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 Current Report
on Form 8-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 Current Report on Form 8-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 Controller
Chief Executive Officer
Officer
6
Exhibit 99.2
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.............................. $ 1,562,745 $ 1,570,767
Interest-bearing deposits with banks................. 57,006 113,440
Federal funds sold and securities purchased under
resale agreements or similar arrangements........... 263,706 450,274
Trading securities at market value................... 96,719 93,221
Securities available for sale at market value........ 14,495,830 12,878,578
Securities held to maturity at amortized cost (market
value: $89,440 at December 31, 2000 and $456,528 at
December 31, 1999).................................. 88,578 462,874
Loans held for sale.................................. 846,830 368,121
Loans and leases, net of unearned income............. 41,679,591 37,321,431
Allowance for loan and lease losses................ (550,599) (502,522)
----------- -----------
Loans and leases, net............................ 41,128,992 36,818,909
----------- -----------
Premises and equipment, net.......................... 834,119 768,950
Other assets......................................... 3,200,608 2,373,823
----------- -----------
Total assets..................................... $62,575,133 $55,898,957
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits....................... $ 5,480,778 $ 5,176,364
Savings and interest checking...................... 2,580,923 3,399,007
Money rate savings................................. 11,505,630 9,961,069
CD's and other time deposits....................... 20,945,956 17,829,671
----------- -----------
Total deposits................................... 40,513,287 36,366,111
----------- -----------
Short-term borrowed funds............................ 7,139,003 8,270,240
Long-term debt....................................... 8,625,100 6,197,118
Accounts payable and other liabilities............... 1,263,909 776,019
----------- -----------
Total liabilities................................ 57,541,299 51,609,488
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued or outstanding............ -- --
Common stock, $5 par, 1,000,000,000 shares
authorized; issued and outstanding, 423,049,641 at
December 31, 2000 and 419,772,712 at December 31,
1999.............................................. 2,115,248 2,098,864
Additional paid-in capital......................... 417,048 388,670
Retained earnings.................................. 2,408,383 2,136,668
Unearned income and unvested restricted stock...... (7,071) (12,397)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of $69,618 at
December 31, 2000 and ($192,990) at December 31,
1999.............................................. 100,226 (322,336)
----------- -----------
Total shareholders' equity....................... 5,033,834 4,289,469
----------- -----------
Total liabilities and shareholders' equity....... $62,575,133 $55,898,957
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
7
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands, except per share data)
2000 1999 1998
---------- ---------- ----------
Interest Income
Interest and fees on loans and leases.... $3,670,921 $3,124,666 $2,902,743
Interest and dividends on securities..... 902,342 839,309 764,190
Interest on short-term investments....... 24,215 25,291 29,160
---------- ---------- ----------
Total interest income.................. 4,597,478 3,989,266 3,696,093
---------- ---------- ----------
Interest Expense
Interest on deposits..................... 1,578,545 1,279,809 1,270,106
Interest on short-term borrowed funds.... 412,518 323,070 286,416
Interest on long-term debt............... 460,848 339,399 271,327
---------- ---------- ----------
Total interest expense................. 2,451,911 1,942,278 1,827,849
---------- ---------- ----------
Net Interest Income........................ 2,145,567 2,046,988 1,868,244
Provision for loan and lease losses...... 142,227 122,034 120,251
---------- ---------- ----------
Net Interest Income After Provision for
Loan and Lease Losses..................... 2,003,340 1,924,954 1,747,993
---------- ---------- ----------
Noninterest Income
Service charges on deposits.............. 276,554 251,362 226,784
Mortgage banking income.................. 103,358 167,056 130,860
Trust income............................. 76,690 70,490 55,012
Investment banking and brokerage fees and
commissions............................. 163,471 129,746 46,448
Agency insurance commissions............. 137,768 85,498 57,518
Other insurance commissions.............. 14,815 14,349 13,368
Bankcard fees and merchant discounts..... 52,695 42,983 36,818
Other nondeposit fees and commissions.... 101,273 81,031 70,161
Securities (losses) gains, net........... (219,432) (4,749) 12,068
Other income............................. 93,720 69,346 75,039
---------- ---------- ----------
Total noninterest income............... 800,912 907,112 724,076
---------- ---------- ----------
Noninterest Expense
Personnel expense........................ 975,134 887,620 750,703
Occupancy and equipment expense.......... 281,695 262,860 223,452
Amortization of intangibles and mortgage
servicing rights........................ 81,656 82,691 64,581
Advertising and public relations
expense................................. 35,458 35,239 37,380
Professional services.................... 70,253 84,622 76,115
Other expense............................ 425,566 393,818 319,192
---------- ---------- ----------
Total noninterest expense.............. 1,869,762 1,746,850 1,471,423
---------- ---------- ----------
Earnings
Income before income taxes............... 934,490 1,085,216 1,000,646
Provision for income taxes............... 287,894 353,433 322,282
---------- ---------- ----------
Net income............................. $ 646,596 $ 731,783 $ 678,364
========== ========== ==========
Per Common Share
Net income:
Basic................................ $ 1.54 $ 1.76 $ 1.65
========== ========== ==========
Diluted.............................. $ 1.52 $ 1.73 $ 1.62
========== ========== ==========
Cash dividends paid by BB&T
Corporation........................... $ .86 $ .75 $ .66
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
8
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Common Paid-In Earnings Changes in Shareholders'
Stock Stock Capital and Other* Equity Equity
----------- ---------- ---------- ---------- -------------- -------------
Balance, December 31,
1997, as previously
reported............... 197,649,866 $ 988,249 $ 628,174 $1,959,324 $ 66,761 $3,642,508
Merger with Century
South Banks, Inc.,
accounted for as a
pooling-of-interests.. 6,199,000 30,995 21,805 71,043 787 124,630
----------- ---------- --------- ---------- --------- ----------
Balance, December 31,
1997, restated......... 203,848,866 1,019,244 649,979 2,030,367 67,548 3,767,138
----------- ---------- --------- ---------- --------- ----------
Add (Deduct):
Nonshareholder changes
in equity:**
Net income............. -- -- -- 678,364 -- 678,364
Unrealized holding
gains arising during
the period........... -- -- -- -- 17,542 17,542
Less: reclassification
adjustment, net of
tax of $3,936........ -- -- -- -- (6,986) (6,986)
----------- ---------- --------- ---------- --------- ----------
Total nonshareholder
changes in equity..... -- -- -- 678,364 10,556 688,920
----------- ---------- --------- ---------- --------- ----------
Common stock issued.... 13,816,325 100,389 294,040 (1,345) -- 393,084
Redemption of common
stock................. (6,855,363) (34,273) (313,827) (297) -- (348,397)
2-for-1 stock split
effective August 3,
1998.................. 206,324,741 1,000,313 (239,552) (724,654) -- 36,107
Cash dividends declared
on common stock....... -- -- -- (267,700) -- (267,700)
Other, net............. -- -- -- (2,671) (16) (2,687)
----------- ---------- --------- ---------- --------- ----------
Balance, December 31,
1998................... 417,134,569 2,085,673 390,640 1,712,064 78,088 4,266,465
----------- ---------- --------- ---------- --------- ----------
Add (Deduct):
Nonshareholder changes
in equity:**
Net income............. -- -- -- 731,783 -- 731,783
Unrealized holding
losses arising during
the period........... -- -- -- -- (404,412) (404,412)
Less: reclassification
adjustment, net of
tax of $22,451....... -- -- -- -- 4,907 4,907
----------- ---------- --------- ---------- --------- ----------
Total nonshareholder
changes in equity..... -- -- -- 731,783 (399,505) 332,278
----------- ---------- --------- ---------- --------- ----------
Common stock issued.... 13,430,557 67,156 334,039 3,657 -- 404,852
Redemption of common
stock................. (10,796,502) (53,985) (336,009) -- -- (389,994)
Cash dividends declared
on common stock....... -- -- -- (315,222) -- (315,222)
Other, net............. 4,088 20 -- (8,011) (919) (8,910)
----------- ---------- --------- ---------- --------- ----------
Balance, December 31,
1999................... 419,772,712 2,098,864 388,670 2,124,271 (322,336) 4,289,469
----------- ---------- --------- ---------- --------- ----------
Add (Deduct):
Nonshareholder changes
in equity:**
Net income............. -- -- -- 646,596 -- 646,596
Unrealized holding
gains arising during
the period........... -- -- -- -- 291,442 291,442
Less: reclassification
adjustment, net of
tax benefit of
$87,412.............. -- -- -- -- 131,120 131,120
----------- ---------- --------- ---------- --------- ----------
Total nonshareholder
changes in equity..... -- -- -- 646,596 422,562 1,069,158
----------- ---------- --------- ---------- --------- ----------
Common stock issued.... 10,372,829 51,861 192,880 128 -- 244,869
Redemption of common
stock................. (7,095,900) (35,477) (170,554) -- -- (206,031)
Cash dividends declared
on common stock....... -- -- -- (374,380) -- (374,380)
Other, net............. -- -- 6,052 4,697 -- 10,749
----------- ---------- --------- ---------- --------- ----------
Balance, December 31,
2000................... 423,049,641 $2,115,248 $ 417,048 $2,401,312 $ 100,226 $5,033,834
=========== ========== ========= ========== ========= ==========
- -------
* Other includes unearned income and unvested restricted stock.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
9
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
----------- ----------- -----------
Cash Flows From Operating Activities:
Net income............................. $ 646,596 $ 731,783 $ 678,364
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan and lease losses.... 142,227 122,034 120,251
Depreciation of premises and
equipment............................. 108,460 108,307 94,891
Amortization of intangibles and
mortgage servicing rights............. 81,656 82,691 64,581
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....... (5,576) 1,986 5,440
Net decrease (increase) in trading
account securities.................... (1,200) (20,774) 7,456
Loss (gain) on sales of securities,
net................................... 219,432 4,749 (12,068)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net... (14,622) (27,085) (36,978)
Loss (gain) on disposals of premises
and equipment, net.................... 5,832 (5,765) (15,616)
Proceeds from sales of loans held for
sale.................................. 2,418,002 4,057,933 5,351,521
Purchases of loans held for sale....... (1,014,372) (961,404) (1,811,810)
Origination of loans held for sale,
net of principal collected............ (1,867,717) (2,092,998) (4,152,614)
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.......................... (609,340) (208,866) (90,280)
Increase (decrease) in:
Accrued interest payable.............. 38,826 43,973 15,154
Accounts payable and other
liabilities.......................... 280,752 115,466 79,798
Other, net............................. (2,189) 13,828 (7,790)
----------- ----------- -----------
Net cash provided by operating
activities.......................... 290,198 1,919,755 268,931
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities
available for sale.................... 5,204,186 959,055 1,703,998
Proceeds from maturities, calls and
paydowns of securities available for
sale.................................. 1,490,850 3,677,008 3,577,644
Purchases of securities available for
sale.................................. (6,338,908) (5,588,887) (5,558,537)
Proceeds from maturities, calls and
paydowns of securities held to
maturity.............................. 45,473 73,169 246,614
Purchases of securities held to
maturity.............................. (10,823) (35,756) (172,163)
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............................. (4,358,366) (3,906,832) (1,940,299)
Purchases of loans..................... (381,219) (364,663) (341,812)
Net cash acquired in transactions
accounted for under the purchase
method................................ (29,707) 302,032 233,576
Purchases and originations of mortgage
servicing rights...................... (53,467) (79,437) (86,954)
Proceeds from disposals of premises and
equipment............................. 10,992 38,573 28,562
Purchases of premises and equipment.... (157,430) (143,883) (147,873)
Proceeds from sales of foreclosed
property.............................. 33,290 28,221 28,911
Proceeds from sales of other real
estate held for development or sale... 5,565 15,623 7,890
Other, net............................. (2,388) 704 (81,924)
----------- ----------- -----------
Net cash used in investing
activities.......................... (4,569,178) (5,076,825) (2,531,796)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits............... 3,317,818 323,856 1,450,885
Net increase (decrease) in short-term
borrowed funds........................ (1,071,865) 3,026,709 (106,402)
Proceeds from long-term debt........... 6,654,557 3,217,874 3,493,134
Repayments of long-term debt........... (4,358,813) (2,608,709) (2,062,378)
Net proceeds from common stock issued.. 41,321 49,558 73,457
Redemption of common stock............. (206,031) (389,994) (348,397)
Cash dividends paid on common stock.... (349,011) (301,898) (256,635)
Other, net............................. (20) (753) (2,094)
----------- ----------- -----------
Net cash provided by financing
activities.......................... 4,027,956 3,316,643 2,241,570
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash
Equivalents............................ (251,024) 159,573 (21,295)
Cash and Cash Equivalents at Beginning
of Year................................ 2,134,481 1,974,908 1,996,203
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,883,457 $ 2,134,481 $ 1,974,908
=========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest............................... $ 2,367,210 $ 1,630,728 $ 1,599,623
Income taxes........................... 64,776 130,184 183,755
Noncash financing and investing
activities:
Transfer of securities from held to
maturity to available for sale........ 324,734 231,529 114,401
Transfer of loans to foreclosed
property.............................. 42,288 28,230 34,574
Transfer of fixed assets to other real
estate owned.......................... 4,307 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.
10
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"), and Scott &
Stringfellow, Inc., ("Scott & Stringfellow") comprise BB&T's principal direct
subsidiaries.
BB&T is also the parent company of 14 subsidiary banks acquired through the
mergers with FirstSpartan Financial Corp, Century South Banks, Inc., and
Virginia Capital Bancshares, Inc. These banks are expected to be merged with
and into BB&T-NC, BB&T-SC or BB&T-VA, as appropriate, 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 the
Notes to Consolidated Financial Statements).
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,
Washington, D.C. and Alabama 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 and a variety of 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.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
11
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $324.7 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.
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.
12
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
13
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
14
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
15
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $760.3 million in unamortized goodwill and $16.6 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
The carrying value of 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 cost allocated to
internally 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 $239.1 million reflected in other assets. Income from
mortgage servicing fees is reflected as mortgage banking income on the
"Consolidated Statements of Income."
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 Financial Accounting Standards Board (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 as either an asset or liability measured at its fair
value. The Statement requires that changes in the
16
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $2.0 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 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...... $ 113,717 $ 141,285 $ 116,701
Purchase Price......................... (195,953) (330,820) (310,618)
--------- --------- ---------
Excess of Purchase Price over Net
Assets Acquired....................... $ (82,236) $(189,535) $(193,917)
========= ========= =========
Income and Expense Recognition
Income and expenses are recognized using the accrual basis of accounting,
except for some immaterial amounts that are recognized when received or paid.
17
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
Shares
Goodwill Issued to
Date of Acquired Total Accounting Goodwill Amortization Complete
Acquisition Institution Headquarters Assets Method Recorded Period Transaction
----------- ---------------- -------------------- -------------- ---------- -------------- ------------ ------------
BankFirst
December 27, 2000 Corporation Knoxville, Tenn. $929.5 million Purchase $ 71.0 million 15 Years 5.3 million
Edgar M. Norris
November 15, 2000 & Co. Greenville, S.C. 3.7 million Purchase N/A N/A N/A
Laureate Capital
September 29, 2000 Corp. Charlotte, N.C. 13.8 million Purchase N/A N/A N/A
One Valley
July 6, 2000 Bancorp, Inc. Charleston, W.Va. 6.4 billion Pooling N/A N/A 43.1 million
June 15, 2000 First Banking
Company of
Southeast
Georgia Statesboro, Ga. 420.0 million Pooling N/A N/A 4.1 million
Hardwick Holding
June 13, 2000 Company Dalton, Ga. 507.2 million Pooling N/A N/A 3.9 million
Premier
January 13, 2000 Bancshares, Inc. Atlanta, Ga. 2.0 billion Pooling N/A N/A 16.8 million
- ------------------------------------------------------------------------------------------------------------------------------
First Liberty
November 10, 1999 Financial Corp. Macon, Ga. $ 1.7 billion Pooling $ N/A N/A 12.4 million
Matewan
August 27, 1999 BancShares, Inc. Williamson, W.Va. 734.7 million Purchase 92.8 million 15 Years 3.2 million
Mason-Dixon
July 14, 1999 Bancshares, Inc. Westminster, Md. 1.2 billion Pooling N/A N/A 6.6 million
First Citizens
July 9, 1999 Corporation Newnan, Ga. 417.8 million Pooling N/A N/A 3.2 million
Scott &
Stringfellow
March 26, 1999 Financial, Inc. Richmond, Va. 262.1 million Purchase 72.8 million 15 Years 3.6 million
MainStreet
Financial
March 5, 1999 Corporation Martinsville, Va. 2.0 billion Pooling N/A N/A 16.8 million
- ------------------------------------------------------------------------------------------------------------------------------
Maryland Federal
September 30, 1998 Bancorp, Inc. Hyattsville, Md. $ 1.3 billion Purchase $158.8 million 15 Years 8.7 million
Franklin
Bancorporation
July 1, 1998 Inc. Washington, D.C. 674.9 million Pooling N/A N/A 4.9 million
W.E. Stanley &
June 30, 1998 Company Inc. Greensboro, N.C. 12.2 million Purchase 10.3 million 15 Years 174,000
Dealers' Credit
June 18, 1998 Inc. Menomonee Falls, Wi. 41.3 million Purchase 9.5 million 15 Years 115,000
Life Bancorp,
March 1, 1998 Inc. Norfolk, Va. 1.5 billion Pooling N/A N/A 11.6 million
- --------
N/A--Not applicable or undisclosed terms.
The table above does not include mergers and acquisitions made by any
acquired company.
18
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the mergers and acquisitions summarized in the above table,
through July 20, 2001, BB&T had acquired two insurance agencies during the year
that were accounted for as purchases. In conjunction with these two
transactions, BB&T issued approximately 29,000 shares of common stock and
recorded $7.7 million in goodwill, which is being amortized using the straight-
line method over 15 years. 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 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
========== ==========
19
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following presentation reflects key line items on an historical basis
for BB&T and Century South, and on a pro forma combined basis assuming the
merger was effective as of and for the periods presented.
Historical Basis
------------------------- BB&T
BB&T Century South restated
----------- ------------- -----------
(Dollars in thousands, except per
share data)
As of / For the Year Ended
December 31, 2000
--------------------------
Net interest income................ $ 2,069,648 $ 73,054 $ 2,145,567
Net income......................... 628,775 17,821 646,596
Net earnings per share.............
Basic............................ 1.54 1.30 1.54
Diluted.......................... 1.52 1.29 1.52
Assets............................. 60,930,318 1,642,186 62,575,133
Deposits........................... 39,176,398 1,334,747 40,513,287
Shareholders' equity............... 4,876,090 157,744 5,033,834
As of / For the Year Ended
December 31, 1999
--------------------------
Net interest income................ $ 1,982,801 $ 64,187 $ 2,046,988
Net income......................... 716,003 15,780 731,783
Net earnings per share.............
Basic............................ 1.77 1.17 1.76
Diluted.......................... 1.74 1.16 1.73
Assets............................. 54,505,555 1,393,402 55,898,957
Deposits........................... 35,176,502 1,189,609 36,366,111
Shareholders' equity............... 4,153,384 136,085 4,289,469
Mergers Pending at or Announced Since December 31, 2000
On July 27, 2000, BB&T announced plans to acquire FCNB Corp. ("FCNB") of
Frederick, Maryland. FCNB had $1.6 billion in assets and operated 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 8, 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 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 had $591
million in assets and operated 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 $42.0 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. The transaction, which was accounted for as a pooling
of interests, was consummated on June 7, 2001. BB&T issued 12.7 million shares
of common stock in exchange for all of the outstanding common shares of Century
South. The financial statements presented herein have been restated to reflect
the accounts of Century South.
20
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The transaction, which was accounted
for as a purchase, was consummated on June 27, 2001. BB&T issued 4.7 million
shares of common stock in exchange for all of the outstanding common shares of
VCAP. BB&T recorded goodwill totaling $15.2 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
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.
On July 10, 2001, BB&T announced plans to acquire Community First Banking
Company ("CFBC") of Carrollton, Georgia. CFBC has $548.1 million in assets and
operates nine banking offices, a consumer finance company, an insurance agency,
and a full-service brokerage subsidiary. Shareholders of CFBC will receive .98
shares of BB&T common stock in exchange for each share of CFBC common stock
held. The transaction, which will be accounted for as a purchase, is planned
for completion in the fourth 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 Gross Unrealized
Amortized ----------------- Estimated Amortized ---------------- Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
----------- -------- -------- ----------- ----------- ------- -------- -----------
(Dollars in thousands)
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations........... $ 33,739 $ -- $ 35 $ 33,704 $ 38,071 $ 14 $ 236 $ 37,849
Mortgage-backed
securities............ 233 1 1 233 5,697 7 94 5,610
States and political
subdivisions.......... 52,643 868 1 53,510 415,260 3,428 9,531 409,157
Other securities....... 1,963 30 -- 1,993 3,846 66 -- 3,912
----------- -------- -------- ----------- ----------- ------- -------- -----------
Total securities held
to maturity.......... 88,578 899 37 89,440 462,874 3,515 9,861 456,528
----------- -------- -------- ----------- ----------- ------- -------- -----------
Securities available for
sale:
U.S. Treasury,
government and agency
obligations........... 8,849,261 256,323 8,724 9,096,860 6,066,748 1,875 186,417 5,882,206
Mortgage-backed
securities............ 2,750,815 26,705 2,265 2,775,255 4,528,694 5,219 129,010 4,404,903
States and political
subdivisions.......... 991,357 11,823 7,346 995,834 668,272 9,132 32,686 644,718
Equity and other
securities............ 1,729,321 662 102,102 1,627,881 2,129,899 2,531 185,679 1,946,751
----------- -------- -------- ----------- ----------- ------- -------- -----------
Total securities
available for sale... 14,320,754 295,513 120,437 14,495,830 13,393,613 18,757 533,792 12,878,578
----------- -------- -------- ----------- ----------- ------- -------- -----------
Total securities...... $14,409,332 $296,412 $120,474 $14,585,270 $13,856,487 $22,272 $543,653 $13,335,106
=========== ======== ======== =========== =========== ======= ======== ===========
Securities with a book value of approximately $7.6 billion and $7.1 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.
21
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $5.2
billion, $959.1 million and $1.7 billion, respectively. Gross gains of $6.6
million, $5.7 million and $18.1 million and gross losses of $226.6 million,
$10.4 million and $6.0 million were realized on those sales in 2000, 1999 and
1998, respectively.
The amortized cost and estimated fair value of the securities portfolio 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
-------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ----------- -----------
(Dollars in thousands)
Debt Securities:
Due in one year or less......... $29,624 $29,619 $ 359,291 $ 364,773
Due after one year through five
years.......................... 49,961 50,536 5,306,548 5,452,426
Due after five years through ten
years.......................... 7,765 8,006 4,406,321 4,518,579
Due after ten years............. 1,228 1,279 2,796,864 2,797,390
------- ------- ----------- -----------
Total debt securities......... $88,578 $89,440 $12,869,024 $13,133,168
======= ======= =========== ===========
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............... $ 6,209,732 $ 5,688,431
Lease receivables........... 4,453,598 2,606,002
Real estate--construction
and land development....... 4,125,408 4,102,520
Real estate--mortgage....... 23,797,120 21,383,611
Consumer.................... 5,573,238 4,786,818
----------- -----------
Loans and leases held for
investment............... 44,159,096 38,567,382
Less: unearned income... (2,479,505) (1,245,951)
----------- -----------
Loans and leases, net of
unearned income........ $41,679,591 $37,321,431
=========== ===========
The net investment in direct financing 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 $846.8 million and $368.1 million,
respectively.
22
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BB&T had $28.8 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.
The following table sets forth certain information regarding BB&T's impaired
loans as defined under SFAS No. 114.
December 31,
-----------------
2000 1999
------- --------
(Dollars in
thousands)
Total recorded investment--impaired loans............... $52,834 $ 53,219
------- --------
Total recorded investment with related valuation
allowance.............................................. 49,413 49,532
Valuation allowance assigned to impaired loans.......... (7,700) (10,965)
------- --------
Net carrying value--impaired loans.................... $41,713 $ 38,567
======= ========
Average balance of impaired loans....................... $40,255 $ 51,044
======= ========
Cash basis interest income recognized on impaired
loans.................................................. $ 269 $ 1,260
======= ========
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....................................... $ 398,486
Additions...................................................... 113,812
Reductions..................................................... (244,816)
---------
Balance, December 31, 2000....................................... $ 267,482
=========
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...................... $ 502,522 $ 464,686 $ 410,168
Allowances of purchased companies.... 14,312 10,697 24,593
Provision for losses charged to
expense............................. 142,227 122,034 120,251
Loans and leases charged-off......... (145,349) (129,149) (119,914)
Recoveries of previous charge-offs... 36,887 34,254 29,588
---------- ---------- ----------
Net loans and leases charged-off... (108,462) (94,895) (90,326)
---------- ---------- ----------
Ending Balance......................... $ 550,599 $ 502,522 $ 464,686
========== ========== ==========
At December 31, 2000, 1999 and 1998, loans not currently accruing interest
totaled $167.2 million, $134.7 million and $131.9 million, respectively. Loans
90 days or more past due and still accruing interest totaled $75.2 million,
$61.3 million and $65.8 million, at December 31, 2000, 1999 and 1998,
respectively. The gross
23
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $13.7 million. Foreclosed
property totaled $46.2 million, $35.6 million and $43.8 million at December 31,
2000, 1999 and 1998, respectively.
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............................ $ 162,147 $ 149,338
Buildings and building improvements................... 672,291 602,268
Furniture and equipment............................... 605,748 603,160
Capitalized leases on premises and equipment.......... 3,943 3,945
---------- ----------
1,444,129 1,358,711
Less--accumulated depreciation and amortization....... 610,010 589,761
---------- ----------
Net premises and equipment.......................... $ 834,119 $ 768,950
========== ==========
Depreciation expense, which is included in occupancy and equipment expense,
was $108.5 million, $108.3 million and $94.9 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 $61.7 million, $67.3 million
and $46.5 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............................................... $ 45,682 $ 381
2002............................................... 39,815 381
2003............................................... 35,418 347
2004............................................... 32,629 289
2005............................................... 28,618 278
2006 and later..................................... 124,623 2,355
-------- ------
Total minimum lease payments......................... $306,785 4,031
========
Less--amount representing interest................... 1,797
------
Present value of net minimum payments on capitalized
leases (Note I)..................................... $2,234
======
24
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
Amount capitalized........................... 54,665 79,437 86,954
Acquired in purchase transaction............. 12,153 -- --
Amount sold.................................. -- -- (1,118)
Amortization expense......................... (18,733) (28,730) (28,042)
Change in valuation allowance................ 1,194 19,489 (17,431)
-------- -------- --------
Balance, December 31,.......................... $239,088 $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 $15.3 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. Since assumptions and estimates used by acquired entities may
differ from those used by BB&T, and such assumptions will change following the
dates of acquisition to reflect the assumptions and fair value methodologies of
BB&T, the accompanying table includes disclosures concerning BB&T's capitalized
mortgage servicing rights as originally reported.
25
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*............... $9,140,775 $8,668,520
Loans Securitized and Transferred to Securities
Available for Sale................................ 1,032,546 695,432
Loans Held for Sale................................ 846,830 368,121
---------- ----------
Mortgage Loans Held for Investment................... $7,261,399 $7,604,967
========== ==========
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.
26
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.................................. $1,437,428 $ 315,815
Securities sold under agreements to repurchase........... 2,650,877 2,699,874
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............... 128,348 687,657
Short-term bank notes.................................... 1,890,000 1,645,000
Other short-term borrowed funds.......................... 107,745 970,721
---------- ----------
Total short-term borrowed funds........................ $7,139,003 $8,270,240
========== ==========
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Term Federal funds purchased are identical to Federal
funds; however, maturities vary and are greater than one day. Securities sold
under agreements to repurchase are borrowings collateralized by securities of
the U.S. Government or its agencies and have maturities ranging from one to
ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon
demand to the U.S. Treasury. Master notes are unsecured, non-negotiable
obligations of BB&T (variable rate commercial paper). Short-term Federal Home
Loan Bank advances generally mature daily. Short-term bank notes are unsecured
borrowings issued by the banking subsidiaries that generally mature in less
than one year.
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%................. 6,400,672 4,198,495
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 November 19, 2027, with interest at 8.90%; and
November 13, 1997, maturing December 31, 2027, with
interest at 9.00%; April 22, 1998, maturing June 15,
2028, with interest at 8.40%; and July 13, 1998,
maturing July 13, 2028, with interest at 8.25%(3)...... 155,000 158,237
Other mortgage indebtedness............................. 3,423 2,506
---------- ----------
Total long-term debt.................................. $8,625,100 $6,197,118
========== ==========
27
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Excluding the capitalized leases set forth in Note F; future debt maturities
are $492.3 million, $816.9 million, $366.7 million, $247.0 million and $383.9
million for the next five years. The maturities for 2006 and later years total
$6.3 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 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
28
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 provisions.
In July, 1998, FCNB Capital Trust ("FCNBCT") issued $40.25 million of 8.25%
Trust Preferred Securities. FCNBCT, a statutory business trust created under
the laws of the State of Delaware, was formed by FCNB Corp, ("FCNB") for the
purpose of issuing the Trust Preferred Securities and investing the proceeds
thereof in 8.25% Subordinated Debentures issued by FCNB. FCNB, which merged
into BB&T on January 7, 2001, entered into agreements which, taken
collectively, fully, irrevocably and unconditionally guarantee, on a
subordinated basis, all of FCNBCT's obligations under the Trust Preferred
Securities. FCNBCT's sole asset is the Subordinated Debentures issued by FCNB
and assumed by BB&T, which mature July 31, 2028, but are subject to early
mandatory redemption in whole under certain limited circumstances and are
callable in whole or part anytime after July 31, 2003. The Trust Preferred
Securities of FCNBCT, are subject to mandatory redemption in whole on July 31,
2028, or such earlier date in the event the Subordinated Debentures are
redeemed by BB&T pursuant to one of the prescribed limited circumstances or
pursuant to the call provisions.
As a result of the mergers with MainStreet Financial Corporation, Mason-
Dixon Bancshares, Inc., Premier Bancshares, Inc. and FCNB Corp, 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 1,000,000,000 shares of
common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par
value. At December 31, 2000, 423,049,641 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'
29
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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..................................... $646,596 $731,783 $678,364
Pro Forma....................................... 626,237 712,768 664,301
Basic EPS:
As reported..................................... 1.54 1.76 1.65
Pro Forma....................................... 1.49 1.71 1.61
Diluted EPS:
As reported..................................... 1.52 1.73 1.62
Pro Forma....................................... 1.47 1.68 1.58
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.
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, 12,544,548 qualified stock options at
prices ranging from $5.49 to $51.41 and 4,743,088 nonqualified 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
30
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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................ 16,110,139 $19.54 16,042,183 $11.44 17,011,550 $11.16
Issued in purchase
transactions........... 645,342 13.95 233,000 11.05 591,955 11.22
Granted................. 4,679,042 23.97 3,200,280 33.03 2,978,534 28.10
Exercised............... (2,613,580) 12.59 (3,068,112) 10.92 (4,369,628) 9.34
Forfeited or Expired.... (529,799) 34.32 (297,212) 35.92 (170,228) 20.28
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year................... 18,291,144 $21.01 16,110,139 $19.54 16,042,183 $11.44
========== ====== ========== ====== ========== ======
Options exercisable at
year-end............... 13,911,502 $19.14 13,633,125 $16.76 12,644,193 $12.34
========== ====== ========== ====== ========== ======
The weighted average fair value of options granted was $7.60, $8.43 and
$7.83 per option at December 31, 2000, 1999 and 1998, respectively.
31
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $ 7.25 426,330 1.9 6.34 426,330 6.34
$ 7.26 to $10.75 2,790,710 3.1 9.05 2,790,710 9.05
$10.76 to $16.00 3,620,069 4.7 12.85 3,620,069 12.85
$16.01 to $24.00 6,480,353 8.3 22.54 3,379,324 21.25
$24.01 to $36.00 2,803,860 7.6 30.02 2,392,648 29.79
$36.01 to $56.98 2,128,454 8.2 37.21 1,261,053 37.88
---------- --- ------ ---------- ------
18,291,144 6.5 yrs $21.01 13,911,502 $19.14
========== === ====== ========== ======
Shareholder Rights Plan
On January 17, 1997, pursuant to the Rights Agreement approved by the Board
of Directors, BB&T distributed to shareholders one preferred stock purchase
right for each share of BB&T's common stock then outstanding. Subsequent to
this date, all shares issued are accompanied by a stock purchase right.
Initially, the rights, which expire in 10 years, are not exercisable and are
not transferable apart from the common stock. The rights will become
exercisable only if a person or group acquires 20% or more of BB&T's common
stock, or BB&T's Board of Directors determines, pursuant to the terms of the
Rights Agreement, that any person or group that has acquired 10% or more of
BB&T's common stock is an "Adverse Person." Each right would then enable the
holder to purchase 1/100th of a share of a new series of BB&T preferred stock
at an initial exercise price of $145.00. The Board of Directors will be
entitled to redeem the rights at $.01 per right under certain circumstances
specified in the Rights Agreement.
Under the terms of the Rights Agreement, if any person or group becomes the
beneficial owner of 25% or more of BB&T's common stock, with certain
exceptions, or if the Board of Directors determines that any 10% or more
stockholder is an "Adverse Person," each right will entitle its holder (other
than the person triggering exercisability of the rights) to purchase, at the
right's then-current exercise price, shares of BB&T's common stock having a
value of twice the right's exercise price. In addition, if after any person or
group has become a 20% or more stockholder, BB&T is involved in a merger or
other business combination transaction with another person in which its common
stock is changed or converted, or sells 50% or more of its assets or earning
power to another person, each right will entitle its holder to purchase, at the
right's then-current exercise price, shares of common stock of such other
person having a value of twice the right's exercise price.
32
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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......................................... $ 98,023 $164,532 $257,070
State........................................... 12,181 12,299 17,419
-------- -------- --------
Total current income tax expense.................. 110,204 176,831 274,489
Deferred income tax expense....................... 177,690 176,602 47,793
-------- -------- --------
Provision for income taxes........................ $287,894 $353,433 $322,282
======== ======== ========
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%.......................................... $326,723 $379,614 $350,007
Tax-exempt income from securities, loans and
leases, net of related non-deductible
interest expense............................. (55,659) (38,325) (27,104)
Amortization of goodwill...................... 16,642 13,327 6,897
State income taxes, net of Federal tax
benefit...................................... 9,482 10,050 12,819
Other, net.................................... (9,294) (11,233) (20,337)
-------- -------- --------
Provision for income taxes.................... $287,894 $353,433 $322,282
======== ======== ========
Effective income tax rate..................... 30.8% 32.6% 32.2%
======== ======== ========
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 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.
33
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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................ $ 205,912 $ 183,504
Net unrealized depreciation on securities available
for sale.......................................... -- 192,990
Deferred compensation.............................. 47,362 39,570
Other.............................................. 87,761 87,603
--------- ---------
Total tax deferred assets............................ 341,035 503,667
--------- ---------
Deferred tax liabilities:
Net unrealized appreciation on securities available
for sale.......................................... (69,618) --
Lease financing.................................... (430,999) (254,197)
Mortgage servicing rights.......................... (65,280) (41,359)
Other.............................................. (72,215) (55,290)
--------- ---------
Total tax deferred liabilities....................... (638,112) (350,846)
--------- ---------
Net deferred tax asset (liability)................... $(297,077) $ 152,821
========= =========
Securities transactions resulted in income tax (benefits) expense of $(76.8
million), $(1.7 million) and $4.2 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................. 23,312 18,432 22,816
------- ------- -------
Total expense related to benefit plans............ $38,426 $37,482 $35,807
======= ======= =======
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.
34
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The restatement of actuarial information to include the benefit plans of
acquired companies is not meaningful because the benefits offered in those
companies' plans and the assumptions used in the calculations related to those
plans are superseded by the benefits offered in the BB&T plans and the
assumptions used in the BB&T calculations. Accordingly, the actuarial
information presented for retirement plans and postretirement benefits in the
accompanying tables is that of BB&T as originally presented.
Financial data relative to the defined benefit pension 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 Plans for which
assets exceed accumulated
accumulated benefits exceed
benefits 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 $ -- $ --
======== ======== ======= =======
35
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plans for which Plans for which
assets exceed accumulated
accumulated benefits exceed
benefits 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.
36
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)
======== ========
37
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.
38
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.......................................... $16,480,155 $13,639,018
Standby letters of credit and financial
guarantees written.............................. 732,930 527,522
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 cash requirements. BB&T
evaluates each customer's creditworthiness on a case-by-case basis. The amount
and type of collateral obtained, if deemed necessary by BB&T upon extension of
credit, is based on management's evaluation of the creditworthiness of the
counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BB&T to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper 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 necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities
are contracts for delayed delivery of securities in which BB&T agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates.
Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the normal
conduct of business. Management believes that the liabilities, 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 Bank based on specified percentages of
certain deposit types, subject to various adjustments. At December 31, 2000,
the net reserve requirement amounted to $235.6 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 $2.1 billion at December 31, 2000.
39
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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............... 9.4% $4,241,646 $1,798,243 10.1% $3,942,470 $1,569,089
BB&T-NC............ 9.5 3,175,532 1,333,429 10.0 2,748,333 1,096,321
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............... 12.1% $5,423,376 $3,596,486 13.2% $5,194,450 $3,138,178
BB&T-NC............ 10.7 3,570,108 2,666,858 11.2 3,066,536 2,192,642
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............... 7.2% $4,241,646 $1,775,549 7.2% $3,942,470 $1,649,217
BB&T-NC............ 6.8 3,175,532 1,401,115 7.0 2,748,333 1,185,127
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
40
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.................................. $ 16,998 $ 24,977
Interest-bearing bank balances........................... 639,323 588,384
Securities............................................... 29,033 81,756
Investment in banking subsidiaries....................... 5,165,218 4,224,128
Investment in other subsidiaries......................... 463,859 563,357
---------- ----------
Total investments in subsidiaries...................... 5,629,077 4,787,485
---------- ----------
Advances to subsidiaries................................. 329,750 348,000
Premises and equipment................................... 5,918 9,376
Receivables from subsidiaries and other assets........... 254,993 301,282
---------- ----------
Total assets........................................... $6,905,092 $6,141,260
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowed funds................................ $ 709,747 $ 707,163
Dividends payable........................................ 94,347 69,785
Accounts payable and accrued liabilities................. 47,173 53,509
Long-term debt........................................... 1,019,991 1,021,334
---------- ----------
Total liabilities...................................... 1,871,258 1,851,791
---------- ----------
Total shareholders' equity............................. 5,033,834 4,289,469
---------- ----------
Total liabilities and shareholders' equity............. $6,905,092 $6,141,260
========== ==========
41
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...................... $601,929 $688,787 $530,045
Interest and other income from subsidiaries...... 108,283 92,818 96,209
Other income..................................... 16,083 17,854 39,318
-------- -------- --------
Total income................................... 726,295 799,459 665,572
-------- -------- --------
Expenses
Interest expense................................. 93,941 89,013 93,240
Other expenses................................... 68,557 73,894 79,840
-------- -------- --------
Total expenses................................. 162,498 162,907 173,080
-------- -------- --------
Income before income taxes and equity in
undistributed earnings of subsidiaries............ 563,797 636,552 492,492
Income tax benefit................................. 9,570 13,610 12,590
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries...................................... 573,367 650,162 505,082
Equity in undistributed earnings of subsidiaries... 73,229 81,621 173,282
-------- -------- --------
Net income......................................... $646,596 $731,783 $678,364
======== ======== ========
42
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.................................. $ 646,596 $ 731,783 $ 678,364
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of subsidiaries less than (in
excess of) dividends from subsidiaries... (73,229) (81,621) (173,282)
Depreciation of premises and equipment.... 981 789 969
Amortization of unearned compensation..... 4,990 4,287 1,956
Discount accretion and premium
amortization............................. -- -- 142
Loss (gain) on sales of securities........ 872 327 (569)
Loss on disposals of other real estate
owned.................................... -- 1 191
Decrease (increase) in other assets....... 45,252 (95,935) (126,001)
Increase (decrease) in accounts payable
and accrued liabilities.................. (11,627) 3,540 7,617
--------- --------- ---------
Net cash provided by operating
activities............................. 613,835 563,171 389,387
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of securities available
for sale................................... 40,168 66,835 71,078
Proceeds from maturities, calls and paydowns
of securities available for sale........... -- -- 3,779
Purchases of securities available for sale.. (32,219) (24,957) (144,753)
Investment in subsidiaries.................. (135,859) (87,388) (120,261)
Advances to subsidiaries.................... (393,061) (728,586) (677,728)
Proceeds from repayment of advances to
subsidiaries............................... 465,311 740,186 530,967
Net cash (paid) received in purchase
accounting transactions.................... (6,950) 588 (6,051)
Other, net.................................. 2,257 4,421 16,302
--------- --------- ---------
Net cash used in investing activities... (60,353) (28,901) (326,667)
--------- --------- ---------
Cash Flows From Financing Activities:
Net increase in long-term debt.............. (342) 19,386 435,093
Net increase in short-term borrowed funds... 2,584 19,054 31,113
Advances from subsidiaries.................. -- -- 4,191
Repayment of advances from subsidiaires..... -- -- (3,260)
Net proceeds from common stock issued....... 41,321 49,558 73,457
Redemption of common stock.................. (206,031) (389,994) (348,397)
Cash dividends paid on common stock......... (349,011) (301,898) (256,635)
Other, net.................................. 957 627 (1,641)
--------- --------- ---------
Net cash (used in) provided by financing
activities............................. (510,522) (603,267) (66,079)
--------- --------- ---------
Net (Decrease) Increase in Cash and Cash
Equivalents.................................. 42,960 (68,997) (3,359)
Cash and Cash Equivalents at Beginning of
Year......................................... 613,361 682,358 685,717
--------- --------- ---------
Cash and Cash Equivalents at End of Year...... $ 656,321 $ 613,361 $ 682,358
========= ========= =========
43
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 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
44
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
2000 1999
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents.. $ 1,883,457 $ 1,883,457 $ 2,134,481 $ 2,134,481
Trading securities......... 96,719 96,719 93,221 93,221
Securities available for
sale...................... 14,495,830 14,495,830 12,878,578 12,878,578
Securities held to
maturity.................. 88,578 89,440 462,874 456,528
Loans and leases:
Loans.................... 40,425,456 39,968,592 36,181,156 35,630,005
Leases................... 2,100,965 N/A 1,508,396 N/A
Allowance for losses..... (550,599) N/A (502,522) N/A
----------- -----------
Net loans and leases... $41,975,822 $37,187,030
=========== ===========
Financial liabilities:
Deposits................... $40,513,287 40,576,324 $36,366,111 36,357,186
Short-term borrowed funds.. 7,139,003 7,139,003 8,270,240 8,270,240
Long-term debt............. 8,622,866 8,446,988 6,194,583 6,167,539
Capitalized leases......... 2,234 N/A 2,535 N/A
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:
2000 1999
-------------------- ----------------------
Notional/ Notional/
Contract Fair Contract Fair
Amount Value Amount Value
----------- -------- ----------- ----------
(Dollars in thousands)
Off balance sheet financial
instruments:
Interest rate swaps, caps and
floors........................ $ 825,878 $ 348 $ 1,901,611 $ 1,971
Commitments to extend,
originate or purchase credit.. 16,480,155 (31,741) 13,639,018 1,264,116
Standby and commercial letters
of credit and financial
guarantees written............ 778,098 (11,294) 567,939 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
- --------
N/A--not applicable.
45
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $825.9 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 changed to
comply with the provisions of SFAS No. 133, as explained in Note A.
The following tables set forth certain information concerning BB&T's
interest rate swaps, caps, floors and collars at December 31, 2000:
Interest Rate Swaps, Caps, Floors and Collars
December 31, 2000
(Dollars in thousands)
Notional Receive
Amount Rate Pay Rate Fair Value
----------- --------- ------------ -----------
Type
Receive fixed swaps........... $ 423,000 6.26% 6.70% $ (87)
Pay fixed swaps............... 226,828 6.76 5.60 354
Caps, Floors & Collars........ 176,050 -- -- 81
----------- --------- -------- -----------
Total....................... $ 825,878 6.11% 5.84% $ 348
=========== ========= ======== ===========
Receive Pay Fixed Caps, Floors
Fixed Swaps Swaps & Collars Total
----------- --------- ------------ -----------
Year-to-date Activity
Balance, December 31, 1999.... $ 955,000 $ 654,361 $292,250 $ 1,901,611
Additions..................... 728,000 14,100 -- 742,100
Maturities/amortizations...... (10,000) (65,978) (80,000) (155,978)
Terminations.................. (1,250,000) (375,655) (36,200) (1,661,855)
----------- --------- -------- -----------
Balance, December 31, 2000.... $ 423,000 $ 226,828 $176,050 $ 825,878
=========== ========= ======== ===========
One to
One Year Five Five to 10
or Less Years Years Total
----------- --------- ------------ -----------
Maturity Schedule
Receive fixed swaps........... $ 300,000 $ 30,000 $ 93,000 $ 423,000
Pay fixed swaps............... -- 203,943 22,885 226,828
Caps, Floors & Collars........ -- 176,050 -- 176,050
----------- --------- -------- -----------
Total....................... $ 300,000 $ 409,993 $115,885 $ 825,878
=========== ========= ======== ===========
46
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The $825.9 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 $348,000.
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.
47
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............................ $ 646,596 $ 731,783 $ 678,364
============ ============ ============
Weighted average number of common
shares outstanding during the
period............................... 420,303,051 416,913,861 411,649,087
============ ============ ============
Basic earnings per share.............. $ 1.54 $ 1.76 $ 1.65
============ ============ ============
Diluted Earnings Per Share:
Net income............................ $ 646,596 $ 731,783 $ 678,364
============ ============ ============
Weighted average number of common
shares............................... 420,303,051 416,913,861 411,649,087
Add:
Shares issuable assuming conversion
of convertible preferred stock..... -- -- 90,202
Dilutive effect of outstanding
options (as determined by
application of treasury stock
method)............................ 5,215,852 6,944,709 8,147,193
------------ ------------ ------------
Weighted average number of common
shares, as adjusted.................. 425,518,903 423,858,570 419,886,482
============ ============ ============
Diluted earnings per share............ $ 1.52 $ 1.73 $ 1.62
============ ============ ============
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 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.
48
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
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
49
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in BB&T's Annual Report on Form 10-K for additional
information about the responsibilities of the Treasury segment.
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" in BB&T's Annual Report on Form
10-K 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 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 provides investment banking, financial advisory and underwriting services
to a variety of regional corporate and municipal 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.
50
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:
BB&T Corporation
Reportable Segments
For the Years Ended December 31, 2000, 1999 and 1998 (Dollars in thousands)
Banking Network Mortgage Banking Trust Services
----------------------------------- ---------------------------------- ----------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Net interest
income (expense)
from external
customers........ $ 1,272,392 $ 1,384,741 $ 1,287,623 $ 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........... 1,758,983 1,711,813 1,574,443 115,197 115,674 141,054 13,781 8,529 4,272
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Provision for
loan and lease
losses........... 143,953 136,885 122,257 3,183 3,802 4,171 -- -- --
Noninterest
income from
external
customers........ 410,018 463,372 414,955 85,310 114,811 103,937 80,232 57,290 43,635
Intersegment
noninterest
income.......... 120,410 123,549 150,672 -- -- -- -- -- --
Noninterest
expense.......... 811,270 1,022,617 904,438 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..... 1,009,003 877,812 903,555 115,599 146,604 148,248 38,323 25,265 17,294
Provision for
income taxes.... 326,036 292,085 332,396 32,124 45,128 56,125 10,559 8,039 6,528
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
Net income....... 682,967 585,727 571,159 $ 83,475 $ 101,476 $ 92,123 $ 27,764 $ 17,226 $ 10,766
=========== =========== =========== ========== ========== ========== ======== ======== ========
Identifiable
segment assets... $33,567,306 $36,262,540 $33,306,222 $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
========= ======= =======
Investment Banking and
Brokerage Treasury All Other Segments(1)
-------------------------- ------------------------------------ --------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- -------- ----------- ----------- ---------- ---------- ---------- ----------
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........ $ 2,145,496 $ 2,166,648 $ 1,996,519
Net intersegment
interest income
(expense)....... 250,481 39,674 54,501
----------- ----------- -----------
Net interest
income........... 2,395,977 2,206,322 2,051,020
----------- ----------- -----------
Provision for
loan and lease
losses........... 193,914 157,408 147,088
Noninterest
income from
external
customers........ 789,995 875,998 697,662
Intersegment
noninterest
income.......... 120,410 123,549 150,672
Noninterest
expense.......... 1,263,142 1,357,622 1,139,498
Intersegment
noninterest
expense......... 366,974 300,578 243,999
----------- ----------- -----------
Income before
income taxes..... 1,482,352 1,390,261 1,368,769
Provision for
income taxes.... 443,992 438,910 459,345
----------- ----------- -----------
Net income....... $ 1,038,360 $ 951,351 $ 909,424
=========== =========== ===========
Identifiable
segment assets... $63,852,896 $55,313,756 $51,747,564
=========== =========== ===========
- ----
(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.
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