-----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, ML1UDXfOuWeG3Til4hjJz2Hry5JYeSK8G+DO2f3761YhuQZsO31EgKD7piXzZp5T BnpeVrUZNKnOJClyAMC+VA== 0000950168-97-002558.txt : 19970912 0000950168-97-002558.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950168-97-002558 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 DATE AS OF CHANGE: 19970908 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BB&T CORP CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10853 FILM NUMBER: 97672832 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-Q 1 BB&T CORPORATION 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ---------------- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: JUNE 30, 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 WINSTON-SALEM, NORTH CAROLINA 27101 (Address of Principal Executive Offices) (Zip Code) (910) 733-2000 (Registrant's Telephone Number, Including Area Code) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No At July 31, 1997, 135,329,245 shares of the registrant's common stock, $5 par value, were outstanding. ---------------- This Form 10-Q has 23 pages. The Exhibit Index is included on page 20. =============================================================================== BB&T CORPORATION FORM 10-Q JUNE 30, 1997 INDEX
PAGE NO. Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited).......................................................................... 3 Consolidated Financial Statements......................................................................... 3 Notes to Consolidated Financial Statements................................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 9 Analysis of Financial Condition........................................................................... 9 Market Risk Management.................................................................................... 11 Capital Adequacy and Resources............................................................................ 13 Analysis of Results of Operations......................................................................... 14 Part II. OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 20 Item 6. Exhibits and Reports on Form 8-K.......................................................................... 20 SIGNATURES.......................................................................................................... 21 EXHIBIT 11 Computation of Earnings Per Share EXHIBIT 27 Financial Data Schedule -- Included with electronically-filed document only.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 1997 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and due from banks.................................................................... $ 647,182 $ 638,748 Interest-bearing deposits with banks....................................................... 10,862 1,046 Federal funds sold and securities purchased under resale agreements or similiar arrangements............................................................................ 6,366 19,940 Securities available for sale.............................................................. 5,505,640 5,136,789 Securities held to maturity (market value: $114,936 at June 30, 1997, and $128,410 at December 31, 1996)...................................................................... 111,737 124,718 Loans held for sale........................................................................ 254,263 219,469 Loans and leases, net of unearned income................................................... 15,607,692 14,364,595 Allowance for loan and lease losses..................................................... (199,237) (183,932) Loans and leases, net................................................................. 15,408,455 14,180,663 Premises and equipment, net................................................................ 336,740 319,082 Other assets............................................................................... 690,919 606,107 TOTAL ASSETS.......................................................................... $ 22,972,164 $ 21,246,562 LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Noninterest-bearing demand deposits........................................................ $ 2,122,241 $ 1,990,415 Savings and interest checking.............................................................. 1,411,331 1,376,260 Money rate savings......................................................................... 3,789,223 3,372,018 Other time deposits........................................................................ 8,764,634 8,215,221 Total deposits........................................................................ 16,087,429 14,953,914 Short-term borrowed funds.................................................................. 2,201,296 2,263,303 Long-term debt............................................................................. 2,641,290 2,051,767 Accounts payable and other liabilities..................................................... 286,718 248,409 TOTAL LIABILITIES..................................................................... 21,216,733 19,517,393 SHAREHOLDERS' EQUITY: Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding.......... -- -- Common stock, $5 par, 300,000,000 shares authorized, 107,698,079 issued and outstanding at June 30, 1997, and 109,297,489 at December 31, 1996..................................... 538,490 546,487 Additional paid-in capital................................................................. 63,999 134,758 Retained earnings.......................................................................... 1,136,009 1,038,067 Loan to employee stock ownership plan and unvested restricted stock........................ (1,819) (1,952) Net unrealized appreciation on securities available for sale, net of income taxes of $12,510 at June 30, 1997 and $8,247 at December 31, 1996................................ 18,752 11,809 TOTAL SHAREHOLDERS' EQUITY............................................................ 1,755,431 1,729,169 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $ 22,972,164 $ 21,246,562 The accompanying notes are an integral part of these consolidated financial statements.
3 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1997 1996 1997 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME Interest and fees on loans and leases............................ $355,006 $320,903 $687,275 $637,463 Interest and dividends on securities............................. 88,875 76,380 172,167 151,321 Interest on short-term investments............................... 646 144 904 376 Total interest income......................................... 444,527 397,427 860,346 789,160 INTEREST EXPENSE Interest on deposits............................................. 148,098 136,870 289,048 277,358 Interest on short-term borrowed funds............................ 32,092 27,472 59,063 57,008 Interest on long-term debt....................................... 34,882 25,762 64,981 47,836 Total interest expense........................................ 215,072 190,104 413,092 382,202 NET INTEREST INCOME................................................ 229,455 207,323 447,254 406,958 Provision for loan and lease losses.............................. 19,000 13,261 36,000 24,661 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES...... 210,455 194,062 411,254 382,297 NONINTEREST INCOME Service charges on deposit accounts.............................. 31,145 26,804 61,745 52,018 Mortgage banking income.......................................... 9,873 8,542 20,359 17,842 Trust income..................................................... 6,690 6,166 12,034 10,840 Agency insurance commissions..................................... 8,188 4,577 18,088 10,766 Other insurance commissions...................................... 3,149 2,566 6,208 5,174 Other nondeposit fees and commissions............................ 21,076 17,491 39,796 33,114 Securities gains (losses), net................................... 79 (154) 890 (162) Other noninterest income......................................... 6,988 7,092 13,581 12,481 Total noninterest income...................................... 87,188 73,084 172,701 142,073 NONINTEREST EXPENSE Personnel expense................................................ 78,947 75,787 160,005 150,698 Occupancy and equipment expense.................................. 28,749 25,091 55,525 50,215 Foreclosed property expense...................................... 363 348 936 1,092 Federal deposit insurance expense................................ 1,193 3,172 2,328 6,527 Other noninterest expense........................................ 58,524 49,073 110,024 94,583 Total noninterest expense..................................... 167,776 153,471 328,818 303,115 EARNINGS Income before income taxes....................................... 129,867 113,675 255,137 221,255 Provision for income taxes....................................... 43,831 37,508 86,033 73,237 Net income....................................................... 86,036 76,167 169,104 148,018 Preferred dividend requirements............................... -- -- -- 610 Income applicable to common shares............................ $ 86,036 $ 76,167 $169,104 $147,408 PER COMMON SHARE Net income: Primary....................................................... $ .78 $ .69 $ 1.52 $ 1.34 Fully diluted................................................. $ .77 $ .68 $ 1.52 $ 1.32 Cash dividends declared....................................... $ .27 $ .23 $ .54 $ .46 AVERAGE SHARES OUTSTANDING Primary.......................................................... 111,001,304 110,944,393 111,284,838 109,635,195 Fully diluted.................................................... 111,282,139 111,230,630 111,587,159 111,832,424 The accompanying notes are an integral part of these consolidated financial statements.
4 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
SHARES OF ADDITIONAL RETAINED COMMON PREFERRED COMMON PAID-IN EARNINGS STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL (DOLLARS IN THOUSANDS) BALANCE, DECEMBER 31, 1995, AS PREVIOUSLY REPORTED.................................... 103,357,440 $ 3,669 $ 516,787 $ 279,204 $ 874,403 $1,674,063 Merger with Regional Acceptance Corporation accounted for under the pooling of interests method of accounting........... 5,794,215 -- 28,971 (9,800) 18,108 37,279 BALANCE, DECEMBER 31, 1995, AS RESTATED....... 109,151,655 $ 3,669 $ 545,758 $ 269,404 $ 892,511 $1,711,342 Add (Deduct) Net income.................................. -- -- -- -- 148,018 148,018 Common stock issued......................... 1,189,406 -- 5,945 22,688 -- 28,633 Redemption of common stock.................. (5,451,000) -- (27,255) (125,306) -- (152,561) Net unrealized depreciation on securities available for sale, net of income taxes............................. -- -- -- -- (64,781) (64,781) Preferred stock cancellations and conversions.............................. 4,334,692 (3,669) 21,674 (18,005) -- -- Cash dividends declared by BB&T: Common stock............................. -- -- -- -- (51,759) (51,759) Preferred stock.......................... -- -- -- -- (610) (610) Other....................................... -- -- -- -- 748 748 BALANCE, JUNE 30, 1996........................ 109,224,753 $ -- $ 546,122 $ 148,781 $ 924,127 $1,619,030 BALANCE, DECEMBER 31, 1996.................... 109,297,489 $ -- $ 546,487 $ 134,758 $1,047,924 $1,729,169 Add (Deduct) Net income.................................. -- -- -- -- 169,104 169,104 Common stock issued......................... 2,489,190 -- 12,446 74,380 -- 86,826 Redemption of common stock.................. (4,088,600) -- (20,443) (145,139) -- (165,582) Net unrealized appreciation on securities available for sale, net of income taxes............................. -- -- -- -- 6,943 6,943 Cash dividends declared by BB&T: Common stock............................. -- -- -- -- (71,162) (71,162) Other....................................... -- -- -- -- 133 133 BALANCE, JUNE 30, 1997........................ 107,698,079 $ -- $ 538,490 $ 63,999 $1,152,942 $1,755,431 * 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.
5 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996 (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................................... $ 169,104 $ 148,018 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses......................................................... 36,000 24,661 Depreciation of premises and equipment...................................................... 20,821 18,360 Amortization of intangibles and mortgage servicing rights................................... 9,443 6,022 Accretion of negative goodwill.............................................................. (3,118) (3,119) Amortization of unearned stock compensation................................................. 133 748 Discount accretion and premium amortization on securities, net.............................. (327) 1,520 Loss (gain) on sales of securities, net..................................................... (890) 162 Loss (gain) on sales of loans and mortgage loan servicing rights, net....................... (5,059) 1,175 Loss (gain) on disposals of premises and equipment, net..................................... 99 (279) Loss (gain) on foreclosed property and other real estate, net............................... 302 493 Proceeds from sales of loans held for sale.................................................. 677,681 738,369 Purchases of loans held for sale............................................................ (263,017) (233,994) Origination of loans held for sale, net of principal collected.............................. (441,141) (554,084) Decrease (increase) in: Accrued interest receivable............................................................... (2,655) 13,028 Other assets.............................................................................. (30,861) (72,553) Increase (decrease) in: Accrued interest payable.................................................................. 8,661 3,405 Accounts payable and other liabilities.................................................... 17,161 18,451 Net cash provided by operating activities............................................... 192,337 110,383 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.......................................... 640,510 265,477 Proceeds from maturities of securities available for sale..................................... 607,742 1,116,494 Purchases of securities available for sale.................................................... (1,572,404) (907,827) Proceeds from maturities of securities held to maturity....................................... 18,848 21,279 Purchases of securities held to maturity...................................................... (5,962) (1,350) Leases made to customers...................................................................... (33,286) (24,475) Principal collected on leases................................................................. 26,645 10,499 Loan originations, net of principal collected................................................. (885,526) (610,863) Purchases of loans............................................................................ (108,606) (52,609) Net cash acquired in transactions accounted for under the purchase method..................... 39,426 -- Purchases and originations of mortgage servicing rights....................................... (12,356) (28,139) Proceeds from disposals of premises and equipment............................................. 3,588 1,298 Purchases of premises and equipment........................................................... (38,576) (28,716) Proceeds from sales of foreclosed property.................................................... 7,123 6,519 Proceeds from sales of other real estate held for development or sale......................... 3,053 3,123 Other, net.................................................................................... -- (6,836) Net cash used in investing activities................................................... (1,309,781) (236,126) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits...................................................................... 880,612 306,628 Net decrease in short-term borrowed funds..................................................... (89,967) (689,387) Proceeds from long-term debt.................................................................. 2,224,640 960,059 Repayments of long-term debt.................................................................. (1,675,722) (388,435) Net proceeds from common stock issued......................................................... 7,153 28,633 Redemption of common stock.................................................................... (165,582) (152,561) Cash dividends paid on common and preferred stock............................................. (59,014) (48,805) Net cash provided by financing activities............................................... 1,122,120 16,132 Net Increase (Decrease) in Cash and Cash Equivalents............................................ 4,676 (109,611) CASH AND CASH EQUIVALENTS at beginning of period................................................ 659,734 705,676 CASH AND CASH EQUIVALENTS at end of period...................................................... $ 664,410 $ 596,065 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.................................................................................... $ 408,752 $ 379,389 Income taxes................................................................................ 75,349 67,479 Noncash financing and investing activities: Restricted stock issued..................................................................... -- 88 Transfer of fixed assets to other real estate owned......................................... 989 -- Transfer of loans to foreclosed property.................................................... 5,390 5,068 Securitization of mortgage loans............................................................ -- 510,160 The accompanying notes are an integral part of these consolidated financial statements.
6 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Unaudited) A. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated balance sheets of BB&T Corporation and subsidiaries ("BB&T" or the "Corporation") as of June 30, 1997 and December 31, 1996; the consolidated statements of income for the six and three months ended June 30, 1997 and 1996; the consolidated statements of changes in shareholders' equity for the six months ended June 30, 1997 and 1996; and the consolidated statements of cash flows for the six months ended June 30, 1997 and 1996. The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T's latest annual report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain 1996 amounts have been reclassified to conform with statement presentations for 1997. The reclassifications have no effect on shareholders' equity or net income as previously reported. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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; and (9) changes occur in the securities markets. B. NATURE OF OPERATIONS BB&T is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations in North Carolina, South Carolina and Virginia primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. The commercial banking subsidiaries, Branch Banking and Trust Company ("BB&T"), Branch Banking and Trust Company of South Carolina ("BB&T-SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"), provide a wide range of traditional banking services for retail and commercial customers, including small and mid-size businesses, public agencies and local governments, trust companies and individuals. Substantially all of BB&T's loans are to businesses and individuals in the Carolinas and Virginia. Subsidiaries of the commercial banks offer lease financing to commercial businesses and municipal governments; investment alternatives, including discount brokerage services, annuities, mutual funds and government and municipal bonds; life and property and casualty insurance on an agency basis; and insurance premium financing. C. NEW ACCOUNTING PRONOUNCEMENTS In June of 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement, which became effective for transactions occurring after December 31, 1996, provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on the financial components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes all assets it does not control and derecognizes liabilities when extinguished. The statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," which 7 amends SFAS No. 125 by deferring the effective date of certain provisions of the statement by one year. BB&T adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997. The implementation of the statement and the related amendment did not have a material impact on the consolidated financial position or consolidated results of operations of BB&T. In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computing earnings per share previously found in Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share," and makes them 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 for all entities with complex capital structures. The statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatements 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. 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 is compliance with the disclosure requirements of SFAS No. 129, and, therefore, the implementation of the statement will not affect the capital structures disclosures made by BB&T. In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Comprehensive income is the 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. 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 additional disclosures to be made. D. MERGERS AND ACQUISITIONS COMPLETED ACQUISITIONS On March 1, 1997, BB&T completed the acquisition of Fidelity Financial Bankshares Corporation of Richmond, Virginia ("Fidelity"). Under the terms of the agreement, Fidelity's shareholders received .7137 shares of BB&T common stock in exchange for each share of Fidelity stock held, which resulted in the issuance of 1.6 million shares. The transaction was accounted for as a purchase and, therefore, the financial information contained herein includes data relevant to Fidelity since the date of acquisition. On May 20, 1997, BB&T completed its acquisition of Phillips Factors Corporation ("Phillips"), which purchases and manages accounts receivable primarily in the furniture, textiles, home furnishings-related and temporary staffing industries. The acquisition of Phillips, located in High Point, North Carolina, was accounted for as a purchase and, therefore, the financial information contained herein includes data relevant to Phillips since the date of acquisition. On July 1, 1997, BB&T completed its acquisition of United Carolina Bancshares Corporation ("UCB") of Whiteville, North Carolina in a transaction accounted for as a pooling of interests. Under the terms of the agreement, UCB shareholders received 1.135 shares of BB&T common stock in exchange for each share of UCB common stock held, which resulted in the issuance of 27.7 million shares. It is currently anticipated that BB&T will incur approximately $65 million in net nonrecurring merger-related costs associated with executing the merger with UCB. Given the efficiencies 8 available from an in-market merger, management also expects to achieve annual cost savings of approximately $70 million beginning in 1998. In conjunction with the merger, BB&T must divest of approximately $513 million in deposits to remain in compliance with anti-trust regulations. On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp., a financial company that specializes in loans to small commercial lawn care businesses across the country. Under the terms of the agreement, Refloat shareholders received approximately 375,000 shares of BB&T common stock. The acquisition was accounted for as a purchase and, therefore, the financial information contained herein includes data relevant to Refloat since the date of acquisition. PENDING ACQUISITIONS On May 1, 1997, BB&T announced plans to acquire 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 merger, which will be accounted for as a purchase, is expected to be completed during the third quarter of 1997. On May 6, 1997, BB&T announced plans to acquire Virginia First Financial Corporation of Petersburg, Virginia, ("VFFC") in a transaction valued at $148.4 million based on BB&T's closing stock price on May 5, 1997. VFFC shareholders will receive .60 shares of BB&T's common stock for each share of VFFC stock held to a maximum of $25.00 per share of VFFC common stock. Each shareholder will receive 30% of this value in cash and 70% in common stock. The merger, which will be accounted for as a purchase, is expected to be completed by the end of 1997. E. SUPPLEMENTAL CASH FLOW INFORMATION During the second 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION BB&T's total assets at June 30, 1997 were $23.0 billion, a $1.7 billion increase from the balance at December 31, 1996. The primary components of the increase were loans and leases, which grew $1.3 billion, securities available for sale, which increased $368.9 million, and other assets, which were up $84.8 million compared to year end 1996. These increases were partially offset by declines in other short-term investments of $13.6 million and securities held to maturity of $13.0 million. The pace of loan growth has increased during 1997. Loan growth in the periods presented was affected by securitizations. These securitizations were designed to provide BB&T with additional liquidity and flexibility in managing mortgage loan assets. Annualized loan growth, excluding the impact of these securitizations, was 16.4% comparing end of period loans at June 30, 1997 and December 31, 1996. Average loans, excluding the impact of the securitizations, increased 13.4% comparing the quarters ended June 30, 1997 and 1996. Growth in average loans has been healthy in all categories. Comparing the quarterly averages for the second quarters of 1997 and 1996, mortgage loans, excluding the impact of the loan securitizations, grew at a rate of 13.6%. Average commercial loans increased 15.3% over the same time frame and average consumer loans grew at a rate of 9.9%. Management attributes the growth in loans to the successful execution of the BB&T Sales Management System, which was applied to the commercial lending function during 1996. The BB&T Sales Management System utilizes extensive monitoring procedures and includes incentives for employees to pursue a healthy volume of high-quality, profitable loans. At June 30, 1997, securities available for sale, which totaled $5.5 billion, had unrealized appreciation, after tax, of $18.8 million compared to unrealized appreciation, after tax, of $11.8 million at December 31, 1996. The taxable equivalent yield on the entire securities portfolio during the second quarter was 6.92%, up slightly from 6.91% for the fourth quarter of 1996 and up from 6.63% for the second quarter of the prior year. During the fourth quarter of 1995, BB&T began to reshape the balance sheet by changing the mix of investments held. The primary result of this strategy was a reduction of holdings in U.S. 9 Treasuries last year, as such investments were replaced with securitized mortgage loans from BB&T's mortgage loan portfolio. The change in mix was undertaken to improve the overall yield of the securities portfolio, as reflected in these improved quarterly yields. The increase in other assets is composed primarily of goodwill recorded in conjunction with the purchases of Fidelity on March 1, 1997 and the purchase of Phillips on May 20, 1997. At June 30, 1997, BB&T reflected unamortized goodwill from these two mergers of $48.2 million. Significant fluctuations in liabilities included deposits, which increased $1.1 billion, or 7.6%, from the year-end 1996 balance and long-term debt, which rose $589.5 million, or 28.7% over the same time frame. The growth in deposits was derived from money rate savings, which increased $417.2 million, or 12.4% during the first six months of 1997 and time deposits, which increased $549.4 million, or 6.7%. The substantial growth in money rate savings reflects 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. Slower deposit growth in recent years, combined with the availability of cost-effective alternative funding sources, caused management to rely more heavily on nondeposit funding sources, such as Federal Home Loan Bank ("FHLB") advances and Federal funds purchased. Management is currently focusing on nontraditional funding sources, as well as transaction, savings and money market deposits, which are often more cost-effective than certificates of deposit. The growth in long-term debt resulted from increased borrowings from the FHLB. These FHLB advances composed 54.4% of total long-term debt at June 30, 1997. Such borrowings are heavily utilized because they are the most cost-effective long-term funding source and provide BB&T with the flexibility to structure the debt to manage interest rate risk and liquidity as needed. ASSET QUALITY Nonperforming assets were $79.8 million at June 30, 1997, compared to $80.2 million at December 31, 1996. The allowance for losses as a percentage of loans and leases was 1.26% at both June 30, 1997 and December 31, 1996, and nonperforming assets as a percentage of loan-related assets were .50% at June 30, 1997 compared to .55% at December 31, 1996. Loans 90 days or more past due and still accruing interest totaled $25.3 million compared to a prior year-end balance of $32.1 million. Net charge-offs as a percentage of average loans and leases increased from .31% in the second quarter of 1996 to .35% in the second quarter of 1997. The overall increases in net charge-offs were driven by higher charge-offs in consumer lending. Management considers the current charge-off level to be within reasonable norms from an historical perspective. The provision for loan and lease losses for the first six months of 1997 was $36.0 million compared to $24.7 million in the first six months of 1996. The increase in the provision reflects higher net charge-offs incurred during recent quarters and accelerating growth in loans. Regional Acceptance Corporation ("Regional Acceptance"), BB&T's nonstandard automobile finance subsidiary, has experienced higher-than-expected net charge-offs in recent quarters which is indicative of the current nature of the used automobile financing industry. Management believes that there are long-term benefits to be realized from the acquisition of Regional Acceptance and that asset quality will improve during the remainder of 1997. The current level of net charge-offs is not expected to have a material impact on BB&T's consolidated financial condition or consolidated results of operations. 10 Asset quality statistics relevant to the last five calendar quarters are presented in the accompanying table. ASSET QUALITY ANALYSIS
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN & LEASE LOSSES Beginning balance.............................................. $193,987 $183,932 $184,203 $181,269 $178,885 Allowance for acquired loans................................... -- 3,811 -- -- -- Provision for loan and lease losses............................ 19,000 17,000 15,500 13,500 13,261 Net charge-offs................................................ (13,750) (10,756) (15,771) (10,566) (10,877) Ending balance.............................................. $199,237 $193,987 $183,932 $184,203 $181,269 RISK ASSETS Nonaccrual loans and leases.................................... $ 59,928 $ 57,681 $ 59,717 $ 58,238 $ 63,703 Foreclosed real estate......................................... 10,055 9,938 9,023 7,166 4,926 Other foreclosed property...................................... 9,799 13,418 11,429 8,609 7,426 Nonperforming assets........................................ $ 79,782 $ 81,037 $ 80,169 $ 74,013 $ 76,055 Loans 90 days or more past due and still accruing.............. $ 25,337 $ 27,999 $ 32,052 $ 28,222 $ 18,025 ASSET QUALITY RATIOS Nonaccrual loans and leases as a percentage of total loans and leases......................................................... .38% .38% .41% .41% .45% Nonperforming assets as a percentage of: Total assets................................................... .35 .37 .38 .35 .37 Loans and leases plus foreclosed property...................... .50 .53 .55 .52 .54 Net charge-offs as a percentage of average loans and leases...... .35 .29 .44 .30 .31 Allowance for loan and lease losses as a percentage of loans and leases......................................................... 1.26 1.26 1.26 1.31 1.28 Ratio of allowance for loan and lease losses to: Net charge-offs................................................ 3.61X 4.45x 2.93x 4.38x 4.14x Nonaccrual loans and leases.................................... 3.32 3.36 3.08 3.16 2.85
All items referring to loans and leases include loans held for sale and are net of unearned income. Applicable ratios are annualized. MARKET RISK MANAGEMENT The effective management of market risk is essential to achieving the Corporation's objectives. As a financial institution, BB&T's 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 streams in those accounts to produce consistent net income during adverse interest rate environments. The Asset/Liability Management Committee ("ALCO") monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk on the balance sheet. 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 assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, while achieving desired growth in earnings and total assets. 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 conservative standards. The majority of assets and liabilities of financial institutions are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in 11 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-based asset/liability model that incorporates current volumes and rates, maturity streams, repricing opportunities and anticipated growth. The model calculates an earnings estimate based on current portfolio balances and rates, less any balances that are scheduled to reprice or mature. Balances and rates that will replace the previous balances and any anticipated growth are added. This level of detail is needed to correctly simulate the effect that changes in interest rates and anticipated balances will have on the earnings of BB&T. This method is subject to the assumptions that underlie the process, but it provides a better illustration of true earnings potential than other analyses such as static or dynamic gap. The asset/liability management process involves various analyses. Management determines the most likely outlook for the economy and interest rates by analyzing environmental factors including regulatory changes, monetary and fiscal policies and the overall state of the economy. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are all considered, given the current environmental situation. Management proceeds by analyzing interest rate sensitivity, risk-based capital requirements and results from past strategies to develop a strategy to meet performance goals. Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point change over six months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. At June 30, 1997, the sensitivity of BB&T's net interest income to changes in interest rates was very low, as a 150 basis point increase in interest rates would reduce net interest income by less than 2%. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS BB&T utilizes a variety of derivative financial instruments to manage various financial risks. These instruments include financial forward and futures contracts, options written and purchased, interest rate caps and floors and interest rate swaps. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose BB&T to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. 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 June 30, 1997, BB&T had outstanding interest rate swaps, caps and floors with notional amounts totaling $1.5 billion. The estimated fair value of open contracts used for risk management purposes at June 30, 1997 reflected pretax net unrealized gains of $7.5 million. BB&T uses these derivatives as synthetic instruments to hedge specified assets or groups of assets, liabilities or groups of liabilities, forward commitments and anticipated transactions. BB&T's derivatives are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and fixed rate notes. The net interest payable or receivable on interest rate swaps and floors that are designated as hedges is accrued and recognized as an adjustment to the interest income or expense of the related asset or liability. For interest rate forwards, futures and options qualifying as a hedge, gains and losses are deferred and are recognized in income as an adjustment of yield. Gains and losses from early terminations of derivatives are deferred and amortized as yield adjustments over the shorter of the remaining term of the hedged asset or liability or the remaining term of the derivative instrument. Upon disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any gains or losses are 12 recognized in income. Derivative financial instruments that fail to qualify as a hedge are carried at fair value with gains and losses recognized in current earnings. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. Credit risk arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with strong credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the 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 June 30, 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. The following tables set forth certain information concerning BB&T's interest rate swaps and floors at June 30, 1997: INTEREST RATE SWAPS, CAPS AND FLOORS JUNE 30, 1997
NOTIONAL RECEIVE PAY NET UNREALIZED TYPE AMOUNT RATE RATE GAINS (LOSSES) (DOLLARS IN THOUSANDS) Receive fixed swaps............................................... $ 727,000 6.66% 5.82% $ 4,440 Pay fixed swaps................................................... 343,980 5.72 5.56 1,984 Basis swaps....................................................... 50,000 5.56 5.46 (3) Caps & floors..................................................... 415,000 -- -- 1,120 Total............................................................. $1,535,980 6.32% 5.72% $ 7,541 RECEIVE FIXED PAY FIXED BASIS SWAPS, YEAR-TO-DATE ACTIVITY SWAPS SWAPS CAPS AND FLOORS TOTAL Balance, December 31, 1996........................................ $ 487,000 $ 304,099 $ 355,000 $1,146,099 Additions......................................................... 250,000 208,400 360,000 818,400 Maturities/amortizations.......................................... (10,000) (168,519) -- (178,519) Terminations...................................................... -- -- (250,000) (250,000) Balance, June 30, 1997............................................ $ 727,000 $ 343,980 $ 465,000 $1,535,980 ONE YEAR ONE TO FIVE AFTER FIVE MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL Receive fixed swaps............................................... $ 25,000 $ 202,000 $ 500,000 $ 727,000 Pay fixed swaps................................................... 6,818 324,657 12,505 343,980 Basis swaps....................................................... 50,000 -- -- 50,000 Caps & floors..................................................... -- 355,000 60,000 415,000 Total............................................................. $ 81,818 $ 881,657 $ 572,505 $1,535,980
* Maturities are based on full contract extensions. CAPITAL ADEQUACY AND RESOURCES The maintenance of appropriate levels of capital is a management priority. Capital adequacy is monitored on an ongoing basis by management. BB&T's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide future growth and compliance with all regulatory standards. Total shareholders' equity was $1.8 billion at June 30, 1997 and $1.7 billion at December 31, 1996. As a percentage of total assets, total shareholders' equity was 7.6% at June 30, 1997, down from 8.1% at December 31, 1996. BB&T's book 13 value per common share at June 30, 1997 was $16.30, versus $15.82 at December 31, 1996. Average shareholders' equity as a percentage of average assets was 8.1% for both the six months ended June 30, 1997 and June 30, 1996. Tier 1 and total risk-based capital ratios at June 30, 1997 were 10.5% and 14.9%, respectively. The leverage ratio was 7.3% at the end of the second quarter. The comparable ratios at the end of 1996 were 11.7%, 14.7% and 8.0%, respectively. These capital ratios measure the capital to risk-weighted assets and off-balance sheet items as defined by FRB guidelines. An 8.00% minimum of total capital to risk-weighted assets is required. One-half of the 8.00% minimum must consist of tangible common shareholders' equity (Tier 1 capital) under regulatory guidelines. The leverage ratio, established by the FRB, measures Tier 1 capital to average total assets less goodwill and must be maintained in conjunction with the risk-based capital standards. The regulatory minimum for the leverage ratio is 3.00%. CAPITAL ADEQUACY RATIOS
1997 1996 SECOND FIRST FOURTH THIRD SECOND QUARTER QUARTER QUARTER QUARTER QUARTER Average equity to average assets........................................ 7.91% 8.23% 8.13% 7.93% 8.00% Equity to assets at period end.......................................... 7.64 7.95 8.14 7.85 7.81 Risk-based capital ratios: Tier 1 capital........................................................ 10.5 10.7 11.7 11.3 11.9 Total capital......................................................... 14.9 13.6 14.7 14.3 15.0 Leverage ratio.......................................................... 7.3 7.8 8.0 7.9 7.9
Future strategies for managing the balance sheet include maintaining an equity to asset ratio of 7.0% to 8.0%. ANALYSIS OF RESULTS OF OPERATIONS BB&T recorded net income for the first six months of 1997 totaling $169.1 million, compared to $148.0 million during the first six months of 1996. On a fully diluted per share basis, earnings for the six months ended June 30, 1997 were $1.52, compared to $1.32 for the same period in 1996. The net income and the net income per share amounts increased at rates of 14.2% and 15.2%, respectively. BB&T's earnings produced a return on average assets of 1.56% and a return on average equity of 19.31% for the six months compared to prior year ratios of 1.47% and 18.12%, respectively. For the second quarter of 1997, net income was $86.0 million, compared to $76.2 million recorded in the second quarter of 1996. On a fully diluted per share basis, net income totaled $.77 for the quarter, up from $.68 in 1996. The return on average assets for the quarter was 1.54% and the return on average equity was 19.46. BB&T's growth in earnings resulted from three factors. First, the net interest margin improved from 4.44% for the first six months of 1996 to 4.58% for the first six months of 1997. The mortgage loan securitizations discussed above and efforts to replace lower-yielding securities as they matured, as well as the use of more cost-effective funding sources, supported the increase. Second, the 21.6% growth in noninterest income for the six months ended June 30, 1997 compared to the same period in 1996 demonstrates the successful execution of the BB&T Sales Management System. Management has emphasized the percentage of customer households with five or more services as an objective indicator of the success of the BB&T Sales Management System and has determined that growth in this indicator produces a higher noninterest income. When the system was implemented, 8% of customer households had five or more services. By the end of 1996, this percentage had increased to 18%, leading management to target 25% for the end of 1997. At June 30, 1997, the percentage had increased to approximately 23% compared to an industry average of 10%. Third, BB&T has controlled noninterest expenses following the 1995 merger of Southern National Corporation and BB&T Financial Corporation as shown by the improvement in the efficiency ratio to 51.1% from 53.4% for the six months ended June 30, 1997 and 1996, respectively. BB&T's market area continues to grow at a healthy, sustainable rate. The core business has shown positive trends each of the nine quarters since the merger of Southern National Corporation and BB&T Financial Corporation. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $469.9 million for the first six months of 1997 compared to $423.5 million for the same period in 1996, an 11.0% increase. For the six months ended June 30, 1997 and 14 1996, average interest-earning assets increased $1.5 billion, or 7.7%, to $20.6 billion, while average interest-bearing liabilities increased by $1.4 billion. As mentioned previously, BB&T also experienced substantial improvement in the net interest margin. The 14 basis point increase in margin was primarily driven by an improved mix of earning assets and liabilities. Average loans increased $1.1 billion and average securities increased $352.3 million driving the increase in margin. Rates also favorably affected the margin during the first six months. By asset category, there was a 35 basis point increase in yields from securities, combined with a 3 basis point decrease in rates paid on deposits, a 4 basis point decline in rates paid on short-term borrowed funds and a 12 basis point decrease in rates paid on long-term debt. These fluctuations reflect the replacement of lower-yielding investments as they matured and the active management of the securities portfolio, as well as an overall focus to manage the balance sheet in a manner to maximize profits. Net interest income on a fully taxable equivalent ("FTE") basis for the second quarter was $242.0 million compared to $215.8 million for the same period in 1996, a 12.2% increase. Over the same time frame, average interest-earning assets increased $1.8 billion, or 9.6%, to $21.1 billion, while average interest-bearing liabilities also increased by $1.8 billion. 15 The following tables demonstrate fluctuations in net interest income and the related yields for the six months and the second quarter compared to comparable periods last year, and details the portions of these changes caused by changes in rates versus changes in volumes. NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE) (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5)................... $ 5,186,142 $ 4,809,201 6.85% 6.46% $ 177,608 $ 155,394 $ 22,214 States and political subdivisions................ 132,768 157,386 8.80 9.11 5,842 7,167 (1,325) Total securities (5)........ 5,318,910 4,966,587 6.90 6.55 183,450 162,561 20,889 Other earning assets (2)........ 32,990 14,170 5.73 5.66 938 399 539 Loans and leases, net of unearned income (1)(3)(4)(5).................. 15,245,661 14,145,466 9.22 9.13 698,555 642,714 55,841 Total earning assets........ 20,597,561 19,126,223 8.62 8.45 882,943 805,674 77,269 Non-earning assets.......... 1,292,153 1,151,216 TOTAL ASSETS.............. $21,889,714 $20,277,439 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings and interest checking deposits.................... $ 1,435,978 $ 1,557,088 1.91 2.02 13,577 15,654 (2,077) Money rate savings............ 3,606,264 2,981,262 2.71 2.49 48,522 36,840 11,682 Time deposits................. 8,365,051 8,185,337 5.47 5.52 226,949 224,864 2,085 Total interest-bearing deposits.................. 13,407,293 12,723,687 4.35 4.38 289,048 277,358 11,690 Short-term borrowed funds....... 2,271,100 2,172,303 5.24 5.28 59,063 57,008 2,055 Long-term debt.................. 2,282,761 1,645,608 5.72 5.84 64,981 47,836 17,145 Total interest-bearing liabilities............... 17,961,154 16,541,598 4.64 4.65 413,092 382,202 30,890 Demand deposits............. 1,891,832 1,823,309 Other liabilities........... 270,773 269,849 Shareholders' equity........ 1,765,955 1,642,683 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $21,889,714 $20,277,439 Average interest rate spread.... 3.98 3.80 Net yield on earning assets..... 4.58% 4.44% $ 469,851 $ 423,472 $ 46,379 Taxable equivalent adjustment... $ 22,597 $ 16,514 CHANGE DUE TO FULLY TAXABLE EQUIVALENT RATE VOLUME ASSETS Securities (1): U.S. Treasury, government and other (5)................... $ 9,542 $12,672 States and political subdivisions................ (244) (1,081) Total securities (5)........ 9,298 11,591 Other earning assets (2)........ 5 534 Loans and leases, net of unearned income (1)(3)(4)(5).................. 7,281 48,560 Total earning assets........ 16,584 60,685 Non-earning assets.......... TOTAL ASSETS.............. LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings and interest checking deposits.................... (903) (1,174) Money rate savings............ 3,590 8,092 Time deposits................. (2,182) 4,267 Total interest-bearing deposits.................. 505 11,185 Short-term borrowed funds....... (358) 2,413 Long-term debt.................. (874) 18,019 Total interest-bearing liabilities............... (727) 31,617 Demand deposits............. Other liabilities........... Shareholders' equity........ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... Average interest rate spread.... Net yield on earning assets..... $17,311 $29,068 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 using statutory 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 the periods shown, are included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. (5) Includes assets held for sale or available for sale at amortized cost. 16 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE) (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5)................... $ 5,343,985 $ 4,821,477 6.87% 6.51% $ 91,844 $ 78,509 $ 13,335 States and political subdivisions................ 127,828 153,754 8.81 9.01 2,814 3,462 (648) Total securities (5)........ 5,471,813 4,975,231 6.92 6.63 94,658 81,971 12,687 Other earning assets (2)........ 45,936 10,780 5.82 5.78 667 155 512 Loans and leases, net of unearned income (1)(3)(4)(5).................. 15,584,414 14,269,580 9.31 9.13 361,785 323,747 38,038 Total earning assets........ 21,102,163 19,255,591 8.68 8.48 457,110 405,873 51,237 Non-earning assets.......... 1,315,209 1,145,087 TOTAL ASSETS.............. $22,417,372 $20,400,678 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings deposits.............. $ 1,435,190 $ 1,531,793 1.89 1.95 6,773 7,429 (656) Money rate savings............ 3,722,238 3,007,011 2.78 2.40 25,784 17,967 7,817 Time deposits................. 8,464,985 8,201,556 5.47 5.47 115,541 111,474 4,067 Total interest-bearing deposits.................. 13,622,413 12,741,060 4.36 4.32 148,098 136,870 11,228 Short-term borrowed funds....... 2,403,603 2,129,143 5.36 5.19 32,092 27,472 4,620 Long-term debt.................. 2,403,913 1,779,639 5.81 5.82 34,882 25,762 9,120 Total interest-bearing liabilities............... 18,429,929 16,649,842 4.68 4.59 215,072 190,104 24,968 Demand deposits............. 1,943,100 1,848,295 Other liabilities........... 270,783 270,590 Shareholders' equity........ 1,773,560 1,631,951 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $22,417,372 $20,400,678 Average interest rate spread.... 4.00 3.89 Net yield on earning assets..... 4.59% 4.49% $ 242,038 $ 215,769 $ 26,269 Taxable equivalent adjustment... $ 12,583 $ 8,446 CHANGE DUE TO FULLY TAXABLE EQUIVALENT RATE VOLUME ASSETS Securities (1): U.S. Treasury, government and other (5)................... $ 4,490 $ 8,845 States and political subdivisions................ (79) (569) Total securities (5)........ 4,411 8,276 Other earning assets (2)........ 1 511 Loans and leases, net of unearned income (1)(3)(4)(5).................. 6,720 31,318 Total earning assets........ 11,132 40,105 Non-earning assets.......... TOTAL ASSETS.............. LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings deposits.............. (197) (459) Money rate savings............ 3,076 4,741 Time deposits................. 166 3,901 Total interest-bearing deposits.................. 3,045 8,183 Short-term borrowed funds....... 900 3,720 Long-term debt.................. (9) 9,129 Total interest-bearing liabilities............... 3,936 21,032 Demand deposits............. Other liabilities........... Shareholders' equity........ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... Average interest rate spread.... Net yield on earning assets..... $ 7,196 $19,073 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 using statutory 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 the periods shown, are included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans is included as income. (5) Includes assets held for sale or available for sale at amortized cost. NONINTEREST INCOME Noninterest income for the six months ended June 30, 1997 was $172.7 million, compared to $142.1 million for the same period in 1996. BB&T experienced positive development in all areas of noninterest income. Service charges on deposits, mortgage banking activities, general and other insurance commissions and trust income all showed strong gains during the period. The percentage of total revenues, calculated as net interest income plus noninterest income excluding securities gains or losses, derived from noninterest (fee-based) income for the six months ended June 30, 1997 was 26.8%, up from 25.1% for the first six months of 1996. Management anticipates continued growth in noninterest income, with an ultimate target ratio of noninterest income to total revenues of 30%. 17 For the second quarter of 1997, noninterest income totaled $87.2 million, up $14.1 million, or 19.3% from the balance for the same period in 1996. Service charges on deposits grew for the first six months in 1997 compared to 1996, increasing by $9.7 million, or 18.7%. The primary factor contributing to the significant growth in service charges on deposits was increased fees on deposit services that were effective the first quarter of 1997. The largest components of the growth within service charges on deposits included fees on commercial transaction accounts, service charges on personal accounts and overdraft charges. For the second quarter of 1997, service charges on deposits increased $4.3 million, or 16.2% compared to the same period in 1996. Trust income grew $1.2 million, or 11.0%, for the six months ended June 30, 1997 compared to the same period in 1996 because of growth in total assets under management in the trust department. For the second quarter, trust income increased $524,000, or 8.5%. Agency insurance commissions increased significantly, up $7.3 million, or 68.0% in the first half of 1997, compared to the six month period of 1996. The growth in agency insurance commissions resulted from increases in property and casualty insurance commissions and insurance fees and charges. Also, the acquisitions of Boyle-Vaughan Associates, Inc., the William Goldsmith Agency Inc. and the C. Dan Joyner Insurance Agency, all in South Carolina, were completed during the fourth quarter of 1996. These acquisitions were accounted for as purchases, therefore the accounts of these agencies are included in operating results only since the dates of acquisition. With these acquisitions, BB&T has assembled the largest independent insurance agency system in the Carolinas. Management anticipates continued growth in agency insurance commissions and will continue to pursue acquisitions of quality independent agencies. For the second quarter of 1997, agency insurance commissions increased $3.6 million, or 78.9% from the corresponding period of 1996. Income from mortgage banking activities increased $2.5 million, or 14.1% for the six months ended June 30, 1997 compared to the same period in 1996. The increase resulted from higher mortgage loan servicing fees. For the second quarter of 1997, mortgage banking income increased $1.3 million or 15.6% from the 1996 period. Other nondeposit fees and commissions increased by $6.7 million, or 20.2% to a level of $39.8 million for the six months ended June 30, 1997 compared with $33.1 million for the first six months of 1996. The primary components generating the increase in nondeposit fees and commissions were ATM and Point-of-Sale fees, which increased $2.8 million and bankcard income, which also increased $2.8 million. For the second quarter of 1997, other nondeposit fees and commissions increased by $3.6 million, or 20.5% compared with the same period in 1996. Other income increased $1.1 million, or 8.8%, for the first six months of 1997 because of income on life insurance products held. BB&T purchased $55 million in such products during the second half of 1996. For the second quarter of 1997, other income decreased $104,000, or 1.5% compared to 1996. NONINTEREST EXPENSE Noninterest expenses totaled $328.8 million for the first six months of 1997 compared to $303.1 million for the same period a year ago. The 8.5% increase resulted from increases in personnel expenses, occupancy expenses and other noninterest expenses, partially offset by reduced Federal deposit insurance premiums. For the second quarter, noninterest expense totaled $167.8 million, a $14.3 million, or 9.3% increase over the second quarter of the prior year. Personnel expense, the largest component of noninterest expense, increased $9.3 million, or 6.2%, compared to the second quarter of 1996. The increase was caused by annual compensation adjustments for exempt employees, which increased $4.7 million, and performance incentive programs, which increased $1.8 million. For the quarter, personnel expense increased $3.2 million, or 4.2% over the 1996 period. Occupancy and equipment expense for the six months ended June 30, 1997, increased $5.3 million, or 10.6%, compared to 1996. Increased rent expense for data processing and other equipment accounted for $1.4 million, and additional expenses associated with the maintenance of ATMs added $1.9 million in costs. For the second quarter of 1997, occupancy and equipment expense totaled $28.7 million, which was an increase of $3.7 million, or 14.6%, from the prior year. Federal deposit insurance expense decreased $4.2 million, or 64.3%, for the six months ended June 30, 1997, compared to the same period in the prior year. During 1995 and 1996, significant legislation was passed affecting deposit insurance premiums. Effective January 1, 1996, insurance premiums charged on FDIC-insured deposits were eliminated because of the recapitalization of the Bank Insurance Fund ("BIF"). BB&T continued to pay insurance premiums on Savings Association Insurance Fund ("SAIF")-insured deposits during 1996 through the third quarter, when a one-time SAIF assessment was levied on all banks with SAIF-insured deposits. BB&T's special assessment totaled approximately $33 million before taxes. 18 The special assessment served to recapitalize the SAIF, and, therefore, eliminated insurance premiums on SAIF-insured deposits. Effective January 1, 1997, BB&T began paying $.0648 per $100 of SAIF-insured deposits and $.0130 per $100 of BIF-insured deposits to service the Financing Corporation ("FICO") bonds. These payments totaled $2.3 million during the first six months of 1997. For the second quarter of 1997, Federal deposit insurance expense totaled $1.2 million, down $2.0 million, or 62.4% from 1996. Other noninterest expenses for the first six months of 1997 increased $15.4 million, or 16.3% from 1996. This increase was primarily because of increases in advertising, public relations and other marketing expense, totaling $2.8 million, increased loan and lease expenses of $2.0 million and professional services, which increased $5.6 million. The increased advertising costs are related to a marketing program to increase awareness of BB&T's brand identity. While it is difficult to measure the impact of advertising costs, and any program takes time to be effective, studies have noted an increase in BB&T's brand identity and in the "switch preference" of customers of competitors. Additional loan and lease expenses resulted primarily from bankcard and merchant interchange expenses. The increases in professional services expense are related to the use of outside consulting firms to analyze strategies to maximize noninterest income and to assist in the Year 2000 project. For the second quarter, BB&T's other noninterest expenses totaled $58.5 million, up $9.5 million, or 19.3% because of increases in the expense categories noted above. BB&T's efficiency ratio improved to 51.1% for the first six months of 1997 compared to 53.4% for the same period in 1996. For the second quarter of 1997, the efficiency ratio was 50.9% compared to 53.0% in 1996. BB&T's efficiency ratio places it in the top 10% of the banking industry. PROVISION FOR INCOME TAXES The provision for income taxes increased to $86.0 million for the first six months of 1997 compared to $73.2 million recorded in the first six months of 1996. The provision increased $12.8 million, or 17.5%, because of higher pretax income. Effective tax rates were 33.7% and 33.1% for the six months ended June 30, 1997 and 1996, respectively. For the second quarter, the provision for income taxes totaled $43.8 million, resulting in an effective tax rate of 33.8%. PROFITABILITY MEASURES
1997 1996 SECOND FIRST FOURTH THIRD SECOND QUARTER QUARTER QUARTER QUARTER QUARTER Return on average assets................................................ 1.54% 1.58% 1.51% 1.08% 1.50% Return on average common equity......................................... 19.46 19.16 18.54 13.55 18.77 Net interest margin..................................................... 4.59 4.56 4.52 4.42 4.49 Efficiency ratio (taxable equivalent)*.................................. 50.9 51.3 54.0 53.3 53.0
_____________ * Excludes securities gains (losses), foreclosed property expense and nonrecurring items. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The nature of the business of BB&T's banking subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of BB&T are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of BB&T. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - "Computation of Earnings Per Share" is included herein. Exhibit 27 - "Financial Data Schedule" is included in the electronically-filed document as required. (b) BB&T filed a Form 8-K under Item 5 on January 14, 1997, to report the results of operations and financial condition as of December 31, 1996. BB&T filed a Form 8-K under Item 5 on April 11, 1997, to report the results of operations and financial condition as of June 30, 1997. BB&T filed a Form 8-K under Item 5 on May 23, 1997, to report a change in the corporate name from Southern National Corporation to BB&T Corporation. This change was effective May 19, 1997. BB&T filed a Form 8-K under Item 5 on June 11, 1997, which included an underwriting agreement related to $250 million in subordinated notes due 2007. BB&T filed a Form 8-K under Item 5 on July 11, 1997, to report the results of operations and financial condition as of June 30, 1997. BB&T filed a Form 8-K under Item 2 on July 14, 1997 to report that completion of BB&T's acquisition of United Carolina Bancshares Corporation, completed July 1, 1997. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BB&T Corporation (Registrant) Date: August 13, 1997 By: /s/ Scott E. Reed ---------------------------------------------- Scott E. Reed, Senior Executive Vice President and Chief Financial Officer Date: August 13, 1997 By: /s/ Sherry A. Kellett --------------------------------------------- Sherry A. Kellett, Executive Vice President and Controller (Principal Accounting Officer) 21 EX-11 2 EXHIBIT 11 EXHIBIT 11
BB&T CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Periods as Indicated For the Three Months For the Six Months ended June 30, ended June 30, 1997 1996 1997 1996 (Dollars in thousands, except per share data) Primary Earnings Per Share: Weighted average number of common shares outstanding during the period ................................. 108,762,982 109,266,445 109,077,939 107,982,568 Add- Dilutive effect of outstanding options (as determined by application of treasury stock method) ....................................................... 2,170,441 1,521,628 2,160,770 1,510,049 Issuance of additional shares under share repurchase agreement, contingent upon market price ....................... 67,881 156,320 46,129 142,578 Weighted average number of common shares, as adjusted .......... 111,001,304 110,944,393 111,284,838 109,635,195 Net income ..................................................... $ 86,036 $ 76,167 $ 169,104 $ 148,018 Less-Preferred dividend requirement ............................ -- -- -- 610 Income available for common shares ............................. $ 86,036 $ 76,167 $ 169,104 $ 147,408 Primary earnings per share ..................................... $ .78 $ .69 $ 1.52 $ 1.34 Fully Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period ................................. 108,762,982 109,266,445 109,077,939 107,982,568 Add- Shares issuable assuming conversion of convertible preferred stock ........................................................ -- -- -- 1,887,620 Dilutive effect of outstanding options (as determined by application of treasury stock method) ...................... 2,451,276 1,807,865 2,463,091 1,819,658 Issuance of additional shares under share repurchase agreement, contingent upon market price ....................... 67,881 156,320 46,129 142,578 Weighted average number of common shares, as adjusted .......... 111,282,139 111,230,630 111,587,159 111,832,424 Net income ..................................................... $ 86,036 $ 76,167 $ 169,104 $ 148,018 Fully diluted earnings per share ............................... $ .77 $ .68 $ 1.52 $ 1.32
EX-27 3 EXHIBIT 27
9 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 647,182 10,862 6,366 0 5,505,640 111,737 114,936 15,861,955 199,237 22,972,164 16,087,429 2,201,296 286,718 2,641,290 0 0 538,490 1,216,941 22,972,164 687,275 172,167 904 860,346 289,048 413,092 447,254 36,000 890 328,818 255,137 255,137 0 0 169,104 1.52 1.52 4.58 59,928 25,337 0 0 183,932 31,499 6,993 199,237 199,237 0 28,332
-----END PRIVACY-ENHANCED MESSAGE-----