 5.54 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 19,629,064 18,684,345 17,932,503 4.35 4.43 4.44 Short-term borrowed funds 4,183,312 3,214,577 2,481,662 5.23 5.25 5.26 Long-term debt 4,236,980 2,965,271 2,087,998 5.75 5.91 5.83 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 28,049,356 24,864,193 22,502,163 4.69 4.71 4.66 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 3,113,988 2,808,541 2,684,240 Other liabilities 547,250 386,050 346,080 Shareholders' equity 2,710,947 2,443,750 2,288,504 - ----------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $34,421,541 $30,502,534 $27,820,987 ===================================================================================================== Average interest rate spread 3.71 3.81 3.75 Net yield on earning assets 4.30 % 4.44 % 4.41% =============================== Taxable equivalent adjustment Income / Expense Change due to - ---------------------------------------------------------------------------------------------- Increase --------------------- 1998 1997 1996 (Decrease) Rate Volume - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Assets Securities (1): U.S. Treasury, government and other (5) $ 565,106 $ 514,148 $ 458,703 $ 50,958 $ (2,921) $ 53,879 States and political subdivisions 19,853 19,007 21,186 846 (105) 951 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities (5) 584,959 533,155 479,889 51,804 (3,026) 54,830 Other earning assets (2) 11,086 6,428 8,909 4,658 (234) 4,892 Loans and leases, net of unearned income (1)(3)(4)(5) 2,103,436 1,907,325 1,716,680 196,111 (32,570) 228,681 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 2,699,481 2,446,908 2,205,478 252,573 (35,830) 288,403 - ------------------------------------------------------------------------------------------------------------------------------------ Non-earning assets - --------------------------------------------------------- Total assets - --------------------------------------------------------- Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest-checking 36,942 43,104 48,992 (6,162) 597 (6,759) Money rate savings 176,537 151,276 118,143 25,261 (4,372) 29,633 Other time deposits 640,636 632,518 628,935 8,118 (9,015) 17,133 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 854,115 826,898 796,070 27,217 (12,790) 40,007 Short-term borrowed funds 218,617 168,785 130,508 49,832 (797) 50,629 Long-term debt 243,546 175,113 121,658 68,433 (4,783) 73,216 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,316,278 1,170,796 1,048,236 145,482 (18,370) 163,852 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits Other liabilities Shareholders' equity - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity ======================================================== Average interest rate spread Net yield on earning assets $1,383,203 $1,276,112 $1,157,242 $107,091 $(17,460) $124,551 ========== ========== ========== ======== ========= ======== Taxable equivalent adjustment $ 66,074 $ 54,454 $ 37,33 ========== ========== ========= 1997 v. 1996 ------------------------------------------------ Change due to Increase ----------------------------------- (Decrease) Rate Volume Assets Securities (1): U.S. Treasury, government and other (5) $ 55,445 $ 13,673 $ 41,772 States and political subdivisions (2,179) (481) (1,698) ---------- ----------- ----------- Total securities (5) 53,266 13,192 40,074 Other earning assets (2) (2,481) 529 (3,010) Loans and leases, net of unearned income (1)(3)(4)(5) 190,645 12,150 178,495 ---------- ----------- ----------- Total earning assets 241,430 25,871 215,559 ---------- ----------- ----------- Non-earning assets Total assets Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest-checking (5,888) (2,327) (3,561) Money rate savings 33,133 9,302 23,831 Other time deposits 3,583 (4,659) 8,242 ---------- ----------- ----------- Total interest-bearing deposits 30,828 2,316 28,512 Short-term borrowed funds 38,277 (206) 38,483 Long-term debt 53,455 1,670 51,785 ---------- ----------- ----------- Total interest-bearing liabilities 122,560 3,780 118,780 ---------- ----------- ----------- Noninterest-bearing deposits Other liabilities Shareholders' equity Total liabilities and shareholders' equity Average interest rate spread Net yield on earning assets $ 118,870 $ 22,091 $ 96,779 ========== =========== =========== Taxable equivalent adjustment
(1) Yields related to securities, loans and leases exempt from both Federal and state income taxes, Federal income taxes only or state income taxes only are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. Table 13 Noninterest Income
% Change Years Ended December 31, ---------------------- ---------------------------------------------- 1998 v. 1997 v. 1998 1997 1996 1997 1996 ----------- ---------- ---------- -------- ------- (Dollars in thousands) Service charges on deposits $ 174,847 $ 154,729 $ 137,972 13.0 % 12.1 % Mortgage banking income 79,670 50,628 40,494 57.4 25.0 Trust income 40,937 35,378 31,781 15.7 11.3 Agency insurance commissions 52,186 40,148 27,541 30.0 45.8 Other insurance commissions 12,599 13,697 13,288 (8.0) 3.1 Securities gains (losses), net 7,682 4,139 3,820 85.6 8.4 Bankcard fees and merchant discounts 30,140 23,955 19,292 25.8 24.2 Investment brokerage commissions 25,537 20,180 17,284 26.5 16.8 Other bank service fees and commissions 57,268 46,439 29,619 23.3 56.8 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 51,957 73,296 22,872 (29.1) 220.5 ----------- ----------- ---------- -------- ------- Total noninterest income $ 543,629 $ 472,454 $ 353,407 15.1 % 33.7 % =========== =========== ========== ======== =======
Table 14 Noninterest Expense
% Change Years Ended December 31, --------------------- ------------------------------------------ 1998 v. 1997 v. 1998 1997 1996 1997 1996 ------------ ----------- ---------- ------- ------- (Dollars in thousands) Salaries and wages $ 419,158 $ 390,870 $ 343,650 7.2 % 13.7 % Pension and other employee benefits 95,388 100,530 83,070 (5.1) 21.0 Net occupancy expense on bank premises 62,781 81,734 61,795 (23.2) 32.3 Furniture and equipment expense 99,095 87,536 72,393 13.2 20.9 Federal deposit insurance premiums 4,464 5,274 50,067 (15.4) (89.5) Foreclosed property expense 2,280 3,454 2,625 (34.0) 31.6 Amortization of intangibles and mortgage servicing rights 49,473 24,734 15,629 100.0 58.3 Software 10,266 14,267 11,107 (28.0) 28.5 Telephone 21,496 19,431 16,882 10.6 15.1 Donations 6,248 6,938 6,203 (9.9) 11.8 Advertising and public relations 26,569 27,082 25,016 (1.9) 8.3 Travel and transportation 10,462 8,966 7,556 16.7 18.7 Professional services 50,807 49,271 28,317 3.1 74.0 Supplies 17,200 16,532 15,636 4.0 5.7 Loan and lease expense 25,514 41,687 32,424 (38.8) 28.6 Deposit related expense 14,955 16,823 14,305 (11.1) 17.6 Other noninterest expenses 103,764 119,748 82,446 (13.3) 45.2 ----------- ----------- --------- ------- -------- Total noninterest expense $ 1,019,920 $1,014,877 $ 869,121 0.5 % 16.8 % =========== ========== ========= ======= ========
Table 15 Interest Rate Sensitivity Gap Analysis December 31, 1998
Expected Repricing or Maturity Date --------------------------------------------------------------------------- Within One to Three to After Five One Year Three Years Five Years Years Total --------------------------------------------------------------------------- (Dollars in thousands) Assets Securities and other interest-earning assets* $ 2,275,329 $ 2,220,729 $2,944,019 $1,442,603 $ 8,882,680 Federal funds sold and securities purchased under resale agreements or similar arrangements 103,216 - - - 103,216 Loans and leases** 14,873,061 4,894,891 2,805,893 2,144,623 24,718,468 ------------ ------------ ----------- ----------- ----------- Total interest-earning assets 17,251,606 7,115,620 5,749,912 3,587,226 33,704,364 ------------ ------------ ----------- ----------- ----------- Liabilities Savings and interest checking*** - 1,070,095 356,698 356,698 1,783,491 Money rate savings*** 3,510,778 3,510,778 - - 7,021,556 Other time deposits 8,296,855 2,620,807 293,496 137,925 11,349,083 Foreign deposits 638,676 - - - 638,676 Federal funds purchased and securities sold under repurchase agreements or similar arrangements 2,367,173 50,870 169,727 - 2,587,770 Long-term debt and other borrowings 2,990,753 760,464 470,812 1,862,331 6,084,360 ------------ ------------ ----------- ----------- ----------- Total interest-bearing liabilities 17,804,235 8,013,014 1,290,733 2,356,954 $29,464,936 ------------ ------------ ----------- ----------- =========== ------------ ------------ ----------- ----------- Asset-liability gap (552,629) (897,394) 4,459,179 1,230,272 ------------ ------------ ----------- ----------- 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 $(1,869,933) $ (230,027) $4,913,193 $1,426,195 ============ ============ =========== =========== Cumulative interest rate sensitivity gap $(1,869,933) $(2,099,960) $2,813,233 $4,239,428 ============ ============ =========== ===========
- ------------------------------------------------------------ * 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. Table 16 Capital - Components and Ratios December 31, -------------------------------------- 1998 1997 --------------- ---------------- (Dollars in thousands) Tier 1 capital $ 2,508,490 $ 2,342,982 Tier 2 capital 1,120,802 769,309 --------------- ---------------- Total regulatory capital $ 3,629,292 $ 3,112,291 =============== ================ Risk-based capital ratios: Tier 1 capital 10.3 % 10.7 % Total regulatory capital 15.0 14.2 Tier 1 leverage ratio 7.0 7.5 Table 17 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
Table 18 Quarterly Financial Summary - Unaudited
1998 ---------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ------------- ------------ ------------ ------------ (Dollars in thousands, except per share data) Consolidated Summary of Operations: Net interest income FTE $ 360,655 $ 348,166 $ 339,477 $ 334,905 FTE adjustment 18,003 16,490 16,016 15,565 Provision for loan and lease losses 22,765 21,229 23,038 23,438 Securities gains (losses), net 1,774 2,114 1,293 2,501 Other noninterest income 140,787 138,863 133,374 122,923 Noninterest expense 269,053 257,943 247,908 245,016 Provision for income taxes 60,761 61,578 59,143 55,865 ------------ ------------ ------------ ------------ Net income $ 132,634 $ 131,903 $ 128,039 $ 120,445 ============ ============ ============ ============ Diluted net income per share $ .42 $ .43 $ .41 $ .39 ============ ============ ============ ============ Selected Average Balances: Assets $ 36,178,328 $ 34,038,818 $ 34,148,967 $ 33,292,545 Securities, at amortized cost 9,151,670 8,376,487 8,630,609 8,511,489 Loans and leases * 24,306,516 23,308,710 23,146,329 22,382,333 Total earning assets 33,622,182 31,851,473 31,993,113 31,130,401 Deposits 23,754,754 22,532,834 22,562,066 22,106,755 Short-term borrowed funds 4,153,424 3,941,189 4,495,242 4,145,971 Long-term debt 4,749,282 4,393,450 3,903,859 3,890,169 Total interest-bearing liabilities 29,322,351 27,726,057 27,891,635 27,238,029 Shareholders' equity 2,938,976 2,621,143 2,631,041 2,650,444 1997 -------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ------------ ------------ ------------- -------------- (Dollars in thousands, except per share data) Consolidated Summary of Operations: Net interest income FTE $ 325,579 $ 322,799 $ 322,837 $ 304,897 FTE adjustment 15,680 14,605 13,422 10,747 Provision for loan and lease losses 31,070 22,885 26,497 22,228 Securities gains (losses), net 1,340 1,053 (930) 2,676 Other noninterest income 113,463 153,187 101,670 99,995 Noninterest expense 255,885 326,191 219,408 213,393 Provision for income taxes 44,518 42,167 56,292 55,291 ------------ ------------ ------------- -------------- Net income $ 93,229 $ 71,191 $ 107,958 $ 105,909 ============ ============ ============= ============== Diluted net income per share $ .31 $ .23 $ .35 $ .34 ============ ============ ============= ============== Selected Average Balances: Assets $ 31,712,650 $ 30,866,095 $ 30,485,739 $ 29,306,418 Securities, at amortized cost 8,003,066 7,975,858 7,908,915 7,527,059 Loans and leases * 21,592,645 21,015,439 20,752,213 19,987,149 Total earning assets 29,764,006 29,086,031 28,771,667 27,638,314 Deposits 21,662,264 21,599,024 21,837,646 21,285,782 Short-term borrowed funds 3,631,430 3,343,621 3,102,596 2,736,641 Long-term debt 3,437,017 3,134,330 2,736,974 2,500,022 Total interest-bearing liabilities 25,762,722 25,187,410 24,825,925 23,792,322 Shareholders' equity 2,473,627 2,447,203 2,460,304 2,435,228
* Loans and leases are net of unearned income and include loans held for sale. -----END PRIVACY-ENHANCED MESSAGE-----