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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, 1997
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, 1998 was approximately $7.9 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 1998, was
136,342,267.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 28, 1998, are incorporated by reference in
Part III of this report.
The Exhibit Index begins on page 82.
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CROSS REFERENCE INDEX
PAGE
------
PART I Item 1 Business............................................. 4
Item 2 Properties........................................... 15, 61
Item 3 Legal Proceedings.................................... 71
Item 4 Submission of Matters to a Vote of Shareholders...... 2
None.
PART II Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters.................................. 38-39
Item 6 Selected Financial Data.............................. 42
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 19
Item 7A Quantitative and Qualitative Disclosures About Market
Risk................................................. 34
Item 8 Financial Statements and Supplementary Data.......... 41
Consolidated Balance Sheets at December 31, 1997 and
1996................................................. 45
Consolidated Statements of Income for each of the
years in the three-year period ended December 31,
1997................................................. 46
Consolidated Statements of Changes in Shareholders'
Equity for each of the years in the three-year period
ended December 31, 1997.............................. 47
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31,
1997................................................. 48
Notes to Consolidated Financial Statements........... 49
Report of Independent Public Accountants............. 44
Quarterly Financial Summary for 1997 and 1996........ 41
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................. 2
None.
PART III Item 10 Directors and Executive Officers of the Registrant... *, 15
Item 11 Executive Compensation............................... *
Item 12 Security Ownership of Certain Beneficial Owners and
Management........................................... *
Item 13 Certain Relationships and Related Transactions....... *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) (1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable.
(3)
Exhibits have been filed separately with the Commission and
are available upon written request.
2
(b)
Reports on Form 8-K.
TYPE DATE FILED REPORTING PURPOSE
---- ---------- -----------------
Item 5. January 14, 1997 Fourth Quarter Earnings Release
Item 5. April 11, 1997 First Quarter Earnings Release
Item 5. May 23, 1997 Corporate Name Change from Southern
National Corporation to BB&T Corporation
effective
May 19, 1997
Item 5. June 11, 1997 $250 million Subordinated Notes Issued
Item 5. July 11, 1997 Second Quarter Earnings Release
Item 2. July 14, 1997 Completion of United Carolina Bancshares
Merger
Item 5. August 15, 1997 30 Days Combined Operations between BB&T
and United Carolina Bancshares Corporation
and certain restated balances
Item 5. August 15, 1997 Restatement of December 31, 1996 Form 10-K
to include the accounts of United Carolina
Bancshares Corporation
Item 5. October 15, 1997 Third Quarter Earnings Release
Item 5. October 30, 1997 Announcement of Plans to Acquire Life
Bancorp, Inc., of Norfolk, Virginia
Item 5. December 17, 1997 Announcement of Plans to Acquire Franklin
Bancorporation, Inc. of Washington, D.C.
Item 5. January 15, 1998 Fourth Quarter Earnings Release
Item 5. February 26, 1998 Announcement of Plans to Acquire Maryland
Federal Bancorp, Inc. of Hyattsville,
Maryland
Item 5. February 27, 1998 Announcement of Share Repurchase Plan
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* The information called for by Item 10 is incorporated herein
by reference to the information that appears under the
headings "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders.
The information called for by Item 11 is incorporated herein
by reference to the information that appears under the
headings "Compensation of Executive Officers", "Retirement
Plans" and "Compensation Committee Report on Executive
Compensation" in the Registrant's Proxy Statement for the
1998 Annual Meeting of Shareholders.
The information called for by Item 12 is incorporated herein
by reference to the information that appears under the
headings "Security Ownership" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy
Statement for the 1998 Annual Meeting of Shareholders.
The information called for by Item 13 is incorporated herein
by reference to the information that appears under the
headings "Compensation Committee Interlocks and Insider
Participation" and "Transactions with Officers and Directors"
in the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders.
3
BUSINESS
GENERAL
BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding
company headquartered in Winston-Salem, North Carolina. BB&T conducts its
operations in North Carolina, South Carolina and Virginia primarily through
its commercial banking subsidiaries and, to a lesser extent, through its other
subsidiaries. At December 31, 1997, the principal assets of BB&T included all
of the outstanding shares of common stock of Branch Banking and Trust Company,
of Winston-Salem, North Carolina; BB&T Financial Corporation of South
Carolina, located in Greenville, South Carolina, which in turn owns all the
outstanding shares of Branch Banking and Trust Company of South Carolina; BB&T
Financial Corporation of Virginia, which in turn owns all the outstanding
shares of Branch Banking and Trust Company of Virginia, Fidelity Federal
Savings Bank and Virginia First Savings Bank. BB&T also owns all of the
outstanding shares of common stock of Regional Acceptance Corporation of
Greenville, North Carolina, Craigie Incorporated of Richmond, Virginia,
Refloat Incorporated of Mount Airy, North Carolina, and Phillips Factors
Corporation of High Point, North Carolina.
Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was
chartered in 1872 and is the oldest bank in North Carolina. BB&T-NC currently
operates 357 banking offices throughout North Carolina and holds the largest
share of deposits in North Carolina. BB&T-NC provides a wide range of banking
services, principally in its local market, to individuals and commercial
customers, including small and mid-sized businesses, public agencies and local
governments. BB&T-NC's principal subsidiaries include BB&T Leasing Corp.,
based in Charlotte, North Carolina, which specializes in lease financing to
commercial businesses; BB&T Investment Services, Inc., located in Charlotte,
North Carolina, which offers customers nondeposit investment alternatives,
including discount brokerage services, fixed-rate and variable-rate annuities,
unit investment trusts, mutual funds and U.S. Government and municipal bonds;
and BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina,
which is the largest independent insurance agency network in the Carolinas and
markets a wide range of insurance coverages to individuals and businesses.
BB&T-NC has a number of additional subsidiaries, including Prime Rate
Premium Finance Corporation, Inc. ("Prime Rate"), located in Florence, South
Carolina, which provides insurance premium financing to customers in Virginia
and the Carolinas. BB&T-NC also owns 51% of AutoBase Information Systems,
Inc., ("AutoBase") a Charlotte, North Carolina-based company that uses
advanced technologies to simplify the car-buying process for consumers and
automotive dealers.
Branch Banking and Trust Company of South Carolina ("BB&T-SC") operates 96
banking offices. BB&T-SC provides a wide range of banking services,
principally in its local market, to retail and commercial customers, including
small and mid-sized businesses, public agencies, local governments and
individuals. BB&T-SC's subsidiaries include BB&T Investment Services of South
Carolina, Inc., located in Charlotte, North Carolina, a broker/dealer
currently engaged in the retailing of mutual funds, U.S. Government and
municipal bonds, fixed and variable rate insurance annuity products and unit
investment trusts.
Branch Banking and Trust Company of Virginia ("BB&T-VA") operates 22 banking
offices in southeastern Virginia. BB&T-VA offers a full range of commercial
and retail banking services.
Fidelity Federal Savings Bank ("Fidelity") was acquired on March 1, 1997.
Fidelity operates seven branch offices offering commercial and retail banking
services in the Richmond, Virginia area.
Virginia First Savings Bank ("Virginia First") was acquired on December 1,
1997. Virginia First operates 24 full service retail facilities throughout
southside, central and southwestern Virginia. In addition, Virginia First
operates twelve loan origination centers in southside, central and
southwestern Virginia, in northern Virginia and Southern Maryland under the
trade name, Virginia First Mortgage.
4
On March 1, 1998, BB&T completed its acquisition of Life Bancorp, Inc. of
Norfolk, Virginia ("Life"). Life has $1.5 billion in assets and currently
operates 20 full service banking offices in Norfolk, Virginia Beach,
Chesapeake, Portsmouth and Suffolk through its banking subsidiary, Life
Savings Bank, FSB. Its primary businesses are retail and mortgage banking.
Regional Acceptance Corporation ("Regional Acceptance"), a consumer finance
company based in Greenville, North Carolina, was acquired by BB&T on September
1, 1996. Regional Acceptance, which operates 28 branch offices in the
Carolinas, Tennessee and Virginia, specializes in indirect lending for
consumer purchases of used automobiles.
Craigie Incorporated ("Craigie"), a registered broker/dealer headquartered
in Richmond, Virginia, was acquired on October 1, 1997. With offices in
Richmond, Virginia and Charlotte, North Carolina, Craigie specializes in the
origination, trading and distribution of fixed-income securities and equity
products in both the public and private capital markets. Craigie's public
finance department provides financial advisory services and municipal bond
financing to a variety of regional tax-exempt issuers. The firm's corporate
finance department specializes in raising equity capital and underwriting debt
issues for corporate clients and has an active mergers and acquisitions
practice.
Phillips Factors ("Phillips"), based in High Point, North Carolina, was
acquired by BB&T on May 20, 1997. Phillips buys and manages account
receivables primarily in the furniture, textiles and home furnishing-related
industries.
Refloat, Inc. ("Refloat"), based in Mount Airy, North Carolina, was acquired
by BB&T on July 31, 1997. Refloat specializes in loans to small commercial
lawn care businesses across the country.
Unified Investors Life Insurance Company is a reinsurer and underwriter of
certain credit life and credit accident and health insurance policies written
by a non-affiliated insurance company in connection with loans made by the
bank subsidiaries.
The following table discloses selected information related to BB&T's banking
subsidiaries:
TABLE 1
SELECTED FINANCIAL DATA OF BANKING SUBSIDIARIES
AS OF/FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BB&T-NC BB&T-SC BB&T-VA FIDELITY**
----------------------------------- -------------------------------- -------------------------- ----------
1997 1996 1995 1997 1996 1995 1997 1996 1995 1997
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Total assets.... $22,530,009 $20,652,519 $19,654,218 $4,364,982 $4,213,458 $4,179,955 $785,870 $790,955 $737,462 $356,226
Securities...... 5,392,894 4,962,941 4,970,762 1,020,554 1,034,385 1,055,622 132,596 147,019 154,358 28,639
Loans and
leases, net of
unearned
income*........ 15,402,775 14,149,983 13,213,131 3,052,755 2,901,930 2,928,298 590,306 550,218 505,767 275,640
Deposits........ 15,931,795 15,683,080 14,856,949 3,401,236 3,336,711 3,255,945 679,252 690,318 669,000 255,475
Shareholder's
equity......... 1,771,589 1,601,950 1,380,924 374,871 399,965 385,481 73,922 67,039 60,734 64,758
Net interest
income......... 842,745 773,019 710,338 184,341 173,235 166,764 36,670 35,144 31,231 10,960
Provision for
loan and lease
losses......... 53,533 44,675 31,264 14,109 8,405 5,518 2,033 2,550 1,910 605
Noninterest
income......... 436,607 333,119 238,050 70,916 57,729 58,199 12,546 10,296 4,650 1,230
Noninterest
expense........ 809,599 689,969 659,681 135,018 134,200 119,931 30,523 24,839 25,965 8,322
Net income...... 278,536 250,956 172,970 68,024 56,489 62,319 10,973 11,791 4,853 1,278
VIRGINIA
FIRST**
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1997
--------
Total assets.... $925,279
Securities...... 23,329
Loans and
leases, net of
unearned
income*........ 771,928
Deposits........ 662,594
Shareholder's
equity......... 152,626
Net interest
income......... 2,826
Provision for
loan and lease
losses......... 183
Noninterest
income......... 1,077
Noninterest
expense........ 2,654
Net income...... 468
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* Includes loans held for sale.
** Fidelity Federal Savings Bank was acquired on March 1, 1997 and Virginia
First Savings Bank was acquired on December 1, 1997. These acquisitions
were accounted for as purchases and, consequently, the amounts above
reflect the operations of the acquired institutions only since the dates of
acquisition.
5
Merger Strategy and Pending Mergers
Profitability and market share have been enhanced through both internal
growth and acquisitions in recent years. The acquisition strategy of BB&T is
focused on three primary objectives: (1) to pursue in-market acquisitions of
high-quality banks and thrifts in the $250 million to $10 billion range, (2)
to acquire companies in niche markets that provide products or services that
can be offered to BB&T's current customer base, and (3) to consider strategic
acquisitions in new markets that are economically feasible and provide
positive long-term benefits.
On December 16, 1997, BB&T announced plans to merge with Franklin
Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction to
be accounted for as a pooling of interests. Franklin shareholders will receive
between .35 and .3743 shares of BB&T common stock in exchange for each share
of Franklin common stock held. With approximately $535 million in assets,
Franklin operates nine full-service banking offices, including six in the
District of Columbia, one in Bethesda, Maryland and two in northern Virginia.
The transaction is expected to be completed during the third quarter of 1998.
On February 25, 1998, BB&T announced plans to acquire Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland in a stock
transaction to be accounted for as a purchase. Maryland Federal shareholders
will receive no less than .5975 and no greater than .6102 shares of BB&T
common stock in exchange for each share of Maryland Federal common stock held.
With approximately $1.2 billion in assets, Maryland Federal operates 28
branches in 24 cities as offices of Maryland Federal Bank. This transaction is
expected to be completed in the third quarter of 1998.
Competition
The banking industry is highly competitive and dramatic change continues to
occur. The banking subsidiaries of BB&T compete actively with national and
state banks, savings and loan associations, securities dealers, mortgage
bankers, finance companies and insurance companies. Competition continues to
grow as customers select from a variety of traditional and nontraditional
financial institutions. The industry continues to consolidate at a fast pace,
which affects competition by eliminating some regional and local institutions
while at the same time creating a growing number of firms with multi-regional
operations. For additional information on markets, BB&T's competitive position
and strategies, see "Market Area" and "Lending Activities" below.
BB&T expects to continue to take advantage of the consolidation of the
financial services industry by further developing its franchise through the
acquisition of financial institutions. Such acquisitions may entail the
payment by BB&T of consideration in excess of the book value of the underlying
net assets acquired, may result in the issuance of additional shares of BB&T
common stock or the incurring of an additional indebtedness by BB&T, and could
have a dilutive effect on the per share earnings or book value of BB&T common
stock. Moreover, such acquisitions sometimes result in significant front-end
charges against earnings, although cost savings, especially incident to in-
market acquisitions, also are frequently anticipated.
MARKET AREA
BB&T's primary market area consists of North Carolina, South Carolina and
Virginia. The area's employment base consists of manufacturing, general
services, agricultural, wholesale/retail and financial services. Among the
primary industries in which BB&T has significant commercial lending
relationships are real estate, textiles, furniture and health care. BB&T
believes its current market area is economically vibrant and will support
consistent growth in assets and deposits in the future. Even so, management
expects to continue to employ aggressive growth strategies, including possible
expansion into neighboring states. The current market area includes numerous
small communities that BB&T seeks to serve. Management believes that
maintaining a community bank approach as asset size and available services
grow will strengthen the Corporation's ability to move into new states and
communities and to target small to mid-sized commercial customers in these
areas.
6
LENDING ACTIVITIES
The primary goal of the BB&T lending function is to help clients achieve
their financial goals and secure their financial futures on terms that are
fair to the clients and profitable to the Corporation. This purpose can best
be accomplished by building strong, profitable customer relationships over
time, with BB&T becoming an important contributor to the prosperity and well-
being of its customers. BB&T's philosophy of lending is to attempt to meet the
business and consumer credit needs within defined market segments where
standards of safety, profitability and liquidity can be met.
BB&T focuses lending efforts on small to intermediate commercial and
industrial loans, one-to-four family residential mortgage loans and other
consumer loans. Typically, fixed-rate residential mortgage loans are sold in
the secondary mortgage market and adjustable-rate residential mortgages are
retained for the portfolio. Loan growth, which typically follows economic
cycles, has been consistent over the past five years. Average loans have
increased 9.3% on an annual basis since 1992 and increased 10.1% in 1997. BB&T
conducts the majority of its lending activities in the context of the
Corporation's community bank focus, with decentralized lending decisions made
as close to the customer as practicable.
TABLE 2
COMPOSITION OF LOAN AND LEASE PORTFOLIO*
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial
and agricultural..... $ 3,017,729 $ 2,715,363 $ 2,395,084 $ 2,941,109 $ 2,303,554
Real estate--
construction and land
development.......... 2,102,234 1,525,964 1,175,839 889,033 870,112
Real estate--
mortgage............. 11,415,319 10,110,927 10,200,968 9,220,222 8,431,729
Consumer.............. 2,688,304 2,748,572 2,487,235 2,388,970 2,198,858
----------- ----------- ----------- ----------- -----------
Loans held for in-
vestment........... 19,223,586 17,100,826 16,259,126 15,439,334 13,804,253
Loans held for
sale............... 509,141 228,333 261,364 141,676 707,973
----------- ----------- ----------- ----------- -----------
Total loans....... 19,732,727 17,329,159 16,520,490 15,581,010 14,512,226
Leases.................. 788,462 576,991 376,152 304,544 225,312
----------- ----------- ----------- ----------- -----------
Total loans and
leases............... $20,521,189 $17,906,150 $16,896,642 $15,885,554 $14,737,538
=========== =========== =========== =========== ===========
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*Balances are gross of unearned income.
Mortgage Banking
BB&T is the largest originator of residential mortgage loans in the
Carolinas. BB&T engages in mortgage loan originations by offering fixed- and
adjustable-rate government and conventional loans for the purpose of
constructing, purchasing or refinancing owner-occupied properties. As
mentioned above, the Corporation usually retains adjustable-rate loans for the
portfolio and sells fixed-rate loans and government loans within the secondary
mortgage market. Servicing rights on loans sold are typically retained by
BB&T. Loans are generally offered in amounts up to 95% of the appraised value
of the collateral for terms up to 30 years based on the qualifications of the
borrower. Except in the Community Reinvestment Act ("CRA") program discussed
below, private mortgage insurance is required in an amount sufficient to
reduce BB&T's exposure to 80% or less of the loan-to-value ratio. BB&T does
not originate loans with negative amortization. Risks associated with the
residential lending function include interest rate risk, which is mitigated
through the sale of substantially all fixed-rate loans, and default risk by
the borrower, which is lessened through underwriting procedures and private
mortgage insurance. BB&T also purchases mortgage loans from other
7
originators and subjects them to the same underwriting and risk management
policies as loans originated internally.
The Corporation also offers, as part of its CRA program, more flexible
underwriting criteria to broaden the availability of mortgage loans in the
communities BB&T serves. CRA loans are available at loan-to-value ratios up to
97% for households with incomes below a specified percentage of county median
income. Such loans do not require private mortgage insurance. These loans are
currently retained in the portfolio since they do not meet the requirements to
be sold in the secondary mortgage market at the time of origination.
BB&T's mortgage banking operation earns fee income from the servicing of the
mortgage loan portfolio and from gains on sales of mortgage loans to the
secondary mortgage market.
Commercial Lending
BB&T's commercial lending program is generally targeted to serve small to
middle-market businesses with sales of $250 million or less, although in-house
limits do allow lending to larger customers, including national customers who
have some reasonable business connections with the Corporation's
geographically-served markets. Commercial lending includes commercial,
financial, agricultural, industrial and real estate loans. Pricing on
commercial loans, driven largely by competition, is usually tied to market
indexes, such as the prime rate, London Interbank Offered Rates or U.S.
Treasury rates. Substantially all of BB&T's commercial lending program is
operated through the banking network.
Construction Lending
Real estate construction loans include loans with 12 month maturities which
are intended to convert to permanent one-to-four family residential mortgage
loans upon completion of the construction. These loans have terms and options
similar to residential mortgage loans and allow a rate to be "locked in" by
the borrower during the 12 month construction period. The loans also allow a
"float down" option once during the construction period. BB&T also originates
commercial construction loans. These loans are usually to in-market
developers, businesses, individuals or real estate investors for the
construction of commercial structures in the Corporation's market area,
including, but not limited to, industrial facilities, apartments, shopping
centers, office buildings, hotels and warehouses. The properties may be for
sale, lease or owner-occupancy. The Corporation generally requires the
borrower to obtain a commitment to "take out" the construction loan and
typically requires significant levels of pre-sales, pre-leasing or, in the
case of owner-occupied properties, that the owner has adequate resources to
repay the debt. Generally, these loans carry floating interest rates tied to
the Corporation's prime interest rate or other market index, and range in term
from six to eighteen months.
Consumer Lending
BB&T offers various consumer loan products. Both secured and unsecured loans
are marketed to qualifying existing clients and to other creditworthy
candidates in BB&T's market area. Home Equity Loans and Lines are underwritten
with note amounts and credit limits that ensure consistency with the
Corporation's loan-to-value policy (80% for consumer loans secured by real
estate). Numerous forms of unsecured loans, including revolving credits
(bankcards, DDA overdraft protection and personal lines of credit), are
provided and various installment loan products, including vehicle loans, are
offered. Pricing of such loans is based, to a great degree, on in-market
competition. Closed-end installment loans are usually priced as fixed-rate
simple interest loans, while most revolving products are priced with variable
rates.
Through the acquisition of Regional Acceptance, BB&T is expanding the sales
finance function by making loans to customers with a higher credit risk
profile than the traditional BB&T customer. These loans are extended through
automobile dealers to finance purchases of mid-model to late-model used
automobiles and are priced higher than BB&T's normal grade consumer loans
based on the higher level of risk associated with these types of loans.
Leasing
BB&T provides commercial leasing products and services principally in North
Carolina, South Carolina and Virginia through BB&T Leasing Corp. ("Leasing"),
a subsidiary of BB&T-NC. Leasing provides three primary
8
products: finance or capital leases, true leases (as defined under the
Internal Revenue Code) and other operating leases. Leasing provides leases for
vehicles, rolling stock and tangible personal property and services for small
to medium-sized commercial customers primarily in BB&T's market area. BB&T
also solicits leasing business from municipalities in North and South Carolina
directly through its subsidiary banks.
TABLE 3
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1997
-------------------------------------
COMMERCIAL,
FINANCIAL AND REAL ESTATE:
AGRICULTURAL CONSTRUCTION TOTAL
------------- ------------ ----------
(DOLLARS IN THOUSANDS)
Fixed rate:
1 year or less(2)...................... $ 217,276 $ 323,954 $ 541,230
1-5 years.............................. 420,068 159,560 579,628
After 5 years.......................... 86,911 -- 86,911
---------- ---------- ----------
Total................................ 724,255 483,514 1,207,769
---------- ---------- ----------
Variable rate:
1 year or less(2)...................... 1,077,933 1,084,543 2,162,476
1-5 years.............................. 1,077,933 534,177 1,612,110
After 5 years.......................... 137,608 -- 137,608
---------- ---------- ----------
Total................................ 2,293,474 1,618,720 3,912,194
---------- ---------- ----------
Total loans and leases(1).......... $3,017,729 $2,102,234 $5,119,963
========== ========== ==========
- --------
* Balances are gross of unearned income. Scheduled repayments are reported in
the maturity category in which the payment is due. Determinations of
maturities are based upon contract terms. BB&T's credit policy does not
permit automatic renewals of loans. At the scheduled maturity date
(including balloon payment date), the customer must request a new loan to
replace the matured loan and execute a new note with rate, terms and
conditions renegotiated at that time.
(1) The table excludes:
(i)consumer loans to individuals for household, family and other
personal expenditures........................................... $ 2,688,304
(ii)real estate mortgage loans................................... 11,415,319
(iii)loans held for sale......................................... 509,141
(iv)leases....................................................... 788,462
-----------
$15,401,226
===========
(2) Includes loans due on demand.
Nonaccrual Loans and Leases
It is BB&T's policy to place commercial loans and leases on nonaccrual
status when full collection of principal and interest becomes doubtful, or
when any portion of principal or interest becomes 90 days past due, whichever
occurs first. When loans are placed on nonaccrual status, interest receivable
is reversed against interest income in the current period and any prior year
interest is charged against the allowance for loan and lease losses. Interest
payments received thereafter are applied as a reduction of the remaining
principal balance so long as doubt exists as to the ultimate collection of the
principal. Loans and leases are removed from nonaccrual status when they
become current as to both principal and interest and when the collectability
of principal or interest is no longer doubtful.
9
Mortgage loans and other consumer loans are also placed on nonaccrual status
when full collection of principal and interest becomes doubtful, or they
become delinquent for a specified period of time, which varies depending on
the type of consumer loan.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged against earnings. The level of the allowance
for loan and lease losses is based on management's evaluation of the risk
inherent in the loan portfolio and changes in the nature and volume of loan
activity. This evaluation, which includes a review of loans for which full
collectability may not be reasonably assured, considers the loans' risk
grades, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
consideration in determining an adequate allowance. BB&T utilizes ten "risk
grades" to evaluate the repayment capacity of borrowers. BB&T's objective is
to maintain a loan portfolio that is diverse in terms of loan type, industry
concentration, geographic distribution and borrower concentration in order to
reduce overall credit risk by minimizing the adverse impact of any single
event or combination of related events. Although management believes that the
best information available is used to determine the adequacy of the allowance,
the nature of the process by which management determines the appropriate
allowance for credit losses requires the exercise of considerable judgment.
Unforeseen market conditions could result in adjustments in the allowance
which would affect earnings. Future additions to BB&T's allowance will be the
result of periodic loan, property and collateral reviews as well as projected
changes in overall economic and real estate markets.
The following table sets forth an allocation of the allowance for loan and
leases losses at the end of each of the past five years. The allowance has
been allocated on an approximate basis and is not necessarily indicative of
future losses. The entire amount of the allowance is available to absorb
losses occurring in any category of loans and leases.
TABLE 4
ALLOCATION OF ALLOWANCE BY LOAN CATEGORY
DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
% LOANS % LOANS % LOANS % LOANS % LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
Commercial, financial
and agricultural....... $ 29,034 15% $ 30,272 15% $ 32,370 14% $ 40,340 19% $ 48,493 16%
Real estate:
Construction and land
development........... 18,476 10 14,645 9 16,436 7 13,522 6 15,004 6
Mortgage............... 89,741 58 96,389 58 96,096 62 83,260 58 84,875 61
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total..... 108,217 68 111,034 67 112,532 69 96,782 64 99,879 67
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer................ 76,543 13 52,238 15 37,977 15 33,706 15 31,461 15
Leases.................. 7,918 4 3,679 3 3,443 2 906 2 1,218 2
Unallocated............. 42,231 -- 32,847 -- 32,730 -- 43,709 -- 31,655 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total.................. $263,943 100% $230,070 100% $219,052 100% $215,443 100% $212,706 100%
======== === ======== === ======== === ======== === ======== ===
10
The following table sets forth information with respect to BB&T's allowance
for loan and lease losses for the most recent five years.
TABLE 5
COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Balance, beginning of
period................. $ 230,070 $ 219,052 $ 215,443 $ 212,706 $ 176,743
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural..... (12,394) (9,341) (10,889) (11,655) (24,832)
Real estate........... (12,743) (11,523) (12,005) (9,131) (11,844)
Consumer.............. (64,829) (47,441) (29,556) (16,398) (16,510)
Lease receivables..... (671) (768) (614) (647) (771)
----------- ----------- ----------- ----------- -----------
Total charge-offs... (90,637) (69,073) (53,064) (37,831) (53,957)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural..... 4,926 5,065 5,302 7,280 6,212
Real estate........... 4,889 6,221 3,658 3,148 3,525
Consumer.............. 7,100 6,158 5,394 4,996 4,267
Lease receivables..... 232 136 395 295 149
----------- ----------- ----------- ----------- -----------
Total recoveries.... 17,147 17,580 14,749 15,719 14,153
----------- ----------- ----------- ----------- -----------
Net charge-offs......... (73,490) (51,493) (38,315) (22,112) (39,804)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense.............. 89,850 62,511 41,924 23,730 59,829
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions......... 17,513 -- -- 1,119 15,938
----------- ----------- ----------- ----------- -----------
Balance, end of period.. $ 263,943 $ 230,070 $ 219,052 $ 215,443 $ 212,706
=========== =========== =========== =========== ===========
Average loans and
leases*................ $18,916,461 $17,186,046 $16,507,428 $14,919,264 $13,344,029
Net charge-offs as a
percentage of average
loans and leases....... .39% .30% .23% .15% .30%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for
sale.
Nonperforming Assets and Classified Assets
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessions. Loans are considered delinquent in most cases
the first day after payment is due. After a loan has been delinquent for ten
days, BB&T mails a reminder notice to the borrower, and if the borrower does
not contact a collection officer, late charges are assessed on the sixteenth
day after the due date. Numerous attempts to work with delinquent borrowers to
establish a repayment plan are made throughout the delinquent period of the
loan. When a commercial loan or unsecured consumer loan becomes 90 days past
due, the loan is placed on nonaccrual status. For mortgage and most other
consumer loans, the period of time that passes before a delinquent loan is
automatically placed on nonaccrual status varies, depending on the type of
loan. In some cases, loans may be placed on nonaccrual status earlier based on
specific circumstances surrounding the loan. If the collection of principal
and/or interest becomes doubtful at any time during the collection process,
the loan is placed on nonaccrual status. Every effort is made to reach an
agreement on payment with the borrower. If it becomes necessary to foreclose
on the collateral securing loans, acquired assets are aggressively marketed to
minimize the cost of carrying such assets.
11
INVESTMENT ACTIVITIES
BB&T maintains a portion of its assets as investment securities. Banks are
allowed to purchase, sell, deal in and hold certain investment securities as
prescribed by bank regulations. These investments include all obligations of
the U.S. Treasury, agencies of the Federal government, obligations of any
state or political subdivision, various types of corporate debt, mutual funds,
limited equity securities and certain derivative securities.
Investment portfolio activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset/Liability Management Committee ("ALCO") which meets
regularly to review the economic environment, assess current activities for
appropriateness and establish investment strategies. The ALCO also has much
broader responsibilities which are discussed in the section, Market Risk
Management, of "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following goals: (i) to provide a
sufficient margin of liquid assets and liabilities to cover unanticipated
deposit and loan fluctuations, seasonal funds flow variations and overall
funds management objectives; (ii) to provide eligible securities to secure
public funds and trust deposits as prescribed by law; and (iii) to earn the
maximum return on funds invested that is commensurate with meeting the
requirements of (i) and (ii).
Within the overall context of the primary purposes of portfolio management
as just described, investment strategy during 1997 was established and
continually adjusted within an environment of stable short-term interest
rates, as set by the Federal Reserve's Open Market Committee.
At December 31, 1997, the investment portfolio represented approximately
23.0% of the total assets of the Corporation. Management has judged overall
liquidity and interest rate sensitivity to be adequate to allow the continued
growth of both the investment and loan portfolios.
As has been the case for the past several years, investment activity during
1997 was centered on obligations of the U.S. Treasury and Federal agency
securities. Excluding mortgage-backed securities, U.S. Treasuries and Federal
agencies comprised 62.4% of the total book value of the portfolio at year end.
The value of these securities from return and quality perspectives made them
relatively more attractive than other types of investments. Emphasis continued
to be placed on short and intermediate-term maturities, balancing reasonable
stability between liquidity and yield. The average contractual maturity of the
entire portfolio at December 31, 1997 was 6 years and 10 months compared to 7
years and 4 months at December 31, 1996. This decrease in maturity reflects a
restructuring of BB&T's holdings during the year. However, the actual cash
flows relating to the investment portfolio, are expected to be received more
quickly than contractual maturities because of prepayments from mortgage-
backed securities. At December 31, 1997, the approximate expected actual
maturity, or the "duration," of BB&T's investment portfolio was 2 years. Table
11--"Securities" presents the maturity distribution by category of BB&T's
investment portfolio at December 31, 1997.
12
The following table provides information regarding the composition of BB&T's
securities portfolio at the end of each of the past three years. Note that
BB&T's trading securities, reflected in the accompanying table, were obtained
through the acquisition of Craigie.
TABLE 6
COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Trading securities (at estimated fair
value)...................................... $ 67,878 $ -- $ --
---------- ---------- ----------
Securities held to maturity (at amortized
cost):
U.S. Treasury, government and agency
obligations............................... 14,952 6,283 41,570
States and political subdivisions.......... 132,847 164,525 205,168
Mortgage-backed securities................. -- -- 4,508
Other securities........................... -- -- 77
---------- ---------- ----------
Total securities held to maturity........ 147,799 170,808 251,323
---------- ---------- ----------
Securities available for sale (at estimated
fair value):
U.S. Treasury, government and agency
obligations............................... 4,163,991 3,954,039 4,788,132
States and political subdivisions.......... 37,141 23,977 22,115
Mortgage-backed securities................. 1,855,755 1,751,025 1,007,062
Other securities........................... 424,628 285,180 153,991
---------- ---------- ----------
Total securities available for sale...... 6,481,515 6,014,221 5,971,300
---------- ---------- ----------
Total securities....................... $6,697,192 $6,185,029 $6,222,623
========== ========== ==========
SOURCES OF FUNDS
Deposits generated through BB&T's domestic banking network are the primary
source of funds for lending and investing activities. The amortization and
scheduled payment of loans and maturities of investment securities also
provide a stable source of funds. Federal Home Loan Bank ("FHLB") advances,
foreign deposits, Federal funds purchased and other short-term borrowed funds,
as well as longer-term debt issued through the capital markets, all provide
supplemental liquidity sources. These secondary funding sources may also be
used if management determines that these are the best sources of funds to meet
current requirements.
Deposits
Customer deposits are attracted principally from within BB&T's market area
through the offering of a broad selection of deposit instruments including
demand deposits, negotiable order of withdrawal accounts, savings accounts,
money rate savings, certificates of deposit and individual retirement
accounts. Deposit account terms vary with respect to the minimum balance
required and the time period the funds must remain on deposit. Interest rates
paid on specific deposit types are set by the ALCO and are determined based on
(i) the interest rates offered by competitors, (ii) anticipated needs for
funding and the timing of the cash flow needs offset by the availability of
more cost-effective funding sources and (iii) anticipated future economic
conditions and interest rates. Customer deposits are attractive sources of
liquidity because of stability, cost and the ability to generate fee income
through the cross-sale of other services.
13
TABLE 7
TIME DEPOSITS $100,000 AND OVER
REMAINING MATURITY AT DECEMBER 31, 1997
(DOLLARS IN
THOUSANDS)
-----------
Less than three months........................................ $ 987,283
Four through six months....................................... 552,084
Seven through twelve months................................... 492,029
Over twelve months............................................ 390,205
-----------
Total....................................................... $ 2,421,601
===========
At December 31, 1997, the scheduled maturities of total time deposits were:
(DOLLARS IN
THOUSANDS)
-----------
1998.......................................................... $ 8,564,920
1999.......................................................... 1,483,623
2000.......................................................... 315,026
2001.......................................................... 86,435
2002.......................................................... 134,786
2003 and later................................................ 12,412
-----------
Total....................................................... $10,597,202
===========
Short-Term Borrowed Funds
BB&T's ability to borrow significant funds through nondeposit sources
generates additional flexibility in meeting the liquidity needs of customers.
Sources of short-term borrowed funds at year end were master notes, securities
sold under repurchase agreements, FHLB advances, Federal funds purchased and
U.S. Treasury tax and loan depository note accounts.
The following information summarizes certain pertinent information for the
past three years with regard to BB&T's short-term borrowed funds:
TABLE 8
SHORT-TERM BORROWED FUNDS
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any month-end
during the year...................... $3,015,177 $2,340,904 $3,902,581
Average outstanding during the year... 2,527,128 2,029,293 3,184,338
Average interest rate during the
year................................. 5.32% 5.26% 5.91%
Average interest rate at end of year.. 5.47 4.80 5.36
CAPITAL ADEQUACY AND RESOURCES
Overall capital adequacy is monitored on an ongoing basis by management and
reviewed regularly by the Board of Directors. BB&T's principal capital
planning goals are to provide an adequate return to shareholders while
retaining a sufficient base from which to support future growth and compliance
with all regulatory standards. Close attention is given to regulatory levels
of capital as percentages of assets and risk-weighted assets. The accompanying
table outlines the regulatory minimums for Tier 1 capital, total risk-based
capital and the leverage ratio, as well as such amounts for BB&T and BB&T's
banking subsidiaries as of December 31, 1997.
14
TABLE 9
CAPITAL ADEQUACY FOR BB&T CORPORATION AND BANKING SUBSIDIARIES
REGULATORY BB&T- BB&T- BB&T- VIRGINIA
MINIMUMS BB&T NC SC VA FIDELITY FIRST
---------- ---- ----- ----- ----- -------- --------
Risk-based capital ratios:
Tier 1 capital(1)....... 4.0% 9.9% 11.0% 12.2% 12.1% 12.3% 10.5%
Total risk-based
capital(2)............. 8.0 13.7 12.3 13.4 13.3 13.3 11.8
Leverage ratio(3)......... 3.0 7.2 7.6 8.5 9.4 7.9 7.3
- --------
(1) Shareholders' equity less nonqualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a ratio of fourth quarter average assets less
nonqualifying intangibles.
EMPLOYEES
At December 31, 1997, BB&T had approximately 9,800 full-time-equivalent
employees.
PROPERTIES
BB&T and its significant subsidiaries occupy headquarters offices that are
either owned or operated under long-term leases and also own free-standing
operations centers in Wilson, Charlotte and Lumberton, North Carolina. Branch
office locations are variously owned or leased. The premises occupied by BB&T
and its subsidiaries are considered to be well-located and suitably equipped
to serve as financial services facilities. See Note F. "Premises and
Equipment" of the "Notes to Consolidated Financial Statements" in this report
for additional disclosures related to BB&T's properties.
EXECUTIVE OFFICERS OF BB&T
BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr.
Allison is 49 and has 27 years of service with the Corporation. Henry G.
Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr.
Williamson is 50 and has 26 years of service with the Corporation. Kelly S.
King is the President of BB&T Corporation and is the Senior Executive Vice
President for the Branch Network. Mr. King is 49 and has 26 years of service
with the Corporation. Robert E. Greene is the President of Branch Banking and
Trust Company and is the Senior Executive Vice President for Administrative
Services for the Corporation. Mr. Greene is 48 and has served the Corporation
for 25 years. W. Kendall Chalk is the Senior Executive Vice President for the
Lending Group. Mr. Chalk is 52 and has served the Corporation for 23 years.
Morris D. Marley is the Senior Executive Vice President for Funds Management.
Mr. Marley is 47 and has served the Corporation for 26 years. Scott E. Reed is
the Senior Executive Vice President and Chief Financial Officer. Mr. Reed is
49 and has 26 years of service with the Corporation.
15
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
As a bank holding company, BB&T is subject to regulation under the Bank
Holding Company Act of 1956, as amended, (the "BHCA") and the examination and
reporting requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). Under the BHCA, a bank holding company may not
directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any additional bank or
merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve Board. The BHCA also generally limits the
activities of a bank holding company to that of banking, managing or
controlling banks, or any other activity which is determined to be so closely
related to banking or to managing or controlling banks that an exception is
allowed for those activities.
As state-chartered banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the
"Banks") are subject to regulation, supervision and examination by state bank
regulatory authorities in their respective home states. These authorities
include the North Carolina Commissioner of Banks, in the case of BB&T-NC, the
South Carolina Commissioner of Banking, in the case of BB&T-SC, and the
Virginia State Corporation Commission's Bureau of Financial Institutions, in
the case of BB&T-VA. Each of the Banks is also subject to regulation,
supervision and examination by the Federal Deposit Insurance Corporation (the
"FDIC"). State and federal law also govern the activities in which the Banks
engage, the investments they make and the aggregate amount of loans that may
be granted to one borrower. Various consumer compliance laws and regulations
also affect the Banks' operations.
Fidelity, Virginia First and Life (collectively, the "Thrifts") are
federally-chartered savings associations and as such are subject to
regulation, examination and supervision by the Office of Thrift Supervision, a
bureau of the U.S. Department of the Treasury. Federal law governs the
activities in which the Thrifts may engage, the investments they may make and
the aggregate amount of loans that may be granted to one borrower. Various
consumer compliance laws and regulations also affect the Thrift's operations.
The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are
affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above. The following description summarizes some
of the state and federal laws to which BB&T, the Banks and Thrifts are
subject. To the extent statutory or regulatory provisions or proposals are
described, the description is qualified in its entirety by reference to the
particular statutory or regulatory provisions or proposals.
PAYMENT OF DIVIDENDS
BB&T is a legal entity separate and distinct from its banking and other
subsidiaries. A major portion of the revenues of BB&T result from amounts paid
as dividends to BB&T by its subsidiaries. BB&T's banking subsidiaries are
subject to state laws and regulations that limit the amount of dividends they
can pay. In addition, both BB&T and its banking and thrift subsidiaries are
subject to various general regulatory policies relating to the payment of
dividends, including requirements to maintain adequate capital above
regulatory minimums. The Federal Reserve Board has indicated that banking
organizations should generally pay dividends only if (1) the organization's
net income available to common shareholders over the past year has been
sufficient to fund fully the dividends and (2) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality and overall financial condition. BB&T does not expect that any
of these laws, regulations or policies will materially impact the ability of
the Banks and Thrifts to pay dividends. During the year ended December 31,
1997, the Banks and Thrifts recorded $248.3 million in cash dividends to BB&T.
CAPITAL
The Federal Reserve Board, and the FDIC and the Office of Thrift Supervision
have issued substantially similar risk-based and leverage capital guidelines
applicable to banking organizations they supervise. Under the risk-based
capital requirements, BB&T, the Banks and the Thrifts are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) of 8%. At least half of the total capital is to be composed of common
equity, retained
16
earnings and qualifying perpetual preferred stock, less certain intangibles
("Tier 1 capital"). The remainder may consist of certain subordinated debt,
certain hybrid capital instruments and other qualifying preferred stock and a
limited amount of the loan loss allowance ("Tier 2 capital"). At December 31,
1997, BB&T's Tier 1 capital and total capital ratios were 9.9% and 13.7%,
respectively, and the ratio of total capital to total risk-adjusted assets for
BB&T-NC, BB&T-SC, BB&T-VA, Fidelity and Virginia First were 12.3%, 13.4%,
13.3%, 13.3% and 11.8%, respectively.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital ratio requirements for banking organizations. These
provisions require a minimum leverage ratio of Tier 1 capital to adjusted
average quarterly assets equal to 3% to 5% subject to Federal bank regulatory
evaluation of an organization's overall safety and soundness. BB&T's leverage
ratio at December 31, 1997 was 7.2%, and the leverage ratios for BB&T-NC, BB&T-
SC. BB&T-VA, Fidelity and Virginia First were 7.6%, 8.5%, 9.4%, 7.9% and 7.3%,
respectively.
The risk-based capital standards of both the Federal Reserve Board and the
FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines
also provide that an institution's exposure to a decline in the economic value
of its capital due to changes in interest rates be considered by the agency as
a factor in evaluating a bank's capital adequacy. The Federal Reserve Board
also has recently issued additional capital guidelines for bank holding
companies that engage in certain trading activities.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each Bank and Thrift are insured by the FDIC up to the limits
set forth under applicable law. A majority of the deposits of the Banks are
subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF")
of the FDIC. However, a portion of the deposits of the Banks (relating to the
Banks' acquisitions of various savings associations) and all of the deposits of
the Thrifts are subject to assessments imposed by the Savings Association
Insurance Fund ("SAIF") of the FDIC.
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured
deposits effective January 1, 1997. Thus, for the semi-annual period beginning
January 1, 1997, the assessments imposed on all FDIC deposits for deposit
insurance have an effective rate ranging from 0 to 27 basis points per $100 of
insured deposits, depending on the institution's capital position and other
supervisory factors. However, because legislation enacted in 1996 requires that
both SAIF-insured and BIF-insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"),
the FDIC is currently assessing BIF-insured deposits an additional 1.26 basis
points per $100 of deposits, and SAIF-insured deposits an additional 6.30 basis
points per $100 of deposits, to cover those obligations.
OTHER SAFETY AND SOUNDNESS REGULATIONS
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under a policy of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the insolvency of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement is superior to claims of
shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
17
The Federal banking agencies also have broad powers under current Federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institution
in question is well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by
the law. As of December 31, 1997, BB&T, the Banks and Thrifts were classified
as well-capitalized.
State regulatory authorities also have broad enforcement powers over the
Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator (with the approval of the Governor in
the case of North Carolina) in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state
bank in certain circumstances, including, among other things, when it appears
that such bank has violated its charter or any applicable laws, is conducting
its business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
The Office of Thrift Supervision has similar powers with regard to the
Thrifts.
INTERSTATE BANKING AND BRANCHING
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1997, a
bank headquartered in one state was authorized to merge with a bank
headquartered in another state, as long as neither of the states had opted out
of such interstate merger authority prior to such date. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the
state where a bank headquartered in that state could have established or
acquired branches under applicable Federal or state law.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and results
of operations of BB&T Corporation ("BB&T" or the "Corporation") for each of
the three years in the period ended December 31, 1997, and related financial
information are presented in conjunction with the consolidated financial
statements and related notes to assist in the evaluation of BB&T's 1997
performance.
1997 was a strong year for the U.S. economy and for the economies of North
Carolina, South Carolina and Virginia, BB&T's primary markets. The national
economy expanded for the seventh consecutive year while inflation remained
very low. Jobs grew by 3.2 million compared to 2.5 million in 1996. The Gross
Domestic Product reflected moderate growth for the year, while inflation
remained low, as evidenced by a rise in the consumer price index of only 1.8%.
Hourly earnings growth slowed to 3.7% from 3.9% in spite of tight labor
markets. Consumer confidence was very high during the year, resulting in
higher spending in disposable goods, durable goods and housing. Capital
spending rose 18% as companies expanded and renewed physical plants to
increase capacity. Productivity improved to record levels across all sectors
of business because of the increased utilization of technology and further
improvements are anticipated in 1998.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, among others, the following
possibilities: (1) competitive pressure in the banking industry increases
significantly; (2) changes in the interest rate environment reduce margins;
(3) general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality; (4) changes occur in the regulatory environment; (5) changes
occur in business conditions and inflation; (6) expected cost savings
associated with pending mergers cannot be fully realized; (7) deposit
attrition, customer loss or revenue loss following pending mergers is greater
than expected; (8) required operational divestitures associated with pending
mergers are greater than expected; (9) the Year 2000 issue is not effectively
corrected; and (10) changes occur in the securities markets.
1997 MERGERS AND ACQUISITIONS
On March 1, 1997, BB&T completed its acquisition of Fidelity Financial
Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction
accounted for as a purchase. BB&T issued 1.6 million shares for all of the
shares of Fidelity's common stock outstanding.
On May 20, 1997, BB&T completed its acquisition of Phillips Factors
Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation
and Phillips Acceptance Corporation, all of High Point, North Carolina.
Phillips purchases and manages receivables in the temporary staffing industry
nationwide. It also provides payroll processing services to that industry.
Phillips also buys and manages account receivables primarily in the furniture,
textiles and home furnishings-related industries. The acquisition of Phillips
was accounted for as a purchase.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp.
(collectively, "Refloat"), a financing company that specializes in loans to
small commercial lawn care businesses across the country. The acquisition,
which was completed through the issuance of 375,000 shares of common stock,
was accounted for as a purchase.
On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie
specializes in the origination, trading and distribution of fixed-income
securities and equity products in both the public and private capital markets.
Craigie also has a public finance department that provides investment banking
services, financial advisory services and municipal bond financing to a
variety of regional tax-exempt issuers. The acquisition, which was accounted
for as a purchase, was accomplished through the issuance of approximately
463,000 shares of BB&T's common stock.
19
On December 1, 1997, BB&T completed its acquisition of Virginia First
Financial Corporation of Petersburg, Virginia ("VFFC"), a financial
institution with $822.9 million in assets at the time of purchase. The merger,
which was accounted for under the purchase method of accounting, was
consummated through the issuance of 1.9 million shares of BB&T's common stock
and the payment of $44.8 million.
On July 1, 1997, BB&T completed its merger with United Carolina Bancshares
Corporation ("UCB") of Whiteville, North Carolina, in a stock transaction
accounted for as a pooling of interests. UCB shareholders received 27.7
million shares of BB&T common stock in exchange for all of the shares of UCB
common stock held.
ANALYSIS OF FINANCIAL CONDITION
Average assets totaled $26.9 billion for the year ended December 31, 1997,
an increase of 8.7% over the 1996 average of $24.8 billion. Average assets in
1996 increased 2.2% compared to the 1995 average of $24.2 billion. The major
components of the increase in average assets during 1997 were loans and
leases, up $1.7 billion, or 10.1%, for the year; securities, which increased
$294.8 million, or 4.9% during the year; and non-earning assets, which
increased $169.8 million, or 11.7%. These increases were partially offset by a
$31.6 million, or 37.6%, decline in other earning assets because of decreases
in Federal funds sold.
The compound rate of growth in average assets was 8.1% for the five years
ended December 31, 1997. Over the same five-year period, the compound annual
growth rates based on average balances were 9.3% for loans and leases, 6.1%
for securities and 4.9% for deposits. All growth rates have been enhanced by
acquisitions accounted for as purchases.
TABLE 10
COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE
---------------
1997 V. 1996 V.
1997 1996 1995 1996 1995
----------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
Securities*............. $ 6,342,124 $ 6,047,280 $ 6,142,707 4.9% (1.6)%
Federal funds sold and
other earning assets... 52,519 84,167 148,373 (37.6) (43.3)
Loans and leases, net of
unearned income**...... 18,916,461 17,186,046 16,507,428 10.1 4.1
----------- ----------- -----------
Average earning assets.. 25,311,104 23,317,493 22,798,508 8.5 2.3
Non-earning assets...... 1,622,386 1,452,609 1,427,507 11.7 1.8
----------- ----------- -----------
Average total assets.... $26,933,490 $24,770,102 $24,226,015 8.7% 2.2%
=========== =========== ===========
Average earning assets
as percent of average
total assets........... 94.0% 94.1% 94.1%
=========== =========== ===========
- --------
* Based on amortized cost.
** Includes loans held for sale based on lower of amortized cost or market.
Amounts are gross of the allowance for loan and lease losses.
Among management's primary strategic objectives is the careful management of
assets and liabilities to maximize revenues and earnings per share. The
various components of assets and liabilities, the fluctuations of these
accounts during 1997 and the strategies surrounding the management of the
balance sheet are discussed below.
SECURITIES
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a maturity of five years or less
20
because of the changing interest rate environment and to provide greater
flexibility in balance sheet management. As a result of the recent emphasis on
the acquisition of higher-yielding, longer-term mortgage-backed securities,
and maturities of lower-yielding, U.S. Government obligations, the average
contractual maturity of the total portfolio has increased to greater than
seven years at year-end 1997. However, the expected duration of the investment
portfolio approximates two years because of anticipated prepayments of
mortgage-backed securities, which compose 27.7% of the entire portfolio. U.S.
Treasury securities, government and agency obligations, which comprised 62.4%
of the portfolio at year-end 1997, provide adequate current yields with
minimal risk and maturities structured to address liquidity concerns. Total
outstanding securities increased 8.3% in 1997 to a total of $6.7 billion at
the end of the year.
Craigie, a registered broker/dealer acquired by BB&T on October 1, 1997,
holds trading securities as a normal part of its operations. At December 31,
1997, Craigie had trading securities totaling $67.9 million that are reflected
on BB&T's consolidated balance sheet. Market valuation gains and losses in
BB&T's trading portfolio are reflected in current earnings. BB&T recorded $.7
million in net unrealized gains from the valuation of these securities during
1997.
Securities held to maturity made up only 2.2% of the total portfolio at
December 31, 1997, and are primarily composed of obligations of states and
municipalities. Securities held to maturity are carried at amortized cost and
totaled $147.8 million at December 31, 1997 compared to $170.8 million
outstanding at the end of 1996. Market valuation gains and losses in the
Corporation's held-to-maturity category affect neither earnings nor capital.
The held-to-maturity portfolio had a net unrealized gain of $3.8 million at
December 31, 1997.
Securities available for sale totaled $6.5 billion at year end and are
carried at estimated fair value in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115. The available-for-sale portfolio is
primarily composed of investments in U.S. Treasuries, government and agency
obligations, which, excluding mortgage-backed securities, composed 64.2% of
the outstanding balance of securities available for sale at year end. This
percentage has decreased slightly from the 1996 percentage of 65.7%, which
reflects a shift to mortgage-backed securities and other securities. The
available-for-sale portfolio also contains investments in obligations of
states and municipalities, which composed less than 1% of the portfolio, and
other securities, including equity investments which comprised the remaining
6.6% of the portfolio.
The available-for-sale portfolio composed 96.8% of total securities.
Management believes that the high concentration of securities in the
available-for-sale portfolio allows greater flexibility in the day-to-day
management of the overall portfolio than the held-to-maturity classification.
The market value of the available-for-sale portfolio was $74.0 million
greater than the amortized cost of these securities. At December 31, 1997,
BB&T's available-for-sale portfolio had net unrealized appreciation, net of
deferred income taxes, of $44.9 million, which is reported as a separate
component of shareholders' equity. This compares to net unrealized
appreciation of $11.7 million at December 31, 1996. The unrealized gains and
losses in the available-for-sale portfolio at the end of 1997 and 1996 were
considered by management to be of a temporary nature and caused by
fluctuations in market interest rates, not by concerns about the ability of
the issuers to meet their obligations.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.84% for the year ended December 31, 1997, compared to 6.61% for the
prior year. The improvement in FTE yield resulted from higher yields from U.S.
Treasury, government and agency obligations and mortgage-backed securities.
U.S. Treasury, government and agency obligations improved from 6.41% in 1996
to 6.65% in 1997 and mortgage-backed securities increased from 6.92% to 7.09%,
while the FTE yield on state and municipal securities decreased from 8.98%
last year to 8.75% in the current year.
Management expects that BB&T's primary investment strategy during 1998 will
be to selectively replace lower-yielding securities with other high-quality
U.S. Government and Federal agency obligations having short and intermediate
maturities. The Corporation's ALCO will continually evaluate such strategies
in consideration of actual economic and balance sheet developments.
21
TABLE 11
SECURITIES
DECEMBER 31, 1997
--------------------------------
CARRYING VALUE AVERAGE YIELD (3)
-------------- -----------------
(DOLLARS IN THOUSANDS)
U.S. Treasury, government and agency
obligations(1)
Within one year............................ $ 765,224 6.11%
One to five years.......................... 3,532,273 6.77
Five to ten years.......................... 200,951 7.00
After ten years............................ 1,536,250 7.07
---------- -----
Total.................................... 6,034,698 6.77
---------- -----
States and political subdivisions
Within one year............................ 24,416 8.88
One to five years.......................... 119,889 8.86
Five to ten years.......................... 23,490 8.69
After ten years............................ 2,193 10.90
---------- -----
Total.................................... 169,988 8.87
---------- -----
Other securities
Within one year............................ 191 5.03
One to five years.......................... 20,347 6.79
Five to ten years.......................... 134 7.90
After ten years............................ 269 6.96
---------- -----
Total.................................... 20,941 6.78
---------- -----
Securities with no stated maturity........... 471,565 6.79
---------- -----
Total securities(2)...................... $6,697,192 6.82%
========== =====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $1.9 billion classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, the average expected duration is substantially shorter
because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $147.8 million carried at
amortized cost and securities available for sale and trading securities
carried at estimated fair values of $6.5 billion and $67.9 million,
respectively.
(3) Taxable equivalent basis as applied to amortized cost.
LOANS AND LEASES
Loans and leases, including loans held for sale, totaled $20.3 billion at
the end of 1997, an increase of $2.5 billion, or 14.3%, from 1996. Average
loans for the year ended December 31, 1997, increased $1.7 billion, or 10.1%,
over the prior year. This growth rate includes the effects of a mortgage loan
securitization program during 1996 and BB&T's divestiture of $232.3 million in
loans associated with completing the UCB merger. Excluding the impact of the
securitization program and the divestiture, average loans grew at a rate of
12.5% compared with 1996.
The FTE yield on loans increased from 9.11% for the twelve months ended
December 31, 1996, to 9.20% for 1997, created by higher yields on commercial
and consumer loans, partially offset by lower mortgage loan rates.
BB&T's lending strategy is to maintain a rate of internal growth, which,
over the long run, approximates that of its markets in the Carolinas and
Virginia. Management believes this effort will result in a rate of increase
22
which will be sustainable and profitable. Average commercial loans, including
leases, increased at a rate of 13.0% during 1997 and yielded 9.1%. Average
consumer loans grew 7.9% over the course of the year and yielded 10.3%.
Average mortgage loans, including the impact of securitizations, increased
6.7% during 1997, while yielding 7.9%. Excluding the impact of the
securitizations, average mortgage loans increased 14.6%.
BB&T concentrated efforts on expanding the leasing function throughout 1997.
As a result average lease receivables grew $190.8 million, or 51.0%, during
1997. Municipal leasing, primarily tax-exempt leases with counties and
municipalities, was stronger than in the prior year. The leasing function,
which provides a quality stream of earnings, has developed numerous lease-
based products and services that have been effectively marketed to existing
BB&T customers and noncustomers.
ASSET QUALITY
The credit quality of the loan and lease portfolio was affected during 1997
by strong internal loan growth and by purchase acquisitions. As reflected in
Table 12--"Asset Quality," nonperforming assets were $122.7 million at year
end, up $32.6 million, or 36.2%, from the prior year. As a percentage of total
assets, nonperforming assets were .42% at December 31, 1997 compared to .35%
at the end of 1996. As a percentage of loans plus foreclosed properties,
nonperforming assets were .60% at December 31, 1997 compared to .51% at the
end of 1996. The allowance for loan and lease losses as a percentage of loans
and leases was 1.30% at both December 31, 1997 and 1996. Loans 90 days or more
past due and still accruing interest increased during 1997 to a year-end
balance of $47.0 million compared to a December 31, 1996 balance of $41.7
million.
The asset quality ratios reflect nonperforming assets obtained through
purchase acquisitions of Fidelity Financial on March 1, 1997 and Virginia
First on December 1, 1997. These two acquisitions resulted in 61.1% of the
increase in nonperforming assets at December 31, 1997. BB&T's merger with UCB
on July 1, 1997 also affected credit quality ratios as BB&T applied more
stringent credit quality standards to UCB's existing portfolio resulting in
higher levels of nonperforming assets following the merger.
Net charge-offs as a percentage of average loans and leases increased from
.30% in 1996 to .39% in 1997, primarily as a result of the purchase
acquisition activity discussed above, as well as efforts to aggressively
charge off nonperforming assets and delinquent accounts at Regional
Acceptance.
Regional Acceptance BB&T's used automobile financing subsidiary in
Greenville, North Carolina, was acquired on September 1, 1996. Because of
current trends in the used automobile financing industry, Regional Acceptance
has experienced higher-than-expected charge-offs during 1997. Regional
Acceptance represented less than 1% of BB&T consolidated assets at December
31, 1997, but accounted for 24.5% of the Corporation's net charge-offs.
Excluding the net charge-offs of Regional Acceptance and Prime Rate Premium
Finance Corporation, Inc., BB&T's insurance premium financing subsidiary, BB&T
had a net charge-off rate of .27% for 1997, .25% for 1996 and .20% for 1995.
BB&T assigns risk grades to all commercial loans in the portfolio. This
assignment of loans to one of ten categories is based upon the relative
strength of the repayment source. All significant loans in the four highest
risk grades are reviewed monthly for appropriateness of risk grade, accrual
status and allowance.
23
The following table reflects relevant asset quality information for BB&T for
the most recent three years.
TABLE 12
ASSET QUALITY
DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans and leases*....................... $ 88,389 $62,190 $68,634
Foreclosed property................................ 34,343 27,945 18,886
-------- ------- -------
Nonperforming assets............................. $122,732 $90,135 $87,520
======== ======= =======
Loans 90 days or more past due and still
accruing........................................ $ 46,999 $41,742 $34,648
======== ======= =======
Asset Quality Ratios
Nonaccrual loans and leases as a percentage of
loans and leases................................ .44% .35% .41%
Nonperforming assets as a percentage of:
Total assets................................... .42 .35 .35
Loans and leases plus foreclosed property...... .60 .51 .52
Net charge-offs as a percentage of average loans
and leases...................................... .39 .30 .23
Allowance for losses as a percentage of loans and
leases.......................................... 1.30 1.30 1.30
Ratio of allowance for losses to:
Net charge-offs................................ 3.59x 4.47x 5.72x
Nonaccrual loans and leases.................... 2.99 3.70 3.19
- --------
Note: Items referring to loans and leases are net of unearned income, gross of
the allowance and include loans held for sale.
* Includes $29.5 million of impaired loans at December 31, 1997 and $18.5
million of impaired loans at December 31, 1996. See Note D in the "Notes to
Consolidated Financial Statements."
DEPOSITS AND OTHER BORROWINGS
Management's primary objective for funding balance sheet activity is to
provide adequate, stable and cost-effective sources of funds. Core deposits
compose BB&T's primary funding source, despite trends in recent years away
from traditional transaction and savings accounts by depositors. As depositors
have sought greater returns for savings, growth rates for deposits have
typically not kept pace with asset growth. BB&T's total deposits at December
31, 1997, compared to year-end 1996, increased $1.2 billion, or 6.4%, to $20.2
billion. The increase in end-of-period deposits was driven by a 23.6% increase
in money rate savings accounts and a 7.8% increase in noninterest-bearing
demand deposits. These growth rates include the impact of $505.8 million in
deposits divested in conjunction with the UCB merger. Excluding the impact of
this divestiture, total deposits would have increased 9.0%. On average, total
deposits increased $733.4 million, or 3.9%. This increase was led by a 4.5%
increase in noninterest-bearing demand deposits and a 19.8% increase in money
rate savings accounts. These increases were offset somewhat by a 32.7%
decrease in interest checking accounts. Other time deposits, BB&T's largest
category of average deposits, increased less than 1% in 1997. This
classification of deposits includes individual retirement accounts and
certificates of deposit. Foreign deposits totaled $1.4 billion at December 31,
1997, a 117.0% increase from the prior year balance. The substantial increase
in these deposits reflects a greater reliance on these deposits as a cost-
effective alternative funding source.
The average rates paid on interest-bearing deposits decreased slightly
during 1997 to 4.39% from 4.41% in 1996. The decrease was led by lower rates
paid on savings accounts, which decreased from 2.09% to 1.86%
24
during the year. Also, the average cost of certificates of deposit and other
time deposits decreased from 5.55% to 5.50%. These declines were offset
somewhat by an increase in rates paid on money rate savings accounts from
2.81% to 3.04%.
BB&T focused efforts during 1997 on restructuring the composition of
deposits toward more cost-effective noninterest-bearing demand deposits and
money rate savings accounts. Thrift acquisitions in prior years had resulted
in a higher concentration of costly certificates of deposit than many of
BB&T's peers, and the restructuring was intended to reduce that concentration
and reduce the overall cost of deposits. As part of this strategy, BB&T began
the special promotion of an "Investor Deposit Account," which is more flexible
than traditional money rate savings accounts and less costly to BB&T than
certificates of deposit. The success of this promotion is evident from the
growth in money rate savings accounts discussed above.
Management also uses various short-term borrowed funds to meet funding
needs. Among these are Federal funds purchased, which composed 29.8% of total
short-term borrowed funds and securities sold under repurchase agreements,
which comprised 33.1% of short-term borrowed funds at year-end 1997.
Management also utilizes master notes, U.S. Treasury tax and loan deposit
notes, short-term bank notes and short-term Federal Home Loan Bank ("FHLB")
advances to supplement funding needs. Average short-term borrowed funds
increased $497.8 million, or 24.5%, during 1997. Total short-term borrowed
funds at year-end 1997 increased $734.4 million, or 32.2%, compared to year-
end 1996. The rates paid on average short-term borrowed funds increased from
5.26% in 1996 to 5.32% during 1997.
Management also employs long-term debt for funding, and management
significantly increased reliance on longer-term funding sources during 1997.
BB&T's total long-term debt at December 31, 1997, increased $1.2 billion, or
59.8%, to $3.3 billion. On average, long-term debt increased $762.0 million,
or 40.9%. BB&T's long-term debt consists primarily of FHLB advances, which
composed 53.3% of total outstanding long-term debt at December 31, 1997, and
medium-term bank notes, which composed 31.2% of the year-end balance. FHLB
advances are the most cost-effective long-term funding source, and provides
BB&T the flexibility to structure the debt to manage interest rate risk and
liquidity. In an effort to diversify long-term funding sources, management
developed various debt programs, including $2 billion in subordinated banknote
programs. In June 1997, BB&T issued $250 million of subordinated notes due in
2007. The proceeds of this issuance are being used to repurchase shares of
BB&T's common stock issued in connection with recent acquisitions. An
additional $200 million of medium term bank notes were issued during 1997 for
general funding purposes. The average rate paid on long-term debt during 1997
increased from 5.78% for 1996 to 5.82% for 1997.
BB&T continually considers liquidity needs in evaluating funding sources.
The ultimate goal is to maintain funding flexibility, which will allow BB&T to
react rapidly to opportunities in the marketplace. Management will continue to
focus on traditional core funding strategies during 1997, including targeting
growth in noninterest-bearing deposits and money rate savings accounts. Also,
because lower interest rates are currently available, management will likely
pursue additional long-term funding during 1998.
25
TABLE 13
COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE
----------------
1997 V. 1996 V.
1997 1996 1995 1996 1995
--------------- ---------------------------------------- ------- -------
(DOLLARS IN THOUSANDS)
Savings and interest
checking............... $ 1,939,789 8% $ 2,125,217 10% $ 2,326,185 11% (8.7)% (8.6)%
Money rate savings...... 4,604,762 19 3,844,718 17 3,741,917 17 19.8 2.7
Other time deposits..... 10,222,656 42 10,174,310 45 9,340,595 42 .5 8.9
----------- --- --------------- ------- ----------- ---
Total interest-bearing
deposits............... 16,767,207 69 16,144,245 72 15,408,697 70 3.9 4.8
Noninterest-bearing
demand deposits........ 2,543,546 10 2,433,123 11 2,282,567 10 4.5 6.6
----------- --- --------------- ------- ----------- ---
Total deposits.......... 19,310,753 79 18,577,368 83 17,691,264 80 3.9 5.0
Short-term borrowed
funds.................. 2,527,128 10 2,029,293 9 3,184,338 14 24.5 (36.3)
Long-term debt.......... 2,623,424 11 1,861,380 8 1,130,460 6 40.9 64.7
----------- --- --------------- ------- ----------- ---
Total deposits and other
borrowings............. $24,461,305 100% $ 22,468,041 100% $22,006,062 100% 8.9% 2.1%
=========== === =============== ======= =========== === ==== =====
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated net income for 1997 totaled $359.9 million, which generated
basic earnings per share of $2.65 and diluted earnings per share of $2.60. Net
income for the prior year was $330.2 million and net income for 1995 was
$227.3 million. Basic earnings per share were $2.42 in 1996 and $1.63 in 1995,
while diluted earnings per share were $2.38 and $1.60, in 1996 and 1995,
respectively.
BB&T incurred significant nonrecurring expenses during 1997, 1996 and 1995
which are reflected in the earnings above. During the third and fourth
quarters of 1997, BB&T recorded $115.3 million in pretax nonrecurring charges
primarily associated with the merger and conversion of UCB. These charges
included costs associated with the consolidation of branch offices and bank
operating functions, reducing staffing levels, relocating staff, early
retirement packages and other expenses. These expenses were partially offset
by a $47.5 million premium on the divestiture of deposits required to comply
with anti-trust regulations. Excluding the effects of these charges, BB&T's
net income for 1997 would have been $408.6 million, or $2.96 per diluted
share.
During 1996, a one-time assessment by the Federal Deposit Insurance
Corporation ("FDIC") was charged to all financial institutions with deposits
insured by the Savings Association Insurance Fund ("SAIF"). The impact of
BB&T's assessment was $33.8 million on a pre-tax basis. On an after-tax basis,
the assessment totaled $21.8 million or $.16 per diluted share. Excluding the
impact of the assessment, BB&T's net income for 1996 would have been $351.9
million, or $2.53 per diluted share.
During 1995, BB&T incurred $108.0 million in pretax nonrecurring expenses
related to the merger between Southern National Corporation and BB&T Financial
Corporation and $19.8 million in securities losses resulting from a
restructuring of the securities portfolio. These costs were offset somewhat by
a $2.2 million gain on the sale of divested deposits made necessary by the
merger. The net after-tax impact of these nonrecurring items and securities
losses was to reduce net income by $82.4 million. Excluding the impact of
these items, BB&T's net income for 1995 would have been $309.7 million, or
$2.18 per diluted share.
On a recurring basis, BB&T's net income for 1997 grew $56.7 million, or
16.1%, from 1996, while diluted earnings per share increased $.43, or 17.0%,
from the prior year. For 1996, net income excluding nonrecurring items
increased $42.2 million, or 13.6%, from 1995. Diluted earnings per share
increased $.35, or 16.1%, compared to the previous year.
26
Management utilizes return on average assets to measure the profitability of
each dollar of assets and to compare BB&T's performance to peers. The returns
on average assets produced by BB&T's earnings excluding the nonrecurring
charges discussed above were 1.52% for 1997, 1.42% for 1996 and 1.28% for
1995. Another important measure of profitability is return on average common
equity produced by recurring earnings. BB&T's returns on average common equity
were 19.31%, 17.84% and 16.70%, for the years ended December 31, 1997, 1996
and 1995, respectively.
NET INTEREST INCOME
Net interest income is BB&T's primary source of revenue. The amount of net
interest income is influenced by a number of factors, including the volumes of
interest-earning assets and interest-bearing liabilities and the interest
rates earned on earning assets less the rates and paid to obtain the asset-
generating funds. The difference between rates earned on interest-earning
assets (with an adjustment made to tax-exempt income to provide comparability
with taxable income) and the cost of supporting funds is measured by the net
spread. The accompanying table presents the dollar amount of changes in
interest income and interest expense and distinguishes between the changes
related to average outstanding balances of interest-earning assets and
interest-bearing liabilities (volume) and the changes related to average
interest rates on such assets and liabilities (rate). Changes attributable to
both volume and rate have been allocated proportionately.
27
TABLE 14
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AVERAGE BALANCES YIELD/RATE INCOME / EXPENSE
----------------------------------- ---------------- --------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
FULLY TAXABLE EQUIVALENT
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury,
government and
other (5)........ $ 6,170,149 $ 5,843,116 $ 5,907,342 6.78% 6.53% 6.08% $ 418,573 $ 381,475 $ 359,182
States and
political
subdivisions..... 171,975 204,164 235,365 8.75 8.98 9.00 15,046 18,333 21,173
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
Total securities
(5)............. 6,342,124 6,047,280 6,142,707 6.84 6.61 6.19 433,619 399,808 380,355
Other earning
assets (2)....... 52,519 84,167 148,373 5.19 5.38 5.90 2,726 4,530 8,760
Loans and leases,
net of unearned
income
(1)(3)(4)(5)..... 18,916,461 17,186,046 16,507,428 9.20 9.11 9.24 1,739,453 1,566,378 1,526,083
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
Total earning
assets.......... 25,311,104 23,317,493 22,798,508 8.60 8.45 8.40 2,175,798 1,970,716 1,915,198
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
Non-earning
assets.......... 1,622,386 1,452,609 1,427,507
----------- ----------- -----------
Total assets.... $26,933,490 $24,770,102 $24,226,015
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
deposits:
Savings and
interest-
checking......... $ 1,939,789 $ 2,125,217 $ 2,326,185 1.74 1.86 2.29 33,736 39,478 53,335
Money rate
savings.......... 4,604,762 3,844,718 3,741,917 3.04 2.81 3.11 139,796 108,187 116,443
Other time
deposits......... 10,222,656 10,174,310 9,340,595 5.50 5.55 5.57 562,724 564,826 519,991
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
Total interest-
bearing
deposits........ 16,767,207 16,144,245 15,408,697 4.39 4.41 4.48 736,256 712,491 689,769
Short-term
borrowed funds... 2,527,128 2,029,293 3,184,338 5.32 5.26 5.91 134,479 106,777 188,301
Long-term debt... 2,623,424 1,861,380 1,130,460 5.82 5.78 6.26 152,680 107,602 70,769
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
Total interest-
bearing
liabilities..... 21,917,759 20,034,918 19,723,495 4.67 4.63 4.81 1,023,415 926,870 948,839
----------- ----------- ----------- ---- ---- ---- ----------- ---------- ---------
Noninterest-
bearing demand
deposits........ 2,543,546 2,433,123 2,282,567
Other
liabilities..... 356,175 317,081 323,572
Shareholders'
equity.......... 2,116,010 1,984,980 1,896,381
----------- ----------- -----------
Total
liabilities and
shareholders'
equity.......... $26,933,490 $24,770,102 $24,226,015
=========== =========== ===========
Average interest
rate spread...... 3.93 3.82 3.59
Net yield on
earning assets... 4.55% 4.48% 4.24% $ 1,152,383 $1,043,846 $ 966,359
==== ==== ==== =========== ========== =========
Taxable
equivalent
adjustment....... $ 52,858 $ 36,146 $ 35,041
=========== ========== =========
1997 V. 1996 1996 V. 1995
----------------------------- ----------------------------
CHANGE DUE TO CHANGE DUE TO
INCREASE ----------------- INCREASE -----------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
----------- -------- -------- ---------- -------- --------
ASSETS
Securities (1):
U.S. Treasury,
government and
other (5)........ $ 37,098 $15,256 $21,842 $22,293 $26,235 $(3,942)
States and
political
subdivisions..... (3,287) (460) (2,827) (2,840) (38) (2,802)
----------- -------- -------- ---------- -------- --------
Total securities
(5)............. 33,811 14,796 19,015 19,453 26,197 (6,744)
Other earning
assets (2)....... (1,804) (156) (1,648) (4,230) (717) (3,513)
Loans and leases,
net of unearned
income
(1)(3)(4)(5)..... 173,075 14,070 159,005 40,295 (21,783) 62,078
----------- -------- -------- ---------- -------- --------
Total earning
assets.......... 205,082 28,710 176,372 55,518 3,697 51,821
----------- -------- -------- ---------- -------- --------
Non-earning
assets..........
Total assets....
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
deposits:
Savings and
interest-
checking......... (5,742) (2,424) (3,318) (13,857) (9,523) (4,334)
Money rate
savings.......... 31,609 9,016 22,593 (8,256) (11,387) 3,131
Other time
deposits......... (2,102) (4,778) 2,676 44,835 (1,453) 46,288
----------- -------- -------- ---------- -------- --------
Total interest-
bearing
deposits........ 23,765 1,814 21,951 22,722 (22,363) 45,085
Short-term
borrowed funds... 27,702 1,223 26,479 (81,524) (18,995) (62,529)
Long-term debt... 45,078 733 44,345 36,833 (5,791) 42,624
----------- -------- -------- ---------- -------- --------
Total interest-
bearing
liabilities..... 96,545 3,770 92,775 (21,969) (47,149) 25,180
----------- -------- -------- ---------- -------- --------
Noninterest-
bearing demand
deposits........
Other
liabilities.....
Shareholders'
equity..........
Total
liabilities and
shareholders'
equity..........
Average interest
rate spread......
Net yield on
earning assets... $ 108,537 $24,940 $83,597 $77,487 $50,846 $26,641
=========== ======== ======== ========== ======== ========
Taxable
equivalent
adjustment.......
- ----
(1) Yields related to securities, loans and leases exempt from both federal
and state income taxes, federal income taxes only or state income taxes
only are stated on a taxable equivalent basis assuming tax rates in effect
for the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost and trading securities at estimated fair value.
28
For 1997, net interest income on an FTE basis totaled $1.2 billion, compared
with $1.0 billion in 1996 and $966.4 million in 1995. During 1997, there was
increased interest income from investment securities, up $33.8 million, and
from loans, up $173.1 million. During the same period, higher interest rates
and higher volumes resulted in an increase of $96.5 million in total interest
expense.
The taxable equivalent net yield on average earning assets is the primary
measure used in evaluating the effectiveness of the management of earning
assets and funding liabilities. The net yield on average earning assets was
4.55% in 1997, 4.48% in 1996 and 4.24% in 1995. The increase in margin during
1997 reflects management's emphasis on generating higher-yielding commercial
and consumer loans while pursuing a more cost-effective deposit mix. The yield
on total earning assets increased 15 basis points, driven by the mix of
volumes and rates earned on loans and both higher rates earned and higher
volumes of securities. Also, management's use of more cost-effective funding
strategies, utilizing more FHLB advances and other longer-term debt, rather
than short-term borrowed funds, contributed to the improved margin. The cost
of total interest-bearing liabilities increased only 4 basis points compared
to 1996.
The net interest margin peaked at 4.62% during the second quarter of 1997.
The fourth quarter net interest margin was 4.49%, 13 basis points lower than
the second quarter net yield and 6 basis points less than the net yield for
the year. The decrease in the margin resulted from a common stock repurchase
program executed in connection with acquisitions during 1997, which resulted
in an 8 basis point drop in the margin and the divestiture of loans and
deposits associated with the UCB merger, which generated the remaining 5 basis
point decrease.
PROVISION FOR LOAN AND LEASE LOSSES
A provision for loan and lease losses is charged against earnings in order
to maintain the allowance for loan and lease losses at a level that reflects
management's evaluation of the risk inherent in the loan portfolio. The amount
of the provision is based on continuing assessments of problem loans,
analytical reviews of loan loss experience in relation to outstanding loans,
management's judgment with respect to current and expected economic conditions
and their impact on the existing loan portfolio. The provision recorded by
BB&T in 1997 was $89.9 million, compared with $62.5 million in 1996 and $41.9
million in 1995.
The increase in the provision for loan and lease losses was influenced by
two factors: higher net charge-offs during the year and continued growth in
loans. Net charge-offs were somewhat higher during 1997 than in 1996
principally because charge-offs at Regional Acceptance and charge-offs of
loans acquired through acquisitions accounted for under the purchase method of
accounting. At December 31, 1997 and 1996, the allowance was 1.30% of loans
and leases outstanding and was at 2.99 times total nonaccrual loans and leases
at year-end 1997, down from 3.70 times in 1996.
The allowance for loan and lease losses is evaluated for adequacy on a
quarterly basis. Specific allowances are allocated to identified problem
commercial loans of $1 million or more, while all other commercial loans are
segregated into one of ten risk categories according to the relative strength
of the borrower and the repayment sources. Allowance allocations are then
determined by multiplying outstandings in each risk category by factors based
on historical loss experience. Allowance allocations are derived for consumer
loans based on product type, such as mortgage, retail, bankcard, etc.
Allocations are determined by applying historical loss ratios to estimated
outstandings, with adjustments made for current and anticipated business
conditions. This approach, which relates the allowance to problem loans, is
employed because changes in problem loans--both the level relative to
outstandings and the mix by risk category--are leading indicators of changes
in the risk inherent in the portfolio.
NONINTEREST INCOME
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking income, insurance commissions, gains and losses on
securities transactions and other commissions and fees derived from banking
and bank-related activities.
29
Noninterest income for 1997 totaled $474.9 million, compared with $353.5
million in 1996 and $271.7 million in 1995. The $121.4 million increase during
1997 resulted from growth in all areas of fee-based income combined with gains
on the divestiture of deposits associated with the UCB merger totaling $47.5
million. Excluding the gain on the divestiture of deposits, noninterest income
would have increased $73.9 million, or 20.9%, during 1997.
The percentage of total revenues, (calculated as net interest income FTE
plus noninterest income excluding securities gains or losses), derived from
noninterest (fee-based) income for 1997 was 26.9%, up from 25.1% in 1996 and
23.1% during 1995.
Service charges on deposit accounts represent the largest single source of
noninterest revenue. Such revenues totaled $148.1 million in 1997, an increase
of $15.9 million, or 12.0%, from the 1996 earnings. Service charges during
1996 totaled $132.2 million, which was a 16.3% increase compared with the
prior year. The primary factor contributing to the significant growth in
service charges on deposit accounts during 1997 and 1996 was a change in the
fee structure implemented during the first quarter of both years. Deposit
services are typically repriced annually to reflect current costs and
competitive factors.
Mortgage banking income (which includes servicing fees and profits and
losses from the origination and sale of loans) increased $12.6 million, or
31.6%, to a total of $52.4 million for 1997. Mortgage banking income totaled
$39.8 million in 1996 and $31.2 million in 1995. The primary components of the
1997 increase were servicing fees on loans sold, which increased $2.1 million,
and net gains on sales of mortgage loans, which totaled $16.0 million, an
increase of $5.2 million from 1996.
Agency insurance commissions, which are composed of commissions generated
through BB&T's agency network, increased $12.9 million, or 48.0%, in 1997 to a
total of $39.8 million. Agency insurance commissions totaled $26.9 million in
1996 and $19.3 million in 1995. BB&T currently operates the largest
independent insurance agency network in the Carolinas, which produced total
premium volume during 1997 of $325 million. During 1996 and 1997, BB&T
acquired five insurance agencies in North and South Carolina. These
acquisitions, accounted for under the purchase method, resulted in a
significant portion of the increase in agency insurance commissions during the
past two years. Expansion into additional products during the year also
generated higher fee income. The product line of the agency has been expanded
to include group health insurance, title insurance and surety bonds.
Other insurance commissions, which include credit-related products offered
through the banking network, totaled $13.2 million in 1997, $12.8 million in
1996 and $12.4 million in 1995.
Revenue from corporate and personal trust services totaled $32.0 million in
1997. This was an increase of $3.2 million, or 11.0% over income of $28.8
million in 1996, which was an increase of $4.9 million, or 20.6%, over the
$23.9 million earned in 1995. Managed assets totaled $8.4 billion at the end
of 1997. BB&T is the manager of the nation's largest government 401(k) plan
with assets in excess of $1.5 billion. BB&T also offers its own family of
mutual funds and manages fourteen mutual funds with total assets of
approximately $1.5 billion. These funds provide investment alternatives both
for trust clients and for other customers. The broker / dealer subsidiaries
are the principal marketing agents of BB&T's proprietary mutual funds.
Other nondeposit fees and commissions, which includes bankcard fees and
brokerage commissions, increased by $26.4 million to a level of $109.2 million
in 1997 compared with $82.8 million for 1996. During 1996, other nondeposit
fees and commissions, including bankcard fees, increased 25.2% from the 1995
income of $66.1 million. Major sources of nondeposit fees and commissions
generating the increases include merchant discounts and other bankcard income,
up $6.6 million, or 18.4%, from the 1996 balance; brokerage commissions, which
increased $2.8 million during 1997 to $19.9 million; ATM and point of sale
fees, which totaled $17.2 million and increased $5.2 million, or 43.5%, during
the year. At December 31, 1997, BB&T had
30
659 ATMs, with 415 located in branches and the remaining 244 at non-branch
locations. As part of BB&T's strategy to increase fee income, the number of
ATMs at non-branch sites were significantly increased during 1997. The
purchases of Craigie, a registered broker/dealer with trading and investment
banking operations, and Phillips Factors, a factoring company, accounted for
$5.7 million in nondeposit fees and commissions during 1997.
Other income increased $50.9 million in 1997 primarily because of a $47.5
million premium realized from the divestiture of deposits required by bank
regulators as a condition for their approval of BB&T's merger with UCB.
Excluding the impact of the deposit premium other income would have increased
$3.4 million, or 12.7%, primarily because of the purchase acquisitions
discussed above. Other income in 1996 totaled $27.1 million, up from the 1995
balance of $23.7 million.
The ability to generate significant additional amounts of noninterest
revenues in the future will be a requisite to the ultimate success of BB&T.
Through its subsidiaries, BB&T will continue to focus on mortgage banking,
trust, insurance, investment and brokerage activities, as well as growing
other fee-related products and services. BB&T will also continue to explore
strategic acquisitions of insurance agencies and other nonbank entities to
improve noninterest income.
The following table provides a breakdown of BB&T's noninterest income:
TABLE 15
NONINTEREST INCOME
YEARS ENDED DECEMBER 31, % CHANGE
-------------------------- ---------------
1997 V. 1996 V.
1997 1996 1995 1996 1995
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Service charges on deposits....... $148,059 $132,180 $113,664 12.0% 16.3%
Mortgage banking income........... 52,429 39,845 31,218 31.6 27.6
Trust income...................... 31,957 28,794 23,872 11.0 20.6
Agency insurance commissions...... 39,759 26,859 19,306 48.0 39.1
Other insurance commissions....... 13,164 12,822 12,384 2.7 3.5
Securities gains (losses), net.... 2,276 3,090 (18,589) (26.3) NM
Bankcard fees and merchant
discounts........................ 42,292 35,729 30,990 18.4 15.3
Investment brokerage commissions.. 19,908 17,069 10,103 16.6 68.9
Other bank service fees and
commissions...................... 43,318 26,752 22,125 61.9 20.9
International income.............. 3,685 3,206 2,895 14.9 10.7
Amortization of negative
goodwill......................... 6,180 6,238 6,239 (.9) --
Other noninterest income.......... 71,887 20,884 17,503 244.2 19.3
-------- -------- -------- ----- ----
Total noninterest income........ $474,914 $353,468 $271,710 34.4% 30.1%
======== ======== ======== ===== ====
- --------
NM--not meaningful.
NONINTEREST EXPENSE
Noninterest expense for 1997 totaled $937.2 million, an increase of $128.6
million, or 15.9%, compared to 1996. Noninterest expense totaled $808.6
million in 1996 and $820.7 million in 1995. Certain material, nonrecurring
items affecting noninterest expense were recorded during 1997, 1996 and 1995.
BB&T recorded $115.3 million in pretax charges during 1997 primarily
associated with the merger with UCB. In 1996, BB&T incurred a special, one-
time SAIF assessment totaling approximately $33.8 million on a pretax basis.
During 1995, BB&T incurred $107.5 million of nonrecurring costs related to the
merger of Southern National Corporation and BB&T Financial Corporation.
Excluding the impact of the nonrecurring items from both 1997
31
and 1996, noninterest expense would have increased $47.1 million, or 6.1%. The
five-year compound rate of growth in noninterest expense on a recurring basis
has been 5.6%.
The control of noninterest expenses is a management priority. The primary
measure of noninterest expense management is the efficiency ratio. For 1997,
BB&T's efficiency ratio, which excludes nonrecurring costs and other
nonoperating items, was 51.9%, placing BB&T in the top 15% of the top 50 banks
in the country. The 1997 ratio showed improvement from the 1996 ratio of 55.4%
and the 1995 ratio of 56.5%.
Total personnel expense, the largest component of noninterest expense,
increased $46.8 million, or 12.1%, in 1997 to a balance of $433.8 million.
Personnel expense totaled $387.1 million for 1996 and $424.3 million in 1995.
Total personnel expense includes salaries and wages, as well as pension and
other employee benefits. The increase during 1997 reflects $25.5 million of
nonrecurring costs associated with the UCB merger. These costs included
severance pay, termination of employment contracts, early retirement packages
and other related benefits. Excluding these nonrecurring charges, total
personnel expense would have increased $21.3 million, or 5.5%, to $408.3
million. The increase in recurring personnel costs reflects higher incentive-
related compensation and normal annual adjustments.
Premiums paid to the FDIC for deposit insurance decreased significantly to a
balance of $4.7 million, compared to $44.0 million in 1996 and $26.9 million
in 1995. As discussed above, BB&T recorded $33.8 million of Federal deposit
insurance expense during 1996 associated with a special assessment to
recapitalize the SAIF. Excluding this assessment, FDIC expense decreased $5.5
million in 1997 compared to 1996. In 1995, the FDIC reduced the rates paid
from $.23 per $100 to $.04 per $100 on deposits insured by the Bank Insurance
Fund and on January 1, 1997, the FDIC eliminated the deposit insurance
premium. This rate decrease resulted in significant savings on deposit
insurance premiums.
Net occupancy and equipment expense totaled $154.7 million in 1997. This
represented an increase of $32.6 million, or 26.7%, over the expense of $122.1
million incurred in 1996. Net occupancy and equipment expense totaled $126.2
million in 1995. The 1997 increase in expenses includes the impact of $20.9
million of nonrecurring charges in 1997 relating to branch closings and the
consolidation of bank operations and systems associated with the UCB merger.
Net occupancy and equipment expense, excluding nonrecurring charges, totaled
$133.8 million for 1997, an increase of $11.7 million, or 9.6%, compared to
1996. Depreciation, maintenance and rent expenses associated with data
processing equipment purchased in connection with implementing the merger and
related to new technology initiatives were the major components of the
increase. Management has closed or consolidated more than 200 branches in the
past three years. These actions have assisted in controlling occupancy and
equipment expense while providing a high level of service to BB&T's customers.
All other expense increased $88.6 million from 1996 to 1997, primarily
because of $68.9 million in nonrecurring costs recorded principally in
connection with the UCB merger. These expenses included losses on disposals of
fixed assets, operational charge-offs, branch and departmental supplies,
donations, legal fees, accounting fees, printing costs, regulatory filing fees
and other professional services. Excluding the impact of these charges, other
noninterest expenses would have increased $19.7 million, or 7.7%. This
increase was driven by higher advertising and marketing expenditures
associated with an ongoing effort to increase BB&T's brand identity, increased
amortization of intangibles because of significant purchase acquisitions
recorded in 1997 and an increase in professional fees resulting from the use
of outside consulting firms to analyze strategies to maximize noninterest
income, to assess customer and product profitability, to implement plans for a
major branch automation project and to assist in the upgrade of BB&T's systems
to make them Year 2000 compliant.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is pervasive and presents both technical and business
risks affecting most, if not all, of BB&T's business activities. The "Year
2000 Issue" is a general term used to describe the various problems that may
result from the improper processing of dates and date-sensitive calculations
by computers and other machinery as the Year 2000 approaches. These problems
generally arise because most of the world's computer
32
hardware and software has historically used only two digits to identify the
applicable year. Any of BB&T's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. These problems may also arise from other sources as well, such as the
use of special codes and conventions in software that make use of the date
field. If not corrected, this could result in system errors or failures
causing disruptions of normal business operations.
BB&T began planning its Year 2000 remediation strategy in 1996 and has
formed a project committee that meets regularly to review the progress of
these efforts. Based on the assessments of this committee, BB&T has determined
that it will be required to modify or replace significant portions of its
information technology platform and other systems so that they will properly
utilize data as the Year 2000 approaches and is reached. Management presently
believes that with modifications to existing systems and conversions to new
systems, the effects of the Year 2000 Issue will be corrected. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 Issue could have a material impact on the
operations of BB&T, which in turn could have a materially adverse effect on
BB&T's results of operations and financial condition.
BB&T has initiated formal communications with all of its significant
suppliers and has developed a communications plan for its large customers to
determine the extent to which BB&T is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. However, there can be no
guarantee that the systems of other organizations on which BB&T's systems
rely, or BB&T's operations depend, will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with
BB&T's systems, would not have a materially adverse effect on BB&T.
BB&T plans to utilize both internal and external resources to reprogram or
replace, and to test all software and other components of its systems for Year
2000 modifications. BB&T has targeted a completion date of December 31, 1998
for Year 2000 project work on critical business applications. System
applications have been scheduled for modification based on a risk-adjusted
priority to ensure that critical programs are adequately completed in time to
allow for extended testing. The projected remaining cost of the Year 2000
project is currently estimated at $26 million and is being funded through
operating cash flows. As of December 31, 1997, approximately $3 million had
been spent on the assessment of and preliminary efforts in connection with the
Year 2000 project and the development of the remediation plan.
The costs of the project and the date on which BB&T plans to complete Year
2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, the inability
to control third party modification plans, and similar uncertainties.
33
The following table presents a breakdown of BB&T's noninterest expenses:
TABLE 16
NONINTEREST EXPENSE
YEARS ENDED DECEMBER 31, % CHANGE
-------------------------- ---------------
1997 V. 1996 V.
1997 1996 1995 1996 1995
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Salaries and wages................ $355,562 $313,585 $349,539 13.4% (10.3)%
Pension and other employee
benefits......................... 78,253 73,465 74,764 6.5 (1.7)
Net occupancy expense on bank
premises......................... 73,273 56,491 59,446 29.7 (5.0)
Furniture and equipment expense... 81,381 65,598 66,743 24.1 (1.7)
Federal deposit insurance
premiums......................... 4,717 44,047 26,859 (89.3) 64.0
Foreclosed property expense....... 2,859 2,470 3,704 15.7 (33.3)
Amortization of intangibles and
mortgage servicing rights........ 26,175 14,534 12,305 80.1 18.1
Software.......................... 14,219 11,074 12,479 28.4 (11.3)
Telephone......................... 18,053 15,788 14,978 14.3 5.4
Donations......................... 6,570 5,760 7,686 14.1 (25.1)
Advertising and public relations.. 25,860 23,716 16,004 9.0 48.2
Travel and transportation......... 8,609 7,332 7,156 17.4 2.5
Professional services............. 43,051 25,609 23,894 68.1 7.2
Supplies.......................... 15,123 14,196 20,326 6.5 (30.2)
Loan and lease expense............ 40,951 32,090 24,844 27.6 29.2
Deposit related expense........... 16,652 14,165 12,780 17.6 10.8
Other noninterest expenses........ 125,842 88,630 87,211 42.0 1.6
-------- -------- -------- ----- -----
Total noninterest expense....... $937,150 $808,550 $820,718 15.9% (1.5)%
======== ======== ======== ===== =====
PROVISION FOR INCOME TAXES
BB&T's provision for income taxes during 1997 was $187.5 million, a 17.2%
increase over the provision recorded in 1996. The provision for income taxes
in 1995 totaled $113.1 million. Excluding the impact of the nonrecurring
charges associated with the UCB merger, BB&T's tax provision would have been
$19.2 million greater, or $206.7 million. Based on recurring earnings, BB&T's
effective tax rates for the years ended December 31, 1997, 1996 and 1995 were
33.6%, 32.8% and 34.2%, respectively.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, BB&T's primary market
risk exposure is interest rate risk. A prime objective in interest rate risk
management is the avoidance of wide fluctuations in net interest income
through balancing the impact of changes in interest rates on interest-
sensitive assets and interest-sensitive liabilities. Management uses balance
sheet repositioning as an efficient and cost-effective means of managing
interest rate risk. This is accomplished through strategic pricing of asset
and liability accounts. The expected result of strategic pricing is the
development of appropriate maturity and repricing opportunities in those
accounts to produce consistent net income during adverse interest rate
environments. The ALCO monitors loan, investment and liability portfolios to
ensure comprehensive balance sheet management of interest rate risk. These
portfolios are analyzed for proper fixed-rate and variable-rate "mixes" given
a specific interest rate outlook.
Asset/liability management activities are designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricings and interest rate sensitivities of earning
34
assets, deposits and borrowed funds. It is the responsibility of the ALCO to
determine and achieve the most appropriate mix of earning assets and interest-
bearing liabilities, as well as ensure an adequate level of liquidity and
capital. The ALCO also sets policy guidelines and establishes long-term
strategies with respect to interest rate exposure and liquidity. The ALCO
meets regularly to review BB&T's interest rate and liquidity risk exposures in
relation to present and prospective market and business conditions, and adopts
funding and balance sheet management strategies that are intended to ensure
that the potential impact on earnings and liquidity of fluctuations in
interest rates is within acceptable standards.
BB&T also uses off-balance sheet financial instruments to manage interest
rate sensitivity and net interest income. These instruments, commonly referred
to as derivatives, primarily consist of interest rate swaps, caps, floors,
financial forward and futures contracts and options written and purchased.
Management accounts for these financial instruments as hedges when the
following conditions are met: (1) the specific assets, liabilities, firm
commitments or anticipated transactions (or an identifiable group of
essentially similar items) to be hedged expose BB&T to interest rate risk or
price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items. BB&T does not utilize
derivatives for trading purposes.
Derivatives contracts are written in amounts referred to as notional
amounts. Notional amounts do not represent amounts to be exchanged between
parties and are not a measure of financial risks, but only provide the basis
for calculating payments between the counterparties. On December 31, 1997,
BB&T had outstanding interest rate swaps, caps and floors with notional
amounts totaling $2.4 billion. The estimated fair value of open contracts used
for risk management purposes at December 31, 1997, reflected pretax net
unrealized gains of $25.6 million.
BB&T uses these derivatives as synthetic instruments to hedge specified
assets or groups of assets, liabilities or groups of liabilities, forward
commitments and anticipated transactions. BB&T's derivatives are primarily
used to hedge variable rate commercial loans, adjustable rate mortgage loans,
retail certificates of deposit and floating rate notes. These hedges
contributed net interest income of $1.1 million in 1997, compared with net
interest expense of $154,200 in 1996 and net interest expense of $10.3 million
in 1995.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. BB&T also utilizes over-the-counter purchased put options and written
call options in its mortgage banking activities. Purchased put options are
used to hedge the mortgage pipeline against increasing interest rates. Written
call options are used to reduce the premiums paid for purchased put options
thereby reducing the cost of the hedge.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of
credit. All of the derivatives contracts to which BB&T is a party settle
monthly, quarterly or semiannually. Accordingly, the amount of off-balance
sheet credit exposure to which BB&T is exposed at any time is immaterial.
Further, BB&T has netting agreements with the dealers with which it does
business. Because of these netting agreements, BB&T had a minimal amount of
off-balance sheet credit exposure at December 31, 1997.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature
and terms of derivative financial instruments. See Note Q. "Derivatives and
Off-Balance Sheet Financial Instruments" for the required quantitative
disclosures.
35
BB&T's interest rate sensitivity is illustrated in the following interest
rate sensitivity gap table. The table reflects rate-sensitive positions at
December 31, 1997, and is not necessarily reflective of positions throughout
each year. The carrying amounts of interest-rate-sensitive assets and
liabilities and the notional amounts of swaps and other derivative financial
instruments are presented in the periods in which they next reprice to market
rates or mature and are aggregated to show the interest rate sensitivity gap.
To reflect anticipated prepayments, certain asset and liability categories are
included in the table based on estimated rather than contractual maturity
dates.
TABLE 17
INTEREST RATE SENSITIVITY GAP ANALYSIS
DECEMBER 31, 1997
EXPECTED REPRICING OR MATURITY DATE
-----------------------------------------------------------------
WITHIN ONE TO THREE TO AFTER FIVE
ONE YEAR THREE YEARS FIVE YEARS YEARS TOTAL
------------ ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Assets
Securities and other
interest-earning
assets*.............. $ 1,367,711 $ 2,198,828 $ 2,163,861 $ 919,805 $ 6,650,205
Federal funds sold and
securities purchased
under resale
agreements or similar
arrangements......... 103,245 -- -- -- 103,245
Loans and leases...... 13,056,586 4,404,949 2,033,054 795,366 20,289,955
------------ ------------ ----------- ----------- -----------
Total interest-earning
assets................. 14,527,542 6,603,777 4,196,915 1,715,171 27,043,405
------------ ------------ ----------- ----------- -----------
Liabilities
Other time deposits... 7,294,535 1,695,552 208,765 12,717 9,211,569
Foreign deposits...... 1,385,633 -- -- -- 1,385,633
Savings and interest
checking**........... -- 976,728 325,576 325,576 1,627,880
Money rate savings**.. 2,578,160 2,578,159 -- -- 5,156,319
Federal funds
purchased and
securities sold under
repurchase agreements
or similar
arrangements......... 1,895,673 -- -- -- 1,895,673
Other borrowings...... 2,986,901 370,824 681,630 363,107 4,402,462
------------ ------------ ----------- ----------- -----------
Total interest-bearing
liabilities............ 16,140,902 5,621,263 1,215,971 701,400 23,679,536
------------ ------------ ----------- ----------- -----------
Asset-liability gap..... (1,613,360) 982,514 2,980,944 1,013,771
------------ ------------ ----------- -----------
Derivative financial
instruments affecting
interest rate
sensitivity
Pay fixed interest
rate swaps........... 247,943 (220,726) (19,417) (7,800)
Receive fixed interest
rate swaps........... (1,025,000) 525,000 -- 500,000
Caps and floors....... (665,000) 605,000 -- 60,000
------------ ------------ ----------- -----------
Interest rate
sensitivity gap........ $ (3,055,417) $ 1,891,788 $ 2,961,527 $ 1,565,971
============ ============ =========== ===========
Cumulative interest rate
sensitivity gap........ $ (3,055,417) $ (1,163,629) $ 1,797,898 $ 3,363,869
============ ============ =========== ===========
- --------
* Securities based on amortized cost.
** Projected runoff of deposits that do not have contractual maturity dates
was computed based upon decay rate assumptions developed by bank regulators
to assist banks in addressing FDIC Improvement Act rule 305.
36
INFLATION AND CHANGING INTEREST RATES
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in interest rates and the efforts of the Board of
Governors of the Federal Reserve ("FRB") to regulate money and credit
conditions have a greater effect on a financial institution's profitability
than do the effects of higher costs for goods and services. Through its
balance sheet management function, BB&T is positioned to respond to changing
interest rates and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of earnings to changes in interest rates. Simulation
Analysis takes into account the current contractual agreements that BB&T has
made with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer model that incorporates current
volumes and rates, maturity streams, repricing opportunities and anticipated
growth. The model calculates an earnings estimate based on current and
projected portfolio balances and rates. This level of detail is needed to
correctly simulate the effect that changes in interest rates and portfolio
balances will have on the earnings of BB&T. This method is subject to the
accuracy of the assumptions that underlie the process, but it provides a
better illustration of the sensitivity of earnings to changes in interest
rates than other analyses such as static or dynamic gap.
The asset/liability management process involves various analyses. Management
determines the most likely outlook for the economy and interest rates by
analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance
are all considered, given the current environmental situation. This data is
combined with various interest rate scenarios to provide management with
information necessary to analyze interest sensitivity and to aid in the
development of strategies to reach performance goals.
The following table represents the interest sensitivity position of BB&T as
of December 31, 1997. This position can be modified by management within a
relatively short time period if necessary through the use of various
techniques, including securitizing assets, changing funding and investment
strategies and utilizing derivative financial instruments. Key assumptions in
the preparation of the table include prepayment speeds of mortgage-related
assets; cash flows and maturities of derivative financial instruments; changes
in market condition, loan volumes and pricing; deposit sensitivity; customer
preferences; and capital plans. This tabular data does not reflect the impact
of a change in the credit quality of BB&T's assets and liabilities. To attempt
to quantify the potential change in net interest income, given a change in
interest rates, various interest rate scenarios are applied to projected
balances, maturities and repricing opportunities of assets and liabilities.
The resulting change in net interest income reflects the level of sensitivity
that net interest income has in relation to changing interest rates.
TABLE 18
INTEREST SENSITIVITY SIMULATION ANALYSIS
ANNUALIZED
HYPOTHETICAL
INTEREST RATE SCENARIO PERCENTAGE
--------------------------------- CHANGE IN
PRIME NET INTEREST
RATE LINEAR INCOME
------ ------ ------------
+3.00% 11.50% -2.34%
+1.50 10.00 -1.88
Flat 8.50 -.20
-1.50 7.00 .46
-3.00 5.50 .60
Management has established parameters for asset/liability management which
prescribe a maximum effect on net interest income of 3% for a 150 basis point
parallel change in interest rates over six months from the
37
most likely interest rate scenario, and a maximum of 6% for a 300 basis point
change over 12 months. It is management's ongoing objective to effectively
manage the impact of changes in interest rates and minimize the resulting
effect on earnings as evidenced by the preceding table. Based on the results
of the simulation model as of December 31, 1997, BB&T would expect an increase
in net interest income of $6.0 million and a decrease in net interest income
of $24.5 million compared to the most likely interest rate scenario if
interest rates gradually decrease or increase, respectively, from current
rates by 150 basis points over a 12-month period.
LIQUIDITY
Liquidity represents a bank's continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities and funding of loan commitments. In addition to its level of
liquid assets, many other factors affect a bank's ability to meet liquidity
needs, including access to additional funding sources, total capital position
and general market conditions.
Traditional sources of liquidity include proceeds from maturity of
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements, FHLB advances and other short-term borrowed
funds, as well as certain long-term debt instruments, supplement these
traditional sources. Management believes liquidity obtainable from these
sources is adequate to meet current requirements.
Total cash and cash equivalents increased to $969.9 million at December 31,
1997 compared to $927.3 million in 1996 and $934.1 million in 1995. Net cash
provided by operating activities for the year was $262.3 million, compared to
$388.7 million in 1996 and $289.2 million in 1995. The decrease in cash
provided by operating activities during 1997 was primarily the result of more
purchases and originations of loans held for sale than in the prior year and a
net increase in securities held for trading purposes.
Net cash flows used in investing activities were $1.7 billion in 1997
compared to $1.1 billion in 1996. Cash used in investing activities during
1995 was $1.1 billion. The primary factors creating the current year increase
in cash flows used in investing activities were a $603.3 million increase in
cash purchases of securities available for sale, and a reduction of $540.6
million in cash proceeds from sales and maturities of securities available for
sale.
Cash flows provided by financing activities were $1.5 billion in 1997
compared to $722.8 million in 1996 and $812.7 million in 1995. The substantial
increase in cash flows provided during 1997 resulted from increases in short-
term borrowed funds and long-term debt.
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Overall capital adequacy is monitored on an ongoing basis by management and
reviewed regularly by the Board of Directors. BB&T's principal capital
planning goals are to provide an adequate return to shareholders while
retaining a sufficient base from which to provide future growth and compliance
with all regulatory standards.
Shareholders' equity grew 8.0% in 1997 as a result of the retention of
earnings. The growth in total shareholders' equity during the year reflects
current year earnings, reduced by resources used for the redemption of 6.9
million shares of common stock, primarily in conjunction with purchase
business combinations, and the declaration of $164.0 million in common
dividends.
The provisions of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," require securities classified as available for sale to
be carried at estimated fair value with net unrealized appreciation or
depreciation recorded as an adjustment to shareholders' equity. At the end of
1997, BB&T had recorded cumulative net unrealized appreciation of $44.9
million, net of deferred income tax.
38
TABLE 19
CAPITAL--COMPONENTS AND RATIOS
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Tier 1 capital..................................... $ 1,979,462 $ 1,997,194
Tier 2 capital..................................... 744,831 464,628
----------- -----------
Total regulatory capital........................... $ 2,724,293 $ 2,461,822
=========== ===========
Risk-based capital ratios:
Tier 1 capital................................... 9.9% 11.5%
Total regulatory capital......................... 13.7 14.2
Tier 1 leverage ratio.............................. 7.2 7.9
Management views the leverage ratio, calculated by dividing tangible equity
capital by tangible assets, as the principal indicator of capital strength.
The minimum regulatory required leverage ratio ranges from 3% to 5% subject to
Federal bank regulatory agency evaluation of an organization's overall safety
and soundness. The leverage ratio for BB&T was 7.2% at the end of 1997 and
7.9% at the end of 1996. The decreases in risk-based capital ratios and the
leverage ratio reflect efforts to actively manage BB&T's capital position
primarily through share repurchase programs.
Bank holding companies and their subsidiaries are also subject to risk-based
capital measures. The risk-based capital ratios measure the relationship of
capital to a combination of balance sheet and off-balance sheet risk. The
values of both balance sheet and off-balance sheet items are adjusted to
reflect these risks. Tier 1 capital is required to be at least 4% of risk-
weighted assets, and total capital must be at least 8% of risk-weighted
assets. The Tier 1 capital ratio for BB&T at the end of 1997 was 9.9%, and the
total capital ratio was 13.7%. At the end of 1996, those ratios were 11.5% and
14.2%, respectively.
COMMON STOCK AND DIVIDENDS
BB&T's ability to pay dividends is primarily dependent on earnings from
operations, the adequacy of capital and the availability of liquid assets for
distribution. BB&T's ability to replenish liquid assets available for
distribution is primarily dependent on the ability of the banking subsidiaries
to pay dividends to BB&T. Historically, BB&T's payment of cash dividends has
been based on management's goal to retain sufficient capital to support future
growth and to meet regulatory requirements while providing a competitive
return on investment to shareholders. BB&T's common dividend payout ratio,
computed by dividing dividends per common share by earnings per common share,
was 43.8% in 1997. Excluding the impact of the nonrecurring merger-related
charges, the dividend payout ratio would have been 38.5%. BB&T's quarterly
cash dividend per common share was increased 14.8% to $.31 per common share in
the third quarter of 1997. This increase marked the 25th consecutive year that
cash dividends have been increased. A discussion of dividend restrictions is
included in Note N-- "Regulatory Requirements and Other Restrictions."
BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "BBK." BB&T's common stock was held by 67,656 shareholders of
record at December 31, 1997. The accompanying table, "Quarterly Common Stock
Summary," sets forth the high, low and last sales prices for the common stock
as reported on the NYSE Composite Tape and the cash dividends paid per share
of common stock paid for each of the last eight quarters.
39
TABLE 20
QUARTERLY COMMON STOCK SUMMARY
1997 1996
------------------------------ ------------------------------
SALES PRICES CASH SALES PRICES CASH
-------------------- DIVIDENDS -------------------- DIVIDENDS
HIGH LOW LAST PAID HIGH LOW LAST PAID
------ ------ ------ --------- ------ ------ ------ ---------
Quarter Ended
March 31....... $40.75 $35.25 $37.25 $.27 $29.75 $25.88 $27.75 $.23
June 30........ 47.13 35.75 45.00 .27 31.75 28.88 31.75 .23
September 30... 55.13 45.31 53.44 .31 33.88 28.63 33.25 .27
December 31.... 65.00 51.94 64.06 .31 36.75 33.38 36.25 .27
Year......... 65.00 35.25 64.06 1.16 36.75 25.88 36.25 1.00
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1997 was $103.4 million, compared to
earnings of $90.0 million for the comparable period of 1996. On a per share
basis, diluted net income was $.75 for the quarter compared to $.65 a year
ago. Annualized returns on average assets and average equity were 1.47% and
19.31%, respectively, for the fourth quarter.
Net interest income on a fully taxable equivalent basis amounted to $294.2
million for the fourth quarter of 1997, an increase of 8.6% compared to $270.8
million for the same period during 1996. Noninterest income totaled $118.5
million for the fourth quarter of 1997, up 24.6% from $95.1 million for the
fourth quarter of 1996. BB&T's noninterest expense totaled $221.6 million, up
7.5% from the $206.2 million recorded in the fourth quarter of the prior year.
The provision for loan and lease losses increased significantly compared to
the prior year because of higher net charge-offs and growth in loans. The
provision totaled $22.0 million for the fourth quarter of 1997 compared to
$18.4 million for 1996.
40
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1997.
TABLE 21
QUARTERLY FINANCIAL SUMMARY--UNAUDITED
1997 1996
------------------------------------------------ ------------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Summary of
Operations
Net interest income
FTE................... $ 294,232 $ 291,292 $ 291,630 $ 275,229 $ 270,792 $ 262,119 $ 259,913 $ 251,022
FTE adjustment......... 15,223 14,169 13,039 10,427 9,755 8,831 8,967 8,593
Provision for loan and
lease losses.......... 21,999 21,901 25,100 20,850 18,350 15,400 15,161 13,600
Securities gains
(losses), net......... 1,664 731 (933) 814 2,681 705 (95) (201)
Other noninterest
income................ 116,815 154,337 102,188 99,298 92,377 88,517 87,248 82,236
Noninterest expense.... 221,560 312,673 205,326 197,591 206,228 226,770 189,369 186,183
Provision for income
taxes................. 50,533 36,353 50,760 49,851 41,533 31,999 44,449 41,951
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 103,396 $ 61,264 $ 98,660 $ 96,622 $ 89,984 $ 68,341 $ 89,120 $ 82,730
=========== =========== =========== =========== =========== =========== =========== ===========
Diluted net income per
share................. $ .75 $ .45 $ .71 $ .69 $ .65 $ .49 $ .64 $ .59
=========== =========== =========== =========== =========== =========== =========== ===========
Selected Average
Balances
Assets................. $27,914,984 $27,168,511 $26,859,692 $25,764,559 $25,452,779 $24,926,111 $24,519,336 $24,172,965
Securities, at
amortized cost........ 6,438,552 6,432,481 6,399,463 6,093,212 6,306,888 6,263,001 5,834,404 5,779,706
Loans and leases *..... 19,635,614 19,076,615 18,833,469 18,101,528 17,450,217 17,185,125 17,217,223 16,888,726
Total earning assets... 26,137,362 25,545,232 25,290,207 24,248,283 23,897,386 23,479,956 23,120,326 22,764,248
Deposits............... 19,328,866 19,309,491 19,568,134 19,033,287 19,039,282 18,803,569 18,324,501 18,134,559
Short-term borrowed
funds................. 2,882,616 2,637,455 2,436,444 2,142,654 1,888,252 1,857,538 2,141,579 2,233,239
Long-term debt......... 3,106,477 2,806,159 2,406,161 2,162,518 2,164,007 1,979,930 1,782,464 1,514,490
Total interest-bearing
liabilities........... 22,682,436 22,182,112 21,867,163 20,917,021 20,554,985 20,205,493 19,830,232 19,541,370
Shareholders' equity... 2,124,191 2,105,646 2,128,949 2,105,159 2,048,895 1,969,944 1,950,958 1,969,586
- --------
* Loans and leases are net of unearned income and include loans held for sale.
41
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
AS OF / FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------- COMPOUND
1997 1996 1995 1994 1993 1992 GROWTH RATE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summary of Operations
Interest income........ $ 2,122,940 $ 1,934,570 $ 1,880,157 $ 1,586,515 $ 1,427,684 $ 1,436,751 8.1%
Interest expense....... 1,023,415 926,870 948,839 678,571 590,709 686,922 8.3
----------- ----------- ----------- ----------- ----------- -----------
Net interest income.... 1,099,525 1,007,700 931,318 907,944 836,975 749,829 8.0
Provision for loan and
lease losses.......... 89,850 62,511 41,924 23,730 59,829 76,030 3.4
----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan and lease
losses................ 1,009,675 945,189 889,394 884,214 777,146 673,799 8.4
Noninterest income..... 474,914 353,468 271,710 278,339 268,856 229,736 15.6
Noninterest expense.... 937,150 808,550 820,718 740,234 791,060 625,875 8.4
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes................. 547,439 490,107 340,386 422,319 254,942 277,660 14.5
Provision for income
taxes................. 187,497 159,932 113,118 147,003 95,229 97,290 14.0
----------- ----------- ----------- ----------- ----------- -----------
Income before
cumulative effect of
changes in accounting
principles............ 359,942 330,175 227,268 275,316 159,713 180,370 14.8
Cumulative effect of
changes in accounting
principles, net of
deferred income
taxes................. -- -- -- -- (32,762) -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 359,942 $ 330,175 $ 227,268 $ 275,316 $ 126,951 $ 180,370 14.8
=========== =========== =========== =========== =========== ===========
Average shares
outstanding (000's)
Basic.................. 135,742 136,025 135,911 134,150 129,089 122,034 2.2
Diluted................ 138,220 138,956 141,914 140,377 135,926 130,682 1.1
Per Common Share
Basic earnings
Income before
cumulative effect..... $ 2.65 $ 2.42 $ 1.63 $ 2.01 $ 1.20 $ 1.44 13.0
Cumulative effect...... -- -- -- -- (.25) -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............ $ 2.65 $ 2.42 $ 1.63 $ 2.01 $ 0.95 $ 1.44 13.0
=========== =========== =========== =========== =========== ===========
Diluted earnings
Income before
cumulative effect..... $ 2.60 $ 2.38 $ 1.60 $ 1.96 $ 1.18 $ 1.38 13.5
Cumulative effect...... -- -- -- -- (.24) -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............ $ 2.60 $ 2.38 $ 1.60 $ 1.96 $ .94 $ 1.38 13.5
=========== =========== =========== =========== =========== ===========
Cash dividends
declared.............. $ 1.16 $ 1.00 $ .86 $ .74 $ .64 $ .50 18.3
Shareholders' equity... 16.45 15.13 14.32 12.79 12.06 11.95 6.6
Average Balance Sheets
Securities, at carrying
value................. $ 6,361,054 $ 6,137,748 $ 6,244,509 $ 6,050,612 $ 5,401,762 $ 4,733,403 6.1
Loans and leases*...... 18,667,328 16,958,876 16,286,928 14,711,409 13,155,522 11,978,837 9.3
Other assets........... 1,905,108 1,673,478 1,694,578 1,707,055 1,626,305 1,567,185 4.0
----------- ----------- ----------- ----------- ----------- -----------
Total assets........... $26,933,490 $24,770,102 $24,226,015 $22,469,076 $20,183,589 $18,279,425 8.1
=========== =========== =========== =========== =========== ===========
Deposits............... $19,310,753 $18,577,368 $17,691,264 $17,318,921 $16,260,492 $15,167,080 4.9
Other liabilities...... 2,883,303 2,346,374 3,507,910 2,724,841 1,687,474 1,535,422 13.4
Long-term debt......... 2,623,424 1,861,380 1,130,460 679,654 598,753 154,113 76.3
Common shareholders'
equity................ 2,116,010 1,969,821 1,824,036 1,671,517 1,562,727 1,357,005 9.3
Preferred shareholders'
equity................ -- 15,159 72,345 74,143 74,143 65,805 NM
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders'
equity............... $26,933,490 $24,770,102 $24,226,015 $22,469,076 $20,183,589 $18,279,425 8.1
=========== =========== =========== =========== =========== ===========
Period End Balances
Total assets........... $29,177,600 $25,707,646 $24,671,277 $23,497,824 $22,273,226 $18,979,348 9.0
Deposits............... 20,210,116 19,003,340 18,321,708 17,458,085 17,594,408 15,674,867 5.2
Long-term debt......... 3,282,958 2,054,040 1,386,910 913,060 839,631 424,102 50.6
Shareholders' equity... 2,237,637 2,071,567 2,025,112 1,803,888 1,686,134 1,510,774 8.2
Selected Performance
Ratios
Rate of return on:
Average total assets... 1.34% 1.33% .94% 1.23% .63% .99%
Average common
shareholders' equity.. 17.01 16.73 12.18 16.16 7.79 12.95
Dividend payout........ 43.77 41.32 52.76 36.82 67.37 34.72
Average equity to
average assets........ 7.86 8.01 7.83 7.77 8.11 7.78
- -------
* Loans and leases are net of unearned income and the allowance for losses.
Amounts include loans held for sale.
NM--Not meaningful.
42
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of BB&T is responsible for the preparation of the financial
statements, related financial data and other information in this Annual Report
on Form 10-K. The financial statements are prepared in accordance with
generally accepted accounting principles and include amounts based on
management's estimates and judgment where appropriate. Financial information
appearing throughout this Annual Report on Form 10-K is consistent with the
financial statements.
BB&T's accounting system, which records, summarizes and reports financial
transactions, is supported by an internal control structure which provides
reasonable assurance that assets are safeguarded and that transactions are
recorded in accordance with BB&T's policies and established accounting
procedures. As an integral part of the internal control structure, BB&T
maintains a professional staff of internal auditors who monitor compliance
with and assess the effectiveness of the internal control structure.
The Audit Committee of BB&T's Board of Directors, composed solely of outside
directors, meets regularly with BB&T's management, internal auditors and
independent public accountants to review matters relating to financial
reporting, internal control structure and the nature, extent and results of
the audit effort. The independent public accountants and the internal auditors
have access to the Audit Committee with or without management present.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, who render an independent opinion on
management's financial statements. Their appointment was recommended by the
Audit Committee, approved by the Board of Directors and ratified by the
shareholders. Their examination provides an objective assessment of the degree
to which BB&T's management meets its responsibility for financial reporting.
Their opinion on the financial statements is based on auditing procedures
which include reviewing the internal control structure to determine the timing
and scope of audit procedures and performing selected tests of transactions
and records as they deem appropriate. These auditing procedures are designed
to provide a reasonable level of assurance that the financial statements are
fairly presented in all material respects.
John A. Allison Scott E. Reed Sherry A.
Chairman and Chief Financial Officer Kellett
Chief Executive Officer Controller
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of BB&T Corporation:
We have audited the accompanying consolidated balance sheets of BB&T
Corporation, (a North Carolina corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income, changes
in shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BB&T Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Charlotte, North Carolina,
January 14, 1998, except for Note B, as to which the date is March 1, 1998.
44
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and due from banks............................. $ 839,579 $ 840,391
Interest-bearing deposits with banks................ 27,051 2,010
Federal funds sold and securities purchased under
resale agreements or
similar arrangements................................ 103,245 84,940
Trading securities.................................. 67,878 --
Securities available for sale....................... 6,481,515 6,014,221
Securities held to maturity (market value: $151,581
in 1997 and $175,744 in 1996)...................... 147,799 170,808
Loans held for sale................................. 509,141 228,333
Loans and leases, net of unearned income............ 19,780,814 17,518,224
Allowance for loan and lease losses................ (263,943) (230,070)
----------- -----------
Loans and leases, net............................. 19,516,871 17,288,154
----------- -----------
Premises and equipment, net......................... 417,897 374,954
Other assets........................................ 1,066,624 703,835
----------- -----------
Total assets...................................... $29,177,600 $25,707,646
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits................ $ 2,828,715 $ 2,623,429
Savings and interest checking...................... 1,627,880 2,026,462
Money rate savings................................. 5,156,319 4,170,949
Other time deposits................................ 9,211,569 9,544,085
Foreign deposits................................... 1,385,633 638,415
----------- -----------
Total deposits.................................... 20,210,116 19,003,340
Short-term borrowed funds........................... 3,015,177 2,280,824
Long-term debt...................................... 3,282,958 2,054,040
Accounts payable and other liabilities.............. 431,712 297,875
----------- -----------
Total liabilities................................. 26,939,963 23,636,079
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1997 and 1996........................ -- --
Common stock, $5 par, 300,000,000 shares
authorized, issued and outstanding 136,051,623 at
December 31, 1997 and 136,896,865 at December 31,
1996.............................................. 680,258 684,484
Additional paid-in capital......................... 85,185 145,704
Retained earnings.................................. 1,428,017 1,231,592
Loan to employee stock ownership plan and unvested
restricted stock.................................. (725) (1,952)
Net unrealized appreciation on securities available
for sale, net of deferred income taxes of $29,136
in 1997 and $8,481 in 1996........................ 44,902 11,739
----------- -----------
Total shareholders' equity........................ 2,237,637 2,071,567
----------- -----------
Total liabilities and shareholders' equity........ $29,177,600 $25,707,646
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
45
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Interest Income
Interest and fees on loans and leases..... $1,713,299 $1,554,822 $1,516,909
Interest and dividends on securities...... 406,977 375,257 354,509
Interest on short-term investments........ 2,664 4,491 8,739
---------- ---------- ----------
Total interest income................... 2,122,940 1,934,570 1,880,157
---------- ---------- ----------
Interest Expense
Interest on deposits...................... 736,256 712,491 689,769
Interest on short-term borrowed funds..... 134,479 106,777 188,301
Interest on long-term debt................ 152,680 107,602 70,769
---------- ---------- ----------
Total interest expense.................. 1,023,415 926,870 948,839
---------- ---------- ----------
Net Interest Income......................... 1,099,525 1,007,700 931,318
Provision for loan and lease losses....... 89,850 62,511 41,924
---------- ---------- ----------
Net Interest Income After Provision for Loan
and Lease Losses........................... 1,009,675 945,189 889,394
---------- ---------- ----------
Noninterest Income
Service charges on deposits............... 148,059 132,180 113,664
Mortgage banking income................... 52,429 39,845 31,218
Trust income.............................. 31,957 28,794 23,872
Agency insurance commissions.............. 39,759 26,859 19,306
Other insurance commissions............... 13,164 12,822 12,384
Bankcard fees and merchant discounts...... 42,292 35,729 30,990
Other nondeposit fees and commissions..... 66,911 47,027 35,123
Securities gains (losses), net............ 2,276 3,090 (18,589)
Other income.............................. 78,067 27,122 23,742
---------- ---------- ----------
Total noninterest income................ 474,914 353,468 271,710
---------- ---------- ----------
Noninterest Expense
Personnel expense......................... 433,815 387,050 424,303
Occupancy and equipment expense........... 154,654 122,089 126,189
Federal deposit insurance expense......... 4,717 44,047 26,859
Amortization of intangibles and mortgage
servicing rights......................... 26,175 14,534 12,305
Advertising and public relations expense.. 25,860 23,716 16,004
Professional services..................... 43,051 25,609 23,894
Other expense............................. 248,878 191,505 191,164
---------- ---------- ----------
Total noninterest expense............... 937,150 808,550 820,718
---------- ---------- ----------
Earnings
Income before income taxes................ 547,439 490,107 340,386
Provision for income taxes................ 187,497 159,932 113,118
---------- ---------- ----------
Net Income.............................. 359,942 330,175 227,268
Preferred dividend requirements........... -- 610 5,079
---------- ---------- ----------
Income applicable to common shares...... $ 359,942 $ 329,565 $ 222,189
========== ========== ==========
Per Common Share
Net income:
Basic................................... $ 2.65 $ 2.42 $ 1.63
========== ========== ==========
Diluted................................. $ 2.60 $ 2.38 $ 1.60
========== ========== ==========
Cash dividends declared................... $ 1.16 $ 1.00 $ .86
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
46
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SHARES OF ADDITIONAL RETAINED TOTAL
COMMON PREFERRED COMMON PAID-IN EARNINGS SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL AND OTHER* EQUITY
----------- --------- -------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31,
1994................... 135,269,365 $3,850 $676,347 $ 285,703 $ 837,988 $1,803,888
ADD (DEDUCT)
Net income............. -- -- -- -- 227,268 227,268
Common stock issued.... 3,167,198 -- 15,836 33,511 (105) 49,242
Redemption of common
stock................. (1,993,351) -- (9,967) (37,344) -- (47,311)
Preferred stock
cancellations and
conversions........... 104,836 (181) 524 (2,714) -- (2,371)
Net unrealized
appreciation on
securities available
for sale, net of
deferred income
taxes................. -- -- -- -- 112,234 112,234
Cash dividends
declared:
Common stock........... -- -- -- -- (115,887) (115,887)
Preferred stock........ -- -- -- -- (5,079) (5,079)
Other.................. -- -- -- -- 3,128 3,128
----------- ------ -------- --------- ---------- ----------
BALANCE, DECEMBER 31,
1995................... 136,548,048 3,669 682,740 279,156 1,059,547 2,025,112
ADD (DEDUCT)
Net income............. -- -- -- -- 330,175 330,175
Common stock issued.... 2,788,586 -- 13,942 56,469 45 70,456
Redemption of common
stock................. (6,774,461) -- (33,872) (173,537) 2 (207,407)
Preferred stock
cancellations and
conversions........... 4,334,692 (3,669) 21,674 (18,005) -- --
Net unrealized
depreciation on
securities available
for sale, net of
deferred income
taxes................. -- -- -- -- (22,351) (22,351)
Cash dividends
declared:
Common stock........... -- -- -- -- (127,791) (127,791)
Preferred stock........ -- -- -- -- (610) (610)
Other.................. -- -- -- 1,621 2,362 3,983
----------- ------ -------- --------- ---------- ----------
BALANCE, DECEMBER 31,
1996................... 136,896,865 -- 684,484 145,704 1,241,379 2,071,567
ADD (DEDUCT)
Net income............. -- -- -- -- 359,942 359,942
Common stock issued.... 6,097,910 -- 30,490 225,989 -- 256,479
Redemption of common
stock................. (6,943,152) -- (34,716) (286,508) -- (321,224)
Net unrealized
appreciation on
securities available
for sale, net of
deferred income
taxes................. -- -- -- -- 33,163 33,163
Cash dividends declared
on common stock....... -- -- -- -- (163,981) (163,981)
Other.................. -- -- -- -- 1,691 1,691
----------- ------ -------- --------- ---------- ----------
BALANCE, DECEMBER 31,
1997................... 136,051,623 $ -- $680,258 $ 85,185 $1,472,194 $2,237,637
=========== ====== ======== ========= ========== ==========
- --------
* Other includes net unrealized appreciation (depreciation) on securities
available for sale, unvested restricted stock and a loan to the employee
stock ownership plan.
The accompanying notes are an integral part of these consolidated financial
statements.
47
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 359,942 $ 330,175 $ 227,268
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan and lease losses... 89,850 62,511 41,924
Depreciation of premises and
equipment............................ 57,662 45,259 42,099
Amortization of intangibles and
mortgage servicing rights............ 26,175 14,534 12,305
Accretion of negative goodwill........ (6,180) (6,238) (6,239)
Amortization of unearned stock
compensation......................... 1,227 2,450 3,128
Discount accretion and premium
amortization on securities, net...... (1,111) 4,826 (26,089)
Net increase in trading account
securities........................... (25,688) -- --
Loss (gain) on sales of securities,
net.................................. (2,276) (3,090) 18,589
Loss (gain) on sales of loans and
mortgage loan servicing rights,
net.................................. (15,876) (9,049) 1,619
Loss (gain) on disposals of premises
and equipment, net................... 30,642 178 3,971
Proceeds from sales of loans held for
sale................................. 1,552,732 1,348,118 789,164
Purchases of loans held for sale...... (734,727) (429,523) (311,059)
Origination of loans held for sale,
net of principal collected........... (986,823) (879,496) (600,676)
Decrease (increase) in:
Accrued interest receivable.......... 5,414 20,692 (26,682)
Other assets......................... (185,825) (111,400) 16,146
Increase (decrease) in:
Accrued interest payable............. 3,093 5,567 15,012
Accounts payable and other
liabilities......................... 93,635 (8,635) 88,413
Other, net............................ 470 1,821 321
----------- ----------- -----------
Net cash provided by operating
activities......................... 262,336 388,700 289,214
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................... 1,396,669 605,792 1,290,237
Proceeds from maturities of securities
available for sale.................... 1,338,002 2,669,532 1,711,859
Purchases of securities available for
sale.................................. (3,102,245) (2,498,976) (3,323,423)
Proceeds from sales of securities held
to maturity........................... -- -- 3,810
Proceeds from maturities of securities
held to maturity...................... 37,200 46,088 304,096
Purchases of securities held to
maturity.............................. (14,516) (2,228) (77,701)
Leases made to customers............... (74,420) (72,390) (18,091)
Principal collected on leases.......... 57,581 48,222 14,620
Loan originations, net of principal
collected............................. (1,122,249) (1,622,476) (717,639)
Purchases of loans..................... (205,232) (232,236) (189,997)
Net cash acquired in transactions
accounted for under the purchase
method................................ 95,205 1,887 --
Purchases and originations of mortgage
servicing rights...................... (39,093) (26,356) (18,082)
Proceeds from disposals of premises
and equipment......................... 14,433 8,764 18,114
Purchases of premises and equipment.... (146,116) (67,106) (62,318)
Proceeds from sales of foreclosed
property.............................. 15,917 16,156 14,213
Proceeds from sales of other real
estate held for development or sale... 7,955 8,127 1,728
Other, net............................. 1,531 (1,079) (8,696)
----------- ----------- -----------
Net cash used in investing
activities......................... (1,739,378) (1,118,279) (1,057,270)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............... 313,633 681,632 874,011
Net decrease (increase) in short-term
borrowed funds........................ 485,331 (345,025) (426,810)
Proceeds from long-term debt........... 5,193,130 1,586,766 2,945,754
Repayments of long-term debt........... (4,022,548) (919,661) (2,471,904)
Net proceeds from common stock
issued................................ 22,583 49,736 49,242
Redemption of common stock............. (321,224) (207,407) (47,311)
Preferred stock cancellations and
conversions........................... -- -- (2,371)
Cash dividends paid on common and
preferred stock....................... (151,329) (123,270) (107,869)
----------- ----------- -----------
Net cash provided by financing
activities......................... 1,519,576 722,771 812,742
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 42,534 (6,808) 44,686
Cash and Cash Equivalents at Beginning
of Year............................... 927,341 934,149 889,463
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 969,875 $ 927,341 $ 934,149
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest.............................. $ 1,043,047 $ 921,632 $ 935,366
Income taxes.......................... 137,195 160,307 141,236
Noncash financing and investing
activities:
Transfer of securities from held to
maturity to available for sale....... -- 36,646 1,763,513
Transfer of securities from available
for sale to held to maturity......... -- 240 --
Transfer of loans to foreclosed
property............................. 15,655 23,970 11,243
Transfer of fixed assets to other
real estate owned.................... 13,761 10,466 21,846
Common stock issued upon conversion
of debentures........................ -- -- 4,896
Restricted stock issued............... 74 88 --
Securitization of mortgage loans...... -- 817,268 354,882
The accompanying notes are an integral part of these consolidated financial
statements.
48
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BB&T Corporation ("BB&T" or "Parent Company"), formerly Southern National
Corporation, is a multi-bank holding company organized under the laws of North
Carolina and registered with the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended. BB&T changed its corporate name from Southern
National Corporation effective at the close of business on May 16, 1997.
Branch Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company
of South Carolina ("BB&T-SC"), Branch Banking and Trust Company of Virginia
("BB&T-VA"), Fidelity Federal Savings Bank ("Fidelity"), and Virginia First
Savings Bank ("Virginia First") (collectively, the "Banks"), Regional
Acceptance Corporation ("Regional Acceptance") and Craigie Incorporated
("Craigie") comprise the principal subsidiaries.
The accounting and reporting policies of BB&T Corporation and Subsidiaries
are in accordance with generally accepted accounting principles and conform to
general practices within the banking industry. The following is a summary of
the more significant policies.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of BB&T include the accounts of the
Parent Company and its subsidiaries. In consolidation, all significant
intercompany accounts and transactions have been eliminated. Prior period
financial statements have been restated to include the accounts of companies
acquired in material transactions accounted for as poolings of interests (See
Note B). Results of operations of companies acquired in transactions accounted
for as purchases are included from the dates of acquisition.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1997. The reclassifications have no effect on
either shareholders' equity or net income as previously reported.
Nature of Operations
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina and
Virginia primarily through its commercial banking subsidiaries and, to a
lesser extent, through its other subsidiaries. BB&T's subsidiaries provide a
full range of traditional commercial banking services and additional services
including investment brokerage, trust services, agency insurance, credit-
related insurance and leasing.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
bank balances, Federal funds sold and securities purchased under resale
agreements or similar arrangements. Generally, both cash and cash equivalents
are considered to have maturities of three months or less. Accordingly, the
carrying amount of such instruments is considered a reasonable estimate of
fair value.
49
Securities
BB&T classifies investment securities in one of three categories: held to
maturity, available for sale and trading. Debt securities acquired with both
the intent and ability to be held to maturity are classified as held to
maturity and reported at amortized cost. Gains or losses realized from the
sale of securities held to maturity, if any, are determined by specific
identification and are included in noninterest income.
Securities, which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity, net of deferred income tax. Gains or losses realized
from the sale of securities available for sale are determined by specific
identification and are included in noninterest income.
Trading account securities are selected according to fundamental and
technical analyses that identify potential market movements. Trading account
securities are positioned to take advantage of such movements and are reported
at fair value. Market adjustments, fees and gains or losses earned on trading
account securities are included in noninterest income. Interest income on
trading account securities is included in other interest income. Gains or
losses realized from the sale of trading securities are determined by specific
identification.
During 1996, BB&T transferred securities with an amortized cost of $36.6
million from the held-to-maturity portfolio to the available-for-sale
portfolio. These securities were previously classified as held-to-maturity by
entities acquired under the pooling-of-interests method of accounting. BB&T
transferred these amounts pursuant to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," to conform the combined investment portfolio to
BB&T's existing interest rate risk position.
During the fourth quarter of 1995, BB&T transferred $1.8 billion of
securities which were previously classified as held to maturity under SFAS No.
115 to the available-for-sale category. The Financial Accounting Standards
Board ("FASB") provided enterprises the opportunity to make a one-time
reassessment of the classification of all investment securities held at that
time, such that the reclassification of any security from the held-to-maturity
category would not call into question the enterprise's intent to hold other
debt securities to maturity in the future. Management anticipates that this
classification will allow more flexibility in the day-to-day management of the
overall portfolio than the prior classifications.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value on an
aggregate loan basis. Gains or losses realized on the sales of loans are
recognized at the time of sale and are determined by the difference between
the net sales proceeds and the carrying value of the loans sold, adjusted for
any servicing asset or liability. Any resulting deferred premium or discount
is amortized, as an adjustment of servicing income, over the estimated lives
of the loans using the level-yield method.
Loans and Lease Receivables
Loans receivable that management has the intent and ability to hold for the
foreseeable future are reported at their outstanding principal balances
adjusted for any deferred fees or costs and unamortized premiums or discounts.
The net amount of nonrefundable loan origination fees, including commitment
fees, and certain direct costs associated with the lending process are
deferred and amortized to interest income over the contractual lives of the
loans using methods which approximate level-yield, with adjustments for
prepayments as they occur. If the loan commitment expires unexercised, the
income is recognized upon expiration of the commitment. Discounts and premiums
are amortized to interest income over the estimated life of the loans using
methods which approximate level-yield.
50
Commercial loans and substantially all installment loans accrue interest on
the unpaid balance of the loans. Lease receivables consist primarily of direct
financing leases on rolling stock, equipment and real property. Lease
receivables are stated at the total amount of lease payments receivable plus
guaranteed residual values, less unearned income. Recognition of income over
the lives of the lease contracts approximates the level-yield method.
As of January 1, 1995, BB&T adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS
No. 114, as amended, requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral-dependent.
A loan is impaired when, based on current information and events, it is
probable that BB&T will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When the measure of the impaired loan
is less than the recorded investment in the loan, the impairment is recorded
through a valuation allowance. BB&T had previously measured the allowance for
credit losses using methods similar to those prescribed in SFAS No. 114. As a
result of adopting these statements, no additional allowance for loan losses
was required as of January 1, 1995.
BB&T's policy is to disclose as impaired loans all commercial loans, greater
than $250,000, that are on nonaccrual status. Substantially all other loans
made by BB&T are excluded from the scope of SFAS No. 114 as they are large
groups of smaller balance homogeneous loans (residential mortgage and consumer
installment) that are collectively evaluated for impairment.
Allowance for Loan and Lease Losses
The provision for loan and lease losses is the estimated amount required to
maintain the allowance for loan and lease losses at a level adequate to cover
estimated incurred losses related to loans and leases currently outstanding.
The primary factors considered in determining the allowance are the
distribution of loans by risk class, the amount of the allowance specifically
allocated to nonperforming loans and other problem loans, prior years' loan
loss experience, economic conditions in BB&T's market areas and the growth of
the credit portfolio. While management uses the best information available in
establishing the allowance for losses, future adjustments to the allowance may
be necessary if economic conditions differ substantially from the assumptions
used in making the valuations or if required by regulators based upon
information at the time of their examinations. Such adjustments to original
estimates, as necessary, are made in the period in which these factors and
other relevant considerations indicate that loss levels may vary from previous
estimates.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property. Foreclosed property consists of real estate
and other assets acquired through customers' loan defaults.
Commercial and unsecured consumer loans and leases are generally placed on
nonaccrual status when concern exists that principal or interest is not fully
collectible, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. Mortgage loans and most other consumer loans past
due 90 days or more may remain on accrual status if management determines that
concern over the collectability of principal and interest is not significant.
When loans are placed on nonaccrual status, interest receivable is reversed
against interest income in the current period. Interest payments received
thereafter are applied as a reduction to the remaining principal balance when
concern exists as to the ultimate collection of the principal. Loans and
leases are removed from nonaccrual status when they become current as to both
principal and interest and when concern no longer exists as to the
collectability of principal or interest.
Assets acquired as a result of foreclosure are valued at the lower of cost
or fair value, and carried thereafter at the lower of cost or fair value less
estimated costs to sell the asset. Cost is the sum of unpaid principal,
accrued
51
but unpaid interest and acquisition costs associated with the loan. Any excess
of unpaid principal over fair value at the time of foreclosure is charged to
the allowance for losses. Generally, such properties are appraised annually
and the carrying value, if greater than the fair value, less costs to sell, is
adjusted with a charge to income. Routine maintenance costs, declines in
market value and net losses on disposal are included in other noninterest
expense.
Premises and Equipment
Premises, equipment, capital leases and leasehold improvements are stated at
cost less accumulated depreciation or amortization. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
basis over the lesser of the lease terms or the estimated useful lives of the
improvements. Capitalized leases are amortized by the same methods as premises
and equipment over the estimated useful lives or the lease term, whichever is
lesser. Obligations under capital leases are amortized using the interest
method to allocate payments between principal reduction and interest expense.
Income Taxes
The operating results of BB&T and its subsidiaries are included in a
consolidated Federal income tax return. Each subsidiary pays its calculated
portion of Federal income taxes to BB&T, or receives payment from BB&T to the
extent that tax benefits are realized. Deferred income taxes have been
provided where different accounting methods have been used for reporting for
income tax purposes and for financial reporting purposes. Deferred tax assets
and liabilities are recognized based on future tax consequences of the
differences arising from their carrying values and respective tax bases. In
the event of changes in the tax laws, deferred tax assets and liabilities are
adjusted in the period of the enactment of those changes, with effects
included in the income tax provision.
The operating results of acquired institutions were included in their
respective income tax returns prior to consummation of the acquisitions.
Derivatives and Off-Balance Sheet Instruments
BB&T utilizes a variety of derivative financial instruments to manage
various financial risks. These instruments include financial forward and
futures contracts, options written and purchased, interest rate caps and
floors and interest rate swaps. Management accounts for these financial
instruments as hedges when the following conditions are met: (1) the specific
assets, liabilities, firm commitments or anticipated transactions (or an
identifiable group of essentially similar items) to be hedged expose BB&T to
interest rate risk or price risk; (2) the financial instrument reduces that
exposure; (3) the financial instrument is designated as a hedge at inception;
and (4) at the inception of the hedge and throughout the hedge period, there
is a high correlation of changes in the fair value or the net interest income
associated with the financial instrument and the hedged items.
The net interest payable or receivable on interest rate swaps, caps and
floors that are designated as hedges is accrued and recognized as an
adjustment to the interest income or expense of the related asset or
liability. For interest rate forwards, futures and options qualifying as a
hedge, gains and losses are deferred and are recognized in income as an
adjustment of yield. Gains and losses from early terminations of derivatives
are deferred and amortized as yield adjustments over the shorter of the
remaining term of the hedged asset or liability or the remaining term of the
derivative instrument. Upon disposition or settlement of the asset or
liability being hedged, deferral accounting is discontinued and any gains or
losses are recognized in income. Derivative financial instruments that fail to
qualify as a hedge are carried at fair value with gains and losses recognized
in current earnings.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. Fees received are deferred and recognized in noninterest income upon
exercise or expiration. Written options are carried at estimated fair value.
Unrealized and realized gains and losses on written call options are included
with securities gains and losses.
52
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
warehouse and pipeline against increasing interest rates. Written call options
are used in tandem with purchased put options to create a net purchased put
option that reduces the cost of the hedge. Net unrealized gains and losses on
purchased put options and net purchased put options are carried with loans
held for sale at the lower of cost or market on an aggregate basis. Realized
gains and losses on purchased put options and net purchased put options are
included in mortgage banking income.
Per Share Data
Effective December 31, 1997, BB&T adopted the provisions of SFAS No. 128,
"Earnings Per Share." This statement establishes standards for computing and
presenting earnings per share ("EPS") and simplifies the standards for
computation previously found in Accounting Principles Board ("APB") Opinion
No. 15, "Earnings Per Share," making them more comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS (which
replaces the former fully diluted EPS) for all entities with complex capital
structures. The EPS information reported in this Annual Report on Form 10-K
reflects the implementation of SFAS No. 128. Prior periods have been restated
to include the provisions of the statement.
Basic net income per common share has been computed by dividing net income
applicable to common shares by the weighted average number of shares of common
stock outstanding during the years presented.
Diluted net income per common share has been computed by dividing net
income, as adjusted for the interest expense related to convertible debt in
prior years, by the weighted average number of shares of common stock, common
stock equivalents and other potentially dilutive securities outstanding during
the years. Other potentially dilutive securities include the number of shares
issuable upon conversion of the preferred stock. Restricted stock grants are
considered as issued for purposes of calculating net income per share.
Weighted average numbers of shares were as follows:
1997 1996 1995
----------- ----------- -----------
Basic.................................... 135,742,174 136,024,587 135,911,150
Diluted.................................. 138,220,057 138,955,834 141,914,467
Intangible Assets
BB&T's intangible assets consist of the cost in excess of the fair value of
net assets acquired in transactions accounted for as purchases (goodwill),
premiums paid on acquisitions of deposits (core deposit intangibles) and other
identifiable intangible assets. Such assets are included in other assets in
the "Consolidated Balance Sheets." Intangible assets are being amortized on
straight-line or accelerated bases over periods ranging from 5 to 25 years. At
December 31, 1997, BB&T had $199.6 million recorded as goodwill and $6.8
million as core deposit and other intangibles, net of amortization. Negative
goodwill is created when the fair value of the net assets purchased exceeds
the purchase price. Such balances are included in other liabilities in the
"Consolidated Balance Sheets" and are being amortized over periods ranging
from 10 to 15 years. At December 31, 1997, BB&T had negative goodwill totaling
$33.0 million, net of amortization.
Mortgage Servicing Rights
Amounts paid to acquire the right to service certain mortgage loans are
capitalized and amortized over the estimated lives of the loans to which they
relate. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." This statement was superceded by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which BB&T adopted on January 1, 1997. SFAS
No. 122,
53
as superceded by SFAS No. 125, requires that mortgage banking enterprises
recognize, as separate assets, rights to service mortgage loans for others,
however those servicing rights are acquired. The statement further requires
mortgage banking enterprises to assess their capitalized mortgage servicing
rights for impairment based on the fair value of those rights. BB&T elected,
in the third quarter of 1995, to adopt this statement effective as of January
1, 1995. The impact of the adoption of this statement resulted in additional
mortgage banking income of $7.6 million, before taxes, or $.03 per diluted
share, after taxes, during 1995. SFAS No. 125 prohibits retroactive
application to prior years. At December 31, 1997, BB&T had capitalized
mortgage servicing rights totaling $68.8 million.
Changes in Accounting Principles and Effects of New Accounting Pronouncements
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and to be disposed
of. The statement requires such assets to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Any resulting impairment loss is required to be
reported in the period in which the recognition criteria are first applied and
met. BB&T adopted the provisions of the statement on January 1, 1996. The
implementation did not have a material impact on the consolidated financial
position or consolidated results of operations.
In October of 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which establishes financial accounting and reporting
standards for stock-based compensation plans. The statement defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages the adoption of that method of accounting.
However, the statement also allows entities to continue to account for such
plans under Accounting Principles Board Opinion No. 25. Entities electing to
remain with the accounting in Opinion No. 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in the statement had been applied. BB&T adopted the
statement effective January 1, 1996 and elected to continue to account for
stock-based compensation plans under the provisions of Opinion No. 25.
Therefore, the implementation of the statement did not have an impact on
BB&T's consolidated financial position or consolidated results of operations.
The required pro forma disclosures relating to SFAS No. 123 are presented in
Note J.
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for such transactions based on
consistent application of a financial components approach. This approach
recognizes the financial and servicing assets an entity controls and the
liabilities it has incurred, as well as derecognizes financial assets when
control has been surrendered and liabilities when they are extinguished. The
statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of
transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." This
statement allows the implementation of certain provisions of SFAS No. 125 to
be deferred for one year. BB&T adopted SFAS No. 125, as amended by SFAS No.
127, effective January 1, 1997. The adoption of these statements did not have
a material impact on BB&T's consolidated financial position or consolidated
results of operations.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share," as
discussed above. The statement was effective for financial statements issued
for periods ending after December 15, 1997, including interim periods, and
requires restatement of all prior periods presented. Accordingly, BB&T adopted
the provisions of the statement effective December 31, 1997, including
retroactive restatement of prior periods. The implementation of the statement
did not have a material impact on BB&T's consolidated financial position or
consolidated results of operations.
54
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing and
amending existing standards. The statement is effective for financial
statements for periods ending after December 15, 1997. Management has
determined that BB&T is currently in compliance with the disclosure
requirements of SFAS No. 129, and, therefore, the implementation of the
statement will not affect the capital structure disclosures made by BB&T.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying
comprehensive income (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. Comprehensive income is net income plus
other comprehensive income, or the change in equity (net assets) of a company
during a period from transactions and other events. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997, including interim periods,
and requires restatement of all prior periods presented. Management does not
believe that the implementation of the statement will have a material impact
on the consolidated financial position or consolidated results of operations
of BB&T, but will require additional disclosures to be made. Currently, BB&T's
only item considered other comprehensive income is unrealized gains and losses
on available-for-sale securities, net of reclassification adjustments and
taxes. At December 31, 1997, this balance totaled $44.9 million.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
way that business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is effective for
periods beginning after December 15, 1997, and requires restatement of all
prior periods presented. Management does not believe that the implementation
of the statement will have a material impact on the consolidated financial
position or consolidated results of operations of BB&T, but will require
substantial additional disclosures to be made.
Supplemental Disclosures of Cash Flow Information
As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired
assets and assumed liabilities in transactions accounted for under the
purchase method of accounting. The fair values of these assets acquired and
liabilities assumed, at acquisition, were as follows:
1997 1996 1995
--------- -------- -----
(DOLLARS IN THOUSANDS)
Fair value of net assets acquired............... $ 129,719 $ 1,394 $ --
Purchase price.................................. (276,483) (22,256) --
--------- -------- -----
Excess of purchase price over net assets
acquired....................................... $(146,764) $(20,862) $ --
========= ======== =====
During the first quarter of 1996, BB&T redeemed all outstanding shares of
Convertible Preferred Stock. This transaction, a noncash financing activity,
resulted in the conversion of 733,869 shares of preferred stock into 4,334,692
shares of common stock.
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
NOTE B. ACQUISITIONS AND MERGERS
Completed Mergers and Acquisitions
On June 30, 1996, BB&T completed the purchase of certain fixed assets and
expiration rights from the James R. Lingle Agency of Florence, South Carolina.
In conjunction with the purchase, BB&T recorded expiration rights totaling
$1.7 million which are being amortized over 15 years.
55
On August 28, 1996, BB&T became a majority shareholder of AutoBase
Information Systems, Inc., ("AutoBase") through the purchase of 51% of
AutoBase's outstanding common stock. In conjunction with this investment, BB&T
recorded $1.2 million in goodwill which is being amortized over 15 years.
During November 1996, BB&T completed the acquisitions of three insurance
agencies in South Carolina. On November 7, 1996, BB&T completed the
acquisition of the William Goldsmith Agency Inc. ("Goldsmith") of Greenville,
South Carolina through the issuance of 70,207 shares of common stock. On
November 13, 1996, BB&T completed the acquisition of the C. Dan Joyner
Insurance Agency ("Joyner") based in Greenville, South Carolina through the
issuance of 48,120 shares of common stock. Boyle-Vaughan Associates, Inc.
("Boyle-Vaughan") based in Columbia, South Carolina, was acquired on November
22, 1996 through the issuance of 492,063 shares of common stock. In
conjunction with the purchase of these agencies, BB&T recorded $17.9 million
in goodwill, which is being amortized over 15 years.
On March 1, 1997, BB&T completed its acquisition of Fidelity Financial
Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction
accounted for as a purchase. BB&T issued 1.6 million shares for all of the
shares of Fidelity's common stock outstanding. In conjunction with the
acquisition, BB&T recorded $37.9 million in goodwill, which is being amortized
using the straight-line method over 15 years.
On May 20, 1997, BB&T completed its acquisition of Phillips Factors
Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation
and Phillips Acceptance Corporation, all of High Point, North Carolina.
Phillips purchases and manages receivables in the temporary staffing industry
nationwide. It also provides payroll processing services to that industry.
Phillips also buys and manages account receivables primarily in the furniture,
textiles and home furnishings-related industries. The acquisition of Phillips
was accounted for as a purchase. In conjunction with the acquisition, BB&T
recorded $11.1 million of goodwill which is being amortized using the
straight-line method over 15 years.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp.
(collectively, "Refloat"), a financial company that specializes in loans to
small commercial lawn care businesses across the country. The acquisition,
which was completed through the issuance of 375,000 shares of common stock,
was accounted for as a purchase. In conjunction with the acquisition of
Refloat, BB&T recorded $3.0 million of goodwill which is being amortized using
the straight-line method over 15 years.
On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie
specializes in the origination, trading and distribution of fixed-income
securities and equity products in both the public and private capital markets.
Craigie also has a public finance department that provides investment banking
services, financial advisory services and municipal bond financing to a
variety of regional tax-exempt issuers. The acquisition, which was accounted
for as a purchase, was accomplished through the issuance of approximately
463,000 shares of BB&T's common stock. In conjunction with the acquisition,
BB&T recorded $6.9 million of goodwill, which is being amortized using the
straight-line method over a period of 25 years.
On December 1, 1997, BB&T completed its acquisition of Virginia First
Financial Corporation of Petersburg, Virginia ("VFFC"), a financial
institution with $822.9 million in assets at the time of purchase. The merger,
which was accounted for under the purchase method of accounting, was
consummated through the issuance of 1.9 million shares of BB&T's common stock
and the payment of $44.8 million. In conjunction with the acquisition, BB&T
recorded $89.5 million in goodwill, which is being amortized using the
straight-line method over a period of 15 years.
56
The above-discussed acquisitions were accounted for under the purchase
method of accounting, and, therefore, the financial information contained
herein includes data relevant to the acquirees since the date of acquisition.
The pro forma effects of the material 1997 purchase transactions, as if they
had been acquired as of the beginning of the years presented, are presented in
the accompanying table:
FOR THE YEARS ENDED
---------------------
1997 1996
---------- ----------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
Total revenues......................................... $1,536,925 $1,436,786
========== ==========
Net income............................................. $ 354,437 $ 337,026
========== ==========
Basic EPS.............................................. $ 2.61 $ 2.47
========== ==========
Diluted EPS............................................ $ 2.56 $ 2.43
========== ==========
On February 28, 1995, BB&T (formerly Southern National Corporation) and BB&T
Financial Corporation completed a merger accounted for as a pooling of
interests. BB&T Financial Corporation's shareholders received 57.9 million
shares of the common stock of the resulting company for all of the shares of
BB&T Financial Corporation stock held. On January 10, 1995, BB&T acquired
Commerce Bank (subsequently, BB&T-VA) through the issuance of 5.2 million
shares of BB&T common stock for all of the outstanding stock of Commerce Bank.
On April 28, 1995, BB&T issued 75,273 shares of common stock to complete an
acquisition of United Agencies, Inc., a general insurance agency located in
Wilmington, North Carolina. The transaction was accounted for under the
pooling-of-interests method of accounting.
Effective January 25, 1996, BB&T consummated a merger with Seaboard Savings
Bank, Inc. ("Seaboard"), headquartered in Plymouth, North Carolina. BB&T
issued 475,158 shares of common stock for all of the outstanding shares of
Seaboard common stock. The transaction was accounted for as a pooling of
interests.
Effective March 29, 1996, BB&T consummated a merger with Triad Bank
("Triad") headquartered in Greensboro, North Carolina. BB&T issued 1.8 million
shares of common stock for all of the outstanding shares of Triad common
stock. The transaction was accounted for as a pooling of interests.
On August 30, 1996, BB&T issued 42,135 shares of common stock to complete an
acquisition of Tomlinson Insurers, Inc., a general insurance agency in
Fayetteville, North Carolina. The transaction was accounted for under the
pooling-of-interests method of accounting.
On September 1, 1996, BB&T completed the acquisition of Regional Acceptance
Corporation of Greenville, N.C. ("Regional Acceptance") in a transaction
accounted for as a pooling of interests. BB&T issued 5.85 million shares in
exchange for all of the outstanding stock of Regional Acceptance.
On July 1, 1997, BB&T completed its acquisition of United Carolina
Bancshares Corporation ("UCB") of Whiteville, North Carolina, in a stock
transaction accounted for as a pooling of interests. UCB shareholders received
27.7 million shares of BB&T common stock in exchange for all of the shares of
UCB common stock held.
On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life")
of Norfolk, Virginia. The transaction was accounted for as a pooling of
interests. In conjunction with the merger, BB&T issued 9.8 million shares of
common stock in exchange for all of the outstanding shares of Life common
stock.
57
Pending Mergers and Acquisitions
On December 16, 1997, BB&T announced plans to acquire Franklin
Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction to
be accounted for under the pooling-of-interests method of accounting. Franklin
shareholders will receive between .35 and .3743 shares of BB&T common stock in
exchange for each share of Franklin stock held.
On February 25, 1998, BB&T announced plans to acquire Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland in a stock
transaction to be accounted for as a purchase. Maryland Federal shareholders
will receive no less than .5975 and no greater than .6102 shares of BB&T
common stock in exchange for each share of Maryland Federal stock held.
NOTE C. SECURITIES
The amortized costs and approximate fair values of securities held to
maturity and available for sale were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------- ---------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- FAIR AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- -------- ------------------ ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations........... $ 14,952 $ -- $ 30 $ 14,922 $ 6,283 $ -- $ 4 $ 6,279
States and political
subdivisions.......... 132,847 3,884 72 136,659 164,525 5,121 181 169,465
---------- -------- ------- ---------- ---------- -------- -------- ----------
Total securities held
to maturity........... 147,799 3,884 102 151,581 170,808 5,121 185 175,744
---------- -------- ------- ---------- ---------- -------- -------- ----------
Securities available for
sale:
U.S. Treasury,
government and agency
obligations........... 4,137,267 32,034 5,310 4,163,991 3,949,039 17,393 12,393 3,954,039
States and political
subdivisions.......... 36,785 387 31 37,141 23,985 168 176 23,977
Mortgage-backed
securities............ 1,821,378 36,584 2,207 1,855,755 1,735,797 29,440 14,212 1,751,025
Equity and other
securities............ 412,047 12,583 2 424,628 285,180 2 2 285,180
---------- -------- ------- ---------- ---------- -------- -------- ----------
Total securities
available for sale.... 6,407,477 81,588 7,550 6,481,515 5,994,001 47,003 26,783 6,014,221
---------- -------- ------- ---------- ---------- -------- -------- ----------
Total securities....... $6,555,276 $ 85,472 $ 7,652 $6,633,096 $6,164,809 $ 52,124 $ 26,968 $6,189,965
========== ======== ======= ========== ========== ======== ======== ==========
Securities with a book value of approximately $3.2 billion and $3.4 billion
at December 31, 1997 and 1996, respectively, were pledged to secure municipal
deposits, securities sold under agreements to repurchase, Federal Reserve
discount window borrowings and for other purposes as required by law.
At December 31, 1997 and 1996, there was no concentration of investments in
obligations of states and political subdivisions that were secured by or
payable from the same taxing authority or revenue source and that exceeded ten
percent of shareholders' equity.
Trading securities totaling $67.9 million are excluded from the accompanying
tables. These securities are reported at fair value with net unrealized gains
of $.7 million included in earnings during 1997.
Proceeds from sales of securities during 1997, 1996 and 1995 were $1.4
billion, $605.8 million and $1.3 billion, respectively. Gross gains of $3.6
million, $5.4 million and $2.7 million and gross losses of $1.3 million, $2.4
million and $21.3 million were realized on those sales in 1997, 1996 and 1995,
respectively.
58
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1997, by contractual maturity, are shown in the accompanying
table. The expected life of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
the underlying mortgage loans with or without call or prepayment penalties.
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings
based on the weighted average contractual maturities of underlying collateral.
DECEMBER 31, 1997
-----------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Debt Securities
Due in one year or less.......... $ 38,677 $ 38,737 $ 740,473 $ 751,154
Due after one year through five
years........................... 95,435 98,367 3,562,085 3,577,074
Due after five years through ten
years........................... 11,494 12,077 212,489 213,081
Due after ten years.............. 2,193 2,400 1,501,308 1,536,519
-------- -------- ---------- ----------
Total debt securities.......... $147,799 $151,581 $6,016,355 $6,077,828
======== ======== ========== ==========
NOTE D. LOANS AND LEASES
Loans and leases were composed of the following:
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial and agricultural............ $ 3,017,729 $ 2,715,363
Real estate--construction and land development.... 2,102,234 1,525,964
Real estate--mortgage............................. 11,415,319 10,110,927
Consumer.......................................... 2,688,304 2,748,572
----------- -----------
Loans held for investment....................... 19,223,586 17,100,826
----------- -----------
Leases............................................ 788,462 576,991
----------- -----------
Total loans and leases........................ 20,012,048 17,677,817
Less: unearned income....................... 231,234 159,593
----------- -----------
Loans and leases, net of unearned income...... $19,780,814 $17,518,224
=========== ===========
The net investment in direct financing leases was $616.3 million and $470.5
million at December 31, 1997 and 1996, respectively. BB&T had loans held for
sale at December 31, 1997 and 1996 totaling $509.1 million and $228.3 million,
respectively.
BB&T's only significant concentration of credit at December 31, 1997
occurred in loans secured by real estate, which totaled $14.2 billion.
However, this amount was not concentrated in any specific market or geographic
area other than the Banks' primary markets.
59
The following table sets forth certain information regarding BB&T's impaired
loans as defined under SFAS No. 114.
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Total recorded investment--impaired loans.......... $ 29,494 $ 18,479
----------- -----------
Total recorded investment with related valuation
allowance......................................... 29,494 17,401
Valuation allowance assigned to impaired loans..... 3,086 2,530
----------- -----------
Net carrying value--impaired loans............... $ 26,408 $ 14,871
=========== ===========
Average balance of impaired loans.................. $ 20,599 $ 22,648
=========== ===========
Cash basis interest income recognized on impaired
loans............................................. $ -- $ 48
=========== ===========
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded
$60,000 at any time during 1997. All amounts shown represent loans made by
BB&T's subsidiary banks in the ordinary course of business at the Banks'
normal credit terms, including interest rate and collateralization prevailing
at the time for comparable transactions with other persons.
(DOLLARS IN THOUSANDS)
Balance, December 31, 1996............................ $174,668
Additions........................................... 32,421
Repayments.......................................... 33,587
--------
Balance, December 31, 1997............................ $173,502
========
NOTE E. ALLOWANCE FOR LOAN AND LEASE LOSSES
An analysis of the allowance for loan and lease losses is presented in the
following table:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance, January 1..................... $ 230,070 $ 219,052 $ 215,443
Provision for losses charged to
expense............................... 89,850 62,511 41,924
Allowances of purchased companies...... 17,513 -- --
---------- ---------- ----------
337,433 281,563 257,367
---------- ---------- ----------
Total charge-offs...................... (90,637) (69,073) (53,064)
Recoveries............................. 17,147 17,580 14,749
---------- ---------- ----------
Net charge-offs...................... (73,490) (51,493) (38,315)
---------- ---------- ----------
Balance, December 31................... $ 263,943 $ 230,070 $ 219,052
========== ========== ==========
At December 31, 1997, 1996 and 1995, loans not currently accruing interest
totaled $88.4 million, $62.2 million and $68.6 million, respectively. Loans 90
days or more past due and still accruing interest totaled $47.0 million, $41.7
million and $34.6 million, at December 31, 1997, 1996 and 1995, respectively.
The gross interest income that would have been earned during 1997 if the
outstanding nonaccrual loans and leases had been current in accordance with
the original terms and had been outstanding throughout the period (or since
origination, if held for part of the period) was approximately $6.7 million.
Foreclosed property was $34.3 million, $27.9 million and $18.9 million at
December 31, 1997, 1996 and 1995, respectively.
60
NOTE F. PREMISES AND EQUIPMENT
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Land and land improvements.......................... $ 70,982 $ 63,041
Buildings and building improvements................. 299,368 284,377
Furniture and equipment............................. 336,745 277,217
Capitalized leases on premises and equipment........ 3,647 3,804
----------- -----------
710,742 628,439
Less--accumulated depreciation and amortization..... 292,845 253,485
----------- -----------
Net premises and equipment........................ $ 417,897 $ 374,954
=========== ===========
Depreciation expense, which is included in occupancy and equipment expense,
was $57.7 million, $45.3 million and $42.1 million in 1997, 1996 and 1995,
respectively.
BB&T has noncancellable leases covering certain premises and equipment.
Total rent expense applicable to operating leases was $44.8 million, $28.4
million and $33.1 million for 1997, 1996 and 1995, respectively. Future
minimum lease payments for operating and capitalized leases for years
subsequent to 1997 are as follows:
LEASES
-------------------------
OPERATING CAPITALIZED
------------ ------------
(DOLLARS IN THOUSANDS)
Years ended December 31:
1998........................................... $ 21,518 $ 450
1999........................................... 20,588 450
2000........................................... 20,071 450
2001........................................... 19,159 450
2002........................................... 16,599 450
2003 and years later........................... 82,272 4,547
------------ ----------
Total minimum lease payments..................... $ 180,207 6,797
============
Less--amount representing interest............... 3,506
----------
Present value of net minimum payments on
capitalized leases (Note I)..................... $ 3,291
==========
NOTE G. LOAN SERVICING
The following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization and adjustments necessary to present the balances at
the lower of cost or estimated fair value, which are included in other assets
in the "Consolidated Balance Sheets:"
CAPITALIZED MORTGAGE
SERVICING RIGHTS
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Balance, January 1,................................ $ 41,891 $ 21,948
Amount capitalized............................... 39,093 26,356
Amortization expense............................. (9,561) (6,197)
Change in valuation allowance.................... (2,643) (216)
----------- -----------
Balance, December 31,.............................. $ 68,780 $ 41,891
=========== ===========
Capitalized mortgage servicing rights are being amortized on a disaggregated
loan basis using an accelerated method over the estimated life of the
servicing income. The servicing rights portfolio is analyzed each quarter to
identify possible impairment using a disaggregated discounted cash flow
methodology that is stratified by
61
predominant risk characteristics. These characteristics include stratification
based on interest rates in intervals of 150 basis points, type of loan and
maturity of loan. Following is an analysis of the aggregate changes in the
valuation allowances for mortgage servicing rights in 1997 and 1996:
VALUATION ALLOWANCE
FOR MORTGAGE
SERVICING RIGHTS
----------------------
(DOLLARS IN THOUSANDS)
Balance, January 1, 1996.............................. $ 499
Additions........................................... 1,184
Reductions.......................................... (968)
------
Balance, December 31, 1996............................ 715
------
Additions........................................... 3,257
Reductions.......................................... (614)
------
Balance, December 31, 1997............................ $3,358
======
Mortgage loans serviced for others are not included in the accompanying
"Consolidated Balance Sheets." The unpaid principal balances of mortgage loans
serviced for others were $8.1 billion and $7.5 billion at December 31, 1997
and 1996, respectively.
NOTE H. SHORT-TERM BORROWED FUNDS
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Federal funds purchased............................. $ 898,160 $ 729,995
Term Federal funds purchased........................ -- 50,000
Securities sold under agreements to repurchase...... 997,513 680,315
Master notes........................................ 638,325 566,225
U.S. Treasury tax and loan deposit notes payable.... 105,851 101,681
Short-term Federal Home Loan Bank advances.......... 155,810 150,000
Short-term Bank Notes............................... 208,079 --
Other short-term borrowed funds..................... 11,439 2,608
----------- -----------
Total short-term borrowed funds................... $3,015,177 $2,280,824
=========== ===========
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Term Federal funds purchased are identical to Federal
funds; however, maturities vary and are greater than one day. Securities sold
under agreements to repurchase are borrowings collateralized by securities of
the U.S. Government or its agencies and have maturities ranging from one to
ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon
demand to the U.S. Treasury. Master notes are unsecured, non-negotiable
obligations of BB&T (variable rate commercial paper). Short-term Federal Home
Loan Bank advances are typically unsecured and generally mature daily.
62
NOTE I. LONG-TERM DEBT
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Capitalized leases, varying maturities to 2028 with
rates from 8.11% to 12.65%. Balance represents the
unamortized amounts due on leases of various
facilities............................................ $ 3,291 $ 3,561
Medium-term bank notes, unsecured, varying maturities
to 2001 with rates from 5.69% to 6.20%................ 1,024,833 424,794
Advances from Federal Home Loan Bank, varying
maturities to 2017 with rates from 1.00% to 8.95%..... 1,750,202 1,375,971
Subordinated Notes, unsecured, dated May 21, 1996 and
June 3, 1997, maturing May 23, 2003 and June 15, 2007,
with interest rates of 7.05% and 7.25%,
respectively*......................................... 495,589 248,019
CMO Bonds, secured by investments, dated 1985, callable
July 1, 2001, with an interest rate of 11.25%......... 8,112 --
Other mortgage indebtedness............................ 931 1,695
----------- -----------
Total long-term debt................................. $3,282,958 $2,054,040
=========== ===========
- --------
Excluding the capitalized leases set forth in Note F, future debt maturities
total $3.3 billion and are $398.6 million, $1.1 billion, $294.5 million,
$404.4 million, and $225.0 million for the next five years. The maturities for
2003 and later years are $850.8 million.
* Subordinated notes qualify under the risk-based capital guidelines as Tier 2
supplementary capital.
NOTE J. SHAREHOLDERS' EQUITY
The authorized capital stock of BB&T consists of 300,000,000 shares of
common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par
value. At December 31, 1997, 136,051,623 shares of common stock and no shares
of preferred stock were issued and outstanding.
Stock Option Plans
At December 31, 1996, BB&T had the following stock-based compensation plans:
the 1994 and the 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the
Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan
("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors'
Plan"), which are described below. BB&T accounts for these plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined based on the fair value at
the grant dates for awards under those plans granted after December 31, 1994,
consistent with the method described by SFAS No. 123, BB&T's pro forma net
income and pro forma earnings per share would have been as follows:
FOR THE YEARS ENDED
--------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income applicable to common shares:
As reported........................................ $359,942 $329,565 $222,189
Pro Forma.......................................... 352,390 327,135 221,853
Basic EPS:
As reported........................................ 2.65 2.42 1.63
Pro Forma.......................................... 2.60 2.40 1.63
Diluted EPS:
As reported........................................ 2.60 2.38 1.60
Pro Forma.......................................... 2.55 2.36 1.60
63
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995; therefore, the weighted average fair value
of options granted prior to that date has not been calculated. The fair value
of each option grant was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used for grants in 1997, 1996 and 1995, respectively: dividend yield of 3.0%
in 1997 and 3.5% in 1996 and 1995; expected volatility of 20% for all years;
risk free interest rates of 6.2%, 6.4% and 5.7% for 1997, 1996 and 1995,
respectively; and expected lives of 6.1 years, 6.5 years and 6.0 years for
1997, 1996 and 1995, respectively.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
In April 1994 and May 1995, the shareholders approved the Omnibus Plans
which cover the award of incentive stock options, non-qualified stock options,
shares of restricted stock, performance shares and stock appreciation rights.
In April, 1996, the shareholders approved an amendment to the 1995 Omnibus
Plan that increased the maximum number of shares issuable under the terms of
the plan to 6,000,000 shares. The combined shares issuable under both Omnibus
Plans is 10,000,000. The Omnibus Plans are intended to allow BB&T to recruit
and retain employees with ability and initiative and to associate the
employees' interests with those of BB&T and its shareholders. At December 31,
1997, 2,599,270 incentive stock options at prices ranging from $9.4828 to
$40.3750 and 1,889,770 non-qualified stock options at prices ranging from $.01
to $38.99 were outstanding. The stock options generally vest over 3 years and
have a 10 year term.
The ISOP and the NQSOP were established to retain key officers and key
management employees and to offer them the incentive to use their best efforts
on behalf of BB&T. The plans, which expire on December 19, 2000, further
provide for up to 1,101,000 shares of common stock to be reserved for the
granting of options, which have a four year vesting schedule and must be
exercised within ten years from the date granted. Incentive stock options
granted must have an exercise price equal to at least 100% of the fair market
value of common stock on the date granted, and the non-qualified stock options
must have an exercise price equal to at least 85% of the fair market value on
the date granted. At December 31, 1997, options to purchase 258,167 shares of
common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant
to the NQSOP. At December 31, 1997, options to purchase 94,174 shares of
common stock at an exercise price of $19.777 were outstanding pursuant to the
ISOP.
The Directors' Plan is intended to provide incentives to non-employee
directors to remain on the Board of Directors and share in the profitability
of BB&T. The plan creates a deferred compensation system for participating
non-employee directors. Each non-employee director may elect to defer 0%, 50%
or 100% of the annual retainer fee for each calendar year and apply that
percentage toward the grant of options to purchase BB&T common stock. Such
elections are required to be in writing and are irrevocable for each calendar
year. The exercise price at which shares of BB&T common stock may be purchased
shall be equal to 75% of the market value of the common stock as of the date
of grant. Options are vested in six months and may be exercised anytime
thereafter until the expiration date, which is 10 years from the date of
grant. The Directors' Plan provides for the reservation of up to 900,000
shares of BB&T common stock. At December 31, 1997, options to purchase 368,613
shares of common stock at prices ranging from $12.7155 to $45.2047 were
outstanding pursuant to the Directors' Plan.
BB&T also has options outstanding from companies acquired in prior years.
These options, which have not been included in the plans described above,
totaled 244,281 as of December 31, 1997, with option prices ranging from
$2.6667 to $23.7069.
64
A summary of the status of the Company's stock option plans at December 31,
1997, 1996 and 1995 and changes during the years then ended is presented
below:
1997 1996 1995
--------------------- -------------------- --------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- --------- --------- --------- ---------
Outstanding at beginning
of year................ 5,697,319 $18.41 6,255,396 $17.58 5,527,583 $14.95
Granted............... 1,012,851 37.48 107,996 25.34 1,379,192 25.24
Exercised............. (1,189,196) 15.29 (615,452) 11.43 (608,181) 10.88
Forfeited or Expired.. (66,699) 27.46 (50,621) 15.82 (43,198) 19.24
---------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 5,454,275 $22.52 5,697,319 $18.41 6,255,396 $17.58
========== ====== ========= ====== ========= ======
Options exercisable at
year-end............... 4,547,860 $19.24 4,570,593 $16.98 4,319,304 $15.33
The weighted average fair value of options granted was $9.33, $6.59 and
$5.05 per option at December 31, 1997, 1996 and 1995, respectively.
The following table summarizes information about the options outstanding at
December 31, 1997:
WEIGHTED-
AVERAGE AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- --------- ----------- ---------
$0.01............... 998 5.0 yrs $ 0.01 998 $ 0.01
$2.67 to $3.67...... 13,571 6.1 2.88 13,571 2.88
$4.92 to $7.03...... 23,343 3.1 6.36 23,343 6.36
$7.45 to $10.81..... 275,346 3.3 9.29 275,346 9.29
$11.72 to $17.50.... 1,518,899 3.9 14.50 1,518,899 14.50
$18.13 to $26.75.... 2,670,869 6.9 22.75 2,640,146 22.80
$27.88 to $40.38.... 936,775 9.1 39.12 75,557 33.49
$45.20.............. 14,474 10.0 45.20 -- --
--------- ---- ------ --------- ------
5,454,275 6.3 yrs $22.52 4,547,860 $19.24
========= ==== ====== ========= ======
Shareholder Rights Plan
On January 17, 1997, pursuant to the Rights Agreement approved by the Board
of Directors, BB&T distributed to shareholders one preferred stock purchase
right for each share of BB&T's common stock then outstanding. Subsequent to
this date, all shares issued are accompanied by a stock purchase right.
Initially, the rights, which expire in 10 years, are not exercisable and are
not transferable apart from the common stock. The rights will become
exercisable only if a person or group acquires 20% or more of BB&T's common
stock, or BB&T's Board of Directors determines, pursuant to the terms of the
Rights Agreement, that any person or group that has acquired 10% or more of
BB&T's common stock is an "Adverse Person." Each right would then enable the
holder to purchase 1/100th of a share of a new series of BB&T preferred stock
at an initial exercise price of $145.00. The Board of Directors will be
entitled to redeem the rights at $.01 per right under certain circumstances
specified in the Rights Agreement.
Under the terms of the Rights Agreement, if any person or group becomes the
beneficial owner of 25% or more of BB&T's common stock, with certain
exceptions, or if the Board of Directors determines that any 10% or more
stockholder is an "Adverse Person," each right will entitle its holder (other
than the person triggering exercisability of the rights) to purchase, at the
right's then-current exercise price, shares of BB&T's common
65
stock having a value of twice the right's exercise price. In addition, if
after any person or group has become a 20% or more stockholder, BB&T is
involved in a merger or other business combination transaction with another
person in which its common stock is changed or converted, or sells 50% or more
of its assets or earning power to another person, each right will entitle its
holder to purchase, at the right's then-current exercise price, shares of
common stock of such other person having a value of twice the right's exercise
price.
NOTE K. INCOME TAXES
The provision for income taxes was composed of the following:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current expense:
Federal.................................... $ 193,669 $ 151,713 $ 125,190
State...................................... 7,991 4,372 6,535
--------- --------- ---------
201,660 156,085 131,725
Deferred expense (benefit)................... (14,163) 3,847 (18,607)
--------- --------- ---------
Provision for income taxes................... $ 187,497 $ 159,932 $ 113,118
========= ========= =========
The reasons for the difference between the provision for income taxes and
the amount computed by applying the statutory Federal income tax rate to
income before income taxes were as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Federal income taxes at statutory rates of
35%.......................................... $191,604 $171,538 $119,135
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense...................................... (9,841) (8,692) (8,263)
State income taxes, net of Federal tax
benefit...................................... 4,221 3,217 3,446
Other, net.................................... 1,513 (6,131) (1,200)
-------- -------- --------
Provision for income taxes.................... $187,497 $159,932 $113,118
======== ======== ========
Effective income tax rate..................... 34.2% 32.6% 33.2%
======== ======== ========
66
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Balance Sheets" were:
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Allowance for loan and lease losses............. $ 101,873 $ 88,924
Deferred compensation........................... 27,127 17,761
Postretirement benefits other than pensions..... 16,850 18,256
Expense accruals................................ 13,394 2,861
Other........................................... 27,035 20,005
----------- ----------
Total tax deferred assets..................... 186,279 147,807
----------- ----------
Deferred tax liabilities:
Depreciation.................................... (24,721) (21,972)
Net unrealized appreciation on securities
available for sale............................. (29,136) (8,481)
Lease financing................................. (19,193) (15,623)
Pension plan contribution....................... (9,839) (6,363)
Loan servicing rights........................... (9,745) (4,048)
Other........................................... (21,781) (21,857)
----------- ----------
Total tax deferred liabilities.................... (114,415) (78,344)
----------- ----------
Net deferred tax asset............................ $ 71,864 $ 69,463
=========== ==========
The deferred tax assets have been determined to be realizable, and,
accordingly, a valuation allowance was not required. At December 31, 1997,
there were no operating losses, income tax credits or alternative minimum tax
credit carryforwards.
Securities transactions resulted in income tax expense (benefits) of $.9
million, $1.1 million and ($7.1 million) related to securities gains (losses)
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE L. BENEFIT PLANS
BB&T has various employee benefit plans and arrangements. Employees of
acquired entities typically participate in existing BB&T plans upon
consummation of the acquisitions. Credit is usually given to these employees
for years of service at the acquired institution.
The following table discloses expenses relating to employee benefit plans
restated for transactions accounted for as poolings of interests.
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Defined benefit plans............................... $12,960 $12,663 $18,643
Defined contribution and ESOP plans................. 13,160 13,035 11,712
------- ------- -------
Total expense related to benefit plans............ $26,120 $25,698 $30,355
======= ======= =======
Retirement Plans
BB&T has a noncontributory defined benefit pension plan. This plan covers
substantially all employees. Benefits are based on years of service, age at
retirement and the employee's compensation during the five highest consecutive
years of earnings within the last ten years of employment.
BB&T's contributions to the plan were in amounts between the minimum
required for funding standard account purposes and the maximum deductible for
Internal Revenue Service purposes.
67
Supplemental retirement benefits are provided to certain key officers under
supplemental executive retirement plans, which are not qualified under the
Internal Revenue Code. Although technically unfunded plans, insurance policies
on the lives of the covered employees partially fund future benefits.
Net periodic pension cost, which is included in employee benefits expense,
consisted of the following components in 1997, 1996 and 1995.
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service cost...................................... $ 12,412 $ 11,488 $ 11,765
Interest cost..................................... 17,911 16,253 14,984
Actual return on assets........................... (42,875) (24,260) (31,771)
Early retirement.................................. -- -- 3,372
Net amortization and deferral and other........... 25,684 8,833 19,746
-------- -------- --------
Net periodic pension cost....................... $ 13,132 $ 12,314 $ 18,096
======== ======== ========
The following table sets forth the plans' funded status at December 31, 1997
and 1996.
PLANS FOR WHICH PLANS FOR WHICH
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Accumulated benefit
obligation:
Vested benefits............. $ (185,227) $ (163,691) $ (10,110) $ (5,471)
Nonvested benefits.......... (4,488) (3,720) (805) (751)
---------- ---------- ---------- ----------
$ (189,715) $ (167,411) $ (10,915) $ (6,222)
========== ========== ========== ==========
Projected benefit obligation.. $ (234,396) $ (221,697) $ (22,946) $ (16,821)
Plan assets at fair value..... 273,922 219,038 -- --
---------- ---------- ---------- ----------
Plan assets in excess of (less
than) projected benefit
obligation................... 39,526 (2,659) (22,946) (16,821)
Unrecognized transition
amount....................... (6,523) (7,626) 277 321
Unrecognized prior service
cost......................... (23,201) (5,931) 3,516 4,163
Unrecognized net loss......... 6,616 22,281 6,066 3,153
Minimum liability adjustment.. -- -- (89) (861)
---------- ---------- ---------- ----------
Prepaid (accrued) pension cost
included in other assets
(other liabilities).......... $ 16,418 $ 6,065 $ (13,176) $ (10,045)
========== ========== ========== ==========
Plan assets consist primarily of investments in mutual funds consisting of
equity investments, obligations of the U.S. Treasury and Federal agencies and
corporations. Plan assets included $20.3 million, $11.2 million and $7.9
million of BB&T common stock at December 31, 1997, 1996 and 1995,
respectively.
Actuarial assumptions used in calculating these amounts were:
1997 1996 1995
---- ------- ----
Rate of increase in future compensation................... 5.5% 5.5% 5.5%
Weighted average discount rate............................ 7.25 7.5 7.5
Weighted average expected long-term rate of return on
assets................................................... 8.0 8.0-9.0 8.0
68
Postretirement Benefits
BB&T revised its retiree health care plans in preparation for the
implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other
Than Pensions." The plan covers employees retiring after December 31, 1995 who
are eligible for participation in the BB&T pension plan and have at least ten
years of service. The plan requires retiree contributions, with a subsidy by
BB&T based upon years of service of the employee at the time of retirement.
The subsidy is periodically reviewed for adjustment. The plan provides
flexible benefits to retirees which may also be used for dependents.
The following table sets forth the components of the retiree benefit plan
and the amount recognized in the consolidated financial statements at December
31, 1997, 1996 and 1995 as originally reported.
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net periodic postretirement benefit cost:
Service cost............................... $ 733 $ 834 $ 1,048
Interest cost.............................. 2,586 2,667 2,920
Amortization of net loss and other......... (37) 344 524
-------- -------- --------
Total expense............................ $ 3,282 $ 3,845 $ 4,492
======== ======== ========
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Reconciliation of funded status:
Accumulated postretirement benefit
obligation................................ $(38,342) $(38,208) $(39,505)
Unrecognized net (gain) loss............... (4,359) (1,463) 1,766
-------- -------- --------
Accrued postretirement benefit costs
included in other liabilities........... $(42,701) $(39,671) $(37,739)
======== ======== ========
Actuarial assumptions used in calculating these amounts were:
1997 1996 1995
---- ---------- --------
Annual rate of increase in the per capita cost
of health care claims:
Current year................................ 10.0% 11.0-11.25% 8.0-14.0%
Final constant amount....................... 5.0 5.0-6.25 4.75-6.5
Annual decrease............................. 1.0 .5-1.0 .8-1.5
General inflation rate........................ 4.0 4.0 4.0
Weighted average discount rate................ 7.25 7.5 7.5-8.0
Impact of 1% increase in assumed health care
cost on:
Net periodic benefit cost................... -- 3.0 2.0-3.0
Expected postretirement benefit obligation.. 2.0 5.0 3.0-4.0
401-k Savings Plan
Prior to 1996, BB&T had an Employee Stock Ownership Plan which allowed all
employees to acquire common stock in BB&T by contributing up to 15% of their
salaries to the plan. BB&T matched 100% of each employee's contributions, up
to a maximum of 6% of the employee's salary. BB&T Financial Corporation had a
Savings and Thrift Plan which permitted eligible employees to make
contributions up to 16% of base compensation, with matching contributions up
to 4% of the employee's base compensation. Effective January 1, 1996, BB&T's
Employee Stock Ownership Plan was merged into the former BB&T Financial
Corporation Savings and Thrift Plan to form the BB&T Corporation 401-k Savings
Plan. The new plan permits employees to contribute up to 16% of their
compensation. BB&T matches up to 6% of the employee's compensation with a 100%
matching contribution.
69
Settlement Agreements
In connection with recent significant mergers, three executive officers of
merged institutions agreed to retire during 1995 and 1997. BB&T entered into
settlement and noncompetition agreements with these executive officers to
settle existing employment contracts and to require them not to compete with
BB&T. One of the agreements provides for annual payments of $1,655,000 less
the company-provided portion of certain benefits payable under existing
benefit plans. The payments continue for the life of the executive and his
current wife but in no event for a period of less than fifteen years. The
executive has agreed not to compete in a defined geographic area for fifteen
years and to serve as a consultant to BB&T for five years. A second agreement
provides for annual payments of $312,000 for ten years or until death. The
third settlement agreement provides for annual payments of $769,392 (to be
adjusted annually in accordance with the Consumer Price Index) until the
executive reaches the age of 65 in 2002, at which time the annual payments
will be reduced to 70% of the amount paid during the final year pursuant to
the agreement, estimated to be approximately $623,000, less the company-
provided portion of benefits payable under certain existing benefit plans. The
reduced payments will continue for the life of the executive. If the
executive's current wife survives him, payments will continue to her in the
annual amount equal to 35% of the amount paid to the executive during the
final year pursuant to the agreement. The executive officer has agreed not to
compete in a defined geographic area for ten years.
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
NOTE M. COMMITMENTS AND CONTINGENCIES
BB&T is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, options written, standby
letters of credit and financial guarantees, interest rate caps and floors
written, interest rate swaps and forward and futures contracts.
BB&T's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. BB&T uses the same credit
policies in making commitments and conditional obligations as it does for on-
balance sheet instruments.
CONTRACT OR
NOTIONAL AMOUNT AT
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend, originate or purchase
credit......................................... $ 7,791,823 $ 6,754,901
Standby letters of credit and financial
guarantees written............................. 262,264 216,910
Commercial letters of credit.................... 35,915 21,703
Financial instruments whose notional or contract
amounts exceed the
amount of credit risk:
Commitments to sell loans and securities........ 555,722 240,121
Foreign exchange contracts...................... 145,855 103,506
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. BB&T
70
evaluates each customer's creditworthiness on a case-by-case basis. The amount
and type of collateral obtained, if deemed necessary by BB&T upon extension of
credit, is based on management's evaluation of the creditworthiness of the
counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BB&T to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers, and letters of credit are collateralized when necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities
are contracts for delayed delivery of securities in which BB&T agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates.
Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the
normal conduct of business. Management believes that the liabilities arising
from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
NOTE N. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS
BB&T's subsidiary banks are required by the Board of Governors of the
Federal Reserve System to maintain reserve balances based on certain
percentages of deposit types subject to various adjustments. At December 31,
1997, these reserves (including average daily vault cash) amounted to $90.1
million.
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the subsidiary banks could have declared dividends from
their retained earnings up to $1.2 billion at December 31, 1997. The
subsidiary banks are prohibited from paying dividends from their capital stock
and additional paid-in capital accounts and are required by regulatory
authorities to maintain minimum capital levels. BB&T was in compliance with
these requirements at December 31, 1997.
BB&T is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on BB&T's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation must meet specific
capital guidelines that involve quantitative measures of BB&T's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. BB&T's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require BB&T to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to average assets.
71
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------- -----------------------------
FOR MINIMUM FOR MINIMUM
ACTUAL CAPITAL ACTUAL CAPITAL
----------------- ADEQUACY ----------------- ADEQUACY
RATIO AMOUNT PURPOSES RATIO AMOUNT PURPOSES
----- ---------- ----------- ----- ---------- -----------
(DOLLARS IN THOUSANDS)
TIER 1 CAPITAL
BB&T Corporation...... 9.9% $1,979,462 $ 796,985 11.5% $1,997,194 $ 692,952
Branch Banking & Trust
Company.............. 11.0 1,672,558 606,912 10.8 1,513,438 558,944
Branch Banking & Trust
Company of South
Carolina............. 12.2 368,256 121,094 14.0 396,537 113,370
Branch Banking & Trust
Company of Virginia.. 12.1 73,296 24,297 11.7 66,640 22,845
Fidelity Federal
Savings Bank......... 12.3 28,253 9,201 N/A N/A N/A
Virginia First Savings
Bank................. 10.5 62,796 23,882 N/A N/A N/A
TOTAL CAPITAL
BB&T Corporation...... 13.7% $2,724,293 $1,593,971 14.2% $2,461,822 $1,385,903
Branch Banking & Trust
Company.............. 12.3 1,862,258 1,213,824 12.1 1,686,083 1,117,887
Branch Banking & Trust
Company of South
Carolina............. 13.4 406,120 242,188 15.2 431,991 226,741
Branch Banking & Trust
Company of Virginia.. 13.3 80,892 48,593 12.9 73,792 45,691
Fidelity Federal
Savings Bank......... 13.3 30,636 18,402 N/A N/A N/A
Virginia First Savings
Bank................. 11.8 70,317 47,764 N/A N/A N/A
LEVERAGE CAPITAL
BB&T Corporation...... 7.2% $1,979,462 $ 836,158 7.9% $1,997,194 $ 761,562
Branch Banking & Trust
Company.............. 7.6 1,672,558 656,147 7.4 1,513,438 609,794
Branch Banking & Trust
Company of South
Carolina............. 8.5 368,256 129,748 9.4 396,537 126,303
Branch Banking & Trust
Company of Virginia.. 9.4 73,296 23,284 8.6 66,640 23,267
Fidelity Federal
Savings Bank......... 7.9 28,253 10,712 N/A N/A N/A
Virginia First Savings
Bank................. 7.3 62,796 25,710 N/A N/A N/A
- --------
N/A--not applicable.
72
NOTE O. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---------- ----------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and due from banks.................................. $ 2,748 $ 9,047
Interest-bearing bank balances........................... 605,319 587,330
Investment securities.................................... 13,824 40,560
Investment in banking subsidiaries....................... 2,544,183 2,063,285
Investment in other subsidiaries......................... 185,504 52,283
Premises and equipment................................... 5,537 5,809
Receivables from subsidiaries and other assets........... 80,778 183,644
---------- ----------
Total assets........................................... $3,437,893 $2,941,958
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowed funds................................ $ 638,325 $ 566,225
Dividends payable........................................ 42,173 29,521
Accounts payable and accrued liabilities................. 23,503 25,626
Long-term debt........................................... 496,255 249,019
---------- ----------
Total liabilities...................................... 1,200,256 870,391
---------- ----------
Total shareholders' equity............................. 2,237,637 2,071,567
---------- ----------
Total liabilities and shareholders' equity............. $3,437,893 $2,941,958
========== ==========
CONDENSED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME
Dividends from subsidiaries.................... $248,294 $142,854 $240,699
Interest and other income from subsidiaries.... 41,682 36,627 20,261
Interest on investment securities.............. 1,739 2,936 1,855
Other income................................... 18,047 7,835 6,143
-------- -------- --------
Total income................................. 309,762 190,252 268,958
-------- -------- --------
EXPENSES
Interest expense............................... 53,161 33,845 17,859
Occupancy expense.............................. 171 171 171
Other expenses................................. 12,520 11,327 26,760
-------- -------- --------
Total expenses............................... 65,852 45,343 44,790
-------- -------- --------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries.......... 243,910 144,909 224,168
Income tax expense (benefit)..................... (816) 661 (6,042)
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries.................................... 244,726 144,248 230,210
Net income of subsidiaries (less than) in excess
of dividends from subsidiaries.................. 115,216 185,927 (2,942)
-------- -------- --------
Net income....................................... $359,942 $330,175 $227,268
======== ======== ========
73
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 359,942 $ 330,175 $ 227,268
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of subsidiaries less than (in
excess of) dividends from subsidiaries..... (115,216) (185,927) 2,942
Depreciation of premises and equipment...... 272 214 214
Amortization of unearned compensation....... 1,227 2,450 3,172
Discount accretion and premium
amortization............................... 396 192 (298)
Loss (gain) on sales of securites........... -- (9) 100
Loss on disposals of other real estate
owned...................................... -- -- 240
Loss on disposal of premises and equipment.. -- -- 29
(Increase) decrease in other assets......... (20,858) 103,134 (145,852)
Increase (decrease) in accounts payable and
accrued liabilities........................ (1,984) 2,293 5,974
--------- --------- ---------
Net cash provided by operating
activities............................... 223,779 252,522 93,789
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale..................................... -- 14 87
Proceeds from maturities of securities
available for sale........................... 35,482 49,347 101,339
Purchases of securities available for sale.... (8,717) (52,324) (41,697)
Proceeds from sales of securities held to
maturity..................................... -- -- 520
Proceeds from sales of premises and
equipment.................................... -- -- 79
Investment in subsidiaries.................... (483) (68,625) (264)
Advances to subsidiaries...................... (430,897) (306,857) --
Repayment of advances to subsidiaries......... 369,375 182,875 --
Net cash paid (received) in purchase
accounting transactions...................... (45,852) -- --
--------- --------- ---------
Net cash (used in) provided by investing
activities............................... (81,092) (195,570) 60,064
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in long-term debt..... 246,873 247,625 (7,333)
Net increase in short-term borrowed funds..... 72,100 169,952 142,004
Net proceeds from common stock issued......... 22,583 49,736 44,242
Redemption of common stock.................... (321,224) (207,407) (47,311)
Preferred stock cancellations and
conversions.................................. -- -- (2,371)
Cash dividends paid on common and preferred
stock........................................ (151,329) (123,270) (107,869)
--------- --------- ---------
Net cash (used in) provided by financing
activities............................... (130,997) 136,636 21,362
--------- --------- ---------
Net Increase in Cash and Cash Equivalents..... 11,690 193,588 175,215
Cash and Cash Equivalents at Beginning of
Year......................................... 596,377 402,789 227,574
--------- --------- ---------
Cash and Cash Equivalents at End of Year...... $ 608,067 $ 596,377 $ 402,789
========= ========= =========
74
NOTE P. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires BB&T to disclose the estimated fair value of its on- and off-balance
sheet financial instruments. A financial instrument is defined by SFAS No. 107
as cash, evidence of an ownership interest in an entity or a contract that
creates a contractual obligation or right to deliver to or receive cash or
another financial instrument from a second entity on potentially favorable or
unfavorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS No. 107 specifies
that fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for
a significant portion of BB&T's financial instruments, fair value estimates
for these instruments are based on judgments regarding current economic
conditions, currency and interest rate risk characteristics, loss experience
and other factors. Many of these estimates involve uncertainties and matters
of significant judgment and cannot be determined with precision. Therefore,
the calculated fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in
a current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
The following methods and assumptions were used by BB&T in estimating the
fair value of its financial instruments at December 31, 1997 and 1996:
Cash and cash equivalents: For these short-term instruments, the carrying
amounts are a reasonable estimate of fair values.
Securities: Fair values for securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
Loans receivable: The fair values for loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms and credit quality. The carrying amounts of accrued
interest approximate fair values.
Deposit liabilities: The fair values for demand deposits, interest-checking
accounts, savings accounts and certain money market accounts are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies current interest rates
to aggregate expected maturities.
Short-term borrowed funds: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowed funds approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on
quoted market prices for similar instruments or by using discounted cash flow
analyses, based on BB&T's current incremental borrowing rates for similar
types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that BB&T would receive or pay
to terminate the swap agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the swap
counterparties.
Commitments to extend credit, standby letters of credit and financial
guarantees written: The fair values of commitments are estimated using the
fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair values also consider the
difference between current levels of interest rates and the committed rates.
The fair values of guarantees and letters of credit are estimated based on
fees currently charged for similar agreements.
75
Other off-balance sheet instruments: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
1997 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash
equivalents............. $ 969,875 $ 969,875 $ 927,341 $ 927,341
Trading securities....... 67,878 67,878 -- --
Securities available for
sale.................... 6,481,515 6,481,515 6,014,221 6,014,221
Securities held to
maturity................ 147,799 151,581 170,808 175,744
Loans and leases:
Loans.................. 19,673,653 19,893,665 17,276,102 17,272,691
Leases................. 616,302 N/A 470,455 N/A
Allowance for losses... (263,943) N/A (230,070) N/A
----------- -----------
Net loans and
leases.............. $20,026,012 $17,516,487
=========== ===========
Financial liabilities:
Deposits................. $20,210,116 20,248,044 $19,003,340 19,052,070
Short-term borrowed
funds................... 3,015,177 3,015,177 2,280,824 2,280,824
Long-term debt........... 3,279,667 3,582,628 2,050,479 2,146,487
Capitalized leases....... 3,291 N/A 3,561 N/A
NOTIONAL/ NOTIONAL/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Unrecognized financial
intruments:
Interest rate swaps, caps
and floors.............. $ 2,428,930 $ 25,570 $ 1,167,099 $ 5,775
Commitments to extend,
originate or purchase
credit.................. 7,791,823 (14,835) 6,754,901 (12,576)
Standby and commercial
letters of credit and
financial guarantees
written................. 298,179 (4,495) 238,613 (3,579)
Commitments to sell loans
and securities.......... 555,722 (2,925) 240,121 822
Foreign exchange
contracts............... 145,855 326 103,506 312
Option contracts
purchased............... 55,000 (303) 14,000 142
Option contracts
written................. 55,000 -- 14,000 --
Futures contracts........ 8,486 -- -- --
- --------
N/A--Not applicable.
NOTE Q. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate volatility often increases to the point that balance sheet
repositioning through the use of account repricing and other on-balance sheet
strategies cannot occur rapidly enough to avoid adverse net income effects. At
those times, off-balance sheet or synthetic hedges are utilized. During 1997,
management used interest rate swaps, caps and floors to supplement balance
sheet repositioning. Such actions were designed to lower the interest
sensitivity of BB&T toward a neutral position.
Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to transform the repricing characteristics of an asset or
liability from a fixed to a floating rate, a floating rate to a fixed rate, or
one floating rate to another floating
76
rate. The underlying principal positions are not affected. Swap terms
generally range from one year to ten years depending on the need. At December
31, 1997, derivatives with a total notional value of $2.4 billion, with terms
ranging up to ten years, were outstanding.
The following tables set forth certain information concerning BB&T's
interest rate swaps at December 31, 1997:
INTEREST RATE SWAPS, CAPS AND FLOORS
DECEMBER 31, 1997
NOTIONAL RECEIVE PAY FAIR
TYPE AMOUNT RATE RATE VALUE
- ---- ----------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
Receive fixed swaps....... $1,301,000 6.39% 5.86% $ 23,785
Pay fixed swaps........... 351,930 5.88 5.58 (121)
Basis swaps............... 100,000 5.70 5.63 --
Caps & Floors............. 676,000 -- -- 1,906
---------- ---------- --------- ----------
Total..................... $2,428,930 6.25% 5.79% $ 25,570
========== ========== ========= ==========
RECEIVE PAY FIXED BASIS SWAPS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS CAPS & FLOORS TOTAL
- --------------------- ----------- ----------- ------------- ----------
Balance, December 31,
1996..................... $ 487,000 $ 304,099 $ 376,000 $1,167,099
Additions................. 849,000 223,900 660,000 1,732,900
Maturities/amortizations.. (35,000) (176,069) (10,000) (221,069)
Terminations.............. -- -- (250,000) (250,000)
---------- ---------- --------- ----------
Balance, December 31,
1997..................... $1,301,000 $ 351,930 $ 776,000 $2,428,930
========== ========== ========= ==========
ONE YEAR ONE TO FIVE FIVE TO 10
MATURITY SCHEDULE OR LESS YEARS YEARS TOTAL
- ----------------- ----------- ----------- ------------- ----------
Receive fixed swaps....... $ 276,000 $ 525,000 $ 500,000 $1,301,000
Pay fixed swaps........... 103,987 240,143 7,800 351,930
Basis swaps............... 100,000 -- -- 100,000
Caps & Floors............. 11,000 605,000 60,000 676,000
---------- ---------- --------- ----------
Total..................... $ 490,987 $1,370,143 $ 567,800 $2,428,930
========== ========== ========= ==========
As of December 31, 1997, unearned income from new swap transactions
initiated during 1997 was $13.5 million. There were no unamortized deferred
gains or losses from terminated transactions remaining at year end. Active
transactions resulted in pretax net income of $1.1 million.
In addition to interest rate swaps, BB&T utilizes written covered over-the-
counter call options on specific securities in the available-for-sale
portfolio in order to enhance returns. During 1997, options were written on
securities totaling $705.0 million. Option fee income was $1.4 million for
1997. There were no unexercised options outstanding at December 31, 1997 or
1996.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
warehouse and pipeline against increasing interest rates. Written call options
are used in tandem with purchased put options to create a net purchased put
option that reduces the cost of the hedge. At December 31, 1997, net purchased
put option contracts with a notional value of $55.0 million were outstanding.
The $2.4 billion of derivatives used in interest rate risk management are
primarily used to hedge variable rate commercial loans, adjustable rate
mortgage loans, retail certificates of deposit and fixed rate notes. BB&T does
not utilize derivatives for trading purposes.
77
Although off-balance sheet derivative financial instruments do not expose
BB&T to credit risk equal to the notional amount, such agreements generate
credit risk to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. Such
risk is minimized based on the quality of the counterparties and the
consistent monitoring of these agreements. The counterparties to these
transactions were large commercial banks and investment banks. Annually, the
counterparties are reviewed for creditworthiness by BB&T's credit policy
group. Where appropriate, master netting agreements are arranged or collateral
is obtained in the form of rights to securities. At December 31, 1997, BB&T's
interest rate swaps, caps and floors reflected an unrealized gain of $25.6
million.
Other risks associated with interest-sensitive derivatives include the
impact on fixed positions during periods of changing interest rates. Indexed
amortizing swaps' notional amounts and maturities change based on certain
interest rate indices. Generally, as rates fall the notional amounts decline
more rapidly, and as rates increase notional amounts decline more slowly.
Under unusual circumstances, financial derivatives also increase liquidity
risk, which could result from an environment of rising interest rates in which
derivatives produce negative cash flows while being offset by increased cash
flows from variable rate loans. Such risk is considered insignificant due to
the relatively small derivative positions held by BB&T. At December 31, 1997,
BB&T had no indexed amortizing swaps outstanding.
NOTE R. CALCULATIONS OF EARNINGS PER SHARE
The basic and diluted earnings per share calculations are presented in the
following table:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EARNINGS PER SHARE:
Weighted average number of
common shares outstanding
during the period........... 135,742,174 136,024,587 135,911,150
=============== =============== ===============
Net income................... $ 359,942 $ 330,175 $ 227,268
Less--Preferred dividend
requirement................. -- 610 5,079
--------------- --------------- ---------------
Income available for common
shares...................... $ 359,942 $ 329,565 $ 222,189
=============== =============== ===============
Basic earnings per share..... $ 2.65 $ 2.42 $ 1.63
=============== =============== ===============
DILUTED EARNINGS PER SHARE:
Weighted average number of
common shares outstanding
during the period........... 135,742,174 136,024,587 135,911,150
Add--
Shares issuable assuming
conversion of convertible
preferred stock........... -- 938,652 4,458,426
Dilutive effect of
outstanding options (as
determined by application
of treasury stock
method)................... 2,405,589 1,890,577 1,218,140
Issuance of additional
shares under share
repurchase agreement,
contingent upon market
price..................... 72,294 102,018 326,751
--------------- --------------- ---------------
Weighted average number of
common shares, as adjusted.. 138,220,057 138,955,834 141,914,467
=============== =============== ===============
Net income................... $ 359,942 $ 330,175 $ 227,268
Add--After tax interest
expense and amortization of
issue costs applicable to
convertible debentures...... -- -- 211
--------------- --------------- ---------------
Net income, as adjusted...... $ 359,942 $ 330,175 $ 227,479
=============== =============== ===============
Diluted earnings per share... $ 2.60 $ 2.38 $ 1.60
=============== =============== ===============
78
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, AS OF MARCH 17,
1998:
BB&T Corporation
(Registrant)
/s/ John A. Allison, IV
By: _________________________________
John A. Allison, IV
Chairman of the Board and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED AS OF MARCH 17, 1998.
/s/ John A. Allison, IV
_____________________________________
John A. Allison, IV
Chairman of the Board and Chief
Executive Officer
/s/ Scott E. Reed
_____________________________________
Scott E. Reed
Senior Executive Vice President and
Chief Financial Officer
/s/ Sherry A. Kellett
_____________________________________
Sherry A. Kellett
Executive Vice President and
Controller
A Majority of the Directors of the Registrant are included.
/s/ Paul B. Barringer
_____________________________________
Paul B. Barringer
Director
/s/ Alfred E. Cleveland
_____________________________________
Alfred E. Cleveland
Director
/s/ W. R. Cuthbertson, Jr.
_____________________________________
W. R. Cuthbertson, Jr.
Director
79
/s/ Ronald E. Deal
_____________________________________
Ronald E. Deal
Director
/s/ A. J. Dooley, Sr.
_____________________________________
A. J. Dooley, Sr.
Director
/s/ Tom D. Efird
_____________________________________
Tom D. Efird
Director
/s/ Paul S. Goldsmith
_____________________________________
Paul S. Goldsmith
Director
/s/ Lloyd Vincent Hackley
_____________________________________
Lloyd Vincent Hackley
Director
/s/ Ernest F. Hardee
_____________________________________
Ernest F. Hardee
Director
/s/ Jane P. Helm
_____________________________________
Jane P. Helm
Director
/s/ Richard Janeway, M.D.
_____________________________________
Richard Janeway, M.D.
Director
/s/ J. Ernest Lathem, M.D.
_____________________________________
J. Ernest Lathem, M.D.
Director
80
/s/ James H. Maynard
_____________________________________
James H. Maynard
Director
/s/ Joseph A. McAleer, Jr.
_____________________________________
Joseph A. McAleer, Jr.
Director
/s/ Albert O. McCauley
_____________________________________
Albert O. McCauley
Director
/s/ L. Glenn Orr, Jr.
_____________________________________
L. Glenn Orr, Jr.
Director
/s/ Richard L. Player, Jr.
_____________________________________
Richard L. Player, Jr.
Director
/s/ C. Edward Pleasants, Jr.
_____________________________________
C. Edward Pleasants, Jr.
Director
/s/ Nido R. Qubein
_____________________________________
Nido R. Qubein
Director
/s/ E. Rhone Sasser
_____________________________________
E. Rhone Sasser
Director
/s/ Jack E. Shaw
_____________________________________
Jack E. Shaw
Director
/s/ Harold B. Wells
_____________________________________
Harold B. Wells
Director
81
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
2(a) Agreement and Plan of Reorganization dated Incorporated herein by
as of July 29, 1994 and amended and reference to Registration
restated as of October 22, 1994 between the No. 33-56437.
Registrant and BB&T Financial Corporation.
2(b) Plan of Merger as of July 29, 1994 as Incorporated herein by
amended and restated on October 22, 1994 reference to Registration
between the Registrant and BB&T Financial No. 33-56437.
Corporation.
2(c) Agreement and Plan of Reorganization dated Incorporated herein by
as of November 1, 1996 between the reference to Exhibit 3(a)
Registrant and United Carolina Bancshares filed in the Annual Report
Corporation, as amended. on Form 10-K, filed March
17, 1997.
2(d) Agreement of Plan of Reorganization dated Incorporated herein by
as of October 29, 1997 between the reference to Registration
Registrant and Life Bancorp, Inc. No. 333-44183.
3(a)(i) Amended and Restated Articles of Incorporated herein by
Incorporation of the Registrant, as reference to Exhibit 3(a)
amended. filed in the Annual Report
on Form 10-K, filed March
17, 1997.
3(a)(ii) Articles of Amendment of Articles of Filed herewith.
Incorporation.
3(b) Bylaws of the Registrant, as amended. Filed herewith.
4(a) Articles of Amendment to Amended and Incorporated herein by
Restated Articles of Incorporation of the reference to Exhibit 3(a)
Registrant related to Junior Participating filed in the Annual Report
Preferred Stock. on Form 10-K, filed March
17, 1997.
4(b) Rights Agreement dated as of December 17, Incorporated herein by
1996 between the Registrant and Branch reference to Exhibit 1 filed
Banking and Trust Company, Rights Agent. under Form 8-A, filed
January 10, 1997.
4(c) Subordinated Indenture (including Form of Incorporated herein by
Subordinated Debt Security) between the reference to Exhibit 4(d) of
Registrant and State Street Bank and Trust Registration No. 333-02899.
Company, Trustee, dated as of May 24, 1996.
4(d) Senior Indenture (including Form of Senior Incorporated herein by
Debt Security) between the Registrant and reference to Exhibit 4(c) of
State Street Bank and Trust company, Registration No. 333-02899.
Trustee, dated as of May 24, 1996.
10(a)* Death Benefit Only Plan, Dated April 23, Incorporated herein by
1990, by and between Branch Banking and reference to Registration
Trust Company (as successor to Southern No. 33-33984.
National Bank of North Carolina) and L.
Glenn Orr, Jr.
10(b)* BB&T Corporation Non-Employee Directors' Incorporated herein by
Deferred Compensation and Stock Option reference to Exhibit 10(b)
Plan. of the Annual Report on Form
10-K, filed March 17, 1997.
82
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by
Incentive Plan. reference to Registration
No. 33-57865.
10(d)* Settlement and Non-Compete Agreement, dated Incorporated herein by
February 28, 1995, by and between the reference to Registration
Registrant and L. Glenn Orr, Jr. No. 33-56437.
10(e)* Settlement Agreement, Waiver and General Incorporated herein by
Release dated September 19, 1994, by and reference to Registration
between the Registrant, Branch Banking and No. 33-56437.
Trust Company (as successor to Southern
National Bank of North Carolina) and Gary
E. Carlton.
10(f) BB&T Corporation Savings and Thrift Plan. Incorporated herein by
reference to Registration
No. 33-57867.
10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by
Incentive Plan. reference to Exhibit 10(g)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(h)* Form of Branch Banking and Trust Company Incorporated by reference to
Long-Term Incentive Plan. the identified exhibit under
the Quarterly Report on Form
10-Q, filed May 14, 1991.
10(i)* Form of Branch Banking and Trust Company Incorporated by reference to
Executive Incentive Compensation Plan. the identified exhibit under
the Annual Report on Form
10-K, filed February 22,
1985.
10(j)* BB&T Deferred Compensation Plan for Key Incorporated herein by
Employees. reference to Exhibit 10(j)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by
reference to Exhibit 10(k)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(l)* BB&T Corporation Special Supplemental Incorporated herein by
Retirement Plan. reference to Exhibit 10(l)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(m)* Settlement and Noncompetition Agreement, Filed herewith.
dated July 1, 1997, by and between the
Registrant and E. Rhone Sasser.
11 Statement re Computation of Earnings Per Filed herewith as Note R. of
Share. the "Notes to Consolidated
Financial Statements."
21 Subsidiaries of the Registrant. Filed herewith.
22 Proxy Statement for the 1998 Annual Meeting Future filing incorporated
of Shareholders, dated April 28, 1998. by reference pursuant to the
General Instruction G(3).
83
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
23(a) Consent of Independent Public Accountants. Filed herewith.
23(b) Opinion of Independent Public Accountants. Filed herewith.
27 Financial Data Schedule. Filed as an exhibit to the
electronically-filed
document as required.
- --------
* Management compensatory plan or arrangement.
84