-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lm+h6GoFq8xVsIbD/U6DFVHESwQZDEoRavfamTxSGMleuVFmtIlwlzFGZDpPpUaC l37UPfdlG5/CvdD4zQHmVQ== 0000950109-99-001828.txt : 19990615 0000950109-99-001828.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950109-99-001828 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BB&T CORP CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10853 FILM NUMBER: 99621476 BUSINESS ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 BUSINESS PHONE: 3367332000 MAIL ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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: MARCH 31, 1999 Commission file number : 1-10853 BB&T CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-0939887 (State of incorporation) (I.R.S. Employer Identification No.)
200 West Second Street Winston-Salem, North Carolina 27101 (Address of Principal Executive Offices) (Zip Code)
(336) 733-2000 (Registrant's Telephone Number, Including Area Code) ---------------- 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 April 30, 1999, 307,563,348 shares of the registrant's common stock, $5 par value, were outstanding. ---------------- This Form 10-Q has 30 pages. The Exhibit Index is included on page 29. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- BB&T CORPORATION FORM 10-Q March 31, 1999 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 13 Analysis of Financial Condition 13 Market Risk Management 16 Capital Adequacy and Resources 20 Analysis of Results of Operations 20 Part II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 6. Exhibits and Reports on Form 8-K 29 SIGNATURES 30 EXHIBIT 11 Calculation of Earnings Per Share 10 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 (Unaudited) (Dollars in thousands, except per share data)
March 31, December 31, 1999 1998 ----------- ------------ Assets Cash and due from banks $ 863,829 $ 997,245 Interest-bearing deposits with banks 7,014 8,925 Federal funds sold and securities purchased under resale agreements or similiar arrangements 245,591 103,216 Trading securities 114,376 60,422 Securities available for sale 9,793,227 8,737,936 Securities held to maturity (approximate market values of $113,077 at March 31, 1999, and $179,444 at December 31, 1998) 110,320 174,735 Loans held for sale 751,439 1,035,668 Loans and leases, net of unearned income 24,224,640 23,682,800 Allowance for loan and lease losses (337,983) (330,615) ----------- ----------- Loans and leases, net 23,886,657 23,352,185 ----------- ----------- Premises and equipment, net 485,961 471,780 Other assets 1,533,076 1,446,218 ----------- ----------- Total assets $37,791,490 $36,388,330 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing deposits $ 3,352,359 $ 3,465,362 Savings and interest checking 1,698,423 1,783,491 Money rate savings 7,080,509 7,021,556 Other time deposits 11,402,439 11,349,083 Foreign deposits 880,405 638,676 ----------- ----------- Total deposits 24,414,135 24,258,168 ----------- ----------- Short-term borrowed funds 4,668,966 3,707,333 Long-term debt 5,187,639 4,964,797 Accounts payable and other liabilities 572,393 534,144 ----------- ----------- Total liabilities 34,843,133 33,464,442 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued or outstanding -- -- Common stock, $5 par, 500,000,000 shares authorized; 307,297,316 issued and outstanding at March 31, 1999, and 306,963,976 at December 31, 1998 1,536,487 1,534,820 Additional paid-in capital 148,255 177,098 Retained earnings 1,233,878 1,151,010 Unearned income -- (14) Accumulated other nonshareholder changes in equity, net of deferred income taxes of $18,256 at March 31, 1999, and $38,366 at December 31, 1998 29,737 60,974 ----------- ----------- Total shareholders' equity 2,948,357 2,923,888 ----------- ----------- Total liabilities and shareholders' equity $37,791,490 $36,388,330 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 2 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
For the Three Months Ended March 31, --------------------------- 1999 1998 ------------- ------------- Interest Income Interest and fees on loans and leases $ 526,972 $ 500,229 Interest and dividends on securities 138,727 136,519 Interest on short-term investments 1,457 3,376 ------------- ------------- Total interest income 667,156 640,124 ------------- ------------- Interest Expense Interest on deposits 209,759 209,292 Interest on short-term borrowed funds 46,262 54,594 Interest on long-term debt 66,758 56,898 ------------- ------------- Total interest expense 322,779 320,784 ------------- ------------- Net Interest Income 344,377 319,340 Provision for loan and lease losses 20,000 23,438 ------------- ------------- Net Interest Income After Provision for Loan and Lease Losses 324,377 295,902 ------------- ------------- Net Interest Income Service charges on deposit accounts 47,624 42,458 Mortgage banking income 32,798 15,397 Trust income 12,714 8,731 Agency insurance commissions 16,882 14,057 Other insurance commissions 2,846 3,016 Other nondeposit fees and commissions 30,078 25,513 Securities gains, net 61 2,501 Other noninterest income 18,181 13,751 ------------- ------------- Total noninterest income 161,184 125,424 ------------- ------------- Noninterest Expense Personnel expense 141,193 123,671 Occupancy and equipment expense 48,140 38,934 Amortization of intangibles and mortgage servicing rights 15,836 10,262 Other noninterest expense 76,639 72,149 ------------- ------------- Total noninterest expense 281,808 245,016 ------------- ------------- Earnings Income before income taxes 203,753 176,310 Provision for income taxes 65,330 55,865 ------------- ------------- Net income $ 138,423 $ 120,445 ============= ============= Per Common Share Net income: Basic $ .45 $ .40 ============= ============= Diluted $ .44 $ .39 ============= ============= Cash dividends paid $ .175 $ .155 ============= ============= Average Shares Outstanding Basic 306,466,263 304,867,015 ============= ============= Diluted 312,553,659 311,282,640 ============= =============
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 Three Months Ended March 31, 1999 and 1998 (Unaudited) (Dollars in thousands)
Accumulated Other Shares of Additional Retained Nonshareholder Total Common Common Paid-In Earnings Changes in Shareholders' Stock Stock Capital and Other* Equity Equity ----------- ---------- ---------- ---------- -------------- ------------- Balance, December 31, 1997, as restated 151,965,992 $ 759,830 $215,041 $1,555,563 $52,071 $2,582,505 Add (Deduct) Nonshareholder changes in equity:** Net income -- -- -- 120,445 -- 120,445 Unrealized holding gains (losses) arising during the period -- -- -- -- (871) (871) Less: reclassification adjustment, net of tax of $989 -- -- -- -- (1,512) (1,512) ----------- ---------- -------- ---------- ------- ---------- Net unrealized gains (losses) on securities -- -- -- -- (2,383) (2,383) ----------- ---------- -------- ---------- ------- ---------- Total nonshareholder changes in equity -- -- -- 120,445 (2,383) 118,062 ----------- ---------- -------- ---------- ------- ---------- Common stock issued 1,187,257 5,936 39,283 -- -- 45,219 Redemption of common stock (814,580) (4,073) (48,734) -- -- (52,807) Cash dividends declared on common stock -- -- -- (47,636) -- (47,636) Other -- -- -- 237 -- 237 ----------- ---------- -------- ---------- ------- ---------- Balance, March 31, 1998 152,338,669 $ 761,693 $205,590 $1,628,609 $49,688 $2,645,580 =========== ========== ======== ========== ======= ========== Balance, December 31, 1998, as restated 306,963,976 $1,534,820 $177,098 $1,150,996 $60,974 $2,923,888 Add (Deduct) Nonshareholder changes in equity:** Net income -- -- -- 138,423 -- 138,423 Unrealized holding gains (losses) arising during the period -- -- -- -- (31,200) (31,200) Less: reclassification adjustment, net of tax of $24 -- -- -- -- (37) (37) ----------- ---------- -------- ---------- ------- ---------- Net unrealized gains (losses) on securities -- -- -- -- (31,237) (31,237) ----------- ---------- -------- ---------- ------- ---------- Total nonshareholder changes in equity -- -- -- 138,423 (31,237) 107,186 ----------- ---------- -------- ---------- ------- ---------- Common stock issued 4,612,940 23,065 115,447 -- -- 138,512 Redemption of common stock (4,279,600) (21,398) (144,290) -- -- (165,688) Cash dividends declared on common stock -- -- -- (56,088) -- (56,088) Other -- -- -- 547 -- 547 ----------- ---------- -------- ---------- ------- ---------- Balance, March 31, 1999 307,297,316 $1,536,487 $148,255 $1,233,878 $29,737 $2,948,357 =========== ========== ======== ========== ======= ==========
- - -------- * Other includes unearned income, unvested restricted stock and a loan to the employee stock ownership plan. ** Comprehensive income as defined by SFAS No. 130. The accompanying notes are an integral part of these consolidated financial statements. 4 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1999 and 1998 (Unaudited) (Dollars in thousands)
1999 1998 ---------- ---------- Cash Flows From Operating Activities: Net income $ 138,423 $ 120,445 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 20,000 23,438 Depreciation of premises and equipment 18,098 17,729 Amortization of intangibles and mortgage servicing rights 15,836 10,262 Accretion of negative goodwill (1,560) (1,561) Amortization of unearned stock compensation 14 237 Discount accretion and premium amortization on securities, net (281) 164 Net decrease (increase) in trading account securities (41,929) (39,394) Loss (gain) on sales of securities, net (61) (2,501) Loss (gain) on sales of loans and mortgage loan servicing rights, net (11,233) (6,030) Loss (gain) on disposals of premises and equipment, net (746) (1,360) Proceeds from sales of loans held for sale 1,348,845 558,990 Purchases of loans held for sale (368,446) (285,214) Origination of loans held for sale, net of principal collected (684,937) (671,660) Decrease (increase) in: Accrued interest receivable (13,136) (20,434) Other assets 12,995 6,930 Increase (decrease) in: Accrued interest payable 18,012 13,271 Accounts payable and other liabilities 46,327 5,236 Other, net 607 (975) ---------- ---------- Net cash provided by (used in) operating activities 496,828 (272,427) ---------- ---------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale 10,023 544,218 Proceeds from maturities, calls and paydowns of securities available for sale 793,189 563,782 Purchases of securities available for sale (1,860,391) (1,521,234) Proceeds from maturities, calls and paydowns of securities held to maturity 17,258 25,373 Purchases of securities held to maturity -- (11,830) Leases made to customers (29,924) (23,327) Principal collected on leases 17,012 16,012 Loan originations, net of principal collected (547,535) (127,938) Purchases of loans (2,030) (96,904) Net cash acquired in transactions accounted for under the purchase method 140,814 22,690 Purchases and originations of mortgage servicing rights (19,574) (11,461) Proceeds from disposals of premises and equipment 16,595 4,394 Purchases of premises and equipment (41,914) (17,504) Proceeds from sales of foreclosed property 6,839 8,200 Proceeds from sales of other real estate held for development or sale 4,955 15 Other -- (358) ---------- ---------- Net cash used in investing activities (1,494,683) (625,872) ---------- ---------- Cash Flows From Financing Activities: Net increase (decrease) in deposits 155,967 (115,950) Net increase (decrease) in short-term borrowed funds 835,566 790,823 Proceeds from long-term debt 409,215 528,783 Repayments of long-term debt (186,373) (285,980) Net proceeds from common stock issued 9,210 28,003 Redemption of common stock (165,688) (52,807) Cash dividends paid on common stock (52,994) (45,572) ---------- ---------- Net cash provided by financing activities 1,004,903 847,300 ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 7,048 (50,999) Cash and Cash Equivalents at Beginning of Period 1,109,386 1,267,253 ---------- ---------- Cash and Cash Equivalents at End of Period $1,116,434 $1,216,254 ========== ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 307,405 $ 282,858 Income taxes 389 8,222 Noncash financing and investing activities: Transfer of securities held to maturity to available for sale 47,265 -- Transfer of loans to foreclosed property 8,005 3,595 Transfer of other real estate owned to fixed assets 1,151 -- Transfer of fixed assets to other real estate owned 287 2,221 Tax benefit from exercise of stock options 6,214 --
The accompanying notes are an integral part of these consolidated financial statements. 5 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (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 March 31, 1999 and December 31, 1998; the consolidated statements of income for the three months ended March 31, 1999 and 1998; the consolidated statements of changes in shareholders' equity for the three months ended March 31, 1999 and 1998; and the consolidated statements of cash flows for the three months ended March 31, 1999 and 1998. The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T's latest annual report on Form 10-K, as restated in BB&T's Current Report on Form 8-K, filed on April 30, 1999, should be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain prior year amounts have been reclassified to conform to statement presentations for 1999. The reclassifications had no effect on shareholders' equity or net income. On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the Corporation's common stock effected in the form of a 100% stock dividend paid August 3, 1998. Accordingly, all per share data and weighted average shares have been restated as appropriate to reflect the split. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and / or a reduced demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged; (5) costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected; (6) expected cost savings associated with pending mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending mergers may be greater than expected; (8) the Year 2000 issue may not be effectively corrected (see additional discussion following under First Quarter 1999 Year 2000 Readiness Disclosure); (9) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (10) adverse changes may occur in the securities markets. 6 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. Nature of Operations BB&T is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T principally conducts its operations in North Carolina, South Carolina, Virginia, Maryland and the metropolitan Washington, D.C. area through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. BB&T's principal banking subsidiaries, Branch Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T- SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"), provide a wide range of traditional banking services to individuals and commercial customers, including small and mid-size businesses, public agencies and local governments. Substantially all of BB&T's loans are to businesses and individuals in the market areas outlined above. Subsidiaries of the commercial banks offer lease financing to commercial businesses and municipal governments, investment services, (including discount brokerage services, annuities, mutual funds and government and municipal bonds), life insurance, property and casualty insurance on an agency basis and insurance premium financing. Other subsidiaries of BB&T provide services such as automobile lending, equipment financing, factoring, full-service securities brokerage, investment banking and corporate finance services. C. New Accounting Pronouncements On January 1, 1998, BB&T adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Comprehensive income is the nonshareholder related change in equity (net assets) of a company during a period from transactions and other events. The standard does not address issues of recognition or measurement of comprehensive income; therefore, the implementation of the statement did not have an impact on BB&T's consolidated financial position or consolidated results of operations. On January 1, 1998, BB&T adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which established standards for the way that business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The standard did not address issues of recognition or measurement; therefore, the implementation of the statement did not have an impact on the consolidated financial position or consolidated results of operations of BB&T. On January 1, 1998, BB&T adopted the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revised the disclosure requirements for pensions and other postretirement benefit plans. SFAS No. 132 did not address issues of recognition or measurement and, therefore, the implementation of the statement did not have an impact on the consolidated financial position or consolidated results of operations of BB&T. On January 1, 1999, BB&T adopted the American Institute of Certified Public Accountants' Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires capitalization of computer software costs that meet certain criteria. The implementation of SOP 98-1 did not have a material effect on BB&T's consolidated financial position or consolidated results of operations. 7 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The statement is effective for fiscal years beginning after June 15, 1999, and cannot be applied retroactively. Management has not yet quantified the impact of adopting SFAS No. 133 and has not determined the timing of or method of adoption of the statement. However, the statement could increase volatility in earnings and other comprehensive income. On January 1, 1999, BB&T adopted the American Institute of Certified Public Accountants' SOP 98-5, "Accounting for Start-up Costs." SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs, requiring start-up costs to be expensed as incurred. The adoption of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. On January 1, 1999, BB&T adopted the provisions of SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. D. Mergers and Acquisitions Completed Mergers and Acquisitions On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life") of Norfolk, Virginia. This transaction was accounted for as a pooling of interests, and, accordingly, the accompanying consolidated financial statements have been restated to reflect the accounts of Life. In conjunction with the merger, BB&T issued approximately 11.6 million shares of common stock in exchange for all of the outstanding shares of Life common stock. On March 10, 1998, BB&T completed its acquisition of Regency Financial Shares, Incorporated ("Regency") of Richmond, Virginia, in a transaction accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 801,000 shares of common stock in exchange for all of the outstanding shares of Regency. On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc. ("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to commercial, agricultural, municipal and consumer users for the purchase of lawn care equipment. The acquisition was accounted for using the purchase method of accounting and, therefore, the accompanying consolidated financial statements include the operating results of DCI only since the date of acquisition. In conjunction with the transaction, BB&T recorded $9.3 million of goodwill, which is being amortized using the straight-line method over 15 years. 8 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company Inc., and its affiliated companies, (collectively, "Stanley"), an actuarial and benefits consulting and administration firm located in Greensboro, North Carolina. In conjunction with the acquisition, which was accounted for as a purchase, BB&T recorded $10.3 million of goodwill, which is being amortized using the straight-line method over 15 years. On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc. ("Franklin") of Washington, D.C., in a stock transaction accounted for as a pooling of interests. Approximately 4.9 million shares of BB&T common stock were issued in exchange for all of the Franklin common stock outstanding. On July 7, 1998, BB&T completed a merger with Ballston Bancorp, Inc. ("Ballston") of Washington, D.C., in a transaction accounted for as a pooling of interests. In conjunction with the merger, BB&T issued approximately 824,000 shares of common stock in exchange for all of the outstanding shares of Ballston. On September 30, 1998, BB&T completed its acquisition of Maryland Federal Bancorp, Inc. ("Maryland Federal") of Hyattsville, Maryland, in a transaction accounted for as a purchase. In conjunction with the merger, BB&T issued 8.7 million shares of BB&T common stock in exchange for all of the outstanding shares of Maryland Federal common stock. BB&T recorded $158.8 million of goodwill, which is being amortized using the straight-line method over a period of 15 years. On March 5, 1999, BB&T completed a merger with MainStreet Financial Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction was accounted for as a pooling of interests. BB&T issued approximately 16.8 million shares of BB&T common stock in exchange for all of the outstanding shares of MainStreet. On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in Richmond, Virginia. The transaction was accounted for as a purchase. In conjunction with the acquisition, BB&T issued 3.6 million shares of BB&T common stock in exchange for all of the outstanding shares of Scott & Stringfellow common stock. BB&T recorded goodwill totaling $72.8 million, which is being amortized using the straight-line method over a period of 15 years. Under the provisions of SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchase Enterprises," BB&T typically provides an allocation period, not to exceed one year, to identify and quantify the assets acquired and liabilities assumed in purchase business combinations. Management currently does not anticipate any material adjustments to the assigned values of the assets and liabilities of acquired companies. Pending Mergers and Acquisitions On January 27, 1999, BB&T announced plans to merge with First Citizens Corporation ("First Citizens"), of Newnan, Georgia. The transaction is expected to be accounted for as a pooling of interests. First Citizens' shareholders will receive 1.0789 shares of BB&T common stock in exchange for each share of First Citizens common stock held. The merger is expected to be completed in the third quarter of 1999. On January 28, 1999, BB&T announced plans to merge with Mason-Dixon Bancshares, Inc. ("Mason-Dixon") of Westminster, Maryland. The transaction is expected to be accounted for as a 9 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) pooling of interests. Mason-Dixon's shareholders will receive 1.30 shares of BB&T common stock in exchange for each share of Mason-Dixon common stock held. The merger is expected to be completed in the third quarter of 1999. On February 25, 1999, BB&T announced plans to acquire Matewan BancShares, Inc. ("Matewan") of Williamson, West Virginia. On April 27, 1999, BB&T and Matewan approved amendments to the merger agreement that provide for Matewan shareholders to receive .67 shares of BB&T common stock for each share of Matewan common stock held and to receive .8375 shares of BB&T common stock for each share of Matewan Series A convertible preferred stock held. The transaction is expected to be completed in the third quarter of 1999 and accounted for as a purchase. On April 28, 1999, BB&T announced plans to merge with First Liberty Financial Corp. ("First Liberty") of Macon, Georgia. First Liberty's shareholders will receive between .85 and .87 shares of BB&T common stock for each share of First Liberty stock held. The transaction is expected to be completed in the fourth quarter of 1999 and accounted for as a pooling of interests. E. Calculation of Earnings Per Common Share BB&T's basic and diluted earnings per common share amounts were calculated as follows (amounts retroactively adjusted for the 2-for-1 stock split effective August 3, 1998): COMPUTATION OF EARNINGS PER SHARE For the Periods as Indicated
For the Three Months Ended March 31, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands, except per share data) Basic Earnings Per Share: Weighted average number of common shares outstanding during the period 306,466,263 304,867,015 =========== =========== Net income $ 138,423 $ 120,445 =========== =========== Basic earnings per share $ .45 $ .40 =========== =========== Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period 306,466,263 304,867,015 Add- Dilutive effect of outstanding options (as determined by application of treasury stock method) 6,087,396 6,415,625 ----------- ----------- Weighted average number of common shares, as adjusted 312,553,659 311,282,640 =========== =========== Net income $ 138,423 $ 120,445 =========== =========== Diluted earnings per share $ .44 $ .39 =========== ===========
10 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) F. Segment Disclosures BB&T's operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage and Treasury. These operating segments have been identified based primarily on BB&T's existing organizational structure. The segments require unique technology and marketing strategies and offer different products and services. While BB&T is managed as an integrated organization, individual executive managers are held accountable for the operations of the business segments that report to them. BB&T emphasizes revenue growth by focusing on client service, client relationships and sales effectiveness. The segment results presented herein are based on internal management accounting policies that support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the segments is not necessarily comparable with BB&T's consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not necessarily indicative of the segments' financial performance if they operated as independent entities. BB&T's internal reporting system was significantly modified during 1998, and, as a result, prior periods have not been reported because it is not practicable to restate prior period results to conform to the current reporting methods. Also, BB&T has completed various mergers and acquisitions accounted for as poolings of interests, which present additional practical limitations to the presentation of comparable prior period information. Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's Current Report on Form 8-K, filed on April 30, 1999, for a description of internal accounting policies and the basis of segmentation, including a description of the segments presented in the accompanying table. There have been no significant changes in the format presented in those documents. The following table discloses selected financial information for BB&T's reportable business segments: 11
For the Three Months Ended March 31, 1999 ------------------------------------------------------------------------------------------------------------ Investment Other Banking All Total Revenues Banking Mortgage Trust Agency and Other Segment and Network Banking Services Insurance Brokerage Treasury Segments(/1/) Results Expenses(/2/) ----------- ---------- -------- --------- ---------- ----------- ------------- ----------- ------------- (dollars in thousands) Net interest income (expense) from external customers $ 182,113 $ 110,794 $(8,186) $ 2,749 $ 255 $ 40,033 $ 49,999 $ 377,757 $ 16,729 Net intersegment interest income (expense) 72,688 (79,113) 9,800 -- -- (4,491) -- (1,116) (3,606) ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Net interest income 254,801 31,681 1,614 2,749 255 35,542 49,999 376,641 13,123 ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Provision for loan and lease losses 21,738 713 -- 978 -- 22 4,110 27,561 551 Noninterest income from external customers 103,222 32,844 11,359 16,796 16,316 1,354 6,259 188,150 2,992 Intersegment noninterest income 13,594 1,313 161 -- -- 142 -- 15,210 130 Noninterest expense 124,547 15,351 7,429 13,540 10,875 1,073 12,009 184,824 63,487 Intersegment noninterest expense 58,796 4,679 629 769 448 2,459 1,384 69,164 (14,095) ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Income before income taxes and the charge for capital 166,536 45,095 5,076 4,258 5,248 33,484 38,755 298,452 (33,698) Provision for income taxes 62,539 17,024 1,916 1,607 2,059 10,802 5,209 101,156 (15,538) ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Net income before the charge for capital 103,997 28,071 3,160 2,651 3,189 22,682 33,546 197,296 (18,160) Charge for capital 30,895 2,983 364 -- -- 323 -- 34,565 297 ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Net income after charge for capital $ 73,102 $ 25,088 $ 2,796 $ 2,651 $ 3,189 $ 22,359 $ 33,546 $ 162,731 $ (18,457) ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Identifiable segment assets $19,277,573 $5,911,572 $14,953 $99,170 $525,448 $10,711,170 $2,553,201 $39,093,087 $2,189,664 ----------- ---------- ------- ------- -------- ----------- ---------- ----------- ---------- Reconciling Items & Consolidated Eliminations Totals ------------------- ------------ Net interest income (expense) from external customers $ (50,109)(/4/) $ 344,377 Net intersegment interest income (expense) 4,722 (/3/) -- ------------------- ------------ Net interest income (45,387) 344,377 ------------------- ------------ Provision for loan and lease losses (8,112)(/4/) 20,000 Noninterest income from external customers (29,958)(/4/) 161,184 Intersegment noninterest income (15,340)(/3/) -- Noninterest expense 33,497 (/4/) 281,808 Intersegment noninterest expense (55,069)(/3/) -- ------------------- ------------ Income before income taxes and the charge for capital (61,001) 203,753 Provision for income taxes (20,288)(/4/) 65,330 ------------------- ------------ Net income before the charge for capital (40,713) 138,423 Charge for capital (34,862)(/3/) -- ------------------- ------------ Net income after charge for capital $ (5,851) $ 138,423 ------------------- ------------ Identifiable segment assets $(3,491,261)(/4/) $37,791,490 ------------------- ------------
- - ---- (1) Financial data for segments below the quantitative thresholds requiring disclosure are attributable to a number of smaller operating segments. Those segments include a sub-prime auto lender, a factoring operation, a commercial lawn care finance company, a home equity finance company and a leasing company. (2) Other revenues and expenses include amounts incurred by BB&T's support functions not allocated to the various segments. Amounts include any unallocated provision for loan and lease losses and unallocated general corporate expenses, as well as costs associated with BB&T's Year 2000 compliance efforts. (3) BB&T's reconciliation of total segment results to consolidated results requires the elimination of the internal management accounting practices. These adjustments include the elimination of the Funds Transfer Pricing credits and charges, the elimination of intersegment capital credits and charges, the elimination of the intersegment noninterest revenues and the elimination of overhead expenses allocated to the various segments. See BB&T's Annual Report on Form 10-K for a description of these internal accounting practices. (4) To reflect elimination entries necessary to consolidated the segment data. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION BB&T's total assets at March 31, 1999, were $37.8 billion, a $1.4 billion increase from the balance at December 31, 1998. The balance sheet categories that accounted for most of the increase were loans and leases, including loans held for sale, which grew $257.6 million, securities available for sale, which increased $1.1 billion, Federal funds sold and securities purchased under resale agreements or similar arrangements, which increased $142.4 million, and other assets, which grew $86.9 million compared to year-end 1998. These increases were partially offset by declines in cash and due from banks, which decreased $133.4 million and securities held to maturity, which decreased $64.4 million. Total deposits increased $156.0 million, short-term borrowed funds increased $961.6 million and long-term debt increased $222.8 million during the first quarter of 1999. Total shareholders' equity increased $24.5 million during the same time frame. The factors causing the fluctuations in these balance sheet categories are further discussed in the following paragraphs. Loans and Leases BB&T's overall loan growth was strong during the first quarter of 1999, with end of period loans, including loans held for sale, increasing 4.2% on an annualized basis since year-end 1998. Average loans increased 8.9% on an annualized basis in the first quarter of 1999 compared to the same period in 1998. The overall growth in loans was reduced by a significant decline in loans held for sale during the first quarter. At March 31, 1999, loans held for sale totaled $751.4 million, down $284.2 million, or 111% on an annualized basis, from the December 31, 1998 balance. Loans held for sale are subject to significant fluctuations from quarter to quarter based on the volume of mortgage loan production. Excluding the decrease in loans held for sale, annualized loan growth from December 31, 1998, to March 31, 1999, was 9.3%. BB&T continues to focus lending efforts on commercial and consumer loans, which are generally more profitable than mortgages. BB&T's acquisition strategy in recent years has resulted in mergers with a number of thrift institutions, which created a concentration of mortgage loans in the portfolio. Through securitizations and sales of fixed rate mortgage loans, management has changed the mix of loans to improve the profitability of the overall portfolio. During the first quarter of 1999, average mortgage loans decreased 5.5%, on an annualized basis, compared to the fourth quarter of 1998 and were up 5.8% for the first three months of 1999 compared to the first three months of 1998. Average commercial loans, including leasing, increased 15.8% in this year's first quarter compared to the first quarter of 1998 and 17.3% on an annualized basis for the first quarter compared to the fourth quarter of 1998. Average consumer loans, which includes sales finance, revolving credit and direct retail, increased 7.6% in the first quarter of 1999 compared to the same period in 1998, and 7.5% on an annualized basis comparing the first quarter of 1999 and the last three months of 1998. The slower growth in consumer lending has been affected by refinancing of mortgage loans as BB&T's clients, in some cases, pay down credit card and home equity lines with proceeds from mortgage refinancing. The 1999 loan growth rates include the effects of loans that were acquired through purchase accounting transactions. BB&T acquired $1.0 billion in loans during 1998 through the purchases of DCI, Stanley and Maryland Federal. Excluding the impact of these purchase accounting transactions, average "internal" loan growth for the three months ended March 31, 1999, was 6.7% compared to 13 the first quarter of 1998. By category, excluding these purchase accounting transactions, average mortgage loans decreased 7.7% for the quarter, commercial loans grew 11.9%, revolving credit increased 3.6% and direct retail loans were up 3.7% compared to the first quarter of 1998. The average annualized yields on commercial, consumer and mortgage loans for the first quarter of 1999 were 8.64%, 9.88%, and 7.48%, respectively, resulting in an average yield on the total loan portfolio of 8.68%. This reflects a decrease of 49 basis points from the 9.17% earned on total average loans during the first quarter of 1998. Securities Securities available for sale, which totaled $9.8 billion, increased $1.1 billion from December 31, 1998. These securities had net unrealized gains, net of deferred income taxes, of $29.7 million at March 31, 1999, compared to $61.0 million at December 31, 1998. Securities held to maturity totaled $110.3 million, down $64.4 million from year-end 1998. The annualized average yield on the total securities portfolio for the first three months of 1999 was 6.59%, down 24 basis points from the net yield earned in the first three months of 1998. Other Interest-Earnings Assets Federal funds sold and securities purchased under resale agreements or similar arrangements increased $142.4 million during the first three months of 1999, or 137.9%, on an annualized basis, compared to December 31, 1998. The average yield on other interest-earning assets for the first three months of 1999 was 4.68%, down from 5.83% earned during the first three months of 1998. Other Assets BB&T's other noninterest-earning assets, excluding premises and equipment, increased $86.9 million from December 31, 1998, to March 31, 1999. The increase results primarily from higher goodwill, which increased $77.8 million during the three months principally because of the acquisition of Scott & Stringfellow. In addition, capitalized mortgage servicing rights increased $15.5 million over the same time frame. Deposits Total deposits increased $156.0 million from December 31, 1998 to March 31, 1999. Certificates of deposit and other time deposits led the increase by growing $295.1 million, an annualized rate of 10.0%. Money rate savings accounts grew $59.0 million, or 3.4% on an annualized basis. Noninterest- bearing deposits decreased $113.0 million during the first three months, an annualized rate of 13.2%. Savings and interest checking decreased $85.1 million, or 19.3% on an annualized basis. The growth in overall deposits primarily results from purchase accounting transactions and from the ongoing promotion of BB&T's "Investor Deposit Account," which is a money rate savings account that provides greater flexibility than traditional certificate accounts and is more cost effective than certificates of deposit. On average, the first quarter balance of investor deposit accounts totaled $3.1 billion, compared to a first quarter 1998 average of $2.1 billion, which reflects a 50.7% growth rate. BB&T acquired $813.3 million of deposits on September 30, 1998, through the purchase of Maryland Federal. Excluding the impact of this acquisition, BB&T's average quarterly deposits would have been $23.3 billion, 5.4% greater than the average balance for the first quarter of 1998. The annualized average cost for total interest-bearing deposits during the first three months of 1999 was 4.08%, down 34 basis points from the comparable period of 1998. 14 Short-term Borrowed Funds As a result of asset growth rates significantly higher than deposit growth rates in recent years, combined with the availability of cost-effective alternative funding sources, management has increasingly utilized nondeposit funding sources, such as Federal Home Loan Bank ("FHLB") advances, master notes, purchases of Federal funds and sales of securities under repurchase agreements. During the first quarter, end of period short-term borrowed funds increased $961.6 million, or 25.9%, compared to year-end 1998. However, on average, short-term borrowed funds decreased $157.2 million for the three months ended March 31, 1999, compared to the same period in 1998, to a balance of $4.0 billion. The average annualized rate paid on short-term borrowed funds was 4.70% for the first three months of 1999, down from 5.34% for the same period in 1998. Long-term Debt Long-term debt consists primarily of FHLB advances, medium term bank notes and corporate subordinated debt. These borrowings are currently being utilized because they are relatively cost-effective long-term funding sources and provide BB&T with the flexibility to structure funding needs to aid in the management of interest rate risk and liquidity. Long-term debt totaled $5.2 billion at March 31, 1999, an increase of $222.8 million, or 4.5%, from the balance at December 31, 1998. On average, long-term debt increased $1.1 billion for the first three months of 1999 compared to the first three months of 1998. Long-term debt has been utilized for a variety of funding needs, including the repurchase of shares of BB&T's common stock in conjunction with various acquisitions. Asset Quality Nonperforming assets (composed of foreclosed assets, nonaccrual loans and restructured loans) totaled $116.5 million at March 31, 1999, compared to $118.3 million at December 31, 1998. Nonperforming assets, as a percentage of loan-related assets, were .47% at March 31, 1999, compared to .48% at December 31, 1998. Loans 90 days or more past due and still accruing interest totaled $40.9 million compared to a year-end 1998 balance of $54.2 million. Net charge-offs totaled $12.6 million and amounted to .21% of average loans and leases, on an annualized basis, in the first quarter of 1999 compared to $15.8 million, or .29% of average loans and leases, in the corresponding period in 1998. The decrease in net charge-offs as a percentage of average loans and leases results from improved overall asset quality and lower charge-offs at Regional Acceptance Corporation, BB&T's nonstandard automobile finance company. The allowance for loan and lease losses was $338.0 million, or 1.35% of loans and leases, at March 31, 1999, compared to $330.6 million, or 1.34% of loans and leases, at December 31, 1998. The provision for loan and lease losses for the first quarter of 1999 was $20.0 million, compared to $23.4 million in the first quarter of 1998. The lower provision results from lower net charge-offs during 1999 and positive trends in nonaccrual loans and leases and other nonperforming assets. 15 Asset quality statistics relevant to the last five calendar quarters are presented in the accompanying table. ASSET QUALITY ANALYSIS (Dollars in thousands)
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 -------- -------- -------- -------- -------- Allowance For Loan & Lease Losses Beginning balance $330,615 $328,244 $308,968 $301,191 $292,667 Allowance for acquired loans -- -- 15,542 1,269 858 Provision for loan and lease losses 20,000 22,765 21,229 23,038 23,438 Net charge-offs (12,632) (20,394) (17,495) (16,530) (15,772) -------- -------- -------- -------- -------- Ending balance $337,983 $330,615 $328,244 $308,968 $301,191 ======== ======== ======== ======== ======== Risk Assets Nonaccrual loans and leases $ 86,457 $ 88,847 $ 89,067 $ 84,062 $ 97,938 Foreclosed real estate 18,969 17,428 21,778 20,761 17,072 Other foreclosed property 10,539 11,548 11,669 14,189 14,878 Restructured loans 520 522 525 528 -- -------- -------- -------- -------- -------- Total nonperforming assets $116,485 $118,345 $123,039 $119,540 $129,888 ======== ======== ======== ======== ======== Loans 90 days or more past due and still accruing $ 40,948 $ 54,226 $ 51,107 $ 52,881 $ 46,864 ======== ======== ======== ======== ======== Asset Quality Ratios Nonaccrual loans and leases as a percentage of total loans and leases .35% .36% .37% .36% .43% Total nonperforming assets as a percentage of: Total assets .31 .33 .34 .35 .38 Loans and leases plus foreclosed property .47 .48 .51 .51 .57 Net charge-offs as a percentage of average loans and leases .21 .33 .30 .29 .29 Allowance for loan and lease losses as a percentage of loans and leases 1.35 1.34 1.36 1.32 1.32 Ratio of allowance for loan and lease losses to: Net charge-offs 6.60x 4.09x 4.73x 4.66x 4.71x Nonaccrual and restructured loans and leases 3.89 3.70 3.66 3.65 3.08
- - -------- 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 basic market risk exposure is interest rate risk. A primary objective in interest rate risk management is to minimize the effect that changes in interest rates on interest-sensitive assets and interest-sensitive liabilities have on net interest income. Management uses active balance sheet management as an efficient and cost-effective means of controlling interest rate risk. This is accomplished through strategic pricing of asset and liability accounts. The expected result of this process is the development of appropriate maturity and repricing opportunities in those accounts to produce consistent earnings during changing interest rate environments. The Asset / Liability Management Committee ("ALCO") monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. 16 The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. The majority of assets and liabilities of financial institutions are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and the efforts of the Board of Governors of the Federal Reserve System ("FRB") to regulate money and credit conditions have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, BB&T is positioned to respond to changing interest rates and inflationary trends. Management uses Interest Sensitivity Simulation Analysis ("Simulation") to measure the sensitivity of earnings to changes in interest rates. Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T's interest sensitivity by means of a computer model that incorporates current volumes and rates, maturities, repricing opportunities and anticipated growth of asset and liability portfolios. The model calculates an earnings estimate based on current and projected portfolio balances and interest rates. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances will have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better illustration of true earnings potential than other analyses such as static or dynamic gap. The asset/liability management process involves various analyses. Management determines the most likely outlook for the economy and interest rates by analyzing environmental factors including regulatory changes, monetary and fiscal policies and the overall state of the economy. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are all considered, given the current environmental situation. This data is combined with various interest rate scenarios to provide management with information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals. The following table represents the interest sensitivity position of BB&T as of March 31, 1999. This position can be modified by management within a relatively short time period if necessary through the use of various techniques, including securitizing assets, changing funding and investment strategies and utilizing derivative financial instruments. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market conditions, loan and deposit volumes and pricing; customer preferences; and capital plans. This tabular data does not reflect the impact of any changes in the credit quality of BB&T's assets. To attempt to quantify the potential change in net interest income, given a change in interest rates, various interest rate scenarios are applied to projected balances of assets and liabilities incorporating the projected effect of maturities and repricing opportunities. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. 17 Interest Sensitivity Simulation Analysis
Interest Annualized Rate Hypothetical Scenario Percentage -------- Change in Prime Net Interest Linear Rate Income ------ ----- ------------ +3.00% 10.75% -3.70% +1.50 9.25 -2.63 -1.50 6.25 -.07 -3.00 4.75 -.40
Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over three months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. At March 31, 1999, the sensitivity of BB&T's net interest income to changes in interest rates was within management's targets, as indicated in the accompanying table. Derivatives and Off-Balance Sheet Financial Instruments BB&T utilizes a variety of derivative financial instruments to manage various financial risks. These instruments include financial forward and futures contracts, options written and purchased, interest rate caps and floors and interest rate swaps. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose BB&T to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. 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 March 31, 1999, BB&T had outstanding interest rate swaps, caps, floors and collars with notional amounts totaling $3.3 billion. The estimated fair value of open contracts used for risk management purposes reflected net unrealized gains of $26.4 million at March 31, 1999. BB&T uses derivative contracts to hedge specified assets or groups of assets, liabilities or groups of liabilities, forward commitments and anticipated transactions. BB&T's derivatives are primarily used to hedge 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 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. 18 A derivative is a financial instrument that derives its cash flows, and therefore its value, from an underlying instrument, index or reference rate. Credit risk arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with strong credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the interest rate swaps, caps and floors to which BB&T is a party settle monthly, quarterly or semiannually. Accordingly, the amount of off-balance sheet credit exposure to which BB&T is exposed at any time is immaterial. Further, BB&T has netting agreements with the dealers with which it does business. Because of these netting agreements, BB&T had a minimal amount of off-balance sheet credit exposure at March 31, 1999. SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments," requires, among other things, certain quantitative and qualitative disclosures with regard to the amounts, nature and terms of derivative financial instruments. The following tables set forth certain information concerning BB&T's interest rate swaps, caps, floors and collars at March 31, 1999: Interest Rate Swaps, Caps, Floors and Collars March 31, 1999 (Dollars in thousands)
Notional Receive Pay Net Unrealized Type Amount Rate Rate Gains (Losses) - - ---- ----------- ---------- ------------------ -------------- Receive fixed swaps $ 770,000 6.35% 4.99% $ 27,270 Pay fixed swaps 1,197,893 5.00 5.67 (1,168) Basis swaps 50,000 4.95 4.97 (3) Caps, floors & collars 1,247,250 -- -- 349 ---------- ---------- ---------- ---------- Total $3,265,143 5.51% 5.39% $ 26,448 ========== ========== ========== ========== Receive Pay Fixed Basis Swaps, Caps, Year-to-date Activity Fixed Swaps Swaps Floors & Collars Total - - --------------------- ----------- ---------- ------------------ -------------- Balance, December 31, 1998 $1,266,200 $1,180,146 $1,297,250 $3,743,596 Additions 15,000 29,904 -- 44,904 Maturities/amortizations (511,200) (12,157) -- (523,357) Terminations -- -- -- -- ---------- ---------- ---------- ---------- Balance, March 31, 1999 $ 770,000 $1,197,893 $1,297,250 $3,265,143 ========== ========== ========== ========== One Year One to After Five Maturity Schedule* or Less Five Years Years Total - - ------------------ ----------- ---------- ------------------ -------------- Receive fixed swaps $ 200,000 $ 295,000 $ 275,000 $ 770,000 Pay fixed swaps 1,001,646 108,954 87,293 1,197,893 Basis swaps 50,000 -- -- 50,000 Caps, floors & collars 500,000 747,250 -- 1,247,250 ---------- ---------- ---------- ---------- Total $1,751,646 $1,151,204 $ 362,293 $3,265,143 ========== ========== ========== ==========
- - -------- * Maturities are based on full contract extensions. 19 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 $2.9 billion at both March 31, 1999 and December 31, 1998. BB&T's book value per common share at March 31, 1999, was $9.59 compared to $9.53 at December 31, 1998. The ratios of Tier 1 capital (total shareholders' equity excluding unrealized gains or losses on securities available for sale, net of taxes, and nonqualifying intangible assets) and total capital (Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) to risk-weighted assets are defined by Federal Bank Regulatory guidelines. An 8.00% minimum of total capital to risk-weighted assets is required. One-half of the 8.00% minimum must consist of Tier 1 capital under regulatory guidelines. The Tier 1 leverage ratio, established by Federal Bank Regulatory guidelines, measures Tier 1 capital to average total assets less nonqualifying intangibles. The regulatory minimum for the leverage ratio is 3.00% to 5.00% depending upon Federal bank regulatory agency evaluation of an organization's overall safety and soundness. These capital ratios relative to the last five quarters are presented in the accompanying table: CAPITAL ADEQUACY RATIOS
1999 1998 ------- ------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- Risk-based capital ratios: Tier 1 capital 9.7% 10.3% 10.5% 10.5% 10.8% Total capital 14.2 15.0 15.3 15.6 14.3 Tier 1 leverage ratio 6.9 7.0 7.3 7.0 7.3
ANALYSIS OF RESULTS OF OPERATIONS Net income for the first quarter of 1999 totaled $138.4 million, an increase of 14.9% over the $120.4 million earned during the first quarter of 1998. On a diluted per share basis, earnings for the three months ended March 31, 1999 were $.44, compared to $.39 for the same period in 1998, an increase of 12.8%. BB&T's operating results for the first quarter of 1999 produced an annualized return on average assets of 1.53% and an annualized return on average shareholders' equity of 19.11% compared to prior year ratios of 1.47% and 18.43%, respectively. BB&T's earnings for the first quarters of 1999 and 1998 were adversely affected by costs of a nonrecurring nature principally associated with consummating mergers and acquisitions. During the first quarter of 1998, BB&T recorded $6.0 million in after-tax expenses primarily associated with the Life merger. These charges included professional fees, as well as costs in connection with the reduction of staffing levels, early retirement packages and other personnel-related expenses. During the first quarter of 1999, $10.4 million in after-tax charges were recorded in conjunction with completing the MainStreet merger. These costs included professional fees, personnel-related expenses and occupancy and equipment costs. Excluding the impact of these merger-related charges on operating results, BB&T would have had first quarter 1999 net income of $148.8 million, an increase of 17.7%, compared to the $126.5 million earned in the first quarter of 1998. On a diluted per share basis, first quarter earnings excluding these changes were $.48, compared to $.41 earned in the first quarter last year, an increase 20 of 17.1%. Earnings before nonrecurring expenses for the first three months of 1999 produced an annualized return on average assets of 1.65% and a return on average equity of 20.54%, compared to prior year ratios of 1.54% and 19.35%, respectively. BB&T's growth in recurring earnings resulted from three principal factors. First, BB&T's noninterest income continues to grow at a very strong pace, increasing 28.5% for the three months ended March 31, 1999, compared to the same period in 1998. Second, as discussed above, BB&T has experienced positive growth in loans and securities during the first quarter, which resulted in an 8.3% increase in net interest income on a fully taxable equivalent ("FTE") basis in the first quarter of 1999, compared to the first quarter of 1998. Third, BB&T has continued to effectively manage the growth of noninterest expenses. Excluding the effect of acquisitions accounted for by the purchase method of accounting, recurring noninterest expense increased 6.9% in the first quarter of 1999 compared to the same period in 1998. Net Interest Income and Net Interest Margin Net interest income on an FTE basis was $362.6 million for the first quarter of 1999 compared to $334.9 million for the same period in 1998, a 8.3% increase. For the three months ended March 31, 1999, average interest-earning assets increased $3.0 billion, or 9.6%, to $34.1 billion over the first quarter of 1998, while average interest-bearing liabilities increased by $2.6 billion. During the same time period, the net interest margin decreased from a first quarter 1998 rate of 4.33% to a rate of 4.28% in the current quarter. The 5 basis point decline in margin was primarily the result of increased funding costs associated with BB&T's share repurchase program, which resulted in a reduction in margin of 7 basis points during the quarter, and the acquisition of Maryland Federal, which resulted in a 5 basis point decline in the net interest margin. The following table sets forth the major components of net interest income and the related yields for the first quarter of 1999 compared to the first quarter of 1998, and the variances between the periods caused by changes in interest rates versus changes in volumes. 21 Net Interest Income and Rate / Volume Analysis For the Three Months Ended March 31, 1999 and 1998
Average Balances Yield / Rate Income / Expense Change due to ----------------------- -------------- ----------------- Increase ---------------- Fully Taxable Equivalent - - - (Dollars in thousands) 1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume - - ------------------------ ----------- ----------- ------ ------ -------- -------- ---------- ------- ------- Assets Securities(1): U.S. Treasury, government and other (5) $ 8,780,620 $ 8,272,961 6.53% 6.76% $143,349 $139,842 $ 3,507 $(4,819) $ 8,326 States and political subdivisions 365,515 238,528 7.72 8.44 7,051 5,033 2,018 (457) 2,475 ----------- ----------- ------ ------ -------- -------- ------- ------- ------- Total securities (5) 9,146,135 8,511,489 6.59 6.83 150,400 144,875 5,525 (5,276) 10,801 Other earning assets (2) 126,241 236,579 4.68 5.83 1,457 3,403 (1,946) (579) (1,367) Loans and leases, net of unearned income (1)(3)(4)(5) 24,838,412 22,382,333 8.68 9.17 533,480 507,411 26,069 (27,631) 53,700 ----------- ----------- ------ ------ -------- -------- ------- ------- ------- Total earning assets 34,110,788 31,130,401 8.11 8.50 685,337 655,689 29,648 (33,486) 63,134 ----------- ----------- ------ ------ -------- -------- ------- ------- ------- Non-earning assets 2,499,747 2,162,144 ----------- ----------- Total assets $36,610,535 $33,292,545 =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking $ 1,784,789 $ 2,052,704 1.64 1.96 7,228 9,912 (2,684) (1,484) (1,200) Money rate savings 6,848,137 5,443,807 2.82 3.03 47,640 40,728 6,912 (3,015) 9,927 Other time deposits 12,203,097 11,705,378 5.15 5.50 154,891 158,652 (3,761) (10,335) 6,574 ----------- ----------- ------ ------ -------- -------- ------- ------- ------- Total interest-bearing deposits 20,836,023 19,201,889 4.08 4.42 209,759 209,292 467 (14,834) 15,301 Short-term borrowed funds 3,988,764 4,145,971 4.70 5.34 46,262 54,594 (8,332) (6,321) (2,011) Long-term debt 4,973,629 3,890,169 5.41 5.89 66,758 56,898 9,860 (4,980) 14,840 ----------- ----------- ------ ------ -------- -------- ------- ------- ------- Total interest-bearing liabilities 29,798,416 27,238,029 4.39 4.77 322,779 320,784 1,995 (26,135) 28,130 ----------- ----------- ------ ------ -------- -------- ------- ------- ------- Noninterest-bearing deposits 3,283,300 2,904,866 Other liabilities 590,981 499,206 Shareholders' equity 2,937,838 2,650,444 ----------- ----------- Total liabilities and shareholders' equity $36,610,535 $33,292,545 =========== =========== Average interest rate spread 3.72 3.73 Net yield on earning assets 4.28% 4.33% $362,558 $334,905 $27,653 $(7,351) $35,004 ====== ====== ======== ======== ======= ======= ======= Taxable equivalent adjustment $ 18,181 $ 15,565 ======== ========
(1) Yields related to securities, loans and leases wholly or partially exempt from income taxes are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. 22 Noninterest Income Noninterest income for the three months ended March 31, 1999, was $161.2 million compared to $125.4 million for the same period in 1998, an increase of 28.5%. Excluding the impact of purchase accounting acquisitions, BB&T's noninterest income would have increased 25.8% in the first quarter of 1999 compared to 1998. BB&T experienced growth in all significant areas of noninterest income. Service charges on deposits, mortgage banking revenues, agency insurance commissions and other fees and commissions all showed strong gains during the period. The percentage of total revenues (tax-equivalent net interest income plus noninterest income excluding securities gains or losses) derived from noninterest income, was 30.8% for the three months ended March 31, 1999, up from 26.8% for the first quarter of 1998. Service charges on deposits increased $5.2 million, or 12.2%, for the first quarter of 1999, compared to the first quarter of 1998. The primary factor contributing to this growth was an increase in the number of accounts subject to service charges. The largest components of the growth within service charges on deposits included account analysis fees on commercial transaction accounts, service charges on commercial and personal accounts and overdraft charges. Trust income increased $4.0 million, or 45.6%, for the three months ended March 31, 1999, from the same period a year ago. Approximately 15% of the increase resulted from the acquisition of W.E. Stanley at the end of the second quarter of 1998. Also, assets under management have increased to $9.5 billion, an increase of approximately 6% from the first quarter of 1998. The remaining increase reflects internal growth, driven principally by increased estate fees and higher fees from the administration of the North Carolina State 401-k plan, which is the nation's largest state-sponsored 401-k retirement plan. Agency insurance commissions increased $2.8 million, or 20.1%, in the first quarter of 1999 compared to the same three-month period of 1998. This resulted from growth in property and casualty insurance commissions, contingent insurance commissions and the purchase of additional agencies. BB&T has the largest independent insurance agency system in the Carolinas, and one of the largest bank-owned agency systems in the country. Over the past several quarters, the network has expanded the types of products offered to include group health, surety bonds, title insurance and life insurance. Income from mortgage banking activities increased $17.4 million, or 113.0%, for the three months ended March 31, 1999, compared to the same period in 1998. The dramatic increase resulted from significantly higher volumes of mortgage loans originated in 1998 and sold during the first quarter of 1999. Mortgage banking operations also benefited from higher mortgage loan servicing fee income and underwriting fee income, as well as a significant increase in gains on mortgage loans sold. Other nondeposit fees and commissions increased by $4.6 million, or 17.9%, to a level of $30.1 million for the three months ended March 31, 1999, compared with $25.5 million for the first quarter of 1998. The components generating the increase in nondeposit fees and commissions were revenues from investment services, up $1.3 million, bankcard-related fees, up $1.4 million and growth in fee income of $1.2 million at Craigie, Inc., BB&T's investment banking and brokerage subsidiary. Other income increased $4.4 million, or 32.2%, in the first quarter of 1999 compared to 1998 primarily as a result of growth in income from Craigie, which was up $2.5 million compared to the first quarter of 1998. BB&T also experienced increases in income from corporate owned life insurance policies and revenues from check sales. 23 Noninterest Expense Noninterest expenses totaled $281.8 million for the first quarter of 1999 compared to $245.0 million for the same period a year ago, an increase of 15.0%. Noninterest expense for 1999 includes $15.8 million of nonrecurring expenses associated with the acquisition of MainStreet, while the first three months of 1998 include $7.8 million of costs resulting from the merger with Life Bancorp. Excluding these merger costs from both years, noninterest expenses increased $28.8 million, or 12.1%. Excluding the effects of business combinations accounted for as purchases that have been completed since March 31, 1999, noninterest expense for the first quarter of 1999 would have increased 6.9% from the first quarter of 1998. BB&T's efficiency ratio, which measures the percentage of recurring expenses to total revenues on an FTE basis, was 50.7% for the first quarter of 1999, improved from the 51.6% in the first three months of 1998. Personnel expense, the largest component of noninterest expense, was $141.2 million for the first quarter of 1999 compared to $123.7 million for the same period in 1998, an increase of $17.5 million, or 14.2%. Personnel expense for 1999 includes $5.5 million of the costs related to the acquisition of MainStreet, while the prior year expense includes $2.4 million of expenses associated with the Life merger. Excluding these costs, personnel expense would have totaled $135.7 million for the first quarter of 1999 and $121.2 million for the first quarter last year, an increase of $14.5 million. This growth results from annual salary adjustments, which typically begin in April, higher incentive compensation costs and the effect of acquisitions accounted for as purchases completed since March 31, 1998. Occupancy and equipment expense for the three months ended March 31, 1999, totaled $48.1 million, an increase of $9.2 million, or 23.6%, compared to 1998. Excluding the nonrecurring charges discussed above from 1999 and 1998, occupancy and equipment expense would have totaled $44.2 million, up $5.4 million, or 14.0%, compared to the first quarter of 1998. This increase was principally due to acquisitions accounted for as purchases, costs associated with the maintenance of computer equipment and other furniture and equipment costs. The amortization of intangible assets and mortgage servicing rights totaled $15.8 million for the three months ended March 31, 1999, a $5.6 million, or 54.3%, increase from the amount incurred in the first quarter of 1998. This increase was the result of a $1.9 million increase in amortization of mortgage loan servicing rights and increased amortization of goodwill due to acquisitions consummated using purchase accounting. Total goodwill and other intangibles have increased from $231.8 million at March 31, 1998 to $477.6 million at March 31, 1999. Other noninterest expenses for the first quarter of 1999 totaled $76.6 million, an increase of $4.5 million, or 6.2%, compared to 1998. Excluding the impact of the nonrecurring charges discussed above from both 1999 and 1998, other noninterest expense would have totaled $70.3 million for the first quarter, up $3.3 million, or 5.0%. This increase was primarily due to purchase accounting acquisitions and higher expenses at Craigie and Regional Acceptance. Provision for Income Taxes The provision for income taxes totaled $65.3 million for the first quarter of 1999, an increase of $9.5 million, or 16.9%, compared to the first three months of 1998. Excluding the tax benefits associated with the nonrecurring charges detailed above, the provision for income taxes for the first quarter would have been $70.8 million, an increase of $13.1 million, or 22.8%. The effective tax rates on recurring pretax income were 32.2% and 31.3% for the three months ended March 31, 1999 and 1998, respectively. 24 PROFITABILITY MEASURES
1999 1998 ------- ------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- Return on average assets 1.53% 1.45% 1.54% 1.50% 1.47% Return on average common equity 19.11 17.90 19.96 19.52 18.43 Net interest margin 4.28 4.28 4.36 4.25 4.33 Efficiency ratio (taxable equivalent)* 50.7 52.5 51.6 52.3 51.6
- - -------- * Excludes securities gains (losses), foreclosed property expense and nonrecurring items. First Quarter 1999 Year 2000 Readiness Disclosure The Year 2000 issue is pervasive and presents both technical and business risks affecting most, if not all, of BB&T's business activities. The "Year 2000 Issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and equipment with embedded microchips as the Year 2000 approaches. These problems generally arise because most of the world's computer hardware and software has historically used only two digits to identify the applicable year. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. If not corrected, this could result in system errors or failures causing disruptions of normal business operations. BB&T began planning its Year 2000 strategy in 1996. Management determined that it would be required to modify or replace significant portions of BB&T's information technology platform and other systems in order for them to be Year 2000 ready. Computer systems that have the ability to process dates before, during and after January 1, 2000, without malfunction are considered to be "Year 2000 Ready." In early 1997, BB&T formed a Year 2000 Program Office, which operates as a joint effort between BB&T and outside service providers. The mission of the Program Office is to address Year 2000 issues affecting BB&T's various systems. The program office management committee meets regularly to review and document the progress of the Year 2000 project. Year 2000 Project BB&T's Year 2000 strategy is divided into five major phases: inventory, assessment, remediation, testing and change / clean management ("Year 2000 Project"). During the inventory and assessment phases, BB&T identified all specific systems that required modification or replacement and assessed the steps necessary to remediate the Year 2000 Issue. In the remediation phase, the systems requiring remediation were replaced, modified or retired, as appropriate. The testing phase includes internal and external testing with third parties to ensure that the remediated systems will accurately process dates and date data before, on and after January 1, 2000. Finally, the change / clean management phase includes placing the remediated systems back into production, and the implementation of processes and procedures to monitor and to protect remediated systems from alterations that might affect Year 2000 readiness. In order to carry out the Year 2000 project, BB&T divided its internal and external systems into three major categories: core business systems, distributed business systems and non-information technology systems. The core business systems are those systems that run on BB&T's mainframe. The distributed systems are those systems that do not run on the mainframe. The non-information technology systems are those systems that have embedded microchips or microprocessors controlling the function of equipment; such as elevators, fire and security systems, etc. These three categories 25 are further broken down into mission-critical and non-mission-critical systems. BB&T prioritized its systems for remediation based on their overall importance to the operations of BB&T. Mission-critical systems are those systems that are critical to the operations of BB&T and / or vital to the business continuity of BB&T. While the Year 2000 Project will address all internal and external systems used by BB&T to conduct its business, the highest priority was given to mission-critical systems. State of Readiness BB&T's current state of readiness as of May 14, 1999, is as follows: Core business systems mission-critical and non-mission critical: The inventory, assessment and remediation phases have been completed and the testing phase is substantially complete. BB&T has placed 100% of remediated core business systems back into production. Distributed business systems mission-critical: The inventory, assessment and remediation phases have been completed and the testing phase is substantially complete. BB&T has placed 96% of remediated mission-critical distributed business systems back into production. Distributed business systems non-mission-critical: The inventory and assessment phases are complete and the majority of the remediation phase is complete. Management anticipates that remediation and testing for these systems will be completed by June 30, 1999. Non-information technology systems mission-critical: Embedded technology controls certain building security and operations, such as power management, elevators and security systems. All facilities, including buildings, equipment and other infrastructure using embedded technology are being evaluated. We expect that those facilities in which critical processes are performed will be confirmed as Year 2000 ready by June 30, 1999. As BB&T has completed testing for each of the above systems, the change / clean management phase has been implemented. Change / clean management will be an ongoing process that will continue into the Year 2000. Management anticipates that BB&T will be substantially complete with all phases of the Year 2000 project by June 30, 1999, in accordance with Federal guidelines. BB&T's Year 2000 readiness plans and status have been reviewed during compliance audits by various state and Federal regulators. These reviews have not resulted in any significant findings of deficiency by regulators and BB&T has not failed to meet any important deadlines during the Year 2000 project. Risks The failure to correct a mission-critical Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities and operations. Such failures could materially and adversely affect BB&T's financial condition or results of operations. Management presently believes that with modifications to existing systems and, in certain circumstances, conversions to new systems, the effects of the Year 2000 issue on BB&T will be minimized. Third Party Assessments BB&T relies on numerous third parties and conducts formal communications on an ongoing basis with these third parties to determine the extent to which BB&T may be vulnerable to their failure to remediate their own Year 2000 issues. These third parties include providers of core and distributed systems-related products and services; external agents, which include government agencies and 26 other agents requiring systems interfaces; infrastructure-related third parties, including utilities and telecommunications providers, landlords and miscellaneous suppliers; and capital markets partners, which includes any third parties requiring financial settlement. During the fourth quarter of 1998 and early in 1999, BB&T mailed in excess of 2,500 surveys to these third parties in order to assess the status of their Year 2000 readiness. These surveys included more than 200 third parties considered mission-critical to BB&T's operations. Information has been obtained from 92% of these mission-critical third parties. Risk assessments have been completed on the mission-critical third parties, and appropriate measures to minimize risk to the extent possible are being undertaken with those vendors that have been determined to represent high levels of risk to BB&T. Among those that have responded, management has determined that approximately 5% represent a high risk to BB&T. For these third parties, appropriate contingency plans have been developed and are constantly being monitored and revised accordingly. However, BB&T has no viable alternative for certain suppliers, such as utilities and telecommunications providers. Also, as with all financial institutions, BB&T places a high degree of reliance on the systems of other institutions, including governmental agencies, to settle transactions. BB&T also relies on clients to make preparations for the Year 2000 to protect their business operations from interruptions that could threaten their ability to honor their financial commitments. During 1998, BB&T developed and implemented revised underwriting policies to address Year 2000 issues for our large commercial clients and new commercial clients. Adherence to these policies is required for credits in excess of $1 million and encouraged for other significant clients. BB&T distributed in excess of 3,000 questionnaires to clients in order to assess the state of their Year 2000 readiness. Lenders were required to follow up with their clients to ensure the accuracy of the responses to the questionnaires. Based on the results of these questionnaires, clients were assigned a Year 2000 "risk grade", which is considered in the calculation of the allowance for loan and lease losses. Among these lending relationships, BB&T rated approximately 3.4% of the commercial loan portfolio as representing a high risk to BB&T, and the remaining clients were determined to represent low risk to BB&T. For clients that were judged to represent significant risks to BB&T, the allowance for loan and lease losses has been evaluated for adequacy. These risk assessments are updated quarterly for larger clients and potential new clients. BB&T is also assessing potential Year 2000 risks associated with its fiduciary activities. When making investment decisions or recommendations, BB&T considers Year 2000 issues in our analyses, and may take certain steps to investigate Year 2000 readiness in assessing assets held in trust. Despite these efforts, because of the general uncertainty inherent in the Year 2000 issue, there can be no assurance that the systems of other organizations upon which BB&T's operations rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with BB&T's systems, would not have a materially adverse effect on BB&T. In view of the uncertainties surrounding the impact of the Year 2000 issue, management considers BB&T's most reasonably likely worst case scenario to be the loss of basic infrastructure services, such as utilities and telecommunications. Contingency Business and Event Planning Management is enhancing BB&T's existing business resumption plans to address various Year 2000 scenarios in the event that efforts to remediate BB&T's systems are not fully successful or are not completed in accordance with current expectations. Each line of business has significant involvement in the preparation of Year 2000 contingency plans designed to address specific business functions. The contingency plans include the use of third party service providers, alternative commercial vendors, alternative data security, redundant facilities and other contingency service suppliers. For mission-critical systems, these contingency plans have been completed. BB&T expects 27 to complete its contingency planning for non-mission-critical systems by June 30, 1999. These plans will be amended as BB&T continues to obtain information relating to its own systems and the systems of its significant suppliers and large clients. BB&T will continually test and revise the contingency plans as the Year 2000 approaches. Costs The projected total incremental cost of the Year 2000 project is currently estimated at approximately $30 million and is being funded through operating cash flows. As of March 31, 1999, a cumulative total of approximately $22.7 million had been spent on the assessment of and efforts in connection with the Year 2000 project, of which $3.7 million represented internal personnel and other costs. Information about BB&T's Year 2000 Project, other than historical information, should be considered forward looking in nature and subject to various risks, uncertainties and assumptions. The costs of the project and the date on which BB&T plans to complete Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the inability to control third party vendor and customer modification plans, the ability of BB&T to implement suitable contingency plans, Congressional legislation, regulatory action and similar uncertainties. 28 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 6. Exhibits and Reports on Form 8-K (a) Exhibit 11--"Computation of Earnings Per Share" is included herein as Note E. Exhibit 27--"Financial Data Schedule" is included in the electronically-filed document as required. (b) Current Reports on Form 8-K On January 14, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report the results of operations for the fourth quarter and twelve months of 1998. On January 27, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that BB&T had entered into a definitive agreement to acquire First Citizens Corporation of Newnan, Georgia. On January 27, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that the Board of Directors had authorized the repurchase of up to 1.6 million shares of BB&T common stock in connection with the acquisition of MainStreet. On January 28, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that BB&T had entered into a definitive agreement to acquire Mason-Dixon Bancshares of Westminster, Maryland. On February 25, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that BB&T had entered into a definitive agreement to acquire Matewan BancShares of Williamson, West Virginia. On April 9, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to announce that BB&T and Matewan had agreed to extend the due diligence period associated with their proposed merger through April 28, 1999. On April 12, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report the results of operations for the first quarter of 1999. On April 28, 1999, BB&T filed an amendment to the Form 8-K, originally filed February 25, 1999, to disclose renegotiated terms of the proposed acquisition of Matewan by BB&T. On April 28, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that the Board of Directors had authorized the repurchase of up to 10 million shares of BB&T common stock in connection with specific business combinations to be accounted for as purchases. On April 28, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to report that BB&T had entered into a definitive agreement to acquire First Liberty Financial Corp. of Macon, Georgia. On April 30, 1999, BB&T filed a Current Report on Form 8-K under Item 5 to restate BB&T's Annual Report on Form 10-K for the accounts of MainStreet, which was acquired on March 5, 1999, and accounted for as a pooling of interests. 29 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 863,829 7,014 245,591 114,376 9,793,227 110,320 113,077 24,976,079 337,983 37,791,490 24,414,135 4,668,966 572,393 5,187,639 0 0 1,536,487 1,411,870 37,791,490 526,972 138,727 1,457 667,156 209,759 322,779 344,377 20,000 61 281,808 203,753 138,423 0 0 138,423 0.45 0.44 4.28 86,457 40,948 520 0 330,615 18,259 5,627 337,983 337,983 0 107,352
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