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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended:
December 31, 1998
Commission File Number: 1-10853
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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)
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(336) 733-2000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $5 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by references in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1999, was approximately $10.9 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 1999, was
289,973,890. No shares of preferred stock were outstanding at January 31,
1999.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 27, 1999, are incorporated by reference in
Part III of this report.
The Exhibit Index begins on page 89
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(b)
Current Report on Form 8-K filed during the fourth quarter of
1998.
Type Date Filed Reporting Purpose
---- ---------- -----------------
Item 5. October 14, 1998 Report results of operations and financial
condition for the 3rd Quarter of 1998.
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* The information required by Item 10 is incorporated herein by
reference to the information that appears under the headings
"Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy
Statement for the 1999 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by
reference to the information that appears under the headings
"Compensation of Executive Officers", "Retirement Plans" and
"Compensation Committee Report on Executive Compensation" in
the Registrant's Proxy Statement for the 1999 Annual Meeting
of Shareholders.
The information required by Item 12 is incorporated herein by
reference to the information that appears under the headings
"Security Ownership of Directors and Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in
the Registrant's Proxy Statement for the 1999 Annual Meeting
of Shareholders.
The information required by Item 13 is incorporated herein by
reference to the information that appears under the headings
"Compensation Committee Interlocks and Insider Participation"
and "Transactions with Executive Officers and Directors" in
the Registrant's Proxy Statement for the 1999 Annual Meeting
of Shareholders.
3
DESCRIPTION OF BUSINESS
General
BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding
company headquartered in Winston-Salem, North Carolina. BB&T conducts its
operations in North Carolina, South Carolina, Virginia, Maryland and
Washington, D.C. primarily through its commercial banking subsidiaries and, to
a lesser extent, through its other subsidiaries. At December 31, 1998, the
principal assets of BB&T included all of the outstanding shares of common
stock of Branch Banking and Trust Company, headquartered in Winston-Salem,
North Carolina; BB&T Financial Corporation of South Carolina, based in
Greenville, South Carolina, which in turn owns all the outstanding shares of
Branch Banking and Trust Company of South Carolina; BB&T Financial Corporation
of Virginia, located in Virginia Beach, Virginia, which in turn owns all the
outstanding shares of Branch Banking and Trust Company of Virginia; and
Franklin National Bank of Washington, D.C. BB&T also owns all of the
outstanding shares of common stock of Regional Acceptance Corporation of
Greenville, North Carolina; Craigie Incorporated of Richmond, Virginia;
Refloat Incorporated of Mount Airy, North Carolina; and Phillips Factors
Corporation of High Point, North Carolina.
Significant Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was
chartered in 1872 and is the oldest bank in North Carolina. At December 31,
1998, BB&T-NC operated through 347 banking offices throughout North Carolina
and 28 offices in Maryland. BB&T-NC's principal subsidiaries include BB&T
Leasing Corp., based in Charlotte, North Carolina, which specializes in lease
financing to commercial businesses; BB&T Investment Services, Inc., located in
Charlotte, North Carolina, which offers nondeposit investment alternatives,
including discount brokerage services, fixed-rate and variable-rate annuities,
mutual funds and government and municipal bonds; BB&T Insurance Services,
Inc., headquartered in Raleigh, North Carolina, which, according to a report
published by Business Insurer Magazine, is the 16th largest independent
insurance agency network in the country; and W.E. Stanley & Company, Inc., an
actuarial and employee benefits consulting firm headquartered in Greensboro,
North Carolina.
BB&T-NC has a number of additional subsidiaries, including Prime Rate
Premium Finance Corporation, Inc. ("Prime Rate"), located in Florence, South
Carolina, which provides insurance premium financing and services to customers
in Virginia and the Carolinas; and Farr Associates, Inc., a behavioral science
consulting firm located in High Point, North Carolina, that provides employee
development and leadership training services to businesses. BB&T-NC also owns
51% of AutoBase Information Systems, Inc., ("AutoBase") a Charlotte, North
Carolina-based company that uses advanced technologies to simplify the car-
buying and selling process for consumers and automotive dealers.
Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 90
banking offices at December 31, 1998. Branch Banking and Trust Company of
Virginia ("BB&T-VA") operated 59 banking offices in Virginia at December 31,
1998. Franklin National Bank ("Franklin"), acquired on July 1, 1998, operates
nine branch offices in the metropolitan Washington, D.C. area.
Craigie Incorporated ("Craigie"), an investment banking firm headquartered
in Richmond, Virginia, specializes in the origination, trading and
distribution of fixed-income securities and equity products in both the public
and private capital markets. Craigie also has a public finance department that
provides investment banking services, financial advisory services and
municipal bond financing to a variety of regional tax-exempt issuers.
The primary services offered by BB&T's subsidiaries include:
.small business lending
.commercial middle market lending
.secured and unsecured consumer lending
.factoring
.asset-based lending
4
.sales finance
.home equity lending
.mortgage lending
.leasing
.trust services
.agency insurance
.cash management and other treasury services
.brokerage services
.mutual fund products
.capital markets
.international services
.merchant processing
.credit card and revolving credit products
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The following table discloses selected financial information related to
BB&T's banking subsidiaries:
Table 1
Selected Financial Data of Banking Subsidiaries
As of / For the Years Ended December 31, 1998, 1997 and 1996
BB&T-NC BB&T-SC BB&T-VA
----------------------------------- -------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Total assets.... $25,985,004 $22,530,009 $20,652,519 $4,641,393 $4,364,982 $4,213,458 $3,473,368 $3,529,844 $2,209,614
Securities...... 6,531,178 5,392,894 4,962,941 783,727 1,020,554 1,034,385 578,224 887,381 883,771
Loans and
leases, net of
unearned
income*........ 17,414,700 15,402,775 14,149,983 3,266,871 3,052,755 2,901,930 2,341,767 2,287,651 1,180,681
Deposits........ 17,275,566 15,931,795 15,683,080 3,702,383 3,401,236 3,336,711 2,320,244 2,333,873 1,422,785
Shareholder's
equity......... 2,124,446 1,771,589 1,601,950 429,572 374,871 399,965 457,600 435,248 194,884
Net interest
income......... 871,515 842,745 773,019 201,132 184,341 173,235 121,030 59,122 43,822
Provision for
loan and lease
losses......... 44,227 53,533 44,675 13,455 14,109 8,405 3,122 3,400 2,584
Noninterest
income......... 455,760 436,607 333,119 71,945 70,916 57,729 41,671 16,149 11,811
Noninterest
expense........ 776,574 809,599 689,969 119,224 135,018 134,200 98,452 47,349 30,129
Net income...... 361,058 278,536 250,956 89,653 68,024 56,489 36,738 15,388 14,542
Franklin National Bank
--------------------------
1998 1997 1996
-------- -------- --------
Total assets.... $800,786 $647,448 $497,817
Securities...... 175,386 179,388 164,116
Loans and
leases, net of
unearned
income*........ 390,086 300,441 232,581
Deposits........ 536,586 427,798 363,427
Shareholder's
equity......... 40,848 39,283 31,893
Net interest
income......... 27,257 21,532 18,290
Provision for
loan and lease
losses......... 1,885 484 27
Noninterest
income......... 2,771 2,447 1,770
Noninterest
expense........ 21,512 13,915 12,652
Net income...... 4,299 5,968 4,523
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*Includes loans held for sale.
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Merger Strategy
BB&T's profitability and market share have been enhanced by both internal
growth and acquisitions in recent years. The acquisition strategy of BB&T is
focused on three primary objectives:
. to pursue in-market acquisitions of high-quality banks and thrifts with
assets in the $250 million to $10 billion range,
. to acquire companies in niche markets that provide products or services
that can be offered to BB&T's current customer base, and
. to consider strategic acquisitions in new markets that are economically
feasible and provide positive long-term benefits.
5
BB&T expects to continue to participate in the consolidation of the
financial services industry and expand and enhance its franchise through
mergers and acquisitions. Mergers and acquisitions will generally be
consummated through the issuance of additional shares of BB&T common stock
and/or additional debt. The consideration paid to complete these transactions
may entail payments in excess of the book value of the underlying net assets
acquired. These actions could have a dilutive effect on earnings per share or
book value. In addition, such transactions sometimes result in significant
front-end charges against earnings. However, cost savings, especially incident
to in-market acquisitions, are also frequently anticipated.
Competition
The banking industry is highly competitive and continues to experience
dynamic change. The banking subsidiaries of BB&T compete actively with
national and state banks, savings and loan associations, securities dealers,
mortgage bankers, finance companies and insurance companies. Competition for
financial products continues to grow as customers select from a variety of
traditional and nontraditional financial institutions. The industry continues
to consolidate at a fast pace, which affects competition by eliminating some
regional and local institutions. For additional information concerning
markets, BB&T's competitive position and business strategies, see "Market
Area" and "Lending Activities" below.
Market Area
BB&T's primary geographic market area consists of North and South Carolina,
Virginia, Maryland and Washington, D.C. The area's employment base is diverse
and consists of manufacturing, general services, agricultural,
wholesale/retail, high tech and financial services. BB&T believes its current
market area is economically strong and will support future growth in assets
and deposits. Even so, management expects to continue to employ growth
strategies designed to enhance BB&T's franchise, including expansion in both
neighboring states and current market areas. Management believes that
maintaining a community bank approach to customer service as asset size and
available services grow strengthens the Corporation's ability to move into new
markets and to target consumers and small to mid-sized commercial customers in
these markets.
Lending Activities
The primary goal of BB&T's lending function is to help clients achieve their
financial goals and secure their financial futures on terms that are fair to
the clients and profitable to the Corporation. BB&T's philosophy of lending is
to attempt to meet all legitimate business and consumer credit needs within
defined market segments where standards of safety, profitability and liquidity
can be met.
BB&T focuses lending efforts on small to intermediate commercial and
industrial loans, one-to-four family residential mortgage loans and other
consumer loans. Typically, fixed-rate residential mortgage loans are sold in
the secondary mortgage market and adjustable-rate residential mortgages are
retained in the portfolio. A portion of mortgage loans have also been
securitized during recent years and held in the investment portfolio.
Servicing rights on all residential mortgage loans are typically retained by
BB&T. BB&T conducts the majority of its lending activities within the context
of the Corporation's community banking network structure, with lending
decisions made as close to the customer as practicable.
6
Table 2
Composition of Loan and Lease Portfolio*
December 31,
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1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans:
Commercial, financial
and agricultural..... $ 3,443,674 $ 3,196,973 $ 2,855,907 $ 2,506,194 $ 3,029,868
Real estate--
construction and land
development.......... 2,223,439 2,165,430 1,567,804 1,194,522 903,589
Real estate--
mortgage............. 13,301,235 12,050,763 10,704,737 10,659,368 9,621,085
Consumer.............. 2,786,572 2,756,554 2,841,540 2,556,373 2,440,768
----------- ----------- ----------- ----------- -----------
Loans held for
investment......... 21,754,920 20,169,720 17,969,988 16,916,457 15,995,310
Loans held for
sale............... 1,029,697 509,141 228,333 261,364 141,676
----------- ----------- ----------- ----------- -----------
Total loans....... 22,784,617 20,678,861 18,198,321 17,177,821 16,136,986
Leases.................. 1,620,326 788,462 576,991 376,152 304,544
----------- ----------- ----------- ----------- -----------
Total loans and
leases........... $24,404,943 $21,467,323 $18,775,312 $17,553,973 $16,441,530
=========== =========== =========== =========== ===========
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* Balances include unearned income.
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Mortgage Banking
BB&T engages in mortgage loan originations by offering fixed- and
adjustable-rate government and conventional loans for the purpose of
constructing, purchasing or refinancing owner-occupied properties. Risks
associated with the residential lending function include interest rate risk,
which is mitigated through the sale or securitization of substantially all
fixed-rate loans, and default risk by the borrower, which is lessened through
underwriting procedures and private mortgage insurance. BB&T also purchases
mortgage loans from other originators and subjects them to the same
underwriting and risk management criteria as loans originated internally.
Commercial Lending
BB&T's commercial lending program is generally targeted to serve small to
middle-market businesses with annual sales of $250 million or less, although
loan policies allow lending to larger customers, including national customers
who have reasonable business connections with the Corporation's
geographically-served markets. Commercial lending includes commercial,
financial, agricultural, industrial and real estate loans. Commercial loan
pricing, while driven largely by competition, is usually tied to market
indexes, such as the prime rate, LIBOR or rates on Treasury securities.
Construction Lending
Real estate construction loans include loans with twelve-month contractual
maturities, which are intended to convert to permanent residential mortgage
loans upon completion of the construction. BB&T also originates commercial
construction loans. Commercial construction loans are usually made to in-
market developers, businesses, individuals or real estate investors for the
construction of commercial structures in the Corporation's market area. They
are made for purposes of constructing industrial facilities, apartments,
shopping centers, office buildings, hotels, warehouses and other commercial
properties. The properties may be for sale, lease or owner-occupancy.
Consumer Lending
BB&T offers a wide variety of consumer loan products. Both secured and
unsecured loans are marketed to qualifying, existing clients and to other
creditworthy candidates in BB&T's market area. Numerous forms of
7
unsecured loans, including revolving lines of credit (e.g. credit cards, DDA
overdraft protection and personal lines of credit) are provided, while a
variety of secured credit including home equity loans and various installment
loan products, such as vehicle loans, are offered.
Through the acquisition of Regional Acceptance, BB&T expanded the sales
finance function by making loans to customers with a higher credit risk
profile than the traditional BB&T customer. These loans are extended through
automobile dealers to finance purchases of mid- to late-model used
automobiles, and bear interest at rates higher than BB&T's normal grade
consumer loans based on the higher level of risk associated with these
borrowers.
Leasing
BB&T provides commercial leasing products and services through BB&T Leasing
Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary
products: finance or capital leases, true leases (as defined under the
Internal Revenue Code) and other operating leases for vehicles, rolling stock
and tangible personal property. Leasing provides lease-related services for
small to medium-sized commercial customers. BB&T provides leasing services to
municipalities in North and South Carolina directly through its subsidiary
banks.
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Table 3
Selected Loan Maturities and Interest Sensitivity *
December 31, 1998
------------------------------------
Commercial,
Financial
and Real Estate:
Agricultural Construction Total
------------ ------------ ----------
(Dollars in thousands)
Fixed rate:
1 year or less (2)...................... $ 272,739 $ 342,632 $ 615,371
1-5 years............................... 681,847 168,759 850,606
After 5 years........................... 181,826 -- 181,826
---------- ---------- ----------
Total................................. 1,136,412 511,391 1,647,803
---------- ---------- ----------
Variable rate:
1 year or less (2)...................... 1,176,703 1,147,072 2,323,775
1-5 years............................... 1,038,268 564,976 1,603,244
After 5 years........................... 92,291 -- 92,291
---------- ---------- ----------
Total................................. 2,307,262 1,712,048 4,019,310
---------- ---------- ----------
Total loans and leases (1).......... $3,443,674 $2,223,439 $5,667,113
========== ========== ==========
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* Balances include unearned income.
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
BB&T's credit policy does not permit automatic renewals of loans. At the
scheduled maturity date (including balloon payment date), the customer must
request a new loan to replace the matured loan and execute a new note with
rate, terms and conditions negotiated at that time.
(1) The table excludes:
(Dollars in
thousands)
------------
(i)consumer loans to individuals for household, family and other
personal expenditures........................................... $ 2,786,572
(ii)real estate mortgage loans.................................. 13,301,235
(iii)loans held for sale......................................... 1,029,697
(iv)leases....................................................... 1,620,326
------------
$ 18,737,830
============
(2) Includes loans due on demand.
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8
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged against earnings. The level of the allowance
for loan and lease losses is based on management's evaluation of the risk
inherent in the loan portfolio and changes in the nature and volume of loan
activity. This evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers the loans' risk
grades, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
consideration in determining an adequate allowance.
The allowance is composed of various elements. Management stratifies the
loan portfolio into the various loan types based on the purpose of the loans.
For commercial loans, specific reserves are determined based on the evaluation
of management's "watch list" of commercial loans in excess of $1 million,
nonperforming or problem loans. General reserves are assigned based on the
risk grade of all other loans. BB&T utilizes ten "risk grades" to evaluate the
repayment capacity of commercial borrowers. Each risk grade is allocated an
appropriate percentage of the general allowance based on the outstanding
balances of each risk grade. For all other loan types, including direct
retail, sales finance, revolving credit and mortgage, BB&T provides general
reserves based on a percentage of the outstanding loan balances. These
percentages are determined based on actual loan losses for the past three
years, with a greater weight assigned to more recent loss trends. By weighting
recent loss experience more heavily, any variances between estimated and
actual loan losses are corrected over time. An additional unallocated portion
of the allowance is determined based on management's consideration of economic
conditions in BB&T's market areas, trends in loan losses, changes in the
composition of BB&T's loan portfolio and other factors.
BB&T's objective is to maintain a loan portfolio that is diverse in terms of
loan type, industry concentration, geographic distribution and borrower
concentration in order to reduce overall credit risk by minimizing the adverse
impact of any single event or combination of related events. Although
management believes that the best information available is used to determine
the adequacy of the allowance, the nature of the process by which management
determines the appropriate allowance for loan and lease losses requires the
exercise of considerable judgment. Unforeseen market conditions could result
in adjustments in the allowance that could have a material impact on earnings.
Future additions to BB&T's allowance will be the result of periodic loan,
property and collateral reviews as well as projected changes in overall
economic and real estate markets.
9
The following table sets an allocation of the allowance for loan and leases
losses at the end of each of the past five years. The allowance has been
allocated on an approximate basis and is not necessarily indicative of future
losses. The entire amount of the allowance is available to absorb losses
occurring in any category of loans and leases.
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Table 4
Allocation of Allowance for Loan and Lease Losses by Category
December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
% Loans % Loans % Loans % Loans % Loans
in each in each in each in each in each
Amount category Amount category Amount category Amount category Amount category
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Balance at end of period
applicable to:
Commercial, financial
and agricultural....... $ 40,331 14% $ 42,109 15% $ 41,652 15% $ 46,553 14% $ 41,799 18%
Real estate:
Construction and land
development........... 31,841 9 24,063 10 17,356 9 19,951 7 17,914 6
Mortgage............... 106,135 59 106,276 58 91,984 58 88,118 62 79,121 59
-------- ---- -------- ---- -------- ---- -------- ---- -------- ---
Real estate--total..... 137,976 68 130,339 68 109,340 67 108,069 69 97,035 65
-------- ---- -------- ---- -------- ---- -------- ---- -------- ---
Consumer................ 21,227 11 20,052 13 17,356 15 8,313 15 7,464 15
Leases.................. 12,736 7 8,021 4 5,207 3 3,325 2 2,986 2
Unallocated............. 102,117 -- 79,075 -- 70,013 -- 60,673 -- 73,022 --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ---
Total.................. $314,387 100% $279,596 100% $243,568 100% $226,933 100% $222,306 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ===
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The following table sets forth information with respect to BB&T's allowance
for loan and lease losses for the most recent five years.
Table 5
Analysis of Allowance for Loan and Lease Losses
December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of
period................. $ 279,596 $ 243,568 $ 226,933 $ 222,306 $ 218,090
Charge-offs:
Commercial, financial
and agricultural...... (10,708) (16,358) (10,452) (11,378) (12,156)
Real estate............ (9,522) (14,068) (11,774) (12,481) (9,700)
Consumer............... (61,667) (66,732) (48,017) (29,749) (16,687)
Lease receivables...... (1,167) (671) (768) (614) (647)
----------- ----------- ----------- ----------- -----------
Total charge-offs..... (83,064) (97,829) (71,011) (54,222) (39,190)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural...... 7,540 5,795 7,487 6,085 7,692
Real estate............ 3,545 5,038 6,338 3,737 3,643
Consumer............... 9,224 7,269 6,227 5,494 5,131
Lease receivables...... 425 232 136 395 295
----------- ----------- ----------- ----------- -----------
Total recoveries...... 20,734 18,334 20,188 15,711 16,761
----------- ----------- ----------- ----------- -----------
Net charge-offs......... (62,330) (79,495) (50,823) (38,511) (22,429)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense............... 80,310 98,010 62,273 42,559 25,526
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions.......... 16,811 17,513 5,185 579 1,119
----------- ----------- ----------- ----------- -----------
Balance, end of period.. $ 314,387 $ 279,596 $ 243,568 $ 226,933 $ 222,306
=========== =========== =========== =========== ===========
Average loans and leases
*...................... $22,266,058 $19,817,354 $17,961,260 $17,106,917 $15,405,158
=========== =========== =========== =========== ===========
Net charge-offs as a
percentage of average
loans and leases....... .28% .40% .28% .23% .15%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
10
Nonperforming Assets and Classified Assets
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessions. It is BB&T's policy to place commercial loans
and leases on nonaccrual status when full collection of principal and interest
becomes doubtful, or when any portion of principal or interest becomes 90 days
past due, whichever occurs first. When loans are placed on nonaccrual status,
interest receivable is reversed against interest income in the current period
and any prior year interest is charged off against the allowance for loan and
lease losses. Interest payments received thereafter are applied as a reduction
of the remaining principal balance so long as doubt exists as to the ultimate
collection of the principal. Mortgage loans and other consumer loans are also
placed on nonaccrual status when full collection of principal and interest
becomes doubtful, or they become delinquent for a specified period of time
that varies depending on the type of loan. Loans and leases are removed from
nonaccrual status when they become current as to both principal and interest
and when the collectibility of principal or interest is no longer considered
doubtful.
Investment Activities
Bank holding companies and their subsidiary banks are allowed to purchase,
sell, deal in and hold certain investment securities as prescribed by bank
regulations. These investments include U.S. Treasury securities, obligations
of U.S. government agencies, obligations of state and political subdivisions,
various types of corporate debt, mutual funds and equity securities (subject
to certain limitations) and certain derivative securities.
BB&T's investment activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset / Liability Management Committee ("ALCO") which meets
regularly to review the economic environment, assess current activities for
appropriateness and establish investment strategies. The ALCO also has much
broader responsibilities, which are discussed in "Market Risk Management", in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
actual and projected deposit growth and availability of other funding sources
and the overall interest rate sensitivity of the Corporation. In general, the
investment portfolio is managed in a manner consistent with the attainment of
the following goals: (i) to provide sufficient liquidity to cover
unanticipated deposit and loan fluctuations, seasonal funds flow variations
and overall funds management objectives; (ii) to provide eligible securities
to secure public funds and trust deposits as prescribed by law; and (iii) to
earn the maximum return on funds invested that is commensurate with meeting
the requirements of (i) and (ii).
11
The following table provides information regarding the composition of BB&T's
securities portfolio at the end of each of the past three years. BB&T's
trading securities, reflected in the accompanying table, are principally owned
by Craigie, a wholly-owned broker-dealer subsidiary acquired in 1997.
- -------------------------------------------------------------------------------
Table 6
Composition of Securities Portfolio
December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
Trading Securities (at estimated fair
value)...................................... $ 60,422 $ 67,878 $ --
Securities held to maturity (at amortized
cost):
U.S. Treasury, government and agency
obligations............................... 23,821 46,338 24,241
States and political subdivisions.......... 103,649 150,369 176,275
Mortgage-backed securities................. -- 33,550 178,222
---------- ---------- ----------
Total securities held to maturity........ 127,470 230,257 378,738
---------- ---------- ----------
Securities available for sale (at estimated
fair value):
U.S. Treasury, government and agency
obligations............................... 3,583,277 4,425,087 4,077,475
States and political subdivisions.......... 153,939 47,346 23,977
Mortgage-backed securities................. 3,092,425 2,396,854 2,318,699
Other securities........................... 1,141,733 426,841 300,144
---------- ---------- ----------
Total securities available for sale...... 7,971,374 7,296,128 6,720,295
---------- ---------- ----------
Total securities....................... $8,159,266 $7,594,263 $7,099,033
========== ========== ==========
- -------------------------------------------------------------------------------
Sources of Funds
Deposits are the primary source of funds for lending and investing
activities. The amortization and scheduled payment of loans and maturities of
investment securities also provide predictable sources of funds. Federal Home
Loan Bank ("FHLB") advances, foreign deposits, Federal funds purchased and
other short-term borrowed funds, as well as longer-term debt issued through
the capital markets, all provide supplemental funding sources.
Deposits
Customer deposits are attracted principally from within BB&T's market area
through the offering of a broad selection of deposit instruments including
various types of checking accounts, money market and savings accounts,
certificates of deposit and individual retirement accounts. Deposit account
terms vary with respect to the minimum balance required and the time period
the funds must remain on deposit. Interest rates paid on specific deposit
types are set by the ALCO and are determined based on (i) the interest rates
offered by competitors, (ii) anticipated needs for funding and the timing of
the cash flow needs offset by the availability of more cost-effective funding
sources and (iii) anticipated future economic conditions and interest rates.
Customer deposits are attractive sources of liquidity because of their
stability, cost and the ability to generate fee income through the cross-sale
of other services to the depositors.
12
- -------------------------------------------------------------------------------
Table 7
Scheduled Maturities of Time Deposits
Time Deposits $100,000 and Over
December 31, 1998
(Dollars in Thousands)
------------------------------------------------------
Maturity Schedule
-----------------
Less than three months...................................... $1,306,895
Three through six months.................................... 687,651
Seven through twelve months................................. 481,198
Over twelve months.......................................... 739,157
----------
Total....................................................... $3,214,901
==========
Total Time Deposits
------------------------------------------------------
Time Deposits Due to Mature by
------------------------------
1999....................................................... $ 8,519,629
2000....................................................... 2,272,295
2001....................................................... 274,114
2002....................................................... 204,852
2003....................................................... 113,963
2004 and later............................................. 13,906
-----------
Total.................................................... $11,398,759
===========
- -------------------------------------------------------------------------------
Short-Term Borrowed Funds
BB&T's ability to borrow significant funds through nondeposit sources
provides additional flexibility in meeting the liquidity needs of customers.
Components of short-term borrowed funds at year end were master notes,
securities sold under repurchase agreements, FHLB advances, Federal funds
purchased and U.S. Treasury tax and loan depository note accounts. The
following table summarizes certain pertinent information regarding BB&T's
short-term borrowed funds for the past three years:
- -------------------------------------------------------------------------------
Table 8
Short-Term Borrowed Funds
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
Maximum outstanding at any month-end
during the year.......................... $4,855,377 $3,493,199 $2,737,629
Average outstanding during the year....... 3,741,501 2,907,657 2,345,750
Average interest rate during the year..... 5.20% 5.23% 5.28%
Average interest rate at end of year...... 4.89 5.44 4.88
13
Employees
At December 31, 1998, BB&T had approximately 10,400 full-time-equivalent
employees.
Properties
BB&T and its significant subsidiaries occupy headquarters facilities that
are either owned or operated under long-term leases and also own freestanding
operations centers in Wilson, Charlotte and Lumberton, North Carolina. BB&T
also owns or leases significant office space in Winston-Salem, North Carolina,
which serves as the Corporation's headquarters. At December 31, 1998, BB&T and
its subsidiary banks operated 534 banking offices in the Carolinas, Virginia,
Maryland and Washington, D.C. Branch office locations are variously owned or
leased. Management believes that the premises occupied by BB&T and its
subsidiaries are well located and suitably equipped to serve as financial
services facilities. See Note F. "Premises and Equipment" of the "Notes to
Consolidated Financial Statements" in this report for additional disclosures
related to BB&T's properties and other fixed assets.
Executive Officers
BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr.
Allison is 50 and has 28 years of service with the Corporation. Henry G.
Williamson, Jr. is the Chief Operating Officer of BB&T Corporation and is
responsible for the Corporate Group. Mr. Williamson is 51 and has 27 years of
service with the Corporation. Kelly S. King is the President of BB&T
Corporation and is responsible for the Branch Banking Network. Mr. King is 50
and has 27 years of service with the Corporation. Robert E. Greene is the
President of Branch Banking and Trust Company and is the Senior Executive Vice
President for Administrative Services for the Corporation. Mr. Greene is 50
and has served the Corporation for 26 years. W. Kendall Chalk is a Senior
Executive Vice President of the Corporation responsible for the Lending Group.
Mr. Chalk is 53 and has served the Corporation for 24 years. Morris D. Marley
is the Senior Executive Vice President for the Funds Management Group. Mr.
Marley is 48 and has served the Corporation for 27 years. Scott E. Reed is a
Senior Executive Vice President and the Corporation's Chief Financial Officer.
Mr. Reed is 50 and has 27 years of service with the Corporation. Sherry A.
Kellett is a Senior Executive Vice President and the Corporation's Controller.
Ms. Kellett is 54 and has 14 years of service with the Corporation.
14
REGULATORY CONSIDERATIONS
General
As a bank holding company, BB&T is subject to regulation under the Bank
Holding Company Act of 1956, as amended, (the "BHCA") and the examination and
reporting requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). Under the BHCA, a bank holding company may not
directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any bank or merge or
consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those
activities.
As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA
(collectively, the "State-Chartered Banks") are subject to regulation,
supervision and examination by state bank regulatory authorities in their
respective home states. These authorities include the North Carolina
Commissioner of Banks, in the case of BB&T-NC, the South Carolina Commissioner
of Banking, in the case of BB&T-SC, and the Virginia State Corporation
Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of
the State-Chartered Banks is also subject to regulation, supervision and
examination by the Federal Deposit Insurance Corporation (the "FDIC").
Franklin National Bank, a subsidiary of BB&T Corporation, is a Federally-
chartered bank and, as such, is subject to regulation, supervision and
examination by the U.S. Office of the Comptroller of the Currency (the "OCC")
(References herein to the "Banks" include Franklin National Bank and the
State-Chartered Banks). State and Federal law also govern the activities in
which the Banks engage, the investments they make and the aggregate amount of
loans that may be granted to one borrower. Various consumer and compliance
laws and regulations also affect the Banks' operations.
The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are
affected by general economic conditions, management polices, changes in state
and Federal legislation and actions of various regulatory authorities,
including those referred to above. The following description summarizes the
significant state and Federal laws to which BB&T and the Banks are subject. To
the extent statutory or regulatory provisions or proposals are described, the
description is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
Payment of Dividends
BB&T is a legal entity separate and distinct from its banking and other
subsidiaries. The majority of BB&T's revenues are from dividends paid to BB&T
by its banking subsidiaries. BB&T's banking subsidiaries are subject to laws
and regulations that limit the amount of dividends they can pay. In addition,
both BB&T and its banking subsidiaries are subject to various regulatory
restrictions relating to the payment of dividends, including requirements to
maintain capital at or above regulatory minimums. Banking regulators have
indicated that banking organizations should generally pay dividends only if
(1) the organization's net income available to common shareholders over the
past year has been sufficient to fund fully the dividends and (2) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition.
BB&T does not expect that any of these laws, regulations or policies will
materially affect the ability of the Banks to pay dividends. During the year
ended December 31, 1998, the Banks declared $389.7 million in dividends
payable to BB&T.
Capital
The Federal Reserve Board, the FDIC and the OCC have issued substantially
similar risk-based and leverage capital guidelines applicable to banking
organizations they supervise. Under the risk-based capital requirements, BB&T
and the Banks are each generally required to maintain a minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) of 8%. At
15
least half of the total capital is to be composed of common equity, retained
earnings and qualifying perpetual preferred stock, less certain intangibles
("Tier 1 capital"). The remainder may consist of certain subordinated debt,
certain hybrid capital instruments, qualifying preferred stock and a limited
amount of the loan loss allowance ("Tier 2 capital" which, together with Tier
1 capital, composes "total capital"). The ratios of Tier 1 capital and total
capital to risk-adjusted assets for BB&T and the subsidiary banks as of
December 31, 1998, are show in the following table.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital requirements for banking organizations. These
requirements provide for a minimum ratio of Tier 1 capital to adjusted average
quarterly assets equal to 3% to 5% subject to Federal Bank regulatory
evaluation of an organization's overall safety and soundness. The leverage
ratios of BB&T and the subsidiary banks as of December 31, 1998, are reflected
in the accompanying table.
- -------------------------------------------------------------------------------
Table 9
Capital Ratios for BB&T Corporation and Banking Subsidiaries
Franklin
Regulatory BB&T- BB&T- BB&T- National
Minimums BB&T NC SC VA Bank
---------- ---- ----- ----- ----- --------
Risk-based capital ratios:
Tier 1 capital (1)................ 4.0% 10.0% 10.9% 12.7% 15.3% 8.5%
Total risk-based capital (2)...... 8.0 14.8 12.2 13.9 16.5 9.7
Tier 1 leverage ratio (3)........... 3.0 6.8 7.2 9.3 10.0 5.3
- --------
(1) Shareholders' equity less nonqualifying intangible assets; as a
percentage of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt
as a percentage of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital as a percentage of fourth quarter average assets less
nonqualifying intangibles.
- -------------------------------------------------------------------------------
The risk-based capital standards of the Federal Reserve Board, the FDIC and
the OCC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines
also provide that an institution's exposure to a decline in the economic value
of its capital due to changes in interest rates be considered by the agency as
a factor in evaluating a bank's capital adequacy.
Deposit Insurance Assessments
The deposits of the Banks are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, a portion of the Banks' deposits (relating to the acquisitions
of various savings associations) are subject to assessments imposed by the
Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured
deposits effective January 1, 1997. The assessments imposed on all FDIC
deposits for deposit insurance have an effective rate ranging from 0 to 27
basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. Legislation was enacted in
1996 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata
portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"). The FDIC is currently assessing, effective for the first
quarter of 1999, BIF-insured deposits totaling an additional 1.22 basis points
per $100 of deposits, and SAIF-insured deposits of an additional 6.10 basis
points per $100 of deposits, to cover those obligations.
16
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is insolvent or is in danger of becoming
insolvent. For example, under a policy of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the insolvency of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution
in danger of default. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company
but is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The Federal banking agencies also have broad powers under current Federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institution
in question is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by
the law. As of December 31, 1998, BB&T and each of the Banks were classified
as well capitalized.
State regulatory authorities and the OCC also have broad enforcement powers
over the Banks, including the power to impose fines and other civil and
criminal penalties, and to appoint a conservator (with the approval of the
Governor in the case of North Carolina) in order to conserve the assets of any
such institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state
bank in certain circumstances, including, among other things, when it appears
that such bank has violated its charter or any applicable laws, is conducting
its business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
Interstate Banking and Branching
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1997, a
bank headquartered in one state was authorized to merge with a bank
headquartered in another state, as long as neither of the states had opted out
of such interstate merger authority prior to such date. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the
state where a bank headquartered in that state could have established or
acquired branches under applicable Federal or state law.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of the consolidated financial
condition and results of operations of BB&T Corporation and subsidiaries
("BB&T" or the "Corporation") for each of the three years in the period ended
December 31, 1998, and related financial information are presented in
conjunction with the consolidated financial statements and related notes to
assist in the evaluation of BB&T's 1998 performance.
Forward-looking Statements
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve risks and uncertainties and are based on
the beliefs and assumptions of the management of BB&T, and on the information
available to management at the time that these disclosures were prepared.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) changes in the interest
rate environment may reduce margins; (3) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality and / or a reduced
demand for credit; (4) legislative or regulatory changes, including changes in
accounting standards, may adversely affect the businesses in which BB&T is
engaged; (5) costs or difficulties related to the integration of the
businesses of BB&T and its merger partners may be greater than expected; (6)
expected cost savings associated with pending mergers may not be fully
realized or realized within the expected time frame; (7) deposit attrition,
customer loss or revenue loss following pending mergers may be greater than
expected; (8) the Year 2000 issue is not effectively corrected (see additional
discussion following under Year 2000 Project); (9) competitors may have
greater financial resources and develop products that enable such competitors
to compete more successfully than BB&T; and (10) adverse changes may occur in
the securities markets.
Stock Split
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend paid
August 3, 1998. All references to the number of common shares and all per
share amounts contained herein have been adjusted, as appropriate, to
retroactively reflect the stock split.
Reclassifications
Certain prior period information has been restated to conform with 1998
presentation.
1998 Mergers and Acquisitions
On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life")
of Norfolk, Virginia, in a transaction accounted for as a pooling of
interests. In conjunction with the merger, BB&T issued approximately 11.6
million shares of common stock in exchange for all of the outstanding shares
of Life common stock.
On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc.
("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to
commercial, agricultural, municipal and consumer users for the purchase of
lawn care equipment. The acquisition was accounted for as a purchase and,
therefore, the accompanying consolidated financial statements include the
operating results of DCI only since the date of acquisition. In conjunction
with the transaction, BB&T recorded $9.3 million of goodwill, which is being
amortized using the straight-line method over 15 years.
On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company
Inc., and its affiliated companies, (collectively, "Stanley"), located in
Greensboro, North Carolina. Stanley, the largest actuarial
18
administration firm headquartered in the Carolinas, has more than 700 clients
located mostly in the Carolinas, Virginia, Maryland and Tennessee. The merger
was accounted for as a purchase and, therefore, the accompanying consolidated
financial statements include the operating results of Stanley only since the
date of the acquisition. In conjunction with the acquisition, BB&T recorded
$10.3 million of goodwill, which is being amortized using the straight-line
method over 15 years.
On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc.
("Franklin") of Washington, D.C. in a transaction accounted for as a pooling
of interests. Under the terms of the merger agreement, Franklin shareholders
received .70 shares of BB&T stock for each share of Franklin stock held.
Approximately 4.9 million shares of BB&T common stock were issued in exchange
for all of the Franklin common stock outstanding.
On September 30, 1998, BB&T completed its acquisition of Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a transaction
accounted for as a purchase. To effect the merger, BB&T issued 8.7 million
shares of BB&T common stock in exchange for all of the outstanding shares of
Maryland Federal common stock. In conjunction with the acquisition, BB&T
recorded $158.8 million of goodwill, which is being amortized using the
straight-line method over a period of 15 years.
BB&T's Insurance Agency Network expanded through the purchase of three
independent insurance agencies during 1998, and a fourth in early 1999.
DeJarnette & Paul Inc., based in Richmond, Virginia, was acquired on January
2, 1998. W.C. Brown Insurance Services, Inc., headquartered in Rocky Mount,
Virginia, was acquired on March 3, 1998, and McPhail, Bray, Murphy & Allen
Inc., a Charlotte, North Carolina, agency was purchased April 30, 1998. The
acquisition of Blue Ridge Burke Insurance Agency, Inc., of Mount Airy and
Winston-Salem, North Carolina, was consummated January 4, 1999. Also, on
October 1, 1998, BB&T acquired a portion of the Charlotte, North Carolina
personal lines of business and an agency in Morganton, North Carolina from
another Charlotte-based company.
Pending Mergers and Acquisitions
On August 10, 1998, BB&T announced plans to acquire Scott & Stringfellow
Financial Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. The transaction will be accounted for as a purchase. Scott
& Stringfellow shareholders will receive one share of BB&T common stock in
exchange for each share of Scott & Stringfellow common stock held. The
acquisition is expected to be completed during the first quarter of 1999.
On August 26, 1998, BB&T announced plans to merge with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction
was completed on March 5, 1999, and was accounted for as a pooling of
interests. MainStreet shareholders received 1.18 shares of BB&T common stock
in exchange for each share of MainStreet common stock held.
On January 27, 1999, BB&T announced plans to merge with First Citizens
Corporation ("First Citizens"), based in Newnan, Georgia. The transaction is
expected to be accounted for as a pooling of interests. First Citizens'
shareholders will receive 1.0789 shares of BB&T common stock in exchange for
each share of First Citizens common stock held. The merger is expected to be
completed in the third quarter of 1999.
On January 28, 1999, BB&T announced plans to merge with Mason-Dixon
Bancshares ("Mason-Dixon") headquartered in Westminster, Maryland. The
transaction is expected to be accounted for as a pooling of interests. Mason-
Dixon's shareholders will receive 1.30 shares of BB&T common stock in exchange
for each share of Mason-Dixon common stock held. The merger is expected to be
completed in the third quarter of 1999.
On February 25, 1999, BB&T announced plans to acquire Matewan BancShares,
Inc. ("Matewan"), headquartered in Williamson, West Virginia. The transaction
is expected to be accounted for as a purchase.
19
Matewan's shareholders will receive .9333 shares of BB&T common stock for each
share of Matewan common stock held subject to adjustment prior to the merger.
The merger is expected to be completed in the third quarter of 1999.
Analysis of Financial Condition
Average assets totaled $32.4 billion for the year ended December 31, 1998,
an increase of 12.1% over the 1997 average of $28.9 billion. Average assets in
1997 increased 9.1% compared to the 1996 average of $26.5 billion. The major
components of the increase in average assets during 1998 were loans and
leases, which increased $2.4 billion, or 12.4%, for the year; securities,
which increased $505.3 million, or 6.9% during the year; and non-earning
assets, which increased $460.9 million, or 27.3%.
The compound rate of growth in average assets was 8.9% for the five years
ended December 31, 1998. Over the same five-year period, the compound annual
growth rates based on average balances were 10.0% for loans and leases, 6.6%
for securities and 4.9% for deposits. All growth rates have been enhanced by
acquisitions accounted for as purchases.
Among management's primary strategic objectives is the careful management of
assets and liabilities to maximize revenues and earnings per share. The
various components of assets and liabilities, the fluctuations of these
accounts during 1998 and the strategies surrounding the management of the
balance sheet are discussed below.
Securities
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a maturity of five years or less
because of the changing interest rate environment and to provide greater
flexibility in balance sheet management. U.S. Treasury securities and U.S.
government and agency obligations comprise 44.2% of the portfolio at December
31, 1998, and provide adequate current yields with minimal risk and maturities
structured to address liquidity concerns. Mortgage-backed securities, which
composed 37.9% of the total investment portfolio at year-end 1998, have higher
yields and longer maturities. Total securities increased 7.4% in 1998 to a
total of $8.2 billion at the end of the year.
Craigie, a registered broker / dealer acquired by BB&T on October 1, 1997,
holds trading securities as a normal part of its operations. At December 31,
1998, Craigie had trading securities totaling $59.7 million that are reflected
on BB&T's consolidated balance sheet. Market valuation gains and losses in
BB&T's trading portfolio are reflected in current earnings.
Securities held to maturity made up only 1.6% of the total portfolio at
December 31, 1998, and are primarily composed of investments in obligations of
states and municipalities. Securities held to maturity are carried at
amortized cost and totaled $127.5 million at December 31, 1998 compared to
$230.3 million outstanding at the end of 1997. Market valuation gains and
losses in the Corporation's held-to-maturity category affect neither earnings
nor capital. The held-to-maturity portfolio had a net unrealized gain of $3.4
million at December 31, 1998.
Securities available for sale totaled $8.0 billion at year end and are
carried at estimated fair value. The available-for-sale portfolio is primarily
composed of investments in U.S. Treasuries and government and agency
obligations, including mortgage-backed securities. The available-for-sale
portfolio also contains investments in obligations of states and
municipalities, which composed less than 2% of the portfolio, and equity and
other securities, which comprised 14% of the portfolio. The percentage of
holdings in state and municipal bonds did not significantly change from the
prior year.
20
Table 10
Securities
December 31, 1998
--------------------
Carrying Average
Value Yield (3)
---------- ---------
(Dollars in
thousands)
U.S. Treasury, government and agency obligations (1):
Within one year......................................... $ 757,580 6.27%
One to five years....................................... 2,812,786 6.12
Five to ten years....................................... 417,060 6.45
After ten years......................................... 2,712,097 6.65
---------- ----
Total................................................. 6,699,523 6.37
---------- ----
States and political subdivisions:
Within one year......................................... 24,101 8.86
One to five years....................................... 119,511 8.57
Five to ten years....................................... 49,190 7.73
After ten years......................................... 64,786 7.52
---------- ----
Total................................................. 257,588 8.17
---------- ----
Other securities:
Within one year......................................... 30 6.38
One to five years....................................... 33,917 7.44
Five to ten years....................................... 5,188 7.20
After ten years......................................... 206,047 6.59
---------- ----
Total................................................. 245,182 6.72
---------- ----
Securities with no stated maturity........................ 956,973 6.45
---------- ----
Total securities (2).................................. $8,159,266 6.45%
========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are
mortgage-backed securities totaling $3.1 billion classified as available
for sale and disclosed at estimated fair value. These securities are
included in each of the categories based upon final stated maturity
dates. The original contractual lives of these securities range from five
to 30 years; however, a more realistic average maturity would be
substantially shorter because of the monthly return of principal on
certain securities.
(2) Includes securities held to maturity of $127.5 million disclosed at
amortized cost and securities available for sale and trading securities
disclosed at estimated fair values of $8.0 billion and $60.4 million,
respectively.
(3) Taxable equivalent basis as applied to amortized cost.
- -------------------------------------------------------------------------------
The available-for-sale portfolio composed 97.7% of total securities.
Management believes that the high concentration of securities in the
available-for-sale portfolio allows greater flexibility in the day-to-day
management of the overall portfolio than the held-to-maturity classification.
The market value of the available-for-sale portfolio at year-end 1998 was
$100.3 million greater than the amortized cost of these securities. At
December 31, 1998, BB&T's available-for-sale portfolio had net unrealized
appreciation, net of deferred income taxes, of $61.6 million, which is
reported as a separate component of shareholders' equity. This compares to net
unrealized appreciation of $49.4 million at December 31, 1997. The unrealized
gains and losses in the available-for-sale portfolio at the end of 1998 and
1997 were considered by management to be of a temporary nature and caused by
fluctuations in market interest rates, not by concerns about the ability of
the issuers to meet their obligations.
21
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.77% for the year ended December 31, 1998, compared to 6.81% for the
prior year. The decline in FTE yield principally resulted from substantially
lower yields earned from mortgage-backed securities. The yield on U.S.
Treasury and U.S. government and agency obligations improved from 6.41% in
1997 to 6.71% in 1998, while the yield on mortgage-backed securities decreased
from 7.44% to 6.79% and the FTE yield on state and municipal securities
decreased from 8.55% last year to 8.40% in the current year.
Loans and Leases
Loans and leases, including loans held for sale, totaled $23.7 billion at
the end of 1998, an increase of $2.5 billion, or 11.6%, from 1997. Average
loans and leases for the year ended December 31, 1998, increased $2.4 billion,
or 12.4%, over the prior year. The 1998 growth includes the effects of a
mortgage loan securitization program totaling $465.3 million during the year,
BB&T's divestiture of $232.3 million in loans in connection with the UCB
merger in 1997 and $1.0 billion of loans acquired through purchase accounting
transactions in both 1998 and 1997. Excluding the impact of these items, BB&T'
"internal" growth rate in average loans for 1998 was 8.9% compared with 1997.
By category, excluding the securitizations, the UCB divestiture and the
purchase accounting transactions, average mortgage loans increased 14.0%
during 1998, average commercial loans grew 7.9%, average revolving credit
loans increased 5.9% and average direct retail loans were up 2.4%.
While BB&T's overall loan growth has remained strong, the mix of the loan
portfolio has changed in 1998 compared to 1997 and the growth rates of the
various categories of loans reflect this change in mix. As a result of
declines in interest rates, mortgage lending activities have increased
dramatically. BB&T originated $5.6 billion in mortgage loans during 1998, an
increase of 186% compared to 1997. Total mortgage loans retained in the
portfolio, including loans held for sale, increased 25.8% on average in 1998.
BB&T's other loan categories experienced growth at a slower pace during the
year. Average commercial loans, including leases, increased 10.5% in 1998
compared to 1997, while average consumer loans, which includes sales finance,
revolving credit and direct retail, increased 4.7% over the same time frame. A
factor contributing to the slower growth in retail lending was customers'
repaying credit card loans and home equity lines as they refinanced their
mortgages.
The change in the overall mix of the loan portfolio, which principally
resulted from the rapid growth in mortgages, negatively affected the yields
earned on total loans and the overall net interest margin. The FTE yield on
loans decreased from 9.17% for the twelve months ended December 31, 1997 to
9.02% for 1998. The average yield on mortgage loans was 7.62%, down 24 basis
points from the yield for 1997. Over the same time frame, the yields from
commercial loans decreased 1 basis point to 9.10% and consumer loan yields
decreased 8 basis points to 10.27%.
Asset Quality
BB&T's asset quality remains excellent compared to industry norms.
Nonperforming assets totaled $113.4 million at year end, a decrease of $22.8
million, or 16.7%, compared to 1997. As a percentage of total assets,
nonperforming assets were .33% at December 31, 1998, compared to .44% at the
end of 1997. As a percentage of loans plus foreclosed properties,
nonperforming assets totaled .48% at December 31, 1998, compared to .64% at
the end of 1997. The allowance for loan and lease losses, as a percentage of
loans and leases, was 1.33% at December 31, 1998, compared to 1.32% at year-
end 1997. Loans 90 days or more past due and still accruing interest increased
to $50.0 million at year-end 1998 compared to $44.4 million at December 31,
1997. Net charge-offs as a percentage of average loans and leases also
improved during 1998, decreasing to .28% from .40% in 1997.
The improvements in credit quality measures during 1998 are partially the
result of the negative impact that purchase accounting transactions had on
year-end 1997 credit quality data and an aggressive effort during 1997 to
charge-off problem loans originated by BB&T's nonstandard auto financing
subsidiary, Regional Acceptance Corporation ("Regional Acceptance"). BB&T
acquired Virginia First Financial Corporation ("Virginia First") on December
1, 1997, and this acquisition added $17.3 million in nonperforming assets and
$4.0 million in loans
22
90 days past due and still accruing interest to BB&T's year-end 1997 totals.
Also, the efforts at Regional Acceptance resulted in net charge-offs totaling
$18.0 million, or 24.5% of BB&T's consolidated net charge-offs for 1997,
compared to $12.9 million, or 20.7%, of the total in 1998.
The following table reflects relevant asset quality information for BB&T for
the past three years.
- -------------------------------------------------------------------------------
Table 11
Asset Quality
December 31,
-----------------------------
1998 1997 1996
-------- -------- -------
(Dollars in thousands)
Nonaccrual loans and leases*................... $ 84,968 $ 99,938 $65,648
Restructured loans............................. 522 1,377 2,464
Foreclosed property............................ 27,952 34,923 29,147
-------- -------- -------
Nonperforming assets......................... $113,442 $136,238 $97,259
======== ======== =======
Loans 90 days or more past due and still
accruing.................................... $ 49,971 $ 44,362 $41,870
======== ======== =======
Asset Quality Ratios:
Nonaccrual loans and leases as a percentage
of loans and leases......................... .36% .47% .35%
Nonperforming assets as a percentage of:
Total assets............................... .33 .44 .35
Loans and leases plus foreclosed property.. .48 .64 .52
Net charge-offs as a percentage of average
loans and leases............................ .28 .40 .28
Allowance for losses as a percentage of loans
and leases.................................. 1.33 1.32 1.31
Ratio of allowance for losses to:
Net charge-offs............................ 5.04 x 3.52 x 4.79 x
Nonaccrual and restructured loans and
leases.................................... 3.68 2.76 3.58
- --------
NOTE: Items referring to loans and leases are net of unearned income, gross of
the allowance and include loans held for sale.
*Includes $ 23.9 million, $ 32.5 million and $ 28.4 million of impaired
loans at December 31, 1998, 1997 and 1996, respectively. See Note D in
the "Notes to Consolidated Financial Statements."
- -------------------------------------------------------------------------------
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is evaluated for adequacy on a
quarterly basis. Specific allowances are allocated to identified problem
commercial loans of $1 million or more, based on management's assessment of
the probable loss exposure applicable to the specific loans. All other
commercial loans are segregated into one of ten risk categories according to
the relative strength of the borrower and the repayment sources. Allowance
allocations are determined by multiplying outstandings in each category by
factors assigned to each risk grade. Allowance allocations are derived for
consumer loans based on product type, such as mortgage, retail, bankcard, etc.
Allocations are determined by applying historical loss ratios to outstanding
loans, with adjustments made for current and anticipated business conditions.
BB&T's allowance for loan losses totaled $314.4 million at December 31,
1998, compared to $279.6 million at the end of 1997. As a percentage of loans
and leases, the allowance rose slightly from 1.32% at December 31, 1997 to
1.33% at the end of 1998. The ratio of the allowance to net charge-offs
increased from 3.52 times for 1997 to 5.04 times during 1998 because of lower
net charge-offs in the current year. The increase in the
23
allowance resulted primarily because fewer loans were charged-off against the
allowance during 1998 compared to the prior year. There were no significant
variations in the percentages used to calculate the components of the
allowance during 1998 compared to 1997, except an increase from 10% to 15% in
the allocation factor applied to commercial loans categorized as substandard.
The outstanding balances of all loan types increased over 1997, producing an
increased allowance, however management does not believe that the level of
risk inherent in the categories of the portfolio changed substantially
compared to year-end 1997. There was little change in the calculation factors
derived from historical charge-off experience or in the fundamental
assumptions or estimation methods used to calculate the allowance during 1998.
The improvements in asset quality ratios during 1998, together with lower
levels of net charge-offs, reduced the percentage of the allowance allocated
to specific loan types and, conversely, increased the portion of the allowance
not allocated to specific loan types.
Deposits and Other Borrowings
Management's primary objective for funding balance sheet activity is to
attract adequate, stable and cost-effective sources of funds. Core deposits
compose BB&T's primary funding source, despite trends in recent years away
from transaction and savings accounts by depositors. As depositors have sought
greater returns, growth rates for deposits have typically not kept pace with
asset growth and financial institutions, including BB&T, have increasingly
used nondeposit sources to fund balance sheet growth.
BB&T's total deposits at December 31, 1998, were $23.0 billion, an increase
of $1.7 billion, or 7.8%, compared to year-end 1997. The increase in deposits
was driven by a 28.4% increase in money rate savings accounts, an 8.4%
increase in certificates of deposit and a 9.2% increase in noninterest-bearing
deposits. On average, total deposits were $21.5 billion, an increase of $1.1
billion, or 5.6%, compared to 1997. This increase was led by a 9.9% increase
in noninterest-bearing deposits and a 19.7% increase in money rate savings
accounts. These increases were offset somewhat by a 22.1% decrease in average
savings account balances and a 7.6% decrease in interest checking accounts.
Other time deposits, including individual retirement accounts and certificates
of deposit, increased 1.8% on average and remain BB&T's largest single
component of average deposits at 48.0%. Foreign deposits totaled $872.1
million at December 31, 1998, an increase of $113.4 million from the prior
year average balance.
The average rates paid on interest-bearing deposits decreased during 1998 to
4.34% from 4.42% in 1997. The decrease resulted from lower rates paid on all
categories of deposit accounts. The average cost of certificates of deposit
and other time deposits decreased from 5.51% to 5.42%; the cost of interest
checking decreased from 1.47% to 1.43%; savings deposits decreased from 1.91%
to 1.89% and money rate savings accounts decreased from 3.07% to 3.00%.
BB&T focused its deposit gathering efforts during 1998 on continuing to
restructure the composition of deposits toward more cost-effective
noninterest-bearing deposits and money rate savings accounts. Over the years,
BB&T has acquired a significant number of thrift institutions, resulting in a
higher percentage of deposits comprised of certificates of deposit than many
of BB&T's peers. The restructuring is intended to reduce that concentration
and, thereby, reduce the overall cost of deposits. As part of this strategy,
BB&T has been promoting an "Investor Deposit Account," which is more flexible
than traditional money rate savings accounts and less costly to BB&T than
certificates of deposit. The success of this promotion is evident from the
growth in money rate savings accounts noted above.
Management also uses various other short-term borrowed funds to supplement
deposits to fulfill funding needs. Among these are Federal funds purchased,
which composed 28.7% of total short-term borrowed funds and securities sold
under repurchase agreements, which comprised 39.7% of short-term borrowed
funds at year-end 1998. Master notes, U.S. Treasury tax and loan deposit
notes, short-term bank notes and short-term Federal Home Loan Bank ("FHLB")
advances are also utilized to supplement short-term funding needs. In certain
circumstances, management also uses foreign deposits and, to a lesser degree,
brokered certificates of deposit as sources of funds. Average short-term
borrowed funds increased $833.8 million, or 28.7%, during 1998, while
24
short-term borrowed funds at year-end 1998 were $3.4 billion, a decrease of
$124.1 million, or 3.6%, compared to year-end 1997.
The rates paid on average short-term borrowed funds decreased slightly from
5.23% in 1997 to 5.20% during 1998. This resulted from decreases in the
Federal funds rate due to actions by the Federal Reserve Board of Governors.
Management also employs long-term debt for additional funding, and
management significantly increased reliance on longer-term funding sources
during 1998. BB&T's total outstanding long-term debt at December 31, 1998
totaled $4.7 billion, an increase of $1.2 billion, or 34.0%, from year-end
1997. On average, long-term debt increased $1.1 billion, or 39.4%, in 1998
compared to the average for 1997. BB&T's long-term debt consists primarily of
FHLB advances, which composed 52.6% of total outstanding long-term debt at
December 31, 1998, and medium-term bank notes, which composed 28.9% of the
year-end balance. FHLB advances are cost-effective long-term funding sources
that provide BB&T the flexibility to structure the debt in a manner that aids
in the management of interest rate risk and liquidity. In an effort to
diversify long-term funding sources and to take advantage of favorable
interest rates, BB&T has issued significant amounts of long-term debt,
including $2 billion in senior and subordinated bank note programs. Also, in
June 1997, BB&T issued $250 million of subordinated notes due in 2007 and in
June 1998, BB&T issued an additional $350 million of subordinated corporate
debt that is puttable to BB&T in 2005. The proceeds of these two issuances
were used to repurchase shares of BB&T's common stock subsequently issued in
connection with mergers and acquisitions and for advances to subsidiaries, as
discussed in the "Stock and Dividends" section. An additional $200 million of
medium term bank notes were issued during 1997 for general funding purposes.
The average rate paid on long-term debt decreased from 5.90% during 1997 to
5.72% during 1998.
BB&T continually considers liquidity needs in evaluating funding sources.
BB&T's strategy is to maintain funding flexibility, in order for the
Corporation to react rapidly to opportunities, which may become available in
the marketplace. Management will continue to focus on traditional core funding
strategies, including targeting growth in noninterest-bearing deposits and
money rate savings accounts. Also, because attractive interest rates are
currently available, additional long-term funding may be pursued.
Analysis of Results of Operations
Consolidated net income for 1998 totaled $501.8 million, which generated
basic earnings per share of $1.75 and diluted earnings per share of $1.71. Net
income for 1997 was $360.4 million and net income for 1996 totaled $343.3
million. Basic earnings per share were $1.25 in 1997 and $1.19 in 1996, while
diluted earnings per share were $1.23 and $1.17, respectively.
BB&T incurred significant expenses related principally to the consummation
of mergers and acquisitions during 1998 and 1997, which are reflected in
reported earnings. During 1998, BB&T recorded $11.0 million in after-tax
nonrecurring charges primarily associated with the mergers of Life and
Franklin. These charges included costs associated with the consolidation of
branch offices and bank operating functions, personnel-related and other
expenses. Excluding the effects of these charges, BB&T's net income for 1998
would have been $512.8 million, or $1.75 per diluted share.
In 1997, BB&T incurred $68.1 million in net after-tax charges primarily
incurred in conjunction with the United Carolina Bancshares Corporation
("UCB") merger. These expenses included personnel-related expenses, such as
staff relocation, early retirement packages and contract settlements;
occupancy, furniture and equipment expenses including branch consolidation;
and other costs, such as operational charge-offs, professional fees, etc.
These costs were partially offset by a gain from the divestiture of 23 branch
locations, including $505.8 million in deposits and $232.3 million in loans,
in order to comply with anti-trust regulations. Excluding the net effects of
these items, BB&T's net income for 1997 would have totaled $428.5 million, or
$1.47 per diluted share.
25
During 1996, a one-time assessment by the FDIC was charged to all financial
institutions with deposits insured by the SAIF. BB&T's assessment was $38.2
million, or $24.4 million after related income tax benefits. Excluding the
impact of the assessment, BB&T's net income for 1996 would have been $367.7
million, or $1.25 per diluted share.
Excluding the effect of the above nonrecurring items, BB&T's net income for
1998 increased $84.2 million, or 19.7%, compared to 1997, while diluted
earnings per share increased $.28, or 19.0%. Net income for 1997, excluding
nonrecurring items, increased $60.8 million, or 16.5%, while diluted earnings
per share increased $.22, or 17.6%, compared to 1996.
Two important and commonly used measures of profitability are return on
assets (net income as a percentage of average total assets) and return on
equity (net income as a percentage of average common shareholders' equity).
The returns on average assets produced by BB&T's earnings, excluding the
nonrecurring charges discussed above, were 1.58% for 1998, 1.48% for 1997 and
1.39% for 1996. BB&T's returns on average equity, excluding the nonrecurring
charges, were 20.16%, 18.58% and 17.07%, for the years ended December 31,
1998, 1997 and 1996, respectively.
Net Interest Income
Net interest income is BB&T's primary source of revenue. Net interest income
is influenced by a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned on
earning assets and the interest rates paid to obtain funding to support the
assets. The difference between rates earned on interest-earning assets (with
an adjustment made to tax-exempt income to provide comparability with taxable
income, i.e. the "FTE" adjustment) and the cost of the supporting funds is
measured by the net interest spread. The accompanying table presents the
dollar amount of changes in interest income and interest expense and
distinguishes between the changes related to average outstanding balances of
interest-earning assets and interest-bearing liabilities (volume) and the
changes related to average interest rates on such assets and liabilities
(rate). Changes attributable to both volume and rate have been allocated
proportionately.
26
Table 12
FTE Net Interest Income and Rate/Volume Analysis
For the Years Ended December 31, 1998, 1997 and 1996
Average Balances Yield/Rate Income/Expense
----------------------------------- ---------------- --------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
(Dollars in thousands)
Assets
Securities (1):
U.S. Treasury,
government and
other (5)....... $ 7,590,071 $ 7,086,567 $ 6,644,731 6.73% 6.77% 6.55% $ 510,706 $ 479,517 $ 435,493
States and
political
subdivisions.... 192,245 190,450 204,164 8.40 8.55 8.98 16,147 16,285 18,333
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total securities
(5)............. 7,782,316 7,277,017 6,848,895 6.77 6.81 6.63 526,853 495,802 453,826
Other earning
assets (2)....... 181,018 93,543 135,808 5.64 5.50 5.37 10,214 5,146 7,291
Loans and leases,
net of unearned
income
(1)(3)(4)(5)..... 22,266,058 19,817,354 17,961,260 9.02 9.17 9.10 2,008,908 1,817,817 1,634,072
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total earning
assets.......... 30,229,392 27,187,914 24,945,963 8.42 8.53 8.40 2,545,975 2,318,765 2,095,189
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Non-earning
assets.......... 2,149,061 1,688,172 1,523,193
----------- ----------- -----------
Total assets.... $32,378,453 $28,876,086 $26,469,156
=========== =========== ===========
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking........ $ 1,684,252 $ 2,052,088 $ 2,234,269 1.74 1.78 1.90 29,363 36,611 42,349
Money rate
savings......... 5,734,490 4,791,693 4,008,368 3.00 3.07 2.85 172,091 146,877 114,044
Other time
deposits........ 11,205,356 10,908,018 10,817,991 5.42 5.51 5.55 607,622 601,066 600,356
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total interest-
bearing
deposits........ 18,624,098 17,751,799 17,060,628 4.34 4.42 4.44 809,076 784,554 756,749
Short-term
borrowed funds... 3,741,501 2,907,657 2,345,750 5.20 5.23 5.28 194,436 152,202 123,896
Long-term debt... 4,025,428 2,886,686 2,027,683 5.72 5.90 5.83 230,266 170,207 118,204
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total interest-
bearing
liabilities..... 26,391,027 23,546,142 21,434,061 4.67 4.70 4.66 1,233,778 1,106,963 998,849
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Noninterest-
bearing
deposits........ 2,915,369 2,651,885 2,534,285
Other
liabilities..... 528,657 371,456 335,164
Shareholders'
equity.......... 2,543,400 2,306,603 2,165,646
----------- ----------- -----------
Total
liabilities and
shareholders'
equity.......... $32,378,453 $28,876,086 $26,469,156
=========== =========== ===========
Average interest
rate spread...... 3.75% 3.83% 3.74%
==== ==== ====
Net yield on
earning assets... 4.34% 4.46% 4.39% $1,312,197 $1,211,802 $1,096,340
==== ==== ==== ========== ========== ==========
Taxable
equivalent
adjustment....... $ 64,793 $ 53,277 $ 36,146
========== ========== ==========
1998 v. 1997 1997 v. 1996
------------------------------ ----------------------------
Change due to Change due to
Increase ------------------- Increase -----------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- --------- --------- ---------- -------- --------
Assets
Securities (1):
U.S. Treasury,
government and
other (5)....... $ 31,189 $ (2,704) $ 33,893 $ 44,024 $14,435 $29,589
States and
political
subdivisions.... (138) (291) 153 (2,048) (851) (1,197)
---------- --------- --------- ---------- -------- --------
Total securities
(5)............. 31,051 (2,995) 34,046 41,976 13,584 28,392
Other earning
assets (2)....... 5,068 135 4,933 (2,145) 176 (2,321)
Loans and leases,
net of unearned
income
(1)(3)(4)(5)..... 191,091 (30,270) 221,361 183,745 13,591 170,154
---------- --------- --------- ---------- -------- --------
Total earning
assets.......... 227,210 (33,130) 260,340 223,576 27,351 196,225
---------- --------- --------- ---------- -------- --------
Non-earning
assets..........
Total assets....
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking........ (7,248) (818) (6,430) (5,738) (2,403) (3,335)
Money rate
savings......... 25,214 (3,134) 28,348 32,833 9,308 23,525
Other time
deposits........ 6,556 (9,667) 16,223 710 (4,264) 4,974
---------- --------- --------- ---------- -------- --------
Total interest-
bearing
deposits........ 24,522 (13,619) 38,141 27,805 2,641 25,164
Short-term
borrowed funds... 42,234 (1,106) 43,340 28,306 562 27,744
Long-term debt... 60,059 (5,221) 65,280 52,003 (238) 52,241
---------- --------- --------- ---------- -------- --------
Total interest-
bearing
liabilities..... 126,815 (19,946) 146,761 108,114 2,965 105,149
---------- --------- --------- ---------- -------- --------
Noninterest-
bearing
deposits........
Other
liabilities.....
Shareholders'
equity..........
Total
liabilities and
shareholders'
equity..........
Average interest
rate spread......
Net yield on
earning assets... $100,395 $(13,184) $113,579 $115,462 $24,386 $91,076
========== ========= ========= ========== ======== ========
Taxable
equivalent
adjustment.......
- ----
(1) Yields related to securities, loans and leases wholly or partially exempt
from income taxes are stated on a taxable equivalent basis assuming tax
rates in effect for the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at amortized
cost and trading securities at estimated fair value.
27
For 1998, net interest income on an FTE adjusted basis totaled $1.3 billion,
compared with $1.2 billion in 1997 and $1.1 billion in 1996. The increase in
net interest income during 1998 resulted from increased interest income from
investment securities, up $31.1 million, and from loans, up $191.1 million.
During the same period, higher volumes of funding sources, partially offset by
lower interest rates, resulted in an increase of $126.8 million in total
interest expense.
The FTE-adjusted net interest margin is the primary measure used in
evaluating the effectiveness of the management of earning assets and funding
liabilities. The FTE adjusted net interest margin was 4.34% in 1998, 4.46% in
1997 and 4.39% in 1996. The 12 basis point decrease in margin during 1998
resulted from three factors. First, BB&T has had a very active common stock
repurchase program in recent years. For acquisitions accounted for under the
purchase method of accounting, it is BB&T's policy to reacquire the shares of
its common stock issued to consummate those transactions, as allowed under
generally accepted accounting standards. During 1998, BB&T acquired 10.2
million shares of common stock at a cost of $344.2 million, which reduced the
FTE adjusted net interest margin by 6 basis points. Second, BB&T divested
$232.3 million in loans and $505.8 million in deposits in conjunction with the
1997 merger with UCB. This transaction reduced BB&T's 1998 net interest margin
by 3 basis points compared to 1997. Third, BB&T's thrift acquisitions during
late 1997 and 1998 diluted BB&T's net interest margin by 2 basis points in
1998. Excluding the effects of all of these events, BB&T's net interest margin
for 1998 would have decreased by only 1 basis point from 1997.
Provision for Loan and Lease Losses
A provision for loan and lease losses is charged against earnings in order
to maintain the allowance for loan and lease losses at a level that reflects
management's evaluation of the risk inherent in the portfolios. The amount of
the provision is based on continuing assessments of nonperforming and "watch
list" loans, analytical reviews of loan loss experience in relation to
outstanding loans, and management's judgment with respect to current and
expected economic conditions and their impact on the existing loan portfolio.
The provision for loan and lease losses recorded by BB&T in 1998 was $80.3
million, compared with $98.0 million in 1997 and $62.3 million in 1996.
The decrease in the current year provision for loan and lease losses
resulted from improved asset quality, as discussed in the "Asset Quality"
section, and lower net charge-offs during the year. Net charge-offs were .28%
of average loans and leases for 1998 compared to .40% during 1997. The
allowance for loan and lease losses was 1.33% of loans and leases outstanding
and was at 3.68 times total nonaccrual and restructured loans and leases at
year-end 1998, compared to 1.32% and 2.76 times during 1997.
Noninterest Income
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking income, insurance commissions, gains and losses on
securities transactions and other commissions and fees derived from bank-
related activities.
Noninterest income for 1998 totaled $528.0 million, compared with $458.0
million in 1997 and $341.3 million in 1996. During 1997, BB&T recorded a gain
from the divestiture of branch offices related to the UCB merger totaling
$47.5 million, which is included in the noninterest income totals reflected
above. Excluding this gain, which was nonrecurring, noninterest income would
have increased $117.2 million, or 28.5%, during 1998, which was the result of
growth in all major categories of fee-generating activities.
The percentage of total revenues (calculated as FTE-adjusted net interest
income plus recurring noninterest income excluding securities gains or losses)
derived from noninterest (fee-based) income for 1998 was 28.4%, up from 25.2%
in 1997 and 23.6% during 1996.
Service charges on deposit accounts represent the largest single category of
noninterest income. Such revenues totaled $170.8 million in 1998, an increase
of $20.5 million, or 13.7%, compared to 1997. Service charges during 1997
totaled $150.3 million, an increase of $16.4 million, or 12.2%, compared to
1996. The primary factor contributing to the significant growth in service
charges on deposit accounts during 1998 and 1997 related to pricing changes
implemented during the first quarter of both years. Deposit services are
typically reviewed for potential repricing annually in an attempt to reflect
current costs and competitive factors.
28
Mortgage banking income (which includes servicing fees and gains and losses
from the origination and sale of mortgage loans) totaled $78.6 million, an
increase of $28.2 million, or 56.1%, compared to 1997. Mortgage banking income
totaled $50.4 million in 1997, an increase of $10.2 million, or 25.3%,
compared to $40.2 million realized in 1996. The primary components of the 1998
increase were servicing fees on loans sold, which increased $16.5 million, and
net gains on sales of mortgage loans, which increased $26.9 million compared
to 1997. These increases were partially offset by a $15.1 million increase in
the valuation allowance for capitalized mortgage servicing rights recorded
during 1998.
Agency insurance commissions, which are composed of commissions generated
through BB&T's extensive agency network, totaled $52.0 million during 1998, an
increase of $11.9 million, or 29.6%, compared to 1997. Agency insurance
commissions totaled $40.1 million in 1997, an increase of $12.6 million, or
45.8%, compared to the $27.5 million in 1996. According to a report in the
July 20, 1998 issue of Business Insurer Magazine, BB&T's insurance agency
network ranked as the 16th largest independent insurance agency in the nation.
During 1998, BB&T acquired three insurance agencies. These acquisitions,
accounted for as purchases, resulted in a significant portion of the increase
in agency insurance commissions during the past year. Expansion into
additional products and the continued development of new products during the
year also generated higher revenues. The product line of the agency network
has been expanded to include group health insurance, title insurance and
surety bonds. BB&T intends to continue to expand its insurance agency
operations through both acquisitions and internally generated growth.
Other insurance commissions, which are principally composed of credit-
related products offered through the banking network, totaled $12.4 million in
1998, $13.2 million in 1997 and $12.8 million in 1996.
Revenue from corporate and personal trust services totaled $36.9 million in
1998. This was an increase of $4.9 million, or 15.4%, over income of $32.0
million in 1997, which was an increase of $3.2 million, or 11.0%, over 1996.
Managed assets totaled $9.6 billion at the end of 1998. BB&T is the manager of
the nation's largest government-sponsored 401(k) plan, which has assets in
excess of $1.9 billion. BB&T also offers its own family of mutual funds and
manages fourteen mutual funds with total assets of approximately $1.8 billion,
which provide investment alternatives both for trust clients and for other
customers. The broker / dealer subsidiaries are the principal marketing agents
of BB&T's proprietary mutual funds.
Other nondeposit fees and commissions, including bankcard fees, totaled
$110.1 million for 1998, an increase of $23.1 million, or 26.6%, compared to
1997. During 1997, other nondeposit fees and commissions, including bankcard
fees, totaled $87.0 million, an increase of $20.4 million, or 30.6%, from the
1996 total of $66.6 million. Major sources of nondeposit fees and commissions
generating increases include merchant discounts and other bankcard income, up
$6.4 million, or 28.2%, from the 1997 balance; investment brokerage
commissions, which increased $5.6 million during 1998 to $25.5 million; and
ATM and point of sale fees, which totaled $21.4 million and increased $4.1
million, or 23.6%, during the year. At December 31, 1998, BB&T had 770 ATMs,
with 473 located in branches and the remaining 297 at non-branch locations. As
part of BB&T's strategy to increase fee income, the number of ATMs at non-
branch sites were significantly increased during 1998. BB&T also experienced
significant growth in other nondeposit fees and commissions as a result of the
1997 acquisitions of Sheffield Financial, Craigie Incorporated and Phillips
Factors, which were accounted for as purchases. These companies were owned by
BB&T for all of 1998 and accounted for $3.6 million of the current year
increase in revenue.
Other noninterest income, excluding securities gains and losses, totaled
$59.4 million in 1998, a decrease of $22.4 million compared to the $81.9
million recorded in 1997 because of a $47.5 million premium realized from the
divestiture of 23 branch locations and the related loans and deposits,
required by bank regulators as a condition for their approval of the UCB
merger. Excluding this gain, other noninterest income would have increased
$25.1 million, or 72.9%, in 1998, primarily because of the purchase
acquisitions of Craigie and Phillips discussed above. During 1998, Craigie and
Phillips provided $17.2 million in other noninterest income, compared to $3.9
million in 1997. BB&T also realized higher income from life insurance
contracts owned by the bank, which increased $5.8 million, and net revenues
from sales of checks to depositors, which increased $2.5 million. Other
noninterest income in 1996 totaled $21.5 million.
29
The ability to generate significant amounts of noninterest revenues in the
future will be very important to the ultimate success of BB&T. Through its
subsidiaries, BB&T will continue to focus on mortgage banking, trust,
insurance, investment and brokerage activities, as well as growing other fee-
related products and services. BB&T will continue to pursue acquisitions of
additional insurance agencies and explore strategic acquisitions of other
nonbank entities as a means of continuing to expand fee-based revenues. Also,
among BB&T's principal strategic objectives following the acquisition of a
financial institution is the cross-sell of noninterest-income generating
products and services to the acquired institution's client base. BB&T will
continue to focus on this strategy in the future.
The following table provides additional information on BB&T's noninterest
income:
- -------------------------------------------------------------------------------
Table 13
Noninterest Income
Years Ended December 31, % Change
-------------------------- -------------------------
1998 1997 1996 1998 v. 1997 1997 v. 1996
-------- -------- -------- ------------ ------------
(Dollars in thousands)
Service charges on
deposits................ $170,802 $150,256 $133,905 13.7% 12.2%
Mortgage banking income.. 78,627 50,383 40,218 56.1 25.3
Trust income............. 36,866 31,957 28,794 15.4 11.0
Agency insurance
commissions............. 52,018 40,148 27,541 29.6 45.8
Other insurance
commissions............. 12,387 13,164 12,822 (5.9) 2.7
Securities gains, net.... 7,752 3,213 3,210 141.3 --
Bankcard fees and
merchant discounts...... 29,247 22,805 18,511 28.2 23.2
Investment brokerage
commissions............. 25,508 19,908 17,069 28.1 16.6
Other service fees and
commissions............. 55,348 44,250 27,821 25.1 59.1
International income..... 4,563 3,685 3,206 23.8 14.9
Amortization of negative
goodwill................ 6,243 6,180 6,238 1.0 (.9)
Other noninterest
income.................. 48,641 72,028 21,924 (32.5) 228.5
-------- -------- -------- ----- -----
Total noninterest
income................ $528,002 $457,977 $341,259 15.3% 34.2%
======== ======== ======== ===== =====
- -------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense totaled $961.4 million during 1998, $968.4 million in
1997 and $827.4 million in 1996. Certain material nonrecurring items
associated primarily with completing mergers and acquisitions affected
noninterest expenses during 1998 and 1997. BB&T recorded $14.4 million in
pretax noninterest expenses during 1998 primarily associated with the mergers
of Life and Franklin. These costs were mainly composed of personnel-related
expenses and other merger costs, including professional fees and operational
charge-offs. In 1997, BB&T recorded $136.0 million of pretax noninterest
expenses principally related to the completion of the UCB merger. During 1996,
BB&T incurred a special, $38.2 million assessment levied by the FDIC on all
financial institutions that had SAIF-insured deposits. Excluding the impact of
the nonrecurring items from all three years, noninterest expense would have
increased $114.7 million, or 13.8%, in 1998 compared to 1997 and $43.2
million, or 5.5%, in 1997 compared to 1996.
The control of noninterest expenses is a management priority. The primary
measure of noninterest expense management used by the financial services
industry is the efficiency ratio (total noninterest expenses divided by the
sum of FTE-adjusted net interest income plus noninterest income). For 1998,
BB&T's efficiency ratio, excluding nonrecurring costs and other nonoperating
items, was 51.6%, placing BB&T in the top 14% of the
30
largest 50 banks in the country, based on information provided by SNL
Securities. The 1998 ratio deteriorated slightly from the efficiency ratio for
1997, which was 51.2%. Both ratios were improved over the 1996 efficiency of
54.8%.
Total personnel expense, the largest component of noninterest expense,
totaled $485.2 million during 1998, an increase of $18.4 million, or 3.9%,
compared to 1997. Personnel expense totaled $466.8 million in 1997 and $404.3
million in 1996. Total personnel expense includes salaries and wages, as well
as pension and other employee benefits. Personnel expenses during 1998 reflect
$5.9 million of nonrecurring costs associated with mergers. Similar expenses
during 1997 totaled $39.1 million. These costs included severance pay,
termination of employment contracts, early retirement packages and other
related benefits. Excluding these nonrecurring charges, total personnel
expense for 1998 would have increased $51.6 million, or 12.1%, compared to
1997. The increase in recurring personnel costs reflects higher costs for
incentive-related compensation, purchase accounting transactions and normal
annual adjustments.
Net occupancy and equipment expense totaled $154.6 million in 1998. This
represented a decrease of $8.1 million, or 5.0%, compared to the expense of
$162.7 million incurred in 1997. Net occupancy and equipment expense totaled
$127.7 million in 1996. The 1998 fluctuations include the impact of $1.1
million of nonrecurring charges relating to branch closings and the
consolidation of bank operations and systems associated with mergers. During
1997, BB&T incurred $24.5 million in similar expenses associated principally
with the UCB merger. Excluding nonrecurring items, net occupancy and equipment
expense for 1998 totaled $153.5 million, an increase of $15.2 million, or
11.0%, compared to $138.2 million in 1997. Depreciation, maintenance and rent
expenses associated with data processing equipment purchased in connection
with implementing mergers and acquisitions, equipment related to new
technology initiatives and computer-related hardware and software expenses
associated with Year 2000 compliance efforts were the major components of the
1998 increase.
Amortization expense associated with intangibles assets, primarily goodwill,
and the amortization of mortgage servicing rights totaled $48.7 million in
1998, an increase of $24.2 million, or 98.9%, compared to 1997, which
reflected an increase of $9.1 million, or 59.3%, compared to 1996. The
significant current year increase reflects substantially higher levels of
goodwill resulting from purchase accounting transactions completed during 1998
and 1997 and a $11.3 million increase in amortization of mortgage servicing
rights. During 1998, BB&T acquired DCI, Stanley, Maryland Federal and four
insurance agencies, which were accounted for as purchase transactions. These
transactions resulted in a $185.1 million increase in goodwill at December 31,
1998, compared to the prior year and accounted for $4.0 million of the
increase in amortization expense.
All other noninterest expenses totaled $272.8 million, a decrease of $41.6
million from 1997 to 1998, primarily because of $72.2 million in nonrecurring
costs associated with the UCB merger recorded in 1997. These expenses included
losses on disposals of fixed assets, operational charge-offs, branch and
departmental supplies, donations, legal fees, accounting fees, printing costs,
regulatory filing fees and other professional services. Excluding the impact
of these charges, as well as $7.3 million of charges related to the Life and
Franklin mergers recorded in 1998, other noninterest expenses would have
increased $23.3 million, or 9.6%. This increase was driven by higher
advertising and marketing expenditures, higher professional fees and costs
associated with the upgrade of BB&T's systems to make them Year 2000
compliant. All other noninterest expenses for 1997 reflected an increase of
$34.5 million, or 12.3%, compared to 1996.
31
The following table presents a breakdown of BB&T's noninterest expenses for
the past three years:
Table 14
Noninterest Expense
Years Ended December 31, % Change
-------------------------- -------------------------
1998 1997 1996 1998 v. 1997 1997 v. 1996
-------- -------- -------- ------------ ------------
(Dollars in thousands)
Salaries and wages....... $397,187 $372,745 $327,222 6.6% 13.9%
Pension and other
employee benefits....... 88,044 94,062 77,104 (6.4) 22.0
Net occupancy expense on
bank premises........... 59,476 79,135 59,379 (24.8) 33.3
Furniture and equipment
expense................. 95,122 83,540 68,335 13.9 22.3
Federal deposit insurance
premiums................ 4,316 5,138 49,999 (16.0) (89.7)
Foreclosed property
expense................. 2,037 3,279 2,531 (37.9) 29.6
Amortization of
intangibles and mortgage
servicing rights........ 48,717 24,496 15,378 98.9 59.3
Software................. 9,945 14,219 11,074 (30.1) 28.4
Telephone................ 20,292 18,483 16,154 9.8 14.4
Donations................ 6,065 6,815 6,079 (11.0) 12.1
Advertising and public
relations............... 25,751 26,540 24,345 (3.0) 9.0
Travel and
transportation.......... 10,176 8,729 7,404 16.6 17.9
Professional services.... 47,358 46,705 26,567 1.4 75.8
Supplies................. 16,152 15,572 14,630 3.7 6.4
Loan and lease expense... 24,291 41,335 32,248 (41.2) 28.2
Deposit related expense.. 14,721 16,820 14,299 (12.5) 17.6
Other noninterest
expenses................ 91,724 110,762 74,614 (17.2) 48.4
-------- -------- -------- ----- -----
Total noninterest
expense............... $961,374 $968,375 $827,362 (0.7)% 17.0%
======== ======== ======== ===== =====
- -------------------------------------------------------------------------------
Year 2000 Project
The Year 2000 issue is pervasive and presents both technical and business
risks affecting most, if not all, of BB&T's business activities. The "Year
2000 Issue" is a general term used to describe the various problems that may
result from the improper processing of dates and date-sensitive calculations
by computers and equipment with embedded microchips as the Year 2000
approaches. These problems generally arise because most of the world's
computer hardware and software has historically used only two digits to
identify the applicable year. Any of BB&T's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. These problems may also arise from other sources as well,
such as the use of special codes and conventions in software that make use of
the date field. If not corrected, this could result in system errors or
failures causing disruptions of normal business operations.
BB&T began planning its Year 2000 strategy in 1996. Management determined
that it would be required to modify or replace significant portions of BB&T's
information technology platform and other systems in order for them to be Year
2000 ready. Computer systems that have the ability to process dates before,
during and after January 1, 2000 without malfunction are considered to be
"Year 2000 ready." In early 1997, BB&T formed a Year 2000 Program Office,
which operates as a joint effort between BB&T and outside service providers.
The mission of the Program Office is to address Year 2000 issues affecting
BB&T's various systems. The program office management committee meets
regularly to review and document the progress of the Year 2000 project.
Year 2000 Project
BB&T's Year 2000 strategy is divided into five major phases: inventory,
assessment, remediation, testing and clean management ("Year 2000 Project").
During the inventory and assessment phases, BB&T identified
32
all specific systems that required modification or replacement and assessed
the steps necessary to remediate the Year 2000 Issue. In the remediation
phase, the systems requiring remediation were replaced, modified or retired,
as appropriate. The testing phase includes internal and external testing with
third parties to ensure that the remediated systems will accurately process
dates and date data before, on and after January 1, 2000. Finally, the clean
management phase includes placing the remediated systems back into production,
and the implementation of processes and procedures to monitor continued Year
2000 readiness and to protect remediated systems from alterations that might
affect Year 2000 readiness.
In order to carry out the Year 2000 project, BB&T divided its internal and
external systems into three major categories: core business systems,
distributed business systems and non-information technology systems. The core
business systems are those systems that run on BB&T's mainframe. The
distributed systems are those systems that do not run on the mainframe. The
non-information technology systems are those systems that have embedded
microchips or microprocessors controlling the function of equipment; such as
elevators, fire and security systems, etc. These three categories are further
broken down into mission-critical and non-mission-critical systems. BB&T has
prioritized its systems for remediation based on their overall importance to
the operations of BB&T. Mission-critical systems are those systems that are
critical to the operations of BB&T and / or vital to the business continuity
of BB&T. While the Year 2000 Project will address all internal and external
systems used by BB&T to conduct its business, the highest priority is given to
mission-critical systems.
State of Readiness
BB&T's current state of readiness as of March 19, 1999, is as follows:
Core business systems--mission-critical and non-mission critical: The
inventory, assessment and remediation phases have been completed and the
testing phase is substantially complete. BB&T has placed 97% of remediated
core business systems back into production.
Distributed business systems--mission-critical: The inventory, assessment
and remediation phases have been completed and the testing phase is
substantially complete. BB&T has placed 91% of remediated mission-critical
distributed business systems back into production.
Distributed business systems--non-mission-critical: The inventory and
assessment phases are complete and the majority of the remediation phase is
complete. Management anticipates that remediation and testing for these
systems will be completed by June 30, 1999.
Non-information technology systems--mission-critical: Embedded technology
controls certain building security and operations, such as power management,
elevators and security systems. All facilities, including buildings, equipment
and other infrastructure using embedded technology are being evaluated. We
expect that those facilities in which critical processes are performed will be
confirmed as Year 2000 ready by June 30, 1999.
As BB&T has completed testing for each of the above systems, the clean
management phase has been implemented. Clean management will be an ongoing
process that will continue into the Year 2000. Management anticipates that
BB&T will be substantially complete with all phases of the Year 2000 project
by June 30, 1999, in accordance with Federal guidelines.
BB&T's Year 2000 readiness plans and status have been reviewed during
compliance audits by various state and Federal regulators. These reviews have
not resulted in any significant findings of deficiency by regulators, and BB&T
has not failed to meet any important deadlines during the Year 2000 project.
Risks
The failure to correct a mission-critical Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities and
operations. Such failures could materially and adversely affect BB&T's
33
financial condition or results of operations. Management presently believes
that with modifications to existing systems and, in certain circumstances,
conversions to new systems, the effects of the Year 2000 issue on BB&T will be
minimized.
Third Party Assessments
BB&T relies on numerous third parties and conducts formal communications on
an ongoing basis with these third parties to determine the extent to which
BB&T may be vulnerable to their failure to remediate their own Year 2000
issues. These third parties include providers of core and distributed systems-
related products and services; external agents, which include government
agencies and other agents requiring systems interfaces; infrastructure-related
third parties, including utilities and telecommunications providers, landlords
and miscellaneous suppliers; and capital markets partners, which includes any
third parties requiring financial settlement. During the fourth quarter of
1998 and early in 1999, BB&T mailed in excess of 2,500 surveys to these third
parties in order to assess the status of their Year 2000 readiness. These
surveys included more than 200 third parties considered mission-critical to
BB&T's operations. Information has been obtained from 76% of these mission-
critical third parties. Risk assessments have been completed on the mission-
critical third parties, and appropriate measures to minimize risk to the
extent possible are being undertaken with those vendors that have been
determined to represent high levels of risk to BB&T. Among those that have
responded, management has determined that approximately 5% represent a high
risk to BB&T. For these third parties, appropriate contingency plans have been
developed and are constantly being monitored and revised accordingly. However,
BB&T has no viable alternative for certain suppliers, such as utilities and
telecommunications providers. Also, as with all financial institutions, BB&T
places a high degree of reliance on the systems of other institutions,
including governmental agencies, to settle transactions.
BB&T also relies on clients to make preparations for the Year 2000 to
protect their business operations from interruptions that could threaten their
ability to honor their financial commitments. During 1998, BB&T developed and
implemented revised underwriting policies to address Year 2000 issues for our
large commercial clients and new commercial clients. Adherence to these
policies is required for credits in excess of $1 million and encouraged for
other significant clients. BB&T distributed approximately 3,000 questionnaires
to clients in order to assess the state of their Year 2000 readiness. Lenders
were required to follow up with their clients to ensure the accuracy of the
responses to the questionnaires. Based on the results of these questionnaires,
clients were assigned a Year 2000 "risk grade", which is considered in the
calculation of the allowance for loan and lease losses. Among these lending
relationships, BB&T rated approximately 3.4% of the commercial loan portfolio
as representing a high risk to BB&T, and the remaining clients were determined
to represent low risk to BB&T. For clients that were judged to represent
significant risks to BB&T, the allowance for loan and lease losses has been
evaluated for adequacy. These risk assessments are updated quarterly for
larger clients and potential new clients.
BB&T is also assessing potential Year 2000 risks associated with its
fiduciary activities. When making investment decisions or recommendations,
BB&T considers the Year 2000 issue in our analyses, and may take certain steps
to investigate Year 2000 readiness in assessing assets held in trust.
Despite these efforts, because of the general uncertainty inherent in the
Year 2000 issue, there can be no assurance that the systems of other
organizations upon which BB&T's operations rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with BB&T's systems, would not have a materially adverse effect
on BB&T. In view of the uncertainties surrounding the impact of the Year 2000
issue, management considers BB&T's most reasonably likely worst case scenario
to be the loss of basic infrastructure services, such as utilities and
telecommunications.
Contingency Business and Event Planning
Management is enhancing BB&T's existing business resumption plans to address
various Year 2000 scenarios in the event that efforts to remediate BB&T's
systems are not fully successful or are not completed in accordance with
current expectations. Each line of business has significant involvement in the
preparation of
34
Year 2000 contingency plans designed to address specific business functions.
The contingency plans include the use of third party service providers,
alternative commercial vendors, alternative data security, redundant
facilities and other contingency service suppliers. For mission-critical
systems, these contingency plans have been completed. BB&T expects to complete
its contingency planning for non-mission-critical systems by March 31, 1999.
These plans will be amended as BB&T continues to obtain information relating
to its own systems and the systems of its significant suppliers and large
clients. BB&T will continually test and revise the contingency plans as the
Year 2000 approaches.
Costs
The projected total incremental cost of the Year 2000 project is currently
estimated at approximately $30 million and is being funded through operating
cash flows. As of December 31, 1998, a cumulative total of approximately $19.4
million had been spent on the assessment of and efforts in connection with the
Year 2000 project, of which $2.8 million represented internal personnel and
other costs.
Information about BB&T's Year 2000 Project, other than historical
information, should be considered forward looking in nature and subject to
various risks, uncertainties and assumptions. The costs of the project and the
date on which BB&T plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the inability to control third party vendor and
customer modification plans, the ability of BB&T to implement suitable
contingency plans, Congressional legislation, regulatory action and similar
uncertainties.
Provision for Income Taxes
BB&T's provision for income taxes for 1998 increased $42.2 million, or
22.2%, compared to 1997 and totaled $231.9 million. The provision for income
taxes totaled $189.7 million in 1997 and $168.5 million in 1996. Excluding the
income tax effect related to the nonrecurring items discussed previously,
BB&T's tax provision would have been $235.3 million in 1998, $218.3 million in
1997 and $182.3 million in 1996. Excluding the tax effect related to the
nonrecurring items, BB&T's effective tax rates for the years ended December
31, 1998, 1997 and 1996 were 31.5%, 33.7% and 33.1%, respectively.
Market Risk Management
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, BB&T's primary market
risk exposure is interest rate risk. A primary objective in interest rate risk
management is the avoidance of wide fluctuations in net interest income
through balancing the effect of changes in interest rates on interest-
sensitive assets and interest-sensitive liabilities. Management uses balance
sheet repositioning as an efficient and cost-effective means of managing
interest rate risk. This is accomplished through the strategic pricing of
asset and liability accounts. The expected result of this process is the
development of appropriate maturity and repricing opportunities in those
accounts to produce consistent earnings during changing interest rate
environments. The Asset/Liability Management Committee ("ALCO") monitors loan,
investment and liability portfolios to ensure comprehensive balance sheet
management of interest rate risk.
Asset/liability management activities are also designed to achieve
relatively stable net interest margins and assure liquidity by coordinating
the volumes, maturities or repricing opportunities and interest rate
sensitivities of earning assets, deposits and borrowed funds. It is the
responsibility of the ALCO to determine and achieve the most appropriate mix
of earning assets and interest-bearing liabilities, as well as ensure an
adequate level of liquidity and capital. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to
35
interest rate exposure and liquidity. The ALCO meets regularly to review
BB&T's interest rate and liquidity risk exposures in relation to present and
prospective market and business conditions, and adopts funding and balance
sheet management strategies that are intended to ensure that the potential
impact on earnings and liquidity of fluctuations in interest rates is within
acceptable standards.
BB&T also uses off-balance sheet financial instruments to manage interest
rate sensitivity and net interest income. These instruments, commonly referred
to as derivatives, primarily consist of interest rate swaps, caps, floors,
financial forward and futures contracts and options written and purchased.
Management accounts for these financial instruments as hedges when the
following conditions are met: (1) the specific assets, liabilities, firm
commitments or anticipated transactions (or an identifiable group of
essentially similar items) to be hedged expose BB&T to interest rate risk or
price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of
credit. All of the derivatives contracts to which BB&T is a party settle
monthly, quarterly or semiannually. Accordingly, the amount of off-balance
sheet credit exposure to which BB&T is exposed at any time is immaterial.
Further, BB&T has netting agreements with the dealers with which it does
business. Because of these netting agreements, BB&T had a minimal amount of
off-balance sheet credit exposure at December 31, 1998.
Derivatives contracts are written in amounts referred to as notional
amounts. Notional amounts do not represent amounts to be exchanged between
parties and are not a measure of financial risks, but only provide the basis
for calculating payments between the counterparties. On December 31, 1998,
BB&T had interest rate swaps, caps and floors outstanding with notional
amounts totaling $3.7 billion. The estimated fair value of open contracts used
for risk management purposes at December 31, 1998, reflected pretax net
unrealized gains of $38.5 million.
BB&T uses these derivatives as synthetic instruments to hedge specified
assets or groups of assets, liabilities or groups of liabilities, forward
commitments and anticipated transactions. BB&T's derivatives are primarily
used to hedge variable rate commercial loans, adjustable rate mortgage loans,
retail certificates of deposit and floating rate notes. These hedges
contributed net interest income of $878,100 in 1998, compared with net
interest income of $1.1 million in 1997 and net interest expense of $154,200
in 1996.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. BB&T also utilizes over-the-counter purchased put options and written
call options in its mortgage banking activities. Purchased put options are
used to hedge the mortgage pipeline against increasing interest rates. Written
call options are used to reduce the premiums paid for purchased put options
thereby reducing the cost of the hedge.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature
and terms of derivative financial instruments. See Note Q, "Derivatives and
Off-Balance Sheet Financial Instruments" for the required quantitative
disclosures.
BB&T's interest rate sensitivity is illustrated in the following table. The
table reflects rate-sensitive positions at December 31, 1998, and is not
necessarily reflective of positions throughout each year. The carrying amounts
of interest-rate-sensitive assets and liabilities and the notional amounts of
swaps and other derivative financial instruments are presented in the periods
in which they next reprice to market rates or mature and are aggregated to
show the interest rate sensitivity gap. To reflect anticipated prepayments,
certain asset and liability categories are included in the table based on
estimated rather than contractual maturity dates.
36
Table 15
Interest Rate Sensitivity Gap Analysis
December 31, 1998
Expected Repricing or Maturity Date
-------------------------------------------------------------
Within One One to Three to After Five
Year Three Years Five Years Years Total
----------- ----------- ---------- ---------- -----------
(Dollars in thousands)
Assets
Securities*........... $ 1,893,946 $ 2,031,867 $2,840,321 $1,292,823 $ 8,058,957
Federal funds sold and
securities purchased
under resale
agreements or similar
arrangements......... 103,210 -- -- -- 103,210
Loans and leases**.... 14,387,903 4,635,728 2,667,032 2,004,113 23,694,776
Other interest-earning
assets............... 4,792 -- -- -- 4,792
----------- ----------- ---------- ---------- -----------
Total interest-earning
assets................. 16,389,851 6,667,595 5,507,353 3,296,936 31,861,735
----------- ----------- ---------- ---------- -----------
Liabilities
Savings and interest
checking***.......... -- 917,501 305,834 305,831 1,529,166
Money rate
savings***........... 3,436,017 3,436,016 -- -- 6,872,033
Other time deposits... 7,902,860 2,475,587 250,464 131,172 10,760,083
Foreign deposits...... 638,676 -- -- -- 638,676
Federal funds
purchased and
securities sold under
repurchase agreements
or similar
arrangements......... 2,307,084 -- -- -- 2,307,084
Long-term debt and
other borrowings..... 2,861,458 759,632 445,253 1,732,608 5,798,951
----------- ----------- ---------- ---------- -----------
Total interest-bearing
liabilities............ 17,146,095 7,588,736 1,001,551 2,169,611 $27,905,993
----------- ----------- ---------- ---------- ===========
Asset-liability gap..... (756,244) (921,141) 4,505,802 1,127,325
----------- ----------- ---------- ----------
Derivatives affecting
interest rate
sensitivity:
Pay fixed interest
rate swaps........... 169,946 (7,633) (98,236) (64,077)
Receive fixed interest
rate swaps........... (740,000) 175,000 305,000 260,000
Caps, floors and
collars.............. (747,250) 500,000 247,250 --
----------- ----------- ---------- ----------
(1,317,304) 667,367 454,014 195,923
----------- ----------- ---------- ----------
Interest rate
sensitivity gap........ $(2,073,548) $(253,774) $4,959,816 $1,323,248
=========== =========== ========== ==========
Cumulative interest rate
sensitivity gap........ $(2,073,548) $(2,327,322) $2,632,494 $3,955,742
=========== =========== ========== ==========
- --------
* Securities based on amortized cost.
** Loans and leases include loans held for sale and are net of unearned
income.
*** Projected runoff of deposits that do not have a contractual maturity date
was computed based upon decay rate assumptions developed by bank
regulators to assist banks in addressing FDICIA rule 305.
- -------------------------------------------------------------------------------
Liquidity, Inflation and Changing Interest Rates
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in interest rates and the efforts of the Board of
Governors of the Federal Reserve System ("FRB") to regulate money and credit
conditions have a greater effect on a financial institution's profitability
than do the effects of higher costs for goods and services. Through its
balance sheet management function, BB&T is positioned to respond to changing
interest rates and inflationary trends.
37
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of projected earnings to changes in interest rates.
Simulation takes into account the current contractual agreements that BB&T has
made with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer model that incorporates current
volumes and rates, scheduled maturities and projected payments, repricing
opportunities and anticipated growth. The model projects earnings based on
current and projected portfolio balances and rates. This level of detail is
needed to correctly simulate the effect that changes in interest rates and
portfolio balances will have on the earnings of BB&T. This method is subject
to the accuracy of the assumptions that underlie the process, but it provides
a better illustration of the sensitivity of earnings to changes in interest
rates than other analyses such as static or dynamic gap.
The asset/liability management process involves various analyses. Management
determines the most likely outlook for the economy and interest rates by
analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance
are all considered, given the current environmental situation. This data is
combined with various interest rate scenarios to provide management with
information necessary to analyze interest sensitivity and to aid in the
development of strategies to reach performance goals.
The following table represents the interest sensitivity position of BB&T as
of December 31, 1998. This position can be modified by management within a
short time period if necessary. Key assumptions in the preparation of the
table include prepayment speeds on mortgage-related assets; cash flows and
maturities of derivative financial instruments; changes in market condition,
loan volumes and pricing; deposit sensitivity; customer preferences; and
capital plans. This tabular data does not reflect the impact of a change in
the credit quality of BB&T's assets and liabilities. To attempt to quantify
the potential change in net interest income, given a change in interest rates,
various interest rate scenarios are applied to projected balances, maturities
and repricing opportunities. The resulting change in net interest income
reflects the level of sensitivity that net interest income has in relation to
changing interest rates.
- -------------------------------------------------------------------------------
Table 16
Interest Sensitivity Simulation Analysis
Interest Rate
Scenario
-------------
Annualized Hypothetical Percentage
Linear Prime Rate Change in Net Interest Income
------ ---------- ----------------------------------
3.00% 10.75% -2.29%
1.50 9.25 -.96
(1.50) 6.25 -.25
(3.00) 4.75 -.18
- -------------------------------------------------------------------------------
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
parallel change in interest rates over six months from the most likely
interest rate scenario, and a maximum of 6% for a 300 basis point change over
12 months. It is management's ongoing objective to effectively manage the
impact of changes in interest rates and minimize the resulting effect on
earnings as evidenced by the preceding table.
Liquidity represents a bank's continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities and funding of loan commitments. In addition to its level of
liquid assets, many other factors affect a bank's ability to meet liquidity
needs, including access to a variety of funding sources, capital position and
general market conditions.
Traditional sources of liquidity include proceeds from maturity of
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements, FHLB advances and other short-term borrowed
funds, as well as long-term debt instruments, supplement these traditional
sources. Management believes liquidity obtainable from these sources is
adequate to meet current requirements.
38
Capital Adequacy and Resources
The maintenance of appropriate levels of capital is a management priority.
BB&T's principal capital planning goals are to provide an adequate return to
shareholders while retaining a sufficient base from which to support future
growth and compliance with all regulatory standards.
Shareholders' equity grew 13.1% in 1998 principally as a result of earnings
retained after dividends, share issuances made in connection with merger and
acquisition activity and shares issued under employee benefit and stock option
plans. These increases were partially offset by the repurchase of 10.2 million
shares of common stock at a total cost of $344.2 million that were
subsequently reissued in conjunction with business combinations.
Bank holding companies and their subsidiaries are subject to various capital
requirements mandated and monitored by Federal banking agencies. Risk-based
capital ratios measure the relationship of capital to a combination of balance
sheet and off-balance sheet risk. The risk-weighted values of both balance
sheet and off-balance sheet items are determined in accordance with risk
factors specified by Federal Bank regulatory authorities.
Tier 1 capital (common shareholders' equity excluding unrealized gains or
losses on securities available for sale, net of taxes, and nonqualifying
intangible assets) is required to be at least 4% of risk-weighted assets, and
total capital (the sum of Tier 1 capital, a qualifying portion of the
allowance for loan and lease losses and qualifying subordinated debt) must be
at least 8% of risk-weighted assets. The Tier 1 capital ratio for BB&T at the
end of 1998 was 10.0%, and the total capital ratio was 14.8%. At the end of
1997, those ratios were 10.3% and 13.9%, respectively.
In addition to risk-based capital ratios, bank holding companies and their
subsidiaries are subject to minimum leverage capital requirements. Management
views the Tier 1 leverage ratio, calculated as Tier 1 capital as a percentage
of quarterly average tangible assets, as the principal indicator of capital
strength. The minimum regulatory required leverage ratio ranges from 3% to 5%,
depending upon Federal bank regulatory agency evaluation of an organization's
overall safety and soundness. BB&T's regulatory capital and ratios are set
forth in the following table.
- -------------------------------------------------------------------------------
Table 17
Capital--Components and Ratios
December 31,
----------------------
1998 1997
---------- ----------
(Dollars in
thousands)
Tier 1 capital........................................ $2,302,400 $2,153,212
Tier 2 capital........................................ 1,106,501 756,351
---------- ----------
Total regulatory capital.............................. $3,408,901 $2,909,563
========== ==========
Risk-based capital ratios:
Tier 1 capital...................................... 10.0% 10.3%
Total regulatory capital............................ 14.8 13.9
Tier 1 leverage ratio................................. 6.8 7.3
- -------------------------------------------------------------------------------
Common Stock and Dividends
BB&T's ability to pay dividends is primarily dependent on earnings from
operations, the adequacy of capital and the availability of liquid assets for
distribution. BB&T's ability to generate liquid assets for distribution is
primarily dependent on the ability of the banking subsidiaries to pay
dividends to BB&T. Historically, BB&T's payment of cash dividends has been
based on management's goals to retain sufficient
39
capital to support future growth and to meet regulatory requirements while
providing a competitive return on investment to shareholders. BB&T's common
dividend payout ratio, computed by dividing dividends paid per common share by
basic earnings per common share, was 37.7% in 1998. Excluding the impact of
the nonrecurring charges discussed in "Analysis of Results of Operations," the
dividend payout ratio would have been 37.1%. BB&T's annual cash dividend per
common share was increased 13.8% during 1998 to $.66 per common share for the
year. This increase marked the 26th consecutive year that BB&T's cash dividend
has been increased. A discussion of dividend restrictions is included in Note
N.--"Regulatory Requirements and Other Restrictions."
BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "BBT". BB&T's common stock was held by 57,087 shareholders of
record at December 31, 1998. The accompanying table, "Quarterly Common Stock
Summary," sets forth the quarterly high, low and last sales prices for the
common stock based on the daily closing price and the dividends paid per share
of common stock for each of the last eight quarters.
- -------------------------------------------------------------------------------
Table 18
Quarterly Common Stock Summary
1998 1997
------------------------------ ------------------------------
Sales Prices Sales Prices
-------------------- Dividends -------------------- Dividends
High Low Last Paid High Low Last Paid
------ ------ ------ --------- ------ ------ ------ ---------
Quarter Ended:
March 31....... $33.84 $29.03 $33.84 $.155 $20.38 $17.63 $18.63 $.135
June 30........ 34.06 32.03 33.81 .155 23.56 17.88 22.50 .135
September 30... 36.03 28.00 29.94 .175 27.56 22.66 26.72 .155
December 31.... 40.63 27.31 40.31 .175 32.50 25.97 32.03 .155
----- -----
Year......... 40.63 27.31 40.31 .66 32.50 17.63 32.03 .58
===== =====
- -------------------------------------------------------------------------------
Fourth Quarter Results
Net income for the fourth quarter of 1998 was $136.5 million, compared to
earnings of $89.4 million for the comparable period of 1997. On a per share
basis, diluted net income was $.46 for the quarter compared to $.31 a year
ago. Annualized returns on average assets and average equity were 1.59% and
19.60%, respectively, for the fourth quarter of 1998. The fourth quarter of
1997 included $25.4 million of after-tax nonrecurring charges primarily
associated with the completion of mergers and acquisitions. If these items are
excluded from 1997 results, net income for the fourth quarter of 1998 would
have increased $21.6 million, or 18.8%, compared to the fourth quarter of 1997
and would have increased 17.9% on a diluted per share basis.
Net interest income on an FTE basis amounted to $343.4 million for the
fourth quarter of 1998, an increase of 11.0% compared to $309.4 million for
the same period of 1997. Noninterest income totaled $139.0 million for the
fourth quarter of 1998, up 24.9% from $111.3 million earned during the fourth
quarter of 1997. BB&T's noninterest expense totaled $249.7 million, up 2.7%
from the $243.2 million recorded in the fourth quarter of the prior year.
Excluding the merger-related charges from the 1997 results as discussed above,
noninterest expense for the fourth quarter of 1998 would have increased 17.1%
over this time frame.
The fourth quarter 1998 provision for loan and lease losses decreased
compared to the prior year because of lower net charge-offs and overall
improved levels of asset quality. The provision totaled $16.0 million for the
fourth quarter of 1998 compared to $30.0 million for the fourth quarter of
1997.
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1998.
40
Table 19
Quarterly Financial Summary--Unaudited
1998 1997
----------------------------------------------- ------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Consolidated Summary of
Operations:
Net interest income
FTE................... $ 343,350 $ 330,025 $ 321,270 $ 317,552 $ 309,350 $ 306,332 $ 306,487 $ 289,633
FTE adjustment......... 17,689 16,174 15,692 15,238 15,359 14,290 13,135 10,493
Provision for loan and
lease losses.......... 16,000 20,015 21,955 22,340 29,995 21,845 24,920 21,250
Securities gains
(losses), net......... 2,040 2,064 1,188 2,460 1,330 1,016 (933) 1,800
Other noninterest
income................ 136,992 135,027 129,048 119,183 109,952 149,747 98,275 96,790
Noninterest expense.... 249,652 244,365 234,698 232,659 243,197 314,966 208,423 201,789
Provision for income
taxes................. 62,548 59,354 56,478 53,517 42,641 39,759 54,069 53,230
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 136,493 $ 127,208 $ 122,683 $ 115,441 $ 89,440 $ 66,235 $ 103,282 $ 101,461
=========== =========== =========== =========== =========== =========== =========== ===========
Diluted earnings per
share................. $ .46 $ .44 $ .42 $ .39 $ .31 $ .23 $ .35 $ .34
=========== =========== =========== =========== =========== =========== =========== ===========
Selected Average
Balances:
Assets................. $34,150,825 $31,952,749 $32,068,458 $31,315,298 $29,939,928 $29,124,995 $28,773,928 $27,637,455
Securities, at
amortized cost........ 8,273,621 7,461,704 7,725,496 7,665,281 7,389,149 7,383,652 7,336,677 6,993,068
Loans and leases *..... 23,279,579 22,271,025 22,105,607 21,387,170 20,561,612 19,989,459 19,727,117 18,971,864
Total earning assets... 31,719,233 29,882,312 30,032,124 29,260,696 28,082,946 27,435,657 27,148,775 26,059,316
Deposits............... 22,537,780 21,317,738 21,336,517 20,950,830 20,453,770 20,400,279 20,647,455 20,109,492
Short-term borrowed
funds................. 3,766,831 3,488,026 4,029,351 3,683,668 3,313,540 3,031,576 2,803,201 2,471,697
Long-term debt......... 4,521,380 4,167,594 3,700,977 3,701,186 3,358,158 3,068,112 2,675,310 2,433,006
Total interest-bearing
liabilities........... 27,705,249 26,039,884 26,198,417 25,601,297 24,370,675 23,820,621 23,481,806 22,487,763
Shareholders' equity... 2,762,782 2,448,113 2,463,748 2,497,084 2,323,200 2,298,912 2,313,691 2,290,331
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- --------------------------------------------------------------------------------
41
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
(Dollars in thousands, except per share data)
As of / For the Years Ended December 31,
----------------------------------------------------------------------------- Compound
1998 1997 1996 1995 1994 1993 Growth Rate
------------ ----------- ----------- ----------- ----------- ----------- -----------
Summary of Operations
Interest income........ $ 2,481,182 $ 2,265,488 $ 2,059,043 $ 1,979,646 $ 1,659,184 $ 1,492,719 10.7%
Interest expense....... 1,233,778 1,106,963 998,849 1,005,286 719,158 626,985 14.5
------------ ----------- ----------- ----------- ----------- ----------- ----
Net interest income.... 1,247,404 1,158,525 1,060,194 974,360 940,026 865,734 7.6
Provision for loan and
lease losses.......... 80,310 98,010 62,273 42,559 25,526 61,625 5.4
------------ ----------- ----------- ----------- ----------- ----------- ----
Net interest income
after provision for
loan and lease
losses................ 1,167,094 1,060,515 997,921 931,801 914,500 804,109 7.7
Noninterest income..... 528,002 457,977 341,259 256,740 270,989 268,470 14.5
Noninterest expense.... 961,374 968,375 827,362 828,174 750,201 810,018 3.5
------------ ----------- ----------- ----------- ----------- ----------- ----
Income before income
taxes................. 733,722 550,117 511,818 360,367 435,288 262,561 22.8
Provision for income
taxes................. 231,897 189,699 168,506 120,568 151,066 97,162 19.0
------------ ----------- ----------- ----------- ----------- ----------- ----
Income before
cumulative effect of
changes in accounting
principles............ 501,825 360,418 343,312 239,799 284,222 165,399 24.9
Less: cumulative
effect of changes in
accounting
principles, net of
income taxes........ -- -- -- -- -- (32,629) NM
------------ ----------- ----------- ----------- ----------- ----------- ----
Net income............. $ 501,825 $ 360,418 $ 343,312 $ 239,799 $ 284,222 $ 132,770 30.5
============ =========== =========== =========== =========== =========== ====
Per Common Share
Average shares
outstanding (000's):
Basic................ 287,428 287,481 287,535 287,925 283,875 272,931 1.0
Diluted.............. 293,571 292,470 293,757 300,156 296,329 286,605 0.5
Basic earnings:
Income before
cumulative effect... $ 1.75 $ 1.25 $ 1.19 $ 0.82 $ 0.98 $ 0.59 24.3
Less: cumulative
effect -- -- -- -- -- (0.12) NM
------------ ----------- ----------- ----------- ----------- ----------- ----
Net income........... $ 1.75 $ 1.25 $ 1.19 $ 0.82 $ 0.98 $ 0.47 30.0
============ =========== =========== =========== =========== =========== ====
Diluted earnings:
Income before
cumulative effect... $ 1.71 $ 1.23 $ 1.17 $ 0.80 $ 0.96 $ 0.58 24.3
Less: cumulative
effect -- -- -- -- -- (0.11) NM
------------ ----------- ----------- ----------- ----------- ----------- ----
Net income........... $ 1.71 $ 1.23 $ 1.17 $ 0.80 $ 0.96 $ 0.47 29.6
============ =========== =========== =========== =========== =========== ====
Cash dividends paid.... $ .66 $ .58 $ .50 $ .43 $ .37 $ .32 15.6
Shareholders' equity... 9.51 8.46 7.78 7.38 6.61 5.91 10.0
Average Balance Sheets
Securities, at
amortized cost........ $ 7,782,316 $ 7,277,017 $ 6,848,895 $ 6,809,077 $ 6,476,343 $ 5,641,778 6.6
Loans and leases *..... 22,266,058 19,817,354 17,961,260 17,106,917 15,405,158 13,842,651 10.0
Other assets........... 2,330,079 1,781,715 1,659,001 1,657,713 1,692,127 1,659,958 7.0
------------ ----------- ----------- ----------- ----------- ----------- ----
Total assets......... $ 32,378,453 $28,876,086 $26,469,156 $25,573,707 $23,573,628 $21,144,387 8.9
============ =========== =========== =========== =========== =========== ====
Deposits............... $ 21,539,467 $20,403,684 $19,594,913 $18,524,803 $18,086,694 $16,948,370 4.9
Other liabilities...... 4,270,158 3,279,113 2,680,914 3,670,664 2,782,404 1,766,415 19.3
Long-term debt......... 4,025,428 2,886,686 2,027,683 1,303,992 870,697 733,047 40.6
Common shareholders'
equity................ 2,543,400 2,306,603 2,150,487 2,001,903 1,759,690 1,622,412 9.4
Preferred shareholders'
equity................ -- -- 15,159 72,345 74,143 74,143 NM
------------ ----------- ----------- ----------- ----------- ----------- ----
Total liabilities and
shareholders'
equity.............. $ 32,378,453 $28,876,086 $26,469,156 $25,573,707 $23,573,628 $21,144,387 8.9
============ =========== =========== =========== =========== =========== ====
Period End Balances
Total assets........... $ 34,427,227 $31,290,247 $27,625,225 $26,135,308 $24,758,727 $23,274,795 8.1
Deposits............... 23,046,907 21,375,974 20,099,089 19,231,282 18,258,880 18,290,673 4.7
Long-term debt......... 4,736,934 3,534,203 2,320,978 1,542,064 1,095,781 1,010,168 36.2
Shareholders' equity... 2,758,548 2,439,110 2,254,398 2,212,438 1,972,144 1,753,129 9.5
Selected Performance
Ratios
Rate of return on:
Average total
assets.............. 1.55% 1.25% 1.30% 0.94% 1.21% 0.63%
Average common
shareholders'
equity.............. 19.73 15.63 15.94 11.72 15.86 7.86
Dividend payout........ 37.71 46.40 42.02 52.44 37.76 68.02
Average equity to
average assets........ 7.86 7.99 8.18 8.11 7.78 8.02
- -------
* Loans and leases are net of unearned income and include loans held for sale.
NM--Not meaningful.
42
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of BB&T is responsible for the preparation of the financial
statements, related financial data and other information in this Annual Report
on Form 10-K. The financial statements are prepared in accordance with
generally accepted accounting principles and include amounts based on
management's estimates and judgment where appropriate. Financial information
appearing throughout this Annual Report on Form 10-K is consistent with the
financial statements.
BB&T's accounting system, which records, summarizes and reports financial
transactions, is supported by an internal control structure which provides
reasonable assurance that assets are safeguarded and that transactions are
recorded in accordance with BB&T's policies and established accounting
procedures. As an integral part of the internal control structure, BB&T
maintains a professional staff of internal auditors who monitor compliance
with and assess the effectiveness of the internal control structure.
The Audit Committee of BB&T's Board of Directors, composed solely of outside
directors, meets regularly with BB&T's management, internal auditors and
independent public accountants to review matters relating to financial
reporting, internal control structure and the nature, extent and results of
the audit effort. The independent public accountants and the internal auditors
have access to the Audit Committee with or without management present.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, who render an independent opinion on
management's financial statements. Their appointment was recommended by the
Audit Committee, approved by the Board of Directors and ratified by the
shareholders. Their examination provides an objective assessment of the degree
to which BB&T's management meets its responsibility for financial reporting.
Their opinion on the financial statements is based on auditing procedures,
which include reviewing the internal control structure to determine the timing
and scope of audit procedures and performing selected tests of transactions
and records as they deem appropriate. These auditing procedures are designed
to provide a reasonable level of assurance that the financial statements are
fairly presented in all material respects.
John A. Allison Scott E. Reed Sherry A. Kellett
Chairman and Chief Financial Officer Controller
Chief Executive Officer
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BB&T Corporation:
We have audited the accompanying consolidated balance sheets of BB&T
Corporation (a North Carolina corporation), and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income, changes
in shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BB&T Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Charlotte, North Carolina,
January 29, 1999.
44
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except per share data)
1998 1997
----------- -----------
Assets
Cash and due from banks............................. $ 938,797 $ 890,003
Interest-bearing deposits with banks................ 4,792 77,622
Federal funds sold and securities purchased under
resale agreements or similar arrangements.......... 103,210 225,245
Trading securities.................................. 60,422 67,878
Securities available for sale....................... 7,971,374 7,296,128
Securities held to maturity (market value: $130,820
at December 31, 1998 and $233,636 at December 31,
1997).............................................. 127,470 230,257
Loans held for sale................................. 1,029,697 509,141
Loans and leases, net of unearned income............ 22,665,079 20,724,729
Allowance for loan and lease losses................ (314,387) (279,596)
----------- -----------
Loans and leases, net............................ 22,350,692 20,445,133
----------- -----------
Premises and equipment, net......................... 453,092 434,260
Other assets........................................ 1,387,681 1,114,580
----------- -----------
Total assets..................................... $34,427,227 $31,290,247
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits....................... $ 3,246,949 $ 2,973,151
Savings and interest checking...................... 1,529,166 1,741,215
Money rate savings................................. 6,872,033 5,352,973
Other time deposits................................ 10,760,083 9,923,003
Foreign deposits................................... 638,676 1,385,632
----------- -----------
Total deposits................................... 23,046,907 21,375,974
Short-term borrowed funds........................... 3,369,101 3,493,199
Long-term debt...................................... 4,736,934 3,534,203
Accounts payable and other liabilities.............. 515,737 447,761
----------- -----------
Total liabilities................................ 31,668,679 28,851,137
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1998 and 1997........................ -- --
Common stock, $5 par, 500,000,000 shares
authorized, issued and outstanding, 290,210,766 at
December 31, 1998 and 144,084,061 at December 31,
1997.............................................. 1,451,054 720,420
Additional paid-in capital......................... 154,034 171,791
Retained earnings.................................. 1,091,875 1,498,493
Loan to employee stock ownership plan and unvested
restricted stock.................................. -- (962)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of $38,724 at
December 31, 1998 and $31,881 at December 31,
1997.............................................. 61,585 49,368
----------- -----------
Total shareholders' equity....................... 2,758,548 2,439,110
----------- -----------
Total liabilities and shareholders' equity....... $34,427,227 $31,290,247
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
45
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands, except
per share data)
Interest Income
Interest and fees on loans and leases....... $1,980,119 $1,791,663 $1,622,516
Interest and dividends on securities........ 490,892 468,741 429,275
Interest on short-term investments.......... 10,171 5,084 7,252
---------- ---------- ----------
Total interest income...................... 2,481,182 2,265,488 2,059,043
---------- ---------- ----------
Interest Expense
Interest on deposits........................ 809,076 784,554 756,749
Interest on short-term borrowed funds....... 194,436 152,202 123,896
Interest on long-term debt.................. 230,266 170,207 118,204
---------- ---------- ----------
Total interest expense..................... 1,233,778 1,106,963 998,849
---------- ---------- ----------
Net Interest Income.......................... 1,247,404 1,158,525 1,060,194
Provision for loan and lease losses......... 80,310 98,010 62,273
---------- ---------- ----------
Net Interest Income After Provision for Loan
and Lease Losses............................ 1,167,094 1,060,515 997,921
---------- ---------- ----------
Noninterest Income
Service charges on deposits................. 170,802 150,256 133,905
Mortgage banking income..................... 78,627 50,383 40,218
Trust income................................ 36,866 31,957 28,794
Agency insurance commissions................ 52,018 40,148 27,541
Other insurance commissions................. 12,387 13,164 12,822
Bankcard fees and merchant discounts........ 29,247 22,805 18,511
Other non deposit fees and commissions...... 80,856 64,158 48,096
Securities gains, net....................... 7,752 3,213 3,210
Other income................................ 59,447 81,893 28,162
---------- ---------- ----------
Total noninterest income................... 528,002 457,977 341,259
---------- ---------- ----------
Noninterest Expense
Personnel expense........................... 485,231 466,807 404,326
Occupancy and equipment expense............. 154,598 162,675 127,714
Federal deposit insurance expense........... 4,316 5,138 49,999
Amortization of intangibles and mortgage
servicing rights........................... 48,717 24,496 15,378
Advertising and public relations expense.... 25,751 26,540 24,345
Professional services....................... 47,358 46,705 26,567
Other expense............................... 195,403 236,014 179,033
---------- ---------- ----------
Total noninterest expense.................. 961,374 968,375 827,362
---------- ---------- ----------
Earnings
Income before income taxes.................. 733,722 550,117 511,818
Provision for income taxes.................. 231,897 189,699 168,506
---------- ---------- ----------
Net Income.................................. 501,825 360,418 343,312
Preferred dividend requirements............. -- -- 610
---------- ---------- ----------
Income applicable to common shares......... $ 501,825 $ 360,418 $ 342,702
========== ========== ==========
Per Common Share
Net income:
Basic..................................... $ 1.75 $ 1.25 $ 1.19
========== ========== ==========
Diluted................................... $ 1.71 $ 1.23 $ 1.17
========== ========== ==========
Cash dividends paid........................ $ .66 $ .58 $ .50
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
46
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Preferred Common Paid-in Earnings Changes Shareholders'
Stock Stock Stock Capital and Other* in Equity Equity
----------- --------- ---------- ---------- ---------- -------------- -------------
(Dollars in thousands)
Balance, December 31,
1995.................... 145,075,281 $3,669 $ 725,377 $363,564 $1,083,796 $36,032 $2,212,438
Add (Deduct):
Nonshareholder changes
in equity:**
Net income............. -- -- -- -- 343,312 -- 343,312
Unrealized holding
losses arising during
the period............ -- -- -- -- -- (19,319) (19,319)
Less: reclassification
adjustment............ -- -- -- -- -- (3,210) (3,210)
----------- ------ ---------- -------- ---------- ------- ----------
Net unrealized losses
on securities.......... -- -- -- -- -- (22,529) (22,529)
----------- ------ ---------- -------- ---------- ------- ----------
Total nonshareholder
changes in equity...... -- -- -- -- 343,312 (22,529) 320,783
----------- ------ ---------- -------- ---------- ------- ----------
Common stock issued.... 2,859,596 -- 14,297 58,155 1,386 -- 73,838
Redemption of common
stock.................. (7,391,457) -- (36,957) (185,614) 2 -- (222,569)
Preferred stock
cancellations and
conversions............ 4,334,692 (3,669) 21,674 (18,005) -- -- --
Cash dividends
declared:
Common Stock........... -- -- -- -- (131,981) -- (131,981)
Preferred stock........ -- -- -- -- (610) -- (610)
Other.................. -- -- -- 1,526 973 -- 2,499
----------- ------ ---------- -------- ---------- ------- ----------
Balance, December 31,
1996.................... 144,878,112 -- 724,391 219,626 1,296,878 13,503 2,254,398
Add (Deduct):
Nonshareholder changes
in equity:**
Net income............. -- -- -- -- 360,418 -- 360,418
Unrealized holding
gains arising during
the period............ -- -- -- -- -- 39,078 39,078
Less: reclassification
adjustment............ -- -- -- -- -- (3,213) (3,213)
----------- ------ ---------- -------- ---------- ------- ----------
Net unrealized gains on
securities............. -- -- -- -- -- 35,865 35,865
----------- ------ ---------- -------- ---------- ------- ----------
Total nonshareholder
changes in equity...... -- -- -- -- 360,418 35,865 396,283
----------- ------ ---------- -------- ---------- ------- ----------
Common stock issued.... 6,149,101 -- 30,745 240,598 5,495 -- 276,838
Redemption of common
stock.................. (6,943,152) -- (34,716) (286,508) -- -- (321,224)
Cash dividends declared
on common stock........ -- -- -- -- (168,340) -- (168,340)
Other.................. -- -- -- (1,925) 3,080 -- 1,155
----------- ------ ---------- -------- ---------- ------- ----------
Balance, December 31,
1997.................... 144,084,061 -- 720,420 171,791 1,497,531 49,368 2,439,110
Add (Deduct):
Nonshareholder changes
in equity:**
Net income............. -- -- -- -- 501,825 -- 501,825
Unrealized holding
gains arising during
the period............ -- -- -- -- -- 19,969 19,969
Less: reclassification
adjustment............ -- -- -- -- -- (7,752) (7,752)
----------- ------ ---------- -------- ---------- ------- ----------
Net unrealized gains on
securities............. -- -- -- -- -- 12,217 12,217
----------- ------ ---------- -------- ---------- ------- ----------
Total nonshareholder
changes in equity...... -- -- -- -- 501,825 12,217 514,042
----------- ------ ---------- -------- ---------- ------- ----------
Common stock issued.... 10,525,328 -- 52,627 292,673 -- -- 345,300
Redemption of common
stock.................. (6,716,080) -- (33,580) (310,430) -- -- (344,010)
2-for-1 stock split
effective August 3,
1998................... 142,317,457 -- 711,587 -- (711,587) -- --
Cash dividends declared
on common stock........ -- -- -- -- (196,856) -- (196,856)
Other.................. -- -- -- -- 962 -- 962
----------- ------ ---------- -------- ---------- ------- ----------
Balance, December 31,
1998.................... 290,210,766 $ -- $1,451,054 $154,034 $1,091,875 $61,585 $2,758,548
=========== ====== ========== ======== ========== ======= ==========
- -----
* Other includes unvested restricted stock and a loan to the employee stock
ownership plan.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
47
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
----------- ---------- ----------
Cash Flows From Operating Activities:
Net income............................... $ 501,825 $ 360,418 $ 343,312
Adjustments to reconcile net income to
net cash provided
by operating activities:
Provision for loan and lease losses.... 80,310 98,010 62,273
Depreciation of premises and
equipment............................. 64,092 59,030 46,398
Amortization of intangibles and
mortgage servicing rights............. 48,717 24,496 15,378
Accretion of negative goodwill......... (6,243) (6,180) (6,238)
Amortization of unearned stock
compensation.......................... 962 8,111 2,450
Discount accretion and premium
amortization on securities, net....... (1,447) 2,193 6,507
Net decrease (increase) in trading
account securities.................... 7,456 (25,688) --
Loss (gain) on sales of securities,
net................................... (7,752) (3,213) (3,210)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net... (31,337) (15,992) (9,061)
Loss (gain) on disposals of premises
and equipment, net.................... (6,383) 30,660 331
Proceeds from sales of loans held for
sale.................................. 4,277,900 1,562,944 1,349,010
Purchases of loans held for sale....... (1,745,442) (734,727) (429,523)
Origination of loans held for sale, net
of principal collected................ (3,021,677) (996,943) (880,376)
Decrease (increase) in:
Accrued interest receivable........... (15,194) 2,650 18,875
Other assets.......................... (64,049) (192,136) (110,068)
Increase (decrease) in:
Accrued interest payable.............. 15,333 5,458 5,661
Accounts payable and other
liabilities.......................... 76,664 96,881 (8,920)
Other, net............................. 240 1,138 4,122
----------- ---------- ----------
Net cash provided by operating
activities........................... 173,975 277,110 406,921
----------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sales of securities
available for sale...................... 1,254,711 1,565,877 612,841
Proceeds from maturities, calls and
paydowns of securities available for
sale.................................... 2,034,413 1,550,682 2,732,459
Purchases of securities available for
sale.................................... (3,284,839) (3,445,535) (2,601,682)
Proceeds from maturities, calls and
paydowns of securities held to
maturity................................ 30,113 40,922 195,543
Purchases of securities held to
maturity................................ (16,115) (33,681) (320,133)
Leases made to customers................. (94,615) (74,420) (72,390)
Principal collected on leases............ 65,186 57,581 48,222
Loan originations, net of principal
collected............................... (1,345,913) (1,215,324) (1,762,800)
Purchases of loans....................... (110,090) (205,232) (232,236)
Net cash acquired in transactions
accounted for under the purchase
method.................................. 75,067 95,205 (4,187)
Purchases and originations of mortgage
servicing rights........................ (74,086) (39,093) (26,356)
Proceeds from disposals of premises and
equipment............................... 22,815 14,512 8,769
Purchases of premises and equipment...... (105,265) (148,012) (71,128)
Proceeds from sales of foreclosed
property................................ 28,902 15,917 16,156
Proceeds from sales of other real estate
held for development or sale............ 17,415 9,787 9,293
Other, net............................... (277) 5,699 (3,818)
----------- ---------- ----------
Net cash used in investing
activities........................... (1,502,578) (1,805,115) (1,471,447)
----------- ---------- ----------
Cash Flows From Financing Activities:
Net increase in deposits................. 857,605 381,395 801,018
Net increase (decrease) in short-term
borrowed funds.......................... (158,284) 464,883 (81,117)
Proceeds from long-term debt............. 2,519,872 5,598,914 1,586,766
Repayments of long-term debt............. (1,533,132) (4,303,648) (919,657)
Net proceeds from common stock issued.... 27,522 23,351 51,068
Redemption of common stock............... (344,010) (321,224) (225,569)
Cash dividends paid on common and
preferred stock......................... (187,041) (155,688) (127,771)
----------- ---------- ----------
Net cash provided by financing
activities........................... 1,182,532 1,687,983 1,084,738
----------- ---------- ----------
Net (Decrease) Increase in Cash and Cash
Equivalents.............................. (146,071) 159,978 20,212
Cash and Cash Equivalents at Beginning of
Year..................................... 1,192,870 1,032,892 1,012,680
----------- ---------- ----------
Cash and Cash Equivalents at End of Year.. $ 1,046,799 $1,192,870 $1,032,892
=========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest............................... $ 1,218,262 $1,056,508 $ 967,804
Income taxes........................... 130,169 140,681 166,532
Noncash financing and investing
activities:
Transfer of securities from held to
maturity to available for sale........ 88,396 -- 36,646
Transfer of securities from available
for sale to held to maturity.......... -- -- 240
Transfer of loans to foreclosed
property.............................. 21,845 17,136 25,119
Transfer of fixed assets to other real
estate owned.......................... 10,351 13,761 10,466
Restricted stock issued................ -- 74 88
Securitization of mortgage loans....... 465,341 -- 817,268
The accompanying notes are an integral part of these consolidated financial
statements.
48
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BB&T Corporation ("BB&T" or "Parent Company"), formerly Southern National
Corporation, is a bank holding company organized under the laws of North
Carolina and registered with the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended. Branch Banking and Trust Company ("BB&T-NC"),
Branch Banking and Trust Company of South Carolina ("BB&T-SC"), Branch Banking
and Trust Company of Virginia ("BB&T-VA"), and Franklin National Bank of
Washington, D.C. ("Franklin") (collectively, the "Banks"), Regional Acceptance
Corporation ("Regional Acceptance") and Craigie Incorporated ("Craigie")
comprise BB&T's direct principal subsidiaries.
The accounting and reporting policies of BB&T Corporation and its
subsidiaries are in accordance with generally accepted accounting principles
and conform to general practices within the banking industry. The following is
a summary of the more significant policies.
NOTE A. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of BB&T include the accounts of the
Parent Company and its subsidiaries. In consolidation, all significant
intercompany accounts and transactions have been eliminated. Prior period
financial statements have been restated to include the accounts of companies
acquired in material transactions accounted for as poolings of interests (See
Note B). Results of operations of companies acquired in transactions accounted
for as purchases are included from the dates of acquisition.
Certain amounts for prior years have been reclassified to conform to
statement presentations for 1998. The reclassifications have no effect on
either shareholders' equity or net income as previously reported.
Nature of Operations
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina,
Virginia, Maryland and the metropolitan Washington, D.C. area primarily
through its commercial banking subsidiaries and, to a lesser extent, through
its other subsidiaries. BB&T's subsidiaries provide a full range of
traditional commercial banking services and additional services including
investment brokerage, investment banking, trust services, agency insurance,
credit-related insurance and leasing.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
bank balances, Federal funds sold and securities purchased under resale
agreements or similar arrangements. Generally, both cash and cash equivalents
are considered to have maturities of three months or less. Accordingly, the
carrying amount of such instruments is considered a reasonable estimate of
fair value.
Securities
BB&T classifies investment securities in one of three categories: held to
maturity, available for sale and trading. Debt securities acquired with both
the intent and ability to be held to maturity are classified as held to
maturity and reported at amortized cost. Gains or losses realized from the
sale of securities held to maturity, if any, are determined by specific
identification and are included in noninterest income.
49
Securities, which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity, net of deferred income tax. Gains or losses realized
from the sale of securities available for sale are determined by specific
identification and are included in noninterest income.
Trading account securities are selected according to fundamental and
technical analyses that identify potential market movements. Trading account
securities are positioned to take advantage of such movements and are reported
at fair value. Market adjustments, fees and gains or losses earned on trading
account securities are included in noninterest income. Interest income on
trading account securities is included in other interest income. Gains or
losses realized from the sale of trading securities are determined by specific
identification.
During 1996 and 1998, BB&T transferred securities with an amortized cost of
$36.6 million and $88.4 million, respectively, from the held-to-maturity
portfolio to the available-for-sale portfolio. These securities were
previously classified as held-to-maturity by entities acquired under the
pooling-of-interests method of accounting. BB&T transferred these amounts
pursuant to the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," to conform the combined investment portfolios to BB&T's existing
interest rate risk position.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value on an
aggregate loan basis. Gains or losses realized on the sales of loans are
recognized at the time of sale and are determined by the difference between
the net sales proceeds and the carrying value of the loans sold, adjusted for
any servicing asset or liability. Any resulting deferred premium or discount
is amortized, as an adjustment of servicing income, over the estimated lives
of the loans using the level-yield method.
Loans and Leases
Loans and leases that management has the intent and ability to hold for the
foreseeable future are reported at their outstanding principal balances
adjusted for any deferred fees or costs and unamortized premiums or discounts.
The net amount of nonrefundable loan origination fees, including commitment
fees and certain direct costs associated with the lending process, are
deferred and amortized to interest income over the contractual lives of the
loans using methods which approximate level-yield, with adjustments for
prepayments as they occur. If the loan commitment expires unexercised, the
income is recognized upon expiration of the commitment. Discounts and premiums
are amortized to interest income over the estimated life of the loans using
methods that approximate level-yield.
Commercial loans and substantially all installment loans accrue interest on
the unpaid balance of the loans. Lease receivables consist primarily of direct
financing leases on rolling stock, equipment and real property. Lease
receivables are stated at the total amount of lease payments receivable plus
guaranteed residual values, less unearned income. Recognition of income over
the lives of the lease contracts approximates the level-yield method.
As of January 1, 1995, BB&T adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS
No. 114, as amended, requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral-dependent.
A loan is impaired when, based on current information and events, it is
probable that BB&T will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When the estimated realizable value
of the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. BB&T had previously
measured the allowance for credit losses using methods similar to those
prescribed in SFAS No. 114. As a result of adopting these statements, no
additional allowance for loan losses was required as of January 1, 1995.
50
BB&T's policy is to disclose all commercial loans greater than $250,000 that
are on nonaccrual status as impaired loans. Substantially all other loans made
by BB&T are excluded from the scope of SFAS No. 114 as they are large groups
of smaller balance homogeneous loans (residential mortgage and consumer
installment) that are collectively evaluated for impairment.
Allowance for Loan and Lease Losses
The provision for loan and lease losses is the estimated amount required to
maintain the allowance for loan and lease losses at a level adequate to cover
estimated inherent losses related to loans and leases currently outstanding.
The primary factors considered in determining the allowance are the
distribution of loans by risk class, the amount of the allowance specifically
allocated to nonperforming loans and other problem loans, prior years' loan
loss experience, economic conditions in BB&T's market areas and the growth of
the credit portfolio. Management stratifies the loan portfolio based on the
purpose of the loan. For commercial loans, specific reserves are assigned to
"watch list" credits of $1 million or more. General reserves on commercial
loans are determined based on the risk grades assigned to the credits. For all
other loan types, general reserves are established based on a weighted average
of actual historical loan loss experience for the loan type and based on the
risk grades of the loans. An additional general reserve is established to
address broader economic conditions in BB&T's market areas and possible
unforeseen losses in the portfolio. While management uses the best information
available in establishing the allowance for losses, future adjustments to the
allowance may be necessary if economic conditions differ substantially from
the assumptions used in making the valuations or, if required by regulators,
based upon information at the time of their examinations. Such adjustments to
original estimates, as necessary, are made in the period in which these
factors and other relevant considerations indicate that loss levels may vary
from previous estimates.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property. Foreclosed property consists of real estate
and other assets acquired through customers' loan defaults.
Commercial and unsecured consumer loans and leases are generally placed on
nonaccrual status when concern exists that principal or interest is not fully
collectible, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. Mortgage loans and most other consumer loans past
due 90 days or more may remain on accrual status if management determines that
concern over the collectibility of principal and interest is not significant.
When loans are placed on nonaccrual status, interest receivable is reversed
against interest income in the current period. Interest payments received
thereafter are applied as a reduction to the remaining principal balance when
concern exists as to the ultimate collection of the principal. Loans and
leases are removed from nonaccrual status when they become current as to both
principal and interest and when concern no longer exists as to the
collectibility of principal or interest.
Assets acquired as a result of foreclosure are valued at the lower of cost
or fair value, and carried thereafter at the lower of cost or fair value less
estimated costs to sell the asset. Cost is the sum of unpaid principal,
accrued but unpaid interest and acquisition costs associated with the loan.
Any excess of unpaid principal over fair value at the time of foreclosure is
charged to the allowance for losses. Generally, such properties are appraised
annually and the carrying value, if greater than the fair value, less costs to
sell, is adjusted with a charge to income. Routine maintenance costs, declines
in market value and net losses on disposal are included in other noninterest
expense.
51
Premises and Equipment
Premises, equipment, capital leases and leasehold improvements are stated at
cost less accumulated depreciation or amortization. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
basis over the lesser of the lease terms or the estimated useful lives of the
improvements. Capitalized leases are amortized by the same methods as premises
and equipment over the estimated useful lives or the lease term, whichever is
lesser. Obligations under capital leases are amortized using the interest
method to allocate payments between principal reduction and interest expense.
Income Taxes
BB&T and its subsidiaries file a consolidated Federal income tax return.
Each subsidiary pays its calculated portion of Federal income taxes to BB&T to
the extent that tax benefits are realized. Deferred income taxes have been
provided where different accounting methods have been used in determining
income for income tax purposes and for financial reporting purposes. Deferred
tax assets and liabilities are recognized based on future tax consequences of
the differences arising from their carrying values and respective tax bases.
In the event of changes in the tax laws, deferred tax assets and liabilities
are adjusted in the period of the enactment of those changes, with effects
included in the income tax provision.
Institutions acquired during the current fiscal year file separate Federal
income tax returns for the periods prior to consummation of the acquisitions.
Derivatives and Off-Balance Sheet Instruments
BB&T utilizes a variety of derivative financial instruments to manage
various financial risks. These instruments include financial forward and
futures contracts, options written and purchased, interest rate caps and
floors and interest rate swaps. Management accounts for these financial
instruments as hedges when the following conditions are met: (1) the specific
assets, liabilities, firm commitments or anticipated transactions (or an
identifiable group of essentially similar items) to be hedged expose BB&T to
interest rate risk or price risk; (2) the financial instrument reduces that
exposure; (3) the financial instrument is designated as a hedge at inception;
and (4) at the inception of the hedge and throughout the hedge period, there
is a high correlation of changes in the fair value or the net interest income
associated with the financial instrument and the hedged items.
The net interest payable or receivable on interest rate swaps, caps and
floors that are designated as hedges is accrued and recognized as an
adjustment to the interest income or expense of the related asset or
liability. For interest rate forwards, futures and options qualifying as a
hedge, gains and losses are deferred and are recognized in income as an
adjustment of yield. Gains and losses from early terminations of derivatives
are deferred and amortized as yield adjustments over the shorter of the
remaining term of the hedged asset or liability or the remaining term of the
derivative instrument. Upon disposition or settlement of the asset or
liability being hedged, deferral accounting is discontinued and any gains or
losses are recognized in income. Derivative financial instruments that fail to
qualify as a hedge are carried at fair value with gains and losses recognized
in current earnings.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. Fees received are deferred and recognized in noninterest income upon
exercise or expiration. Written options are carried at estimated fair value.
Unrealized and realized gains and losses on written call options are included
with securities gains and losses.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
warehouse and pipeline against increasing interest rates. Written call options
are used in tandem with purchased put options to create a net purchased put
option that reduces the cost of the hedge. Net unrealized gains and losses on
purchased put options and net purchased put options are carried with loans
held for sale at
52
the lower of cost or market on an aggregate basis. Realized gains and losses
on purchased put options and net purchased put options are included in
mortgage banking income.
Per Share Data
Effective December 31, 1997, BB&T adopted the provisions of SFAS No. 128,
"Earnings Per Share." This statement establishes standards for computing and
presenting earnings per share ("EPS") and simplifies the standards for
computation previously found in Accounting Principles Board ("APB") Opinion
No. 15, "Earnings Per Share," making them more comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS (which
replaces the former fully diluted EPS) for all entities with complex capital
structures. The EPS information reported herein reflects the implementation of
SFAS No. 128. Prior periods have been restated to include the provisions of
the statement.
Basic net income per common share has been computed by dividing net income
applicable to common shares by the weighted average number of shares of common
stock outstanding during the years presented.
Diluted net income per common share has been computed by dividing net
income, as adjusted for the interest expense related to convertible debt in
prior years, by the weighted average number of shares of common stock, common
stock equivalents and other potentially dilutive securities outstanding. Other
potentially dilutive securities include the number of shares issuable upon
conversion of preferred stock. Restricted stock grants are considered as
issued for purposes of calculating net income per share.
Weighted average numbers of shares were as follows:
1998 1997 1996
----------- ----------- -----------
Basic.................................... 287,427,644 287,480,712 287,535,321
Diluted.................................. 293,571,251 292,470,468 293,756,819
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 stock split
in the Corporation's common stock effected in the form of a 100% stock
dividend paid August 3, 1998. All per share amounts presented herein and the
weighted average shares reflected above have been restated as appropriate to
retroactively reflect the stock split.
Intangible Assets
BB&T's intangible assets consist of the cost in excess of the fair value of
net assets acquired in transactions accounted for as purchases (goodwill),
premiums paid on acquisitions of deposits (core deposit intangibles) and other
identifiable intangible assets. Such assets are included in other assets in
the "Consolidated Balance Sheets." Intangible assets are being amortized on
straight-line or accelerated bases over periods ranging from 5 to 25 years. At
December 31, 1998, BB&T had $382.3 million recorded as goodwill and $7.4
million as core deposit base premiums and other intangibles, net of
amortization. Negative goodwill is created when the fair value of the net
assets purchased exceeds the purchase price. Such balances are included in
other liabilities in the "Consolidated Balance Sheets" and are being amortized
over periods ranging from 10 to 15 years. At December 31, 1998, BB&T had
negative goodwill totaling $26.7 million, net of amortization.
Mortgage Servicing Rights
Amounts paid to acquire the right to service certain mortgage loans are
capitalized and amortized over the estimated lives of the loans to which they
relate. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." This statement was superseded by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which BB&T adopted on January 1, 1997. SFAS
No. 122, as superseded by SFAS No. 125, requires that mortgage banking
enterprises recognize, as separate assets, rights to service mortgage loans
for others, however those servicing rights are acquired. The statement further
requires
53
mortgage banking enterprises to assess their capitalized mortgage servicing
rights for impairment based on the fair value of those rights. At December 31,
1998, BB&T had capitalized mortgage servicing rights totaling $101.3 million.
Changes in Accounting Principles and Effects of New Accounting Pronouncements
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for such transactions based on
consistent application of a financial components approach. This approach
recognizes the financial and servicing assets an entity controls and the
liabilities it has incurred, as well as derecognizes financial assets when
control has been surrendered and liabilities when they are extinguished. The
statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of
transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." This
statement allows the implementation of certain provisions of SFAS No. 125 to
be deferred for one year. BB&T adopted SFAS No. 125, as amended by SFAS No.
127, effective January 1, 1997. The adoption of these statements did not have
a material impact on BB&T's consolidated financial position or consolidated
results of operations.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share," as
discussed above. The statement was effective for financial statements issued
for periods ending after December 15, 1997, including interim periods, and
requires restatement of all prior periods presented. Accordingly, BB&T adopted
the provisions of the statement effective December 31, 1997, including
retroactive restatement of prior periods. The implementation of the statement
did not have a material impact on BB&T's consolidated financial position or
consolidated results of operations.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing and
amending existing standards. The statement was effective for financial
statements for periods ending after December 15, 1997. Management determined
that BB&T was and is in compliance with the disclosure requirements of SFAS
No. 129, and, therefore, the implementation of the statement did not affect
the capital structure disclosures made by BB&T.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying
comprehensive income (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. Comprehensive income is the
nonshareholder-related change in equity (net assets) of a company during a
period from transactions and other events. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997, including interim periods, and
requires restatement of all prior periods presented. BB&T adopted the
provisions of the statement effective January 1, 1998, including retroactive
application to prior periods. The standard does not address issues of
recognition or measurement of comprehensive income; therefore, the
implementation of the statement did not have a material impact on BB&T's
consolidated financial position or consolidated results of operations.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
way that business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. BB&T adopted the provisions of
the statement effective December 31, 1998. The standard does not address
issues of recognition or measurement and, therefore, the implementation of the
statement did not have an impact on the consolidated financial position or
consolidated results of operations of BB&T. See Note S. in the "Notes to
Consolidated Financial Statements" for disclosures related to the
implementation of this statement.
54
In March of 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises the
disclosure requirements for pensions and other postretirement benefit plans.
BB&T adopted the provisions of this statement effective December 31, 1998,
including restatement of all prior periods presented. The statement does not
address issues of recognition or measurement and, therefore, the
implementation of the statement did not have an impact on BB&T's consolidated
financial position or consolidated results of operations. See Note L. in the
"Notes to Consolidated Financial Statements" for disclosures related to the
implementation of this statement.
During the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires capitalization of computer software costs that meet certain criteria.
BB&T adopted the provisions of this statement effective January 1, 1999. This
implementation of the SOP did not have a material effect on BB&T's
consolidated financial position or consolidated results of operations.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The statement is
effective for fiscal years beginning after June 15, 1999, and cannot be
applied retroactively. Management has not yet quantified the impact of
adopting SFAS No. 133 and has not determined the timing of or method of our
adoption of the statement. However, the statement could increase volatility in
earnings and other comprehensive income.
During the second quarter of 1998, the American Institute of Certified
Public Accountants issued SOP 98-5, "Accounting for Start-up Costs." SOP 98-5
provides guidance on the financial reporting of start-up costs and
organization costs requiring start-up costs to be expensed as incurred. BB&T
adopted the provisions of the SOP effective January 1, 1999. The adoption of
the statement did not have a material impact on BB&T's consolidated financial
position or consolidated results of operations.
During October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities." BB&T adopted the
provisions of the statement effective January 1, 1999. The implementation of
the statement did not have a material impact on BB&T's consolidated financial
position or consolidated results of operations.
Supplemental Disclosures of Cash Flow Information
As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired
assets and assumed liabilities in transactions accounted for under the
purchase method of accounting. The fair values of these assets acquired and
liabilities assumed, at acquisition, were as follows:
1998 1997 1996
---------- ---------- ---------
(Dollars in thousands)
Fair value of net assets acquired....... $ 98,468 $ 129,719 $ 4,994
Purchase price.......................... (277,591) (276,483) (31,056)
---------- ---------- ---------
Excess of purchase price over net assets
acquired............................... $ (179,123) $ (146,764) $ (26,062)
========== ========== =========
During the first quarter of 1996, BB&T redeemed all outstanding shares of
Convertible Preferred Stock. This transaction, a noncash financing activity,
resulted in the conversion of 733,869 shares of preferred stock into 4,334,692
shares of common stock.
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
55
NOTE B. Acquisitions and Mergers
Completed Mergers and Acquisitions
Purchase Transactions
On June 30, 1996, BB&T completed the purchase of certain fixed assets and
expiration rights to outstanding insurance policies from the James R. Lingle
Agency of Florence, South Carolina. In conjunction with the purchase, BB&T
recorded expiration rights totaling $1.7 million, which are being amortized
using the straight-line method over 15 years.
On August 28, 1996, BB&T became a majority shareholder of AutoBase
Information Systems, Inc., ("AutoBase") through the purchase of 51% of
AutoBase's outstanding common stock. In conjunction with this investment, BB&T
recorded $1.2 million in goodwill, which is being amortized using the
straight-line method over 15 years.
During November 1996, BB&T completed the acquisitions of three insurance
agencies in South Carolina. On November 7, 1996, BB&T completed the
acquisition of the William Goldsmith Agency Inc. of Greenville, South Carolina
through the issuance of 70,207 shares of common stock (140,414 shares on a
post-split basis). On November 13, 1996, BB&T completed the acquisition of the
C. Dan Joyner Insurance Agency based in Greenville, South Carolina through the
issuance of 48,120 shares of common stock (96,240 shares on a post-split
basis). Boyle-Vaughan Associates, Inc. based in Columbia, South Carolina, was
acquired on November 22, 1996 through the issuance of 492,063 shares of common
stock (984,126 shares on a post-split basis). In conjunction with the purchase
of these agencies, BB&T recorded $17.9 million in goodwill, which is being
amortized using the straight-line method over 15 years.
On January 31, 1996, BB&T acquired Seaboard Bancorp, Inc. ("Seaboard
Bancorp") of Virginia Beach, Virginia, in a transaction accounted for as a
purchase. The acquisition was accomplished through the payment of $8.8 million
in cash. In conjunction with the purchase, BB&T recorded $5.2 million in
goodwill, which is being amortized using the straight-line method over 15
years.
On March 1, 1997, BB&T completed its acquisition of Fidelity Financial
Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction
accounted for as a purchase. BB&T issued 1.6 million shares (3.2 million
shares on a post-split basis) for all of the shares of Fidelity's common stock
outstanding. In conjunction with the acquisition, BB&T recorded $37.9 million
in goodwill, which is being amortized using the straight-line method over 15
years.
On May 20, 1997, BB&T purchased Phillips Factors Corporation ("Phillips")
and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance
Corporation, all of High Point, North Carolina. Phillips purchases and manages
receivables in the temporary staffing industry nationwide. It also provides
payroll processing services to that industry. Phillips also buys and manages
account receivables primarily in the furniture, textiles and home furnishings-
related industries. In conjunction with the acquisition, BB&T recorded $11.1
million of goodwill, which is being amortized using the straight-line method
over 15 years.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp.
(collectively, "Refloat"), a financial company that specializes in loans to
small commercial lawn care businesses across the country. The acquisition,
which was completed through the issuance of 375,000 shares of common stock
(750,000 shares on a post-split basis), was accounted for as a purchase. BB&T
recorded $3.0 million of goodwill, which is being amortized using the
straight-line method over 15 years in conjunction with this transaction.
On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie
specializes in the origination, trading and distribution of fixed-income
securities and equity products in both the public and private capital markets.
Craigie also has a public finance department that provides investment banking
services, financial advisory services and municipal
56
bond financing to a variety of regional tax-exempt issuers. The acquisition,
which was accounted for as a purchase, was accomplished through the issuance
of approximately 463,000 shares of BB&T's common stock (926,000 shares on a
post-split basis). In conjunction with the acquisition, BB&T recorded $6.8
million of goodwill, which is being amortized using the straight-line method
over a period of 25 years.
On December 1, 1997, BB&T completed its acquisition of Virginia First
Financial Corporation of Petersburg, Virginia ("Virginia First"), a financial
institution with $822.9 million in assets at the time of purchase. The merger,
which was accounted for under the purchase method of accounting, was
consummated through the issuance of 1.9 million shares of BB&T's common stock
(3.8 million shares on a post-split basis) and the payment of $44.8 million.
In conjunction with the acquisition, BB&T recorded $89.5 million in goodwill,
which is being amortized using the straight-line method over a period of 15
years.
On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc.
("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to
commercial, agricultural, municipal and consumer users for the purchase of
lawn care equipment. In conjunction with the transaction, BB&T recorded $9.3
million of goodwill, which is being amortized using the straight-line method
over 15 years.
On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company
Inc., and its subsidiaries, (collectively, "Stanley"), located in Greensboro,
North Carolina. Stanley, the largest actuarial, consulting and administration
firm headquartered in the Carolinas, primarily manages retirement plans for
companies and has more than 700 clients located mostly in the Carolinas,
Virginia, Maryland and Tennessee. In conjunction with the acquisition, BB&T
recorded $10.3 million of goodwill, which is being amortized using the
straight-line method over 15 years.
On September 30, 1998, BB&T completed its acquisition of Maryland Federal
Bancorp, Inc. ("Maryland Federal") located in Hyattsville, Maryland. In
conjunction with the merger, BB&T issued 8.7 million shares of BB&T common
stock in exchange for all of the outstanding shares of Maryland Federal common
stock. BB&T recorded $158.8 million of goodwill, which is being amortized
using the straight-line method over a period of 15 years.
The above-discussed acquisitions were accounted for under the purchase
method of accounting, and, therefore, the financial information contained
herein includes data relevant to the acquirees since the date of acquisition.
The following unaudited presentation reflects key line items on a Pro Forma
basis as if these purchase transactions had been acquired as of the beginning
of the years presented:
For the Years Ended
---------------------
1998 1997
---------- ----------
(Dollars in
thousands,
except per share
data)
Total revenues......................................... $1,805,585 $1,715,784
========== ==========
Net income............................................. $ 498,175 $ 352,083
========== ==========
Basic EPS.............................................. $ 1.73 $ 1.22
========== ==========
Diluted EPS............................................ $ 1.70 $ 1.20
========== ==========
Under the provisions of SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchase Enterprises," BB&T typically provides an allocation
period, not to exceed one year, to identify and quantify the assets acquired
and liabilities assumed in purchase business combinations. Management
currently does not anticipate any material adjustments to the assigned values
of the assets and liabilities of acquired companies.
Pooling of Interests Transactions
Effective January 25, 1996, BB&T consummated a merger with Seaboard Savings
Bank, Inc. ("Seaboard"), headquartered in Plymouth, North Carolina. BB&T
issued 475,158 shares of common stock (950,316 shares on
57
a post-split basis) for all of the outstanding shares of Seaboard common
stock. The transaction was accounted for as a pooling of interests.
Effective March 29, 1996, BB&T consummated a merger with Triad Bank
("Triad") headquartered in Greensboro, North Carolina. BB&T issued 1.8 million
shares of common stock (3.6 million shares on a post-split basis) for all of
the outstanding shares of Triad common stock. The transaction was accounted
for as a pooling of interests.
On August 30, 1996, BB&T issued 42,135 shares of common stock (84,270 shares
on a post-split basis) to complete the acquisition of Tomlinson Insurers,
Inc., a general insurance agency in Fayetteville, North Carolina. The
transaction was accounted for under the pooling-of-interests method of
accounting.
On September 1, 1996, BB&T completed a merger with Regional Acceptance
Corporation of Greenville, N.C. ("Regional Acceptance") in a transaction
accounted for as a pooling of interests. BB&T issued 5.85 million shares (11.7
million shares on a post-split basis) in exchange for all of the outstanding
stock of Regional Acceptance.
On July 1, 1997, BB&T completed its merger with United Carolina Bancshares
Corporation ("UCB") of Whiteville, North Carolina, in a stock transaction
accounted for as a pooling of interests. BB&T issued 27.7 million shares of
common stock (55.4 million shares on a post-split basis) in exchange for all
of the shares of UCB common stock outstanding.
On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life")
of Norfolk, Virginia. The transaction was accounted for as a pooling of
interests. In conjunction with the merger, BB&T issued 5.8 million shares of
common stock (11.6 million shares on a post-split basis) in exchange for all
of the shares of Life common stock outstanding.
On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc.
("Franklin") of Washington, D.C. in a stock transaction accounted for under
the pooling-of-interests method of accounting. In conjunction with the merger,
BB&T issued 2.5 million shares of common stock (4.9 million shares on a post-
split basis) in exchange for all of the shares of Franklin common stock
outstanding.
Pending Acquisitions
On August 10, 1998, BB&T announced plans to merge with Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. The transaction will be accounted for as a purchase. Scott
& Stringfellow shareholders will receive one share of BB&T common stock in
exchange for each share of Scott & Stringfellow common stock held. The merger
is expected to be completed in the first quarter of 1999.
On August 26, 1998, BB&T announced plans to merge with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction
will be accounted for as a pooling of interests. MainStreet shareholders will
receive 1.18 shares of BB&T common stock in exchange for each share of
MainStreet stock held. The merger was completed effective March 5, 1999.
On January 27, 1999, BB&T announced plans to merge with First Citizens
Corporation ("First Citizens"), of Newnan, Georgia. The transaction is
expected to be accounted for as a pooling of interests. First Citizens'
shareholders will receive 1.0789 shares of BB&T common stock in exchange for
each share of First Citizens common stock held. The merger is expected to be
completed in the third quarter of 1999.
On January 28, 1999, BB&T announced plans to merge with Mason-Dixon
Bancshares ("Mason-Dixon") of Westminster, Maryland. The transaction is
expected to be accounted for as a pooling of interests. Mason-Dixon's
shareholders will receive 1.30 shares of BB&T common stock in exchange for
each share of Mason-Dixon common stock held. The merger is expected to be
completed in the third quarter of 1999.
On February 25, 1999, BB&T announced plans to purchase Matewan BancShares
Inc. ("Matewan"), of Williamson, West Virginia. The transaction is expected to
be accounted for as a purchase. Matewan's shareholders will receive .9333
shares of BB&T stock (based on the February 23, 1999, BB&T closing price) in
exchange for each share of Matewan common stock held. The merger is expected
to be completed in the third quarter of 1999.
58
NOTE C. Securities
The amortized costs and approximate fair values of securities held to
maturity and available for sale were as follows:
December 31, 1998 December 31, 1997
-------------------------------------- ------------------------------------
Gross
Gross Unrealized Unrealized
---------------- --------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- -------- ------- ---------- ---------- ------- ------ ----------
(Dollars in thousands)
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations........... $ 23,821 $ 8 $ 2 $ 23,827 $ 46,338 $ 326 $ 84 $ 46,580
Mortgage-backed
securities............ -- -- -- -- 33,550 71 982 32,639
States and political
subdivisions.......... 103,649 3,348 4 106,993 150,369 4,120 72 154,417
---------- -------- ------- ---------- ---------- ------- ------ ----------
Total securities held
to maturity........... 127,470 3,356 6 130,820 230,257 4,517 1,138 233,636
---------- -------- ------- ---------- ---------- ------- ------ ----------
Securities available for
sale:
U.S. Treasury,
government and agency
obligations........... 3,530,506 55,212 2,441 3,583,277 4,397,252 33,408 5,573 4,425,087
Mortgage-backed
securities............ 3,067,154 33,623 8,352 3,092,425 2,356,469 43,515 3,130 2,396,854
Equity and other
securities............ 1,122,362 20,045 674 1,141,733 414,260 12,583 2 426,841
States and political
subdivisions.......... 151,043 2,896 -- 153,939 46,898 479 31 47,346
---------- -------- ------- ---------- ---------- ------- ------ ----------
Total securities
available for sale.... 7,871,065 111,776 11,467 7,971,374 7,214,879 89,985 8,736 7,296,128
---------- -------- ------- ---------- ---------- ------- ------ ----------
Total securities....... $7,998,535 $115,132 $11,473 $8,102,194 $7,445,136 $94,502 $9,874 $7,529,764
========== ======== ======= ========== ========== ======= ====== ==========
Securities with a book value of approximately $4.4 billion and $3.8 billion
at December 31, 1998 and 1997, respectively, were pledged to secure municipal
deposits, securities sold under agreements to repurchase, Federal Reserve
discount window borrowings and for other purposes as required by law.
At December 31, 1998 and 1997, there was no concentration of investments in
obligations of states and political subdivisions that were secured by or
payable from the same taxing authority or revenue source and that exceeded ten
percent of shareholders' equity. Trading securities totaling $60.4 million are
excluded from the accompanying tables.
Proceeds from sales of securities during 1998, 1997 and 1996 were $1.3
billion, $1.6 billion and $612.8 million, respectively. Gross gains of $7.9
million, $6.8 million and $5.5 million and gross losses of $167,000, $3.6
million and $2.3 million were realized on those sales in 1998, 1997 and 1996,
respectively.
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1998, by contractual maturity, are shown in the accompanying
table. The expected life of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
the underlying mortgage loans with or without call or prepayment penalties.
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings
based on the weighted average contractual maturities of underlying collateral.
December 31, 1998
-----------------------------------------
Held to Maturity Available for Sale
------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ---------- ----------
(Dollars in thousands)
Debt Securities:
Due in one year or less........ $ 46,310 $ 46,472 $ 730,593 $ 735,401
Due after one year through five
years......................... 69,954 72,507 2,848,573 2,896,260
Due after five years through
ten years..................... 9,012 9,410 456,232 462,426
Due after ten years............ 2,194 2,431 2,939,116 2,980,736
-------- -------- ---------- ----------
Total debt securities........ $127,470 $130,820 $6,974,514 $7,074,823
======== ======== ========== ==========
59
NOTE D. Loans and Leases
Loans and leases were composed of the following:
December 31,
-------------------------
1998 1997
------------ ------------
(Dollars in thousands)
Loans:
Commercial, financial and agricultural......... $ 3,443,674 $ 3,196,973
Real estate--construction and land
development................................... 2,223,439 2,165,430
Real estate--mortgage.......................... 13,301,235 12,050,763
Consumer....................................... 2,786,572 2,756,554
------------ ------------
Loans held for investment.................... 21,754,920 20,169,720
------------ ------------
Leases........................................... 1,620,326 788,462
------------ ------------
Total loans and leases..................... 23,375,246 20,958,182
Less: unearned income.................... 710,167 233,453
------------ ------------
Loans and leases, net of unearned income... $ 22,665,079 $ 20,724,729
============ ============
The net investment in direct financing leases was $981.9 million and $616.3
million at December 31, 1998 and 1997, respectively. BB&T had loans held for
sale at December 31, 1998 and 1997 totaling $1.0 billion and $509.1 million,
respectively.
BB&T's only significant concentration of credit at December 31, 1998
occurred in loans secured by real estate, which totaled $16.6 billion.
However, this amount was not concentrated in any specific market or geographic
area other than the Banks' primary markets.
The following table sets forth certain information regarding BB&T's impaired
loans as defined under SFAS No. 114.
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
Total recorded investment--impaired loans.......... $ 23,897 $ 32,470
----------- -----------
Total recorded investment with related valuation
allowance......................................... 23,897 32,470
Valuation allowance assigned to impaired loans..... 4,040 3,493
----------- -----------
Net carrying value--impaired loans............... $ 19,857 $ 28,977
=========== ===========
Average balance of impaired loans.................. $ 28,521 $ 24,012
=========== ===========
Cash basis interest income recognized on impaired
loans............................................. $ -- $ 211
=========== ===========
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded
$60,000 at any time during 1998. All amounts shown represent loans made by
BB&T's subsidiary banks in the ordinary course of business at the Banks'
normal credit terms, including interest rate and collateralization prevailing
at the time for comparable transactions with other persons.
(Dollars in thousands)
Balance, December 31, 1997............................... $ 188,929
Additions.............................................. 41,270
Reductions............................................. (82,567)
---------
Balance, December 31, 1998............................... $ 147,632
=========
60
NOTE E. Allowance for Loan and Lease Losses
An analysis of the allowance for loan and lease losses is presented in the
following table:
For the Years Ended December
31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in thousands)
Beginning Balance.............................. $ 279,596 $ 243,568 $ 226,933
Provision for losses charged to expense...... 80,310 98,010 62,273
Allowances of purchased companies............ 16,811 17,513 5,185
--------- --------- ---------
376,717 359,091 294,391
--------- --------- ---------
Total charge-offs............................ (83,064) (97,829) (71,011)
Recoveries................................... 20,734 18,334 20,188
--------- --------- ---------
Net charge-offs............................ (62,330) (79,495) (50,823)
--------- --------- ---------
Ending Balance................................. $ 314,387 $ 279,596 $ 243,568
========= ========= =========
At December 31, 1998, 1997 and 1996, loans not currently accruing interest
totaled $85.0 million, $99.9 million and $65.6 million, respectively. Loans 90
days or more past due and still accruing interest totaled $50.0 million, $44.4
million and $41.9 million, at December 31, 1998, 1997 and 1996, respectively.
The gross interest income that would have been earned during 1998 if the
outstanding nonaccrual loans and leases had been current in accordance with
the original terms and had been outstanding throughout the period (or since
origination, if held for part of the period) was approximately $6.6 million.
Foreclosed property was $28.0 million, $34.9 million and $29.1 million at
December 31, 1998, 1997 and 1996, respectively.
NOTE F. Premises and Equipment
December 31,
-----------------
1998 1997
-------- --------
(Dollars in
thousands)
Land and land improvements............................... $ 78,635 $ 74,617
Buildings and building improvements...................... 318,601 313,800
Furniture and equipment.................................. 382,111 344,983
Capitalized leases on premises and equipment............. 3,946 3,647
-------- --------
Subtotal............................................... 783,293 737,047
Less--accumulated depreciation and amortization.......... 330,201 302,787
-------- --------
Net premises and equipment............................. $453,092 $434,260
======== ========
Depreciation expense, which is included in occupancy and equipment expense,
was $64.1 million, $59.0 million and $46.4 million in 1998, 1997 and 1996,
respectively.
61
BB&T has noncancellable leases covering certain premises and equipment.
Total rent expense applicable to operating leases was $29.1 million, $46.5
million and $29.9 million for 1998, 1997 and 1996, respectively. Future
minimum lease payments for operating and capitalized leases for years
subsequent to 1998 are as follows:
Leases
---------------------
Operating Capitalized
--------- -----------
(Dollars in
thousands)
Years ended December 31:
1999............................................... $ 26,001 $ 450
2000............................................... 24,901 450
2001............................................... 23,520 450
2002............................................... 20,583 450
2003............................................... 17,732 427
2004 and years later............................... 87,623 4,116
-------- ------
Total minimum lease payments......................... $200,360 6,343
========
Less--amount representing interest................... 3,033
------
Present value of net minimum payments on capitalized
leases (Note I)..................................... $3,310
======
NOTE G. Loan Servicing
The following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization and adjustments necessary to present the balances at
the lower of cost or estimated fair value, which are included in the
"Consolidated Balance Sheets:"
Capitalized
Mortgage
Servicing Rights
-----------------
1998 1997
-------- -------
(Dollars in
thousands)
Balance, January 1,....................................... $ 68,780 $41,891
Amount capitalized...................................... 74,086 39,093
Amortization expense.................................... (25,359) (9,561)
Change in valuation allowance........................... (16,230) (2,643)
-------- -------
Balance, December 31,..................................... $101,277 $68,780
======== =======
Capitalized mortgage servicing rights are being amortized on a disaggregated
loan basis using an accelerated method over the estimated life of the
servicing income. The servicing rights portfolio is analyzed each quarter to
identify possible impairment using a disaggregated discounted cash flow
methodology that is stratified by predominant risk characteristics. These
characteristics include stratification based on interest rates in intervals of
150 basis points, type of loan and maturity of loan. Following is an analysis
of the aggregate changes in the valuation allowances for mortgage servicing
rights in 1998 and 1997:
Valuation Allowance
for Mortgage
Servicing Rights
----------------------
(Dollars in thousands)
Balance, January 1, 1997.............................. $ 715
Additions........................................... 3,257
Reductions.......................................... (614)
-------
Balance, December 31, 1997............................ 3,358
-------
Additions........................................... 16,503
Reductions.......................................... (273)
-------
Balance, December 31, 1998............................ $19,588
=======
62
Mortgage loans serviced for others are not included in the accompanying
"Consolidated Balance Sheets." The unpaid principal balances of mortgage loans
serviced for others were $10.1 billion and $8.2 billion at December 31, 1998
and 1997, respectively.
NOTE H. Short-Term Borrowed Funds
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
Federal funds purchased............................. $ 942,935 $ 898,160
Term Federal funds purchased........................ 25,000 --
Securities sold under agreements to repurchase...... 1,339,149 1,434,221
Master notes........................................ 675,141 638,325
U.S. Treasury tax and loan deposit notes payable.... 177,306 105,851
Short-term Federal Home Loan Bank advances.......... 87,049 197,124
Short-term bank notes............................... 73,181 208,079
Other short-term borrowed funds..................... 49,340 11,439
----------- -----------
Total short-term borrowed funds................... $ 3,369,101 $ 3,493,199
=========== ===========
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Term Federal funds purchased are identical to Federal
funds; however, maturities vary and are greater than one day. Securities sold
under agreements to repurchase are borrowings collateralized by securities of
the U.S. Government or its agencies and have maturities ranging from one to
ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon
demand to the U.S. Treasury. Master notes are unsecured, non-negotiable
obligations of BB&T (variable rate commercial paper). Short-term Federal Home
Loan Bank advances are typically unsecured and generally mature daily. Short-
term bank notes are unsecured borrowings issued by the banking subsidiaries
that generally mature in less than one year.
63
NOTE I. Long-Term Debt
December 31,
---------------------
1998 1997
---------- ----------
(Dollars in
thousands)
Capitalized leases, varying maturities to 2028 with rates
from 8.11% to 12.65%. Balance represents the unamortized
amounts due on leases of various facilities............. $ 3,310 $ 3,291
Medium-term bank notes, unsecured, varying maturities to
2001 with variable rates from 5.279% to 5.714%.......... 1,369,890 1,024,833
Advances from Federal Home Loan Bank, varying maturities
to 2018 with rates from 1.00% to 8.75%.................. 2,491,538 1,997,186
Subordinated Notes, unsecured, dated May 21, 1996, June
3, 1997 and June 30, 1998; maturing May 23, 2003, June
15, 2007 and June 30, 2025; with interest rates of
7.05%, 7.25% and 6.375%, respectively. /1/,/2......../.. 858,303 495,589
CMO Bonds, secured by investments, dated 1985, callable
July 1, 2001, with an interest rate of 11.25%........... 10,558 8,112
Other mortgage indebtedness.............................. 3,335 5,192
---------- ----------
Total long-term debt................................... $4,736,934 $3,534,203
========== ==========
- --------
Excluding the capitalized leases set forth in Note F, future debt maturities
total $4.7 billion and are $833.3 million, $866.0 million, $449.0 million,
$264.2 million and $431.1 million for the next five years. The maturities for
2004 and later years are $1.9 billion.
/1 /Subordinated notes qualify under the risk-based capital guidelines as Tier
2 supplementary capital.
/2 /Consists of three issuances of BB&T Corporation debt. During 1998, BB&T
issued $350 million of debt, which is mandatorally puttable to BB&T on June
30, 2005, and contains a remarketing option that allows the debt to be
reissued to the stated maturity date of June 30, 2025.
64
NOTE J. Shareholders' Equity
The authorized capital stock of BB&T consists of 500,000,000 shares of
common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par
value. At December 31, 1998, 290,210,766 shares of common stock and no shares
of preferred stock were issued and outstanding.
Stock Option Plans
At December 31, 1998, BB&T had the following stock-based compensation plans:
the 1994 and 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the
Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan
("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors'
Plan"), which are described below. BB&T accounts for these plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined based on the fair value at
the grant dates for awards under those plans granted after December 31, 1994,
consistent with the method described by SFAS No. 123, BB&T's pro forma net
income and pro forma earnings per share would have been as follows:
For the Years Ended
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands,
except per share data)
Net income applicable to common shares:
As reported....................................... $501,825 $360,418 $342,702
Pro Forma......................................... 490,915 351,325 339,214
Basic EPS:
As reported....................................... 1.75 1.25 1.19
Pro Forma......................................... 1.71 1.22 1.18
Diluted EPS:
As reported....................................... 1.71 1.23 1.17
Pro Forma......................................... 1.67 1.20 1.16
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995; therefore, the weighted average fair value
of options granted prior to that date has not been calculated. The fair value
of each option grant was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used for grants in 1998, 1997 and 1996, respectively: dividend yield of 2.5%
in 1998, 2.8% in 1997 and 2.5% in 1996; expected volatility of 23% in 1998,
21% in 1997 and 22% in 1996; risk free interest rates of 5.7%, 6.2% and 6.4%
for 1998, 1997 and 1996, respectively; and expected lives of 6.1 years, 6.2
years and 6.7 years for 1998, 1997 and 1996, respectively.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
In April, 1994 and February, 1995, the shareholders approved the Omnibus
Plans which cover the award of incentive stock options, non-qualified stock
options, shares of restricted stock, performance shares and stock appreciation
rights. In April 1996, the shareholders approved an amendment to the 1995
Omnibus Plan that increased the maximum number of shares issuable under the
terms of the plan to 12,000,000 shares. The combined shares issuable under
both Omnibus Plans, after giving effect to the August 3, 1998, 2-for-1 stock
split, is 20,000,000. The Omnibus Plans are intended to allow BB&T to recruit
and retain employees with ability and initiative and to associate the
employees' interests with those of BB&T and its shareholders. At December 31,
1998, 7,119,150 qualified stock options at prices ranging from $4.29 to
$33.485 and 3,471,811 non-qualified stock options at prices ranging from $.005
to $30.45 were outstanding. The stock options generally vest over 3 years and
have a 10-year term.
65
The ISOP and the NQSOP were established to retain key officers and key
management employees and to offer them the incentive to use their best efforts
on behalf of BB&T. The plans, which expire on December 19, 2000, further
provide for up to 2,202,000 shares of common stock to be reserved for the
granting of options, which have a four year vesting schedule and must be
exercised within ten years from the date granted. Incentive stock options
granted must have an exercise price equal to at least 100% of the fair market
value of common stock on the date granted, and the non-qualified stock options
must have an exercise price equal to at least 85% of the fair market value on
the date granted. At December 31, 1998, options to purchase 153,788 shares of
common stock at prices ranging from $4.75 to $8.375 were outstanding pursuant
to the NQSOP. At December 31,1998, options to purchase 133,832 shares of
common stock at an exercise price of $9.8885 were outstanding pursuant to the
ISOP.
The Directors' Plan is intended to provide incentives to non-employee
directors to remain on the Board of Directors and share in the profitability
of BB&T. The plan creates a deferred compensation system for participating
non-employee directors. Each non-employee director may elect to defer 0%, 50%
or 100% of the annual retainer fee for each calendar year and apply that
percentage toward the grant of options to purchase BB&T common stock. Such
elections are required to be in writing and are irrevocable for each calendar
year. The exercise price at which shares of BB&T common stock may be purchased
shall be equal to 75% of the market value of the common stock as of the date
of grant. Options are vested in six months and may be exercised anytime
thereafter until the expiration date, which is 10 years from the date of
grant. The Directors' Plan provides for the reservation of up to 1,800,000
shares of BB&T common stock. At December 31, 1998, options to purchase 794,746
shares of common stock at prices ranging from $6.3578 to $28.8719 were
outstanding pursuant to the Directors' Plan.
BB&T also has options outstanding from companies acquired in prior years.
These options, which have not been included in the plans described above,
totaled 230,164 as of December 31, 1998, with option prices ranging from
$1.3334 to $11.8535.
A summary of the status of the Company's stock option plans at December 31,
1998, 1997 and 1996 and changes during the years then ended is presented
below:
1998 1997 1996
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning
of year................ 12,429,353 $11.24 12,842,059 $ 9.33 13,908,434 $8.91
Granted............... 2,477,827 26.30 2,204,348 18.49 328,447 12.29
Exercised............. (2,886,585) 9.10 (2,480,928) 7.64 (1,285,180) 5.73
Forfeited or Expired.. (117,104) 20.53 (136,126) 13.74 (109,642) 7.85
---------- ------ ---------- ------ ---------- -----
Outstanding at end of
year................... 11,903,491 $14.80 12,429,353 $11.24 12,842,059 $9.33
========== ====== ========== ====== ========== =====
Options exercisable at
year-end............... 9,094,342 $10.60 10,186,861 $ 9.72 10,000,171 $8.55
The weighted average fair value of options granted was $7.97, $4.83 and
$3.78 per option at December 31, 1998, 1997 and 1996, respectively.
66
The following table summarizes information about the options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
--------------- ----------- ----------- -------- ----------- --------
$0.01................. 998 4.0 yrs $ 0.01 998 $ 0.01
$1.33 to $1.84........ 13,678 5.1 1.33 13,678 1.33
$2.46 to $3.52........ 11,202 4.4 3.23 11,202 3.23
$3.72 to $5.54........ 217,366 3.0 4.68 217,366 4.68
$5.86 to $8.75........ 2,291,029 3.2 7.41 2,291,029 7.26
$9.06 to $13.38....... 5,540,321 6.0 11.50 5,514,583 10.98
$13.94 to $20.19...... 1,952,367 8.1 19.11 913,434 15.90
$20.36 to $29.11...... 203,476 9.3 25.74 105,248 26.05
$30.45 to $33.49...... 1,673,054 9.2 31.01 26,804 31.44
---------- --- ------ --------- ------
11,903,491 6.3 yrs $14.80 9,094,342 $10.60
========== === ====== ========= ======
Shareholder Rights Plan
On January 17, 1997, pursuant to the Rights Agreement approved by the Board
of Directors, BB&T distributed to shareholders one preferred stock purchase
right for each share of BB&T's common stock then outstanding. Subsequent to
this date, all shares issued are accompanied by a stock purchase right.
Initially, the rights, which expire in 10 years, are not exercisable and are
not transferable apart from the common stock. The rights will become
exercisable only if a person or group acquires 20% or more of BB&T's common
stock, or BB&T's Board of Directors determines, pursuant to the terms of the
Rights Agreement, that any person or group that has acquired 10% or more of
BB&T's common stock is an "Adverse Person." Each right would then enable the
holder to purchase 1/100th of a share of a new series of BB&T preferred stock
at an initial exercise price of $145.00. The Board of Directors will be
entitled to redeem the rights at $.01 per right under certain circumstances
specified in the Rights Agreement.
Under the terms of the Rights Agreement, if any person or group becomes the
beneficial owner of 25% or more of BB&T's common stock, with certain
exceptions, or if the Board of Directors determines that any 10% or more
stockholder is an "Adverse Person," each right will entitle its holder (other
than the person triggering exercisability of the rights) to purchase, at the
right's then-current exercise price, shares of BB&T's common stock having a
value of twice the right's exercise price. In addition, if after any person or
group has become a 20% or more stockholder, BB&T is involved in a merger or
other business combination transaction with another person in which its common
stock is changed or converted, or sells 50% or more of its assets or earning
power to another person, each right will entitle its holder to purchase, at
the right's then-current exercise price, shares of common stock of such other
person having a value of twice the right's exercise price.
NOTE K. Income Taxes
The provision for income taxes was composed of the following:
Years Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Current expense:
Federal....................................... $170,095 $194,049 $159,331
State......................................... 9,925 9,830 5,413
-------- -------- --------
180,020 203,879 164,744
Deferred expense (benefit)...................... 51,877 (14,180) 3,762
-------- -------- --------
Provision for income taxes...................... $231,897 $189,699 $168,506
======== ======== ========
67
The reasons for the difference between the provision for income taxes and
the amount computed by applying the statutory Federal income tax rate to
income before income taxes were as follows:
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Federal income taxes at statutory rates of
35%.......................................... $256,803 $192,541 $179,136
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense...................................... (11,026) (10,077) (8,190)
State income taxes, net of Federal tax
benefit...................................... 8,249 5,506 3,963
Other, net.................................... (22,129) 1,729 (6,403)
-------- -------- --------
Provision for income taxes.................... $231,897 $189,699 $168,506
======== ======== ========
Effective income tax rate..................... 31.6% 34.5% 32.9%
======== ======== ========
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Balance Sheets" were:
December 31,
--------------------
1998 1997
--------- ---------
Deferred tax assets: (Dollars in thousands)
Allowance for loan and lease losses.............. $ 118,402 $ 108,032
Deferred compensation............................ 29,895 28,033
Postretirement benefits other than pensions...... 18,256 16,850
Expense accruals................................. 8,077 16,115
Other............................................ 24,047 28,842
--------- ---------
Total tax deferred assets...................... 198,677 197,872
--------- ---------
Deferred tax liabilities:
Depreciation..................................... (16,521) (27,139)
Net unrealized appreciation on securities
available for sale.............................. (38,724) (31,881)
Lease financing.................................. (75,933) (19,193)
Other............................................ (27,103) (45,169)
--------- ---------
Total tax deferred liabilities................. (158,281) (123,382)
--------- ---------
Net deferred tax asset......................... $ 40,396 $ 74,490
========= =========
The deferred tax assets have been determined to be realizable, and,
accordingly, a valuation allowance was not required. At December 31, 1998,
there were no income tax credits or alternative minimum tax credit
carryforwards.
Securities transactions resulted in income tax expense of $3.0 million, $1.3
million and $1.3 million related to securities gains (losses) for the years
ended December 31, 1998, 1997 and 1996, respectively.
68
NOTE L. Benefit Plans
BB&T provides various employee benefit plans to existing employees and
employees of acquired entities. Employees of acquired entities typically
participate in existing BB&T plans upon consummation of the acquisitions.
Credit is usually given to these employees for years of service at the
acquired institution. The combination of actuarial information for the benefit
plans of acquired entities is typically not meaningful because the benefits
offered in those plans and assumptions used in the calculations related to
those plans are superseded by the benefits offered in the BB&T plans and the
assumptions used in the BB&T calculations. Accordingly, the actuarial
information presented for retirement plans and postretirement benefits in the
accompanying tables is that of BB&T as originally presented.
The following table discloses expenses relating to employee benefit plans
restated for transactions accounted for as poolings of interests.
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Defined benefit plans.................................. $ 9,121 $13,246 $12,494
Defined contribution and ESOP plans.................... 15,060 27,537 13,295
------- ------- -------
Total expense related to benefit plans............... $24,181 $40,783 $25,789
======= ======= =======
Retirement Plans
BB&T provides a retirement plan that covers substantially all employees.
Benefits are based on years of service, age at retirement and the employee's
compensation during the five highest consecutive years of earnings within the
last ten years of employment. BB&T's contributions to the plan are in amounts
between the minimum required for funding standard account purposes and the
maximum deductible for Internal Revenue Service purposes.
Supplemental retirement benefits are provided to certain key officers under
supplemental executive retirement plans, which are not qualified under the
Internal Revenue Code. Although technically unfunded plans, insurance policies
on the lives of the covered employees partially fund future benefits.
69
The tables below summarize data relative to the plans for the years as
indicated:
Net Periodic Pension Cost 1998 1997 1996
- ------------------------- ---------- ---------- ----------
(Dollars in thousands)
Service cost......................................... $ 13,681 $ 12,412 $ 11,488
Interest cost........................................ 19,022 17,971 16,253
Estimated return on plan assets...................... (21,873) (17,987) (24,260)
Net amortization and other........................... (1,504) 790 8,833
---------- ---------- ----------
Net periodic pension cost.......................... $ 9,326 $ 13,186 $ 12,314
========== ========== ==========
Plans for which Plans for which
assets exceed accumulated benefits
accumulated benefits exceed assets*
---------------------- ----------------------
Change in Projected Benefit Obligation 1998 1997 1998 1997
- -------------------------------------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Projected benefit obligation, January 1,............. $ 234,396 $ 221,697 $ 24,188 $ 17,668
Service cost....................................... 12,554 11,668 1,127 744
Interest cost...................................... 17,022 16,513 2,000 1,458
Actuarial loss..................................... 26,047 11,607 6,190 3,877
Benefits paid...................................... (10,098) (9,593) (685) (515)
Change in plan provisions.......................... -- (17,990) -- --
Other, net......................................... 4,829 494 -- 956
---------- ---------- ---------- ----------
Projected benefit obligation, December 31,........... $ 284,750 $ 234,396 $ 32,820 $ 24,188
========== ========== ========== ==========
Change in Plan Assets 1998 1997 1998 1997
- --------------------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Fair value of plan assets, January 1,................ $ 273,922 $ 221,394 $ -- $ --
Actual return on plan assets....................... 35,276 42,875 -- --
Employer contributions............................. 4,749 19,247 685 516
Benefits paid...................................... (10,098) (9,594) (685) (516)
Other, net......................................... 5,757 -- -- --
---------- ---------- ---------- ----------
Fair value of plan assets, December 31,.............. $ 309,606 $ 273,922 $ -- $ --
========== ========== ========== ==========
Net Amount Recognized 1998 1997 1998 1997
- --------------------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Funded status........................................ $ 24,856 $ 39,527 $ (32,820) $ (24,188)
Unrecognized transition asset (liability)............ (5,436) (6,523) 234 277
Unrecognized prior service cost...................... (20,824) (23,201) 3,114 3,964
Unrecognized net loss................................ 19,259 6,615 11,215 6,583
Other, net........................................... -- -- -- (490)
---------- ---------- ---------- ----------
Net amount recognized................................ $ 17,855 $ 16,418 $ (18,257) $ (13,854)
========== ========== ========== ==========
Reconciliation of Net Pension Asset (Liability) 1998 1997 1998 1997
- ----------------------------------------------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Prepaid pension cost, January 1,..................... $ 16,418 $ 6,065 $ (13,854) $ (10,037)
Contributions...................................... 4,749 19,247 685 516
Net periodic pension cost.......................... (4,239) (8,894) (5,057) (2,908)
Other, net......................................... 927 -- (31) (1,425)
---------- ---------- ---------- ----------
Prepaid (accrued) pension cost, December 31,......... $ 17,855 $ 16,418 $ (18,257) $ (13,854)
========== ========== ========== ==========
December 31,
----------------------
Weighted Average Assumptions 1998 1997
- ---------------------------- ---------- ----------
Weighted average assumed discount rate............... 6.75% 7.25%
Weighted average expected long-term rate of return on
plan assets......................................... 8.00 8.00
Assumed rate of annual compensation increases........ 5.50 5.50
- --------
* 1998 reflects the inclusion of a nonqualified plan not reflected in 1997
actuarial date. The added plan information is effective January 1, 1998.
70
Plan assets consist primarily of investments in mutual funds consisting of
equity investments, obligations of the U.S. Treasury and Federal agencies and
corporations. Plan assets included $26.8 million, $20.3 million and $11.2
million of BB&T common stock at December 31, 1998, 1997 and 1996,
respectively. The market value of total plan assets was $309.6 million and
$273.9 million at December 31, 1998 and 1997, respectively.
Postretirement Benefits
BB&T revised its retiree health care plans in preparation for the
implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other
Than Pensions." Effective January 1, 1996, the plans of BB&T and BB&T
Financial Corporation were merged into a single plan. The new plan covers
employees retiring after December 31, 1995 who are eligible for participation
in the BB&T pension plan and have at least ten years of service. The plan
requires retiree contributions, with a subsidy by BB&T based upon years of
service of the employee at the time of retirement. The subsidy is periodically
reviewed for adjustment. The plan provides flexible benefits to retirees or
their dependents.
The following tables set forth the components of the retiree benefit plan
and the amount recognized in the consolidated financial statements at December
31, 1998, 1997 and 1996.
Net Periodic Postretirement Benefit Cost: 1998 1997 1996
- ----------------------------------------- ----------- ----------- ------
(Dollars in thousands)
Service cost.................................. $ 1,550 $ 733 $ 834
Interest cost................................. 3,422 2,586 2,667
Amortization and other........................ 519 (37) 344
----------- ----------- ------
Total expense............................... $ 5,491 $ 3,282 $3,845
=========== =========== ======
Change in Projected Benefit Obligation 1998 1997
- -------------------------------------- ----------- -----------
(Dollars in thousands)
Projected benefit obligation, January 1,........ $ 38,342 $ 38,552
Service cost.................................. 1,550 733
Interest cost................................. 3,422 2,586
Plan participants' contributions.............. 475 272
Actuarial loss (gain)......................... 4,958 (1,949)
Benefits paid................................. (1,859) (1,852)
Other, net.................................... 6,742 --
----------- -----------
Projected benefit obligation, December 31,...... $ 53,630 $ 38,342
=========== ===========
Change in Plan Assets 1998 1997
- --------------------- ----------- -----------
(Dollars in thousands)
Fair value of plan assets, January 1,........... $ -- $ --
Actual return on plan assets.................. -- --
Employer contributions........................ 1,384 1,581
Plan participants' contributions.............. 475 272
Benefits paid................................. (1,859) (1,853)
----------- -----------
Fair value of plan assets, December 31,......... $ -- $ --
=========== ===========
Net Amount Recognized 1998 1997
- --------------------- ----------- -----------
(Dollars in thousands)
Funded status................................... $(53,630) $(38,342)
Unrecognized prior service cost................. 6,223 --
Unrecognized net loss (gain).................... 600 (4,358)
----------- -----------
Net amount recognized........................... $(46,807) $(42,700)
=========== ===========
71
Reconciliation of Net Pension Asset (Liability) 1998 1997
- ----------------------------------------------- ----------- -----------
(Dollars in thousands)
Prepaid (accrued) pension cost, January 1,........... $(42,700) $(28,977)
Contributions...................................... 1,384 1,581
Net periodic pension cost.......................... (5,491) (3,282)
Other, net......................................... -- (12,022)
----------- -----------
Prepaid (accrued) pension cost, December 31,......... $(46,807) $(42,700)
=========== ===========
December 31,
--------------------------
Weighted Average Assumptions 1998 1997
- ---------------------------- ----------- -----------
Weighted average assumed discount rate............... 6.75% 7.25%
Medical trend rate-initial year...................... 9.00 10.00
Medical trend rate-ultimate.......................... 5.00 5.00
Select period........................................ 4yrs 5yrs
1%
1% Increase Decrease
----------- -----------
Impact of a 1% change in assumed health care cost
on:
Service and interest costs....................... 2.36% (1.81)%
Accumulated postretirement benefit obligation.... 2.29 (1.97)
401-k Savings Plan
Prior to 1996, BB&T had an Employee Stock Ownership Plan that allowed all
employees to acquire BB&T common stock by contributing up to 15% of their
salaries to the plan. BB&T matched 100% of each employee's contributions, up
to a maximum of 6% of the employee's salary. BB&T Financial Corporation
provided a Savings and Thrift Plan permitting eligible employees to make
contributions up to 16% of base compensation, with matching contributions up
to 4% of the employee's base compensation. Effective January 1, 1996, BB&T's
Employee Stock Ownership Plan was merged into the former BB&T Financial
Corporation Savings and Thrift Plan to form the BB&T Corporation 401-k Savings
Plan. The new plan permits employees to contribute up to 16% of their
compensation. BB&T matches up to 6% of the employee's compensation with a 100%
matching contribution.
Settlement Agreements
In connection with recent significant mergers, three executive officers of
merged institutions agreed to retire during 1995 and 1997. BB&T entered into
settlement and noncompetition agreements with these executive officers to
settle existing employment contracts and to require them not to compete with
BB&T. One of the agreements provides for annual payments of $1,655,000 less
the company-provided portion of certain benefits payable under existing
benefit plans. The payments continue for the life of the executive and his
current wife but in no event for a period of less than fifteen years. The
executive has agreed not to compete in a defined geographic area for fifteen
years and to serve as a consultant to BB&T for five years. A second agreement
provides for annual payments of $312,000 for ten years or until death. The
third settlement agreement provides for annual payments of $769,392 (to be
adjusted annually in accordance with the Consumer Price Index) until the
executive reaches the age of 65 in 2002, at which time the annual payments
will be reduced to 70% of the amount paid during the final year pursuant the
agreement, estimated to be approximately $623,000, less the company-provided
portion of benefits payable under certain existing benefit plans. The reduced
payments will continue for the life of the executive. If the executive's
current wife survives him, payments will continue to her in the annual amount
equal to 35% of the amount paid to the executive during the final year
pursuant to the agreement. The executive officer has agreed not to compete in
a defined geographic area for ten years.
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
72
NOTE M. Commitments and Contingencies
BB&T is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, options written, standby
letters of credit and financial guarantees, interest rate caps and floors
written, interest rate swaps and forward and futures contracts.
BB&T's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. BB&T uses the same credit
policies in making commitments and conditional obligations as it does for on-
balance sheet instruments.
Contract or
Notional Amount at
December 31,
---------------------
1998 1997
---------- ----------
(Dollars in
thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend, originate or purchase
credit............................................ $9,837,164 $7,922,157
Standby letters of credit and financial guarantees
written........................................... 356,193 288,200
Commercial letters of credit....................... 36,201 35,915
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Commitments to sell loans and securities........... $1,076,502 $ 555,722
Foreign exchange contracts......................... 136,628 145,855
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. BB&T evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by BB&T upon extension of credit, is based on
management's evaluation of the creditworthiness of the counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BB&T to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers, and letters of credit are collateralized when necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities
are contracts for delayed delivery of securities in which BB&T agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates.
Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the
normal conduct of business. Management believes that the liabilities arising
from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
73
NOTE N. Regulatory Requirements and Other Restrictions
BB&T's subsidiary banks are required by the Board of Governors of the
Federal Reserve System to maintain reserve balances based on certain
percentages of deposit types subject to various adjustments. At December 31,
1998, the net reserve requirement amounted to $203.5 million.
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the subsidiary banks could have declared dividends from
their retained earnings up to $1.4 billion at December 31, 1998. The
subsidiary banks are prohibited from paying dividends from their capital stock
and additional paid-in capital accounts and are required by regulatory
authorities to maintain minimum capital levels. BB&T was in compliance with
these requirements at December 31, 1998.
BB&T is subject to various regulatory capital requirements mandated and
monitored by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on BB&T's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of BB&T's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. BB&T's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require BB&T to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to average assets.
December 31, 1998 December 31, 1997
----------------------------- -----------------------------
For Minimum For Minimum
Actual Capital Actual Capital
----------------- Adequacy ----------------- Adequacy
Ratio Amount Purposes Ratio Amount Purposes
----- ---------- ----------- ----- ---------- -----------
(Dollars in thousands)
Tier 1 Capital
BB&T.................. 10.0% $2,302,400 $ 924,271 10.3% $2,153,246 $ 835,300
BB&T--NC.............. 10.9 1,834,215 673,725 11.0 1,672,558 606,912
BB&T--SC.............. 12.7 421,891 133,225 12.2 368,256 121,094
BB&T--VA.............. 15.3 332,579 87,128 14.6 300,179 81,986
Franklin National
Bank................. 8.5 38,810 18,222 9.8 34,513 14,102
Total Capital
BB&T.................. 14.8% $3,408,901 $1,848,542 13.9% $2,909,598 $1,670,601
BB&T--NC.............. 12.2 2,053,215 1,347,450 12.3 1,862,258 1,213,824
BB&T--SC.............. 13.9 463,895 266,451 13.4 406,120 242,188
BB&T--VA.............. 16.5 359,957 174,256 15.6 319,334 163,971
Franklin National
Bank................. 9.7 43,992 36,444 11.0 38,705 28,204
Tier 1 Leverage Capital
BB&T.................. 6.8% $2,302,400 $1,010,330 7.2% $2,153,246 $ 900,236
BB&T--NC.............. 7.2 1,834,215 762,111 7.6 1,672,558 656,147
BB&T--SC.............. 9.3 421,891 135,789 8.5 368,256 129,748
BB&T--VA.............. 10.0 332,579 99,972 8.6 300,179 104,192
Franklin National
Bank................. 5.3 38,810 21,908 7.1 34,513 19,589
N/A--not applicable.
74
NOTE O. Parent Company Financial Statements
Condensed Balance Sheets
December 31, 1998 and 1997
1998 1997
----------- -----------
Assets (Dollars in thousands)
Cash and due from banks................................ $ 6,951 $ 5,853
Interest-bearing bank balances......................... 602,094 605,319
Securities............................................. 13,992 13,824
Investment in banking subsidiaries..................... 3,056,104 2,631,737
Investment in other subsidiaries....................... 170,855 109,850
Advances to subsidiaries............................... 331,000 185,504
Premises and equipment, net............................ 5,366 5,537
Receivables from subsidiaries and other assets......... 180,814 81,768
----------- -----------
Total assets......................................... $ 4,367,176 $ 3,639,392
=========== ===========
Liabilities and Shareholders' Equity
Short-term borrowed funds.............................. $ 675,141 $ 638,325
Dividends payable...................................... 50,804 42,173
Accounts payable and accrued liabilities............... 24,130 23,529
Long-term debt......................................... 858,553 496,255
----------- -----------
Total liabilities.................................... 1,608,628 1,200,282
----------- -----------
Total shareholders' equity .......................... 2,758,548 2,439,110
----------- -----------
Total liabilities and shareholders' equity .......... $ 4,367,176 $ 3,639,392
=========== ===========
75
Condensed Income Statements
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------- --------- ---------
Income (Dollars in thousands)
Dividends from subsidiaries.................. $389,684 $ 248,294 $ 142,854
Interest and other income from subsidiaries.. 77,074 61,649 36,627
Interest on investment securities............ 1,162 1,739 2,936
Other income................................. 2,196 722 7,835
-------- --------- ---------
Total income............................... 470,116 312,404 190,252
-------- --------- ---------
Expenses
Interest expense............................. 71,440 53,161 33,845
Occupancy expense............................ 171 249 171
Other expenses............................... 11,403 14,537 11,704
-------- --------- ---------
Total expenses............................. 83,014 67,947 45,720
-------- --------- ---------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries........ 387,102 244,457 144,532
Income tax (benefit) expense................... (784) (52) 597
-------- --------- ---------
Income before equity in undistributed earnings
of subsidiaries............................... 387,886 244,509 143,935
Net income of subsidiaries in excess of
dividends from subsidiaries................... 113,939 115,909 199,377
-------- --------- ---------
Net income..................................... $501,825 $ 360,418 $ 343,312
======== ========= =========
76
Condensed Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Cash Flows From Operating Activities:
Net income....................................... $501,825 $360,418 $343,312
Adjustments to reconcile net income to net cash
provided by operating activities:
Net income of subsidiaries less than (in excess
of) dividends from subsidiaries............... (113,939) (115,909) (199,377)
Depreciation of premises and equipment......... 171 272 214
Amortization of unearned compensation.......... 962 8,111 2,450
Discount accretion and premium amortization.... -- 396 192
Loss (gain) on sales of securities............. (37) -- (9)
(Increase) decrease in other assets............ (99,136) (23,258) 125,920
Increase (decrease) in accounts payable and
accrued liabilities........................... 601 (2,008) 2,333
-------- -------- --------
Net cash provided by operating activities.... 290,447 228,022 275,035
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for
sale.......................................... 68 -- 14
Proceeds from maturities, calls and paydowns of
securities available for sale................. -- 35,482 49,347
Purchases of securities available for sale..... (237) (8,717) (52,324)
Investment in subsidiaries..................... (36,545) (733) (68,625)
Advances to subsidiaries....................... (676,032) (430,897) (306,857)
Repayment of advances to subsidiaries.......... 530,536 369,375 182,875
Net cash received in purchase accounting
transactions.................................. (6,051) (45,852) --
-------- -------- --------
Net cash (used in) provided by investing
activities.................................. (188,261) (81,342) (195,570)
-------- -------- --------
Cash Flows From Financing Activities:
Net increase (decrease) in long-term debt...... 362,400 246,873 247,629
Net increase in short-term borrowed funds...... 36,816 72,100 169,952
Net proceeds from common stock issued.......... 27,522 23,351 51,068
Redemption of common stock..................... (344,010) (321,224) (225,569)
Cash dividends paid on common and preferred
stock......................................... (187,041) (155,688) (127,771)
-------- -------- --------
Net cash (used in) provided by financing
activities.................................. (104,313) (134,588) 115,309
-------- -------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents..................................... (2,127) 12,092 194,774
Cash and Cash Equivalents at Beginning of Year... 611,172 599,080 404,306
-------- -------- --------
Cash and Cash Equivalents at End of Year......... $609,045 $611,172 $599,080
======== ======== ========
77
NOTE P. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires BB&T to disclose the estimated fair value of its on- and off-balance
sheet financial instruments. A financial instrument is defined by SFAS No. 107
as cash, evidence of an ownership interest in an entity or a contract that
creates a contractual obligation or right to deliver to or receive cash or
another financial instrument from a second entity on potentially favorable or
unfavorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS No. 107 specifies
that fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for
a significant portion of BB&T's financial instruments, fair value estimates
for these instruments are based on judgments regarding current economic
conditions, currency and interest rate risk characteristics, loss experience
and other factors. Many of these estimates involve uncertainties and matters
of significant judgment and cannot be determined with precision. Therefore,
the calculated fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in
a current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
The following methods and assumptions were used by BB&T in estimating the
fair value of its financial instruments at December 31, 1998 and 1997:
Cash and cash equivalents: For these short-term instruments, the carrying
amounts are a reasonable estimate of fair values.
Securities: Fair values for securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
Loans receivable: The fair values for loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms and credit quality. The carrying amounts of accrued
interest approximate fair values.
Deposit liabilities: The fair values for demand deposits, interest-checking
accounts, savings accounts and certain money market accounts are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies current interest rates
to aggregate expected maturities.
Short-term borrowed funds: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowed funds approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on
quoted market prices for similar instruments or by using discounted cash flow
analyses, based on BB&T's current incremental borrowing rates for similar
types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that BB&T would receive or pay
to terminate the swap agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the swap
counterparties.
Commitments to extend credit, standby letters of credit and financial
guarantees written: The fair values of commitments are estimated using the
fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair values also consider the
difference between current levels of interest rates and the committed rates.
The fair values of guarantees and letters of credit are estimated based on
fees currently charged for similar agreements.
78
Other off-balance sheet instruments: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Dollars in thousands)
Financial assets:
Cash and cash
equivalents............. $ 1,046,799 $ 1,046,799 $ 1,192,870 $ 1,192,870
Trading securities....... 60,422 60,422 67,878 67,878
Securities available for
sale.................... 7,971,374 7,971,374 7,296,128 7,296,128
Securities held to
maturity................ 127,470 130,820 230,257 233,636
Loans and leases:
Loans.................. 22,074,450 23,293,939 20,617,568 20,853,513
Leases................. 1,620,326 N/A 616,302 N/A
Allowance for losses... (314,387) N/A (279,596) N/A
----------- -----------
Net loans and
leases.............. $23,380,390 $20,954,274
=========== ===========
Financial liabilities:
Deposits................. $23,046,907 23,128,155 $21,375,974 21,409,413
Short-term borrowed
funds................... 3,369,101 3,369,101 3,493,199 3,451,885
Long-term debt........... 4,733,624 4,789,095 3,530,912 3,868,116
Capitalized leases....... 3,310 N/A 3,291 N/A
Notional/ Notional/
Contract Fair Contract Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Off balance sheet financial
instruments:
Interest rate swaps...... $ 2,496,346 $ 37,835 $ 2,428,930 $ 25,570
Commitments to extend,
originate or purchase
credit.................. 9,837,164 (19,379) 7,922,157 (14,835)
Standby and commercial
letters of credit and
financial guarantees
written................. 392,394 (5,886) 324,115 (4,495)
Commitments to sell loans
and securities.......... 1,075,000 (1,038) 555,722 (2,925)
Foreign exchange
contracts............... 136,628 319 145,855 326
Option contracts
purchased............... 35,000 623 55,000 (303)
Option contracts
written................. 1,267,250 (257) 55,000 --
Futures contracts........ 1,502 (7) 8,486 --
- --------
N/A--not applicable.
79
NOTE Q. Derivatives and Off-Balance Sheet Financial Instruments
BB&T utilizes interest rate swaps, caps and floors in the management of
interest rate risk. Interest rate swaps are contractual agreements between two
parties to exchange a series of cash flows representing interest payments. A
swap allows both parties to transform the repricing characteristics of an
asset or liability from a fixed to a floating rate, a floating rate to a fixed
rate, or one floating rate to another floating rate. The underlying principal
positions are not affected. Swap terms generally range from one year to ten
years depending on the need. At December 31, 1998, derivatives with a total
notional value of $3.7 billion, with terms ranging up to fourteen years, were
outstanding.
The following tables set forth certain information concerning BB&T's
interest rate swaps at December 31, 1998:
Interest Rate Swaps, Caps, Floors and Collars
December 31, 1998
Notional Receive Pay Fair
Amount Rate Rate Value
---------- ---------- ------------------ ----------
Type
- ---- (Dollars in thousands)
Receive fixed swaps....... $1,266,200 6.24% 5.30% $ 43,369
Pay fixed swaps........... 1,180,146 5.34 5.67 (5,503)
Basis swaps............... 50,000 4.95 5.34 (31)
Caps, Floors & Collars.... 1,247,250 -- -- 623
---------- ---------- ---------- ----------
Total..................... $3,743,596 5.79% 5.48% $ 38,458
========== ========== ========== ==========
Receive
Fixed Pay Fixed Basis Swaps, Caps,
Year-to-date Activity Swaps Swaps Floors & Collars Total
- --------------------- ---------- ---------- ------------------ ----------
Balance, December 31,
1997..................... $1,301,000 $ 351,930 $ 776,000 $2,428,930
Additions................. 205,000 936,673 797,250 1,938,923
Maturities/amortizations.. (239,800) (108,457) (111,000) (459,257)
Terminations.............. -- -- (165,000) (165,000)
---------- ---------- ---------- ----------
Balance, December 31,
1998..................... $1,266,200 $1,180,146 $1,297,250 $3,743,596
========== ========== ========== ==========
One to
One Year Five Five to 10
Maturity Schedule or Less Years Years Total
- ----------------- ---------- ---------- ------------------ ----------
Receive fixed swaps....... $ 561,200 $ 445,000 $ 260,000 $1,266,200
Pay fixed swaps........... 1,010,200 105,869 64,077 1,180,146
Basis swaps............... 50,000 -- -- 50,000
Caps, Floors & Collars.... 500,000 747,250 -- 1,247,250
---------- ---------- ---------- ----------
Total..................... $2,121,400 $1,298,119 $ 324,077 $3,743,596
========== ========== ========== ==========
As of December 31, 1998, deferred losses from new swap transactions
initiated during 1998 were $3.3 million. There were no unamortized deferred
gains or losses from terminated transactions remaining at year end. Active
transactions resulted in pretax net income of $878,100.
In addition to interest rate swaps, BB&T utilizes written covered over-the-
counter call options on specific securities in the available-for-sale
portfolio in order to enhance returns. During 1998, options were written on
80
securities totaling $1.9 billion. Option fee income was $3.2 million for 1998.
There were no unexercised options outstanding at December 31, 1998 or 1997.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
warehouse and pipeline against increasing interest rates. Written call options
are used in tandem with purchased put options to create a net purchased put
option that reduces the cost of the hedge. At December 31, 1998, net purchased
put option contracts with a notional value of $15.0 million were outstanding.
The $3.7 billion of derivatives used in interest rate risk management are
primarily used to hedge variable rate commercial loans, adjustable rate
mortgage loans, retail certificates of deposit and fixed rate notes. BB&T does
not utilize derivatives for trading purposes.
Although off-balance sheet derivative financial instruments do not expose
BB&T to credit risk equal to the notional amount, such agreements generate
credit risk to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. Such
risk is minimized based on the quality of the counterparties and the
consistent monitoring of these agreements. The counterparties to these
transactions were large commercial banks and investment banks. Annually, the
counterparties are reviewed for creditworthiness by BB&T's credit policy
group. Where appropriate, master netting agreements are arranged or collateral
is obtained in the form of rights to securities. At December 31, 1998, BB&T's
interest rate swaps, caps, floors and collars reflected an unrealized gain of
$38.5 million.
Other risks associated with interest-sensitive derivatives include the
impact on fixed positions during periods of changing interest rates. Indexed
amortizing swaps' notional amounts and maturities change based on certain
interest rate indices. Generally, as rates fall the notional amounts decline
more rapidly, and as rates increase notional amounts decline more slowly.
Under unusual circumstances, financial derivatives also increase liquidity
risk, which could result from an environment of rising interest rates in which
derivatives produce negative cash flows while being offset by increased cash
flows from variable rate loans. Such risk is considered insignificant due to
the relatively small derivative positions held by BB&T. At December 31, 1998,
BB&T had no indexed amortizing swaps outstanding.
81
NOTE R. Calculations of Earnings Per Share
The basic and diluted earnings per share calculations are presented in the
following table:
Years Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands, except per
share data)
Basic Earnings Per Share:
Weighted average number of common
shares outstanding during the
period............................... 287,427,644 287,480,712 287,535,321
------------ ------------ ------------
Net income............................ $ 501,825 $ 360,418 $ 343,312
Less--Preferred dividend requirement.. -- -- 610
------------ ------------ ------------
Income available for common shares.... $ 501,825 $ 360,418 $ 342,702
============ ============ ============
Basic earnings per share.............. $ 1.75 $ 1.25 $ 1.19
============ ============ ============
Diluted Earnings Per Share:
Weighted average number of common
shares............................... 287,427,644 287,480,712 287,535,321
Add--
Shares issuable assuming conversion
of convertible preferred stock..... -- -- 1,877,304
Dilutive effect of outstanding
options (as determined by
application of treasury stock
method)............................ 6,143,607 4,845,168 4,140,158
Issuance of additional shares under
share repurchase agreement,
contingent upon market price....... -- 144,588 204,036
------------ ------------ ------------
Weighted average number of common
shares, as adjusted.................. 293,571,251 292,470,468 293,756,819
============ ============ ============
Net income............................ $ 501,825 $ 360,418 $ 343,312
============ ============ ============
Diluted earnings per share............ $ 1.71 $ 1.23 $ 1.17
============ ============ ============
NOTE S. Operating Segments
BB&T's operations are divided into six reportable business segments: the
Banking Network, Mortgage Banking, Trust Services, Agency Insurance,
Investment Banking and Brokerage and Treasury. These operating segments have
been identified based primarily on BB&T's existing organizational structure.
The segments require unique technology and marketing strategies and offer
different products and services.While BB&T is managed as an integrated
organization, individual executive managers are held accountable for the
operations of the business segments that report to them.
BB&T measures and presents information for internal reporting purposes in a
variety of different ways, including reportable segments based on
organizational structure, products, services and customer relationships. The
internal reporting system presently utilized by management in the planning and
measuring of operating activities, as well as the system to which most
managers are held accountable, is based on organizational structure.
BB&T emphasizes revenue growth by focusing on client service, client
relationships and sales effectiveness. The segment results presented herein
are based on internal management accounting policies, which support these
strategic objectives. Unlike financial accounting, there is no comprehensive
authoritative body of guidance for management accounting equivalent to
generally accepted accounting principles. Therefore, the performance of the
segments is not necessarily comparable with BB&T's consolidated results or
with similar information presented by any other financial institution.
Additionally, because of the interrelationships of the various
82
segments, the information presented is not necessarily indicative of the
segments' financial performance if they operated as independent entities.
BB&T's internal reporting system was significantly modified during 1998, and
prior periods have not been reported to reflect the new system because it is
not practicable to restate prior period results in order to do so. Also, BB&T
has completed various mergers and acquisitions accounted for as poolings of
interests, which present additional practical limitations to the presentation
of comparable prior period information.
The management accounting process uses various estimates and allocation
methodologies to measure the performance of the operating segments. To
determine financial performance for each segment, BB&T allocates capital,
funding charges and credits, an economic provision for loan and lease losses,
certain noninterest expenses and income tax provisions to each segment, as
applicable. Also, to promote revenue growth, certain revenues of Mortgage
Banking, Trust Services, Agency Insurance and Investment Banking and Brokerage
segments are allocated to the Banking Network and are reflected in
intersegment noninterest revenues. The estimates and allocations are subject
to periodic adjustment as the internal management accounting system is revised
and business or product lines within the segments change. Also, because the
development and application of these methodologies is a dynamic process, the
financial results presented may be periodically revised.
BB&T's overall objective is to maximize shareholder value by optimizing
return on equity and limiting risk. Allocations of capital and the economic
provision for loan and lease losses are designed to address this objective.
Capital is assigned to each segment on an economic basis, using management's
assessment of the inherent risks associated with the segment. Required
economic capital allocations are made to cover the following risk categories:
credit risk, funding risk, interest rate risk, option risk, basis risk, market
risk and operational risk. Each segment is evaluated based on a risk-adjusted
return on capital. Capital assignments are not equivalent to regulatory
capital guidelines and the total amount assigned to all segments may vary from
consolidated shareholders' equity. All unallocated capital is retained in the
Treasury segment.
The economic provision for loan and lease losses is also allocated to the
relevant segments based on management's assessment of the segments' risks as
described above. Unlike the provision for loan and lease losses recorded
pursuant to generally accepted accounting principles, the economic provision
adjusts for the impact of expected credit losses over the effective lives of
the related loans and leases. Any unallocated provision for loan and lease
losses is retained in the Corporate Office, reflected in the accompanying
table as "other revenues and expenses."
BB&T has implemented an extensive noninterest expense allocation process to
support organizational and product profitability. BB&T allocates expenses to
the reportable segments based on various cost allocation methodologies,
including the number of items processed, overall percentage of time spent,
full-time equivalent employees assigned to functions, functional position
surveys and activity-based costing. A portion of corporate overhead expenses
is not allocated, but is retained in corporate accounts reflected as other
expenses in the accompanying table. Income taxes are allocated to the various
segments using effective tax rates.
BB&T utilizes a funds transfer pricing ("FTP") system to eliminate the
effect of interest rate risk from the segments' net interest income because
such risk is centrally managed within the Treasury segment. The FTP system
credits or charges the segments with the true value or cost of the funds the
segments create or use. The FTP system provides a funds credit for sources of
funds and a funds charge for the use of funds by each segment. The net FTP
charge or credit is reflected as net intersegment interest income (expense) in
the accompanying table.
Banking Network
BB&T's Banking Network, which consists of 534 full-service banking offices
in North Carolina, South Carolina, Virginia, Maryland and Washington, D.C.,
serves commercial and retail clients by offering a variety of loan and deposit
products and other financial services. The Banking Network is primarily
responsible for client relationships, and, therefore, is credited with revenue
from the Mortgage Banking, Trust Services, Agency
83
Insurance and Investment Banking and Brokerage segments, which is reflected in
intersegment noninterest revenues. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional discussion of
the functions of the banking network.
Mortgage Banking
The Mortgage Banking segment retains mortgage loans originated by the
Banking Network and purchased from various correspondents. Mortgage loan
products include fixed- and adjustable-rate government and conventional loans
for the purpose of constructing, purchasing or refinancing owner-occupied
properties. Fixed-rate mortgage loans are typically sold to government and
private investors with servicing rights retained, while adjustable rate loans
are typically held in the portfolio. The Mortgage Banking segment earns
interest on loans held in the warehouse and portfolio, fee income from the
origination and servicing of mortgage loans and reflects gains or losses from
the sale of mortgage loans. The Mortgage Banking segment is charged and the
Banking Network receives a corresponding credit for the origination of loans
and servicing.
Trust Services
BB&T's Trust Services segment provides personal trust administration and
estate planning, investment counseling and management, employee benefits
services, and corporate trust services to individuals, corporations,
institutions, foundations and government entities. The Banking Network
receives an interoffice credit for trust fees in the initial year the account
is referred, with the corresponding charge remaining in the Corporate Office.
Insurance Services
BB&T has the largest independent insurance agency network in the Carolinas
and represents many of the nation's top-rated insurance carriers. BB&T
Insurance Services provides property and casualty, life and health insurance
to businesses and to individuals, provides small business and corporate
products, such as workers compensation and professional liability, and
provides surety and title insurance. The Banking Network receives credit for
insurance commissions on referred accounts, with the corresponding charge
retained in the Corporate Office.
Investment Banking and Brokerage
BB&T's Investment Banking and Brokerage segment offers customers investment
alternatives, including discount brokerage services, fixed-rate and variable-
rate annuities, mutual funds and government and municipal bonds and various
other investment products. Investment Banking and Brokerage also provides
personal financial planning services to individuals. The Investment Banking
and Brokerage segment includes Craigie, Incorporated, an investment banking
firm located in Richmond, Virginia. Craigie specializes in the origination,
trading and distribution of fixed-income securities and equity products in
both the public and private capital markets. Craigie also has a public finance
department that provides investment banking services, financial advisory
services and municipal bond financing to a variety of regional tax-exempt
issuers. The Banking Network is credited for investment service revenues on
referred accounts, with the corresponding charge retained in the Corporate
Office.
Treasury
BB&T's Treasury segment is responsible for the management of the securities
portfolios, funding and liquidity requirements, and management of interest
rate risk through the use of balance sheet repositioning and derivative
financial instruments. See the Market Risk Management section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information about the responsibilities of the Treasury segment.
84
The following table discloses selected financial information for BB&T's
reportable business segments:
For the Year Ended December 31, 1998
--------------------------------------------------------------------------------------------------------------
Investment All Total
Banking Mortgage Trust Agency Banking Other Segment Other Revenues
Network Banking Services Insurance and Brokerage Treasury Segments/1/ Results and Expenses/2/
----------- ---------- -------- --------- ------------- ---------- ----------- ----------- ---------------
(dollars in thousands)
Net interest
income (expense)
from external
customers......... $ 672,190 $ 409,944 $(33,714) $11,419 $ 1,127 $ 126,762 $ 195,860 $ 1,383,588 $ 59,802
Net intersegment
interest income
(expense)......... 228,085 (274,934) 37,427 -- -- (1,013) -- (10,435) (12,724)
----------- ---------- -------- ------- -------- ---------- ---------- ----------- ----------
Net interest
income............ 900,275 135,010 3,713 11,419 1,127 125,749 195,860 1,373,153 47,078
----------- ---------- -------- ------- -------- ---------- ---------- ----------- ----------
Provision for loan
and lease losses.. 85,199 3,851 -- 4,173 -- 103 17,994 111,320 1,829
Noninterest income
from external
customers......... 401,974 76,491 36,422 51,291 48,604 11,631 23,082 649,495 (30,172)
Intersegment
noninterest
income............ 58,735 4,761 563 -- -- 878 -- 64,937 486
Noninterest
expense........... 421,210 56,211 22,956 44,991 37,472 4,325 43,363 630,528 265,921
Intersegment
noninterest
expense........... 209,820 16,207 1,986 11,263 8,948 5,383 7,279 260,886 (55,464)
----------- ---------- -------- ------- -------- ---------- ---------- ----------- ----------
Income before
income taxes and
the charge for
capital........... 644,755 139,993 15,756 2,283 3,311 128,447 150,306 1,084,851 (194,894)
Provision for
income taxes.... 243,996 52,847 5,948 862 1,294 46,415 9,990 361,352 (71,359)
----------- ---------- -------- ------- -------- ---------- ---------- ----------- ----------
Net income before
the charge for
capital........... 400,759 87,146 9,808 1,421 2,017 82,032 140,316 723,499 (123,535)
Charge for
capital......... 112,952 9,154 1,082 -- -- 1,689 -- 124,877 942
----------- ---------- -------- ------- -------- ---------- ---------- ----------- ----------
Net income after
charge for
capital........... $ 287,807 $ 77,992 $ 8,726 $ 1,421 $ 2,017 $ 80,343 $ 140,316 $ 598,622 $ (124,477)
=========== ========== ======== ======= ======== ========== ========== =========== ==========
Identifiable
segment assets.... $16,944,158 $6,274,100 $ 6,168 $92,554 $237,429 $9,417,056 $2,368,956 $35,340,421 $1,651,609
=========== ========== ======== ======= ======== ========== ========== =========== ==========
Reconciling
Items & Consolidated
Eliminations Totals
---------------- ------------
Net interest
income (expense)
from external
customers......... $ (195,986)/4/ $ 1,247,404
Net intersegment
interest income
(expense)......... 23,159 /3/ --
---------------- ------------
Net interest
income............ (172,827) 1,247,404
---------------- ------------
Provision for loan
and lease losses.. (32,839)/4/ 80,310
Noninterest income
from external
customers......... (91,321)/4/ 528,002
Intersegment
noninterest
income............ (65,423)/3/ --
Noninterest
expense........... 64,925 /4/ 961,374
Intersegment
noninterest
expense........... (205,422)/3/ --
---------------- ------------
Income before
income taxes and
the charge for
capital........... (156,235) 733,722
Provision for
income taxes.... (58,096)/4/ 231,897
---------------- ------------
Net income before
the charge for
capital........... (98,139) 501,825
Charge for
capital......... (125,819)/3/ --
---------------- ------------
Net income after
charge for
capital........... $ 27,680 $ 501,825
================ ============
Identifiable
segment assets.... $(2,564,803)/4/ $34,427,227
================ ============
- ----
(1) Financial data for segments below the quantitative thresholds requiring
disclosure are attributable to a number of smaller operating segments.
Those segments include a sub-prime auto lender, a factoring operation, a
commercial lawn care finance company, a home equity finance company and a
leasing company.
(2) Other revenues and expenses include amounts incurred by BB&T's support
functions not allocated to the various segments. Amounts include any
unallocated provision for loan and lease losses and unallocated general
corporate expenses, as well as costs associated with BB&T's Year 2000
compliance efforts.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of the internal management accounting practices.
These adjustments include the elimination of the FTP credits and charges,
the elimination of intersegment capital credits and charges, the
elimination of the intersegment noninterest revenues described above and
the elimination of overhead expenses allocated to the various segments.
(4) To reflect elimination entries necessary to consolidate the segment data.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, as of March 19,
1999:
BB&T Corporation
(Registrant)
/s/ John A. Allison, IV
By: _________________________________
John A. Allison, IV
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 19, 1999.
/s/ John A. Allison, IV
_____________________________________
John A. Allison, IV
Chairman of the Board and Chief
Executive Officer
/s/ Scott E. Reed
_____________________________________
Scott E. Reed
Senior Executive Vice President and
Chief Financial Officer
/s/ Sherry A. Kellett
_____________________________________
Sherry A. Kellett
Senior Executive Vice President and
Controller
86
A Majority of the Directors of the Registrant are included.
/s/ Paul B. Barringer
_____________________________________
Paul B. Barringer
Director
/s/ Alfred E. Cleveland
_____________________________________
Alfred E. Cleveland
Director
/s/ W. R. Cuthbertson, Jr.
_____________________________________
W. R. Cuthbertson, Jr.
Director
/s/ Ronald E. Deal
_____________________________________
Ronald E. Deal
Director
/s/ A. J. Dooley, Sr.
_____________________________________
A. J. Dooley, Sr.
Director
/s/ Tom D. Efird
_____________________________________
Tom D. Efird
Director
/s/ Paul S. Goldsmith
_____________________________________
Paul S. Goldsmith
Director
/s/ Lloyd Vincent Hackley
_____________________________________
Lloyd Vincent Hackley
Director
/s/ Jane P. Helm
_____________________________________
Jane P. Helm
Director
87
/s/ Richard Janeway, M.D.
_____________________________________
Richard Janeway, M.D.
Director
/s/ J. Ernest Lathem, M.D.
_____________________________________
J. Ernest Lathem, M.D.
Director
/s/ James H. Maynard
_____________________________________
James H. Maynard
Director
/s/ Joseph A. McAleer, Jr.
_____________________________________
Joseph A. McAleer, Jr.
Director
/s/ Albert O. McCauley
_____________________________________
Albert O. McCauley
Director
/s/ Richard L. Player, Jr.
_____________________________________
Richard L. Player, Jr.
Director
/s/ C. Edward Pleasants, Jr.
_____________________________________
C. Edward Pleasants, Jr.
Director
/s/ Nido R. Qubein
_____________________________________
Nido R. Qubein
Director
/s/ E. Rhone Sasser
_____________________________________
E. Rhone Sasser
Director
/s/ Jack E. Shaw
_____________________________________
Jack E. Shaw
Director
/s/ Harold B. Wells
_____________________________________
Harold B. Wells
Director
88
EXHIBIT INDEX
Exhibit
No. Description Location
------- ----------- --------
2(a) Agreement and Plan of Reorganization dated Incorporated herein by reference to
as of July 29, 1994 and amended and Registration No. 33-56437.
restated as of October 22, 1994 between the
Registrant and BB&T Financial Corporation.
2(b) Plan of Merger as of July 29, 1994 as Incorporated herein by
amended and restated on October 22, 1994 reference to Registration
between the Registrant and BB&T Financial No. 33-56437.
Corporation.
2(c) Agreement and Plan of Reorganization dated Incorporated herein by
as of November 1, 1996 between the reference to Exhibit 3(a)
Registrant and United Carolina Bancshares filed in the Annual
Corporation, as amended. Report on Form 10-K, filed
March 17, 1997.
2(d) Agreement of Plan of Reorganization dated Incorporated herein by
as of October 29, 1997 between the reference to Registration
Registrant and Life Bancorp, Inc. No. 33-44183.
3(a)(i) Amended and Restated Articles of Incorporated herein by
Incorporation of the Registrant, as reference to Exhibit 3(a)
amended. filed in the Annual
Report on Form 10-K, filed
March 17, 1997.
3(a)(ii) Articles of Amendment of Articles of Incorporated herein by
Incorporation. reference to Exhibit 3(a)
(ii) filed in the Annual
Report on Form 10-K, filed
March 18, 1998.
3(b) Bylaws of the Registrant, as amended. Incorporated herein by
reference to Exhibit 3(b)
filed in the Annual
Report on Form 10-K, filed
March 18, 1998.
4(a) Articles of Amendment to Amended and Incorporated herein by
Restated Articles of Incorporation of the reference to Exhibit 3(a)
Registrant related to Junior Participating filed in the Annual
Preferred Stock. Report on Form 10-K, filed
March 17, 1997.
4(b) Rights Agreement dated as of December 17, Incorporated herein by
1996 between the Registrant and Branch reference to Exhibit 1 filed
Banking and Trust Company, Rights Agent. under Form 8-A, filed
January 10, 1997.
4(c) Subordinated Indenture (including Form of Incorporated herein by
Subordinated Debt Security) between the reference to Exhibit 4(d) of
Registrant and State Street Bank and Trust Registration
Company, Trustee, dated as of May 24, 1996. No. 333-02899.
4(d) Senior Indenture (including Form of Senior Incorporated herein by
Debt Security) between the Registrant and reference to Exhibit 4(c) of
State Street Bank and Trust company, Registration No. 333-02899.
Trustee, dated as of May 24, 1996.
10(a)* Death Benefit Only Plan, Dated April 23, Incorporated herein by
1990, by and between Branch Banking and reference to Registration
Trust Company (as successor to Southern No. 33-33984.
National Bank of North Carolina) and
L. Glenn Orr, Jr.
89
10(b)* BB&T Corporation Non-Employee Directors' Incorporated herein by
Deferred Compensation and Stock Option Plan reference to Exhibit 10(b)
of the Annual Report on
Form 10-K, filed
March 17, 1997.
10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by
Incentive Plan. reference to Registration
No. 33-57865.
10(d)* Settlement and Non-Compete Agreement, dated Incorporated herein by
February 28, 1995, by and between the reference to Registration
Registrant and L. Glenn Orr, Jr. No. 33-56437.
10(e)* Settlement Agreement, Waiver and General Incorporated herein by
Release dated September 19, 1994, by and reference to Registration
between the Registrant, Branch Banking and No. 33-56437.
Trust Company (as successor to Southern
National Bank of North Carolina) and
Gary E. Carlton.
10(f) BB&T Corporation Savings and Thrift Plan. Incorporated herein by
reference to Registration
No. 33-57867.
10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by
Incentive Plan. reference to Exhibit 10(g)
filed in the Annual
Report on Form 10-K, filed
March 17, 1997.
10(h)* Form of Branch Banking and Trust Company Incorporated by reference to
Long-Term Incentive Plan. the identified exhibit under
the Quarterly Report on Form
10-Q, filed May 14, 1991.
10(i)* Form of Branch Banking and Trust Company Incorporated by reference to
Executive Incentive Compensation Plan. the identified exhibit under
the Annual Report on Form
10-K, filed February 22,
1985.
10(j)* Deferred Compensation Plan for Key Incorporated herein by
Employees. reference to Exhibit 10(j)
filed in the Annual Report
on Form 10-K, filed
March 17, 1997.
10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by
reference to Exhibit 10(k)
filed in the Annual
Report on Form 10-K, filed
March 17, 1997.
10(l)* BB&T Corporation Special Supplemental Incorporated herein by
Retirement Plan. reference to Exhibit 10(l)
filed in the Annual
Report on Form 10-K, filed
March 17, 1997.
10(m)* Settlement and Noncompetition Agreement, Incorporated herein by
dated July 1, 1997, by and between the reference to Exhibit 10(m)
Registrant and E. Rhone Sasser. filed in the Annual
Report on Form 10-K, filed
March 18, 1998.
90
11 Statement re Computation of Earnings Per Filed herewith as Note R. of
Share. the "Notes to Consolidated
Financial Statements."
21 Subsidiaries of the Registrant. Filed herewith.
22 Proxy Statement for the 1999 Annual Meeting Future filing incorporated
of Shareholders, dated April 27, 1999. by reference pursuant to the
General Instruction G(3).
23(a) Consent of Independent Public Accountants. Filed herewith.
23(b) Opinion of Independent Public Accountants. Filed herewith.
27 Financial Data Schedule. Filed as an exhibit to the
electronically-filed
document as required.
* Management compensatory plan or arrangement.
91