-----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, QVESMAxebjkhOt0OuMsHucr/7yOjUxJ27ttwy+1MN70rFhe/KkJvGRUqyADywQ1+ s4vfxii8EesHYt4x/B1jgQ== 0000950132-98-000220.txt : 19980319 0000950132-98-000220.hdr.sgml : 19980319 ACCESSION NUMBER: 0000950132-98-000220 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BB&T CORP CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10853 FILM NUMBER: 98567853 BUSINESS ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 BUSINESS PHONE: 9107332000 MAIL ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997 COMMISSION FILE NUMBER: 1-10853 ---------------- BB&T CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NORTH CAROLINA 56-0939887 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 200 WEST SECOND STREET 27101 WINSTON-SALEM, NORTH CAROLINA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------- (336) 733-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ----------------------- Common Stock, $5 par value New York Stock Exchange Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant at January 31, 1998 was approximately $7.9 billion. The number of shares of the Registrant's Common Stock outstanding on January 31, 1998, was 136,342,267. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 28, 1998, are incorporated by reference in Part III of this report. The Exhibit Index begins on page 82. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CROSS REFERENCE INDEX
PAGE ------ PART I Item 1 Business............................................. 4 Item 2 Properties........................................... 15, 61 Item 3 Legal Proceedings.................................... 71 Item 4 Submission of Matters to a Vote of Shareholders...... 2 None. PART II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters.................................. 38-39 Item 6 Selected Financial Data.............................. 42 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 19 Item 7A Quantitative and Qualitative Disclosures About Market Risk................................................. 34 Item 8 Financial Statements and Supplementary Data.......... 41 Consolidated Balance Sheets at December 31, 1997 and 1996................................................. 45 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997................................................. 46 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 1997.............................. 47 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997................................................. 48 Notes to Consolidated Financial Statements........... 49 Report of Independent Public Accountants............. 44 Quarterly Financial Summary for 1997 and 1996........ 41 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................. 2 None. PART III Item 10 Directors and Executive Officers of the Registrant... *, 15 Item 11 Executive Compensation............................... * Item 12 Security Ownership of Certain Beneficial Owners and Management........................................... * Item 13 Certain Relationships and Related Transactions....... * PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements (See Item 8 for reference). (2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable. (3) Exhibits have been filed separately with the Commission and are available upon written request. 2 (b) Reports on Form 8-K.
TYPE DATE FILED REPORTING PURPOSE ---- ---------- ----------------- Item 5. January 14, 1997 Fourth Quarter Earnings Release Item 5. April 11, 1997 First Quarter Earnings Release Item 5. May 23, 1997 Corporate Name Change from Southern National Corporation to BB&T Corporation effective May 19, 1997 Item 5. June 11, 1997 $250 million Subordinated Notes Issued Item 5. July 11, 1997 Second Quarter Earnings Release Item 2. July 14, 1997 Completion of United Carolina Bancshares Merger Item 5. August 15, 1997 30 Days Combined Operations between BB&T and United Carolina Bancshares Corporation and certain restated balances Item 5. August 15, 1997 Restatement of December 31, 1996 Form 10-K to include the accounts of United Carolina Bancshares Corporation Item 5. October 15, 1997 Third Quarter Earnings Release Item 5. October 30, 1997 Announcement of Plans to Acquire Life Bancorp, Inc., of Norfolk, Virginia Item 5. December 17, 1997 Announcement of Plans to Acquire Franklin Bancorporation, Inc. of Washington, D.C. Item 5. January 15, 1998 Fourth Quarter Earnings Release Item 5. February 26, 1998 Announcement of Plans to Acquire Maryland Federal Bancorp, Inc. of Hyattsville, Maryland Item 5. February 27, 1998 Announcement of Share Repurchase Plan
---------------------------------------------------------------------- * The information called for by Item 10 is incorporated herein by reference to the information that appears under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders. The information called for by Item 11 is incorporated herein by reference to the information that appears under the headings "Compensation of Executive Officers", "Retirement Plans" and "Compensation Committee Report on Executive Compensation" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders. The information called for by Item 12 is incorporated herein by reference to the information that appears under the headings "Security Ownership" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders. The information called for by Item 13 is incorporated herein by reference to the information that appears under the headings "Compensation Committee Interlocks and Insider Participation" and "Transactions with Officers and Directors" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders. 3 BUSINESS GENERAL BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations in North Carolina, South Carolina and Virginia primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. At December 31, 1997, the principal assets of BB&T included all of the outstanding shares of common stock of Branch Banking and Trust Company, of Winston-Salem, North Carolina; BB&T Financial Corporation of South Carolina, located in Greenville, South Carolina, which in turn owns all the outstanding shares of Branch Banking and Trust Company of South Carolina; BB&T Financial Corporation of Virginia, which in turn owns all the outstanding shares of Branch Banking and Trust Company of Virginia, Fidelity Federal Savings Bank and Virginia First Savings Bank. BB&T also owns all of the outstanding shares of common stock of Regional Acceptance Corporation of Greenville, North Carolina, Craigie Incorporated of Richmond, Virginia, Refloat Incorporated of Mount Airy, North Carolina, and Phillips Factors Corporation of High Point, North Carolina. Subsidiaries Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was chartered in 1872 and is the oldest bank in North Carolina. BB&T-NC currently operates 357 banking offices throughout North Carolina and holds the largest share of deposits in North Carolina. BB&T-NC provides a wide range of banking services, principally in its local market, to individuals and commercial customers, including small and mid-sized businesses, public agencies and local governments. BB&T-NC's principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North Carolina, which specializes in lease financing to commercial businesses; BB&T Investment Services, Inc., located in Charlotte, North Carolina, which offers customers nondeposit investment alternatives, including discount brokerage services, fixed-rate and variable-rate annuities, unit investment trusts, mutual funds and U.S. Government and municipal bonds; and BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which is the largest independent insurance agency network in the Carolinas and markets a wide range of insurance coverages to individuals and businesses. BB&T-NC has a number of additional subsidiaries, including Prime Rate Premium Finance Corporation, Inc. ("Prime Rate"), located in Florence, South Carolina, which provides insurance premium financing to customers in Virginia and the Carolinas. BB&T-NC also owns 51% of AutoBase Information Systems, Inc., ("AutoBase") a Charlotte, North Carolina-based company that uses advanced technologies to simplify the car-buying process for consumers and automotive dealers. Branch Banking and Trust Company of South Carolina ("BB&T-SC") operates 96 banking offices. BB&T-SC provides a wide range of banking services, principally in its local market, to retail and commercial customers, including small and mid-sized businesses, public agencies, local governments and individuals. BB&T-SC's subsidiaries include BB&T Investment Services of South Carolina, Inc., located in Charlotte, North Carolina, a broker/dealer currently engaged in the retailing of mutual funds, U.S. Government and municipal bonds, fixed and variable rate insurance annuity products and unit investment trusts. Branch Banking and Trust Company of Virginia ("BB&T-VA") operates 22 banking offices in southeastern Virginia. BB&T-VA offers a full range of commercial and retail banking services. Fidelity Federal Savings Bank ("Fidelity") was acquired on March 1, 1997. Fidelity operates seven branch offices offering commercial and retail banking services in the Richmond, Virginia area. Virginia First Savings Bank ("Virginia First") was acquired on December 1, 1997. Virginia First operates 24 full service retail facilities throughout southside, central and southwestern Virginia. In addition, Virginia First operates twelve loan origination centers in southside, central and southwestern Virginia, in northern Virginia and Southern Maryland under the trade name, Virginia First Mortgage. 4 On March 1, 1998, BB&T completed its acquisition of Life Bancorp, Inc. of Norfolk, Virginia ("Life"). Life has $1.5 billion in assets and currently operates 20 full service banking offices in Norfolk, Virginia Beach, Chesapeake, Portsmouth and Suffolk through its banking subsidiary, Life Savings Bank, FSB. Its primary businesses are retail and mortgage banking. Regional Acceptance Corporation ("Regional Acceptance"), a consumer finance company based in Greenville, North Carolina, was acquired by BB&T on September 1, 1996. Regional Acceptance, which operates 28 branch offices in the Carolinas, Tennessee and Virginia, specializes in indirect lending for consumer purchases of used automobiles. Craigie Incorporated ("Craigie"), a registered broker/dealer headquartered in Richmond, Virginia, was acquired on October 1, 1997. With offices in Richmond, Virginia and Charlotte, North Carolina, Craigie specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Craigie's public finance department provides financial advisory services and municipal bond financing to a variety of regional tax-exempt issuers. The firm's corporate finance department specializes in raising equity capital and underwriting debt issues for corporate clients and has an active mergers and acquisitions practice. Phillips Factors ("Phillips"), based in High Point, North Carolina, was acquired by BB&T on May 20, 1997. Phillips buys and manages account receivables primarily in the furniture, textiles and home furnishing-related industries. Refloat, Inc. ("Refloat"), based in Mount Airy, North Carolina, was acquired by BB&T on July 31, 1997. Refloat specializes in loans to small commercial lawn care businesses across the country. Unified Investors Life Insurance Company is a reinsurer and underwriter of certain credit life and credit accident and health insurance policies written by a non-affiliated insurance company in connection with loans made by the bank subsidiaries. The following table discloses selected information related to BB&T's banking subsidiaries: TABLE 1 SELECTED FINANCIAL DATA OF BANKING SUBSIDIARIES AS OF/FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BB&T-NC BB&T-SC BB&T-VA FIDELITY** ----------------------------------- -------------------------------- -------------------------- ---------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 ----------- ----------- ----------- ---------- ---------- ---------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) Total assets.... $22,530,009 $20,652,519 $19,654,218 $4,364,982 $4,213,458 $4,179,955 $785,870 $790,955 $737,462 $356,226 Securities...... 5,392,894 4,962,941 4,970,762 1,020,554 1,034,385 1,055,622 132,596 147,019 154,358 28,639 Loans and leases, net of unearned income*........ 15,402,775 14,149,983 13,213,131 3,052,755 2,901,930 2,928,298 590,306 550,218 505,767 275,640 Deposits........ 15,931,795 15,683,080 14,856,949 3,401,236 3,336,711 3,255,945 679,252 690,318 669,000 255,475 Shareholder's equity......... 1,771,589 1,601,950 1,380,924 374,871 399,965 385,481 73,922 67,039 60,734 64,758 Net interest income......... 842,745 773,019 710,338 184,341 173,235 166,764 36,670 35,144 31,231 10,960 Provision for loan and lease losses......... 53,533 44,675 31,264 14,109 8,405 5,518 2,033 2,550 1,910 605 Noninterest income......... 436,607 333,119 238,050 70,916 57,729 58,199 12,546 10,296 4,650 1,230 Noninterest expense........ 809,599 689,969 659,681 135,018 134,200 119,931 30,523 24,839 25,965 8,322 Net income...... 278,536 250,956 172,970 68,024 56,489 62,319 10,973 11,791 4,853 1,278 VIRGINIA FIRST** -------- 1997 -------- Total assets.... $925,279 Securities...... 23,329 Loans and leases, net of unearned income*........ 771,928 Deposits........ 662,594 Shareholder's equity......... 152,626 Net interest income......... 2,826 Provision for loan and lease losses......... 183 Noninterest income......... 1,077 Noninterest expense........ 2,654 Net income...... 468
- -------- * Includes loans held for sale. ** Fidelity Federal Savings Bank was acquired on March 1, 1997 and Virginia First Savings Bank was acquired on December 1, 1997. These acquisitions were accounted for as purchases and, consequently, the amounts above reflect the operations of the acquired institutions only since the dates of acquisition. 5 Merger Strategy and Pending Mergers Profitability and market share have been enhanced through both internal growth and acquisitions in recent years. The acquisition strategy of BB&T is focused on three primary objectives: (1) to pursue in-market acquisitions of high-quality banks and thrifts in the $250 million to $10 billion range, (2) to acquire companies in niche markets that provide products or services that can be offered to BB&T's current customer base, and (3) to consider strategic acquisitions in new markets that are economically feasible and provide positive long-term benefits. On December 16, 1997, BB&T announced plans to merge with Franklin Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction to be accounted for as a pooling of interests. Franklin shareholders will receive between .35 and .3743 shares of BB&T common stock in exchange for each share of Franklin common stock held. With approximately $535 million in assets, Franklin operates nine full-service banking offices, including six in the District of Columbia, one in Bethesda, Maryland and two in northern Virginia. The transaction is expected to be completed during the third quarter of 1998. On February 25, 1998, BB&T announced plans to acquire Maryland Federal Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland in a stock transaction to be accounted for as a purchase. Maryland Federal shareholders will receive no less than .5975 and no greater than .6102 shares of BB&T common stock in exchange for each share of Maryland Federal common stock held. With approximately $1.2 billion in assets, Maryland Federal operates 28 branches in 24 cities as offices of Maryland Federal Bank. This transaction is expected to be completed in the third quarter of 1998. Competition The banking industry is highly competitive and dramatic change continues to occur. The banking subsidiaries of BB&T compete actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies and insurance companies. Competition continues to grow as customers select from a variety of traditional and nontraditional financial institutions. The industry continues to consolidate at a fast pace, which affects competition by eliminating some regional and local institutions while at the same time creating a growing number of firms with multi-regional operations. For additional information on markets, BB&T's competitive position and strategies, see "Market Area" and "Lending Activities" below. BB&T expects to continue to take advantage of the consolidation of the financial services industry by further developing its franchise through the acquisition of financial institutions. Such acquisitions may entail the payment by BB&T of consideration in excess of the book value of the underlying net assets acquired, may result in the issuance of additional shares of BB&T common stock or the incurring of an additional indebtedness by BB&T, and could have a dilutive effect on the per share earnings or book value of BB&T common stock. Moreover, such acquisitions sometimes result in significant front-end charges against earnings, although cost savings, especially incident to in- market acquisitions, also are frequently anticipated. MARKET AREA BB&T's primary market area consists of North Carolina, South Carolina and Virginia. The area's employment base consists of manufacturing, general services, agricultural, wholesale/retail and financial services. Among the primary industries in which BB&T has significant commercial lending relationships are real estate, textiles, furniture and health care. BB&T believes its current market area is economically vibrant and will support consistent growth in assets and deposits in the future. Even so, management expects to continue to employ aggressive growth strategies, including possible expansion into neighboring states. The current market area includes numerous small communities that BB&T seeks to serve. Management believes that maintaining a community bank approach as asset size and available services grow will strengthen the Corporation's ability to move into new states and communities and to target small to mid-sized commercial customers in these areas. 6 LENDING ACTIVITIES The primary goal of the BB&T lending function is to help clients achieve their financial goals and secure their financial futures on terms that are fair to the clients and profitable to the Corporation. This purpose can best be accomplished by building strong, profitable customer relationships over time, with BB&T becoming an important contributor to the prosperity and well- being of its customers. BB&T's philosophy of lending is to attempt to meet the business and consumer credit needs within defined market segments where standards of safety, profitability and liquidity can be met. BB&T focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and other consumer loans. Typically, fixed-rate residential mortgage loans are sold in the secondary mortgage market and adjustable-rate residential mortgages are retained for the portfolio. Loan growth, which typically follows economic cycles, has been consistent over the past five years. Average loans have increased 9.3% on an annual basis since 1992 and increased 10.1% in 1997. BB&T conducts the majority of its lending activities in the context of the Corporation's community bank focus, with decentralized lending decisions made as close to the customer as practicable. TABLE 2 COMPOSITION OF LOAN AND LEASE PORTFOLIO*
DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Loans-- Commercial, financial and agricultural..... $ 3,017,729 $ 2,715,363 $ 2,395,084 $ 2,941,109 $ 2,303,554 Real estate-- construction and land development.......... 2,102,234 1,525,964 1,175,839 889,033 870,112 Real estate-- mortgage............. 11,415,319 10,110,927 10,200,968 9,220,222 8,431,729 Consumer.............. 2,688,304 2,748,572 2,487,235 2,388,970 2,198,858 ----------- ----------- ----------- ----------- ----------- Loans held for in- vestment........... 19,223,586 17,100,826 16,259,126 15,439,334 13,804,253 Loans held for sale............... 509,141 228,333 261,364 141,676 707,973 ----------- ----------- ----------- ----------- ----------- Total loans....... 19,732,727 17,329,159 16,520,490 15,581,010 14,512,226 Leases.................. 788,462 576,991 376,152 304,544 225,312 ----------- ----------- ----------- ----------- ----------- Total loans and leases............... $20,521,189 $17,906,150 $16,896,642 $15,885,554 $14,737,538 =========== =========== =========== =========== ===========
- -------- *Balances are gross of unearned income. Mortgage Banking BB&T is the largest originator of residential mortgage loans in the Carolinas. BB&T engages in mortgage loan originations by offering fixed- and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. As mentioned above, the Corporation usually retains adjustable-rate loans for the portfolio and sells fixed-rate loans and government loans within the secondary mortgage market. Servicing rights on loans sold are typically retained by BB&T. Loans are generally offered in amounts up to 95% of the appraised value of the collateral for terms up to 30 years based on the qualifications of the borrower. Except in the Community Reinvestment Act ("CRA") program discussed below, private mortgage insurance is required in an amount sufficient to reduce BB&T's exposure to 80% or less of the loan-to-value ratio. BB&T does not originate loans with negative amortization. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale of substantially all fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and private mortgage insurance. BB&T also purchases mortgage loans from other 7 originators and subjects them to the same underwriting and risk management policies as loans originated internally. The Corporation also offers, as part of its CRA program, more flexible underwriting criteria to broaden the availability of mortgage loans in the communities BB&T serves. CRA loans are available at loan-to-value ratios up to 97% for households with incomes below a specified percentage of county median income. Such loans do not require private mortgage insurance. These loans are currently retained in the portfolio since they do not meet the requirements to be sold in the secondary mortgage market at the time of origination. BB&T's mortgage banking operation earns fee income from the servicing of the mortgage loan portfolio and from gains on sales of mortgage loans to the secondary mortgage market. Commercial Lending BB&T's commercial lending program is generally targeted to serve small to middle-market businesses with sales of $250 million or less, although in-house limits do allow lending to larger customers, including national customers who have some reasonable business connections with the Corporation's geographically-served markets. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Pricing on commercial loans, driven largely by competition, is usually tied to market indexes, such as the prime rate, London Interbank Offered Rates or U.S. Treasury rates. Substantially all of BB&T's commercial lending program is operated through the banking network. Construction Lending Real estate construction loans include loans with 12 month maturities which are intended to convert to permanent one-to-four family residential mortgage loans upon completion of the construction. These loans have terms and options similar to residential mortgage loans and allow a rate to be "locked in" by the borrower during the 12 month construction period. The loans also allow a "float down" option once during the construction period. BB&T also originates commercial construction loans. These loans are usually to in-market developers, businesses, individuals or real estate investors for the construction of commercial structures in the Corporation's market area, including, but not limited to, industrial facilities, apartments, shopping centers, office buildings, hotels and warehouses. The properties may be for sale, lease or owner-occupancy. The Corporation generally requires the borrower to obtain a commitment to "take out" the construction loan and typically requires significant levels of pre-sales, pre-leasing or, in the case of owner-occupied properties, that the owner has adequate resources to repay the debt. Generally, these loans carry floating interest rates tied to the Corporation's prime interest rate or other market index, and range in term from six to eighteen months. Consumer Lending BB&T offers various consumer loan products. Both secured and unsecured loans are marketed to qualifying existing clients and to other creditworthy candidates in BB&T's market area. Home Equity Loans and Lines are underwritten with note amounts and credit limits that ensure consistency with the Corporation's loan-to-value policy (80% for consumer loans secured by real estate). Numerous forms of unsecured loans, including revolving credits (bankcards, DDA overdraft protection and personal lines of credit), are provided and various installment loan products, including vehicle loans, are offered. Pricing of such loans is based, to a great degree, on in-market competition. Closed-end installment loans are usually priced as fixed-rate simple interest loans, while most revolving products are priced with variable rates. Through the acquisition of Regional Acceptance, BB&T is expanding the sales finance function by making loans to customers with a higher credit risk profile than the traditional BB&T customer. These loans are extended through automobile dealers to finance purchases of mid-model to late-model used automobiles and are priced higher than BB&T's normal grade consumer loans based on the higher level of risk associated with these types of loans. Leasing BB&T provides commercial leasing products and services principally in North Carolina, South Carolina and Virginia through BB&T Leasing Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary 8 products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases. Leasing provides leases for vehicles, rolling stock and tangible personal property and services for small to medium-sized commercial customers primarily in BB&T's market area. BB&T also solicits leasing business from municipalities in North and South Carolina directly through its subsidiary banks. TABLE 3 SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1997 ------------------------------------- COMMERCIAL, FINANCIAL AND REAL ESTATE: AGRICULTURAL CONSTRUCTION TOTAL ------------- ------------ ---------- (DOLLARS IN THOUSANDS) Fixed rate: 1 year or less(2)...................... $ 217,276 $ 323,954 $ 541,230 1-5 years.............................. 420,068 159,560 579,628 After 5 years.......................... 86,911 -- 86,911 ---------- ---------- ---------- Total................................ 724,255 483,514 1,207,769 ---------- ---------- ---------- Variable rate: 1 year or less(2)...................... 1,077,933 1,084,543 2,162,476 1-5 years.............................. 1,077,933 534,177 1,612,110 After 5 years.......................... 137,608 -- 137,608 ---------- ---------- ---------- Total................................ 2,293,474 1,618,720 3,912,194 ---------- ---------- ---------- Total loans and leases(1).......... $3,017,729 $2,102,234 $5,119,963 ========== ========== ==========
- -------- * Balances are gross of 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 renegotiated at that time. (1) The table excludes: (i)consumer loans to individuals for household, family and other personal expenditures........................................... $ 2,688,304 (ii)real estate mortgage loans................................... 11,415,319 (iii)loans held for sale......................................... 509,141 (iv)leases....................................................... 788,462 ----------- $15,401,226 ===========
(2) Includes loans due on demand. Nonaccrual Loans and Leases It is BB&T's policy to place commercial loans and leases on nonaccrual status when full collection of principal and interest becomes doubtful, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period and any prior year interest is charged against the allowance for loan and lease losses. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectability of principal or interest is no longer doubtful. 9 Mortgage loans and other consumer loans are also placed on nonaccrual status when full collection of principal and interest becomes doubtful, or they become delinquent for a specified period of time, which varies depending on the type of consumer loan. Allowance for Loan and Lease Losses The allowance for loan and lease losses is established through a provision for loan and lease losses charged against earnings. The level of the allowance for loan and lease losses is based on management's evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity. This evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers the loans' risk grades, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant consideration in determining an adequate allowance. BB&T utilizes ten "risk grades" to evaluate the repayment capacity of borrowers. BB&T's objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to reduce overall credit risk by minimizing the adverse impact of any single event or combination of related events. Although management believes that the best information available is used to determine the adequacy of the allowance, the nature of the process by which management determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Unforeseen market conditions could result in adjustments in the allowance which would affect earnings. Future additions to BB&T's allowance will be the result of periodic loan, property and collateral reviews as well as projected changes in overall economic and real estate markets. The following table sets forth an allocation of the allowance for loan and leases losses at the end of each of the past five years. The allowance has been allocated on an approximate basis and is not necessarily indicative of future losses. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. TABLE 4 ALLOCATION OF ALLOWANCE BY LOAN CATEGORY
DECEMBER 31, ----------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------- ----------------- ----------------- ----------------- ----------------- % LOANS % LOANS % LOANS % LOANS % LOANS IN EACH IN EACH IN EACH IN EACH IN EACH AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at end of period applicable to: Commercial, financial and agricultural....... $ 29,034 15% $ 30,272 15% $ 32,370 14% $ 40,340 19% $ 48,493 16% Real estate: Construction and land development........... 18,476 10 14,645 9 16,436 7 13,522 6 15,004 6 Mortgage............... 89,741 58 96,389 58 96,096 62 83,260 58 84,875 61 -------- --- -------- --- -------- --- -------- --- -------- --- Real estate--total..... 108,217 68 111,034 67 112,532 69 96,782 64 99,879 67 -------- --- -------- --- -------- --- -------- --- -------- --- Consumer................ 76,543 13 52,238 15 37,977 15 33,706 15 31,461 15 Leases.................. 7,918 4 3,679 3 3,443 2 906 2 1,218 2 Unallocated............. 42,231 -- 32,847 -- 32,730 -- 43,709 -- 31,655 -- -------- --- -------- --- -------- --- -------- --- -------- --- Total.................. $263,943 100% $230,070 100% $219,052 100% $215,443 100% $212,706 100% ======== === ======== === ======== === ======== === ======== ===
10 The following table sets forth information with respect to BB&T's allowance for loan and lease losses for the most recent five years. TABLE 5 COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Balance, beginning of period................. $ 230,070 $ 219,052 $ 215,443 $ 212,706 $ 176,743 ----------- ----------- ----------- ----------- ----------- Charge-offs: Commercial, financial and agricultural..... (12,394) (9,341) (10,889) (11,655) (24,832) Real estate........... (12,743) (11,523) (12,005) (9,131) (11,844) Consumer.............. (64,829) (47,441) (29,556) (16,398) (16,510) Lease receivables..... (671) (768) (614) (647) (771) ----------- ----------- ----------- ----------- ----------- Total charge-offs... (90,637) (69,073) (53,064) (37,831) (53,957) ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial, financial and agricultural..... 4,926 5,065 5,302 7,280 6,212 Real estate........... 4,889 6,221 3,658 3,148 3,525 Consumer.............. 7,100 6,158 5,394 4,996 4,267 Lease receivables..... 232 136 395 295 149 ----------- ----------- ----------- ----------- ----------- Total recoveries.... 17,147 17,580 14,749 15,719 14,153 ----------- ----------- ----------- ----------- ----------- Net charge-offs......... (73,490) (51,493) (38,315) (22,112) (39,804) ----------- ----------- ----------- ----------- ----------- Provision charged to expense.............. 89,850 62,511 41,924 23,730 59,829 ----------- ----------- ----------- ----------- ----------- Allowance of loans acquired in purchase transactions......... 17,513 -- -- 1,119 15,938 ----------- ----------- ----------- ----------- ----------- Balance, end of period.. $ 263,943 $ 230,070 $ 219,052 $ 215,443 $ 212,706 =========== =========== =========== =========== =========== Average loans and leases*................ $18,916,461 $17,186,046 $16,507,428 $14,919,264 $13,344,029 Net charge-offs as a percentage of average loans and leases....... .39% .30% .23% .15% .30% =========== =========== =========== =========== ===========
- -------- * Loans and leases are net of unearned income and include loans held for sale. Nonperforming Assets and Classified Assets Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessions. Loans are considered delinquent in most cases the first day after payment is due. After a loan has been delinquent for ten days, BB&T mails a reminder notice to the borrower, and if the borrower does not contact a collection officer, late charges are assessed on the sixteenth day after the due date. Numerous attempts to work with delinquent borrowers to establish a repayment plan are made throughout the delinquent period of the loan. When a commercial loan or unsecured consumer loan becomes 90 days past due, the loan is placed on nonaccrual status. For mortgage and most other consumer loans, the period of time that passes before a delinquent loan is automatically placed on nonaccrual status varies, depending on the type of loan. In some cases, loans may be placed on nonaccrual status earlier based on specific circumstances surrounding the loan. If the collection of principal and/or interest becomes doubtful at any time during the collection process, the loan is placed on nonaccrual status. Every effort is made to reach an agreement on payment with the borrower. If it becomes necessary to foreclose on the collateral securing loans, acquired assets are aggressively marketed to minimize the cost of carrying such assets. 11 INVESTMENT ACTIVITIES BB&T maintains a portion of its assets as investment securities. Banks are allowed to purchase, sell, deal in and hold certain investment securities as prescribed by bank regulations. These investments include all obligations of the U.S. Treasury, agencies of the Federal government, obligations of any state or political subdivision, various types of corporate debt, mutual funds, limited equity securities and certain derivative securities. Investment portfolio activities are governed internally by a written, board- approved investment policy. Investment policy is carried out by the Corporation's Asset/Liability Management Committee ("ALCO") which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities which are discussed in the section, Market Risk Management, of "Management's Discussion and Analysis of Financial Condition and Results of Operations." Investment strategies are established by the ALCO in consideration of the interest rate cycle, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets and liabilities to cover unanticipated deposit and loan fluctuations, seasonal funds flow variations and overall funds management objectives; (ii) to provide eligible securities to secure public funds and trust deposits as prescribed by law; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii). Within the overall context of the primary purposes of portfolio management as just described, investment strategy during 1997 was established and continually adjusted within an environment of stable short-term interest rates, as set by the Federal Reserve's Open Market Committee. At December 31, 1997, the investment portfolio represented approximately 23.0% of the total assets of the Corporation. Management has judged overall liquidity and interest rate sensitivity to be adequate to allow the continued growth of both the investment and loan portfolios. As has been the case for the past several years, investment activity during 1997 was centered on obligations of the U.S. Treasury and Federal agency securities. Excluding mortgage-backed securities, U.S. Treasuries and Federal agencies comprised 62.4% of the total book value of the portfolio at year end. The value of these securities from return and quality perspectives made them relatively more attractive than other types of investments. Emphasis continued to be placed on short and intermediate-term maturities, balancing reasonable stability between liquidity and yield. The average contractual maturity of the entire portfolio at December 31, 1997 was 6 years and 10 months compared to 7 years and 4 months at December 31, 1996. This decrease in maturity reflects a restructuring of BB&T's holdings during the year. However, the actual cash flows relating to the investment portfolio, are expected to be received more quickly than contractual maturities because of prepayments from mortgage- backed securities. At December 31, 1997, the approximate expected actual maturity, or the "duration," of BB&T's investment portfolio was 2 years. Table 11--"Securities" presents the maturity distribution by category of BB&T's investment portfolio at December 31, 1997. 12 The following table provides information regarding the composition of BB&T's securities portfolio at the end of each of the past three years. Note that BB&T's trading securities, reflected in the accompanying table, were obtained through the acquisition of Craigie. TABLE 6 COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Trading securities (at estimated fair value)...................................... $ 67,878 $ -- $ -- ---------- ---------- ---------- Securities held to maturity (at amortized cost): U.S. Treasury, government and agency obligations............................... 14,952 6,283 41,570 States and political subdivisions.......... 132,847 164,525 205,168 Mortgage-backed securities................. -- -- 4,508 Other securities........................... -- -- 77 ---------- ---------- ---------- Total securities held to maturity........ 147,799 170,808 251,323 ---------- ---------- ---------- Securities available for sale (at estimated fair value): U.S. Treasury, government and agency obligations............................... 4,163,991 3,954,039 4,788,132 States and political subdivisions.......... 37,141 23,977 22,115 Mortgage-backed securities................. 1,855,755 1,751,025 1,007,062 Other securities........................... 424,628 285,180 153,991 ---------- ---------- ---------- Total securities available for sale...... 6,481,515 6,014,221 5,971,300 ---------- ---------- ---------- Total securities....................... $6,697,192 $6,185,029 $6,222,623 ========== ========== ==========
SOURCES OF FUNDS Deposits generated through BB&T's domestic banking network are the primary source of funds for lending and investing activities. The amortization and scheduled payment of loans and maturities of investment securities also provide a stable source of funds. Federal Home Loan Bank ("FHLB") advances, foreign deposits, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. These secondary funding sources may also be used if management determines that these are the best sources of funds to meet current requirements. Deposits Customer deposits are attracted principally from within BB&T's market area through the offering of a broad selection of deposit instruments including demand deposits, negotiable order of withdrawal accounts, savings accounts, money rate savings, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required and the time period the funds must remain on deposit. Interest rates paid on specific deposit types are set by the ALCO and are determined based on (i) the interest rates offered by competitors, (ii) anticipated needs for funding and the timing of the cash flow needs offset by the availability of more cost-effective funding sources and (iii) anticipated future economic conditions and interest rates. Customer deposits are attractive sources of liquidity because of stability, cost and the ability to generate fee income through the cross-sale of other services. 13 TABLE 7 TIME DEPOSITS $100,000 AND OVER REMAINING MATURITY AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS) ----------- Less than three months........................................ $ 987,283 Four through six months....................................... 552,084 Seven through twelve months................................... 492,029 Over twelve months............................................ 390,205 ----------- Total....................................................... $ 2,421,601 =========== At December 31, 1997, the scheduled maturities of total time deposits were: (DOLLARS IN THOUSANDS) ----------- 1998.......................................................... $ 8,564,920 1999.......................................................... 1,483,623 2000.......................................................... 315,026 2001.......................................................... 86,435 2002.......................................................... 134,786 2003 and later................................................ 12,412 ----------- Total....................................................... $10,597,202 ===========
Short-Term Borrowed Funds BB&T's ability to borrow significant funds through nondeposit sources generates additional flexibility in meeting the liquidity needs of customers. Sources of short-term borrowed funds at year end were master notes, securities sold under repurchase agreements, FHLB advances, Federal funds purchased and U.S. Treasury tax and loan depository note accounts. The following information summarizes certain pertinent information for the past three years with regard to BB&T's short-term borrowed funds: TABLE 8 SHORT-TERM BORROWED FUNDS
1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Maximum outstanding at any month-end during the year...................... $3,015,177 $2,340,904 $3,902,581 Average outstanding during the year... 2,527,128 2,029,293 3,184,338 Average interest rate during the year................................. 5.32% 5.26% 5.91% Average interest rate at end of year.. 5.47 4.80 5.36
CAPITAL ADEQUACY AND RESOURCES Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. BB&T's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to support future growth and compliance with all regulatory standards. Close attention is given to regulatory levels of capital as percentages of assets and risk-weighted assets. The accompanying table outlines the regulatory minimums for Tier 1 capital, total risk-based capital and the leverage ratio, as well as such amounts for BB&T and BB&T's banking subsidiaries as of December 31, 1997. 14 TABLE 9 CAPITAL ADEQUACY FOR BB&T CORPORATION AND BANKING SUBSIDIARIES
REGULATORY BB&T- BB&T- BB&T- VIRGINIA MINIMUMS BB&T NC SC VA FIDELITY FIRST ---------- ---- ----- ----- ----- -------- -------- Risk-based capital ratios: Tier 1 capital(1)....... 4.0% 9.9% 11.0% 12.2% 12.1% 12.3% 10.5% Total risk-based capital(2)............. 8.0 13.7 12.3 13.4 13.3 13.3 11.8 Leverage ratio(3)......... 3.0 7.2 7.6 8.5 9.4 7.9 7.3
- -------- (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 ratio of fourth quarter average assets less nonqualifying intangibles. EMPLOYEES At December 31, 1997, BB&T had approximately 9,800 full-time-equivalent employees. PROPERTIES BB&T and its significant subsidiaries occupy headquarters offices that are either owned or operated under long-term leases and also own free-standing operations centers in Wilson, Charlotte and Lumberton, North Carolina. Branch office locations are variously owned or leased. The premises occupied by BB&T and its subsidiaries are considered to be well-located and suitably equipped to serve as financial services facilities. See Note F. "Premises and Equipment" of the "Notes to Consolidated Financial Statements" in this report for additional disclosures related to BB&T's properties. EXECUTIVE OFFICERS OF BB&T BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr. Allison is 49 and has 27 years of service with the Corporation. Henry G. Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr. Williamson is 50 and has 26 years of service with the Corporation. Kelly S. King is the President of BB&T Corporation and is the Senior Executive Vice President for the Branch Network. Mr. King is 49 and has 26 years of service with the Corporation. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 48 and has served the Corporation for 25 years. W. Kendall Chalk is the Senior Executive Vice President for the Lending Group. Mr. Chalk is 52 and has served the Corporation for 23 years. Morris D. Marley is the Senior Executive Vice President for Funds Management. Mr. Marley is 47 and has served the Corporation for 26 years. Scott E. Reed is the Senior Executive Vice President and Chief Financial Officer. Mr. Reed is 49 and has 26 years of service with the Corporation. 15 CERTAIN REGULATORY CONSIDERATIONS GENERAL As a bank holding company, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the "BHCA") and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any additional bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities. As state-chartered banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the "Banks") are subject to regulation, supervision and examination by state bank regulatory authorities in their respective home states. These authorities include the North Carolina Commissioner of Banks, in the case of BB&T-NC, the South Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia State Corporation Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of the Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC"). State and federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer compliance laws and regulations also affect the Banks' operations. Fidelity, Virginia First and Life (collectively, the "Thrifts") are federally-chartered savings associations and as such are subject to regulation, examination and supervision by the Office of Thrift Supervision, a bureau of the U.S. Department of the Treasury. Federal law governs the activities in which the Thrifts may engage, the investments they may make and the aggregate amount of loans that may be granted to one borrower. Various consumer compliance laws and regulations also affect the Thrift's operations. The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including those referred to above. The following description summarizes some of the state and federal laws to which BB&T, the Banks and Thrifts are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. PAYMENT OF DIVIDENDS BB&T is a legal entity separate and distinct from its banking and other subsidiaries. A major portion of the revenues of BB&T result from amounts paid as dividends to BB&T by its subsidiaries. BB&T's banking subsidiaries are subject to state laws and regulations that limit the amount of dividends they can pay. In addition, both BB&T and its banking and thrift subsidiaries are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. BB&T does not expect that any of these laws, regulations or policies will materially impact the ability of the Banks and Thrifts to pay dividends. During the year ended December 31, 1997, the Banks and Thrifts recorded $248.3 million in cash dividends to BB&T. CAPITAL The Federal Reserve Board, and the FDIC and the Office of Thrift Supervision have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements, BB&T, the Banks and the Thrifts are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is to be composed of common equity, retained 16 earnings and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance ("Tier 2 capital"). At December 31, 1997, BB&T's Tier 1 capital and total capital ratios were 9.9% and 13.7%, respectively, and the ratio of total capital to total risk-adjusted assets for BB&T-NC, BB&T-SC, BB&T-VA, Fidelity and Virginia First were 12.3%, 13.4%, 13.3%, 13.3% and 11.8%, respectively. In addition, each of the Federal bank regulatory agencies has established minimum leverage capital ratio requirements for banking organizations. These provisions require a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to Federal bank regulatory evaluation of an organization's overall safety and soundness. BB&T's leverage ratio at December 31, 1997 was 7.2%, and the leverage ratios for BB&T-NC, BB&T- SC. BB&T-VA, Fidelity and Virginia First were 7.6%, 8.5%, 9.4%, 7.9% and 7.3%, respectively. The risk-based capital standards of both the Federal Reserve Board and the FDIC explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank's capital adequacy. The Federal Reserve Board also has recently issued additional capital guidelines for bank holding companies that engage in certain trading activities. DEPOSIT INSURANCE ASSESSMENTS The deposits of each Bank and Thrift are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC. However, a portion of the deposits of the Banks (relating to the Banks' acquisitions of various savings associations) and all of the deposits of the Thrifts are subject to assessments imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. Thus, for the semi-annual period beginning January 1, 1997, the assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. However, because legislation enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"), the FDIC is currently assessing BIF-insured deposits an additional 1.26 basis points per $100 of deposits, and SAIF-insured deposits an additional 6.30 basis points per $100 of deposits, to cover those obligations. OTHER SAFETY AND SOUNDNESS REGULATIONS There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is in danger of becoming insolvent or is insolvent. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the "cross- guarantee" provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the insolvency of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC's claim for reimbursement is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. 17 The Federal banking agencies also have broad powers under current Federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law. As of December 31, 1997, BB&T, the Banks and Thrifts were classified as well-capitalized. State regulatory authorities also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of North Carolina) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner also has the authority to take possession of a state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock. The Office of Thrift Supervision has similar powers with regard to the Thrifts. INTERSTATE BANKING AND BRANCHING Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis of the financial condition and results of operations of BB&T Corporation ("BB&T" or the "Corporation") for each of the three years in the period ended December 31, 1997, and related financial information are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T's 1997 performance. 1997 was a strong year for the U.S. economy and for the economies of North Carolina, South Carolina and Virginia, BB&T's primary markets. The national economy expanded for the seventh consecutive year while inflation remained very low. Jobs grew by 3.2 million compared to 2.5 million in 1996. The Gross Domestic Product reflected moderate growth for the year, while inflation remained low, as evidenced by a rise in the consumer price index of only 1.8%. Hourly earnings growth slowed to 3.7% from 3.9% in spite of tight labor markets. Consumer confidence was very high during the year, resulting in higher spending in disposable goods, durable goods and housing. Capital spending rose 18% as companies expanded and renewed physical plants to increase capacity. Productivity improved to record levels across all sectors of business because of the increased utilization of technology and further improvements are anticipated in 1998. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressure in the banking industry increases significantly; (2) changes in the interest rate environment reduce margins; (3) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes occur in the regulatory environment; (5) changes occur in business conditions and inflation; (6) expected cost savings associated with pending mergers cannot be fully realized; (7) deposit attrition, customer loss or revenue loss following pending mergers is greater than expected; (8) required operational divestitures associated with pending mergers are greater than expected; (9) the Year 2000 issue is not effectively corrected; and (10) changes occur in the securities markets. 1997 MERGERS AND ACQUISITIONS On March 1, 1997, BB&T completed its acquisition of Fidelity Financial Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction accounted for as a purchase. BB&T issued 1.6 million shares for all of the shares of Fidelity's common stock outstanding. On May 20, 1997, BB&T completed its acquisition of Phillips Factors Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips purchases and manages 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. The acquisition of Phillips was accounted for as a purchase. 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 financing company that specializes in loans to small commercial lawn care businesses across the country. The acquisition, which was completed through the issuance of 375,000 shares of common stock, was accounted for as a purchase. 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 463,000 shares of BB&T's common stock. 19 On December 1, 1997, BB&T completed its acquisition of Virginia First Financial Corporation of Petersburg, Virginia ("VFFC"), a financial institution with $822.9 million in assets at the time of purchase. The merger, which was accounted for under the purchase method of accounting, was consummated through the issuance of 1.9 million shares of BB&T's common stock and the payment of $44.8 million. 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. UCB shareholders received 27.7 million shares of BB&T common stock in exchange for all of the shares of UCB common stock held. ANALYSIS OF FINANCIAL CONDITION Average assets totaled $26.9 billion for the year ended December 31, 1997, an increase of 8.7% over the 1996 average of $24.8 billion. Average assets in 1996 increased 2.2% compared to the 1995 average of $24.2 billion. The major components of the increase in average assets during 1997 were loans and leases, up $1.7 billion, or 10.1%, for the year; securities, which increased $294.8 million, or 4.9% during the year; and non-earning assets, which increased $169.8 million, or 11.7%. These increases were partially offset by a $31.6 million, or 37.6%, decline in other earning assets because of decreases in Federal funds sold. The compound rate of growth in average assets was 8.1% for the five years ended December 31, 1997. Over the same five-year period, the compound annual growth rates based on average balances were 9.3% for loans and leases, 6.1% for securities and 4.9% for deposits. All growth rates have been enhanced by acquisitions accounted for as purchases. TABLE 10 COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE --------------- 1997 V. 1996 V. 1997 1996 1995 1996 1995 ----------- ----------- ----------- ------- ------- (DOLLARS IN THOUSANDS) Securities*............. $ 6,342,124 $ 6,047,280 $ 6,142,707 4.9% (1.6)% Federal funds sold and other earning assets... 52,519 84,167 148,373 (37.6) (43.3) Loans and leases, net of unearned income**...... 18,916,461 17,186,046 16,507,428 10.1 4.1 ----------- ----------- ----------- Average earning assets.. 25,311,104 23,317,493 22,798,508 8.5 2.3 Non-earning assets...... 1,622,386 1,452,609 1,427,507 11.7 1.8 ----------- ----------- ----------- Average total assets.... $26,933,490 $24,770,102 $24,226,015 8.7% 2.2% =========== =========== =========== Average earning assets as percent of average total assets........... 94.0% 94.1% 94.1% =========== =========== ===========
- -------- * Based on amortized cost. ** Includes loans held for sale based on lower of amortized cost or market. Amounts are gross of the allowance for loan and lease losses. Among management's primary strategic objectives is the careful management of assets and liabilities to maximize revenues and earnings per share. The various components of assets and liabilities, the fluctuations of these accounts during 1997 and the strategies surrounding the management of the balance sheet are discussed below. SECURITIES The securities portfolios provide earnings and liquidity, as well as providing an effective tool in managing interest rate risk. Management has historically emphasized investments with a maturity of five years or less 20 because of the changing interest rate environment and to provide greater flexibility in balance sheet management. As a result of the recent emphasis on the acquisition of higher-yielding, longer-term mortgage-backed securities, and maturities of lower-yielding, U.S. Government obligations, the average contractual maturity of the total portfolio has increased to greater than seven years at year-end 1997. However, the expected duration of the investment portfolio approximates two years because of anticipated prepayments of mortgage-backed securities, which compose 27.7% of the entire portfolio. U.S. Treasury securities, government and agency obligations, which comprised 62.4% of the portfolio at year-end 1997, provide adequate current yields with minimal risk and maturities structured to address liquidity concerns. Total outstanding securities increased 8.3% in 1997 to a total of $6.7 billion at the end of the year. Craigie, a registered broker/dealer acquired by BB&T on October 1, 1997, holds trading securities as a normal part of its operations. At December 31, 1997, Craigie had trading securities totaling $67.9 million that are reflected on BB&T's consolidated balance sheet. Market valuation gains and losses in BB&T's trading portfolio are reflected in current earnings. BB&T recorded $.7 million in net unrealized gains from the valuation of these securities during 1997. Securities held to maturity made up only 2.2% of the total portfolio at December 31, 1997, and are primarily composed of obligations of states and municipalities. Securities held to maturity are carried at amortized cost and totaled $147.8 million at December 31, 1997 compared to $170.8 million outstanding at the end of 1996. Market valuation gains and losses in the Corporation's held-to-maturity category affect neither earnings nor capital. The held-to-maturity portfolio had a net unrealized gain of $3.8 million at December 31, 1997. Securities available for sale totaled $6.5 billion at year end and are carried at estimated fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115. The available-for-sale portfolio is primarily composed of investments in U.S. Treasuries, government and agency obligations, which, excluding mortgage-backed securities, composed 64.2% of the outstanding balance of securities available for sale at year end. This percentage has decreased slightly from the 1996 percentage of 65.7%, which reflects a shift to mortgage-backed securities and other securities. The available-for-sale portfolio also contains investments in obligations of states and municipalities, which composed less than 1% of the portfolio, and other securities, including equity investments which comprised the remaining 6.6% of the portfolio. The available-for-sale portfolio composed 96.8% of total securities. Management believes that the high concentration of securities in the available-for-sale portfolio allows greater flexibility in the day-to-day management of the overall portfolio than the held-to-maturity classification. The market value of the available-for-sale portfolio was $74.0 million greater than the amortized cost of these securities. At December 31, 1997, BB&T's available-for-sale portfolio had net unrealized appreciation, net of deferred income taxes, of $44.9 million, which is reported as a separate component of shareholders' equity. This compares to net unrealized appreciation of $11.7 million at December 31, 1996. The unrealized gains and losses in the available-for-sale portfolio at the end of 1997 and 1996 were considered by management to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations. The fully taxable equivalent ("FTE") yield on the total securities portfolio was 6.84% for the year ended December 31, 1997, compared to 6.61% for the prior year. The improvement in FTE yield resulted from higher yields from U.S. Treasury, government and agency obligations and mortgage-backed securities. U.S. Treasury, government and agency obligations improved from 6.41% in 1996 to 6.65% in 1997 and mortgage-backed securities increased from 6.92% to 7.09%, while the FTE yield on state and municipal securities decreased from 8.98% last year to 8.75% in the current year. Management expects that BB&T's primary investment strategy during 1998 will be to selectively replace lower-yielding securities with other high-quality U.S. Government and Federal agency obligations having short and intermediate maturities. The Corporation's ALCO will continually evaluate such strategies in consideration of actual economic and balance sheet developments. 21 TABLE 11 SECURITIES
DECEMBER 31, 1997 -------------------------------- CARRYING VALUE AVERAGE YIELD (3) -------------- ----------------- (DOLLARS IN THOUSANDS) U.S. Treasury, government and agency obligations(1) Within one year............................ $ 765,224 6.11% One to five years.......................... 3,532,273 6.77 Five to ten years.......................... 200,951 7.00 After ten years............................ 1,536,250 7.07 ---------- ----- Total.................................... 6,034,698 6.77 ---------- ----- States and political subdivisions Within one year............................ 24,416 8.88 One to five years.......................... 119,889 8.86 Five to ten years.......................... 23,490 8.69 After ten years............................ 2,193 10.90 ---------- ----- Total.................................... 169,988 8.87 ---------- ----- Other securities Within one year............................ 191 5.03 One to five years.......................... 20,347 6.79 Five to ten years.......................... 134 7.90 After ten years............................ 269 6.96 ---------- ----- Total.................................... 20,941 6.78 ---------- ----- Securities with no stated maturity........... 471,565 6.79 ---------- ----- Total securities(2)...................... $6,697,192 6.82% ========== =====
- -------- (1) Included in U.S. Treasury, government and agency obligations are mortgage- backed securities totaling $1.9 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, the average expected duration is substantially shorter because of the monthly return of principal on certain securities. (2) Includes securities held to maturity of $147.8 million carried at amortized cost and securities available for sale and trading securities carried at estimated fair values of $6.5 billion and $67.9 million, respectively. (3) Taxable equivalent basis as applied to amortized cost. LOANS AND LEASES Loans and leases, including loans held for sale, totaled $20.3 billion at the end of 1997, an increase of $2.5 billion, or 14.3%, from 1996. Average loans for the year ended December 31, 1997, increased $1.7 billion, or 10.1%, over the prior year. This growth rate includes the effects of a mortgage loan securitization program during 1996 and BB&T's divestiture of $232.3 million in loans associated with completing the UCB merger. Excluding the impact of the securitization program and the divestiture, average loans grew at a rate of 12.5% compared with 1996. The FTE yield on loans increased from 9.11% for the twelve months ended December 31, 1996, to 9.20% for 1997, created by higher yields on commercial and consumer loans, partially offset by lower mortgage loan rates. BB&T's lending strategy is to maintain a rate of internal growth, which, over the long run, approximates that of its markets in the Carolinas and Virginia. Management believes this effort will result in a rate of increase 22 which will be sustainable and profitable. Average commercial loans, including leases, increased at a rate of 13.0% during 1997 and yielded 9.1%. Average consumer loans grew 7.9% over the course of the year and yielded 10.3%. Average mortgage loans, including the impact of securitizations, increased 6.7% during 1997, while yielding 7.9%. Excluding the impact of the securitizations, average mortgage loans increased 14.6%. BB&T concentrated efforts on expanding the leasing function throughout 1997. As a result average lease receivables grew $190.8 million, or 51.0%, during 1997. Municipal leasing, primarily tax-exempt leases with counties and municipalities, was stronger than in the prior year. The leasing function, which provides a quality stream of earnings, has developed numerous lease- based products and services that have been effectively marketed to existing BB&T customers and noncustomers. ASSET QUALITY The credit quality of the loan and lease portfolio was affected during 1997 by strong internal loan growth and by purchase acquisitions. As reflected in Table 12--"Asset Quality," nonperforming assets were $122.7 million at year end, up $32.6 million, or 36.2%, from the prior year. As a percentage of total assets, nonperforming assets were .42% at December 31, 1997 compared to .35% at the end of 1996. As a percentage of loans plus foreclosed properties, nonperforming assets were .60% at December 31, 1997 compared to .51% at the end of 1996. The allowance for loan and lease losses as a percentage of loans and leases was 1.30% at both December 31, 1997 and 1996. Loans 90 days or more past due and still accruing interest increased during 1997 to a year-end balance of $47.0 million compared to a December 31, 1996 balance of $41.7 million. The asset quality ratios reflect nonperforming assets obtained through purchase acquisitions of Fidelity Financial on March 1, 1997 and Virginia First on December 1, 1997. These two acquisitions resulted in 61.1% of the increase in nonperforming assets at December 31, 1997. BB&T's merger with UCB on July 1, 1997 also affected credit quality ratios as BB&T applied more stringent credit quality standards to UCB's existing portfolio resulting in higher levels of nonperforming assets following the merger. Net charge-offs as a percentage of average loans and leases increased from .30% in 1996 to .39% in 1997, primarily as a result of the purchase acquisition activity discussed above, as well as efforts to aggressively charge off nonperforming assets and delinquent accounts at Regional Acceptance. Regional Acceptance BB&T's used automobile financing subsidiary in Greenville, North Carolina, was acquired on September 1, 1996. Because of current trends in the used automobile financing industry, Regional Acceptance has experienced higher-than-expected charge-offs during 1997. Regional Acceptance represented less than 1% of BB&T consolidated assets at December 31, 1997, but accounted for 24.5% of the Corporation's net charge-offs. Excluding the net charge-offs of Regional Acceptance and Prime Rate Premium Finance Corporation, Inc., BB&T's insurance premium financing subsidiary, BB&T had a net charge-off rate of .27% for 1997, .25% for 1996 and .20% for 1995. BB&T assigns risk grades to all commercial loans in the portfolio. This assignment of loans to one of ten categories is based upon the relative strength of the repayment source. All significant loans in the four highest risk grades are reviewed monthly for appropriateness of risk grade, accrual status and allowance. 23 The following table reflects relevant asset quality information for BB&T for the most recent three years. TABLE 12 ASSET QUALITY
DECEMBER 31, -------------------------- 1997 1996 1995 -------- ------- ------- (DOLLARS IN THOUSANDS) Nonaccrual loans and leases*....................... $ 88,389 $62,190 $68,634 Foreclosed property................................ 34,343 27,945 18,886 -------- ------- ------- Nonperforming assets............................. $122,732 $90,135 $87,520 ======== ======= ======= Loans 90 days or more past due and still accruing........................................ $ 46,999 $41,742 $34,648 ======== ======= ======= Asset Quality Ratios Nonaccrual loans and leases as a percentage of loans and leases................................ .44% .35% .41% Nonperforming assets as a percentage of: Total assets................................... .42 .35 .35 Loans and leases plus foreclosed property...... .60 .51 .52 Net charge-offs as a percentage of average loans and leases...................................... .39 .30 .23 Allowance for losses as a percentage of loans and leases.......................................... 1.30 1.30 1.30 Ratio of allowance for losses to: Net charge-offs................................ 3.59x 4.47x 5.72x Nonaccrual loans and leases.................... 2.99 3.70 3.19
- -------- Note: Items referring to loans and leases are net of unearned income, gross of the allowance and include loans held for sale. * Includes $29.5 million of impaired loans at December 31, 1997 and $18.5 million of impaired loans at December 31, 1996. See Note D in the "Notes to Consolidated Financial Statements." DEPOSITS AND OTHER BORROWINGS Management's primary objective for funding balance sheet activity is to provide adequate, stable and cost-effective sources of funds. Core deposits compose BB&T's primary funding source, despite trends in recent years away from traditional transaction and savings accounts by depositors. As depositors have sought greater returns for savings, growth rates for deposits have typically not kept pace with asset growth. BB&T's total deposits at December 31, 1997, compared to year-end 1996, increased $1.2 billion, or 6.4%, to $20.2 billion. The increase in end-of-period deposits was driven by a 23.6% increase in money rate savings accounts and a 7.8% increase in noninterest-bearing demand deposits. These growth rates include the impact of $505.8 million in deposits divested in conjunction with the UCB merger. Excluding the impact of this divestiture, total deposits would have increased 9.0%. On average, total deposits increased $733.4 million, or 3.9%. This increase was led by a 4.5% increase in noninterest-bearing demand deposits and a 19.8% increase in money rate savings accounts. These increases were offset somewhat by a 32.7% decrease in interest checking accounts. Other time deposits, BB&T's largest category of average deposits, increased less than 1% in 1997. This classification of deposits includes individual retirement accounts and certificates of deposit. Foreign deposits totaled $1.4 billion at December 31, 1997, a 117.0% increase from the prior year balance. The substantial increase in these deposits reflects a greater reliance on these deposits as a cost- effective alternative funding source. The average rates paid on interest-bearing deposits decreased slightly during 1997 to 4.39% from 4.41% in 1996. The decrease was led by lower rates paid on savings accounts, which decreased from 2.09% to 1.86% 24 during the year. Also, the average cost of certificates of deposit and other time deposits decreased from 5.55% to 5.50%. These declines were offset somewhat by an increase in rates paid on money rate savings accounts from 2.81% to 3.04%. BB&T focused efforts during 1997 on restructuring the composition of deposits toward more cost-effective noninterest-bearing demand deposits and money rate savings accounts. Thrift acquisitions in prior years had resulted in a higher concentration of costly certificates of deposit than many of BB&T's peers, and the restructuring was intended to reduce that concentration and reduce the overall cost of deposits. As part of this strategy, BB&T began the special promotion of an "Investor Deposit Account," which is more flexible than traditional money rate savings accounts and less costly to BB&T than certificates of deposit. The success of this promotion is evident from the growth in money rate savings accounts discussed above. Management also uses various short-term borrowed funds to meet funding needs. Among these are Federal funds purchased, which composed 29.8% of total short-term borrowed funds and securities sold under repurchase agreements, which comprised 33.1% of short-term borrowed funds at year-end 1997. Management also utilizes master notes, U.S. Treasury tax and loan deposit notes, short-term bank notes and short-term Federal Home Loan Bank ("FHLB") advances to supplement funding needs. Average short-term borrowed funds increased $497.8 million, or 24.5%, during 1997. Total short-term borrowed funds at year-end 1997 increased $734.4 million, or 32.2%, compared to year- end 1996. The rates paid on average short-term borrowed funds increased from 5.26% in 1996 to 5.32% during 1997. Management also employs long-term debt for funding, and management significantly increased reliance on longer-term funding sources during 1997. BB&T's total long-term debt at December 31, 1997, increased $1.2 billion, or 59.8%, to $3.3 billion. On average, long-term debt increased $762.0 million, or 40.9%. BB&T's long-term debt consists primarily of FHLB advances, which composed 53.3% of total outstanding long-term debt at December 31, 1997, and medium-term bank notes, which composed 31.2% of the year-end balance. FHLB advances are the most cost-effective long-term funding source, and provides BB&T the flexibility to structure the debt to manage interest rate risk and liquidity. In an effort to diversify long-term funding sources, management developed various debt programs, including $2 billion in subordinated banknote programs. In June 1997, BB&T issued $250 million of subordinated notes due in 2007. The proceeds of this issuance are being used to repurchase shares of BB&T's common stock issued in connection with recent acquisitions. An additional $200 million of medium term bank notes were issued during 1997 for general funding purposes. The average rate paid on long-term debt during 1997 increased from 5.78% for 1996 to 5.82% for 1997. BB&T continually considers liquidity needs in evaluating funding sources. The ultimate goal is to maintain funding flexibility, which will allow BB&T to react rapidly to opportunities in the marketplace. Management will continue to focus on traditional core funding strategies during 1997, including targeting growth in noninterest-bearing deposits and money rate savings accounts. Also, because lower interest rates are currently available, management will likely pursue additional long-term funding during 1998. 25 TABLE 13 COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE ---------------- 1997 V. 1996 V. 1997 1996 1995 1996 1995 --------------- ---------------------------------------- ------- ------- (DOLLARS IN THOUSANDS) Savings and interest checking............... $ 1,939,789 8% $ 2,125,217 10% $ 2,326,185 11% (8.7)% (8.6)% Money rate savings...... 4,604,762 19 3,844,718 17 3,741,917 17 19.8 2.7 Other time deposits..... 10,222,656 42 10,174,310 45 9,340,595 42 .5 8.9 ----------- --- --------------- ------- ----------- --- Total interest-bearing deposits............... 16,767,207 69 16,144,245 72 15,408,697 70 3.9 4.8 Noninterest-bearing demand deposits........ 2,543,546 10 2,433,123 11 2,282,567 10 4.5 6.6 ----------- --- --------------- ------- ----------- --- Total deposits.......... 19,310,753 79 18,577,368 83 17,691,264 80 3.9 5.0 Short-term borrowed funds.................. 2,527,128 10 2,029,293 9 3,184,338 14 24.5 (36.3) Long-term debt.......... 2,623,424 11 1,861,380 8 1,130,460 6 40.9 64.7 ----------- --- --------------- ------- ----------- --- Total deposits and other borrowings............. $24,461,305 100% $ 22,468,041 100% $22,006,062 100% 8.9% 2.1% =========== === =============== ======= =========== === ==== =====
ANALYSIS OF RESULTS OF OPERATIONS Consolidated net income for 1997 totaled $359.9 million, which generated basic earnings per share of $2.65 and diluted earnings per share of $2.60. Net income for the prior year was $330.2 million and net income for 1995 was $227.3 million. Basic earnings per share were $2.42 in 1996 and $1.63 in 1995, while diluted earnings per share were $2.38 and $1.60, in 1996 and 1995, respectively. BB&T incurred significant nonrecurring expenses during 1997, 1996 and 1995 which are reflected in the earnings above. During the third and fourth quarters of 1997, BB&T recorded $115.3 million in pretax nonrecurring charges primarily associated with the merger and conversion of UCB. These charges included costs associated with the consolidation of branch offices and bank operating functions, reducing staffing levels, relocating staff, early retirement packages and other expenses. These expenses were partially offset by a $47.5 million premium on the divestiture of deposits required to comply with anti-trust regulations. Excluding the effects of these charges, BB&T's net income for 1997 would have been $408.6 million, or $2.96 per diluted share. During 1996, a one-time assessment by the Federal Deposit Insurance Corporation ("FDIC") was charged to all financial institutions with deposits insured by the Savings Association Insurance Fund ("SAIF"). The impact of BB&T's assessment was $33.8 million on a pre-tax basis. On an after-tax basis, the assessment totaled $21.8 million or $.16 per diluted share. Excluding the impact of the assessment, BB&T's net income for 1996 would have been $351.9 million, or $2.53 per diluted share. During 1995, BB&T incurred $108.0 million in pretax nonrecurring expenses related to the merger between Southern National Corporation and BB&T Financial Corporation and $19.8 million in securities losses resulting from a restructuring of the securities portfolio. These costs were offset somewhat by a $2.2 million gain on the sale of divested deposits made necessary by the merger. The net after-tax impact of these nonrecurring items and securities losses was to reduce net income by $82.4 million. Excluding the impact of these items, BB&T's net income for 1995 would have been $309.7 million, or $2.18 per diluted share. On a recurring basis, BB&T's net income for 1997 grew $56.7 million, or 16.1%, from 1996, while diluted earnings per share increased $.43, or 17.0%, from the prior year. For 1996, net income excluding nonrecurring items increased $42.2 million, or 13.6%, from 1995. Diluted earnings per share increased $.35, or 16.1%, compared to the previous year. 26 Management utilizes return on average assets to measure the profitability of each dollar of assets and to compare BB&T's performance to peers. The returns on average assets produced by BB&T's earnings excluding the nonrecurring charges discussed above were 1.52% for 1997, 1.42% for 1996 and 1.28% for 1995. Another important measure of profitability is return on average common equity produced by recurring earnings. BB&T's returns on average common equity were 19.31%, 17.84% and 16.70%, for the years ended December 31, 1997, 1996 and 1995, respectively. NET INTEREST INCOME Net interest income is BB&T's primary source of revenue. The amount of net interest income is influenced by a number of factors, including the volumes of interest-earning assets and interest-bearing liabilities and the interest rates earned on earning assets less the rates and paid to obtain the asset- generating funds. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income) and the cost of supporting funds is measured by the net spread. The accompanying table presents the dollar amount of changes in interest income and interest expense and distinguishes between the changes related to average outstanding balances of interest-earning assets and interest-bearing liabilities (volume) and the changes related to average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately. 27 TABLE 14 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AVERAGE BALANCES YIELD/RATE INCOME / EXPENSE ----------------------------------- ---------------- -------------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- FULLY TAXABLE EQUIVALENT (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5)........ $ 6,170,149 $ 5,843,116 $ 5,907,342 6.78% 6.53% 6.08% $ 418,573 $ 381,475 $ 359,182 States and political subdivisions..... 171,975 204,164 235,365 8.75 8.98 9.00 15,046 18,333 21,173 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- Total securities (5)............. 6,342,124 6,047,280 6,142,707 6.84 6.61 6.19 433,619 399,808 380,355 Other earning assets (2)....... 52,519 84,167 148,373 5.19 5.38 5.90 2,726 4,530 8,760 Loans and leases, net of unearned income (1)(3)(4)(5)..... 18,916,461 17,186,046 16,507,428 9.20 9.11 9.24 1,739,453 1,566,378 1,526,083 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- Total earning assets.......... 25,311,104 23,317,493 22,798,508 8.60 8.45 8.40 2,175,798 1,970,716 1,915,198 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- Non-earning assets.......... 1,622,386 1,452,609 1,427,507 ----------- ----------- ----------- Total assets.... $26,933,490 $24,770,102 $24,226,015 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings and interest- checking......... $ 1,939,789 $ 2,125,217 $ 2,326,185 1.74 1.86 2.29 33,736 39,478 53,335 Money rate savings.......... 4,604,762 3,844,718 3,741,917 3.04 2.81 3.11 139,796 108,187 116,443 Other time deposits......... 10,222,656 10,174,310 9,340,595 5.50 5.55 5.57 562,724 564,826 519,991 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- Total interest- bearing deposits........ 16,767,207 16,144,245 15,408,697 4.39 4.41 4.48 736,256 712,491 689,769 Short-term borrowed funds... 2,527,128 2,029,293 3,184,338 5.32 5.26 5.91 134,479 106,777 188,301 Long-term debt... 2,623,424 1,861,380 1,130,460 5.82 5.78 6.26 152,680 107,602 70,769 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- Total interest- bearing liabilities..... 21,917,759 20,034,918 19,723,495 4.67 4.63 4.81 1,023,415 926,870 948,839 ----------- ----------- ----------- ---- ---- ---- ----------- ---------- --------- Noninterest- bearing demand deposits........ 2,543,546 2,433,123 2,282,567 Other liabilities..... 356,175 317,081 323,572 Shareholders' equity.......... 2,116,010 1,984,980 1,896,381 ----------- ----------- ----------- Total liabilities and shareholders' equity.......... $26,933,490 $24,770,102 $24,226,015 =========== =========== =========== Average interest rate spread...... 3.93 3.82 3.59 Net yield on earning assets... 4.55% 4.48% 4.24% $ 1,152,383 $1,043,846 $ 966,359 ==== ==== ==== =========== ========== ========= Taxable equivalent adjustment....... $ 52,858 $ 36,146 $ 35,041 =========== ========== ========= 1997 V. 1996 1996 V. 1995 ----------------------------- ---------------------------- CHANGE DUE TO CHANGE DUE TO INCREASE ----------------- INCREASE ----------------- (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME ----------- -------- -------- ---------- -------- -------- ASSETS Securities (1): U.S. Treasury, government and other (5)........ $ 37,098 $15,256 $21,842 $22,293 $26,235 $(3,942) States and political subdivisions..... (3,287) (460) (2,827) (2,840) (38) (2,802) ----------- -------- -------- ---------- -------- -------- Total securities (5)............. 33,811 14,796 19,015 19,453 26,197 (6,744) Other earning assets (2)....... (1,804) (156) (1,648) (4,230) (717) (3,513) Loans and leases, net of unearned income (1)(3)(4)(5)..... 173,075 14,070 159,005 40,295 (21,783) 62,078 ----------- -------- -------- ---------- -------- -------- Total earning assets.......... 205,082 28,710 176,372 55,518 3,697 51,821 ----------- -------- -------- ---------- -------- -------- Non-earning assets.......... Total assets.... LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings and interest- checking......... (5,742) (2,424) (3,318) (13,857) (9,523) (4,334) Money rate savings.......... 31,609 9,016 22,593 (8,256) (11,387) 3,131 Other time deposits......... (2,102) (4,778) 2,676 44,835 (1,453) 46,288 ----------- -------- -------- ---------- -------- -------- Total interest- bearing deposits........ 23,765 1,814 21,951 22,722 (22,363) 45,085 Short-term borrowed funds... 27,702 1,223 26,479 (81,524) (18,995) (62,529) Long-term debt... 45,078 733 44,345 36,833 (5,791) 42,624 ----------- -------- -------- ---------- -------- -------- Total interest- bearing liabilities..... 96,545 3,770 92,775 (21,969) (47,149) 25,180 ----------- -------- -------- ---------- -------- -------- Noninterest- bearing demand deposits........ Other liabilities..... Shareholders' equity.......... Total liabilities and shareholders' equity.......... Average interest rate spread...... Net yield on earning assets... $ 108,537 $24,940 $83,597 $77,487 $50,846 $26,641 =========== ======== ======== ========== ======== ======== 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. 28 For 1997, net interest income on an FTE basis totaled $1.2 billion, compared with $1.0 billion in 1996 and $966.4 million in 1995. During 1997, there was increased interest income from investment securities, up $33.8 million, and from loans, up $173.1 million. During the same period, higher interest rates and higher volumes resulted in an increase of $96.5 million in total interest expense. The taxable equivalent net yield on average earning assets is the primary measure used in evaluating the effectiveness of the management of earning assets and funding liabilities. The net yield on average earning assets was 4.55% in 1997, 4.48% in 1996 and 4.24% in 1995. The increase in margin during 1997 reflects management's emphasis on generating higher-yielding commercial and consumer loans while pursuing a more cost-effective deposit mix. The yield on total earning assets increased 15 basis points, driven by the mix of volumes and rates earned on loans and both higher rates earned and higher volumes of securities. Also, management's use of more cost-effective funding strategies, utilizing more FHLB advances and other longer-term debt, rather than short-term borrowed funds, contributed to the improved margin. The cost of total interest-bearing liabilities increased only 4 basis points compared to 1996. The net interest margin peaked at 4.62% during the second quarter of 1997. The fourth quarter net interest margin was 4.49%, 13 basis points lower than the second quarter net yield and 6 basis points less than the net yield for the year. The decrease in the margin resulted from a common stock repurchase program executed in connection with acquisitions during 1997, which resulted in an 8 basis point drop in the margin and the divestiture of loans and deposits associated with the UCB merger, which generated the remaining 5 basis point decrease. PROVISION FOR LOAN AND LEASE LOSSES A provision for loan and lease losses is charged against earnings in order to maintain the allowance for loan and lease losses at a level that reflects management's evaluation of the risk inherent in the loan portfolio. The amount of the provision is based on continuing assessments of problem loans, analytical reviews of loan loss experience in relation to outstanding loans, management's judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The provision recorded by BB&T in 1997 was $89.9 million, compared with $62.5 million in 1996 and $41.9 million in 1995. The increase in the provision for loan and lease losses was influenced by two factors: higher net charge-offs during the year and continued growth in loans. Net charge-offs were somewhat higher during 1997 than in 1996 principally because charge-offs at Regional Acceptance and charge-offs of loans acquired through acquisitions accounted for under the purchase method of accounting. At December 31, 1997 and 1996, the allowance was 1.30% of loans and leases outstanding and was at 2.99 times total nonaccrual loans and leases at year-end 1997, down from 3.70 times in 1996. The allowance for loan and lease losses is evaluated for adequacy on a quarterly basis. Specific allowances are allocated to identified problem commercial loans of $1 million or more, while all other commercial loans are segregated into one of ten risk categories according to the relative strength of the borrower and the repayment sources. Allowance allocations are then determined by multiplying outstandings in each risk category by factors based on historical loss experience. Allowance allocations are derived for consumer loans based on product type, such as mortgage, retail, bankcard, etc. Allocations are determined by applying historical loss ratios to estimated outstandings, with adjustments made for current and anticipated business conditions. This approach, which relates the allowance to problem loans, is employed because changes in problem loans--both the level relative to outstandings and the mix by risk category--are leading indicators of changes in the risk inherent in the portfolio. NONINTEREST INCOME Noninterest income includes service charges on deposit accounts, trust revenues, mortgage banking income, insurance commissions, gains and losses on securities transactions and other commissions and fees derived from banking and bank-related activities. 29 Noninterest income for 1997 totaled $474.9 million, compared with $353.5 million in 1996 and $271.7 million in 1995. The $121.4 million increase during 1997 resulted from growth in all areas of fee-based income combined with gains on the divestiture of deposits associated with the UCB merger totaling $47.5 million. Excluding the gain on the divestiture of deposits, noninterest income would have increased $73.9 million, or 20.9%, during 1997. The percentage of total revenues, (calculated as net interest income FTE plus noninterest income excluding securities gains or losses), derived from noninterest (fee-based) income for 1997 was 26.9%, up from 25.1% in 1996 and 23.1% during 1995. Service charges on deposit accounts represent the largest single source of noninterest revenue. Such revenues totaled $148.1 million in 1997, an increase of $15.9 million, or 12.0%, from the 1996 earnings. Service charges during 1996 totaled $132.2 million, which was a 16.3% increase compared with the prior year. The primary factor contributing to the significant growth in service charges on deposit accounts during 1997 and 1996 was a change in the fee structure implemented during the first quarter of both years. Deposit services are typically repriced annually to reflect current costs and competitive factors. Mortgage banking income (which includes servicing fees and profits and losses from the origination and sale of loans) increased $12.6 million, or 31.6%, to a total of $52.4 million for 1997. Mortgage banking income totaled $39.8 million in 1996 and $31.2 million in 1995. The primary components of the 1997 increase were servicing fees on loans sold, which increased $2.1 million, and net gains on sales of mortgage loans, which totaled $16.0 million, an increase of $5.2 million from 1996. Agency insurance commissions, which are composed of commissions generated through BB&T's agency network, increased $12.9 million, or 48.0%, in 1997 to a total of $39.8 million. Agency insurance commissions totaled $26.9 million in 1996 and $19.3 million in 1995. BB&T currently operates the largest independent insurance agency network in the Carolinas, which produced total premium volume during 1997 of $325 million. During 1996 and 1997, BB&T acquired five insurance agencies in North and South Carolina. These acquisitions, accounted for under the purchase method, resulted in a significant portion of the increase in agency insurance commissions during the past two years. Expansion into additional products during the year also generated higher fee income. The product line of the agency has been expanded to include group health insurance, title insurance and surety bonds. Other insurance commissions, which include credit-related products offered through the banking network, totaled $13.2 million in 1997, $12.8 million in 1996 and $12.4 million in 1995. Revenue from corporate and personal trust services totaled $32.0 million in 1997. This was an increase of $3.2 million, or 11.0% over income of $28.8 million in 1996, which was an increase of $4.9 million, or 20.6%, over the $23.9 million earned in 1995. Managed assets totaled $8.4 billion at the end of 1997. BB&T is the manager of the nation's largest government 401(k) plan with assets in excess of $1.5 billion. BB&T also offers its own family of mutual funds and manages fourteen mutual funds with total assets of approximately $1.5 billion. These funds provide investment alternatives both for trust clients and for other customers. The broker / dealer subsidiaries are the principal marketing agents of BB&T's proprietary mutual funds. Other nondeposit fees and commissions, which includes bankcard fees and brokerage commissions, increased by $26.4 million to a level of $109.2 million in 1997 compared with $82.8 million for 1996. During 1996, other nondeposit fees and commissions, including bankcard fees, increased 25.2% from the 1995 income of $66.1 million. Major sources of nondeposit fees and commissions generating the increases include merchant discounts and other bankcard income, up $6.6 million, or 18.4%, from the 1996 balance; brokerage commissions, which increased $2.8 million during 1997 to $19.9 million; ATM and point of sale fees, which totaled $17.2 million and increased $5.2 million, or 43.5%, during the year. At December 31, 1997, BB&T had 30 659 ATMs, with 415 located in branches and the remaining 244 at non-branch locations. As part of BB&T's strategy to increase fee income, the number of ATMs at non-branch sites were significantly increased during 1997. The purchases of Craigie, a registered broker/dealer with trading and investment banking operations, and Phillips Factors, a factoring company, accounted for $5.7 million in nondeposit fees and commissions during 1997. Other income increased $50.9 million in 1997 primarily because of a $47.5 million premium realized from the divestiture of deposits required by bank regulators as a condition for their approval of BB&T's merger with UCB. Excluding the impact of the deposit premium other income would have increased $3.4 million, or 12.7%, primarily because of the purchase acquisitions discussed above. Other income in 1996 totaled $27.1 million, up from the 1995 balance of $23.7 million. The ability to generate significant additional amounts of noninterest revenues in the future will be a requisite to the ultimate success of BB&T. Through its subsidiaries, BB&T will continue to focus on mortgage banking, trust, insurance, investment and brokerage activities, as well as growing other fee-related products and services. BB&T will also continue to explore strategic acquisitions of insurance agencies and other nonbank entities to improve noninterest income. The following table provides a breakdown of BB&T's noninterest income: TABLE 15 NONINTEREST INCOME
YEARS ENDED DECEMBER 31, % CHANGE -------------------------- --------------- 1997 V. 1996 V. 1997 1996 1995 1996 1995 -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Service charges on deposits....... $148,059 $132,180 $113,664 12.0% 16.3% Mortgage banking income........... 52,429 39,845 31,218 31.6 27.6 Trust income...................... 31,957 28,794 23,872 11.0 20.6 Agency insurance commissions...... 39,759 26,859 19,306 48.0 39.1 Other insurance commissions....... 13,164 12,822 12,384 2.7 3.5 Securities gains (losses), net.... 2,276 3,090 (18,589) (26.3) NM Bankcard fees and merchant discounts........................ 42,292 35,729 30,990 18.4 15.3 Investment brokerage commissions.. 19,908 17,069 10,103 16.6 68.9 Other bank service fees and commissions...................... 43,318 26,752 22,125 61.9 20.9 International income.............. 3,685 3,206 2,895 14.9 10.7 Amortization of negative goodwill......................... 6,180 6,238 6,239 (.9) -- Other noninterest income.......... 71,887 20,884 17,503 244.2 19.3 -------- -------- -------- ----- ---- Total noninterest income........ $474,914 $353,468 $271,710 34.4% 30.1% ======== ======== ======== ===== ====
- -------- NM--not meaningful. NONINTEREST EXPENSE Noninterest expense for 1997 totaled $937.2 million, an increase of $128.6 million, or 15.9%, compared to 1996. Noninterest expense totaled $808.6 million in 1996 and $820.7 million in 1995. Certain material, nonrecurring items affecting noninterest expense were recorded during 1997, 1996 and 1995. BB&T recorded $115.3 million in pretax charges during 1997 primarily associated with the merger with UCB. In 1996, BB&T incurred a special, one- time SAIF assessment totaling approximately $33.8 million on a pretax basis. During 1995, BB&T incurred $107.5 million of nonrecurring costs related to the merger of Southern National Corporation and BB&T Financial Corporation. Excluding the impact of the nonrecurring items from both 1997 31 and 1996, noninterest expense would have increased $47.1 million, or 6.1%. The five-year compound rate of growth in noninterest expense on a recurring basis has been 5.6%. The control of noninterest expenses is a management priority. The primary measure of noninterest expense management is the efficiency ratio. For 1997, BB&T's efficiency ratio, which excludes nonrecurring costs and other nonoperating items, was 51.9%, placing BB&T in the top 15% of the top 50 banks in the country. The 1997 ratio showed improvement from the 1996 ratio of 55.4% and the 1995 ratio of 56.5%. Total personnel expense, the largest component of noninterest expense, increased $46.8 million, or 12.1%, in 1997 to a balance of $433.8 million. Personnel expense totaled $387.1 million for 1996 and $424.3 million in 1995. Total personnel expense includes salaries and wages, as well as pension and other employee benefits. The increase during 1997 reflects $25.5 million of nonrecurring costs associated with the UCB merger. These costs included severance pay, termination of employment contracts, early retirement packages and other related benefits. Excluding these nonrecurring charges, total personnel expense would have increased $21.3 million, or 5.5%, to $408.3 million. The increase in recurring personnel costs reflects higher incentive- related compensation and normal annual adjustments. Premiums paid to the FDIC for deposit insurance decreased significantly to a balance of $4.7 million, compared to $44.0 million in 1996 and $26.9 million in 1995. As discussed above, BB&T recorded $33.8 million of Federal deposit insurance expense during 1996 associated with a special assessment to recapitalize the SAIF. Excluding this assessment, FDIC expense decreased $5.5 million in 1997 compared to 1996. In 1995, the FDIC reduced the rates paid from $.23 per $100 to $.04 per $100 on deposits insured by the Bank Insurance Fund and on January 1, 1997, the FDIC eliminated the deposit insurance premium. This rate decrease resulted in significant savings on deposit insurance premiums. Net occupancy and equipment expense totaled $154.7 million in 1997. This represented an increase of $32.6 million, or 26.7%, over the expense of $122.1 million incurred in 1996. Net occupancy and equipment expense totaled $126.2 million in 1995. The 1997 increase in expenses includes the impact of $20.9 million of nonrecurring charges in 1997 relating to branch closings and the consolidation of bank operations and systems associated with the UCB merger. Net occupancy and equipment expense, excluding nonrecurring charges, totaled $133.8 million for 1997, an increase of $11.7 million, or 9.6%, compared to 1996. Depreciation, maintenance and rent expenses associated with data processing equipment purchased in connection with implementing the merger and related to new technology initiatives were the major components of the increase. Management has closed or consolidated more than 200 branches in the past three years. These actions have assisted in controlling occupancy and equipment expense while providing a high level of service to BB&T's customers. All other expense increased $88.6 million from 1996 to 1997, primarily because of $68.9 million in nonrecurring costs recorded principally in connection with the UCB merger. These expenses included losses on disposals of fixed assets, operational charge-offs, branch and departmental supplies, donations, legal fees, accounting fees, printing costs, regulatory filing fees and other professional services. Excluding the impact of these charges, other noninterest expenses would have increased $19.7 million, or 7.7%. This increase was driven by higher advertising and marketing expenditures associated with an ongoing effort to increase BB&T's brand identity, increased amortization of intangibles because of significant purchase acquisitions recorded in 1997 and an increase in professional fees resulting from the use of outside consulting firms to analyze strategies to maximize noninterest income, to assess customer and product profitability, to implement plans for a major branch automation project and to assist in the upgrade of BB&T's systems to make them Year 2000 compliant. YEAR 2000 COMPLIANCE The Year 2000 Issue is pervasive and presents both technical and business risks affecting most, if not all, of BB&T's business activities. The "Year 2000 Issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the Year 2000 approaches. These problems generally arise because most of the world's computer 32 hardware and software has historically used only two digits to identify the applicable year. Any of BB&T's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. If not corrected, this could result in system errors or failures causing disruptions of normal business operations. BB&T began planning its Year 2000 remediation strategy in 1996 and has formed a project committee that meets regularly to review the progress of these efforts. Based on the assessments of this committee, BB&T has determined that it will be required to modify or replace significant portions of its information technology platform and other systems so that they will properly utilize data as the Year 2000 approaches and is reached. Management presently believes that with modifications to existing systems and conversions to new systems, the effects of the Year 2000 Issue will be corrected. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of BB&T, which in turn could have a materially adverse effect on BB&T's results of operations and financial condition. BB&T has initiated formal communications with all of its significant suppliers and has developed a communications plan for its large customers to determine the extent to which BB&T is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. However, there can be no guarantee that the systems of other organizations on which BB&T's systems rely, or BB&T's operations depend, will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with BB&T's systems, would not have a materially adverse effect on BB&T. BB&T plans to utilize both internal and external resources to reprogram or replace, and to test all software and other components of its systems for Year 2000 modifications. BB&T has targeted a completion date of December 31, 1998 for Year 2000 project work on critical business applications. System applications have been scheduled for modification based on a risk-adjusted priority to ensure that critical programs are adequately completed in time to allow for extended testing. The projected remaining cost of the Year 2000 project is currently estimated at $26 million and is being funded through operating cash flows. As of December 31, 1997, approximately $3 million had been spent on the assessment of and preliminary efforts in connection with the Year 2000 project and the development of the remediation plan. The costs of the project and the date on which BB&T plans to complete Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the inability to control third party modification plans, and similar uncertainties. 33 The following table presents a breakdown of BB&T's noninterest expenses: TABLE 16 NONINTEREST EXPENSE
YEARS ENDED DECEMBER 31, % CHANGE -------------------------- --------------- 1997 V. 1996 V. 1997 1996 1995 1996 1995 -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Salaries and wages................ $355,562 $313,585 $349,539 13.4% (10.3)% Pension and other employee benefits......................... 78,253 73,465 74,764 6.5 (1.7) Net occupancy expense on bank premises......................... 73,273 56,491 59,446 29.7 (5.0) Furniture and equipment expense... 81,381 65,598 66,743 24.1 (1.7) Federal deposit insurance premiums......................... 4,717 44,047 26,859 (89.3) 64.0 Foreclosed property expense....... 2,859 2,470 3,704 15.7 (33.3) Amortization of intangibles and mortgage servicing rights........ 26,175 14,534 12,305 80.1 18.1 Software.......................... 14,219 11,074 12,479 28.4 (11.3) Telephone......................... 18,053 15,788 14,978 14.3 5.4 Donations......................... 6,570 5,760 7,686 14.1 (25.1) Advertising and public relations.. 25,860 23,716 16,004 9.0 48.2 Travel and transportation......... 8,609 7,332 7,156 17.4 2.5 Professional services............. 43,051 25,609 23,894 68.1 7.2 Supplies.......................... 15,123 14,196 20,326 6.5 (30.2) Loan and lease expense............ 40,951 32,090 24,844 27.6 29.2 Deposit related expense........... 16,652 14,165 12,780 17.6 10.8 Other noninterest expenses........ 125,842 88,630 87,211 42.0 1.6 -------- -------- -------- ----- ----- Total noninterest expense....... $937,150 $808,550 $820,718 15.9% (1.5)% ======== ======== ======== ===== =====
PROVISION FOR INCOME TAXES BB&T's provision for income taxes during 1997 was $187.5 million, a 17.2% increase over the provision recorded in 1996. The provision for income taxes in 1995 totaled $113.1 million. Excluding the impact of the nonrecurring charges associated with the UCB merger, BB&T's tax provision would have been $19.2 million greater, or $206.7 million. Based on recurring earnings, BB&T's effective tax rates for the years ended December 31, 1997, 1996 and 1995 were 33.6%, 32.8% and 34.2%, respectively. MARKET RISK MANAGEMENT The effective management of market risk is essential to achieving the Corporation's objectives. As a financial institution, BB&T's primary market risk exposure is interest rate risk. A prime objective in interest rate risk management is the avoidance of wide fluctuations in net interest income through balancing the impact of changes in interest rates on interest- sensitive assets and interest-sensitive liabilities. Management uses balance sheet repositioning as an efficient and cost-effective means of managing interest rate risk. This is accomplished through strategic pricing of asset and liability accounts. The expected result of strategic pricing is the development of appropriate maturity and repricing opportunities in those accounts to produce consistent net income during adverse interest rate environments. The ALCO monitors loan, investment and liability portfolios to ensure comprehensive balance sheet management of interest rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate "mixes" given a specific interest rate outlook. Asset/liability management activities are designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricings and interest rate sensitivities of earning 34 assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate mix of earning assets and interest- bearing liabilities, as well as ensure an adequate level of liquidity and capital. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate and liquidity risk exposures in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity of fluctuations in interest rates is within acceptable standards. BB&T also uses off-balance sheet financial instruments to manage interest rate sensitivity and net interest income. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, financial forward and futures contracts and options written and purchased. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose BB&T to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. BB&T does not utilize derivatives for trading purposes. Derivatives contracts are written in amounts referred to as notional amounts. Notional amounts do not represent amounts to be exchanged between parties and are not a measure of financial risks, but only provide the basis for calculating payments between the counterparties. On December 31, 1997, BB&T had outstanding interest rate swaps, caps and floors with notional amounts totaling $2.4 billion. The estimated fair value of open contracts used for risk management purposes at December 31, 1997, reflected pretax net unrealized gains of $25.6 million. BB&T uses these derivatives as synthetic instruments to hedge specified assets or groups of assets, liabilities or groups of liabilities, forward commitments and anticipated transactions. BB&T's derivatives are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and floating rate notes. These hedges contributed net interest income of $1.1 million in 1997, compared with net interest expense of $154,200 in 1996 and net interest expense of $10.3 million in 1995. BB&T utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. BB&T also utilizes over-the-counter purchased put options and written call options in its mortgage banking activities. Purchased put options are used to hedge the mortgage pipeline against increasing interest rates. Written call options are used to reduce the premiums paid for purchased put options thereby reducing the cost of the hedge. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. Credit risk arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with strong credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the derivatives contracts to which BB&T is a party settle monthly, quarterly or semiannually. Accordingly, the amount of off-balance sheet credit exposure to which BB&T is exposed at any time is immaterial. Further, BB&T has netting agreements with the dealers with which it does business. Because of these netting agreements, BB&T had a minimal amount of off-balance sheet credit exposure at December 31, 1997. SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments" requires, among other things, certain quantitative and qualitative disclosures with regard to the amounts, nature and terms of derivative financial instruments. See Note Q. "Derivatives and Off-Balance Sheet Financial Instruments" for the required quantitative disclosures. 35 BB&T's interest rate sensitivity is illustrated in the following interest rate sensitivity gap table. The table reflects rate-sensitive positions at December 31, 1997, and is not necessarily reflective of positions throughout each year. The carrying amounts of interest-rate-sensitive assets and liabilities and the notional amounts of swaps and other derivative financial instruments are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are included in the table based on estimated rather than contractual maturity dates. TABLE 17 INTEREST RATE SENSITIVITY GAP ANALYSIS DECEMBER 31, 1997
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*.............. $ 1,367,711 $ 2,198,828 $ 2,163,861 $ 919,805 $ 6,650,205 Federal funds sold and securities purchased under resale agreements or similar arrangements......... 103,245 -- -- -- 103,245 Loans and leases...... 13,056,586 4,404,949 2,033,054 795,366 20,289,955 ------------ ------------ ----------- ----------- ----------- Total interest-earning assets................. 14,527,542 6,603,777 4,196,915 1,715,171 27,043,405 ------------ ------------ ----------- ----------- ----------- Liabilities Other time deposits... 7,294,535 1,695,552 208,765 12,717 9,211,569 Foreign deposits...... 1,385,633 -- -- -- 1,385,633 Savings and interest checking**........... -- 976,728 325,576 325,576 1,627,880 Money rate savings**.. 2,578,160 2,578,159 -- -- 5,156,319 Federal funds purchased and securities sold under repurchase agreements or similar arrangements......... 1,895,673 -- -- -- 1,895,673 Other borrowings...... 2,986,901 370,824 681,630 363,107 4,402,462 ------------ ------------ ----------- ----------- ----------- Total interest-bearing liabilities............ 16,140,902 5,621,263 1,215,971 701,400 23,679,536 ------------ ------------ ----------- ----------- ----------- Asset-liability gap..... (1,613,360) 982,514 2,980,944 1,013,771 ------------ ------------ ----------- ----------- Derivative financial instruments affecting interest rate sensitivity Pay fixed interest rate swaps........... 247,943 (220,726) (19,417) (7,800) Receive fixed interest rate swaps........... (1,025,000) 525,000 -- 500,000 Caps and floors....... (665,000) 605,000 -- 60,000 ------------ ------------ ----------- ----------- Interest rate sensitivity gap........ $ (3,055,417) $ 1,891,788 $ 2,961,527 $ 1,565,971 ============ ============ =========== =========== Cumulative interest rate sensitivity gap........ $ (3,055,417) $ (1,163,629) $ 1,797,898 $ 3,363,869 ============ ============ =========== ===========
- -------- * Securities based on amortized cost. ** Projected runoff of deposits that do not have contractual maturity dates was computed based upon decay rate assumptions developed by bank regulators to assist banks in addressing FDIC Improvement Act rule 305. 36 INFLATION AND CHANGING INTEREST RATES The majority of assets and liabilities of financial institutions are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and the efforts of the Board of Governors of the Federal Reserve ("FRB") to regulate money and credit conditions have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, BB&T is positioned to respond to changing interest rates and inflationary trends. Management uses Interest Sensitivity Simulation Analysis ("Simulation") to measure the sensitivity of earnings to changes in interest rates. Simulation Analysis takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T's interest sensitivity by means of a computer model that incorporates current volumes and rates, maturity streams, repricing opportunities and anticipated growth. The model calculates an earnings estimate based on current and projected portfolio balances and rates. This level of detail is needed to correctly simulate the effect that changes in interest rates and portfolio balances will have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. The asset/liability management process involves various analyses. Management determines the most likely outlook for the economy and interest rates by analyzing environmental factors including regulatory changes, monetary and fiscal policies and the overall state of the economy. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are all considered, given the current environmental situation. This data is combined with various interest rate scenarios to provide management with information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals. The following table represents the interest sensitivity position of BB&T as of December 31, 1997. This position can be modified by management within a relatively short time period if necessary through the use of various techniques, including securitizing assets, changing funding and investment strategies and utilizing derivative financial instruments. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market condition, loan volumes and pricing; deposit sensitivity; customer preferences; and capital plans. This tabular data does not reflect the impact of a change in the credit quality of BB&T's assets and liabilities. To attempt to quantify the potential change in net interest income, given a change in interest rates, various interest rate scenarios are applied to projected balances, maturities and repricing opportunities of assets and liabilities. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. TABLE 18 INTEREST SENSITIVITY SIMULATION ANALYSIS
ANNUALIZED HYPOTHETICAL INTEREST RATE SCENARIO PERCENTAGE --------------------------------- CHANGE IN PRIME NET INTEREST RATE LINEAR INCOME ------ ------ ------------ +3.00% 11.50% -2.34% +1.50 10.00 -1.88 Flat 8.50 -.20 -1.50 7.00 .46 -3.00 5.50 .60
Management has established parameters for asset/liability management which prescribe a maximum effect on net interest income of 3% for a 150 basis point parallel change in interest rates over six months from the 37 most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. Based on the results of the simulation model as of December 31, 1997, BB&T would expect an increase in net interest income of $6.0 million and a decrease in net interest income of $24.5 million compared to the most likely interest rate scenario if interest rates gradually decrease or increase, respectively, from current rates by 150 basis points over a 12-month period. LIQUIDITY Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to its level of liquid assets, many other factors affect a bank's ability to meet liquidity needs, including access to additional funding sources, total capital position and general market conditions. Traditional sources of liquidity include proceeds from maturity of securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements, FHLB advances and other short-term borrowed funds, as well as certain long-term debt instruments, supplement these traditional sources. Management believes liquidity obtainable from these sources is adequate to meet current requirements. Total cash and cash equivalents increased to $969.9 million at December 31, 1997 compared to $927.3 million in 1996 and $934.1 million in 1995. Net cash provided by operating activities for the year was $262.3 million, compared to $388.7 million in 1996 and $289.2 million in 1995. The decrease in cash provided by operating activities during 1997 was primarily the result of more purchases and originations of loans held for sale than in the prior year and a net increase in securities held for trading purposes. Net cash flows used in investing activities were $1.7 billion in 1997 compared to $1.1 billion in 1996. Cash used in investing activities during 1995 was $1.1 billion. The primary factors creating the current year increase in cash flows used in investing activities were a $603.3 million increase in cash purchases of securities available for sale, and a reduction of $540.6 million in cash proceeds from sales and maturities of securities available for sale. Cash flows provided by financing activities were $1.5 billion in 1997 compared to $722.8 million in 1996 and $812.7 million in 1995. The substantial increase in cash flows provided during 1997 resulted from increases in short- term borrowed funds and long-term debt. CAPITAL ADEQUACY AND RESOURCES The maintenance of appropriate levels of capital is a management priority. Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. BB&T's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide future growth and compliance with all regulatory standards. Shareholders' equity grew 8.0% in 1997 as a result of the retention of earnings. The growth in total shareholders' equity during the year reflects current year earnings, reduced by resources used for the redemption of 6.9 million shares of common stock, primarily in conjunction with purchase business combinations, and the declaration of $164.0 million in common dividends. The provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," require securities classified as available for sale to be carried at estimated fair value with net unrealized appreciation or depreciation recorded as an adjustment to shareholders' equity. At the end of 1997, BB&T had recorded cumulative net unrealized appreciation of $44.9 million, net of deferred income tax. 38 TABLE 19 CAPITAL--COMPONENTS AND RATIOS
DECEMBER 31, ------------------------ 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Tier 1 capital..................................... $ 1,979,462 $ 1,997,194 Tier 2 capital..................................... 744,831 464,628 ----------- ----------- Total regulatory capital........................... $ 2,724,293 $ 2,461,822 =========== =========== Risk-based capital ratios: Tier 1 capital................................... 9.9% 11.5% Total regulatory capital......................... 13.7 14.2 Tier 1 leverage ratio.............................. 7.2 7.9
Management views the leverage ratio, calculated by dividing tangible equity capital by tangible assets, as the principal indicator of capital strength. The minimum regulatory required leverage ratio ranges from 3% to 5% subject to Federal bank regulatory agency evaluation of an organization's overall safety and soundness. The leverage ratio for BB&T was 7.2% at the end of 1997 and 7.9% at the end of 1996. The decreases in risk-based capital ratios and the leverage ratio reflect efforts to actively manage BB&T's capital position primarily through share repurchase programs. Bank holding companies and their subsidiaries are also subject to risk-based capital measures. The risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risk. The values of both balance sheet and off-balance sheet items are adjusted to reflect these risks. Tier 1 capital is required to be at least 4% of risk- weighted assets, and total capital must be at least 8% of risk-weighted assets. The Tier 1 capital ratio for BB&T at the end of 1997 was 9.9%, and the total capital ratio was 13.7%. At the end of 1996, those ratios were 11.5% and 14.2%, respectively. COMMON STOCK AND DIVIDENDS BB&T's ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution. BB&T's ability to replenish liquid assets available for distribution is primarily dependent on the ability of the banking subsidiaries to pay dividends to BB&T. Historically, BB&T's payment of cash dividends has been based on management's goal to retain sufficient capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to shareholders. BB&T's common dividend payout ratio, computed by dividing dividends per common share by earnings per common share, was 43.8% in 1997. Excluding the impact of the nonrecurring merger-related charges, the dividend payout ratio would have been 38.5%. BB&T's quarterly cash dividend per common share was increased 14.8% to $.31 per common share in the third quarter of 1997. This increase marked the 25th consecutive year that cash dividends have been increased. A discussion of dividend restrictions is included in Note N-- "Regulatory Requirements and Other Restrictions." BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "BBK." BB&T's common stock was held by 67,656 shareholders of record at December 31, 1997. The accompanying table, "Quarterly Common Stock Summary," sets forth the high, low and last sales prices for the common stock as reported on the NYSE Composite Tape and the cash dividends paid per share of common stock paid for each of the last eight quarters. 39 TABLE 20 QUARTERLY COMMON STOCK SUMMARY
1997 1996 ------------------------------ ------------------------------ SALES PRICES CASH SALES PRICES CASH -------------------- DIVIDENDS -------------------- DIVIDENDS HIGH LOW LAST PAID HIGH LOW LAST PAID ------ ------ ------ --------- ------ ------ ------ --------- Quarter Ended March 31....... $40.75 $35.25 $37.25 $.27 $29.75 $25.88 $27.75 $.23 June 30........ 47.13 35.75 45.00 .27 31.75 28.88 31.75 .23 September 30... 55.13 45.31 53.44 .31 33.88 28.63 33.25 .27 December 31.... 65.00 51.94 64.06 .31 36.75 33.38 36.25 .27 Year......... 65.00 35.25 64.06 1.16 36.75 25.88 36.25 1.00
FOURTH QUARTER RESULTS Net income for the fourth quarter of 1997 was $103.4 million, compared to earnings of $90.0 million for the comparable period of 1996. On a per share basis, diluted net income was $.75 for the quarter compared to $.65 a year ago. Annualized returns on average assets and average equity were 1.47% and 19.31%, respectively, for the fourth quarter. Net interest income on a fully taxable equivalent basis amounted to $294.2 million for the fourth quarter of 1997, an increase of 8.6% compared to $270.8 million for the same period during 1996. Noninterest income totaled $118.5 million for the fourth quarter of 1997, up 24.6% from $95.1 million for the fourth quarter of 1996. BB&T's noninterest expense totaled $221.6 million, up 7.5% from the $206.2 million recorded in the fourth quarter of the prior year. The provision for loan and lease losses increased significantly compared to the prior year because of higher net charge-offs and growth in loans. The provision totaled $22.0 million for the fourth quarter of 1997 compared to $18.4 million for 1996. 40 The accompanying table, "Quarterly Financial Summary--Unaudited," presents condensed information relating to eight quarters in the period ended December 31, 1997. TABLE 21 QUARTERLY FINANCIAL SUMMARY--UNAUDITED
1997 1996 ------------------------------------------------ ------------------------------------------------ FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Consolidated Summary of Operations Net interest income FTE................... $ 294,232 $ 291,292 $ 291,630 $ 275,229 $ 270,792 $ 262,119 $ 259,913 $ 251,022 FTE adjustment......... 15,223 14,169 13,039 10,427 9,755 8,831 8,967 8,593 Provision for loan and lease losses.......... 21,999 21,901 25,100 20,850 18,350 15,400 15,161 13,600 Securities gains (losses), net......... 1,664 731 (933) 814 2,681 705 (95) (201) Other noninterest income................ 116,815 154,337 102,188 99,298 92,377 88,517 87,248 82,236 Noninterest expense.... 221,560 312,673 205,326 197,591 206,228 226,770 189,369 186,183 Provision for income taxes................. 50,533 36,353 50,760 49,851 41,533 31,999 44,449 41,951 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income............. $ 103,396 $ 61,264 $ 98,660 $ 96,622 $ 89,984 $ 68,341 $ 89,120 $ 82,730 =========== =========== =========== =========== =========== =========== =========== =========== Diluted net income per share................. $ .75 $ .45 $ .71 $ .69 $ .65 $ .49 $ .64 $ .59 =========== =========== =========== =========== =========== =========== =========== =========== Selected Average Balances Assets................. $27,914,984 $27,168,511 $26,859,692 $25,764,559 $25,452,779 $24,926,111 $24,519,336 $24,172,965 Securities, at amortized cost........ 6,438,552 6,432,481 6,399,463 6,093,212 6,306,888 6,263,001 5,834,404 5,779,706 Loans and leases *..... 19,635,614 19,076,615 18,833,469 18,101,528 17,450,217 17,185,125 17,217,223 16,888,726 Total earning assets... 26,137,362 25,545,232 25,290,207 24,248,283 23,897,386 23,479,956 23,120,326 22,764,248 Deposits............... 19,328,866 19,309,491 19,568,134 19,033,287 19,039,282 18,803,569 18,324,501 18,134,559 Short-term borrowed funds................. 2,882,616 2,637,455 2,436,444 2,142,654 1,888,252 1,857,538 2,141,579 2,233,239 Long-term debt......... 3,106,477 2,806,159 2,406,161 2,162,518 2,164,007 1,979,930 1,782,464 1,514,490 Total interest-bearing liabilities........... 22,682,436 22,182,112 21,867,163 20,917,021 20,554,985 20,205,493 19,830,232 19,541,370 Shareholders' equity... 2,124,191 2,105,646 2,128,949 2,105,159 2,048,895 1,969,944 1,950,958 1,969,586
- -------- * Loans and leases are net of unearned income and include loans held for sale. 41 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
AS OF / FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- COMPOUND 1997 1996 1995 1994 1993 1992 GROWTH RATE ----------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Summary of Operations Interest income........ $ 2,122,940 $ 1,934,570 $ 1,880,157 $ 1,586,515 $ 1,427,684 $ 1,436,751 8.1% Interest expense....... 1,023,415 926,870 948,839 678,571 590,709 686,922 8.3 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income.... 1,099,525 1,007,700 931,318 907,944 836,975 749,829 8.0 Provision for loan and lease losses.......... 89,850 62,511 41,924 23,730 59,829 76,030 3.4 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan and lease losses................ 1,009,675 945,189 889,394 884,214 777,146 673,799 8.4 Noninterest income..... 474,914 353,468 271,710 278,339 268,856 229,736 15.6 Noninterest expense.... 937,150 808,550 820,718 740,234 791,060 625,875 8.4 ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes................. 547,439 490,107 340,386 422,319 254,942 277,660 14.5 Provision for income taxes................. 187,497 159,932 113,118 147,003 95,229 97,290 14.0 ----------- ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of changes in accounting principles............ 359,942 330,175 227,268 275,316 159,713 180,370 14.8 Cumulative effect of changes in accounting principles, net of deferred income taxes................. -- -- -- -- (32,762) -- NM ----------- ----------- ----------- ----------- ----------- ----------- Net income............. $ 359,942 $ 330,175 $ 227,268 $ 275,316 $ 126,951 $ 180,370 14.8 =========== =========== =========== =========== =========== =========== Average shares outstanding (000's) Basic.................. 135,742 136,025 135,911 134,150 129,089 122,034 2.2 Diluted................ 138,220 138,956 141,914 140,377 135,926 130,682 1.1 Per Common Share Basic earnings Income before cumulative effect..... $ 2.65 $ 2.42 $ 1.63 $ 2.01 $ 1.20 $ 1.44 13.0 Cumulative effect...... -- -- -- -- (.25) -- NM ----------- ----------- ----------- ----------- ----------- ----------- Net income............ $ 2.65 $ 2.42 $ 1.63 $ 2.01 $ 0.95 $ 1.44 13.0 =========== =========== =========== =========== =========== =========== Diluted earnings Income before cumulative effect..... $ 2.60 $ 2.38 $ 1.60 $ 1.96 $ 1.18 $ 1.38 13.5 Cumulative effect...... -- -- -- -- (.24) -- NM ----------- ----------- ----------- ----------- ----------- ----------- Net income............ $ 2.60 $ 2.38 $ 1.60 $ 1.96 $ .94 $ 1.38 13.5 =========== =========== =========== =========== =========== =========== Cash dividends declared.............. $ 1.16 $ 1.00 $ .86 $ .74 $ .64 $ .50 18.3 Shareholders' equity... 16.45 15.13 14.32 12.79 12.06 11.95 6.6 Average Balance Sheets Securities, at carrying value................. $ 6,361,054 $ 6,137,748 $ 6,244,509 $ 6,050,612 $ 5,401,762 $ 4,733,403 6.1 Loans and leases*...... 18,667,328 16,958,876 16,286,928 14,711,409 13,155,522 11,978,837 9.3 Other assets........... 1,905,108 1,673,478 1,694,578 1,707,055 1,626,305 1,567,185 4.0 ----------- ----------- ----------- ----------- ----------- ----------- Total assets........... $26,933,490 $24,770,102 $24,226,015 $22,469,076 $20,183,589 $18,279,425 8.1 =========== =========== =========== =========== =========== =========== Deposits............... $19,310,753 $18,577,368 $17,691,264 $17,318,921 $16,260,492 $15,167,080 4.9 Other liabilities...... 2,883,303 2,346,374 3,507,910 2,724,841 1,687,474 1,535,422 13.4 Long-term debt......... 2,623,424 1,861,380 1,130,460 679,654 598,753 154,113 76.3 Common shareholders' equity................ 2,116,010 1,969,821 1,824,036 1,671,517 1,562,727 1,357,005 9.3 Preferred shareholders' equity................ -- 15,159 72,345 74,143 74,143 65,805 NM ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity............... $26,933,490 $24,770,102 $24,226,015 $22,469,076 $20,183,589 $18,279,425 8.1 =========== =========== =========== =========== =========== =========== Period End Balances Total assets........... $29,177,600 $25,707,646 $24,671,277 $23,497,824 $22,273,226 $18,979,348 9.0 Deposits............... 20,210,116 19,003,340 18,321,708 17,458,085 17,594,408 15,674,867 5.2 Long-term debt......... 3,282,958 2,054,040 1,386,910 913,060 839,631 424,102 50.6 Shareholders' equity... 2,237,637 2,071,567 2,025,112 1,803,888 1,686,134 1,510,774 8.2 Selected Performance Ratios Rate of return on: Average total assets... 1.34% 1.33% .94% 1.23% .63% .99% Average common shareholders' equity.. 17.01 16.73 12.18 16.16 7.79 12.95 Dividend payout........ 43.77 41.32 52.76 36.82 67.37 34.72 Average equity to average assets........ 7.86 8.01 7.83 7.77 8.11 7.78
- ------- * Loans and leases are net of unearned income and the allowance for losses. Amounts include loans held for sale. NM--Not meaningful. 42 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of BB&T is responsible for the preparation of the financial statements, related financial data and other information in this Annual Report on Form 10-K. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this Annual Report on Form 10-K is consistent with the financial statements. BB&T's accounting system, which records, summarizes and reports financial transactions, is supported by an internal control structure which provides reasonable assurance that assets are safeguarded and that transactions are recorded in accordance with BB&T's policies and established accounting procedures. As an integral part of the internal control structure, BB&T maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure. The Audit Committee of BB&T's Board of Directors, composed solely of outside directors, meets regularly with BB&T's management, internal auditors and independent public accountants to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent public accountants and the internal auditors have access to the Audit Committee with or without management present. The financial statements have been audited by Arthur Andersen LLP, independent public accountants, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which BB&T's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures which include reviewing the internal control structure to determine the timing and scope of audit procedures and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects. John A. Allison Scott E. Reed Sherry A. Chairman and Chief Financial Officer Kellett Chief Executive Officer Controller 43 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Charlotte, North Carolina, January 14, 1998, except for Note B, as to which the date is March 1, 1998. 44 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and due from banks............................. $ 839,579 $ 840,391 Interest-bearing deposits with banks................ 27,051 2,010 Federal funds sold and securities purchased under resale agreements or similar arrangements................................ 103,245 84,940 Trading securities.................................. 67,878 -- Securities available for sale....................... 6,481,515 6,014,221 Securities held to maturity (market value: $151,581 in 1997 and $175,744 in 1996)...................... 147,799 170,808 Loans held for sale................................. 509,141 228,333 Loans and leases, net of unearned income............ 19,780,814 17,518,224 Allowance for loan and lease losses................ (263,943) (230,070) ----------- ----------- Loans and leases, net............................. 19,516,871 17,288,154 ----------- ----------- Premises and equipment, net......................... 417,897 374,954 Other assets........................................ 1,066,624 703,835 ----------- ----------- Total assets...................................... $29,177,600 $25,707,646 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits................ $ 2,828,715 $ 2,623,429 Savings and interest checking...................... 1,627,880 2,026,462 Money rate savings................................. 5,156,319 4,170,949 Other time deposits................................ 9,211,569 9,544,085 Foreign deposits................................... 1,385,633 638,415 ----------- ----------- Total deposits.................................... 20,210,116 19,003,340 Short-term borrowed funds........................... 3,015,177 2,280,824 Long-term debt...................................... 3,282,958 2,054,040 Accounts payable and other liabilities.............. 431,712 297,875 ----------- ----------- Total liabilities................................. 26,939,963 23,636,079 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding at December 31, 1997 and 1996........................ -- -- Common stock, $5 par, 300,000,000 shares authorized, issued and outstanding 136,051,623 at December 31, 1997 and 136,896,865 at December 31, 1996.............................................. 680,258 684,484 Additional paid-in capital......................... 85,185 145,704 Retained earnings.................................. 1,428,017 1,231,592 Loan to employee stock ownership plan and unvested restricted stock.................................. (725) (1,952) Net unrealized appreciation on securities available for sale, net of deferred income taxes of $29,136 in 1997 and $8,481 in 1996........................ 44,902 11,739 ----------- ----------- Total shareholders' equity........................ 2,237,637 2,071,567 ----------- ----------- Total liabilities and shareholders' equity........ $29,177,600 $25,707,646 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 45 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income Interest and fees on loans and leases..... $1,713,299 $1,554,822 $1,516,909 Interest and dividends on securities...... 406,977 375,257 354,509 Interest on short-term investments........ 2,664 4,491 8,739 ---------- ---------- ---------- Total interest income................... 2,122,940 1,934,570 1,880,157 ---------- ---------- ---------- Interest Expense Interest on deposits...................... 736,256 712,491 689,769 Interest on short-term borrowed funds..... 134,479 106,777 188,301 Interest on long-term debt................ 152,680 107,602 70,769 ---------- ---------- ---------- Total interest expense.................. 1,023,415 926,870 948,839 ---------- ---------- ---------- Net Interest Income......................... 1,099,525 1,007,700 931,318 Provision for loan and lease losses....... 89,850 62,511 41,924 ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses........................... 1,009,675 945,189 889,394 ---------- ---------- ---------- Noninterest Income Service charges on deposits............... 148,059 132,180 113,664 Mortgage banking income................... 52,429 39,845 31,218 Trust income.............................. 31,957 28,794 23,872 Agency insurance commissions.............. 39,759 26,859 19,306 Other insurance commissions............... 13,164 12,822 12,384 Bankcard fees and merchant discounts...... 42,292 35,729 30,990 Other nondeposit fees and commissions..... 66,911 47,027 35,123 Securities gains (losses), net............ 2,276 3,090 (18,589) Other income.............................. 78,067 27,122 23,742 ---------- ---------- ---------- Total noninterest income................ 474,914 353,468 271,710 ---------- ---------- ---------- Noninterest Expense Personnel expense......................... 433,815 387,050 424,303 Occupancy and equipment expense........... 154,654 122,089 126,189 Federal deposit insurance expense......... 4,717 44,047 26,859 Amortization of intangibles and mortgage servicing rights......................... 26,175 14,534 12,305 Advertising and public relations expense.. 25,860 23,716 16,004 Professional services..................... 43,051 25,609 23,894 Other expense............................. 248,878 191,505 191,164 ---------- ---------- ---------- Total noninterest expense............... 937,150 808,550 820,718 ---------- ---------- ---------- Earnings Income before income taxes................ 547,439 490,107 340,386 Provision for income taxes................ 187,497 159,932 113,118 ---------- ---------- ---------- Net Income.............................. 359,942 330,175 227,268 Preferred dividend requirements........... -- 610 5,079 ---------- ---------- ---------- Income applicable to common shares...... $ 359,942 $ 329,565 $ 222,189 ========== ========== ========== Per Common Share Net income: Basic................................... $ 2.65 $ 2.42 $ 1.63 ========== ========== ========== Diluted................................. $ 2.60 $ 2.38 $ 1.60 ========== ========== ========== Cash dividends declared................... $ 1.16 $ 1.00 $ .86 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 46 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SHARES OF ADDITIONAL RETAINED TOTAL COMMON PREFERRED COMMON PAID-IN EARNINGS SHAREHOLDERS' STOCK STOCK STOCK CAPITAL AND OTHER* EQUITY ----------- --------- -------- ---------- ---------- ------------- (DOLLARS IN THOUSANDS) BALANCE, DECEMBER 31, 1994................... 135,269,365 $3,850 $676,347 $ 285,703 $ 837,988 $1,803,888 ADD (DEDUCT) Net income............. -- -- -- -- 227,268 227,268 Common stock issued.... 3,167,198 -- 15,836 33,511 (105) 49,242 Redemption of common stock................. (1,993,351) -- (9,967) (37,344) -- (47,311) Preferred stock cancellations and conversions........... 104,836 (181) 524 (2,714) -- (2,371) Net unrealized appreciation on securities available for sale, net of deferred income taxes................. -- -- -- -- 112,234 112,234 Cash dividends declared: Common stock........... -- -- -- -- (115,887) (115,887) Preferred stock........ -- -- -- -- (5,079) (5,079) Other.................. -- -- -- -- 3,128 3,128 ----------- ------ -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1995................... 136,548,048 3,669 682,740 279,156 1,059,547 2,025,112 ADD (DEDUCT) Net income............. -- -- -- -- 330,175 330,175 Common stock issued.... 2,788,586 -- 13,942 56,469 45 70,456 Redemption of common stock................. (6,774,461) -- (33,872) (173,537) 2 (207,407) Preferred stock cancellations and conversions........... 4,334,692 (3,669) 21,674 (18,005) -- -- Net unrealized depreciation on securities available for sale, net of deferred income taxes................. -- -- -- -- (22,351) (22,351) Cash dividends declared: Common stock........... -- -- -- -- (127,791) (127,791) Preferred stock........ -- -- -- -- (610) (610) Other.................. -- -- -- 1,621 2,362 3,983 ----------- ------ -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1996................... 136,896,865 -- 684,484 145,704 1,241,379 2,071,567 ADD (DEDUCT) Net income............. -- -- -- -- 359,942 359,942 Common stock issued.... 6,097,910 -- 30,490 225,989 -- 256,479 Redemption of common stock................. (6,943,152) -- (34,716) (286,508) -- (321,224) Net unrealized appreciation on securities available for sale, net of deferred income taxes................. -- -- -- -- 33,163 33,163 Cash dividends declared on common stock....... -- -- -- -- (163,981) (163,981) Other.................. -- -- -- -- 1,691 1,691 ----------- ------ -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1997................... 136,051,623 $ -- $680,258 $ 85,185 $1,472,194 $2,237,637 =========== ====== ======== ========= ========== ==========
- -------- * Other includes net unrealized appreciation (depreciation) on securities available for sale, unvested restricted stock and a loan to the employee stock ownership plan. The accompanying notes are an integral part of these consolidated financial statements. 47 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................. $ 359,942 $ 330,175 $ 227,268 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses... 89,850 62,511 41,924 Depreciation of premises and equipment............................ 57,662 45,259 42,099 Amortization of intangibles and mortgage servicing rights............ 26,175 14,534 12,305 Accretion of negative goodwill........ (6,180) (6,238) (6,239) Amortization of unearned stock compensation......................... 1,227 2,450 3,128 Discount accretion and premium amortization on securities, net...... (1,111) 4,826 (26,089) Net increase in trading account securities........................... (25,688) -- -- Loss (gain) on sales of securities, net.................................. (2,276) (3,090) 18,589 Loss (gain) on sales of loans and mortgage loan servicing rights, net.................................. (15,876) (9,049) 1,619 Loss (gain) on disposals of premises and equipment, net................... 30,642 178 3,971 Proceeds from sales of loans held for sale................................. 1,552,732 1,348,118 789,164 Purchases of loans held for sale...... (734,727) (429,523) (311,059) Origination of loans held for sale, net of principal collected........... (986,823) (879,496) (600,676) Decrease (increase) in: Accrued interest receivable.......... 5,414 20,692 (26,682) Other assets......................... (185,825) (111,400) 16,146 Increase (decrease) in: Accrued interest payable............. 3,093 5,567 15,012 Accounts payable and other liabilities......................... 93,635 (8,635) 88,413 Other, net............................ 470 1,821 321 ----------- ----------- ----------- Net cash provided by operating activities......................... 262,336 388,700 289,214 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.................... 1,396,669 605,792 1,290,237 Proceeds from maturities of securities available for sale.................... 1,338,002 2,669,532 1,711,859 Purchases of securities available for sale.................................. (3,102,245) (2,498,976) (3,323,423) Proceeds from sales of securities held to maturity........................... -- -- 3,810 Proceeds from maturities of securities held to maturity...................... 37,200 46,088 304,096 Purchases of securities held to maturity.............................. (14,516) (2,228) (77,701) Leases made to customers............... (74,420) (72,390) (18,091) Principal collected on leases.......... 57,581 48,222 14,620 Loan originations, net of principal collected............................. (1,122,249) (1,622,476) (717,639) Purchases of loans..................... (205,232) (232,236) (189,997) Net cash acquired in transactions accounted for under the purchase method................................ 95,205 1,887 -- Purchases and originations of mortgage servicing rights...................... (39,093) (26,356) (18,082) Proceeds from disposals of premises and equipment......................... 14,433 8,764 18,114 Purchases of premises and equipment.... (146,116) (67,106) (62,318) Proceeds from sales of foreclosed property.............................. 15,917 16,156 14,213 Proceeds from sales of other real estate held for development or sale... 7,955 8,127 1,728 Other, net............................. 1,531 (1,079) (8,696) ----------- ----------- ----------- Net cash used in investing activities......................... (1,739,378) (1,118,279) (1,057,270) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits............... 313,633 681,632 874,011 Net decrease (increase) in short-term borrowed funds........................ 485,331 (345,025) (426,810) Proceeds from long-term debt........... 5,193,130 1,586,766 2,945,754 Repayments of long-term debt........... (4,022,548) (919,661) (2,471,904) Net proceeds from common stock issued................................ 22,583 49,736 49,242 Redemption of common stock............. (321,224) (207,407) (47,311) Preferred stock cancellations and conversions........................... -- -- (2,371) Cash dividends paid on common and preferred stock....................... (151,329) (123,270) (107,869) ----------- ----------- ----------- Net cash provided by financing activities......................... 1,519,576 722,771 812,742 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents...................... 42,534 (6,808) 44,686 Cash and Cash Equivalents at Beginning of Year............................... 927,341 934,149 889,463 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year.................................. $ 969,875 $ 927,341 $ 934,149 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.............................. $ 1,043,047 $ 921,632 $ 935,366 Income taxes.......................... 137,195 160,307 141,236 Noncash financing and investing activities: Transfer of securities from held to maturity to available for sale....... -- 36,646 1,763,513 Transfer of securities from available for sale to held to maturity......... -- 240 -- Transfer of loans to foreclosed property............................. 15,655 23,970 11,243 Transfer of fixed assets to other real estate owned.................... 13,761 10,466 21,846 Common stock issued upon conversion of debentures........................ -- -- 4,896 Restricted stock issued............... 74 88 -- Securitization of mortgage loans...... -- 817,268 354,882
The accompanying notes are an integral part of these consolidated financial statements. 48 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 BB&T Corporation ("BB&T" or "Parent Company"), formerly Southern National Corporation, is a multi-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. BB&T changed its corporate name from Southern National Corporation effective at the close of business on May 16, 1997. Branch Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T-SC"), Branch Banking and Trust Company of Virginia ("BB&T-VA"), Fidelity Federal Savings Bank ("Fidelity"), and Virginia First Savings Bank ("Virginia First") (collectively, the "Banks"), Regional Acceptance Corporation ("Regional Acceptance") and Craigie Incorporated ("Craigie") comprise the principal subsidiaries. The accounting and reporting policies of BB&T Corporation and Subsidiaries are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The following is a summary of the more significant policies. NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of BB&T include the accounts of the Parent Company and its subsidiaries. In consolidation, all significant intercompany accounts and transactions have been eliminated. Prior period financial statements have been restated to include the accounts of companies acquired in material transactions accounted for as poolings of interests (See Note B). Results of operations of companies acquired in transactions accounted for as purchases are included from the dates of acquisition. Certain amounts for prior years have been reclassified to conform with statement presentations for 1997. 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 and Virginia 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, 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. 49 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, BB&T transferred securities with an amortized cost of $36.6 million 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 portfolio to BB&T's existing interest rate risk position. During the fourth quarter of 1995, BB&T transferred $1.8 billion of securities which were previously classified as held to maturity under SFAS No. 115 to the available-for-sale category. The Financial Accounting Standards Board ("FASB") provided enterprises the opportunity to make a one-time reassessment of the classification of all investment securities held at that time, such that the reclassification of any security from the held-to-maturity category would not call into question the enterprise's intent to hold other debt securities to maturity in the future. Management anticipates that this classification will allow more flexibility in the day-to-day management of the overall portfolio than the prior classifications. 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 Lease Receivables Loans receivable 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 which approximate level-yield. 50 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 as impaired loans all commercial loans, greater than $250,000, that are on nonaccrual status. 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 incurred 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. 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 51 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 The operating results of BB&T and its subsidiaries are included in a consolidated Federal income tax return. Each subsidiary pays its calculated portion of Federal income taxes to BB&T, or receives payment from BB&T to the extent that tax benefits are realized. Deferred income taxes have been provided where different accounting methods have been used for reporting 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. The operating results of acquired institutions were included in their respective income tax returns 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. 52 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 in this Annual Report on Form 10-K 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 during the years. Other potentially dilutive securities include the number of shares issuable upon conversion of the 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:
1997 1996 1995 ----------- ----------- ----------- Basic.................................... 135,742,174 136,024,587 135,911,150 Diluted.................................. 138,220,057 138,955,834 141,914,467
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, 1997, BB&T had $199.6 million recorded as goodwill and $6.8 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, 1997, BB&T had negative goodwill totaling $33.0 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 superceded 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, 53 as superceded 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. BB&T elected, in the third quarter of 1995, to adopt this statement effective as of January 1, 1995. The impact of the adoption of this statement resulted in additional mortgage banking income of $7.6 million, before taxes, or $.03 per diluted share, after taxes, during 1995. SFAS No. 125 prohibits retroactive application to prior years. At December 31, 1997, BB&T had capitalized mortgage servicing rights totaling $68.8 million. Changes in Accounting Principles and Effects of New Accounting Pronouncements During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes accounting standards for long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and to be disposed of. The statement requires such assets to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any resulting impairment loss is required to be reported in the period in which the recognition criteria are first applied and met. BB&T adopted the provisions of the statement on January 1, 1996. The implementation did not have a material impact on the consolidated financial position or consolidated results of operations. In October of 1995, the FASB issued SFAS No. 123, "Accounting for Stock- Based Compensation," which establishes financial accounting and reporting standards for stock-based compensation plans. The statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages the adoption of that method of accounting. However, the statement also allows entities to continue to account for such plans under Accounting Principles Board Opinion No. 25. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in the statement had been applied. BB&T adopted the statement effective January 1, 1996 and elected to continue to account for stock-based compensation plans under the provisions of Opinion No. 25. Therefore, the implementation of the statement did not have an impact on BB&T's consolidated financial position or consolidated results of operations. The required pro forma disclosures relating to SFAS No. 123 are presented in Note J. 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. 54 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 is effective for financial statements for periods ending after December 15, 1997. Management has determined that BB&T is currently in compliance with the disclosure requirements of SFAS No. 129, and, therefore, the implementation of the statement will 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 net income plus other comprehensive income, or the 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. Management does not believe that the implementation of the statement will have a material impact on the consolidated financial position or consolidated results of operations of BB&T, but will require additional disclosures to be made. Currently, BB&T's only item considered other comprehensive income is unrealized gains and losses on available-for-sale securities, net of reclassification adjustments and taxes. At December 31, 1997, this balance totaled $44.9 million. In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for periods beginning after December 15, 1997, and requires restatement of all prior periods presented. Management does not believe that the implementation of the statement will have a material impact on the consolidated financial position or consolidated results of operations of BB&T, but will require substantial additional disclosures to be made. 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:
1997 1996 1995 --------- -------- ----- (DOLLARS IN THOUSANDS) Fair value of net assets acquired............... $ 129,719 $ 1,394 $ -- Purchase price.................................. (276,483) (22,256) -- --------- -------- ----- Excess of purchase price over net assets acquired....................................... $(146,764) $(20,862) $ -- ========= ======== =====
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 On June 30, 1996, BB&T completed the purchase of certain fixed assets and expiration rights 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 over 15 years. 55 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 over 15 years. During November 1996, BB&T completed the acquisitions of three insurance agencies in South Carolina. On November 7, 1996, BB&T completed the acquisition of the William Goldsmith Agency Inc. ("Goldsmith") of Greenville, South Carolina through the issuance of 70,207 shares of common stock. On November 13, 1996, BB&T completed the acquisition of the C. Dan Joyner Insurance Agency ("Joyner") based in Greenville, South Carolina through the issuance of 48,120 shares of common stock. Boyle-Vaughan Associates, Inc. ("Boyle-Vaughan") based in Columbia, South Carolina, was acquired on November 22, 1996 through the issuance of 492,063 shares of common stock. In conjunction with the purchase of these agencies, BB&T recorded $17.9 million in goodwill, which is being amortized over 15 years. On March 1, 1997, BB&T completed its acquisition of Fidelity Financial Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction accounted for as a purchase. BB&T issued 1.6 million shares 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 completed its acquisition of Phillips Factors Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips purchases and manages 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. The acquisition of Phillips was accounted for as a purchase. In conjunction with the acquisition, BB&T recorded $11.1 million of goodwill which is being amortized using the straight-line method over 15 years. On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp. (collectively, "Refloat"), a financial company that specializes in loans to small commercial lawn care businesses across the country. The acquisition, which was completed through the issuance of 375,000 shares of common stock, was accounted for as a purchase. In conjunction with the acquisition of Refloat, BB&T recorded $3.0 million of goodwill which is being amortized using the straight-line method over 15 years. 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 463,000 shares of BB&T's common stock. In conjunction with the acquisition, BB&T recorded $6.9 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 ("VFFC"), a financial institution with $822.9 million in assets at the time of purchase. The merger, which was accounted for under the purchase method of accounting, was consummated through the issuance of 1.9 million shares of BB&T's common stock 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. 56 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 pro forma effects of the material 1997 purchase transactions, as if they had been acquired as of the beginning of the years presented, are presented in the accompanying table:
FOR THE YEARS ENDED --------------------- 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues......................................... $1,536,925 $1,436,786 ========== ========== Net income............................................. $ 354,437 $ 337,026 ========== ========== Basic EPS.............................................. $ 2.61 $ 2.47 ========== ========== Diluted EPS............................................ $ 2.56 $ 2.43 ========== ==========
On February 28, 1995, BB&T (formerly Southern National Corporation) and BB&T Financial Corporation completed a merger accounted for as a pooling of interests. BB&T Financial Corporation's shareholders received 57.9 million shares of the common stock of the resulting company for all of the shares of BB&T Financial Corporation stock held. On January 10, 1995, BB&T acquired Commerce Bank (subsequently, BB&T-VA) through the issuance of 5.2 million shares of BB&T common stock for all of the outstanding stock of Commerce Bank. On April 28, 1995, BB&T issued 75,273 shares of common stock to complete an acquisition of United Agencies, Inc., a general insurance agency located in Wilmington, North Carolina. The transaction was accounted for under the pooling-of-interests method of accounting. Effective January 25, 1996, BB&T consummated a merger with Seaboard Savings Bank, Inc. ("Seaboard"), headquartered in Plymouth, North Carolina. BB&T issued 475,158 shares of common stock for all of the outstanding shares of Seaboard common stock. The transaction was accounted for as a pooling of interests. Effective March 29, 1996, BB&T consummated a merger with Triad Bank ("Triad") headquartered in Greensboro, North Carolina. BB&T issued 1.8 million shares of common stock for all of the outstanding shares of Triad common stock. The transaction was accounted for as a pooling of interests. On August 30, 1996, BB&T issued 42,135 shares of common stock to complete an 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 the acquisition of Regional Acceptance Corporation of Greenville, N.C. ("Regional Acceptance") in a transaction accounted for as a pooling of interests. BB&T issued 5.85 million shares in exchange for all of the outstanding stock of Regional Acceptance. On July 1, 1997, BB&T completed its acquisition of United Carolina Bancshares Corporation ("UCB") of Whiteville, North Carolina, in a stock transaction accounted for as a pooling of interests. UCB shareholders received 27.7 million shares of BB&T common stock in exchange for all of the shares of UCB common stock held. 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 9.8 million shares of common stock in exchange for all of the outstanding shares of Life common stock. 57 Pending Mergers and Acquisitions On December 16, 1997, BB&T announced plans to acquire Franklin Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction to be accounted for under the pooling-of-interests method of accounting. Franklin shareholders will receive between .35 and .3743 shares of BB&T common stock in exchange for each share of Franklin stock held. On February 25, 1998, BB&T announced plans to acquire Maryland Federal Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland in a stock transaction to be accounted for as a purchase. Maryland Federal shareholders will receive no less than .5975 and no greater than .6102 shares of BB&T common stock in exchange for each share of Maryland Federal stock held. NOTE C. SECURITIES The amortized costs and approximate fair values of securities held to maturity and available for sale were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------------------- --------------------------------------- GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED AMORTIZED ----------------- FAIR AMORTIZED ----------------- FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE ---------- -------- ------------------ ---------- -------- -------- ---------- (DOLLARS IN THOUSANDS) Securities held to maturity: U.S. Treasury, government and agency obligations........... $ 14,952 $ -- $ 30 $ 14,922 $ 6,283 $ -- $ 4 $ 6,279 States and political subdivisions.......... 132,847 3,884 72 136,659 164,525 5,121 181 169,465 ---------- -------- ------- ---------- ---------- -------- -------- ---------- Total securities held to maturity........... 147,799 3,884 102 151,581 170,808 5,121 185 175,744 ---------- -------- ------- ---------- ---------- -------- -------- ---------- Securities available for sale: U.S. Treasury, government and agency obligations........... 4,137,267 32,034 5,310 4,163,991 3,949,039 17,393 12,393 3,954,039 States and political subdivisions.......... 36,785 387 31 37,141 23,985 168 176 23,977 Mortgage-backed securities............ 1,821,378 36,584 2,207 1,855,755 1,735,797 29,440 14,212 1,751,025 Equity and other securities............ 412,047 12,583 2 424,628 285,180 2 2 285,180 ---------- -------- ------- ---------- ---------- -------- -------- ---------- Total securities available for sale.... 6,407,477 81,588 7,550 6,481,515 5,994,001 47,003 26,783 6,014,221 ---------- -------- ------- ---------- ---------- -------- -------- ---------- Total securities....... $6,555,276 $ 85,472 $ 7,652 $6,633,096 $6,164,809 $ 52,124 $ 26,968 $6,189,965 ========== ======== ======= ========== ========== ======== ======== ==========
Securities with a book value of approximately $3.2 billion and $3.4 billion at December 31, 1997 and 1996, 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, 1997 and 1996, 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 $67.9 million are excluded from the accompanying tables. These securities are reported at fair value with net unrealized gains of $.7 million included in earnings during 1997. Proceeds from sales of securities during 1997, 1996 and 1995 were $1.4 billion, $605.8 million and $1.3 billion, respectively. Gross gains of $3.6 million, $5.4 million and $2.7 million and gross losses of $1.3 million, $2.4 million and $21.3 million were realized on those sales in 1997, 1996 and 1995, respectively. 58 The amortized cost and estimated fair value of the securities portfolio at December 31, 1997, 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, 1997 ----------------------------------------- HELD TO MATURITY AVAILABLE FOR SALE ------------------- --------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Debt Securities Due in one year or less.......... $ 38,677 $ 38,737 $ 740,473 $ 751,154 Due after one year through five years........................... 95,435 98,367 3,562,085 3,577,074 Due after five years through ten years........................... 11,494 12,077 212,489 213,081 Due after ten years.............. 2,193 2,400 1,501,308 1,536,519 -------- -------- ---------- ---------- Total debt securities.......... $147,799 $151,581 $6,016,355 $6,077,828 ======== ======== ========== ==========
NOTE D. LOANS AND LEASES Loans and leases were composed of the following:
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Loans-- Commercial, financial and agricultural............ $ 3,017,729 $ 2,715,363 Real estate--construction and land development.... 2,102,234 1,525,964 Real estate--mortgage............................. 11,415,319 10,110,927 Consumer.......................................... 2,688,304 2,748,572 ----------- ----------- Loans held for investment....................... 19,223,586 17,100,826 ----------- ----------- Leases............................................ 788,462 576,991 ----------- ----------- Total loans and leases........................ 20,012,048 17,677,817 Less: unearned income....................... 231,234 159,593 ----------- ----------- Loans and leases, net of unearned income...... $19,780,814 $17,518,224 =========== ===========
The net investment in direct financing leases was $616.3 million and $470.5 million at December 31, 1997 and 1996, respectively. BB&T had loans held for sale at December 31, 1997 and 1996 totaling $509.1 million and $228.3 million, respectively. BB&T's only significant concentration of credit at December 31, 1997 occurred in loans secured by real estate, which totaled $14.2 billion. However, this amount was not concentrated in any specific market or geographic area other than the Banks' primary markets. 59 The following table sets forth certain information regarding BB&T's impaired loans as defined under SFAS No. 114.
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Total recorded investment--impaired loans.......... $ 29,494 $ 18,479 ----------- ----------- Total recorded investment with related valuation allowance......................................... 29,494 17,401 Valuation allowance assigned to impaired loans..... 3,086 2,530 ----------- ----------- Net carrying value--impaired loans............... $ 26,408 $ 14,871 =========== =========== Average balance of impaired loans.................. $ 20,599 $ 22,648 =========== =========== Cash basis interest income recognized on impaired loans............................................. $ -- $ 48 =========== ===========
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 1997. 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, 1996............................ $174,668 Additions........................................... 32,421 Repayments.......................................... 33,587 -------- Balance, December 31, 1997............................ $173,502 ========
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, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Balance, January 1..................... $ 230,070 $ 219,052 $ 215,443 Provision for losses charged to expense............................... 89,850 62,511 41,924 Allowances of purchased companies...... 17,513 -- -- ---------- ---------- ---------- 337,433 281,563 257,367 ---------- ---------- ---------- Total charge-offs...................... (90,637) (69,073) (53,064) Recoveries............................. 17,147 17,580 14,749 ---------- ---------- ---------- Net charge-offs...................... (73,490) (51,493) (38,315) ---------- ---------- ---------- Balance, December 31................... $ 263,943 $ 230,070 $ 219,052 ========== ========== ==========
At December 31, 1997, 1996 and 1995, loans not currently accruing interest totaled $88.4 million, $62.2 million and $68.6 million, respectively. Loans 90 days or more past due and still accruing interest totaled $47.0 million, $41.7 million and $34.6 million, at December 31, 1997, 1996 and 1995, respectively. The gross interest income that would have been earned during 1997 if the outstanding nonaccrual loans and leases had been current in accordance with the original terms and had been outstanding throughout the period (or since origination, if held for part of the period) was approximately $6.7 million. Foreclosed property was $34.3 million, $27.9 million and $18.9 million at December 31, 1997, 1996 and 1995, respectively. 60 NOTE F. PREMISES AND EQUIPMENT
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Land and land improvements.......................... $ 70,982 $ 63,041 Buildings and building improvements................. 299,368 284,377 Furniture and equipment............................. 336,745 277,217 Capitalized leases on premises and equipment........ 3,647 3,804 ----------- ----------- 710,742 628,439 Less--accumulated depreciation and amortization..... 292,845 253,485 ----------- ----------- Net premises and equipment........................ $ 417,897 $ 374,954 =========== ===========
Depreciation expense, which is included in occupancy and equipment expense, was $57.7 million, $45.3 million and $42.1 million in 1997, 1996 and 1995, respectively. BB&T has noncancellable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $44.8 million, $28.4 million and $33.1 million for 1997, 1996 and 1995, respectively. Future minimum lease payments for operating and capitalized leases for years subsequent to 1997 are as follows:
LEASES ------------------------- OPERATING CAPITALIZED ------------ ------------ (DOLLARS IN THOUSANDS) Years ended December 31: 1998........................................... $ 21,518 $ 450 1999........................................... 20,588 450 2000........................................... 20,071 450 2001........................................... 19,159 450 2002........................................... 16,599 450 2003 and years later........................... 82,272 4,547 ------------ ---------- Total minimum lease payments..................... $ 180,207 6,797 ============ Less--amount representing interest............... 3,506 ---------- Present value of net minimum payments on capitalized leases (Note I)..................... $ 3,291 ==========
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 other assets in the "Consolidated Balance Sheets:"
CAPITALIZED MORTGAGE SERVICING RIGHTS ------------------------ 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Balance, January 1,................................ $ 41,891 $ 21,948 Amount capitalized............................... 39,093 26,356 Amortization expense............................. (9,561) (6,197) Change in valuation allowance.................... (2,643) (216) ----------- ----------- Balance, December 31,.............................. $ 68,780 $ 41,891 =========== ===========
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 61 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 1997 and 1996:
VALUATION ALLOWANCE FOR MORTGAGE SERVICING RIGHTS ---------------------- (DOLLARS IN THOUSANDS) Balance, January 1, 1996.............................. $ 499 Additions........................................... 1,184 Reductions.......................................... (968) ------ Balance, December 31, 1996............................ 715 ------ Additions........................................... 3,257 Reductions.......................................... (614) ------ Balance, December 31, 1997............................ $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 $8.1 billion and $7.5 billion at December 31, 1997 and 1996, respectively. NOTE H. SHORT-TERM BORROWED FUNDS
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Federal funds purchased............................. $ 898,160 $ 729,995 Term Federal funds purchased........................ -- 50,000 Securities sold under agreements to repurchase...... 997,513 680,315 Master notes........................................ 638,325 566,225 U.S. Treasury tax and loan deposit notes payable.... 105,851 101,681 Short-term Federal Home Loan Bank advances.......... 155,810 150,000 Short-term Bank Notes............................... 208,079 -- Other short-term borrowed funds..................... 11,439 2,608 ----------- ----------- Total short-term borrowed funds................... $3,015,177 $2,280,824 =========== ===========
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. 62 NOTE I. LONG-TERM DEBT
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- (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............................................ $ 3,291 $ 3,561 Medium-term bank notes, unsecured, varying maturities to 2001 with rates from 5.69% to 6.20%................ 1,024,833 424,794 Advances from Federal Home Loan Bank, varying maturities to 2017 with rates from 1.00% to 8.95%..... 1,750,202 1,375,971 Subordinated Notes, unsecured, dated May 21, 1996 and June 3, 1997, maturing May 23, 2003 and June 15, 2007, with interest rates of 7.05% and 7.25%, respectively*......................................... 495,589 248,019 CMO Bonds, secured by investments, dated 1985, callable July 1, 2001, with an interest rate of 11.25%......... 8,112 -- Other mortgage indebtedness............................ 931 1,695 ----------- ----------- Total long-term debt................................. $3,282,958 $2,054,040 =========== ===========
- -------- Excluding the capitalized leases set forth in Note F, future debt maturities total $3.3 billion and are $398.6 million, $1.1 billion, $294.5 million, $404.4 million, and $225.0 million for the next five years. The maturities for 2003 and later years are $850.8 million. * Subordinated notes qualify under the risk-based capital guidelines as Tier 2 supplementary capital. NOTE J. SHAREHOLDERS' EQUITY The authorized capital stock of BB&T consists of 300,000,000 shares of common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At December 31, 1997, 136,051,623 shares of common stock and no shares of preferred stock were issued and outstanding. Stock Option Plans At December 31, 1996, BB&T had the following stock-based compensation plans: the 1994 and the 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 -------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income applicable to common shares: As reported........................................ $359,942 $329,565 $222,189 Pro Forma.......................................... 352,390 327,135 221,853 Basic EPS: As reported........................................ 2.65 2.42 1.63 Pro Forma.......................................... 2.60 2.40 1.63 Diluted EPS: As reported........................................ 2.60 2.38 1.60 Pro Forma.......................................... 2.55 2.36 1.60
63 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 1997, 1996 and 1995, respectively: dividend yield of 3.0% in 1997 and 3.5% in 1996 and 1995; expected volatility of 20% for all years; risk free interest rates of 6.2%, 6.4% and 5.7% for 1997, 1996 and 1995, respectively; and expected lives of 6.1 years, 6.5 years and 6.0 years for 1997, 1996 and 1995, 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 May 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 6,000,000 shares. The combined shares issuable under both Omnibus Plans is 10,000,000. 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, 1997, 2,599,270 incentive stock options at prices ranging from $9.4828 to $40.3750 and 1,889,770 non-qualified stock options at prices ranging from $.01 to $38.99 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 1,101,000 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, 1997, options to purchase 258,167 shares of common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant to the NQSOP. At December 31, 1997, options to purchase 94,174 shares of common stock at an exercise price of $19.777 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 900,000 shares of BB&T common stock. At December 31, 1997, options to purchase 368,613 shares of common stock at prices ranging from $12.7155 to $45.2047 were outstanding pursuant to the Directors' Plan. BB&T also has options outstanding from companies acquired in prior years. These options, which have not been included in the plans described above, totaled 244,281 as of December 31, 1997, with option prices ranging from $2.6667 to $23.7069. 64 A summary of the status of the Company's stock option plans at December 31, 1997, 1996 and 1995 and changes during the years then ended is presented below:
1997 1996 1995 --------------------- -------------------- -------------------- WTD. AVG. WTD. AVG. WTD. AVG. EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- --------- --------- --------- --------- Outstanding at beginning of year................ 5,697,319 $18.41 6,255,396 $17.58 5,527,583 $14.95 Granted............... 1,012,851 37.48 107,996 25.34 1,379,192 25.24 Exercised............. (1,189,196) 15.29 (615,452) 11.43 (608,181) 10.88 Forfeited or Expired.. (66,699) 27.46 (50,621) 15.82 (43,198) 19.24 ---------- ------ --------- ------ --------- ------ Outstanding at end of year................... 5,454,275 $22.52 5,697,319 $18.41 6,255,396 $17.58 ========== ====== ========= ====== ========= ====== Options exercisable at year-end............... 4,547,860 $19.24 4,570,593 $16.98 4,319,304 $15.33
The weighted average fair value of options granted was $9.33, $6.59 and $5.05 per option at December 31, 1997, 1996 and 1995, respectively. The following table summarizes information about the options outstanding at December 31, 1997:
WEIGHTED- AVERAGE AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE --------------- ----------- ----------- --------- ----------- --------- $0.01............... 998 5.0 yrs $ 0.01 998 $ 0.01 $2.67 to $3.67...... 13,571 6.1 2.88 13,571 2.88 $4.92 to $7.03...... 23,343 3.1 6.36 23,343 6.36 $7.45 to $10.81..... 275,346 3.3 9.29 275,346 9.29 $11.72 to $17.50.... 1,518,899 3.9 14.50 1,518,899 14.50 $18.13 to $26.75.... 2,670,869 6.9 22.75 2,640,146 22.80 $27.88 to $40.38.... 936,775 9.1 39.12 75,557 33.49 $45.20.............. 14,474 10.0 45.20 -- -- --------- ---- ------ --------- ------ 5,454,275 6.3 yrs $22.52 4,547,860 $19.24 ========= ==== ====== ========= ======
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 65 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, ------------------------------ 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Current expense: Federal.................................... $ 193,669 $ 151,713 $ 125,190 State...................................... 7,991 4,372 6,535 --------- --------- --------- 201,660 156,085 131,725 Deferred expense (benefit)................... (14,163) 3,847 (18,607) --------- --------- --------- Provision for income taxes................... $ 187,497 $ 159,932 $ 113,118 ========= ========= =========
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, ---------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Federal income taxes at statutory rates of 35%.......................................... $191,604 $171,538 $119,135 Tax-exempt income from securities, loans and leases less related non-deductible interest expense...................................... (9,841) (8,692) (8,263) State income taxes, net of Federal tax benefit...................................... 4,221 3,217 3,446 Other, net.................................... 1,513 (6,131) (1,200) -------- -------- -------- Provision for income taxes.................... $187,497 $159,932 $113,118 ======== ======== ======== Effective income tax rate..................... 34.2% 32.6% 33.2% ======== ======== ========
66 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, ------------------------ 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Allowance for loan and lease losses............. $ 101,873 $ 88,924 Deferred compensation........................... 27,127 17,761 Postretirement benefits other than pensions..... 16,850 18,256 Expense accruals................................ 13,394 2,861 Other........................................... 27,035 20,005 ----------- ---------- Total tax deferred assets..................... 186,279 147,807 ----------- ---------- Deferred tax liabilities: Depreciation.................................... (24,721) (21,972) Net unrealized appreciation on securities available for sale............................. (29,136) (8,481) Lease financing................................. (19,193) (15,623) Pension plan contribution....................... (9,839) (6,363) Loan servicing rights........................... (9,745) (4,048) Other........................................... (21,781) (21,857) ----------- ---------- Total tax deferred liabilities.................... (114,415) (78,344) ----------- ---------- Net deferred tax asset............................ $ 71,864 $ 69,463 =========== ==========
The deferred tax assets have been determined to be realizable, and, accordingly, a valuation allowance was not required. At December 31, 1997, there were no operating losses, income tax credits or alternative minimum tax credit carryforwards. Securities transactions resulted in income tax expense (benefits) of $.9 million, $1.1 million and ($7.1 million) related to securities gains (losses) for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE L. BENEFIT PLANS BB&T has various employee benefit plans and arrangements. 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 following table discloses expenses relating to employee benefit plans restated for transactions accounted for as poolings of interests.
1997 1996 1995 ------- ------- ------- (DOLLARS IN THOUSANDS) Defined benefit plans............................... $12,960 $12,663 $18,643 Defined contribution and ESOP plans................. 13,160 13,035 11,712 ------- ------- ------- Total expense related to benefit plans............ $26,120 $25,698 $30,355 ======= ======= =======
Retirement Plans BB&T has a noncontributory defined benefit pension plan. This plan 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 were in amounts between the minimum required for funding standard account purposes and the maximum deductible for Internal Revenue Service purposes. 67 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. Net periodic pension cost, which is included in employee benefits expense, consisted of the following components in 1997, 1996 and 1995.
1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Service cost...................................... $ 12,412 $ 11,488 $ 11,765 Interest cost..................................... 17,911 16,253 14,984 Actual return on assets........................... (42,875) (24,260) (31,771) Early retirement.................................. -- -- 3,372 Net amortization and deferral and other........... 25,684 8,833 19,746 -------- -------- -------- Net periodic pension cost....................... $ 13,132 $ 12,314 $ 18,096 ======== ======== ========
The following table sets forth the plans' funded status at December 31, 1997 and 1996.
PLANS FOR WHICH PLANS FOR WHICH ASSETS EXCEED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Accumulated benefit obligation: Vested benefits............. $ (185,227) $ (163,691) $ (10,110) $ (5,471) Nonvested benefits.......... (4,488) (3,720) (805) (751) ---------- ---------- ---------- ---------- $ (189,715) $ (167,411) $ (10,915) $ (6,222) ========== ========== ========== ========== Projected benefit obligation.. $ (234,396) $ (221,697) $ (22,946) $ (16,821) Plan assets at fair value..... 273,922 219,038 -- -- ---------- ---------- ---------- ---------- Plan assets in excess of (less than) projected benefit obligation................... 39,526 (2,659) (22,946) (16,821) Unrecognized transition amount....................... (6,523) (7,626) 277 321 Unrecognized prior service cost......................... (23,201) (5,931) 3,516 4,163 Unrecognized net loss......... 6,616 22,281 6,066 3,153 Minimum liability adjustment.. -- -- (89) (861) ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost included in other assets (other liabilities).......... $ 16,418 $ 6,065 $ (13,176) $ (10,045) ========== ========== ========== ==========
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 $20.3 million, $11.2 million and $7.9 million of BB&T common stock at December 31, 1997, 1996 and 1995, respectively. Actuarial assumptions used in calculating these amounts were:
1997 1996 1995 ---- ------- ---- Rate of increase in future compensation................... 5.5% 5.5% 5.5% Weighted average discount rate............................ 7.25 7.5 7.5 Weighted average expected long-term rate of return on assets................................................... 8.0 8.0-9.0 8.0
68 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." The 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 which may also be used for dependents. The following table sets forth the components of the retiree benefit plan and the amount recognized in the consolidated financial statements at December 31, 1997, 1996 and 1995 as originally reported.
1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Net periodic postretirement benefit cost: Service cost............................... $ 733 $ 834 $ 1,048 Interest cost.............................. 2,586 2,667 2,920 Amortization of net loss and other......... (37) 344 524 -------- -------- -------- Total expense............................ $ 3,282 $ 3,845 $ 4,492 ======== ======== ======== 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Reconciliation of funded status: Accumulated postretirement benefit obligation................................ $(38,342) $(38,208) $(39,505) Unrecognized net (gain) loss............... (4,359) (1,463) 1,766 -------- -------- -------- Accrued postretirement benefit costs included in other liabilities........... $(42,701) $(39,671) $(37,739) ======== ======== ========
Actuarial assumptions used in calculating these amounts were:
1997 1996 1995 ---- ---------- -------- Annual rate of increase in the per capita cost of health care claims: Current year................................ 10.0% 11.0-11.25% 8.0-14.0% Final constant amount....................... 5.0 5.0-6.25 4.75-6.5 Annual decrease............................. 1.0 .5-1.0 .8-1.5 General inflation rate........................ 4.0 4.0 4.0 Weighted average discount rate................ 7.25 7.5 7.5-8.0 Impact of 1% increase in assumed health care cost on: Net periodic benefit cost................... -- 3.0 2.0-3.0 Expected postretirement benefit obligation.. 2.0 5.0 3.0-4.0
401-k Savings Plan Prior to 1996, BB&T had an Employee Stock Ownership Plan which allowed all employees to acquire common stock in BB&T 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 had a Savings and Thrift Plan which permitted 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. 69 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 to 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, ----------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Financial instruments whose contract amounts represent credit risk: Commitments to extend, originate or purchase credit......................................... $ 7,791,823 $ 6,754,901 Standby letters of credit and financial guarantees written............................. 262,264 216,910 Commercial letters of credit.................... 35,915 21,703 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Commitments to sell loans and securities........ 555,722 240,121 Foreign exchange contracts...................... 145,855 103,506
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 70 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, 1997, these reserves (including average daily vault cash) amounted to $90.1 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 $1.2 billion at December 31, 1997. 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, 1997. 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. 71
DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------------------- ----------------------------- FOR MINIMUM FOR MINIMUM ACTUAL CAPITAL ACTUAL CAPITAL ----------------- ADEQUACY ----------------- ADEQUACY RATIO AMOUNT PURPOSES RATIO AMOUNT PURPOSES ----- ---------- ----------- ----- ---------- ----------- (DOLLARS IN THOUSANDS) TIER 1 CAPITAL BB&T Corporation...... 9.9% $1,979,462 $ 796,985 11.5% $1,997,194 $ 692,952 Branch Banking & Trust Company.............. 11.0 1,672,558 606,912 10.8 1,513,438 558,944 Branch Banking & Trust Company of South Carolina............. 12.2 368,256 121,094 14.0 396,537 113,370 Branch Banking & Trust Company of Virginia.. 12.1 73,296 24,297 11.7 66,640 22,845 Fidelity Federal Savings Bank......... 12.3 28,253 9,201 N/A N/A N/A Virginia First Savings Bank................. 10.5 62,796 23,882 N/A N/A N/A TOTAL CAPITAL BB&T Corporation...... 13.7% $2,724,293 $1,593,971 14.2% $2,461,822 $1,385,903 Branch Banking & Trust Company.............. 12.3 1,862,258 1,213,824 12.1 1,686,083 1,117,887 Branch Banking & Trust Company of South Carolina............. 13.4 406,120 242,188 15.2 431,991 226,741 Branch Banking & Trust Company of Virginia.. 13.3 80,892 48,593 12.9 73,792 45,691 Fidelity Federal Savings Bank......... 13.3 30,636 18,402 N/A N/A N/A Virginia First Savings Bank................. 11.8 70,317 47,764 N/A N/A N/A LEVERAGE CAPITAL BB&T Corporation...... 7.2% $1,979,462 $ 836,158 7.9% $1,997,194 $ 761,562 Branch Banking & Trust Company.............. 7.6 1,672,558 656,147 7.4 1,513,438 609,794 Branch Banking & Trust Company of South Carolina............. 8.5 368,256 129,748 9.4 396,537 126,303 Branch Banking & Trust Company of Virginia.. 9.4 73,296 23,284 8.6 66,640 23,267 Fidelity Federal Savings Bank......... 7.9 28,253 10,712 N/A N/A N/A Virginia First Savings Bank................. 7.3 62,796 25,710 N/A N/A N/A
- -------- N/A--not applicable. 72 NOTE O. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks.................................. $ 2,748 $ 9,047 Interest-bearing bank balances........................... 605,319 587,330 Investment securities.................................... 13,824 40,560 Investment in banking subsidiaries....................... 2,544,183 2,063,285 Investment in other subsidiaries......................... 185,504 52,283 Premises and equipment................................... 5,537 5,809 Receivables from subsidiaries and other assets........... 80,778 183,644 ---------- ---------- Total assets........................................... $3,437,893 $2,941,958 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowed funds................................ $ 638,325 $ 566,225 Dividends payable........................................ 42,173 29,521 Accounts payable and accrued liabilities................. 23,503 25,626 Long-term debt........................................... 496,255 249,019 ---------- ---------- Total liabilities...................................... 1,200,256 870,391 ---------- ---------- Total shareholders' equity............................. 2,237,637 2,071,567 ---------- ---------- Total liabilities and shareholders' equity............. $3,437,893 $2,941,958 ========== ==========
CONDENSED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME Dividends from subsidiaries.................... $248,294 $142,854 $240,699 Interest and other income from subsidiaries.... 41,682 36,627 20,261 Interest on investment securities.............. 1,739 2,936 1,855 Other income................................... 18,047 7,835 6,143 -------- -------- -------- Total income................................. 309,762 190,252 268,958 -------- -------- -------- EXPENSES Interest expense............................... 53,161 33,845 17,859 Occupancy expense.............................. 171 171 171 Other expenses................................. 12,520 11,327 26,760 -------- -------- -------- Total expenses............................... 65,852 45,343 44,790 -------- -------- -------- Income before income tax benefit and equity in undistributed earnings of subsidiaries.......... 243,910 144,909 224,168 Income tax expense (benefit)..................... (816) 661 (6,042) -------- -------- -------- Income before equity in undistributed earnings of subsidiaries.................................... 244,726 144,248 230,210 Net income of subsidiaries (less than) in excess of dividends from subsidiaries.................. 115,216 185,927 (2,942) -------- -------- -------- Net income....................................... $359,942 $330,175 $227,268 ======== ======== ========
73 CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................... $ 359,942 $ 330,175 $ 227,268 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries less than (in excess of) dividends from subsidiaries..... (115,216) (185,927) 2,942 Depreciation of premises and equipment...... 272 214 214 Amortization of unearned compensation....... 1,227 2,450 3,172 Discount accretion and premium amortization............................... 396 192 (298) Loss (gain) on sales of securites........... -- (9) 100 Loss on disposals of other real estate owned...................................... -- -- 240 Loss on disposal of premises and equipment.. -- -- 29 (Increase) decrease in other assets......... (20,858) 103,134 (145,852) Increase (decrease) in accounts payable and accrued liabilities........................ (1,984) 2,293 5,974 --------- --------- --------- Net cash provided by operating activities............................... 223,779 252,522 93,789 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale..................................... -- 14 87 Proceeds from maturities of securities available for sale........................... 35,482 49,347 101,339 Purchases of securities available for sale.... (8,717) (52,324) (41,697) Proceeds from sales of securities held to maturity..................................... -- -- 520 Proceeds from sales of premises and equipment.................................... -- -- 79 Investment in subsidiaries.................... (483) (68,625) (264) Advances to subsidiaries...................... (430,897) (306,857) -- Repayment of advances to subsidiaries......... 369,375 182,875 -- Net cash paid (received) in purchase accounting transactions...................... (45,852) -- -- --------- --------- --------- Net cash (used in) provided by investing activities............................... (81,092) (195,570) 60,064 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in long-term debt..... 246,873 247,625 (7,333) Net increase in short-term borrowed funds..... 72,100 169,952 142,004 Net proceeds from common stock issued......... 22,583 49,736 44,242 Redemption of common stock.................... (321,224) (207,407) (47,311) Preferred stock cancellations and conversions.................................. -- -- (2,371) Cash dividends paid on common and preferred stock........................................ (151,329) (123,270) (107,869) --------- --------- --------- Net cash (used in) provided by financing activities............................... (130,997) 136,636 21,362 --------- --------- --------- Net Increase in Cash and Cash Equivalents..... 11,690 193,588 175,215 Cash and Cash Equivalents at Beginning of Year......................................... 596,377 402,789 227,574 --------- --------- --------- Cash and Cash Equivalents at End of Year...... $ 608,067 $ 596,377 $ 402,789 ========= ========= =========
74 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, 1997 and 1996: 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. 75 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.
1997 1996 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents............. $ 969,875 $ 969,875 $ 927,341 $ 927,341 Trading securities....... 67,878 67,878 -- -- Securities available for sale.................... 6,481,515 6,481,515 6,014,221 6,014,221 Securities held to maturity................ 147,799 151,581 170,808 175,744 Loans and leases: Loans.................. 19,673,653 19,893,665 17,276,102 17,272,691 Leases................. 616,302 N/A 470,455 N/A Allowance for losses... (263,943) N/A (230,070) N/A ----------- ----------- Net loans and leases.............. $20,026,012 $17,516,487 =========== =========== Financial liabilities: Deposits................. $20,210,116 20,248,044 $19,003,340 19,052,070 Short-term borrowed funds................... 3,015,177 3,015,177 2,280,824 2,280,824 Long-term debt........... 3,279,667 3,582,628 2,050,479 2,146,487 Capitalized leases....... 3,291 N/A 3,561 N/A NOTIONAL/ NOTIONAL/ CONTRACT FAIR CONTRACT FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- Unrecognized financial intruments: Interest rate swaps, caps and floors.............. $ 2,428,930 $ 25,570 $ 1,167,099 $ 5,775 Commitments to extend, originate or purchase credit.................. 7,791,823 (14,835) 6,754,901 (12,576) Standby and commercial letters of credit and financial guarantees written................. 298,179 (4,495) 238,613 (3,579) Commitments to sell loans and securities.......... 555,722 (2,925) 240,121 822 Foreign exchange contracts............... 145,855 326 103,506 312 Option contracts purchased............... 55,000 (303) 14,000 142 Option contracts written................. 55,000 -- 14,000 -- Futures contracts........ 8,486 -- -- --
- -------- N/A--Not applicable. NOTE Q. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Interest rate volatility often increases to the point that balance sheet repositioning through the use of account repricing and other on-balance sheet strategies cannot occur rapidly enough to avoid adverse net income effects. At those times, off-balance sheet or synthetic hedges are utilized. During 1997, management used interest rate swaps, caps and floors to supplement balance sheet repositioning. Such actions were designed to lower the interest sensitivity of BB&T toward a neutral position. 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 76 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, 1997, derivatives with a total notional value of $2.4 billion, with terms ranging up to ten years, were outstanding. The following tables set forth certain information concerning BB&T's interest rate swaps at December 31, 1997: INTEREST RATE SWAPS, CAPS AND FLOORS DECEMBER 31, 1997
NOTIONAL RECEIVE PAY FAIR TYPE AMOUNT RATE RATE VALUE - ---- ----------- ----------- ------------- ---------- (DOLLARS IN THOUSANDS) Receive fixed swaps....... $1,301,000 6.39% 5.86% $ 23,785 Pay fixed swaps........... 351,930 5.88 5.58 (121) Basis swaps............... 100,000 5.70 5.63 -- Caps & Floors............. 676,000 -- -- 1,906 ---------- ---------- --------- ---------- Total..................... $2,428,930 6.25% 5.79% $ 25,570 ========== ========== ========= ========== RECEIVE PAY FIXED BASIS SWAPS YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS CAPS & FLOORS TOTAL - --------------------- ----------- ----------- ------------- ---------- Balance, December 31, 1996..................... $ 487,000 $ 304,099 $ 376,000 $1,167,099 Additions................. 849,000 223,900 660,000 1,732,900 Maturities/amortizations.. (35,000) (176,069) (10,000) (221,069) Terminations.............. -- -- (250,000) (250,000) ---------- ---------- --------- ---------- Balance, December 31, 1997..................... $1,301,000 $ 351,930 $ 776,000 $2,428,930 ========== ========== ========= ========== ONE YEAR ONE TO FIVE FIVE TO 10 MATURITY SCHEDULE OR LESS YEARS YEARS TOTAL - ----------------- ----------- ----------- ------------- ---------- Receive fixed swaps....... $ 276,000 $ 525,000 $ 500,000 $1,301,000 Pay fixed swaps........... 103,987 240,143 7,800 351,930 Basis swaps............... 100,000 -- -- 100,000 Caps & Floors............. 11,000 605,000 60,000 676,000 ---------- ---------- --------- ---------- Total..................... $ 490,987 $1,370,143 $ 567,800 $2,428,930 ========== ========== ========= ==========
As of December 31, 1997, unearned income from new swap transactions initiated during 1997 was $13.5 million. There were no unamortized deferred gains or losses from terminated transactions remaining at year end. Active transactions resulted in pretax net income of $1.1 million. 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 1997, options were written on securities totaling $705.0 million. Option fee income was $1.4 million for 1997. There were no unexercised options outstanding at December 31, 1997 or 1996. 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, 1997, net purchased put option contracts with a notional value of $55.0 million were outstanding. The $2.4 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. 77 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, 1997, BB&T's interest rate swaps, caps and floors reflected an unrealized gain of $25.6 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, 1997, 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, ----------------------------------------------- 1997 1996 1995 --------------- --------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS PER SHARE: Weighted average number of common shares outstanding during the period........... 135,742,174 136,024,587 135,911,150 =============== =============== =============== Net income................... $ 359,942 $ 330,175 $ 227,268 Less--Preferred dividend requirement................. -- 610 5,079 --------------- --------------- --------------- Income available for common shares...................... $ 359,942 $ 329,565 $ 222,189 =============== =============== =============== Basic earnings per share..... $ 2.65 $ 2.42 $ 1.63 =============== =============== =============== DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding during the period........... 135,742,174 136,024,587 135,911,150 Add-- Shares issuable assuming conversion of convertible preferred stock........... -- 938,652 4,458,426 Dilutive effect of outstanding options (as determined by application of treasury stock method)................... 2,405,589 1,890,577 1,218,140 Issuance of additional shares under share repurchase agreement, contingent upon market price..................... 72,294 102,018 326,751 --------------- --------------- --------------- Weighted average number of common shares, as adjusted.. 138,220,057 138,955,834 141,914,467 =============== =============== =============== Net income................... $ 359,942 $ 330,175 $ 227,268 Add--After tax interest expense and amortization of issue costs applicable to convertible debentures...... -- -- 211 --------------- --------------- --------------- Net income, as adjusted...... $ 359,942 $ 330,175 $ 227,479 =============== =============== =============== Diluted earnings per share... $ 2.60 $ 2.38 $ 1.60 =============== =============== ===============
78 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, AS OF MARCH 17, 1998: BB&T Corporation (Registrant) /s/ John A. Allison, IV By: _________________________________ John A. Allison, IV Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED AS OF MARCH 17, 1998. /s/ John A. Allison, IV _____________________________________ John A. Allison, IV Chairman of the Board and Chief Executive Officer /s/ Scott E. Reed _____________________________________ Scott E. Reed Senior Executive Vice President and Chief Financial Officer /s/ Sherry A. Kellett _____________________________________ Sherry A. Kellett Executive Vice President and Controller A Majority of the Directors of the Registrant are included. /s/ Paul B. Barringer _____________________________________ Paul B. Barringer Director /s/ Alfred E. Cleveland _____________________________________ Alfred E. Cleveland Director /s/ W. R. Cuthbertson, Jr. _____________________________________ W. R. Cuthbertson, Jr. Director 79 /s/ Ronald E. Deal _____________________________________ Ronald E. Deal Director /s/ A. J. Dooley, Sr. _____________________________________ A. J. Dooley, Sr. Director /s/ Tom D. Efird _____________________________________ Tom D. Efird Director /s/ Paul S. Goldsmith _____________________________________ Paul S. Goldsmith Director /s/ Lloyd Vincent Hackley _____________________________________ Lloyd Vincent Hackley Director /s/ Ernest F. Hardee _____________________________________ Ernest F. Hardee Director /s/ Jane P. Helm _____________________________________ Jane P. Helm Director /s/ Richard Janeway, M.D. _____________________________________ Richard Janeway, M.D. Director /s/ J. Ernest Lathem, M.D. _____________________________________ J. Ernest Lathem, M.D. Director 80 /s/ James H. Maynard _____________________________________ James H. Maynard Director /s/ Joseph A. McAleer, Jr. _____________________________________ Joseph A. McAleer, Jr. Director /s/ Albert O. McCauley _____________________________________ Albert O. McCauley Director /s/ L. Glenn Orr, Jr. _____________________________________ L. Glenn Orr, Jr. Director /s/ Richard L. Player, Jr. _____________________________________ Richard L. Player, Jr. Director /s/ C. Edward Pleasants, Jr. _____________________________________ C. Edward Pleasants, Jr. Director /s/ Nido R. Qubein _____________________________________ Nido R. Qubein Director /s/ E. Rhone Sasser _____________________________________ E. Rhone Sasser Director /s/ Jack E. Shaw _____________________________________ Jack E. Shaw Director /s/ Harold B. Wells _____________________________________ Harold B. Wells Director 81 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 2(a) Agreement and Plan of Reorganization dated Incorporated herein by as of July 29, 1994 and amended and reference to Registration restated as of October 22, 1994 between the No. 33-56437. Registrant and BB&T Financial Corporation. 2(b) Plan of Merger as of July 29, 1994 as Incorporated herein by amended and restated on October 22, 1994 reference to Registration between the Registrant and BB&T Financial No. 33-56437. Corporation. 2(c) Agreement and Plan of Reorganization dated Incorporated herein by as of November 1, 1996 between the reference to Exhibit 3(a) Registrant and United Carolina Bancshares filed in the Annual Report Corporation, as amended. on Form 10-K, filed March 17, 1997. 2(d) Agreement of Plan of Reorganization dated Incorporated herein by as of October 29, 1997 between the reference to Registration Registrant and Life Bancorp, Inc. No. 333-44183. 3(a)(i) Amended and Restated Articles of Incorporated herein by Incorporation of the Registrant, as reference to Exhibit 3(a) amended. filed in the Annual Report on Form 10-K, filed March 17, 1997. 3(a)(ii) Articles of Amendment of Articles of Filed herewith. Incorporation. 3(b) Bylaws of the Registrant, as amended. Filed herewith. 4(a) Articles of Amendment to Amended and Incorporated herein by Restated Articles of Incorporation of the reference to Exhibit 3(a) Registrant related to Junior Participating filed in the Annual Report Preferred Stock. on Form 10-K, filed March 17, 1997. 4(b) Rights Agreement dated as of December 17, Incorporated herein by 1996 between the Registrant and Branch reference to Exhibit 1 filed Banking and Trust Company, Rights Agent. under Form 8-A, filed January 10, 1997. 4(c) Subordinated Indenture (including Form of Incorporated herein by Subordinated Debt Security) between the reference to Exhibit 4(d) of Registrant and State Street Bank and Trust Registration No. 333-02899. Company, Trustee, dated as of May 24, 1996. 4(d) Senior Indenture (including Form of Senior Incorporated herein by Debt Security) between the Registrant and reference to Exhibit 4(c) of State Street Bank and Trust company, Registration No. 333-02899. Trustee, dated as of May 24, 1996. 10(a)* Death Benefit Only Plan, Dated April 23, Incorporated herein by 1990, by and between Branch Banking and reference to Registration Trust Company (as successor to Southern No. 33-33984. National Bank of North Carolina) and L. Glenn Orr, Jr. 10(b)* BB&T Corporation Non-Employee Directors' Incorporated herein by Deferred Compensation and Stock Option reference to Exhibit 10(b) Plan. of the Annual Report on Form 10-K, filed March 17, 1997.
82
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by Incentive Plan. reference to Registration No. 33-57865. 10(d)* Settlement and Non-Compete Agreement, dated Incorporated herein by February 28, 1995, by and between the reference to Registration Registrant and L. Glenn Orr, Jr. No. 33-56437. 10(e)* Settlement Agreement, Waiver and General Incorporated herein by Release dated September 19, 1994, by and reference to Registration between the Registrant, Branch Banking and No. 33-56437. Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton. 10(f) BB&T Corporation Savings and Thrift Plan. Incorporated herein by reference to Registration No. 33-57867. 10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by Incentive Plan. reference to Exhibit 10(g) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(h)* Form of Branch Banking and Trust Company Incorporated by reference to Long-Term Incentive Plan. the identified exhibit under the Quarterly Report on Form 10-Q, filed May 14, 1991. 10(i)* Form of Branch Banking and Trust Company Incorporated by reference to Executive Incentive Compensation Plan. the identified exhibit under the Annual Report on Form 10-K, filed February 22, 1985. 10(j)* BB&T Deferred Compensation Plan for Key Incorporated herein by Employees. reference to Exhibit 10(j) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by reference to Exhibit 10(k) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(l)* BB&T Corporation Special Supplemental Incorporated herein by Retirement Plan. reference to Exhibit 10(l) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(m)* Settlement and Noncompetition Agreement, Filed herewith. dated July 1, 1997, by and between the Registrant and E. Rhone Sasser. 11 Statement re Computation of Earnings Per Filed herewith as Note R. of Share. the "Notes to Consolidated Financial Statements." 21 Subsidiaries of the Registrant. Filed herewith. 22 Proxy Statement for the 1998 Annual Meeting Future filing incorporated of Shareholders, dated April 28, 1998. by reference pursuant to the General Instruction G(3).
83
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 23(a) Consent of Independent Public Accountants. Filed herewith. 23(b) Opinion of Independent Public Accountants. Filed herewith. 27 Financial Data Schedule. Filed as an exhibit to the electronically-filed document as required.
- -------- * Management compensatory plan or arrangement. 84 EX-3.A(II) 2 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION STATE OF [SEAL OF THE STATE OF NORTH CAROLINA APPEARS HERE] NORTH Department of The CAROLINA Secretary of State - -------------------------------------------------------------------------------- To all whom these presents shall come, Greetings: I, ELAINE F. MARSHALL, Secretary of State of the State of North Carolina, do hereby certify the following and hereto attached to be a true copy of ARTICLES OF AMENDMENT OF SOUTHERN NATIONAL CORPORATION Which changed its name to: BB&T CORPORATION the original of which was filed in this office on the 6th day of May, 1997. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal at the City of Raleigh, this 6th day of May, 1997. [SEAL OF THE SECRETARY OF STATE OF NORTH CAROLINA APPEARS HERE] /s/ Elaine F. Marshall Secretary of State - -------------------------------------------------------------------------------- ARTICLES OF AMENDMENT OF SOUTHERN NATIONAL CORPORATION The undersigned corporation hereby submits these articles of amendment for the purpose of amending its articles of incorporation: 1. The name of the corporation is Southern National Corporation. 2. The following amendment to the articles of incorporation of the corporation was adopted by its shareholders on the 22nd day of April, 1997 in the manner prescribed by law: Delete the provisions of Article I and substitute therefor the following: "The name of the Corporation is BB&T Corporation" 3. The above amendment is effective at 11:59 p.m. on Friday, May 16, 1997. This the 1st day of May, 1997. SOUTHERN NATIONAL CORPORATION By: /s/ Jerone C. Herring -------------------------------- Jerone C. Herring, Secretary EX-3.B 3 BYLAWS OF THE REGISTRANT, AS AMENDED BYLAWS OF BB&T CORPORATION ARTICLE I Offices 1. Principal Office: The principal office of the corporation shall be ---------------- located at 500 North Chestnut Street, Lumberton, North Carolina. 2. Registered Office: The registered office of the corporation required ------------------ by law to be maintained in the State of North Carolina may be, but need not be, identical with the principal office. 3. Other Offices: The corporation may have offices at such other places, ------------- either within or without the State of North Carolina, as the Board of Directors may from time to time determine, or as the affairs of the corporation may require. ARTICLE II Meetings of Stockholders 1. Place of Meetings: All meetings of shareholders shall be held at the ------------------ principal office of the corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting or agreed upon by a majority of the shareholders entitled to vote thereat. 2. Annual Meetings: The annual meeting of the shareholders shall be held on ---------------- the third Tuesday of April of each year at such time of day as shall be designated by the Chief Executive Officer, President or Secretary for the purpose of electing directors of the corporation and for such other business as may be properly brought before the meeting. 3. Substitute Annual Meeting: If the annual meeting shall not be held on -------------------------- the day designated by these bylaws, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. 4. Special Meetings: Special meetings of the shareholders may be called at ----------------- any time by the Chief Executive Officer, President, Secretary or Board of Directors of the corporation. 5. Notice of Meetings: Written or printed notice stating the time and ------------------- place of the meeting shall be delivered not less than ten nor more than fifty days before the date thereof, either personally or by mail, by or at the direction of the Chief Executive Officer, President, the Secretary, or other persons calling the meeting, to each shareholder of record entitled to vote at the meeting. In case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted thereat unless it is a matter, other than election of directors, on which the vote of shareholders is expressly required by the provisions of the North Carolina Business Corporation Act. In the case of a special meeting, the notice of meeting shall specifically state the purpose or purposes for which the meeting is called. When a meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for less than thirty days in any one adjournment, it is not necessary to give any notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken. 6. Quorum: The holders of a majority of the shares entitled to vote, ------- represented in person or by proxy, shall constitute a quorum at meetings of shareholders. If there is no quorum at the opening of a meeting of shareholders, such meeting may be adjourned from time to time by the vote of a majority of the shares voting on the motion to adjourn; and at any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting. The stockholders at a meeting at which quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 7. Voting of Shares: Each outstanding share having voting rights shall be ---------------- entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Except in the election of directors, the vote of a majority of the shares voted on any matter at a meeting of shareholders at which a quorum is present shall be the act of the shareholders on that matter, unless the vote of a greater number is required by law or by the charter or bylaws of this corporation. Voting on all matters except the election of directors shall be by voice or by a show of hands unless the holders of one-tenth of the shares represented at the meeting shall, prior to the voting on any matter, demand a ballot vote on that particular matter. 8. Proxies: Shareholders may vote at any meeting of the shareholders by ------- proxies duly authorized in writing, but no officer or employee of this corporation shall act as proxy. Proxies shall be valid only for one meeting, to be specified therein, and any adjournment of such meeting. Proxies shall be dated and shall be filed with the records of the meeting. 9. Notice of Stockholder Business and Nominees for Election as ----------------------------------------------------------- Directors: In addition to the requirements of any applicable laws with - ---------- respect to any proposal presented by a shareholder for action at a meeting of the shareholders of the corporation, and subject to the provisions of the North Carolina Business Corporation Act as in effect from time to time, any shareholder desiring to introduce any business before any meeting of the shareholders of the corporation shall be required to deliver to the Secretary written notice containing the information specified herein (a) in the case of an annual meeting at least 60 days prior to the date one year from the date of the immediately preceding annual meeting, and (b) in the case of a special meeting at least 10 days prior to such meeting or not more than 3 days after receipt of notice of such meeting, whichever is closer to the date of such meeting. Such written notice shall contain the following information: The shareholder's name and address; the number of shares of each class of capital stock owned by the shareholder; a description of the business to be introduced to the shareholders; and any material interest, direct or indirect, which the shareholder may have in the business described in the notice. Any shareholder desiring to nominate a person for election as a director of the corporation in addition to the nominees set forth in the proxy materials delivered to the shareholders prior to an annual meeting shall deliver to the Secretary a written notice at such time and containing such information as set forth in the immediately preceding paragraph, with such additional information in the notice concerning the nominee for election as a director of the corporation as is disclosed in the proxy materials concerning all persons nominated by the Board of Directors for election as a director of the corporation. Failure of any shareholder to provide such notices in such a timely manner as set forth in this Section 9 shall authorize the presiding officer at the meeting of shareholders before which such business is to be introduced or at which such nominee is to be considered for election as a director to rule such proposal or nomination out of order and not to be introduced or considered. ARTICLE III Directors 1. General Powers: The business and affairs of the corporation shall be --------------- managed by the Board of Directors or by the Executive Committee. 2. Number, Term and Qualification: The Board shall consist of not less than ------------------------------- three nor more than twenty-five members and the number of members shall be fixed and determined from time to time by a resolution of the majority of the full board or by resolution of the shareholders at any meeting thereof, but the number of Directors shall not be less than three. The Board of Directors shall be divided into three classes, each class to be as nearly equal in number as possible. At the annual meeting of stockholders in 1984, the directors of one class shall be elected for a term of three years. At each annual meeting of the stockholders after the 1984 annual meeting, the successor of the directors of the class whose terms expire in that year shall be elected to hold office for a term of three years, so that the term of office of one class of directors shall expire each year. Each director shall hold office until his death, resignation, retirement, removal, disqualification, or his successor is elected and qualified. If the size of the Board of Directors is increased, the new directors elected in the year of the increase shall be elected to serve for terms of one, two or three years such that the three classes shall remain equal or nearly equal. Directors must possess the qualifications required of directors of National Banks as set forth in the laws of the United States and the regulations and rulings of the regulatory authorities supervising such National Banks. 3. Election of Directors: Except as provided in Section 6 of this Article, ---------------------- the directors shall be elected at the annual meeting of shareholders, and those persons who receive the highest number of votes shall be deemed to have been elected. Every election of directors shall be managed by three judges, who shall be appointed from among the shareholders by the Board of Directors. The judges of election shall hold and conduct the election at which they are appointed to serve; and, after the election, they shall file with the Secretary a certificate under their hands, certifying the result thereof and the names of the directors elected. The judges of election, at the request of the Chairman of the meeting, shall act as tellers of any other vote by ballot taken at such meeting, and shall certify the result thereof. 4. Cumulative Voting: Every shareholder entitled to vote at an election of ------------------ directors shall have the right to vote the number of shares standing of record in his name for as many persons as there are directors to be elected and for whose election he has a right to vote, or to cumulate his vote by giving one candidate as many votes as the number of such directors multiplied by the number of shares shall equal, or by distributing such votes on the same principal among any number of such candidates. This right of cumulative voting shall not be exercised unless some shareholder or proxy holder announces in open meeting, before the voting for the directors starts, his intention so to vote cumulatively; and if such announcement is made, the chair shall declare that all shares entitled to vote have the right to vote cumulatively and shall thereupon grant a recess of not less than one nor more than four hours, as he shall determine, or of such other period of time as is unanimously then agreed upon. 5. Removal: Directors may be removed from office only for cause and only by ------- a vote of shareholders holding a majority of the shares entitled to vote at an election of directors. However, unless the entire board is removed, an individual director may not be removed when the number of shares voting against the proposal for removal would be sufficient to elect a director if such shares were voted cumulatively at an annual election. If any or all directors are so removed, new directors may be elected at the same meeting. 6. Vacancies: A vacancy occurring in the Board of Directors, including a --------- vacancy not filled by the shareholders and a vacancy created by an increase in the number of directors, may be filled by a majority of the remaining directors provided, however, that a majority of the full Board of Directors may not increase the number of directors to a number which: (a) exceeds by more than two the number of directors last fixed by shareholders where such number was fifteen or less, and (b) to a number which exceeds by more than four the number of directors last fixed by shareholders where such number was sixteen or more. 7. Chairman: There shall be a Chairman of the Board of Directors elected by -------- the directors from their number at any meeting of the board. The Chairman shall be Chief Executive Officer as provided under Article V, shall preside at all meetings of the Board of Directors and shall perform such other duties as may be directed by the board. There may also be a Vice Chairman of the Board of Directors who shall preside in the absence of the Chairman. 8. Compensation: The Board of Directors may compensate Directors for their ------------- services as such and may provide for the payment of all expenses incurred by the directors in attending regular and special meetings of the board. 9. Executive Committee: There shall be an Executive Committee composed of ------------------- not less than three members, appointed by the Chief Executive Officer with the approval of the board annually or more often. The Executive Committee shall have and may exercise, to the extent provided by law, all of the authority and powers of the Board of Directors in the management of the corporation, during intervals between meetings of the board. The Executive Committee shall advise in regard to policies of the corporation and the conduct of its affairs, may make such recommendations to the Board of Directors as it may deem proper, and shall consider any matters submitted to it by the officers or by any committee during intervals between meetings of the board, with power to act in the premises. The Board of Directors may elect a Chairman of the Executive Committee, and if the board does not elect a chairman of the committee, the Executive Committee shall elect as its chairman one of its members. 10. Examining Committee: There shall be an examining committee composed of -------------------- not less than three directors, exclusive of any active officers, appointed by the Chief Executive Officer with the approval of the board annually or more often. The duty of the Examining Committee shall be to examine at least once during each calendar year and within 15 months of the last examination the affairs of the corporation and its subsidiaries or cause suitable examinations to be made by auditors appointed by the board of directors whose report shall be made to the shareholders, and to report the result of such examinations in writing to the board at the next regular meeting thereafter. Such reports shall state whether the corporation and its subsidiaries are in a sound condition, whether adequate internal controls and procedures are being maintained and shall recommend to the board such changes in the manner of conducting the affairs of the corporation and its subsidiaries as shall be deemed advisable. 11. Other Committees: The board may provide for any other committee not ----------------- provided for in these bylaws composed of members appointed by the Chief Executive Officer with the approval of the board. ARTICLE IV Meeting of Directors 1. Organization Meeting: The Secretary, upon receiving the certificate of --------------------- the judges of the result of any election, shall notify the directors-elect of their election and of the time at which they are required to meet at the Main Office of the corporation of the purpose of organizing a new board and electing and appointing officers of the corporation for the succeeding year. Such meeting shall be appointed to be held on the day of election or as soon thereafter as practicable, and, in any event, within thirty days thereof. If, at the time fixed for such meeting, there shall not be a quorum present, the directors present may adjourn the meeting, from time to time, until a quorum is obtained. 2. Regular Meetings: The regular meetings of the Board of Directors shall ----------------- be held, without notice, on the third Thursday of each month at the Main Office except when five days notice of another meeting date or place is given by the Chief Executive Officer or Secretary. When any regular meeting of the board falls upon a holiday, the meeting shall be held on the next banking business day unless the board shall designate some other day. 3. Special Meetings: Special meetings of the Board of Directors may be ----------------- called by the Chief Executive Officer or President of the corporation, or at the request of three or more directors. Each member of the Board of Directors shall be given notice stating the time and place, by telegram, letter, or in person, of each special meeting not less than two days before the meeting. Such notice need not specify the purpose for which the meeting is called. Attendance by a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called. 4. Quorum: A majority of the directors fixed by these bylaws shall ------- constitute a quorum for the transaction of business at any meeting of the Board of Directors but a less number may adjourn any meeting from time to time and the meeting may be held as adjourned, without further notice. 5. Manner of Acting: Except as otherwise provided in this section, the act ----------------- of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The vote of a majority of the number of directors fixed by these bylaws shall be required to adopt a resolution constituting an Executive Committee. The vote of a majority of the directors then holding office shall be required to adopt, amend or repeal a bylaw, or to adopt a resolution dissolving the corporation without action by the shareholders. Vacancies in the Board of Directors may be filled as provided in Article III, Section 6, of these bylaws. 6. Evaluation of Business Combinations: The Board of Directors of the ------------------------------------ corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the corporation, give due consideration to all relevant factors, including without limitation the social and economic effects on the employees, customers and other constituents of the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located. ARTICLE V Officers 1. Number: The officers of the corporation shall consist of a Chairman of ------ the Board and Chief Executive Officer, a President, one or more Executive Vice Presidents, a Secretary, a Treasurer, a Comptroller, and such Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers as the Board of Directors may from time to time elect. Any two or more offices may be held by the same person, except the offices of Chief Executive Officer or President or Executive Vice President and Secretary, and the offices of Treasurer and Comptroller may not be held by the same person. 2. Election and Term: The officers of the corporation shall be elected by ----------------- the Board of Directors. Such election may be held at any meeting of the board. Each officer shall hold office until the next organizational meeting as provided in Article IV, Section I. 3. Removal: Any officer or agent elected or appointed by the Board of -------- Directors may be removed by the board with or without cause; but such removal shall be without prejudice to the contract rights, if any, of the person so removed. 4. Compensation: The compensation of all officers of the corporation shall ------------- be fixed by the Board of Directors. 5. Chairman of the Board and Chief Executive Officer: The Board of ------------------------------------------------- Directors shall appoint and elect one of its members to be Chairman of the Board and Chief Executive Officer of the corporation. The Chairman of the Board and Chief Executive Officer shall have full executive powers, shall be the principal executive officer of the corporation, shall have and exercise all powers, duties and authority pertaining by practice or custom to the Office of Chief Executive and shall supervise, direct and control the management of the corporation in accordance with these Bylaws. He shall preside at all meetings of the Board of Directors. He shall appoint all committees of the Board of Directors with the approval of the Board of Directors. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to him by the Board of Directors. The Chairman of the Board is herein called and is referred to throughout these Bylaws and the "Chief Executive Officer". 6. President: The Board of Directors shall appoint one of its members to be --------- President of the corporation. The President shall be the Chief Administrative Officer of the corporation and he shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to him by the Board of Directors. 7. Executive Vice President: The Board of Directors may appoint one or more ------------------------- Executive Vice Presidents. Each Executive Vice President, in the order designated by the Board, in the absence of the President, shall perform all the duties and have all the powers of the President. 8. Senior Vice Presidents: The Board of Directors may appoint Senior Vice ---------------------- Presidents whose responsibilities and management shall extend to more than one area of the management of the corporation. 9. Vice Presidents: The Board of Directors may appoint Vice Presidents who ---------------- shall perform such duties and have such other powers as the Chief Executive Officer, President, Executive Vice Presidents, Senior Vice Presidents and/or Board of Directors shall prescribe. 10. Secretary: The Secretary shall keep accurate records of the acts and ---------- proceedings of all meetings of shareholders and directors. He shall give all notices required by law and by these bylaws. He shall have general charge of the corporate books and records of the corporate seal, and he shall affix the corporate seal to any lawfully executed instrument requiring it. He shall have general charge of the stock transfer books of the corporation and shall keep, at the registered or principal office of the corporation, a record of shareholders showing the name and address of each shareholder and the number and class of the shares held by each. He shall sign such instruments as may require his signature, and, in general, shall perform all duties incident to the office of secretary and such other duties as may be assigned him from time to time by the Chief Executive Officer or by the Board of Directors. 11. Treasurer: The Treasurer shall have custody of all funds and securities --------- belonging to the corporation and shall receive and deposit the same under the direction of the Board of Directors. The Treasurer shall, in general, perform all duties incident to his office and such other duties as may be assigned to him from time to time by the Chief Executive Officer or by the Board of Directors. 12. Comptroller: The Comptroller shall keep full and accurate accounts of ------------ the finances of the corporation in records especially provided for that purpose; and, he shall cause to be made a true statement of its assets and liabilities as of the close of each fiscal year and of the results of its operations and of changes in surplus for such fiscal year. The Comptroller shall mail or otherwise deliver a copy of the latest of such statement to any shareholder upon his written request therefor. The Comptroller shall, in general, perform all duties incident to his office and such other duties as may be assigned to him by the Board of Directors. 13. Assistant Secretaries and Treasurers: The Assistant Secretaries and ------------------------------------ Assistant Treasurers shall by delegation by or in the absence of the Secretary or Treasurer, respectively, perform the duties and exercise the powers of those offices, and they shall, in general, perform such other duties as shall be assigned to them by the Secretary or Treasurer, respectively, or by the Chief Executive Officer or the Board of Directors. 14. Bonds: The Board of Directors may by resolution require any or all ----- officers, agents and employees of the corporation to give bond to the corporation, with sufficient sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the Board of Directors. 15. Chairman of the Board Emeritus: The Board of Directors may elect ------------------------------ annually a Chairman of the Board Emeritus who shall be a special officer of the Corporation, to have such duties as the Chairman and Chief Executive Officer may assign to him from time to time. ARTICLE VI Contracts, Loans and Deposits 1. Contracts: The Board of Directors may authorize any officer or officers, --------- agent or agents, to enter into any contract or execute and deliver any instrument on behalf of the corporation, and such authority may be general or confined to special instances. 2. Loans: No loans shall be contracted on behalf of the corporation and no ----- evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. 3. Checks and Drafts: All checks, drafts, or other orders for the payment ------------------ of money issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. 4. Deposits: All funds of the corporation not otherwise employed shall be --------- deposited from time to time to the credit of the corporation in such depositories as the Board of Directors shall direct. ARTICLE VII Certificates for Shares and Their Transfer 1. Certificates for Shares: Certificates representing shares of the ------------------------ corporation shall be issued in such form as the Board of Directors shall determine, to every shareholder for the fully-paid shares owned by him. These certificates shall be signed by the Chief Executive Officer or President by facsimile or manually by the Chief Executive Officer or President, Executive Vice President, any Senior Vice President and by the Secretary by facsimile or manually by the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer. They shall bear a facsimile of the seal of the Corporation and be consecutively numbered or otherwise identified. The name of the persons to whom they are issued, the number of shares and the date of issue shall appear on each certificate that is issued. The Board of Directors shall designate a Transfer Agent who may countersign each certificate either manually or by use of a facsimile signature. The Transfer Agent shall keep the stock transfer books of the corporation which shall reflect the name and address of the persons to whom certificates are issued and the number of shares represented by each certificate and its date of issue. The Board of Directors may designate a Registrar to register each certificate that is issued either manually or by use of a facsimile signature. 2. Transfer of Shares: Transfer of shares shall be made and recorded on the ------------------- stock transfer books of the corporation only upon surrender of the certificates for the shares sought to be transferred by the record holder thereof or by his duly authorized agent, transferee or legal representative. All certificates surrendered for transfer shall be canceled before new certificates for the transferred shares shall be issued. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all rights and liabilities of the prior holder of such shares. 3. Closing Transfer Books and Fixing Record Date: For the purpose of --------------------------------------------- determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, fifty days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such record date in any case to be not more than fifty days, and in case of a meeting of shareholders, not less than ten days immediately preceding the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. 4. Lost Certificates: The Board of Directors may authorize the issuance of ----------------- a new share certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the loss or destruction. When authorizing such issuance of a new certificate, the board may require the claimant to give the corporation a bond in such sum as it may direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; or the board may, by resolution reciting the circumstances justifying such action, authorize the issuance of the new certificate without requiring such a bond. ARTICLE VIII Indemnification of Officers and Directors Section 1: Any person who at any time hereafter serves or heretofore has ---------- served: (i) As an officer or director of the Corporation; or (ii) At the request of the Corporation as an officer or director (or in any position of similar authority, by whatever title known) of any other corporation, partnership, joint venture, trust or other enterprise in which the Corporation has a significant financial interest (hereinafter referred to as an "Affiliate" of the Corporation); or (iii) As an individual trustee or administrator under any employee benefit plan sponsored by the corporation or any of its Affiliates, shall have a right to be indemnified by the Corporation to the fullest extent permitted by law against: (a) All liability expense including without limitation costs and expenses of litigation and reasonable attorney's fees, actually and reasonable incurred by him in connection with or as a consequence of any threatened, pending or completed action, suit or preceding, whether civil, criminal, administrative or investigative, including appeals, and whether or not brought by or on behalf the Corporation or any of its affiliates or by or on behalf of any third party, outsider or any other person, seeking to hold him liable by reason of or arising out of his status or his activities in any of the foregoing capacities; and (b) Liability incurred by him for any judgments, money decrees, fines, penalties or amounts paid in settlement in connection with or as a consequence of any action, suit or proceeding described in (a) above. Provided, however, the Corporation shall not indemnify any person against any liability or litigation expense he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interest of the Corporation or any of its affiliates. Section 2: Any person entitled to indemnification under this Article shall --------- be entitled to recover from the Corporation his costs, expenses and reasonable attorney's fees incurred in connection with enforcing his right to indemnification. Section 3: Expenses incurred by a director or officer of the Corporation --------- in defending an action, suit or proceeding described above shall, at the request of such director or officer, be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to indemnification from the Corporation under this Article or otherwise. Section 4: Any person who at any time after the adoption of this Article ---------- serves or has served in any of the foregoing capacities for or on behalf of the Corporation or any of its Affiliates shall be deemed to be doing so and to have done so in reliance upon, and as consideration for, the rights provided herein. Such rights shall inure to the benefit of the heirs and legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provisions of this Article. Section 5: Any amendment, alteration, repeal or other change hereof ---------- limiting or restricting in any way the rights granted hereunder shall operate prospectively only and shall not prejudice, defeat or impair any rights of any person existing at the time of such amendment, alteration, or repeal or other change. Section 6: If this Article or any portion hereof shall be invalidated on ---------- any ground by any court or agency of competent jurisdiction, then the Corporation shall nevertheless indemnify each person described in Section I to the full extent permitted by the portion of this Article that is not invalidated and also to the full extent permitted or required by other applicable law. ARTICLE IX General Provisions 1. Dividends: The Board of Directors may from time to time declare, and the --------- corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by the law and by the charter. 2. Seal: The corporate seal of the corporation shall consist of two ---- concentric circles between which is the name of the corporation and in the center of which is embossed the corporation's eagle logo; and such seal, as impressed on the margin hereof, is hereby adopted as the seal of the corporation. 3. Waiver of Notice: Whenever any notice is required to be given to any ----------------- shareholder or director under the provisions of the North Carolina Business Corporation Act or under the provisions of the charter or bylaws of this corporation, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. 4. Fiscal Year: Unless otherwise ordered by the Board of Directors, the ----------- fiscal year of the corporation shall be from January 1 to December 31. 5. Amendments: Except as otherwise provided herein, these bylaws ---------- may be amended or repealed and new bylaws may be adopted by the affirmative vote of a majority of the directors then holding office at any regular or special meeting of the Board of Directors, provided ten days notice of the proposed amendment has been given to each member of the Board of Directors. The Board of Directors shall have no power to adopt a bylaw: (1) requiring more than a majority of the voting shares for a quorum at a regular meeting of the shareholders or more than a majority of the votes cast to constitute action by the shareholders, except where higher percentages are required by law; (2) providing for the management of the corporation otherwise than by the Board of Directors or its Executive Committee; (3) increasing or decreasing the number of directors; (4) that is inconsistent with the requirements of the laws of the State of North Carolina and of the Articles of Incorporation. No bylaw adopted or amended by the shareholders shall be altered or repealed by the Board of Directors. The affirmative vote of two-thirds of the total number of shares outstanding shall be required to amend, alter, change or repeal Article III, Section 2.5 and 6 and this Section 5 of Article VIII of these bylaws. 6. North Carolina Shareholder Protection Act Inapplicable. The provisions ------------------------------------------------------ of Article 7, Affiliated Transactions, of Chapter 55 of the General Statutes of North Carolina, known as the North Carolina Shareholder Protection Act, shall not be applicable to the Corporation. Adopted: Amended: March 23, 1976 and October 18, 1986 Amended: Amended: July 20, 1978 July 16, 1987 Amended: Amended: March 27, 1984 February 18, 1988 by Stockholders at Southern National Corporation Annual Meeting Amended February 16, 1989 Amended August 16, 1990 Amended April 9, 1992 AMENDMENT TO BYLAWS MADE AT 4/22/97 MEETING OF SHAREHOLDERS OF SOUTHERN NATIONAL CORPORATION RESOLVED, that Article III, Section 2 of the Bylaws of Southern National Corporation be amended to read as follows: 2. Number, Term and Qualification: The Board shall consist of not less ------------------------------- than three nor more than 30 members and the number of members shall be fixed and determined from time to time by resolution of the majority of the full board or by resolution of the shareholders at any meeting thereof, but the number of directors shall not be less than three. AMENDMENT TO BYLAWS MADE AT 4/22/97 MEETING OF BOARD OF DIRECTORS OF SOUTHERN NATIONAL CORPORATION WHEREAS, the first sentence of Article II, Section 8 of the Bylaws of the Company currently provides as follows: "Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing, but no officer or employee of this corporation shall act as proxy."; and WHEREAS, the Board of Directors deems it to be in the best interests of the Company to amend the Bylaws to permit officers and employees of the Company to act as proxies in connection with voting by the shareholders of the Company; NOW, THEREFORE, BE IT RESOLVED, that the first sentence of Article II, Section 8 of the Bylaws of the Company is hereby amended to read in its entirety as follows: "Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing." FURTHER RESOLVED, that such amendment shall be retroactive to the date of adoption of Article II, Section 8 of the Bylaws in the form herein amended; and FURTHER RESOLVED, that prior appointments of officers and employees of the Company as proxies in connection with voting by the shareholders of the Company, and all actions of all such officers and employees as proxies pursuant to such appointments, are hereby approved and ratified in all respects whatsoever. Exhibit C RESOLUTION WHEREAS, the first sentence of Article II, Section 8 of the Bylaws of the Company currently provides as follows: "Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing, but no officer or employee of this corporation shall act as proxy."; and WHEREAS, the Board of Directors deems it to be in the best interests of the Company to amend the Bylaws to permit officers and employees of the Company to act as proxies in connection with voting by the shareholders of the Company; NOW, THEREFORE, BE IT RESOLVED, that the first sentence of Article II, Section 8 of the Bylaws of the Company is hereby amended to read in its entirety as follows: "Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing." FURTHER RESOLVED, that such amendment shall be retroactive to the date of adoption of Article II, Section 8 of the Bylaws in the form herein amended; and FURTHER RESOLVED, that prior appointments of officers and employees of the Company as proxies in connection with voting by the shareholders of the Company, and all actions of all such officers and employees as proxies pursuant to such appointments, are hereby approved and ratified in all respects whatsoever. Charles E. Nichols A. Winniett Peters The Chairman recognized the Secretary for remarks relating to a proposal to amend the Corporation's Charter. Mr. Herring reported that Southern National Corporation and BB&T Financial Corporation had merged in February of 1995, and that all of the subsidiary banks had operated under the BB&T name since that time. In order to eliminate confusion among banking clients, investors and the public generally, the Board of Directors has recommended that the holding company name be changed to BB&T Corporation. Mr. Herring, on behalf of the Board of Directors, moved the adoption of the following resolution, which motion was duly seconded and the resolution adopted: RESOLVED, that Article I of the Articles of Incorporation of Southern National Corporation be amended to read as follows: The name of the Corporation is BB&T Corporation. The Chairman recognized the Secretary for remarks relating to a proposal to amend the Bylaws to increase the maximum number of directors. Mr. Herring reported that the Bylaws presently provide that the maximum number of directors is 25, and that the board presently consists of 24 directors. The UCB Reorganization Agreement provides that four current UCB directors be added to the Southern National board, and to assist in complying with this requirement it would be desirable to increase the maximum number of directors to 30. He further indicated that five of the current directors would retire in December 1997, pursuant to normal retirement policy. On behalf of the Board of Directors, Mr. Herring moved the adoption of the following resolution, which motion was duly seconded and the resolution adopted: RESOLVED, that Article III, Section 2 of the Bylaws of Southern National Corporation be amended to read as follows: 2. Number, Term and Qualification: The Board shall consist of not less ------------------------------ than three nor more than 30 members and the number of members shall be fixed and determined from time to time by resolution of the majority of the full board or by resolution of the shareholders at any meeting thereof, but the number of directors shall not be less than three. The Chairman recognized the Secretary for remarks relating to a proposal to allocate additional shares to the Non-Employee Directors' Stock Option Plan ("Directors' Plan"). Mr. Herring reported that the Directors' Plan was originally adopted in 1992 and 400,000 shares of common stock were reserved for use under the plan. Approximately 93,000 remain available under the Directors' Plan, which was amended in January 1997 to include it as a sub-plan of the Directors' Stock Option and Deferred Compensation Plan. In order to provide additional shares for the sub-plan, it is recommended that an additional 500,000 shares be allocated for use under the sub-plan. On behalf of the Compensation Committee, Mr. Herring moved the adoption of the following resolution, which was duly seconded and adopted: RESOLVED, that the number of shares of Southern National Corporation common stock authorized for issuance pursuant to the Stock Option Subplan of the Non-Employee Directors' 3 EX-10.M 4 SETTLEMENT AND NONCOMPETITION AGREEMENT EXHIBIT 10(M) SETTLEMENT AND NONCOMPETITION AGREEMENT THIS SETTLEMENT AND NONCOMPETITION AGREEMENT (the "Agreement") made and entered into this 1st day of July 1997, by and between BB&T CORPORATION, a North Carolina corporation with its principal office at Winston-Salem, North Carolina ("BB&T"), and E. RHONE SASSER, an individual residing in Whiteville, North Carolina ("Sasser"). R E C I T A L S: - - - - - - - - Sasser has been employed by United Carolina Bancshares Corporation ("UCB") as its Chairman of the Board of Directors and Chief Executive Officer pursuant to an Employment Agreement entered into by Sasser and UCB dated as of January 18, 1995 (the "UCB Employment Agreement"). As of November 1, 1996, BB&T and UCB entered into an Agreement and Plan of Reorganization (later modified as of the same date in an Amended and Restated Agreement and Plan of Reorganization, and referred to herein as the "Reorganization Agreement"), pursuant to which UCB has been merged with and into BB&T (the "Merger"). The parties hereto acknowledge that the UCB Employment Agreement constitutes a legally enforceable agreement by Sasser, that Sasser has complied with his obligations thereunder in all material respects, and that Sasser is willing and able to continue to perform his obligations thereunder, BB&T, as successor to UCB, desires to terminate the UCB Employment Agreement and Sasser's employment by BB&T and to enter into this Agreement in full settlement of the UCB Employment Agreement. BB&T and Sasser acknowledge that this Agreement has been negotiated at arms-length, that both parties hold equal bargaining positions, and that each has relied on the advice of experienced counsel in negotiating the terms and provisions of this Agreement. BB&T also recognizes that Sasser has broad experience in the banking business and close relations with many of UCB's major customers, has close relations with key employees of UCB, and has extensive knowledge of UCB trade secrets and other proprietary information, and BB&T thus believes that Sasser could substantially damage the business of BB&T were he to compete with BB&T or attempt to solicit away customers or employees of BB&T. Sasser, in consideration of the payments in Article I and the benefits provided in Article II, agrees that the UCB Employment Agreement shall be and hereby is terminated in its entirety effective on the date hereof, and acknowledges and agrees that he has no further rights or entitlements thereunder. NOW, THEREFORE, for and in consideration of the premises and the mutual promises and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, BB&T and Sasser covenant and agree as follows: ARTICLE I COMPENSATION ------------ 1.01. Annual Compensation. ------------------- (a) Payments to Sasser. ------------------ Commencing on the date hereof and continuing through the earlier of (i) attainment by Sasser of his sixty-fifth birthday, or (ii) Sasser's death, BB&T shall pay to Sasser $769,392 per annum, as adjusted as provided in Section 1.01(d) (such amount as adjusted is referred to herein as the "Base Amount"). The payments made pursuant to this Section 1.01 are in addition to the benefits provided in Article II. One-twelfth of the Base Amount shall be paid for each calendar month in accordance with the normal payroll practices of BB&T on the date set from time to time for payment of monthly salary to BB&T senior executives (the "Payment Date"). If Sasser shall survive to the date of his sixty-fifth birthday (the "Determination Date"), he shall receive for the remainder of his lifetime monthly amounts (payable on the Payment Date each month) of seventy percent of the highest monthly Base Amount paid to him during the twelve calendar months preceding the Determination Date, reduced as provided in Section 1.02. (b) Payments following Death of Sasser. ---------------------------------- If Sasser's death occurs before the Determination Date, BB&T shall pay through and including the Determination Date, to Sasser's current spouse, Dorothy F. Sasser ("Current Spouse"), if she survives him and was married to Sasser at the date of his death, or if not, in equal portions to Saaser's two sons, Edward Craig Sasser and Douglas Bryon Sasser, if they both survive him, or if they do not both survive him, to Sasser's estate (the foregoing to be referred to hereinafter, as appropriate, as "Sasser's Beneficiary") a monthly death benefit equal to one-twelfth of the Base Amount, including continuing adjustments as provided in Section 1.01(d). The monthly payment for each calendar month shall be made on the Payment Date for the month. Upon the occurrence of the Determination Date (if Sasser's death occurs before the Determination Date), or upon Sasser's death if he dies following the Determination Date, BB&T shall pay to his Current Spouse, if she is then living and was married to Sasser at the date of his death, a monthly death benefit for her life, payable on the Payment Date each month, equal to thirty-five percent of the highest monthly Base Amount paid by BB&T to Sasser or Sasser's Beneficiary during the twelve-month period immediately preceding the Determination Date, reduced as provided in Section 1.02. No payments shall be made under this Section 1.01(b) following the Determination Date if Sasser dies prior to the Determination Date and his Current Spouse either is not married to him on the date of his death or does not survive beyond the Determination Date, or following Sasser's death if Sasser dies following the Determination Date and his Current Spouse is not married to him on the date of his death. (c) Partial Month. ------------- If any payment pursuant to 1.01(a) or (b) commences on a day other than the first day of a calendar month, or ceases on a day other than the last day of a calendar month, the monthly amount payable for such partial month shall equal the amount payable for a full month multiplied by a fraction, the numerator of which is the number of days in the month during the period for which the payment is to be made, and the denominator of which is the number of days in the month. 2 (d) CPI Adjustment -------------- The Base Amount shall be automatically increased as of each year (commencing on July 1, 1998 and ending with July 1 next preceding the Determination Date) to reflect increases in the cost of living (as hereinafter described). The amount of any annual automatic cost of living increase in the Base Amount shall be determined by multiplying the most recent Base Amount by a fraction, the numerator of which shall be the Consumer Price Index (the "CPI") [All Urban Consumers, South Region Average (1982-84 = 100); All Items, Bureau of Labor Statistics of The United States Department of Labor], for the month of May preceding the July 1 of the current calendar year, and the denominator of which shall be the CPI for May of the calendar year preceding the current year. If the quotient obtained in the foregoing fraction shall be less than one, the Base Amount shall not be adjusted for the current year (and, for the purpose of determining the CPI adjustment, if any, for future years, the denominator of the above fraction shall be the CPI for May of the calendar year in which a CPI adjustment was last made to the Base Amount). In the event (i) the CPI ceases to use the 1982-84 average of 100 as the base of calculation, or (ii) a substantial change is made in the quality or quantity of the items utilized in determining the CPI, or (iii) the publishing of the CPI shall be discontinued for any reason, the parties hereto shall thereafter accept and use such other index or comparable statistics to measure the cost of living as shall be mutually agreeable to BB&T and Sasser or Sasser's Beneficiary. (e) Parachute Payment Adjustment. ---------------------------- In the event that any amount required to be paid or distributed to Sasser pursuant to this Agreement shall constitute a parachute within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder (the "Code"), and the aggregate of such parachute payments and any other amounts otherwise required to be paid or distributed to Sasser by BB&T shall cause Sasser to be subject to the excise tax on excess parachute payments under Section 4999 of the Code (the "Excise Tax"), BB&T shall pay to Sasser an additional amount (the "Gross-Up Payment") such that the net amount Sasser shall receive after the payment of any Excise Tax shall equal the amount which he would have received if the Excise Tax had not been imposed. The Gross-Up Payment shall be determined by BB&T's regular independent auditors and shall equal the sum of the following: (i) The rate of the Excise Tax multiplied by the amount of the excess parachute payments; (ii) Any federal income tax, social security tax, unemployment tax or Excise Tax imposed upon Sasser as a result of the Gross-Up Payment required to be made under this paragraph (e); and (iii) Any state income or other tax imposed upon Sasser as a result of the Gross-Up Payment required to be made under this paragraph (e). For purposes of determining the amount of the Gross-Up Payment, Sasser shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation for individuals in the calendar year in which the Excise Tax is required to be paid. In addition, Sasser shall be deemed to pay state income taxes at a rate determined in accordance with the following formula: 3 ( l - (highest marginal rate of federal income taxation for individuals)) X (highest marginal rate of North Carolina income taxes for individuals in the calendar year in which the Excise Tax is required to be paid). The Gross-Up Payment shall be made on or before the date that Sasser is required to pay the Excise Tax; provided, that if the amount of such Payment cannot be finally determined on or before such date, BB&T shall pay to Sasser on such date an estimate, as determined in good faith by BB&T's regular independent auditors, of the minimum amount of such payment and shall pay the remainder of such payment (together with interest at the rate provided under Section 1274(b)(2)(B) of the Code) as soon as the amount can be determined but no later than the thirtieth day after the date Sasser becomes subject to the payment of the Excise Tax. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, Sasser shall repay to BB&T at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax, federal and state taxes imposed on the Gross-Up Payment being repaid by Sasser, if such repayment results in a reduction in Excise Tax and/or a federal or state tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), BB&T shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. 1.02. Other Payments. -------------- The payments due after the Determination Date to Sasser or his Current Spouse under Section 1.01 shall be reduced by the sum of the following amounts: (a) BB&T Pension Plan. ----------------- The amount actually paid each month to Sasser (and to his Current Spouse, if applicable) under the BB&T Pension Plan (which plan shall succeed by plan merger to the assets and liabilities under the UCB defined benefit pension plan), based on the payment option applicable with respect to Sasser under the BB&T Pension Plan. (b) Benefit Equivalency Plan. ------------------------ The amount actually paid each month to Sasser (and to his Current Spouse, if applicable) under the UCB Benefit Equivalency Plan, based on the payment option applicable with respect to Sasser under such Plan. 1.03. Liquidated Damages. ------------------ The amounts payable pursuant to this Article I and the life insurance coverages and other benefits provided in Article II are payable to or for the benefit of Sasser as liquidated damages for settlement of the UCB Employment Agreement, as well as compensation for the covenants in Article III. 4 ARTICLE II ADDITIONAL BENEFITS In order to protect Sasser against the loss of certain rights and benefits to which he is entitled under the UCB Employment Agreement, and to provide certain additional benefits, BB&T hereby agrees to the following: 2.01. Life Insurance. -------------- BB&T shall maintain Sasser's split-dollar life insurance policies and shall provide additional life insurance, as follows: (a) Split-Dollar Life Insurance. --------------------------- BB&T shall continue to pay through the earlier of the Determination Date or Sasser's death the employer's portion of the premiums on the UCB split-dollar insurance policies on Sasser's life. Sasser or his designee shall continue to own the policies subject to BB&T's interest therein. (b) Life Insurance. -------------- BB&T has acquired and shall maintain one or more life insurance policies with an insurer reasonably acceptable to Sasser with an aggregate death benefit of $1,000,000 on Sasser's life, payable to one or more beneficiaries designated from time to time by Sasser. BB&T shall pay the premium payments for such policies until the date of Sasser's death. 2.02. Medical Insurance. ----------------- BB&T shall provide medical benefits coverage to Sasser, including dependent coverage for his Current Spouse (if she shall remain married to Sasser), at the same level as provided by BB&T to participants under the BB&T Corporation Retiree Health Care Plan (the "BB&T Plan") for the period beginning on the date hereof and ending on the date of death of Sasser or, if later, the date of death of his Current Spouse if she shall be married to him at the date of his death; provided, however, that in on event will the level of such benefits be less than that provided under UCB's retiree health plan in effect immediately prior to the effective time of the Merger. Sasser (or, if coverage extends beyond Sasser's death, his Current Spouse) shall be responsible for that percentage of the cost of his coverage (and that of his dependent spouse) under the BB&T Plan which is paid by other similarly situated participants under the BB&T plan. 2.03. Other Benefits. -------------- In addition to the benefits provided in Section 2.02, Sasser shall be entitled to participate in the benefit plans or arrangements under the BB&T Corporation Flexible Compensation Program (the "BB&T Flexible Benefits Plan"), if and to the extent he is eligible to participate in accordance with the terms and provisions of the BB&T Flexible Benefits Plan. Sasser shall be responsible for that portion of the cost of his coverage under the BB&T Flexible Benefits Plan which is paid by other similarly situated 5 participants under the BB&T Plan. If Sasser is not eligible to participate in accordance with the terms and conditions of the BB&T Flexible Benefits Plan, BB&T shall, if Sasser so requests, provide similar coverage outside such plan at a level not less than that provided under UCB's flexible benefits plan in effect immediately prior to the effective time of the Merger, and Sasser will pay an amount towards such alternate coverage as he would have paid had he been eligible to participate in the BB&T Flexible Benefits Plan. 2.04 Long Term Incentive Plan. ------------------------ In accordance with the UCB Long Term Incentive Plan, immediately prior to the effective time of the Merger, the dollar amount of Sasser's accrued benefits under such plan were converted to shares of UCB common stock based on the average of the closing price of such stock over the 20 trading days immediately preceding the Merger. Such UCB shares were converted to shares of BB&T common stock in the Merger, based on the Exchange Ratio (as defined in the Reorganization Agreement). Such shares of BB&T common stock shall be distributed to Sasser in a single lump sum on the date hereof. 2.05 Stock Options. ------------- Any Stock Options (as defined in the Reorganization Agreement) issued pursuant to the Stock Option Plan (as defined in the Reorganization Agreement) in which Sasser is vested as of the date hereof shall be converted to options to acquire shares of common stock of BB&T pursuant to Section 2.10 of the Reorganization Agreement. Such Stock Options as so converted shall be subject to and governed by the terms of the Stock Option Plan as defined in the Reorganization Agreement. ARTICLE III NONCOMPETITION AND CONFIDENTIALITY 3.01 Background for Covenants. ------------------------ Sasser has been an employee of UCB for approximately 29 years, of which 14 years have been as Chairman of the Board of Directors, Chief Executive Officer or in other senior executive positions. During his tenure with UCB, Sasser has established close personal relationships with many of UCB's largest and most significant customers. In addition, he has established close personal relationships with many of UCB's key employees at all levels within the organization, many of whom will be important to BB&T in the transition period following the merger of UCB into BB&T and in conducting the former business of UCB on an on-going basis. Sasser and BB&T recognize and acknowledge that Sasser could cause serious harm to the business formerly conducted by UCB (and now to be conducted by BB&T) if he were to compete with BB&T in its market area or if he were to attempt to entice key employees of UCB (now employees of BB&T) to terminate their employment with BB&T. The parties further acknowledge that the terms and provisions of this Article III have been negotiated at arms-length, that both parties hold equal bargaining positions, that each party has relied on the advice of experienced legal counsel in negotiating the terms and provisions of this Article III, and that each party intends to be legally bound by these terms and provisions. 6 3.02. Noncompetition and Nonsolicitation Covenants. -------------------------------------------- Following the date of this Agreement, Sasser shall not directly or indirectly, (i) anywhere in the states of North Carolina, South Carolina and Virginia and in any county outside such states contiguous to one or more of such states, either as a principal, agent, employee, employer, stockholder, owner, member, proprietor, partner or in any other individual or representative capacity whatsoever, engage in the banking and financial services business, which includes consumer, savings and commercial banking and the insurance and trust businesses, or the savings and loan or mortgage banking business, or any other business in which BB&T is engaged at this time; (ii) solicit or assist any other person in soliciting, any depositors or customers of BB&T (including without limitation any former depositors or customers of UCB) to become depositors or customers of any other institution; or (iii) induce any employee of BB&T (including without limitation any former employee of UCB) to terminate his or her employment with BB&T; provided, that nothing contained in part (i) of this Section 3.02 shall be deemed to limit Sasser's right to invest in a business similar to BB&T's business if such investment is limited to less than one percent of the capital stock or other securities of any corporation or similar organization with stock or securities publicly owned or regularly traded on any public exchange or market. This Section 3.02 shall apply for a period of ten years from the date hereof. 3.03. Proprietary and Confidential Information. ---------------------------------------- Sasser acknowledges that during his employment with UCB he learned a substantial amount of information which is now proprietary and confidential to BB&T. Such proprietary and confidential information includes, but is not limited to, UCB's business, marketing, customer development, strategic planning and expansion plans, methods of doing business, trade secrets and similar information as related to the business formerly conducted by UCB. Sasser acknowledges that BB&T would be damaged if such proprietary and confidential information were made available to BB&T's competitors. Sasser agrees that, except as required by law, he shall not at any time divulge to any person, agency, institution, company or other entity any information which he knows or has reason to believe is proprietary or confidential to BB&T. Sasser agrees that his duties and obligations under this Section 3.03 shall continue for as long as such information remains proprietary or confidential to BB&T. 3.04. Breach of Obligations. --------------------- Payments and benefits due Sasser under Article I (other than under Section 1.01(e)) shall be discontinued in the event Sasser breaches the provisions of Section 3.02 or 3.03; provided that Sasser has received written notice from BB&T of such breach and such breach remains uncured thirty days after the delivery of such notice. If there is a disagreement between the parties as to whether Sasser has breached Section 3.02 or 3.03, then after the above thirty-day period, if such breach remains uncured in BB&T's opinion, BB&T may suspend payments and benefits to Sasser until such time as BB&T and Sasser shall agree as to BB&T's right to discontinue payments and benefits or until there is a final determination of the issue. In the event such determination results in a continuation of payments and benefits to Sasser, BB&T shall pay any suspended payments in a lump sum, together with interest at the rate provided under Section 1274(b)(2)(B) of the Code from the date of suspension, and shall resume regular payments and benefits in accordance with Article I. 7 3.05 Reasonableness of Restrictions. ------------------------------ BB&T and Sasser acknowledge and agree that this Agreement, including without limitation the noncompetition provisions of Section 3.02 and the nondisclosure provisions of Section 3.03, does not unduly or unfairly curtail Sasser's ability to support himself and his family due to Sasser's financial resources, extensive business experience and expertise, and ability to engage in banking and related businesses outside of North Carolina, South Carolina and Virginia. BB&T and Sasser further acknowledge and agree that the protections to BB&T in this Article III are reasonable and necessary in relation to the need of BB&T to protect its business. ARTICLE IV AMENDMENT OR TERMINATION BB&T may, with the prior written consent of Sasser or Sasser's Beneficiary following his death, modify, alter, amend or terminate this Agreement, in whole or in part at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or if agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. ARTICLE V BOARD OF DIRECTOR AND EXECUTIVE COMMITTEE SERVICE At the first meeting of the Board of Directors of BB&T following the date hereof, Sasser will be appointed to BB&T's Board of Directors, which appointment will continue for so long as Sasser is willing and able to serve and until the next annual meeting of shareholders of BB&T. Sasser will also at such meeting be appointed as a member of the Executive Committee of BB&T's Board of Directors. Thereafter, BB&T will use to best efforts, subject to the fiduciary duties of the members of the Nominating Committee and the other members of its Board of Directors, to nominate Sasser for election to BB&T's Board of Directors and to appoint him to the Executive Committee, in each case so that he will serve on the Board and Executive Committee until the normal retirement age for BB&T directors as established from time to time (currently age 70). Sasser will receive the normal compensation of an outside director or committee member with respect to these services. ARTICLE VI GENERAL PROVISIONS 6.01. Construction. ------------ Headings and subheadings used in this Agreement have been inserted for convenience of reference only and shall be ignored in any construction of the provisions. If a provision of this Agreement is illegal or invalid, that illegality or invalidity does not affect other provisions in this Agreement. 8 6.02. Governing Law. ------------- This Agreement shall be construed, enforced, and administered in accordance with the laws of the State of North Carolina (other than its choice of law rules), except to the extent that those laws are superseded by the laws of the United States of America. 6.03. Mitigation. ---------- Sasser shall not be required to mitigate the amounts of any payments provide for in this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment be reduced by any compensation earned by Sasser as the result of employment by another employer, subject to compliance by Sasser with the provisions of Sections 3.02 and 3.03. 6.04 Withholding. ----------- All payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. 6.05. Notice. ------ For purposes of this Agreement, notices and all other communications shall be in writing. All notices to BB&T shall be directed to the attention of the Chief Executive Officer. Notices and communications are effective when personally delivered or sent by nationally recognized air courier, charges prepaid, addressed to the addressee at the addressee's last known address. Notices of change in address are effective only upon receipt. 6.06 Certain Expenses. ---------------- In the event a dispute arises as to Sasser's entitlements to any rights or benefits hereunder, and thereafter Sasser incurs legal fees and other expenses, including court costs or arbitrator fees, in seeking to obtain or to enforce such rights or benefits, and Sasser prevails in obtaining or enforcing such rights or benefits through settlement, arbitration, judgment or otherwise, BB&T shall promptly pay Sasser's reasonable legal fees and expenses incurred in so enforcing this Agreement. Except to the extent provided in the preceding sentence, each party hereto shall pay its own legal fees and other expenses associated with any dispute. 6.07. Entire Agreement. ---------------- This Agreement sets forth all of the promises, covenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements or conditions, express or implied, oral or written, with respect thereto, except as contained herein. Specifically, without limitation, Sasser agrees that (i) this Agreement fulfills the obligations of BB&T with respect to him as set forth in that letter agreement between UCB and BB&T dated November 1, 1996, as amended and supplemented, (ii) the UCB Employment Agreement is terminated in its entirety effective on the date hereof, and he has no further rights or entitlements under the UCB Employment Agreement, and (iii) his employment with UCB 9 is terminated and the benefits and payments herein are in full settlement of all obligations to him under the UCB Employment Agreement or otherwise arising out of his employment with UCB. 6.08. Recitals. -------- The Recitals to this Agreement shall form a part of this Agreement. 6.09. Counterparts. ------------ This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 6.10. Contests and Audits. ------------------- Sasser agrees that for tax purposes he shall report the payments made to him hereunder in a manner that is consistent with the tax treatment of such payments by BB&T. Sasser shall promptly notify BB&T in writing upon receipt of notice of any pending or threatened audit or assessment with respect to Sasser which may relate to the treatment of payments hereunder. BB&T shall have the right at its option and expense to exclusively control and have responsibility for the conduct of any audit, examination, proceeding or litigation (a "Contest") to the extent such Contest relates to the treatment of payments hereunder, but Sasser shall retain control of any other matter included in such Contest. BB&T agrees to notify Sasser reasonably in advance of any proposed settlement. [signature page follows] 10 IN WITNESS WHEREOF, BB&T, by its duly authorized officer and Sasser have hereunto set their hands as of the day and year first written above. BB&T CORPORATION By: /s/ John A. Allison, IV -------------------------------------- John A. Allison, IV Chairman of the Board of Directors and Chief Executive Officer ----------------------------------------- E. RHONE SASSER IN WITNESS WHEREOF, BB&T, by its duly authorized officer and Sasser have hereunto set their hands as of the day and year first written above. BB&T CORPORATION By: -------------------------------------- John A. Allison, IV Chairman of the Board of Directors and Chief Executive Officer /s/ E. Rhone Sasser ----------------------------------------- E. RHONE SASSER EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT BB&T Corporation, a North Carolina corporation, is a multi-bank holding company. The table below sets forth all of BB&T's subsidiaries as to State or Jurisdiction of Organization and Percentage of Voting Securities Owned as well as their relationship to BB&T. All of the subsidiaries listed below are included in the consolidated financial statements, and no separate financial statements are submitted for any subsidiary.
PERCENTAGE STATE OR JURISDICTION OF VOTING SUBSIDIARY OF ORGANIZATION SHARES OWNED - ---------- --------------------- ------------ Branch Banking and Trust Company......... North Carolina 100% BB&T Financial Corporation of South Carolina................................ South Carolina 100% Branch Banking and Trust Company of South Carolina................................ South Carolina 100%(1) BB&T Financial Corporation of Virginia... Virginia 100% Regional Acceptance Corporation.......... North Carolina 100% Money 24, Inc............................ North Carolina 100% Craigie, Incorporated.................... Virginia 100% Phillips Factors Corporation............. North Carolina 100% Refloat, Incorporated.................... North Carolina 100% Unified Investors Life Insurance Company................................. Arizona 100% BB&T Leasing Corp........................ North Carolina 100%(2) Southern National Mortgage Company....... North Carolina 100%(2) BB&T Investment Services, Inc............ North Carolina 100%(2) BB&T Insurance Services, Inc............. North Carolina 100%(2) Grey Eagle, Inc.......................... Delaware 100%(2) BB&T Realty Investments, Inc............. Virginia 100%(2) Prime Rate Premium Finance Corporation, Inc..................................... South Carolina 100%(2) Agency Technologies, Inc................. South Carolina 100%(2) 150 Corporation.......................... North Carolina 100%(2) Farr Associates, Inc..................... North Carolina 100%(2) AutoBase Information Systems, Inc........ North Carolina 51%(2) Workmen's Service Corp................... North Carolina 100%(2,13) First Savings Service Corp............... North Carolina 100%(2,13) Fay-Charl Corp........................... North Carolina 100%(2,13) Peoples Service Corp. of Thomasville..... North Carolina 100%(2,13) City Finance Company, Inc................ North Carolina 100%(2,13) Guaranty Financial Services.............. North Carolina 100%(2,13) CSB Financial Services, Inc.............. North Carolina 100%(2,13) North Carolina Trustee Company........... North Carolina 100%(2,13) Davidson Financial, Inc.................. North Carolina 100%(2,13) BT Financial Corporation................. North Carolina 100%(2,13) BB&T Investment Services of South Carolina, Inc........................... South Carolina 100%(3) Investor Services, Inc................... South Carolina 100%(3) The First Real Estate Group, Inc......... South Carolina 100%(3,13) FICORP of South Carolina................. South Carolina 100%(3,13) BB&T Realty Corporation.................. North Carolina 100%(3,13) College Investments of South Carolina, Inc..................................... South Carolina 100%(3,13) College Investments of North Carolina, Inc..................................... North Carolina 100%(3,13) College Properties, Inc.................. South Carolina 100%(3,13) Firstmark Development Corporation........ South Carolina 100%(3,13) Branch Banking and Trust Company of Virginia................................ Virginia 100%(4)
PERCENTAGE STATE OR JURISDICTION OF VOTING SUBSIDIARY OF ORGANIZATION SHARES OWNED - ---------- ---------------------- ------------ Fidelity Federal Savings Bank.......... Virginia 100%(4) Virginia First Savings Bank............ Virginia 100%(4) Nexus Software, Inc.................... North Carolina 51%(5) BB&T Real Estate Investment Trust, Inc................................... North Carolina 100%(6) Regional Acceptance Investment Corporation of Nevada................. Nevada 100%(7) Rega Insurance Services, Inc........... North Carolina 100%(7) Greenville Car Mart, Inc............... North Carolina 100%(7) Regional Fidelity Limited.............. British Virgin Islands 99%(7) Roanoke Fidelity Limited............... British Virgin Islands 99%(7) Universal Fidelity Limited............. British Virgin Islands 99%(7) Atlantic Financing Corporation......... Virginia 100%(8) Mountain Financial Corporation......... Virginia 100%(8) Security Federal Financing Corporation........................... Virginia 100%(8) Phillips Financial Corporation......... North Carolina 100%(9) Sheffield Financial Corporation........ North Carolina 100%(10) Southside Services Corp................ Virginia 100%(11) Century Title.......................... Virginia 100%(11) Freedom Financial...................... Virginia 100%(11) American Finance & Investment.......... Virginia 100%(11) Century Mortgage Inc................... Virginia 100%(11) Virginia First Investment Corp......... Virginia 100%(11,13) Colony Financial....................... Virginia 100%(11,13) Fidelity Service Corporation........... Virginia 100%(12) Southern International Corp............ North Carolina 100%(13) BB&T Savings Corporation............... North Carolina 100%(13)
- -------- (1)Owned by BB&T Financial Corporation of South Carolina (2)Owned by Branch Banking and Trust Company (North Carolina) (3)Owned by Branch Banking and Trust Company of South Carolina (4)Owned by BB&T Financial Corporation of Virginia (5)Owned by 150 Corporation (6)Owned by BB&T Realty Investments, Inc. (7)Owned by Regional Acceptance Corporation (8)Owned by Craigie, Inc. (9)Owned by Phillips Factors Corporation (10)Owned by Refloat, Inc. (11)Owned by Virginia First Savings Bank (12)Owned by Fidelity Federal Savings Bank (13)Inactive EX-23.A 6 CONSENT OF INDEPENDENT PUBLIC Exhibit 23(a) Report of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into BB&T Corporation's previously filed Registration Statement File Nos. 33-52367, 33-57865, 33-57867 and 333-03989 filed on Form S-8 and Registration Statement File Nos. 33-57859, 33-57861, 33-57871 and 333-02899 filed on Form S-3. Charlotte, North Carolina, March 17, 1998. EX-23.B 7 OPINION OF INDEPENDENT PUBLIC ACCOUNTANT 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Charlotte, North Carolina, January 14, 1998, except for Note B, as to which the date is March 1, 1998. 44 EX-27 8 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 839,579 27,051 103,245 67,878 6,481,515 147,799 151,581 20,289,955 263,943 29,177,600 20,210,116 3,015,177 431,712 3,282,958 0 0 680,258 1,557,379 29,177,600 1,713,299 406,977 2,664 2,122,940 736,256 1,023,415 1,099,525 89,850 2,276 937,150 547,439 359,942 0 0 359,942 2.65 2.60 4.55 88,389 46,999 0 0 230,070 90,637 17,147 263,943 263,943 0 42,231
-----END PRIVACY-ENHANCED MESSAGE-----