EXHIBIT 99.2
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
ASSETS
Cash and due from banks...................................................................... $ 840,391 $ 768,587
Interest-bearing deposits with banks......................................................... 2,010 4,795
Federal funds sold and securities purchased under resale agreements or similar
arrangements.............................................................................. 84,940 160,767
Securities available for sale................................................................ 6,014,221 5,971,300
Securities held to maturity (market value: $175,744 in 1996 and $259,156 in 1995)............ 170,808 251,323
Loans held for sale.......................................................................... 228,333 261,364
Loans and leases, net of unearned income..................................................... 17,518,224 16,528,861
Allowance for loan and lease losses....................................................... (230,070) (219,052)
Loans and leases, net................................................................... 17,288,154 16,309,809
Premises and equipment, net.................................................................. 374,954 371,860
Other assets................................................................................. 703,835 571,472
Total assets............................................................................ $25,707,646 $24,671,277
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits....................................................... $ 2,623,429 $ 2,464,590
Savings and interest checking............................................................. 2,026,462 2,212,524
Money rate savings........................................................................ 4,170,949 3,782,967
Other time deposits....................................................................... 10,182,500 9,861,627
Total deposits.......................................................................... 19,003,340 18,321,708
Short-term borrowed funds.................................................................... 2,280,824 2,625,855
Long-term debt............................................................................... 2,054,040 1,386,910
Accounts payable and other liabilities....................................................... 297,875 311,692
Total liabilities....................................................................... 23,636,079 22,646,165
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding at
December 31, 1996 and 733,869 at December 31, 1995....................................... -- 3,669
Common stock, $5 par, 300,000,000 shares authorized, issued and outstanding 136,896,865 at
December 31, 1996 and 136,548,048 at December 31, 1995................................... 684,484 682,740
Additional paid-in capital................................................................ 145,704 279,156
Retained earnings......................................................................... 1,231,592 1,029,771
Loan to employee stock ownership plan and unvested restricted stock....................... (1,952) (4,314)
Net unrealized appreciation on securities available for sale, net of income taxes of
$8,481 in 1996 and $22,122 in 1995....................................................... 11,739 34,090
Total shareholders' equity.............................................................. 2,071,567 2,025,112
Total liabilities and shareholders' equity.............................................. $25,707,646 $24,671,277
The accompanying notes are an integral part of these consolidated financial
statements.
4
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
Interest Income
Interest and fees on loans and leases............................................. $1,554,822 $1,516,909 $1,255,064
Interest and dividends on securities.............................................. 375,257 354,509 324,103
Interest on short-term investments................................................ 4,491 8,739 7,348
Total interest income.......................................................... 1,934,570 1,880,157 1,586,515
Interest Expense
Interest on deposits.............................................................. 712,491 689,769 531,306
Interest on short-term borrowed funds............................................. 106,777 188,301 106,174
Interest on long-term debt........................................................ 107,602 70,769 41,091
Total interest expense......................................................... 926,870 948,839 678,571
Net Interest Income................................................................. 1,007,700 931,318 907,944
Provision for loan and lease losses............................................... 62,511 41,924 23,730
Net Interest Income After Provision for Loan and Lease Losses....................... 945,189 889,394 884,214
Noninterest Income
Service charges on deposits....................................................... 132,180 113,664 108,980
Mortgage banking income........................................................... 39,845 31,218 28,813
Trust income...................................................................... 28,794 23,872 22,343
Agency insurance commissions...................................................... 26,859 19,306 16,151
Other insurance commissions....................................................... 12,822 12,384 11,865
Bankcard fees and merchant discounts.............................................. 35,729 30,990 23,977
Other nondeposit fees and commissions............................................. 47,027 35,123 35,662
Securities gains (losses), net.................................................... 3,090 (18,589) 3,028
Other income...................................................................... 27,122 23,742 27,520
Total noninterest income....................................................... 353,468 271,710 278,339
Noninterest Expense
Personnel expense................................................................. 387,050 424,303 385,038
Occupancy and equipment expense................................................... 122,089 126,189 107,373
Federal deposit insurance expense................................................. 44,047 26,859 39,253
Other expense..................................................................... 255,364 243,367 208,570
Total noninterest expense...................................................... 808,550 820,718 740,234
Earnings
Income before income taxes........................................................ 490,107 340,386 422,319
Provision for income taxes........................................................ 159,932 113,118 147,003
Net Income........................................................................ 330,175 227,268 275,316
Preferred dividend requirements................................................... 610 5,079 5,198
Income applicable to common shares............................................. $ 329,565 $ 222,189 $ 270,118
Per Common Share
Net income:
Primary........................................................................ $ 2.39 $ 1.62 $ 2.00
Fully Diluted.................................................................. $ 2.37 $ 1.60 $ 1.96
Cash dividends declared........................................................... $ 1.00 $ .86 $ .74
The accompanying notes are an integral part of these consolidated financial
statements.
5
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
SHARES OF ADDITIONAL RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER*
BALANCE, DECEMBER 31, 1993, AS PREVIOUSLY
REPORTED................................... 106,614,794 $ 3,850 $533,073 $ 265,603 $ 618,264
Merger with United Carolina Bancshares
Corporation accounted for under the
pooling of interests method............. 27,040,568 -- 135,203 9,838 120,303
BALANCE, DECEMBER 31, 1993, AS RESTATED...... 133,655,362 3,850 668,276 275,441 738,567
ADD (DEDUCT)
Net income................................. -- -- -- -- 275,316
Common stock issued........................ 2,702,255 -- 13,512 26,248 (1,214)
Redemption of common stock................. (1,088,252) -- (5,441) (18,151) 2
Net unrealized depreciation on securities
available for sale...................... -- -- -- -- (78,989)
Cash dividends declared
Common stock............................ -- -- -- -- (93,869)
Preferred stock......................... -- -- -- -- (5,198)
Other...................................... -- -- -- 2,165 3,373
BALANCE, DECEMBER 31, 1994................... 135,269,365 3,850 676,347 285,703 837,988
ADD (DEDUCT)
Net income -- -- -- -- 227,268
Common stock issued........................ 3,167,198 -- 15,836 33,511 (105)
Redemption of common stock................. (1,993,351) -- (9,967) (37,344) --
Preferred stock cancellations and
conversions............................. 104,836 (181) 524 (2,714) --
Net unrealized appreciation on securities
available for sale...................... -- -- -- -- 112,234
Cash dividends declared
Common stock............................ -- -- -- -- (115,887)
Preferred stock......................... -- -- -- -- (5,079)
Other...................................... -- -- -- -- 3,128
BALANCE, DECEMBER 31, 1995................... 136,548,048 3,669 682,740 279,156 1,059,547
ADD (DEDUCT)
Net income................................. -- -- -- -- 330,175
Common stock issued........................ 2,788,586 -- 13,942 56,469 45
Redemption of common stock................. (6,774,461) -- (33,872) (173,537) 2
Preferred stock cancellations and
conversions............................. 4,334,692 (3,669) 21,674 (18,005) --
Net unrealized depreciation on securities
available for sale...................... -- -- -- -- (22,351)
Cash dividends declared
Common stock............................ -- -- -- -- (127,791)
Preferred stock......................... -- -- -- -- (610)
Other...................................... -- -- -- 1,621 2,362
BALANCE, DECEMBER 31, 1996................... 136,896,865 $ -- $684,484 $ 145,704 $1,241,379
TOTAL
SHAREHOLDERS'
EQUITY
BALANCE, DECEMBER 31, 1993, AS PREVIOUSLY
REPORTED................................... $ 1,420,790
Merger with United Carolina Bancshares
Corporation accounted for under the
pooling of interests method............. 265,344
BALANCE, DECEMBER 31, 1993, AS RESTATED...... 1,686,134
ADD (DEDUCT)
Net income................................. 275,316
Common stock issued........................ 38,546
Redemption of common stock................. (23,590)
Net unrealized depreciation on securities
available for sale...................... (78,989)
Cash dividends declared
Common stock............................ (93,869)
Preferred stock......................... (5,198)
Other...................................... 5,538
BALANCE, DECEMBER 31, 1994................... 1,803,888
ADD (DEDUCT)
Net income 227,268
Common stock issued........................ 49,242
Redemption of common stock................. (47,311)
Preferred stock cancellations and
conversions............................. (2,371)
Net unrealized appreciation on securities
available for sale...................... 112,234
Cash dividends declared
Common stock............................ (115,887)
Preferred stock......................... (5,079)
Other...................................... 3,128
BALANCE, DECEMBER 31, 1995................... 2,025,112
ADD (DEDUCT)
Net income................................. 330,175
Common stock issued........................ 70,456
Redemption of common stock................. (207,407)
Preferred stock cancellations and
conversions............................. --
Net unrealized depreciation on securities
available for sale...................... (22,351)
Cash dividends declared
Common stock............................ (127,791)
Preferred stock......................... (610)
Other...................................... 3,983
BALANCE, DECEMBER 31, 1996................... $ 2,071,567
* Other includes net unrealized appreciation (depreciation) on securities
available for sale, unvested restricted stock and a loan unvested restricted
stock, and a loan to the employee stock ownership plan. to the employee stock
ownership plan.
The accompanying notes are an integral part of these consolidated financial
statements.
6
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 330,175 $ 227,268 $ 275,316
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses.............................................. 62,511 41,924 23,730
Depreciation of premises and equipment........................................... 45,259 42,099 41,455
Amortization of intangibles and mortgage servicing rights........................ 14,534 12,305 10,090
Accretion of negative goodwill................................................... (6,238) (6,310) (1,114)
Amortization of unearned stock compensation...................................... 2,450 3,128 1,711
Discount accretion and premium amortization on securities, net................... 4,826 (26,089) (292)
Loss (gain) on sales of securities, net.......................................... (3,090) 18,589 (3,028)
Loss (gain) on sales of loans and mortgage loan servicing rights, net............ (9,049) 1,619 998
Proceeds from sales of loans held for sale....................................... 1,348,118 789,164 596,249
Purchases of loans held for sale................................................. (429,523) (311,059) (33,351)
Origination of loans held for sale, net of principal collected................... (879,496) (600,676) (251,051)
Decrease (increase) in:
Accrued interest receivable.................................................... 20,692 (26,682) (28,562)
Other assets................................................................... (111,400) 16,146 (74,428)
Increase (decrease) in:
Accrued interest payable....................................................... 5,567 15,012 4,001
Accounts payable and other liabilities......................................... (8,635) 88,413 30,154
Other, net....................................................................... 1,999 9,363 (809)
Net cash provided by operating activities...................................... 388,700 294,214 591,069
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale............................... 605,792 1,290,237 797,878
Proceeds from maturities of securities available for sale.......................... 2,669,532 1,711,859 990,790
Purchases of securities available for sale......................................... (2,498,976) (3,323,423) (1,688,123)
Proceeds from sales of securities held to maturity................................. -- 3,810 --
Proceeds from maturities of securities held to maturity............................ 46,088 304,096 479,795
Purchases of securities held to maturity........................................... (2,228) (77,701) (872,737)
Leases made to customers........................................................... (72,390) (18,091) (44,379)
Principal collected on leases...................................................... 48,222 14,620 41,661
Loan originations, net of principal collected...................................... (1,622,476) (717,639) (1,421,789)
Purchases of loans................................................................. (232,236) (189,997) (27,864)
Net cash acquired in transactions accounted for under the purchase method.......... 1,887 -- 2,262
Purchases and originations of mortgage servicing rights............................ (26,356) (18,082) (3,649)
Proceeds from disposals of premises and equipment.................................. 8,764 18,114 7,988
Purchases of premises and equipment................................................ (67,106) (62,318) (76,687)
Proceeds from sales of foreclosed property......................................... 16,156 14,213 33,185
Proceeds from sales of other real estate held for development or sale.............. 8,127 1,728 9,519
Other, net......................................................................... (1,079) (8,696) 29,099
Net cash used in investing activities.......................................... (1,118,279) (1,057,270) (1,743,051)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits................................................ 681,632 874,011 (147,013)
Net (decrease) increase in short-term borrowed funds............................... (345,025) (426,810) 1,155,787
Proceeds from long-term debt....................................................... 1,586,766 2,945,754 356,439
Repayments of long-term debt....................................................... (919,661) (2,471,904) (283,137)
Net proceeds from common stock issued.............................................. 49,736 44,242 24,151
Redemption of common stock......................................................... (207,407) (47,311) (23,590)
Preferred stock cancellations and conversions...................................... -- (2,371) --
Cash dividends paid on common and preferred stock.................................. (123,270) (107,869) (88,866)
Net cash provided by financing activities...................................... 722,771 807,742 993,771
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (6,808) 44,686 (158,211)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 934,149 889,463 1,047,674
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................. $ 927,341 $ 934,149 $ 889,463
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest......................................................................... $ 921,632 $ 935,366 $ 674,882
Income taxes..................................................................... 160,307 141,236 169,273
Noncash financing and investing activities:
Transfer of securities from held to maturity to available for sale............... 36,646 1,763,513 14,815
Transfer of securities from available for sale to held to maturity............... 240 -- 2,316
Transfer of loans to foreclosed property......................................... 23,970 11,243 24,901
Transfer of fixed assets to other real estate owned.............................. 10,466 21,846 --
Common stock issued upon conversion of debentures................................ -- 4,896 --
Restricted stock issued.......................................................... 88 -- --
Securitization of mortgage loans................................................. 817,268 354,882 7,497
The accompanying notes are an integral part of these consolidated financial
statements.
7
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
BB&T Corporation ("BB&T" or "Parent Company"), formerly Southern National
Corporation, is a multi-bank holding company organized under the laws of North
Carolina and registered with the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended. BB&T changed its corporate name from Southern
National Corporation effective at the close of business on May 16, 1997. Branch
Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South
Carolina ("BB&T-SC"), Branch Banking and Trust Company of Virginia ("BB&T-VA"),
United Carolina Bank and United Carolina Bank of South Carolina (collectively,
the "Banks" or the "Subsidiaries") comprise the Parent Company's principal
subsidiaries.
The accounting and reporting policies of BB&T Corporation and Subsidiaries
are in accordance with generally accepted accounting principles and conform to
general practices within the banking industry. The following is a summary of the
more significant policies.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of BB&T include the accounts of the
Parent Company and its subsidiaries. In consolidation, all significant
intercompany accounts and transactions have been eliminated. Prior period
financial statements have been restated to include the accounts of companies
acquired in material transactions accounted for as poolings of interests (See
Note B). Results of operations of companies acquired in transactions accounted
for as purchases are included from the dates of acquisition.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1996. The reclassifications have no effect on either
shareholders' equity or net income as previously reported.
NATURE OF OPERATIONS
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina and
Virginia primarily through its commercial banking subsidiaries and, to a lesser
extent, through its other subsidiaries. BB&T's subsidiaries provide a full range
of traditional commercial banking services and additional services including
investment brokerage, insurance and leasing. Substantially all of BB&T's loans
are to businesses and individuals in the Carolinas and Virginia.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, interest-bearing
bank balances, Federal funds sold and securities purchased under resale
agreements or similar arrangements. Generally, both cash and cash equivalents
are considered to have maturities of three months or less. Accordingly, the
carrying amount of such instruments is considered a reasonable estimate of fair
value.
SECURITIES
BB&T classifies investment securities in one of three categories: held to
maturity, available for sale and trading. Debt securities acquired with both the
intent and ability to be held to maturity are classified as held to maturity and
reported at amortized cost. Gains or losses realized from the sale of securities
held to maturity, if any, are determined by specific identification and are
included in noninterest income.
8
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities, which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity, net of deferred income tax. Gains or losses realized from
the sale of securities available for sale are determined by specific
identification and are included in noninterest income.
Trading account securities, of which none were held on December 31, 1996
and 1995, are selected according to fundamental and technical analyses that
identify potential market movements. Trading account securities are positioned
to take advantage of such movements and are reported at fair value. Market
adjustments, fees, gains or losses and interest income earned on trading account
securities are included in noninterest income. Gains or losses realized from the
sale of trading securities are determined by specific identification.
During 1994 and 1996, BB&T transferred securities with an amortized cost of
$14,815,000 and $36,646,000, respectively from the held-to-maturity portfolio to
the available-for-sale portfolio. These securities were previously classified as
held-to-maturity by entities acquired under the pooling-of-interests method of
accounting. BB&T transferred these amounts pursuant to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" to conform the combined
investment portfolio to BB&T's existing interest rate risk position. During the
fourth quarter of 1995, BB&T transferred $1.8 billion of securities which were
previously classified as held to maturity under SFAS No. 115 to the
available-for-sale category. The Financial Accounting Standards Board ("FASB")
provided enterprises the opportunity to make a one-time reassessment of the
classification of all investment securities held at that time, such that the
reclassification of any security from the held-to-maturity category would not
call into question the enterprise's intent to hold other debt securities to
maturity in the future. Management anticipates that this classification will
allow more flexibility in the day-to-day management of the overall portfolio
than the prior classifications.
LOANS HELD FOR SALE
Loans held for sale are reported at the lower of cost or market value on an
aggregate loan basis. Gains or losses realized on the sales of loans are
recognized at the time of sale and are determined by the difference between the
net sales proceeds and the carrying value of the loans sold, adjusted for any
yield differential and a normal servicing fee. Any resulting deferred premium or
discount is amortized, as an adjustment of servicing income, over the estimated
lives of the loans using the level-yield method.
LOANS AND LEASE RECEIVABLES
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or until the loans are repaid are reported
at their outstanding principal balances adjusted for any deferred fees or costs
and unamortized premiums or discounts. The net amount of nonrefundable loan
origination fees, including commitment fees and certain direct costs associated
with the lending process are deferred and amortized to interest income over the
contractual lives of the loans using methods which approximate level-yield, with
adjustments for prepayments as they occur. If the loan commitment expires
unexercised, the income is recognized upon expiration of the commitment.
Discounts and premiums are amortized to interest income over the estimated life
of the loans using methods which approximate level-yield.
Commercial loans and substantially all installment loans accrue interest on
the unpaid balance of the loans. Lease receivables consist primarily of direct
financing leases on rolling stock, equipment and real property. Lease
receivables are stated at the total amount of lease payments receivable plus
guaranteed residual values, less unearned income. Recognition of income over the
lives of the lease contracts approximates the level-yield method.
As of January 1, 1995, BB&T adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No.
114, as amended, requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral-dependent. A loan is
impaired when, based on current information and events, it is probable that BB&T
will be unable to collect all amounts due according to the contractual terms of
the loan
9
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance. BB&T had previously measured the allowance for credit losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for loan losses was required as of
January 1, 1995.
BB&T's policy is to disclose as impaired loans all commercial loans,
greater than $250,000, that are on nonaccrual status. Substantially all other
loans made by BB&T are excluded from the scope of SFAS No. 114 as they are large
groups of smaller balance homogeneous loans (residential mortgage and consumer
installment) that are collectively evaluated for impairment.
The total recorded investment for impaired loans at December 31, 1996, was
$18.5 million, offset by a valuation allowance of $2.6 million, which resulted
in a net carrying value of $15.9 million. Impaired loans which did not have an
assigned valuation allowance at year end totaled $1.1 million. The average
recorded investment in impaired loans during 1996 totaled $22.6 million. BB&T
recognizes no interest income on loans that are impaired. Cash receipts for both
principal and interest are applied directly to principal.
ALLOWANCE FOR LOSSES
The provision for loan and lease losses charged to noninterest expense is
the estimated amount required to maintain the allowance for loan and lease
losses at a level adequate to cover estimated incurred losses related to loans
and leases currently outstanding. The primary factors considered in determining
the allowance are the distribution of loans by risk class, the amount of the
allowance specifically allocated to nonperforming loans and other problem loans,
prior years' loan loss experience, economic conditions in BB&T's market areas
and the growth of the credit portfolio. While management uses the best
information available in establishing the allowance for losses, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations or if required
by regulators based upon information at the time of their examinations. Such
adjustments to original estimates, as necessary, are made in the period in which
these factors and other relevant considerations indicate that loss levels may
vary from previous estimates.
NONPERFORMING ASSETS
Nonperforming assets include loans and leases on which interest is not
being accrued and foreclosed property. Foreclosed property consists of real
estate and other assets acquired through customers' loan defaults.
Commercial and unsecured consumer loans and leases are generally placed on
nonaccrual status when concern exists that principal or interest is not fully
collectible, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. Mortgage loans and most other consumer loans past
due 90 days or more may remain on accrual status if management determines that
concern over the collectability of principal and interest is not significant.
When loans are placed on nonaccrual status, interest receivable is reversed
against interest income in the current period. Interest payments received
thereafter are applied as a reduction to the remaining principal balance when
concern exists as to the ultimate collection of the principal. Loans and leases
are removed from nonaccrual status when they become current as to both principal
and interest and when concern no longer exists as to the collectability of
principal or interest.
Assets acquired as a result of foreclosure are valued at the lower of cost
or fair value, and carried thereafter at the lower of cost or fair value less
estimated costs to sell the asset. Cost is the sum of unpaid principal, accrued
but unpaid interest and acquisition costs associated with the loan. Any excess
of unpaid principal over fair value at the time of foreclosure is charged to the
allowance for losses. Generally, such properties are appraised annually and the
carrying value, if greater than the fair value, less costs to sell, is adjusted
with a charge to income. Routine maintenance costs, declines in market value and
net losses on disposal are included in other noninterest expense.
PREMISES AND EQUIPMENT
Premises, equipment, capital leases and leasehold improvements are stated
at cost less accumulated depreciation or amortization. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
basis over the lesser of the lease terms or the estimated useful lives of the
improvements. Capitalized leases are amortized by the same methods as premises
and equipment
10
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
over the estimated useful lives or the lease term, whichever is lesser.
Obligations under capital leases are amortized using the interest method to
allocate payments between principal reduction and interest expense.
INCOME TAXES
The operating results of BB&T and its subsidiaries are included in a
consolidated Federal income tax return. Each subsidiary pays its calculated
portion of Federal income taxes to BB&T, or receives payment from BB&T to the
extent that tax benefits are realized. Deferred income taxes have been provided
where different accounting methods have been used for reporting for income tax
purposes and for financial reporting purposes. Deferred tax assets and
liabilities are recognized based on future tax consequences of the differences
arising from their carrying values and respective tax bases. In the event of
changes in the tax laws, deferred tax assets and liabilities are adjusted in the
period of the enactment of those changes, with effects included in the income
tax provision.
The operating results of acquired institutions were included in their
respective income tax returns prior to consummation of the acquisitions.
DERIVATIVES AND OFF-BALANCE SHEET INSTRUMENTS
BB&T utilizes a variety of derivative financial instruments to manage
various financial risks. These instruments include financial forward and futures
contracts, options written and purchased, interest rate caps and floors and
interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose BB&T to interest rate
risk or price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
The net interest payable or receivable on interest rate swaps, caps and
floors that are designated as hedges is accrued and recognized as an adjustment
to the interest income or expense of the related asset or liability. For
interest rate forwards, futures and options qualifying as a hedge, gains and
losses are deferred and are recognized in income as an adjustment of yield.
Gains and losses from early terminations of derivatives are deferred and
amortized as yield adjustments over the shorter of the remaining term of the
hedged asset or liability or the remaining term of the derivative instrument.
Upon disposition or settlement of the asset or liability being hedged, deferral
accounting is discontinued and any gains or losses are recognized in income.
Derivative financial instruments that fail to qualify as a hedge are carried at
fair value with gains and losses recognized in current earnings.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. Fees received are deferred and recognized in noninterest income upon
exercise or expiration. Written options are carried at estimated fair value.
Unrealized and realized gains and losses on written call options are included
with securities gains and losses.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in its
mortgage banking activities. These options are used to hedge the mortgage
warehouse and pipeline against increasing interest rates. Written call options
are used in tandem with purchased put options to create a net purchased put
option that reduces the cost of the hedge. Net unrealized gains and losses on
purchased put options and net purchased put options are carried with loans held
for sale at the lower of cost or market on an aggregate basis. Realized gains
and losses on purchased put options and net purchased put options are included
in mortgage banking income.
PER SHARE DATA
Primary net income per common share has been computed by dividing net
income applicable to common shares by the weighted average number of shares of
common stock and common stock equivalents of dilutive stock options outstanding
during the years.
11
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fully diluted net income per common share has been computed by dividing net
income, as adjusted for the interest expense related to convertible debt, by the
weighted average number of shares of common stock, common stock equivalents and
other potentially dilutive securities outstanding during the years. Other
potentially dilutive securities include the number of shares issuable upon
conversion of the preferred stock. Restricted stock grants are considered as
issued for purposes of calculating net income per share.
Weighted average numbers of shares were as follows:
1996 1995 1994
Primary................................................. 138,152,190 137,129,290 135,331,706
Fully diluted........................................... 139,517,709 142,154,423 140,382,399
INTANGIBLE ASSETS
The cost in excess of the fair value of net assets acquired in transactions
accounted for as purchases (goodwill), premiums paid on acquisitions of deposits
(core deposit intangibles) and other identifiable intangible assets are included
in other assets in the "Consolidated Balance Sheets." Such assets are being
amortized on straight-line or accelerated bases over periods ranging from 5 to
15 years. At December 31, 1996, BB&T had $58.8 million recorded as goodwill and
$9.3 million as core deposit and other intangibles, net of amortization.
Negative goodwill is created when the fair value of the net assets purchased
exceeds the purchase price. Such balances are included in other liabilities in
the "Consolidated Balance Sheets" and are being amortized over periods ranging
from 10 to 15 years. At December 31, 1996, BB&T had negative goodwill totaling
$39.2 million, net of amortization.
MORTGAGE SERVICING RIGHTS
Amounts paid to acquire the right to service certain mortgage loans are
capitalized and amortized over the estimated lives of the loans to which they
relate. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." SFAS No. 122 requires that mortgage banking enterprises
recognize, as separate assets, rights to service mortgage loans for others,
however those servicing rights are acquired. The statement further requires
mortgage banking enterprises to assess their capitalized mortgage servicing
rights for impairment based on the fair value of those rights. BB&T elected, in
the third quarter of 1995, to adopt this statement effective as of January 1,
1995. The impact of the adoption of this statement resulted in additional
mortgage banking income of $7.6 million, before taxes, or $.03 per fully diluted
share, after taxes, during 1995. SFAS No. 122 prohibits retroactive application
to prior years. At December 31, 1996, BB&T had capitalized mortgage servicing
rights totaling $41.9 million.
CHANGES IN ACCOUNTING PRINCIPLES AND EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and to
be disposed of. The statement requires such assets to be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Any resulting impairment loss is required to be
reported in the period in which the recognition criteria are first applied and
met. BB&T adopted the provisions of the statement on January 1, 1996. The
implementation did not have a material impact on the consolidated financial
position or consolidated results of operations.
In October of 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based compensation plans. The statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages the adoption of that method of accounting. However,
the statement also allows entities to continue to account for such plans under
Accounting Principles Board ("APB") Opinion No. 25. Entities electing to remain
with the accounting in Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in the statement had been applied. BB&T adopted the statement effective
January 1, 1996 and elected to continue to account for stock-based compensation
plans under the provisions of Opinion No. 25. Therefore, the implementation of
the statement did not have an
12
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impact on BB&T's consolidated financial position or consolidated results of
operations. The required pro forma disclosures relating to SFAS No. 123 are
presented in Note J.
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for such transactions based on
consistent application of a financial components approach. This approach
recognizes the financial and servicing assets an entity controls and the
liabilities it has incurred, as well as derecognizes financial assets when
control has been surrendered and liabilities when they are extinguished. The
statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." This statement allows the
implementation of certain provisions of SFAS No. 125 to be deferred for one
year. BB&T adopted SFAS No. 125, as amended by SFAS No. 127, effective January
1, 1997. The adoption of these statements did not have a material impact on
BB&T's consolidated financial position or consolidated results of operations.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings per
share ("EPS") and simplifies the standards for computing earnings per share
previously found in Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS for all entities with
complex capital structures. The statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and requires restatement of all prior periods presented. Management does not
believe that the implementation of the statement will have a material impact on
the consolidated financial position or consolidated results of operations of
BB&T.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure by continuing and amending
existing standards. The statement is effective for financial statements for
periods ending after December 15, 1997. Management has determined that BB&T is
currently in compliance with the disclosure requirements of SFAS No. 129, and,
therefore, the implementation of the statement will not affect the capital
structure disclosures made by BB&T.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. Comprehensive income is the change in
equity (net assets) of a company during a period from transactions and other
events. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997, including interim periods, and requires restatement of all prior periods
presented. Management does not believe that the implementation of the statement
will have a material impact on the consolidated financial position or
consolidated results of operations of BB&T but will require additional
disclosures to be made.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
way that business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997, and requires restatement of all prior periods
presented. Management does not believe that the implementation of the statement
will have a material impact on the consolidated financial position or
consolidated results of operations of BB&T but will require additional
disclosures to be made.
13
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired
assets and assumed liabilities in transactions accounted for under the purchase
method of accounting. The fair values of these assets acquired and liabilities
assumed, at acquisition, were as follows:
1996 1995 1994
(DOLLARS IN THOUSANDS)
Fair value of net assets acquired.......................................................... $ 1,394 $ -- $ 6,203
Purchase price............................................................................. (22,256) -- (15,016)
Excess of purchase price over net assets acquired.......................................... $(20,862) $ -- $ (8,813)
During the first quarter of 1996, BB&T redeemed all outstanding shares of
Convertible Preferred Stock. This transaction, a noncash financing activity,
resulted in the conversion of 733,869 shares of preferred stock into 4,334,692
shares of common stock.
INCOME AND EXPENSE RECOGNITION
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
NOTE B. ACQUISITIONS AND MERGERS
COMPLETED MERGERS AND ACQUISITIONS
On June 1, 1994, BB&T completed the acquisition of McLean, Brady & McLean
Agency, Inc. ("McLean") by the issuance of 38,823 shares of BB&T common stock.
In conjunction with the acquisition of McLean, BB&T recorded $1.1 million of
expiration rights which are being amortized over 10 years.
On June 6, 1994, BB&T completed the acquisition of Leasing Associates, Inc.
by the issuance of 97,876 shares of BB&T common stock.
On November 1, 1994, BB&T completed the acquisition of Prime Rate Premium
Finance Corporation, Inc. and related interests, Agency Technologies, Inc. and
IFCO, Inc. ("Prime Rate") by the issuance of 590,406 shares of BB&T common
stock. In conjunction with the acquisition of Prime Rate, BB&T recorded $8.8
million of goodwill which is being amortized over 15 years.
On June 30, 1996, BB&T completed the purchase of certain fixed assets and
expiration rights from the James R. Lingle Agency of Florence, South Carolina.
In conjunction with the purchase, BB&T recorded expiration rights totaling $1.7
million which are being amortized over 15 years.
On August 28, 1996, BB&T became a majority shareholder of AutoBase
Information Systems, Inc., ("AutoBase") through the purchase of 51% of
AutoBase's outstanding common stock. In conjunction with this investment, BB&T
recorded $1.2 million in goodwill which is being amortized over 15 years.
During November 1996, BB&T completed the acquisitions of three insurance
agencies in South Carolina. On November 7, 1996, BB&T completed the acquisition
of the William Goldsmith Agency Inc., ("Goldsmith") of Greenville, South
Carolina through the issuance of 70,207 shares of common stock. On November 13,
1996, BB&T completed the acquisition of the C. Dan Joyner Insurance Agency,
("Joyner") based in Greenville, South Carolina through the issuance of 48,120
shares of common stock. Boyle-Vaughan Associates, Inc., ("Boyle-Vaughan") based
in Columbia, South Carolina, was acquired on November 22, 1996 through the
issuance of 492,063 shares of common stock. In conjunction with the purchase of
these agencies, BB&T recorded $17.9 million in goodwill, which is being
amortized over 15 years.
The above-discussed acquisitions were accounted for under the purchase
method of accounting, and, therefore, the financial information contained herein
includes data relevant to the acquirees since the date of acquisition. The pro
forma effects of 1996 purchases, as if they had been acquired as of the
beginning of the year, are not material.
14
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 1, 1997, BB&T completed its acquisition of Fidelity Financial
Bankshares Corporation ("Fidelity") in a transaction accounted for as a
purchase. BB&T issued 1.6 million shares for all of the shares of Fidelity's
common stock outstanding. In conjunction with the acquisition, BB&T recorded
$37.9 million in goodwill, which is being amortized using the straight-line
method over 15 years.
On May 20, 1997, BB&T completed its acquisition of Phillips Factors
Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation
and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips
purchases and manages receivables in the temporary staffing industry nationwide.
It also provides payroll processing services to that industry. Phillips also
buys and manages account receivables primarily in the furniture, textiles and
home furnishings-related industries. The acquisition of Phillips was accounted
for as a purchase. In conjunction with the acquisition, BB&T recorded $11.1
million of goodwill.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp., a
financial company that specializes in loans to small commercial lawn care
businesses across the country. The acquisition, which was completed through the
issuance of 375,000 shares of BB&T common stock, was accounted for as a
purchase.
The above-discussed completed during 1997, accounted for under the purchase
method of accounting, are not reflected in these consolidated financial
statements.
On March 31, 1994, BB&T issued 47,232 shares of common stock to consummate
a merger with Sanford Real Estate, Loan and Insurance Company. On November 30,
1994, BB&T issued 14,744 shares of common stock to complete an acquisition of
Executive Insurance Company, Inc. The transactions were accounted for as
poolings of interests.
On June 30, 1994, BB&T completed the acquisition of L.S.B. Bancshares Inc.,
of Lexington, South Carolina and its wholly-owned subsidiaries, The Lexington
State Bank and The Community Bank of South Carolina ("LSB"). The transaction was
accounted for as a pooling of interests. The merger was consummated through the
issuance of 5.7 million shares of BB&T common stock.
Effective August 31, 1994, BB&T issued 1.1 million shares of common stock
to complete the acquisition of the Bank of Iredell, headquartered in
Statesville, North Carolina. The merger was accounted for as a pooling of
interests.
On February 28, 1995, BB&T (formerly Southern National Corporation) and
BB&T Financial Corporation completed a merger. The transaction was accounted for
as a pooling-of-interests in which BB&T Financial Corporation's shareholders
received 57.9 million shares of the common stock of the resulting company for
all of the shares of BB&T Financial Corporation stock held. On January 10, 1995,
BB&T acquired Commerce Bank (subsequently, BB&T-VA) through the issuance of 5.2
million shares of BB&T common stock for all of the outstanding stock of Commerce
Bank.
On April 28, 1995, BB&T issued 75,273 shares of common stock to complete an
acquisition of United Agencies, Inc., a general insurance agency located in
Wilmington, North Carolina. The transaction was accounted for under the
pooling-of-interests method of accounting.
Effective January 25, 1996, BB&T consummated a merger with Seaboard Savings
Bank, Inc. ("Seaboard"), headquartered in Plymouth, North Carolina. BB&T issued
475,158 shares of common stock for all of the outstanding shares of Seaboard
common stock. The transaction was accounted for as a pooling of interests.
Effective March 29, 1996, BB&T consummated a merger with Triad Bank
("Triad") headquartered in Greensboro, North Carolina. BB&T issued 1.8 million
shares of common stock for all of the outstanding shares of Triad common stock.
The transaction was accounted for as a pooling of interests.
On August 30, 1996, BB&T issued 42,135 shares of common stock to complete
an acquisition of Tomlinson Insurers, Inc., a general insurance agency in
Fayetteville, North Carolina. The transaction was accounted for under the
pooling-of-interests method of accounting.
15
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 1, 1996, BB&T completed the acquisition of Regional Acceptance
Corporation of Greenville, N.C. ("Regional Acceptance") in a transaction
accounted for as a pooling-of-interests. BB&T issued 5.85 million shares in
exchange for all of the outstanding stock of Regional Acceptance.
On July 1, 1997, BB&T completed its acquisition of United Carolina
Bancshares Corporation ("UCB") of Whiteville, North Carolina in a stock
transaction accounted for as a pooling of interests. UCB shareholders received
27.7 million shares of BB&T common stock in exchange for all of the shares of
UCB common stock held. It is currently anticipated that BB&T will incur, on a
pretax basis, approximately $65 million in net nonrecurring merger-related costs
associated with executing the merger with UCB. Management also expects to
achieve annual cost savings of approximately $70 million given the efficiencies
available from an in-market merger. In conjunction with the merger, BB&T must
divest of approximately $505 million in deposits to remain in compliance with
anti-trust regulations.
The following presentation reflects key line items on an historical basis
for BB&T and UCB and on a pro forma combined basis assuming the merger was
effective as of and for the periods presented.
HISTORICAL BASIS BB&T
BB&T UCB RESTATED*
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
1996
Net interest income.............................................................. $ 828,493 $ 179,207 $ 1,007,700
Net income....................................................................... 283,664 45,204 330,175
Net earnings per share
Primary........................................................................ 2.56 1.87 2.39
Fully diluted.................................................................. 2.54 1.87 2.37
Assets........................................................................... 21,246,562 4,487,843 25,707,646
Deposits......................................................................... 14,953,914 4,049,426 19,003,340
Shareholders' equity............................................................. 1,729,169 350,469 2,071,567
1995
Net interest income.............................................................. $ 762,670 $ 168,648 $ 931,318
Net income....................................................................... 186,341 46,047 227,268
Net earnings per share
Primary........................................................................ 1.65 1.91 1.62
Fully diluted.................................................................. 1.62 1.91 1.60
Assets........................................................................... 20,636,430 4,037,518 24,671,277
Deposits......................................................................... 14,684,056 3,637,652 18,321,708
Shareholders' equity............................................................. 1,711,342 323,148 2,025,112
* Balances reflect adjustments necessary to combine BB&T and UCB accounts.
PENDING MERGERS AND ACQUISITIONS
On May 1, 1997, BB&T announced plans to acquire Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie
specializes in the origination, trading and distribution of fixed-income
securities and equity products in both the public and private capital markets.
Craigie also has a public finance department that provides investment banking
services, financial advisory services and municipal bond financing to a variety
of regional tax-exempt issuers. The merger, which will be accounted for as a
purchase, is expected to be completed during the third quarter of 1997.
On May 6, 1997, BB&T announced plans to acquire Virginia First Financial
Corporation of Petersburg, Virginia ("VFFC") in a transaction valued at $148.4
million based on BB&T's closing stock price on May 5, 1997. VFFC shareholders
will receive .60 shares of BB&T's common stock for each share of VFFC stock held
to a maximum of $25 per share of VFFC common stock. Each shareholder will
receive 30% of this value in cash and 70% in common stock. The merger, which
will be accounted for as a purchase, is expected to be completed by the end of
1997.
16
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C. SECURITIES
The amortized costs and approximate fair values of securities were as
follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
ESTIMATED ESTIMATED
AMORTIZED GROSS UNREALIZED FAIR AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. Treasury, government and
agency obligations.............. $ 6,283 $ -- $ 4 $ 6,279 $ 41,570 $ 141 $ 340 $ 41,371
States and political
subdivisions.................... 164,525 5,121 181 169,465 205,168 8,205 145 213,228
Mortgage-backed securities......... -- -- -- -- 4,508 16 44 4,480
Other debt securities.............. -- -- -- -- 77 -- -- 77
Total securities held to
maturity........................ 170,808 5,121 185 175,744 251,323 8,362 529 259,156
Securities available for sale:
U.S. Treasury, government and
agency obligations.............. 3,949,039 17,393 12,393 3,954,039 4,735,657 59,925 7,450 4,788,132
States and political
subdivisions.................... 23,985 168 176 23,977 21,952 259 96 22,115
Mortgage-backed securities......... 1,735,797 29,440 14,212 1,751,025 1,002,967 8,468 4,373 1,007,062
Equity and other securities........ 285,180 2 2 285,180 154,512 3 524 153,991
Total securities available
for sale........................ 5,994,001 47,003 26,783 6,014,221 5,915,088 68,655 12,443 5,971,300
Total securities................... $6,164,809 $52,124 $26,968 $6,189,965 $6,166,411 $77,017 $12,972 $6,230,456
Securities with a book value of approximately $3.4 billion and $2.8 billion
at December 31, 1996 and 1995, respectively, were pledged to secure municipal
deposits, securities sold under agreements to repurchase, Federal Reserve
discount window borrowings and for other purposes as required by law.
At December 31, 1996 and 1995, there was no concentration of investments in
obligations of states and political subdivisions that were secured by or payable
from the same taxing authority or revenue source and that exceeded ten percent
of shareholders' equity.
Proceeds from sales of securities during 1996, 1995 and 1994 were $605.8
million, $1.3 billion and $797.9 million, respectively. Gross gains of $5.4
million, $2.7 million and $3.6 million and gross losses of $2.4 million, $21.3
million and $586,000 were realized on those sales in 1996, 1995 and 1994,
respectively.
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1996, by contractual maturity, are shown in the accompanying table.
The expected life of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to call or prepay the underlying
mortgage loans with or without call or prepayment penalties. For purposes of the
maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the weighted
average contractual maturities of underlying collateral.
17
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
HELD TO MATURITY AVAILABLE FOR SALE
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(DOLLARS IN THOUSANDS)
DEBT SECURITIES
Due in one year or less.......................... $ 30,033 $ 30,109 $ 974,603 $ 976,008
Due after one year through five years............ 105,002 108,290 3,304,085 3,299,262
Due after five years through ten years........... 33,036 34,433 352,343 351,215
Due after ten years.............................. 2,737 2,912 1,266,449 1,291,215
Total debt securities.......................... $ 170,808 $ 175,744 $5,897,480 $5,917,700
NOTE D. LOANS AND LEASES
Loans and leases were composed of the following:
DECEMBER 31,
1996 1995
(DOLLARS IN THOUSANDS)
Loans --
Commercial, financial and agricultural................... $ 2,715,363 $ 2,395,084
Real estate -- construction and land development......... 1,525,964 1,175,839
Real estate -- mortgage.................................. 10,110,927 10,200,968
Consumer................................................. 2,748,572 2,487,235
Loans held for investment............................. 17,100,826 16,259,126
Leases..................................................... 576,991 376,152
Total loans and leases.............................. 17,677,817 16,635,278
Less: unearned income............................ 159,593 106,417
Loans and leases, net of unearned income............ $17,518,224 $16,528,861
The net investment in direct financing leases was $470.5 million and $315.5
million at December 31, 1996 and 1995, respectively. BB&T had loans held for
sale at December 31, 1996 and 1995 totaling $228.3 million and $261.4 million,
respectively.
BB&T's only significant concentration of credit at December 31, 1996
occurred in real estate loans, which totaled $12.0 billion. However, this amount
was not concentrated in any specific market or geographic area other than the
Banks' primary market.
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded $60,000
at any time during 1996. All amounts shown represent loans made by BB&T's
subsidiary banks in the ordinary course of business at the Banks' normal credit
terms, including interest rate and collateralization prevailing at the time for
comparable transactions with other persons (Dollars in thousands):
Balance, December 31, 1995........................................ $139,311
Additions......................................................... 95,449
Repayments........................................................ 60,092
Balance, December 31, 1996........................................ $174,668
18
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E. ALLOWANCE FOR LOSSES
An analysis of the allowance for losses is presented in the following
table:
YEARS ENDED DECEMBER 31,
1996 1995 1994
(DOLLARS IN THOUSANDS)
Balance, January 1............................................... $219,052 215,443 212,706
Provision for losses charged to expense.......................... 62,511 41,924 23,730
Allowances of purchased companies................................ -- -- 1,119
Subtotal....................................................... 281,563 257,367 237,555
Loans charged-off................................................ (69,073) (53,064) (37,831)
Recoveries....................................................... 17,580 14,749 15,719
Net charge-offs................................................ (51,493) (38,315) (22,112)
Balance, December 31............................................. 230,070 219,052 215,443
At December 31, 1996, 1995 and 1994, loans not currently accruing interest
totaled $62.2 million, $68.6 million and $55.0 million, respectively. Loans 90
days or more past due and still accruing interest totaled $41.7 million, $34.6
million and $29.1 million, at December 31, 1996, 1995 and 1994, respectively.
The gross interest income that would have been earned during 1996 if the
outstanding nonaccrual loans and leases had been current in accordance with the
original terms and had been outstanding throughout the period (or since
origination, if held for part of the period) was approximately $5.6 million.
Foreclosed property was $27.9 million, $18.9 million and $19.5 million at
December 31, 1996, 1995 and 1994, respectively.
NOTE F. PREMISES AND EQUIPMENT
DECEMBER 31,
1996 1995
(DOLLARS IN
THOUSANDS)
Land and land improvements........................................ $ 63,041 $ 62,186
Buildings and building improvements............................... 284,377 278,073
Furniture and equipment........................................... 277,217 270,116
Capitalized leases on premises and equipment...................... 3,804 4,257
628,439 614,632
Less -- accumulated depreciation and amortization................. 253,485 242,772
Net premises and equipment...................................... $374,954 $371,860
Depreciation expense, which is included in occupancy and equipment expense,
was $45.3 million, $42.1 million and $41.5 million in 1996, 1995 and 1994,
respectively.
19
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BB&T has noncancellable leases covering certain premises and equipment.
Total rent expense applicable to operating leases was $28.4 million, $33.1
million and $25.9 million for 1996, 1995 and 1994, respectively. Future minimum
lease payments for operating and capitalized leases for years subsequent to 1996
are as follows:
LEASES
OPERATING CAPITALIZED
(DOLLARS IN THOUSANDS)
Years ended December 31:
1997........................................................... $ 22,160 $ 465
1998........................................................... 21,373 465
1999........................................................... 19,979 465
2000........................................................... 19,399 465
2001........................................................... 18,299 465
2002 and years later........................................... 119,803 5,316
Total minimum lease payments..................................... $ 221,013 7,641
Less -- amount representing interest............................. 4,080
Present value of net minimum payments on capitalized leases (Note
I)............................................................. $ 3,561
NOTE G. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
"Consolidated Balance Sheets." The unpaid principal balances of mortgage loans
serviced for others were $7.5 billion and $6.1 billion at December 31, 1996 and
1995, respectively.
The following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization and adjustments necessary to present the balances at
that lower of cost or estimated fair value, which are included in the
"Consolidated Balance Sheets:"
CAPITALIZED MORTGAGE
SERVICING RIGHTS
(DOLLARS IN
THOUSANDS)
Balance, January 1,.......................................................... $21,948 $ 7,225
Amount capitalized......................................................... 26,356 18,082
Amortization expense....................................................... (6,197) (2,860)
Change in valuation allowance.............................................. (216) (499)
Balance, December 31,........................................................ $41,891 $21,948
20
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized mortgage servicing rights are being amortized on a
disaggregated loan basis using an accelerated method over the estimated life of
the servicing income. The servicing rights portfolio is analyzed each quarter to
identify possible impairment using a disaggregated discounted cash flow
methodology that is stratified by predominant risk characteristics. These
characteristics include stratification based on interest rates in intervals of
150 basis points, type of loan and maturity of loan. Following is an analysis of
the aggregate changes in the valuation allowances for mortgage servicing rights
in 1996 and 1995:
VALUATION ALLOWANCE
FOR MORTGAGE SERVICING
RIGHTS
(DOLLARS IN THOUSANDS)
Balance, January 1, 1995........................................................ $ --
Additions..................................................................... 499
Balance, December 31, 1995...................................................... 499
Additions..................................................................... 1,184
Reductions.................................................................... (968)
Balance, December 31, 1996...................................................... $ 715
NOTE H. SHORT-TERM BORROWED FUNDS
DECEMBER 31,
1996 1995
(DOLLARS IN THOUSANDS)
Federal funds purchased................................................... $ 729,995 $ 828,985
Term Federal funds purchased.............................................. 50,000 350,000
Securities sold under agreements to repurchase............................ 680,315 700,453
Master notes.............................................................. 566,225 396,273
U.S. Treasury tax and loan deposit notes payable.......................... 101,681 66,271
Short-term Federal Home Loan Bank advances................................ 150,000 175,000
Other short-term borrowed funds........................................... 2,608 108,873
Total short-term borrowed funds......................................... $2,280,824 $2,625,855
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Term Federal funds purchased are identical to Federal
funds; however, maturities vary and are greater than one day. Securities sold
under agreements to repurchase are borrowings collateralized by securities of
the U.S. Government or its agencies and have maturities ranging from one to
ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon
demand to the U.S. Treasury. Master notes are unsecured, non-negotiable
obligations of BB&T (variable rate commercial paper). Short-term Federal Home
Loan Bank advances are typically unsecured and generally mature daily.
21
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. LONG-TERM DEBT
DECEMBER 31,
1996 1995
(DOLLARS IN THOUSANDS)
$5 million Industrial Revenue Bond, dated 1984, secured by premises with a net book value of
$5,708,000 at December 31, 1996, due in quarterly installments of $83,340 through the second
quarter 1999, and one final installment of $82,940 in 1999. Interest rate is variable -- 76.99%
of prime -- 6.352% at December 31, 1996......................................................... $ 1,000 $ 1,250
Capitalized leases, varying maturities to 2028 with rates from 8.11% to 12.65%. This represents
the unamortized balances due on leases of various facilities.................................... 3,561 4,125
Medium-term bank notes, unsecured, varying maturities to 2001 with rates from 5.31% to 5.70%...... 424,794 201,979
Advances from Federal Home Loan Bank, varying maturities to 2016 with rates from 1.00% to 8.95%... 1,375,971 1,178,559
$250 million Subordinated Notes, unsecured, dated May 21, 1996, maturing May 23, 2003 with an
interest rate of 7.05%.*........................................................................ 248,019 --
Other mortgage indebtedness....................................................................... 695 997
$2,054,040 $1,386,910
* Subordinated notes qualify under the risk-based capital guidelines as Tier 2
supplementary capital.
Excluding the capitalized leases set forth in Note F, future debt
maturities total $2.1 billion and are $550.5 million, $339.6 million, $175.9
million, $112.1 million, and $418.8 million for the next five years. The
maturities for 2002 and later years are $453.6 million.
NOTE J. SHAREHOLDERS' EQUITY
The authorized capital stock of BB&T consists of 300,000,000 shares of
common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par
value. At December 31, 1996, 136,896,865 shares of common stock and no shares of
preferred stock were issued and outstanding.
STOCK OPTION PLANS
At December 31, 1996, BB&T had the following stock-based compensation
plans: the 1994 and the 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"),
the Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan
("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors' Plan"),
which are described below. BB&T accounts for these plans under Accounting
Principles Board ("APB") Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for these plans been determined based on
the fair value at the grant dates for awards under those plans, consistent with
the method of SFAS No. 123, BB&T's pro forma net income and pro forma earnings
per share would have been as follows:
1996 1995
Net income applicable to common shares:
As reported..................................................... $329,565 $222,189
Pro Forma....................................................... 327,104 221,836
Primary EPS:
As reported..................................................... 2.39 1.62
Pro Forma....................................................... 2.37 1.62
Fully diluted EPS:
As reported..................................................... 2.37 1.60
Pro Forma....................................................... 2.35 1.60
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995; therefore, the weighted average fair value of
options granted prior to that date has not been calculated. The fair value of
each option grant
22
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1996 and
1995, respectively: dividend yield of 3.5% for both years; expected volatility
of 20% for both years; risk free interest rates of 6.4% and 5.7%; and expected
lives of 6.5 years and 6.1 years.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
In April 1994 and May 1995, the shareholders approved the Omnibus Plans
which cover the award of incentive stock options, non-qualified stock options,
shares of restricted stock, performance shares and stock appreciation rights. In
April 1996, the shareholders approved an amendment to the 1995 Omnibus Plan that
increased the maximum number of shares issuable under the terms of the plan to
6,000,000 shares. The combined shares issuable under both Omnibus Plans is
10,000,000. The Omnibus Plans are intended to allow BB&T to recruit and retain
employees with ability and initiative and to associate the employees' interests
with those of BB&T and its shareholders. At December 31, 1996, 2,200,641
incentive stock options at prices ranging from $5.8828 to $36.625 and 2,391,543
non-qualified stock options at prices ranging from $.01 to $23.3655 were
outstanding. The stock options vest over 3 years and have a 10 year term.
The ISOP and the NQSOP were established to retain key officers and key
management employees and to offer them the incentive to use their best efforts
on behalf of BB&T. The plans, which expire on December 19, 2000, further provide
for up to 1,101,000 shares of common stock to be reserved for the granting of
options, which have a four year vesting schedule and must be exercised within
ten years from the date granted. Incentive stock options granted must have an
exercise price equal to at least 100% of the fair market value of common stock
on the date granted, and the non-qualified stock options must have an exercise
price equal to at least 85% of the fair market value on the date granted. At
December 31, 1996, options to purchase 348,660 shares of common stock at prices
ranging from $9.50 to $16.75 were outstanding pursuant to the NQSOP. At December
31,1996, options to purchase 157,329 shares of common stock at an exercise price
of $19.777 were outstanding pursuant to the ISOP.
The Directors' Plan is intended to provide incentives to non-employee
directors to remain on the Board of Directors and share in the profitability of
BB&T. The plan creates a deferred compensation system for participating
non-employee directors. Each non-employee director may elect to defer 0%, 50% or
100% of the annual retainer fee for each calendar year and apply that percentage
toward the grant of options to purchase BB&T common stock. Such elections are
required to be in writing and are irrevocable for each calendar year. The
exercise price at which shares of BB&T common stock may be purchased shall be
equal to 75% of the market value of the common stock as of the date of grant.
Options are vested in six months and may be exercised anytime thereafter until
the expiration date, which is 10 years from the date of grant. The Directors'
Plan provides for the reservation of up to 400,000 shares of BB&T common stock.
At December 31, 1996, options to purchase 291,143 shares of common stock at
prices ranging from $12.7155 to $22.07 were outstanding pursuant to the
Directors' Plan.
BB&T also has options outstanding from companies acquired in prior years.
These options, which have not been included in the plans described above,
totaled 297,067 as of December 31, 1996, with option prices ranging from $2.6667
to $23.7069.
23
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years then ended is presented below:
YEARS ENDED DECEMBER 31,
1996 1995 1994
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year.................... 6,242,714 $ 17.58 5,518,450 $ 14.94 5,040,088 $ 12.83
Granted............................................. 107,996 25.34 1,378,254 25.24 1,225,829 19.18
Exercised........................................... (615,852) 11.44 (608,181) 10.88 (674,824) 6.77
Forfeited or Expired................................ (48,475) 15.70 (45,808) 19.20 (72,644) 16.27
Outstanding at end of year.......................... 5,686,383 $ 18.40 6,242,715 $ 17.58 5,518,449 $ 14.94
Options exercisable at year-end..................... 4,563,558 $ 16.97 4,316,010 $ 15.33 2,783,738 $ 12.10
The weighted average fair value of options granted was $6.63 and $5.05 per
option at December 31, 1996 and 1995, respectively.
The following table summarizes information about the options outstanding at
December 31, 1996:
WEIGHTED-
AVERAGE WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96
$0.01.......................................................... 1,497 4.7yrs $ 0.01 1,497
$2.67 to $3.79................................................. 37,516 7.1 3.33 37,516
$4.92 to $7.26................................................. 94,391 2.7 5.98 94,391
$7.45 to $10.81................................................ 486,896 3.8 9.23 486,896
$11.72 to $17.50............................................... 1,898,838 4.5 14.29 1,848,284
$18.13 to $26.75............................................... 3,133,736 7.9 22.72 2,093,190
$28.88 to $36.63............................................... 33,509 9.6 33.89 1,784
5,686,383 6.3yrs $ 18.40 4,563,558
WEIGHTED-
AVERAGE
RANGE OF EXERCISE
EXERCISE PRICES PRICE
$0.01.......................................................... $ 0.01
$2.67 to $3.79................................................. 3.33
$4.92 to $7.26................................................. 5.98
$7.45 to $10.81................................................ 9.23
$11.72 to $17.50............................................... 14.32
$18.13 to $26.75............................................... 21.86
$28.88 to $36.63............................................... 29.63
$ 16.97
SHAREHOLDER RIGHTS PLAN
On January 17, 1997, pursuant to the Rights Agreement approved by the Board
of Directors, BB&T distributed to shareholders one preferred stock purchase
right for each share of BB&T's common stock then outstanding. Subsequent to this
date, all shares issued are accompanied by a stock purchase right. Initially,
the rights, which expire in 10 years, are not exercisable and are not
transferable apart from the common stock. The rights will become exercisable
only if a person or group acquires 20% or more of BB&T's common stock, or BB&T's
Board of Directors determines, pursuant to the terms of the Rights Agreement,
that any person or group that has acquired 10% or more of BB&T's common stock is
an "Adverse Person."Each right would then enable the holder to purchase 1/100th
of a share of a new series of BB&T preferred stock at an initial exercise price
of $145.00. The Board of Directors will be entitled to redeem the rights at $.01
per right under certain circumstances specified in the Rights Agreement.
Under the terms of the Rights Agreement, if any person or group becomes the
beneficial owner of 25% or more of BB&T's common stock, with certain exceptions,
or if the Board of Directors determines that any 10% or more stockholder is an
"Adverse Person," each right will entitle its holder (other than the person
triggering exercisability of the rights) to purchase, at the right's
then-current exercise price, shares of BB&T's common stock having a value of
twice the right's exercise price. In addition, if after any person or group has
become a 20% or more stockholder, BB&T is involved in a merger or other business
combination transaction with another person in which its common stock is changed
or converted, or sells 50% or more of its assets or earning power to another
person, each right will entitle its holder to purchase, at the right's then-
current exercise price, shares of common stock of such other person having a
value of twice the right's exercise price.
24
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K. INCOME TAXES
The provision for income taxes was composed of the following:
YEARS ENDED DECEMBER 31,
1996 1995 1994
(DOLLARS IN THOUSANDS)
Current expense:
Federal............................................ $151,713 $125,190 $154,687
State.............................................. 4,372 6,535 12,953
156,085 131,725 167,640
Deferred expense (benefit)........................... 3,847 (18,607) (20,637)
Provision for income taxes........................... $159,932 $113,118 $147,003
The reasons for the difference between the provision for income taxes and
the amount computed by applying the statutory Federal income tax rate to income
before income taxes were as follows:
YEARS ENDED DECEMBER 31,
1996 1995 1994
(DOLLARS IN THOUSANDS)
Federal income taxes at statutory rates of 35%....... $171,538 $119,135 $147,812
Tax-exempt income from securities, loans and leases
less related non-deductible interest expense....... (8,692) (8,263) (8,563)
State income taxes, net of Federal tax benefit....... 3,217 3,446 5,386
Other, net........................................... (6,131) (1,200) 2,368
Provision for income taxes........................... $159,932 $113,118 $147,003
Effective income tax rate............................ 32.6% 33.2% 34.8%
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Balance Sheets" were:
DECEMBER 31,
1996 1995
(DOLLARS IN
THOUSANDS)
Deferred tax assets:
Allowance for losses............................................ $ 88,924 $ 83,267
Deferred compensation........................................... 17,761 18,426
Postretirement benefits other than pensions..................... 18,256 18,016
Other........................................................... 22,866 23,113
Total tax deferred assets....................................... 147,807 142,822
Deferred tax liabilities:
Tax accounting method changes................................... (6,599) (10,493)
Depreciation.................................................... (21,972) (18,712)
Net unrealized appreciation on securities available for sale.... (8,248) (20,014)
Lease financing................................................. (15,623) (13,558)
Pension plan contribution....................................... (6,363) (3,705)
Other........................................................... (19,539) (15,788)
Total tax deferred liabilities.................................... (78,344) (82,270)
Net deferred tax asset............................................ $ 69,463 $ 60,552
25
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax assets have been determined to be realizable, and,
accordingly, a valuation allowance was not required. At December 31, 1996, there
were no operating losses, income tax credits or alternative minimum tax credit
carryforwards.
Securities transactions resulted in income tax expense (benefits) of $1.1
million, ($7.1 million) and $1.2 million related to securities gains (losses)
for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE L. BENEFIT PLANS
BB&T has various employee benefit plans and arrangements. Employees of
acquired entities typically participate in existing BB&T plans upon consummation
of the acquisitions. Credit is usually given to these employees for years of
service at the acquired institution. The combination of actuarial information
for the benefit plans of the acquired entities is not meaningful because the
benefits offered in those plans and assumptions used in the calculations related
to those plans are superseded by the benefits offered in the BB&T plans and the
assumptions used in the BB&T calculations. Accordingly, the actuarial
information presented for retirement plans and postretirement benefits is that
of BB&T as originally presented.
The following table discloses expenses relating to employee benefit plans,
restated for transactions accounted for as poolings of interests.
YEARS ENDED DECEMBER 31,
1996 1995 1994
(DOLLARS IN THOUSANDS)
Defined benefit plans................................................ $12,663 $18,643 $22,239
Defined contribution and ESOP plans.................................. 13,035 11,712 12,053
Total expense related to benefit plans............................... $25,698 $30,355 $34,292
RETIREMENT PLANS
Prior to the merger of Southern National Corporation ("BB&T) and BB&T
Financial Corporation, both companies had noncontributory defined benefit plans
covering substantially all employees. Benefits were based on years of service,
age at retirement and the employee's compensation as defined.
Effective January 1, 1996, BB&T's and BB&T Financial Corporation's pension
plans were merged into a single noncontributory defined benefit pension plan.
This plan covers substantially all employees of the merged institution. Benefits
are based on years of service, age at retirement and the employee's compensation
during the five highest consecutive years of earnings within the last ten years
of employment.
BB&T's contributions to the plan were in amounts between the minimum
required for funding standard account purposes and the maximum deductible for
Internal Revenue Service purposes.
Supplemental retirement benefits are provided to certain key officers under
supplemental executive retirement plans ("SERPs"), which are not qualified under
the Internal Revenue Code. Although technically unfunded plans, insurance
policies on the lives of the covered employees partially fund future benefits.
Net periodic pension cost, which is included in employee benefits expense,
consisted of the following components in 1996, 1995 and 1994.
1996 1995 1994
(DOLLARS IN THOUSANDS)
Service cost....................................................... $ 8,860 $ 9,658 $ 9,431
Interest cost...................................................... 11,755 10,864 9,504
Actual return on assets............................................ (18,498) (25,226) 711
Early retirement................................................... -- 3,372 --
Net amortization and deferral and other............................ 7,453 16,414 (10,699)
Net periodic pension cost........................................ $ 9,570 $ 15,082 $ 8,947
26
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the plans' funded status at December 31,
1996 and 1995.
PLANS FOR WHICH
PLANS FOR WHICH ACCUMULATED
ASSETS EXCEED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
1996 1995 1996 1995
(DOLLARS IN THOUSANDS)
Accumulated benefit obligation
Vested benefits.................................... $(120,396) $(104,000) $ -- $ --
Nonvested benefits................................. (3,107) (3,566) -- --
$(123,503) $(107,566) $ -- $ --
Projected benefit obligation at December 31.......... $(161,157) $(140,394) $(11,483) $(9,929)
Plan assets at fair value............................ 162,126 129,574 -- --
Plan assets in excess of (less than) projected
benefit obligation................................. 969 (10,820) (11,483) (9,929)
Unrecognized transition amount....................... (5,345) (6,162) 321 364
Unrecognized prior service cost...................... (6,699) (7,503) 3,314 3,313
Unrecognized net loss................................ 16,951 16,717 3,233 3,214
Minimum liability adjustment......................... -- -- (620) (2,597)
Prepaid (accrued) pension cost included in other
assets (other liabilities)......................... $ 5,876 $ (7,768) $ (5,235) $(5,635)
Actuarial assumptions used in calculating these amounts were:
1996 1995 1994
Rate of increase in future compensation....................................... 5.5 % 5.5 % 4.8-6.0%
Weighted average discount rate................................................ 7.5 7.5 7.8
Weighted average expected long-term rate of return on assets.................. 8.0 8.0 8.0-9.0
Plan assets consist primarily of investments in mutual funds consisting of
equity investments, obligations of the U.S. Treasury and Federal agencies and
corporations. Plan assets included $11.2 million and $7.9 million of BB&T common
stock at December 31, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS
BB&T revised its retiree health care plans in preparation for the
implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other
Than Pensions." Effective January 1, 1996, the plans of BB&T and BB&T Financial
Corporation were merged into a single plan. The new plan covers employees
retiring after December 31, 1995 who are eligible for participation in the BB&T
pension plan and have at least ten years of service. The plan requires retiree
contributions, with a subsidy by BB&T based upon years of service of the
employee at the time of retirement. The subsidy is periodically reviewed for
adjustment. The plan provides flexible benefits to retirees which may also be
used for dependents.
The following table sets forth the components of the retiree benefit plan
and the amount recognized in the consolidated financial statements at December
31, 1996, 1995 and 1994 as originally reported.
1996 1995 1994
NET PERIODIC POSTRETIREMENT BENEFIT COST:
Service cost........................................................... $ 739 $ 972 $ 990
Interest cost.......................................................... 2,029 2,248 1,841
Amortization of net loss and other..................................... -- 156 104
Total expense....................................................... $2,768 $3,376 $2,935
27
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995 1994
RECONCILIATION OF FUNDED STATUS:
Accumulated postretirement benefit obligation.................... $(29,046) $(30,735) $(27,590)
Unrecognized net loss............................................ 69 3,348 1,356
Accrued postretirement benefit costs included in other
liabilities................................................... $(28,977) $(27,387) $(26,234)
Actuarial assumptions used in calculating these amounts were:
1996 1995 1994
Annual rate of increase in the per capita cost of health care claims
Current year........................................................ 11.0% 8.0-11.0% 10.0-12.0%
Final constant amount............................................... 5.0 4.75-5.0 5.0
Annual decrease..................................................... 1.0 .8-1.0 1.0
General inflation rate................................................ 4.0 4.0 4.0
Weighted average discount rate........................................ 7.5 7.5 7.8
Impact of 1% increase in assumed health care cost on:
Net periodic benefit cost........................................... 3.0 2.0-3.0 0.0-1.0
Expected postretirement benefit obligation.......................... 5.0 3.0-4.0 1.1-3.0
401-K SAVINGS PLAN
Prior to 1996, BB&T had an Employee Stock Ownership Plan which allowed all
employees to acquire common stock in BB&T by contributing up to 15% of their
salaries to the plan. BB&T matched 100% of each employee's contributions, up to
a maximum of 6% of the employee's salary. BB&T Financial Corporation had a
Savings and Thrift Plan which permitted eligible employees to make contributions
up to 16% of base compensation, with matching contributions up to 4% of the
employee's base compensation. Effective January 1, 1996, BB&T's Employee Stock
Ownership Plan was merged into the former BB&T Financial Corporation Savings and
Thrift Plan to form the BB&T Corporation 401-k Savings Plan. The new plan
permits employees to contribute up to 16% of their compensation. BB&T matches up
to 6% of the employee's compensation with a 100% matching contribution.
SETTLEMENT AGREEMENTS
In connection with recent significant mergers, three executive officers of
merged institutions agreed to retire during 1995 and 1997. BB&T entered into
settlement and noncompetition agreements with these executive officers to settle
existing employment contracts and to require them not to compete with BB&T. One
of the agreements provides for annual payments of $1,655,000 less the
company-provided portion of certain benefits payable under existing benefit
plans. The payments continue for the life of the executive and his current wife
but in no event for a period of less than fifteen years. The executive has
agreed not to compete in a defined geographic area for fifteen years and to
serve as a consultant to the merged company for five years. A second agreement
provides for annual payments of $312,000 for ten years or until death. The third
settlement agreement provides for annual payments of $769,392 (to be adjusted
annually in accordance with the Consumer Price Index) until the executive
reaches the age of 65 in 2002, at which time the annual payments will be reduced
to 70% of the amount paid during the final year pursuant to the agreement,
estimated to be approximately $623,000, less the company-provided portion of
benefits payable under certain existing benefit plans. The reduced payments will
continue for the life of the executive. If the executive's current wife survives
him, payments will continue to her in an annual amount equal to 35% of the
amount paid to the executive during the final year pursuant to the agreement.
The executive officer has agreed not to compete in a defined geographic area for
ten years.
OTHER
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
28
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M. COMMITMENTS AND CONTINGENCIES
BB&T is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, options written, standby
letters of credit and financial guarantees, interest rate caps and floors
written, interest rate swaps and forward and futures contracts.
BB&T's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. BB&T uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
CONTRACT OR
NOTIONAL AMOUNT AT
DECEMBER 31,
1996 1995
(DOLLARS IN THOUSANDS)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend, originate or purchase credit............................................. 6,754,901 5,093,090
Standby letters of credit and financial guarantees written...................................... 216,910 156,711
Commercial letters of credit.................................................................... 21,703 30,038
Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Commitments to sell loans and securities........................................................ 240,121 308,358
Foreign exchange contracts...................................................................... 103,506 109,747
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. BB&T evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by BB&T upon extension of credit, is based on
management's evaluation of the creditworthiness of the counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BB&T to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers,
and letters of credit are collateralized when necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities
are contracts for delayed delivery of securities in which BB&T agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates.
LEGAL PROCEEDINGS
The nature of the business of BB&T's banking subsidiaries ordinarily
results in a certain amount of litigation. The subsidiaries of BB&T are involved
in various legal proceedings, all of which are considered incidental to the
normal conduct of business. Management believes that the liabilities arising
from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
NOTE N. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS
BB&T's subsidiary banks are required by the Board of Governors of the
Federal Reserve System to maintain reserve balances based on certain percentages
of deposit types subject to various adjustments. At December 31, 1996, these
reserves (including average daily vault cash) amounted to $376.5 million.
29
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the subsidiary banks could have declared dividends from
their retained earnings up to $1.0 billion at December 31, 1996. The subsidiary
banks are prohibited from paying dividends from their capital stock and
additional paid-in capital accounts and are required by regulatory authorities
to maintain minimum capital levels. BB&T was in compliance with these
requirements at December 31, 1996.
BB&T is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional -- discretionary
-- actions by regulators that, if undertaken, could have a direct material
effect on BB&T's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of BB&T's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. BB&T's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
See Table 9 for additional disclosure concerning regulatory capital
requirements.
NOTE O. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks........................................................................... $ 9,047 $ 6,458
Interest-bearing bank balances.................................................................... 587,330 396,331
Investment securities............................................................................. 40,560 37,672
Investment in banking subsidiaries................................................................ 2,063,285 1,818,444
Investment in other subsidiaries.................................................................. 52,283 42,153
Premises.......................................................................................... 5,809 6,017
Receivables from subsidiaries and other assets.................................................... 183,644 163,282
Total assets................................................................................. $2,941,958 $2,470,357
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowed funds......................................................................... $ 566,225 $ 396,273
Dividends payable................................................................................. 29,521 24,389
Accounts payable and accrued liabilities.......................................................... 25,626 23,333
Long-term debt.................................................................................... 249,019 1,250
Total liabilities............................................................................ 870,391 445,245
Total shareholders' equity................................................................... 2,071,567 2,025,112
Total liabilities and shareholders' equity................................................... $2,941,958 $2,470,357
30
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
(DOLLARS IN THOUSANDS)
INCOME
Dividends from subsidiaries............................................................ $142,854 $240,699 $150,140
Interest and other income from subsidiaries............................................ 36,627 20,261 16,075
Interest on investment securities...................................................... 2,936 1,855 2,334
Other income........................................................................... 7,835 6,143 3,595
Total income........................................................................ 190,252 268,958 172,144
EXPENSES
Interest expense....................................................................... 33,845 17,859 12,393
Occupancy expense...................................................................... 171 171 172
Other expenses......................................................................... 11,327 26,760 10,916
Total expenses...................................................................... 45,343 44,790 23,481
Income before income tax benefit and equity in
undistributed earnings of subsidiaries................................................. 144,909 224,168 148,663
Income tax expense (benefit)............................................................. 661 (6,042) (580)
Income before equity in undistributed earnings of subsidiaries........................... 144,248 230,210 149,243
Net income of subsidiaries (less than) in excess of dividends from
subsidiaries........................................................................... 185,927 (2,942) 126,073
NET INCOME............................................................................... $330,175 $227,268 $275,316
31
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 330,175 $ 227,268 $ 275,316
Adjustments to reconcile net income to net cash provided by operating activities:
Net income of subsidiaries (less than) in excess of dividends from subsidiaries...... (185,927) 2,942 (126,073)
Depreciation of premises and equipment............................................... 214 214 215
Amortization of unearned compensation................................................ 2,450 3,172 1,711
Discount accretion and premium amortization.......................................... 192 (298) 83
Loss (gain) on sales of securites.................................................... (9) 100 --
Loss on disposals of other real estate owned......................................... -- 240 --
Loss on disposal of premises and equipment........................................... -- 29 --
(Increase) decrease in other assets.................................................. 103,134 (145,852) 39,881
Increase (decrease) in accounts payable and accrued liabilities...................... 2,293 5,974 (932)
Net cash provided by operating activities......................................... 252,522 93,789 190,201
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale................................. 14 87 10,128
Proceeds from maturities of securities available for sale............................ 49,347 101,339 100,461
Purchases of securities available for sale........................................... (52,324) (41,697) (99,526)
Proceeds from sales of securities held to maturity................................... -- 520 --
Repayment of note from bank subsidiary............................................... -- -- 30,000
Sale of savings bank subsidiary to bank subsidiary................................... -- -- 58,883
Proceeds from sales of premises and equipment........................................ -- 79 --
Investment in subsidiaries........................................................... (68,625) (264) (67,492)
Advances to subsidiaries............................................................. (306,857) -- --
Repayment of advances to subsidiaries................................................ 182,875 -- --
Other................................................................................ -- -- (32,328)
Net cash (used in) provided by investing activities............................... (195,570) 60,064 126
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in long-term debt............................................ 247,625 (7,333) (53,333)
Net increase in short-term borrowed funds............................................ 169,952 142,004 95,614
Repayment of advance from bank subsidiary............................................ -- -- (58,250)
Net proceeds from common stock issued................................................ 49,716 44,242 24,123
Redemption of common stock........................................................... (207,387) (47,311) (23,562)
Preferred stock cancellations and conversions........................................ -- (2,371) --
Cash dividends paid on common and preferred stock.................................... (123,270) (107,869) (88,866)
Other................................................................................ -- -- 1,656
Net cash provided by (used in) financing activities............................... 136,636 21,362 (102,618)
Net Increase in Cash and Cash Equivalents............................................ 193,588 175,215 87,709
Cash and Cash Equivalents at Beginning of Year....................................... 402,789 227,574 139,865
Cash and Cash Equivalents at End of Year............................................. $ 596,377 $ 402,789 $ 227,574
32
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires BB&T to disclose the estimated fair value of its on- and off-balance
sheet financial instruments. A financial instrument is defined by SFAS No. 107
as cash, evidence of an ownership interest in an entity or a contract that
creates a contractual obligation or right to deliver to or receive cash or
another financial instrument from a second entity on potentially favorable or
unfavorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS No. 107 specifies that
fair values should be calculated based on the value of one trading unit without
regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for a
significant portion of BB&T's financial instruments, fair value estimates for
these instruments are based on judgments regarding current economic conditions,
currency and interest rate risk characteristics, loss experience and other
factors. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision. Therefore, the
calculated fair value estimates cannot always be substantiated by comparison to
independent markets and, in many cases, may not be realizable in a current sale
of the instrument. Changes in assumptions could significantly affect the
estimates.
The following methods and assumptions were used by BB&T in estimating the
fair value of its financial instruments at December 31, 1996 and 1995.
CASH AND CASH EQUIVALENTS: For these short-term instruments, the carrying
amounts are a reasonable estimate of fair values.
SECURITIES: Fair values for securities are based on quoted market prices,
if available. If quoted market prices are not available, fair values are based
on quoted market prices for similar securities.
LOANS RECEIVABLE: The fair values for loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms and credit quality. The carrying amounts of accrued interest
approximate fair values.
DEPOSIT LIABILITIES: The fair values for demand deposits, interest-checking
accounts, savings accounts and certain money market accounts are, by definition,
equal to the amount payable on demand at the reporting date, i.e., their
carrying amounts. Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies current interest rates to
aggregate expected maturities.
SHORT-TERM BORROWED FUNDS: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowed funds approximate their fair values.
LONG-TERM DEBT: The fair values of long-term debt are estimated based on
quoted market prices for similar instruments or by using discounted cash flow
analyses, based on BB&T's current incremental borrowing rates for similar types
of instruments.
INTEREST RATE SWAP AGREEMENTS: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that BB&T would receive or pay
to terminate the swap agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the swap
counterparties.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN:The fair values of commitments are estimated using the fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair values also consider the difference
between current levels of interest rates and the committed rates. The fair
values of guarantees and letters of credit are estimated based on fees currently
charged for similar agreements.
OTHER OFF-BALANCE SHEET INSTRUMENTS: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
33
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(DOLLARS IN THOUSANDS)
Financial assets:............................................... $ 927,341 $ 927,341 $ 934,149 $ 934,149
Cash and cash equivalents..................................... 6,014,221 6,014,221 5,971,300 5,971,300
Securities available for sale................................. 170,808 175,744 215,323 259,156
Securities held to maturity...................................
Loans and leases
Loans...................................................... 17,276,102 17,272,691 16,474,684 16,573,738
Leases..................................................... 470,455 N/A 315,541 N/A
Allowances for losses...................................... (230,070) N/A (219,052) N/A
Net loans and leases..................................... $17,516,487 $16,571,173
Financial liablities:
Deposits...................................................... $19,003,340 19,052,070 $18,321,708 18,355,876
Short-term borrowed funds..................................... 2,280,824 2,280,824 2,625,855 2,625,855
Long-term debt................................................ 2,050,479 2,146,487 1,382,785 1,388,389
Capitalized leases............................................ 3,561 N/A 4,125 N/A
1996 1995
NOTIONAL/ NOTIONAL/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
Unrecognized financial intruments:
Interest rate swaps, caps and floors..................................... $1,144,114 $ 5,775 $ 7,43,413 $(6,067)
Commitments to extend, originate or purchase credit...................... 6,754,901 (12,576) 5,093,090 (8,915
Standby and commerical letters of credit and financial guarantees
written............................................................... 238,613 (3,579) 186,749 (2,500)
Commitments to sell loans and securities................................. 240,121 822 308,358 (3,818)
Foreign exchange contacts................................................ 103,506 312 109,747 --
Option contracts purchased............................................... 14,000 142 8,000 --
Option contracts written................................................. 14,000 -- 8,000 (160)
N/A Not applicable.
NOTE Q. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate volatility often increases to the point that balance sheet
repositioning through the use of account repricing and other on-balance sheet
strategies cannot occur rapidly enough to avoid adverse net income effects. At
those times, off-balance sheet or synthetic hedges are utilized. During 1996,
management used interest rate swaps, caps and floors to supplement balance sheet
repositioning. Such actions were designed to lower the interest sensitivity of
BB&T toward a neutral position.
Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to transform the repricing characteristics of an asset or liability
from a fixed to a floating rate, a floating rate to a fixed rate, or one
floating rate to another floating rate. The underlying principal positions are
not affected. Swap terms generally range from one year to ten years depending on
the need. At December 31, 1996, derivatives with a total notional value of $1.1
billion, with terms ranging up to seven years, were outstanding.
34
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth certain information concerning BB&T interest
rate swaps at December 31, 1996:
INTEREST RATE SWAPS, CAPS AND FLOORS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY FAIR
AMOUNT RATE RATE VALUE
TYPE
Received fixed swaps............................................................... $ 485,000 6.60% 5.50% $ 6,698
Pay fixed swaps.................................................................... 304,114 5.50 5.43 (25)
Basis swaps........................................................................ 250,000 5.53 5.51 (1,251)
Floors............................................................................. 105,000 -- -- 353
Total.............................................................................. $1,144,114 6.02% 5.48% $ 5,775
RECEIVE PAY FIXED BASIS SWAPS
FIXED SWAPS SWAPS AND FLOORS TOTAL
YEAR-TO-DATE ACTIVITY
Balance, December 31, 1995............................................ $ 140,000 $ 353,413 $ 250,000 $ 743,413
Additions............................................................. 450,000 2,015 105,000 557,015
Maturities/amortizations.............................................. (105,000) (51,314) -- (156,314)
Balance, December 31, 1996............................................ $ 485,000 $ 304,114 $ 355,000 $1,144,114
ONE YEAR ONE TO FIVE TO
OR LESS FIVE YEARS 10 YEARS TOTAL
MATURITY SCHEDULE
Receive fixed swaps....................................................... $35,000 $ 200,000 $250,000 $ 485,000
Pay fixed swaps........................................................... 15,485 284,337 4,292 304,114
Basis swaps............................................................... -- 250,000 -- 250,000
Floors.................................................................... -- 105,000 -- 105,000
Total..................................................................... $50,485 $ 839,337 $254,292 $$1,144,114
As of December 31, 1996, unearned income from new swap transactions
initiated during 1996 was $6.4 million. There were no unamortized deferred gains
or losses from terminated transactions remaining at year end. Active
transactions resulted in pretax net expenses of $300,000.
In addition to interest rate swaps, BB&T utilizes written covered
over-the-counter call options on specific securities in the available-for-sale
portfolio in order to enhance returns. During 1996, options were written on
securities totaling $375.0 million. Option fee income was $1.1 million for 1996.
There were no unexercised options outstanding at December 31, 1996 or 1995.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in its
mortgage banking activities. These options are used to hedge the mortgage
warehouse and pipeline against increasing interest rates. Written call options
are used in tandem with purchased put options to create a net purchased put
option that reduces the cost of the hedge. At December 31, 1996, net purchased
put option contracts with a notional value of $14.0 million were outstanding.
The $1.1 billion of derivatives used in interest rate risk management are
primarily used to hedge variable rate commercial loans, adjustable rate mortgage
loans, retail certificates of deposit and fixed rate notes. BB&T does not
utilize derivatives for trading purposes.
35
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although off-balance sheet derivative financial instruments do not expose
BB&T to credit risk equal to the notional amount, such agreements generate
credit risk to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. Such risk
is minimized based on the quality of the counterparties and the consistent
monitoring of these agreements. The counterparties to these transactions were
large commercial banks and investment banks. Annually, the counterparties are
reviewed for creditworthiness by BB&T's credit policy group. Where appropriate,
master netting agreements are arranged or collateral is obtained in the form of
rights to securities. At December 31, 1996, BB&T's interest rate swaps, caps and
floors reflected an unrealized gain of $5.8 million.
Other risks associated with interest-sensitive derivatives include the
impact on fixed positions during periods of changing interest rates. Indexed
amortizing swaps' notional amounts and maturities change based on certain
interest rate indices. Generally, as rates fall the notional amounts decline
more rapidly, and as rates increase notional amounts decline more slowly. Under
unusual circumstances, financial derivatives also increase liquidity risk, which
could result from an environment of rising interest rates in which derivatives
produce negative cash flows while being offset by increased cash flows from
variable rate loans. Such risk is considered insignificant due to the relatively
small derivative positions held by BB&T. At December 31, 1996, BB&T had no
indexed amortizing swaps outstanding.
36