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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 2000
Commission File Number: 1-10853
BB&T CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of principal executive offices) (Zip Code)
(336) 733-2000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $5 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by references in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 2001, was approximately $14.8 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 2001, was
409,584,752. No shares of preferred stock were outstanding at January 31, 2001.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 24, 2001, are incorporated by reference in
Part III of this report.
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The Exhibit Index begins on page 107.
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CROSS REFERENCE INDEX
Page
------
PART I Item 1 Description of Business........................................ 5
Item 2 Properties..................................................... 18, 72
Item 3 Legal Proceedings.............................................. 87
Item 4 Submission of Matters to a Vote of Shareholders
None
PART II Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters............................................ 49
Item 6 Selected Financial Data........................................ 52
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 41, 94
Item 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 2000 and 1999...... 55
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2000...................... 56
Consolidated Statements of Changes in Shareholders' Equity for
each of the years in the three-year period ended December 31,
2000........................................................... 57
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 2000.................. 58
Notes to Consolidated Financial Statements..................... 59
Report of Independent Public Accountants....................... 54
Quarterly Financial Summary for 2000 and 1999.................. 51
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III Item 10 Directors and Executive Officers of the Registrant............. *, 19
Item 11 Executive Compensation......................................... *
Security Ownership of Certain Beneficial Owners and
Item 12 Management..................................................... *
2
Page
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Item 13 Certain Relationships and Related Transactions......... *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
(2) Financial Statement Schedules normally required on Form
10-K are omitted since they are not applicable, except
as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission
and are available upon written request.
(b) Current Reports on Form 8-K filed during the fourth
quarter of 2000
Type Date Filed Reporting Purpose
---- ---------- -----------------
Item 5. October 12, 2000 To report the financial results for BB&T
Corporation ("BB&T") for the third quarter
of 2000.
Item 5. October 26, 2000 To report that BB&T's board of directors
had authorized a program to repurchase up
to 20 million shares of BB&T common stock
to be reissued in purchase accounting
transactions.
Item 5. October 27, 2000 To restate BB&T's Annual Report on Form 10-
K for December 31, 1999 for the accounts of
One Valley Bancorp, Inc., Hardwick Holding
Company and First Banking Company of
Southeast Georgia.
Item 5. October 30, 2000 To issue supplemental financial
information, restated to include the
accounts of One Valley Bancorp, Inc.,
Hardwick Holding Company and First Banking
Company of Southeast Georgia.
Item 5. December 5, 2000 To report plans to acquire Century South
Banks, Inc., of Alpharetta, Georgia.
(c) Exhibits -- See Item 14(a)(3)
(d) Financial Statement Schedules -- See Item 14(a)(2)
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* The information required by Item 10 is incorporated herein by reference to
the information that appears under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by reference to
the information that appears under the headings "Compensation of Executive
Officers", "Retirement Plans" and "Compensation Committee Report on
Executive Compensation" in the Registrant's Proxy Statement for the 2001
Annual Meeting of Shareholders.
3
The information required by Item 12 is incorporated herein by reference to
the information that appears under the headings "Security Ownership" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders.
The information required by Item 13 is incorporated herein by reference to
the information that appears under the headings "Compensation Committee
Interlocks and Insider Participation" and "Transactions with Executive
Officers and Directors" in the Registrant's Proxy Statement for the 2001
Annual Meeting of Shareholders.
4
DESCRIPTION OF BUSINESS
General
BB&T Corporation ("BB&T" or "the Corporation") is a financial holding company
headquartered in Winston-Salem, North Carolina. BB&T conducts its business
operations through its subsidiaries primarily in North Carolina, South
Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky and
the metropolitan Washington, D.C. area.
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) competitors may
have greater financial resources and develop products that enable such
competitors to compete more successfully than BB&T; and (9) adverse changes may
occur in the securities markets.
Significant Subsidiaries
At December 31, 2000, the principal assets of BB&T included all of the
outstanding shares of common stock of:
. Branch Banking and Trust Company, Winston-Salem, North Carolina;
. Branch Banking and Trust Company of South Carolina, Greenville, South
Carolina;
. Branch Banking and Trust Company of Virginia, Richmond, Virginia;
. Hardwick Bank and Trust Company, Dalton, Georgia;
. First National Bank of Northwest Georgia, Calhoun, Georgia;
. First Bulloch Bank & Trust Company, Statesboro, Georgia;
. First National Bank of Effingham, Springfield, Georgia;
. Metter Banking Company, Metter, Georgia;
. Wayne National Bank, Jesup, Georgia;
. BankFirst, Knoxville, Tennessee;
. First National Bank and Trust Company of Athens, Athens, Tennessee;
. Regional Acceptance Corporation, Greenville, North Carolina;
. Scott & Stringfellow, Inc., Richmond, Virginia;
. Edgar M. Norris & Co., Inc., Greenville, South Carolina;
. Sheffield Financial Corporation, Clemmons, North Carolina; and
. BB&T Factors Corporation, High Point, North Carolina.
5
Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was
chartered in 1872 and is the oldest bank headquartered in North Carolina. At
December 31, 2000, BB&T-NC operated 335 banking offices in North Carolina, 53
in Maryland, six in Washington, D.C., 102 in Georgia, 85 in West Virginia, 32
in Tennessee, and ten banking offices in Kentucky. At December 31, 2000, BB&T-
NC held the largest share of deposits, excluding home office deposits, in North
Carolina, and the largest share of deposits in West Virginia. BB&T-NC's
principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North
Carolina, which specializes in lease financing to commercial businesses; BB&T
Investment Services, Inc., located in Charlotte, North Carolina, which offers
nondeposit investment alternatives, including fixed-rate and variable-rate
annuities, mutual funds and discount brokerage services; BB&T Insurance
Services, Inc., headquartered in Raleigh, North Carolina, which is the 11th
largest independent insurance agency network in the country; and W.E. Stanley,
Inc., an actuarial and employee benefits consulting firm headquartered in
Greensboro, North Carolina.
BB&T-NC has a number of additional subsidiaries including but not limited to
the following: Prime Rate Premium Finance Corporation, Inc. ("Prime Rate"),
located in Florence, South Carolina, which provides insurance premium financing
primarily to clients in BB&T's principal market area; and Laureate Capital
Corp. ("Laureate"), located in Charlotte, North Carolina. Laureate principally
specializes in arranging financing of commercial and multi-family real estate.
Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 90
banking offices at December 31, 2000. BB&T-SC is the third largest bank in
South Carolina in terms of deposit market share.
Branch Banking and Trust Company of Virginia ("BB&T-VA") operated 141 banking
offices in Virginia at December 31, 2000. BB&T-VA is the sixth largest bank in
Virginia in terms of deposit market share.
Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow") is an
investment banking and full-service brokerage firm headquartered in Richmond,
Virginia. On November 15, 2000, BB&T consummated the acquisition of Edgar M.
Norris & Co., a full-service brokerage firm based in Greenville, South
Carolina. Edgar M. Norris will be merged into Scott & Stringfellow in 2001.
Scott & Stringfellow and Edgar M. Norris together operated 23 full-service
brokerage offices in Virginia, one in West Virginia, eleven in North Carolina,
seven in South Carolina, one in Maryland, and one in Tennessee at December 31,
2000. Scott & Stringfellow specializes in the origination, trading and
distribution of fixed-income securities and equity products in both the public
and private capital markets. Scott & Stringfellow also has a public finance
department that provides investment banking, financial advisory and debt
underwriting services to a variety of regional tax-exempt issuers.
The primary services offered by BB&T's subsidiaries include:
. small business lending
. commercial middle market lending
. retail lending
. home equity lending
. sales finance
. mortgage lending
. leasing
. asset management
. trust services
6
. agency insurance
. treasury services
. investment and mutual fund sales
. capital markets
. factoring
. asset-based lending
. international banking services
. cash management
. electronic payment services
. credit and debit card services
7
The following table discloses selected financial information related to
BB&T's significant banking subsidiaries. Additionally, please see Note S. in
the "Notes to Consolidated Financial Statements" for further discussion
relating to BB&T's reportable business segments.
Table 1
Selected Financial Data of Significant Banking Subsidiaries
As of / For the Year Ended December 31, 2000
BB&T-NC BB&T-SC BB&T-VA
----------- ---------- ----------
(Dollars in thousands)
Total assets $46,991,799 $5,249,100 $6,254,434
Securities 12,557,947 389,331 564,472
Loans and leases, net of unearned income* 30,452,881 4,008,789 4,028,827
Deposits 28,540,937 3,952,819 4,877,131
Shareholder's equity 3,690,959 378,740 595,603
Net interest income 1,421,898 230,877 235,543
Provision for loan and lease losses 79,612 12,554 12,529
Noninterest income 633,992 55,306 23,704
Noninterest expense 1,323,816 125,123 178,203
Net income 458,903 95,175 42,122
As of / For the Year Ended December 31, 1999
BB&T-NC BB&T-SC BB&T-VA
----------- ---------- ----------
Total assets $41,060,416 $4,842,462 $6,550,666
Securities 10,196,460 477,705 1,681,540
Loans and leases, net of unearned income* 26,852,336 3,698,046 4,265,276
Deposits 25,765,790 3,686,484 4,563,833
Shareholder's equity 3,053,222 364,060 617,758
Net interest income 1,349,554 216,781 237,715
Provision for loan and lease losses 75,796 15,491 7,376
Noninterest income 700,251 68,473 59,324
Noninterest expense 1,228,596 126,689 180,430
Net income 519,577 91,059 68,756
As of / For the Year Ended December 31, 1998
BB&T-NC BB&T-SC BB&T-VA
----------- ---------- ----------
Total assets $36,404,453 $4,641,393 $6,669,554
Securities 9,067,377 783,727 1,607,902
Loans and leases, net of unearned income* 24,143,314 3,266,871 4,159,735
Deposits 25,131,437 3,702,383 4,636,337
Shareholder's equity 2,932,664 429,572 765,964
Net interest income 1,255,010 201,132 236,198
Provision for loan and lease losses 66,652 13,455 13,915
Noninterest income 570,295 71,945 59,549
Noninterest expense 1,059,878 119,224 176,466
Net income 489,572 89,653 66,155
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* Includes loans held for sale.
8
Merger Strategy
BB&T's profitability and market share have been enhanced through both
internal growth and acquisitions in recent years. BB&T's acquisition strategy
is focused on three primary objectives:
. to pursue in-market acquisitions of high-quality banks and thrifts with
assets in the $250 million to $10 billion range,
. to acquire companies in niche markets that provide products or services
that can be offered through the existing distribution system to BB&T's
current customer base, and
. to consider strategic acquisitions in new markets that are economically
feasible and provide positive long-term benefits.
BB&T has consummated the acquisitions of 48 community banks and thrifts, 47
insurance agencies and 14 nonbank financial services providers over the last
ten years. BB&T expects to continue to take advantage of the consolidation of
the financial services industry and expand and enhance its franchise through
mergers and acquisitions. The consideration paid for these acquisitions may be
in the form of cash, debt or BB&T stock. The amount of consideration paid to
complete these transactions may be in excess of the book value of the
underlying net assets acquired, which could have a dilutive effect on BB&T's
earnings per share or book value. In addition, acquisitions sometimes result in
significant front-end charges against earnings. However, cost savings,
especially incident to in-market acquisitions, are also anticipated.
Competition
The financial services industry is highly competitive and dramatic change
continues to occur. BB&T's subsidiaries compete actively with national and
state banks, savings and loan associations, securities dealers, mortgage
bankers, finance companies and insurance companies. Competition for financial
products and services continues to grow as clients select from a variety of
traditional and nontraditional alternatives. The industry continues to rapidly
consolidate which affects competition by eliminating some regional and local
institutions, while strengthening the franchise of acquirers. For additional
information concerning markets, BB&T's competitive position and business
strategies, see "Market Area" and "Lending Activities" below.
Market Area
BB&T's market area consists of North and South Carolina, Virginia, Maryland,
Georgia, eastern Tennessee, West Virginia, eastern Kentucky and Washington,
D.C. The area's employment base is diverse and primarily consists of
manufacturing, general services, agricultural, wholesale/retail trade,
technology and financial services. BB&T believes its current market area is
economically strong and will support consistent growth in assets and deposits
in the future. Even so, management intends to continue expanding the BB&T
franchise. Management strongly believes that BB&T's community bank approach to
providing client service is a competitive advantage which strengthens the
Corporation's ability to enter new markets and effectively provide products and
services to businesses and individuals in these markets.
Lending Activities
The primary goal of the BB&T lending function is to help clients achieve
their financial goals and secure their financial futures on terms that are fair
to the clients and profitable to the Corporation. This purpose can best be
accomplished by building strong, profitable client relationships over time,
with BB&T becoming an important contributor to the prosperity and well being of
their clients. BB&T's philosophy of lending is to attempt to meet all
legitimate business and consumer credit needs within defined market segments
where standards of profitability, growth and quality can be met. Based on
internal analyses, this philosophy has resulted in BB&T's loan portfolio
consistently outperforming the average of our national peers in terms of asset
quality, yield and rate of growth.
9
BB&T focuses lending efforts on small to intermediate commercial and
industrial loans, one-to-four family residential mortgage loans and consumer
loans. Typically, fixed-rate residential mortgage loans are sold in the
secondary mortgage market and adjustable-rate residential mortgages are
generally retained in the portfolio. Servicing rights on mortgage loans sold
are typically retained by BB&T. As of December 31, 2000, BB&T's total mortgage
servicing portfolio exceeded $23.6 billion. BB&T conducts the majority of its
lending activities in the context of the Corporation's community bank focus,
with lending decisions made as close to the client as practicable.
The following table summarizes BB&T's loan portfolio based on the source of
the underlying collateral, rather than the primary purpose of the loan.
Table 2
Composition of Loan and Lease Portfolio*
December 31,
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2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans and leases:
Commercial, financial
and agricultural $ 5,893,808 $ 5,382,373 $ 5,055,051 $ 4,602,571 $ 4,013,399
Lease receivables 4,453,589 2,606,002 1,620,326 788,462 576,991
Real estate--
construction and land
development 3,789,309 3,818,396 2,932,284 2,790,483 2,125,963
Real estate--mortgage 22,428,312 20,237,959 18,272,695 16,424,868 14,616,876
Consumer 5,368,810 4,589,510 4,035,015 3,952,321 3,997,544
----------- ----------- ----------- ----------- -----------
Loans and leases
held for investment 41,933,828 36,634,240 31,915,371 28,558,705 25,330,773
Loans held for sale 846,323 367,243 1,340,420 627,900 303,632
----------- ----------- ----------- ----------- -----------
Total loans and
leases $42,780,151 $37,001,483 $33,255,791 $29,186,605 $25,634,405
=========== =========== =========== =========== ===========
- --------
* Balances include unearned income.
Mortgage Banking
BB&T is the largest originator of residential mortgage loans in the
Carolinas. Originations in 2000 were $4.7 billion. BB&T offers various types of
fixed- and adjustable-rate loans for the purpose of constructing, purchasing or
refinancing owner-occupied properties. Risks associated with the residential
lending function include interest rate risk, which is mitigated through the
sale of substantially all fixed-rate loans, and default risk by the borrower,
which is lessened through underwriting procedures and mortgage insurance. BB&T
also purchases mortgage loans from more than 100 correspondent originators. The
loans purchased from third-party originators are subject to the same
underwriting and risk management criteria as loans originated internally.
Commercial Lending
BB&T's commercial lending program is generally targeted to serve small-to-
middle market businesses with sales of $200 million or less, although in-house
limits do allow lending to larger customers, including national customers who
have business connections with the Corporation's geographically-served markets.
Commercial lending includes commercial, financial, agricultural, industrial and
real estate loans. Pricing on commercial loans, driven largely by competition,
is usually tied to market indexes, such as the prime rate, the London Interbank
Offer Rate ("LIBOR") or rates on U.S. Treasury securities. For the second time
in three years, BB&T received recognition from the U.S. Small Business
Administration as the #1 "small business friendly" bank in the United States.
Management believes that commercial lending to small and mid-sized businesses
is BB&T's strongest market, as BB&T has the largest market share in all types
of small business lending in the Carolinas.
10
Construction Lending
Real estate construction loans include twelve-month contract home
construction loans, which are intended to convert to permanent one-to-four
family residential mortgage loans upon completion of the construction. BB&T is
also in the commercial construction lending business. These loans are usually
to in-market developers, businesses, individuals or real estate investors for
the construction of commercial structures in BB&T's market area. They are made
for purposes including, but not limited to, the construction of industrial
facilities, apartments, shopping centers, office buildings, hotels and
warehouses. The properties may be constructed for sale, lease or owner-
occupancy.
Consumer Lending
BB&T offers a wide variety of consumer loan products. Various types of
secured and unsecured loans are marketed to qualifying, existing clients and to
other creditworthy candidates in BB&T's market area. Home equity loans and
lines are underwritten with note amounts and credit limits that ensure
consistency with the Corporation's policies. Numerous forms of unsecured loans,
including revolving credits (e.g. credit cards, checking account overdraft
protection and personal lines of credit) are provided and various installment
loan products, such as vehicle loans, are offered. As a home equity lender,
BB&T ranks third in portfolio size in the Southeast, and 12th nationwide.
Leasing
BB&T provides commercial leasing products and services through BB&T Leasing
Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary
products: finance or capital leases, true leases (as defined under the Internal
Revenue Code) and other operating leases for vehicles, rolling stock and
tangible personal property. Leasing also provides lease-related services for
small to medium-sized commercial customers. In addition, various other BB&T
subsidiaries provide leases to municipalities and invest in leveraged lease
transactions.
The following table presents BB&T's total loan portfolio based on the primary
purpose of the loan, rather than the underlying collateral:
Table 3
Composition of Loan and Lease Portfolio Based on Loan Purpose
December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Business loans $19,395,921 $16,668,979 $14,256,857 $14,055,066 $10,995,072
Lease receivables 2,100,956 1,508,396 992,684 616,302 470,456
----------- ----------- ----------- ----------- -----------
Total commercial
loans and leases 21,496,877 18,177,375 15,249,541 14,671,368 11,465,528
----------- ----------- ----------- ----------- -----------
Sales Finance 2,700,858 2,433,717 2,131,190 1,657,487 1,575,049
Revolving Credit 840,613 693,133 583,083 553,179 552,425
Direct Retail 7,407,112 6,701,607 5,705,966 5,020,877 5,482,505
----------- ----------- ----------- ----------- -----------
Total consumer loans 10,948,583 9,828,457 8,420,239 7,231,543 7,609,979
----------- ----------- ----------- ----------- -----------
Mortgage loans 7,855,174 7,749,397 8,860,821 6,773,779 6,353,609
----------- ----------- ----------- ----------- -----------
Total loans and
leases $40,300,634 $35,755,229 $32,530,601 $28,676,690 $25,429,116
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
11
The following table reflects the scheduled maturities of commercial,
financial and agricultural loans, as well as construction loans:
Table 4
Selected Loan Maturities and Interest Sensitivity (1)
December 31, 2000
------------------------------------
Commercial,
Financial
and Real Estate:
Agricultural Construction Total
------------ ------------ ----------
(Dollars in thousands)
Fixed rate:
1 year or less (2) $ 456,120 $ 566,502 $1,022,622
1-5 years 1,094,008 305,039 1,399,047
After 5 years 257,500 -- 257,500
---------- ---------- ----------
Total 1,807,628 871,541 2,679,169
========== ========== ==========
Variable rate:
1 year or less (2) 2,050,324 1,984,082 4,034,406
1-5 years 1,701,641 933,686 2,635,327
After 5 years 334,215 -- 334,215
---------- ---------- ----------
Total 4,086,180 2,917,768 7,003,948
---------- ---------- ----------
Total loans and leases (3) $5,893,808 $3,789,309 $9,683,117
========== ========== ==========
- --------
(1) Balances include unearned income
(2) Includes loans due on demand.
(Dollars in
thousands)
-----------
(3) This table excludes:
(i) consumer loans to individuals for household, family and
other personal expenditures $ 5,368,810
(ii)real estate mortgage loans 22,428,312
(iii)loans held for sale 846,323
(iv)lease receivables 4,453,589
-----------
$33,097,034
===========
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
BB&T's credit policy does not permit automatic renewals of loans. At the
scheduled maturity date (including balloon payment date), the customer must
request a new loan to replace the matured loan and execute a new note with
rate, terms and conditions negotiated at that time.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged against earnings. The level of the allowance
for loan and lease losses reflects management's estimate of losses incurred in
the portfolio as of the balance sheet date and is based on management's
evaluation of the risks inherent in the loan portfolio and changes in the
nature and volume of loan activity. Management's evaluation, which includes a
review of loans for which full collectibility may not be reasonably assured,
considers the loans' "risk grades," the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and
other current factors that warrant consideration in determining an adequate
allowance. BB&T's
12
objective is to maintain a loan portfolio that is diverse in terms of loan
type, industry concentration, geographic distribution and borrower
concentration in order to reduce overall credit risk by minimizing the adverse
impact of any single event or combination of related events.
Reserve Policy and Methodology
The allowance for loan and lease losses is composed of general reserves,
specific reserves and an unallocated reserve. General reserves are established
for the commercial loan portfolio using loss percentages that are determined
based on management's evaluation of the losses inherent in the various risk
grades of commercial loans. Commercial loans are categorized as one of ten risk
grades based on management's assessment of the overall credit quality of the
loan, including the payment history, the financial position of the borrower,
underlying collateral, internal credit reviews and the results of external
regulatory examinations. The general reserve percentages described above are
then applied to each risk grade to calculate the necessary allowance to cover
inherent losses in each risk category. The following table presents the risk
grades and reserve percentages applicable to each grade at December 31, 2000
and 1999:
Table 5
General Reserves for Commercial Loans
December 31, 2000 and 1999
Percentage of General
Commercial Loans Reserve
Risk Grade by Risk Grade Percentage
- ---------- ------------------ ------------
2000 1999 2000 1999
-------- -------- ----- -----
Risk 0 (Loans from recently acquired
institutions*) 1.22% 0.03% 1.30% 1.30%
Risk 1 (Superior Quality) 3.17 4.25 0.10 0.10
Risk 2 (High Quality) 14.41 16.13 0.20 0.20
Risk 3 (Very Good Quality--Normal Risk) 28.43 30.49 0.60 0.60
Risk 4 (Good Quality--Normal Risk) 33.76 32.27 1.30 1.30
Risk 5 (Acceptable Quality) 13.50 11.75 2.25 2.25
Risk 6 (Management Attention) 3.02 2.85 3.25 3.25
Risk 7 (Special Mention) 0.55 0.73 5.00 5.00
Risk 8 (Substandard) 1.91 1.48 15.00 15.00
Risk 9 (Doubtful) 0.03 0.02 50.00 50.00
- --------
* Acquired companies that had not been converted to BB&T's operating systems at
the dates indicated.
The general reserve percentages used have been determined by management to be
appropriate based primarily on historical loan losses and the level of risk
assumed for the various risk grades. The reserve percentages for Special
Mention, Substandard and Doubtful are based on the preferred rates used by
banking regulators, and the other risk grades are "stepped down" from these
percentages as loan quality improves.
The process of classifying commercial loans into the appropriate risk grades
is performed initially as a component of the approval of the loan by the
appropriate credit officer. Based on the size of the loan, senior credit
officers and/or the loan committee may review the classification to ensure
accuracy and consistency of classification. Loan classifications are frequently
reviewed by internal credit examiners to determine if any changes in the
circumstances of the loan require a different risk grade. To determine the most
appropriate risk grade classification for each loan, the credit officers
examine the borrower's liquidity level, the quality of any collateral, the
amount of the borrower's other indebtedness, cash flow, earnings, sources of
financing and existing lending relationships.
Specific reserves are provided on certain commercial loans that are
classified in the Special Mention, Substandard or Doubtful risk grades. The
specific reserves are determined on a loan-by-
13
loan basis based on management's evaluation of BB&T's loss exposure for each
credit, given the current payment status of the loan and the value of any
underlying collateral. Loans for which specific reserves are provided are
excluded from the general allowance calculations described above to prevent
redundant reserves. The calculations of specific reserves on commercial loans
also incorporate specific reserves based on the results of measuring impaired
loans pursuant to the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan."
SFAS No. 114, as amended, requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral-dependent.
A loan is impaired when, based on current information and events, it is
probable that BB&T will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When the measure of the impaired loan
is less than the recorded investment in the loan, the amount of the impairment
is recorded through a specific reserve. It is BB&T's policy to classify and
disclose all commercial loans greater than $300,000 that are on nonaccrual
status as impaired loans. Substantially all other loans made by BB&T are
excluded from the scope of SFAS No. 114 as they are comprised of large groups
of smaller balance homogeneous loans (e.g. residential mortgage and consumer
installment) that are collectively evaluated for impairment.
General reserves are provided for noncommercial loans based on a four-year
weighted average of actual loss experience of each major loan category, which
is then applied to the total outstanding loan balance of each loan category.
The weighted average loss experience for each category is determined as
follows: assigning a 40% weight to the most recent year's loss experience for
each category, a 30% weight to the loss ratio from two years ago, a 20% weight
to the loss ratio from three years ago, and the remaining 10% weight applied to
the loss ratio from four years ago. This methodology places greater emphasis on
more recent loss trends and, therefore, provides a self-correcting mechanism
for the differences between estimated and actual losses.
There are two primary components considered in determining an appropriate
level for the unallocated reserve. A portion of the unallocated reserve is
established to cover the elements of imprecision and estimation risk inherent
in the calculations of the general and specific reserves described above. The
remaining portion of the unallocated allowance is determined based on
management's evaluation of various conditions that are not directly measured by
any other component of the allowance, including current general economic and
business conditions affecting key lending areas, credit quality trends,
collateral values, loan volumes and concentrations, seasoning of the loan
portfolio, the findings of internal credit examinations and results from
external bank regulatory examinations.
While management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the allowance or to
the reserving methodology may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations or, if
required by regulators, based upon information at the time of their
examinations. Such adjustments to original estimates, as necessary, are made in
the period in which these factors and other relevant considerations indicate
that loss levels may vary from previous estimates.
The following table discloses an allocation of the allowance for loan and
lease losses at the end of each of the past five years. The allowance has been
allocated applying the methodologies described above to the loan portfolios
based on the underlying purpose of the loans. Amounts applicable to years prior
to 2000 have been restated for acquisitions accounted for as poolings of
interests. The allowances for acquired companies that have been converted to
BB&T's operating systems have been allocated to the various loan categories
based on historic percentages applicable to BB&T's loan categories. This
allocation of the allowance for loan and lease losses is calculated on an
approximate basis and is not necessarily indicative of future losses. The
entire amount of the allowance is available to absorb losses occurring in any
category of loans and leases.
14
Table 6
Allocation of Allowance for Loan and Lease Losses by Category
December 31,
------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ----------------- -----------------
% Loans % Loans % Loans % Loans % Loans
in each in each in each in each in each
Amount category Amount category Amount category Amount category Amount category
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Business loans and
leases $ 295,918 53% $247,005 51% $212,472 47% $191,337 50% $169,256 45%
--------- --- -------- --- -------- --- -------- --- -------- ---
Direct Retail 20,665 19 23,174 19 19,041 18 16,769 18 12,935 22
Sales Finance 28,058 7 30,620 7 27,701 7 29,082 6 22,418 6
Revolving Credit 25,901 2 26,664 2 25,805 2 20,093 2 13,973 2
--------- --- -------- --- -------- --- -------- --- -------- ---
Total Consumer 74,624 28 80,458 28 72,547 27 65,944 26 49,326 30
--------- --- -------- --- -------- --- -------- --- -------- ---
Mortgage 2,700 19 2,420 21 3,533 26 2,757 24 2,647 25
Recently Acquired
Subsidiaries* 27,112 -- 11,952 -- 11,538 -- 11,178 -- 11,017 --
Unallocated 121,606 -- 135,461 -- 142,251 -- 117,651 -- 113,865 --
--------- --- -------- --- -------- --- -------- --- -------- ---
Total $ 521,960 100% $477,296 100% $442,341 100% $388,867 100% $346,111 100%
========= === ======== === ======== === ======== === ======== ===
- --------
* Acquired companies that had not been converted to BB&T's operating systems at
the dates indicated.
Table 7
Analysis of Allowance for Loan and Lease Losses
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of
period $ 477,296 $ 442,341 $ 388,867 $ 346,111 $ 320,599
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural (23,943) (29,147) (18,765) (24,094) (16,793)
Real estate (15,775) (17,192) (13,831) (16,226) (13,306)
Consumer (86,892) (75,146) (80,989) (82,495) (59,862)
Lease receivables (3,502) (993) (1,167) (671) (768)
----------- ----------- ----------- ----------- -----------
Total charge-offs (130,112) (122,478) (114,752) (123,486) (90,729)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural 11,066 11,994 9,269 8,138 10,454
Real estate 3,136 4,146 4,153 5,882 7,171
Consumer 19,897 16,056 14,499 11,455 10,868
Lease receivables 312 107 425 232 136
----------- ----------- ----------- ----------- -----------
Total recoveries 34,411 32,303 28,346 25,707 28,629
----------- ----------- ----------- ----------- -----------
Net charge-offs (95,701) (90,175) (86,406) (97,779) (62,100)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense 127,431 114,433 114,729 123,096 77,919
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions 12,934 10,697 25,151 17,439 9,693
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 521,960 $ 477,296 $ 442,341 $ 388,867 $ 346,111
=========== =========== =========== =========== ===========
Average loans and
leases* $37,569,941 $33,904,694 $30,543,475 $27,100,788 $24,438,883
Net charge-offs as a
percentage of average
loans and leases .25% .27% .28% .36% .25%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
15
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessed collateral. It is BB&T's policy to place
commercial loans and leases on nonaccrual status when full collection of
principal and interest becomes doubtful, or when any portion of principal or
interest becomes 90 days past due, whichever occurs first. When loans are
placed on nonaccrual status, interest receivable is reversed against interest
income in the current period and any prior year interest is charged off against
the allowance for loan and lease losses. Interest payments received thereafter
are applied as a reduction of the remaining principal balance so long as doubt
exists as to the ultimate collection of the principal. Loans and leases are
removed from nonaccrual status when they become current as to both principal
and interest and when the collectibility of principal or interest is no longer
doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual
status when full collection of principal and interest becomes doubtful, or they
become delinquent for a specified period of time.
Investment Activities
BB&T maintains a portion of its assets as investment securities. BB&T's
subsidiary banks are allowed to invest and deal in securities as prescribed by
bank regulations. These securities include all obligations of the U.S.
Treasury, agencies of the U.S. government, obligations of any state or
political subdivision, various types of corporate debt, mutual funds, limited
types of equity securities and certain derivative securities. Scott &
Stringfellow, BB&T's full-service brokerage and investment banking subsidiary,
is permitted to engage in the underwriting, trading and sales of equity and
debt securities subject only to the risk management policies of the
Corporation.
BB&T's investment activities are governed internally by a written, board-
approved policy. Investment policy is carried out by the Corporation's
Asset/Liability Committee ("ALCO") which meets regularly to review the economic
environment, assess current activities for appropriateness and establish
investment strategies. The ALCO also has much broader responsibilities, which
are discussed in "Market Risk Management", and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following goals: (i) to provide a
sufficient margin of liquid assets to meet unanticipated deposit and loan
fluctuations and overall funds management objectives; (ii) to provide eligible
securities to secure public funds and trust deposits as prescribed by law; and
(iii) to earn the maximum return on funds invested that is commensurate with
meeting the requirements of (i) and (ii).
16
The following table provides information regarding the composition of BB&T's
securities portfolio at the end of each of the past three years. Note that
BB&T's trading securities, reflected in the accompanying table, represent
positions held primarily by Scott & Stringfellow.
Table 8
Composition of Securities Portfolio
December 31,
-----------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
Trading Securities (at estimated fair
value): $ 96,719 $ 93,221 $ 60,422
----------- ----------- -----------
Securities held to maturity (at
amortized cost):
U.S. Treasury, government and agency
obligations 33,739 23,184 59,823
States and political subdivisions 35,535 379,822 533,371
Mortgage-backed securities -- -- 71,663
Other securities -- 1,891 8,786
----------- ----------- -----------
Total securities held to maturity 69,274 404,897 673,643
----------- ----------- -----------
Securities available for sale (at
estimated fair value):
U.S. Treasury, government and agency
obligations 8,815,848 5,588,786 4,924,593
States and political subdivisions 953,379 615,878 229,343
Mortgage-backed securities 2,562,917 4,257,004 4,605,457
Other securities 1,449,719 1,796,154 1,414,361
----------- ----------- -----------
Total securities available for sale 13,781,863 12,257,822 11,173,754
----------- ----------- -----------
Total securities $13,947,856 $12,755,940 $11,907,819
=========== =========== ===========
Sources of Funds
Deposits are the primary source of funds for lending and investing
activities. Scheduled loan payments and maturities and prepayments from
portfolios of loans and investment securities also provide a stable source of
funds. Federal Home Loan Bank ("FHLB") advances, Federal funds purchased and
other short-term borrowed funds, as well as longer-term debt issued through the
capital markets, all provide supplemental liquidity sources.
Deposits
Deposits are attracted principally from clients within BB&T's market area
through the offering of a broad selection of deposit instruments including
noninterest-bearing checking accounts, interest-bearing checking accounts,
savings accounts, money rate savings, certificates of deposit and individual
retirement accounts. Deposit account terms vary with respect to the minimum
balance required, the time period the funds must remain on deposit and service
charge schedules. Interest rates paid on specific deposit types are set by the
ALCO and are determined based on (i) the interest rates offered by competitors,
(ii) anticipated amount and timing of funding needs, (iii) availability of and
cost of alternative sources of funding and (iv) anticipated future economic
conditions and interest rates. Client deposits are attractive sources of
liquidity because of their stability, relative cost and the ability to generate
fee income through service charges and the cross-sale of other services.
17
Table 9
Scheduled Maturities of Time Deposits $100,000 and Greater
December 31, 2000
(Dollars in thousands)
Maturity Schedule
Less than three months $1,546,922
Three through six months 1,013,942
Seven through twelve months 1,124,876
Over twelve months 1,308,131
----------
Total $4,993,871
==========
Other Borrowed Funds
BB&T's ability to borrow funds through nondeposit sources provides additional
flexibility in meeting the liquidity needs of customers. Components of short-
term borrowed funds at year end were master notes, securities sold under
repurchase agreements, short-term FHLB advances, Federal funds purchased and
U.S. Treasury tax and loan depository note accounts. See Note H. in the "Notes
to Consolidated Financial Statements" for additional disclosures related to
short-term borrowed funds. The following table summarizes certain pertinent
information for the past three years with respect to BB&T's short-term borrowed
funds:
Table 10
Short-Term Borrowings
As of / For the Year Ended
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Maximum outstanding at any month-end
during the year $8,111,010 $8,101,034 $6,851,348
Balance outstanding at end of year 6,956,696 7,971,873 4,815,734
Average outstanding during the year 6,684,688 6,270,755 5,255,111
Average interest rate during the year 6.01% 4.89% 5.20%
Average interest rate at end of year 6.12 4.28 4.82
BB&T also utilizes longer-term borrowings when management determines that the
pricing and maturity options available through these sources create more cost-
effective options for funding asset growth and satisfying capital needs. BB&T's
long-term borrowings include capitalized leases, medium term bank notes, long-
term FHLB advances, subordinated debt issued by BB&T Corporation and trust
preferred securities. See Note I. in the "Notes to Consolidated Financial
Statements" for additional disclosures related to long-term borrowings.
Employees
At December 31, 2000, BB&T had approximately 17,500 full-time equivalent
employees compared to approximately 13,700 full-time equivalent employees at
December 31, 1999, on an originally-reported basis.
Properties
BB&T and its significant subsidiaries occupy headquarters offices that are
either owned or operated under long-term leases, and also own free-standing
operations centers, with its primary operations and information technology
center located in Wilson, North Carolina. BB&T also owns or
18
leases significant office space used as the Corporation's headquarters in
Winston-Salem, North Carolina. At December 31, 2000, BB&T's subsidiary banks
operated 854 branch offices in the Carolinas, Virginia, Maryland, Georgia, West
Virginia, Tennessee, eastern Kentucky and Washington, D.C. Branch office
locations are variously owned or leased. Management believes that the premises
occupied by BB&T and its subsidiaries are well-located and suitably equipped to
serve as financial services facilities. See Note F. "Premises and Equipment" of
the "Notes to Consolidated Financial Statements" in this report for additional
disclosures related to BB&T's properties and other fixed assets.
Executive Officers of BB&T
BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr.
Allison is 52 and has 30 years of service with the Corporation. Henry G.
Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr.
Williamson is 53 and has 29 years of service with the Corporation. Kelly S.
King is the President of BB&T Corporation and is the Senior Executive Vice
President for the Branch Network. Mr. King is 52 and has 29 years of service
with the Corporation. W. Kendall Chalk is the Senior Executive Vice President
for the Lending Group. Mr. Chalk is 55 and has served the Corporation for 26
years. Scott E. Reed is a Senior Executive Vice President and the Corporation's
Chief Financial Officer. Mr. Reed is 52 and has 29 years of service with the
Corporation. Robert E. Greene is the President of Branch Banking and Trust
Company and is the Senior Executive Vice President for Administrative Services
for the Corporation. Mr. Greene is 52 and has served the Corporation for 28
years. Sherry A. Kellett is a Senior Executive Vice President and the
Corporation's Controller. Ms. Kellett is 56 and has 16 years of service with
the Corporation. C. Leon Wilson is a Senior Executive Vice President and is the
Corporation's Operations Division Manager. Mr. Wilson is 45 and has served BB&T
for 24 years.
19
REGULATORY CONSIDERATIONS
General
As a bank holding company and, effective June 14, 2000, a financial holding
company under the Gramm-Leach-Bliley Act of 1999, BB&T is subject to regulation
under the Bank Holding Company Act of 1956, as amended, (the "BHCA") and the
examination and reporting requirements of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). As state-chartered commercial
banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the "State-Chartered Banks")
are subject to regulation, supervision and examination by state bank regulatory
authorities in their respective home states. These authorities include the
North Carolina Commissioner of Banks, in the case of BB&T-NC, the South
Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia
State Corporation Commission's Bureau of Financial Institutions, in the case of
BB&T-VA. Each of the State-Chartered Banks is also subject to regulation,
supervision and examination by the Federal Deposit Insurance Corporation (the
"FDIC"). At December 31, 2000, BB&T also operated eight financial institutions
that were subsidiaries of bank holding companies acquired by BB&T during 2000
(the "Acquired Banks") that will be merged into either BB&T-NC, BB&T-SC or
BB&T-VA, as appropriate, during 2001. These banks include Hardwick Bank and
Trust Company, First National Bank of Northwest Georgia, First Bulloch Bank &
Trust Company, First National Bank of Effingham, Metter Banking Company, Wayne
National Bank, BankFirst, and First National Bank and Trust Company. Hardwick
Bank and Trust Company, First Bulloch Bank & Trust Company, and Metter Banking
Company are state-chartered banks subject to supervision by the Georgia
Department of Banking and Finance; BankFirst is a state-chartered bank subject
to supervision by the State of Tennessee Department of Financial Institutions;
First National Bank of Northwest Georgia, First National Bank of Effingham,
Wayne National Bank, and First National Bank and Trust Company are Federally-
chartered banks subject to regulation, supervision and examination by the U.S.
Office of the Comptroller of the Currency (the "OCC"). In addition to the state
regulators discussed herein, each of the Acquired Banks that is state-chartered
is also subject to regulation, supervision, and examination by the FDIC.
(References herein to the "Banks" include these Acquired Banks and the State-
Chartered Banks). State and Federal law also govern the activities in which the
Banks engage, the investments they make and the aggregate amount of loans that
may be granted to one borrower. Various consumer and compliance laws and
regulations also affect the Banks' operations.
In addition to banking laws, regulations and regulatory agencies, BB&T and
certain of its subsidiaries and affiliates are subject to various other laws
and regulations and supervision and examination by other state and federal
regulatory agencies. These include the regulation, examination and supervision
of BB&T's subsidiaries and affiliates engaged in securities underwriting,
dealing, brokerage, investment advisory activities and insurance activities.
The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are
affected by general economic conditions, management policies, changes in state
and Federal legislation and actions of various regulatory authorities,
including those referred to above. The following description summarizes the
significant state and Federal laws to which BB&T and the Banks are subject. To
the extent statutory or regulatory provisions or proposals are described, the
description is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
The Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act" or the "Act"), signed into
law on November 12, 1999, amended a number of Federal banking laws that affect
BB&T and its subsidiary banks, and the provisions of the Act that are believed
to be of most significance to BB&T are discussed below. In particular, the GLB
Act permits a bank holding company to elect to become a
20
financial holding company. In order to become and maintain its status as a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating. BB&T filed an election
and on June 14, 2000, became a financial holding company.
Under the BHCA, a bank holding company, including a financial holding
company, may not directly or indirectly acquire ownership or control of more
than 5% of the voting shares or substantially all of the assets of any bank or
merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve Board. The BHCA, as amended by the GLB Act, now
generally limits the activities of a bank holding company that is a financial
holding company to that of banking, managing or controlling banks; performing
certain servicing activities for subsidiaries; and engaging in any activity, or
acquiring and retaining the shares of any company engaged in any activity, that
is either (1) financial in nature or incidental to such financial activity, as
determined by the Federal Reserve Board in consultation with the Secretary of
the Treasury; or (2) complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally, as determined by the Federal Reserve Board.
Activities that are "financial in nature" include those activities that the
Federal Reserve Board had determined, by order or regulation in effect prior to
enactment of the GLB Act, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The GLB Act covers a broad range of issues, including a repeal of most of the
restrictions on affiliations among depository institutions, securities firms
and insurance companies. In particular, the GLB Act repeals sections 20 and 32
of the Glass-Stegall Act, thus permitting unrestricted affiliations between
banks and securities firms. The Act also provides that, while the states
continue to have the authority to regulate insurance activities, in most
instances they are prohibited from preventing or significantly interfering with
the ability of a bank, directly or through an affiliate, to engage in insurance
sales, solicitations or cross-marketing activities. A financial holding
company, therefore, may engage in or acquire companies that engage in a broad
range of financial services, including securities activities such as
underwriting, dealing, brokerage, investment and merchant banking; and
insurance underwriting, sales and brokerage activities. Although the states
generally must regulate bank insurance activities in a nondiscriminatory
manner, the states may continue to adopt and enforce rules that specifically
regulate bank insurance activities in certain areas identified in the Act. The
Act directs the Federal bank regulatory agencies to adopt insurance consumer
protection regulations that apply to sales practices, solicitations,
advertising and disclosures, and such regulations have been adopted and will
become effective April 1, 2001.
The GLB Act includes a system of functional regulation under which the
Federal Reserve Board is confirmed as the umbrella regulator for bank holding
companies, but bank holding company affiliates are to be principally regulated
by functional regulators such as the FDIC for state nonmember bank affiliates,
the Securities and Exchange Commission for securities affiliates and state
insurance regulators for insurance affiliates. The Act repealed the broad
exemption of banks from the definitions of "broker" and "dealer" for purposes
of the Securities Exchange Act of 1934, but identifies a set of specific
activities, including traditional bank trust and fiduciary activities, in which
a bank may engage without being deemed a "broker", and a set of activities in
which a bank may engage without being deemed a "dealer". The Act also makes
conforming changes in the definitions of "broker" and "dealer" for purposes of
the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
The GLB Act contains extensive customer privacy protection provisions. Under
these provisions, a financial institution must provide to its customers, at the
inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third
21
parties unless the institution discloses to the customer that such information
may be so provided and the customer is given the opportunity to opt out of such
disclosure. An institution may not disclose to a non-affiliated third party,
other than to a consumer reporting agency, customer account numbers or other
similar account identifiers for marketing purposes. The Act also provides that
the states may adopt customer privacy protections that are more strict than
those contained in the Act. The Act also makes a criminal offense, except in
limited circumstances, obtaining or attempting to obtain customer information
of a financial nature by fraudulent or deceptive means. The Act also contains
requirements for the posting of notices by operators of automated teller
machines regarding fees charged for the use of such machines.
Many of the GLB Act's provisions, including the customer privacy protection
provisions, require the Federal bank regulatory agencies and other regulatory
bodies to adopt regulations to implement those respective provisions. Most of
the required implementing regulations have been proposed and/or adopted by the
bank regulatory agencies as of December 31, 2000. Neither the provisions of the
GLB Act nor the Act's implementing regulations as proposed or adopted have had
a material impact on BB&T's or the Banks' regulatory capital ratios or well
capitalized status (as discussed below) or ability to continue to operate in a
safe and sound manner.
Payment of Dividends
BB&T is a legal entity separate and distinct from its subsidiaries. The
majority of BB&T's revenue is from dividends paid to BB&T by its banking
subsidiaries. BB&T's banking subsidiaries are subject to laws and regulations
that limit the amount of dividends they can pay. In addition, both BB&T and its
banking subsidiaries are subject to various regulatory restrictions relating to
the payment of dividends, including requirements to maintain capital at or
above regulatory minimums. Banking regulators have indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fully fund the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition. BB&T does not expect that any of these laws,
regulations or policies will materially affect the ability of the Banks to pay
dividends. During the year ended December 31, 2000, the Banks declared $578.0
million in dividends payable to BB&T.
Capital
The Federal Reserve Board, the FDIC and the OCC have issued substantially
similar risk-based and leverage capital guidelines applicable to banking
organizations they supervise. Additionally as noted above, under the Gramm-
Leach-Bliley Act of 1999, a bank holding company that elects to become a
financial holding company must be well-managed, have at least a satisfactory
Community Reinvestment Act rating, and be well-capitalized. Under the risk-
based capital requirements, BB&T and the Banks are each generally required to
maintain a minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) of 8%.
At least half of the total capital must be composed of common equity, retained
earnings and qualifying perpetual preferred stock, less certain intangibles
("Tier 1 capital"). The remainder may consist of certain subordinated debt,
certain hybrid capital instruments, qualifying preferred stock and a limited
amount of the loan loss allowance ("Tier 2 capital" which, together with Tier 1
capital, composes "total capital"). The ratios of Tier 1 capital and total
capital to risk-adjusted assets for BB&T and the subsidiary banks as of
December 31, 2000, are shown in the following table.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations must maintain a minimum ratio of Tier
1 capital to adjusted average quarterly assets equal to 3% to 5% subject to
federal bank regulatory evaluation of an organization's overall safety
22
and soundness. The leverage ratios of BB&T and the subsidiary banks as of
December 31, 2000, also are reflected in the following table.
Table 11
Capital Adequacy Ratios of BB&T Corporation and Principal Banking Subsidiaries
December 31, 2000
Regulatory
Minimums to
Regulatory be Well- BB&T- BB&T- BB&T-
Minimums Capitalized BB&T NC SC VA
---------- ----------- ---- ----- ----- -----
Risk-based capital ratios:
Tier 1 capital (1) 4.0% 6.0% 9.3% 9.6% 9.0% 10.2%
Total risk-based capital
(2) 8.0 10.0 12.0 10.7 10.2 11.4
Tier 1 leverage ratio (3) 3.0 5.0 7.1 6.9 7.4 7.4
- --------
(1) Shareholders' equity less nonqualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a percentage of fourth quarter average assets
less nonqualifying intangibles.
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), among other
things, identifies five capital categories for insured depository institutions:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. As of December 31, 2000, BB&T
and each of the Banks are classified as "well capitalized". FDICIA also
requires the bank regulatory agencies to implement systems for "prompt
corrective action" for institutions that fail to meet minimum capital
requirements within these five categories, with progressively more severe
restrictions on operations, management and capital distributions according to
the category in which an institution is placed. Failure to meet capital
requirements can also cause an institution to be directed to raise additional
capital. FDICIA also mandates that the agencies adopt safety and soundness
standards relating generally to operations and management, asset quality and
executive compensation, and authorizes administrative action against an
institution that fails to meet such standards.
In addition, the Federal Reserve Board, the FDIC and the OCC each by
regulation has adopted risk-based capital standards that explicitly identify
concentrations of credit risk and the risk arising from non-traditional
activities, as well as an institution's ability to manage these risks, as
important factors to be taken into account by each agency in assessing an
institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agency as a
factor in evaluating a banking organization's capital adequacy.
In addition to the "prompt corrective action" directives, failure to meet
capital guidelines can subject a banking organization to a variety of other
enforcement remedies, including additional substantial restrictions on its
operations and activities, termination of deposit insurance by the FDIC, and
under certain conditions the appointment of a conservator or receiver.
Deposit Insurance Assessments
The deposits of the Banks are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, a portion of the Banks' deposits (relating to
23
the acquisitions of various savings associations) are subject to assessments
imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured
deposits effective January 1, 1998. The assessments imposed on all FDIC
deposits for deposit insurance have an effective rate ranging from 0 to 27
basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. Legislation was enacted in 1997
requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion
of the interest due on the obligations issued by the Financing Corporation
("FICO"). The FDIC currently assesses BIF-insured and SAIF-insured deposits an
additional 1.96 basis points per $100 of deposits to cover those obligations.
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is insolvent or is in danger of becoming
insolvent. For example, under requirements of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the insolvency of
commonly controlled insured depository institutions or for any assistance
provided by the FDIC to commonly controlled insured depository institutions in
danger of failure. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement under the cross
guarantee provisions is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and nonaffiliated holders of subordinated debt of
the commonly controlled insured depository institutions.
State banking regulators and the OCC also have broad enforcement powers over
the Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator (with the approval of the Governor in
the case of North Carolina) in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state bank
in certain circumstances, including, among other things, when it appears that
such bank has violated its charter or any applicable laws, is conducting its
business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
Interstate Banking and Branching
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1998, a bank
headquartered in one state was authorized to merge with a bank headquartered in
another state, as long as neither of the states had opted out of such
interstate merger authority prior to such date, and subject to any state
requirement that the target bank shall have been in existence and operating for
a minimum period of time, not to exceed five years; and certain deposit market-
share limitations. After a bank has established branches in a state through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where a bank headquartered in that state
could have established or acquired branches under applicable Federal or state
law.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of the consolidated financial condition
and consolidated results of operations of BB&T Corporation and subsidiaries
("BB&T" or the "Corporation") for each of the three years in the period ended
December 31, 2000, and related financial information, are presented in
conjunction with the consolidated financial statements and related notes to
assist in the evaluation of BB&T's 2000 performance.
Stock Split
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. All references to the number of common shares and all per share
amounts contained herein have been adjusted, as appropriate, to retroactively
reflect the stock split.
Reclassifications
In certain circumstances, reclassifications have been made to prior period
information to conform to the 2000 presentation.
Mergers and Acquisitions Completed during 2000
On January 13, 2000, BB&T completed its merger with Premier Bancshares, Inc.
("Premier"), based in Atlanta, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 16.8 million shares of common stock in
exchange for all of the outstanding common and preferred shares of Premier.
On June 13, 2000, BB&T completed its merger with Hardwick Holding Company
("Hardwick"), based in Dalton, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 3.9 million shares of common stock in
exchange for all of the outstanding common shares of Hardwick.
On June 15, 2000, BB&T completed its merger with First Banking Company of
Southeast Georgia ("First Banking"), of Statesboro, Georgia. The transaction
was accounted for as a pooling of interests. BB&T issued 4.1 million shares of
common stock in exchange for all of the outstanding common shares of First
Banking.
On July 6, 2000, BB&T completed its merger with One Valley Bancorp, Inc.
("One Valley") of Charleston, West Virginia. The transaction was accounted for
as a pooling of interests. In conjunction with the merger, BB&T issued 43.1
million shares of common stock in exchange for all of the outstanding common
shares of One Valley.
On September 29, 2000, BB&T completed its acquisition of Laureate Capital
Corp. ("Laureate"), a commercial mortgage banking firm based in Charlotte,
North Carolina. The transaction was accounted for as a purchase.
On November 15, 2000, BB&T completed its acquisition of Edgar M. Norris & Co.
("Edgar Norris"), a brokerage firm based in Greenville, South Carolina. The
transaction was accounted for as a purchase.
25
On December 27, 2000, BB&T completed its acquisition of BankFirst Corporation
("BankFirst") of Knoxville, Tennessee. To consummate the transaction, which was
accounted for as a purchase, BB&T issued 5.3 million shares of common stock in
exchange for all of the outstanding common and preferred shares of BankFirst.
BB&T recorded goodwill totaling $71.0 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
Mergers and Acquisitions Pending at December 31, 2000
On July 27, 2000, BB&T announced plans to acquire FCNB Corp. ("FCNB") of
Frederick, Maryland. FCNB has $1.6 billion in assets and operates 34 banking
offices primarily in Frederick and Montgomery counties in central Maryland. The
transaction, which was accounted for as a pooling of interests, was consummated
on January 7, 2001. BB&T issued 8.7 million shares of common stock in exchange
for all of the outstanding common shares of FCNB. The financial statements
presented herein have not been restated to reflect the accounts of FCNB.
On September 6, 2000, BB&T announced plans to acquire FirstSpartan Financial
Corp. ("FirstSpartan") of Spartanburg, South Carolina. FirstSpartan has $591
million in assets and operates eleven banking offices in Spartanburg and
Greenville counties. The transaction, which was accounted for as a purchase,
was consummated on March 2, 2001. BB&T issued 3.8 million shares of common
stock in exchange for all of the outstanding common shares of FirstSpartan.
BB&T recorded goodwill totaling $46.0 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
On December 5, 2000, BB&T announced plans to merge with Century South Banks
Inc. ("Century South") of Alpharetta, Georgia. Century South has $1.6 billion
in assets and operates 40 banking offices in Georgia, North Carolina,
Tennessee, and Alabama. Shareholders of Century South will receive .93 shares
of BB&T common stock in exchange for each share of Century South common stock
held. The transaction, which is expected to be accounted for as a pooling of
interests, is planned for completion in the second quarter of 2001.
On January 24, 2001, BB&T announced plans to acquire Virginia Capital
Bancshares Inc. ("VCAP") of Fredericksburg, Virginia. VCAP has $532.7 million
in assets and operates four banking offices in the Washington-Baltimore
combined metropolitan statistical area. Shareholders of VCAP will receive
between .4958 and .6060 shares of BB&T common stock depending on a pricing
period prior to the VCAP shareholders' meeting to vote on the proposed merger.
The transaction, which is expected to be accounted for as a purchase, is
planned for completion in the second quarter of 2001.
On January 24, 2001, BB&T announced plans to merge with F&M National
Corporation ("F&M") of Winchester, Virginia. F&M has $4 billion in assets and
operates 163 banking offices, 13 mortgage banking offices, three trust offices,
and six insurance offices. Shareholders of F&M will receive 1.09 shares of BB&T
common stock in exchange for each share of F&M common stock held. The
transaction, which is expected to be accounted for as a pooling of interests,
is planned for completion in the third quarter of 2001.
Analysis of Financial Condition
BB&T's average assets totaled $55.0 billion for the year ended December 31,
2000, an increase of $4.1 billion, or 8.1%, compared to the 1999 average of
$50.9 billion. The major balance sheet categories with increases in average
balances were: loans and leases, up $3.7 billion, or 10.8%, and securities,
which increased $173.6 million, or 1.3%. Total other earning assets decreased
$122.7 million, or 28.2%, compared to 1999. Total earning assets averaged $51.3
billion in 2000, an increase of
26
$3.7 billion, or 7.8%, compared to 1999. The primary components of growth in
average total earning assets were commercial loans and leases, which increased
$2.6 billion, or 15.2%, and consumer loans, which increased $1.1 billion, or
13.0%. These increases were partially offset by a $129.5 million, or 1.7%
decrease in average mortgage loans compared to 1999.
BB&T's average deposits totaled $35.9 billion, reflecting growth of $2.2
billion, or 6.4%, compared to 1999. The categories of deposits with the highest
growth rates were money rate savings, which increased $994.0 million, or 11.3%,
noninterest-bearing deposits, which increased $210.7 million, or 4.5%, and
domestic time deposits, which increased $688.9 million, or 4.3%. The growth
realized in these areas was offset by declines in savings and interest checking
of $558.5 million, or 17.4%.
BB&T has increasingly utilized nondeposit funding sources in recent years to
support balance sheet growth. Short-term borrowed funds include federal funds
purchased, securities sold under repurchase agreements, master notes and
Federal Home Loan Bank ("FHLB") advances. Average short-term borrowed funds
totaled $6.7 billion for the year ended December 31, 2000, an increase of
$414.0 million, or 6.6%, over the 1999 average. BB&T has also utilized long-
term debt based on the flexibility and cost-effectiveness of the alternatives
available. Long-term funding sources also include FHLB advances, subordinated
debt issued by the Corporation and subordinated notes issued by the subsidiary
banks. Average long-term debt totaled $7.3 billion for 2000, up $1.2 billion,
or 18.9%, compared to 1999, with the majority of the increase comprised of FHLB
advances.
The compound annual rate of growth in average total assets for the five-year
period ended December 31, 2000, was 9.8%. Over the same five-year period,
average loans and leases increased at a compound annual rate of 10.6%,
securities increased at a compound annual rate of 7.5%, and deposits grew at a
compound annual rate of 6.9%. All growth rates have been enhanced by
acquisitions accounted for as purchases, as well as by internal growth.
Securities
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a duration of five years or less to
provide greater flexibility in balance sheet management in changing interest
rate environments. U.S. Treasury securities and U.S. government agency
obligations, excluding mortgage-backed securities, comprised 63.4% of the
portfolio at December 31, 2000, and provided improved yields compared to 1999.
These securities had an average duration of 2.5 years at December 31, 2000.
Mortgage-backed securities, which composed 18.4% of the total investment
portfolio at year-end 2000, also provided improved yields compared to 1999, and
generally have longer durations than BB&T's other investments. Total securities
increased 9.3% in 2000, to a total of $13.9 billion at the end of the year.
BB&T holds trading securities as a normal part of its operations. At December
31, 2000, BB&T had trading securities totaling $96.7 million that are reflected
on BB&T's consolidated balance sheet. Market valuation gains and losses in
BB&T's trading portfolio are reflected in current earnings.
Securities held to maturity, which are composed of investments in obligations
of states and municipalities, as well as investments in U.S. Treasuries, made
up less than 1% of the total portfolio at December 31, 2000. Securities held to
maturity are carried at amortized cost and totaled $69.3 million at December
31, 2000, compared to $404.9 million outstanding at the end of 1999. Market
valuation gains and losses in the Corporation's held-to-maturity category
affect neither earnings nor capital. The held-to-maturity portfolio had a net
unrealized gain of $.5 million at December 31, 2000.
Securities available for sale totaled $13.8 billion at year-end 2000 and are
carried at estimated fair value. The available-for-sale portfolio is primarily
composed of investments in U.S. Treasuries, government agency obligations and
mortgage-backed securities. The available-for-sale portfolio also
27
contains investments in obligations of states and municipalities, which
composed 6.9% of the available-for-sale portfolio, and equity and other
securities, which comprised 10.5% of the available-for-sale portfolio.
During the second and third quarters of 2000, BB&T restructured the
available-for-sale securities portfolio. This restructuring was undertaken to
improve the overall yield of the portfolio, improve the liquidity, and reduce
the average duration of the portfolio. BB&T sold $5.9 billion of U.S.
Treasuries, obligations of U.S. government agencies, and mortgage-backed
securities. BB&T incurred approximately $222 million in pretax losses as a
result of these sales. The proceeds from these sales were reinvested in higher
yielding securities, primarily obligations of U.S. government agencies. The
restructuring improved the yield on the restructured portion of the portfolio
by 133 basis points, from 6.31% to 7.64%. Management expects to recover the
losses incurred over a three-year period through increased interest income
generated as a result of the restructuring. As of December 31, 2000, the
securities purchased as part of the restructuring had unrealized pretax gains
of $203.0 million.
The following table presents BB&T's securities portfolio by category
disclosing maturities and average yields.
Table 12
Securities
December 31, 2000
---------------------
Carrying Average
Value Yield (3)
----------- ---------
(Dollars in
thousands)
U.S. Treasury,
government and agency
obligations (1):
Within one year $ 322,915 6.63%
One to five years 4,962,833 7.35
Five to ten years 3,830,162 7.63
After ten years 2,296,594 6.99
----------- ----
Total 11,412,504 7.35
----------- ----
States and political
subdivisions:
Within one year 26,773 7.48
One to five years 163,319 7.63
Five to ten years 500,284 7.55
After ten years 298,538 7.52
----------- ----
Total 988,914 7.55
----------- ----
Other securities:
Within one year 5,393 6.35
One to five years 20,928 7.00
Five to ten years 10,280 6.75
After ten years 88,711 6.75
----------- ----
Total 125,312 6.77
----------- ----
Securities with no
stated maturity 1,421,126 5.80
----------- ----
Total securities (2) $13,947,856 7.20%
=========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $2.6 billion classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, a more realistic average maturity would be substantially
shorter because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $69.3 million carried at amortized
cost, and securities available for sale and trading securities carried at
estimated fair values of $13.8 billion and $96.7 million, respectively.
(3) Taxable equivalent basis as applied to amortized cost.
28
The available-for-sale portfolio composed 98.8% of total securities at
December 31, 2000. Management believes that the high concentration of
securities in the available-for-sale portfolio allows greater flexibility in
the day-to-day management of the overall portfolio than the held-to-maturity
classification.
The market value of the available-for-sale portfolio at year-end 2000 was
$175.0 million greater than the amortized cost of these securities. At December
31, 2000, BB&T's available-for-sale portfolio had net unrealized appreciation,
net of deferred income taxes, of $103.5 million, which is reported as a
separate component of shareholders' equity. At December 31, 1999, the
available-for-sale portfolio had net unrealized depreciation of $309.4 million,
net of deferred taxes. The net unrealized gains recorded in the available-for-
sale portfolio at year-end 2000 reflect the results of the portfolio
restructuring undertaken during the year.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 7.00% for the year ended December 31, 2000, compared to 6.57% for the prior
year. The increase in the FTE yield reflects higher yields earned on U.S.
Treasuries, agency obligations and mortgage-backed securities due to the
successful restructuring of the portfolio. The yield on U.S. Treasury and
government agency obligations increased from 6.51% in 1999 to 7.02% in 2000,
while the yield on mortgage-backed securities increased from 6.49% to 6.90% and
the FTE yield on state and municipal securities decreased from 7.65% last year
to 7.49% in the current year. As previously mentioned, the restructuring
improved the yield on the restructured portion of the portfolio by 133 basis
points, which contributed significantly to the overall securities yield.
Loans and Leases
BB&T continued to enjoy strong loan growth during 2000, with end of period
loans, excluding loans held for sale, increasing $4.1 billion, or 11.5%, as
compared to 1999. Average total loans and leases for 2000 increased $3.7
billion, or 10.8%, as compared to 1999.
Commercial and consumer loan portfolios grew at a much faster rate than
mortgage loans during 2000, which reflected a slow-down in the mortgage market
due to rising interest rates as well as the securitization of a part of the
existing mortgage portfolio. BB&T acquired a number of community banks and
thrift institutions in recent years, which resulted in a significant percentage
of the consolidated loan portfolio being composed of mortgages. Also, BB&T is
the largest originator of mortgage loans in the Carolinas. Through the use of
securitization programs and sales of fixed-rate mortgage loan originations,
combined with BB&T's commercial and consumer lending focus, the mix of the loan
portfolio has changed in recent periods compared to prior years. The change in
the weighting of the portfolio to a higher percentage of commercial and
consumer loans and a lower percentage of mortgage loans has had a positive
effect on the overall yield of the portfolio. Average mortgage loans decreased
$129.5, million or 1.7%, in 2000 as compared to 1999, and represented 20.2% of
average total loans, compared to 22.7% a year ago. Average commercial loans,
including lease receivables, increased 15.2% in 2000 as compared to 1999, and
now compose 52.2% of the loan portfolio, compared to 50.2% in 1999. Average
consumer loans, which includes sales finance, revolving credit and direct
retail, increased $1.2 billion, or 13.2%, for the year ended December 31, 2000
as compared to the same period in 1999 and compose the remaining 27.6% of
average loans.
The growth rates of average loans in the current year were affected by loan
portfolios held by companies that were acquired during 2000 and accounted for
as purchases. Also, the securitization of $304.8 million of mortgage loans
during 1999 and $984.5 million in 2000 affected the reported growth in average
mortgage loans. During 2000, loans totaling $612.7 million were acquired
through the purchase of BankFirst Corporation ("BankFirst"). Excluding the
effect of these purchase accounting transactions and the loan securitizations,
average "internal" loan growth for the year ended
29
December 31, 2000, was 11.9% compared to 1999. Excluding the effects of
purchase accounting transactions and loan securitizations, average mortgage
loans, including loans held for sale, increased 7.1%, commercial loans grew
14.7%, and consumer loans increased 10.5% in 2000 as compared to 1999.
The combination of the change in loan mix to a higher percentage of
commercial and consumer loans, the growth of the overall loan portfolio and the
increase in the yield of the portfolio, from 8.79% for the twelve months of
1999 to 9.34% in 2000, resulted in a 17.2% increase in interest income from
loans and leases in the current year. The average annualized fully taxable
equivalent ("FTE") yields on commercial, consumer and mortgage loans for 2000
were 9.56%, 10.14%, and 7.73%, respectively. The 55 basis point increase in the
average yield on loans resulted from the aforementioned more profitable mix of
loan portfolio and generally higher interest rates prevalent during 2000,
including a higher average prime rate, compared to 1999. For the year ended
2000, the prime rate, which is the basis for pricing many commercial and
consumer loans, averaged 9.24%, compared to 8.00% for 1999.
Asset Quality
BB&T's asset quality remained excellent at December 31, 2000. Nonperforming
assets totaled $193.5 million at year-end, as compared to $152.6 million in
1999, an increase of 26.8%. Nonaccrual and restructured loans and leases at
year-end 2000 increased to $150.5 million, or 24.7%, over 1999, while assets
acquired through foreclosure and repossession increased to $43.0 million, an
increase of 34.9% over 1999. As a percentage of total assets, nonperforming
assets were .33% at December 31, 2000, compared to .29% at the end of 1999. As
a percentage of loans plus foreclosed properties, nonperforming assets totaled
.48% at December 31, 2000, compared to .43% at the end of 1999. The allowance
for loan and lease losses, as a percentage of loans and leases, was 1.30% at
December 31, 2000, compared to 1.33% at year-end 1999. Loans 90 days or more
past due and still accruing interest increased to $72.3 million at year-end
2000 compared to $60.0 million at December 31, 1999. Net charge- offs as a
percentage of average loans and leases also improved during 2000, decreasing to
.25% from .27% in 1999.
30
The following table reflects relevant asset quality information for BB&T for
the past three years.
Table 13
Asset Quality
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Nonaccrual loans and leases* $149,945 $118,975 $119,138
Restructured loans 492 1,681 3,744
Foreclosed property 43,033 31,894 37,231
-------- -------- --------
Nonperforming assets $193,470 $152,550 $160,113
======== ======== ========
Loans 90 days or more past due and still
accruing $ 72,256 $ 59,974 $ 63,316
======== ======== ========
Asset Quality Ratios:
Nonaccrual and restructured loans and leases
as a percentage of loans and leases .37% .34% .38%
Nonperforming assets as a percentage of:
Total assets .33 .29 .33
Loans and leases plus foreclosed property .48 .43 .49
Net charge-offs as a percentage of average
loans and leases .25 .27 .28
Allowance for losses as a percentage of loans
and leases 1.30 1.33 1.37
Ratio of allowance for losses to:
Net charge-offs 5.45x 5.29x 5.12x
Nonaccrual and restructured loans and leases 3.47 3.96 3.60
- --------
NOTE: Items referring to loans and leases are net of unearned income and
include loans held for sale.
* Includes $42.7 million, $39.1 million and $50.7 million of impaired loans at
December 31, 2000, 1999 and 1998, respectively. See Note D in the "Notes to
Consolidated Financial Statements."
Allowance for Loan and Lease Losses
BB&T's allowance for loan and lease losses totaled $522.0 million at December
31, 2000, compared to $477.3 million at the end of 1999, an increase of 9.4%.
As a percentage of loans and leases outstanding, the allowance decreased from
1.33% at December 31, 1999, to 1.30% at the end of 2000, as a result of
continued strong asset quality. The ratio of the allowance to net charge-offs
increased from 5.29 times for 1999 to 5.45 times in 2000.
BB&T provides specific allowances for certain business loans and lease
receivables and provides general allowances for all types of loans to provide
for losses inherent in the loan portfolios. As disclosed in Table 5 in
"Description of Business," the general reserve percentages applied to the
various risk grades of commercial loans did not change from 1999 to 2000,
reflecting management's determination that the overall risk associated with
each risk grade did not change substantially during 2000. As is also visible in
the table, the percentages of commercial loans in each risk grade did not
significantly change from 1999 to 2000. Specific reserves are typically
provided on all loans classified as Special Mention, Substandard or Doubtful.
The general reserve percentages disclosed in Table 5 are applied to the
commercial loan balances in each risk grade to determine the total general
reserves on commercial loans and lease receivables. Please refer to the
discussion preceding and following Table 5 for BB&T's reserve policy and
methodology.
General reserves established to cover losses inherent in noncommercial loan
categories are derived based on a weighted average of actual loan losses over
the last four years. Thus, these rates
31
change each year based on trends in actual observed loan losses. To calculate
the reserve rate applied to each category, a weight of 40% is given to the most
current year's loan loss percentage. A weight of 30% is applied to the loan
loss ratio from two years ago, a 20% weight to the loss ratio from three years
ago, and the remaining 10% weight is applied to the loan loss percentage from
four years ago. The resulting reserves are applied to the outstanding loan
balances at period end to determine the total general reserves on noncommercial
loans. Specific reserves may be established for noncommercial loans as
considered necessary.
Recently acquired subsidiaries are considered separately for purposes of
calculating the allowance for loan losses. At December 31, 2000, these
subsidiaries included Hardwick Holding Company and First Banking Company of
Southeast Georgia, which were acquired in June, 2000 and accounted for as
poolings of interests, and BankFirst Corporation, which was acquired in
December, 2000 and accounted for as a purchase. These recently acquired
subsidiaries, which have not yet been converted to BB&T's operating systems,
are considered separately because the related loans have not yet been subjected
to BB&T's credit monitoring policies and procedures, nor have they been
assigned a BB&T risk grade. Management considers historical loan loss
experience in determining reserves for these subsidiaries. Also, evidence
gathered during due diligence performed in connection with the mergers is
considered in calculating the reserve. At December 31, 2000 and 1999, these
subsidiaries had $1.3 billion and $637.7 million in total loans outstanding,
respectively, and related reserves totaling $27.1 million and $12.0 million,
respectively.
The unallocated allowance totaled $121.6 million at December 31, 2000, down
from $135.5 million, or 10.2%, from the unallocated balance at December 31,
1999, as restated for business combinations accounted for as poolings of
interests. The unallocated allowance was 23.3% of the total allowance at 2000,
compared to 28.4% in 1999. Due to the effects of mergers and acquisitions,
which in many cases had higher relative allowance levels than BB&T in the
period preceding completion of the transaction, together with BB&T's continued
strong credit quality, the overall allowance as a percentage of outstanding
loans and leases decreased slightly, from 1.33% of total loans and leases at
December 31, 1999, to 1.30% of total loans at year-end 2000. As a result of the
methodology utilized by BB&T in restating prior year allowance allocations for
merged companies, the portion of these companies' allowance considered
unallocated for periods prior to 2000 is typically higher in relation to their
total allowance than that of BB&T. This contributed to the decline in this
element of the allowance at year-end 2000 compared to 1999.
Please refer to Table 6 in the "Description of Business" section, which
reflects BB&T's allowance allocations for the last five years.
Management does not believe that the level of risk inherent in the categories
of the portfolio at year-end 2000 changed substantially compared to year-end
1999. Because of this, there were no changes in the estimation methods or
fundamental assumptions used in the calculations. The higher outstanding
balance of commercial loans and lower balance of mortgage loans at December 31,
2000, compared to year-end 1999, resulted in the fluctuations in specific and
general reserves applicable to those loan types. There were no reallocations of
the allowance from 1999, nor were there any significant changes in asset
quality trends other than as discussed in "Asset Quality."
Deposits and Other Borrowings
Client deposits generated through the BB&T branch network are the largest
source of funds to support loan and other asset growth. Core deposits compose
BB&T's primary source of funding; however, as depositors have sought greater
returns on their investment growth rates of core deposits have not kept pace
with asset growth. Therefore, nondeposit funding sources have increasingly been
used to fund balance sheet growth.
Total deposits at December 31, 2000, were $38.0 billion, an increase of $3.9
billion, or 11.3%, compared to year-end 1999. The increase in deposits was
driven by a 15.9% increase in money rate savings accounts, a 17.9% increase in
certificates of deposit and other time deposits, and a 4.5% increase in
noninterest-bearing deposits. For the year ended December 31, 2000, total
deposits
32
averaged $35.9 billion, an increase of $2.2 billion, or 6.4%, compared to 1999.
This increase was led by a 4.5% increase in average noninterest-bearing
deposits and an 11.3% increase in money rate savings accounts. These increases
were offset by a 17.4% decrease in average savings and interest-checking
accounts. Other time deposits, including individual retirement accounts and
certificates of deposit, increased 8.9% on average in 2000 and remain BB&T's
largest category of average deposits, comprising 51.7% of average total
deposits.
The average rates paid on interest-bearing deposits increased during 2000 to
4.77% from 4.14% in 1999. The increase resulted from higher average rates paid
on most major categories of interest-bearing deposits. The average rate paid on
certificates of deposit and other time deposits increased from 5.16% in 1999 to
5.82% in the current year and the average cost of money rate savings increased
from 2.97% to 3.63% in 2000. These increases were offset somewhat by decreases
in the average cost of interest-checking from 1.93% to 1.77% and savings
deposits from 1.88% to 1.61%.
BB&T also uses various types of short-term borrowed funds to supplement
deposits in order to fulfill funding needs. The types of short-term borrowings
utilized by the Corporation include Federal funds purchased, which composed
20.0% of total short-term borrowed funds and securities sold under repurchase
agreements, which comprised 37.3% of short-term borrowed funds at year-end
2000. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank
notes and short-term Federal Home Loan Bank ("FHLB") advances are also utilized
to meet short-term funding needs. Average short-term borrowed funds totaled
$6.7 billion during 2000, an increase of $413.9 million, or 6.6%, from 1999,
while short-term borrowed funds at year-end 2000 were $7.0 billion, an decrease
of $1.0 billion, or 12.7%, compared to year-end 1999. The rates paid on average
short-term borrowed funds increased from 4.89% in 1999 to 6.01% during 2000.
The increase in the cost of short-term borrowed funds resulted from the higher
interest rate environment during 2000, resulting in a 127 basis point increase
in the average Federal funds rate for 2000.
BB&T also utilizes long-term debt to provide both funding and, to a lesser
extent, regulatory capital. Total outstanding long-term debt at December 31,
2000, totaled $8.4 billion, an increase of $2.3 billion, or 37.6%, from year-
end 1999. After long-term rates peaked in May, BB&T systematically added longer
term debt in order to take advantage of declining rates. For the year ended
December 31, 2000, average long-term debt increased $1.2 billion, or 18.9%,
compared to the average for 1999. BB&T's long-term debt consists primarily of
FHLB advances, which composed 73.9% of total outstanding long-term debt at
December 31, 2000, and medium-term bank notes, which composed 14.4% of the
year-end balance. FHLB advances are cost-effective long-term funding sources
that provide BB&T the flexibility to structure the debt in a manner that aids
in the management of interest rate risk and liquidity. The average rate paid on
long-term debt increased from 5.47% during 1999 to 6.05% during 2000.
Liquidity needs are a primary consideration in evaluating funding sources.
BB&T's strategy is to maintain funding flexibility, in order that the
Corporation may react rapidly to opportunities that may become available in the
marketplace. BB&T will continue to focus on traditional core funding
strategies, including targeting growth in noninterest-bearing deposits and
money rate savings accounts. Also, if rates and terms are deemed attractive,
additional long-term funding may be pursued.
Analysis of Results of Operations
Consolidated net income for 2000 totaled $626.4 million, which generated
basic earnings per share of $1.57 and diluted earnings per share of $1.55. Net
income for 1999 was $705.6 million and net income for 1998 totaled $651.7
million. Basic earnings per share were $1.78 in 1999 and $1.67 in 1998, while
diluted earnings per share were $1.75 and $1.64, respectively.
33
BB&T incurred significant expenses related principally to the consummation of
mergers and acquisitions during 2000, 1999 and 1998, which are reflected in
reported earnings. During 2000, BB&T recorded $248.6 million in after-tax
nonrecurring charges primarily associated with the mergers of Premier,
Hardwick, First Banking and One Valley, and with the restructuring of the
securities portfolio as discussed in "Securities" above. Merger-related charges
include the consolidation of branch offices and bank operating functions,
merger-related personnel costs and other expenses. Excluding the effects of
these items, BB&T's net income for 2000 would have been $875.1 million, or
$2.17 per diluted share.
In 1999, BB&T incurred $61.7 million in net after-tax charges primarily
incurred in conjunction with mergers and acquisitions. These expenses included
personnel-related expenses, such as staff relocation, early retirement packages
and contract settlements; occupancy, furniture and equipment expenses including
branch consolidation; and other costs, such as operational charge-offs,
professional fees, etc. Excluding the effects of these charges, BB&T's net
income for 1999 would have totaled $767.3 million, or $1.91 per diluted share.
In 1998, BB&T incurred $17.9 million in net after-tax charges primarily
incurred in conjunction with mergers and acquisitions. These expenses included
costs similar in type to those described in the preceding paragraph. Excluding
the effects of these charges, BB&T's net income for 1998 would have totaled
$669.7 million, or $1.68 per diluted share.
Excluding the effect of the above nonrecurring items from the three years
presented, BB&T's net income for 2000 increased $107.8 million, or 14.0%,
compared to 1999, while diluted earnings per share increased $.26, or 13.6%.
Net income for 1999, excluding nonrecurring items, increased $97.6 million, or
14.6%, while diluted earnings per share increased $.23, or 13.7%, compared to
1998.
Two important and commonly used measures of profitability are return on
assets (net income as a percentage of average total assets) and return on
shareholders' equity (net income as a percentage of average common
shareholders' equity). BB&T's returns on average assets were 1.14%, 1.39% and
1.43% for the years ended December 31, 2000, 1999 and 1998, respectively. The
returns on average common shareholders' equity were 14.55%, 17.45% and 17.41%
for the last three years. The returns on average assets produced by BB&T's
earnings, excluding the nonrecurring charges discussed above, were 1.59% for
2000, 1.51% for 1999 and 1.47% for 1998. BB&T's returns on average
shareholders' equity, excluding the nonrecurring charges, were 20.33%, 18.97%
and 17.89%, for the years ended December 31, 2000, 1999 and 1998, respectively.
Net Interest Income
Net interest income is BB&T's primary source of revenue. Net interest income
is influenced by a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned on
earning assets and the interest rates paid to obtain funding to support the
assets. The difference between rates earned on interest-earning assets (with an
adjustment made to tax-exempt income to provide comparability with taxable
income, i.e. the "FTE" adjustment) and the cost of the supporting funds is
measured by the net interest margin. The accompanying table presents the dollar
amount of changes in interest income and interest expense, and distinguishes
between the changes related to increases or decreases in average outstanding
balances of interest-earning assets and interest-bearing liabilities (volume),
and the changes related to increases or decreases in average interest rates on
such assets and liabilities (rate). Changes attributable to both volume and
rate have been allocated proportionately.
34
Table 14
FTE Net Interest Income and Rate/Volume Analysis
For the Years Ended December 31, 2000, 1999 and 1998
Average Balances Yield/Rate Income/Expense
----------------------------------- ---------------- --------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
(Dollars in thousands)
Assets
Securities (1):
U.S. Treasury,
government and
other $12,420,661 $12,261,714 $10,899,209 6.96% 6.49% 6.65% $864,961 $ 795,483 $ 725,280
States and
political
subdivisions 970,622 955,994 649,383 7.49 7.65 7.99 72,740 73,100 51,888
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total
securities (5) 13,391,283 13,217,708 11,548,592 7.00 6.57 6.73 937,701 868,583 777,168
Other earning
assets (2) 311,774 434,495 438,079 6.82 5.06 5.56 21,266 21,997 24,345
Loans and
leases, net of
unearned
income
(1)(3)(4)(5) 37,569,941 33,904,694 30,543,475 9.34 8.79 9.07 3,510,735 2,981,635 2,769,855
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total earning
assets 51,272,998 47,556,897 42,530,146 8.72 8.14 8.40 4,469,702 3,872,215 3,571,368
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Non-earning
assets 3,689,318 3,307,595 2,951,782
----------- ----------- -----------
Total assets $54,962,316 $50,864,492 $45,481,928
=========== =========== ===========
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking $ 2,646,809 $ 3,205,315 $ 3,519,414 1.68 1.90 2.13 44,363 60,897 75,056
Money rate
savings 9,789,555 8,795,744 7,123,108 3.63 2.97 3.13 355,005 261,375 222,767
Other time
deposits 18,568,252 17,044,678 16,302,152 5.82 5.16 5.48 1,080,908 879,195 892,836
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total
interest-
bearing
deposits 31,004,616 29,045,737 26,944,674 4.77 4.14 4.42 1,480,276 1,201,467 1,190,659
Short-term
borrowed funds 6,684,688 6,270,755 5,255,111 6.01 4.89 5.20 401,713 306,545 273,223
Long-term debt 7,271,632 6,116,548 4,647,116 6.05 5.47 5.79 440,057 334,593 269,226
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total
interest-
bearing
liabilities 44,960,936 41,433,040 36,846,901 5.16 4.45 4.70 2,322,046 1,842,605 1,733,108
Noninterest-
bearing
deposits 4,893,035 4,682,417 4,248,653
Other
liabilities 803,514 705,051 643,028
Shareholders'
equity 4,304,831 4,043,984 3,743,346
----------- ----------- -----------
Total
liabilities
and
shareholders'
equity $54,962,316 $50,864,492 $45,481,928
=========== =========== ===========
Average interest
rate spread 3.56 3.69 3.70
Net yield on
earning assets 4.19% 4.27% 4.32% $2,147,656 $2,029,610 $1,838,260
==== ==== ==== ========== ========== ==========
Taxable
equivalent
adjustment $ 130,028 $ 96,662 $ 78,555
========== ========== ==========
2000 v. 1999 1999 v. 1998
------------------------------ ------------------------------
Change due to Change due to
Increase ------------------- Increase -------------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- --------- --------- ---------- --------- ---------
Assets
Securities (1):
U.S. Treasury,
government and
other $ 69,478 $ 59,053 $ 10,425 $ 70,203 $(18,570) $ 88,773
States and
political
subdivisions (360) (1,469) 1,109 21,212 (2,321) 23,533
---------- --------- --------- ---------- --------- ---------
Total
securities (5) 69,118 57,584 11,534 91,415 (20,891) 112,306
Other earning
assets (2) (731) 6,450 (7,181) (2,348) (2,150) (198)
Loans and
leases, net of
unearned
income
(1)(3)(4)(5) 529,100 193,996 335,104 211,780 (85,800) 297,580
---------- --------- --------- ---------- --------- ---------
Total earning
assets 597,487 258,030 339,457 300,847 (108,841) 409,688
---------- --------- --------- ---------- --------- ---------
Non-earning
assets
Total assets
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking (16,534) (6,669) (9,865) (14,159) (7,789) (6,370)
Money rate
savings 93,630 61,892 31,738 38,608 (11,552) 50,160
Other time
deposits 201,713 118,981 82,732 (13,641) (53,269) 39,628
---------- --------- --------- ---------- --------- ---------
Total
interest-
bearing
deposits 278,809 174,204 104,605 10,808 (72,610) 83,418
Short-term
borrowed funds 95,168 73,896 21,272 33,322 (17,073) 50,395
Long-term debt 105,464 37,980 67,484 65,367 (15,727) 81,094
---------- --------- --------- ---------- --------- ---------
Total
interest-
bearing
liabilities 479,441 286,080 193,361 109,497 (105,410) 214,907
Noninterest-
bearing
deposits
Other
liabilities
Shareholders'
equity
Total
liabilities
and
shareholders'
equity
Average interest
rate spread
Net yield on
earning assets $118,046 $(28,051) $146,096 $191,350 $ (3,431) $194,781
========== ========= ========= ========== ========= =========
Taxable
equivalent
adjustment
- -----
(1) Yields related to securities, loans and leases 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.
35
For 2000, net interest income on an FTE adjusted basis totaled $2.1 billion,
compared with $2.0 billion in 1999 and $1.8 billion in 1998. The increase in
net interest income during 2000 resulted from increased interest income from
loans, up $529.1 million and from investment securities, up $69.1 million.
During the same period, average balances of deposits and short-term and long-
term borrowing, as well as higher average costs for these funds, resulted in an
increase of $479.4 million in total interest expense.
The FTE-adjusted net interest margin is the primary measure used in
evaluating the effectiveness of the management of earning assets and the
liabilities funding those assets. The FTE adjusted net interest margin was
4.19% in 2000, 4.27% in 1999 and 4.32% in 1998. The eight basis point decrease
in margin during 2000 primarily resulted from three principal factors. First,
the most substantial component of the decline was the increased costs of
interest-bearing deposits and borrowed funds. Second, BB&T increased the level
of its investments in bank owned life insurance products, which add to the cost
of funds included in interest expense, but produce revenue that is classified
as noninterest income. Third, BB&T has had an active common stock repurchase
program in recent years. For acquisitions accounted for under the purchase
method of accounting, it is BB&T's policy to acquire the shares of its common
stock that will be issued to consummate those transactions, as allowed under
generally accepted accounting standards. The cost of funds related to share
repurchases resulted in an approximate two basis point decline in 2000 margin.
In order to partially offset the decrease in margin discussed above, BB&T
restructured the available-for-sale securities portfolio early in the third
quarter of 2000, as referred to in "Securities" above. The restructuring was
undertaken to improve the overall yield of the portfolio, reduce the duration
and improve the liquidity of the portfolio. BB&T reinvested the proceeds from
these sales in higher yielding securities resulting in an improvement of
approximately five basis points in the 2000 net interest margin.
Provision for Loan and Lease Losses
A provision for loan and lease losses is charged against earnings in order to
maintain the allowance for loan and lease losses at a level that reflects
management's evaluation of the risk inherent in the portfolio as discussed
above. The amount of the provision is based on continuing assessments of
nonperforming and "watch list" loans, analytical reviews of loan loss
experience in relation to outstanding loans, and management's judgment with
respect to current and expected economic conditions and their impact on the
existing loan portfolio. The provision for loan and lease losses recorded by
BB&T in 2000 was $127.4 million, compared with $114.4 million in 1999 and
$114.7 million in 1998.
The increase in the current year provision for loan and lease losses resulted
from increased dollars of net charge-offs during the year, as well as
adjustment for acquired companies in order to comply with BB&T's reserve
policy. Net charge-offs were .25% of average loans and leases for 2000 compared
to .27% of average loans during 1999. The allowance for loan and lease losses
was 1.30% of loans and leases outstanding and was at 3.47 times total
nonaccrual and restructured loans and leases at year-end 2000, compared to
1.33% and 3.96 times, respectively, at December 31, 1999.
Noninterest Income
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking income, investment banking and brokerage fees,
insurance commissions, gains and losses on securities transactions and other
commissions and fees derived from bank-related activities.
Noninterest income for 2000 totaled $777.0 million, compared with $875.1
million in 1999 and $690.4 million in 1998. The 2000 noninterest income
reflects a decrease of $98.1 million, or 11.2%,
36
compared to 1999. Noninterest income for 1999 was $184.7 million, or 26.7%,
higher than 1998. The 2000 results includes the effect of the restructuring of
the securities portfolio during the second and third quarters of the year (as
further discussed in the "Securities" section), which reduced total noninterest
income by $222 million. Excluding the effect of the securities portfolio
restructuring, noninterest income would have increased $123.9 million, or
14.2%, compared to 1999. The major categories of noninterest income for 2000
are discussed in the following paragraphs.
Service charges on deposit accounts represent BB&T's largest single source of
noninterest revenue. Such revenues totaled $264.1 million in 2000, an increase
of $24.9 million, or 10.4%, compared to 1999. Service charges during 1999
totaled $239.1 million, which represented a 11.2% increase compared with 1998.
The primary factors contributing to these increases were changes in the fee
structure for deposit-related services and higher fees earned from commercial
account analysis and overdrafts, as well as personal account service charges.
Income from mortgage banking activities (which includes revenues from
originating, marketing and servicing mortgage loans) totaled $103.1 million in
2000, $163.6 million in 1999 and $127.1 million in 1998. In 2000, mortgage
banking income decreased $60.5 million, or 37.0%, compared to 1999. This
decline resulted from losses on sales of mortgage loans, lower origination fees
as compared to 1999, and the recapture in 1999 of valuation allowances related
to capitalized mortgage servicing rights established in 1998.
BB&T has an extensive insurance agency network which is the 11th largest in
the nation. Commission income from the agency network totaled $129.7 million in
2000, an increase of $50.2 million, or 63.2%, compared to 1999. Commission
income for 1999 totaled $79.5, an increase of $27.3 million, or 52.3% compared
to 1998. During 1999 and 2000, BB&T continued to acquire quality insurance
agencies in current markets. These acquisitions, accounted for as purchases,
resulted in an increase of $23.2 million in agency insurance commissions during
2000. In addition to acquisition activity, commissions have increased due to
strong growth in group health coverage, property and casualty insurance, life
insurance, as well as internal growth in the existing agency network and
products.
Revenue from corporate and personal trust services totaled $76.0 million in
2000, $70.1 million in 1999 and $54.9 million in 1998. The 2000 revenue
reflects an increase of $5.9 million, or 8.5% over 1999, which was $15.2
million, or 27.8%, more than 1998. Managed assets totaled $15.3 billion at the
end of 2000 compared to $14.3 billion at December 31, 1999. The revenue
increases in 2000 and 1999 are primarily the result of internal growth, driven
by increased general trust services income and higher revenues from estate
management and higher mutual fund fees. BB&T manages its own family of mutual
funds, which are marketed through its broker/dealer subsidiaries. Fees from the
management of these funds increased $3.1 million during 2000.
Investment banking and brokerage fees and commissions totaled $162.0 million
in 2000, $128.6 million in 1999 and $45.7 million in 1998. The 2000 revenue
reflects an increase of $33.4 million, or 25.9% over 1999, which was $82.9
million, or 181.3% greater than 1998. As previously reported, the large
increase in 1999 over 1998 revenue was primarily the result of the acquisition
of Scott & Stringfellow Financial, Inc., on March 26, 1999. The Scott &
Stringfellow acquisition was accounted for as a purchase; therefore, its
operating results were only included in BB&T's accounts in periods following
the acquisition.
Other nondeposit fees and commissions, including bankcard fees and merchant
discounts and international income, totaled $148.0 million in 2000, an increase
of $25.8 million, or 21.2%, compared with $122.2 million earned in 1999, which
represented an increase of $17.1 million, or 16.3%, over the $105.1 million in
1998 revenue. Major sources of nondeposit fees and commissions generating the
increase in 2000 revenue include merchant discount and other bankcard fees,
which increased $9.6 million, or 22.4%, and ATM and Point of Sale fees, which
increased $2.7 million, or 8.3%, due primarily to an increase in the number of
ATMs in service. BB&T's international banking unit also enjoyed a strong year,
with revenues up $1.2 million, or 19.9%, compared to 1999. The increase in this
37
category of revenue in 1999 compared to 1998 was primarily the result of higher
bankcard fees and merchant discount and increased ATM and Point of Sale fees.
Other noninterest income totaled $90.9 million for the twelve months ended
December 31, 2000, up $32.9 million, or 56.7%, compared to 1999. This was
primarily the result of income from increased investments in bank-owned life
insurance, which represented 81% of the increase. The remaining increase
reflects income from investments in venture capital, which totaled $4.2
million. Other noninterest income totaled $58.0 million for 1999, up $3.0
million, or 4.9%, compared to 1998.
The ability to generate significant amounts of noninterest revenues in the
future will be very important to the ultimate success of BB&T. Through its
subsidiaries, BB&T will continue to focus on asset management, mortgage
banking, trust, insurance, investment and brokerage services, as well as other
fee-producing products and services. BB&T plans to continue to pursue
acquisitions of additional insurance agencies and explore strategic
acquisitions of other nonbank entities as a means of continuing to expand fee-
based revenues. Also, among BB&T's principal strategies following the
acquisition of a financial institution is the cross-sell of noninterest-income
generating products and services to the acquired institution's client base.
BB&T will continue to focus on this strategy in the future.
The following table provides a breakdown of BB&T's noninterest income:
Table 15
Noninterest Income
% Change
----------------
Years Ended December 31,
---------------------------- 2000 v. 1999 v.
2000 1999 1998 1999 1998
-------- -------- -------- ------- -------
(Dollars in thousands)
Service charges on deposits $264,084 $239,144 $215,021 10.4% 11.2%
Mortgage banking income 103,086 163,562 127,122 (37.0) 28.7
Trust income 76,016 70,079 54,851 8.5 27.8
Agency insurance commissions 129,727 79,499 52,186 63.2 52.3
Other insurance commissions 15,580 13,991 13,099 11.4 6.8
Securities (losses) gains, net (218,531) (6,149) 10,155 NM NM
Bankcard fees and merchant
discounts 52,484 42,883 36,657 22.4 17.0
Investment banking and
brokerage fees and
commissions 161,964 128,609 45,723 25.9 181.3
Other bank service fees and
commissions 88,173 73,153 63,855 20.5 14.6
International income 7,337 6,120 4,563 19.9 34.1
Amortization of negative
goodwill 6,243 6,243 6,243 -- --
Other noninterest income 90,859 57,987 60,952 56.7 (4.9)
-------- -------- -------- ----- -----
Total noninterest income $777,022 $875,121 $690,427 (11.2)% 26.8%
======== ======== ======== ===== =====
- --------
NM--not meaningful
Noninterest Expense
Noninterest expense totaled $1.8 billion in 2000, $1.6 billion in 1999 and
$1.4 billion in 1998. Certain material, nonrecurring items stemming from
mergers and acquisitions were recorded as charges to noninterest expenses
during 2000, 1999 and 1998. In 2000, $140.0 million in pretax merger-related
expenses were recorded as charges to noninterest expenses, while 1999 included
$71.5 million
38
in these types of costs and $19.9 million in nonrecurring charges were
recognized in 1998. Excluding the impact of these nonrecurring charges from all
years, noninterest expense increased $45.9 million, or 2.9%, from 1999 to 2000
and $218.6 million, or 16.1%, from 1998 to 1999. These growth rates include the
effects of acquisitions accounted for as purchases, including BankFirst, Scott
& Stringfellow, Matewan and numerous insurance agencies. Excluding the merger-
related charges and the growth in expenses from purchase transactions, BB&T's
noninterest expense would have decreased 1.8% from 1999 to 2000, reflecting
effective expense control.
The control of noninterest expenses is a management priority. The primary
measure of the effectiveness of noninterest expense control is the efficiency
ratio, which is calculated by dividing total noninterest expenses by tax
equivalent net interest income plus noninterest income. The efficiency ratio
measures the percentage of revenues that are absorbed by costs of production.
For 2000, BB&T's efficiency ratio, excluding the effects of merger-related
charges, foreclosed property expense and restructuring of the securities
portfolio, was 51.5%. Comparable ratios for 1999 and 1998 were 54.0% and 53.8%,
respectively. The relatively flat trend in efficiency ratios during recent
years and current year improvement is a positive reflection on expense control
because, during this time period, BB&T has substantially increased its
noninterest revenue-producing lines of business, which typically have higher
efficiency ratios than traditional banking operations. Additionally,
acquisitions of traditional financial institutions generally cause the
efficiency ratio to increase until merger synergies are realized, which
typically does not fully occur in the first year of the combination.
Total personnel expense, the largest component of noninterest expense,
totaled $922.9 million in 2000, $834.9 million in 1999 and $700.3 million in
1998. Total personnel expense includes salaries and wages, as well as pension
and other employee benefits costs. Personnel expenses for 2000, 1999 and 1998
include nonrecurring merger-related costs in the form of severance pay,
contract termination payments, costs of funding early retirement packages and
other related benefits. Total personnel expense, excluding nonrecurring
charges, increased $70.5 million, or 8.6% in 2000. A significant portion of
this increase is the result of acquisitions accounted for as purchases in both
2000 and 1999. Excluding the effect of these transactions, personnel expense
increased $28.0 million, or 3.4%, which reflects normal annual adjustments to
compensation and increased incentive-related compensation.
Net occupancy and equipment expense totaled $265.0 million in 2000, $245.9
million in 1999 and $208.3 million in 1998. These amounts include nonrecurring
charges of $19.3 million in 2000, $6.1 million in 1999 and $1.1 million in 1998
related to branch closings and consolidations of backroom operations and
information systems associated with mergers. Excluding nonrecurring charges,
net occupancy and equipment expense for 2000 increased $5.8 million, or 2.4%
compared to 1999, which was an increase of $32.6 million, or 15.7% over 1998.
Increased expenses associated with telecommunications and information
technology initiatives were primarily responsible for the remainder of the
increases in this cost category incurred during the past two years.
Amortization expense associated with intangible assets, primarily goodwill,
and the amortization of capitalized mortgage servicing rights, totaled $80.4
million in 2000, $81.7 million in 1999 and $61.5 million in 1998. The
significant increase from 1998 to 1999 reflects substantially higher levels of
goodwill resulting from purchase accounting transactions completed during 1999
and 1998. At December 31, 2000, BB&T's unamortized goodwill totaled $747.4
million, up $66.5 million, or 9.8%, compared to 1999. This increase resulted
from the 2000 purchases of Edgar M. Norris & Co., BankFirst Corporation,
Laureate Capital Corp., and five insurance agencies. Capitalized mortgage
servicing rights also increased during 2000, totaling $237.9 million, up 25.3%,
or $48.1 million over 1999.
Other noninterest expense totaled $493.3 million for 2000, $484.7 million in
1999 and $406.8 million in 1998. These amounts include nonrecurring charges
principally related to mergers and acquisitions totaling $89.5 million in 2000,
$51.8 million in 1999 and $9.6 million in 1998. The
39
nonrecurring items include losses on disposals of fixed assets, operational
charge-offs, branch and departmental supplies, donations, legal fees,
accounting fees, printing costs, regulatory filing fees and other professional
services. Excluding these costs, other noninterest expense decreased $28.7
million, or 6.6% from 1999 to 2000. The decrease from 1999 to 2000 is primarily
related to additional costs incurred in 1999 associated with upgrading BB&T's
systems to make them Year 2000 compliant.
The following table presents a breakdown of BB&T's noninterest expenses for
the past three years:
Table 16
Noninterest Expense
% Change
---------------
Years Ended December 31,
-------------------------------- 2000 v. 1999 v.
2000 1999 1998 1999 1998
---------- ---------- ---------- ------- -------
(Dollars in thousands)
Salaries and wages $ 758,736 $ 683,624 $ 578,696 11.0% 18.1%
Pension and other employee
benefits 164,153 151,264 121,563 8.5 24.4
Net occupancy expense on bank
premises 115,395 103,896 89,018 11.1 16.7
Furniture and equipment
expense 149,560 141,955 119,297 5.4 19.0
Federal deposit insurance
premiums 10,879 10,531 6,537 3.3 61.1
Foreclosed property expense 3,963 4,816 2,880 (17.7) 67.2
Amortization of intangibles
and mortgage servicing
rights 80,432 81,699 61,523 (1.6) 32.8
Software 21,247 19,299 11,610 10.1 66.2
Telephone 40,583 32,487 27,162 24.9 19.6
Donations 12,827 14,526 7,828 (11.7) 85.6
Advertising and public
relations 33,760 32,057 34,751 5.3 (7.8)
Travel and transportation 21,351 16,526 12,640 29.2 30.7
Professional services 67,750 78,937 69,928 (14.2) 12.9
Supplies 29,611 26,563 25,111 11.5 5.8
Loan and lease expense 38,094 38,137 28,657 (0.1) 33.1
Deposit related expense 19,214 19,721 16,109 (2.6) 22.4
Other noninterest expenses 193,984 191,141 163,605 1.5 16.8
---------- ---------- ---------- ----- ----
Total noninterest expense $1,761,539 $1,647,179 $1,376,915 6.9% 19.6%
========== ========== ========== ===== ====
Provision for Income Taxes
BB&T's provision for income taxes totaled $279.2 million for 2000, a decrease
of $61.6 million, or 18.1%, compared to 1999. The provision for income taxes
totaled $340.9 million in 1999 and $306.7 million in 1998. Excluding the income
tax effect related to the nonrecurring items discussed previously, BB&T's tax
provision would have been $411.5 million in 2000, $370.3 million in 1999 and
$313.7 million in 1998. Excluding the effect of the nonrecurring items on
pretax income and the income tax provision, BB&T's effective tax rates for the
years ended December 31, 1999, 1998 and 1997 were 32.0%, 32.6% and 31.9%,
respectively.
During the fourth quarter of 2000, BB&T transferred responsibility for the
management of certain operations to a subsidiary in a tax-advantaged
jurisdiction, thereby lowering the effective income tax rate applicable to
certain lease investments. In accordance with SFAS No. 13, "Accounting for
Leases", the net income from the affected leases was recalculated from
inception based on the new effective income tax rate. The recalcuation had the
effect of reducing net interest income for 2000 by $14.3 million and reducing
the current year's income tax provision by $19.8
40
million. BB&T intends to permanently reinvest the earnings of this subsidiary
and, therefore, in accordance with the provisions of SFAS No. 109, "Accounting
for Income Taxes", deferred income taxes associated with the current year's
income tax benefit have not been provided.
Market Risk Management
The effective management of market risk is essential to achieving BB&T's
strategic financial objectives. As a financial institution, BB&T's most
significant market risk exposure is interest rate risk. The primary objective
of interest rate risk management is to minimize the effect that changes in
interest rates have on net interest income. This is accomplished through active
management of asset and liability portfolios with a focus on the strategic
pricing of asset and liability accounts and management of appropriate maturity
mixes of assets and liabilities. The goal of these activities is the
development of appropriate maturity and repricing opportunities in BB&T's
portfolios of assets and liabilities that will produce consistent net interest
income during periods of changing interest rates. BB&T's Asset / Liability
Management Committee ("ALCO") monitors loan, investment and liability
portfolios to ensure comprehensive management of interest rate risk. These
portfolios are analyzed for proper fixed-rate and variable-rate mixes under
various interest rate scenarios.
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.
BB&T also uses off-balance sheet financial instruments to manage interest
rate sensitivity and net interest income. These instruments, commonly referred
to as derivatives, primarily consist of interest rate swaps, caps, floors,
financial forward and futures contracts and options written and purchased.
Management accounts for these financial instruments as hedges when the
following conditions are met: (1) the specific assets, liabilities, firm
commitments or anticipated transactions (or an identifiable group of
essentially similar items) to be hedged expose BB&T to interest rate risk or
price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed amounts payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.
All of the derivatives contracts to which BB&T is a party settle monthly,
quarterly or semiannually. Further, BB&T has netting agreements with the
dealers with which it does business. Because of these factors, BB&T's off-
balance sheet credit risk exposure at December 31, 2000 was immaterial.
41
Derivative contracts are written in amounts referred to as notional amounts.
Notional amounts only provide the basis for calculating payments between
counterparties and do not represent amounts to be exchanged between parties and
are not a measure of financial risks. On December 31, 2000, BB&T had interest
rate swaps, caps, floors and collars outstanding with notional amounts totaling
$725.9 million. The estimated fair value of open contracts used for risk
management purposes at December 31, 2000 had net unrealized gains of $.3
million.
BB&T uses these derivatives as synthetic instruments to hedge specified
assets or groups of assets, liabilities or groups of liabilities, forward
commitments and anticipated transactions. BB&T's derivatives are primarily used
to hedge variable rate commercial loans, adjustable rate mortgage loans, retail
certificates of deposit and floating rate notes. These hedges resulted in an
increase in net interest expense of $8.1 million in 2000 and $2.9 million in
1999, compared with an increase in net interest income of $.9 million in 1998.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. BB&T also utilizes over-the-counter purchased put options and written
call options in its mortgage banking activities. Purchased put options are used
to hedge fixed rate mortgage loan originations against increasing interest
rates. Written call options are used to reduce the premiums paid for purchased
put options thereby reducing the cost of the hedge.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. See Note Q. "Derivatives and Off-
Balance Sheet Financial Instruments" for the required quantitative disclosures.
Effective January 1, 2001, the accounting for these instruments will change to
comply with the provisions of SFAS No. 133, as explained in Note A.
Liquidity, Inflation and Changing Interest Rates
The majority of assets and liabilities of financial institutions are monetary
in nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Fluctuations in interest rates and actions of the Board of Governors of the
Federal Reserve System ("FRB") to regulate the availability and cost of credit
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.
BB&T's interest rate sensitivity is illustrated in the following table. The
table reflects rate-sensitive positions at December 31, 2000, and is not
necessarily indicative of positions on other dates. The carrying amounts of
interest-rate-sensitive assets and liabilities and the notional amounts of
swaps and other derivative financial instruments are presented in the periods
in which they next reprice to market rates or mature and are aggregated to show
the interest rate sensitivity gap. To reflect anticipated prepayments, certain
asset and liability categories are shown in the table using estimated cash
flows rather than contractual cash flows.
42
Table 17
Interest Rate Sensitivity Gap Analysis
December 31, 2000
Expected Repricing or Maturity Date
-------------------------------------------------------------
Within One to Three to After
One Year Three Years Five Years Five Years Total
----------- ----------- ---------- ---------- -----------
(Dollars in thousands)
Assets
Securities and other
interest-earning
assets* $ 1,064,027 $ 2,866,665 $5,235,174 $4,645,787 $13,811,653
Federal funds sold and
securities purchased
under resale
agreements or similar
arrangements 243,011 -- -- -- 243,011
Loans and leases** 25,266,455 6,567,265 3,964,285 4,502,629 40,300,634
----------- ----------- ---------- ---------- -----------
Total interest-earning
assets 26,573,493 9,433,930 9,199,459 9,148,416 54,355,298
----------- ----------- ---------- ---------- -----------
Liabilities
Savings and interest
checking*** -- 1,263,827 421,276 421,276 2,106,379
Money rate savings*** 5,557,021 5,557,020 -- -- 11,114,041
Other time deposits 13,807,064 5,480,750 414,985 27,373 19,730,172
Federal funds
purchased and
securities sold under
repurchase agreements
or similar
arrangements 3,990,015 -- -- -- 3,990,015
Long-term debt and
other borrowings 4,535,843 278,998 721,103 5,785,409 11,321,353
----------- ----------- ---------- ---------- -----------
Total interest-bearing
liabilities 27,889,943 12,580,595 1,557,364 6,234,058 $48,261,960
----------- ----------- ---------- ---------- -----------
Asset-liability gap (1,316,450) (3,146,665) 7,642,095 2,914,358
----------- ----------- ---------- ----------
Derivatives affecting
interest rate
sensitivity:
Pay fixed interest
rate swaps 226,828 (185,000) (18,943) (22,885)
Receive fixed interest
rate swaps (123,000) 20,000 10,000 93,000
Caps, floors and
collars (76,050) 47,250 28,800 --
----------- ----------- ---------- ----------
27,778 (117,750) 19,857 70,115
----------- ----------- ---------- ----------
Interest rate
sensitivity gap $(1,288,672) $(3,264,415) $7,661,952 $2,984,473
=========== =========== ========== ==========
Cumulative interest rate
sensitivity gap $(1,288,672) $(4,553,087) $3,108,865 $6,093,338
=========== =========== ========== ==========
- --------
* Securities based on amortized cost.
** Loans and leases include loans held for sale and are net of unearned
income.
*** Projected runoff of deposits that do not have a contractual maturity date
was computed based upon decay rate assumptions developed by bank
regulators to assist banks in addressing FDICIA rule 305.
43
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of projected 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, average rates earned and paid, and scheduled maturities, payments of
asset and liability portfolios, together with multiple scenarios of projected
prepayments, repricing opportunities and anticipated volume growth. Using this
information, the model projects earnings based on projected portfolio balances
under multiple interest rate scenarios. This level of detail is needed to
simulate the effect that changes in interest rates and portfolio balances may
have on the earnings of BB&T. This method is subject to the accuracy of the
assumptions that underlie the process, but it provides a better illustration of
the sensitivity of earnings to changes in interest rates than other analyses
such as static or dynamic gap.
The asset/liability management process requires a number of key assumptions.
Management determines the most likely outlook for the economy and interest
rates by analyzing external factors, including published economic projections
and data, the effects of likely monetary and fiscal policies as well as any
enacted or prospective regulatory changes. 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 also
considered. 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 shows the effect that the indicated changes in interest
rates would have on net interest income as projected for the next twelve months
under the "most likely" interest rate scenario incorporated into the Interest
Sensitivity Simulation computer model. Key assumptions in the preparation of
the table include prepayment speeds on mortgage-related assets; cash flows and
maturities of derivative financial instruments, changes in market condition,
loan volumes and pricing, deposit sensitivity, customer preferences, and
capital plans. The resulting change in net interest income reflects the level
of sensitivity that net interest income has in relation to changing interest
rates.
Table 18
Interest Sensitivity Simulation Analysis
Annualized
Hypothetical
Percentage
Interest Rate Scenario Change in
------------------------------------------- Net Interest
Linear Prime Rate Income
------ ---------- ------------
3.00% 12.50% -1.50%
1.50 11.00 -.93
No Change 9.50 -.22
(1.50) 8.00 -.26
(3.00) 6.50 -.63
Management has established parameters for asset/liability management which
prescribe a maximum impact on projected net interest income of 3% for a 150
basis point parallel change in interest rates over six 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.
44
Liquidity represents the continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities and funding of loan commitments. In addition to the level of liquid
assets, many other factors affect the ability to meet liquidity needs,
including access to a variety of funding sources, capital position and general
market conditions.
Traditional sources of liquidity include proceeds from maturity of
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements, FHLB advances and other short-term borrowed
funds, as well as the issuance of long-term debt, supplement these traditional
sources. Management believes liquidity obtainable from these sources is
adequate to meet current requirements.
Capital Adequacy and Resources
The maintenance of appropriate levels of capital is a management priority and
is monitored on an ongoing basis. BB&T's principal goals related to capital are
to provide an adequate return to shareholders while retaining a sufficient base
from which to support future growth and to comply with all regulatory
standards.
Shareholders' equity totaled $4.8 billion at December 31, 2000, an increase
of 17.8% from year-end 1999. Factors which significantly affected growth in
shareholders' equity during 2000 were: earnings retained after dividends to
shareholders, which totaled $267.0 million; the market value of common shares
issued in connection with acquisitions accounted for as purchases, which
amounted to $194.0 million; exercises of stock options and other incentive plan
transactions totaling $41.1 million; repurchase of 7.0 million shares of common
stock at a cost of $203.6 million, that were reissued in connection with
mergers and acquisitions, and unrealized holding gains on securities available
for sale, which totaled $412.9 million, net of deferred income tax benefits
during 2000.
Bank holding companies and their subsidiaries are subject to regulatory
requirements with respect to risk-based capital adequacy. Risk-based capital
ratios measure capital as a percentage of a combination of risk-weighted
balance sheet and off-balance sheet risk. The risk-weighted values of both
balance sheet and off-balance sheet items are determined in accordance with
risk factors specified by Federal bank regulatory pronouncements.
Tier 1 capital (common shareholders' equity, excluding unrealized gains
(losses) on debt securities available for sale, net of tax effect, plus certain
mandatorily redeemable capital securities, less nonqualifying intangible
assets) is required to be at least 4% of risk-weighted assets, and total
capital (the sum of Tier 1 capital, a qualifying portion of the allowance for
loan and lease losses and qualifying subordinated debt) must be at least 8% of
risk-weighted assets, with one half of the minimum consisting of Tier 1
capital. The Tier 1 capital ratio for BB&T at the end of 2000 was 9.3%, and the
total capital ratio was 12.0%. At the end of 1999, these ratios were 9.9% and
13.2%, respectively.
In addition to the risk-based capital measures described above, regulators
have also established minimum leverage capital requirements for banking
organizations. This is the primary measure of capital adequacy used by
management and is calculated by dividing period-end Tier 1 capital by average
tangible assets for the most recent quarter. BB&T's Tier 1 leverage ratio at
year-end 2000 and 1999 was 7.1%. The minimum required Tier 1 leverage ratio
ranges from 3% to 5% depending upon Federal bank regulatory agency evaluation
of an organization's overall safety and soundness. BB&T's regulatory capital
and ratios are set forth in the following table.
45
Table 19
Capital--Components and Ratios
December 31,
----------------------
2000 1999
---------- ----------
(Dollars in
thousands)
Tier 1 capital $3,965,892 $3,679,736
Tier 2 capital 1,156,753 1,221,886
---------- ----------
Total regulatory capital $5,122,645 $4,901,622
========== ==========
Risk-based capital ratios:
Tier 1 capital 9.3% 9.9%
Total regulatory capital 12.0 13.2
Tier 1 leverage ratio 7.1 7.1
Segment Results
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. See
Note S. "Operating Segments", in the "Notes to Consolidated Financial
Statements" herein for a full discussion of the segments, the internal
accounting and reporting practices utilized by BB&T to manage these segments
and financial disclosures by segment. Fluctuations in noninterest income and
expense earned and incurred related to external customers are more fully
discussed in the "Noninterest Income" and "Noninterest Expense" sections of
this discussion and analysis. This analysis excludes balances that are
considered nonrecurring merger-related expenses, as such expenses are typically
not allocated at the segment level, but are retained at the corporate level.
Banking Network
The Banking Network grew internally during 2000 as well as through five
mergers of banking companies, four of which were accounted for as poolings of
interests. Prior period balances have been restated to reflect the impact of
these transactions, except for internal management accounting practices, for
which it is not practicable to restate balances. The total Banking Network is
composed of 854 banking offices, up from 831 banking offices at December 31,
1999. Net interest income for the Banking Network totaled $1.6 billion, an
increase of $38.5 million, or 2.4%, from 1999. The 1999 balance reflected an
increase of $131.9 million, or 9.0%, compared to 1998. The slight increase in
2000 is composed of a 9.5% decrease in net interest income from external
customers and a 48.8% increase in the net credit generated by the internal
funds transfer pricing ("FTP") system. The increase in net intersegment
interest income reflects the addition of FTP adjustments associated with the
loan and deposit balances of the institutions acquired during 2000. Also, as
interest rates increased during 2000, the FTP credits and charges also
increased because they are based primarily on the London Interbank Offer Rate
("LIBOR"). Deposits, which receive an FTP credit, reprice faster than loans,
which receive an FTP charge, adding to the increase in the net FTP credit.
The provision for loan and lease losses was basically unchanged compared to
1999, decreasing less than 1% to $129.2 million. This slight decrease reflects
continued strong credit quality. The 1999 provision for loan and lease losses
was $12.5 million, or 10.8% greater than the 1998 balance. Noninterest income
produced from external customers through the Banking Network decreased $49.2
million, or 11.4% during 2000, while noninterest income allocated from other
segments decreased $3.1 million, or 2.5%. Comparing 1999 to 1998, noninterest
income from external customers increased $50.1 million, or 13.1%, and
intersegment noninterest income decreased $27.1 million, or
46
18.0%. Noninterest expenses incurred within the Banking Network decreased
$218.6 million, or 23.7%, while noninterest expenses allocated from the other
operating segments increased $63.8 million, or 24.4%. The increases in
intersegment noninterest expense reflects a significant increase in the amount
of expenses allocated to the Banking Network during 2000 because of the
additional allocations for financial institutions acquired during 2000.
Comparing 1999 to 1998, noninterest expense increased $113.0 million, or 14.0%,
and noninterest expenses allocated to the Banking Network from intercompany
sources increased $51.6 million, or 24.6%.
The provision for income taxes allocated to the Banking Network increased
$37.8 million, or 13.5%, because of higher pretax income. The 1999 provision
for income taxes decreased $37.3 million, or 11.8%, compared to 1998. Total
identifiable assets for the Banking Network decreased 9.1% to a total of $30.3
billion, compared to 1999, due in part to lower securities balances held at the
banking network. Total identifiable assets for the Banking Network increased
9.1%, or $2.8 billion, compared to 1998.
Mortgage Banking
BB&T's Mortgage Banking segment experienced a slower 2000 compared to 1999
because of less favorable mortgage rates. By the end of 2000, the rate
environment had improved leading to a strong finish to the year. While BB&T's
mortgage originations slowed for the full year, BB&T remains the largest
originator of mortgage loans in North and South Carolina, with 2000
originations totaling $4.7 billion, up from $4.6 billion originated during
1999, and down from a record $5.6 billion in 1998. BB&T's mortgage servicing
portfolio totaled $23.6 billion at year-end 2000.
Net interest income for the Mortgage Banking segment totaled $115.2 million,
down less than 1% compared to 1999. The 1999 balance reflected a decrease of
$25.4 million, or 18.0%, compared with 1998, due to the slowdown in
originations discussed above. The provision for loan and lease losses decreased
$.6 million, or 16.3%, to a balance of $3.2 million. This reduction was because
of continued strong credit quality and flat originations during 2000. The 1999
provision reflected a $.4 million, or 8.9% decrease compared to 1998.
Noninterest income produced from external customers decreased $29.5 million, or
25.7% during 2000. Noninterest income from external sources increased $10.9
million, or 10.5%, from 1998 to 1999. Noninterest expenses incurred within the
Mortgage Banking segment decreased $2.4 million, or 4.0%, while noninterest
expenses allocated from the other operating segments increased $4.1 million, or
21.5%. The increase in expenses allocated to the Mortgage Banking segment
during 2000 reflects the results of acquired institutions, including Premier
Lending, the mortgage operations of One Valley and Laureate Capital. Comparing
1999 and 1998, noninterest expenses from external sources decreased $15.2
million, or 19.9%, and intersegment noninterest expenses increased $2.7
million, or 16.7%.
The provision for income taxes allocated to the Mortgage Banking segment
decreased $13.0 million, or 28.8% due to lower pretax income. For 1999, the
provision for income taxes had decreased $11.0 million, or 19.6%, compared to
1998. Total identifiable assets for the Mortgage Banking segment increased $2.6
billion, or 46.2%, due to the acquisitions during 2000. For 1999, the
identifiable segment assets had decreased $654.2 million, or 10.3%, compared to
1998.
Trust Services
Net interest income for the Trust Services segment totaled $13.8 million, an
increase of $5.3 million, or 61.6%, compared to 1999. This increase in composed
of an 18.2% increase in net interest expense paid to external customers and a
26.9% increase in the net credit for funds as calculated by BB&T's internal FTP
system. This increase is due to an increase in total deposits held in trust and
the resulting higher funds credit allocated due to the higher interest rate
environment during 2000. The net interest income in 1999, which totaled $8.5
million, was $4.3 million, or 99.7% greater than the balance for 1998.
Noninterest income produced from external customers increased $22.9 million, or
40.0% during 2000, while noninterest income for 1999 reflected an increase of
$13.7 million, or
47
31.3%, compared to 1998. Noninterest expenses incurred within the Trust
Services segment increased $13.9 million, or 36.7%, while noninterest expenses
allocated from the other operating segments increased $1.2 million, or 47.3%.
This increase reflects additional expenses allocated due to the trust
operations acquired from One Valley. For 1999, noninterest expense increased
$9.4 million, or 32.6%, while expenses allocated to the Trust Services segment
increased $.6 million, or 30.1%. The provision for income taxes allocated to
Trust Services increased $2.5 million, or 31.4%, due to higher pretax income.
Comparing 1999 and 1998, the provision for income taxes increased $1.5 million,
or 23.2%. Total identifiable assets for Trust Services increased 25.6% to a
total of $39.5 million compared to 1999, and increased 18.0% from 1998 to 1999.
The increase during 2000 resulted from greater securities holdings.
Agency Insurance
Noninterest income produced from external sources increased $44.1 million, or
56.5% during 2000, due to the acquisitions of six insurance agencies during the
year, as well as internal growth. For 1999, noninterest income increased $27.9
million, or 55.5%, compared to 1998. Noninterest expenses incurred within the
Agency Insurance segment increased $27.6 million, or 46.2%, while noninterest
expenses allocated from the other operating segments increased $1.4 million, or
49.5%. The increase in expenses allocated to Agency Insurance results from the
purchased agencies discussed above. For 1999, noninterest expenses increased
$20.3 million, or 51.4%, and intersegment noninterest expenses increased 13.8%.
The provision for income taxes allocated to Agency Insurance increased $6.0
million consistent with the growth in pretax income. For the prior year, the
provision for income taxes increased $2.9 million. Total identifiable assets
for Agency Insurance increased 57.9% to a total of $100.9 million, primarily
due to the acquired insurance agencies. For 1999, total identifiable assets
increased 58.6%.
Investment Banking and Brokerage
Net interest income for the Investment Banking and Brokerage segment totaled
$11.7 million, an increase of $4.1 million compared to 1999. This increase
reflects the purchase of Edgar M. Norris & Co., an independent broker/dealer
based in Greenville, South Carolina, and other internal growth. For the prior
year, net interest income increased $6.4 million from 1998 to 1999. Noninterest
income produced from external customers increased $31.5 million, or 23.8%
during 2000. For 1999, noninterest income increased $83.9 million compared to
1998. Noninterest expenses incurred within the Investment Banking and Brokerage
segment increased $41.7 million, while noninterest expenses allocated from the
other operating segments decreased 16.5%. The decrease in allocated expenses
resulted from decreased administrative fees charged by the Banking Network.
Comparing 1999 and 1998, noninterest expenses increased $80.8 million, and
intersegment noninterest expenses increased $.8 million. The provision for
income taxes allocated to Investment Banking and Brokerage decreased $4.5
million, consistent with the decrease in pretax income. For 1999, the provision
for income taxes increased $3.2 million compared to 1998. Total identifiable
assets for the Investment Banking and Brokerage segment increased 7.5% to a
total of $751.7 million principally due to the acquisition of Edgar M. Norris &
Co., and internal growth. For 1999, total identifiable segment assets increased
$460.5 million.
Treasury
Net interest income for the Treasury segment totaled $239.2 million, an
increase of $98.9 million, or 70.5%, compared to 1999. This increase is
comprised of a 1.5% decrease in net interest income from external customers,
offset by a $101.3 million increase in the net credit for funds as calculated
by BB&T's internal FTP system. This increase is principally due to changes in
the mix of securities held by the Treasury segment. For 1999, net interest
income increased $13.7 million compared to 1998. Noninterest income produced
from external customers decreased $189.9 million during 2000, principally
because of a restructuring of the securities portfolio, which resulted in
pretax securities losses of approximately $222 million. For 1999, noninterest
income decreased $10.6 million.
48
Noninterest expenses incurred within the Treasury segment increased $1.4
million, or 28.7%, while noninterest expenses allocated from the other
operating segments decreased $7.7 million, or 93.3%. This decrease reflects
lower administrative fees charged by the Banking Network. For 1999, noninterest
expenses increased 10.6% and intersegment noninterest expenses increased 53.4%.
The provision for income taxes allocated to the Treasury segment decreased
$31.7 million due to the lower levels of pretax income that resulted from the
significant securities losses during 2000. In 1999, the provision for income
taxes decreased 30.2%, consistent with a decline in pretax income. Total
identifiable assets for the Treasury segment increased 48.4% during 2000 to a
total of $17.1 billion. For 1999, total identifiable segment assets for the
Treasury segment increased $2.1 billion.
Common Stock and Dividends
BB&T's ability to pay dividends is primarily dependent on earnings from
operations, the adequacy of capital and the availability of liquid assets for
distribution. BB&T's ability to generate liquid assets for distribution is
primarily dependent on the ability of the banking subsidiaries to pay dividends
to BB&T. BB&T's payment of cash dividends is an integral part of management's
goals to retain sufficient capital to support future growth and to meet
regulatory requirements while providing a competitive return on investment to
shareholders. BB&T's common dividend payout ratio, computed by dividing
dividends paid per common share by basic earnings per common share, was 54.78%
in 2000 as compared to 42.13% in 1999. Excluding the impact of the nonrecurring
charges discussed in "Analysis of Results of Operations," the dividend payout
ratio would have been 39.27% in 2000 as compared to 38.66% in 1999. BB&T's cash
dividends per common share increased 14.7% during 2000 to $.86 per common share
for the year, as compared to $.75 per common share in 1999. This increase
marked the 28th consecutive year that BB&T's annual cash dividend has been
increased. A discussion of dividend restrictions is included in Note N.--
"Regulatory Requirements and Other Restrictions," and "Regulatory
Considerations."
BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "BBT". BB&T's common stock was held by 83,993 shareholders of record
at December 31, 2000. The accompanying table, "Quarterly Common Stock Summary,"
sets forth the quarterly high, low and last sales prices for the common stock
based on the daily closing price and the dividends paid per share of common
stock for each of the last eight quarters.
Table 20
Quarterly Common Stock Summary
2000 1999
------------------------------ ------------------------------
Closing Sales Prices Closing Sales Prices
-------------------- Dividends -------------------- Dividends
High Low Last Paid High Low Last Paid
------ ------ ------ --------- ------ ------ ------ ---------
Quarter Ended:
March 31 $29.19 $22.00 $28.06 $.20 $40.44 $34.94 $36.19 $.175
June 30 31.75 23.88 23.88 .20 40.25 33.81 36.69 .175
September 30 30.44 24.06 30.13 .23 36.63 30.50 32.38 .20
December 31 38.25 27.38 37.31 .23 36.94 27.31 27.38 .20
---- -----
Year $38.25 $22.00 $37.31 $.86 $40.44 $27.31 $27.38 $ .75
==== =====
Fourth Quarter Results
Net income for the fourth quarter of 2000 was $225.5 million, compared to
earnings of $166.8 million for the comparable period of 1999. On a per share
basis, diluted net income for the fourth quarter of 2000 was $.56 compared to
$.41 for the same period a year ago. Annualized returns on average assets and
average shareholders' equity were 1.58% and 20.14%, respectively, for the
fourth quarter of 2000. The fourth quarter of 2000 and 1999 included $7.1
million and $30.4 million, respectively, after tax benefits, of nonrecurring
charges primarily associated with the completion of
49
mergers and acquisitions. Excluding these items, net income for the fourth
quarter of 2000 would have been $232.6 million, an increase of $34.1 million,
or 17.2%, compared to the recurring fourth quarter 1999 results. Diluted
earnings per share, excluding the merger-related charges, would have been $.58,
an increase of 18.4% compared to the fourth quarter of 1999.
Net interest income on an FTE basis amounted to $550.4 million for the fourth
quarter of 2000, an increase of 4.4% compared to $527.3 million for the same
period of 1999. Noninterest income totaled $263.9 million for the fourth
quarter of 2000, up 18.0% from $223.6 million earned during the fourth quarter
of 1999. BB&T's noninterest expense for the fourth quarter of 2000 totaled
$404.8 million, down 7.0% from the $435.3 million recorded in the fourth
quarter of 1999. Excluding the merger-related charges from both years,
noninterest expense for the fourth quarter of 2000 would have decreased 3.2%
from the fourth quarter of 1999.
The fourth quarter 2000 provision for loan and lease losses totaled $35.0
million compared to $40.0 million for the fourth quarter of 1999, a decrease of
12.6%.
50
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to four quarters in the periods ended December
31, 2000 and 1999.
Table 21
Quarterly Financial Summary--Unaudited
2000 1999
------------------------------------------------- --------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Consolidated Summary of
Operations:
Net interest income
FTE $ 550,398 $ 538,651 $ 532,297 $ 526,310 $ 527,314 $ 517,565 $ 505,242 $ 479,489
FTE adjustment 53,057 28,286 24,564 24,121 24,729 25,620 24,817 21,496
Provision for loan and
lease losses 35,000 38,200 27,914 26,317 40,032 24,352 26,078 23,971
Securities gains
(losses), net 4,380 (181,361) (41,279) (271) (1,969) (1,882) (2,895) 597
Other noninterest
income 259,556 253,241 247,214 235,542 225,565 224,407 228,540 202,758
Noninterest expense 404,826 478,925 440,801 436,987 435,275 433,496 401,703 376,705
Provision for income
taxes 95,995 15,856 79,534 87,853 84,083 82,843 89,759 84,198
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $ 225,456 $ 49,264 $ 165,419 $ 186,303 $ 166,791 $ 173,779 $ 188,530 $ 176,474
=========== =========== =========== =========== =========== =========== =========== ===========
Diluted net income per
share $ .56 $ .12 $ .41 $ .46 $ .41 $ .43 $ .47 $ .44
=========== =========== =========== =========== =========== =========== =========== ===========
Selected Average
Balances:
Total assets $56,752,304 $55,579,535 $54,317,488 $53,173,484 $52,637,446 $51,667,452 $50,660,806 $48,437,194
Securities, at
amortized cost 13,483,213 13,479,872 13,335,345 13,264,718 13,447,769 13,814,500 13,450,238 12,137,366
Loans and leases* 38,971,153 37,970,855 37,138,517 36,179,435 35,347,238 34,134,406 33,416,040 32,689,363
Total earning assets 52,728,060 51,720,222 50,799,599 49,823,206 49,181,874 48,448,160 47,344,073 45,199,843
Deposits 36,468,268 36,426,142 35,713,025 34,971,091 34,276,963 33,994,031 33,525,563 33,100,204
Short-term borrowed
funds 6,693,489 5,756,069 7,001,270 7,298,032 6,940,113 6,676,203 6,337,899 5,104,085
Long-term debt 8,247,480 8,173,862 6,610,451 6,034,097 6,582,262 6,316,154 6,048,556 5,505,189
Total interest-bearing
liabilities 46,587,239 45,407,383 44,297,727 43,528,617 42,951,801 42,256,418 41,264,928 39,208,742
Shareholders' equity 4,452,562 4,418,578 4,226,740 4,118,571 4,101,967 3,967,306 4,057,292 4,049,638
- ----
* Loans and leases are net of unearned income and include loans held for sale.
51
SIX YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
(Dollars in thousands, except per share data)
As of / For the Years Ended December 31, Five Year
---------------------------------------------------------------------------- Compound
2000 1999 1998 1997 1996 1995 Growth Rate
----------- ----------- ----------- ----------- ----------- ----------- -----------
Summary of Operations
Interest income $ 4,339,674 $ 3,775,553 $ 3,492,813 $ 3,163,890 $ 2,858,370 $ 2,681,366 10.1%
Interest expense 2,322,046 1,842,605 1,733,108 1,540,561 1,371,882 1,325,225 11.9
----------- ----------- ----------- ----------- ----------- ----------- ----
Net interest income 2,017,628 1,932,948 1,759,705 1,623,329 1,486,488 1,356,141 8.3
Provision for loan and
lease losses 127,431 114,433 114,729 123,096 77,919 54,694 18.4
----------- ----------- ----------- ----------- ----------- ----------- ----
Net interest income
after provision for
loan and lease losses 1,890,197 1,818,515 1,644,976 1,500,233 1,408,569 1,301,447 7.7
Noninterest income 777,022 875,121 690,427 588,347 445,134 346,430 17.5
Noninterest expense 1,761,539 1,647,179 1,376,915 1,326,657 1,159,092 1,119,710 9.5
----------- ----------- ----------- ----------- ----------- ----------- ----
Income before income
taxes 905,680 1,046,457 958,488 761,923 694,611 528,167 11.4
Provision for income
taxes 279,238 340,883 306,744 260,197 227,302 173,453 10.0
----------- ----------- ----------- ----------- ----------- ----------- ----
Net income $ 626,442 $ 705,574 $ 651,744 $ 501,726 $ 467,309 $ 354,714 12.0%
=========== =========== =========== =========== =========== =========== ====
Per Common Share
Average shares
outstanding (000's):
Basic 398,916 395,871 390,777 387,667 387,598 386,109 .7%
Diluted 404,005 402,553 398,608 394,996 396,127 400,369 .2
Basic earnings per
share $ 1.57 $ 1.78 $ 1.67 $ 1.29 $ 1.20 $ 0.90 11.8%
=========== =========== =========== =========== =========== =========== ====
Diluted earnings per
share $ 1.55 $ 1.75 $ 1.64 $ 1.27 $ 1.18 $ 0.89 11.7%
=========== =========== =========== =========== =========== =========== ====
Cash dividends paid $ .86 $ .75 $ .66 $ .58 $ .50 $ .43 15.1%
Shareholders' equity 11.91 10.19 10.17 9.12 8.62 8.34 7.4
Average Balances
Securities, at
amortized cost $13,391,283 $13,217,708 $11,548,592 $10,567,862 $ 9,731,073 $ 9,311,950 7.5%
Loans and leases* 37,569,941 33,904,694 30,543,475 27,100,788 24,438,883 22,659,115 10.6
Other assets 4,001,092 3,742,090 3,389,861 2,715,990 2,522,365 2,417,805 10.6
----------- ----------- ----------- ----------- ----------- ----------- ----
Total assets $54,962,316 $50,864,492 $45,481,928 $40,384,640 $36,692,321 $34,388,870 9.8%
=========== =========== =========== =========== =========== =========== ====
Deposits $35,897,651 $33,728,154 $31,193,327 $29,243,442 $27,728,536 $25,665,570 6.9%
Other liabilities 7,488,202 6,975,806 5,898,139 4,469,812 3,583,192 4,375,395 11.3
Long-term debt 7,271,632 6,116,548 4,647,116 3,303,968 2,232,005 1,398,506 39.1
Common shareholders'
equity 4,304,831 4,043,984 3,743,346 3,363,646 3,125,865 2,869,490 8.5
Preferred shareholders'
equity -- -- -- 3,772 22,723 79,909 NM
----------- ----------- ----------- ----------- ----------- ----------- ----
Total liabilities and
shareholders' equity $54,962,316 $50,864,492 $45,481,928 $40,384,640 $36,692,321 $34,388,870 9.8%
=========== =========== =========== =========== =========== =========== ====
Period End Balances
Total assets $59,340,228 $52,999,759 $48,190,494 $43,606,211 $38,612,527 $35,810,281 10.6%
Deposits 38,014,501 34,147,643 33,214,094 30,601,384 28,731,109 26,966,326 7.1
Long-term debt 8,354,672 6,073,428 5,499,873 4,183,462 2,611,973 1,701,433 37.5
Shareholders' equity 4,785,925 4,063,619 4,030,929 3,546,832 3,278,515 3,155,310 8.7
Selected Ratios
Rate of return on:
Average total assets 1.14% 1.39% 1.43% 1.24% 1.27% 1.03%
Average common
shareholders' equity 14.55 17.45 17.41 14.91 14.92 12.15
Dividend payout 54.78 42.13 39.52 44.96 41.67 47.78
Average equity to
average assets 7.83 7.95 8.23 8.34 8.58 8.58
- -----
NM--Not meaningful
52
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of BB&T is responsible for the preparation of the financial
statements, related financial data and other information in this Annual Report
on Form 10-K. The financial statements are prepared in accordance with
generally accepted accounting principles and include amounts based on
management's estimates and judgment where appropriate. Financial information
appearing throughout this Annual Report on Form 10-K is consistent with the
financial statements.
BB&T's accounting system, which records, summarizes and reports financial
transactions, is supported by an internal control structure which provides
reasonable assurance that assets are safeguarded and that transactions are
recorded in accordance with BB&T's policies and established accounting
procedures. As an integral part of the internal control structure, BB&T
maintains a professional staff of internal auditors who monitor compliance with
and assess the effectiveness of the internal control structure.
The Audit Committee of BB&T's Board of Directors, composed solely of outside
directors, meets regularly with BB&T's management, internal auditors and
independent public accountants to review matters relating to financial
reporting, internal control structure and the nature, extent and results of the
audit effort. The independent public accountants and the internal auditors have
access to the Audit Committee with or without management present.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, who render an independent opinion on
management's financial statements. Their appointment was recommended by the
Audit Committee, approved by the Board of Directors and ratified by the
shareholders. Their examination provides an objective assessment of the degree
to which BB&T's management meets its responsibility for financial reporting.
Their opinion on the financial statements is based on auditing procedures,
which include reviewing the internal control structure to determine the timing
and scope of audit procedures and performing selected tests of transactions and
records as they deem appropriate. These auditing procedures are designed to
provide a reasonable level of assurance that the financial statements are
fairly presented in all material respects.
John A. Allison Scott E. Reed Sherry A. Kellett
Chairman and Chief Financial Officer Controller
Chief Executive Officer
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BB&T Corporation:
We have audited the accompanying consolidated balance sheets of BB&T
Corporation (a North Carolina corporation), and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BB&T Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of operations
and cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Charlotte, North Carolina,
January 26, 2001.
54
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollars in thousands, except per share data)
2000 1999
----------- -----------
Assets
Cash and due from banks $ 1,471,035 $ 1,466,071
Interest-bearing deposits with banks 38,783 81,927
Federal funds sold and securities purchased under
resale agreements or similar arrangements 243,011 432,877
Trading securities at market value 96,719 93,221
Securities available for sale at market value 13,781,863 12,257,822
Securities held to maturity at amortized cost
(market value: $69,727 at December 31, 2000 and
$398,527 at December 31, 1999) 69,274 404,897
Loans held for sale 846,323 367,243
Loans and leases, net of unearned income 39,454,311 35,387,986
Allowance for loan and lease losses (521,960) (477,296)
----------- -----------
Loans and leases, net 38,932,351 34,910,690
----------- -----------
Premises and equipment, net 777,760 713,089
Other assets 3,083,109 2,271,922
----------- -----------
Total assets $59,340,228 $52,999,759
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits $ 5,063,909 $ 4,847,976
Savings and interest checking 2,106,379 2,978,811
Money rate savings 11,114,041 9,592,326
Time and other deposits 19,730,172 16,728,530
----------- -----------
Total deposits 38,014,501 34,147,643
----------- -----------
Short-term borrowed funds 6,956,696 7,971,873
Long-term debt 8,354,672 6,073,428
Accounts payable and other liabilities 1,228,434 743,196
----------- -----------
Total liabilities 54,554,303 48,936,140
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $5 par, 500,000,000 shares
authorized; issued and outstanding, 401,678,881 at
December 31, 2000 and 398,742,188 at December 31,
1999 2,008,394 1,993,711
Additional paid-in capital 402,442 379,363
Retained earnings 2,278,641 2,011,627
Loan to employee stock ownership plan and unvested
restricted stock (7,071) (11,676)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of $71,467 at
December 31, 2000 and ($185,516) at December 31,
1999 103,519 (309,406)
----------- -----------
Total shareholders' equity 4,785,925 4,063,619
----------- -----------
Total liabilities and shareholders' equity $59,340,228 $52,999,759
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
55
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands,
except per share data)
Interest Income
Interest and fees on loans and leases $3,463,281 $2,954,252 $2,737,983
Interest and dividends on securities 855,127 799,304 730,527
Interest on short-term investments 21,266 21,997 24,303
---------- ---------- ----------
Total interest income 4,339,674 3,775,553 3,492,813
---------- ---------- ----------
Interest Expense
Interest on deposits 1,480,276 1,201,467 1,190,659
Interest on short-term borrowed funds 401,713 306,545 273,223
Interest on long-term debt 440,057 334,593 269,226
---------- ---------- ----------
Total interest expense 2,322,046 1,842,605 1,733,108
---------- ---------- ----------
Net Interest Income 2,017,628 1,932,948 1,759,705
Provision for loan and lease losses 127,431 114,433 114,729
---------- ---------- ----------
Net Interest Income After Provision for
Loan and Lease Losses 1,890,197 1,818,515 1,644,976
---------- ---------- ----------
Noninterest Income
Service charges on deposits 264,084 239,144 215,021
Mortgage banking income 103,086 163,562 127,122
Trust income 76,016 70,079 54,851
Investment banking and brokerage fees
and commissions 161,964 128,609 45,723
Agency insurance commissions 129,727 79,499 52,186
Other insurance commissions 15,580 13,991 13,099
Bankcard fees and merchant discounts 52,484 42,883 36,657
Other nondeposit fees and commissions 95,510 79,273 68,418
Securities (losses) gains, net (218,531) (6,149) 10,155
Other income 97,102 64,230 67,195
---------- ---------- ----------
Total noninterest income 777,022 875,121 690,427
---------- ---------- ----------
Noninterest Expense
Personnel expense 922,889 834,888 700,259
Occupancy and equipment expense 264,955 245,851 208,315
Amortization of intangibles and
mortgage servicing rights 80,432 81,699 61,523
Advertising and public relations
expense 33,760 32,057 34,751
Professional services 67,750 78,937 69,928
Other expense 391,753 373,747 302,139
---------- ---------- ----------
Total noninterest expense 1,761,539 1,647,179 1,376,915
---------- ---------- ----------
Earnings
Income before income taxes 905,680 1,046,457 958,488
Provision for income taxes 279,238 340,883 306,744
---------- ---------- ----------
Net income $ 626,442 $ 705,574 $ 651,744
========== ========== ==========
Per Common Share
Net income:
Basic $ 1.57 $ 1.78 $ 1.67
========== ========== ==========
Diluted $ 1.55 $ 1.75 $ 1.64
========== ========== ==========
Cash dividends paid by BB&T Corporation $ .86 $ .75 $ .66
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
56
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Common Paid-In Earnings Changes Shareholders'
Stock Stock Capital and Other* in Equity Equity
----------- ---------- ---------- ---------- -------------- -------------
(Dollars in thousands)
Balance, December 31,
1997 194,466,237 $ 972,331 $ 579,808 $1,931,597 $ 63,096 $3,546,832
Add (Deduct):
Nonshareholder changes
in equity:**
Net income -- -- -- 651,744 -- 651,744
Unrealized holding
gains arising during
the period -- -- -- -- 16,374 16,374
Less: reclassification
adjustment, net of
tax of $3,936 -- -- -- -- (6,351) (6,351)
----------- ---------- --------- ---------- -------- ----------
Total nonshareholder
changes in equity -- -- -- 651,744 10,023 661,767
----------- ---------- --------- ---------- -------- ----------
Common stock issued 13,665,967 68,331 324,217 (1,345) -- 391,203
Redemption of common
stock (6,795,376) (33,977) (311,053) -- -- (345,030)
2-for-1 stock split
effective August 3,
1998 194,897,159 974,486 (218,928) (721,913) -- 33,645
Reconciliation of
fiscal year of First
Citizens to calendar
year (32,732) (165) (211) (1,209) (16) (1,601)
Cash dividends declared
on common stock -- -- -- (257,291) -- (257,291)
Other, net -- -- 2,837 (1,433) -- 1,404
----------- ---------- --------- ---------- -------- ----------
Balance, December 31,
1998 396,201,255 1,981,006 376,670 1,600,150 73,103 4,030,929
Add (Deduct):
Nonshareholder changes
in equity:**
Net income -- -- -- 705,574 -- 705,574
Unrealized holding
losses arising during
the period -- -- -- -- (387,063) (387,063)
Less: reclassification
adjustment, net of
tax benefit of
$22,451 -- -- -- -- 5,473 5,473
----------- ---------- --------- ---------- -------- ----------
Total nonshareholder
changes in equity -- -- -- 705,574 (381,590) 323,984
----------- ---------- --------- ---------- -------- ----------
Common stock issued 13,186,347 65,933 335,118 10,033 -- 411,084
Redemption of common
stock (10,649,502) (53,248) (332,425) -- -- (385,673)
Reconciliation of
fiscal year of First
Liberty to calendar
year 4,088 20 -- 1,622 (919) 723
Cash dividends declared
on common stock -- -- -- (308,226) -- (308,226)
Other, net -- -- -- (9,202) -- (9,202)
----------- ---------- --------- ---------- -------- ----------
Balance, December 31,
1999 398,742,188 1,993,711 379,363 1,999,951 (309,406) 4,063,619
Add (Deduct):
Nonshareholder changes
in equity:**
Net income -- -- -- 626,442 -- 626,442
Unrealized holding
gains arising during
the period -- -- -- -- 281,806 281,806
Less: reclassification
adjustment, net of
tax of $87,412 -- -- -- -- 131,119 131,119
----------- ---------- --------- ---------- -------- ----------
Total nonshareholder
changes in equity -- -- -- 626,442 412,925 1,039,367
----------- ---------- --------- ---------- -------- ----------
Common stock issued 9,921,593 49,608 185,579 -- 235,187
Redemption of common
stock (6,984,900) (34,925) (168,670) -- (203,595)
Cash dividends declared
on common stock -- -- -- (359,430) -- (359,430)
Other, net -- -- 6,170 4,607 -- 10,777
----------- ---------- --------- ---------- -------- ----------
Balance, December 31,
2000 401,678,881 $2,008,394 $ 402,442 $2,271,570 $103,519 $4,785,925
=========== ========== ========= ========== ======== ==========
- --------
* Other includes a loan to employee stock ownership plan and unvested
restricted stock.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
57
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Cash Flows From Operating Activities:
Net income $ 626,442 $ 705,574 $ 651,744
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan and lease losses 127,431 114,433 114,729
Depreciation of premises and equipment 101,579 101,462 89,066
Amortization of intangibles and
mortgage servicing rights 80,432 81,699 61,523
Accretion of negative goodwill (6,243) (6,243) (6,243)
Amortization of unearned stock
compensation 4,605 3,906 1,325
Discount accretion and premium
amortization on securities, net (5,094) 1,708 5,355
Net decrease (increase) in trading
account securities (1,200) (20,774) 7,456
Loss (gain) on sales of securities, net 218,531 6,149 (10,155)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net (14,356) (26,213) (36,227)
Loss (gain) on disposals of premises
and equipment, net 5,858 (5,756) (15,723)
Proceeds from sales of loans held for
sale 2,417,736 4,057,061 5,350,770
Purchases of loans held for sale (1,014,372) (961,404) (1,811,810)
Origination of loans held for sale, net
of principal collected (1,868,088) (2,097,356) (4,148,521)
Reconciliation of fiscal year of merged
companies to calendar year -- 3,216 4,991
Decrease (increase) in:
Accrued interest receivable (134,931) (46,982) (21,442)
Other assets (603,345) (209,092) (82,503)
Increase (decrease) in:
Accrued interest payable 38,826 43,973 15,154
Accounts payable and other liabilities 273,274 110,235 76,755
Other, net (600) 16,227 (5,383)
---------- ---------- ----------
Net cash provided by operating
activities 246,485 1,871,823 240,861
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sales of securities
available for sale 5,053,981 874,774 1,637,182
Proceeds from maturities, calls and
paydowns of securities available for
sale 1,383,899 3,503,261 3,348,678
Purchases of securities available for
sale (6,054,601) (5,278,597) (5,097,268)
Proceeds from maturities, calls and
paydowns of securities held to maturity 38,565 61,764 220,287
Purchases of securities held to maturity (10,823) (35,756) (162,215)
Leases made to customers (119,017) (126,066) (94,615)
Principal collected on leases 91,791 74,314 65,186
Loan originations, net of principal
collected (4,162,906) (3,711,076) (1,790,445)
Purchases of loans (381,219) (364,663) (341,812)
Net cash (paid) acquired in transactions
accounted for under the purchase method (16,902) 302,032 191,740
Purchases and originations of mortgage
servicing rights (55,855) (79,437) (86,954)
Proceeds from disposals of premises and
equipment 9,605 37,596 25,693
Purchases of premises and equipment (150,945) (137,237) (140,893)
Proceeds from sales of foreclosed
property 32,113 28,221 28,911
Proceeds from sales of other real estate
held for development or sale 4,502 12,439 4,341
Other, net -- 764 (38,472)
---------- ---------- ----------
Net cash used in investing activities (4,337,812) (4,837,667) (2,230,656)
---------- ---------- ----------
Cash Flows From Financing Activities:
Net increase in deposits 3,194,161 163,413 1,320,680
Net increase (decrease) in short-term
borrowed funds (1,097,096) 3,029,260 (207,276)
Proceeds from long-term debt 6,576,633 3,188,096 3,436,289
Repayments of long-term debt (4,312,416) (2,602,804) (2,053,611)
Net proceeds from common stock issued 40,273 48,740 71,397
Redemption of common stock (203,595) (385,673) (345,030)
Cash dividends paid on common stock (334,679) (289,467) (246,361)
Other, net -- (697) (355)
---------- ---------- ----------
Net cash provided by financing
activities 3,863,281 3,150,868 1,975,733
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents (228,046) 185,024 (14,062)
Cash and Cash Equivalents at Beginning
of Year 1,980,875 1,795,851 1,809,913
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $1,752,829 $1,980,875 $1,795,851
========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest $2,238,119 $1,532,010 $1,509,736
Income taxes 52,055 115,005 168,371
Noncash financing and investing
activities:
Transfer of securities from held to
maturity to available for sale 307,775 231,529 114,401
Transfer of loans to foreclosed
property 37,470 26,306 26,954
Transfer of fixed assets to other real
estate owned 3,887 7,405 14,165
Transfer of other real estate owned to
fixed assets 3,675 1,306 --
Tax benefit from exercise of stock
options 6,170 18,129 25,090
Securitization of mortgage loans 984,518 304,795 478,768
The accompanying notes are an integral part of these consolidated financial
statements.
58
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
BB&T Corporation ("BB&T" or "Parent Company") is a financial holding company
organized under the laws of North Carolina. Branch Banking and Trust Company
("BB&T-NC"); Branch Banking and Trust Company of South Carolina ("BB&T-SC");
Branch Banking and Trust Company of Virginia ("BB&T-VA"), (collectively, the
"Banks"), Regional Acceptance Corporation ("Regional Acceptance"), BB&T Factors
and Scott & Stringfellow Financial, Inc., ("Scott & Stringfellow") comprise
BB&T's principal direct subsidiaries.
BB&T is also the parent company for eight subsidiary banks acquired through
the mergers with Hardwick Holding Company, First Banking Company of Southeast
Georgia and BankFirst Corporation. These banks are expected to be merged with
and into BB&T-NC during 2001. References to the "Banks" herein include these
subsidiary banks.
The accounting and reporting policies of BB&T Corporation and its
subsidiaries are in accordance with accounting principles generally accepted in
the United States and conform to general practices within the banking industry.
The following is a summary of the more significant policies.
NOTE A. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of BB&T include the accounts of BB&T
Corporation and its subsidiaries. In consolidation, all significant
intercompany accounts and transactions have been eliminated. Prior period
financial statements have been restated to include the accounts of companies
acquired in business combinations accounted for as poolings of interests. The
results of operations of companies acquired in transactions accounted for as
purchases are included only from the dates of acquisition. (See Note B).
In certain instances, amounts reported in prior years' consolidated financial
statements have been reclassified to conform to statement presentations
selected for 2000. Such reclassifications had no effect on previously reported
shareholders' equity or net income.
Nature of Operations
BB&T is a financial holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations primarily in North Carolina, South
Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky and
Washington, D.C. through its commercial banking subsidiaries and, to a lesser
extent, through its other subsidiaries. BB&T's principal banking subsidiaries,
BB&T-NC, BB&T-SC and BB&T-VA, provide a wide range of traditional banking
services to individuals and businesses. BB&T's loans are primarily to
individuals residing in the market areas described above or to businesses
located in this geographic area. Subsidiaries of BB&T's commercial banking
units offer lease financing to businesses and municipal governments, investment
services, (including discount brokerage services, annuities and mutual funds),
life insurance, property and casualty insurance on an agency basis, insurance
premium financing, loan servicing for financial institutions, asset and
portfolio management. The direct nonbank subsidiaries of BB&T provide a variety
of financial services including automobile lending, equipment financing,
factoring, full-service securities brokerage, investment banking and municipal
and corporate finance services.
59
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan and lease losses and deferred tax
assets or liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
bank balances, Federal funds sold and securities purchased under resale
agreements or similar arrangements. Generally, both cash and cash equivalents
are considered to have maturities of three months or less. Accordingly, the
carrying amount of such instruments is considered a reasonable estimate of fair
value.
Securities
BB&T classifies investment securities as held to maturity, available for sale
or trading. Debt securities acquired with both the intent and ability to be
held to maturity are classified as held to maturity and reported at amortized
cost. Gains or losses realized from the sale of securities held to maturity, if
any, are determined by specific identification and are included in noninterest
income.
Debt securities, which may be sold to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital
requirements, or unforeseen changes in market conditions, are classified as
available for sale. In addition, all investments in equity securities are
classified as available for sale. Securities available for sale are reported at
estimated fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity, net of deferred income taxes. Gains or
losses realized from the sale of securities available for sale are determined
by specific identification and are included in noninterest income.
Trading account securities are primarily held by Scott & Stringfellow, BB&T's
investment banking and full-service brokerage subsidiary. Trading account
securities are reported on the Consolidated Balance Sheets at fair value.
Market adjustments, fees, and gains or losses earned on trading account
securities are included in noninterest income. Interest income on trading
account securities is included in other interest income. Gains or losses
realized from the sale of trading securities are determined by specific
identification and are included in noninterest income.
During 2000, 1999 and 1998, BB&T transferred securities with amortized costs
of $307.8 million, $231.5 million and $114.4 million, respectively, from the
held-to-maturity portfolio to the available-for-sale portfolio. These
securities were previously classified as held-to-maturity by entities that
merged into BB&T under the pooling-of-interests method of accounting. BB&T
transferred these amounts pursuant to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," to conform the combined investment portfolios to
BB&T's existing policies.
60
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value on an
aggregate loan portfolio basis. Gains or losses realized on the sales of loans
are recognized at the time of sale and are determined by the difference between
the net sales proceeds and the carrying value of the loans sold, adjusted for
any servicing asset or liability. Gains and losses on sales of loans are
included in noninterest income.
Loans and Leases
Loans and leases that management has the intent and ability to hold for the
foreseeable future are reported at their outstanding principal balances
adjusted for any deferred fees or costs and unamortized premiums or discounts.
The net amount of nonrefundable loan origination fees, commitment fees and
certain direct costs associated with the lending process are deferred and
amortized to interest income over the contractual lives of the loans using
methods which approximate level-yield. Discounts and premiums are amortized to
interest income over the estimated life of the loans using methods that
approximate level-yield. Commercial loans and substantially all installment
loans accrue interest on the unpaid balance of the loans. Lease receivables
consist primarily of direct financing leases on rolling stock, equipment and
real property, leases to municipalities and investments in leveraged lease
transactions. Lease receivables are stated at the total amount of lease
payments receivable plus guaranteed residual values, less unearned income.
Recognition of income over the lives of the lease contracts approximates the
level-yield method.
A loan is impaired when, based on current information and events, it is
probable that BB&T will be unable to collect all amounts due according to the
contractual terms of the loan agreement. It is BB&T's policy to classify and
disclose all commercial loans greater than $300,000 that are on nonaccrual
status as impaired loans. Substantially all other loans made by BB&T are
excluded from the definition of impaired loans as they are comprised of large
groups of smaller balance homogeneous loans (residential mortgage and consumer
installment) that are collectively evaluated for impairment. SFAS No. 114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral-dependent. When the fair value of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is the estimated amount considered
adequate to cover credit losses inherent in the outstanding loan and lease
portfolio at the balance sheet date. The allowance is established through the
provision for loan and lease losses, which is reflected in the Consolidated
Statements of Income.
The allowance is composed of general reserves, specific reserves and an
unallocated reserve. General reserves for commercial loans are determined by
applying loss percentages to the portfolio based on management's evaluation and
"risk grading" of the commercial loan portfolio. General reserves are provided
for noncommercial loan categories based on a four-year weighted average of
actual loss experience, which is applied to the total outstanding loan balance
of each loan category. Specific reserves are provided on all commercial loans
that are classified in the Special Mention, Substandard or Doubtful risk
grades. The specific reserves are determined on a loan-by-loan basis based on
management's evaluation of BB&T's exposure for each credit, given the current
payment status of the loan and the value of any underlying collateral.
Commercial loans for which a specific reserve is provided are excluded from the
calculations of general reserves. The allowance calculation also incorporates
specific reserves based on the results of measuring impaired loans, as
described above.
61
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unallocated reserve consists of an amount deemed appropriate to cover the
elements of imprecision and estimation risk inherent in the general and
specific reserves and an amount determined based on management's evaluation of
various conditions that are not directly measured by any other component of the
allowance. This evaluation includes general economic and business conditions
affecting key lending areas, credit quality trends, collateral values, loan
volumes and concentrations, seasoning of the loan portfolio, the findings of
internal credit examiners and results from external bank regulatory
examinations.
While management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the valuations or, if required by regulators, based upon information
available to them at the time of their examinations. Such adjustments to
original estimates, as necessary, are made in the period in which these factors
and other relevant considerations indicate that loss levels may vary from
previous estimates.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property. Foreclosed property consists of real estate
and other assets acquired through customers' loan defaults. Commercial and
unsecured consumer loans and leases are generally placed on nonaccrual status
when concern exists that principal or interest is not fully collectible, or
when any portion of principal or interest becomes 90 days past due, whichever
occurs first. Mortgage loans and most other types of consumer loans past due 90
days or more may remain on accrual status if management determines that concern
over the collectibility of principal and interest is not significant. When
loans are placed on nonaccrual status, interest receivable is reversed against
interest income in the current period. Interest payments received thereafter
are applied as a reduction to the remaining principal balance as long as
concern exists as to the ultimate collection of the principal. Loans and leases
are removed from nonaccrual status when they become current as to both
principal and interest and when concern no longer exists as to the
collectibility of principal or interest.
Assets acquired as a result of foreclosure are carried at the lower of cost
or fair value less estimated selling costs. Cost is determined based on the sum
of unpaid principal, accrued but unpaid interest and acquisition costs
associated with the loan. Any excess of unpaid principal over fair value at the
time of foreclosure is charged to the allowance for loan and lease losses.
Generally, such properties are appraised annually and the carrying value, if
greater than the fair value, less selling costs, is adjusted with a charge to
noninterest expense. Routine maintenance costs, declines in market value and
net losses on disposal are included in other noninterest expense.
Premises and Equipment
Premises, equipment, capital leases and leasehold improvements are stated at
cost less accumulated depreciation or amortization. In addition, purchased
software and costs of computer software developed for internal use is
capitalized provided certain criteria are met. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
basis over the lesser of the lease terms or the estimated useful lives of the
improvements. Capitalized leases are amortized by the same methods as premises
and equipment over the estimated useful lives or the lease term, whichever is
less. Obligations under capital leases are amortized using the interest method
to allocate payments between principal reduction and interest expense.
62
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase, which are classified as
secured short-term borrowed funds, generally mature within one year from the
transaction date. Securities sold under agreements to repurchase are reflected
at the amount of cash received in connection with the transaction. BB&T may be
required to provide additional collateral based on the fair value of the
underlying securities.
Income Taxes
The provision for income taxes is based upon income for financial statement
purposes, adjusted for nontaxable income and nondeductible expenses. Deferred
income taxes have been provided when different accounting methods have been
used in determining income for income tax purposes and for financial reporting
purposes. Deferred tax assets and liabilities are recognized based on future
tax consequences attributable to differences arising from the financial
statement carrying values of assets and liabilities and their tax bases. In the
event of changes in the tax laws, deferred tax assets and liabilities are
adjusted in the period of the enactment of those changes, with effects included
in the income tax provision. BB&T and its subsidiaries file a consolidated
Federal income tax return. Each subsidiary pays its proportional share of
Federal income taxes to BB&T based on its taxable income. Institutions acquired
during the current fiscal year file separate Federal income tax returns for the
periods prior to consummation of the acquisitions.
Derivatives and Off-Balance Sheet Instruments
BB&T utilizes a variety of derivative financial instruments to manage various
financial risks. These instruments include financial forward and futures
contracts, options written and purchased, interest rate caps and floors and
interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose BB&T to interest rate
risk or price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
The net interest payable or receivable on interest rate swaps, caps and
floors that are designated as hedges is accrued and recognized as an adjustment
to the interest income or expense of the related asset or liability. For
interest rate forwards, futures and options qualifying as a hedge, gains and
losses are deferred and are recognized in income as an adjustment of yield.
Gains and losses from early terminations of derivatives are deferred and
amortized as yield adjustments over the shorter of the remaining term of the
hedged asset or liability or the remaining term of the derivative instrument.
Upon disposition or settlement of the asset or liability being hedged, deferral
accounting is discontinued and any gains or losses are recognized in income.
Derivative financial instruments that fail to qualify as a hedge are carried at
fair value with gains and losses recognized in current earnings.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. Fees received are deferred and recognized in noninterest income upon
exercise or expiration. Written options are carried at estimated fair value.
Unrealized and realized gains and losses on written call options are included
in the Consolidated Statements of Income as securities gains and losses.
63
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
loan inventory and applications and mortgage loans in process against
increasing interest rates. Written call options are used in tandem with
purchased put options to create a net purchased put option that reduces the
cost of the hedge. Net unrealized gains and losses on purchased put options and
net purchased put options are included with loans held for sale at the lower of
cost or market on an aggregate basis. Realized gains and losses on purchased
put options and net purchased put options are included in mortgage banking
income.
Per Share Data
Basic net income per common share has been computed by dividing net income
applicable to common shares by the weighted average number of shares of common
stock outstanding during the years presented. Diluted net income per common
share has been computed by dividing net income, as adjusted for the interest
expense related to convertible debt where applicable, by the weighted average
number of shares of common stock, common stock equivalents and other
potentially dilutive securities outstanding. Restricted stock grants are
considered as issued for purposes of calculating net income per share. See Note
R. in the "Notes to Consolidated Financial Statements for the calculation of
basic and diluted earnings per share.
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 stock split in
the Corporation's common stock effected in the form of a 100% stock dividend
paid August 3, 1998. All per share amounts presented herein and the weighted
average shares reflected above have been restated as appropriate to
retroactively reflect the stock split.
Intangible Assets
Intangible assets consist of the cost in excess of the fair value of net
assets acquired in transactions accounted for as purchases (goodwill), premiums
paid for acquisitions of core deposits (core deposit intangibles) and other
identifiable intangible assets. Such assets are included in other assets in the
"Consolidated Balance Sheets," and are being amortized on straight-line or
accelerated bases over periods ranging from 5 to 25 years. At December 31,
2000, BB&T had $747.4 million in unamortized goodwill and $14.0 million in
unamortized core deposit and other intangibles. Negative goodwill is created
when the fair value of the net assets purchased exceeds the purchase price.
Such balances are included in other liabilities in the "Consolidated Balance
Sheets" and are being amortized over periods ranging from 10 to 15 years. At
December 31, 2000, BB&T had unamortized negative goodwill totaling $14.3
million.
Mortgage Servicing Rights
Purchased and internally originated mortgage servicing rights are included as
other assets in the "Consolidated Balance Sheets". The cost of purchased
mortgage servicing rights and the allocated cost of originated mortgage
servicing rights are capitalized and amortized over the estimated lives of the
loans to which they relate. BB&T periodically assesses the capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
Impairment is determined by stratifying rights by predominant characteristics,
such as interest rates and terms. Impairment is recognized through a valuation
allowance established through a charge to mortgage banking income. At December
31, 2000, BB&T had capitalized mortgage servicing rights totaling $237.9
million reflected in other assets. Income from mortgage servicing fees is
reflected as mortgage banking income on the "Consolidated Statements of
Income."
64
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan Securitizations
BB&T periodically transfers mortgage loans from the loan portfolio to
securities available for sale by securitizing the mortgage loans in the
secondary mortgage market. Following the transfers, the securities are reported
at estimated fair value based on quoted market prices, with unrealized gains
and losses reported as a separate component of shareholders' equity, net of
deferred income taxes. Since the transfers are not considered a sale, no gain
or loss is recorded in conjunction with the transfers of the loans. BB&T also
securitizes and sells loans to third party investors, while retaining the
mortgage servicing on the loans sold. Gains or losses incurred on the loans
sold are reflected in mortgage banking income.
Changes in Accounting Principles and Effects of New Accounting Pronouncements
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 the 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 be offset by
related results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. In June of 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends SFAS No. 133. SFAS No. 138 addresses a
limited number of issues related to the implementation of SFAS No. 133. The
fair value of BB&T's derivative financial instruments was not reflected on the
balance sheet as of December 31, 2000. BB&T adopted the provisions of SFAS No.
133, as amended, effective January 1, 2001, as required by the FASB. On that
date, BB&T reassessed and designated derivative instruments used for risk
management as fair value hedges, cash flow hedges and derivatives not
qualifying for hedge accounting treatment, as appropriate. On January 1, 2001,
BB&T had derivatives with a notional value of $1.8 billion. In conjunction with
the adoption of SFAS No. 133, BB&T recorded a transition adjustment of $7.9
million, after taxes, to accumulated other nonshareholder changes in equity on
January 1, 2001. There was no material impact on net income at the date of
adoption. Substantially all of the transition adjustment will be reversed into
net income during 2001. The transition adjustment is based on the interpretive
guidance issued thus far by the FASB. However, the FASB continues to issue
guidance that could affect BB&T's application of the statement and require
adjustments to the transition amount.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. The statements provide accounting and
reporting standards for such transactions based on consistent application of a
financial components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. Certain disclosure requirements of the statement
were effective immediately and have been adopted by BB&T. Other portions become
effective for transactions occurring after March 31, 2001. The adoption of the
continuing provisions of SFAS No. 125 did not have a material impact on BB&T's
consolidated
65
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial position or consolidated results of operations. Management does not
anticipate that the adoption of the new provisions of SFAS No. 140 will have a
material impact on BB&T's consolidated financial position or consolidated
results of operations. See Note G. in the "Notes to Consolidated Financial
Statements" for disclosures relating to SFAS No. 140.
Supplemental Disclosures of Cash Flow Information
As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired
assets and assumed liabilities in transactions accounted for as purchases. The
fair values of these assets acquired and liabilities assumed, at acquisition,
were as follows:
2000 1999 1998
--------- --------- ---------
(Dollars in thousands)
Fair Value of Net Assets acquired $ 92,542 $ 101,722 $ 116,701
Purchase Price (168,678) (288,984) (310,618)
--------- --------- ---------
Excess of Purchase Price over Net Assets
acquired $ (76,136) $(187,262) $(193,917)
========= ========= =========
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts that are recognized when
received or paid.
66
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE B. Mergers and Acquisitions
The following table presents summary information with respect to mergers and
acquisitions of financial institutions completed during the last three years:
Summary of Completed Mergers and Acquisitions
BB&T Common
Goodwill Shares Issued
Date of Acquired Accounting Goodwill Amortization to Complete
Acquisition Institution Headquarters Total Assets Method Recorded Period Transaction
----------- ---------------- -------------------- -------------- ---------- ------------- ------------ -------------
December 27, BankFirst Knoxville, Tenn. $929.5 million Purchase $71.0 million 15 Years 5.3 million
2000 Corporation
November 15, Edgar M. Norris Greenville, S.C. 3.7 million Purchase N/A N/A N/A
2000 & Co.
September 29, Laureate Capital Charlotte, N.C. 13.8 million Purchase N/A N/A N/A
2000 Corp.
July 6, 2000 One Valley Charleston, W.Va. 6.4 billion Pooling N/A N/A 43.1 million
Bancorp, Inc.
June 15, 2000 First Banking Statesboro, Ga. 420.0 million Pooling N/A N/A 4.1 million
Company of
Southeast
Georgia
June 13, 2000 Hardwick Holding Dalton, Ga. 507.2 million Pooling N/A N/A 3.9 million
Company
January 13, 2000 Premier Atlanta, Ga. 2.0 billion Pooling N/A N/A 16.8 million
Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------------------------------
November 10, First Liberty Macon, Ga. 1.7 billion Pooling N/A N/A 12.4 million
1999 Financial Corp.
August 27, 1999 Matewan Williamson, W.Va. 734.7 million Purchase 92.8 million 15 Years 3.2 million
BancShares, Inc.
July 14, 1999 Mason-Dixon Westminster, Md. 1.2 billion Pooling N/A N/A 6.6 million
Bancshares, Inc.
July 9, 1999 First Citizens Newnan, Ga. 417.8 million Pooling N/A N/A 3.2 million
Corporation
March 26, 1999 Scott & Richmond, Va. 262.1 million Purchase 72.8 million 15 Years 3.6 million
Stringfellow
Financial, Inc.
March 5, 1999 MainStreet Martinsville, Va. 2.0 billion Pooling N/A N/A 16.8 million
Financial
Corporation
- ---------------------------------------------------------------------------------------------------------------------------
September 30, Maryland Federal Hyattsville, Md. 1.3 billion Purchase 158.8 million 15 Years 8.7 million
1998 Bancorp, Inc.
July 1, 1998 Franklin Washington, D.C. 674.9 million Pooling N/A N/A 4.9 million
Bancorporation
Inc.
June 30, 1998 W.E. Stanley & Greensboro, N.C. 12.2 million Purchase 10.3 million 15 Years 174,000
Company Inc.
June 18, 1998 Dealers' Credit Menomonee Falls, Wi. 41.3 million Purchase 9.5 million 15 Years 115,000
Inc.
March 1, 1998 Life Bancorp, Norfolk, Va. 1.5 billion Pooling N/A N/A 11.6 million
Inc.
- --------
N/A--Not applicable or undisclosed terms.
The table above does not include mergers and acquisitions made by any of the
acquired companies prior to their acquisition by BB&T.
During 2000, BB&T acquired six insurance agencies, which were accounted for
as purchases. In conjunction with these transactions, BB&T issued 1.4 million
shares of common stock and recorded $38.9 million in goodwill, which is being
amortized using the straight-line method over 15 years. During 1999, BB&T
acquired eleven insurance agencies and the book of business from another
agency. These acquisitions were accounted for as purchases. In conjunction with
the 1999 transactions, BB&T issued a total of 1.5 million shares of common
stock and recorded $52.8 million of goodwill, which is being amortized using
the straight-line method over 15 years. During 1998, BB&T acquired four
insurance agencies and the book of business of another agency. These
acquisitions were accounted for as purchases. In conjunction with the 1998
transactions, BB&T issued approximately 475,000 shares of common stock and
recorded $17.5 million of goodwill, which is being amortized using the
straight-line method over 15 years.
For acquisitions accounted for as purchases, the financial information
contained herein includes data relevant to the acquirees since the date of
acquisition. For acquisitions accounted for as poolings of
67
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interests, the financial information contained herein has been restated to
include the accounts of the merged institutions for all periods presented. BB&T
typically provides an allocation period, not to exceed one year, to identify
and quantify the assets acquired and liabilities assumed in business
combinations accounted for as purchases.
Management currently does not anticipate any material adjustments to the
assigned values of the assets and liabilities of acquired companies.
The following unaudited presentation reflects selected information from the
"Consolidated Income Statements" on a Pro Forma basis as if the purchase
transactions listed in the table above had been acquired as of the beginning of
the years presented:
For the Years Ended
---------------------
2000 1999
---------- ----------
(Dollars in
thousands,
except per share
data)
Total revenues $2,853,570 $2,896,815
========== ==========
Net income $ 609,670 $ 707,286
========== ==========
Basic EPS $ 1.53 $ 1.79
========== ==========
Diluted EPS $ 1.51 $ 1.76
========== ==========
Mergers and Acquisitions Pending at December 31, 2000
On July 27, 2000, BB&T announced plans to acquire FCNB Corp. ("FCNB") of
Frederick, Maryland. FCNB has $1.6 billion in assets and operates 34 banking
offices primarily in Frederick and Montgomery counties in central Maryland. The
transaction, which was accounted for as a pooling of interests, was consummated
on January 7, 2001. BB&T issued 8.7 million shares of common stock in exchange
for all of the outstanding common shares of FCNB. The financial statements
presented herein have not been restated to reflect the accounts of FCNB.
On September 6, 2000, BB&T announced plans to acquire FirstSpartan Financial
Corp. ("FirstSpartan") of Spartanburg, South Carolina. FirstSpartan has $591
million in assets and operates eleven banking offices in Spartanburg and
Greenville counties. The transaction, which was accounted for as a purchase,
was consummated on March 2, 2001. BB&T issued 3.8 million shares of common
stock in exchange for all of the outstanding common shares of FirstSpartan.
BB&T recorded goodwill totaling $46.0 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
On December 5, 2000, BB&T announced plans to merge with Century South Banks
Inc. ("Century South") of Alpharetta, Georgia. Century South has $1.6 billion
in assets and operates 40 banking offices in Georgia, North Carolina,
Tennessee, and Alabama. Shareholders of Century South will receive .93 shares
of BB&T common stock in exchange for each share of Century South common stock
held. The transaction, which is expected to be accounted for as a pooling of
interests, is planned for completion in the second quarter of 2001.
On January 24, 2001, BB&T announced plans to acquire Virginia Capital
Bancshares Inc. ("VCAP") of Fredericksburg, Virginia. VCAP has $532.7 million
in assets and operates four banking offices in the Washington-Baltimore
combined metropolitan statistical area. Shareholders of VCAP will receive
between .4958 and .6060 shares of BB&T common stock depending on a pricing
period prior to the VCAP shareholders' meeting to vote on the proposed merger.
The transaction, which is expected to be accounted for as a purchase, is
planned for completion in the second quarter of 2001.
68
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 24, 2001, BB&T announced plans to merge with F&M National
Corporation ("F&M") of Winchester, Virginia. F&M has $4 billion in assets and
operates 163 banking offices, 13 mortgage banking offices, three trust offices,
and six insurance offices. Shareholders of F&M will receive 1.09 shares of BB&T
common stock in exchange for each share of F&M common stock held. The
transaction, which is expected to be accounted for as a pooling of interests,
is planned for completion in the third quarter of 2001.
NOTE C. Securities
The amortized costs and approximate fair values of securities held to
maturity and available for sale were as follows:
December 31, 2000 December 31, 1999
----------------------------------------- ----------------------------------------
Gross Unrealized Estimated Gross Unrealized
Amortized ----------------- Fair Amortized ---------------- Estimated
Cost Gains Losses Cost Gains Value Losses Fair Value
----------- -------- -------- ----------- ----------- ------- -------- -----------
(Dollars in thousands)
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations $ 33,739 $ -- $ 35 $ 33,704 $ 23,184 $ 4 $ 6 $ 23,182
Mortgage-backed
securities -- -- -- -- -- -- -- --
States and political
subdivisions 35,535 488 -- 36,023 379,822 2,580 8,948 373,454
Other securities -- -- -- -- 1,891 -- -- 1,891
----------- -------- -------- ----------- ----------- ------- -------- -----------
Total securities held
to maturity 69,274 488 35 69,727 404,897 2,584 8,954 398,527
----------- -------- -------- ----------- ----------- ------- -------- -----------
Securities available
for sale:
U.S. Treasury,
government and agency
obligations 8,568,020 254,645 6,817 8,815,848 5,762,670 1,716 175,600 5,588,786
Mortgage-backed
securities 2,538,584 26,535 2,202 2,562,917 4,376,959 5,129 125,084 4,257,004
States and political
subdivisions 949,439 11,148 7,208 953,379 639,225 8,692 32,039 615,878
Equity and other
securities 1,550,834 105 101,220 1,449,719 1,973,599 516 177,961 1,796,154
----------- -------- -------- ----------- ----------- ------- -------- -----------
Total securities
available for sale 13,606,877 292,433 117,447 13,781,863 12,752,453 16,053 510,684 12,257,822
----------- -------- -------- ----------- ----------- ------- -------- -----------
Total securities $13,676,151 $292,921 $117,482 $13,851,590 $13,157,350 $18,637 $519,638 $12,656,349
=========== ======== ======== =========== =========== ======= ======== ===========
Securities with a book value of approximately $7.1 billion and $6.6 billion
at December 31, 2000 and 1999, respectively, were pledged to secure municipal
deposits, securities sold under agreements to repurchase and for other purposes
as required by law. At December 31, 2000 and 1999, the carrying amount of
securities pledged to secure repurchase agreements was $2.8 billion and $2.7
billion, respectively.
At December 31, 2000 and 1999, there were no concentrations of investments in
obligations of states and political subdivisions that were payable from the
same taxing authority or secured by the same revenue source that exceeded ten
percent of shareholders' equity. Trading securities totaling $96.7 million at
December 31, 2000 and $93.2 million at December 31, 1999 are excluded from the
accompanying tables.
Proceeds from sales of securities during 2000, 1999 and 1998 were $5.1
billion, $874.8 million and $1.6 billion, respectively. Gross gains of $5.0
million, $4.0 million and $16.1 million and gross losses of $223.6 million,
$10.1 million and $6.0 million were realized on those sales in 2000, 1999 and
1998, respectively.
69
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturity, are shown in the accompanying table. The
expected life of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to call or prepay the
underlying mortgage loans with or without call or prepayment penalties. For
purposes of the maturity table, mortgage-backed securities, which are not due
at a single maturity date, have been allocated over maturity groupings based on
the weighted average contractual maturities of underlying collateral.
December 31, 2000
-------------------------------------------
Held to Maturity Available for Sale
------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ----------- -----------
(Dollars in thousands)
Debt Securities:
Due in one year or less $27,652 $27,637 $ 326,745 $ 327,429
Due after one year through five
years 37,592 37,904 4,952,139 5,109,488
Due after five years through ten
years 3,667 3,811 4,228,114 4,337,059
Due after ten years 363 375 2,681,340 2,683,480
------- ------- ----------- -----------
Total debt securities $69,274 $69,727 $12,188,338 $12,457,456
======= ======= =========== ===========
NOTE D. Loans and Leases
Loans and leases were composed of the following:
December 31,
------------------------
2000 1999
----------- -----------
(Dollars in thousands)
Loans:
Commercial, financial and agricultural $ 5,893,808 $ 5,382,373
Leases receivables 4,453,589 2,606,002
Real estate--construction and land
development 3,789,309 3,818,396
Real estate--mortgage 22,428,312 20,237,959
Consumer 5,368,810 4,589,510
----------- -----------
Loans and leases held for investment 41,933,828 36,634,240
Less: unearned income (2,479,517) (1,246,254)
----------- -----------
Loans and leases, net of unearned income $39,454,311 $35,387,986
=========== ===========
The net investment in leases was $2.1 billion and $1.5 billion at December
31, 2000 and 1999, respectively. BB&T had loans held for sale at December 31,
2000 and 1999 totaling $846.3 million and $367.2 million, respectively.
BB&T had $27.1 billion in loans secured by real estate at December 31, 2000.
However, these loans were not concentrated in any specific market or geographic
area other than the Banks' primary markets.
70
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth certain information regarding BB&T's impaired
loans:
December 31,
-------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Total recorded investment--impaired loans $42,730 $39,107 $50,749
------- ------- -------
Total recorded investment with related valuation
allowance 42,730 39,107 49,368
Valuation allowance assigned to impaired loans (6,409) (8,335) (9,791)
------- ------- -------
Net carrying value--impaired loans $36,321 $30,772 $39,577
======= ======= =======
Average balance of impaired loans $27,572 $36,558 $57,996
======= ======= =======
Cash basis interest income recognized on
impaired loans $ -- $ 822 $ 440
======= ======= =======
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded $60,000
at any time during 2000. All amounts shown represent loans made by BB&T's
subsidiary banks in the ordinary course of business at the Banks' normal credit
terms, including interest rate and collateralization prevailing at the time for
comparable transactions with other persons.
(Dollars in thousands)
----------------------
Balance, December 31, 1999 $336,836
Additions 74,938
Reductions 224,869
--------
Balance, December 31, 2000 $186,905
========
NOTE E. Allowance for Loan and Lease Losses
An analysis of the allowance for loan and lease losses is presented in the
following table:
For the Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Beginning Balance $ 477,296 $ 442,341 $ 388,867
Allowances of purchased companies 12,934 10,697 25,151
Provision for losses charged to
expense 127,431 114,433 114,729
Loans and leases charged-off (130,112) (122,478) (114,752)
Recoveries of previous charge-offs 34,411 32,303 28,346
---------- ---------- ----------
Net loans and leases charged-off (95,701) (90,175) (86,406)
---------- ---------- ----------
Ending Balance $ 521,960 $ 477,296 $ 442,341
========== ========== ==========
At December 31, 2000, 1999 and 1998, loans not currently accruing interest
totaled $150.0 million, $119.0 million and $119.1 million, respectively. Loans
90 days or more past due and still accruing interest totaled $72.3 million,
$60.0 million and $63.3 million, at December 31, 2000, 1999 and 1998,
respectively. The gross interest income that would have been earned during 2000
if the outstanding nonaccrual loans and leases had been current in accordance
with the original terms and had been outstanding throughout the period (or
since origination, if held for part of the period) was approximately $13.1
million. Foreclosed property totaled $43.0 million, $31.9 million and $37.2
million at December 31, 2000, 1999 and 1998, respectively.
71
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE F. Premises and Equipment
A summary of premises and equipment is presented in the accompanying table:
December 31,
---------------------
2000 1999
---------- ----------
(Dollars in
thousands)
Land and land improvements $ 150,404 $ 139,545
Buildings and building improvements 622,900 555,608
Furniture and equipment 573,163 564,877
Capitalized leases on premises and equipment 3,943 3,945
---------- ----------
1,350,410 1,263,975
Less--accumulated depreciation and amortization 572,650 550,886
---------- ----------
Net premises and equipment $ 777,760 $ 713,089
========== ==========
Depreciation expense, which is included in occupancy and equipment expense,
was $101.6 million, $101.5 and $89.1 million in 2000, 1999 and 1998,
respectively.
BB&T has noncancelable leases covering certain premises and equipment. Total
rent expense applicable to operating leases was $58.0 million, $64.0 million
and $43.7 million for 2000, 1999 and 1998, respectively. Future minimum lease
payments for operating and capitalized leases for years subsequent to 2000 are
as follows:
Leases
---------------------
Operating Capitalized
--------- -----------
(Dollars in
thousands)
Years ended December 31:
2001 $ 43,879 $ 381
2002 38,107 381
2003 33,792 347
2004 31,011 289
2005 27,188 278
2006 and years later 113,831 2,355
-------- ------
Total minimum lease payments $287,808 4,031
========
Less--amount representing interest 1,797
------
Present value of net minimum payments on capitalized
leases (See Note I.) $2,234
======
72
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE G. Loan Servicing
The following is an analysis of capitalized mortgage servicing rights
included in other assets in the Consolidated Balance Sheets:
Capitalized Mortgage
Servicing Rights
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Balance, January 1, $189,809 $119,613 $ 79,250
Servicing rights capitalized 55,855 79,437 86,954
Acquired in purchase transactions 12,153 -- --
Servicing rights sold -- -- (1,118)
Amortization expense (18,733) (28,730) (28,042)
Change in valuation allowance (1,194) 19,489 (17,431)
-------- -------- --------
Balance, December 31, $237,890 $189,809 $119,613
======== ======== ========
Capitalized mortgage servicing rights are being amortized on a disaggregated
loan basis using an accelerated method over the estimated life of the
underlying loans. The servicing rights portfolio is analyzed each quarter to
identify possible impairment using a disaggregated discounted cash flow
methodology that is stratified by predominant risk characteristics. These
characteristics include stratification based on type of loan, maturity of loan
and interest rates in intervals of 150 basis points, except at December 31,
2000, when the interval was expanded to 200 basis points. Following is an
analysis of the aggregate changes in the valuation allowance for mortgage
servicing rights in 2000, 1999 and 1998 including the effects of related
hedging instruments:
Valuation Allowance for
Mortgage Servicing
Rights
--------------------------
2000 1999 1998
------- -------- -------
(Dollars in thousands)
Balance, January 1, $ 1,542 $ 21,031 $ 3,600
Additions 107 462 17,704
Reductions (1,301) (19,951) (273)
------- -------- -------
Balance, December 31, $ 348 $ 1,542 $21,031
======= ======== =======
Mortgage loans serviced for others are not included in loans on the
accompanying Consolidated Balance Sheets. The unpaid principal balances of
mortgage loans serviced for others were $15.8 billion and $15.2 billion at
December 31, 2000 and 1999, respectively.
During 2000, BB&T securitized and sold $2.4 billion of fixed rate mortgage
loans and recognized a pretax loss of $5.4 million, which was recorded in
noninterest income. BB&T retained the related mortgage servicing rights and
receives annual servicing fees approximating .25% of the outstanding balance of
the mortgage loans. The investors in the resulting securities have no recourse
against BB&T for any failure of the loans underlying the securities.
BB&T uses assumptions and estimates in determining the fair value of
capitalized mortgage servicing rights. These assumptions include prepayment
speeds, net charge-off experience and discount rates commensurate with the
risks involved.
73
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the sensitivity of the current fair value of the
capitalized mortgage servicing rights to immediate 25% and 50% adverse changes
in key economic assumptions are included in the accompanying table.
Key Assumptions in the
Valuation of Mortgage
Servicing Rights
----------------------
(Dollars in thousands)
Fair Value of Mortgage Servicing Rights
Retained in Loan Sale Transactions $222,135
========
Weighted Average Life 10.0 yrs
========
Prepayment Speed 18.0%
Effect on fair value of a 25% increase $(20,016)
Effect on fair value of a 50% increase (36,211)
Expected credit losses 0.4%
Effect on fair value of a 25% increase $ (718)
Effect on fair value of a 50% increase (1,435)
Discount Rate 8.00%
Effect on fair value of a 25% increase $(15,179)
Effect on fair value of a 50% increase (28,248)
The sensitivity calculations above are hypothetical and should not be
considered to be predictive of future performance. As the figures indicate,
changes in fair value based on adverse changes in assumptions generally cannot
be extrapolated because the relationship of the change in assumption to the
change in fair value may not be linear. Also, in this table, the effect of an
adverse variation in a particular assumption on the fair value of the mortgage
servicing rights is calculated without changing any other assumption; while in
reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and
increased credit losses), which might magnify or counteract the effect of the
change.
The following table includes a summary of mortgage loans outstanding, the
portion securitized and derecognized during the periods presented and related
delinquencies and net charge-offs.
2000 1999
---------- ----------
(Dollars in
thousands)
Mortgage Loans Managed or Securitized* $8,887,720 $8,444,829
Less: Loans Securitized and Transferred to
Securities Available for Sale 1,032,546 695,432
Less: Loans Held for Sale 846,323 367,243
---------- ----------
Mortgage Loans Held for Investment $7,008,851 $7,382,154
========== ==========
Mortgage Loans on Nonaccrual Status $ 37,642 $ 37,954
Mortgage Loans Past Due 90 Days and Still Accruing 27,867 23,119
Mortgage Loan Net Charge-offs 1,623 4,272
- --------
* Mortgage loans managed or securitized include loans in which BB&T retains
only the related servicing rights. Balances exclude loans serviced for
others.
74
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE H. Short-Term Borrowed Funds
Short-term borrowed funds are summarized as follows:
December 31,
---------------------
2000 1999
---------- ----------
(Dollars in
thousands)
Federal funds purchased $1,394,755 $ 304,793
Securities sold under agreements to repurchase 2,595,260 2,639,879
Master notes 709,747 698,704
U.S. Treasury tax and loan deposit notes payable 214,858 1,252,469
Short-term Federal Home Loan Bank advances 44,331 461,657
Short-term bank notes 1,890,000 1,645,000
Other short-term borrowed funds 107,745 969,371
---------- ----------
Total short-term borrowed funds $6,956,696 $7,971,873
========== ==========
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Securities sold under agreements to repurchase are
borrowings collateralized by securities of the U.S. Government or its agencies
and generally have maturities ranging from overnight to one year. U.S. Treasury
tax and loan deposit notes payable are payable upon demand to the U.S.
Treasury. Master notes are unsecured, non-negotiable obligations of BB&T
(variable rate commercial paper with maturities of 270 days). Short-term
Federal Home Loan Bank advances generally mature daily. Short-term bank notes
are unsecured borrowings issued by the banking subsidiaries that generally
mature in less than one year.
A summary of selected data related to short-term borrowed funds follows:
As of / For the Year Ended
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Maximum outstanding at any month-end
during the year $8,111,010 $8,101,034 $6,851,348
Balance outstanding at end of year 6,956,696 7,971,873 4,815,734
Average outstanding during the year 6,684,688 6,270,755 5,255,111
Average interest rate during the year 6.01% 4.89% 5.20%
Average interest rate at end of year 6.12 4.28 4.82
75
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE I. Long-Term Debt
Long-term debt is summarized as follows:
December 31,
---------------------
2000 1999
---------- ----------
(Dollars in
thousands)
Capitalized leases, varying maturities to 2028 with
rates from 8.11% to 12.65%. Balance represents the
unamortized amounts due on leases of various
facilities. $ 2,234 $ 2,535
Medium-term bank notes, unsecured, varying maturities to
2002 with variable rates from 5.70% to 7.05%. 1,201,996 969,945
Advances from Federal Home Loan Bank, varying maturities
to 2019 with rates from 1.00% to 8.51%. 6,170,520 4,115,086
Subordinated Notes, unsecured, dated May 21, 1996, June
3, 1997 and June 30, 1998(1); maturing May 23, 2003,
June 15, 2007 and June 30, 2025; with interest rates of
7.05%, 7.25% and 6.375%, respectively.(2) 856,072 857,272
CMO Bonds, secured by investments, dated 1985, callable
July 1, 2001, with an interest rate of 11.25%. 5,703 8,128
Corporation-obligated mandatorily redeemable capital
securities, dated July 16, 1997, maturing June 15,
2027, with interest at 10.07%; November 19, 1997,
maturing December 1, 2027, with interest at 8.90%;
November 13, 1997, maturing December 31, 2027, with
interest at 9.00%; and April 22, 1998, maturing June
30, 2028, with interest at 8.40%.(3) 114,750 117,987
Other mortgage indebtedness 3,397 2,475
---------- ----------
Total long-term debt $8,354,672 $6,073,428
========== ==========
- --------
Excluding the capitalized leases set forth in Note F, future debt maturities
are $479.1 million, $795.0 million, $356.9 million, $240.4 million and $373.6
million for the next five years. The maturities for 2006 and later years total
$6.1 billion.
(1) The $350 million in subordinated debt, issued June 30, 1998, is mandatorily
puttable to BB&T on June 30, 2005, and contains a remarketing option that
allows the debt to be reissued by the holder of the option to the stated
maturity of June 30, 2025.
(2) Subordinated notes qualify under the risk-based capital guidelines as Tier
2 supplementary capital.
(3) Securities qualify under the risk-based capital guidelines as Tier 1
capital, subject to certain limitations.
Redeemable Capital Securities
In July, 1997, Mason-Dixon Capital Trust ("MDCT") issued $20 million of
10.07% Preferred Securities. MDCT, a statutory business trust created under the
laws of the State of Delaware, was formed by Mason-Dixon Bancshares, Inc.,
("Mason-Dixon") for the sole purpose of issuing the Preferred Securities and
investing the proceeds thereof in 10.07% Junior Subordinated Debentures issued
by Mason-Dixon. Mason Dixon, which merged into BB&T on July 14, 1999, entered
into agreements which, taken collectively, fully, irrevocably and
unconditionally guarantee, on a subordinated basis, all of MDCT's obligations
under the Preferred Securities. MDCT's sole asset is
76
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Junior Subordinated Debentures issued by Mason-Dixon and assumed by BB&T,
which mature June 15, 2027, but are subject to early mandatory redemption in
whole under certain limited circumstances and are callable in whole or part
anytime after June 15, 2007. The Preferred Securities of MDCT, are subject to
mandatory redemption in whole on June 15, 2027, or such earlier date in the
event the Junior Subordinated Debentures are redeemed by BB&T pursuant to one
of the prescribed limited circumstances or pursuant to the call provisions.
In November, 1997, MainStreet Capital Trust I ("MSCT I") issued $50 million
of 8.90% Trust Securities. MSCT I, a statutory business trust created under the
laws of the State of Delaware, was formed by MainStreet Financial Corporation,
("MainStreet") for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in 8.90% Junior Subordinated Debentures issued
by MainStreet. MainStreet, which merged into BB&T on March 5, 1999, entered
into agreements which, taken collectively, fully, irrevocably and
unconditionally guarantee, on a subordinated basis, all of MSCT I's obligations
under the Trust Securities. MSCT I's sole asset is the Junior Subordinated
Debentures issued by MainStreet and assumed by BB&T, which mature December 1,
2027, but are subject to early mandatory redemption in whole under certain
limited circumstances and are callable in whole or part anytime after December
1, 2007. The Trust Securities of MSCT I, are subject to mandatory redemption in
whole on December 1, 2027, or such earlier date in the event the Junior
Subordinated Debentures are redeemed by BB&T pursuant to one of the prescribed
limited circumstances or pursuant to the call provisions. One Valley Bancorp,
Inc., which merged into BB&T Corporation on July 6, 2000 and a subsidiary of
Mason-Dixon Bancshares, Inc, which merged into BB&T on July 14, 1999, each
owned $2 million of the Trust Securities issued by MSCT I. As a result of these
mergers, the outstanding balance of the MSCT I Trust Securities included in the
consolidated balance sheets at December 31, 2000 and December 31, 1999 was $46
million.
In November, 1997, Premier Capital Trust I ("PCT I") issued $28.75 million of
9.00% Preferred Securities. PCT I, a statutory business trust created under the
laws of the State of Delaware, was formed by Premier Bancshares, Inc.,
("Premier") for the purpose of issuing the Preferred Securities and investing
the proceeds thereof in 9.00% Junior Subordinated Debentures issued by Premier.
Premier, which merged into BB&T on January 13, 2000, entered into agreements
which, taken collectively, fully, irrevocably and unconditionally guarantee, on
a subordinated basis, all of PCT I's obligations under the Preferred
Securities. PCT I's sole asset is the Junior Subordinated Debentures issued by
Premier and assumed by BB&T, which mature December 31, 2027, but are subject to
early mandatory redemption in whole under certain limited circumstances and are
callable in whole or part anytime after December 31, 2007. The Preferred
Securities of PCT I, are subject to mandatory redemption in whole on December
31, 2027, or such earlier date in the event the Junior Subordinated Debentures
are redeemed by BB&T pursuant to one of the prescribed limited circumstances or
pursuant to the call provisions.
In April, 1998, Mason-Dixon Capital Trust II ("MDCT II") issued $20 million
of 8.40% Preferred Securities. MDCT II, a Delaware statutory business trust,
was formed by Mason-Dixon Bancshares, Inc., ("Mason-Dixon") for the sole
purpose of issuing the Preferred Securities and investing the proceeds thereof
in 8.40% Junior Subordinated Debentures issued by Mason-Dixon. Mason Dixon,
which merged into BB&T on July 14, 1999, entered into agreements which, taken
collectively, fully, irrevocably and unconditionally guarantee, on a
subordinated basis, all of MDCT II's obligations under the Preferred
Securities. MDCT II's sole asset is the Junior Subordinated Debentures issued
by Mason-Dixon and assumed by BB&T, which mature June 30, 2028, but are subject
to early mandatory redemption in whole under certain limited circumstances and
are callable in whole or part anytime after June 30, 2003. The Preferred
Securities of MDCT II, are subject to mandatory
77
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
redemption in whole on June 30, 2028, or such earlier date in the event the
Junior Subordinated Debentures are redeemed by BB&T pursuant to one of the
prescribed limited circumstances or pursuant to the call provision.
As a result of the mergers with MainStreet Financial Corporation, Mason-Dixon
Bancshares, Inc. and Premier Bancshares, Inc., BB&T is the sole owner of the
common stock of the above statutory Delaware business trusts and has assumed
agreements which, taken collectively, fully, irrevocably and unconditionally
guarantee, on a subordinated basis, all of the trusts obligations under the
Trust and Preferred Securities. The proceeds from the issuance of these
securities qualify as Tier I capital under the risk-based capital guidelines
established by the Federal Reserve.
NOTE J. Shareholders' Equity
The authorized capital stock of BB&T consists of 500,000,000 shares of common
stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At
December 31, 2000, 401,678,881 shares of common stock and no shares of
preferred stock were issued and outstanding.
Stock Option Plans
At December 31, 2000, BB&T had the following stock-based compensation plans:
the 1994 and 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the
Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan
("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors'
Plan"), which are described below. BB&T accounts for these plans under APB
Opinion No. 25 and related Interpretations, under which no compensation cost
has been recognized. Had compensation cost for these plans been determined
based on the fair value at the grant dates for awards under those plans granted
after December 31, 1994, consistent with the method described by SFAS No. 123,
BB&T's pro forma net income and pro forma earnings per share would have been as
follows:
For the Years Ended
December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands,
except per share data)
Net income applicable to common shares:
As reported $626,442 $705,574 $651,744
Pro Forma 607,514 687,295 638,991
Basic EPS:
As reported 1.57 1.78 1.67
Pro Forma 1.52 1.74 1.64
Diluted EPS:
As reported 1.55 1.75 1.64
Pro Forma 1.51 1.71 1.60
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend
yield of 2.5% in 2000, 2.5% in 1999 and 2.3% in 1998; expected volatility of
29% in 2000, 25% in 1999 and 26% in 1998; risk free interest rates of 6.6%,
5.3% and 5.4% for 2000, 1999 and 1998, respectively; and expected lives of 6.0
years, 5.8 years and 6.2 years for 2000, 1999 and 1998, respectively.
78
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
In April, 1994 and February, 1995, the shareholders approved the Omnibus
Plans which cover the award of incentive stock options, non-qualified stock
options, shares of restricted stock, performance shares and stock appreciation
rights. In April 1996, the shareholders approved an amendment to the 1995
Omnibus Plan that increased the maximum number of shares issuable under the
terms of the plan, after giving effect to the August 3, 1998, 2-for-1 stock
split, to 12,000,000. In May 2000, the shareholders approved an amendment to
the 1995 Omnibus Plan that registered an additional 21.6 million shares for
issuance under the Omnibus Plans.
The provisions of the 1995 Omnibus Plan also provide for an automatic
increase in the authorized number of shares issuable, equal to 3% of any
increase in the Corporation's outstanding common shares. Including options
authorized under these provisions, the maximum number of shares issuable under
the 1995 Omnibus Plan was 35.7 million at December 31, 2000. The combined
shares issuable under both Omnibus Plans, after giving effect to the 2-for-1
stock split and the automatic increase provided by the terms of the 1995
Omnibus Plan, is 43.7 million at December 31, 2000. The Omnibus Plans are
intended to allow BB&T to recruit and retain employees with ability and
initiative and to associate the employees' interests with those of BB&T and its
shareholders. At December 31, 2000, 12,409,086 qualified stock options at
prices ranging from $5.49 to $51.41 and 4,041,485 non-qualified stock options
at prices ranging from $3.23 to $56.98 were outstanding. The stock options
generally vest over 3 years and have a 10-year term.
The ISOP and the NQSOP were established to retain key officers and key
management employees and to offer them the incentive to use their best efforts
on behalf of BB&T. The plans further provide for up to 2,202,000 shares of
common stock to be reserved for the granting of options, which have a four year
vesting schedule and must be exercised within ten years from the date granted.
These plans expired on December 19, 2000; however, any options previously
granted under the plans will be available to be exercised for ten years. No
additional grants will be made pursuant to these plans. Incentive stock options
granted had an exercise price equal to at least 100% of the fair market value
of common stock on the date granted, and the non-qualified stock options were
required to have an exercise price equal to at least 85% of the fair market
value on the date granted. At December 31, 2000, options to purchase 97,428
shares of common stock at prices ranging from $4.75 to $8.375 were outstanding
pursuant to the NQSOP. At December 31, 2000, options to purchase 76,782 shares
of common stock at an exercise price of $9.8885 were outstanding pursuant to
the ISOP.
The Directors' Stock Option Plan is intended to provide incentives to non-
employee directors to remain on the Board of Directors and share in the
profitability of BB&T. The plan creates a deferred compensation system for
participating non-employee directors. Each non-employee director may elect to
defer 0%, 50% or 100% of the annual retainer fee for each calendar year and
apply that percentage toward the grant of options to purchase BB&T common
stock. Such elections are required to be in writing and are irrevocable for
each calendar year. The exercise price at which shares of BB&T common stock may
be purchased shall be equal to 75% of the market value of the common stock as
of the date of grant. Options are vested in six months and may be exercised
anytime thereafter until the expiration date, which is 10 years from the date
of grant. The Directors' Plan provides for the reservation of up to 1,800,000
shares of BB&T common stock. At December 31,
79
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000, options to purchase 671,142 shares of common stock at prices ranging from
$6.3578 to $24.7774 were outstanding pursuant to the Directors' Plan.
BB&T also has options outstanding that were granted by certain acquired
companies. These options, which have not been included in the plans described
above, totaled 158,156 as of December 31, 2000, with option prices ranging from
$4.4327 to $11.8535.
A summary of the status of the Company's stock option plans at December 31,
2000, 1999 and 1998 and changes during the years then ended is presented below:
2000 1999 1998
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning
of year 15,460,519 $19.43 15,508,850 $11.21 16,308,031 $11.21
Issued in purchase
transactions 572,940 14.48 233,000 11.05 591,955 11.22
Granted 4,433,655 23.79 2,913,317 34.01 2,800,577 28.03
Exercised (2,503,135) 12.59 (2,907,228) 10.89 (4,046,474) 9.49
Forfeited or Expired (509,900) 34.87 (287,420) 36.28 (145,239) 22.21
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year 17,454,079 $20.87 15,460,519 $19.43 15,508,850 $11.21
========== ====== ========== ====== ========== ======
Options exercisable at
year-end 13,074,437 $18.83 12,983,505 $16.49 12,110,860 $12.08
========== ====== ========== ====== ========== ======
The weighted average fair value of options granted was $7.47, $8.56 and $7.44
per option at December 31, 2000, 1999 and 1998, respectively.
The following table summarizes information about the options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices 12/31/00 Life Price 12/31/00 Price
--------------- ----------- ----------- --------- ----------- ---------
$ 3.23 to $ 4.75 41,368 1.6 Yrs $ 4.30 41,368 $ 4.30
$ 4.76 to $ 7.25 378,939 1.6 6.47 378,939 6.47
$ 7.26 to $10.75 2,790,710 3.1 9.05 2,790,710 9.05
$10.76 to $16.00 3,575,582 4.7 12.84 3,575,582 4.65
$16.01 to $24.00 6,143,443 8.3 22.68 3,042,414 21.39
$24.01 to $36.00 2,489,830 7.5 30.27 2,078,618 30.24
$36.01 to $56.98 2,034,207 8.1 37.24 1,166,806 37.99
---------- --- ------ ---------- ------
17,454,079 6.4 $20.87 13,074,437 $18.83
========== === ====== ========== ======
Shareholder Rights Plan
On January 17, 1997, pursuant to the Rights Agreement approved by the Board
of Directors, BB&T distributed to shareholders one preferred stock purchase
right for each share of BB&T's common stock then outstanding. Subsequent to
this date, all shares issued are accompanied by a stock purchase right.
Initially, the rights, which expire in 10 years, are not exercisable and are
not transferable apart from the common stock. The rights will become
exercisable only if a person or group acquires 20% or more of BB&T's common
stock, or BB&T's Board of Directors determines, pursuant to the terms of the
Rights Agreement, that any person or group that has acquired 10% or
80
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
more of BB&T's common stock is an "Adverse Person." Each right would then
enable the holder to purchase 1/100th of a share of a new series of BB&T
preferred stock at an initial exercise price of $145.00. The Board of Directors
will be entitled to redeem the rights at $.01 per right under certain
circumstances specified in the Rights Agreement.
Under the terms of the Rights Agreement, if any person or group becomes the
beneficial owner of 25% or more of BB&T's common stock, with certain
exceptions, or if the Board of Directors determines that any 10% or more
stockholder is an "Adverse Person," each right will entitle its holder (other
than the person triggering exercisability of the rights) to purchase, at the
right's then-current exercise price, shares of BB&T's common stock having a
value of twice the right's exercise price. In addition, if after any person or
group has become a 20% or more stockholder, BB&T is involved in a merger or
other business combination transaction with another person in which its common
stock is changed or converted, or sells 50% or more of its assets or earning
power to another person, each right will entitle its holder to purchase, at the
right's then-current exercise price, shares of common stock of such other
person having a value of twice the right's exercise price.
Note K. Income Taxes
The provision for income taxes was composed of the following:
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Current expense:
Federal $ 93,319 $151,492 $244,547
State 13,296 10,958 15,651
-------- -------- --------
Total current expense 106,615 162,450 260,198
Deferred expense 172,623 178,433 46,546
-------- -------- --------
Provision for income taxes $279,238 $340,883 $306,744
======== ======== ========
The reasons for the difference between the provision for income taxes and the
amount computed by applying the statutory Federal income tax rate to income
before income taxes were as follows:
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Federal income taxes at statutory rates of
35% $316,998 $366,048 $335,251
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense (54,511) (36,909) (25,779)
Amortization of goodwill 16,429 13,221 6,700
State income taxes, net of Federal tax
benefit 10,268 9,821 12,112
Other, net (9,946) (11,298) (21,540)
-------- -------- --------
Provision for income taxes $279,238 $340,883 $306,744
======== ======== ========
Effective income tax rate 30.8% 32.6% 32.0%
======== ======== ========
During the fourth quarter of 2000, BB&T transferred responsibility for the
management of certain operations to a subsidiary in a tax-advantaged
jurisdiction, thereby lowering the effective
81
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income tax rate applicable to certain lease investments. In accordance with
SFAS No. 13, Accounting for Leases, the net income from the affected leases was
recalculated from inception based on the new effective income tax rate. The
recalculation had the effect of reducing net interest income for 2000 by $14.3
million and reducing the current year's income tax provision by $19.8 million.
BB&T intends to permanently reinvest the earnings of this subsidiary and,
therefore, in accordance with the provisions of SFAS No. 109, Accounting for
Income Taxes, deferred income taxes associated with the current year's income
tax benefit have not been provided.
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Balance Sheets" were:
December 31,
------------------------
2000 1999
----------- -----------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses $ 195,199 $ 174,411
Net unrealized depreciation on securities
available for sale -- 185,516
Deferred compensation 45,168 38,498
Other 83,126 84,536
----------- -----------
Total tax deferred assets 323,493 482,961
----------- -----------
Deferred tax liabilities:
Net unrealized appreciation on securities
available for sale (71,467) --
Lease financing (430,999) (254,197)
Mortgage servicing rights (65,280) (41,359)
Other (64,941) (53,265)
----------- -----------
Total tax deferred liabilities (632,687) (348,821)
----------- -----------
Net deferred tax asset (liability) $ (309,194) $ 134,140
=========== ===========
Securities transactions resulted in income tax (benefits) expense of ($76.6
million), ($2.3 million) and $3.9 million related to securities (losses) gains
for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE L. Benefit Plans
BB&T provides various benefit plans to existing employees and employees of
acquired entities. Employees of acquired entities generally participate in
existing BB&T plans upon consummation of the business combinations. The plans
of acquired institutions are typically merged into the BB&T plans upon
consummation of the mergers, and, under these circumstances, credit is usually
given to these employees for years of service at the acquired institution for
vesting and benefit accrual purposes.
The following table summarizes expenses relating to employee retirement
plans. These expenses are restated for business combinations accounted for as
poolings of interests.
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Defined benefit plans $15,114 $19,050 $12,991
Defined contribution and ESOP plans 21,480 16,968 21,582
------- ------- -------
Total expense related to benefit plans $36,594 $36,018 $34,573
======= ======= =======
82
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Defined Benefit Retirement Plans
BB&T provides a defined benefit retirement plan qualified under the Internal
Revenue Code that covers substantially all employees. Benefits are based on
years of service, age at retirement and the employee's compensation during the
five highest consecutive years of earnings within the last ten years of
employment. BB&T's contributions to the plan are in amounts between the minimum
required for funding standard accounts and the maximum deductible for federal
income tax purposes.
In addition, supplemental retirement benefits are provided to certain key
officers under supplemental defined benefit executive retirement plans, which
are not qualified under the Internal Revenue Code. Although technically
unfunded plans, insurance policies on the lives of the covered employees
partially fund future benefits.
Financial data relative to the defined benefit plans is summarized in the
following tables for the years indicated:
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Net Periodic Pension Cost
Service cost $ 19,390 $ 21,761 $ 15,059
Interest cost 28,040 26,831 19,765
Estimated return on plan assets (31,535) (31,376) (22,869)
Net amortization and other (2,653) (1,811) 1,257
-------- -------- --------
Net periodic pension cost $ 13,242 $ 15,405 $ 13,212
======== ======== ========
Plans for which
assets exceed Plans for which
accumulated accumulated benefits
benefits exceed assets
------------------ ----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(Dollars in thousands)
Change in Projected Benefit
Obligation
Projected benefit obligation,
January 1, $324,769 $361,597 $32,037 $36,105
Service cost 18,150 20,491 1,240 1,270
Interest cost 25,427 24,578 2,613 2,254
Actuarial (gain) loss 23,379 (64,754) 3,597 (6,924)
Benefits paid (16,541) (20,474) (729) (741)
Change in plan provisions (17,222) (3,054) (74) 75
Other, net 4,636 6,385 1 (2)
-------- -------- ---------- ----------
Projected benefit obligation,
December 31, $362,598 $324,769 $38,685 $32,037
======== ======== ========== ==========
2000 1999 2000 1999
-------- -------- ---------- ----------
(Dollars in thousands)
Change in Plan Assets
Fair value of plan assets,
January 1, $395,925 $382,554 $ -- $ --
Actual return on plan assets 17,842 20,173 -- --
Employer contributions 1,871 7,286 729 741
Benefits paid (16,541) (20,474) (729) (741)
Other, net 6,235 6,386 -- --
-------- -------- ---------- ----------
Fair value of plan assets,
December 31, $405,332 $395,925 $ -- $ --
======== ======== ========== ==========
83
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plans for which Plans for which
assets exceed accumulated benefits
accumulated benefits exceed assets
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in thousands)
Net Amount Recognized
Funded status $ 42,734 71,156 $ (38,685) $ (32,037)
Unrecognized transition
(asset) obligation (4,136) (5,453) 337 429
Unrecognized prior
service cost (34,353) (19,505) 2,033 2,436
Unrecognized net loss
(gain) 9,093 (27,978) 7,656 4,675
Other, net (1) 1 -- 1
---------- ---------- ---------- ----------
Net amount recognized $ 13,337 $ 18,221 $ (28,659) $ (24,496)
========== ========== ========== ==========
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in thousands)
Reconciliation of Net
Pension Asset (Liability)
Prepaid pension cost,
January 1, $ 18,221 $ 21,266 $ (24,496) $ (20,164)
Contributions 1,871 7,286 729 741
Net periodic pension cost (8,353) (10,331) (4,889) (5,074)
Other, net 1,598 -- (3) 1
---------- ---------- ---------- ----------
Prepaid (accrued) pension
cost, December 31, $ 13,337 $ 18,221 $ (28,659) $ (24,496)
========== ========== ========== ==========
December 31,
----------------------
2000 1999
---------- ----------
Weighted Average
Assumptions
Weighted average assumed
discount rate 7.50% 7.75%
Weighted average expected
long-term rate of return
on plan assets 8.00 8.00
Assumed rate of annual
compensation increases 5.50 5.50
Pension plan assets consist primarily of investments in mutual funds
consisting of equity investments, obligations of the U.S. Treasury and Federal
agencies and corporations. Plan assets included $26.0 million and $18.5 million
of BB&T common stock at December 31, 2000 and 1999, respectively. The market
value of total plan assets was $405.3 million and $395.9 million at December
31, 2000 and 1999, respectively.
Postretirement Benefits Other than Pension
BB&T provides certain postretirement benefits that cover employees retiring
after December 31, 1995, who are eligible for participation in the BB&T pension
plan and have at least ten years of service. The plan requires retiree
contributions, with a subsidy by BB&T based upon years of service of the
employee at the time of retirement. The subsidy is periodically reviewed for
adjustment. The plan provides flexible benefits to retirees or their
dependents.
84
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the components of the retiree benefit plan and
the amount recognized in the consolidated financial statements at December 31,
2000, 1999 and 1998.
2000 1999 1998
------ ------ ------
(Dollars in
thousands)
Net Periodic Postretirement Benefit Cost:
Service cost $2,141 $1,126 $1,550
Interest cost 4,426 3,314 3,422
Amortization and other 633 518 519
------ ------ ------
Total expense $7,200 $4,958 $5,491
====== ====== ======
2000 1999
-------- --------
(Dollars in
thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, January 1, $ 51,198 $ 53,630
Service cost 2,141 1,126
Interest cost 4,426 3,314
Plan participants' contributions 567 727
Actuarial loss (gain) 3,646 (8,286)
Benefits paid (3,535) (1,793)
Other, net 7,049 2,480
-------- --------
Projected benefit obligation, December 31, $ 65,492 $ 51,198
======== ========
2000 1999
-------- --------
(Dollars in
thousands)
Change in Plan Assets
Fair value of plan assets, January 1, $ -- $ --
Actual return on plan assets -- --
Employer contributions 2,968 1,066
Plan participants' contributions 567 727
Benefits paid (3,535) (1,793)
-------- --------
Fair value of plan assets, December 31, $ -- $ --
======== ========
2000 1999
-------- --------
(Dollars in
thousands)
Net Amount Recognized
Funded status $(65,492) $(51,198)
Unrecognized prior service cost 5,347 5,704
Unrecognized net (gain) loss (5,899) (7,740)
Unrecognized transition obligation 2,622 --
-------- --------
Net amount recognized $(63,422) $(53,234)
======== ========
85
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 1999
-------- --------
(Dollars in
thousands)
Reconciliation of Postretirement Benefit
Prepaid (accrued) postretirement benefit, January
1, $(53,234) $(46,807)
Contributions 2,968 1,066
Net periodic postretirement benefit cost (7,200) (4,958)
Other, net (5,956) (2,535)
-------- --------
Prepaid (accrued) postretirement benefit cost,
December 31, $(63,422) $(53,234)
======== ========
December 31,
--------------------
2000 1999
-------- --------
Weighted Average Assumptions
Weighted average assumed discount rate 7.50% 7.75%
Medical trend rate--initial year 6.00 8.00
Medical trend rate--ultimate 5.00 5.00
Select period 1 yr 3 yrs
1% 1%
Increase Decrease
-------- --------
Impact of a 1% change in assumed health care cost
on:
Service and interest costs 1.00% (1.00)%
Accumulated postretirement benefit obligation 1.20 (1.00)
401(k) Savings Plan
BB&T operates a 401(k) Savings Plan that permits employees to contribute up
to 16% of their compensation. BB&T makes matching contributions of up to 6% of
the employee's compensation.
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
NOTE M. Commitments and Contingencies
BB&T is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of clients and to reduce
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit, options written, standby letters of credit and
financial guarantees, interest rate caps and floors written, interest rate
swaps and forward and futures contracts.
BB&T's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. BB&T uses the same credit
policies in making commitments and conditional obligations as it does for on-
balance sheet transactions.
86
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 and 1999, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract or
Notional Amount at
December 31,
-----------------------
2000 1999
----------- -----------
(Dollars in thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend, originate or purchase credit $16,355,262 $13,398,955
Standby letters of credit and financial guarantees
written 707,778 504,350
Commercial letters of credit 45,168 40,417
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Forward and futures contracts $ 869,000 $ 319,411
Foreign exchange contracts 131,148 72,228
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Historically, many commitments expire without
being drawn upon; therefore, the total commitment amounts shown in the above
table are not necessarily indicative of future funding requirements. BB&T
evaluates each customer's creditworthiness on a case-by-case basis. The amount
and type of collateral obtained, if deemed necessary by BB&T, is based on
management's evaluation of the creditworthiness of the counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BB&T to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper issuance, bond
financing and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers, and letters of credit are collateralized when deemed necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities are
contracts in which BB&T agrees to make delivery at a specified future date of a
specified instrument, at a specified price or yield. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movements in securities' values and interest rates.
Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the normal
conduct of business. Management believes that the liabilities, if any, arising
from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
NOTE N. Regulatory Requirements and Other Restrictions
BB&T's subsidiary banks are required by the Board of Governors of the Federal
Reserve System to maintain reserve balances in the form of vault cash or
deposits with the Federal Reserve
87
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bank based on specified percentages of certain deposit types, subject to
various adjustments. At December 31, 2000, the net reserve requirement amounted
to $220.9 million.
BB&T's subsidiary banks are prohibited from paying dividends from their
capital stock and additional paid-in capital accounts and are required by
regulatory authorities to maintain minimum capital levels. Subject to
restrictions imposed by state laws and federal regulations, the Boards of
Directors of the subsidiary banks could have declared dividends from their
retained earnings up to $2.0 billion at December 31, 2000.
BB&T is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on BB&T's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation must meet specific
capital guidelines that involve quantitative measures of BB&T's assets,
liabilities and certain off-balance-sheet items calculated pursuant to
regulatory directives. BB&T's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. BB&T was in compliance with these requirements at
December 31, 2000. See "Regulatory Considerations" for additional information
regarding BB&T's regulatory requirements.
Quantitative measures established by regulation to ensure capital adequacy
require BB&T to maintain minimum amounts and ratios of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital to average assets.
The following table provides summary information regarding regulatory capital
for BB&T and its significant banking subsidiaries as of December 31, 2000 and
1999:
December 31, 2000 December 31, 1999
----------------------------- -----------------------------
Actual Capital Minimum Actual Capital Minimum
----------------- Capital ----------------- Capital
Ratio Amount Requirement Ratio Amount Requirement
----- ---------- ----------- ----- ---------- -----------
(Dollars in thousands)
Tier 1 Capital
BB&T 9.3% $3,965,892 $1,704,175 9.9% $3,679,736 $1,485,032
BB&T--NC 9.6 3,091,106 1,286,772 10.0 2,641,650 1,053,039
BB&T--SC 9.0 374,771 166,559 9.7 366,991 151,036
BB&T--VA 10.2 440,942 173,072 11.5 482,278 167,717
Total Capital
BB&T 12.0% $5,122,645 $3,408,350 13.2% $4,901,622 $2,970,064
BB&T--NC 10.7 3,448,379 2,573,544 11.2 2,949,749 2,106,077
BB&T--SC 10.2 425,217 333,118 11.0 413,911 302,071
BB&T--VA 11.4 495,222 346,144 12.8 534,840 335,434
Leverage Capital
BB&T 7.1% $3,965,892 $1,679,114 7.1% $3,679,736 $1,565,338
BB&T--NC 6.9 3,091,106 1,353,694 6.9 2,641,650 1,141,587
BB&T--SC 7.4 374,771 152,417 7.7 366,991 142,148
BB&T--VA 7.4 440,942 178,357 7.6 482,278 191,292
88
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE O. Parent Company Financial Statements
Condensed Balance Sheets
December 31, 2000 and 1999
2000 1999
---------- ----------
(Dollars in
thousands)
Assets
Cash and due from banks $ 8,924 $ 9,001
Interest-bearing bank balances 638,112 582,032
Securities 15,996 64,560
Investment in banking subsidiaries 4,926,773 4,005,374
Investment in other subsidiaries 462,614 563,357
---------- ----------
Total investments in subsidiaries 5,389,387 4,568,731
---------- ----------
Advances to subsidiaries 302,750 348,000
Premises and equipment 5,036 7,312
Receivables from subsidiaries and other assets 244,397 290,454
---------- ----------
Total assets $6,604,602 $5,870,090
========== ==========
Liabilities and Shareholders' Equity
Short-term borrowed funds $ 709,747 $ 707,163
Dividends payable 94,347 69,785
Accounts payable and accrued liabilities 36,087 49,684
Long-term debt 978,496 979,839
---------- ----------
Total liabilities 1,818,677 1,806,471
---------- ----------
Total shareholders' equity 4,785,925 4,063,619
---------- ----------
Total liabilities and shareholders' equity $6,604,602 $5,870,090
========== ==========
89
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Income Statements
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Income
Dividends from subsidiaries $577,955 $660,478 $513,962
Interest and other income from subsidiaries 105,802 92,109 96,159
Other income 8,271 10,060 28,885
-------- -------- --------
Total income 692,028 762,647 639,006
-------- -------- --------
Expenses
Interest expense 90,390 85,583 93,213
Other expenses 56,931 61,228 67,216
-------- -------- --------
Total expenses 147,321 146,811 160,429
-------- -------- --------
Income before income taxes and equity in
undistributed earnings of subsidiaries 544,707 615,836 478,577
Income tax benefit 7,842 11,192 11,781
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries 552,549 627,028 490,358
Equity in undistributed earnings of subsidiaries 73,893 78,546 161,386
-------- -------- --------
Net income $626,442 $705,574 $651,744
======== ======== ========
90
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- --------- ---------
(Dollars in thousands)
Cash Flows From Operating Activities:
Net income $ 626,442 $ 705,574 $ 651,744
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of subsidiaries less than (in
excess of) dividends from subsidiaries (73,893) (78,546) (161,386)
Depreciation of premises and equipment 568 492 783
Amortization of unearned compensation 4,605 3,906 1,325
Discount accretion and premium amortization -- -- 142
Loss (gain) on sales of securities 1,434 954 (15)
Loss on disposals of other real estate
owned -- 1 191
Decrease (increase) in other assets 50,030 (93,875) (120,543)
Increase (decrease) in accounts payable and
accrued liabilities (13,793) 183 5,928
--------- --------- ---------
Net cash provided by operating activities 595,393 538,689 378,169
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of securities available
for sale 33,517 64,143 68,801
Proceeds from maturities, calls and paydowns
of securities available for sale -- -- 3,779
Purchases of securities available for sale (30,204) (18,050) (137,709)
Investment in subsidiaries (99,859) (86,371) (95,345)
Advances to subsidiaries (393,061) (728,586) (677,728)
Proceeds from repayment of advances to
subsidiaries 438,311 740,186 530,967
Net cash (paid) received in purchase
accounting transactions 6,396 588 (6,051)
Other, net 150 645 17,373
--------- --------- ---------
Net cash used in investing activities (44,750) (27,445) (295,913)
--------- --------- ---------
Cash Flows From Financing Activities:
Net increase in long-term debt (200) 19,806 393,178
Net increase in short-term borrowed funds 2,584 19,054 32,613
Advances from subsidiaries -- -- 4,191
Repayment of advances from subsidiaires -- -- (3,260)
Net proceeds from common stock issued 40,273 48,740 71,397
Redemption of common stock (203,595) (385,673) (345,030)
Cash dividends paid (334,679) (289,467) (246,361)
Other, net 977 558 (1,375)
--------- --------- ---------
Net cash used in financing activities (494,640) (586,982) (94,647)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents 56,003 (75,738) (12,391)
Cash and Cash Equivalents at Beginning of
Year 591,033 666,771 679,162
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 647,036 $ 591,033 $ 666,771
========= ========= =========
91
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE P. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of on-balance sheet and off-
balance sheet financial instruments. A financial instrument is defined by SFAS
No. 107 as cash, evidence of an ownership interest in an entity or a contract
that creates a contractual obligation or right to deliver or receive cash or
another financial instrument from a second entity on potentially favorable or
unfavorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS No. 107 specifies
that fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. No readily available market exists for a
significant portion of BB&T's financial instruments. Fair value estimates for
these instruments are based on judgments regarding current economic conditions,
currency and interest rate risk characteristics, loss experience and other
factors. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision. Therefore, the
calculated fair value estimates in many instances cannot be substantiated by
comparison to independent markets and, in many cases, may not be realizable in
a current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
The following methods and assumptions were used by BB&T in estimating the
fair value of its financial instruments:
Cash and cash equivalents: For these short-term instruments, the carrying
amounts are a reasonable estimate of fair values.
Securities: Fair values for securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
Loans receivable: The fair values for loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms and credit quality. The carrying amounts of accrued interest
approximate fair values.
Deposit liabilities: The fair values for demand deposits, interest-checking
accounts, savings accounts and certain money market accounts are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies current interest rates to
aggregate expected maturities.
Short-term borrowed funds: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowed funds approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on
quoted market prices for the instrument if available, or for similar
instruments if not available, or by using discounted cash flow analyses, based
on BB&T's current incremental borrowing rates for similar types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that BB&T would receive or pay
to terminate the swap agreements at the
92
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reporting date, taking into account current interest rates and the current
creditworthiness of the swap counterparties.
Commitments to extend credit, standby letters of credit and financial
guarantees written: The fair values of commitments are estimated using the fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair values also consider the difference
between current levels of interest rates and the committed rates. The fair
values of guarantees and letters of credit are estimated based on fees
currently charged for similar agreements.
Other off-balance sheet instruments: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
The following is a summary of the carrying amounts and fair values of BB&T's
financial assets and liabilities as of the periods indicated:
December 31,
-------------------------------------------------
2000 1999
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 1,752,829 $ 1,752,829 $ 1,980,875 $ 1,980,875
Trading securities 96,719 96,719 93,221 93,221
Securities available for
sale 13,781,863 13,781,863 12,257,822 12,257,822
Securities held to maturity 69,274 69,727 404,897 398,527
Loans and leases:
Loans 38,199,678 37,756,286 34,246,833 33,713,742
Leases 2,100,956 N/A 1,508,396 N/A
Allowance for losses (521,960) N/A (477,296) N/A
----------- -----------
Net loans and leases $39,778,674 $35,277,933
----------- -----------
Financial liabilities:
Deposits $38,014,501 $38,136,685 $34,147,643 $34,130,120
Short-term borrowed funds 6,956,696 6,956,696 7,971,873 7,971,873
Long-term debt 8,352,438 8,183,138 6,070,893 6,048,780
Capitalized leases 2,234 N/A 2,535 N/A
- --------
NA - not applicable.
93
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the notional or contractual amounts and fair
values of BB&T's off-balance sheet financial instruments as of the periods
indicated:
December 31,
--------------------------------------------
2000 1999
-------------------- ----------------------
Notional/ Notional/
Contract Fair Contract
Amount Value Amount Fair Value
----------- -------- ----------- ----------
(Dollars in thousands)
Off balance sheet financial
intruments:
Interest rate swaps, caps,
floors and collars $ 725,878 $ 267 $ 1,701,611 $ 2,007
Commitments to extend,
originate or purchase credit 16,355,262 (31,741) 13,398,955 1,264,116
Standby and commercial letters
of credit and financial
guarantees written 752,946 (11,294) 544,767 33,691
Forward and futures contracts 869,000 (12,618) 319,411 2,544
Foreign exchange contracts 131,148 547 72,228 1,149
Option contracts purchased 50,000 (282) 15,000 (10)
Option contracts written 76,050 -- 47,250 236
NOTE Q. Derivatives and Off-Balance Sheet Financial Instruments
BB&T utilizes interest rate swaps, caps, floors and collars in the management
of interest rate risk. Interest rate swaps are contractual agreements between
two parties to exchange a series of cash flows representing interest payments.
A swap allows both parties to alter the repricing characteristics of assets or
liabilities without affecting the underlying principal positions. Through the
use of a swap, assets and liabilities may be transformed from fixed to floating
rates, from floating rates to fixed rates, or from one type of floating rate to
another. Swap terms generally range from one year to ten years depending on the
need. At December 31, 2000, derivatives with a total notional value of $725.9
million, with terms ranging up to sixteen years, were outstanding.
See Note A. of the "Notes to Consolidated Financial Statements" herein for a
summary of accounting policies related to derivative financial instruments.
Effective January 1, 2001, the accounting for these instruments will change to
comply with the provisions of SFAS No. 133, as explained in Note A.
94
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth certain information concerning BB&T's interest
rate swaps at December 31, 2000:
Interest Rate Swaps, Caps, Floors and Collars
December 31, 2000
(Dollars in thousands)
Notional Receive Pay Fair
Type Amount Rate Rate Value
- ---- ----------- ----------- ------------ -----------
Receive fixed swaps $ 423,000 6.26% 6.70% $ (87)
Pay fixed swaps 226,828 6.76 5.60 354
Caps, Floors & Collars 76,050 -- -- --
----------- --------- -------- -----------
Total $ 725,878 6.43% 6.32% $ 267
=========== ========= ======== ===========
Receive Pay Fixed Caps, Floors
Year-to-date Activity Fixed Swaps Swaps & Collars Total
- --------------------- ----------- ----------- ------------ -----------
Balance, December 31, 1999 $ 945,000 $ 644,361 $112,250 $ 1,701,611
Additions 728,000 14,100 -- 742,100
Maturities/amortizations -- (55,978) -- (55,978)
Terminations (1,250,000) (375,655) (36,200) (1,661,855)
----------- --------- -------- -----------
Balance, December 31, 2000 $ 423,000 $ 226,828 $ 76,050 $ 725,878
=========== ========= ======== ===========
One Year One to Five After Five
Maturity Schedule or Less Years Years Total
- ----------------- ----------- ----------- ------------ -----------
Receive fixed swaps $ 300,000 $ 30,000 $ 93,000 $ 423,000
Pay fixed swaps -- 203,943 22,885 226,828
Caps, Floors & Collars -- 76,050 -- 76,050
----------- --------- -------- -----------
Total $ 300,000 $ 309,993 $115,885 $ 725,878
=========== ========= ======== ===========
As of December 31, 2000, deferred gains from new swap transactions initiated
during 2000 were $468,000. There were no unamortized deferred gains or losses
from terminated transactions remaining at year end. Active transactions
resulted in additional net interest expense totaling $8.1 million during 2000.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale portfolio in order to enhance returns.
During 2000, options were written on securities totaling $150.0 million. Option
fee income was $1.1 million for 2000. There were no unexercised options
outstanding at December 31, 2000 or 1999.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
loan warehouse and mortgage applications and loans in process against
increasing interest rates. Written call options are used in tandem with
purchased put options to create a net purchased put option that reduces the
cost of the hedge. At December 31, 2000, net purchased put option contracts
with a notional value of $50.0 million were outstanding.
95
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $725.9 million notional amount of derivatives used in interest rate risk
management are primarily used to hedge variable rate commercial loans,
mortgage-backed securities, retail certificates of deposit and fixed rate
notes. BB&T does not utilize derivatives for trading purposes.
Although off-balance sheet derivative financial instruments do not expose
BB&T to credit risk equal to the notional amount, such agreements generate
credit risk to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. Such risk
is minimized through the creditworthiness of the counterparties and the
consistent monitoring of these agreements. The counterparties to these
arrangements were primarily large commercial banks and investment banks. All
counterparties are reviewed annually for creditworthiness by BB&T's credit
policy group. Where appropriate, master netting agreements are arranged or
collateral is obtained in the form of rights to securities. At December 31,
2000, BB&T's interest rate swaps, caps, floors and collars reflected an
unrealized gain of $267,000.
Other risks associated with interest-sensitive derivatives include the effect
on fixed rate positions during periods of changing interest rates. Indexed
amortizing swaps' notional amounts and maturities change based on certain
interest rate indices. Generally, as rates fall the notional amounts decline
more rapidly, and as rates increase notional amounts decline more slowly. Under
unusual circumstances, financial derivatives also increase liquidity risk,
which could result from an environment of rising interest rates in which
derivatives produce negative cash flows while being offset by increased cash
flows from variable rate loans. Such risk is considered insignificant due to
the relatively small derivative positions held by BB&T. At December 31, 2000,
BB&T had no indexed amortizing swaps outstanding.
96
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note R. Calculations of Earnings Per Share
The basic and diluted earnings per share calculations are presented in the
following table:
Years Ended December 31,
-----------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands, except per
share data)
Basic Earnings Per Share:
Net income $ 626,442 $ 705,574 $ 651,744
=========== =========== ===========
Weighted average number of common shares 398,915,645 395,871,173 390,777,294
----------- ----------- -----------
Basic earnings per share $ 1.57 $ 1.78 $ 1.67
=========== =========== ===========
Diluted Earnings Per Share:
Net income $ 626,442 $ 705,574 $ 651,744
=========== =========== ===========
Weighted average number of common shares 398,915,645 395,871,173 390,777,294
Add:
Shares issuable assuming conversion of
convertible preferred stock -- -- 90,202
Dilutive effect of outstanding options
(as determined by application of
treasury stock method) 5,089,614 6,682,111 7,740,358
----------- ----------- -----------
Weighted average number of common shares,
as adjusted 404,005,259 402,553,284 398,607,854
=========== =========== ===========
Add:
After tax interest expense and
amortization of issue costs applicable
to convertible debentures -- -- --
----------- ----------- -----------
Net income, as adjusted $ 626,442 $ 705,574 $ 651,744
=========== =========== ===========
Diluted earnings per share $ 1.55 $ 1.75 $ 1.64
=========== =========== ===========
NOTE S. Operating Segments
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 on BB&T's 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 these business
segments.
BB&T measures and presents information for internal reporting purposes in a
variety of different ways. Information for BB&T's reportable segments is
available based on organizational structure, product offerings and customer
relationships. The internal reporting system presently utilized by management
in the planning and measuring of operating activities, as well as the system to
which most managers are held accountable, is based on organizational structure.
BB&T emphasizes revenue growth by focusing on client service, sales
effectiveness and relationship management. The segment results contained herein
are presented based on internal
97
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management accounting policies that were designed to 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 indicative of how the segments would perform if they operated
as independent entities.
BB&T's internal reporting system was significantly modified during 1999 and
1998. During 1999, BB&T revised the methods used to allocate noninterest
expenses among the various segments. The information presented for 1998 has
been restated to reflect these revisions. Also, BB&T completed various mergers
and acquisitions accounted for as poolings of interests in 2000. Prior period
information presented herein has been restated to reflect the effect of those
mergers on the segment results; however, BB&T does not restate prior periods
for internal accounting methodologies, as discussed below.
The management accounting process uses various estimates and allocation
methodologies to measure the performance of the operating segments. To
determine financial performance for each segment, BB&T allocates capital,
funding charges and credits, an economic provision for loan and lease losses,
certain noninterest expenses and income tax provisions to each segment, as
applicable. Also, to promote revenue growth and provide a basis for employee
incentives, certain revenues of Mortgage Banking, Trust Services, Agency
Insurance and the Investment Banking and Brokerage segments are reflected in
the individual segments and also allocated to the Banking Network. This double
counting of revenue is reflected in intersegment noninterest revenues and
eliminated to arrive at consolidated results. Allocation methodologies are
subject to periodic adjustment as the internal management accounting system is
revised and business or product lines within the segments change. Also, because
the development and application of these methodologies is a dynamic process,
the financial results presented may be periodically revised. As discussed
above, funds transfer pricing and allocations derived by BB&T's internal
accounting practices are not restated for mergers accounted for as poolings of
interests.
BB&T's overall objective is to maximize shareholder value by optimizing
return on equity and limiting risk. Allocations of capital and the economic
provision for loan and lease losses are designed to address this objective.
Capital is assigned to each segment on an economic basis, using management's
assessment of the inherent risks associated with the segment. Economic capital
allocations are made to cover the following risk categories: credit risk,
funding risk, interest rate risk, option risk, basis risk, market risk and
operational risk. Each segment is evaluated based on a risk-adjusted return on
capital. Capital assignments are not equivalent to regulatory capital
guidelines and the total amount assigned to all segments may vary from
consolidated shareholders' equity. All unallocated capital is retained in the
Treasury segment.
The economic provision for loan and lease losses is also allocated to the
relevant segments based on management's assessment of the segments' risks as
described above. Unlike the provision for loan and lease losses recorded
pursuant to generally accepted accounting principles, the economic provision
adjusts for the impact of expected credit losses over the effective lives of
the related loans and leases. Any unallocated provision for loan and lease
losses is retained in the Corporate Office.
98
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BB&T has implemented an extensive noninterest expense allocation process to
support organizational profitability. BB&T allocates expenses to the reportable
segments based on various cost allocation methodologies, including the number
of items processed, overall percentage of time spent, full-time equivalent
employees assigned to functions, functional position surveys and activity-based
costing. A portion of corporate overhead expense is not allocated, but is
retained in corporate accounts reflected as other expenses in the accompanying
tables. Income taxes are allocated to the various segments using effective tax
rates.
BB&T utilizes a funds transfer pricing ("FTP") system to eliminate the effect
of interest rate risk from the segments' net interest income because such risk
is centrally managed within the Treasury segment. The FTP system credits or
charges the segments with the true value or cost of the funds the segments
create or use. The FTP system provides a funds credit for sources of funds and
a funds charge for the use of funds by each segment. The net FTP credit or
charge is reflected as net intersegment interest income (expense) in the
accompanying tables.
Banking Network
BB&T's Banking Network serves individual and business clients by offering a
variety of loan and deposit products and other financial services. The Banking
Network is primarily responsible for client relationships, and, therefore, is
credited with revenue from the Mortgage Banking, Trust Services, Agency
Insurance and Investment Banking and Brokerage segments, which is reflected in
intersegment noninterest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional discussion
concerning the functions of the Banking Network.
Mortgage Banking
The Mortgage Banking segment retains and services mortgage loans originated
by the Banking Network as well as those purchased from various correspondent
originators. Mortgage loan products include fixed- and adjustable-rate
government and conventional loans for the purpose of constructing, purchasing
or refinancing owner-occupied properties. Fixed-rate mortgage loans are
typically sold to government agencies and private investors with servicing
rights retained by BB&T, while adjustable-rate loans are typically held in the
portfolio. The Mortgage Banking segment earns interest on loans held in the
warehouse and portfolio, fee income from the origination and servicing of
mortgage loans and recognizes gains or losses from the sale of mortgage loans.
The Banking Network receives an interoffice credit for the origination of loans
and servicing rights, with the corresponding charge remaining in the Corporate
Office.
Trust Services
BB&T's Trust Services segment provides personal trust administration, estate
planning, investment counseling, asset management, employee benefits services,
and corporate trust services to individuals, corporations, institutions,
foundations and government entities. The Banking Network receives an
interoffice credit for trust fees in the initial year the account is referred,
with the corresponding charge remaining in the Corporate Office.
Agency Insurance
BB&T has the largest independent insurance agency network in the Carolinas.
BB&T Insurance Services provides property and casualty, life and health
insurance to businesses and individuals. It
99
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
also provides small business and corporate products, such as workers
compensation and professional liability, as well as provides surety coverage
and title insurance. The Banking Network receives credit for insurance
commissions on referred accounts, with the corresponding charge retained in the
Corporate Office. These revenues and expenses are reflected in the accompanying
tables as intersegment noninterest income and expense.
Investment Banking and Brokerage
BB&T's Investment Banking and Brokerage segment offers clients investment
alternatives, including discount brokerage services, fixed-rate and variable-
rate annuities, and mutual funds through BB&T Investment Services, Inc., a
subsidiary of BB&T-NC. The Investment Banking and Brokerage segment includes
Scott & Stringfellow, Inc., a full-service brokerage and investment banking
firm headquartered in Richmond, Virginia. Scott & Stringfellow specializes in
the origination, trading and distribution of fixed-income securities and equity
products in both the public and private capital markets. Scott & Stringfellow
also has a public finance department that provides investment banking services,
financial advisory services and municipal bond financing to a variety of
regional tax-exempt issuers. The Banking Network is credited for investment
service revenues on referred accounts, with the corresponding charge retained
in the Corporate Office. These revenues and expenses are reflected in the
accompanying tables as intersegment noninterest income and expense.
Treasury
BB&T's Treasury segment is responsible for the management of the securities
portfolios, overall balance sheet funding and liquidity, and overall management
of interest rate risk. See the Market Risk Management section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information about the responsibilities of the Treasury segment.
100
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables disclose selected financial information for BB&T's
reportable business segments:
For the Years Ended December 31, 2000, 1999 and 1998
-----------------------------------------------------------------------------------------------------
Banking Network Mortgage Banking Trust Services
----------------------------------- ---------------------------------- ----------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
(Dollars in thousands)
Net interest
income (expense)
from external
customers $1,149,635 $ 1,270,691 $ 1,179,084 $ 484,070 $ 423,158 $ 411,227 $(39,785) $(33,668) $(33,717)
Net intersegment
interest income
(expense) 486,591 327,072 286,820 (368,873) (307,484) (270,173) 53,566 42,197 37,989
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Net interest
income 1,636,226 1,597,763 1,465,904 115,197 115,674 141,054 13,781 8,529 4,272
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Provision for
loan and lease
losses 129,157 129,284 116,735 3,183 3,802 4,171 -- -- --
Noninterest
income from
external
customers 382,213 431,381 381,306 85,310 114,811 103,937 80,232 57,290 43,635
Intersegment
noninterest
income 120,410 123,549 150,672 -- -- -- -- -- --
Noninterest
expense 704,314 922,946 809,930 58,742 61,161 76,365 51,960 38,022 28,666
Intersegment
noninterest
expense 325,185 261,420 209,820 22,983 18,918 16,207 3,730 2,532 1,947
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Income before
income taxes 980,193 839,043 861,397 115,599 146,604 148,248 38,323 25,265 17,294
Provision for
income taxes 317,380 279,535 316,858 32,124 45,128 56,125 10,559 8,039 6,528
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Net income $ 662,813 $ 559,508 $ 544,539 $ 83,475 $ 101,476 $ 92,123 $ 27,764 $ 17,226 $ 10,766
=========== =========== =========== ========== ========== ========== ======== ======== ========
Identifiable
segment assets $30,332,401 $33,363,342 $30,584,031 $8,318,744 $5,689,889 $6,344,073 $ 39,508 $ 31,469 $ 26,664
=========== =========== =========== ========== ========== ========== ======== ======== ========
Agency Insurance
-------------------------
2000 1999 1998
--------- ------- -------
Net interest
income (expense)
from external
customers $ (16) $ -- $ --
Net intersegment
interest income
(expense) -- -- --
--------- ------- -------
Net interest
income (16) -- --
--------- ------- -------
Provision for
loan and lease
losses -- -- --
Noninterest
income from
external
customers 122,241 78,125 50,252
Intersegment
noninterest
income -- -- --
Noninterest
expense 87,249 59,688 39,420
Intersegment
noninterest
expense 4,107 2,748 2,415
--------- ------- -------
Income before
income taxes 30,869 15,689 8,417
Provision for
income taxes 12,315 6,278 3,367
--------- ------- -------
Net income $ 18,554 $ 9,411 $ 5,050
========= ======= =======
Identifiable
segment assets $100,852 $63,873 $40,262
========= ======= =======
101
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------------------------
Investment Banking
and Brokerage Treasury All Other Segments (1)
-------------------------- ------------------------------------ --------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- -------- ----------- ----------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Net interest
income (expense)
from external
customers $ 11,659 $ 7,561 $ 1,127 $ 160,043 $ 162,459 $ 126,762 $ 257,133 $ 222,397 $ 203,497
Net intersegment
interest income
(expense) -- -- -- 79,197 (22,111) (135) -- -- --
-------- -------- -------- ----------- ----------- ---------- ---------- ---------- ----------
Net interest
income 11,659 7,561 1,127 239,240 140,348 126,627 257,133 222,397 203,497
-------- -------- -------- ----------- ----------- ---------- ---------- ---------- ----------
Provision for
loan and lease
losses -- -- -- 121 90 103 46,657 16,631 20,557
Noninterest
income from
external
customers 164,023 132,519 48,604 (188,841) 1,031 11,631 117,012 28,850 24,648
Intersegment
noninterest
income -- -- -- -- -- -- -- -- --
Noninterest
expense 159,598 117,945 37,175 6,154 4,783 4,325 88,169 53,406 49,109
Intersegment
noninterest
expense 1,497 1,792 948 555 8,258 5,383 8,917 4,910 7,279
-------- -------- -------- ----------- ----------- ---------- ---------- ---------- ----------
Income before
income taxes 14,587 20,343 11,608 43,569 128,248 128,447 230,402 176,300 151,200
Provision for
income taxes 3,195 7,693 4,524 733 32,403 46,415 59,030 47,284 9,990
-------- -------- -------- ----------- ----------- ---------- ---------- ---------- ----------
Net income $ 11,392 $ 12,650 $ 7,084 $ 42,836 $ 95,845 $ 82,032 $ 171,372 $ 129,016 $ 141,210
======== ======== ======== =========== =========== ========== ========== ========== ==========
Identifiable
segment assets $751,722 $699,100 $238,622 $17,084,443 $11,510,760 $9,417,056 $3,990,321 $1,056,125 $2,374,665
======== ======== ======== =========== =========== ========== ========== ========== ==========
Total Segments
-----------------------------------
2000 1999 1998
----------- ----------- -----------
Net interest
income (expense)
from external
customers $ 2,022,739 $ 2,052,598 $ 1,887,980
Net intersegment
interest income
(expense) 250,481 39,674 54,501
----------- ----------- -----------
Net interest
income 2,273,220 2,092,272 1,942,481
----------- ----------- -----------
Provision for
loan and lease
losses 179,118 149,807 141,566
Noninterest
income from
external
customers 762,190 844,007 664,013
Intersegment
noninterest
income 120,410 123,549 150,672
Noninterest
expense 1,156,186 1,257,951 1,044,990
Intersegment
noninterest
expense 366,974 300,578 243,999
----------- ----------- -----------
Income before
income taxes 1,453,542 1,351,492 1,326,611
Provision for
income taxes 435,336 426,360 443,807
----------- ----------- -----------
Net income $ 1,018,206 $ 925,132 $ 882,804
=========== =========== ===========
Identifiable
segment assets $60,617,991 $52,414,558 $49,025,373
=========== =========== ===========
- ----
(1) Financial data from segments below the quantitative thresholds requiring
disclosure are attributable to nonbank consumer finance operations,
factoring, commercial lawn care equipment financing, leasing and other
smaller subsidiaries.
102
For the Years Ended
December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Net Interest Income
Net interest income from segments $ 2,273,220 $ 2,092,272 $ 1,942,481
Other net interest income (1) 153,649 77,973 47,564
Elimination of net intersegment
interest income (2) (409,241) (237,297) (230,340)
----------- ----------- -----------
Consolidated net interest income $ 2,017,628 $ 1,932,948 $ 1,759,705
=========== =========== ===========
Net income
Net income from segments $ 1,018,206 $ 925,132 $ 882,804
Other net income (loss) (1) 2,721 (93,778) (123,535)
Elimination of intersegment net
income (2) (394,485) (125,780) (107,525)
----------- ----------- -----------
Consolidated net income $ 626,442 $ 705,574 $ 651,744
=========== =========== ===========
December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Total Assets
Total assets from segments $60,617,991 $52,414,558 $49,025,373
Other assets (1) 4,232,050 2,835,382 1,651,609
Elimination of intersegment assets
(2) (5,509,813) (2,250,181) (2,486,488)
----------- ----------- -----------
Consolidated total assets $59,340,228 $52,999,759 $48,190,494
=========== =========== ===========
- --------
(1) Other net interest income, other net income (loss) and other assets include
amounts incurred by or applicable to BB&T's support functions that are not
allocated to the various segments.
(2) 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 and the elimination of intersegment noninterest income
and noninterest expense described above. These amounts are allocated to the
various segments using BB&T's internal accounting methods.
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of March 16,
2001:
BB&T CORPORATION
(Registrant)
/s/ John A. Allison, IV
By: _________________________________
John A. Allison, IV
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 16, 2001.
/s/ John A. Allison, IV
_____________________________________
John A. Allison, IV
Chairman of the Board and
Chief Executive Officer
/s/ Scott E. Reed
_____________________________________
Scott E. Reed
Senior Executive Vice President
and Chief Financial Officer
/s/ Sherry A. Kellett
_____________________________________
Sherry A. Kellett
Senior Executive Vice President
and Controller
A Majority of the Directors of the Registrant are included.
/s/ Nelle Ratrie Chilton
_____________________________________
Nelle Ratrie Chilton
Director
/s/ Alfred E. Cleveland
_____________________________________
Alfred E. Cleveland
Director
/s/ Ronald E. Deal
_____________________________________
Ronald E. Deal
Director
104
/s/ Tom D. Efird
_____________________________________
Tom D. Efird
Director
/s/ Paul S. Goldsmith
_____________________________________
Paul S. Goldsmith
Director
/s/ Lloyd Vincent Hackley
_____________________________________
Lloyd Vincent Hackley
Director
/s/ Jane P. Helm
_____________________________________
Jane P. Helm
Director
/s/ Richard Janeway, M.D.
_____________________________________
Richard Janeway, M.D.
Director
/s/ J. Ernest Lathem, M.D.
_____________________________________
J. Ernest Lathem, M.D.
Director
/s/ James H. Maynard
_____________________________________
James H. Maynard
Director
/s/ Joseph A. McAleer, Jr.
_____________________________________
Joseph A. McAleer, Jr.
Director
105
/s/ Albert O. McCauley
_____________________________________
Albert O. McCauley
Director
/s/ J. Holmes Morrison
_____________________________________
J. Holmes Morrison
Director
/s/ Richard L. Player, Jr.
_____________________________________
Richard L. Player, Jr.
Director
/s/ C. Edward Pleasants, Jr.
_____________________________________
C. Edward Pleasants, Jr.
Director
/s/ Nido R. Qubein
_____________________________________
Nido R. Qubein
Director
/s/ E. Rhone Sasser
_____________________________________
E. Rhone Sasser
Director
/s/ Jack E. Shaw
_____________________________________
Jack E. Shaw
Director
/s/ Harold B. Wells
_____________________________________
Harold B. Wells
Director
106
EXHIBIT INDEX
Exhibit
No. Description Location
------- ----------- --------
2(a) Agreement and Plan of Reorganization dated as of Incorporated herein by reference
July 29, 1994 and amended and restated as of to Registration No. 33-56437.
October 22, 1994 between the Registrant and BB&T
Financial Corporation.
2(b) Plan of Merger as of July 29, 1994 as amended Incorporated herein by reference
and restated on October 22, 1994 between the to Registration No. 33-56437.
Registrant and BB&T Financial Corporation.
2(c) Agreement and Plan of Reorganization dated as of Incorporated herein by reference
November 1, 1996 between the Registrant and to Exhibit 3(a) filed in the
United Carolina Bancshares Corporation, as Annual Report on Form 10-K,
amended. filed March 17, 1997.
2(d) Agreement of Plan of Reorganization dated as of Incorporated herein by reference
October 29, 1997 between the Registrant and Life to Registration No. 33-44183.
Bancorp, Inc.
2(e) Agreement and Plan of Reorganization dated as of Incorporated herein by reference
February 6, 2000 between the Registrant and One to Exhibit 99.1 filed in the
Valley Bancorp, Inc. Current Report on Form 8-K,
dated February 9, 2000.
3(a)(i) Amended and Restated Articles of Incorporation Incorporated herein by reference
of the Registrant, as amended. to Exhibit 3(a) filed in the
Annual Report on Form 10-K,
filed March 17, 1997.
3(a)(ii) Articles of Amendment of Articles of Incorporated herein by reference
Incorporation. to Exhibit 3(a)(ii) filed in the
Annual Report on Form 10-K,
filed March 18, 1998.
3(b) Bylaws of the Registrant, as amended. Incorporated herein by reference
to Exhibit 3(b) filed in the
Annual Report on Form 10-K,
filed March 18, 1998.
4(a) Articles of Amendment to Amended and Restated Incorporated herein by reference
Articles of Incorporation of the Registrant to Exhibit 3(a) filed in the
related to Junior Participating Preferred Stock. Annual Report on Form 10-K,
filed March 17, 1997.
4(b) Rights Agreement dated as of December 17, 1996 Incorporated herein by reference
between the Registrant and Branch Banking and to Exhibit 1 filed under Form 8-
Trust Company, Rights Agent. A, filed January 10, 1997.
4(c) Subordinated Indenture (including Form of Incorporated herein by reference
Subordinated Debt Security) between the to Exhibit 4(d) of Registration
Registrant and State Street Bank and Trust No. 333-02899.
Company, Trustee, dated as of May 24, 1996.
107
Exhibit
No. Description Location
- ------- ----------- --------
4(d) Senior Indenture (including Form of Senior Debt Incorporated herein by reference
Security) between the Registrant and State to Exhibit 4(c) of Registration
Street Bank and Trust company, Trustee, dated as No. 333-02899.
of May 24, 1996.
10(a)* Death Benefit Only Plan, Dated April 23, 1990, Incorporated herein by reference
by and between Branch Banking and Trust Company to Registration No. 33-33984.
(as successor to Southern National Bank of North
Carolina) and L. Glenn Orr, Jr.
10(b)* BB&T Corporation Non-Employee Directors' Incorporated herein by reference
Deferred Compensation and Stock Option Plan. to Exhibit 10(b) of the Annual
Report on Form 10-K, filed March
17, 1997.
10 (c)* BB&T Corporation 1994 Omnibus Stock Incentive Incorporated herein by reference
Plan. to Registration No. 33-57865.
10 (d)* Settlement and Non-Compete Agreement, dated Incorporated herein by reference
February 28, 1995, by and between the Registrant to Registration No. 33-56437.
and L. Glenn Orr, Jr.
10 (e)* Settlement Agreement, Waiver and General Release Incorporated herein by reference
dated September 19, 1994, by and between the to Registration No. 33-56437.
Registrant, Branch Banking and Trust Company (as
successor to Southern National Bank of North
Carolina) and Gary E. Carlton.
10 (f) BB&T Corporation 401(k) Savings Plan (amended Filed herewith.
effective January 1, 2000).
10 (g)* BB&T Corporation 1995 Omnibus Stock Incentive Incorporated herein by reference
Plan. to Exhibit 10(g) filed in the
Annual Report on Form 10-K,
filed March 17, 1997.
10 (h)* Form of Branch Banking and Trust Company Long- Incorporated by reference to the
Term Incentive Plan. identified exhibit under the
Quarterly Report on Form 10-Q,
filed May 14, 1991.
10 (i)* Form of Branch Banking and Trust Company Incorporated by reference to the
Executive Incentive Compensation Plan. identified exhibit under the
Annual Report on Form 10-K,
filed February 22, 1985.
10 (j)* Southern National Deferred Compensation Plan for Incorporated herein by reference
Key Employees. to Exhibit 10(j) filed in the
Annual Report on Form 10-K,
filed March 17, 1997.
10 (k)* BB&T Corporation Target Pension Plan. Incorporated herein by reference
to Exhibit 10(k) filed in the
Annual Report on Form 10-K,
filed March 17, 1997.
108
Exhibit
No. Description Location
- ------- ----------- --------
10 (l)* BB&T Corporation Supplemental Executive Incorporated herein by reference
Retirement Plan. to Exhibit 10(l) filed in the
Annual Report on Form 10-K,
filed March 17, 1997.
10 (m)* Settlement and Noncompetition Agreement, dated Incorporated herein by reference
July 1, 1997, by and between the Registrant and to Exhibit 10(m) filed in the
E. Rhone Sasser. Annual Report on Form 10-K,
filed March 18, 1998.
10 (n)* BB&T Corporation Supplemental Defined Incorporated herein by reference
Contribution Plan for Highly Compensated to Registration No. 333-69823.
Employees.
10 (o)* Scott & Stringfellow, Inc. Executive and Incorporated herein by reference
Employee Retention Plan. to Registration No. 333-81471.
10 (p)* BB&T Corporation Non-Qualified Defined Incorporated herein by reference
Contribution Plan. to Registration No. 333-50035.
10 (q)* 1996 Amended and Restated Southern National Filed herewith.
Corporation Short-term Incentive Plan.
10 (r)* Amendment to 1995 Omnibus Stock Incentive Plan. Incorporated herein by reference
to Registration No. 333-36540.
10 (s)* Employment Agreement dated February 6, 2000, by Filed herewith.
and between the Registrant and J. Holmes
Morrison.
10 (t) BB&T Corporation Pension Plan (amended effective Filed herewith.
January 1, 2000).
10 (u)* Amendment to BB&T Corporation Nonqualified Filed herewith.
Defined Contribution Plan.
10 (v)* Amendment to BB&T Corporation Non-Employee Filed herewith.
Directors' Deferred Compensation and Stock
Option Plan.
10 (w)* Amendment to the BB&T Corporation Supplemental Filed herewith.
Defined Contribution Plan for Highly Compensated
Employees.
11 Statement re Computation of Earnings Per Share. Filed herewith as Note R. of the
"Notes to Consolidated Financial
Statements."
21 Subsidiaries of the Registrant. Filed herewith.
22 Proxy Statement for the 2001 Annual Meeting of Future filing incorporated by
Shareholders. reference pursuant to the
General Instruction G(3).
23(a) Consent of Independent Public Accountants. Filed herewith.
23(b) Opinion of Independent Public Accountants. Filed herewith on Page 54.
- --------
* Management compensatory plan or arrangement.
109
C0001125008