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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
------------------------
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
SEPTEMBER 30, 1997
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(Address of Principal Executive Offices) (Zip Code)
(910) 733-2000
(Registrant's Telephone Number, Including Area Code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
At October 31, 1997, 133,878,371 shares of the registrant's common stock,
$5 par value, were outstanding.
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This Form 10-Q has 23 pages. The Exhibit Index is included on page 21.
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BB&T CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PAGE NO.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).......................................................................... 2
Consolidated Financial Statements......................................................................... 2
Notes to Consolidated Financial Statements................................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 9
Analysis of Financial Condition........................................................................... 9
Market Risk Management.................................................................................... 11
Capital Adequacy and Resources............................................................................ 14
Analysis of Results of Operations......................................................................... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 21
Item 2. Changes in Securities..................................................................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 21
SIGNATURES.......................................................................................................... 22
EXHIBIT 11 Computation of Earnings Per Share
EXHIBIT 27 Financial Data Schedule -- Included with electronically-filed document only.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
ASSETS
Cash and due from banks.................................................................... $ 690,938 $ 840,391
Interest-bearing deposits with banks....................................................... 13,760 2,010
Federal funds sold and securities purchased under resale agreements or similar
arrangements............................................................................ 17,278 84,940
Securities available for sale.............................................................. 6,243,316 6,014,221
Securities held to maturity (market value: $152,523 at September 30, 1997 and $175,744 at
December 31, 1996)...................................................................... 147,584 170,808
Loans held for sale........................................................................ 349,023 228,333
Loans and leases, net of unearned income................................................... 18,849,940 17,518,224
Allowance for loan and lease losses..................................................... (257,439) (230,070)
------------- ------------
Loans and leases, net................................................................. 18,592,501 17,288,154
------------- ------------
Premises and equipment, net................................................................ 385,997 374,954
Other assets............................................................................... 771,714 703,835
------------- ------------
TOTAL ASSETS.......................................................................... $ 27,212,111 $ 25,707,646
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits........................................................ $ 2,665,266 $ 2,623,429
Savings and interest checking.............................................................. 1,599,043 2,026,462
Money rate savings......................................................................... 4,858,975 4,170,949
Other time deposits........................................................................ 10,211,990 10,182,500
------------- ------------
Total deposits........................................................................ 19,335,274 19,003,340
Short-term borrowed funds.................................................................. 2,391,141 2,280,824
Long-term debt............................................................................. 2,999,743 2,054,040
Accounts payable and other liabilities..................................................... 401,727 297,875
------------- ------------
TOTAL LIABILITIES..................................................................... 25,127,885 23,636,079
------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding.......... -- --
Common stock, $5 par, 300,000,000 shares authorized, 134,308,475 issued and outstanding at
September 30, 1997, and 136,896,865 at December 31, 1996................................ 671,542 684,484
Additional paid-in capital................................................................. 7,567 145,704
Retained earnings.......................................................................... 1,367,196 1,231,592
Loan to employee stock ownership plan and unvested restricted stock........................ (1,610) (1,952)
Net unrealized gains on securities available for sale, net of deferred income taxes of
$25,775 at September 30, 1997 and $8,481 at December 31, 1996........................... 39,531 11,739
------------- ------------
TOTAL SHAREHOLDERS' EQUITY............................................................ 2,084,226 2,071,567
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $ 27,212,111 $ 25,707,646
------------- ------------
------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases.................. $435,763 $390,127 $1,268,920 $1,159,217
Interest and dividends on securities................... 103,825 98,436 303,070 274,586
Interest on short-term investments..................... 377 429 1,914 2,603
-------- -------- ---------- ----------
Total interest income............................... 539,965 488,992 1,573,904 1,436,406
-------- -------- ---------- ----------
INTEREST EXPENSE
Interest on deposits................................... 185,499 181,774 551,468 530,558
Interest on short-term borrowed funds.................. 35,741 25,046 95,278 82,380
Interest on long-term debt............................. 41,602 28,884 106,642 76,805
-------- -------- ---------- ----------
Total interest expense.............................. 262,842 235,704 753,388 689,743
-------- -------- ---------- ----------
NET INTEREST INCOME...................................... 277,123 253,288 820,516 746,663
Provision for loan and lease losses.................... 21,901 15,400 67,851 44,161
-------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES................................................. 255,222 237,888 752,665 702,502
-------- -------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts.................... 36,518 33,427 110,777 98,003
Mortgage banking activities............................ 13,742 8,352 36,413 28,935
Trust income........................................... 8,498 7,366 23,860 21,142
Agency insurance commissions........................... 9,670 6,727 30,171 19,559
Other insurance commissions............................ 2,696 3,412 9,600 9,288
Other nondeposit fees and commissions.................. 27,924 21,372 75,886 60,969
Securities gains, net.................................. 731 705 612 409
Other noninterest income............................... 55,289 7,861 69,116 20,105
-------- -------- ---------- ----------
Total noninterest income............................ 155,068 89,222 356,435 258,410
-------- -------- ---------- ----------
NONINTEREST EXPENSE
Personnel expense...................................... 121,706 96,132 324,848 289,246
Occupancy and equipment expense........................ 54,013 31,334 118,461 90,521
Federal deposit insurance expense...................... 1,232 37,255 3,767 43,994
Other noninterest expense.............................. 135,722 62,049 268,514 178,561
-------- -------- ---------- ----------
Total noninterest expense........................... 312,673 226,770 715,590 602,322
-------- -------- ---------- ----------
EARNINGS
Income before income taxes............................. 97,617 100,340 393,510 358,590
Provision for income taxes............................. 36,353 31,999 136,964 118,399
-------- -------- ---------- ----------
Net Income............................................. 61,264 68,341 256,546 240,191
Preferred dividend requirements..................... -- -- -- 610
-------- -------- ---------- ----------
Income applicable to common shares.................. $ 61,264 $ 68,341 $ 256,546 $ 239,581
-------- -------- ---------- ----------
PER COMMON SHARE
Net income:
Primary............................................. $ .45 $ .49 $ 1.85 $ 1.74
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Fully diluted....................................... $ .45 $ .49 $ 1.84 $ 1.72
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Cash dividends declared............................. $ .31 $ .27 $ .85 $ .73
-------- -------- ---------- ----------
-------- -------- ---------- ----------
AVERAGE SHARES OUTSTANDING
Primary................................................ 137,518,215 138,526,858 138,614,126 137,715,880
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted.......................................... 137,612,268 138,705,063 139,070,796 139,379,877
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
SHARES OF ADDITIONAL RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL
----------- --------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1995 136,548,048 $ 3,669 $ 682,740 $ 279,156 $1,059,547 $2,025,112
Add (Deduct)
Net income.................................. -- -- -- -- 240,191 240,191
Common stock issued......................... 1,950,175 -- 9,751 36,478 45 46,274
Redemption of common stock.................. (6,179,978) -- (30,900) (149,512) 2 (180,410)
Net unrealized losses on securities
available for sale, net of deferred
income taxes............................. -- -- -- -- (48,349) (48,349)
Preferred stock cancellations and
conversions.............................. 4,334,692 (3,669) 21,674 (18,005) -- --
Cash dividends declared:
Common stock............................. -- -- -- -- (93,829) (93,829)
Preferred stock.......................... -- -- -- -- (610) (610)
Other, net.................................. -- -- -- -- 1,343 1,343
----------- --------- ---------- --------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996................... 136,652,937 $ -- $ 683,265 $ 148,117 $1,158,340 $1,989,722
----------- --------- ---------- --------- ---------- ----------
----------- --------- ---------- --------- ---------- ----------
BALANCE, DECEMBER 31, 1996.................... 136,896,865 $ -- $ 684,484 $ 145,704 $1,241,379 $2,071,567
Add (Deduct)
Net income.................................. -- -- -- -- 256,546 256,546
Common stock issued......................... 3,390,862 -- 16,954 98,798 -- 115,752
Redemption of common stock.................. (5,979,252) -- (29,896) (236,935) -- (266,831)
Net unrealized gains on securities available
for sale, net of deferred income taxes... -- -- -- -- 27,792 27,792
Cash dividends declared on common stock..... -- -- -- -- (121,407) (121,407)
Other, net.................................. -- -- -- -- 807 807
----------- --------- ---------- --------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997................... 134,308,475 $ -- $ 671,542 $ 7,567 $1,405,117 $2,084,226
----------- --------- ---------- --------- ---------- ----------
----------- --------- ---------- --------- ---------- ----------
- ---------------
* Includes net unrealized gains (losses) on securities available for sale,
unvested restricted stock and loan to employee stock ownership plan.
The accompanying notes are an integral part of these consolidated financial
statements.
4
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................... $ 256,546 $ 240,191
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses........................................................ 67,851 44,161
Depreciation of premises and equipment..................................................... 43,242 33,328
Amortization of intangibles and mortgage servicing rights.................................. 16,330 9,801
Accretion of negative goodwill............................................................. (4,678) (4,678)
Amortization of unearned stock compensation................................................ 342 1,343
Discount accretion and premium amortization on securities, net............................. (610) 5,028
Loss (gain) on sales of securities, net.................................................... (612) (409)
Loss (gain) on sales of loans and mortgage loan servicing rights, net...................... (10,329) (6,679)
Loss (gain) on disposals and sales of premises and equipment............................... 35,721 --
Proceeds from sales of loans held for sale................................................. 1,056,424 1,114,377
Purchases of loans held for sale........................................................... (446,036) (309,600)
Origination of loans held for sale, net of principal collected............................. (717,491) (725,241)
Decrease (increase) in:
Accrued interest receivable.............................................................. (395) 22,210
Other assets............................................................................. (9,192) (98,389)
Increase (decrease) in:
Accrued interest payable................................................................. 8,918 2,324
Accounts payable and other liabilities................................................... 72,646 36,881
Other, net................................................................................. 567 2,961
----------- -----------
Net cash provided by operating activities.............................................. 369,244 367,609
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale......................................... 1,216,652 325,606
Proceeds from maturities of securities available for sale.................................... 1,054,042 2,040,363
Purchases of securities available for sale................................................... (2,420,290) (1,949,288)
Proceeds from maturities of securities held to maturity...................................... 33,618 41,492
Purchases of securities held to maturity..................................................... (10,693) (2,034)
Leases made to customers..................................................................... (51,185) (53,082)
Principal collected on leases................................................................ 41,078 35,419
Loan originations, net of principal collected................................................ (887,995) (1,244,478)
Purchases of loans........................................................................... (155,187) (79,344)
Net cash acquired in transactions accounted for under the purchase method.................... 22,210 --
Purchases and originations of mortgage servicing rights...................................... (19,461) (22,547)
Proceeds from disposals of premises and equipment............................................ 1,464 3,619
Purchases of premises and equipment.......................................................... (88,464) (44,612)
Proceeds from sales of foreclosed property................................................... 10,020 11,302
Proceeds from sales of other real estate held for development or sale........................ 4,012 5,672
Other, net................................................................................... -- (1,152)
----------- -----------
Net cash used in investing activities.................................................. (1,250,179) (933,064)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits..................................................................... 79,031 632,354
Net increase (decrease) in short-term borrowed funds......................................... 59,503 (516,137)
Proceeds from long-term debt................................................................. 3,536,101 1,236,758
Repayments of long-term debt................................................................. (2,640,003) (570,667)
Net proceeds from common stock issued........................................................ 17,398 46,163
Redemption of common stock................................................................... (266,831) (180,410)
Cash dividends paid on common and preferred stock............................................ (109,629) (89,434)
----------- -----------
Net cash provided by financing activities.............................................. 675,570 558,627
----------- -----------
Net Decrease in Cash and Cash Equivalents...................................................... (205,365) (6,828)
CASH AND CASH EQUIVALENTS at beginning of period............................................... 927,341 934,149
----------- -----------
CASH AND CASH EQUIVALENTS at end of period..................................................... $ 721,976 $ 927,321
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................................... $ 753,668 $ 698,634
Income taxes............................................................................... 93,167 131,644
Noncash financing and investing activities:
Restricted stock issued.................................................................... -- 88
Transfer of securities from held to maturity to available for sale......................... -- 36,646
Transfer of securities from available for sale to held to maturity......................... -- 240
Transfer of fixed assets to other real estate owned........................................ 1,668 8,416
Transfer of loans to foreclosed property................................................... 10,015 17,070
Securitization of mortgage loans........................................................... -- 817,268
The accompanying notes are an integral part of these consolidated financial
statements.
5
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated balance
sheets of BB&T Corporation and subsidiaries ("BB&T" or the "Corporation")
as of September 30, 1997 and December 31, 1996; the consolidated statements
of income for the three months and nine months ended September 30, 1997 and
1996; the consolidated statements of changes in shareholders' equity for
the nine months ended September 30, 1997 and 1996; and the consolidated
statements of cash flows for the nine months ended September 30, 1997 and
1996.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the
footnotes included in BB&T's latest annual report on Form 10-K, as restated
in BB&T's Current Report on Form 8-K filed on August 15, 1997, should be
referred to in connection with the reading of these unaudited interim
consolidated financial statements. Certain 1996 amounts have been
reclassified to conform with statement presentations for 1997. The
reclassifications have no effect on shareholders' equity or net income as
previously reported.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
This report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated
by such forward-looking statements include, among others, the following
possibilities: (1) competitive pressure in the banking industry increases
significantly; (2) changes in the interest rate environment reduce margins;
(3) general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration
in credit quality; (4) changes occur in the regulatory environment; (5)
changes occur in business conditions and inflation; (6) expected cost
savings associated with pending mergers cannot be fully realized; (7)
deposit attrition, customer loss or revenue loss following pending mergers
is greater than expected; (8) required operational divestitures associated
with pending mergers are greater than expected; and (9) changes occur in
the securities markets.
B. NATURE OF OPERATIONS
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina
and Virginia primarily through its commercial banking subsidiaries and, to
a lesser extent, through its other subsidiaries. The commercial banking
subsidiaries, Branch Banking and Trust Company ("BB&T"), Branch Banking and
Trust Company of South Carolina ("BB&T-SC") and Branch Banking and Trust
Company of Virginia ("BB&T-VA"), provide a wide range of traditional
banking services to individuals and commercial customers, including small
and mid-size businesses, public agencies and local governments.
Substantially all of BB&T's loans are to businesses and individuals in the
Carolinas and Virginia. Subsidiaries of the commercial banks offer lease
financing to commercial businesses and municipal governments, investment
alternatives, including discount brokerage services, annuities, mutual
funds and government and municipal bonds, life and property and casualty
insurance on an agency basis, insurance premium financing, sub-prime
lending, factoring and investment banking.
C. NEW ACCOUNTING PRONOUNCEMENTS
In June of 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The statement, which became effective for transactions
occurring after December 31, 1996, provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on the financial components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes all assets it does
6
not control and derecognizes liabilities when extinguished. The statement
also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
In December of 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which
amends SFAS No. 125 by deferring the effective date of certain provisions
of the statement by one year. BB&T adopted SFAS No. 125, as amended by SFAS
No. 127, on January 1, 1997. The implementation of the statement and the
related amendment did not have a material impact on the consolidated
financial position or consolidated results of operations of BB&T.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings
per share ("EPS") and simplifies the standards for computing earnings per
share previously found in Accounting Principles Board ("APB") Opinion No.
15, "Earnings per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires dual presentation of basic and diluted EPS for
all entities with complex capital structures. The statement is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods, and requires restatements of all prior periods
presented. Management does not believe that the implementation of the
statement will have a material impact on the consolidated financial
position or consolidated results of operations of BB&T.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing
and amending existing standards. The statement is effective for financial
statements for periods ending after December 15, 1997. Management has
determined that BB&T is currently is compliance with the disclosure
requirements of SFAS No. 129, and, therefore, the implementation of the
statement will not affect the capital 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 non-shareholder related change in equity (net
assets) of a company during a period from transactions and other events.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997, including interim periods, and requires restatement of all prior
periods presented. The implementation of the statement will not have an
impact on the consolidated financial position or consolidated results of
operations of BB&T but the statement 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. The implementation of the
statement will not have an impact on the consolidated financial position or
consolidated results of operations of BB&T but the statement will require
additional disclosures to be made.
D. MERGERS AND ACQUISITIONS
COMPLETED ACQUISITIONS
On March 1, 1997, BB&T completed the acquisition of Fidelity Financial
Bankshares Corporation of Richmond, Virginia ("Fidelity") in a transaction
accounted for as a purchase. Under the terms of the agreement, Fidelity's
shareholders received .7137 shares of BB&T common stock in exchange for
each share of Fidelity stock held, which resulted in the issuance of 1.6
million shares. In conjunction with the acquisition, BB&T recorded $37.9
million in goodwill, which is being amortized over 15 years using the
straight-line method.
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 accounts receivable primarily in
the furniture, textiles, home furnishings-related and temporary staffing
industries. The acquisition of Phillips was accounted for as a purchase. In
conjunction with the acquisition, BB&T recorded $11.1 million of goodwill,
which is being amortized over 15 years using the straight-line method.
On July 1, 1997, BB&T completed its merger with United Carolina Bancshares
Corporation ("UCB") of Whiteville, North Carolina in a transaction
accounted for as a pooling of interests. Under the terms of the agreement,
UCB shareholders received 1.135 shares of BB&T common stock in exchange for
each share of UCB common stock held, which
7
resulted in the issuance of 27.7 million shares. In conjunction with the
merger, BB&T divested of 23 branches during the third quarter of 1997. The
divestiture included loans of $232.3 million and deposits of $505.8 million
and was required by the Federal Reserve Board due to anti-trust
considerations. BB&T recorded a premium on the divestiture of the deposits
of $47.8 million.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial
Corp. (collectively, "Refloat"), a company that specializes in loans to
small commercial lawn care businesses across the country. Under the terms
of the agreement, Refloat shareholders received approximately 375,000
shares of BB&T common stock. The acquisition of Refloat was accounted for
as a purchase. In conjunction with the acquisition, BB&T recorded $3.0
million of goodwill, which is being amortized over 15 years using the
straight-line method.
On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia,
through the issuance of approximately 410,000 shares of BB&T common stock.
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. In conjunction with
the acquisition, which was accounted for as a purchase, BB&T recorded $6.1
million of goodwill, which is being amortized over 25 years using the
straight-line method.
PENDING ACQUISITIONS
On May 6, 1997, BB&T announced plans to acquire Virginia First Financial
Corporation of Petersburg, Virginia ("VFFC"). VFFC shareholders will
receive a maximum of $25 per share for each share of VFFC stock held. Each
shareholder will receive 30% of this value in cash and 70% in BB&T common
stock. The acquisition, which will be accounted for as a purchase, is
expected to be completed by the end of 1997.
On October 29, 1997, BB&T announced plans to merge with Life Bancorp, Inc.
of Norfolk, Virginia ("Life") in a transaction to be accounted for as a
pooling of interests. Based upon BB&T's closing stock price of $54.88 on
October 28, 1997, the transaction is valued at $359.2 million, or $32.93
per share of Life common stock. Life shareholders will receive .58 shares
of BB&T common stock for each share of Life common stock held. The merger
is expected to be completed in the spring of 1998.
E. SUPPLEMENTAL CASH FLOW INFORMATION
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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at September 30, 1997 were $27.2 billion, a $1.5
billion increase from the balance at December 31, 1996. The primary components
of the increase were loans and leases, which grew $1.3 billion, securities
available for sale, which increased $229.1 million, and other assets, which were
up $67.9 million compared to year end 1996. These increases were partially
offset by declines in other short-term investments of $67.7 million and cash and
due from banks, which decreased $149.5 million. The factors causing the
fluctuations in these asset categories are further discussed in the following
paragraphs.
Loans have grown at a healthy pace during 1997. Actual growth was affected
by securitizations of loans during 1995 and 1996. Including all securitizations
during 1996 and 1995, BB&T restructured the balance sheet by moving $1.2 billion
in mortgage loans from the mortgage portfolio to the securities portfolio. These
securitizations were designed to provide BB&T with additional liquidity and
flexibility in managing mortgage loan assets. Annualized loan growth, including
loans held for sale, was 10.9% comparing end of period loans at September 30,
1997 and December 31, 1996. Average loans, excluding the impact of the
securitizations, increased 11.5% comparing the quarters ended September 30, 1997
and 1996. Including the securitizations, average loans, including loans held for
sale, still grew at a rate of 11.0% comparing the same time periods. Growth in
average loans was strong in all categories. Comparing the quarterly averages for
the third quarters of 1997 and 1996, mortgage loans, excluding the impact of the
loan securitizations, grew at a rate of 13.5%. Average commercial loans
increased 13.1% over the same time frame and average consumer loans grew at a
rate of 7.2%.
BB&T divested of $232.3 million of loans in conjunction with merger with
UCB. Excluding the impact of this divestiture and the securitizations discussed
above, average quarterly loans for the three months ended September 30, 1997
grew at an annualized rate of 12.1% compared to the third quarter of 1996.
BB&T's loan growth during 1997 was aided by acquisitions accounted for by
the purchase method. Such acquisitions added $337.7 million in loans to the
balance sheet during 1997.
Management attributes the growth in loans to the successful execution of
the BB&T Sales Management System, which was applied to the commercial lending
function during 1996. The BB&T Sales Management System utilizes extensive
planning and monitoring procedures and includes incentives for employees to
pursue a healthy volume of high-quality, profitable loans.
At September 30, 1997, securities available for sale, which totaled $6.2
billion, had unrealized gains, net of deferred income taxes, of $39.5 million
compared to unrealized gains, net of deferred income taxes, of $11.7 million at
December 31, 1996. The taxable equivalent yield on the securities portfolio
during the third quarter was 6.89%, up from 6.66% for the third quarter of 1996
and from 6.79% for the second quarter of 1997. The improvement in the overall
yield on securities was primarily the result of changing the mix of the
portfolio through a reduction of holdings in U.S. Treasuries and replacement
with securitized mortgage loans from BB&T's mortgage loan portfolio.
The increase in other assets is composed primarily of goodwill recorded in
conjunction with four purchase transactions during 1997. Goodwill recorded from
the acquisitions of Fidelity, Phillips, Refloat and a title insurance agency
totaled $53.2 million.
Significant fluctuations in liabilities included deposits, which increased
$331.9 million, or 1.7%, from the year-end 1996 balance and long-term debt,
which rose $945.7 million, or 46.0% over the same time frame. On August 15,
1997, BB&T divested $505.8 million of deposits in conjunction with the merger
with UCB. Excluding the impact of the divestiture, total deposits at September
30, 1997 were 4.4% higher than total deposits at December 31, 1996. BB&T
acquired $252.9 million in deposits through the acquisitions accounted for as
purchases discussed above.
The growth in deposits was derived from money rate savings, which increased
$688.0 million, or 16.5% during the first nine months of 1997. The substantial
growth in money rate savings reflects the special promotion of an "Investor
Deposit Account," which is more flexible than traditional money rate savings
accounts and less costly to BB&T than certificates of deposit.
Slower deposit growth in recent years, combined with the availability of
cost-effective alternative funding sources, caused management to rely more
heavily on nondeposit funding sources, such as Federal Home Loan Bank ("FHLB")
9
advances and Federal funds purchased. Management is currently focusing on
nontraditional funding sources, as well as transaction, savings and money market
deposits, which are often more cost-effective than certificates of deposit.
Management's future goals include some restructuring of the deposit mix acquired
from UCB to control the costs of funding.
Following numerous acquisitions of thrift institutions in recent years,
BB&T had a high concentration of more costly certificates of deposit acquired
from the thrifts. Efforts to promote special money rate savings accounts, as
discussed above, have aided in the reduction of these concentrations and
resulted in higher net interest margins.
The significant growth in long-term debt resulted from increased borrowings
from the FHLB, the additional issuance of subordinated notes and the issuance of
bank notes. FHLB advances composed 56.5% of total long-term debt at September
30, 1997. Such borrowings are heavily utilized because they are the most
cost-effective long-term funding source and provide BB&T with the flexibility to
structure the debt to manage interest rate risk and liquidity. In June, 1997,
BB&T issued $250 million of subordinated notes due in 2007. The proceeds of this
issuance are being used to repurchase shares of BB&T's common stock in
connection with recent acquisitions. BB&T also issued $200 million of medium
term bank notes during 1997 for general funding purposes. The rates paid on
these borrowings have not changed the margin significantly, as the average rate
paid for long-term debt during the third quarter was 5.88%, compared to a rate
of 5.80% paid during the three months ended September 30, 1996.
ASSET QUALITY
Nonperforming assets were $99.9 million at September 30, 1997, compared to
$90.1 million at December 31, 1996. Nonperforming assets as a percentage of
loan-related assets were .52% at September 30, 1997 compared to .51% at December
31, 1996. Loans 90 days or more past due and still accruing interest totaled
$40.0 million compared to a prior year-end balance of $41.7 million. Net
charge-offs totaled $17.4 million and amounted to .36% of average loans in the
third quarter of 1997 compared to $11.8 million, or .27% of average loans, in
the corresponding period in 1996. For the nine months ended September 30, 1997,
net charge-offs were $46.0 million, or .33% of average loans and leases compared
to $33.2 million, or .26% in the prior year. While the charge-offs have
increased from last year, management considers the current charge-off level to
be within reasonable norms from an historical perspective. A portion of the
increase in nonperforming assets relates to the integration of UCB's assets
following the merger. BB&T utilizes a more conservative classification system
for assets than that used by UCB, which is reflected in higher nonperforming
assets and past due loans.
The allowance for losses was $257.4 million, or 1.34% of loans and leases
at September 30, 1997 compared to $230.1 million, or 1.30%, at December 31,
1996. The increase in the allowance is the result of provisions for loan and
lease losses that are substantially in excess of actual net losses charged
against the allowance.
The provision for loan and lease losses for the first nine months of 1997
was $67.9 million compared to $44.2 million in the first nine months of 1996.
The increase in the provision reflects higher net charge-offs incurred during
recent quarters and accelerating growth in loans.
Regional Acceptance Corporation ("Regional Acceptance"), BB&T's nonbank
automobile finance subsidiary, has experienced higher-than-expected net
charge-offs in recent quarters which is indicative of the current nature of the
used automobile financing industry. Management believes that there are long-term
benefits to be realized from the acquisition of Regional Acceptance and that
asset quality will improve in the future. The current level of net charge-offs
at Regional Acceptance is not expected to have a material impact on BB&T's
consolidated financial condition or consolidated results of operations.
10
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance.............................................. $251,222 $242,253 $230,070 $230,040 $226,481
Allowance for acquired loans................................... 1,690 -- 3,811 -- --
Provision for loan and lease losses............................ 21,901 25,100 20,850 18,350 15,400
Net charge-offs................................................ (17,374) (16,131) (12,478) (18,320) (11,841)
-------- -------- -------- -------- --------
Ending balance.............................................. $257,439 $251,222 $242,253 $230,070 $230,040
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RISK ASSETS
Nonaccrual loans and leases.................................... $ 71,023 $ 61,326 $ 60,111 $ 62,190 $ 61,007
Foreclosed real estate......................................... 15,305 14,702 15,460 14,655 13,756
Other foreclosed property...................................... 13,617 13,056 15,900 13,290 10,801
-------- -------- -------- -------- --------
Nonperforming assets........................................ $ 99,945 $ 89,084 $ 91,471 $ 90,135 $ 85,564
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Loans 90 days or more past due and still accruing.............. $ 39,958 $ 37,361 $ 40,021 $ 41,742 $ 34,610
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total loans and
leases......................................................... .37% .32% .32% .35% .35%
Nonperforming assets as a percentage of:
Total assets................................................... .37 .32 .34 .35 .34
Loans and leases plus foreclosed property...................... .52 .46 .49 .51 .50
Net charge-offs as a percentage of average loans and leases...... .36 .34 .28 .42 .27
Allowance for loan and lease losses as a percentage of loans and
leases......................................................... 1.34 1.31 1.30 1.30 1.34
Ratio of allowance for loan and lease losses to:
Net charge-offs................................................ 3.73X 3.88x 4.79x 3.16x 4.88x
Nonaccrual loans and leases.................................... 3.62 4.10 4.03 3.70 3.77
- ---------------
All items referring to loans and leases include loans held for sale and are net
of unearned income.
Applicable ratios are annualized.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, BB&T's primary market risk
exposure is interest rate risk. A prime objective in interest rate risk
management is to minimize the effect that changes in interest rates on
interest-sensitive assets and interest-sensitive liabilities have on net
interest income. Management uses active balance sheet management as an efficient
and cost-effective means of controlling interest rate risk. This is accomplished
through strategic pricing of asset and liability accounts. The expected result
of strategic pricing is the development of appropriate maturity and repricing
streams in those accounts to produce consistent net income during changing
interest rate environments. The Asset/Liability Management Committee ("ALCO")
monitors loan, investment and liability portfolios to ensure comprehensive
management of interest rate risk on the balance sheet. These portfolios are
analyzed for proper fixed-rate and variable-rate "mixes" given a specific
interest rate outlook.
Asset/liability management activities are designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricings and interest rate sensitivities of earning assets,
deposits and borrowed funds. It is the responsibility of the ALCO to determine
and achieve the most appropriate volume and mix of earning assets and
interest-bearing liabilities, as well as ensure an adequate level of liquidity
and capital, while achieving performance goals. The ALCO also sets policy
guidelines and establishes long-term strategies with respect to interest rate
exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate
and liquidity risk exposures in relation to present and prospective market and
business conditions, and adopts funding and balance sheet management strategies
that are intended to ensure that the potential impact on earnings and liquidity
of fluctuations in interest rates is within acceptable standards.
11
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in interest rates and the efforts of the Board of
Governors of the Federal Reserve ("FRB") to regulate money and credit conditions
have a greater effect on a financial institution's profitability than do the
effects of higher costs for goods and services. Through its balance sheet
management function, BB&T is positioned to respond to changing interest rates
and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of earnings to changes in interest rates. Simulation
Analysis takes into account the current contractual agreements that BB&T has
made with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer-based asset/liability model that
incorporates current volumes and rates, maturity streams, repricing
opportunities and anticipated growth. The model calculates an earnings estimate
based on current portfolio balances and rates, less any balances that are
scheduled to reprice or mature. This level of detail is needed to correctly
simulate the effect that changes in interest rates and anticipated balances will
have on the earnings of BB&T. This method is subject to the assumptions that
underlie the process, but it provides a better illustration of true earnings
potential than other analyses such as static or dynamic gap.
The asset/liability management process involves various analyses.
Management determines the most likely outlook for the economy and interest rates
by analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance are
all considered, given the current environmental situation. Management proceeds
by analyzing interest rate sensitivity, risk-based capital requirements and
results from past strategies. Using this information, management develops a
strategy to meet current performance goals.
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
change over nine months from the most likely interest rate scenario, and a
maximum of 6% for a 300 basis point change over 12 months. It is management's
ongoing objective to effectively manage the impact of changes in interest rates
and minimize the resulting effect on earnings as evidenced by the preceding
table. At September 30, 1997, the sensitivity of BB&T's net interest income to
changes in interest rates was well within management's targets, as a 150 basis
point increase in interest rates would reduce net interest income by 1.0% and a
150 basis point decline in interest rates would reduced net interest income by
less than 1.0%.
DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
BB&T utilizes a variety of derivative financial instruments to manage
various financial risks. These instruments include financial forward and futures
contracts, options written and purchased, interest rate caps and floors and
interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose BB&T to interest rate
risk or price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
Many of BB&T's derivative contracts are written in amounts referred to as
notional amounts. Notional amounts do not represent amounts to be exchanged
between parties and are not a measure of financial risks, but only provide the
basis for calculating payments between the counterparties. On September 30,
1997, BB&T had outstanding interest rate swaps, caps and floors with notional
amounts totaling $2.0 billion. The estimated fair value of open contracts used
for risk management purposes at September 30, 1997 reflected net unrealized
gains of $17.4 million.
BB&T uses derivative contracts to hedge specified assets or groups of
assets, liabilities or groups of liabilities, forward commitments and
anticipated transactions. BB&T's derivatives are primarily used to hedge
variable rate commercial loans, adjustable rate mortgage loans, retail
certificates of deposit and fixed rate notes.
The net interest payable or receivable on interest rate swaps and floors
that are designated as hedges is accrued and recognized as an adjustment to the
interest income or expense of the related asset or liability. For interest rate
forwards, futures and options qualifying as a hedge, gains and losses are
deferred and are recognized in income as an adjustment of yield. Gains and
losses from early terminations of derivatives are deferred and amortized as
yield adjustments over the shorter of the remaining term of the hedged asset or
liability or the remaining term of the derivative instrument. Upon
12
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.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.
All of the interest rate swaps, caps and floors to which BB&T is a party settle
monthly, quarterly or semiannually. Accordingly, the amount of off-balance sheet
credit exposure to which BB&T is exposed at any time is immaterial. Further,
BB&T has netting agreements with the dealers with which it does business.
Because of these netting agreements, BB&T had a minimal amount of off-balance
sheet credit exposure at September 30, 1997.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. The following tables set forth
certain information concerning BB&T's interest rate swaps and floors at
September 30, 1997:
INTEREST RATE SWAPS, CAPS AND FLOORS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
- ---- ----------- ----------- --------------- --------------
Receive fixed swaps.............................................. $ 991,000 6.50% 5.71% $ 14,692
Pay fixed swaps.................................................. 339,291 5.68 5.56 956
Basis swaps...................................................... 50,000 5.56 5.53 (1)
Caps & floors.................................................... 665,000 -- -- 1,743
----------- ----------- --------------- --------------
Total............................................................ $ 2,045,291 6.26% 5.67% $ 17,390
----------- ----------- --------------- --------------
----------- ----------- --------------- --------------
RECEIVE PAY FIXED BASIS SWAPS,
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS CAPS AND FLOORS TOTAL
- ---------------------- ----------- ----------- --------------- --------------
Balance, December 31, 1996....................................... $ 487,000 $ 304,099 $ 355,000 $ 1,146,099
Additions........................................................ 539,000 208,400 610,000 1,357,400
Maturities/amortizations......................................... (35,000) (173,208) -- (208,208)
Terminations..................................................... -- -- (250,000) (250,000)
----------- ----------- --------------- --------------
Balance, September 30, 1997...................................... $ 991,000 $ 339,291 $ 715,000 $ 2,045,291
----------- ----------- --------------- --------------
----------- ----------- --------------- --------------
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
- ------------------ ----------- ----------- --------------- --------------
Receive fixed swaps.............................................. $ 200,000 $ 291,000 $ 500,000 $ 991,000
Pay fixed swaps.................................................. 3,478 323,702 12,111 339,291
Basis swaps...................................................... 50,000 -- -- 50,000
Caps & floors.................................................... -- 605,000 60,000 665,000
----------- ----------- --------------- --------------
Total............................................................ $ 253,478 $ 1,219,702 $ 572,111 $ 2,045,291
----------- ----------- --------------- --------------
----------- ----------- --------------- --------------
- ---------------
* Maturities are based on full contract extensions.
13
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Capital adequacy is monitored on an ongoing basis by management. BB&T's
principal capital planning goals are to provide an adequate return to
shareholders while retaining a sufficient base to support future growth and
comply with all regulatory standards.
Total shareholders' equity was $2.1 billion at September 30, 1997 and
December 31, 1996. As a percentage of total assets, total shareholders' equity
was 7.7% at September 30, 1997, down from 8.1% at December 31, 1996. BB&T's book
value per common share at September 30, 1997 was $15.52, versus $15.13 at
December 31, 1996. Average shareholders' equity as a percentage of average
assets was 7.9% for the nine months ended September 30, 1997 and 8.0% for the
nine months ended September 30, 1996.
Tier 1 capital, total risk-based capital and the leverage ratios at
September 30, 1997 were 10.0%, 13.9% and 7.1%, respectively. The comparable
ratios at the end of 1996 were 11.5%, 14.2% and 7.9%, respectively. These
capital ratios measure capital relative to risk-weighted assets as defined by
FRB guidelines. An 8.00% minimum of total capital to risk-weighted assets is
required. One-half of the 8.00% minimum must consist of tangible common
shareholders' equity (Tier 1 capital) under regulatory guidelines. The leverage
ratio, established by the FRB, measures Tier 1 capital to average total assets
less goodwill and must be maintained in conjunction with the risk-based capital
standards. The regulatory minimum for the leverage ratio is 3.00%.
The modest declines in certain capital ratios reflect significant
acquisition activity during 1997 resulting in rapid growth in intangible assets
which decreases tangible equity. Also, management has undertaken a program to
repurchase BB&T common stock issued to effect the acquisitions accounted for as
purchases. This program resulted in the repurchase of 6.9 million shares through
the first nine months of 1997.
CAPITAL ADEQUACY RATIOS
1997 1996
----------------------------- ------------------
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
Average equity to average assets............................................. 7.75% 7.93% 8.17% 8.05% 7.90%
Equity to assets at period end............................................... 7.66 7.71 7.94 8.06 7.82
Risk-based capital ratios:
Tier 1 capital............................................................. 10.0 10.6 10.8 11.5 11.3
Total capital.............................................................. 13.9 14.5 13.4 14.2 13.9
Leverage ratio............................................................... 7.1 7.4 7.8 7.9 7.8
ANALYSIS OF RESULTS OF OPERATIONS
BB&T recorded net income for the first nine months of 1997 totaling $256.5
million, an increase of 6.8% over the $240.2 million earned during the first
nine months of 1996. On a fully diluted per share basis, earnings for the nine
months ended September 30, 1997 were $1.84, compared to $1.72 for the same
period in 1996, an increase of 7.0%. BB&T's earnings produced an annualized
return on average assets of 1.29% and a return on average shareholders' equity
of 16.23% for the nine months compared to prior year ratios of 1.31% and 16.47%,
respectively.
For the third quarter of 1997, net income was $61.3 million, compared to
$68.3 million recorded in the third quarter of 1996. On a fully diluted per
share basis, net income totaled $.45 for the quarter, down from $.49 in 1996.
The annualized return on average assets for the quarter was .89% and the return
on average shareholders' equity was 11.54%.
BB&T's earnings in both 1997 and 1996 were adversely affected by
nonrecurring charges. During the third quarter of 1997, BB&T recorded $106.1
million in pretax expenses primarily associated with the merger with UCB. These
charges included costs associated with the consolidation of branch offices and
bank operating functions, reducing staffing levels, relocating staff, early
retirement packages and other expenses. BB&T also recorded a gain from the
divestiture of deposits referred to above totaling $47.8 million, which reduced
the net pretax charges to $58.3 million, or $42.7 million after income tax
benefits.
14
A brief description of the nature of the nonrecurring items incurred during
1997 is presented below:
DOLLARS IN
THOUSANDS
----------
Personnel expense................................................................................................. $ 20,024
Occupancy expense................................................................................................. 16,044
Furniture and equipment expense................................................................................... 3,569
Loss on disposal of fixed assets.................................................................................. 36,938
Other noninterest expense......................................................................................... 29,530
----------
Total........................................................................................................... 106,105
Less: Premium on divested deposits................................................................................ (47,783)
----------
Total........................................................................................................... $ 58,322
----------
----------
Total -- net of tax............................................................................................. $ 42,678
----------
----------
The 1996 earnings reflected the impact of a one-time assessment levied by
the Federal Deposit Insurance Corporation ("FDIC") totaling approximately $34
million on a pretax basis. The purpose of the assessment was to recapitalize the
Savings Association Insurance Fund ("SAIF") and was levied on all institutions
with SAIF-insured deposits. BB&T was significantly affected by the assessment
because of numerous acquisitions of thrift institutions in recent years.
Excluding the impact of the nonrecurring merger-related charges on 1997
operations and the impact of the SAIF assessment on 1996 results, BB&T had net
income for the first nine months of 1997 of $299.2 million, compared to earnings
in the prior year of $262.0 million, an increase of 14.2%. On a fully diluted
per share basis, earnings, excluding nonrecurring charges, totaled $2.15, up
14.4% from the prior year earnings per share of $1.88. Earnings before
nonrecurring expenses produced an annualized return on average assets of 1.50%
and a return on average equity of 18.93%, compared to prior year ratios of 1.43%
and 17.82%, respectively.
For the third quarter of 1997, earnings, excluding nonrecurring items,
totaled $103.9 million, compared to $90.1 million earned in the third quarter of
1996, an increase of 15.3%. Fully diluted earnings per share, excluding
nonrecurring items, were $.76 for the quarter, compared to $.65 in the prior
year, up 16.9%. The annualized returns on average assets and average equity were
1.52% and 19.58%, respectively, for the third quarter of 1997 excluding the
effects of nonrecurring charges.
BB&T's growth in earnings resulted from three principal factors. First, the
net interest margin improved from 4.46% for the first nine months of 1996 to
4.58% for the first nine months of 1997. The mortgage loan securitizations
discussed above and the use of more cost-effective funding sources supported the
increase. Second, the 20.2% growth in noninterest income for the nine months
ended September 30, 1997 compared to the same period in 1996 demonstrates the
successful execution of the BB&T Sales Management System. Management has
emphasized the percentage of customer households with five or more services as
an objective indicator of the success of the BB&T Sales Management System and
has determined that growth in this indicator produces growth in noninterest
income. When the system was implemented, 8% of BB&T's customer households had
five or more services. By the end of 1996, this percentage had increased to 18%,
leading management to target 25% for the end of 1997. At September 30, 1997, the
percentage had increased to approximately 23% compared to an industry average of
10%. Third, BB&T has controlled the growth of noninterest expenses and
emphasized operating efficiently. These efforts can be measured by the slower
growth in noninterest expenses compared to growth in revenues. Noninterest
expenses excluding nonrecurring charges grew 7.2% comparing the nine-month
periods ended September 30, 1997 and 1996. A more accurate measure of expense
control is the efficiency ratio (noninterest expenses, excluding nonrecurring
costs, as a percentage of total revenues, excluding gains from the deposit
divestiture, on a fully tax equivalent basis), which improved from 55.0% to
52.1% for the nine months ended September 30, 1997 and 1996, respectively.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $858.2
million for the first nine months of 1997 compared to $773.1 million for the
same period in 1996, an 11.0% increase. For the nine months ended September 30,
1997 and 1996, average interest-earning assets increased $1.9 billion, or 8.3%,
to $25.0 billion, while average interest-bearing liabilities increased by $1.8
billion. As mentioned previously, BB&T also experienced substantial improvement
in the net interest margin from 4.46% in 1996 to 4.58% in 1997. The 12 basis
point increase in margin was primarily driven by an improved mix of earning
assets and liabilities. Average loans increased $1.6 billion and average
securities increased $349.5 million driving the increase in higher-yielding
volumes. The yields earned on these assets also improved. By category, there was
a 25 basis point increase in yields earned from securities, combined with a 9
basis point increased in yields from the loan
15
portfolio, a 3 basis point decrease in rates paid on interest-bearing deposits,
a 1 basis point decline in rates paid on short-term borrowed funds and a 4 basis
point decrease in rates paid on long-term debt.
Among BB&T's primary strategic objectives for 1997 was the effective
execution of fundamentals in developing a profit-maximizing balance sheet. The
replacement of lower-yielding U.S. Treasuries with mortgage-backed securities,
produced the substantial increase in the yield on securities. An emphasis on
commercial and consumer lending versus mortgage lending improved the
profitability in the loan portfolio. Also, the special promotion of money rate
savings accounts versus more expensive certificate accounts and the issuance of
more fixed rate long-term debt has improved the cost of funding.
Net interest income on an FTE basis for the third quarter was $291.3
million compared to $262.1 million for the same period in 1996, an 11.1%
increase. Over the same time frame, average interest-earning assets increased
$2.1 billion, or 8.8%, to $25.5 billion, while average interest-bearing
liabilities increased by $2.0 billion.
16
The following tables demonstrate fluctuations in net interest income and
the related yields for the nine months and the third quarter compared to
comparable periods last year, and details the portions of these changes caused
by changes in rates versus changes in volumes.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE
--------------------------- ------------- -------------------------- INCREASE
FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE)
- -------------------------------- ----------- ----------- ---- ---- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 6,135,804 $ 5,751,306 6.75% 6.46% $ 310,587 $ 278,486 $ 32,101
States and political
subdivisions................ 173,824 208,840 8.71 9.02 11,357 14,131 (2,774)
----------- ----------- ---- ---- ----------- ----------- ----------
Total securities (5)........ 6,309,628 5,960,146 6.80 6.55 321,944 292,617 29,327
Other earning assets (2)........ 48,921 65,324 5.35 5.39 1,958 2,635 (677)
Loans and leases, net of
unearned income (1)(3)(4)(5)... 18,674,109 17,097,346 9.21 9.12 1,287,637 1,167,545 120,092
----------- ----------- ---- ---- ----------- ----------- ----------
Total earning assets........ 25,032,658 23,122,816 8.60 8.44 1,611,539 1,462,797 148,742
----------- ----------- ---- ---- ----------- ----------- ----------
Non-earning assets.......... 1,570,072 1,418,063
----------- -----------
TOTAL ASSETS.............. $26,602,730 $24,540,879
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings and interest
checking.................... $ 2,034,721 $ 2,137,325 1.73 1.90 26,399 30,356 (3,957)
Money rate savings............ 4,498,731 3,779,803 3.05 2.83 102,700 79,948 22,752
Time deposits................. 10,258,647 10,106,751 5.50 5.55 422,369 420,254 2,115
----------- ----------- ---- ---- ----------- ----------- ----------
Total interest-bearing
deposits.................. 16,792,099 16,023,879 4.39 4.42 551,468 530,558 20,910
Short-term borrowed funds....... 2,407,330 2,076,650 5.29 5.30 95,278 82,380 12,898
Long-term debt.................. 2,460,637 1,759,768 5.79 5.83 106,642 76,805 29,837
----------- ----------- ---- ---- ----------- ----------- ----------
Total interest-bearing
liabilities............... 21,660,066 19,860,297 4.65 4.64 753,388 689,743 63,645
----------- ----------- ---- ---- ----------- ----------- ----------
Demand deposits............. 2,512,550 2,398,394
Other liabilities........... 316,861 318,668
Shareholders' equity........ 2,113,253 1,963,520
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........... $26,602,730 $24,540,879
----------- -----------
----------- -----------
Average interest rate spread.... 3.95 3.80
Net yield on earning assets..... 4.58% 4.46% $ 858,151 $ 773,054 $ 85,097
---- ---- ----------- ----------- ----------
---- ---- ----------- ----------- ----------
Taxable equivalent adjustment... $ 37,635 $ 26,391
----------- -----------
----------- -----------
CHANGE DUE TO
-------------------
FULLY TAXABLE EQUIVALENT RATE VOLUME
- -------------------------------- ------- -------
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $12,944 $19,157
States and political
subdivisions................ (479) (2,295)
------- -------
Total securities (5)........ 12,465 16,862
Other earning assets (2)........ (20) (657)
Loans and leases, net of
unearned income (1)(3)(4)(5)... 12,562 107,530
------- -------
Total earning assets........ 25,007 123,735
------- -------
Non-earning assets..........
TOTAL ASSETS..............
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings and interest
checking.................... (2,518) (1,439)
Money rate savings............ 6,775 15,977
Time deposits................. (3,773) 5,888
------- -------
Total interest-bearing
deposits.................. 484 20,426
Short-term borrowed funds....... (114) 13,012
Long-term debt.................. (470) 30,307
------- -------
Total interest-bearing
liabilities............... (100) 63,745
------- -------
Demand deposits.............
Other liabilities...........
Shareholders' equity........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...........
Average interest rate spread....
Net yield on earning assets..... $25,107 $59,990
------- -------
------- -------
Taxable equivalent adjustment...
- ---------------
(1) Yields related to securities, loand leases exempt from both federal and
state income taxes, federal income taxes only or state income taxes only are
stated on a taxable equivalent basis using statutory tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale agreements
or similar arrangements.
(3) Loan fees, which are not material for the periods shown, are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances.
(5) Includes assets which were held for sale or available for sale at amortized
cost.
17
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE
--------------------------- ------------- ---------------------- INCREASE
FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE)
- -------------------------------- ----------- ----------- ---- ---- --------- --------- ----------
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 6,267,073 $ 6,066,509 6.84% 6.59% $ 107,194 $ 99,957 $ 7,237
States and political
subdivisions................ 165,408 196,492 8.56 8.88 3,541 4,360 (819)
----------- ----------- ---- ---- --------- --------- ----------
Total securities (5)........ 6,432,481 6,263,001 6.89 6.66 110,735 104,317 6,418
Other earning assets (2)........ 36,136 31,830 4.26 5.49 387 439 (52)
Loans and leases, net of
unearned income (1)(3)(4)(5)... 19,076,615 17,185,125 9.23 9.10 443,012 393,067 49,945
----------- ----------- ---- ---- --------- --------- ----------
Total earning assets........ 25,545,232 23,479,956 8.63 8.44 554,134 497,823 56,311
----------- ----------- ---- ---- --------- --------- ----------
Non-earning assets.......... 1,623,279 1,446,155
----------- -----------
TOTAL ASSETS.............. $27,168,511 $24,926,111
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS'
EQUITY Interest-bearing
deposits:
Savings and interest
checking.................... $ 1,984,556 $ 2,074,650 1.71 1.79 8,576 9,324 (748)
Money rate savings............ 4,588,310 3,861,121 3.12 2.81 36,033 27,263 8,770
Time deposits................. 10,165,632 10,432,254 5.50 5.54 140,890 145,187 (4,297)
----------- ----------- ---- ---- --------- --------- ----------
Total interest-bearing
deposits.................. 16,738,498 16,368,025 4.40 4.42 185,499 181,774 3,725
Short-term borrowed funds....... 2,637,455 1,857,538 5.38 5.36 35,741 25,046 10,695
Long-term debt.................. 2,806,159 1,979,930 5.88 5.80 41,602 28,884 12,718
----------- ----------- ---- ---- --------- --------- ----------
Total interest-bearing
liabilities............... 22,182,112 20,205,493 4.70 4.64 262,842 235,704 27,138
----------- ----------- ---- ---- --------- --------- ----------
Demand deposits............. 2,570,993 2,435,544
Other liabilities........... 309,760 315,130
Shareholders' equity........ 2,105,646 1,969,944
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........... $27,168,511 $24,926,111
----------- -----------
----------- -----------
Average interest rate spread.... 3.93 3.80
Net yield on earning assets..... 4.55% 4.44% $ 291,292 $ 262,119 $ 29,173
---- ---- --------- --------- ----------
---- ---- --------- --------- ----------
Taxable equivalent adjustment... $ 14,169 $ 8,831
--------- ---------
--------- ---------
CHANGE DUE TO
------------------
FULLY TAXABLE EQUIVALENT RATE VOLUME
- -------------------------------- ------ -------
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $3,853 $ 3,384
States and political
subdivisions................ (145) (674)
------ -------
Total securities (5)........ 3,708 2,710
Other earning assets (2)........ (106) 54
Loans and leases, net of
unearned income (1)(3)(4)(5)... 4,985 44,960
------ -------
Total earning assets........ 8,587 47,724
------ -------
Non-earning assets..........
TOTAL ASSETS..............
LIABILITIES AND SHAREHOLDERS'
EQUITY Interest-bearing
deposits:
Savings and interest
checking.................... (352) (396)
Money rate savings............ 3,182 5,588
Time deposits................. (606) (3,691)
------ -------
Total interest-bearing
deposits.................. 2,224 1,501
Short-term borrowed funds....... 57 10,638
Long-term debt.................. 394 12,324
------ -------
Total interest-bearing
liabilities............... 2,675 24,463
------ -------
Demand deposits.............
Other liabilities...........
Shareholders' equity........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...........
Average interest rate spread....
Net yield on earning assets..... $5,912 $23,261
------ -------
------ -------
Taxable equivalent adjustment...
- ---------------
(1) Yields related to securities, loans and leases exempt from both federal and
state income taxes, federal income taxes only or state income taxes only are
stated on a taxable equivalent basis using statutory tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale agreements
or similar arrangements.
(3) Loan fees, which are not material for the periods shown are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances.
(5) Includes assets held for sale or available for sale at amortized cost.
18
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1997 was $356.4
million, compared to $258.4 million for the same period in 1996. The 1997
noninterest income reflects the premium from the divestiture of deposits, which
totaled $47.8 million. Excluding the premium, which is considered nonrecurring,
total noninterest income increased $50.2 million, or 19.4%.
BB&T experienced positive development in all significant areas of
noninterest income except non-agency insurance commissions. Service charges on
deposits, mortgage banking activities, agency insurance commissions and trust
income all showed strong gains during the period. The percentage of total
revenues, calculated as net interest income plus noninterest income excluding
securities gains or losses and nonrecurring items, derived from noninterest
income for the nine months ended September 30, 1997 was 26.4%, up from 25.0% for
the first nine months of 1996. Management anticipates continued growth in
noninterest income, with a target ratio of noninterest income to total revenues
of 30%.
For the third quarter of 1997, noninterest income totaled $107.3 million on
a recurring basis, up $18.1 million, or 20.2% from the balance for the same
period in 1996.
Service charges on deposits increased $12.8 million, or 13.0%, for the
first nine months in 1997 compared to 1996. The primary factor contributing to
the significant growth in service charges on deposits was an increased fee
schedule on deposit services that were effective in the first quarter of 1997.
The largest components of the growth within service charges on deposits included
fees on commercial transaction accounts, service charges on personal accounts
and overdraft charges. For the third quarter of 1997, service charges on
deposits increased $3.1 million, or 9.2%, compared to the same period in 1996.
Trust income grew $2.7 million, or 12.9%, for the nine months ended
September 30, 1997 compared to the same period in 1996. For the third quarter,
trust income increased $1.1 million, or 15.4%. These increases reflect expanded
services and a growing trust customer base.
Agency insurance commissions increased significantly, up $10.6 million, or
54.3%, in the first nine months of 1997 compared to the nine month period of
1996. The growth in agency insurance commissions resulted from increases in
property and casualty insurance commissions and insurance fees and charges.
Also, the acquisitions of Boyle-Vaughan Associates, Inc., the William Goldsmith
Agency Inc. and the C. Dan Joyner Insurance Agency, all in South Carolina, were
completed during the fourth quarter of 1996. These acquisitions were accounted
for as purchases; therefore, the accounts of these agencies are included in
operating results only since the dates of acquisition. With these acquisitions,
BB&T has assembled the largest independent insurance agency system in the
Carolinas. BB&T's insurance network has expanded the types of products offered
to group health, surety bonds, title insurance and life insurance. Management
anticipates continued growth in agency insurance commissions and will continue
to pursue acquisitions of quality independent agencies. For the third quarter of
1997, agency insurance commissions increased $2.9 million, or 43.7%, from the
corresponding period of 1996.
Income from mortgage banking activities increased $7.5 million, or 25.8%,
for the nine months ended September 30, 1997 compared to the same period in
1996. The increase resulted from higher mortgage loan servicing fees. For the
third quarter of 1997, mortgage banking income increased $5.4 million or 64.5%,
from the amount earned in 1996.
Other nondeposit fees and commissions increased by $14.9 million, or 24.5%,
to a level of $75.9 million for the nine months ended September 30, 1997
compared with $61.0 million for the first nine months of 1996. The primary
components generating the increase in nondeposit fees and commissions were
revenues from investment services, which increased $1.6 million, ATM and
Point-of-Sale fees, which increased $4.4 million and bankcard income, which
increased $4.5 million. For the third quarter of 1997, other nondeposit fees and
commissions increased by $6.6 million, or 30.7%, compared with the same period
in 1996.
Other income increased $49.0 million for the first nine months of 1997
because of the previously discussed premium recorded on the divestiture of
deposits in conjunction with the UCB merger. Excluding the gain, other income
decreased $355,000. For the third quarter of 1997, other income on a recurring
basis decreased $1.2 million, or 6.1%, because of lower revenues from check
sales.
NONINTEREST EXPENSE
Noninterest expenses totaled $715.6 million for the first nine months of
1997 compared to $602.3 million for the same period a year ago. The 18.8%
increase resulted from the merger-related nonrecurring charges previously
discussed. Excluding the $106.1 million of pretax nonrecurring charges recorded
in 1997 and the $34 million SAIF assessment recorded in 1996, noninterest
expenses would have been $609.5 million, up 7.2%, from the prior year. A portion
of this increase reflects
19
acquisitions accounted for under the purchase method of accounting. These
acquisitions added approximately $8.0 million to noninterest expenses during
1997. For the third quarter of 1997, noninterest expense totaled $206.6 million
on a recurring basis, a $13.6 million, or 7.1%, increase over the third quarter
of the prior year.
Personnel expense, the largest component of noninterest expense, was $324.8
million for the first nine months of 1997 compared to $289.2 million for the
same period in 1996, an increase of $35.6 million, or 12.3%. The increase was
primarily caused by $20.0 million in nonrecurring merger-related charges in the
form of severance pay, termination of employment contracts, early retirement
packages, costs to relocate staff and other related benefits. Excluding these
costs, personnel expense increased $15.6 million, or 5.4%. The remaining
increase resulted from annual compensation adjustments for exempt employees and
performance incentive programs. For the quarter, personnel expense totaled
$101.7 million on a recurring basis, an increase of 5.8% compared to the third
quarter of 1996.
Occupancy and equipment expense for the nine months ended September 30,
1997, totaled $118.5 million, an increase of $27.9 million, or 30.9%, compared
to 1996. The merger with UCB resulted in $19.6 million of costs associated with
branch closings and the consolidation of backroom operations and systems.
Excluding the impact of these charges, occupancy and equipment expense would
have been $98.8 million, reflecting a 9.2% increase from the prior year expense.
These increases result from increased rent expense for data processing and other
equipment, additional costs associated with the maintenance of a higher number
of ATMs, equipment costs necessary to upgrade BB&T's systems to make them year
2000 compliant (see discussion below) and to automate certain branch information
systems to make them more efficient. For the third quarter of 1997, occupancy
and equipment expense totaled $34.4 million on a recurring basis, which is an
increase of $3.1 million, or 9.8%, from the prior year.
Federal deposit insurance expense decreased $40.2 million, or 91.4%, for
the nine months ended September 30, 1997, compared to the same period in the
prior year. As discussed above, BB&T recorded a one-time assessment during the
third quarter of 1996 totaling approximately $34 million. Excluding the prior
year impact of this assessment, FDIC expense would have decreased $6.4 million,
reflecting the higher premiums paid on SAIF-insured deposits prior to the
assessment levied in the third quarter. Effective January 1, 1997, BB&T began
paying $.0648 per $100 of SAIF-insured deposits and $.0130 per $100 of
BIF-insured deposits to service the Financing Corporation ("FICO") bonds. These
payments totaled $3.8 million during the first nine months of 1997. For the
third quarter of 1997, Federal deposit insurance expense totaled $1.2 million,
down $2.2 million, or 63.9%, from 1996.
Other noninterest expenses for the first nine months of 1997 totaled $268.5
million, an increase of $90.0 million, or 50.4%, over 1996. The 1997 expenses
include $66.5 million of nonrecurring expenses related to the UCB merger. The
costs include $36.9 million in merger-related losses on the disposal of
redundant fixed assets and $29.5 million of other merger costs. Excluding the
impact of these charges, other noninterest expense would have totaled $202.0
million for the nine months, an increase of $23.5 million, or 13.2%. This
increase was primarily due to increases in advertising, public relations and
other marketing expense totaling $2.5 million, increased loan and lease expenses
of $3.5 million and professional services, which increased $12.8 million.
The increased advertising costs are related to an ongoing marketing program
to enhance awareness of BB&T's brand identity. While it is difficult to measure
the impact of advertising costs, and any program takes time to be effective,
studies have noted an increase in BB&T's brand identity and in the "switch
preference" of customers of competitors. Additional loan and lease expenses
resulted primarily from bankcard and merchant interchange expenses. The increase
in professional services expense results from the use of outside consulting
firms to analyze strategies to maximize noninterest income, to assess customer
and product profitability, to assist in the modifications necessary to upgrade
BB&T's systems to make them year 2000 compliant (as discussed below) and to
implement plans for a major branch automation project.
Many computer systems will incur data processing difficulties resulting
from date codings of transactions after the year 1999. BB&T recognized expenses
during 1996 to begin upgrading certain computer software and operating systems
to enable the systems to function properly in the year 2000. Some of BB&T's
systems were not previously programmed to consider the start of a new century,
and the process of upgrading the systems' date recognition to make them year
2000 compliant will continue in coming months. Management anticipates costs to
be incurred related to the year 2000 project to be approximately $26 million.
For the third quarter, BB&T's other noninterest expenses totaled $69.3
million on a recurring basis, up $7.7 million, or 12.4%, compared to the third
quarter of 1996.
BB&T's efficiency ratio improved to 52.1% for the first nine months of 1997
compared to 55.0% for the same period in 1996. For the third quarter of 1997,
the efficiency ratio was 51.7% compared to 54.9% in 1996.
20
PROVISION FOR INCOME TAXES
The provision for income taxes totaled $137.0 million for the first nine
months of 1997, an increase of $18.6 million, or 15.7%. Excluding the tax
benefits associated with the nonrecurring charges detailed above, the provision
for income taxes totaled $152.6 million compared to a prior year provision of
$130.5 million. Effective tax rates on recurring pretax income were 33.8% and
33.2% for the nine months ended September 30, 1997 and 1996, respectively. For
the third quarter, the provision for income taxes applicable to recurring pretax
income totaled $52.0 million, resulting in an effective tax rate of 33.3%.
PROFITABILITY MEASURES
1997 1996
----------------------------- ------------------
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
Return on average assets..................................................... .89% 1.47% 1.52% 1.41% 1.09%
Return on average equity..................................................... 11.54 18.59 18.61 17.47 13.80
Net interest margin.......................................................... 4.55 4.62 4.57 4.51 4.44
Efficiency ratio (taxable equivalent)*....................................... 51.7 52.0 52.6 56.5 54.9
- ---------------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items for all periods.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the business of BB&T's banking subsidiaries ordinarily
results in a certain amount of litigation. The subsidiaries of BB&T are involved
in various legal proceedings, all of which are considered incidental to the
normal conduct of business. Management believes that the liabilities arising
from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
ITEM 2. CHANGES IN SECURITIES
(c) On July 31, 1997, BB&T issued 374,841 shares of common stock to the
shareholders of Refloat, Inc. of Mount Airy, North Carolina and its principal
subsidiary, Sheffield Financial Corp., in exchange for the transfer of
substantially all of the net assets of these companies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 -- "Computation of Earnings Per Share" is included herein.
Exhibit 27 -- "Financial Data Schedule" is included in the
electronically-filed document as required.
(b) BB&T filed a Form 8-K under Item 5 on January 14, 1997, to report the
results of operations and financial condition as of December 31, 1996. BB&T
filed a Form 8-K under Item 5 on April 11, 1997, to report the results of
operations and financial condition as of March 31, 1997. BB&T filed a Form 8-K
under Item 5 on May 23, 1997, to report a change in the corporate name from
Southern National Corporation to BB&T Corporation. This change was effective May
19, 1997. BB&T filed a Form 8-K under Item 5 on June 11, 1997, which included an
underwriting agreement related to $250 million in subordinated notes due 2007.
BB&T filed a Form 8-K under Item 5 on July 11, 1997, to report the results of
operations and financial condition as of June 30, 1997. BB&T filed a Form 8-K
under Item 2 on July 14, 1997 to report that BB&T's acquisition of United
Carolina Bancshares Corporation was completed July 1, 1997. BB&T filed a Form
8-K under Item 5 on August 15, 1997, to report the combined financial condition
and combined results of operations including UCB for the period ending July 31,
1997 and to report certain prior period balances restated to include the
accounts of UCB. BB&T filed a Form 8-K under Item 5 on August 15, 1997, to
restate BB&T's December 31, 1996 Form 10-K for the accounts of UCB. BB&T filed a
Form 8-K under Item 5 on October 15, 1997, to report the results of operations
and financial condition as of September 30, 1997. BB&T filed a Form 8-K under
Item 5 on October 30, 1997, to report plans to acquire Life Bancorp, Inc. of
Norfolk, Virginia.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T CORPORATION
(Registrant)
Date: November 14, 1997 By: /s/ SCOTT E. REED
------------------------------
SCOTT E. REED, SENIOR EXECUTIVE VICE
PRESIDENT
AND CHIEF FINANCIAL OFFICER
Date: November 14, 1997 By: /s/ SHERRY A. KELLETT
-----------------------------
SHERRY A. KELLETT, EXECUTIVE VICE
PRESIDENT AND
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
23