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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 1999
Commission File Number: 1-10853
BB&T CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of Principal Executive Offices) (Zip Code)
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
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Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $5 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by references in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 2000, was approximately $9.2 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 2000, was
331,442,010. No shares of preferred stock were outstanding at January 31, 2000.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 25, 2000, are incorporated by reference in
Part III of this report.
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The Exhibit Index begins on page 109.
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CROSS REFERENCE INDEX
Page
------
PART I Item 1 Business 4
Item 2 Properties 18, 76
Item 3 Legal Proceedings 90
Item 4 Submission of Matters to a Vote of Shareholders 2
None.
PART II Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 48-49
Item 6 Selected Financial Data 51
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Quantitative and Qualitative Disclosures About
Item 7A Market Risk 40
Item 8 Financial Statements and Supplementary Data 50
Consolidated Balance Sheets at December 31, 1999 and 54
1998
Consolidated Statements of Income for each of the
years in the three-year period ended December 31,
1999 55
Consolidated Statements of Changes in Shareholders'
Equity for each of the years in the three-year
period ended December 31, 1999 56
Consolidated Statements of Cash Flows for each of
the years in the three-year period ended December
31, 1999 57
Notes to Consolidated Financial Statements 58
Report of Independent Public Accountants 53
Quarterly Financial Summary for 1999 and 1998 50
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.
None.
PART III Item 10 Directors and Executive Officers of the Registrant *, 18
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and *
Management
2
Page
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Item 13 Certain Relationships and Related Transactions *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form
10-K are omitted since they are not applicable, except
as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission
and are available upon written request.
(b) Current Reports on Form 8-K filed during the fourth
quarter of 1999.
Type Date Filed Reporting Purpose
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Item 5. October 12, 1999 To report the results of operations and
financial condition for the 3rd Quarter of
1999.
Item 5. November 17, 1999 To report plans to acquire Hardwick
Holding Company of Dalton, Georgia.
Item 5. December 15, 1999 To report plans to acquire First Banking
Company of Southeast Georgia.
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* The information required by Item 10 is incorporated herein by reference to
the information that appears under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by reference to
the information that appears under the headings "Compensation of Executive
Officers", "Retirement Plans" and "Compensation Committee Report on
Executive Compensation" in the Registrant's Proxy Statement for the 2000
Annual Meeting of Shareholders.
The information required by Item 12 is incorporated herein by reference to
the information that appears under the headings "Security Ownership" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.
The information required by Item 13 is incorporated herein by reference to
the information that appears under the headings "Compensation Committee
Interlocks and Insider Participation" and "Transactions with Executive
Officers and Directors" in the Registrant's Proxy Statement for the 2000
Annual Meeting of Shareholders.
3
DESCRIPTION OF BUSINESS
General
BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding
company headquartered in Winston-Salem, North Carolina. BB&T conducts its
operations in North Carolina, South Carolina, Virginia, Maryland, Georgia,
West Virginia, Kentucky and the metropolitan Washington, D.C. area.
At December 31, 1999, the principal assets of BB&T included all of the
outstanding shares of common stock of:
. Branch Banking and Trust Company, of Winston-Salem, North Carolina;
. BB&T Financial Corporation of South Carolina, located in Greenville,
South Carolina, which in turn owns all the outstanding shares of Branch
Banking and Trust Company of South Carolina;
. BB&T Financial Corporation of Virginia, which in turn owns all the
outstanding shares of Branch Banking and Trust Company of Virginia;
. First Citizens Bank of Georgia, of Newnan, Georgia;
. Carroll County Bank and Trust Company, of Westminster, Maryland;
. The Matewan National Bank, of Williamson, West Virginia;
. First Liberty Bank, of Macon, Georgia;
. Regional Acceptance Corporation, of Greenville, North Carolina;
. Scott & Stringfellow, Inc., of Richmond, Virginia;
. Refloat Incorporated, of Mount Airy, North Carolina; and
. BB&T Factors Corporation, of High Point, North Carolina.
Forward-Looking Statements
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve risks and uncertainties and are based on
the beliefs and assumptions of the management of BB&T, and on the information
available to management at the time that these disclosures were prepared.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) changes in the interest
rate environment may reduce margins; (3) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality and/or a reduced demand
for credit; (4) legislative or regulatory changes, including changes in
accounting standards, may adversely affect the businesses in which BB&T is
engaged; (5) costs or difficulties related to the integration of the
businesses of BB&T and its merger partners may be greater than expected; (6)
expected cost savings associated with pending mergers may not be fully
realized or realized within the expected time frame; (7) deposit attrition,
customer loss or revenue loss following pending mergers may be greater than
expected; (8) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than BB&T;
and (9) adverse changes may occur in the securities markets.
4
Significant Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was
chartered in 1872 and is the oldest bank headquartered in North Carolina. At
December 31, 1999, BB&T-NC operated through 339 banking offices throughout
North Carolina and, excluding home office deposits, held the largest share of
deposits in North Carolina. BB&T-NC also operated 50 banking offices in
Maryland and six offices in Washington, D.C. BB&T-NC's principal subsidiaries
include BB&T Leasing Corp., based in Charlotte, North Carolina, which
specializes in lease financing to commercial businesses and municipalities;
BB&T Investment Services, Inc., located in Charlotte, North Carolina, which
offers nondeposit investment alternatives, including discount brokerage
services, fixed-rate and variable-rate annuities, mutual funds and government
and municipal bonds; BB&T Insurance Services, Inc., headquartered in Raleigh,
North Carolina, which is the 12th largest independent insurance agency network
in the country; and W.E. Stanley, Inc., an actuarial and employee benefits
consulting firm headquartered in Greensboro, North Carolina.
BB&T-NC has a number of additional subsidiaries, including Prime Rate Premium
Finance Corporation, Inc. ("Prime Rate"), located in Florence, South Carolina,
which provides insurance premium financing and other services to customers in
Virginia and the Carolinas. BB&T-NC also owns 51% of AutoBase Information
Systems, Inc., ("AutoBase") a Charlotte, North Carolina-based company that uses
advanced technologies to simplify the car-buying and selling process for
consumers and automotive dealers.
Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 88
banking offices at December 31, 1999. BB&T-SC is the third largest bank in
South Carolina in terms of deposit market share.
Branch Banking and Trust Company of Virginia ("BB&T-VA") operated 104 banking
offices in Virginia at December 31, 1999. BB&T-VA is the sixth largest bank in
Virginia in terms of deposit market share.
Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow") is an
investment banking and full-service brokerage firm located in Richmond,
Virginia. Scott & Stringfellow operated 23 full-service brokerage offices in
Virginia, one in West Virginia, ten in North Carolina and two in South Carolina
at December 31, 1999. Scott & Stringfellow specializes in the origination,
trading and distribution of fixed-income securities and equity products in both
the public and private capital markets. Scott & Stringfellow also has a public
finance department that provides investment banking services, financial
advisory services and municipal bond financing to a variety of regional tax-
exempt issuers.
The primary services offered by BB&T's subsidiaries include:
. small business lending
. commercial middle market lending
. retail lending
. home equity lending
. sales finance
. mortgage lending
. leasing
. trust services
. agency insurance
5
. treasury services
. investment sales and mutual fund products
. capital markets
. factoring
. asset-based lending
. international banking services
. merchant banking
. cash management
. bankcard
6
The following table discloses selected financial information related to
BB&T's significant banking subsidiaries:
Table 1
Selected Financial Data of Significant Banking & Thrift Subsidiaries
As of / For the Years Ended December 31, 1999, 1998 and 1997
First
BB&T-NC BB&T-SC BB&T-VA Liberty
----------- ---------- ---------- ----------
(Dollars in thousands)
1999
Total assets $29,631,391 $4,842,462 $5,098,872 $1,765,277
Securities 7,740,265 477,705 1,308,673 399,005
Loans and leases, net of unearned
income* 19,402,829 3,698,046 3,294,038 1,201,689
Deposits 18,021,189 3,686,484 3,462,041 1,047,686
Shareholder's equity 2,130,303 364,060 471,938 123,658
Net interest income 968,187 216,781 188,522 59,626
Provision for loan and lease
losses 43,053 15,491 6,689 9,728
Noninterest income 564,174 68,473 51,170 22,072
Noninterest expense 896,799 126,689 145,242 59,615
Net income 417,751 91,059 54,457 8,463
1998
Total assets $26,868,711 $4,641,393 $5,257,737 $1,506,352
Securities 6,735,729 783,727 1,177,446 322,152
Loans and leases, net of unearned
income* 17,845,119 3,266,871 3,321,677 1,034,511
Deposits 17,858,406 3,702,383 3,496,787 1,075,832
Shareholder's equity 2,170,812 429,572 612,083 123,333
Net interest income 902,319 201,132 187,189 49,653
Provision for loan and lease
losses 47,167 13,455 12,227 5,116
Noninterest income 459,246 71,945 52,550 20,080
Noninterest expense 801,036 119,224 143,515 40,632
Net income 365,517 89,653 52,526 15,057
1997
Total assets $23,253,933 $4,364,982 $5,260,598 $1,269,997
Securities 5,590,186 1,020,554 1,469,392 245,277
Loans and leases, net of unearned
income* 15,749,571 3,052,755 3,274,679 910,502
Deposits 16,419,895 3,401,236 3,507,108 936,502
Shareholder's equity 1,816,733 374,871 574,742 101,457
Net interest income 867,392 184,341 123,738 43,105
Provision for loan and lease
losses 54,197 14,109 8,537 6,316
Noninterest income 439,772 70,916 27,008 15,650
Noninterest expense 825,898 135,018 90,649 35,320
Net income 285,209 68,024 34,089 8,850
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* Includes loans held for sale.
7
Merger Strategy
BB&T's profitability and market share have been enhanced through both
internal growth and acquisitions in recent years. The acquisition strategy of
BB&T is focused on three primary objectives:
. to pursue in-market acquisitions of high-quality banks and thrifts with
assets in the $250 million to $10 billion range,
. to acquire companies in niche markets that provide products or services
that can be offered through the existing distribution system to BB&T's
current customer base, and
. to consider strategic acquisitions in new markets that are economically
feasible and provide positive long-term benefits.
BB&T has consummated 43 acquisitions of community banks and thrifts,
acquired 49 insurance agencies and completed 12 acquisitions of nonbank
financial services providers over the last ten years. BB&T expects to continue
to take advantage of the consolidation of the financial services industry and
expand and enhance its franchise through mergers and acquisitions. The
consideration paid for these acquisitions may be in the form of cash, debt or
BB&T stock. The amount of consideration paid to complete these transactions
may entail payments in excess of the book value of the underlying net assets
acquired, which could have a dilutive effect on earnings per share or book
value. In addition, such acquisitions sometimes result in significant front-
end charges against earnings. However, cost savings, especially incident to
in-market acquisitions, are also frequently anticipated.
Competition
The banking industry is highly competitive and dramatic change continues to
occur. The banking subsidiaries of BB&T compete actively with national and
state banks, savings and loan associations, securities dealers, mortgage
bankers, finance companies and insurance companies. Competition for financial
products continues to grow as customers select from a variety of traditional
and nontraditional alternatives. The industry continues to consolidate at a
fast pace, which affects competition by eliminating some regional and local
institutions. For additional information concerning markets, BB&T's
competitive position and business strategies, see "Market Area" and "Lending
Activities" below.
Market Area
BB&T's market area consists of North and South Carolina, Virginia, Maryland,
Georgia, West Virginia, eastern Kentucky and the metropolitan Washington, D.C.
area. The area's employment base is diverse and consists of manufacturing,
general services, agricultural, wholesale/retail, high tech and financial
services. BB&T believes its current market area is economically strong and
will support consistent growth in assets and deposits in the future. Even so,
management expects to continue to employ aggressive growth strategies,
including possible expansion into neighboring states. Management believes that
maintaining a community bank approach to customer service as asset size and
available services grow will strengthen the Corporation's ability to move into
new states and communities and continue to market services to small to mid-
sized commercial customers and individuals in these markets.
Lending Activities
The primary goal of the BB&T lending function is to help clients achieve
their financial goals and secure their financial futures on terms that are
fair to the clients and profitable to the Corporation. This purpose can best
be accomplished by building strong, profitable customer relationships over
8
time, with BB&T becoming an important contributor to the prosperity and well
being of its customers. BB&T's philosophy of lending is to attempt to meet all
legitimate business and consumer credit needs within defined market segments
where standards of safety, profitability and liquidity can be met. Based on
internal analyses, BB&T's loan portfolio consistently outperforms an average of
our national peers in terms of asset quality, yield and rate of growth.
BB&T focuses lending efforts on small to intermediate commercial and
industrial loans, one-to-four family residential mortgage loans and consumer
loans. Typically, fixed-rate residential mortgage loans are sold in the
secondary mortgage market and adjustable-rate residential mortgages are
retained in the portfolio. Servicing rights on mortgage loans sold are
typically retained by BB&T. As of December 31, 1999, BB&T's total mortgage
servicing portfolio exceeded $17.0 billion. BB&T conducts the majority of its
lending activities in the context of the Corporation's community bank focus,
with decentralized lending decisions made as close to the customer as
practicable.
The following table reflects BB&T's loan portfolio based on the source of the
underlying collateral, rather than the primary purpose of the loan.
Table 2
Composition of Loan and Lease Portfolio*
December 31,
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1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans:
Commercial, financial
and agricultural $ 4,592,691 $ 4,128,455 $ 3,816,252 $ 3,331,333 $ 2,844,598
Real estate--
construction and
land development 3,310,561 2,570,017 2,453,380 1,816,520 1,343,621
Real estate--mortgage 16,010,893 14,604,025 13,395,782 11,918,118 11,651,183
Consumer 3,635,267 3,231,827 3,217,073 3,261,604 2,874,951
----------- ----------- ----------- ----------- -----------
Loans held for
investment 27,549,412 24,534,324 22,882,487 20,327,575 18,714,353
Loans held for sale 285,025 1,171,415 553,662 267,082 294,967
----------- ----------- ----------- ----------- -----------
Total loans 27,834,437 25,705,739 23,436,149 20,594,657 19,009,320
Leases 2,602,819 1,620,326 788,462 576,991 376,152
----------- ----------- ----------- ----------- -----------
Total loans and
leases $30,437,256 $27,326,065 $24,224,611 $21,171,648 $19,385,472
=========== =========== =========== =========== ===========
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* Balances include unearned income.
Mortgage Banking
BB&T continues to be the largest originator of residential mortgage loans in
the Carolinas, with 1999 originations of $4.6 billion. BB&T engages in mortgage
loan originations by offering various types of fixed- and adjustable-rate loans
for the purpose of constructing, purchasing or refinancing owner-occupied
properties. Risks associated with the residential lending function include
interest rate risk, which is mitigated through the sale of substantially all
fixed-rate loans, and default risk by the borrower, which is lessened through
underwriting procedures and mortgage insurance. BB&T also purchases mortgage
loans from more than 100 correspondent originators and subjects them to the
same underwriting and risk management criteria as loans originated internally.
9
Commercial Lending
BB&T's commercial lending program is generally targeted to serve small-to-
middle market businesses with sales of $200 million or less, although in-house
limits do allow lending to larger customers, including national customers who
have some reasonable business connections with the Corporation's
geographically-served markets. Commercial lending includes commercial,
financial, agricultural, industrial and real estate loans. Pricing on
commercial loans, driven largely by competition, is usually tied to market
indexes, such as the prime rate, LIBOR or rates on U.S. Treasury securities.
BB&T has received recognition from the U.S. Small Business Administration for
the last two years as the #1 "small business friendly" bank in the eastern
United States. Management believes that small to mid-sized commercial lending
is BB&T's strongest market, as BB&T has the largest market share in all types
of small business lending in the Carolinas.
Construction Lending
Real estate construction loans include twelve-month contract housing loans,
which are intended to convert to permanent one-to-four family residential
mortgage loans upon completion of the construction, and commercial construction
loans. These loans are usually to in-market developers, businesses, individuals
or real estate investors for the construction of commercial structures in the
Corporation's market area. They are made for purposes including, but not
limited to, the construction of industrial facilities, apartments, shopping
centers, office buildings, hotels and warehouses. The properties may be for
sale, lease or owner-occupancy.
Consumer Lending
BB&T offers a wide variety of consumer loan products. Various types of
secured and unsecured loans are marketed to qualifying, existing clients and to
other creditworthy candidates in BB&T's market area. Home equity loans and
lines are underwritten with note amounts and credit limits that ensure
consistency with the Corporation's policies. Numerous forms of unsecured loans,
including revolving credits (e.g. bankcards, checking accounts, overdraft
protection and personal lines of credit) are provided and various installment
loan products, such as vehicle loans, are offered. BB&T is the largest home
equity lender in North and South Carolina.
Leasing
BB&T provides commercial leasing products and services through BB&T Leasing
Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary
products: finance or capital leases, true leases (as defined under the Internal
Revenue Code) and other operating leases for vehicles, rolling stock and
tangible personal property. Leasing provides lease-related services for small
to medium-sized commercial customers. BB&T also engages in leasing transactions
with municipalities directly through its subsidiary banks and has the largest
market share of municipal leasing in the Carolinas.
10
The following table presents BB&T's total loan portfolio based on the primary
purpose of the loan, rather than the underlying collateral:
Table 3
Composition of Loan Portfolio Based on Loan Purpose
December 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands)
Business loans $13,680,978 $11,761,770
Lease Financing 1,471,194 986,885
----------- -----------
Total commercial loans 15,152,172 12,748,655
----------- -----------
Sales Finance 2,120,403 1,695,286
Revolving Credit 628,118 543,172
Direct Retail 5,341,104 4,723,745
----------- -----------
Total consumer loans 8,089,625 6,962,203
----------- -----------
Mortgage loans 5,955,658 6,893,267
----------- -----------
Total loans $29,197,455 $26,604,125
=========== ===========
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* Loans and leases are net of unearned income and include loans held for sale.
The following table reflects the scheduled maturities of commercial,
financial and agricultural loans, as well as construction loans.
Table 4
Selected Loan Maturities and Interest Sensitivity(3)
December 31, 1999
------------------------------------
Commercial,
Financial
and Real Estate:
Agricultural Construction Total
------------ ------------ ----------
(Dollars in thousands)
Fixed rate:
1 year or less (2) $ 232,560 $ 494,929 $ 727,489
1-5 years 987,493 266,500 1,253,993
After 5 years 255,579 -- 255,579
---------- ---------- ----------
Total 1,475,632 761,429 2,237,061
---------- ---------- ----------
Variable rate:
1 year or less (2) 1,631,780 1,733,410 3,365,190
1-5 years 1,343,452 815,722 2,159,174
After 5 years 141,827 -- 141,827
---------- ---------- ----------
Total 3,117,059 2,549,132 5,666,191
---------- ---------- ----------
Total loans and leases (1) $4,592,691 $3,310,561 $7,903,252
========== ========== ==========
- --------
(Dollars in
thousands)
-----------
(1)The table excludes:
(i) consumer loans to individuals for household, family and
other personal expenditures $ 3,635,267
(ii) real estate mortgage loans 16,010,893
(iii)loans held for sale 285,025
(iv) leases 2,602,819
-----------
$22,534,004
===========
(2)Includes loans due on demand.
(3)Balances include unearned income.
11
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
BB&T's credit policy does not permit automatic renewals of loans. At the
scheduled maturity date (including balloon payment date), the customer must
request a new loan to replace the matured loan and execute a new note with
rate, terms and conditions negotiated at that time.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged against earnings. The level of the allowance
for loan and lease losses is based on management's evaluation of the risk
inherent in the loan portfolio at the balance sheet date and changes in the
nature and volume of loan activity. This evaluation, which includes a review of
loans for which full collectibility may not be reasonably assured, considers
the loans' "risk grades," the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and
other current factors that warrant consideration in determining an adequate
allowance. BB&T's objective is to maintain a loan portfolio that is diverse in
terms of loan type, industry concentration, geographic distribution and
borrower concentration in order to reduce overall credit risk by minimizing the
adverse impact of any single event or combination of related events.
Reserve Policy and Methodology
The allowance for loan and lease losses is composed of general reserves,
specific reserves and an unallocated reserve. General reserves are established
on the commercial loan portfolio based on loss percentages that are determined
based on management's evaluation of the losses inherent in the various risk
grades of the commercial loans. Commercial loans are categorized in one of ten
risk grades based on management's assessment of the overall credit quality of
the loan, including the payment history, the financial position of the
borrower, underlying collateral, internal credit reviews and the results of
external regulatory examinations. The general reserve percentages described
above are then applied to each risk grade to calculate the necessary allowance
to cover inherent losses in each risk category. The following table presents
the risk grades and reserve percentages applicable to each grade at December
31, 1999:
Table 5
General Reserves for Commercial Loans
December 31, 1999
Percentage
of
Commercial General
Loans by Reserve
Risk Grade Risk Grade Percentage
---------- ---------- ----------
Risk 0 (Loans from acquired institutions) 0.05% 1.30%
Risk 1 (Superior Quality) 4.25 0.10
Risk 2 (High Quality) 16.13 0.20
Risk 3 (Very Good Quality--Normal Risk) 30.48 0.60
Risk 4 (Good Quality--Normal Risk) 32.26 1.30
Risk 5 (Acceptable Quality) 11.75 2.25
Risk 6 (Management Attention) 2.85 3.25
Risk 7 (Special Mention) 0.73 5.00
Risk 8 (Substandard) 1.48 15.00
Risk 9 (Doubtful) 0.02 50.00
12
The general reserve percentages used have been determined by management to be
appropriate based primarily on historical loan losses and the level of risk
assumed for the various risk grades. The reserve percentages for Special
Mention, Substandard and Doubtful are based on the preferred rates used by
banking regulators, and the other risk grades are "stepped down" from these
percentages as loan quality improves.
The process of classifying commercial loans into the appropriate risk grades
is performed initially as a component of the approval of the loan by the
appropriate credit officer. Based on the size of the loan, senior credit
officers and / or the loan committee may review the classification to ensure
accuracy and consistency of classification. Loan classifications are frequently
reviewed by internal credit examiners to determine if any changes in the
circumstances of the loan require a different risk grade. To determine the most
appropriate risk grade classification for each loan, the credit officers
examine the borrower's liquidity level, asset quality, the amount of the
borrower's other indebtedness, cash flow, earnings, sources of financing and
existing lending relationships.
Specific reserves are provided on certain commercial loans that are
classified in the Special Mention, Substandard or Doubtful risk grades. The
specific reserves are determined on a loan-by-loan basis based on management's
evaluation of BB&T's loss exposure for each credit, given the current payment
status of the loan and the value of any underlying collateral. Loans for which
specific reserves are provided are excluded from the general allowance
calculations described above to prevent redundant reserves. The calculations of
specific reserves on commercial loans also incorporates specific reserves based
on the results of measuring impaired loans pursuant to the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent. A loan is impaired when, based
on current information and events, it is probable that BB&T will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When the measure of the impaired loan is less than the recorded
investment in the loan, the amount of the impairment is recorded through a
valuation allowance. It is BB&T's policy to classify and disclose all
commercial loans greater than $250,000 that are on nonaccrual status as
impaired loans. Substantially all other loans made by BB&T are excluded from
the scope of SFAS No. 114 as they are comprised of large groups of smaller
balance homogeneous loans (residential mortgage and consumer installment) that
are collectively evaluated for impairment.
General reserves are provided for noncommercial loans based on a three-year
weighted average of actual loss experience of each major loan category, which
is then applied to the total outstanding loan balance of each loan category.
The weighted average loss experience for each category is determined by
assigning a 50% weight to the most recent year's loss experience for each
category, a 30% weight to the loss ratio from two years ago, and the remaining
20% weight is applied to the loss ratio from three years ago. This methodology
places greater emphasis on more recent loss trends and, therefore, provides a
self-correcting mechanism for the differences between estimated and actual
losses.
There are two primary components considered in determining an appropriate
level for the unallocated reserve. First, a portion of the unallocated reserve
is established to cover the elements of imprecision and estimation risk
inherent in the general and specific reserves described above. Second, the
remaining portion of the unallocated allowance is determined based on
management's evaluation of various conditions that are not directly measured by
any other component of the allowance, including current general economic and
business conditions affecting key lending areas, credit quality trends,
collateral values, loan volumes and concentrations, seasoning of the loan
portfolio, the findings of internal credit examinations and results from
external bank regulatory examinations.
13
While management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the allowance or to
the reserving methodology may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations or, if
required by regulators, based upon information at the time of their
examinations. Such adjustments to original estimates, as necessary, are made in
the period in which these factors and other relevant considerations indicate
that loss levels may vary from previous estimates.
The following table discloses an allocation of the allowance for loan and
leases losses at the end of each of the past five years. The allowance has been
allocated applying the methodologies described above to the loan portfolios
based on the underlying collateral of the loans. This allocation is calculated
on an approximate basis and is not necessarily indicative of future losses. The
entire amount of the allowance is available to absorb losses occurring in any
category of loans and leases.
Table 6
Allocation of Allowance for Loan and Lease Losses by Category
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
% Loans % Loans % Loans % Loans % Loans
in each in each in each in each in each
Amount category Amount category Amount category Amount category Amount category
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Balance at end of period
applicable to:
Commercial, financial
and agricultural $ 58,046 15% $ 52,745 16% $ 55,188 16% $ 54,279 16% $ 57,232 15%
Real estate:
Construction and land
development 39,576 11 33,065 10 24,792 10 17,962 10 21,531 8
Mortgage 139,837 53 111,099 54 109,765 56 96,429 56 92,213 60
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total 179,413 64 144,164 64 134,557 66 114,391 66 113,744 68
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer 26,384 12 33,010 13 29,181 14 24,581 15 17,424 15
Leases 21,726 9 12,737 7 8,021 4 5,207 3 3,325 2
Unallocated 102,394 -- 119,213 -- 89,603 -- 78,162 -- 63,254 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total $387,963 100% $361,869 100% $316,550 100% $276,620 100% $254,979 100%
======== === ======== === ======== === ======== === ======== ===
14
The following table sets forth information with respect to BB&T's allowance
for loan and lease losses for the most recent five years.
Table 7
Analysis of Allowance for Loan and Lease Losses
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of
period $ 361,869 $ 316,550 $ 276,620 $ 254,979 $ 245,326
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural (21,803) (15,602) (20,204) (14,154) (13,570)
Real estate (14,825) (12,523) (14,708) (12,242) (13,481)
Consumer (66,843) (73,363) (74,274) (53,281) (32,729)
Lease receivables (993) (1,167) (671) (768) (614)
----------- ----------- ----------- ----------- -----------
Total charge-offs (104,464) (102,655) (109,857) (80,445) (60,394)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural 10,837 8,423 6,949 9,464 7,149
Real estate 3,961 3,792 5,287 6,521 3,825
Consumer 13,979 12,170 8,893 8,139 7,757
Lease receivables 107 425 232 136 395
----------- ----------- ----------- ----------- -----------
Total recoveries 28,884 24,810 21,361 24,260 19,126
----------- ----------- ----------- ----------- -----------
Net charge-offs (75,580) (77,845) (88,496) (56,185) (41,268)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense 92,097 101,842 110,913 70,359 47,108
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions 9,272 21,258 17,513 7,467 3,813
Reconciliation of fiscal
year of merged
companies to calendar
year 305 64 -- -- --
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 387,963 $ 361,869 $ 316,550 $ 276,620 $ 254,979
=========== =========== =========== =========== ===========
Average loans and
leases* $27,729,172 $25,065,207 $22,438,508 $20,223,203 $18,900,682
Net charge-offs as a
percentage of average
loans and leases .27% .31% .39% .28% .22%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
Nonperforming Assets and Classified Assets
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessed collateral. It is BB&T's policy to place
commercial loans and leases on nonaccrual status when full collection of
principal and interest becomes doubtful, or when any portion of principal or
interest becomes 90 days past due, whichever occurs first. When loans are
placed on nonaccrual status, interest receivable is reversed against interest
income in the current period and any prior year interest is charged off against
the allowance for loan and lease losses. Interest payments received thereafter
are applied as a reduction of the remaining principal balance so long as doubt
exists as to the ultimate collection of the principal. Loans and leases are
removed from nonaccrual status when they become current as to both principal
and interest and when the collectibility of principal or interest is no longer
doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual
status when full collection of principal and interest becomes doubtful, or they
become delinquent for a specified period of time.
15
Investment Activities
BB&T maintains a significant portion of its assets as investment securities.
BB&T's subsidiary banks are allowed to purchase, sell, deal in and hold certain
investment securities as prescribed by bank regulations. These investments
include all obligations of the U.S. Treasury, agencies of the Federal
government, obligations of any state or political subdivision, various types of
corporate debt, mutual funds, limited types of equity securities and certain
derivative securities. Scott & Stringfellow, BB&T's full-service brokerage and
investment banking subsidiary, is permitted to engage in the underwriting,
trading and sales of equity and debt securities subject only to the risk
management policies of the Corporation.
BB&T's investment activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset and Liability Committee ("ALCO") which meets regularly to
review the economic environment, assess current activities for appropriateness
and establish investment strategies. The ALCO also has much broader
responsibilities, which are discussed in "Market Risk Management", in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
funding options and the overall interest rate sensitivity of the Corporation.
In general, the investment portfolio is managed in a manner appropriate to the
attainment of the following goals: (i) to provide a sufficient margin of liquid
assets to cover unanticipated deposit and loan fluctuations, seasonal funds
flow variations and overall funds management objectives; (ii) to provide
eligible securities to secure public funds and trust deposits as prescribed by
law; and (iii) to earn the maximum return on funds invested that is
commensurate with meeting the requirements of (i) and (ii).
The following table provides information regarding the composition of BB&T's
securities portfolio at the end of each of the past three years. BB&T's trading
securities, reflected in the accompanying table, represent positions held
primarily by Scott & Stringfellow.
Table 8
Composition of Securities Portfolio
December 31,
---------------------------------
1999 1998 1997
----------- ---------- ----------
(Dollars in thousands)
Trading Securities (at estimated fair
value): $ 93,221 $ 60,422 $ 67,878
----------- ---------- ----------
Securities held to maturity (at
amortized cost):
U.S. Treasury, government and agency
obligations 23,117 51,102 105,236
States and political subdivisions 74,005 232,406 271,993
Mortgage-backed securities -- 70,355 142,164
Other securities -- 6,920 1,315
----------- ---------- ----------
Total securities held to maturity 97,122 360,783 520,708
----------- ---------- ----------
Securities available for sale (at
estimated fair value):
U.S. Treasury, government and agency
obligations 4,529,221 3,838,080 4,632,400
States and political subdivisions 540,219 185,056 78,856
Mortgage-backed securities 3,793,185 4,204,668 3,361,852
Other securities 1,619,419 1,270,682 503,162
----------- ---------- ----------
Total securities available for sale 10,482,044 9,498,486 8,576,270
----------- ---------- ----------
Total securities $10,672,387 $9,919,691 $9,164,856
=========== ========== ==========
16
Sources of Funds
Deposits are the primary source of funds for lending and investing
activities. Scheduled loan payments and maturities and prepayments from
portfolios of loans and investment securities also provide a stable source of
funds. Federal Home Loan Bank ("FHLB") advances, foreign deposits, Federal
funds purchased and other short-term borrowed funds, as well as longer-term
debt issued through the capital markets, all provide supplemental liquidity
sources.
Deposits
Deposits are attracted principally from customers within BB&T's market area
through the offering of a broad selection of deposit instruments including
demand deposits, negotiable order of withdrawal accounts, savings accounts,
money rate savings, certificates of deposit and individual retirement accounts.
Deposit account terms vary with respect to the minimum balance required, the
time period the funds must remain on deposit and service charge schedules.
Interest rates paid on specific deposit types are set by the ALCO and are
determined based on (i) the interest rates offered by competitors, (ii)
anticipated amount and timing of funding needs (iii) availability of and cost
of alternative sources of funding and (iv) anticipated future economic
conditions and interest rates. Customer deposits are attractive sources of
liquidity because of their stability, cost and the ability to generate fee
income through the cross-sale of other services to the depositors.
Table 9
Scheduled Maturities of Time Deposits
December 31, 1999
(Dollars in thousands)
Time Deposits $100,000 and Over
Maturity Schedule
Less than three months $1,514,247
Three through six months 719,615
Seven through twelve months 807,005
Over twelve months 642,444
----------
Total $3,683,311
==========
Total Time Deposits
Time Deposits Due to Mature by December 31,
2000 $10,525,443
2001 1,785,389
2002 585,374
2003 187,808
2004 272,954
2005 and later 39,347
-----------
Total $13,396,315
===========
Short-Term Borrowed Funds
BB&T's ability to borrow funds through nondeposit sources provides additional
flexibility in meeting the liquidity needs of customers. Components of short-
term borrowed funds at year end were master notes, securities sold under
repurchase agreements, FHLB advances, Federal funds
17
purchased and U.S. Treasury tax and loan depository note accounts. The
following table summarizes certain pertinent information for the past three
years regarding BB&T's short-term borrowed funds:
Table 10
Short-Term Borrowed Funds
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
Maximum outstanding at any month-end
during the year $6,875,290 $5,681,846 $4,157,911
Average outstanding during the year 5,311,658 4,430,989 3,430,232
Average interest rate during the year 4.86% 5.23% 5.28%
Average interest rate at end of year 4.11 4.86 5.49
Employees
At December 31, 1999, BB&T had approximately 13,700 full-time-equivalent
employees compared to approximately 10,400 full-time equivalent employees at
December 31, 1998.
Properties
BB&T and its significant subsidiaries occupy headquarters offices that are
either owned or operated under long-term leases and also own free-standing
operations centers in Winston-Salem, Wilson, Charlotte and Lumberton, North
Carolina. At December 31, 1999, BB&T and its subsidiary banks operated 655
banking offices in the Carolinas, Virginia, Maryland, Georgia, West Virginia,
eastern Kentucky and Washington, D.C. Branch office locations are variously
owned or leased. Management believes that the premises occupied by BB&T and its
subsidiaries are well-located and suitably equipped to serve as financial
services facilities. See Note F. "Premises and Equipment" of the "Notes to
Consolidated Financial Statements" in this report for additional disclosures
related to BB&T's properties and other fixed assets.
Executive Officers of BB&T
BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr.
Allison is 51 and has 29 years of service with the Corporation. Henry G.
Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr.
Williamson is 52 and has 28 years of service with the Corporation. Kelly S.
King is the President of BB&T Corporation and is the Senior Executive Vice
President for the Branch Network. Mr. King is 51 and has 28 years of service
with the Corporation. Robert E. Greene is the President of Branch Banking and
Trust Company and is the Senior Executive Vice President for Administrative
Services for the Corporation. Mr. Greene is 51 and has served the Corporation
for 27 years. W. Kendall Chalk is the Senior Executive Vice President for the
Lending Group. Mr. Chalk is 54 and has served the Corporation for 25 years.
Scott E. Reed is a Senior Executive Vice President and the Corporation's Chief
Financial Officer. Mr. Reed is 51 and has 28 years of service with the
Corporation. Sherry A. Kellett is a Senior Executive Vice President and the
Corporation's Controller. Ms. Kellett is 55 and has 15 years of service with
the Corporation. C. Leon Wilson is a Senior Executive Vice President and is the
Corporation's Operations Division Manager. Mr. Wilson is 44 and has served BB&T
for 23 years.
18
REGULATORY CONSIDERATIONS
General
As a bank holding company, BB&T is subject to regulation under the Bank
Holding Company Act of 1956, as amended, (the "BHCA") and the examination and
reporting requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). Under the BHCA, a bank holding company may not
directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any bank or merge or
consolidate with another bank holding company without the prior approval of the
Federal Reserve Board. The BHCA also generally limits the activities of a bank
holding company to that of banking, managing or controlling banks, or any other
activity which is determined to be so closely related to banking or to managing
or controlling banks that an exception is allowed for those activities.
As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA
(collectively, the "State-Chartered Banks") are subject to regulation,
supervision and examination by state bank regulatory authorities in their
respective home states. These authorities include the North Carolina
Commissioner of Banks, in the case of BB&T-NC, the South Carolina Commissioner
of Banking, in the case of BB&T-SC, and the Virginia State Corporation
Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of
the State-Chartered Banks is also subject to regulation, supervision and
examination by the Federal Deposit Insurance Corporation (the "FDIC"). BB&T
also operates seven banks that were subsidiaries of bank holding companies
acquired by BB&T during 1999 that will be merged into either BB&T-NC, BB&T-SC
or BB&T-VA, as appropriate, during 2000. These banks include First Citizens
Bank of Georgia, First Citizens Bank of Newnan and First Liberty Bank, state-
chartered banks subject to supervision by the Georgia Department of Banking and
Finance; Carroll County Bank and Trust Company and the Bank of Maryland, state-
chartered banks supervised by Maryland's Commissioner of Financial Regulation;
The Matewan National Bank, a Federally-chartered bank subject to regulation,
supervision and examination by the U.S. Office of the Comptroller of the
Currency (the "OCC"); and Matewan Bank, FSB, a Federally-chartered thrift
institution supervised by the Office of Thrift Supervision ("OTS"). (References
herein to the "Banks" include these acquired banks and the State-Chartered
Banks). State and Federal law also govern the activities in which the Banks
engage, the investments they make and the aggregate amount of loans that may be
granted to one borrower. Various consumer and compliance laws and regulations
also affect the Banks' operations.
The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are
affected by general economic conditions, management policies, changes in state
and Federal legislation and actions of various regulatory authorities,
including those referred to above. The following description summarizes the
significant state and Federal laws to which BB&T and the Banks are subject. To
the extent statutory or regulatory provisions or proposals are described, the
description is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
Payment of Dividends
BB&T is a legal entity separate and distinct from its banking and other
subsidiaries. The majority of BB&T's revenues are from dividends paid to BB&T
by its banking subsidiaries. BB&T's banking subsidiaries are subject to laws
and regulations that limit the amount of dividends they can pay. In addition,
both BB&T and its banking subsidiaries are subject to various regulatory
restrictions relating to the payment of dividends, including requirements to
maintain capital at or above regulatory minimums. Banking regulators have
indicated that banking organizations should generally pay dividends only if (1)
the organization's net income available to common shareholders over the past
year has been sufficient to fully fund the dividends and (2) the prospective
rate of
19
earnings retention appears consistent with the organization's capital needs,
asset quality and overall financial condition. BB&T does not expect that any
of these laws, regulations or policies will materially affect the ability of
the Banks to pay dividends. During the year ended December 31, 1999, the Banks
declared $589.3 million in dividends payable to BB&T.
Capital
The Federal Reserve Board, the Federal Deposit Insurance Corporation
("FDIC") and the Office of the Comptroller of the Currency ("OCC") have issued
substantially similar risk-based and leverage capital guidelines applicable to
banking organizations they supervise. Under the risk-based capital
requirements, BB&T and the Banks are each generally required to maintain a
minimum ratio of total capital to risk-weighted assets (including certain off-
balance sheet activities, such as standby letters of credit) of 8%. At least
half of the total capital must be composed of common equity, retained earnings
and qualifying perpetual preferred stock, less certain intangibles ("Tier 1
capital"). The remainder may consist of certain subordinated debt, certain
hybrid capital instruments, qualifying preferred stock and a limited amount of
the loan loss allowance ("Tier 2 capital" which, together with Tier 1 capital,
composes "total capital"). The ratios of Tier 1 capital and total capital to
risk-adjusted assets for BB&T and the subsidiary banks as of December 31, 1999
are shown in the following table.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations must maintain a minimum ratio of
Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject
to Federal Bank regulatory evaluation of an organization's overall safety and
soundness. The leverage ratios of BB&T and the subsidiary banks as of December
31, 1999 are reflected in the accompanying table.
Table 11
Capital Adequacy for BB&T Corporation and Principal Banking and Thrift
Subsidiaries
Regulatory BB&T- BB&T- BB&T- First
Minimums BB&T NC SC VA Liberty
---------- ---- ----- ----- ----- -------
Risk-based capital ratios:
Tier 1 capital (1) 4.0% 9.3% 9.8% 9.7% 11.3% 9.3%
Total risk-based capital (2) 8.0 13.0 11.0 11.0 12.5 10.5
Tier 1 leverage ratio (3) 3.0 6.6 6.7 7.7 7.5 6.9
- --------
(1) Shareholders' equity less nonqualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a percentage of fourth quarter average assets
less nonqualifying intangibles.
The risk-based capital standards of the Federal Reserve Board, the FDIC and
the OCC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines
also provide that an institution's exposure to a decline in the economic value
of its capital due to changes in interest rates be considered by the agency as
a factor in evaluating a banking organization's capital adequacy.
20
Deposit Insurance Assessments
The deposits of the Banks are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, a portion of the Banks' deposits (relating to the acquisitions
of various savings associations) are subject to assessments imposed by the
Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured
deposits effective January 1, 1998. The assessments imposed on all FDIC
deposits for deposit insurance have an effective rate ranging from 0 to 27
basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. Legislation was enacted in 1997
requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion
of the interest due on the obligations issued by the Financing Corporation
("FICO"). The FDIC currently assesses BIF-insured and SAIF-insured deposits an
additional 2.12 basis points per $100 of deposits to cover those obligations.
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is insolvent or is in danger of becoming
insolvent. For example, under requirements of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the insolvency of
commonly controlled insured depository institutions or for any assistance
provided by the FDIC to commonly controlled insured depository institutions in
danger of failure. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement under the cross
guarantee provisions is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and nonaffiliated holders of subordinated debt of
the commonly controlled insured depository institutions.
The Federal banking agencies also have broad powers under current Federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institution
in question is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by
the law. As of December 31, 1999, BB&T and each of the Banks were classified as
well capitalized.
State banking regulators and the OCC also have broad enforcement powers over
the Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator (with the approval of the Governor in
the case of North Carolina) in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state bank
in certain circumstances, including, among other things, when it appears that
such bank has violated its charter or any applicable laws, is conducting its
business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
21
Interstate Banking and Branching
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1998, a bank
headquartered in one state was authorized to merge with a bank headquartered in
another state, as long as neither of the states had opted out of such
interstate merger authority prior to such date. After a bank has established
branches in a state through an interstate merger transaction, the bank may
establish and acquire additional branches at any location in the state where a
bank headquartered in that state could have established or acquired branches
under applicable Federal or state law.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (the "Act") was signed into law on
November 12, 1999. The Act covers a broad range of issues, including a repeal
of most of the restrictions on affiliations among depository institutions,
securities firms and insurance companies. Most of the Act's provisions require
the federal bank regulatory agencies and other regulatory bodies to adopt
regulations to implement the Act, and for that reason an assessment of the full
impact on BB&T of the Act must await completion of that regulatory process. The
provisions of the Act that are believed to be of most significance to BB&T are
discussed below.
The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting
unrestricted affiliations between banks and securities firms. The Act also
permits bank holding companies to elect to become financial holding companies.
A financial holding company may engage in or acquire companies that engage in a
broad range of financial services, including securities activities such as
underwriting, dealing, brokerage, investment and merchant banking; and
insurance underwriting, sales and brokerage activities. In order to become a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating.
The Act provides that the states continue to have the authority to regulate
insurance activities, but prohibits the states in most instances from
preventing or significantly interfering with the ability of a bank, directly or
through an affiliate, to engage in insurance sales, solicitations or cross-
marketing activities. Although the states generally must regulate bank
insurance activities in a nondiscriminatory manner, the states may continue to
adopt and enforce rules that specifically regulate bank insurance activities in
certain areas identified in the Act. The Act directs the federal bank
regulatory agencies to adopt insurance consumer protection regulations that
apply to sales practices, solicitations, advertising and disclosures.
The Act adopts a system of functional regulation under which the Federal
Reserve Board is confirmed as the umbrella regulator for bank holding
companies, but bank holding company affiliates are to be principally regulated
by functional regulators such as the FDIC for state nonmember bank affiliates,
the Securities and Exchange Commission for securities affiliates and state
insurance regulators for insurance affiliates. The Act repeals the broad
exemption of banks from the definitions of "broker" and "dealer" for purposes
of the Securities Exchange Act of 1934, but identifies a set of specific
activities, including traditional bank trust and fiduciary activities, in which
a bank may engage without being deemed a "broker", and a set of activities in
which a bank may engage without being deemed a "dealer". The Act also makes
conforming changes in the definitions of "broker" and "dealer" for purposes of
the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
The Act contains extensive customer privacy protection provisions. Under
these provisions, a financial institution must provide to its customers, at the
inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
22
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The Act also provides that the states may adopt customer privacy
protections that are more strict than those contained in the Act. The Act also
makes a criminal offense, except in limited circumstances, obtaining or
attempting to obtain customer information of a financial nature by fraudulent
or deceptive means.
The Act also contains requirements for the posting of notices by operators of
automated teller machines regarding fees charged for the use of such machines.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of the consolidated financial condition
and results of operations of BB&T Corporation and subsidiaries ("BB&T" or the
"Corporation") for each of the three years in the period ended December 31,
1999, and related financial information are presented in conjunction with the
consolidated financial statements and related notes to assist in the evaluation
of BB&T's 1999 performance.
Stock Split
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend paid
August 3, 1998. All references to the number of common shares and all per share
amounts contained herein have been adjusted, as appropriate, to retroactively
reflect the stock split.
Reclassifications
In certain circumstances, reclassifications have been made to prior period
information to conform to the 1999 presentation.
Recently Completed Mergers and Acquisitions
On March 5, 1999, BB&T completed its merger with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction
was accounted for as a pooling of interests. BB&T issued 16.8 million shares of
common stock in exchange for all of the outstanding shares of MainStreet common
stock.
On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. To consummate the acquisition, which was accounted for as a
purchase, BB&T issued 3.6 million shares of common stock in exchange for all of
the outstanding shares of Scott & Stringfellow common stock. BB&T recorded
goodwill totaling $72.8 million in connection with this acquisition, which is
being amortized using the straight-line method over a period of 15 years.
On July 9, 1999, BB&T completed its merger with First Citizens Corporation
("First Citizens"), of Newnan, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 3.2 million shares of common stock in
exchange for all of the outstanding shares of First Citizens common stock.
On July 14, 1999, BB&T completed its merger with Mason-Dixon Bancshares, Inc.
("Mason-Dixon") of Westminster, Maryland. The transaction was accounted for as
a pooling of interests. In conjunction with the merger, BB&T issued 6.6 million
shares of common stock in exchange for all of the outstanding common stock of
Mason-Dixon.
On August 27, 1999, BB&T completed its acquisition of Matewan BancShares,
Inc. ("Matewan") of Williamson, West Virginia. To consummate the transaction,
which was accounted for as a purchase, BB&T issued 3.2 million shares of common
stock in exchange for all of the outstanding common and preferred shares of
Matewan. BB&T recorded goodwill totaling $92.8 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
24
On November 10, 1999, BB&T merged with First Liberty Financial Corp. ("First
Liberty"), based in Macon, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 12.4 million shares of common stock in
exchange for all of the outstanding stock of First Liberty.
On January 13, 2000, BB&T completed its merger with Premier Bancshares
("Premier") of Atlanta, Georgia. The transaction, which was completed through
the issuance of 16.8 million shares of BB&T common stock in exchange for all of
the outstanding common and preferred stock of Premier, was accounted for as a
pooling of interests.
Pending Mergers and Acquisitions
On November 17, 1999, BB&T announced plans to merge with Hardwick Holding
Company of Dalton, Georgia ("Hardwick"). Hardwick has $518 million in assets
and operates nine banking offices in northwest Georgia. In exchange for each
share of Hardwick common stock held, shareholders of Hardwick will receive
between .9010 and .9320 shares of BB&T common stock depending on the average
closing price of BB&T common stock over a five-day pricing period ending
shortly before the effective time of the merger. The transaction, which is
expected to be accounted for as a pooling of interests, is planned for
completion in the second quarter of 2000.
On December 15, 1999, BB&T announced plans to merge with First Banking
Company of Southeast Georgia ("First Banking Company"), which is based in
Statesboro. The transaction is expected to be accounted for as a pooling of
interests. With $419 million in assets, First Banking Company operates 12
banking offices in southeast Georgia. Shareholders of First Banking Company
will receive .74 shares of BB&T common stock in exchange for each share of
First Banking Company common stock held. The merger is expected to be completed
in the second quarter of 2000.
On February 7, 2000, BB&T announced plans to merge with One Valley Bancorp,
Inc. ("One Valley") of Charleston, West Virginia. The acquisition, which is
expected to be completed in the third quarter of 2000, will be accounted for as
a pooling of interests. One Valley, which has $6.6 billion in assets, operates
123 branches in West Virginia and Virginia. Shareholders of One Valley will
receive 1.28 shares of BB&T common stock in exchange for each share of One
Valley common stock held.
Analysis of Financial Condition
BB&T's average assets totaled $41.9 billion for the year ended December 31,
1999, an increase of $4.6 billion, or 12.4%, compared to the 1998 average of
$37.3 billion. The major balance sheet categories with increases in average
balances were: loans and leases, up $2.7 billion, or 10.6%; securities, which
increased $1.6 billion, or 16.9%; and other earning assets, which increased
$27.1 million, or 10.7%. The primary components of growth in average loans were
a $2.2 billion, or 18.4% increase in commercial loans and a $779.7 million, or
12.6%, increase in consumer loans, partially offset by a $331.3 million, or
5.0%, decrease in mortgage loans.
BB&T's average deposits totaled $27.0 billion, reflecting growth of $2.2
billion, or 8.9%, compared to 1998. The categories of deposits with the highest
growth rates were money rate savings, which increased $1.3 billion, or 20.4%,
noninterest-bearing deposits, which increased $373.0 million, or 11.0%, and
domestic time deposits, which increased $698.1 million, or 5.8%. The growth
realized in these areas was slightly offset by declines in savings and interest
checking of $217.0 million, or 9.8%.
BB&T has increasingly utilized nondeposit funding sources in recent years to
support balance sheet growth. Short-term borrowed funds include federal funds
purchased, securities sold under repurchase agreements, master notes and
Federal Home Loan Bank ("FHLB") advances. Average short-term borrowed funds
totaled $5.3 billion for the year ended December 31, 1999, an increase of
$880.7 million, or 19.9%, over the 1998 average. BB&T has also utilized long-
term debt based on the
25
flexibility and cost-effectiveness of the alternatives available. Long-term
funding sources also include FHLB advances, subordinated debt issued by the
Corporation and subordinated notes issued by the subsidiary banks. Average
long-term debt totaled $5.8 billion for 1999, up $1.2 billion, or 26.8%,
compared to 1998.
The compound annual rate of growth in average total assets for the five-year
period ended December 31, 1999, was 9.9%. Over the same five-year period,
average loans and leases increased at the compound annual rate of 10.3%,
securities increased at an 8.9% annual rate, and deposits grew at an annual
compound rate of 6.0%. All growth rates have been enhanced by acquisitions
accounted for as purchases.
Securities
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a duration of five years or less to
provide greater flexibility in balance sheet management in changing interest
rate environments. U.S. Treasury securities and U.S. government agency
obligations, excluding mortgage backed securities, comprised 42.7% of the
portfolio at December 31, 1999, and provided adequate current yields with
minimal risk, and maturities structured to address liquidity concerns.
Mortgage-backed securities, which composed 35.5% of the total investment
portfolio at year-end 1999, have higher yields and longer durations. Total
securities increased 7.6% in 1999 to a total of $10.7 billion at the end of the
year.
BB&T holds trading securities as a normal part of its operations. At December
31, 1999, BB&T had trading securities totaling $93.2 million that are reflected
on BB&T's consolidated balance sheet. Market valuation gains and losses in
BB&T's trading portfolio are reflected in current earnings.
Securities held to maturity, which are primarily composed of investments in
obligations of states and municipalities, made up less than 1% of the total
portfolio at December 31, 1999. Securities held to maturity are carried at
amortized cost and totaled $97.1 million at December 31, 1999, compared to
$360.8 million outstanding at the end of 1998. Market valuation gains and
losses in the Corporation's held-to-maturity category affect neither earnings
nor capital. The held-to-maturity portfolio had a net unrealized gain of $.9
million at December 31, 1999.
Securities available for sale totaled $10.5 billion at year-end 1999 and are
carried at estimated fair value. The available-for-sale portfolio is primarily
composed of investments in U.S. Treasuries and government agency obligations,
including mortgage-backed securities. The available-for-sale portfolio also
contains investments in obligations of states and municipalities, which
composed 5.2% of the available-for-sale portfolio, and equity and other
securities, which comprised 15.4% of the portfolio.
26
The following table presents BB&T securities portfolio by category with
maturities and average yields.
Table 12
Securities
December 31, 1999
--------------------------------
Carrying Value Average Yield (3)
-------------- -----------------
(Dollars in thousands)
U.S. Treasury, government and agency
obligations (1):
Within one year $ 963,355 6.41%
One to five years 2,741,709 6.26
Five to ten years 1,293,428 6.56
After ten years 3,347,031 6.47
----------- ----
Total 8,345,523 6.41
----------- ----
States and political subdivisions:
Within one year 32,127 8.49
One to five years 115,044 8.15
Five to ten years 218,154 7.18
After ten years 248,899 7.54
----------- ----
Total 614,224 7.57
----------- ----
Other securities:
Within one year 510 6.82
One to five years 11,678 7.34
Five to ten years 6,602 6.19
After ten years 342,191 6.54
----------- ----
Total 360,981 6.56
----------- ----
Securities with no stated maturity 1,351,659 5.84
----------- ----
Total securities (2) $10,672,387 6.41%
=========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $3.8 billion classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, a more realistic average maturity would be substantially
shorter because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $97.1 million carried at amortized
cost and securities available for sale and trading securities carried at
estimated fair values of $10.5 billion and $93.2 million, respectively.
(3) Fully tax-equivalent basis as applied to amortized cost.
The available-for-sale portfolio composed 98.2% of total securities at
December 31, 1999. Management believes that the high concentration of
securities in the available-for-sale portfolio allows greater flexibility in
the day-to-day management of the overall portfolio than the held-to-maturity
classification.
The market value of the available-for-sale portfolio at year-end 1999 was
$441.5 million less than the amortized cost of these securities. At December
31, 1999, BB&T's available-for-sale portfolio had net unrealized depreciation,
net of deferred income taxes, of $276.2 million, which is reported as a
separate component of shareholders' equity. At December 31, 1998, the
available-for-sale portfolio
27
had net unrealized appreciation of $64.6 million, net of deferred taxes. The
net unrealized losses recorded in the available-for-sale portfolio at year-end
1999 reflect higher interest rates during the year, which sharply decreased the
fair market value of fixed income investments. The unrealized losses in the
available-for-sale portfolio at the end of 1999 were considered by management
to be of a temporary nature and caused by increased market interest rates, not
by concerns about the ability of the issuers to meet their obligations.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.61% for the year ended December 31, 1999, compared to 6.76% for the prior
year. The decline in FTE yield reflects lower yields earned on all categories
of securities due to the higher market interest rates during the year. The
yield on U.S. Treasury and U.S. government agency obligations decreased from
6.74% in 1998 to 6.62% in 1999, while the yield on mortgage-backed securities
decreased from 6.68% to 6.48% and the FTE yield on state and municipal
securities decreased from 8.45% last year to 7.71% in the current year.
Loans And Leases
Loans and leases, including loans held for sale, totaled $29.2 billion at the
end of 1999, an increase of $2.6 billion, or 9.7%, compared to 1998. Average
loans and leases were $27.7 billion for the year ended December 31, 1999, an
increase of $2.7 billion, or 10.6%, over the prior year. The 1999 growth
includes the effects of a mortgage loan securitization program, which totaled
$465.3 million during 1998 and $304.8 million during 1999, and the effects of
loans acquired through the acquisitions accounted for as purchases totaling
$414.6 million in 1999 in 1999 and $1.0 billion in 1998. Excluding the impact
of these items, BB&T' "internal" growth rate in average loans for 1999 was 9.6%
compared with 1998. By category, excluding the securitizations and the purchase
acquisitions, average mortgage loans decreased 6.1% during 1999, average
commercial loans grew 17.8%, and average consumer loans increased 8.6%.
While BB&T's overall loan growth was good during 1999, the mix of the loan
portfolio changed in comparison to 1998. As a result of increases in interest
rates, mortgage lending decreased during the year. During 1999, mortgage loan
originations fell to $4.6 billion from $5.6 billion in 1998. Mortgage loans in
the loan portfolio, including loans held for sale, decreased 5.0% on average in
1999. BB&T's other loan categories, however, experienced growth at a strong
pace during the year. Average commercial loans, including leases, increased
18.4% in 1999 compared to 1998, while average consumer loans, which includes
sales finance, revolving credit and direct retail, increased 12.3% over the
same time frame.
The FTE yield on average total loans decreased from 9.08% for the year ended
December 31, 1998 to 8.85% for 1999. The average yield on mortgage loans for
1999 was 7.50%, down .14% from the yield for 1998. Over the same time frame,
the yields from commercial loans decreased .28% to 8.87% and consumer loan
yields decreased .44% to 9.95%.
Asset Quality
BB&T's asset quality was excellent at December 31, 1999. Nonperforming assets
totaled $131.7 million at year end, a decrease of $9.9 million, or 7.0%,
compared to 1998. As a percentage of total assets, nonperforming assets were
.30% at December 31, 1999, compared to .36% at the end of 1998. As a percentage
of loans plus foreclosed properties, nonperforming assets totaled .45% at
December 31, 1999, compared to .53% at the end of 1998. Loans 90 days or more
past due and still accruing interest decreased slightly to $54.2 million at
year-end 1999 compared to $54.3 million at December 31, 1998.
28
The allowance for loan and lease losses, as a percentage of loans and
leases, was 1.33% at December 31, 1999, compared to 1.36% at year-end 1998.
Net charge-offs as a percentage of average loans and leases also improved
during 1999, decreasing to .27% from .31% in 1998.
The improvements in credit quality measures during 1999 reflect a decrease
in nonaccrual loans and leases, which fell 2.5% to $103.5 million and a 15.9%
decline in assets acquired through foreclosure and repossession, to $27.1
million. BB&T also enjoyed a higher recovery rate for loan charge-offs during
1999. Recoveries of loans previously charged-off increased $4.1 million, or
16.4%, compared to 1998 recoveries.
The following table reflects relevant asset quality information for BB&T for
the past three years.
Table 13
Asset Quality
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Nonaccrual loans and leases* $103,487 $106,123 $115,674
Restructured loans 1,094 3,214 2,492
Foreclosed property 27,121 32,245 41,784
-------- -------- --------
Nonperforming assets $131,702 $141,582 $159,950
======== ======== ========
Loans 90 days or more past due and still
accruing $ 54,244 $ 54,299 $ 49,318
======== ======== ========
Asset Quality Ratios:
Nonaccrual and restructured loans and leases
as a percentage of loans and leases .36% .41% .49%
Nonperforming assets as a percentage of:
Total assets .30 .36 .44
Loans and leases plus foreclosed property .45 .53 .67
Net charge-offs as a percentage of average
loans and leases .27 .31 .39
Allowance for losses as a percentage of loans
and leases 1.33 1.36 1.32
Ratio of allowance for losses to:
Net charge-offs 5.13x 4.65x 3.58x
Nonaccrual and restructured loans and leases 3.71 3.31 2.68
- --------
NOTE: Items referring to loans and leases are net of unearned income and
include loans held for sale.
* Includes $22.6 million, $41.8 million and $47.1 million of impaired loans at
December 31, 1999, 1998 and 1997, respectively.
See Note D in the "Notes to Consolidated Financial Statements."
Allowance for Loan and Lease Losses
BB&T's allowance for loan losses totaled $388.0 million at December 31,
1999, compared to $361.9 million at the end of 1998, or an increase of 7.2%.
As a percentage of loans and leases, the allowance decreased from 1.36% at
December 31, 1998, to 1.33% at the end of 1999 as a result of improving asset
quality measures, both in terms of loans charged off and nonperforming assets.
The ratio of the allowance to net charge-offs increased from 4.65 times for
1998 to 5.13 times during 1999 because of lower net charge-offs in the current
year.
29
The changes in the elements and components of the loan loss allowance related
to commercial loans are summarized as follows:
Commercial Loans--General Reserves--The general reserve percentages disclosed
in Table 5 did not change from 1998 to 1999. The general reserve applied to
commercial loans increased from $138.1 million at December 31, 1998, to $168.1
million at December 31, 1999, primarily because of the 18.5% growth in end of
period commercial loans and leases. The percentage of commercial loans in the
higher risk grades (grades 5-9) also did not change from 1998 to 1999,
indicating a very stable level of asset quality and risk associated with the
commercial loan portfolio.
Commercial Loans--Specific Reserves--Specific reserves applied to commercial
loans increased from $10.8 million at December 31, 1998, to $14.3 million at
December 31, 1999. This increase is due to the aforementioned 18.5% increase in
commercial loans and a 14.1% increase in commercial loans with specific
reserves. The percentage of specific reserves to total reserves on commercial
loans increased from 7.2% to 7.8% at December 31, 1998 and 1999, respectively.
The reserves established to cover losses inherent in the noncommercial
categories of the loan portfolio are derived based on a weighted average of
actual loan losses over the last three years. Thus, these rates change each
year based on trends in actual losses. To calculate the reserve rate, a weight
of 50% is given to the most current year's loan loss percentage. A weight of
30% is applied to the loan loss ratio from two years ago, and the remaining 20%
weight is applied to the loan loss percentage from three years ago.
Mortgage Loans--The weighted average rate applied to the mortgage loan
portfolio at December 31, 1999, was .035%, down slightly from the 1998 reserve
rate of .042%. The resulting allowance decreased from $2.5 million at December
31, 1998, to $1.8 million at December 31, 1999.
Direct Retail--The weighted average rate applied to direct retail loans at
December 31, 1999, was .205%, compared to .271% at December 31, 1998. The
resulting allowance decreased from $11.0 million to $9.9 million from December
31, 1998, to December 31, 1999.
Sales Finance--The weighted average rate applied to sales finance loans at
December 31, 1999, was .85%, compared to .927% at December 31, 1998. The
resulting allowance increased from $12.5 million to $14.8 million from December
31, 1998, to December 31, 1999, because of an 18.6% increase in sales finance
loans outstanding.
Revolving Credit--The weighted average rate applied to revolving credit loans
at December 31, 1999, was 3.193%, compared to 3.5% at December 31, 1998. The
resulting allowance increased from $16.8 million to $18.3 million from December
31, 1998, to December 31, 1999, because of a 9.2% increase in revolving credit
loans outstanding.
Bankcard--BB&T's allowance for bankcards at December 31, 1999, totaled $1.9
million, which reflects a reserve rate of 3.9944% of the outstanding balance of
bankcard loans. At December 31, 1998, the reserve associated with bankcard
loans was $1.8 million, calculated based on a rate of 3.9955%.
Subsidiaries--Other subsidiaries are considered separately for purposes of
calculating the allowance for loan losses. These subsidiaries include BB&T's
sub-prime lending subsidiaries, and subsidiaries that have been merged with
BB&T, but whose accounting systems have not been converted to BB&T's systems.
The sub-prime lending subsidiaries are considered separately because their
operations, loan loss experience and credit management procedures are
substantially different than the general loan portfolio. Merged-but-unconverted
subsidiaries are considered separately because the related loans have not yet
been subjected to BB&T's credit monitoring policies and
30
procedures, nor have they been assigned an appropriate BB&T risk grade.
Management considers historical loan loss experience in determining reserves
for all of these subsidiaries. For merged-but-unconverted subsidiaries,
evidence gathered during due diligence is also considered in calculating the
reserve. At December 31, 1999 and 1998, these subsidiaries had $2.9 billion and
$2.6 billion in total loans outstanding, respectively, and related reserves
totaling $54.8 million and $48.9 million, respectively.
Unallocated--The unallocated allowance totaled $102.4 million at December 31,
1999, down from $119.2 million, or 14.1%, from the unallocated balance at
December 31, 1998. This decrease resulted because the entire allowance from the
subsidiary banks acquired during 1999 was allocated to the appropriate loan
categories. In prior years, the unallocated balances determined by the acquired
banking subsidiaries were combined with BB&T's unallocated calculations, since
these subsidiaries were accounted for as poolings of interests. Excluding these
restatements associated with the acquired banks, the unallocated allowance was
flat, up less than 1%.
Management does not believe that the level of risk inherent in the categories
of the portfolio at year-end 1999 changed substantially compared to year-end
1998. Because of this, there were no changes in the estimation methods or
fundamental assumptions used in the calculations. The higher outstanding
balance of commercial loans and lower balance of mortgage loans at December 31,
1999, compared to year-end 1998, resulted in the fluctuations in specific and
general reserves applicable to those loan types. There were no reallocations of
the allowance from 1998, nor were there any significant changes in asset
quality trends other than the overall improvements noted above.
Deposits and Other Borrowings
Client deposits generated through the BB&T branch network are the largest
source of funds used to support loan and other asset growth. Core deposits
compose BB&T's primary source of funding as depositors have sought greater
returns on their funds for investment, growth rates of core deposits have not
kept pace with asset growth and nondeposit sources have increasingly been used
to fund balance sheet growth.
Total deposits at December 31, 1999, were $27.3 billion, an increase of
$801.5 million, or 3.0%, compared to year-end 1998. The increase in deposits
was driven by an 11.7% increase in money rate savings accounts, a 2.0% increase
in certificates of deposit and a 3.6% increase in noninterest-bearing deposits.
For the year ended December 31, 1999, average total deposits were $27.0
billion, an increase of $2.2 billion, or 8.9%, compared to 1998. This increase
was led by an 11.0% increase in average noninterest-bearing deposits and a
20.4% increase in money rate savings accounts. These increases were offset
somewhat by a 9.8% decrease in average savings and interest checking accounts.
Other time deposits, including individual retirement accounts and certificates
of deposit, increased 5.8% on average in 1999 and remain BB&T's largest
category of average deposits, comprising 47.6% of total deposits. Average
foreign deposits totaled $954.4 million for 1999, an increase of $82.3 million,
or 9.4%, from the prior year average balance.
The average rates paid on interest-bearing deposits decreased during 1999 to
4.14% from 4.40% in 1998. The decrease resulted from lower average rates paid
on all major categories of interest-bearing deposits. The average cost of
certificates of deposit and other time deposits decreased from 5.47% in 1998 to
5.15% in the current year; the cost of interest checking decreased from 1.84%
to 1.51%; savings deposits decreased from 2.08% to 1.75% and money rate savings
accounts decreased from 3.03% in 1999 to 2.92% in 1999.
BB&T continued to focus on restructuring the mix of deposits toward more
cost-effective transaction and savings deposits during 1999. BB&T has acquired
a significant number of thrift institutions over the past several years, which
has resulted in a higher percentage of deposits comprised of certificates of
deposit than many of BB&T's peers. The continued restructuring of the mix of
deposits has reduced that concentration and also reduced the overall cost of
deposits.
31
BB&T also uses various types of short-term borrowed funds to supplement
deposits to fulfill funding needs. The types of short-term borrowings utilized
by the Corporation include Federal funds purchased, which composed 5.6% of
total short-term borrowed funds and securities sold under repurchase
agreements, which comprised 25.9% of short-term borrowed funds at year-end
1999. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank
notes and short-term Federal Home Loan Bank ("FHLB") advances are also utilized
to meet short-term funding needs. Average short-term borrowed funds totaled
$5.3 billion during 1999, an increase of $880.7 million, or 19.9%, during 1999,
while short-term borrowed funds at year-end 1999 were $6.9 billion, an increase
of $3.0 billion, or 76.9%, compared to year-end 1998. This significant increase
in end of period short-term borrowed funds reflects the issuance of $1.6
billion in short-term bank notes during 1999. Management also uses foreign
deposits and, to a lesser degree, brokered certificates of deposit as sources
of funds. The rates paid on average short-term borrowed funds decreased from
5.23% in 1998 to 4.86% during 1999.
BB&T also employs long-term debt to provide funding and, to a lesser extent,
provide Tier 2 capital. Total outstanding long-term debt at December 31, 1999
totaled $5.5 billion, an increase of $78.9 million, or 1.5%, from year-end
1998. For the year ended December 31, 1999, average long-term debt increased
$1.2 billion, or 26.8%, compared to the average for 1998. BB&T's long-term debt
consists primarily of FHLB advances, which composed 64.9% of total outstanding
long-term debt at December 31, 1999, and medium-term bank notes, which composed
17.7% of the year-end balance. FHLB advances are cost-effective long-term
funding sources that provide BB&T the flexibility to structure the debt in a
manner that aids in the management of interest rate risk and liquidity. In an
effort to diversify long-term funding sources and to take advantage of
favorable interest rates, BB&T issued $350 million of subordinated corporate
debt in June 1998 that is puttable to BB&T in 2005. The proceeds of the
corporate debt issuance were primarily used to repurchase shares of BB&T's
common stock subsequently reissued in connection with business combinations.
The average rate paid on long-term debt decreased from 5.77% during 1998 to
5.46% during 1999.
Liquidity needs are a primary consideration in evaluating funding sources.
BB&T's strategy is to maintain funding flexibility, in order for the
Corporation to react rapidly to opportunities that may become available in the
marketplace. BB&T will continue to focus on traditional core funding
strategies, including targeting growth in noninterest-bearing deposits and
money rate savings accounts. Also, if rates and terms are deemed attractive,
additional long-term funding may be pursued.
Analysis of Results of Operations
Consolidated net income for 1999 totaled $612.8 million, which generated
basic earnings per share of $1.86 and diluted earnings per share of $1.83. Net
income for 1998 was $543.2 million and net income for 1997 totaled $408.4
million. Basic earnings per share were $1.67 in 1998 and $1.26 in 1997, while
diluted earnings per share were $1.63 and $1.24, respectively.
BB&T incurred significant expenses related principally to the consummation of
mergers and acquisitions during 1999, 1998 and 1997, which are reflected in
reported earnings. During 1999, BB&T recorded $46.2 million in after-tax
nonrecurring charges primarily associated with the mergers of MainStreet,
Mason-Dixon, First Citizens and First Liberty. These charges were associated
with the consolidation of branch offices and bank operating functions, merger-
related personnel costs and other expenses. Excluding the effects of these
items, BB&T's net income for 1999 would have been $659.1 million, or $1.97 per
diluted share.
In 1998, BB&T incurred $17.9 million in net after-tax charges primarily
incurred in conjunction with mergers and acquisitions. These expenses included
personnel-related expenses, such as staff
32
relocation, early retirement packages and contract settlements; occupancy,
furniture and equipment expenses including branch consolidation; and other
costs, such as operational charge-offs, professional fees, etc. Excluding the
effects of these charges, BB&T's net income for 1998 would have totaled $561.1
million, or $1.69 per diluted share.
During 1997, BB&T incurred $68.1 million in after-tax costs associated with
mergers and acquisitions, primarily the merger with United Carolina Bancshares
Corporation ("UCB"). These costs were similar in type to those outlined in the
preceding paragraph, however, the expenses were offset by a $47.8 million gain
from the divestiture of 23 branch locations, including $505.8 million in
deposits and $232.3 million in loans, in order to comply with anti-trust
regulations. Excluding the net impact of these items, BB&T's net income for
1997 would have been $473.7 million, or $1.43 per diluted share.
Excluding the effect of the above nonrecurring items from the three years
presented, BB&T's net income for 1999 increased $97.9 million, or 17.5%,
compared to 1998, while diluted earnings per share increased $.28, or 16.6%.
Net income for 1998, excluding nonrecurring items, increased $87.4 million, or
18.5%, while diluted earnings per share increased $.26, or 18.2%, compared to
1997.
Two important and commonly used measures of profitability are return on
assets (net income as a percentage of average total assets) and return on
equity (net income as a percentage of average common shareholders' equity). The
returns on average assets produced by BB&T's earnings, excluding the
nonrecurring charges discussed above, were 1.57% for 1999, 1.51% for 1998 and
1.43% for 1997. BB&T's returns on average equity, excluding the nonrecurring
charges, were 20.60%, 19.11% and 17.80%, for the years ended December 31, 1999,
1998 and 1997, respectively.
Net Interest Income
Net interest income is BB&T's primary source of revenue. Net interest income
is influenced by a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned on
earning assets and the interest rates paid to obtain funding to support the
assets. The difference between rates earned on interest-earning assets (with an
adjustment made to tax-exempt income to provide comparability with taxable
income, i.e. the "FTE" adjustment) and the cost of the supporting funds is
measured by the net interest margin. The accompanying table presents the dollar
amount of changes in interest income and interest expense and distinguishes
between the changes related to average outstanding balances of interest-earning
assets and interest-bearing liabilities (volume) and the changes related to
average interest rates on such assets and liabilities (rate). Changes
attributable to both volume and rate have been allocated proportionately.
33
Table 14
FTE Net Interest Income and Rate / Volume Analysis
For the Years Ended December 31, 1999, 1998 and 1997
Average Balances Yield/Rate Income/Expense
----------------------------------- ---------------- --------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
(Dollars in thousands)
Assets
Securities (1):
U.S. Treasury,
government and
other (5) $10,505,953 $ 9,167,307 $ 8,308,770 6.55% 6.70% 6.72% $ 688,262 $ 614,522 $ 558,360
States and
political
subdivisions 600,240 330,713 313,320 7.71 8.45 8.29 46,282 27,934 25,981
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total
securities (5) 11,106,193 9,498,020 8,622,090 6.61 6.76 6.78 734,544 642,456 584,341
Other earning
assets (2) 281,773 254,629 148,956 4.51 5.56 6.66 12,700 14,162 9,917
Loans and
leases, net of
unearned
income (1)(3)(4)(5) 27,729,172 25,065,207 22,438,508 8.85 9.08 9.19 2,455,237 2,276,310 2,063,114
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total earning
assets 39,117,138 34,817,856 31,209,554 8.19 8.42 8.51 3,202,481 2,932,928 2,657,372
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Non-earning
assets 2,790,806 2,452,898 1,979,315
----------- ----------- -----------
Total assets $41,907,944 $37,270,754 $33,188,869
=========== =========== ===========
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking $ 1,991,050 $ 2,208,008 $ 2,690,514 1.66 1.99 1.91 33,075 44,047 51,462
Money rate
savings 7,452,072 6,187,274 5,102,950 2.92 3.03 3.19 217,612 187,503 162,675
Other time
deposits 13,790,625 13,010,224 12,616,259 5.15 5.47 5.50 710,272 711,200 694,417
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total interest-
bearing
deposits 23,233,747 21,405,506 20,409,723 4.14 4.40 4.45 960,959 942,750 908,554
Short-term
borrowed funds 5,311,658 4,430,989 3,430,232 4.86 5.23 5.28 258,169 231,659 181,140
Long-term debt 5,768,516 4,549,118 3,201,818 5.46 5.77 5.93 314,937 262,564 189,950
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total interest-
bearing
liabilities 34,313,921 30,385,613 27,041,773 4.47 4.73 4.73 1,534,065 1,436,973 1,279,644
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Noninterest-
bearing deposits 3,754,025 3,381,007 3,058,444
Other
liabilities 641,003 567,945 427,261
Shareholders'
equity 3,198,995 2,936,189 2,661,391
----------- ----------- -----------
Total
liabilities and
shareholders'
equity $41,907,944 $37,270,754 $33,188,869
=========== =========== ===========
Average interest
rate spread 3.72 3.69 3.78
Net yield on
earning assets 4.27% 4.30% 4.41% $1,668,416 $1,495,955 $1,377,728
==== ==== ==== ========== ========== ==========
Taxable
equivalent
adjustment $ 86,701 $ 69,302 $ 57,195
========== ========== ==========
1999 v. 1998 1998 v. 1997
------------------------------ ------------------------------
Change due to Change due to
Increase ------------------- Increase -------------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- --------- --------- ---------- --------- ---------
Assets
Securities (1):
U.S. Treasury,
government and
other (5) $ 73,740 $(14,231) $ 87,971 $ 56,162 $ (1,393) $ 57,555
States and
political
subdivisions 18,348 (2,626) 20,974 1,953 491 1,462
---------- --------- --------- ---------- --------- ---------
Total
securities (5) 92,088 (16,857) 108,945 58,115 (902) 59,017
Other earning
assets (2) (1,462) (2,869) 1,407 4,245 (1,850) 6,095
Loans and
leases, net of
unearned
income (1)(3)(4)(5) 178,927 (58,103) 237,030 213,196 (25,631) 238,827
---------- --------- --------- ---------- --------- ---------
Total earning
assets 269,553 (77,829) 347,382 275,556 (28,383) 303,939
---------- --------- --------- ---------- --------- ---------
Non-earning
assets
Total assets
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking (10,972) (6,912) (4,060) (7,415) 2,134 (9,549)
Money rate
savings 30,109 (7,036) 37,145 24,828 (8,354) 33,182
Other time
deposits (928) (42,332) 41,404 16,783 (4,780) 21,563
---------- --------- --------- ---------- --------- ---------
Total interest-
bearing
deposits 18,209 (56,280) 74,489 34,196 (11,000) 45,196
Short-term
borrowed funds 26,510 (17,141) 43,651 50,519 (1,819) 52,338
Long-term debt 52,373 (14,840) 67,213 72,614 (5,280) 77,894
---------- --------- --------- ---------- --------- ---------
Total interest-
bearing
liabilities 97,092 (88,261) 185,353 157,329 (18,099) 175,428
---------- --------- --------- ---------- --------- ---------
Noninterest-
bearing deposits
Other
liabilities
Shareholders'
equity
Total
liabilities and
shareholders'
equity
Average interest
rate spread
Net yield on
earning assets $172,461 $ 10,432 $162,029 $118,227 $(10,284) $128,511
========== ========= ========= ========== ========= =========
Taxable
equivalent
adjustment
- ----
(1) Yields related to securities, loans and leases exempt from both Federal
and state income taxes, Federal income taxes only or state income taxes
only are stated on a taxable equivalent basis assuming tax rates in
effect for the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost and trading securities at estimated fair value.
34
For 1999, net interest income on an FTE adjusted basis totaled $1.7 billion,
compared with $1.5 billion in 1998 and $1.4 billion in 1997. The increase in
net interest income during 1999 resulted from increased interest income from
loans, up $178.9 million and from investment securities, up $92.1 million.
During the same period, higher volumes of funding sources, partially offset by
lower interest rates, resulted in an increase of $97.1 million in total
interest expense.
The FTE-adjusted net interest margin is the primary measure used in
evaluating the effectiveness of the management of earning assets and the
liabilities funding those assets. The FTE adjusted net interest margin was
4.27% in 1999, 4.30% in 1998 and 4.41% in 1997. The 3 basis point decrease in
margin during 1999 resulted from two principal factors. First, BB&T has had a
very active common stock repurchase program in recent years. For acquisitions
accounted for under the purchase method of accounting, it is BB&T's policy to
acquire the shares of its common stock that will be issued to consummate those
transactions, as allowed under generally accepted accounting standards. The
cost of funds related to share repurchases accounted for substantially all of
the decline in 1999 margin.
Provision for Loan and Lease Losses
A provision for loan and lease losses is charged against earnings in order to
maintain the allowance for loan and lease losses at a level that reflects
management's evaluation of the risk inherent in the portfolio as discussed
above. The amount of the provision is based on continuing assessments of
nonperforming and "watch list" loans, analytical reviews of loan loss
experience in relation to outstanding loans, and management's judgment with
respect to current and expected economic conditions and their impact on the
existing loan portfolio. The provision for loan and lease losses recorded by
BB&T in 1999 was $92.1 million, compared with $101.8 million in 1998 and $110.9
million in 1997.
The decrease in the current year provision for loan and lease losses resulted
from improved asset quality, as discussed in the "Asset Quality" section, and
lower net charge-offs during the year. Net charge-offs were .27% of average
loans and leases for 1999 compared to .31% during 1998. The allowance for loan
and lease losses was 1.33% of loans and leases outstanding and was at 3.71
times total nonaccrual and restructured loans and leases at year-end 1999,
compared to 1.36% and 3.31 times, respectively, during 1998.
Noninterest Income
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking income, investment banking and brokerage fees,
insurance commissions, gains and losses on securities transactions and other
commissions and fees derived from bank-related activities.
Noninterest income for 1999 totaled $761.4 million, compared with $579.7
million in 1998 and $503.1 million in 1997. The 1999 noninterest income
reflects an increase of $181.7 million, or 31.3%, compared to 1998. Excluding a
$47.5 million nonrecurring gain from the divestiture of branch locations
(including related loans and deposits) from 1997 results, noninterest income
for 1998 increased $124.1 million, or 27.2%, compared to the previous year. The
increases in noninterest income for both 1999 and 1998 resulted from growth in
all major categories of noninterest revenues, as explained in the following
paragraphs.
Service charges on deposit accounts represent BB&T's largest single source of
noninterest revenue. Such revenues totaled $206.6 million in 1999, an increase
of $21.1 million, or 11.4%, compared to 1998. Service charges during 1998
totaled $185.6 million, which represented a 12.1% increase compared with 1997.
The primary factors contributing to these increases were changes in
35
the fee structure for deposit-related services and higher fees earned from
commercial account analysis and overdrafts, as well as personal account service
charges.
Mortgage banking income (which includes revenues from originating, marketing
and servicing mortgage loans) totaled $130.1 million in 1999, $92.4 million in
1998 and $61.4 million in 1997. In 1999, mortgage banking income increased
$37.7 million, or 40.8%, compared to 1998. The primary components of the 1999
increase were servicing fees, which increased $6.7 million, and the recapture
of valuation allowances established in prior years related to capitalized
mortgage servicing rights. In 1999, $18.2 million in valuation allowances were
recaptured, which, when compared with the $15 million provision recorded in
1998, resulted in a $33.2 million increase in revenue reported for 1999. The
recapture of valuation allowances resulted from rising mortgage rates in the
last half of 1999, which slowed prepayment speeds on mortgage loans and
increased the value of the servicing portfolio. This rising interest rate
environment, while beneficial to the value of servicing rights, resulted in a
slowing of mortgage loan originations in the last half of 1999, which resulted
in a decline in origination fees and marketing gains compared to 1998. The
increase in 1998 mortgage banking income compared to 1997 was the result of
increases in servicing revenue, origination fees and marketing gains, partially
offset by an increase in the valuation allowance related to capitalized
mortgage servicing rights.
BB&T has an extensive insurance agency network, which, according to a report
published in the July 19, 1999, issue of Business Insurer Magazine, ranks as
the 12th largest in the nation based on revenues. Commission income from the
agency network totaled $78.9 million in 1999, an increase of $26.8 million, or
51.3%, compared to $52.2 million earned in 1998 and $40.1 million in 1997.
During 1999, BB&T continued to acquire quality insurance agencies in current
markets. These acquisitions, accounted for as purchases, resulted in an
increase of $21.0 million in agency insurance commissions during 1999. In
addition to acquisition activity, commissions have increased through the
expansion of the product line to include group health coverage, title insurance
and surety bonds, as well as internal growth in the existing agency network and
products.
Revenue from corporate and personal trust services totaled $55.4 million in
1999, $42.6 million in 1998 and $36.8 million in 1997. The 1999 revenue
reflects an increase of $12.8 million, or 30.1% over 1998, which was $5.8
million, or 15.6%, more than 1997. Managed assets totaled $10.3 billion at the
end of 1999 compared to $9.6 billion at December 31, 1998. The revenue
increases in 1999 and 1998 are primarily the result of internal growth, driven
by increased general trust services income and higher revenues from estate
management and higher mutual fund fees. In addition, the purchase of W.E.
Stanley in June 1998, resulted in $4.8 million of the increase in 1998 revenues
compared to 1997. BB&T manages its own family of mutual funds, which are
marketed through its broker / dealer subsidiaries.
Investment banking and brokerage fees and commissions totaled $127.3 million
in 1999, $44.3 million in 1998 and $27.2 million in 1997. This income category
increased $83.0 million, or 187.3%, in 1999 and $17.1 million, or 63.1%, in
1998. The large increase in 1999 revenue was primarily the result of the
acquisition of Scott & Stringfellow Financial, Inc., on March 26, 1999. The
Scott & Stringfellow acquisition was accounted for as a purchase; therefore,
its operating results were only included in BB&T's accounts in periods
following the acquisition. The increase in 1998 revenue compared to 1997 was
the result of internal growth from BB&T Investment Services and, also, the
full-year effect of revenues from Craigie, Incorporated, which was acquired on
October 1, 1997, and accounted for as a purchase.
Other nondeposit fees and commissions including bankcard fees and merchant
discounts, totaled $102.0 million in 1999, an increase of $14.4 million, or
16.5%, compared with $87.6 million earned in 1998, which represented an
increase of $17.9 million, or 25.8%, over the $69.6 million in 1997 revenue.
Major sources of nondeposit fees and commissions generating the increase in
1999 revenue include merchant discount and other bankcard fees, which
36
increased $7.1 million, or 23.3%, and ATM and Point Of Sale fees, which
increased $3.5 million, or 15.8%. The increase in ATM and Point Of Sale fees
was due primarily to a significant increase in the number of ATMs in service.
At December 31, 1999, BB&T had 952 ATMs compared to 770 at the end of 1998.
BB&T's international banking unit also enjoyed a strong year, with revenues up
$1.2 million, or 23.7%, compared to 1998. The increase in this category of
revenue in 1998 compared to 1997 was primarily the result of higher bankcard
fees and merchant discount and increased ATM and Point of Sale fees.
The ability to generate significant amounts of noninterest revenues in the
future will be very important to the ultimate success of BB&T. Through its
subsidiaries, BB&T will continue to focus on mortgage banking, trust,
insurance, investment and brokerage services, as well as other fee-producing
products and services. BB&T plans to continue to pursue acquisitions of
additional insurance agencies and explore strategic acquisitions of other
nonbank entities as a means of continuing to expand fee-based revenues. Also,
among BB&T's principal strategies following the acquisition of a financial
institution is the cross-sell of noninterest-income generating products and
services to the acquired institution's client base. BB&T will continue to focus
on this strategy in the future.
The following table provides additional information on BB&T's noninterest
income:
Table 15
Noninterest Income
% Change
-------------
Years Ended December 31, 1999 1998
--------------------------- v. v.
1999 1998 1997 1998 1997
-------- -------- -------- ------ -----
(Dollars in thousands)
Service charges on deposits $206,649 $185,571 $165,489 11.4% 12.1%
Mortgage banking income 130,084 92,387 61,415 40.8 50.4
Trust income 55,416 42,603 36,849 30.1 15.6
Agency insurance commissions 78,945 52,186 40,149 51.3 30.0
Other insurance commissions 11,806 11,284 14,069 4.6 (19.8)
Securities (losses) gains, net (5,131) 8,822 4,833 (158.2) 82.5
Bankcard fees and merchant
discounts 37,707 30,579 24,104 23.3 26.9
Investment banking and brokerage
fees and commissions 127,336 44,326 27,180 187.3 63.1
Other bank service fees and
commissions 58,175 52,433 41,839 11.0 25.3
International income 6,120 4,563 3,685 34.1 23.8
Amortization of negative goodwill 6,243 6,243 6,180 -- 1.0
Other noninterest income 48,006 48,673 77,299 (1.4) (37.0)
-------- -------- -------- ------ -----
Total noninterest income $761,356 $579,670 $503,091 31.3% 15.2%
======== ======== ======== ====== =====
Noninterest Expense
Noninterest expense totaled $1.3 billion in 1999 and $1.1 billion in both
1998 and 1997, respectively. Certain material, nonrecurring items stemming from
mergers and acquisitions were recorded as noninterest expenses during 1999,
1998 and 1997. In 1999, $59.3 million in pretax merger-related charges were
recorded as charges to noninterest expenses, while 1998 included $19.9 million
in these types of costs and $136.0 million in nonrecurring charges were
recognized in 1997. Excluding the impact of these nonrecurring charges from all
years, noninterest expense increased $198.3 million, or 18.2%, from 1998 to
1999 and $132.3 million, or 13.8%, from 1997 to 1998. These growth rates
include the effects of acquisitions accounted for as purchases, including Scott
& Stringfellow, Matewan and the insurance agencies, during both 1999 and 1998.
Excluding the growth in expenses
37
from these purchase transactions, BB&T's noninterest expense would have
increased 5.4% from 1998 to 1999, and would have decreased 3.3% from 1997 to
1998, reflecting efficiencies from mergers and effective expense control.
The control of noninterest expenses is a management priority. The primary
measure of the effectiveness of noninterest expense control is the efficiency
ratio, which is calculated by dividing total noninterest expenses by tax
equivalent net interest income plus noninterest income. The efficiency ratio
measures the percentage of revenues that are absorbed by costs of production.
For 1999, BB&T's efficiency ratio, excluding nonrecurring items, was 52.7%.
Comparable ratios for 1998 and 1997 were 52.6% and 52.1%, respectively. The
relatively flat trend in efficiency ratios during recent years is a positive
reflection on expense control because, during this time period, BB&T has
substantially increased its noninterest revenue-producing lines of business,
which typically have substantially higher efficiency ratios than traditional
banking operations. Additionally, acquisitions of traditional financial
institutions generally cause the efficiency ratio to increase until merger
synergies are realized, which typically does not fully occur in the first year
of the combination.
Total personnel expense, the largest component of noninterest expense,
totaled $684.9 million in 1999, $562.9 million in 1998 and $534.7 million in
1997. Total personnel expense includes salaries and wages, as well as pension
and other employee benefits costs. Personnel expenses for 1999, 1998 and 1997
include nonrecurring merger-related costs in the form of severance pay,
contract termination payments, costs of funding early retirement packages and
other related benefits. Total personnel expense, excluding nonrecurring
charges, increased $119.1 million, or 21.5% in 1999. A significant portion of
this increase is the result of acquisitions accounted for as purchases in both
1999 and 1998. Excluding the effect of these transactions, personnel expense
increased $29.2 million, or 5.3%, which reflects normal annual adjustments to
compensation and increased incentive-related compensation.
Net occupancy and equipment expense totaled $206.2 million in 1999, $173.3
million in 1998 and $179.5 million in 1997. These amounts include nonrecurring
charges of $6.0 million in 1999, $1.1 million in 1998 and $24.5 million in 1997
related to branch closings and consolidations of backroom operations and
information systems associated with mergers. Excluding nonrecurring charges,
net occupancy and equipment expense for 1999 increased $28.1 million, or 16.3%
compared to 1998, which was an increase of $17.1 million, or 11.0% over 1997.
Excluding the impact of purchase accounting transactions, net occupancy and
equipment expense in 1999 increased $15.3 million, or 8.8%, compared to 1998.
Increased expenses associated with telecommunications and information
technology initiatives were primarily responsible for the remainder of the
increases in this cost category incurred during the past two years.
Amortization expense associated with intangible assets, primarily goodwill,
and the amortization of mortgage servicing rights, totaled $73.5 million in
1999, $54.7 million in 1998 and $27.2 million in 1997. The significant current
year increase reflects substantially higher levels of goodwill resulting from
purchase accounting transactions completed during 1999 and 1998. At December
31, 1999, BB&T's unamortized goodwill totaled $597.1 million, up $184.7
million, or 44.8%, compared to 1998. This increase resulted from the 1999
purchases of Scott & Stringfellow Financial, Inc., Matewan BancShares, Inc and
twelve insurance agencies. Mortgage servicing rights also increased during
1999, up a substantial $70.4 million, or 61.1%. The increase during 1998
compared to 1997 resulted from higher goodwill, which resulted from the
purchases of Maryland Federal, W.E. Stanley and Dealers' Credit, as well as a
52.7% increase in mortgage servicing rights.
Other noninterest expense totaled $382.3 million for 1999, $318.4 million in
1998 and $351.7 million in 1997. These amounts include nonrecurring charges
principally related to mergers and acquisitions totaling $41.3 million in 1999,
$9.6 million in 1998 and $72.5 million in 1997. The nonrecurring items include
losses on disposals of fixed assets, operational charge-offs, branch and
departmental supplies, donations, legal fees, accounting fees, printing costs,
regulatory filing fees and
38
other professional services. Excluding these costs, other noninterest expense
increased $33.1 million, or 10.7% from 1998 to 1999. The increases for both
1999 and 1998 were driven by higher advertising and marketing expenses,
increases in professional fees, growth in expenses resulting from purchase
accounting transactions and costs associated with upgrading BB&T's systems to
make them Year 2000 compliant.
The following table presents a breakdown of BB&T's noninterest expenses for
the past three years:
Table 16
Noninterest Expense
% Change
---------------
Years Ended December 31,
-------------------------------- 1999 v. 1998 v.
1999 1998 1997 1998 1997
---------- ---------- ---------- ------- -------
(Dollars in thousands)
Salaries and wages $ 563,767 $ 461,908 $ 424,181 22.1% 8.9%
Pension and other employee
benefits 121,123 100,953 110,506 20.0 (8.6)
Net occupancy expense on bank
premises 85,941 69,238 87,163 24.1 (20.6)
Furniture and equipment
expense 120,256 104,045 92,316 15.6 12.7
Federal deposit insurance
premiums 9,070 5,329 6,237 70.2 (14.6)
Foreclosed property expense 3,864 2,264 3,518 70.7 (35.6)
Amortization of intangibles
and mortgage servicing
rights 73,468 54,673 27,245 34.4 100.7
Software 16,487 11,560 15,494 42.6 (25.4)
Telephone 27,273 23,324 20,745 16.9 12.4
Donations 7,918 6,581 7,206 20.3 (8.7)
Advertising and public
relations 22,648 28,992 29,477 (21.9) (1.6)
Travel and transportation 14,645 11,054 9,425 32.5 17.3
Professional services 59,411 53,052 52,298 12.0 1.4
Supplies 19,534 18,593 17,732 5.1 4.9
Loan and lease expense 31,063 26,565 42,805 16.9 (37.9)
Deposit related expense 15,635 15,220 16,936 2.7 (10.1)
Other noninterest expenses 154,801 115,816 129,784 33.7 (10.8)
---------- ---------- ---------- ----- -----
Total noninterest expense $1,346,904 $1,109,167 $1,093,068 21.4% 1.5%
========== ========== ========== ===== =====
Provision for Income Taxes
BB&T's provision for income taxes totaled $291.2 million for 1999, an
increase of $39.1 million, or 15.5%, compared to 1998. The provision for income
taxes totaled $252.1 million in 1998 and $211.3 million in 1997. Excluding the
income tax effect related to the nonrecurring items discussed previously,
BB&T's tax provision would have been $314.0 million in 1999, $259.0 million in
1998 and $239.8 million in 1997. Excluding the effect of the nonrecurring items
on pretax income and the income tax provision, BB&T's effective tax rates for
the years ended December 31, 1999, 1998 and 1997 were 32.3%, 31.6% and 33.5%,
respectively.
Year 2000 Project
Based on the results of extensive testing following January 1, 2000, BB&T was
very successful in its three-year effort to prepare its systems for the Year
2000 date change. BB&T has undergone several system-wide tests following year
end, and management has noted no significant problems for any of BB&T's
systems, including the branch network, nonbank subsidiaries, and back room
39
operations. All of BB&T's systems, including the ATM network, were operating
normally through the date change.
BB&T began planning its Year 2000 strategy in 1996. Management determined
that it would be required to modify or replace significant portions of BB&T's
information technology platform and other systems in order for them to be Year
2000 ready.
BB&T's Year 2000 strategy was divided into five major phases: inventory,
assessment, remediation, testing and clean management ("Year 2000 Project").
During the inventory and assessment phases, BB&T identified all specific
systems that required modification or replacement and assessed the steps
necessary to remediate the Year 2000 Issue. In the remediation phase, the
systems requiring remediation were replaced, modified or retired, as
appropriate. The testing phase included internal and external testing with
third parties to ensure that the remediated systems would accurately process
dates and date data before, on and after January 1, 2000. Finally, the clean
management phase included placing the remediated systems back into production
and the implementation of processes and procedures to monitor continued Year
2000 readiness and to protect remediated systems from alterations that might
affect Year 2000 readiness. As BB&T completed testing for its systems during
1999, the clean management phase was implemented. Clean management will be an
ongoing process that will continue into the Year 2000.
Current Status of Year 2000 Project
BB&T has completed all phases of the Year 2000 Project, including substantial
post date change testing. BB&T continues to be in contact with third parties
(as described below) to ensure that none have identified any Year 2000-related
problems. The clean management phase will continue as a general policy of
BB&T's operations division.
Third Party Assessments
BB&T works with numerous third parties in the ordinary course of business,
including clients, providers of systems-related products and services; external
agents, which include government agencies and other agents requiring systems
interfaces; infrastructure-related third parties, including utilities and
telecommunications providers, landlords and miscellaneous suppliers; and
capital markets partners, which includes any third parties requiring financial
settlement. BB&T has been conducting numerous tests with these third parties
before and after the January 1, 2000 date change, and no significant problems
have been noted. The Year 2000 Program Office will continue discussions with
these third parties throughout 2000 to ensure that no systems-related problems
arise.
Costs
BB&T's total incremental cost for the Year 2000 project was $29.4 million.
Management does not expect any additional material expenses as the project
nears completion. These expenses were funded through operating cash flows.
These costs were incurred to remediate existing systems and replace systems and
equipment where this approach was more cost-effective. During the process, BB&T
acquired and implemented 7,500 new PCs, upgraded existing computer code and
made other systems enhancements, which will benefit the company in the future.
Market Risk Management
The effective management of market risk is essential to achieving BB&T's
strategic objectives. As a financial institution, BB&T's most significant
market risk exposure is interest rate risk. The primary objective of interest
rate risk management is to minimize the effect that changes in interest rates
have on net interest income. This is accomplished through active management of
asset and
40
liability portfolios with a focus on the strategic pricing of asset and
liability accounts and management of appropriate maturity mixes of assets and
liabilities. The goal of these activities is the development of appropriate
maturity and repricing opportunities in BB&T's portfolios of assets and
liabilities that will produce consistent net interest income during periods of
changing interest rates. BB&T's Asset / Liability Management Committee ("ALCO")
monitors loan, investment and liability portfolios to ensure comprehensive
management of interest rate risk. These portfolios are analyzed for proper
fixed-rate and variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the ALCO to determine and achieve the most
appropriate volume and mix of earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to interest rate risk
exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate
risk and liquidity positions in relation to present and prospective market and
business conditions, and adopts funding and balance sheet management strategies
that are intended to ensure that the potential impact on earnings and liquidity
as a result of fluctuations in interest rates is within acceptable standards.
BB&T also uses off-balance sheet financial instruments to manage interest
rate sensitivity and net interest income. These instruments, commonly referred
to as derivatives, primarily consist of interest rate swaps, caps, floors,
financial forward and futures contracts and options written and purchased.
Management accounts for these financial instruments as hedges when the
following conditions are met: (1) the specific assets, liabilities, firm
commitments or anticipated transactions (or an identifiable group of
essentially similar items) to be hedged expose BB&T to interest rate risk or
price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.
All of the derivatives contracts to which BB&T is a party settle monthly,
quarterly or semiannually. Further, BB&T has netting agreements with the
dealers with which it does business. Because of these factors, BB&T's off-
balance sheet credit risk exposure at December 31, 1999 was immaterial.
Derivatives contracts are written in amounts referred to as notional amounts.
Notional amounts only provide the basis for calculating payments between
counterparties and do not represent amounts to be exchanged between parties and
are not a measure of financial risks. On December 31, 1999, BB&T had interest
rate swaps, caps and floors outstanding with notional amounts totaling $1.3
billion. The estimated fair value of open contracts used for risk management
purposes at December 31, 1999 had net unrealized losses of $.3 million.
BB&T uses these derivatives as synthetic instruments to hedge specified
assets or groups of assets, liabilities or groups of liabilities, forward
commitments and anticipated transactions. BB&T's derivatives are primarily used
to hedge variable rate commercial loans, adjustable rate mortgage loans, retail
certificates of deposit and floating rate notes. These hedges resulted in an
increase in net
41
interest expense of $2.9 million in 1999, compared with an increase in net
interest income of $.9 million in 1998 and $1.1 million in 1997.
BB&T utilizes written covered over-the-counter call options on specific
securities in the available-for-sale securities portfolio in order to enhance
returns. BB&T also utilizes over-the-counter purchased put options and written
call options in its mortgage banking activities. Purchased put options are used
to hedge fixed rate mortgage loan originations against increasing interest
rates. Written call options are used to reduce the premiums paid for purchased
put options thereby reducing the cost of the hedge.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. See Note Q. "Derivatives and Off-
Balance Sheet Financial Instruments" for the required quantitative disclosures.
BB&T's interest rate sensitivity is illustrated in the following table. The
table reflects rate-sensitive positions at December 31, 1999, and is not
necessarily indicative of positions on other dates. The carrying amounts of
interest-rate-sensitive assets and liabilities and the notional amounts of
swaps and other derivative financial instruments are presented in the periods
in which they next reprice to market rates or mature and are aggregated to show
the interest rate sensitivity gap. To reflect anticipated prepayments, certain
asset and liability categories are shown in the table using estimated cash
flows rather than contractual maturity payment dates.
Table 17
Interest Sensitivity Simulation Analysis
Annualized
Interest Hypothetical
Rate Percentage
Scenario Change in
-------- Prime Net Interest
Linear Rate Income
------ ----- ------------
3.00% 11.50% -1.73%
1.50 10.00 -1.21
No change 8.50 .25
(1.50) 7.00 -.23
(3.00) 5.50 -.46
Liquidity, Inflation and Changing Interest Rates
The majority of assets and liabilities of financial institutions are monetary
in nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Fluctuations in interest rates and the efforts of the Board of Governors of the
Federal Reserve System ("FRB") to regulate money and credit conditions have a
greater effect on a financial institution's profitability than do the effects
of higher costs for goods and services. Through its balance sheet management
function, BB&T is positioned to respond to changing interest rates and
inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of projected earnings to changes in interest rates.
Simulation takes into account the current contractual agreements that BB&T has
made with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer model that incorporates current
volumes and
42
rates, scheduled maturities and payments, projected prepayments, repricing
opportunities and anticipated growth. The model projects earnings based on
current and projected portfolio balances and rates. This level of detail is
needed to correctly simulate the effect that changes in interest rates and
portfolio balances will have on the earnings of BB&T. This method is subject to
the accuracy of the assumptions that underlie the process, but it provides a
better illustration of the sensitivity of earnings to changes in interest rates
than other analyses such as static or dynamic gap.
The asset/liability management process involves various analyses. Management
determines the most likely outlook for the economy and interest rates by
analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance are
all considered, given the current environmental situation. This data is
combined with various interest rate scenarios to provide management with
information necessary to analyze interest sensitivity and to aid in the
development of strategies to reach performance goals.
43
The following table represents the interest sensitivity position of BB&T as
of December 31, 1999. Key assumptions in the preparation of the table include
prepayment speeds on mortgage-related assets; cash flows and maturities of
derivative financial instruments; changes in market condition, loan volumes and
pricing; deposit sensitivity; customer preferences; and capital plans. This
tabular data does not reflect the impact of a change in the credit quality of
BB&T's assets and liabilities. To attempt to quantify the potential change in
net interest income, given a change in interest rates, various interest rate
scenarios are applied to projected balances, maturities and repricing
opportunities. The resulting change in net interest income reflects the level
of sensitivity that net interest income has in relation to changing interest
rates.
Table 18
Interest Rate Sensitivity Gap Analysis
December 31, 1999
Expected Repricing or Maturity Date
-------------------------------------------------------------
Within One to Three to After Five
One Year Three Years Five Years Years Total
----------- ----------- ---------- ---------- -----------
(Dollars in thousands)
Assets
Securities and other
interest-earning
assets* $ 2,824,247 $ 2,698,973 $3,779,457 $1,882,458 $11,185,135
Federal funds sold and
securities purchased
under resale
agreements or similar
arrangements 225,786 -- -- -- 225,786
Loans and leases** 16,271,742 4,426,334 4,788,383 3,710,996 29,197,455
----------- ----------- ---------- ---------- -----------
Total interest-earning
assets 19,321,775 7,125,307 8,567,840 5,593,454 40,608,376
----------- ----------- ---------- ---------- -----------
Liabilities
Savings and interest
checking*** -- 1,051,835 350,612 350,612 1,753,059
Money rate savings*** 4,096,844 4,096,844 -- -- 8,193,688
Other time deposits 10,332,132 2,216,969 258,625 59,188 12,866,914
Foreign deposits 529,401 -- -- -- 529,401
Federal funds
purchased and
securities sold under
repurchase agreements
or similar
arrangements 2,161,563 -- -- -- 2,161,563
Long-term debt and
other borrowings 6,304,934 433,732 142,876 3,323,919 10,205,461
----------- ----------- ---------- ---------- -----------
Total interest-bearing
liabilities 23,424,874 7,799,380 752,113 3,733,719 $35,710,086
----------- ----------- ---------- ---------- ===========
Asset-liability gap (4,103,099) (674,073) 7,815,727 1,859,735
----------- ----------- ---------- ----------
Derivatives affecting
interest rate
sensitivity:
Pay fixed interest
rate swaps 476,146 (4,361) (441,036) (30,749)
Receive fixed interest
rate swaps (560,000) -- 270,000 290,000
Caps, floors and
collars (47,250) -- 47,250 --
----------- ----------- ---------- ----------
(131,104) (4,361) (123,786) 259,251
----------- ----------- ---------- ----------
Interest rate
sensitivity gap $(4,234,203) $ (678,434) $7,691,941 $2,118,986
=========== =========== ========== ==========
Cumulative interest rate
sensitivity gap $(4,234,203) $(4,912,637) $2,779,304 $4,898,290
=========== =========== ========== ==========
- --------
* Securities based on amortized cost.
** Loans and leases include loans held for sale and are net of unearned
income.
*** Projected runoff of deposits that do not have a contractual maturity date
was computed based upon decay rate assumptions developed by bank regulators
to assist banks in addressing FDICIA rule 305.
44
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
parallel change in interest rates over six months from the most likely interest
rate scenario, and a maximum of 6% for a 300 basis point change over 12 months.
It is management's ongoing objective to effectively manage the impact of
changes in interest rates and minimize the resulting effect on earnings as
evidenced by the preceding table.
Liquidity represents the continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities and funding of loan commitments. In addition to its level of liquid
assets, many other factors affect the ability to meet liquidity needs,
including access to a variety of funding sources, capital position and general
market conditions.
Traditional sources of liquidity include proceeds from maturity of
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements, FHLB advances and other short-term borrowed
funds, as well as long-term debt instruments, supplement these traditional
sources. Management believes liquidity obtainable from these sources is
adequate to meet current requirements.
Capital Adequacy and Resources
The maintenance of appropriate levels of capital is a management priority and
is monitored on an ongoing basis. BB&T's principal goals related to capital are
to provide an adequate return to shareholders while retaining a sufficient base
from which to support future growth and to comply with all regulatory
standards.
Shareholders' equity totaled $3.2 billion at December 31, 1999, an increase
of .9% from year-end 1998. Factors which significantly affected growth in
shareholders' equity during 1999 were: earnings retained after dividends to
shareholders, which totaled $354.2 million; the market value of common shares
issued in connection with acquisitions accounted for as purchases, which
amounted to $290.1 million; exercises of stock options and other incentive plan
transactions totaling $58.0 million; the repurchase of 8.5 million shares of
common stock at a cost of $326.1 million that were reissued in connection with
mergers and acquisitions; and unrealized losses incurred during 1999 on
securities available for sale, which totaled $340.8 million, net of deferred
income tax benefits.
Bank holding companies and their subsidiaries are subject to risk-based
measures of capital adequacy. The risk-based capital ratios measure capital as
a percentage of a combination of balance sheet and off-balance sheet risk. The
risk-weighted values of both balance sheet and off-balance sheet items are
determined in accordance with risk factors specified by Federal bank regulatory
pronouncements.
Tier 1 capital (common shareholders' equity, excluding unrealized gains
(losses) on debt securities available for sale, net of tax effect, less
nonqualifying intangible assets) is required to be at least 4% of risk-weighted
assets, and total capital (the sum of Tier 1 capital, a qualifying portion of
the allowance for loan and lease losses and qualifying subordinated debt) must
be at least 8% of risk-weighted assets. The Tier 1 capital ratio for BB&T at
the end of 1999 was 9.3%, and the total capital ratio was 13.0%. At the end of
1998, those ratios were 10.5% and 14.9%, respectively.
45
In addition to the risk-based capital measures described above, regulators
have also established minimum leverage capital requirements for banking
organizations. This is the primary measure of capital adequacy used by
management and is calculated by dividing period-end Tier 1 capital by average
tangible assets for the most recent quarter. BB&T's Tier 1 leverage ratio at
year-end 1999 was 6.6%, compared to 7.1% at the end of 1998. The minimum
required Tier 1 leverage ratio ranges from 3% to 5% depending upon Federal bank
regulatory agency evaluation of an organization's overall safety and soundness.
BB&T's regulatory capital and ratios are set forth in the following table.
Table 19
Capital--Components and Ratios
December 31,
------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Tier 1 capital $ 2,845,786 $ 2,747,687
Tier 2 capital 1,140,185 1,159,405
----------- -----------
Total regulatory capital $ 3,985,971 $ 3,907,092
=========== ===========
Risk-based capital ratios:
Tier 1 capital 9.3% 10.5%
Total regulatory capital 13.0 14.9
Tier 1 leverage ratio 6.6 7.1
Segment Results
BB&T's operations are divided into six reportable business segments: the
Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment
Banking and Brokerage and Treasury. These operating segments have been
identified based primarily on BB&T's existing organizational structure. See
Note S. "Operating Segments", in the "Notes to Consolidated Financial
Statements" herein for a full discussion of the segments, the internal
accounting and reporting practices utilized by BB&T to manage these segments
and financial disclosures by segment. Fluctuations in noninterest income
related to external customers and noninterest expense are more fully discussed
in the "Noninterest Income" and "Noninterest Expense" sections of this
discussion and analysis.
Banking Network
The banking network grew internally during 1999 as well as through four
mergers, three of which were accounted for as poolings of interests. 1998
balances have been restated to reflect the impact of these transactions. The
total banking network is composed of 655 banking offices, down from 657 banking
offices at December 31, 1998. This decrease reflects management's efforts to
operate the branch network as efficiently as possible, by combining or closing
redundant branches acquired through mergers. Net interest income for the
banking network totaled $1.2 billion, an increase of $109.1 million, or 9.6%,
from 1998. This increase is composed of an 8.1% increase in net interest income
from external customers and a 14.0% increase in the net credit generated by the
internal funds transfer pricing system. This increase reflects adjustments in
the rates credited and charged for deposits and loans and a shift in the mix of
deposits into products with higher funds credit rates. The provision for loan
and lease losses increased $3.8 million, or 3.7%, to $108.0 million.
Noninterest income produced from external customers through the banking network
increased $26.0 million, or 8.7% during 1999, while noninterest income
allocated from other segments decreased $27.1 million, or 18.0%. Noninterest
expenses incurred within the banking network increased $63.7 million, or 11.3%,
while noninterest expenses allocated from the other operating segments
increased $51.6
46
million, or 24.6%. The provision for income taxes allocated to the banking
network decreased $36.0 million, or 13.6%, because of lower pretax income,
principally for the institutions acquired during 1999. Total identifiable
assets for the banking network increased 9.1% to a total of $23.9 billion.
Mortgage Banking
BB&T's mortgage banking segment experienced excellent results in 1999 because
of favorable mortgage rates early in the year and a strong economy. Mortgage
originations slowed during the second half of 1999, however, as rising interest
rates began to negatively affect mortgage loan volumes. BB&T's mortgage banking
segment remains the largest originator of mortgage loans in the Carolinas, with
1999 originations totaling $4.6 billion, down from a record $5.6 billion in
1998. BB&T's mortgage servicing portfolio totaled $17.0 billion at year-end
1999.
Net interest income for the mortgage banking segment totaled $115.4 million,
a decrease of $24.3 million, or 17.4%, from 1998. This decrease is composed of
a 3.2% increase in net interest income from external customers and a 13.8%
increase in the net charge for funds as calculated by BB&T's internal funds
transfer pricing system. This increase reflects higher funds transfer rates for
adjustable-rate loans, which increased as interest rates increased during 1999.
The provision for loan and lease losses decreased $1.1 million, or 28.9%, to
$2.7 million. Noninterest income produced from external customers increased
$37.0 million, or 48.4% during 1999. Noninterest expenses incurred within the
mortgage banking segment increased $3.1 million, or 5.5%, while noninterest
expenses allocated from the other operating segments increased $2.7 million, or
16.7%. The provision for income taxes allocated to the mortgage banking segment
decreased $7.3 million, or 13.8%. Total identifiable assets for the mortgage
banking segment decreased 10.8% to a total of $5.6 billion because of the
significant reduction in mortgage loan originations and a resulting decrease in
loans held for sale of $886.4 million.
Trust Services
Net interest income for the trust services segment totaled $8.5 million, an
increase of $4.3 million, or 99.6%, compared to 1998. This increase is due to
an 11.1% increase in the net credit for funds as calculated by BB&T's internal
funds transfer pricing system. This increase is due to a 10.1% increase in
total deposits held in trust and a shift in deposit mix to categories that
receive a higher funds credit. Noninterest income produced from external
customers increased $13.7 million, or 31.3% during 1999. Noninterest expenses
incurred within the trust services segment increased $9.4 million, or 32.6%,
while noninterest expenses allocated from the other operating segments
increased $.6 million, or 30.0%. These increases in noninterest income and
noninterest expenses were due, to a large extent, to the purchase of W.E.
Stanley & Company in mid-1998. The provision for income taxes allocated to
trust services increased $1.5 million, or 23.1%. Total identifiable assets for
trust services increased 88.6% to a total of $31.5 million.
Agency Insurance
Noninterest income produced from external customers increased $27.9 million,
or 55.5% during 1999, due to the acquisitions of twelve insurance agencies
during the year and the purchase of a book of business of a thirteenth agency,
as well as internal growth. Noninterest expenses incurred within the agency
insurance segment increased $20.3 million, or 51.4%, while noninterest expenses
allocated from the other operating segments increased $.3 million, or 13.8%.
The increase in expenses incurred within the segment results from the purchased
agencies discussed above. The provision for income taxes allocated to agency
insurance increased $2.9 million consistent with the growth in pretax income.
Total identifiable assets for agency insurance increased 58.6% to a total of
$63.9 million, primarily due to the acquired insurance agencies.
47
Investment Banking and Brokerage
Net interest income for the investment banking and brokerage segment totaled
$7.6 million, an increase of $6.4 million compared to 1998. This substantial
increase reflects the March 26, 1999 purchase of Scott & Stringfellow
Financial, Inc., an investment banking firm and full-service brokerage
headquartered in Richmond, Virginia. Noninterest income produced from external
customers increased $83.9 million, or 172.7% during 1999, also principally
because of the acquisition of Scott & Stringfellow. Noninterest expenses
incurred within the investment banking and brokerage segment increased $87.4
million, also primarily due to the Scott & Stringfellow purchase, while
noninterest expenses allocated from the other operating segments increased $.8
million, or 89.0%. The provision for income taxes allocated to investment
banking and brokerage increased $2.0 million, consistent with the increase in
pretax income. Total identifiable assets for the investment banking and
brokerage segment increased 193.0% to a total of $699.1 million principally due
to the acquisition of Scott & Stringfellow.
Treasury
Net interest income for the treasury segment totaled $140.3 million, an
increase of $13.7 million, or 10.8%, compared to 1998. This increase is
comprised of a 28.2% increase in net interest income from external customers,
offset by a $22.0 million increase in the net charge for funds as calculated by
BB&T's internal funds transfer pricing system. This increase is principally due
to changes in the mix of securities held by the treasury segment. Noninterest
income produced from external customers decreased $10.6 million, or 91.1%
during 1999. Noninterest expenses incurred within the treasury segment
increased $.5 million, or 10.6%, while noninterest expenses allocated from the
other operating segments increased $2.9 million, or 53.4%. The provision for
income taxes allocated to the treasury segment decreased $14.0 million, or
30.2%, due to higher levels of tax-advantaged investments during 1999. Total
identifiable assets for the treasury segment increased 22.2% to a total of
$11.5 billion.
Common Stock and Dividends
BB&T's ability to pay dividends is primarily dependent on earnings from
operations, the adequacy of capital and the availability of liquid assets for
distribution. BB&T's ability to generate liquid assets for distribution is
primarily dependent on the ability of the banking subsidiaries to pay dividends
to BB&T. BB&T's payment of cash dividends is an integral part of management's
goals to retain sufficient capital to support future growth and to meet
regulatory requirements while providing a competitive return on investment to
shareholders. BB&T's common dividend payout ratio, computed by dividing
dividends paid per common share by basic earnings per common share, was 40.32%
in 1999. Excluding the impact of the nonrecurring charges discussed in
"Analysis of Results of Operations," the dividend payout ratio would have been
37.5%. BB&T's cash dividends per common share increased 13.6% during 1999 to
$.75 per common share for the year. This increase marked the 27th consecutive
year that BB&T's annual cash dividend has been increased. A discussion of
dividend restrictions is included in Note N.--"Regulatory Requirements and
Other Restrictions."
BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "BBT". BB&T's common stock was held by 68,703 shareholders of record
at December 31, 1999. The accompanying table, "Quarterly Common Stock Summary,"
sets forth the quarterly high, low and last sales prices for the common stock
based on the daily closing price and the dividends paid per share of common
stock for each of the last eight quarters.
48
Table 20
Quarterly Common Stock Summary
1999 1998
------------------------------ ------------------------------
Sales Prices Sales Prices
-------------------- Dividends -------------------- Dividends
High Low Last Paid High Low Last Paid
------ ------ ------ --------- ------ ------ ------ ---------
Quarter Ended:
March 31 $40.44 $34.94 $36.19 $.175 $33.84 $29.03 $33.84 $.155
June 30 40.25 33.81 36.69 .175 34.06 32.03 33.81 .155
September 30 36.63 30.50 32.38 .20 36.03 28.00 29.94 .175
December 31 36.94 27.31 27.38 .20 40.63 27.31 40.31 .175
----- -----
Year 40.44 27.31 27.38 .75 40.63 27.31 40.31 .66
===== =====
Fourth Quarter Results
Net income for the fourth quarter of 1999 was $158.8 million, compared to
earnings of $139.6 million for the comparable period of 1998. On a per share
basis, diluted net income was $.47 for the quarter compared to $.42 a year ago.
Annualized returns on average assets and average shareholders' equity were
1.45% and 19.41%, respectively, for the fourth quarter of 1999. The fourth
quarter of 1999 included $16.1 million, after tax benefits, of nonrecurring
charges primarily associated with the completion of mergers and acquisitions.
If these items are excluded, net income for the fourth quarter of 1999 would
have been $174.9 million, an increase of $28.3 million, or 19.3%, compared to
recurring results for the fourth quarter of 1998. Diluted earnings per share,
excluding the merger-related charges, would have been $.52, an increase of
18.2% compared to recurring diluted earnings per share in the fourth quarter of
1998.
Net interest income on an FTE basis amounted to $435.0 million for the fourth
quarter of 1999, an increase of 11.7% compared to $389.4 million for the same
period of 1998. Noninterest income totaled $198.3 million for the fourth
quarter of 1999, up 30.6% from $151.8 million earned during the fourth quarter
of 1998. BB&T's noninterest expense totaled $347.6 million, up 18.5% from the
$293.3 million recorded in the fourth quarter of the prior year. Excluding the
merger-related charges from both years, noninterest expense for the fourth
quarter of 1999 would have increased 15.2% from the fourth quarter of 1998.
The fourth quarter 1999 provision for loan and lease losses totaled $27.1
million for the fourth quarter of 1999 compared to $25.6 million for the fourth
quarter of 1998, an increase of 5.7%.
49
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1999.
Table 21
Quarterly Financial Summary--Unaudited
1999 1998
-------------------------------------------------- -----------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Consolidated Summary of
Operations:
Net interest income
FTE $ 434,963 $ 426,564 $ 414,943 $ 391,946 $ 389,423 $ 376,251 $ 369,692 $ 360,589
FTE adjustment 22,154 23,104 22,322 19,121 18,946 17,276 16,773 16,307
Provision for loan and
lease losses 27,091 21,145 22,789 21,072 25,632 22,716 27,889 25,605
Securities gains
(losses), net (826) (1,575) (2,897) 167 2,120 2,537 1,348 2,817
Other noninterest
income 199,118 195,986 198,527 172,856 149,667 148,137 141,973 131,071
Noninterest expense 347,593 361,300 330,303 307,708 293,308 284,635 267,291 263,933
Provision for income
taxes 77,665 69,182 74,837 69,539 63,713 64,110 64,040 60,240
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $ 158,752 $ 146,244 $ 160,322 $ 147,529 $ 139,611 $ 138,188 $ 137,020 $ 128,392
=========== =========== =========== =========== =========== =========== =========== ===========
Diluted net income per
share $ .47 $ .44 $ .48 $ .44 $ .42 $ .42 $ .41 $ .39
=========== =========== =========== =========== =========== =========== =========== ===========
Selected Average
Balances:
Assets $43,403,097 $42,641,925 $41,702,966 $39,836,528 $39,215,677 $36,909,565 $36,913,104 $36,013,448
Securities, at
amortized cost 11,279,693 11,634,168 11,323,830 10,169,073 10,069,846 9,247,122 9,394,130 9,275,008
Loans and leases * 28,912,360 27,902,034 27,321,501 26,755,188 26,165,119 25,068,155 24,905,173 24,099,650
Total earning assets 40,481,016 39,914,306 38,906,583 37,120,961 36,455,615 34,534,554 34,575,582 33,678,267
Deposits 27,466,801 27,254,994 26,782,661 26,432,327 25,889,172 24,552,080 24,595,254 24,092,389
Short-term borrowed
funds 5,963,911 5,686,621 5,390,937 4,181,454 4,412,067 4,199,609 4,737,809 4,376,625
Long-term debt 6,055,124 5,906,736 5,683,714 5,419,991 5,127,292 4,739,993 4,153,541 4,162,956
Total interest-bearing
liabilities 35,572,456 35,055,282 34,147,798 32,437,550 31,796,118 30,080,277 30,159,791 29,484,230
Shareholders' equity 3,245,485 3,143,726 3,216,861 3,189,904 3,184,574 2,847,241 2,848,133 2,862,246
- ----
* Loans and leases are net of unearned income and include loans held for sale.
50
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
(Dollars in thousands, except per share data)
As of/For the Years Ended December 31,
---------------------------------------------------------------------------- Compound
1999 1998 1997 1996 1995 1994 Growth Rate
----------- ----------- ----------- ----------- ----------- ----------- -----------
Summary of Operations
Interest income $ 3,115,780 $ 2,863,626 $ 2,600,177 $ 2,342,835 $ 2,217,961 $ 1,852,378 11.0%
Interest expense 1,534,065 1,436,973 1,279,644 1,137,637 1,120,695 806,274 13.7
----------- ----------- ----------- ----------- ----------- ----------- ----
Net interest income 1,581,715 1,426,653 1,320,533 1,205,198 1,097,266 1,046,104 8.6
Provision for loan and
lease losses 92,097 101,842 110,913 70,359 47,108 31,857 23.7
----------- ----------- ----------- ----------- ----------- ----------- ----
Net interest income
after provision
for loan and lease
losses 1,489,618 1,324,811 1,209,620 1,134,839 1,050,158 1,014,247 8.0
Noninterest income 761,356 579,670 503,091 377,462 286,709 292,435 21.1
Noninterest expense 1,346,904 1,109,167 1,093,068 941,583 922,221 837,970 10.0
----------- ----------- ----------- ----------- ----------- ----------- ----
Income before income
taxes 904,070 795,314 619,643 570,718 414,646 468,712 14.0
Provision for income
taxes 291,223 252,103 211,252 186,941 136,653 159,509 12.8
----------- ----------- ----------- ----------- ----------- ----------- ----
Net income before
extraordinary item* $ 612,847 $ 543,211 $ 408,391 $ 383,777 $ 277,993 $ 309,203 14.7
=========== =========== =========== =========== =========== =========== ====
Per Common Share
Average shares
outstanding (000's):
Basic 329,306 325,735 324,799 323,913 322,060 316,158 0.8
Diluted 335,298 332,336 330,565 331,039 335,602 329,984 0.3
Basic earnings per share $ 1.86 $ 1.67 $ 1.25 $ 1.17 $ 0.85 $ 0.98 13.7
=========== =========== =========== =========== =========== =========== ====
Diluted earnings per
share $ 1.83 $ 1.63 $ 1.23 $ 1.16 $ 0.83 $ 0.94 14.3
=========== =========== =========== =========== =========== =========== ====
Cash dividends paid $ .75 $ .66 $ .58 $ .50 $ .43 $ .37 15.2
Shareholders' equity 9.66 9.64 8.62 7.93 7.48 6.65 7.8
Average Balances
Securities, at amortized
cost $11,106,193 $ 9,498,020 $ 8,622,090 $ 7,886,144 $ 7,683,291 $ 7,251,139 8.9
Loans and leases** 27,729,172 25,065,207 22,438,508 20,223,203 18,900,682 16,980,793 10.3
Other assets 3,072,579 2,707,527 2,128,271 1,979,823 1,895,776 1,924,205 9.8
----------- ----------- ----------- ----------- ----------- ----------- ----
Total assets $41,907,944 $37,270,754 $33,188,869 $30,089,170 $28,479,749 $26,156,137 9.9
=========== =========== =========== =========== =========== =========== ====
Deposits $26,987,772 $24,786,513 $23,468,167 $22,383,475 $20,841,946 $20,183,593 6.0
Other liabilities 5,952,661 4,998,934 3,857,493 3,026,237 3,934,678 2,954,670 15.0
Long-term debt 5,768,516 4,549,118 3,201,818 2,196,747 1,369,453 957,829 43.2
Common shareholders'
equity 3,198,995 2,936,189 2,657,619 2,459,988 2,253,763 1,978,338 10.1
Preferred shareholders'
equity -- -- 3,772 22,723 79,909 81,707 NM
----------- ----------- ----------- ----------- ----------- ----------- ----
Total liabilities and
shareholders' equity $41,907,944 $37,270,754 $33,188,869 $30,089,170 $28,479,749 $26,156,137 9.9
=========== =========== =========== =========== =========== =========== ====
Period End Balances
Total assets $43,480,996 $39,470,135 $35,997,812 $31,659,938 $29,536,083 $27,482,489 9.6
Deposits 27,251,142 26,449,632 24,593,981 23,064,759 21,921,901 20,503,018 5.9
Long-term debt 5,491,734 5,412,850 4,023,062 2,521,854 1,625,406 1,168,675 36.3
Shareholders' equity 3,199,159 3,171,145 2,808,423 2,590,357 2,512,683 2,198,560 7.8
Selected Ratios
Rate of return on:
Average total assets 1.46% 1.46% 1.23% 1.28% 0.98% 1.18%
Average common
shareholders' equity 19.16 18.50 15.36 15.56 12.07 15.32
Dividend payout 40.32 39.52 46.03 42.74 50.59 38.54
Average equity to
average assets 7.63 7.88 8.02 8.25 8.19 7.88
- ----
* Net income for 1997 is presented before the impact of an extraordinary loss
on extinguishment of debt, which totaled $2.8 million, net of income tax
benefits of $1.5 million.
** Loans and leases are net of unearned income and include loans held for
sale.
NM Not meaningful.
51
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of BB&T is responsible for the preparation of the financial
statements, related financial data and other information in this Annual Report
on Form 10-K. The financial statements are prepared in accordance with
generally accepted accounting principles and include amounts based on
management's estimates and judgment where appropriate. Financial information
appearing throughout this Annual Report on Form 10-K is consistent with the
financial statements.
BB&T's accounting system, which records, summarizes and reports financial
transactions, is supported by an internal control structure which provides
reasonable assurance that assets are safeguarded and that transactions are
recorded in accordance with BB&T's policies and established accounting
procedures. As an integral part of the internal control structure, BB&T
maintains a professional staff of internal auditors who monitor compliance with
and assess the effectiveness of the internal control structure.
The Audit Committee of BB&T's Board of Directors, composed solely of outside
directors, meets regularly with BB&T's management, internal auditors and
independent public accountants to review matters relating to financial
reporting, internal control structure and the nature, extent and results of the
audit effort. The independent public accountants and the internal auditors have
access to the Audit Committee with or without management present.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, who render an independent opinion on
management's financial statements. Their appointment was recommended by the
Audit Committee, approved by the Board of Directors and ratified by the
shareholders. Their examination provides an objective assessment of the degree
to which BB&T's management meets its responsibility for financial reporting.
Their opinion on the financial statements is based on auditing procedures,
which include reviewing the internal control structure to determine the timing
and scope of audit procedures and performing selected tests of transactions and
records as they deem appropriate. These auditing procedures are designed to
provide a reasonable level of assurance that the financial statements are
fairly presented in all material respects.
John A. Allison Scott E. Reed Sherry A. Kellett
Chairman and Chief Financial Officer Controller
Chief Executive Officer
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BB&T Corporation:
We have audited the accompanying consolidated balance sheets of BB&T
Corporation (a North Carolina corporation), and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BB&T Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of operations
and cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Charlotte, North Carolina,
January 24, 2000.
53
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands, except per share data)
1999 1998
----------- -----------
Assets
Cash and due from banks $ 1,138,820 $ 1,100,381
Interest-bearing deposits with banks 71,214 19,749
Federal funds sold and securities purchased under
resale agreements or similar arrangements 225,786 122,460
Trading securities at market value 93,221 60,422
Securities available for sale at market value 10,482,044 9,498,486
Securities held to maturity at amortized cost
(market value: $98,070 at December 31, 1999 and
$368,655 at December 31, 1998) 97,122 360,783
Loans held for sale 285,025 1,171,415
Loans and leases, net of unearned income 28,912,430 25,432,710
Allowance for loan and lease losses (387,963) (361,869)
----------- -----------
Loans and leases, net 28,524,467 25,070,841
----------- -----------
Premises and equipment, net 555,866 525,239
Other assets 2,007,431 1,540,359
----------- -----------
Total assets $43,480,996 $39,470,135
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits $ 3,908,080 $ 3,771,421
Savings and interest checking 1,753,059 2,082,879
Money rate savings 8,193,688 7,337,066
Other time deposits 12,866,914 12,619,590
Foreign deposits 529,401 638,676
----------- -----------
Total deposits 27,251,142 26,449,632
Short-term borrowed funds 6,875,290 3,885,737
Long-term debt 5,491,734 5,412,850
Accounts payable and other liabilities 663,671 550,771
----------- -----------
Total liabilities 40,281,837 36,298,990
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $5 par, 500,000,000 shares
authorized; issued and outstanding, 331,170,260 at
December 31, 1999 and 328,948,902 at December 31,
1998 1,655,851 1,644,745
Additional paid-in capital 189,440 189,032
Retained earnings 1,640,970 1,272,776
Loan to employee stock ownership plan and unvested
restricted stock (10,891) (14)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of $(165,368) at
December 31, 1999 and $40,492 at December 31, 1998 (276,211) 64,606
----------- -----------
Total shareholders' equity 3,199,159 3,171,145
----------- -----------
Total liabilities and shareholders' equity $43,480,996 $39,470,135
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
54
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- --------------- ---------------
(Dollars in thousands, except per share data)
Interest Income
Interest and fees on loans
and leases $ 2,429,750 $ 2,245,961 $ 2,036,733
Interest and dividends on
securities 673,330 603,545 553,589
Interest on short-term
investments 12,700 14,120 9,855
--------------- --------------- ---------------
Total interest income 3,115,780 2,863,626 2,600,177
--------------- --------------- ---------------
Interest Expense
Interest on deposits 960,959 942,750 908,554
Interest on short-term
borrowed funds 258,169 231,659 181,140
Interest on long-term debt 314,937 262,564 189,950
--------------- --------------- ---------------
Total interest expense 1,534,065 1,436,973 1,279,644
--------------- --------------- ---------------
Net Interest Income 1,581,715 1,426,653 1,320,533
Provision for loan and
lease losses 92,097 101,842 110,913
--------------- --------------- ---------------
Net Interest Income After
Provision for Loan and Lease
Losses 1,489,618 1,324,811 1,209,620
--------------- --------------- ---------------
Noninterest Income
Service charges on deposits 206,649 185,571 165,489
Mortgage banking income 130,084 92,387 61,415
Trust income 55,416 42,603 36,849
Investment banking and
brokerage fees and
commissions 127,336 44,326 27,180
Agency insurance
commissions 78,945 52,186 40,149
Other insurance commissions 11,806 11,284 14,069
Bankcard fees and merchant
discounts 37,707 30,579 24,104
Other nondeposit fees and
commissions 64,295 56,996 45,524
Securities (losses) gains,
net (5,131) 8,822 4,833
Other income 54,249 54,916 83,479
--------------- --------------- ---------------
Total noninterest income 761,356 579,670 503,091
--------------- --------------- ---------------
Noninterest Expense
Personnel expense 684,890 562,861 534,687
Occupancy and equipment
expense 206,197 173,283 179,479
Federal deposit insurance
expense 9,070 5,329 6,237
Amortization of intangibles
and mortgage servicing
rights 73,468 54,673 27,245
Advertising and public
relations expense 22,648 28,992 29,477
Professional services 59,411 53,052 52,298
Other expense 291,220 230,977 263,645
--------------- --------------- ---------------
Total noninterest expense 1,346,904 1,109,167 1,093,068
--------------- --------------- ---------------
Earnings
Income before income taxes 904,070 795,314 619,643
Provision for income taxes 291,223 252,103 211,252
--------------- --------------- ---------------
Income before extraordinary
item 612,847 543,211 408,391
Extraordinary loss on
extinguishment of debt,
net of income tax
benefit of $1,514 -- -- 2,811
--------------- --------------- ---------------
Net income 612,847 543,211 405,580
Preferred dividend
requirements -- -- 113
--------------- --------------- ---------------
Income applicable to
common shares $ 612,847 $ 543,211 $ 405,467
=============== =============== ===============
Per Common Share
Income before
extraordinary item:
Basic $ 1.86 $ 1.67 $ 1.26
=============== =============== ===============
Diluted $ 1.83 $ 1.63 $ 1.24
=============== =============== ===============
Extraordinary loss on
extinguishment of debt:
Basic $ -- $ -- $ 0.01
=============== =============== ===============
Diluted $ -- $ -- $ 0.01
=============== =============== ===============
Net income:
Basic $ 1.86 $ 1.67 $ 1.25
=============== =============== ===============
Diluted $ 1.83 $ 1.63 $ 1.23
=============== =============== ===============
Cash dividends paid $ .75 $ .66 $ .58
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
55
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Preferred Common Paid-In Earnings Changes Shareholders'
Stock Stock Stock Capital and Other* in Equity Equity
----------- --------- ---------- ---------- ----------- -------------- -------------
(Dollars in thousands)
Balance, December 31,
1996, as previously
reported 157,119,544 $ -- $ 785,599 $ 300,017 $ 1,385,233 $ 14,163 $2,485,012
Merger with First
Liberty Financial
Corp. 5,716,335 7,564 28,582 16,725 52,632 (158) 105,345
----------- ------- ---------- --------- ----------- --------- ----------
Balance, December 31,
1996, restated 162,835,879 7,564 814,181 316,742 1,437,865 14,005 2,590,357
----------- ------- ---------- --------- ----------- --------- ----------
Add (Deduct):
Nonshareholder changes
in equity:**
Net income -- -- -- -- 405,580 -- 405,580
Unrealized holding
gains arising during
the period -- -- -- -- -- 44,539 44,539
Less: reclassification
adjustment, net of
tax of $2,454 -- -- -- -- -- (2,918) (2,918)
----------- --------- ----------
Total nonshareholder
changes in equity -- -- -- -- 405,580 41,621 447,201
----------- --------- ----------
Common stock issued 6,795,759 -- 33,978 241,084 5,470 -- 280,532
Redemption of common
stock (7,114,730) -- (35,574) (291,264) -- -- (326,838)
Preferred stock
redemptions and
conversions 350,610 (7,564) 1,753 5,811 -- -- --
Cash dividends declared
on common stock -- -- -- -- (182,914) -- (182,914)
Other, net -- -- -- (2,786) 2,871 -- 85
----------- ------- ---------- --------- ----------- --------- ----------
Balance, December 31,
1997 162,867,518 -- 814,338 269,587 1,668,872 55,626 2,808,423
Add (Deduct):
Nonshareholder changes
in equity:**
Net income -- -- -- -- 543,211 -- 543,211
Unrealized holding
gains arising during
the period -- -- -- -- -- 14,040 14,040
Less: reclassification
adjustment, net of
tax of $3,548 -- -- -- -- -- (5,044) (5,044)
----------- --------- ----------
Total nonshareholder
changes in equity -- -- -- -- 543,211 8,996 552,207
----------- --------- ----------
Common stock issued 11,667,939 -- 58,340 311,963 (1,045) -- 369,258
Redemption of common
stock (6,736,880) -- (33,684) (311,345) -- -- (345,029)
2-for-1 stock split
effective August 3,
1998 161,183,057 -- 805,915 (84,002) (721,913) -- --
Reconciliation of
fiscal year of First
Citizens to calendar
year (32,732) -- (164) (211) (1,177) (16) (1,568)
Cash dividends declared
on common stock -- -- -- -- (213,608) -- (213,608)
Other, net -- -- -- 3,040 (1,578) -- 1,462
----------- ------- ---------- --------- ----------- --------- ----------
Balance, December 31,
1998 328,948,902 -- 1,644,745 189,032 1,272,762 64,606 3,171,145
Add (Deduct):
Nonshareholder changes
in equity:**
Net income -- -- -- -- 612,847 -- 612,847
Unrealized holding
losses arising during
the period -- -- -- -- -- (343,233) (343,233)
Less: reclassification
adjustment, net of
tax benefit of $1,796 -- -- -- -- -- 3,335 3,335
----------- --------- ----------
Total nonshareholder
changes in equity -- -- -- -- 612,847 (339,898) 272,949
----------- --------- ----------
Common stock issued 10,752,814 -- 53,764 283,738 10,570 -- 348,072
Redemption of common
stock (8,535,544) -- (42,678) (283,330) -- -- (326,008)
Reconciliation of
fiscal year of First
Liberty to calendar
year 4,088 -- 20 -- 3,460 (919) 2,561
Cash dividends declared
on common stock -- -- -- -- (258,683) -- (258,683)
Other, net -- -- -- -- (10,877) -- (10,877)
----------- ------- ---------- --------- ----------- --------- ----------
Balance, December 31,
1999 331,170,260 $ -- $1,655,851 $ 189,440 $ 1,630,079 $(276,211) $3,199,159
=========== ======= ========== ========= =========== ========= ==========
- --------
* Other includes unearned income, unvested restricted stock and a loan to the
employee stock ownership plan.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
56
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
1999 1998 1997
----------- ----------- -----------
Cash Flows From Operating Activities:
Net income $ 612,847 $ 543,211 $ 405,580
Extraordinary loss on extinguishment
of debt -- -- 4,325
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan and lease losses 92,097 101,842 110,913
Depreciation of premises and
equipment 83,083 71,954 66,052
Amortization of intangibles and
mortgage servicing rights 73,468 54,673 27,245
Accretion of negative goodwill (6,243) (6,243) (6,180)
Amortization of unearned stock
compensation 3,873 1,171 8,133
Discount accretion and premium
amortization on securities, net 1,190 1,984 3,598
Net decrease (increase) in trading
account securities (20,774) 7,456 (25,688)
Loss (gain) on sales of securities,
net 5,131 (8,822) (4,833)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net (26,213) (36,227) (17,687)
Loss (gain) on disposals of premises
and equipment, net (5,754) (15,352) 28,263
Proceeds from sales of loans held
for sale 3,874,226 5,119,437 1,903,172
Purchases of loans held for sale (961,404) (1,749,648) (906,824)
Origination of loans held for sale,
net of principal collected (2,000,219) (3,887,322) (1,167,108)
Reconciliation of fiscal year of
merged companies to calendar year 3,216 4,991 --
Decrease (increase) in:
Accrued interest receivable (43,648) (21,852) (378)
Other assets (180,664) (81,562) (199,063)
Increase (decrease) in:
Accrued interest payable 36,997 18,045 6,024
Accounts payable and other
liabilities 122,642 75,907 102,161
Other, net 3,625 (6,511) (9,299)
----------- ----------- -----------
Net cash provided by operating
activities 1,667,476 187,132 328,406
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities
available for sale 771,045 1,511,163 1,900,158
Proceeds from maturities, calls and
paydowns of securities available for
sale 2,644,672 2,512,294 1,823,432
Purchases of securities available for
sale (4,247,311) (4,239,309) (4,493,416)
Proceeds from sales of securities
held to maturity -- -- 26,170
Proceeds from maturities, calls and
paydowns of securities held to
maturity 36,815 137,712 70,139
Purchases of securities held to
maturity (4,765) (79,479) (69,448)
Leases made to customers (126,066) (94,615) (74,420)
Principal collected on leases 74,314 65,186 57,581
Loan originations, net of principal
collected (3,221,285) (1,400,799) (1,446,199)
Purchases of loans (196,010) (110,108) (205,232)
Net cash acquired in transactions
accounted for under the purchase
method 302,032 73,369 95,205
Purchases and originations of
mortgage servicing rights (78,527) (85,113) (42,599)
Proceeds from disposals of premises
and equipment 37,540 25,559 14,579
Purchases of premises and equipment (123,416) (118,553) (158,955)
Proceeds from sales of foreclosed
property 28,190 28,902 17,333
Proceeds from sales of other real
estate held for development or sale 10,128 513 15,248
Other, net -- (41,067) (3,412)
----------- ----------- -----------
Net cash used in investing
activities (4,092,644) (1,814,345) (2,473,836)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits 226,435 1,019,274 628,544
Net increase (decrease) in short-term
borrowed funds 2,851,287 (452,946) 575,335
Proceeds from long-term debt 2,658,991 3,428,689 6,328,829
Repayments of long-term debt (2,592,003) (2,034,525) (4,734,838)
Net proceeds from common stock issued 39,594 34,916 27,274
Redemption of common stock (326,008) (345,029) (326,838)
Preferred stock cancellations and
conversions -- -- (38)
Cash dividends paid on common and
preferred stock (239,898) (202,740) (170,081)
Other, net -- 1,306 (20,533)
----------- ----------- -----------
Net cash provided by financing
activities 2,618,398 1,448,945 2,307,654
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 193,230 (178,268) 162,224
Cash and Cash Equivalents at Beginning
of Year 1,242,590 1,420,858 1,258,634
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year $ 1,435,820 $ 1,242,590 $ 1,420,858
=========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest $ 1,499,140 $ 1,413,515 $ 1,226,679
Income taxes 109,197 150,194 162,480
Noncash financing and investing
activities:
Transfer of securities from held to
maturity to available for sale 231,529 106,819 --
Transfer of loans to foreclosed
property 25,644 26,211 23,476
Transfer of fixed assets to other
real estate owned 6,005 10,351 13,761
Restricted stock issued -- -- 74
Securitization of mortgage loans 304,795 478,768 --
The accompanying notes are an integral part of these consolidated financial
statements.
57
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
BB&T Corporation ("BB&T" or "Parent Company") is a bank holding company
organized under the laws of North Carolina and registered with the Federal
Reserve Board under the Bank Holding Company Act of 1956, as amended. Branch
Banking and Trust Company ("BB&T-NC"); BB&T Financial Corporation of South
Carolina, parent company of Branch Banking and Trust Company of South Carolina
("BB&T-SC"); BB&T Financial Corporation of Virginia, parent company of Branch
Banking and Trust Company of Virginia ("BB&T-VA"), (collectively, the "Banks"),
Regional Acceptance Corporation ("Regional Acceptance") and Scott &
Stringfellow Financial, Inc., ("Scott & Stringfellow") comprise BB&T's
principal direct subsidiaries.
The accounting and reporting policies of BB&T Corporation and its
subsidiaries are in accordance with generally accepted accounting principles
and conform to general practices within the banking industry. The following is
a summary of the more significant policies.
NOTE A. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of BB&T include the accounts of 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 material transactions 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). On
November 10, 1999, BB&T completed its merger with First Liberty Financial
Corporation ("First Liberty"), of Macon, Georgia. To consummate the merger,
First Liberty's shareholders received .87 shares of BB&T common stock in
exchange for each share of First Liberty common stock held, resulting in the
issuance of 12.4 million shares of BB&T common stock. The transaction was
accounted for as a pooling of interests. Accordingly, the consolidated
financial statements (including the notes to the consolidated financial
statements), and supplemental financial information contained in BB&T's Current
Report on Form 8-K dated September 3, 1999, restated for the accounts of First
Liberty, are included in this Annual Report on Form 10-K. As permitted under
generally accepted accounting principles, the restatement of BB&T's
consolidated financial statements to reflect the pooling of interest merger
with First Liberty is presented herein by combining the September 30 fiscal
year ends of First Liberty with BB&T's calendar year ends for years prior to
1999. This method of combination did not have a material impact on BB&T's
consolidated financial position or consolidated results of operations.
In certain instances, amounts reported in prior years' consolidated financial
statements have been reclassified to conform to statement presentations
selected for 1999. Such reclassifications had no effect on previously reported
shareholders' equity or net income.
Nature of Operations
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina,
Virginia, Maryland, Georgia, West Virginia, Kentucky and the metropolitan
Washington, D.C. area primarily through its commercial banking subsidiaries
and, to a lesser extent, through its other subsidiaries. BB&T's subsidiaries
provide a full range of traditional commercial banking services and additional
services including investment brokerage, investment banking, trust services,
agency insurance, credit-related insurance and leasing.
58
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
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 and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, 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.
During 1999 and 1998, BB&T transferred securities with amortized costs of
$231.5 million and $106.8 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 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. Any resulting deferred premium or discount is
amortized, as an adjustment of servicing income, over the estimated lives of
the loans using the level-yield method.
59
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, with adjustments for prepayments as they
occur. If the loan commitment expires unexercised, the income is recognized
upon expiration of the commitment. Discounts and premiums are amortized to
interest income over the estimated life of the loans using methods 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. Lease
receivables are stated at the total amount of lease payments receivable plus
guaranteed residual values, less unearned income. Recognition of income over
the lives of the lease contracts approximates the level-yield method.
As of January 1, 1995, BB&T adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS
No. 114, as amended, requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral-dependent.
A loan is impaired when, based on current information and events, it is
probable that BB&T will be unable to collect all amounts due according to the
contractual terms of the loan agreement. 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.
It is BB&T's policy to classify and disclose all commercial loans greater
than $250,000 that are on nonaccrual status as impaired loans. Substantially
all other loans made by BB&T are excluded from the scope of SFAS No. 114 as
they are comprised of large groups of smaller balance homogeneous loans
(residential mortgage and consumer installment) that are collectively evaluated
for impairment.
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 three-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
60
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 required by SFAS No. 114,
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
our internal credit examiners and results from external bank regulatory
examinations.
While management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the valuations or, if required by regulators, based upon information
available to them at the time of their examinations. Such adjustments to
original estimates, as necessary, are made in the period in which these factors
and other relevant considerations indicate that loss levels may vary from
previous estimates.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property. Foreclosed property consists of real estate
and other assets acquired through customers' loan defaults. Commercial and
unsecured consumer loans and leases are generally placed on nonaccrual status
when concern exists that principal or interest is not fully collectible, or
when any portion of principal or interest becomes 90 days past due, whichever
occurs first. Mortgage loans and most other 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
income. Routine maintenance costs, declines in market value and net losses on
disposal are included in other noninterest expense.
Premises and Equipment
Premises, equipment, capital leases and leasehold improvements are stated at
cost less accumulated depreciation or amortization. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are
61
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Income Taxes
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. Deferred income taxes have been provided when different
accounting methods have been used in determining income for income tax purposes
and for financial reporting purposes. Deferred tax assets and liabilities are
recognized based on future tax consequences of the differences arising from
their carrying values and respective tax bases. In the event of changes in the
tax laws, deferred tax assets and liabilities are adjusted in the period of the
enactment of those changes, with effects included in the income tax provision.
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.
62
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Effective December 31, 1997, BB&T adopted the provisions of SFAS No. 128,
"Earnings Per Share." This statement established standards for computing and
presenting earnings per share ("EPS") and simplifies the standards for
computation previously found in Accounting Principles Board ("APB") Opinion No.
15, "Earnings Per Share," making them more comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS (which
replaces the former fully diluted EPS) for all entities with complex capital
structures. The EPS information reported herein reflects the implementation of
SFAS No. 128. Prior periods have been restated to include the provisions of the
statement.
Basic net income per common share has been computed by dividing net income
applicable to common shares by the weighted average number of shares of common
stock outstanding during the years presented.
Diluted net income per common share has been computed by dividing net income,
as adjusted for the interest expense related to convertible debt where
applicable, by the weighted average number of shares of common stock, common
stock equivalents and other potentially dilutive securities outstanding.
Restricted stock grants are considered as issued for purposes of calculating
net income per share.
Weighted average numbers of shares were as follows:
1999 1998 1997
----------- ----------- -----------
Basic 329,305,820 325,735,189 324,799,136
Diluted 335,298,333 332,336,113 330,564,863
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
BB&T's 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 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,
1999, BB&T had $597.1 million in unamortized goodwill and $11.6 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
63
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amortized over periods ranging from 10 to 15 years. At December 31, 1999, BB&T
had negative goodwill totaling $20.5 million, net of accumulated amortization.
Mortgage Servicing Rights
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." This statement was superseded by SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which BB&T adopted on January 1, 1997. SFAS No. 122, as
superseded by SFAS No. 125, requires that mortgage banking enterprises
recognize, as separate assets, rights to service mortgage loans for others,
however those servicing rights are acquired. Amounts paid to acquire the right
to service mortgage loans are capitalized and amortized over the estimated
lives of the loans to which they relate. BB&T also capitalizes servicing rights
on loans originated internally as required under the statement. SFAS No. 122
further requires mortgage banking enterprises to assess their capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. At December 31, 1999, BB&T had capitalized mortgage servicing rights
totaling $185.6 million. Income from mortgage servicing fees is reflected as
mortgage banking income on the Consolidated Statements of Income.
Changes in Accounting Principles and Effects of New Accounting Pronouncements
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for such transactions based on
consistent application of a financial components approach. This approach
recognizes the financial and servicing assets an entity controls and the
liabilities it has incurred, as well as derecognizes financial assets when
control has been surrendered and liabilities when they are extinguished. The
statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." This statement allows the
implementation of certain provisions of SFAS No. 125 to be deferred for one
year. BB&T adopted SFAS No. 125, as amended by SFAS No. 127, effective January
1, 1997. The adoption of these statements did not have a material impact on
BB&T's consolidated financial position or consolidated results of operations.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share," as
discussed above. The statement was effective for financial statements issued
for periods ending after December 15, 1997, including interim periods, and
requires restatement of all prior periods presented. Accordingly, BB&T adopted
the provisions of the statement effective December 31, 1997, including
retroactive restatement of prior periods. The implementation of the statement
did not have a material impact on BB&T's consolidated financial position or
consolidated results of operations.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure by continuing and amending
existing standards. The statement was effective for financial statements for
periods ending after December 15, 1997. Management determined that BB&T was and
is in
64
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compliance with the disclosure requirements of SFAS No. 129, and, therefore,
the implementation of the statement did not affect the capital structure
disclosures made by BB&T.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income (revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Comprehensive income is the nonshareholder-related change
in equity (net assets) of a company during a period from transactions and other
events. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997, including interim periods, and requires restatement of all prior periods
presented. BB&T adopted the provisions of the statement effective January 1,
1998, including retroactive application to prior periods. The standard does not
address issues of recognition or measurement of comprehensive income;
therefore, the implementation of the statement did not have a material impact
on BB&T's consolidated financial position or consolidated results of
operations.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. BB&T adopted the provisions of the
statement effective December 31, 1998. The standard does not address issues of
recognition or measurement and, therefore, the implementation of the statement
did not have an impact on the consolidated financial position or consolidated
results of operations of BB&T. See Note S. in the "Notes to Consolidated
Financial Statements" for disclosures related to the implementation of this
statement.
In March of 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises the disclosure
requirements for pensions and other postretirement benefit plans. BB&T adopted
the provisions of this statement effective December 31, 1998, including
restatement of all prior periods presented. The statement does not address
issues of recognition or measurement and, therefore, the implementation of the
statement did not have an impact on BB&T's consolidated financial position or
consolidated results of operations. See Note L. in the "Notes to Consolidated
Financial Statements" for disclosures related to the implementation of this
statement.
During the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires capitalization of computer software costs that meet certain criteria.
BB&T adopted the provisions of this statement effective January 1, 1999. This
implementation of the SOP did not have a material effect on BB&T's consolidated
financial position or consolidated results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that
65
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
receive hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which delays the original effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
Management has not yet quantified the impact of adopting SFAS No. 133 and has
not determined the timing of or method of adoption of the statement. However,
management does not anticipate that the implementation of the statement will
have a material effect on BB&T's consolidated financial position or
consolidated results of operations.
During the second quarter of 1998, the American Institute of Certified Public
Accountants issued SOP 98-5, "Accounting for Start-up Costs." SOP 98-5 provides
guidance on the financial reporting of start-up costs and organization costs
and requires start-up costs to be expensed as incurred. BB&T adopted the
provisions of the SOP effective January 1, 1999. The adoption of the statement
did not have a material impact on BB&T's consolidated financial position or
consolidated results of operations.
During October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." The statement amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." BB&T adopted the
provisions of the statement effective January 1, 1999. The implementation of
the statement did not have a material impact on BB&T's consolidated financial
position or consolidated results of operations.
Supplemental Disclosures of Cash Flow Information
As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired
assets and assumed liabilities in transactions accounted for under the purchase
method of accounting. The fair values of these assets acquired and liabilities
assumed, at acquisition, were as follows:
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
Fair Value of Net Assets acquired $ 80,193 $ 116,701 $ 138,029
Purchase Price (236,238) (310,618) (287,031)
--------- --------- ---------
Excess of Purchase Price over Net Assets
acquired $(156,045) $(193,917) $(149,002)
========= ========= =========
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts that are recognized when
received or paid.
NOTE B. Acquisitions and Mergers
Completed Mergers and Acquisitions
Certain of the acquisitions detailed below were acquired by companies that
were subsequently acquired by BB&T and accounted for as poolings of interests.
Purchase Transactions
On March 1, 1997, BB&T completed its acquisition of Fidelity Financial
Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction
accounted for as a purchase. BB&T issued 3.2
66
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million shares for all of the shares of Fidelity's common stock outstanding. In
conjunction with the acquisition, BB&T recorded $37.9 million in goodwill,
which is being amortized using the straight-line method over 15 years.
On March 31, 1997, First Citizens Corporation ("First Citizens"), which
merged into BB&T on July 9, 1999, acquired Tara Bankshares Corporation
("Tara"). To consummate the acquisition, First Citizens issued common stock
which was later converted to approximately 239,000 shares of BB&T common stock,
and paid $5.1 million in cash. As a result of the acquisition, goodwill
totaling $2.2 million was recorded and is being amortized using the straight-
line method over 20 years.
On May 20, 1997, BB&T purchased Phillips Factors Corporation ("Phillips") and
its subsidiaries, Phillips Financial Corporation and Phillips Acceptance
Corporation, all of High Point, North Carolina. Phillips purchases and manages
receivables in the temporary staffing industry nationwide. It also provides
payroll processing services to that industry. Phillips also buys and manages
account receivables primarily in the furniture, textiles and home furnishings-
related industries. In conjunction with the acquisition, BB&T recorded $11.1
million of goodwill, which is being amortized using the straight-line method
over 15 years.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp.
(collectively, "Refloat"), a finance company that specializes in loans to small
commercial lawn care businesses across the country. The acquisition, which was
completed through the issuance of 750,000 shares of common stock, was accounted
for as a purchase. BB&T recorded $3.0 million of goodwill, which is being
amortized using the straight-line method over 15 years, in conjunction with
this transaction.
On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie
specializes in the origination, trading and distribution of fixed-income
securities and equity products in both the public and private capital markets.
Craigie also has a public finance department that provides investment banking
services, financial advisory services and municipal bond financing to a variety
of regional tax-exempt issuers. The acquisition, which was accounted for as a
purchase, was accomplished through the issuance of approximately 926,000 shares
of BB&T's common stock. In conjunction with the acquisition, BB&T recorded $6.8
million of goodwill, which is being amortized using the straight-line method
over a period of 25 years.
On December 1, 1997, BB&T completed its acquisition of Virginia First
Financial Corporation of Petersburg, Virginia ("Virginia First"), a financial
institution with $822.9 million in assets at the time the merger was
consummated. The merger, which was accounted for under the purchase method of
accounting, was effected through the issuance of 3.8 million shares of BB&T's
common stock and the payment of $44.8 million. In conjunction with the
acquisition, BB&T recorded $89.5 million in goodwill, which is being amortized
using the straight-line method over a period of 15 years.
On February 11, 1998, Mason-Dixon Bancshares, Inc. ("Mason-Dixon"), which
merged into BB&T on July 14, 1999, purchased substantially all of the assets of
Rose Shanis Companies ("Rose Shanis"), a consumer finance company located in
Baltimore, Maryland. Mason-Dixon paid cash totaling $15.4 million to acquire
Rose Shanis. In conjunction with the merger, goodwill totaling $5.5 million was
recorded and is being amortized using the straight-line method over 10 years.
67
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 28, 1998, MainStreet Financial Corporation ("MainStreet"), which
merged into BB&T on March 5, 1999, completed the acquisition of Tysons
Financial Corporation ("Tysons") of McLean, Virginia. Tysons, with $102.1
million in assets, was acquired through the issuance of MainStreet common stock
which was later converted to 721,187 shares of BB&T common stock. In
conjunction with the acquisition, goodwill totaling $9.3 million was recorded,
which is being amortized using the straight-line method over a period of 15
years.
On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc.
("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to
commercial, agricultural, municipal and consumer users for the purchase of lawn
care equipment. In conjunction with the transaction, BB&T recorded $9.5 million
of goodwill, which is being amortized using the straight-line method over 15
years.
On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company
Inc., and its subsidiaries, (collectively, "Stanley"), located in Greensboro,
North Carolina. Stanley, the largest actuarial, consulting and administration
firm headquartered in the Carolinas, primarily manages retirement plans for
companies and has more than 700 clients located mostly in the Carolinas,
Virginia, Maryland and Tennessee. In conjunction with the acquisition, BB&T
recorded $10.3 million of goodwill, which is being amortized using the
straight-line method over 15 years.
On September 30, 1998, BB&T completed its acquisition of Maryland Federal
Bancorp, Inc. ("Maryland Federal") located in Hyattsville, Maryland. In
conjunction with the merger, BB&T issued 8.7 million shares of BB&T common
stock in exchange for all of the outstanding shares of Maryland Federal common
stock. BB&T recorded $158.8 million of goodwill, which is being amortized using
the straight-line method over a period of 15 years.
On January 5, 1999, Mason-Dixon, which merged into BB&T on July 14, 1999,
completed its acquisition of Sterling Bancorp, a privately held commercial bank
headquartered in Baltimore, Maryland. To complete the transaction, Mason-Dixon
paid $10.3 million in cash. In conjunction with the acquisition, goodwill
totaling $3.7 million was recorded, which is being amortized using the
straight-line method over 15 years.
On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. The transaction was accounted for as a purchase. In
conjunction with the acquisition, BB&T issued 3.6 million shares of BB&T common
stock in exchange for all of the outstanding shares of Scott & Stringfellow
common stock. BB&T recorded goodwill totaling $72.8 million, which is being
amortized using the straight-line method over a period of 15 years.
On August 27, 1999, BB&T completed its acquisition of Matewan BancShares,
Inc. ("Matewan") of Williamson, West Virginia. In conjunction with the merger,
BB&T issued 3.2 million shares of common stock in exchange for all of the
outstanding shares of Matewan common and preferred stock. As a result of the
acquisition, BB&T recorded $92.8 million of goodwill, which is being amortized
using the straight-line method over a period of 15 years.
68
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The above-discussed acquisitions were accounted for under the purchase method
of accounting, and, therefore, the financial information contained herein
includes data relevant to the acquirees since the date of acquisition. The
following unaudited presentation reflects key line items on a Pro Forma basis
as if these purchase transactions had been acquired as of the beginning of the
years presented:
For the Years Ended
---------------------
1999 1998
---------- ----------
(Dollars in
thousands,
except per share
data)
Total revenues $2,393,457 $2,172,354
========== ==========
Net income $ 604,994 $ 537,906
========== ==========
Basic EPS $ 1.84 $ 1.65
========== ==========
Diluted EPS $ 1.80 $ 1.62
========== ==========
Under the provisions of SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchase Enterprises," BB&T typically provides an allocation
period, not to exceed one year, to identify and quantify the assets acquired
and liabilities assumed in 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.
Pooling of Interests Transactions
On July 1, 1997, BB&T completed its merger with United Carolina Bancshares
Corporation ("UCB") of Whiteville, North Carolina, in a stock transaction
accounted for as a pooling of interests. To consummate the merger, BB&T issued
55.4 million shares of common stock in exchange for all of the shares of UCB
common stock outstanding.
On December 1, 1997, MainStreet, which merged into BB&T on March 5, 1999,
completed its merger with Commerce Bank Corporation ("Commerce") in a
transaction accounted for as a pooling of interests. In conjunction with the
merger, MainStreet issued common stock, which was later converted to
approximately 676,000 shares of BB&T common stock, in exchange for all of the
outstanding common stock of Commerce.
On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life")
of Norfolk, Virginia. The transaction was accounted for as a pooling of
interests. In conjunction with the merger, BB&T issued 11.6 million shares of
common stock in exchange for all of the shares of Life common stock
outstanding.
On March 10, 1998, MainStreet, which merged into BB&T on March 5, 1999,
completed its merger with Regency Financial Shares, Incorporated ("Regency") of
Richmond, Virginia, in a transaction accounted for as a pooling of interests.
In conjunction with the merger, MainStreet issued common stock, which was later
converted to approximately 801,000 shares of BB&T common stock, in exchange for
all of the shares of Regency.
On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc.
("Franklin") of Washington, D.C. in a stock transaction accounted for under the
pooling-of-interests method of accounting. In conjunction with the merger, BB&T
issued 4.9 million shares of common stock in exchange for all of the shares of
Franklin common stock outstanding.
69
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 7, 1998, MainStreet, which merged into BB&T on March 5, 1999,
completed a merger with Ballston Bancorp, Inc. ("Ballston") of Washington,
D.C., in a transaction accounted for as a pooling of interests. In conjunction
with the merger, MainStreet issued common stock, which later converted to
approximately 824,000 shares of BB&T common stock, in exchange for all of the
outstanding common stock of Ballston.
On March 5, 1999, BB&T completed a merger with MainStreet, based in
Martinsville, Virginia. The transaction was accounted for as a pooling of
interests. BB&T issued approximately 16.8 million shares of BB&T common stock
in exchange for all of the outstanding shares of MainStreet.
On April 1, 1999, First Liberty Financial Corp. ("First Liberty"), which
merged into BB&T on November 10, 1999, completed a merger with Vidalia
Bankshares, Inc. ("Vidalia"), based in Vidalia, Georgia. The transaction was
accounted for as a pooling of interests. First Liberty issued common stock,
which later converted to approximately 568,000 shares of BB&T common stock, in
exchange for all of the outstanding shares of Vidalia.
On July 9, 1999, BB&T completed its merger with First Citizens, of Newnan,
Georgia. The transaction was accounted for as a pooling of interests. BB&T
issued approximately 3.2 million shares of common stock in exchange for all of
the outstanding shares of First Citizens.
On July 14, 1999, BB&T completed its merger with Mason-Dixon of Westminster,
Maryland. The transaction was accounted for as a pooling of interests. BB&T
issued approximately 6.6 million shares of BB&T common stock in exchange for
all of the outstanding shares of Mason-Dixon.
On November 10, 1999, BB&T completed its merger with First Liberty of Macon,
Georgia. In conjunction with the transaction, which was accounted for as a
pooling of interests, BB&T issued 12.4 million shares of BB&T common stock in
exchange for all of the outstanding shares of First Liberty common stock.
70
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 First Liberty on a pro forma combined basis assuming the merger was
effective as of and for the periods presented. See Principles of Consolidation
in Note A.
Historical Basis
------------------------- BB&T
BB&T First Liberty restated
----------- ------------- -----------
(Dollars in thousands, except per
share data)
As of/For the Year Ended December 31,
1998
Net interest income $ 1,369,989 $ 56,187 $ 1,426,653
Net income 527,254 15,480 543,211
Net earnings per share
Basic 1.68 1.10 1.67
Diluted 1.65 1.09 1.63
Assets 37,903,119 1,567,016 39,470,135
Deposits 25,263,311 1,186,321 26,449,632
Shareholders' equity 3,044,330 126,899 3,171,145
As of/For the Year Ended December 31,
1997
Net interest income $ 1,267,848 $ 52,685 $ 1,320,533
Net income 394,661 10,919 405,580
Net earnings per share
Basic 1.26 .79 1.25
Diluted 1.24 .77 1.23
Assets 34,523,133 1,474,679 35,997,812
Deposits 23,474,381 1,119,600 24,593,981
Shareholders' equity 2,694,714 113,709 2,808,423
On January 13, 2000, BB&T completed its merger with Premier Bancshares, Inc.
("Premier") of Atlanta, Georgia. In connection with the merger, which was
accounted for as a pooling of interests, BB&T issued 16.8 million shares of
BB&T common stock in exchange for all of the outstanding shares of Premier
common stock.
Pending Mergers
On November 17, 1999, BB&T announced plans to merge with Hardwick Holding
Company ("Hardwick") of Dalton, Georgia. In exchange for each share of Hardwick
common stock held, Hardwick's shareholders will receive between .9010 and .9320
shares of BB&T common stock depending on the average closing price of BB&T
common stock over a five-day pricing period ending shortly before the effective
time of the Merger. The transaction is expected to be completed during the
second quarter of 2000 and accounted for as a pooling of interests.
On December 15, 1999, BB&T announced plans to merge with First Banking
Company of Southeast Georgia ("First Banking Company") of Statesboro, Georgia.
First Banking Company's shareholders will receive .74 shares of BB&T common
stock for each share of First Banking Company common stock held. The
transaction is expected to be completed during the second quarter of 2000 and
accounted for as a pooling of interests.
On February 7, 2000, BB&T announced plans to merge with One Valley Bancorp,
Inc. ("One Valley") of Charleston, West Virginia. The acquisition, which is
expected to be completed in the third quarter of 2000, is expected to be
accounted for as a pooling of interests. One Valley, which has $6.6 billion in
assets, operates 123 branches in West Virginia and Virginia. Shareholders of
One Valley will receive 1.28 shares of BB&T common stock in exchange for each
share of One Valley common stock held.
71
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE C. Securities
The amortized costs and approximate fair values of securities held to
maturity and available for sale were as follows:
December 31, 1999 December 31, 1998
---------------------------------------- --------------------------------------
Gross Unrealized Estimated Gross Unrealized Estimated
Amortized ---------------- Fair Amortized ---------------- Fair
Cost Gains Losses Value Cost Gains Losses Value
----------- ------- -------- ----------- ---------- -------- ------- ----------
(Dollars in thousands)
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations $ 23,117 $ 1 $ 6 $ 23,112 $ 51,102 $ 235 $ 2 $ 51,335
Mortgage-backed
securities -- -- -- -- 70,355 937 351 70,941
States and political
subdivisions 74,005 974 21 74,958 232,406 7,167 329 239,244
Other securities -- -- -- -- 6,920 215 -- 7,135
----------- ------- -------- ----------- ---------- -------- ------- ----------
Total securities held
to maturity 97,122 975 27 98,070 360,783 8,554 682 368,655
----------- ------- -------- ----------- ---------- -------- ------- ----------
Securities available
for sale:
U.S. Treasury,
government and agency
obligations 4,664,395 1,548 136,722 4,529,221 3,783,815 57,035 2,770 3,838,080
Mortgage-backed
securities 3,901,774 3,970 112,559 3,793,185 4,175,502 41,859 12,693 4,204,668
Equity and other
securities 1,795,534 120 176,235 1,619,419 1,252,768 21,612 3,698 1,270,682
States and political
subdivisions 561,875 8,467 30,123 540,219 181,303 3,951 198 185,056
----------- ------- -------- ----------- ---------- -------- ------- ----------
Total securities
available for sale 10,923,578 14,105 455,639 10,482,044 9,393,388 124,457 19,359 9,498,486
----------- ------- -------- ----------- ---------- -------- ------- ----------
Total securities $11,020,700 $15,080 $455,666 $10,580,114 $9,754,171 $133,011 $20,041 $9,867,141
=========== ======= ======== =========== ========== ======== ======= ==========
Securities with a book value of approximately $5.5 billion and $5.2 billion
at December 31, 1999 and 1998, respectively, were pledged to secure municipal
deposits, securities sold under agreements to repurchase, Federal Reserve
discount window borrowings and for other purposes as required by law.
At December 31, 1999 and 1998, 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 $93.2 million are excluded from the accompanying
tables.
Proceeds from sales of securities during 1999, 1998 and 1997 were $771.0
million, $1.5 billion and $1.9 billion, respectively. Gross gains of $3.5
million, $14.8 million and $8.7 million and gross losses of $8.7 million, $6.0
million and $3.8 million were realized on those sales in 1999, 1998 and 1997,
respectively.
72
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1999, 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, 1999
-----------------------------------------
Held to Maturity Available for Sale
------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ---------- ----------
(Dollars in thousands)
Debt Securities:
Due in one year or less $45,906 $45,994 $ 950,028 $ 950,086
Due after one year through five
years 46,871 47,548 2,893,025 2,821,560
Due after five years through ten
years 2,151 2,194 1,578,928 1,516,033
Due after ten years 2,194 2,334 4,243,159 3,935,927
------- ------- ---------- ----------
Total debt securities $97,122 $98,070 $9,665,140 $9,223,606
======= ======= ========== ==========
NOTE D. Loans and Leases
Loans and leases were composed of the following:
December 31,
------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Loans:
Commercial, financial and agricultural $ 4,592,691 $ 4,128,455
Real estate--construction and land
development 3,310,561 2,570,017
Real estate--mortgage 16,010,893 14,604,025
Consumer 3,635,267 3,231,827
----------- -----------
Loans held for investment 27,549,412 24,534,324
Leases: 2,602,819 1,620,326
----------- -----------
Total loans and leases 30,152,231 26,154,650
Less: unearned income (1,239,801) (721,940)
----------- -----------
Loans and leases, net of unearned income $28,912,430 $25,432,710
=========== ===========
The net investment in direct financing leases was $1.5 billion and $986.9
million at December 31, 1999 and 1998, respectively. BB&T had loans held for
sale at December 31, 1999 and 1998 totaling $285.0 million and $1.2 billion,
respectively.
BB&T had $19.6 billion in loans secured by real estate at December 31, 1999.
However, these loans were not concentrated in any specific market or geographic
area other than the Banks' primary markets.
73
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth certain information regarding BB&T's impaired
loans as defined under SFAS No. 114.
December 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands)
Total recorded investment--impaired loans $ 22,619 $ 41,791
----------- -----------
Total recorded investment with related valuation
allowance 22,619 40,410
Valuation allowance assigned to impaired loans 5,001 9,013
----------- -----------
Net carrying value--impaired loans $ 17,618 $ 31,397
=========== ===========
Average balance of impaired loans $ 22,252 $ 47,001
=========== ===========
Cash basis interest income recognized on impaired
loans $ 363 $ 169
=========== ===========
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 1999. 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, 1998 $180,511
Additions 81,581
Reductions (71,896)
--------
Balance, December 31, 1999 $190,196
========
74
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Beginning Balance $361,869 $316,550 $276,620
Provision for losses charged to expense 92,097 101,842 110,913
Allowances of purchased companies 9,272 21,258 17,513
Loans and leases charged-off (104,464) (102,655) (109,857)
Recoveries of previous charge-offs 28,884 24,810 21,361
-------- -------- --------
Net loans and leases charged-off (75,580) (77,845) (88,496)
-------- -------- --------
Reconciliation of fiscal year of merged
companies to calander year 305 64 --
-------- -------- --------
Ending Balance $387,963 $361,869 $316,550
======== ======== ========
At December 31, 1999, 1998 and 1997, loans not currently accruing interest
totaled $103.5 million, $106.1 million and $115.7 million, respectively. Loans
90 days or more past due and still accruing interest totaled $54.2 million,
$54.3 million and $49.3 million, at December 31, 1999, 1998 and 1997,
respectively. The gross interest income that would have been earned during 1999
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 $9.9
million. Foreclosed property totaled $27.1 million, $32.2 million and $41.8
million at December 31, 1999, 1998 and 1997, respectively.
75
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE F. Premises and Equipment
A summary of premises and equipment is presented in the accompanying table:
December 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands)
Land and land improvements $ 102,530 $ 91,618
Buildings and building improvements 407,859 385,896
Furniture and equipment 453,951 442,838
Capitalized leases on premises and equipment 2,965 4,089
----------- -----------
967,305 924,441
Less--accumulated depreciation and amortization 411,439 399,202
----------- -----------
Net premises and equipment $ 555,866 $ 525,239
=========== ===========
Depreciation expense, which is included in occupancy and equipment expense,
was $83.1 million, $72.0 million and $66.1 million in 1999, 1998 and 1997,
respectively.
BB&T has noncancelable leases covering certain premises and equipment. Total
rent expense applicable to operating leases was $51.0 million, $32.6 million
and $49.8 million for 1999, 1998 and 1997, respectively. Future minimum lease
payments for operating and capitalized leases for years subsequent to 1999 are
as follows:
Leases
--------------------------
Operating Capitalized
------------ ------------
(Dollars in thousands)
Years ended December 31:
2000 $ 29,677 $ 394
2001 28,038 394
2002 25,512 395
2003 22,780 355
2004 21,322 303
2005 and years later 102,458 2,784
------------ ----------
Total minimum lease payments $ 229,787 4,625
============
Less--amount representing interest 2,129
----------
Present value of net minimum payments on
capitalized leases (Note I) $ 2,496
==========
76
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
--------------------------
1999 1998
------------ ------------
(Dollars in thousands)
Balance, January 1, $ 115,218 $ 75,471
Amount capitalized 78,527 85,113
Amount sold -- (1,118)
Amortization expense (27,628) (26,817)
Change in valuation allowance 19,489 (17,431)
------------ ------------
Balance, December 31, $ 185,606 $ 115,218
============ ============
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 interest rates in intervals of
150 basis points, type of loan and maturity of loan. Following is an analysis
of the aggregate changes in the valuation allowance for mortgage servicing
rights in 1999 and 1998 including the effects of related hedging instruments:
Valuation Allowance for
Mortgage Servicing Rights
--------------------------
1999 1998
------------ ------------
(Dollars in thousands)
Balance, January 1, $ 21,031 $ 3,600
Additions 462 17,704
Reductions (19,951) (273)
------------ ------------
Balance, December 31, $ 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 $13.9 billion and $11.4 billion at
December 31, 1999 and 1998, respectively.
77
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,
---------------------
1999 1998
---------- ----------
(Dollars in
thousands)
Federal funds purchased $ 287,131 $ 924,307
Term Federal funds purchased -- 25,000
Securities sold under agreements to repurchase 1,874,432 1,683,737
Master notes 698,704 675,141
U.S. Treasury tax and loan deposit notes payable 1,202,924 182,741
Short-term Federal Home Loan Bank advances 241,926 218,579
Short-term bank notes 1,645,000 73,181
Other short-term borrowed funds 925,173 103,051
---------- ----------
Total short-term borrowed funds $6,875,290 $3,885,737
========== ==========
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.
78
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE I. Long-Term Debt
Long-term debt is summarized as follows:
December 31,
-----------------------
1999 1998
----------- -----------
(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. $ 2,496 $ 3,462
Medium-term bank notes, unsecured, varying maturities
to 2008 with variable rates from 5.279% to 7.48%. 969,945 1,389,890
Advances from Federal Home Loan Bank, varying
maturities to 2018 with rates from 1.00% to 8.75%. 3,562,207 3,056,502
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) 857,272 858,303
CMO Bonds, secured by investments, dated 1985,
callable July 1, 2001, with an interest rate of
11.25%. 8,128 10,558
Corporation-obligated mandatorily redeemable capital
securities, dated June 15, 1997, maturing June 15,
2027, with interest at 10.07%; June 15, 1997,
maturing June 15, 2028, with interest at 8.40%; and
Nov. 19, 1997, maturing Nov. 19, 2027, with interest
at 8.90%.(3) 89,237 88,000
Other mortgage indebtedness 2,449 6,135
----------- -----------
Total long-term debt $ 5,491,734 $ 5,412,850
=========== ===========
- --------
Excluding the capitalized leases set forth in Note F, future debt maturities
are $1.1 billion, $554.1 million, $75.7 million, $293.4 million and $.5
million for the next five years. The maturities for 2005 and later years total
$3.4 billion.
(1) The $350 million in subordinated debt, issued June 30, 1998, is
mandatorally 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.
NOTE J. Shareholders' Equity
The authorized capital stock of BB&T consists of 500,000,000 shares of
common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par
value. At December 31, 1999, 331,170,260 shares of common stock and no shares
of preferred stock were issued and outstanding.
Stock Option Plans
At December 31, 1999, BB&T had the following stock-based compensation plans:
the 1994 and 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the
Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan
("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors'
Plan"), which are described below. BB&T accounts for these plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these
79
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
--------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands,
except per share data)
Net income applicable to common shares:
As reported $ 612,847 $ 543,211 $ 405,467
Pro Forma 594,588 531,668 396,125
Basic EPS:
As reported 1.86 1.67 1.25
Pro Forma 1.81 1.63 1.22
Diluted EPS:
As reported 1.83 1.63 1.23
Pro Forma 1.78 1.60 1.20
The SFAS No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995; therefore, the weighted average fair value of options
granted prior to that date has not been calculated. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for grants
in 1999, 1998 and 1997, respectively: dividend yield of 2.5% in 1999, 2.4% in
1998 and 2.7% in 1997; expected volatility of 25% in 1999, 24% in 1998 and 22%
in 1997; risk free interest rates of 5.3%, 5.7% and 6.2% for 1999, 1998 and
1997, respectively; and expected lives of 6.0 years, 6.3 years and 6.3 years
for 1999, 1998 and 1997, 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. 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 plan was 16,601,000 at December 31, 1999. 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 24,601,000 at December 31, 1999. 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, 1999, 9,041,313 qualified stock options at prices
ranging from $4.29 to $40.31 and 2,957,749 non-qualified stock options at
prices ranging from $.005 to $33.26 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, which expire on December 19, 2000, further
provide for up to 2,202,000 shares of common stock to be
80
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reserved for the granting of options, which have a four year vesting schedule
and must be exercised within ten years from the date granted. Incentive stock
options granted must have an exercise price equal to at least 100% of the fair
market value of common stock on the date granted, and the non-qualified stock
options must have an exercise price equal to at least 85% of the fair market
value on the date granted. At December 31, 1999, options to purchase 142,526
shares of common stock at prices ranging from $4.75 to $8.375 were outstanding
pursuant to the NQSOP. At December 31, 1999, options to purchase 102,546 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, 1999, options to purchase 814,370
shares of common stock at prices ranging from $6.3578 to $28.8719 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 166,742 as of December 31, 1999, with option prices ranging from
$1.3334 to $11.8535.
A summary of the status of the Company's stock option plans at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented below:
1999 1998 1997
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning
of year 12,910,599 $14.57 13,637,818 $11.08 14,092,315 $ 9.17
Granted 2,634,990 32.34 2,701,139 26.30 2,480,564 17.92
Exercised (2,171,907) 11.13 (3,318,063) 9.14 (2,798,102) 7.39
Forfeited or Expired (148,436) 31.85 (119,891) 20.63 (136,959) 13.73
Reconciliation of fiscal
year to calendar year -- -- 9,596 -- -- --
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year 13,225,246 $18.47 12,910,599 $14.57 13,637,818 $11.08
========== ====== ========== ====== ========== ======
Options exercisable at
year-end 10,761,544 $15.32 9,920,136 $11.22 11,084,467 $ 9.64
---------- ------ ---------- ------ ---------- ------
The weighted average fair value of options granted was $8.96, $8.07 and $4.88
per option at December 31, 1999, 1998 and 1997, respectively.
81
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices 12/31/99 Life Price 12/31/99 Price
--------------- ----------- ----------- --------- ----------- ---------
$ 0.01 to $ 2.50 6,384 4.7yrs $ 1.13 6,384 $ 1.13
$ 2.51 to $ 3.75 9,202 3.4 3.23 9,202 3.23
$ 3.76 to $ 5.50 78,144 2.4 4.61 72,494 4.62
$ 5.51 to $ 8.25 1,224,692 2.3 6.91 1,224,692 6.91
$ 8.26 to $12.25 4,218,578 4.5 10.36 4,218,578 10.36
$12.26 to $18.25 2,134,633 6.2 13.61 2,134,633 13.61
$18.26 to $27.25 1,917,377 7.6 21.05 1,553,826 21.23
$27.26 to $40.31 3,636,236 8.7 33.65 1,541,735 32.63
---------- --- ------ ---------- ------
13,225,246 6.2yrs $18.47 10,761,544 $15.32
========== === ====== ========== ======
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.
82
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,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Current expense:
Federal $102,118 $193,830 $216,703
State 7,498 10,051 10,094
-------- -------- --------
109,616 203,881 226,797
Deferred expense (benefit) 181,607 48,222 (15,545)
-------- -------- --------
Provision for income taxes $291,223 $252,103 $211,252
======== ======== ========
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,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Federal income taxes at statutory rates of
35% $316,425 $278,308 $216,767
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense (17,822) (13,821) (13,098)
State income taxes, net of Federal tax
benefit 7,699 8,576 6,285
Other, net (15,079) (20,960) 1,298
-------- -------- --------
Provision for income taxes $291,223 $252,103 $211,252
======== ======== ========
Effective income tax rate 32.2% 31.7% 34.1%
======== ======== ========
83
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,
------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses $ 143,945 $ 133,115
Net unrealized depreciation on securities
available for sale 165,368 --
Deferred compensation 38,140 30,723
Postretirement benefits other than pensions 19,973 19,217
Other 57,583 41,503
----------- -----------
Total tax deferred assets 425,009 224,558
----------- -----------
Deferred tax liabilities:
Depreciation (14,007) (18,029)
Net unrealized appreciation on securities
available for sale -- (40,492)
Lease financing (254,197) (75,933)
Mortgage servicing rights (41,359) (3,807)
Other (25,283) (27,938)
----------- -----------
Total tax deferred liabilities (334,846) (166,199)
----------- -----------
Net deferred tax asset $ 90,163 $ 58,359
=========== ===========
Securities transactions resulted in income tax (benefits) expense of $(2.0
million), $3.4 million and $1.8 million related to securities (losses) gains
for the years ended December 31, 1999, 1998 and 1997, 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. Credit is
usually given to these employees for years of service at the acquired
institution.
The following table discloses expenses relating to employee benefit plans
restated for transactions accounted for as poolings of interests.
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Defined benefit plans $15,309 $ 9,201 $14,225
Defined contribution and ESOP plans 16,571 19,922 28,475
------- ------- -------
Total expense related to benefit plans $31,880 $29,123 $42,700
======= ======= =======
84
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 tables below summarize data relative to the plans for the years as
indicated:
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Net Periodic Pension Cost
- -------------------------
Service cost $ 18,935 $ 15,059 $ 12,412
Interest cost 22,456 19,765 17,971
Estimated return on plan assets (26,017) (22,869) (17,987)
Net amortization and other (2,133) 1,257 790
-------- -------- --------
Net periodic pension cost $ 13,241 $ 13,212 $ 13,186
======== ======== ========
Plans for which Plans for which
assets exceed accumulated
accumulated benefits exceed
benefits assets
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
(Dollars in thousands)
Change in Projected Benefit Obligation
- --------------------------------------
Projected benefit obligation, January
1, $300,136 $244,769 $32,820 $24,188
Service cost 17,784 13,932 1,151 1,127
Interest cost 20,420 17,765 2,037 2,000
Actuarial (gain) loss (57,384) 26,529 (6,606) 6,190
Benefits paid (16,522) (10,502) (669) (685)
Change in plan provisions (2,418) 2,813 75 --
Other, net 6,384 4,830 (1) --
-------- -------- ------- -------
Projected benefit obligation, December
31, $268,400 $300,136 $28,807 $32,820
======== ======== ======= =======
1999 1998 1999 1998
-------- -------- ------- -------
(Dollars in thousands)
Change in Plan Assets
- ---------------------
Fair value of plan assets, January 1, $321,474 $284,905 $ -- $ --
Accrual return on plan assets 15,091 35,965 -- --
Employer contributions 1,693 5,349 669 685
Benefits paid (16,522) (10,502) (669) (685)
Other, net 6,384 5,757 -- --
-------- -------- ------- -------
Fair value of plan assets, December 31, $328,120 $321,474 $ -- $ --
======== ======== ======= =======
85
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
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
(Dollars in thousands)
Net Amount Recognized
---------------------
Funded status $59,719 $21,338 $(28,807) $(32,820)
Unrecognized transition (asset)
obligation (4,262) (5,400) 191 234
Unrecognized prior service cost (20,949) (20,909) 2,781 3,114
Unrecognized net loss (26,890) 19,568 3,678 11,215
------- ------- -------- --------
Net amount recognized $ 7,618 $14,597 $(22,157) $(18,257)
======= ======= ======== ========
1999 1998 1999 1998
------- ------- -------- --------
(Dollars in thousands)
Reconciliation of Net Pension Asset
(Liability)
-----------------------------------
Prepaid pension cost, January 1, $14,597 $16,446 $(18,257) $(13,086)
Contributions 1,693 5,349 517 519
Net periodic pension cost (8,672) (8,126) (4,452) (4,489)
Other, net -- 928 35 (1,201)
------- ------- -------- --------
Prepaid (accrued) pension cost,
December 31, $ 7,618 $14,597 $(22,157) $(18,257)
======= ======= ======== ========
December 31,
--------------
1999 1998
------ ------
Weighted Average Assumptions
----------------------------
Weighted average assumed discount rate 7.75% 6.75%
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 $18.5 million and $26.8 million
of BB&T common stock at December 31, 1999 and 1998 respectively. The market
value of total plan assets was $328.1 million and $321.5 million at December
31, 1999 and 1998, respectively.
Postretirement Benefits
BB&T revised its retiree health care plans in preparation for the
implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other
Than Pensions." The new plan covers employees retiring after December 31, 1995
who are eligible for participation in the BB&T pension plan and have at least
ten years of service. The plan requires retiree contributions, with a subsidy
by BB&T based upon years of service of the employee at the time of retirement.
The subsidy is periodically reviewed for adjustment. The plan provides flexible
benefits to retirees or their dependents.
86
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,
1999, 1998 and 1997.
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Net Periodic Postretirement Benefit Cost
----------------------------------------
Service cost $ 1,126 $ 1,550 $ 733
Interest cost 3,314 3,422 2,586
Amortization and other 518 519 (37)
------- ------- -------
Total expense $ 4,958 $ 5,491 $ 3,282
======= ======= =======
1999 1998
----------- -----------
(Dollars in thousands)
Change in Projected Benefit Obligation
--------------------------------------
Projected benefit obligation, January 1, $ 53,630 $ 38,342
Service cost 1,126 1,550
Interest cost 3,314 3,422
Plan participants' contributions 727 475
Actuarial loss (gain) (8,286) 4,958
Benefits paid (1,793) (1,859)
Other, net 2,480 6,742
----------- -----------
Projected benefit obligation, December 31, $ 51,198 $ 53,630
=========== ===========
1999 1998
----------- -----------
(Dollars in thousands)
Change in Plan Assets
---------------------
Fair value of plan assets, January 1, $ -- $ --
Actual return on plan assets -- --
Employer contributions 1,066 1,384
Plan participants' contributions 727 475
Benefits paid (1,793) (1,859)
----------- -----------
Fair value of plan assets, December 31, $ -- $ --
=========== ===========
1999 1998
----------- -----------
(Dollars in thousands)
Net Amount Recognized
---------------------
Funded status $ (51,198) $ (53,630)
Unrecognized prior service cost 5,704 6,223
Unrecognized net (gain) loss (7,740) 600
----------- -----------
Net amount recognized $ (53,234) $ (46,807)
=========== ===========
87
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 1998
----------- -----------
(Dollars in thousands)
Reconciliation of Postretirement Benefit Cost
---------------------------------------------
Prepaid (accrued) postretirement benefit cost,
January 1, $(46,807) $(42,700)
Contributions 1,066 1,384
Net periodic postretirement benefit cost (4,958) (5,491)
Other, net (2,535) --
-------- --------
Prepaid (accrued) postretirement benefit cost,
December 31, $(53,234) $(46,807)
======== ========
December 31,
-----------------------
1999 1998
----------- -----------
Weighted Average Assumptions
Weighted average assumed discount rate 7.75% 6.75%
Medical trend rate--initial year 8.00 9.00
Medical trend rate--ultimate 5.00 5.00
Select period 3 yrs 4 yrs
1% Increase 1% Decrease
----------- -----------
Impact of a 1% change in assumed health care cost
on:
Service and interest costs 1.90% (1.70)%
Accumulated postretirement benefit obligation 1.80 (1.60)
401-k Savings Plan
Effective January 1, 1996, BB&T's Employee Stock Ownership Plan was merged
into the former BB&T Financial Corporation Savings and Thrift Plan to form the
BB&T Corporation 401-k Savings Plan. The plan permits employees to contribute
up to 16% of their compensation. BB&T matches up to 6% of the employee's
compensation with a 100% matching contribution.
Settlement Agreements
In connection with a merger, an executive officer of a merged institution
agreed to retire during 1997. BB&T entered into a settlement and noncompetition
agreement with this executive officer to settle an existing employment contract
and to require the officer not to compete with BB&T. The settlement agreement
provides for annual payments of $769,392 (to be adjusted annually in accordance
with the Consumer Price Index) until the executive reaches the age of 65 in
2002, at which time the annual payments will be reduced to 70% of the amount
paid during the final year pursuant the agreement, estimated to be
approximately $623,000, less the company-provided portion of benefits payable
under certain existing benefit plans. The reduced payments will continue for
the life of the executive. If the executive's current wife survives him,
payments will continue to her in the annual amount equal to 35% of the amount
paid to the executive during the final year pursuant to the agreement. The
executive officer has agreed not to compete in a defined geographic area for
ten years.
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
88
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Notional Amount at
December 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend, originate or purchase
credit $12,109,347 $10,678,283
Standby letters of credit and financial guarantees
written 463,106 386,151
Commercial letters of credit 40,417 36,277
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Forward and futures contracts $ 319,411 $ 1,274,620
Foreign exchange contracts 72,228 136,628
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.
89
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 certain percentages of deposit
types, subject to various adjustments. At December 31, 1998, the net reserve
requirement amounted to $264.2 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 $1.4 billion at December 31, 1999.
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, 1999.
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.
90
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides summary information regarding regulatory capital
for BB&T and its significant banking subsidiaries as of December 31, 1999 and
1998:
December 31, 1999 December 31, 1998
----------------------------- -----------------------------
For Minimum For Minimum
Actual Capital Actual Capital
----------------- Adequacy ----------------- Adequacy
Ratio Amount Purposes Ratio Amount Purposes
----- ---------- ----------- ----- ---------- -----------
(Dollars in thousands)
Tier 1 Capital
BB&T 9.3% $2,845,786 $1,223,794 10.5% $2,747,687 $1,051,106
BB&T--NC 9.8 1,977,275 806,531 10.9 1,839,894 675,643
BB&T--SC 9.7 366,991 151,036 12.7 421,891 133,225
BB&T--VA 11.3 373,412 132,495 14.8 477,894 129,551
First Liberty 9.3 122,272 52,684 10.3 111,660 43,321
Total Capital
BB&T 13.0% $3,985,971 $2,447,589 14.9% $3,907,092 $2,102,212
BB&T--NC 11.0 2,209,849 1,613,062 12.2 2,059,494 1,351,286
BB&T--SC 11.0 413,911 302,071 13.9 463,895 266,451
BB&T--VA 12.5 415,120 264,990 16.0 518,525 259,103
First Liberty 10.5 138,046 105,369 11.6 125,185 86,642
Leverage Capital
BB&T 6.6% $2,845,786 $1,287,471 7.1% $2,747,687 $1,160,476
BB&T--NC 6.7 1,977,275 879,741 7.2 1,839,894 764,608
BB&T--SC 7.7 366,991 142,148 9.3 421,891 135,789
BB&T--VA 7.5 373,412 148,745 9.4 477,894 153,013
First Liberty 6.9 122,272 53,018 7.5 111,660 44,843
91
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE O. Parent Company Financial Statements
Condensed Balance Sheets
December 31, 1999 and 1998
1999 1998
----------- -----------
(Dollars in thousands)
Assets
Cash and due from banks $ 8,120 $ 4,323
Interest-bearing bank balances 548,615 607,389
Securities 15,850 21,539
Investment in banking subsidiaries 3,198,063 3,499,484
Investment in other subsidiaries 554,749 170,855
----------- -----------
Total investments in subsidiaries 3,752,812 3,670,339
----------- -----------
Advances to subsidiaries 348,000 359,600
Premises and equipment 5,201 5,366
Receivables from subsidiaries and other assets 266,927 183,972
----------- -----------
Total assets $ 4,945,525 $ 4,852,528
=========== ===========
Liabilities and Shareholders' Equity
Short-term borrowed funds $ 698,704 $ 677,141
Dividends payable 69,589 52,110
Accounts payable and accrued liabilities 27,873 26,542
Long-term debt 950,200 925,590
----------- -----------
Total liabilities 1,746,366 1,681,383
----------- -----------
Total shareholders' equity 3,199,159 3,171,145
----------- -----------
Total liabilities and shareholders' equity $ 4,945,525 $ 4,852,528
=========== ===========
92
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Income Statements
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Income
Dividends from subsidiaries $589,329 $421,774 $265,442
Interest and other income from subsidiaries 91,521 95,232 74,911
Interest on investment securities 322 971 1,782
Other income 498 17,914 2,647
-------- -------- --------
Total income 681,670 535,891 344,782
-------- -------- --------
Expenses
Interest expense 81,815 89,903 56,127
Other expenses 23,646 37,202 30,372
-------- -------- --------
Total expenses 105,461 127,105 86,499
-------- -------- --------
Income before income taxes and equity in
undistributed
earnings of subsidiaries 576,209 408,786 258,283
Income tax benefit 1,352 3,877 1,075
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries 577,561 412,663 259,358
Equity in undistributed earnings of subsidiaries 35,286 130,548 146,222
-------- -------- --------
Net income $612,847 $543,211 $405,580
======== ======== ========
93
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
Cash Flows Operating Activities:
Net income $ 612,847 $ 543,211 $ 405,580
Adjustments to reconcile net income to net
cash provided by
operating activities:
Net income of subsidiaries less than (in
excess of) dividends from subsidiaries (35,286) (130,548) (146,222)
Depreciation of premises and equipment 165 171 272
Amortization of unearned compensation 3,873 1,171 8,133
Discount secretion and premium amortization -- -- 421
Loss (gain) on sales of securities 955 (37) --
Loss on disposals of other real estate owned -- 191 47
Reconciliation of fiscal year of merged
company to calendar year -- (158) --
Decrease (increase) in other assets (88,109) (117,903) (27,526)
Increase (decrease) in accounts payable and
accrued liabilities (25) 5,832 (38)
--------- --------- ---------
Net cash provided by operating activities 494,420 301,930 240,667
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of securities available
for sale 4,729 64,984 10,206
Proceeds from maturities, calls and paydowns
of securities available for sale -- -- 35,482
Purchases of securities available for sale -- (54,804) (214,064)
Investment in subsidiaries (81,371) (82,677) (12,024)
Advances to subsidiaries (728,586) (677,728) (446,844)
Proceeds from repayment of advances to
subsidiaries 740,186 530,967 369,435
Net cash (paid) received in purchase
accounting transactions 588 (6,051) (45,852)
Other, net -- 143 594
--------- --------- ---------
Net cash used in investing activities (64,454) (225,166) (303,067)
--------- --------- ---------
Cash Flows From Financing Activities:
Net increase in long-term debt 19,806 393,178 393,192
Net increase in short-term borrowed funds 21,563 27,750 161,581
Advances from subsidiaries -- 4,191 --
Repayment of advances from subsidiaries -- (3,260) --
Net proceeds from common stock issued 39,594 34,916 27,274
Redemption of common stock (326,008) (345,029) (326,838)
Cash dividends paid on common and preferred
stock (239,898) (202,740) (170,081)
Other, net -- 264 (1,259)
--------- --------- ---------
Net cash (used in) provided by financing
activities (484,943) (90,730) 83,869
--------- --------- ---------
Net (Decrease) Increase in Cash and Cash
Equivalents (54,977) (13,966) 21,469
Cash and Cash Equivalents at Beginning of Year 611,712 625,678 604,209
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 556,735 $ 611,712 $ 625,678
========= ========= =========
94
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- 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 similar instruments or by using discounted cash flow
analyses, based on BB&T's current incremental borrowing rates for similar
types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that BB&T would receive or pay
to terminate the swap agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the swap
counterparties.
95
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments to extend credit, standby letters of credit and financial
guarantees written: The fair values of commitments are estimated using the
fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair values also consider the
difference between current levels of interest rates and the committed rates.
The fair values of guarantees and letters of credit are estimated based on
fees currently charged for similar agreements.
Other off-balance sheet instruments: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
The following is a summary of the carrying amounts and fair values of BB&T's
financial assets and liabilities as of the periods indicated:
1999 1998
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 1,435,820 $ 1,435,820 $ 1,242,590 $ 1,242,590
Trading securities 93,221 93,221 60,422 60,422
Securities available for
sale 10,482,044 10,482,044 9,498,486 9,498,486
Securities held to maturity 97,122 98,070 360,783 368,655
Loans and leases:
Loans 27,726,261 27,269,164 25,617,240 26,211,686
Leases 1,471,194 N/A 986,885 N/A
Allowance for losses (387,963) N/A (361,869) N/A
----------- -----------
Net loans and leases $28,809,492 $26,242,256
----------- -----------
Financial liabilities:
Deposits $27,251,142 27,289,977 $26,449,632 26,503,491
Short-term borrowed funds 6,875,290 6,875,290 3,885,737 3,885,737
Long-term debt 5,489,238 5,471,527 5,409,388 5,472,523
Capitalized leases 2,496 N/A 3,462 N/A
- --------
N/A--not applicable.
96
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the notional or contractual amounts and fair
values of BB&T's off-balance sheet financial instruments as of the periods
indicated:
1999 1998
-------------------- --------------------
Notional/ Notional/
Contract Fair Contract Fair
Amount Value Amount Value
----------- -------- ----------- --------
(Dollars in thousands)
Off balance sheet financial
instruments:
Interest rate swaps, caps and
floors $ 1,301,611 $ (301) $ 3,825,596 $ 35,938
Commitments to extend, originate
or purchase credit 12,109,347 (25,492) 10,678,283 374,928
Standby and commercial letters of
credit and financial guarantees
written 503,523 (7,553) 422,428 (4,650)
Forward and futures contracts 319,411 2,544 1,274,620 196,952
Foreign exchange contracts 72,228 1,149 136,628 319
Option contracts purchased 15,000 (10) 35,000 623
Option contracts written 47,250 236 1,267,250 (257)
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 a
floating rate, 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, 1999, derivatives with a total notional
value of $1.3 billion, with terms ranging up to sixteen years, were
outstanding.
97
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth certain information concerning BB&T's interest
rate swaps at December 31, 1999:
Interest Rate Swaps, Caps, Floors and Collars
December 31, 1999
(Dollars in thousands)
Notional Receive Pay Fair
Type Amount Rate Rate Value
- ---- ----------- ----------- ------------ -----------
Receive fixed swaps $ 745,000 6.35% 6.20% $ (6,712)
Pay fixed swaps 494,361 5.74 5.31 6,411
Caps, Floors & Collars 62,250 -- -- --
---------- ----------- ---------- -----------
Total $1,301,611 6.11% 5.84% $ (301)
========== =========== ========== ===========
Receive Pay Fixed Caps, Floors
Year-to-date Activity Fixed Swaps Swaps & Collars Total
- --------------------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 $1,286,200 $ 1,242,146 $1,297,250 $ 3,825,596
Additions 40,000 385,175 15,000 440,175
Maturities/amortizations (581,200) (1,051,553) (550,000) (2,182,753)
Terminations -- (81,407) (700,000) (781,407)
---------- ----------- ---------- -----------
Balance, December 31, 1999 $ 745,000 $ 494,361 $ 62,250 $ 1,301,611
========== =========== ========== ===========
One Year One to Five Five to 10
Maturity Schedule or Less Years Years Total
- ----------------- ----------- ----------- ------------ -----------
Receive fixed swaps $ 185,000 $ 270,000 $ 290,000 $ 745,000
Pay fixed swaps 18,215 445,397 30,749 494,361
Caps, Floors & Collars 15,000 47,250 -- 62,250
---------- ----------- ---------- -----------
Total $ 218,215 $ 762,647 $ 320,749 $ 1,301,611
========== =========== ========== ===========
As of December 31, 1999, deferred gains from new swap transactions initiated
during 1999 were $195,000. There were no unamortized deferred gains or losses
from terminated transactions remaining at year end. Active transactions
resulted in a pretax net loss of $2.9 million.
In addition to interest rate swaps, BB&T utilizes written covered over-the-
counter call options on specific securities in the available-for-sale portfolio
in order to enhance returns. During 1999, options were written on securities
totaling $1.7 billion. Option fee income was $2.5 million for 1999. There were
no unexercised options outstanding at December 31, 1999 or 1998.
BB&T also utilizes over-the-counter purchased put options and net purchased
put options (combination of purchased put option and written call option) in
its mortgage banking activities. These options are used to hedge the mortgage
warehouse and 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, 1999, net purchased put option contracts with a notional
value of $15.0 million were outstanding.
The $1.3 billion notional amount of derivatives used in interest rate risk
management are primarily used to hedge variable rate commercial loans,
adjustable rate mortgage loans, retail certificates of deposit and fixed rate
notes. BB&T does not utilize derivatives for trading purposes.
98
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Although off-balance sheet derivative financial instruments do not expose
BB&T to credit risk equal to the notional amount, such agreements generate
credit risk to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. Such risk
is minimized based on the 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,
1999, BB&T's interest rate swaps, caps, floors and collars reflected an
unrealized loss of $301,000.
Other risks associated with interest-sensitive derivatives include the impact
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, 1999,
BB&T had no indexed amortizing swaps outstanding.
99
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,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands, except per
share data)
Basic Earnings Per Share:
Net income $ 612,847 $ 543,211 $ 405,580
Less:
Preferred dividend requirement -- -- 113
----------- ----------- -----------
Income available for common shares $ 612,847 $ 543,211 $ 405,467
=========== =========== ===========
Weighted average number of common shares
outstanding during the period 329,305,820 325,735,189 324,799,136
----------- ----------- -----------
Basic earnings per share $ 1.86 $ 1.67 $ 1.25
=========== =========== ===========
Diluted Earnings Per Share:
Net income $ 612,847 $ 543,211 $ 405,580
=========== =========== ===========
Weighted average number of common shares 329,305,820 325,735,189 324,799,136
Add:
Shares issuable assuming conversion of
convertible preferred stock -- -- 305,370
Dilutive effect of outstanding options
(as determined by application of
treasury stock method) 5,992,513 6,600,924 5,315,769
Issuance of additional shares under
share repurchase agreement, contingent
upon market price -- -- 144,588
----------- ----------- -----------
Weighted average number of common shares,
as adjusted 335,298,333 332,336,113 330,564,863
=========== =========== ===========
Diluted earnings per share $ 1.83 $ 1.63 $ 1.23
=========== =========== ===========
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 primarily on BB&T's existing organizational structure. The
segments require unique technology and marketing strategies and offer different
products and services. While BB&T is managed as an integrated organization,
individual executive managers are held accountable for the operations of 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.
100
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, which 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 necessarily indicative of
the segments' financial performance if they operated as independent entities.
BB&T's internal reporting system was significantly modified during 1999 and
1998, and information from 1997 has not been presented herein to reflect the
new reporting system because it is not practicable to restate prior period
results. 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 has completed various
mergers and acquisitions accounted for as poolings of interests, which present
additional practical limitations to the presentation of comparable 1997
information.
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, certain revenues of Mortgage
Banking, Trust Services, Agency Insurance and 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.
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. Required 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, reflected in the accompanying table
as "other revenues and expenses."
101
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BB&T has implemented an extensive noninterest expense allocation process to
support organizational and product 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 expenses is
not allocated, but is retained in corporate accounts reflected as other
expenses in the accompanying tables. Income taxes are allocated to the various
segments using effective tax rates.
BB&T utilizes a funds transfer pricing ("FTP") system to eliminate the effect
of interest rate risk from the segments' net interest income because such risk
is centrally managed within the Treasury segment. The FTP system credits or
charges the segments with the true value or cost of the funds the segments
create or use. The FTP system provides a funds credit for sources of funds and
a funds charge for the use of funds by each segment. The net FTP credit or
charge is reflected as net intersegment interest income (expense) in the
accompanying tables.
Banking Network
BB&T's Banking Network, which operates in North Carolina, South Carolina,
Virginia, Maryland, Georgia, West Virginia, Kentucky and Washington, D.C.,
serves commercial and retail clients by offering a variety of loan and deposit
products and other financial services. The Banking Network is primarily
responsible for client relationships, and, therefore, is credited with revenue
from the Mortgage Banking, Trust Services, Agency Insurance and Investment
Banking and Brokerage segments, which is reflected in intersegment noninterest
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for additional discussion concerning the functions of
the Banking Network.
Mortgage Banking
The Mortgage Banking segment retains and services mortgage loans originated
by the Banking Network and 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
reflects 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 and
estate planning, investment counseling and 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.
102
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 customers investment
alternatives, including discount brokerage services, fixed-rate and variable-
rate annuities, mutual funds and government and municipal bonds and various
other investment products through BB&T Investment Services Inc., a subsidiary
of BB&T-NC. The Investment Banking and Brokerage segment includes Scott &
Stringfellow, Inc., a full-service brokerage and investment banking firm
headquartered in Richmond, Virginia. Scott & Stringfellow specializes in the
origination, trading and distribution of fixed-income securities and equity
products in both the public and private capital markets. Scott & Stringfellow
also has a public finance department that provides investment banking services,
financial advisory services and municipal bond financing to a variety of
regional tax-exempt issuers. The Banking Network is credited for investment
service revenues on referred accounts, with the corresponding charge retained
in the Corporate Office. These revenues and expenses are reflected in the
accompanying tables as intersegment noninterest income and expense.
Treasury
BB&T's Treasury segment is responsible for the management of the securities
portfolios, overall balance sheet funding and liquidity, and overall management
of interest rate risk. See the Market Risk Management section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information about the responsibilities of the Treasury segment.
103
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables disclose selected financial information for BB&T's
reportable business segments:
For the Year Ended December 31, 1999
-------------------------------- --------------------------------------------------------------
Investment Total
Banking Mortgage Trust Agency Banking All Other Segment
Network Banking Services Insurance and Brokerage Treasury Segments(/1/) Results
----------- ---------- -------- --------- ------------- ----------- ------------- -----------
(Dollars in thousands)
Net interest
income (expense)
from external
customers $ 916,201 $ 422,910 $(33,668) $ -- $ 7,561 $ 162,459 $ 222,397 $ 1,697,860
Net intersegment
interest income
(expense) 327,072 (307,484) 42,197 -- -- (22,111) -- 39,674
----------- ---------- -------- ------- -------- ----------- ---------- -----------
Net interest
income 1,243,273 115,426 8,529 -- 7,561 140,348 222,397 1,737,534
----------- ---------- -------- ------- -------- ----------- ---------- -----------
Provision for
loan and lease
losses 108,013 2,737 -- -- -- 90 16,631 127,471
Noninterest
income from
external
customers 323,972 113,486 57,290 78,125 132,519 1,031 28,850 735,273
Intersegment
noninterest
income 123,549 -- -- -- -- -- -- 123,549
Noninterest
expense 626,060 59,297 38,022 59,688 124,900 4,783 53,406 966,156
Intersegment
noninterest
expense 261,420 18,918 2,532 2,748 1,792 8,258 4,910 300,578
----------- ---------- -------- ------- -------- ----------- ---------- -----------
Income before
income taxes 695,301 147,960 25,265 15,689 13,388 128,248 176,300 1,202,151
Provision for
income taxes 229,449 45,555 8,039 6,278 6,506 32,403 47,284 375,514
----------- ---------- -------- ------- -------- ----------- ---------- -----------
Net income $ 465,852 $ 102,405 $ 17,226 $ 9,411 $ 6,882 $ 95,845 $ 129,016 $ 826,637
=========== ========== ======== ======= ======== =========== ========== ===========
Identifiable
segment assets $23,927,142 $5,597,514 $ 31,469 $63,873 $699,100 $11,510,760 $1,056,125 $42,885,983
=========== ========== ======== ======= ======== =========== ========== ===========
---------------------------------------------
Other Reconciling
Revenues and Items & Consolidated
Expenses(/2/) Eliminations Totals
------------- ------------------ ------------
Net interest
income (expense)
from external
customers $ 90,143 $ (206,288)(/4/) $ 1,581,715
Net intersegment
interest income
(expense) (12,170) (27,504)(/3/) --
------------- ------------------ ------------
Net interest
income 77,973 (233,792) 1,581,715
------------- ------------------ ------------
Provision for
loan and lease
losses 5,690 (41,064)(/4/) 92,097
Noninterest
income from
external
customers 15,721 10,362 (/4/) 761,356
Intersegment
noninterest
income -- (123,549)(/3/) --
Noninterest
expense 288,278 92,470 (/4/) 1,346,904
Intersegment
noninterest
expense (60,682) (239,896)(/3/) --
------------- ------------------ ------------
Income before
income taxes (139,592) (158,489) 904,070
Provision for
income taxes (45,814) (38,477)(/4/) 291,223
------------- ------------------ ------------
Net income $ (93,778) $ (120,012) $ 612,847
============= ================== ============
Identifiable
segment assets $2,835,382 $(2,240,369)(/4/) $43,480,996
============= ================== ============
- ----
(1) Financial data from segments below the quantitative thresholds requiring
disclosure are attributable to a number of smaller operating segments.
Those segments include BB&T's nonbank consumer finance operations, a
factoring subsidiary, a subsidiary specializing in financing commercial
lawn care equipment and a leasing company.
(2) Other revenues and expenses include amounts incurred by BB&T's support
functions not allocated to the various segments. Amounts include any
unallocated provision for loan and lease losses and unallocated general
corporate expenses, as well as costs associated with BB&T's Year 2000
compliance efforts.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of the internal management accounting practices.
These adjustments include the elimination of the FTP credits and charges,
the elimination of the intersegment noninterest income described above and
the elimination of intersegment noninterest expense allocated to the
various segments.
(4) To reflect elimination entries necessary to consolidate the segment data.
104
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year Ended December 31, 1998
-------------------------------- -------------------------------------------------------------
Investment Total
Banking Mortgage Trust Agency Banking All Other Segment
Network Banking Services Insurance and Brokerage Treasury Segments(/1/) Results
----------- ---------- -------- --------- ------------- ---------- ------------- -----------
(Dollars in thousands)
Net interest
income (expense)
from external
customers $ 847,315 $ 409,944 $(33,717) $ -- $ 1,127 $ 126,762 $ 203,497 $ 1,554,928
Net intersegment
interest income
(expense) 286,820 (270,173) 37,989 -- -- (135) -- 54,501
----------- ---------- -------- ------- -------- ---------- ---------- -----------
Net interest
income 1,134,135 139,771 4,272 -- 1,127 126,627 203,497 1,609,429
----------- ---------- -------- ------- -------- ---------- ---------- -----------
Provision for
loan and lease
losses 104,168 3,851 -- -- -- 103 20,557 128,679
Noninterest
income from
external
customers 297,995 76,491 43,635 50,252 48,604 11,631 24,648 553,256
Intersegment
noninterest
income 150,672 -- -- -- -- -- -- 150,672
Noninterest
expense 562,336 56,211 28,666 39,420 37,472 4,325 49,109 777,539
Intersegment
noninterest
expense 209,820 16,207 1,947 2,415 948 5,383 7,279 243,999
----------- ---------- -------- ------- -------- ---------- ---------- -----------
Income before
income taxes 706,478 139,993 17,294 8,417 11,311 128,447 151,200 1,163,140
Provision for
income taxes 265,495 52,847 6,528 3,367 4,524 46,415 9,990 389,166
----------- ---------- -------- ------- -------- ---------- ---------- -----------
Net income $ 440,983 $ 87,146 $ 10,766 $ 5,050 $ 6,787 $ 82,032 $ 141,210 $ 773,974
=========== ========== ======== ======= ======== ========== ========== ===========
Identifiable
segment assets $21,933,645 $6,274,100 $ 26,664 $40,262 $238,622 $9,417,056 $2,374,665 $40,305,014
=========== ========== ======== ======= ======== ========== ========== ===========
---------------------------------------------
Other Reconciling
Revenues and Items & Consolidated
Expenses(/2/) Eliminations Totals
------------- ------------------ ------------
Net interest
income (expense)
from external
customers $ 59,802 $ (188,077)(/4/) $ 1,426,653
Net intersegment
interest income
(expense) (12,238) (42,263)(/3/) --
------------- ------------------ ------------
Net interest
income 47,564 (230,340) 1,426,653
------------- ------------------ ------------
Provision for
loan and lease
losses 1,829 (28,666)(/4/) 101,842
Noninterest
income from
external
customers (30,172) 56,586 (/4/) 579,670
Intersegment
noninterest
income -- (150,672)(/3/) --
Noninterest
expense 265,921 65,707 (/4/) 1,109,167
Intersegment
noninterest
expense (55,464) (188,535)(/3/) --
------------- ------------------ ------------
Income before
income taxes (194,894) (172,932) 795,314
Provision for
income taxes (71,359) (65,704)(/4/) 252,103
------------- ------------------ ------------
Net income $ (123,535) $ (107,228) $ 543,211
============= ================== ============
Identifiable
segment assets $1,651,609 $(2,486,488)(/4/) $39,470,135
============= ================== ============
- ----
(1) Financial data from segments below the quantitative thresholds requiring
disclosure are attributable to a number of smaller operating segments.
Those segments include BB&T's nonbank consumer finance operations, a
factoring subsidiary, a subsidiary specializing in financing commercial
lawn care equipment and a leasing company.
(2) Other revenues and expenses include amounts incurred by BB&T's support
functions not allocated to the various segments. Amounts include any
unallocated provision for loan and lease losses and unallocated general
corporate expenses, as well as costs associated with BB&T's Year 2000
compliance efforts.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of the internal management accounting practices.
These adjustments include the elimination of the FTP credits and charges,
the elimination of the intersegment noninterest income described above and
the elimination of intersegment noninterest expense allocated to the
various segments.
(4) To reflect elimination entries necessary to consolidate the segment data.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, as of March 14,
2000:
BB&T CORPORATION
(Registrant)
/s/ John A. Allison, IV
By: _________________________________
John A. Allison, IV
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 14, 2000.
/s/ John A. Allison, IV
By: _________________________________
John A. Allison, IV
Chairman of the Board and
Chief Executive Officer
/s/ Scott E. Reed
By: _________________________________
Scott E. Reed
Senior Executive Vice President
and Chief Financial Officer
/s/ Sherry A. Kellett
By: _________________________________
Sherry A. Kellett
Senior Executive Vice President
and Controller
A Majority of the Directors of the Registrant are included.
/s/ Paul B. Barringer
By: _________________________________
Paul B. Barringer
Director
/s/ Alfred E. Cleveland
By: _________________________________
Alfred E. Cleveland
Director
/s/ W. R. Cuthbertson, Jr.
By: _________________________________
W. R. Cuthbertson, Jr.
Director
106
/s/ Ronald E. Deal
By: _________________________________
Ronald E. Deal
Director
/s/ A. J. Dooley, Sr.
By: _________________________________
A. J. Dooley, Sr.
Director
/s/ Tom D. Efird
By: _________________________________
Tom D. Efird
Director
/s/ Paul S. Goldsmith
By: _________________________________
Paul S. Goldsmith
Director
/s/ Lloyd Vincent Hackley
By: _________________________________
Lloyd Vincent Hackley
Director
/s/ Jane P. Helm
By: _________________________________
Jane P. Helm
Director
/s/ Richard Janeway, M.D.
By: _________________________________
Richard Janeway, M.D.
Director
/s/ J. Ernest Lathem, M.D.
By: _________________________________
J. Ernest Lathem, M.D.
Director
/s/ James H. Maynard
By: _________________________________
James H. Maynard
Director
By: _________________________________
Joseph A. McAleer, Jr.
Director
/s/ Albert O. McCauley
By: _________________________________
Albert O. McCauley
Director
107
/s/ Richard L. Player, Jr.
By: _________________________________
Richard L. Player, Jr.
Director
/s/ C. Edward Pleasants, Jr.
By: _________________________________
C. Edward Pleasants, Jr.
Director
/s/ Nido R. Qubein
By: _________________________________
Nido R. Qubein
Director
/s/ E. Rhone Sasser
By: _________________________________
E. Rhone Sasser
Director
/s/ Jack E. Shaw
By: _________________________________
Jack E. Shaw
Director
/s/ Harold B. Wells
By: _________________________________
Harold B. Wells
Director
108
EXHIBIT INDEX
Exhibit
No. Description Location
------- ----------- --------
2(a) Agreement and Plan of Incorporated herein by
Reorganization dated as of July 29, reference to Registration
1994 and amended and restated as of No. 33-56437.
October 22, 1994 between the
Registrant and BB&T Financial
Corporation.
2(b) Plan of Merger as of July 29, 1994 Incorporated herein by
as amended and restated on October reference to Registration
22, 1994 between the Registrant and No. 33-56437.
BB&T Financial Corporation.
2(c) Agreement and Plan of Incorporated herein by
Reorganization dated as of November reference to Exhibit 3(a)
1, 1996 between the Registrant and filed in the Annual Report on
United Carolina Bancshares Form 10-K, filed March 17,
Corporation, as amended. 1997.
2(d) Agreement of Plan of Reorganization Incorporated herein by
dated as of October 29, 1997 reference to Registration
between the Registrant and Life No. 33-44183.
Bancorp, Inc.
2(e) Agreement and Plan of Incorporated herein by
Reorganization dated as of February reference to Exhibit 99.1
6, 2000 between the Registrant and filed in the Current Report on
One Valley Bancorp, Inc. Form 8-K, dated February 9,
2000.
3(a)(i) Amended and Restated Articles of Incorporated herein by
Incorporation of the Registrant, as reference to Exhibit 3(a)
amended. filed in the Annual Report on
Form 10-K, filed March 17,
1997.
3(a)(ii) Articles of Amendment of Articles Incorporated herein by
of Incorporation. reference to Exhibit 3(a)(ii)
filed in the Annual Report on
Form 10-K, filed March 18,
1998.
3(b) Bylaws of the Registrant, as Incorporated herein by
amended. reference to Exhibit 3(b)
filed in the Annual Report on
Form 10-K, filed March 18,
1998.
4(a) Articles of Amendment to Amended Incorporated herein by
and Restated Articles of reference to Exhibit 3(a)
Incorporation of the Registrant filed in the Annual Report on
related to Junior Participating Form 10-K, filed March 17,
Preferred Stock. 1997.
4(b) Rights Agreement dated as of Incorporated herein by
December 17, 1996 between the reference to Exhibit 1 filed
Registrant and Branch Banking and under Form 8-A, filed
Trust Company, Rights Agent. January 10, 1997.
4(c) Subordinated Indenture (including Incorporated herein by
Form of Subordinated Debt Security) reference to Exhibit 4(d) of
between the Registrant and State Registration No. 333-02899.
Street Bank and Trust Company,
Trustee, dated as of May 24, 1996.
109
Exhibit
No. Description Location
------- ----------- --------
4(d) Senior Indenture (including Form of Incorporated herein by
Senior Debt Security) between the reference to Exhibit 4(c) of
Registrant and State Street Bank and Registration No. 333-02899.
Trust company, Trustee, dated as of
May 24, 1996.
10(a)* Death Benefit Only Plan, Dated April Incorporated herein by
23, 1990, by and between Branch reference to Registration No.
Banking and Trust Company (as 33-33984.
successor to Southern National Bank of
North Carolina) and L. Glenn Orr, Jr.
10(b)* BB&T Corporation Non-Employee Incorporated herein by
Directors' Deferred Compensation and reference to Exhibit 10(b) of
Stock Option Plan. the Annual Report on Form 10-
K, filed March 17, 1997.
10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by
Incentive Plan. reference to Registration No.
33-57865.
10(d)* Settlement and Non-Compete Agreement, Incorporated herein by
dated February 28, 1995, by and reference to Registration No.
between the Registrant and L. Glenn 33-56437.
Orr, Jr.
10(e)* Settlement Agreement, Waiver and Incorporated herein by
General Release dated September 19, reference to Registration No.
1994, by and between the Registrant, 33-56437.
Branch Banking and Trust Company (as
successor to Southern National Bank of
North Carolina)
and Gary E. Carlton.
10(f) BB&T Corporation 401(k) Savings Plan. Incorporated herein by
reference to Registration No.
33-57867.
10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by
Incentive Plan. reference to Exhibit 10(g)
filed in the Annual Report on
Form 10-K, filed March 17,
1997.
10(h)* Form of Branch Banking and Trust Incorporated by reference to
Company Long-Term Incentive Plan. the identified exhibit under
the Quarterly Report on Form
10-Q, filed May 14, 1991.
10(i)* Form of Branch Banking and Trust Incorporated by reference to
Company Executive Incentive the identified exhibit under
Compensation Plan. the Annual Report on Form 10-
K, filed February 22, 1985.
10(j)* Southern National Deferred Incorporated herein by
Compensation Plan for Key Employees. reference to Exhibit 10(j)
filed in the Annual Report on
Form 10-K, filed March 17,
1997.
10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by
reference to Exhibit 10(k)
filed in the Annual Report on
Form 10-K, filed March 17,
1997.
110
Exhibit
No. Description Location
------- ----------- --------
10(l)* BB&T Corporation Supplemental Incorporated herein by
Executive Retirement Plan. reference to Exhibit 10(l)
filed in the Annual Report on
Form 10-K, filed March 17,
1997.
10(m)* Settlement and Noncompetition Incorporated herein by
Agreement, dated July 1, 1997, by and reference to Exhibit 10(m)
between the Registrant and E. Rhone filed in the Annual Report on
Sasser. Form 10-K, filed March 18,
1998.
10(n)* BB&T Corporation Supplemental Defined Incorporated herein by
Contribution Plan for Highly reference to Registration No.
Compensated Employees. 333-69823.
10(o)* Scott & Stringfellow, Inc. Executive Incorporated herein by
and Employee Retention Plan. reference to Registration No.
333-81471.
10(p)* BB&T Corporation Non-Qualified Defined Incorporated herein by
Contribution Plan. reference to Registration No.
333-50035.
11 Statement re Computation of Earnings Filed herewith as Note R. of
Per Share. the "Notes to Consolidated
Financial Statements."
21 Subsidiaries of the Registrant. Filed herewith.
22 Proxy Statement for the 2000 Annual Future filing incorporated by
Meeting of Shareholders. reference pursuant to the
General Instruction G(3).
23(a) Consent of Independent Public Filed herewith.
Accountants.
23(b) Opinion of Independent Public Filed herewith on page 53.
Accountants.
27 Financial Data Schedule. Filed as an exhibit to the
electronically-filed document
as required.
- --------
* Management compensatory plan or arrangement.
111