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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
June 30, 1999
Commission file number : 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0939887
(State of incorporation) (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of Principal Executive Offices) (Zip Code)
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
At July 31, 1999, 316,191,883 shares of the registrant's common stock, $5 par
value, were outstanding.
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This Form 10-Q has 33 pages. The Exhibit Index is included on Page 32.
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BB&T CORPORATION
FORM 10-Q
June 30, 1999
INDEX
Page No.
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Part I. FINANCIAL INFORMATION 2
Item 1. Financial Statements (Unaudited) 2
Consolidated Financial Statements 2
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Analysis of Financial Condition 15
Market Risk Management 18
Capital Adequacy and Resources 21
Analysis of Results of Operations 22
Part II. OTHER INFORMATION 32
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
EXHIBIT 11 Calculation of Earnings Per Share 32
EXHIBIT 27 Financial Data Schedule-- Included with
electronically-filed document only.
1
Part I. FINANCIAL INFORMATION
Item I. Financial Statements
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share data)
June 30, December 31,
1999 1998
----------- ------------
Assets
Cash and due from banks $ 968,851 $ 997,245
Interest-bearing deposits with banks 5,662 8,925
Federal funds sold and securities purchased under
resale agreements or similar arrangements 628,719 103,216
Trading securities 97,896 60,422
Securities available for sale 10,143,528 8,737,936
Securities held to maturity (approximate market
values of $99,288 at June 30, 1999, and $179,444 at
December 31, 1998) 97,450 174,735
Loans held for sale 539,326 1,035,668
Loans and leases, net of unearned income 24,845,667 23,682,800
Allowance for loan and lease losses (343,856) (330,615)
----------- -----------
Loans and leases, net 24,501,811 23,352,185
----------- -----------
Premises and equipment, net 489,290 471,780
Other assets 1,712,331 1,446,218
----------- -----------
Total assets $39,184,864 $36,388,330
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits $ 3,477,699 $ 3,465,362
Savings and interest checking 1,638,290 1,783,491
Money rate savings 7,054,675 7,021,556
Time deposits 11,361,761 11,349,083
Other deposits 737,575 638,676
----------- -----------
Total deposits 24,270,000 24,258,168
----------- -----------
Short-term borrowed funds 6,343,442 3,707,333
Long-term debt 5,162,749 4,964,797
Accounts payable and other liabilities 576,634 534,144
----------- -----------
Total liabilities 36,352,825 33,464,442
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $5 par, 500,000,000 shares
authorized; 306,051,309 issued and outstanding at
June 30, 1999, and 306,963,976 at December 31,
1998 1,530,257 1,534,820
Additional paid-in capital 104,028 177,098
Retained earnings 1,323,059 1,151,010
Unvested restricted stock and unearned income (12,580) (14)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of ($68,198) at June
30, 1999 and $38,366 at December 31, 1998 (112,725) 60,974
----------- -----------
Total shareholders' equity 2,832,039 2,923,888
----------- -----------
Total liabilities and shareholders' equity $39,184,864 $36,388,330
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest Income
Interest and fees on loans
and leases $ 543,197 $ 514,112 $ 1,070,169 $ 1,014,341
Interest and dividends on
securities 153,968 136,020 292,695 272,539
Interest on short-term
investments 5,541 3,009 6,998 6,385
----------- ----------- ----------- -----------
Total interest income 702,706 653,141 1,369,862 1,293,265
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits 210,808 213,175 420,567 422,467
Interest on short-term
borrowed funds 59,468 59,607 105,730 114,201
Interest on long-term debt 70,154 56,898 136,912 113,796
----------- ----------- ----------- -----------
Total interest expense 340,430 329,680 663,209 650,464
----------- ----------- ----------- -----------
Net Interest Income 362,276 323,461 706,653 642,801
Provision for loan and
lease losses 20,000 23,038 40,000 46,476
----------- ----------- ----------- -----------
Net Interest Income After
Provision for Loan and
Lease Losses 342,276 300,423 666,653 596,325
----------- ----------- ----------- -----------
Noninterest Income
Service charges on
deposits 47,313 43,324 94,937 85,782
Mortgage banking revenues 32,569 23,261 65,367 38,658
Investment banking &
brokerage fees 37,836 11,178 51,605 21,390
Trust revenue 12,957 8,991 25,671 17,722
Agency insurance
commissions 16,820 12,231 33,702 26,288
Other insurance
commissions 2,642 3,265 5,488 6,281
Other nondeposit fees and
commissions 26,448 20,070 48,898 39,032
Securities (losses) gains,
net (3,024) 1,293 (2,963) 3,794
Other income 10,635 11,054 22,675 21,144
----------- ----------- ----------- -----------
Total noninterest income 184,196 134,667 345,380 260,091
----------- ----------- ----------- -----------
Noninterest Expense
Personnel expense 158,624 124,776 299,817 248,447
Occupancy and equipment
expense 47,129 41,731 95,269 80,665
Amortization of
intangibles and mortgage
servicing rights 16,544 11,238 32,380 21,500
Other noninterest expense 79,822 70,163 156,461 142,312
----------- ----------- ----------- -----------
Total noninterest expense 302,119 247,908 583,927 492,924
----------- ----------- ----------- -----------
Earnings
Income before income taxes 224,353 187,182 428,106 363,492
Provision for income taxes 71,561 59,143 136,891 115,008
----------- ----------- ----------- -----------
Net income $ 152,792 $ 128,039 $ 291,215 $ 248,484
----------- ----------- ----------- -----------
Per Common Share
Net income:
Basic $ .50 $ .42 $ .95 $ .82
=========== =========== =========== ===========
Diluted $ .49 $ .41 $ .93 $ .80
=========== =========== =========== ===========
Cash dividends paid $ .175 $ .155 $ .35 $ .31
=========== =========== =========== ===========
Average Shares Outstanding
Basic 306,431,875 302,781,582 306,448,974 303,818,538
=========== =========== =========== ===========
Diluted 312,377,609 309,028,401 312,465,148 310,149,293
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands)
Accumulated
Retained Other
Shares of Additional Earnings Nonshareholder Total
Common Common Paid-In and Changes in Shareholders'
Stock Stock Capital Other* Equity Equity
----------- ---------- ---------- ---------- -------------- -------------
Balance, December 31,
1997, as restated 151,965,992 $ 759,830 $215,041 $1,555,563 $ 52,071 $2,582,505
Add (Deduct)
Nonshareholder changes
in equity:**
Net income -- -- -- 248,484 -- 248,484
Unrealized holding
gains (losses)
arising during the
period -- -- -- -- 2,040 2,040
Less: reclassification
adjustment, net of
tax of $1,501 -- -- -- -- (2,293) (2,293)
----------- ---------- -------- ---------- ---------- ----------
Net unrealized gains
(losses) on securities -- -- -- -- (253) (253)
----------- ---------- -------- ---------- ---------- ----------
Total nonshareholder
changes in equity -- -- -- 248,484 (253) 248,231
----------- ---------- -------- ---------- ---------- ----------
Common stock issued 1,974,004 9,870 77,033 -- -- 86,903
Redemption of common
stock (2,649,480) (13,247) (161,973) -- -- (175,220)
Cash dividends declared
on common stock -- -- -- (97,148) -- (97,148)
Other -- -- -- (11,473) -- (11,473)
----------- ---------- -------- ---------- ---------- ----------
Balance, June 30, 1998 151,290,516 $ 756,453 $130,101 $1,695,426 $ 51,818 $2,633,798
=========== ========== ======== ========== ========== ==========
Balance, December 31,
1998, as restated 306,963,976 $1,534,820 $177,098 $1,150,996 $ 60,974 $2,923,888
Add (Deduct)
Nonshareholder changes
in equity:**
Net income -- -- -- 291,215 -- 291,215
Unrealized holding
gains (losses)
arising during the
period -- -- -- -- (175,490) (175,490)
Less: reclassification
adjustment, net of
tax of $(1,172) -- -- -- -- 1,791 1,791
----------- ---------- -------- ---------- ---------- ----------
Net unrealized gains
(losses) on securities -- -- -- -- (173,699) (173,699)
----------- ---------- -------- ---------- ---------- ----------
Total nonshareholder
changes in equity -- -- -- 291,215 (173,699) 117,516
----------- ---------- -------- ---------- ---------- ----------
Common stock issued 5,840,533 29,203 156,808 -- -- 186,011
Redemption of common
stock (6,753,200) (33,766) (229,878) -- -- (263,644)
Cash dividends declared
on common stock -- -- -- (119,166) -- (119,166)
Other -- -- -- (12,566) -- (12,566)
----------- ---------- -------- ---------- ---------- ----------
Balance, June 30, 1999 306,051,309 $1,530,257 $104,028 $1,310,479 $ (112,725) $2,832,039
=========== ========== ======== ========== ========== ==========
- --------
* Other includes unearned income and unvested restricted stock.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
4
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands)
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net income.......................................... $ 291,215 $ 248,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses................ 40,000 46,476
Depreciation of premises and equipment............. 36,469 32,100
Amortization of intangibles and mortgage servicing
rights............................................ 32,380 21,500
Accretion of negative goodwill..................... (3,121) (3,121)
Amortization of unearned stock compensation........ 1,022 339
Discount accretion and premium amortization on
securities, net................................... (355) 1,559
Net decrease (increase) in trading account
securities........................................ (25,449) (3,278)
Loss (gain) on sales of securities, net............ 2,963 (3,794)
Loss (gain) on disposals of premises and equipment,
net............................................... (3,404) (4,553)
Proceeds from sales of loans held forsale.......... 2,544,414 1,972,011
Purchases of loans held forsale.................... (659,218) (944,815)
Origination of loans held for sale, net of
principal collected............................... (1,388,854) (1,465,928)
Decrease (increase) in:
Accrued interest receivable....................... (22,075) (16,721)
Other assets...................................... (96,387) (106,258)
Increase (decrease) in:
Accrued interest payable.......................... 13,048 23,256
Accounts payable and other liabilities............ 114,524 (21,823)
Other, net......................................... 1,245 (10,774)
----------- -----------
Net cash provided by (used in) operating
activities...................................... 878,417 (235,340)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale
................................................... 336,449 879,244
Proceeds from maturities, calls and paydowns of
securities available for sale...................... 1,391,147 1,128,119
Purchases of securities available for sale.......... (3,366,792) (2,036,986)
Proceeds from maturities, calls and paydowns of
securities held to maturity........................ 32,710 41,032
Purchases of securities held to maturity............ (2,730) (4,318)
Lease originations.................................. (63,262) (45,869)
Lease principal payments............................ 35,463 31,120
Loan originations, net of principal collected....... (1,168,754) (490,706)
Purchases of loans.................................. (5,658) (91,483)
Net cash acquired in transactions accounted for
under the purchase method.......................... 139,614 15,097
Purchases and originations of mortgage servicing
rights............................................. (53,775) (33,717)
Proceeds from disposals of premises and equipment... 22,654 14,631
Purchases of premises and equipment................. (67,308) (43,556)
Proceeds from sales of foreclosed property.......... 17,627 9,856
Proceeds from sales of other real estate held for
development or sale................................ 6,480 7,771
Other............................................... -- (441)
----------- -----------
Net cash used in investing activities............ (2,746,135) (620,206)
----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits............................ 11,832 193,046
Net increase (decrease) in short-term borrowed
funds.............................................. 2,510,042 (13,387)
Proceeds from long-term debt........................ 720,564 1,141,207
Repayments of long-term debt........................ (522,612) (401,151)
Net proceeds from common stock issued............... 12,179 22,882
Redemption of common stock.......................... (263,644) (175,220)
Cash dividends paid on common stock................. (106,797) (91,401)
----------- -----------
Net cash provided by financing activities........ 2,361,564 675,976
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ 493,846 (179,570)
Cash and Cash Equivalents at Beginning of Period.... 1,109,386 1,267,253
----------- -----------
Cash and Cash Equivalents at End of Period.......... $ 1,603,232 $ 1,087,683
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 652,799 $ 579,968
Income taxes 35,760 67,333
Noncash financing and investing activities:
Transfer of securities held to maturity to
available for sale 47,265 --
Transfer of loans to foreclosed property 12,416 8,815
Transfer of other real estate owned to fixed assets 1,153 --
Transfer of fixed assets to other real estate owned 582 2,221
Tax benefit from exercise of stock options 12,999 --
The accompanying notes are an integral part of these consolidated financial
statements.
5
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
A. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated balance sheets of BB&T Corporation and subsidiaries ("BB&T" or the
"Corporation") as of June 30, 1999 and December 31, 1998; the consolidated
statements of income for the three months and the six months ended June 30,
1999 and 1998; the consolidated statements of changes in shareholders' equity
for the six months ended June 30, 1999 and 1998; and the consolidated
statements of cash flows for the six months ended June 30, 1999 and 1998.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the footnotes
included in BB&T's latest annual report on Form 10-K, as restated in BB&T's
Current Report on Form 8-K filed on April 30, 1999, should be referred to in
connection with the reading of these unaudited interim consolidated financial
statements. Certain prior year amounts have been reclassified to conform to
statement presentations for 1999. The reclassifications had no effect on
shareholders' equity or net income.
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend paid
August 3, 1998. Accordingly, all per share data and weighted average shares
have been restated as appropriate to reflect the split.
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Forward-Looking Statements
This report contains forward-looking statements with respect to the financial
condition, results of operations and business of BB&T. These forward-looking
statements involve risks and uncertainties and are based on the beliefs and
assumptions of the management of BB&T, and on the information available to
management at the time that these disclosures were prepared. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
increase significantly; (2) changes in the interest rate environment may reduce
margins; (3) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and / or a reduced demand for credit; (4)
legislative or regulatory changes, including changes in accounting standards,
may adversely affect the businesses in which BB&T is engaged; (5) costs or
difficulties related to the integration of the businesses of BB&T and its
merger partners may be greater than expected; (6) expected cost savings
associated with pending mergers may not be fully realized or realized within
the expected time frame; (7) deposit attrition, customer loss or revenue loss
following pending mergers may be greater than expected; (8) the Year 2000 issue
may not be effectively corrected (see additional discussion following under
Second Quarter 1999 Year 2000 Readiness
6
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Disclosure); (9) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than BB&T;
and (10) adverse changes may occur in the securities markets.
B. Nature of Operations
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina,
Virginia, Maryland, Georgia and the metropolitan Washington, D.C. area through
its commercial banking subsidiaries and, to a lesser extent, through its other
subsidiaries. BB&T's principal banking subsidiaries, Branch Banking and Trust
Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T-
SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"), provide a
wide range of traditional banking services to individuals and commercial
customers, including small and mid-size businesses, local governments and their
agencies. Substantially all of BB&T's loans are to businesses and individuals
in the market areas outlined above. Subsidiaries of the commercial banking
subsidiaries offer lease financing to commercial businesses and municipal
governments, investment services, (including discount brokerage services,
annuities, mutual funds and government and municipal bonds), life insurance,
property and casualty insurance on an agency basis and insurance premium
financing. Other subsidiaries of the Corporation provide a variety of financial
services including automobile lending, equipment financing, factoring, full-
service securities brokerage, investment banking and corporate finance
services.
C. New Accounting Pronouncements
On January 1, 1998, BB&T adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. Comprehensive income is the
nonshareholder related change in equity (net assets) of a company during a
period from transactions and other events. The standard does not address issues
of recognition or measurement of comprehensive income; therefore, the
implementation of the statement did not have an impact on BB&T's consolidated
financial position or consolidated results of operations.
On January 1, 1998, BB&T adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which established
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. The standard did
not address issues of recognition or measurement; therefore, the implementation
of the statement did not have an impact on the consolidated financial position
or consolidated results of operations of BB&T.
On January 1, 1998, BB&T adopted the provisions of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revised
the disclosure requirements for pensions and other postretirement benefit
plans. SFAS No. 132 did not address issues of recognition or measurement and,
therefore, the implementation of the statement did not have a material impact
on the consolidated financial position or consolidated results of operations of
BB&T.
7
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 1, 1999, BB&T adopted the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
capitalization of computer software costs that meet certain criteria. The
implementation of SOP 98-1 did not have a material effect on BB&T's
consolidated financial position or consolidated results of operations.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. In June, 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which delays the original effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
Management has not yet quantified the impact of adopting SFAS No. 133, as
amended, and has not determined the timing of or method of adoption of the
statement. However, the implementation of the statement is not expected to have
a material effect on BB&T's consolidated financial position or consolidated
results of operations.
On January 1, 1999, BB&T adopted the American Institute of Certified Public
Accountants' SOP 98-5, "Accounting for Start-up Costs." SOP 98-5 provides
guidance on the financial reporting of start-up costs and organization costs,
requiring start-up costs to be expensed as incurred. The adoption of the
statement did not have a material impact on BB&T's consolidated financial
position or consolidated results of operations.
On January 1, 1999, BB&T adopted the provisions of SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The
implementation of the statement did not have a material impact on BB&T's
consolidated financial position or consolidated results of operations.
D. Mergers and Acquisitions
Completed Mergers and Acquisitions
On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life")
of Norfolk, Virginia. This transaction was accounted for as a pooling of
interests, and, accordingly, the accompanying consolidated financial statements
have been restated to reflect the accounts of Life. In conjunction with the
merger, BB&T issued approximately 11.6 million shares of common stock in
exchange for all of the outstanding shares of Life common stock.
On March 10, 1998, BB&T completed its acquisition of Regency Financial
Shares, Incorporated ("Regency") of Richmond, Virginia, in a transaction
accounted for as a pooling of interests. In conjunction with the merger, BB&T
issued approximately 801,000 shares of common stock in exchange for all of the
outstanding shares of Regency.
8
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc.
("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to
commercial, agricultural, municipal and consumer users for the purchase of lawn
care equipment. The acquisition was accounted for using the purchase method of
accounting and, therefore, the accompanying consolidated financial statements
include the operating results of DCI only since the date of acquisition. In
conjunction with the transaction, BB&T recorded $9.3 million of goodwill, which
is being amortized using the straight-line method over 15 years.
On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company
Inc., and its affiliated companies, (collectively, "Stanley"), an actuarial and
benefits consulting and administration firm located in Greensboro, North
Carolina. In conjunction with the acquisition, which was accounted for as a
purchase, BB&T recorded $10.3 million of goodwill, which is being amortized
using the straight-line method over 15 years.
On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc.
("Franklin") of Washington, D.C., in a stock transaction accounted for as a
pooling of interests. Approximately 4.9 million shares of BB&T common stock
were issued in exchange for all of the Franklin common stock outstanding.
On July 7, 1998, BB&T completed a merger with Ballston Bancorp, Inc.
("Ballston") of Washington, D.C., in a transaction accounted for as a pooling
of interests. In conjunction with the merger, BB&T issued approximately 824,000
shares of common stock in exchange for all of the outstanding shares of
Ballston.
On September 30, 1998, BB&T completed its acquisition of Maryland Federal
Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a transaction
accounted for as a purchase. In conjunction with the merger, BB&T issued 8.7
million shares of BB&T common stock in exchange for all of the outstanding
shares of Maryland Federal common stock. BB&T recorded $158.8 million of
goodwill, which is being amortized using the straight-line method over a period
of 15 years.
On March 5, 1999, BB&T completed a merger with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction
was accounted for as a pooling of interests. BB&T issued approximately 16.8
million shares of BB&T common stock in exchange for all of the outstanding
shares of MainStreet.
On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. The transaction was accounted for as a purchase. In
conjunction with the acquisition, BB&T issued 3.6 million shares of BB&T common
stock in exchange for all of the outstanding shares of Scott & Stringfellow
common stock. BB&T recorded goodwill totaling $72.8 million, which is being
amortized using the straight-line method over a period of 15 years.
On July 9, 1999, BB&T completed its merger with First Citizens Corporation
("First Citizens"), of Newnan, Georgia. The transaction was accounted for as a
pooling of interests. In conjunction with the acquisition, BB&T issued 3.2
million shares of BB&T common stock in exchange for all of the outstanding
shares of First Citizens.
On July 14, 1999, BB&T completed its merger with Mason-Dixon Bancshares, Inc.
("Mason-Dixon") of Westminster, Maryland. The transaction was accounted for as
a pooling of interests. In
9
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
conjunction with the merger, BB&T issued approximately 6.6 million shares of
common stock in exchange for all of the outstanding common stock of Mason-
Dixon.
Under the provisions of SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchase Enterprises," BB&T typically provides an allocation
period, not to exceed one year, to identify and quantify the assets acquired
and liabilities assumed in purchase business combinations. Management currently
does not anticipate any material adjustments to the assigned values of the
assets and liabilities of acquired companies.
Pending Mergers and Acquisitions
On February 25, 1999, BB&T announced plans to acquire Matewan BancShares,
Inc. ("Matewan") of Williamson, West Virginia. On April 27, 1999, BB&T and
Matewan approved amendments to the merger agreement that provide for Matewan
shareholders to receive .67 shares of BB&T common stock for each share of
Matewan common stock held and to receive .8375 shares of BB&T common stock for
each share of Matewan Series A convertible preferred stock held. The
transaction is expected to be completed in the third quarter of 1999 and
accounted for as a purchase.
On April 28, 1999, BB&T announced plans to merge with First Liberty Financial
Corp. ("First Liberty") of Macon, Georgia. First Liberty's shareholders will
receive between .85 and .87 shares of BB&T common stock for each share of First
Liberty stock held. The transaction is expected to be completed in the fourth
quarter of 1999 and accounted for as a pooling of interests.
On July 28, 1999, BB&T announced plans to merge with Premier Bancshares, Inc.
("Premier") of Atlanta, Georgia. Premier's shareholders will receive .5155
shares of BB&T common stock for each share of Premier stock held. The
transaction is expected to be completed in the first quarter of 2000 and
accounted for as a pooling of interests.
10
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
E. Calculation of Earnings Per Common Share
BB&T's basic and diluted earnings per common share amounts were calculated as
follows (amounts retroactively adjusted for the 2-for-1 stock split effective
August 3, 1998):
BB&T CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Periods as Indicated
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands except per share data)
Basic Earnings Per Share:
Weighted average number
of common shares
outstanding during the
period 306,431,875 302,781,582 306,448,974 303,818,538
------------ ------------ ------------ ------------
Net income $ 152,792 $ 128,039 $ 291,215 $ 248,484
------------ ------------ ------------ ------------
Basic earnings per share $ .50 $ .42 $ .95 $ .82
------------ ------------ ------------ ------------
Diluted Earnings Per
Share:
Weighted average number
of common shares
outstanding during the
period 306,431,875 302,781,582 306,448,974 303,818,538
Add-
Dilutive effect of
outstanding options (as
determined by
application of treasury
stock method) 5,945,734 6,246,819 6,016,174 6,330,755
------------ ------------ ------------ ------------
Weighted average number
of common shares, as
adjusted 312,377,609 309,028,401 312,465,148 310,149,293
------------ ------------ ------------ ------------
Net income $ 152,792 $ 128,039 $ 291,215 $ 248,484
------------ ------------ ------------ ------------
Diluted earnings per
share $ .49 $ .41 $ .93 $ .80
------------ ------------ ------------ ------------
11
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. Segment Disclosures
BB&T's operations are divided into six reportable business segments: the
Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment
Banking and Brokerage, and Treasury. These operating segments have been
identified based primarily on BB&T's existing organizational structure. The
segments require unique technology and marketing strategies and offer different
products and services. While BB&T is managed as an integrated organization,
individual executive managers are held accountable for the operations of the
business segments that report to them.
BB&T emphasizes revenue growth by focusing on client service, client
relationships and sales effectiveness. The segment results presented herein are
based on internal management accounting policies that support these strategic
objectives. Unlike financial accounting, there is no comprehensive
authoritative body of guidance for management accounting equivalent to
generally accepted accounting principles. Therefore, the performance of the
segments is not necessarily comparable with BB&T's consolidated results or with
similar information presented by any other financial institution. Additionally,
because of the interrelationships of the various segments, the information
presented is not necessarily indicative of the segments' financial performance
if they operated as independent entities.
BB&T's internal reporting system was significantly modified during 1998, and,
as a result, prior periods have not been reported because it is not practicable
to restate prior period results to conform to the current reporting methods.
Also, BB&T has completed various mergers and acquisitions accounted for as
poolings of interests, which present additional practical limitations to the
presentation of comparable prior period information.
Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's
Current Report on Form 8-K, filed on April 30, 1999, for a description of
internal accounting policies and the basis of segmentation, including a
description of the segments presented in the accompanying table. There have
been no significant changes in the format presented in those documents.
The following tables disclose selected financial information for BB&T's
reportable business segments for the periods as indicated:
12
For the Three Months Ended June 30, 1999
---------------------------------------------------------------------------------------------------
Investment All Total
Banking Mortgage Trust Agency Banking Other Segment
Network Banking Services Insurance and Brokerage Treasury Segments Results
------------ ----------- -------- --------- ------------- ------------ ----------- ------------
(dollars in thousands)
Net interest income (expense)
from external customers $ 198,879 $ 103,503 $ (8,390) $ 2,733 $ 2,258 $ 39,183 $ 60,731 $ 398,897
Net intersegment
interest income
(expense) 61,736 (76,452) 10,071 -- -- (5,581) -- (10,226)
------------ ----------- -------- -------- --------- ------------ ----------- ------------
Net interest
income 260,615 27,051 1,681 2,733 2,258 33,602 60,731 388,671
------------ ----------- -------- -------- --------- ------------ ----------- ------------
Provision for
loan and lease
losses 22,203 687 -- 928 -- 23 4,127 27,968
Noninterest
income from
external
customers 103,884 32,564 11,689 16,701 39,431 (1,659) 7,358 209,968
Intersegment
noninterest
income 14,009 1,339 160 -- -- 128 -- 15,636
Noninterest
expense 123,262 15,072 7,008 15,473 38,367 1,545 13,767 214,494
Intersegment
noninterest
expense 61,798 4,668 631 770 448 1,553 1,654 71,522
------------ ----------- -------- -------- --------- ------------ ----------- ------------
Income before
income taxes and
the charge for
capital 171,245 40,527 5,891 2,263 2,874 28,950 48,541 300,291
Provision
for income taxes 64,227 15,298 2,218 855 1,480 11,598 8,139 103,815
------------ ----------- -------- -------- --------- ------------ ----------- ------------
Net income
before capital
charge 107,018 25,229 3,673 1,408 1,394 17,352 40,402 196,476
Charge for
capital 31,839 3,044 365 -- -- 291 -- 35,539
------------ ----------- -------- -------- --------- ------------ ----------- ------------
Net income after
charge for
capital $ 75,179 $ 22,185 $ 3,308 $ 1,408 $ 1,394 $ 17,061 $ 40,402 $ 160,937
============ =========== ======== ======== ========= ============ =========== ============
Identifiable
segment assets $ 19,567,354 $ 5,580,091 $ 17,376 $ 99,873 $ 915,979 $ 11,738,763 $ 2,709,394 $ 40,628,830
============ =========== ======== ======== ========= ============ =========== ============
Other Reconciling
Revenues Items & Consolidated
and Expenses Eliminations Totals
------------- ------------------ ------------
Net interest income (expense)
from external customers $ 28,029 $ (64,650)(/4/) $ 362,276
Net intersegment
interest income
(expense) (9,785) 20,011 (/3/) --
------------- ------------------ ------------
Net interest
income 18,244 (44,639) 362,276
------------- ------------------ ------------
Provision for
loan and lease
losses 456 (8,424)(/4/) 20,000
Noninterest
income from
external
customers 11,565 (37,337)(/4/) 184,196
Intersegment
noninterest
income 144 (15,780)(/3/) --
Noninterest
expense 68,533 19,092 (/4/) 302,119
Intersegment
noninterest
expense (13,995) (57,527)(/3/) --
------------- ------------------ ------------
Income before
income taxes and
the charge for
capital (25,041) (50,897) 224,353
Provision
for income taxes (14,188) (18,066)(/4/) 71,561
------------- ------------------ ------------
Net income
before capital
charge (10,853) (32,831) 152,792
Charge for
capital 324 (35,863)(/3/) --
------------- ------------------ ------------
Net income after
charge for
capital $ (11,177) $ 3,032 $ 152,792
============= ================== ============
Identifiable
segment assets $ 2,246,651 $ (3,690,617)(/4/) $39,184,864
============= ================== ============
- ----
(1) Financial data for segments below the quantitative thresholds requiring
disclosure are attributable to a number of smaller operating segments.
Those segments include a sub-prime auto lender, a factoring operation, a
commercial lawn care finance company, a home equity finance company and a
leasing company.
(2) Other revenues and expenses include amounts incurred by BB&T's support
functions not allocated to the various segments. Amounts include any
unallocated provision for loan and lease losses and unallocated general
corporate expenses, as well as costs associated with BB&T's Year 2000
compliance efforts.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of the internal management accounting practices.
These adjustments include the elimination of the FTP credits and charges,
the elimination of intersegment capital credits and charges, the
elimination of the intersegment noninterest revenues and the elimination
of overhead expenses allocated to the various segments.
(4) To reflect elimination entries necessary to consolidated the segment data.
13
For the Six Months Ended June 30, 1999
-----------------------------------------------------------------------------------------------
All
Investment Other Total
Banking Mortgage Trust Agency Banking Segments Segment
Network Banking Services Insurance and Brokerage Treasury (/1/) Results
----------- ---------- --------- --------- ------------- ----------- ---------- -----------
(dollars in thousands)
Net interest income (expense)
from external
customers $ 380,992 $ 214,297 $ (16,576) $ 5,482 $ 2,513 $ 79,216 $ 110,730 $ 776,654
Net intersegment
interest income
(expense) 134,424 (155,565) 19,871 -- -- (10,072) -- (11,342)
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Net interest
income 515,416 58,732 3,295 5,482 2,513 69,144 110,730 765,312
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Provision for
loan and lease
losses 43,941 1,400 -- 1,906 -- 45 8,237 55,529
Noninterest
income from
external
customers 207,106 65,408 23,048 33,497 55,747 (305) 13,617 398,118
Intersegment
noninterest
income 27,603 2,652 321 -- -- 270 -- 30,846
Noninterest
expense 247,809 30,423 14,437 29,013 49,242 2,618 25,776 399,318
Intersegment
noninterest
expense 120,594 9,347 1,260 1,539 896 4,012 3,038 140,686
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Income before
income taxes and
the charge for
capital 337,781 85,622 10,967 6,521 8,122 62,434 87,296 598,743
Provision for
income taxes 126,766 32,322 4,134 2,462 3,539 22,400 13,348 204,971
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Net income
before capital
charge 211,015 53,300 6,833 4,059 4,583 40,034 73,948 393,772
Charge for
capital 62,734 6,027 729 -- -- 614 -- 70,104
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Net income after
charge for
capital $ 148,281 $ 47,273 $ 6,104 $ 4,059 $ 4,583 $ 39,420 $ 73,948 $ 323,668
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Identifiable
segment assets $19,567,354 $5,580,091 $ 17,376 $99,873 $915,979 $11,738,763 $2,709,394 $40,628,830
----------- ---------- --------- ------- -------- ----------- ---------- -----------
Other
Revenues Reconciling
and Expenses Items & Consolidated
(/1/) Eliminations Totals
------------ ------------------ ------------
Net interest income (expense)
from external
customers $ 44,758 $ (114,759)(/4/) $ 706,653
Net intersegment
interest income
(expense) (13,391) 24,733 (/3/) --
------------ ------------------ ------------
Net interest
income 31,367 (90,026) 706,653
------------ ------------------ ------------
Provision for
loan and lease
losses 1,007 (16,536)(/4/) 40,000
Noninterest
income from
external
customers 14,557 (67,295)(/4/) 345,380
Intersegment
noninterest
income 274 (31,120)(/3/) --
Noninterest
expense 132,020 52,589 (/4/) 583,927
Intersegment
noninterest
expense (28,090) (112,596)(/3/) --
------------ ------------------ ------------
Income before
income taxes and
the charge for
capital (58,739) (111,898) 428,106
Provision for
income taxes (29,726) (38,354)(/4/) 136,891
------------ ------------------ ------------
Net income
before capital
charge (29,013) (73,544) 291,215
Charge for
capital 621 (70,725)(/3/) --
------------ ------------------ ------------
Net income after
charge for
capital $ (29,634) $ (2,819) $ 291,215
------------ ------------------ ------------
Identifiable
segment assets $2,246,651 $ (3,690,617)(/4/) $39,184,864
------------ ------------------ ------------
- ----
(1) Financial data for segments below the quantitative thresholds requiring
disclosure are attributable to a number of smaller operating segments.
Those segments include a sub-prime auto lender, a factoring operation, a
commercial lawn care finance company, a home equity finance company and a
leasing company.
(2) Other revenues and expenses include amounts incurred by BB&T's support
functions not allocated to the various segments. Amounts include any
unallocated provision for loan and lease losses and unallocated general
corporate expenses, as well as costs associated with BB&T's Year 2000
compliance efforts.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of the internal management accounting practices.
These adjustments include the elimination of the FTP credits and charges,
the elimination of intersegment capital credits and charges, the
elimination of the intersegment noninterest revenues and the elimination
of overhead expenses allocated to the various segments.
(4) To reflect elimination entries necessary to consolidated the segment data.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at June 30, 1999, were $39.2 billion, a $2.8 billion
increase from the balance at December 31, 1998. The balance sheet categories
that accounted for most of the increase were loans and leases, including loans
held for sale, which grew $666.5 million, securities available for sale, which
increased $1.4 billion, Federal funds sold and securities purchased under
resale agreements or similar arrangements, which increased $525.5 million, and
other assets, which grew $266.1 million compared to year-end 1998. These
increases were partially offset by declines in cash and due from banks, which
decreased $28.4 million and securities held to maturity, which decreased $77.3
million.
Total deposits at June 30, 1999, remained relatively flat compared to year-
end 1998, while short-term borrowed funds increased $2.6 billion and long-term
debt increased $198.0 million during the first six months of 1999. Total
shareholders' equity decreased $91.8 million during the same time frame.
The factors causing the fluctuations in these balance sheet categories are
further discussed in the following paragraphs.
Loans and Leases
BB&T's overall loan growth was solid during the second quarter and the first
six months of 1999, with end of period loans, including loans held for sale,
increasing 6.6% on an annualized basis since the end of the first quarter of
1999 and 5.4% on an annualized basis since year-end 1998. Average loans
increased 8.9% in the second quarter of 1999 compared to the same period in
1998. For the six months, average loans grew 9.9%. The overall growth in loans
was reduced by a significant decline in loans held for sale during the second
quarter and the first six months of 1999. At June 30, 1999, end of period loans
held for sale totaled $539.3 million, down $496.3 million, or 47.9%, from the
balance at December 31, 1998. Loans held for sale are subject to significant
fluctuations from quarter to quarter based on the volume of mortgage loan
production. Excluding the impact of the decrease in loans held for sale,
annualized loan growth from December 31, 1998, to June 30, 1999, would have
been 9.9%.
BB&T continues to focus lending efforts on commercial and consumer loans,
which are generally more profitable than mortgage loans. BB&T's acquisition
strategy in recent years has resulted in mergers with a number of thrift
institutions, which created a concentration of mortgage loans in the portfolio.
Through securitizations and sales of fixed rate mortgage loans, the mix of the
loan portfolio has changed in the current year compared to 1998. During the
second quarter of 1999, mortgage loans decreased 8.2% on average compared to
the second quarter of 1998 and were down 1.5% on average for the first six
months. Average commercial loans, including leasing, increased 18.3% in this
year's second quarter compared to the second quarter of 1998 and 17.0% for the
six month period ending June 30, 1999 compared to 1998. Average consumer loans,
which includes sales finance, revolving credit and direct retail, increased
9.6% in the second quarter of 1999 compared to the same period in 1998, and
8.6% comparing the first six months of 1999 and the same period of 1998.
The 1999 loan growth rates include the effects of loans that were acquired
through purchase accounting transactions. BB&T acquired $1.0 billion in loans
during 1998 through the purchases of DCI, Stanley and Maryland Federal.
Excluding the impact of these purchase accounting transactions, average
"internal" loan growth for the three months ended June 30, 1999, was 4.7%
compared to the second quarter of 1998. By category, excluding these purchase
accounting transactions, average
15
mortgage loans decreased 20.8%, commercial loans grew 17.9%, revolving credit
increased 7.8% and direct retail loans were up 4.8% in the second quarter of
1999 compared to 1998.
The change in mix and the continued growth of the loan portfolio boosted
interest income in the second quarter despite a decline in the average yield
earned on loans. The average annualized yields on commercial, consumer and
mortgage loans for the second quarter of 1999 were 8.70%, 9.84%, and 7.48%,
respectively, resulting in an average yield on the total loan portfolio of
8.72%. This reflects a decrease of 37 basis points from the 9.09% earned on
total average loans during the second quarter of 1998.
Securities
Securities available for sale, which totaled $10.1 billion at June 30, 1999,
increased $1.4 billion from December 31, 1998. This portfolio of securities had
net unrealized losses, net of deferred income taxes, of $112.7 million at June
30, 1999, compared to net unrealized gains of $61.0 million at December 31,
1998. Securities held to maturity totaled $97.5 million, down $77.3 million
from year-end 1998. The annualized average yield on the securities portfolio
for the second quarter of 1999 was 6.60%, down 17 basis points from the net
yield earned in the second quarter of 1998.
Other Interest-Earnings Assets
Federal funds sold and securities purchased under resale agreements or
similar arrangements increased $525.5 million during the first six months of
1999, compared to December 31, 1998. These balances are subject to large
fluctuations based on the availability of funds. The average yield on other
interest-earning assets for the first six months of 1999 was 5.41%, down from
5.72% earned during the first half of 1998.
Other Assets
BB&T's other noninterest-earning assets, excluding premises and equipment,
increased $266.1 million from December 31, 1998, to June 30, 1999. The increase
results primarily from higher goodwill, which increased $91.8 million during
the first six months of the year because of the acquisition of Scott &
Stringfellow and a number of insurance agencies. In addition, capitalized
mortgage servicing rights increased $31.9 million over the same time frame.
Deposits
Total end of period deposits increased slightly from December 31, 1998 to
June 30, 1999; however, average deposits for the first six months of 1999
increased 8.7% compared to the same period in 1998. Average certificates of
deposit and other time deposits grew $531.5 million, or 4.5%. Average money
rate savings accounts, including investor deposit accounts, grew $1.3 billion,
or 23.3%. Noninterest-bearing deposits increased $347.0 million, or 11.6%.
Savings and interest checking decreased $233.3 million, or 11.6%.
The growth in average deposits primarily results from purchase accounting
transactions and from the ongoing promotion of BB&T's "Investor Deposit
Account," which is a money rate savings account that provides greater
flexibility than traditional certificate accounts and is more cost effective
than certificates of deposit. BB&T acquired $813.3 million of deposits on
September 30, 1998, through the purchase of Maryland Federal. On average,
investor deposit accounts for the first half of 1999 totaled $3.1 billion,
compared to a prior year average of $2.2 billion, an increase of 45.4%.
The annualized average cost for total interest-bearing deposits during the
first six months of 1999 was 4.05%, down 35 basis points from the comparable
period of 1998.
16
Short-term Borrowed Funds
As a result of asset growth rates significantly higher than deposit growth
rates in recent years, cost-effective alternative funding sources, such as
Federal Home Loan Bank ("FHLB") advances, master notes, purchases of Federal
funds and sales of securities under repurchase agreements have been
increasingly utilized to support balance sheet growth.
During the first six months of 1999, end of period short-term borrowed funds
increased $2.6 billion, or 71.1%, compared to year-end 1998. However, on
average, short-term borrowed funds increased $246.0 million, or 5.7%. The
overall increase in average short-term borrowed funds was composed of an
increase in short-term bank notes, offset by declines in Federal funds
purchased, securities sold under repurchase agreements and short-term FHLB
advances. The average annualized rate paid on short-term borrowed funds was
4.67% for the first six months of 1999, down from 5.33% for the same period in
1998.
Long-term Debt
Long-term debt consists primarily of FHLB advances, medium term bank notes
and corporate subordinated debt. These borrowings are currently being utilized
because they are relatively cost-effective funding sources and provide BB&T
with the flexibility to structure borrowings in a manner that aids in the
management of interest rate risk and liquidity. Long-term debt totaled $5.2
billion at June 30, 1999, an increase of $198.0 million, or 4.0%, from the
balance at December 31, 1998. On average, long-term debt increased $1.2
billion, or 31.0%, for the first six months of 1999 compared to the first half
of 1998. Long-term debt has been utilized for a variety of funding needs,
including the repurchase of shares of BB&T's common stock in conjunction with
certain acquisitions.
Asset Quality
Nonperforming assets (composed of foreclosed assets, nonaccrual loans and
restructured loans) totaled $100.4 million at June 30, 1999, compared to $118.3
million at December 31, 1998. Nonperforming assets, as a percentage of loan-
related assets, were .40% at June 30, 1999, compared to .48% at December 31,
1998. Loans 90 days or more past due and still accruing interest totaled $44.2
million compared to a year-end 1998 balance of $54.2 million.
Net charge-offs totaled $26.9 million and amounted to .22% of average loans
and leases, on an annualized basis, in the first six months of 1999 compared to
$32.3 million, or .29% of average loans and leases, in the corresponding period
in 1998. The decrease in net charge-offs as a percentage of average loans and
leases results from improved overall asset quality.
The allowance for loan and lease losses was $343.9 million, or 1.35% of loans
and leases, at June 30, 1999, compared to $330.6 million, or 1.34% of loans and
leases, at December 31, 1998. The slight increase in the allowance as a
percentage of total loans and leases results from provisions for loan losses in
excess of net charge-offs.
The provision for loan and lease losses for the second quarter of 1999 was
$20.0 million, compared to $23.0 million in the second quarter of 1998. For the
six months ended June 30, 1999, the provision totaled $40.0 million, a decrease
of $6.5 million, or 13.9%, compared to the first half of 1998. The lower
provisions were principally the result of lower net charge-offs during 1999 and
positive trends in nonaccrual loans and leases and other nonperforming assets.
17
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
(Dollars in thousands)
As of / For the Three Months Ended
------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98
-------- -------- -------- -------- --------
Allowance For Loan & Lease
Losses
Beginning balance $337,983 $330,615 $328,244 $308,968 $301,191
Allowance for acquired
loans 169 -- -- 15,542 1,269
Provision for loan and
lease losses 20,000 20,000 22,765 21,229 23,038
Net charge-offs (14,296) (12,632) (20,394) (17,495) (16,530)
-------- -------- -------- -------- --------
Ending balance $343,856 $337,983 $330,615 $328,244 $308,968
======== ======== ======== ======== ========
Risk Assets
Nonaccrual loans and leases $ 77,084 $ 86,457 $ 88,847 $ 89,067 $ 84,062
Foreclosed real estate 14,042 18,969 17,428 21,778 20,761
Other foreclosed property 8,487 10,539 11,548 11,669 14,189
Restructured loans 747 520 522 525 528
-------- -------- -------- -------- --------
Total nonperforming assets $100,360 $116,485 $118,345 $123,039 $119,540
======== ======== ======== ======== ========
Loans 90 days or more past
due and still accruing $ 44,195 $ 40,948 $ 54,226 $ 51,107 $ 52,881
======== ======== ======== ======== ========
Asset Quality Ratios
Nonaccrual loans and
restructured loans & leases
as a percentage of total
loans and leases .31% .35% .36% .37% .36%
Total nonperforming assets
as a percentage of:
Total assets .26 .31 .33 .34 .35
Loans and leases plus
foreclosed property .40 .47 .48 .51 .51
Net charge-offs as a
percentage of average loans
and leases .23 .21 .33 .30 .29
Allowance for loan and lease
losses as a percentage of
loans and leases 1.35 1.35 1.34 1.36 1.32
Ratio of allowance for loan
and lease losses to:
Net charge-offs 6.00x 6.60x 4.09x 4.73x 4.66x
Nonaccrual and restructured
loans and leases 4.42 3.89 3.70 3.66 3.65
- --------
All items referring to loans and leases include loans held for sale and are net
of unearned income. Applicable ratios are annualized.
MARKET RISK MANAGEMENT
As a financial intermediary, BB&T's market risk exposure is principally
interest rate risk. A primary objective in interest rate risk management is to
minimize the effect that changes in interest rates on interest-sensitive assets
and interest-sensitive liabilities have on net interest income. Management uses
active balance sheet management as an efficient and cost-effective means of
controlling interest rate risk. This is accomplished through strategic pricing
of asset and liability accounts. The expected result of this process is the
development of appropriate maturity and repricing opportunities in those
accounts to produce consistent earnings during changing interest rate
environments. The Asset / Liability Management Committee ("ALCO") monitors
loan, investment and liability portfolios to ensure comprehensive management of
interest rate risk.
18
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the ALCO to determine and achieve the most
appropriate volume and mix of earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to interest rate risk
exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate
risk and liquidity positions 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
as a result of fluctuations in interest rates is within acceptable standards.
The majority of assets and liabilities of financial institutions are monetary
in nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Fluctuations in interest rates and the efforts of the Board of Governors of the
Federal Reserve System ("FRB") to regulate money and credit conditions have a
greater effect on a financial institution's profitability than do the effects
of higher costs for goods and services. Through its balance sheet management
function, BB&T is positioned to respond to changing interest rates and
inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of earnings to changes in interest rates. Simulation
takes into account the current contractual agreements that BB&T has made with
its customers on deposits, borrowings, loans, investments and any commitments
to enter into those transactions. Management monitors BB&T's interest
sensitivity by means of a computer model that incorporates current volumes and
rates, maturities, repricing opportunities and anticipated growth of asset and
liability portfolios. The model calculates an earnings estimate based on
current and projected portfolio balances and interest rates. This level of
detail is needed to 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 true earnings potential than other analyses such as
static or dynamic gap.
The asset/liability management process involves various analyses. Management
determines the most likely outlook for the economy and interest rates by
analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance are
all considered, given the current environmental situation. 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 June 30, 1999. 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 conditions, loan and deposit volumes and pricing; customer
preferences; and capital plans. This tabular data does not reflect the impact
of any changes in the credit quality of BB&T's assets. 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 of assets and
liabilities incorporating the projected effect of maturities and repricing
opportunities. The resulting change in net interest income reflects the level
of sensitivity that net interest income has in relation to changing interest
rates.
19
Interest Sensitivity Simulation Analysis
Annualized
Interest Hypothetical
Rate Percentage
Scenario Change in
-------- Prime Net Interest
Linear Rate Income
------ ----- ------------
+ 3.00% 12.00% -2.85%
+ 1.50 9.50 -1.95
-1.50 7.50 .72
-3.00 5.00 .67
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
parallel change in interest rates over three months from the most likely
interest rate scenario, and a maximum of 6% for a 300 basis point change over
12 months. It is management's ongoing objective to effectively manage the
impact of changes in interest rates and minimize the resulting effect on
earnings as evidenced by the preceding table. At June 30, 1999, the sensitivity
of BB&T's net interest income to changes in interest rates was within
management's targets, as illustrated in the accompanying table.
Derivatives and Off-Balance Sheet Financial Instruments
BB&T utilizes a variety of derivative financial instruments to manage various
financial risks. These instruments include financial forward and futures
contracts, options written and purchased, interest rate caps and floors and
interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose BB&T to interest rate
risk or price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
BB&T's derivative contracts are typically written in amounts referred to as
notional amounts. Notional amounts do not represent amounts to be exchanged
between parties and are not a measure of financial risks, but only provide the
basis for calculating payments between the counterparties. On June 30, 1999,
BB&T had outstanding interest rate swaps, caps, floors and collars with
notional amounts totaling $2.0 billion. The estimated fair value of open
contracts used for risk management purposes reflected net unrealized gains of
$15.2 million at June 30, 1999.
BB&T uses derivative contracts 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 commercial loans,
adjustable rate mortgage loans, commercial swaps, retail certificates of
deposit and fixed rate debt.
The net interest payable or receivable on interest rate swaps and floors that
are designated as hedges is accrued and recognized as an adjustment to the
interest income or expense of the related asset or liability. For interest rate
forwards, futures and options qualifying as a hedge, gains and losses are
deferred and are recognized in income as an adjustment of yield. Gains and
losses from early terminations of derivatives are deferred and amortized as
yield adjustments over the shorter of the remaining term of the hedged asset or
liability or the remaining term of the derivative instrument. Upon disposition
or settlement of the asset or liability being hedged, deferral accounting is
discontinued and any gains or losses are 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.
20
A derivative is a financial instrument that derives its cash flows, and
therefore its value, from 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 interest
rate swaps, caps and floors to which BB&T is a party settle monthly, quarterly
or semiannually. Accordingly, the amount of off-balance sheet credit exposure
to which BB&T is exposed at any time is immaterial. Further, BB&T has netting
agreements with the dealers with which it does business. Because of these
netting agreements, BB&T had a minimal amount of off-balance sheet credit
exposure at June 30, 1999.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments," requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. The following tables set forth
certain information concerning BB&T's interest rate swaps, caps, floors and
collars at June 30, 1999:
Interest Rate Swaps, Caps, Floors and Collars
June 30, 1999
(Dollars in thousands)
Net
Notional Receive Pay Unrealized
Type Amount Rate Rate Gains
- ---- ----------- ----------- ------------------ ----------
Receive fixed swaps $ 785,000 6.49% 5.06% $ 9,233
Pay fixed swaps 175,014 4.99 5.36 5,213
Caps, floors & collars 997,250 -- -- 772
---------- ---------- ---------- ----------
Total $1,957,264 5.51 % 5.39 % $ 15,218
========== ========== ========== ==========
Receive Pay Fixed Basis Swaps, Caps,
Year-to-date Activity Fixed Swaps Swaps Floors & Collars Total
- --------------------- ----------- ----------- ------------------ ----------
Balance, December 31,
1998 $1,266,200 $1,180,146 $1,297,250 $3,743,596
Additions 30,000 39,870 -- 69,870
Maturities/amortizations (511,200) (1,045,002) (300,000) (1,856,202)
Terminations -- -- -- --
---------- ---------- ---------- ----------
Balance, June 30, 1999 $ 785,000 $ 175,014 $ 997,250 $1,957,264
========== ========== ========== ==========
One Year One to Five After Five
Maturity Schedule* or Less Years Years Total
- ------------------ ----------- ----------- ------------------ ----------
Receive fixed swaps $ 225,000 $ 270,000 $ 290,000 $ 785,000
Pay fixed swaps 5,465 101,976 67,573 175,014
Caps, floors & collars 250,000 747,250 -- 997,250
---------- ---------- ---------- ----------
Total $ 480,465 $1,119,226 $ 357,573 $1,957,264
========== ========== ========== ==========
- --------
* Maturities are based on full contract extensions.
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority and
is closely monitored. BB&T's principal capital planning goals are to provide an
adequate return to shareholders while retaining a sufficient base to support
future growth and comply with all regulatory standards.
21
Total shareholders' equity was $2.8 billion at June 30, 1999 and $2.9 billion
at December 31, 1998. BB&T's book value per common share at June 30, 1999, was
$9.25 compared to $9.53 at December 31, 1998.
The minimum required ratios of Tier 1 capital (total shareholders' equity
excluding unrealized gains or losses on securities available for sale, net of
taxes, and nonqualifying intangible assets) and total capital (Tier 1 capital,
a qualifying portion of the allowance for loan and lease losses and qualifying
subordinated debt) to risk-weighted assets are defined by Federal Bank
Regulatory guidelines. An 8.00% minimum of total capital to risk-weighted
assets is required. One-half of the 8.00% minimum must consist of Tier 1
capital under regulatory guidelines. The Tier 1 leverage ratio, established by
Federal Bank Regulatory guidelines, measures Tier 1 capital to average total
assets less nonqualifying intangibles. The regulatory minimum for the Tier 1
leverage ratio is 3.00% to 5.00% depending upon Federal bank regulatory agency
evaluation of an organization's overall safety and soundness. BB&T's capital
adequacy ratios for the last five quarters are presented in the accompanying
table:
CAPITAL ADEQUACY RATIOS
1999 1998
--------------- -----------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Risk-based capital ratios:
Tier 1 capital 9.4% 9.7% 10.3% 10.5% 10.5%
Total capital 13.5 14.2 15.0 15.3 15.6
Tier 1 leverage ratio 6.6 6.9 7.0 7.3 7.0
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the second quarter of 1999 totaled $152.8 million, an increase
of 19.3% over the $128.0 million earned during the second quarter of 1998. On a
diluted per share basis, earnings for the three months ended June 30, 1999 were
$.49, compared to $.41 for the same period in 1998, an increase of 19.5%.
BB&T's operating results for the second quarter of 1999 produced an annualized
return on average assets of 1.60% and an annualized return on average
shareholders' equity of 20.70% compared to prior year ratios of 1.50% and
19.52%, respectively.
For the first half of 1999, net income totaled $291.2 million, an increase of
17.2% compared to the $248.5 million earned in the first six months of 1998. On
a diluted per share basis, BB&T earned $.93 in the six months, compared to $.80
last year, an increase of 16.3%.
BB&T's earnings for the first six months of both 1999 and 1998 were adversely
affected by costs of a nonrecurring nature principally associated with
consummating mergers and acquisitions. During the first quarter of 1998, BB&T
recorded $6.0 million in after-tax expenses primarily associated with the Life
merger. These charges included professional fees, as well as costs in
connection with the reduction of staffing levels, early retirement packages and
other personnel-related expenses. During the first quarter of 1999, $10.4
million in after-tax charges were recorded in conjunction with completing the
MainStreet merger. These costs included professional fees, personnel-related
expenses and occupancy and equipment costs.
Excluding the impact of these merger-related charges on operating results,
BB&T would have had net income for the first six months of 1999 of $301.6
million, an increase of 18.5%, compared to the $254.5 million earned in the
first half of 1998. On a diluted per share basis, earnings for the first six
months of 1999 excluding these changes were $.97, compared to $.82 earned last
year, an increase of 18.3%. Earnings before nonrecurring expenses for the first
half of 1999 produced an annualized
22
return on average assets of 1.62% and a return on average equity of 20.62%,
compared to prior year ratios of 1.52% and 19.44%, respectively.
BB&T's growth in recurring earnings resulted from four principal factors.
First, BB&T's noninterest income continues to grow at a very strong pace,
increasing 36.8% for the three months ended June 30, 1999, compared to the same
period in 1998, and 32.8% for the six months ended June 30, 1999, compared to
the first half of 1998. The components of noninterest income that are producing
this growth are further described in the following sections. Second, as
discussed above, BB&T has experienced positive growth in loans and securities
during the second quarter, which resulted in a 13.0% increase in net interest
income on a fully taxable equivalent ("FTE") basis in the second quarter of
1999, compared to the second quarter of 1998. For the first six months of 1999,
net interest income FTE has increased 10.6% compared to the same period in
1998. Third, BB&T has continued to effectively manage the growth of noninterest
expenses. Excluding the effect of acquisitions accounted for by the purchase
method of accounting, recurring noninterest expense increased 4.5% in the
second quarter of 1999 and 5.8% for the six months of 1999 compared to the same
periods in 1998. Fourth, improved overall asset quality and lower credit losses
have allowed BB&T to record lower provisions for loan losses during 1999.
Net Interest Income and Net Interest Margin
Net interest income on an FTE basis was $383.6 million for the second quarter
of 1999 compared to $339.5 million for the same period in 1998, a 13.0%
increase. For the first half of 1999, net interest income FTE totaled $746.2
million, compared to $674.4 million in 1998, an increase of 10.6%. For the
three months ended June 30, 1999, average interest-earning assets increased
$3.8 billion, or 12.0%, to $35.8 billion over the second quarter of 1998, while
average interest-bearing liabilities increased by $3.5 billion. During the same
time period, the net interest margin increased from 4.25% in the second quarter
of 1998 to 4.29% in the current quarter. The 4 basis point increase in margin
was primarily the result of lower funding costs.
The following tables set forth the major components of net interest income
and the related yields for the second quarter of 1999 compared to the second
quarter of 1998, and the six months ended June 30, 1999 and 1998, and the
variances between the periods caused by changes in interest rates versus
changes in volumes.
23
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended June 30, 1999 and 1998
Yield /
Average Balances Rate Income / Expense Change due to
----------------------- ---------- ----------------- Increase ----------------
Fully Taxable Equivalent
- - (Dollars in thousands) 1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume
- ------------------------ ----------- ----------- ---- ---- -------- -------- ---------- ------- -------
Assets
Securities(1):
U.S. Treasury,
government and other (5) $ 9,702,642 $ 8,402,370 6.56% 6.67% $159,020 $140,129 $18,891 $(2,450) $21,341
States and political
subdivisions 519,717 228,239 7.51 8.36 9,764 4,770 4,994 (526) 5,520
----------- ----------- ---- ---- -------- -------- ------- ------- -------
Total securities (5) 10,222,359 8,630,609 6.61 6.72 168,784 144,899 23,885 (2,976) 26,861
Other earning assets (2) 394,035 216,175 5.64 5.60 5,541 3,018 2,523 22 2,501
Loans and leases, net of
unearned income
(1)(3)(4)(5) 25,200,396 23,146,329 8.74 9.03 549,709 521,240 28,469 (16,716) 45,185
----------- ----------- ---- ---- -------- -------- ------- ------- -------
Total earning assets 35,816,790 31,993,113 8.10 8.38 724,034 669,157 54,877 (19,670) 74,547
----------- ----------- ---- ---- -------- -------- ------- ------- -------
Non-earning assets 2,576,790 2,155,854
----------- -----------
Total assets $38,393,580 $34,148,967
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking $ 1,760,553 $ 1,959,573 1.57 1.96 6,893 9,589 (2,696) (1,788) (908)
Money rate savings 6,954,090 5,750,932 2.78 2.94 48,139 42,149 5,990 (2,441) 8,431
Time deposits 12,346,889 11,782,029 5.06 5.50 155,776 161,437 (5,661) (13,170) 7,509
----------- ----------- ---- ---- -------- -------- ------- ------- -------
Total interest-bearing
deposits 21,061,532 19,492,534 4.01 4.39 210,808 213,175 (2,367) (17,399) 15,032
Short-term borrowed
funds 5,140,023 4,495,242 4.64 5.32 59,468 59,607 (139) (8,112) 7,973
Long-term debt 5,238,732 3,903,859 5.36 5.84 70,154 56,898 13,256 (4,923) 18,179
----------- ----------- ---- ---- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 31,440,287 27,891,635 4.34 4.74 340,430 329,680 10,750 (30,434) 41,184
----------- ----------- ---- ---- -------- -------- ------- ------- -------
Noninterest-bearing
deposits 3,385,402 3,069,532
Other liabilities 607,239 556,759
Shareholders' equity 2,960,652 2,631,041
----------- -----------
Total liabilities and
shareholders' equity $38,393,580 $34,148,967
=========== ===========
Average interest rate
spread 3.76 3.64
Net yield on earning
assets 4.29% 4.25% $383,604 $339,477 $44,127 $10,764 $33,363
==== ==== ======== ======== ======= ======= =======
Taxable equivalent
adjustment $ 21,328 $ 16,016
======== ========
(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 is 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.
24
Net Interest Income and Rate / Volume Analysis For the Six Months Ended June
30, 1999 and 1998
Average Balances Yield / Rate Income / Expense Change due to
----------------------- -------------- ------------------- Increase ----------------
Fully Taxable Equivalent
- - (Dollars in thousands) 1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume
- ------------------------ ----------- ----------- ------ ------ --------- --------- ---------- ------- -------
Assets
Securities(1):
U.S. Treasury,
government and other (5) $ 9,244,178 $ 8,338,023 6.54% 6.72% $ 302,369 $ 279,971 $22,398 $(7,332) $29,730
States and political
subdivisions 443,042 233,355 7.59 8.40 16,815 9,803 7,012 (1,020) 8,032
----------- ----------- ------ ------ --------- --------- ------- ------- -------
Total securities (5) 9,687,220 8,571,378 6.60 6.77 319,184 289,774 29,410 (8,352) 37,762
Other earning assets (2) 260,878 226,321 5.41 5.72 6,998 6,421 577 (364) 941
Loans and leases, net
of unearned income
(1)(3)(4)(5) 25,020,404 22,766,441 8.72 9.09 1,083,189 1,028,651 54,538 (44,307) 98,845
----------- ----------- ------ ------ --------- --------- ------- ------- -------
Total earning assets 34,968,502 31,564,140 8.10 8.44 1,409,371 1,324,846 84,525 (53,023) 137,548
----------- ----------- ------ ------ --------- --------- ------- ------- -------
Non-earning assets 2,538,481 2,158,982
----------- -----------
Total assets $37,506,983 $33,723,122
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking $ 1,772,604 $ 2,005,882 1.61 1.96 14,121 19,501 (5,380) (3,273) (2,107)
Money rate savings 6,901,406 5,598,218 2.80 2.99 95,779 82,877 12,902 (5,439) 18,341
Time deposits 12,275,390 11,743,915 5.10 5.50 310,667 320,089 (9,422) (23,506) 14,084
----------- ----------- ------ ------ --------- --------- ------- ------- -------
Total interest-bearing
deposits 20,949,400 19,348,015 4.05 4.40 420,567 422,467 (1,900) (32,218) 30,318
Short-term borrowed
funds 4,567,574 4,321,572 4.67 5.33 105,730 114,201 (8,471) (14,718) 6,247
Long-term debt 5,106,913 3,897,052 5.38 5.87 136,912 113,796 23,116 (9,923) 33,039
----------- ----------- ------ ------ --------- --------- ------- ------- -------
Total interest-bearing
liabilities 30,623,887 27,566,639 4.36 4.76 663,209 650,464 12,745 (56,859) 69,604
----------- ----------- ------ ------ --------- --------- ------- ------- -------
Noninterest-bearing
deposits 3,334,633 2,987,654
Other liabilities 599,155 528,140
Shareholders' equity 2,949,308 2,640,689
----------- -----------
Total liabilities and
shareholders' equity $37,506,983 $33,723,122
=========== ===========
Average interest rate
spread 3.74 3.68
Net yield on earning
assets 4.28% 4.29% $ 746,162 $ 674,382 $71,780 $ 3,836 $67,944
====== ====== ========= ========= ======= ======= =======
Taxable equivalent
adjustment $ 39,509 $ 31,581
========= =========
(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 is included as income.
(5) Included assets which were held for resale or available for sale at
amortized cost and trading securities at estimated fair value.
25
Noninterest Income
Noninterest income for the three months ended June 30, 1999, was $184.2
million compared to $134.7 million for the same period in 1998, an increase of
36.8%. Excluding the impact of purchase accounting acquisitions, BB&T's
noninterest income would have increased 14.7% in the second quarter of 1999
compared to 1998. For the six months ended June 30, 1999, noninterest income
totaled $345.4 million, an increase of $85.3 million, or 32.8%, compared to the
first half of 1998.
BB&T experienced growth in all significant areas of noninterest income.
Service charges on deposits, mortgage banking revenues, investment banking and
brokerage fees, agency insurance commissions and other fees and commissions all
showed strong gains during the period. The percentage of total revenues (tax-
equivalent net interest income plus noninterest income excluding securities
gains or losses) derived from noninterest income, was 32.8% for the three
months ended June 30, 1999, up from 28.2% for the second quarter of 1998. For
the six months, the percentage of total revenues derived from noninterest
income was 31.8%, compared to 27.5% for the first six months of 1998.
Service charges on deposits increased $4.0 million, or 9.2%, for the second
quarter of 1999, compared to the second quarter of 1998. The primary factor
contributing to this growth was an increase in the number of accounts subject
to service charges. The largest components of the growth within service charges
on deposits included account analysis fees on commercial transaction accounts,
service charges on commercial and personal accounts and overdraft charges on
commercial accounts. For the six months ended June 30, 1999, service charges on
deposits increased $9.2 million, or 10.7%, compared to 1998.
Trust income increased $4.0 million, or 44.1%, for the three months ended
June 30, 1999, from the same period a year ago. Approximately 15% of the
increase resulted from the acquisition of W.E. Stanley at the end of the second
quarter of 1998. Also, assets under management have increased to $10.3 billion,
an increase of approximately 13.2% from the second quarter of 1998. The
remaining increase reflects internal growth, driven principally by increased
general trust services income and higher mutual fund fees. For the six months
ended June 30, 1999, trust income increased $7.9 million, or 44.9%.
Investment banking and brokerage fees increased $26.7 million in the second
quarter of 1999 compared to the second quarter of 1998 because of the March 26,
1999, acquisition of Scott & Stringfellow. Scott & Stringfellow was accounted
for as a purchase; therefore, the earnings of Scott & Stringfellow were only
included in BB&T's accounts in periods following the acquisition. For the six
months ended June 30, 1999, investment banking and brokerage fees increased
$30.2 million, or 141.3%. Scott & Stringfellow contributed $28.3 million to the
increase.
Agency insurance commissions increased $4.6 million, or 37.5%, in the second
quarter of 1999 compared to the same three-month period of 1998. This resulted
from growth in property and casualty insurance commissions, contingent
insurance commissions and the purchase of additional agencies. BB&T has the
largest independent insurance agency system in the Carolinas, and the second
largest bank-owned insurance agency network in the country. Over the past
several quarters, the network has expanded both the types of products offered
and the number of agencies in the network. BB&T acquired five insurance
agencies and the entire book of business of a sixth agency. For the six months
ended June 30, 1999, agency insurance commissions increased $7.4 million, or
28.2%.
Income from mortgage banking activities increased $9.3 million, or 40.0%, for
the three months ended June 30, 1999, compared to the same period in 1998. The
increase resulted from significantly higher volumes of mortgage loans
originated in 1998 and sold during 1999. Mortgage banking
26
operations also benefited from higher mortgage loan servicing fee income and
underwriting fee income, as well as a significant increase in gains on mortgage
loans sold. For the six months ended June 30, 1999, mortgage banking income
increased $26.7 million, or 69.1%.
Other nondeposit fees and commissions increased by $6.4 million, or 31.8%, to
a level of $26.4 million for the three months ended June 30, 1999, compared
with $20.1 million for the second quarter of 1998. The components generating
the increase in nondeposit fees and commissions were revenues from merchant
discounts, bankcard-related fees, higher overlimit fees and increased
international income. For the six months ended June 30, 1999, other nondeposit
fees and commissions increased $9.9 million, or 25.3%.
Other income decreased 3.8% in the second quarter of 1999 compared to 1998,
and increased $1.5 million, or 7.2%, for the six months principally from check
sales revenues and earnings from BB&T-owned life insurance policies.
Noninterest Expense
Noninterest expenses totaled $302.1 million for the second quarter of 1999
compared to $247.9 million for the same period a year ago, an increase of
21.9%. For the six months, noninterest expenses totaled $583.9 million, an
increase of 18.5% compared to the first half of 1998. Noninterest expense for
the first quarter of 1999 includes $15.8 million of nonrecurring expenses
associated with the acquisition of MainStreet, while the first three months of
1998 include $7.8 million of costs resulting from the merger with Life.
Excluding these merger costs from both years, noninterest expenses increased
$83.0 million, or 17.1%, for the six months ended June 30, 1999, compared to
the same period in 1998. Excluding the effects of business combinations
accounted for as purchases that have been completed since June 30, 1998,
noninterest expenses for the second quarter and six months of 1999 would have
increased 4.5% and 5.8%, respectively, from the comparable periods in 1998.
BB&T's efficiency ratio, which measures the percentage of recurring expenses to
total net revenues on an FTE basis, was 52.8% for the second quarter of 1999
and 51.8% for the first six months of 1999, compared to 52.3% and 52.0%,
respectively, in 1998.
Personnel expense, the largest component of noninterest expense, was $158.6
million for the second quarter of 1999 compared to $124.8 million for the same
period in 1998, an increase of $33.8 million, or 27.1%. This growth results
from annual salary adjustments, which typically begin in April, higher
incentive compensation costs and the effect of acquisitions accounted for as
purchases completed since June 30, 1998. For the six months ended June 30,
1999, personnel expense totaled $299.8 million, an increase of $51.4 million,
or 20.7%. Excluding the impact of acquisitions accounted for as purchases,
personnel expense would have increased $12.1 million, or 5.0%, during the first
six months of 1999.
Occupancy and equipment expense for the three months ended June 30, 1999,
totaled $47.1 million, an increase of $5.4 million, or 12.9%, compared to 1998.
This increase was principally due to acquisitions accounted for as purchases,
costs associated with the maintenance of computer equipment and other furniture
and equipment costs. For the six months ended June 30, 1999, occupancy and
equipment expense increased $14.6 million, or 18.1%. Excluding the impact of
acquisitions accounted for as purchases, net occupancy and equipment expense
would have increased $6.1 million, or 7.5%, during the first six months of
1999.
The amortization of intangible assets and mortgage servicing rights totaled
$16.5 million for the three months ended June 30, 1999, a $5.3 million, or
47.2% increase from the amount incurred in the second quarter of 1998. This
increase was the result of a $540,000 increase in amortization of mortgage loan
servicing rights and increased amortization of goodwill totaling $4.8 million
due to acquisitions consummated using purchase accounting. Total goodwill and
other intangibles, including
27
mortgage servicing rights, have increased from $340.1 million at June 30, 1998
to $626.2 million at June 30, 1999. For the six months ended June 30, 1999, the
amortization of intangible assets and mortgage servicing rights increased $10.9
million, or 50.6%.
Other noninterest expenses for the second quarter of 1999 totaled $79.8
million, an increase of $9.7 million, or 13.8%, compared to 1998. This increase
was primarily due to purchase accounting acquisitions and higher expenses at
Craigie and Regional Acceptance. For the six months ended June 30, 1999, other
noninterest expenses increased $14.1 million, or 9.9%, compared to the first
half of 1998.
Provision for Income Taxes
The provision for income taxes totaled $71.6 million for the second quarter
of 1999, an increase of $12.4 million, or 21.0%, compared to the second quarter
of 1998. For the six months ended June 30, 1999, the provision for income taxes
totaled $136.9 million, an increase of $21.9 million, or 19.0%, compared to the
first half of 1998. The effective tax rates on pretax income were 31.9% and
31.6% for the three months ended June 30, 1999 and 1998, respectively, and were
32.0% and 31.6% for the six months ended June 30, 1999 and 1998, respectively.
PROFITABILITY MEASURES
1999 1998
---------------- -------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Return on average assets 1.60% 1.53% 1.45% 1.54% 1.50%
Return on average common equity 20.70 19.11 17.90 19.96 19.52
Net interest margin 4.29 4.28 4.28 4.36 4.25
Efficiency ratio (taxable
equivalent)* 52.8 50.7 52.5 51.6 52.3
- --------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
Second Quarter 1999 Year 2000 Readiness Disclosure
The Year 2000 issue is pervasive and presents both technical and business
risks affecting most, if not all, of BB&T's business activities. The "Year 2000
Issue" is a general term used to describe the various problems that may result
from the improper processing of dates and date-sensitive calculations by
computers and equipment with embedded microchips as the Year 2000 approaches.
These problems generally arise because most of the world's computer hardware
and software has historically used only two digits to identify the applicable
year. Any computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. These problems may
also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field. If not corrected, this
could result in system errors or failures causing disruptions of normal
business operations.
BB&T began planning its Year 2000 strategy in 1996. Management determined
that it would be required to modify or replace significant portions of BB&T's
information technology platform and other systems in order for them to be Year
2000 ready. Computer systems that have the ability to process dates before,
during and after January 1, 2000, without malfunction are considered to be
"Year 2000 Ready." In early 1997, BB&T formed a Year 2000 Program Office, which
operates as a joint effort between BB&T and outside service providers. The
mission of the Program Office is to address Year 2000 issues affecting BB&T's
various systems. The program office management committee meets regularly to
review and document the progress of the Year 2000 project.
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Year 2000 Project
BB&T's Year 2000 strategy is divided into five major phases: inventory,
assessment, remediation, testing and change / clean management ("Year 2000
Project"). During the inventory and assessment phases, BB&T identified all
specific systems that required modification or replacement and assessed the
steps necessary to remediate the Year 2000 Issue. In the remediation phase, the
systems requiring remediation were replaced, modified or retired, as
appropriate. The testing phase included internal and external testing with
third parties to ensure that the remediated systems will accurately process
dates and date data before, on and after January 1, 2000. Finally, the change
/ clean management phase includes placing the remediated systems back into
production and the implementation of processes and procedures to monitor and to
protect remediated systems from alterations that might affect Year 2000
readiness.
In order to carry out the Year 2000 project, BB&T divided its internal and
external systems into three major categories: core business systems,
distributed business systems and non-information technology systems. The core
business systems are those systems that run on BB&T's mainframe. The
distributed systems are those systems that do not run on the mainframe. The
non-information technology systems are those systems that have embedded
microchips or microprocessors controlling the function of equipment; such as
elevators, fire and security systems, etc. These three categories are further
broken down into mission-critical and non-mission-critical systems. BB&T
prioritized its systems for remediation based on their overall importance to
the operations of BB&T. Mission-critical systems are those systems that are
critical to the operations of BB&T and / or vital to the business continuity of
BB&T. While the Year 2000 Project addressed all internal and external systems
used by BB&T to conduct its business, the highest priority was given to
mission-critical systems.
State of Readiness
BB&T's current state of readiness as of August 12, 1999, is as follows:
Core business systems mission-critical: All phases have been completed and
the change / clean management phase has been implemented. BB&T has placed 100%
of remediated core business systems back into production.
Distributed business systems mission-critical: All phases have been completed
and the change / clean management phase has been implemented. BB&T has placed
100% of remediated mission-critical distributed business systems back into
production.
Non-information technology systems mission-critical: Embedded technology
controls certain building security and operations, such as power management,
elevators and security systems. All facilities, including buildings, equipment
and other infrastructure using embedded technology have been evaluated. Those
buildings in which critical processes are performed have been confirmed as Year
2000 Ready.
BB&T's Year 2000 readiness plans and status have been reviewed during
compliance audits by various state and Federal regulators. These reviews have
not resulted in any significant findings of deficiency by regulators and BB&T
has met all regulatory deadlines during the Year 2000 project.
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Risks
The failure to correct a mission-critical Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities and
operations. Such failures could materially and adversely affect BB&T's
financial condition or results of operations. Management presently believes
that the modifications to existing systems and, in certain circumstances,
conversions to new systems, will minimize the effects on BB&T of the Year 2000
issue.
Third Party Assessments
BB&T relies on numerous third parties and conducts formal communications on
an ongoing basis with these third parties to determine the extent to which BB&T
may be vulnerable to their failure to remediate their own Year 2000 issues.
These third parties include providers of core and distributed systems-related
products and services; external agents, which include government agencies and
other agents requiring systems interfaces; infrastructure-related third
parties, including utilities and telecommunications providers, landlords and
miscellaneous suppliers; and capital markets partners, which includes any third
parties requiring financial settlement. During the fourth quarter of 1998 and
early in 1999, BB&T mailed in excess of 2,500 surveys to these third parties in
order to assess the status of their Year 2000 readiness. These surveys included
227 third parties considered mission-critical to BB&T's operations. Information
has been obtained from 99% of these mission-critical third parties. Risk
assessments have been completed on the mission-critical third parties, and
appropriate measures to minimize risk to the extent possible have been
undertaken with those vendors that have been determined to represent high
levels of risk to BB&T. Among those that have responded, management has
determined that less than 1% represent a high risk to BB&T. For these third
parties, appropriate contingency plans have been developed and are constantly
being monitored and revised accordingly. However, BB&T has no viable
alternative for certain suppliers, such as utilities and telecommunications
providers. Also, as with all financial institutions, BB&T places a high degree
of reliance on the systems of other institutions, including governmental
agencies, to settle transactions.
BB&T also relies on clients to make preparations for the Year 2000 to protect
their business operations from interruptions that could threaten their ability
to honor their financial commitments. During 1998, BB&T developed and
implemented revised underwriting policies to address Year 2000 issues for our
large commercial clients and new commercial clients. Adherence to these
policies is required for credits in excess of $1 million and encouraged for
other significant clients. BB&T distributed in excess of 4,000 questionnaires
to clients in order to assess the state of their Year 2000 Readiness. Lenders
were required to follow up with their clients to ensure the accuracy of the
responses to the questionnaires. Based on the results of these questionnaires,
clients were assigned a Year 2000 "risk grade". Among these lending
relationships, BB&T rated approximately 3.3% of the commercial loan portfolio
as representing a high risk to BB&T, and the remaining clients were determined
to represent low risk to BB&T. For clients that were judged to represent
significant risks to BB&T, management is monitoring their progress in
addressing their own Year 2000 Readiness and assessing their ability to meet
their financial obligations. These risk assessments are updated quarterly for
larger clients and potential new clients.
BB&T is also assessing potential Year 2000 risks associated with its
fiduciary activities. When making investment decisions or recommendations, BB&T
considers Year 2000 issues in our analyses, and may take steps to investigate
Year 2000 Readiness in assessing certain assets held in trust.
Despite these efforts, because of the general uncertainty inherent in the
Year 2000 issue, there can be no assurance that the systems of other
organizations upon which BB&T's operations rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with BB&T's systems, would not have a materially adverse effect on
BB&T. In view of
30
the uncertainties surrounding the impact of the Year 2000 issue, management
considers BB&T's most reasonably likely worst case scenario to be the loss of
basic infrastructure services, such as utilities and telecommunications.
Contingency Business and Event Planning
During 1998 and 1999, management took action to enhance existing business
resumption plans to address potential Year 2000 disruptions. Each line of
business had significant involvement in the preparation of supplemental Year
2000 contingency / event plans designed to address specific business functions.
BB&T completed its Year 2000 contingency / event planning as of June 30, 1999.
All of the plans have been tested and additional testing of mission-critical
plans will be conducted as the Year 2000 approaches. The plans will be modified
as needed as BB&T continues to obtain information relating to its own systems
and the systems of its significant third parties.
In addition to its contingency planning efforts, BB&T is designing and
implementing a Corporate Command Center to monitor, coordinate and report on
enterprise-wide Year 2000 activities. The Command Center will be the central
communications point for branches, business offices and management, and will
coordinate any corrective actions or activation of contingency plans should
Year 2000 disruptions occur.
Costs
The projected total incremental cost of the Year 2000 project is currently
estimated at approximately $30 million and is being funded through operating
cash flows. As of June 30, 1999, a cumulative total of approximately $25.8
million had been spent on the assessment of and efforts in connection with the
Year 2000 project, of which $4.5 million represented internal personnel and
other costs.
Information about BB&T's Year 2000 Project, other than historical
information, should be considered forward looking in nature and subject to
various risks, uncertainties and assumptions. The costs of the project and the
date on which BB&T plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the inability to control third party vendor and customer
modification plans, the ability of BB&T to implement suitable contingency
plans, Congressional legislation, regulatory action and similar uncertainties.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the normal
conduct of business. Management believes that the liabilities arising from
these proceedings will not have a materially adverse effect on the consolidated
financial position or consolidated results of operations of BB&T.
Item 4. Submission of Matters to a Vote of Security Holders
BB&T held its annual meeting of the shareholders on April 27, 1999, to
consider and vote upon the following matters:
(1) To elect seven Directors for three-year terms expiring in 2002. Of shares
represented by proxy, votes in favor were 211,923,602; and votes withheld
were 1,650,320.
(2) To ratify the reappointment of Arthur Andersen LLP as the Corporation's
independent auditors for 1999. Of shares represented by proxy, votes in
favor were 212,382,333; votes opposed were 391,207; and abstentions were
936,252.
(3) To transact such other business as may properly come before the meeting. Of
shares represented by proxy, votes in favor were 207,283,719; votes opposed
were 4,803,292; and abstentions were 1,511,525.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11--"Computation of Earnings Per Share" is included herein as Note
E.
Exhibit 27--"Financial Data Schedule" is included in the electronically-filed
document as required.
(b) Current Reports on Form 8-K
On April 9, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to
announce that BB&T and Matewan had agreed to extend the due diligence period
associated with their proposed merger through April 28, 1999. On April 12,
1999, BB&T filed a Current Report on Form 8-K under Item 5 to report the
results of operations for the first quarter of 1999. On April 28, 1999, BB&T
filed an amendment to the Form 8-K, originally filed February 25, 1999, to
disclose renegotiated terms of the proposed acquisition of Matewan by BB&T. On
April 28, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report
that the Board of Directors had authorized the repurchase of up to 10 million
shares of BB&T common stock in connection with specific business combinations
to be accounted for as purchases. On April 28, 1999, BB&T filed a Current
Report on Form 8-K under Item 5 to report that BB&T had entered into a
definitive agreement to acquire First Liberty Financial Corp. of Macon,
Georgia. On April 30, 1999, BB&T filed a Current Report on Form 8-K under Item
5 to restate BB&T's Annual Report on Form 10-K for the accounts of MainStreet
Financial Corporation, which was acquired on March 5, 1999, and accounted for
as a pooling of interests. On July 14, 1999, BB&T filed a Form 8-K under Item 5
to report the results of operations for the second quarter of 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T CORPORATION
(Registrant)
Date: August 12, 1999 By: /s/ Scott E. Reed
______________________________ ___________________________________________
Scott E. Reed, Senior Executive Vice
President and Chief Financial Officer
Date: August 12, 1999 By: /s/ Sherry A. Kellett
______________________________ __________________________________________
Sherry A. Kellett, Senior Executive
Vice President and Controller
(Principal Accounting Officer)
33