10-Q 1 0001.txt QUARTERLY REPORT ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: September 30, 2000 Commission file number: 1-10853 BB&T CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-0939887 (State of Incorporation) (I.R.S. Employer Identification No.)
200 West Third Street Winston-Salem, North Carolina 27101 (Address of Principal Executive Offices) (Zip Code)
(336) 733-2000 (Registrant's Telephone Number, Including Area Code) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At October 31, 2000, 396,576,029 shares of the registrant's common stock, $5 par value, were outstanding. This Form 10-Q has 31 pages. The Exhibit Index is included on page 30. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- BB&T CORPORATION FORM 10-Q September 30, 2000 INDEX
Page No. -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)........................... 2 Consolidated Financial Statements.............................. 2 Notes to Consolidated Financial Statements..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 14 Analysis of Financial Condition................................ 14 Market Risk Management......................................... 18 Capital Adequacy and Resources................................. 22 Analysis of Results of Operations.............................. 23 Part II. OTHER INFORMATION Item 1. Legal Proceedings.......................................... 30 Item 6. Exhibits and Reports on Form 8-K........................... 30 SIGNATURES........................................................... 31 EXHIBIT 11 Calculation of Earnings Per Share......................... 9 EXHIBIT 27 Financial Data Schedule--Included with electronically- filed document only.
1 Part I. FINANCIAL INFORMATION Item 1. Financial Statements BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
September 30, December 31, 2000 1999 ------------- ------------ (unaudited) Assets Cash and due from banks .......................... $ 1,283,947 $ 1,466,071 Interest-bearing deposits with banks.............. 26,613 81,927 Federal funds sold and securities purchased under resale agreements or similar arrangements........ 310,914 432,877 Trading securities................................ 132,543 93,221 Securities available for sale..................... 13,129,528 12,257,822 Securities held to maturity (approximate market values of $70,312 at September 30, 2000, and $398,527 at December 31, 1999)................... 69,984 404,897 Loans held for sale............................... 505,038 367,243 Loans and leases, net of unearned income.......... 37,913,841 35,389,063 Allowance for loan and lease losses............... (505,576) (477,296) ----------- ----------- Loans and leases, net............................ 37,408,265 34,911,767 ----------- ----------- Premises and equipment, net....................... 723,609 713,089 Other assets...................................... 3,080,740 2,271,922 ----------- ----------- Total assets .................................... $56,671,181 $53,000,836 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing deposits..................... $ 4,856,375 $ 4,847,976 Savings and interest checking.................... 2,271,620 2,978,811 Money rate savings............................... 10,167,957 9,592,326 Other time deposits.............................. 16,932,290 16,199,129 Foreign deposits................................. 1,806,834 529,401 ----------- ----------- Total deposits................................... 36,035,076 34,147,643 ----------- ----------- Short-term borrowed funds......................... 6,692,661 7,971,873 Long-term debt.................................... 8,343,252 6,073,428 Accounts payable and other liabilities............ 1,263,189 744,273 ----------- ----------- Total liabilities................................ 52,334,178 48,937,217 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding......... -- -- Common stock, $5 par, 500,000,000 shares authorized; 397,828,643 issued and outstanding at September 30, 2000, and 398,742,188 at December 31, 1999............................... 1,989,143 1,993,711 Additional paid-in capital....................... 335,787 379,363 Retained earnings................................ 2,146,924 2,011,627 Unearned income and unvested restricted stock.... (7,190) (11,676) Accumulated other nonshareholder changes in equity, net of deferred income taxes of $(69,384) at September 30, 2000 and $(185,516) at December 31, 1999............................ (127,661) (309,406) ----------- ----------- Total shareholders' equity....................... 4,337,003 4,063,619 ----------- ----------- Total liabilities and shareholders' equity....... $56,671,181 $53,000,836 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 2 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months For the Nine Months Ended Ended September 30, September 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Dollars in thousands, except per share data) Interest Income Interest and fees on loans and leases........ $ 894,093 $ 750,292 $ 2,559,041 $ 2,165,725 Interest and dividends on securities.............. 222,225 208,545 630,627 594,539 Interest on short-term investments............. 5,084 6,038 15,975 16,077 ----------- ----------- ----------- ----------- Total interest income... 1,121,402 964,875 3,205,643 2,776,341 ----------- ----------- ----------- ----------- Interest Expense Interest on deposits..... 393,197 303,596 1,077,895 887,615 Interest on short-term borrowed funds.......... 91,328 83,576 295,067 216,928 Interest on long-term debt.................... 126,512 85,758 312,394 241,435 ----------- ----------- ----------- ----------- Total interest expense.. 611,037 472,930 1,685,356 1,345,978 ----------- ----------- ----------- ----------- Net Interest Income....... 510,365 491,945 1,520,287 1,430,363 Provision for loan and lease losses............ 38,200 24,352 92,431 74,401 ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan and Lease Losses............. 472,165 467,593 1,427,856 1,355,962 ----------- ----------- ----------- ----------- Noninterest Income Service charges on deposit accounts........ 69,186 60,991 196,401 178,512 Investment banking and brokerage fees and commissions............. 36,488 38,079 123,347 91,471 Mortgage banking income.. 24,243 37,501 76,605 133,871 Trust income............. 20,297 17,982 58,375 51,969 Agency insurance commissions............. 34,278 20,618 94,667 54,570 Other insurance commissions............. 3,910 3,779 11,142 10,639 Other nondeposit fees and commissions............. 37,503 30,125 103,433 89,257 Securities gains (losses), net........... (181,361) (1,882) (222,911) (4,180) Other income............. 27,456 15,419 72,371 45,667 ----------- ----------- ----------- ----------- Total noninterest income................. 72,000 222,612 513,430 651,776 ----------- ----------- ----------- ----------- Noninterest Expense Personnel expense........ 238,600 218,214 699,867 618,620 Occupancy and equipment expense................. 70,862 63,530 201,738 184,292 Amortization of intangibles and mortgage servicing rights........ 19,874 20,080 59,525 59,776 Other noninterest expense................. 149,709 131,759 395,927 349,467 ----------- ----------- ----------- ----------- Total noninterest expense................ 479,045 433,583 1,357,057 1,212,155 ----------- ----------- ----------- ----------- Earnings Income before income taxes................... 65,120 256,622 584,229 795,583 Provision for income taxes................... 15,856 82,843 183,243 256,800 ----------- ----------- ----------- ----------- Net income.............. $ 49,264 $ 173,779 $ 400,986 $ 538,783 =========== =========== =========== =========== Per Common Share Net income: Basic................... $ .12 $ .44 $ 1.00 $ 1.36 =========== =========== =========== =========== Diluted................. $ .12 $ .43 $ .99 $ 1.34 =========== =========== =========== =========== Cash dividends paid by BB&T Corporation........ $ .23 $ .20 $ .63 $ .55 =========== =========== =========== =========== Weighted Average Shares Outstanding Basic.................... 399,662,723 394,941,799 399,588,220 395,125,226 =========== =========== =========== =========== Diluted.................. 404,477,344 401,178,084 404,427,972 402,126,950 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (Dollars in thousands)
Accumulated Other Shares of Additional Retained Nonshareholder Total Common Common Paid-In Earnings Changes in Shareholders' Stock Stock Capital and Other* Equity Equity ----------- ---------- ---------- ---------- -------------- ------------- Balance, December 31, 1998, as restated...... 396,201,255 $1,981,006 $376,670 $1,600,150 $ 73,103 $4,030,929 Add (Deduct) Nonshareholder changes in equity:** Net income............. -- -- -- 538,783 -- 538,783 Unrealized holding gains (losses) arising during the period............... -- -- -- -- (232,219) (232,219) Less: reclassification adjustment, net of tax of $(1,349)...... -- -- -- -- (2,831) (2,831) ----------- ---------- -------- ---------- --------- ---------- Net unrealized gains (losses) on securities............ -- -- -- -- (235,050) (235,050) ----------- ---------- -------- ---------- --------- ---------- Total nonshareholder changes in equity..... -- -- -- 538,783 (235,050) 303,733 ----------- ---------- -------- ---------- --------- ---------- Common stock issued.... 8,903,643 44,518 352,258 -- -- 396,776 Redemption of common stock................. (8,537,631) (42,688) (344,098) -- -- (386,786) Cash dividends declared on common stock....... -- -- -- (277,329) -- (277,329) Other.................. -- -- -- (12,060) -- (12,060) ----------- ---------- -------- ---------- --------- ---------- Balance, September 30, 1999................... 396,567,267 $1,982,836 $384,830 $1,849,544 $(161,947) $4,055,263 =========== ========== ======== ========== ========= ========== Balance, December 31, 1999, as restated...... 398,742,188 $1,993,711 $379,363 $1,999,951 $(309,406) $4,063,619 Add (Deduct) Nonshareholder changes in equity:** Net income............. -- -- -- 400,986 -- 400,986 Unrealized holding gains (losses) arising during the period............... -- -- -- -- (334,751) (334,751) Less: reclassification adjustment, net of tax of $(69,905)..... -- -- -- -- (153,006) (153,006) ----------- ---------- -------- ---------- --------- ---------- Net unrealized gains (losses) on securities............ -- -- -- -- 181,745 181,745 ----------- ---------- -------- ---------- --------- ---------- Total nonshareholder changes in equity..... -- -- -- 400,986 181,745 582,731 ----------- ---------- -------- ---------- --------- ---------- Common stock issued.... 2,986,155 14,931 45,731 -- -- 60,662 Redemption of common stock................. (3,899,700) (19,499) (89,307) -- -- (108,806) Cash dividends declared on common stock....... -- -- -- (265,689) -- (265,689) Other.................. -- -- -- 4,486 -- 4,486 ----------- ---------- -------- ---------- --------- ---------- Balance, September 30, 2000................... 397,828,643 $1,989,143 $335,787 $2,139,734 $(127,661) $4,337,003 =========== ========== ======== ========== ========= ==========
-------- * Other includes unearned income and unvested restricted stock. ** Comprehensive income as defined by SFAS No. 130. The accompanying notes are an integral part of these consolidated financial statements. 4 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
2000 1999 ----------- ----------- (Dollars in thousands) Cash Flows From Operating Activities: Net income.......................................... $ 400,986 $ 538,783 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses................. 92,431 74,401 Depreciation of premises and equipment.............. 63,618 76,372 Amortization of intangibles and mortgage servicing rights............................................. 59,525 59,776 Accretion of negative goodwill...................... (4,682) (4,682) Amortization of unearned stock compensation......... 4,486 2,690 Discount accretion and premium amortization on securities, net.................................... (3,544) (2,099) Net decrease (increase) in trading account securities......................................... (39,322) (303) Loss (gain) on sales of securities, net............. 222,911 4,180 Loss (gain) on disposals of premises and equipment, net................................................ 1,554 (4,400) Proceeds from sales of loans held for sale.......... 1,565,184 3,390,074 Purchases of loans held for sale.................... (492,272) (827,952) Origination of loans held for sale, net of principal collected................................ (1,201,669) (1,692,671) Decrease (increase) in: Accrued interest receivable........................ (95,550) (30,468) Other assets....................................... (957,178) (116,410) Increase (decrease) in: Accrued interest payable........................... (1,886) 48,292 Accounts payable and other liabilities............. 716,049 204,972 Other, net.......................................... (10,138) (24,619) ----------- ----------- Net cash provided by (used in) operating activities....................................... 320,503 1,695,936 ----------- ----------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale............................................... 4,741,468 606,883 Proceeds from maturities, calls and paydowns of securities available for sale...................... 1,194,716 2,424,883 Purchases of securities available for sale.......... (5,735,017) (4,831,017) Proceeds from maturities, calls and paydowns of securities held to maturity........................ 37,260 57,403 Purchases of securities held to maturity............ (10,219) (13,844) Leases made to customers............................ (87,474) (93,096) Principal collected on leases....................... 67,786 53,819 Loan originations, net of principal collected....... (2,951,873) (2,671,106) Purchases of loans.................................. (386,619) (83,139) Net cash (paid) acquired in transactions accounted for under the purchase method...................... (10,467) 311,975 Purchases and originations of mortgage servicing rights............................................. (40,880) (48,934) Proceeds from disposals of premises and equipment... 8,600 18,842 Purchases of premises and equipment................. (82,088) (90,694) Proceeds from sales of foreclosed property.......... 18,654 22,878 Proceeds from sales of other real estate held for development or sale................................ 3,520 9,916 Other, net.......................................... -- (38) ----------- ----------- Net cash used in investing activities............. (3,232,633) (4,325,269) ----------- ----------- Cash Flows From Financing Activities: Net increase (decrease) in deposits................. 1,887,433 (156,024) Net increase (decrease) in short-term borrowed funds.............................................. (1,279,212) 2,066,207 Proceeds from long-term debt........................ 6,068,460 2,285,482 Repayments of long-term debt........................ (3,798,636) (879,547) Net proceeds from common stock issued............... 26,653 43,534 Redemption of common stock.......................... (108,806) (386,786) Cash dividends paid on common stock................. (243,163) (208,837) Other, net.......................................... -- 452 Net cash provided by financing activities......... 2,552,729 2,764,481 Net Decrease in Cash and Cash Equivalents............ (359,401) 135,148 Cash and Cash Equivalents at Beginning of Period..... 1,980,875 1,795,851 ----------- ----------- Cash and Cash Equivalents at End of Period........... $ 1,621,474 $ 1,930,999 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest............................................ $ 1,642,141 $ 1,101,854 Income taxes........................................ 65,224 69,182 Noncash financing and investing activities: Transfer of securities held to maturity to available for sale................................. 307,775 231,529 Transfer of loans to foreclosed property............ 22,184 20,664 Transfer of other real estate owned to fixed assets............................................. 3,675 1,255 Transfer of fixed assets to other real estate owned.............................................. 1,471 3,940 Tax benefit from exercise of stock options.......... 3,672 14,787 Securitization of mortgage loans.................... 747,067 --
The accompanying notes are an integral part of these consolidated financial statements. 5 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) A. Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of BB&T Corporation and subsidiaries (referred to herein as "BB&T", "the Corporation" or "the Company") as of September 30, 2000 and December 31, 1999; the consolidated statements of income for the three and nine months ended September 30, 2000 and 1999; the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2000 and 1999; and the consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999. The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T's 1999 Annual Report on Form 10-K, as restated in BB&T's Current Report on Form 8-K filed on October 27, 2000, should be referred to in connection with the reading of these unaudited interim consolidated financial statements. In certain instances, amounts reported in the 1999 financial statements have been reclassified to conform to the 2000 statement presentation. Such reclassifications had no effect on shareholders' equity or net income. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged; (5) costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected; (6) expected cost savings associated with pending mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending mergers may be greater than expected; (8) 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. B. Nature of Operations BB&T Corporation is a financial 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 Washington, D.C. through its subsidiaries. BB&T's principal banking subsidiaries, Branch Banking and 6 Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T-SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"), provide a wide range of traditional banking services to individuals and commercial customers. BB&T is also the parent company for fifteen subsidiary banks acquired through mergers with Hardwick Holding Company, First Banking Company of Southeast Georgia and One Valley Bancorp, Inc. These banks are expected to be merged with and into BB&T-NC or BB&T-VA based on their states of operation. Substantially all of BB&T's loans are to individuals residing in the market areas described above or to businesses that are located in this geographic area. Subsidiaries of BB&T's commercial banking units offer lease financing to commercial businesses and municipal governments, investment services, (including discount brokerage services, annuities, mutual funds and government and municipal bonds), life insurance and property and casualty insurance on an agency basis and insurance premium financing. Direct nonbank subsidiaries of BB&T provide a variety of financial services including automobile lending, equipment financing, factoring, full-service securities brokerage, investment banking and corporate finance services. C. New Accounting Pronouncements In June, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. 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 delayed the original effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amends SFAS No. 133. SFAS No. 138 addresses a limited number of issues related to the implementation of SFAS No. 133. The notional amount of derivative financial instruments held by BB&T at September 30, 2000, was $2.7 billion with unrealized net losses of $1.4 million compared to $2.0 billion with unrealized net gains of $4.5 million at December 31, 1999. The transition obligation related to the adoption of SFAS No. 133, as amended, is not expected to have a material effect on BB&T's consolidated financial position or consolidated results of operations. Additionally, management believes that substantially all of BB&T's derivatives should qualify for hedge accounting and be highly effective in offsetting the hedged risk. Accordingly, the adoption of SFAS No. 133, as amended, is not expected to have a material impact on BB&T's consolidated financial position or consolidated results of operations. On January 1, 1999, BB&T adopted the provisions of SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The statements provide accounting and reporting standards for such transactions based on consistent application of a financial components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Portions of the 7 statement are effective immediately and have been adopted by BB&T. Other portions become effective for transactions occurring after March 31, 2001. The adoption of the continuing provisions of SFAS No. 125 did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. Management does not anticipate that the adoption of the new provisions of SFAS No. 140 will have a material impact on BB&T's consolidated financial position or consolidated results of operations. D. Mergers and Acquisitions The following table presents summary information with respect to mergers and acquisitions completed by BB&T Corporation during 1999 and 2000: SUMMARY OF COMPLETED MERGERS AND ACQUISITIONS
Goodwill Date of Accounting Goodwill Amoritization Acquisition Acquired Institution Headquarters Total Assets Method Recorded Period ----------------- ------------------------------------ ----------------- -------------- ---------- ------------- ------------- July 6, 2000 One Valley Bancorp, Inc. Charleston, W.Va. $ 6.4 billion Pooling $ N/A N/A June 15, 2000 First Banking Company of Southeast Georgia Statesboro, Ga. 420.0 million Pooling N/A N/A June 13, 2000 Hardwick Holding Company Dalton, Ga. 507.2 million Pooling N/A N/A January 13, 2000 Premier Bancshares, Inc. Atlanta, Ga. 2.0 billion Pooling N/A N/A -------------------------------------------------------------------------------------------------------------------------------- November 10, 1999 First Liberty Financial Corp. Macon, Ga. $ 1.7 billion Pooling $ N/A N/A August 27, 1999 Matewan BancShares, Inc. Williamson, W.Va. 734.7 million Purchase 92.8 million 15 Years July 14, 1999 Mason-Dixon Bancshares, Inc. Westminster, Md. 1.2 billion Pooling N/A N/A July 9, 1999 First Citizens Corporation Newnan, Ga. 417.8 million Pooling N/A N/A March 26, 1999 Scott & Stringfellow Financial, Inc. Richmond, Va. 262.1 million Purchase 72.8 million 15 Years March 5, 1999 MainStreet Financial Corporation Martinsville, Va. 2.0 billion Pooling N/A N/A -------------------------------------------------------------------------------------------------------------------------------- BB&T Common Shares Issued in Date of Complete Acquisition Transaction ------------------- ----------- July 6, 2000 43.1 million June 15, 2000 4.1 million June 13, 2000 3.9 million January 13, 2000 16.8 million -------------------------------------------------------------------------------------------------------------------------------- November 10, 1999 12.4 million August 27, 1999 3.2 million July 14, 1999 6.6 million July 9, 1999 3.2 million March 26, 1999 3.6 million March 5, 1999 16.8 million --------------------------------------------------------------------------------------------------------------------------------
N/A--Not Applicable The table above does not include mergers and acquisitions of acquired companies or insurance agency acquisitions, which are summarized below. In addition to the transactions included in the table above, BB&T acquired five insurance agencies during 2000, which were accounted for as purchases. In conjunction with these transactions, BB&T issued 1.1 million shares of common stock and recorded $30.4 million in goodwill, which is being amortized using the straight-line method over 15 years. During 1999, BB&T acquired eleven insurance agencies and the book of business from another agency. These acquisitions were accounted for as purchases. In conjunction with the transactions, BB&T issued a total of 1.5 million shares of common stock and recorded $52.8 million of goodwill, which is being amortized using the straight-line method over 15 years. 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. Pending Mergers and Acquisitions On July 27, 2000, BB&T announced plans to merge with FCNB Corp ("FCNB"), of Frederick, Maryland. FCNB has approximately $1.6 billion in assets and operates 34 banking offices, primarily in central Maryland. FCNB's shareholders will receive .725 shares of BB&T common stock in exchange for each share of FCNB held. The transaction is expected to be accounted for as a pooling of interests and projected to close in the first quarter of 2001. 8 On August 23, 2000, BB&T announced plans to acquire BankFirst Corporation ("BankFirst"), of Knoxville, Tennessee. BankFirst has approximately $848.8 million in assets and operates 32 banking offices in eastern Tennessee. In conjunction with the acquisition, shareholders of BankFirst will receive .4554 shares of BB&T common stock in exchange for each share of BankFirst common stock held. The transaction is expected to be accounted for as a purchase and projected to close in the fourth quarter of 2000. BB&T anticipates repurchasing substantially all of the shares projected to be issued in connection with this transaction prior to the acquisition. On September 6, 2000, BB&T announced plans to acquire FirstSpartan Financial Corp. ("FirstSpartan"), of Spartanburg, South Carolina. FirstSpartan has approximately $586 million in assets and operates 11 banking offices in the Upstate Region of South Carolina. In conjunction with the acquisition, shareholders of FirstSpartan will receive 1.0 share of BB&T common stock in exchange for each share of FirstSpartan common stock held. The transaction is expected to be accounted for as a purchase and is projected to close in the first quarter of 2001. BB&T anticipates repurchasing substantially all of the shares projected to be issued in connection with this transaction prior to the acquisition. E. Calculation of Earnings Per Common Share BB&T's basic and diluted earnings per common share amounts were calculated as follows: BB&T CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Periods as Indicated
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Dollars in thousands, except per share data) Basic Earnings Per Share: Weighted average number of common shares outstanding during the period........... 399,662,723 394,941,799 399,588,220 395,125,226 =========== =========== =========== =========== Net income................... $ 49,264 $ 173,779 $ 400,986 $ 538,783 =========== =========== =========== =========== Basic earnings per share..... $ .12 $ .44 $ 1.00 $ 1.36 =========== =========== =========== =========== Diluted Earnings Per Share: Weighted average number of common shares............... 399,662,723 394,941,799 399,588,220 395,125,226 Add: Dilutive effect of outstanding options (as determined by application of treasury stock method).. 4,814,621 6,236,285 4,839,752 7,001,724 Weighted average number of common shares, as adjusted.. 404,477,344 401,178,084 404,427,972 402,126,950 =========== =========== =========== =========== Net income................... $ 49,264 $ 173,779 $ 400,986 $ 538,783 =========== =========== =========== =========== Diluted earnings per share... $ .12 $ .43 $ .99 $ 1.34 =========== =========== =========== ===========
F. Segment Disclosures BB&T's operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage, and Treasury. These operating segments have been identified based primarily on BB&T's existing organizational structure. The segments 9 require unique technology and marketing strategies and offer different products and services. While BB&T is managed as an integrated organization, individual executive managers are held accountable for the operations of the business segments that report to them. BB&T's strategies for revenue growth are focused on developing and expanding client relationships through quality service delivery and an effective sales culture. The segment results presented herein are based on internal management accounting policies that are 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 individual segments is not 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. Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's Current Report on Form 8-K, filed on October 27, 2000, for a description of internal accounting policies and the basis of segmentation, including a description of the segments presented in the accompanying tables. There have been no significant changes from the methods used to develop the segment disclosures contained therein. 10 The following tables disclose selected financial information for BB&T's reportable business segments for the periods as indicated: BB&T CORPORATION REPORTABLE SEGMENTS For the Three Months Ended September 30, 2000 and 1999
Investment Agency Banking and Banking Network Mortgage Banking Trust Services Insurance Brokerage ----------------------- ---------------------- ----------------- --------------- ------------------ 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 ----------- ----------- ---------- ---------- -------- ------- ------- ------- -------- -------- (Dollars in thousands) Net interest income (expense) from external customers........ $ 281,219 $ 315,194 $ 117,994 $ 104,806 $(10,154) $(8,584) $ -- $ -- $ 2,810 $ 2,209 Net intersegment interest income (expense)........ 124,240 75,851 (97,597) (77,281) 13,830 10,651 -- -- -- -- ----------- ----------- ---------- ---------- -------- ------- ------- ------- -------- -------- Net interest income.......... 405,459 391,045 20,397 27,525 3,676 2,067 -- -- 2,810 2,209 ----------- ----------- ---------- ---------- -------- ------- ------- ------- -------- -------- Provision for loan and lease losses........... 46,273 31,758 757 688 -- -- -- -- -- -- Noninterest income from external customers........ 100,142 130,193 18,952 31,636 17,527 6,976 30,941 20,377 36,980 39,047 Intersegment noninterest income........... 30,320 29,547 -- -- -- -- -- -- -- -- Noninterest expense.......... 198,243 252,180 12,578 20,242 10,938 1,789 21,392 15,928 39,087 39,375 Intersegment noninterest expense.......... 84,686 71,853 5,594 4,875 922 466 1,027 688 373 448 ----------- ----------- ---------- ---------- -------- ------- ------- ------- -------- -------- Income before income taxes..... 206,719 194,994 20,420 33,356 9,343 6,788 8,522 3,761 330 1,433 Provision for income taxes.... 78,156 79,100 6,677 4,105 3,051 2,135 3,326 1,480 753 1,072 ----------- ----------- ---------- ---------- -------- ------- ------- ------- -------- -------- Net income....... $ 128,563 $ 115,894 $ 13,743 $ 29,251 $ 6,292 $ 4,653 $ 5,196 $ 2,281 $ (423) $ 361 =========== =========== ========== ========== ======== ======= ======= ======= ======== ======== Identifiable segment assets... $32,074,412 $32,217,107 $6,424,395 $5,789,834 $ 32,737 $12,361 $87,455 $53,863 $853,657 $601,525 =========== =========== ========== ========== ======== ======= ======= ======= ======== ======== All Other Treasury Segments(1) Total Segments ------------------------- --------------------- ----------------------- 2000 1999 2000 1999 2000 1999 ------------ ------------ ---------- ---------- ----------- ----------- Net interest income (expense) from external customers........ $ 24,823 $ 52,198 $ 68,047 $ 59,972 $ 484,739 $ 525,795 Net intersegment interest income (expense)........ 23,301 (6,021) -- -- 63,774 3,200 ------------ ------------ ---------- ---------- ----------- ----------- Net interest income.......... 48,124 46,177 68,047 59,972 548,513 528,995 ------------ ------------ ---------- ---------- ----------- ----------- Provision for loan and lease losses........... 30 22 12,015 4,042 59,075 36,510 Noninterest income from external customers........ (174,183) (286) 28,860 7,175 59,219 235,118 Intersegment noninterest income........... -- -- -- -- 30,320 29,547 Noninterest expense.......... 1,704 1,428 23,947 13,566 307,889 344,508 Intersegment noninterest expense.......... 139 2,517 2,234 1,222 94,975 82,069 ------------ ------------ ---------- ---------- ----------- ----------- Income before income taxes..... (127,932) 41,924 58,711 48,317 176,113 330,573 Provision for income taxes.... (43,106) 5,366 17,898 7,827 66,755 101,085 ------------ ------------ ---------- ---------- ----------- ----------- Net income....... $ (84,826) $ 36,558 $ 40,813 $ 40,490 $ 109,358 $ 229,488 ============ ============ ========== ========== =========== =========== Identifiable segment assets... $14,775,241 $12,006,225 $3,193,114 $2,741,083 $57,441,011 $53,421,998 ============ ============ ========== ========== =========== ===========
11 BB&T CORPORATION REPORTABLE SEGMENTS For the Nine Months Ended September 30, 2000 and 1999
Investment Agency Banking and Banking Network Mortgage Banking Trust Services Insurance Brokerage ----------------------- ---------------------- ------------------ --------------- ----------------- 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 ----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- -------- (Dollars in thousands) Net interest income (expense) from external customers........ $ 1,016,678 $ 925,814 $ 342,170 $ 320,639 $(29,406) $(25,067) $ -- $ -- $ 8,840 $ 4,722 Net intersegment interest income (expense)........ 335,688 242,749 (262,796) (230,194) 39,685 30,843 -- -- -- -- ----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- -------- Net interest income.......... 1,352,366 1,168,563 79,374 90,445 10,279 5,776 -- -- 8,840 4,722 ----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- -------- Provision for loan and lease losses........... 110,519 85,248 2,137 2,178 -- -- -- -- -- -- Noninterest income from external customers........ 275,397 331,389 54,605 111,376 49,712 35,446 84,399 53,257 122,979 94,794 Intersegment noninterest income........... 86,644 99,222 -- -- -- -- -- -- -- -- Noninterest expense.......... 660,936 671,769 35,031 62,518 32,970 20,618 59,422 42,045 123,618 87,317 Intersegment noninterest expense.......... 240,109 192,593 16,078 14,222 2,736 1,902 3,076 2,061 1,125 1,344 ----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- -------- Income before income taxes..... 702,843 649,564 80,733 122,903 24,285 18,702 21,901 9,151 7,076 10,855 Provision for income taxes.... 231,861 215,354 25,276 37,965 8,074 5,625 8,636 3,646 4,052 5,243 ----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- -------- Net income....... $ 470,982 $ 434,210 $ 55,457 $ 84,938 $ 16,211 $ 13,077 $13,265 $ 5,505 $ 3,024 $ 5,612 =========== =========== ========== ========== ======== ======== ======= ======= ======== ======== Identifiable segment assets... $32,074,412 $32,217,107 $6,424,395 $5,789,834 $ 32,737 $ 12,361 $87,455 $53,863 $853,657 $601,525 =========== =========== ========== ========== ======== ======== ======= ======= ======== ======== Treasury All Other Segments(1) Total Segments ------------------------- --------------------- ----------------------- 2000 1999 2000 1999 2000 1999 ------------ ------------ ---------- ---------- ----------- ----------- Net interest income (expense) from external customers........ $ 70,761 $ 131,414 $ 196,081 $ 170,702 $ 1,605,124 $ 1,528,224 Net intersegment interest income (expense)........ 56,987 (15,823) -- -- 169,564 27,575 ------------ ------------ ---------- ---------- ----------- ----------- Net interest income.......... 127,748 115,591 196,081 170,702 1,774,688 1,555,799 ------------ ------------ ---------- ---------- ----------- ----------- Provision for loan and lease losses........... 91 67 31,497 12,279 144,244 99,772 Noninterest income from external customers........ (160,952) (591) 90,646 20,792 516,786 646,463 Intersegment noninterest income........... -- -- -- -- 86,644 99,222 Noninterest expense.......... 4,292 4,046 65,653 39,342 981,922 927,655 Intersegment noninterest expense.......... 415 6,529 6,690 4,260 270,229 222,911 ------------ ------------ ---------- ---------- ----------- ----------- Income before income taxes..... (38,002) 104,358 182,887 135,613 981,723 1,051,146 Provision for income taxes.... (22,807) 27,766 54,471 21,175 309,563 316,774 ------------ ------------ ---------- ---------- ----------- ----------- Net income....... $ (15,195) $ 76,592 $ 128,416 $ 114,438 $ 672,160 $ 734,372 ============ ============ ========== ========== =========== =========== Identifiable segment assets... $14,775,241 $12,006,225 $3,193,114 $2,741,083 $57,441,011 $53,421,998 ============ ============ ========== ========== =========== ===========
12 The following table presents a reconciliation of total segment results to consolidated results:
For the Three Months Ended For the Nine Months September 30, Ended September 30, ------------------- ---------------------- 2000 1999 2000 1999 -------- --------- ---------- ---------- Net Interest Income Net interest income from segments........................ $548,513 $ 528,995 $1,774,688 $1,555,799 Other net interest income(2)..... 25,322 17,093 80,845 48,460 Elimination of net intersegment interest income(3).............. (63,470) (54,143) (335,246) (173,896) -------- --------- ---------- ---------- Consolidated net interest income......................... $510,365 $ 491,945 $1,520,287 $1,430,363 ======== ========= ========== ========== Net income Net income from segments......... $109,358 $ 229,488 $ 672,160 $ 734,372 Other net income (loss)(2)....... (44,087) (102,013) (30,250) (131,026) Elimination of intersegment net income(3)....................... (16,007) 46,304 (240,924) (64,563) -------- --------- ---------- ---------- Consolidated net income......... $ 49,264 $ 173,779 $ 400,986 $ 538,783 ======== ========= ========== ==========
September 30, September 30, 2000 1999 ------------- ------------- Total Assets Total assets from segments......................... $57,441,011 $53,421,998 Other assets(2).................................... 3,369,176 2,702,465 Elimination of intersegment assets(3).............. (4,139,006) (3,741,233) ----------- ----------- Consolidated total assets......................... $56,671,181 $52,383,230 =========== ===========
-------- (1) Financial data from segments below the quantitative thresholds requiring disclosure are attributable to nonbank consumer finance operations, factoring, lawn care equipment financing, leasing and other smaller banking subsidiaries. (2) Other net interest income, other net income (loss) and other assets include amounts by BB&T's support functions not allocated to the various segments. (3) BB&T's reconciliation of total segment results to consolidated results requires the elimination of internal management accounting practices. These adjustments include the elimination of funds transfer pricing credits and charges and the elimination of intersegment noninterest income and noninterest expense, which are allocated to the various segments using BB&T's internal accounting methods. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION BB&T's total assets at September 30, 2000, were $56.7 billion, a $3.7 billion increase from the balance at December 31, 1999. The balance sheet categories that produced the majority of the increase were loans and leases, including loans held for sale, which grew $2.7 billion; securities available for sale, which increased $871.7 million; and other assets, which increased $808.8 million. These increases were partially offset by declines in interest- bearing deposits with banks and securities held to maturity, which declined by a collective $390.2 million compared to year-end 1999; cash and due from banks, which decreased $182.1 million; and other earning assets, which include federal funds sold and securities purchased under resale agreements or similar arrangements, which decreased $122.0 million. Total deposits at September 30, 2000, increased $1.9 billion from December 31, 1999, while short-term borrowed funds declined $1.3 billion and long-term debt increased $2.3 billion during the first nine months of 2000. Total shareholders' equity increased $273.4 million during the same time frame. The factors causing the fluctuations in these balance sheet categories are further discussed in the following sections. Loans and Leases BB&T continued to enjoy strong loan growth during the third quarter and first nine months of 2000, with end of period loans, excluding loans held for sale, increasing 9.5% on an annualized basis since the end of 1999. Average total loans for the quarter ended September 30, 2000 increased 11.2% compared to the same period of 1999. Average total loans for the nine months ended September 30 were $37.1 billion, or 11.0% greater than the average for the first nine months of 1999. Management has emphasized increasing the commercial and consumer loan portfolios at a faster rate than mortgage loans in order to improve the profitability of the overall loan portfolio. BB&T acquired a number of community banks and thrift institutions in recent years, which resulted in a significant percentage of the consolidated loan portfolio being composed of mortgages. Through the use of securitization programs and the sale of fixed- rate mortgage loan originations, combined with BB&T's commercial and consumer lending focus, the mix of the loan portfolio has changed in recent periods compared to prior years. Also, higher mortgage rates during 2000 have slowed mortgage lending substantially compared to 1999, although the pace of mortgage loan originations increased during the third quarter. The loan portfolio now includes a higher percentage of commercial and consumer loans and lower percentage of mortgage loans compared to prior years. Average mortgage loans decreased 3.9% during the first nine months of 2000 compared to the same period of 1999 and represented 20.3% of average total loans at September 30, 2000, compared to 23.4% a year ago. Average commercial loans, including lease receivables, increased 16.1% during the first nine months of 2000 compared to 1999, and now compose 51.9% of the loan portfolio. Average consumer loans, which includes sales finance, revolving credit and direct retail, increased 14.7% for the nine months ended September 30, 2000 compared to the same period in 1999 and compose the remaining 27.8% of average loans. Similar growth trends are also evident in the average balances for the third quarter of 2000, except that average mortgage loans actually increased compared to the third quarter of 1999. Average total loans were $38.0 billion, an increase of 11.2% compared to the third quarter of 1999. Average commercial loans and leases increased 14.4% in the third quarter of 2000 to a total of $19.8 billion; average consumer loans increased 12.3% to total $10.5 billion; while average mortgage loans increased 2.5% to a balance of $7.7 billion compared to the third quarter of 1999. The growth rates of average loans for the third quarter of 2000 include the full effect of loan portfolios held by companies that were acquired during 1999 and accounted for as purchases. Also, the securitization of $304.8 million of mortgage loans during 1999 and $747.1 million in 2000 affected the reported growth in average mortgage loans. During 1999, loans totaling $414.1 million were acquired through the purchase of Matewan 14 Bancshares, Inc. ("Matewan") and $75.9 million in loans were added as a result of Premier Bancshares, Inc.'s acquisition of Farmers and Merchants Bank. Excluding the effect of these purchase accounting transactions and the loan securitizations, average "internal" loan growth for the three months ended September 30, 2000, was 12.8% compared to the third quarter of 1999. Excluding the effects of purchase accounting transactions and loan securitizations, average mortgage loans, including loans held for sale, increased 13.0%, commercial loans grew 13.9%, and consumer loans increased 10.4% in the third quarter of 2000 compared to 1999. The change in loan mix to a higher percentage of commercial and consumer loans, the growth of the overall loan portfolio and the increase in the yield of the portfolio, from 8.82% in the third quarter and 8.74% in the first nine months of 1999 to 9.44% in the third quarter and 9.28% in the first nine months of 2000, resulted in a 19.2% increase in interest income from loans and leases in the current quarter and a 18.2% increase in interest income from loans and leases during the first nine months of 2000 compared to the 1999 periods. The average annualized fully taxable equivalent ("FTE") yields on commercial, consumer and mortgage loans for the first nine months of 2000 were 9.45%, 10.10%, and 7.71%, respectively, resulting in an average yield on the total loan portfolio of 9.28%. This reflects an increase of 54 basis points over the 8.74% earned on total average loans during the first nine months of 1999. The increase in yields during 2000 resulted from generally higher interest rates prevalent in the debt markets, including a higher average prime rate, compared to 1999. During the three months ended September 30, 2000, the prime rate, which is the basis for pricing many commercial and consumer loans, averaged 9.50%, compared to 8.15% for the comparable period of 1999. For the first nine months of 2000, the prime rate averaged 9.10%, compared to 7.87% during the first nine months of 1999. Securities Securities available for sale totaled $13.1 billion at September 30, 2000, an increase of $871.7 million from December 31, 1999. Securities available for sale had net unrealized losses, net of deferred income taxes, of $127.7 million at September 30, 2000, compared to unrealized losses of $309.4 million at December 31, 1999. The significant improvement in the net unrealized losses reflects the impact of a restrucuring of the bond portfolio, and the resulting realization of a substantial portion of these losses. The bond restructuring is discussed in further detail in the following paragraphs. Securities held to maturity totaled $70.0 million, down $334.9 million from year-end 1999. Trading securities totaled $132.5 million, an increase of $39.3 million compared to the balance at December 31, 1999. Average total securities for the first nine months totaled $13.4 billion, up 1.7% from the average during the first nine months of 1999. For the third quarter of 2000, average securities totaled $13.5 billion, basically unchanged from the average balance for the third quarter of 1999. The annualized FTE yield on the average total securities portfolio for the first nine months of 2000 was 6.88%, an increase of 33 basis points from the yield earned in the first nine months of 1999. The increase in the yield on securities reflects the generally higher interest rate environment that has existed during 2000 compared to 1999 and the positive effects from a restructuring of the securities portfolio during the third quarter, as discussed below. During the second and third quarters of 2000, BB&T restructured the available-for-sale securities portfolio. This restructuring was undertaken to improve the overall yield of the portfolio, improve the liquidity and reduce the average duration of the portfolio. BB&T sold $5.9 billion of U.S. Treasuries, obligations of U.S. government agencies and mortgage-backed securities. BB&T incurred approximately $222 million in pretax losses as a result of these sales. The proceeds from these sales were reinvested in higher yielding securities, primarily obligations of U.S. government agencies. The restructuring improved the yield on the restructured portion of the portfolio by 133 basis points, from 6.31% to 7.64%. Management expects to recover the losses incurred over a three-year period through increased interest income generated as a result of the restructuring. As of September 30, 2000, the securities acquired as a part of the restructuring had unrealized pretax gains of $37.5 million. 15 Other Interest-Earning Assets Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $310.9 million at September 30, 2000, a decrease of $122.0 million, or 28.2% compared to December 31, 1999. Interest-bearing deposits with banks declined $55.3 million from December 31, 1999. These categories of earning assets are subject to large daily fluctuations based on the availability of these types of funds. The average yield on other interest- earning assets for the first nine months of 2000 was 6.57%, an increase from the 4.77% earned during the first nine months of 1999. The increase in the yield on other interest earning assets is principally the result of the increase in the average Federal funds rate to 6.10% for the first nine months of 2000 compared to 4.87% for the comparable period of 1999. Other Assets BB&T's other noninterest-earning assets, excluding premises and equipment and noninterest bearing cash and due from banks, increased $808.8 million from December 31, 1999 to September 30, 2000. The increase resulted primarily from the purchases of additional bank-owned life insurance, which is used as a funding source for certain post-retirement benefits, at a cost of $500 million. On average, BB&T's investment in bank owned life insurance during the third quarter of 2000 totaled $763.9 million, compared to $230.9 million for the third quarter of 1999. For the first nine months of 2000, the average investment in bank owned life insurance totaled $592.6 million, up from $227.7 million during the first nine months of last year. Deposits Total end of period deposits increased $1.9 billion from December 31, 1999 to September 30, 2000. Average deposits for the first nine months of 2000 increased $2.2 billion, or 6.5%, compared to the first nine months of 1999. The categories of deposits with the highest average rates of growth in 2000 compared to 1999 were: certificates of deposit and other time deposits, which grew $1.4 billion, or 8.5%; money rate savings accounts, including investor deposit accounts, which increased $906.3 million, or 10.5%; and noninterest- bearing deposits, which grew $291.6 million, or 6.3%. The growth realized in these deposit categories was partially offset by declines of $473.3 million, or 14.6%, in savings and interest checking. For the third quarter, average deposits increased 7.2%. Average transaction accounts, which include noninterest-bearing deposits, savings, interest checking and money rate savings, totaled $17.2 billion for the third quarter, an increase of 2.8% compared to the third quarter of 1999. Average certificates of deposits and other time deposits for the third quarter totaled $19.2 billion, an increase of 11.4% compared to the third quarter of 1999. The growth in average deposits includes the effect of deposits acquired in purchase accounting transactions completed in the latter quarters of 1999. The August 27, 1999 purchase of Matewan resulted in the addition of $575.1 million in deposits, while Farmers and Merchants Bank, which was purchased by Premier on November 5, 1999, accounted for $151.1 million in deposit growth. Excluding the effects of these purchase accounting transactions, average deposits for the nine months ended September 30, 2000 would have increased 5.0% compared to the first nine months of 1999. Excluding purchase accounting, transaction account deposits, which include noninterest-bearing deposits, savings, interest checking and money rate savings, would have increased 3.0%, compared to 4.4% including deposits acquired through purchase accounting transactions. Certificate accounts and other time deposits, including foreign deposits, would have increased 2.5% excluding purchase accounting transactions. For the third quarter, total average deposits, excluding the effects of purchase accounting transactions, would have increased 6.2% compared to the third quarter of 1999. The annualized average cost of total interest-bearing deposits for the first nine months of 2000 was 4.68%, an increase of 58 basis points compared to 1999. 16 Short-Term Borrowed Funds The growth in loans, securities and other assets in recent years have exceeded the growth of total deposits. As a result, cost-effective alternative funding sources, such as Federal Home Loan Bank ("FHLB") advances, master notes, purchases of Federal funds and sales of securities under repurchase agreements have been increasingly utilized to support balance sheet growth. At September 30, 2000, short-term borrowed funds totaled $6.7 billion, a decrease of $1.3 billion, or 16.0%, compared to December 31, 1999. For the third quarter of 2000, average short-term borrowed funds totaled $5.8 billion, a decrease of $920.1 million, or 13.8%, from the comparable period of 1999. For the nine months ended September 30, 2000, average short-term borrowed funds totaled $6.7 billion, an increase of $636.6 million, or 10.5%, compared to the first nine months of 1999. The average annualized rate paid on short-term borrowed funds was 6.31% for the third quarter of 2000, an increase of 134 basis points from the average rate of 4.97% paid in the third quarter of 1999. For the nine months ended September 30, 2000, the cost of average short-term borrowed funds was 5.90%, compared to 4.80% for the first nine months of last year. The increase in the cost of short-term borrowed funds results from the higher interest rate environment during 2000, which included a 135 basis point increase in the quarterly average Federal funds rate and a 123 basis point increase in the year-to-date average Federal funds rate. Long-Term Debt Long-term debt consists primarily of FHLB advances, medium term bank notes and corporate subordinated debt. These borrowings are relatively cost- effective funding sources and provide BB&T with the flexibility to structure borrowings in a manner that aids in the management of interest rate risk and liquidity. Long-term debt totaled $8.3 billion at September 30, 2000, an increase of $2.3 billion, or 37.4%, from the balance at December 31, 1999. Long-term debt averaged $8.2 billion in the third quarter of 2000, an increase of $1.9 billion, or 29.4%, compared to the third quarter of 1999. For the first nine months of 2000, average long-term debt totaled $6.9 billion, an increase of $984.4 million, or 16.5%, compared to the prior year. Long-term debt has been utilized for a variety of funding needs, including the repurchase of common stock in conjunction with certain acquisitions. The substantial increase in long-term borrowings during the year reflects the funding to support investments and loan growth. Asset Quality BB&T's asset quality, as measured by relative levels of nonperforming assets and net charge-offs, has remained excellent compared to published industry averages. Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $159.3 million at September 30, 2000, compared to $152.6 million at December 31, 1999. Nonperforming assets, as a percentage of loan-related assets, were .41% at September 30, 2000, compared to .43% at December 31, 1999. Loans 90 days or more past due and still accruing interest totaled $74.9 million compared to $60.0 million at year-end 1999. BB&T's net charge-offs totaled $21.7 million for the third quarter and amounted to .23% of average loans and leases, on an annualized basis, compared to $23.4 million, or .27% of average loans and leases, in the corresponding period in 1999. For the nine months ended September 30, 2000, net charge-offs totaled $64.2 million, or .23% of average loans and leases, compared to $59.2 million, or .24% of average loans and leases, in 1999. The allowance for loan and lease losses was $505.6 million, or 1.32% of loans and leases, at September 30, 2000, compared to $477.3 million, or 1.33% of loans and leases, at December 31, 1999. The allowance has declined slightly as a percentage of the loan portfolio during 2000, reflecting the continued positive overall asset quality trends. 17 The provision for loan and lease losses for the third quarter of 2000 was $38.2 million, compared to $24.4 million in the comparable quarter of 1999. For the nine months, the provision for loan and lease losses totaled $92.4 million compared to $74.4 million in 1999. The increased provisions during 2000 were necessary to cover the net charge-offs, to maintain the allowance at a level considered adequate to absorb losses inherent in the loan portfolio at the balance sheet date given the growth in the loan portfolio, and to provide additional provisions for acquired entities to align their collection and charge-off policies and procedures with those of BB&T. Asset quality statistics for the last five calendar quarters are presented in the accompanying table. ASSET QUALITY ANALYSIS (Dollars in thousands)
For the Three Months Ended ------------------------------------------------ 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 -------- -------- -------- -------- -------- Allowance For Loan & Lease Losses Beginning balance........... $489,067 $484,441 $477,296 $467,106 $458,689 Allowance for acquired loans...................... -- -- -- 1,120 7,473 Provision for loan and lease losses..................... 38,200 27,914 26,317 40,032 24,352 Net charge-offs............. (21,691) (23,288) (19,172) (30,962) (23,408) -------- -------- -------- -------- -------- Ending balance............. $505,576 $489,067 $484,441 $477,296 $467,106 ======== ======== ======== ======== ======== Risk Assets Nonaccrual loans and leases..................... $124,276 $122,559 $117,607 $118,975 $104,086 Foreclosed real estate...... 18,535 16,044 17,679 17,015 20,902 Other foreclosed property... 16,042 13,694 16,105 14,879 12,044 Restructured loans.......... 445 501 1,471 1,681 1,951 -------- -------- -------- -------- -------- Total nonperforming assets.................... $159,298 $152,798 $152,862 $152,550 $138,983 ======== ======== ======== ======== ======== Loans 90 days or more past due and still accruing..... $ 74,922 $ 62,602 $ 48,668 $ 59,974 $ 57,215 ======== ======== ======== ======== ======== Asset Quality Ratios Nonaccrual loans and leases as a percentage of total loans and leases*.......... .32% .33% .33% .34% .30% Total nonperforming assets as a percentage of: Total assets............... .28 .28 .28 .29 .27 Loans and leases plus foreclosed property*...... .41 .41 .42 .43 .40 Annualized net charge-offs as a percentage of average loans and leases*.......... .23 .25 .21 .35 .27 Allowance for loan and lease losses as a percentage of loans and leases*.......... 1.32 1.30 1.33 1.33 1.34 Ratio of allowance for loan and lease losses to: Net charge-offs............ 5.86x 5.22x 6.28x 3.89x 5.03x Nonaccrual and restructured loans and leases.......... 4.05 3.97 4.07 3.96 4.41
-------- * All items referring to loans and leases include loans held for sale and are net of unearned income. MARKET RISK MANAGEMENT As a financial institution, BB&T's most significant market risk exposure is interest rate risk. The primary objective of interest rate risk management is to minimize the effect that changes in interest rates have on net interest income. This is accomplished through active management of asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of maturity mixes for 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. 18 The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. The majority of assets and liabilities of financial institutions are monetary in nature and differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve System ("FRB") to regulate the availability and cost of credit have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, BB&T is positioned to respond to changing interest rates and inflationary trends. 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 the current volumes, average rates and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios of projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, however, it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. The asset/liability management process requires the determination of a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies as well as any enacted or prospective regulatory changes. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals. 19 The following table represents the interest sensitivity of BB&T as of September 30, 2000. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market conditions, loan and deposit volumes and pricing; customer preferences; and capital plans. This tabular data does not reflect the impact of any changes in the credit quality of BB&T's assets. In an attempt to quantify the potential change in net interest income given hypothetical changes in interest rates, various interest rate scenarios are applied to projected balances of assets and liabilities incorporating the projected effect of maturities and repricing opportunities. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. INTEREST SENSITIVITY SIMULATION ANALYSIS
Annualized Hypothetical Interest Rate Scenario Percentage --------------------------------- Change in Change in Prime Net Interest Prime Rate Rate Income ---------- ----- ------------ +3.00% 12.50% -2.09% +1.50 11.00 -1.63 -1.50 8.00 1.21 -3.00 6.50 1.18
Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over three months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. At September 30, 2000, the sensitivity of BB&T's net interest income to changes in interest rates was within management's targets, as illustrated in the accompanying table. Derivatives and Off-Balance Sheet Financial Instruments BB&T utilizes a variety of 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. The net interest payable or receivable on interest rate swaps and floors that are designated as hedges is accrued and recognized as an adjustment to the interest income or expense of the related asset or liability. For interest rate forwards, futures and options qualifying as a hedge, gains and losses are deferred and are recognized in income as an adjustment of yield. Gains and losses from early terminations of derivatives are deferred and amortized as yield adjustments over the shorter of the remaining term of the hedged asset or liability or the remaining term of the derivative instrument. Upon disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any gains or losses are recognized in income. Derivative financial instruments that fail to qualify as a hedge are carried at fair value with gains and losses recognized in current earnings. 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. 20 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 derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. Accordingly, the amount of off-balance sheet credit risk to which BB&T is exposed at any time is immaterial. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T's off-balance sheet credit risk exposure at September 30, 2000 was immaterial. Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risks. On September 30, 2000, BB&T had outstanding interest rate swaps, caps, floors and collars outstanding with notional amounts totaling $1.8 billion. The estimated fair value of open contracts used for risk management purposes reflected net unrealized gains of $5.9 million at September 30, 2000. BB&T uses derivative contracts 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 specific assets or groups of assets, specific 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 a $2.0 million increase in net interest income in the third quarter of 2000 compared to an increase of $.6 million in the comparable period of 1999. For the nine months, hedge activity resulted in a $5.6 million increase in net interest income compared to a prior year reduction in net interest income of $2.2 million. 21 SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments," requires, among other things, certain quantitative and qualitative disclosures with regard to the amounts, nature and terms of derivative financial instruments. The following tables set forth certain information concerning BB&T's interest rate swaps, caps, floors and collars at September 30, 2000: INTEREST RATE SWAPS, CAPS, FLOORS AND COLLARS September 30, 2000 (Dollars in thousands)
Notional Receive Net Unrealized Type Amount Rate Pay Rate Gains (Losses) ---- ---------- ----------- ------------ -------------- Receive fixed swaps......... $1,423,000 7.32% 7.12% $ 931 Pay fixed swaps............. 253,036 6.69 5.55 4,933 Caps, floors & collars...... 76,050 -- -- -- ---------- --------- -------- ---------- Total..................... $1,752,086 6.91% 6.58% $ 5,864 ========== ========= ======== ========== Receive Fixed Pay Caps, Floors Year-to-date Activity Swaps Fixed Swaps & Collars Total --------------------- ---------- ----------- ------------ -------------- Balance, December 31, 1999.. $ 945,000 $ 644,361 $112,250 $1,701,611 Additions................... 948,000 14,100 28,800 990,900 Maturities/amortizations.... (470,000) (405,425) (65,000) (940,425) ---------- --------- -------- ---------- Balance, September 30, 2000....................... $1,423,000 $ 253,036 $ 76,050 $1,752,086 ========== ========= ======== ========== One Year One to After Maturity Schedule* or Less Five Years Five Years Total ------------------ ---------- ----------- ------------ -------------- Receive fixed swaps......... $ 550,000 $ 530,000 $343,000 $1,423,000 Pay fixed swaps............. -- 219,512 33,524 253,036 Caps, floors & collars...... -- 76,050 -- 76,050 ---------- --------- -------- ---------- Total..................... $ 550,000 $ 825,562 $376,524 $1,752,086 ========== ========= ======== ==========
-------- * Maturities are based on full contract extensions. 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 to support future growth and comply with all regulatory standards. Total shareholders' equity was $4.3 billion at September 30, 2000 and $4.1 billion at December 31, 1999. BB&T's book value per common share at September 30, 2000 was $10.90 compared to $10.19 at December 31, 1999. Financial holding companies and their subsidiaries are subject to regulatory requirements with respect to risk-based capital adequacy. Risk-based capital ratios measure capital as a percentage of a combination of risk-weighted balance sheet and off-balance sheet risk. The risk-weighted values of both balance sheet and off-balance sheet items are determined in accordance with risk factors specified by Federal regulatory pronouncements. Tier 1 capital (total shareholders' equity excluding unrealized gains or losses on debt securities available for sale, net of tax effect, plus certain mandatorily redeemable capital securities, less nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk- weighted assets, with one half of the minimum consisting of Tier 1 capital. 22 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 BB&T's management, and is calculated by dividing period-end Tier 1 capital by average tangible assets for the most recent quarter. 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 capital adequacy ratios for the last five quarters are presented in the accompanying table: CAPITAL ADEQUACY RATIOS
2000 1999 ----------------------- --------------- Third Second First Fourth Third Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- Risk-based capital ratios: Tier 1 capital...................... 9.3% 10.0% 10.1% 9.9% 10.1% Total capital....................... 12.1 12.9 13.3 13.2 13.4 Tier 1 leverage ratio................ 6.9 7.2 7.3 7.1 7.0
ANALYSIS OF RESULTS OF OPERATIONS Net income for the third quarter of 2000 totaled $49.3 million, a decrease of 71.7% compared to the $173.8 million earned during the comparable quarter of 1999. On a diluted per share basis, earnings for the three months ended September 30, 2000 were $.12, compared to $.43 for the same period in 1999, a decrease of 72.1%. BB&T's operating results for the third quarter of 2000 produced an annualized return on average assets of .35% and an annualized return on average shareholders' equity of 4.44% compared to prior year ratios of 1.33% and 17.38%, respectively. BB&T's earnings for the third quarter of 2000 was adversely affected by costs primarily associated with consummating the merger with One Valley, converting the systems of previously acquired institutions, and losses incurred as a result of the previously discussed bond portfolio restructuring. During the third quarter of 2000, BB&T incurred $57.9 million in after-tax merger-related charges. Charges related to the One Valley merger included professional fees, costs in connection with the reduction of staffing levels, early retirement packages and other personnel-related expenses, losses related to facilities and equipment write-offs, an additional provision for loan and lease losses to align the collection and charge-off policies and procedures with those of BB&T. Also included were costs to convert the systems of previously acquired institutions and $117.8 million in after-tax losses related to the restructuring of the bond portfolio discussed in "Securities" above. For the nine months ended September 30, 2000, BB&T incurred $98.0 million in after-tax merger-related charges and $143.5 million in after-tax losses from restructuring the bond portfolios of BB&T and One Valley. During the first nine months of 1999, BB&T incurred $30.1 million in after-tax merger-related charges associated primarily with the acquisitions of MainStreet Financial Corporation, Mason-Dixon Bancshares and First Citizens Corporation. Of these costs, $19.7 million, relating primarily to these same mergers, were incurred in the third quarter of 1999. Excluding the effect of the bond restructuring losses and the merger-related charges on 2000 and 1999 operating results, BB&T would have had net income for the third quarter of 2000 totaling $225.0 million, an increase of 16.3% over the $193.5 million that would have been earned during the third quarter of 1999. On a diluted per share basis, earnings for the three months ended September 30, 2000, excluding merger charges and bond losses, were $.56, compared to $.48 for the same period in 1999, an increase of 16.7%. BB&T's recurring operating results for the third quarter of 2000 produced an annualized return on average assets of 1.61% and an annualized return on average shareholders' equity of 20.25% compared to prior year ratios of 1.49% and 19.35%, respectively. 23 FTE net interest income increased 4.1% during the third quarter and 6.3% for the nine months due to solid growth in average loans, greater overall returns on the loan and securities portfolio and a more profitable mix of loans. Fluctuations in net interest income, noninterest income and noninterest expenses will be further discussed in the following paragraphs. PROFITABILITY MEASURES*
2000 1999 ----------------------- --------------- Third Second First Fourth Third Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- Return on average assets................. 1.61% 1.57% 1.56% 1.50% 1.49% Return on average equity................. 20.25 20.12 20.13 19.19 19.35 Net interest margin..... 4.16 4.20 4.24 4.28 4.26 Fee income ratio (taxable equivalent)... 31.9 31.7 30.9 29.9 30.3 Efficiency ratio (taxable equivalent)... 51.3 53.1 53.2 53.8 54.6
-------- * Table excludes securities gains (losses), foreclosed property expense and nonrecurring items. Net Interest Income and Net Interest Margin Net interest income on an FTE basis was $538.7 million for the third quarter of 2000 compared to $517.6 million for the same period in 1999, a 4.1% increase. For the three months ended September 30, 2000, average earning assets increased $3.3 billion, or 6.8%, compared to the same period of 1999, while average interest-bearing liabilities increased by $3.2 billion, or 7.5%, and the net interest margin decreased from 4.26% in the third quarter of 1999 to 4.16% in the current quarter. The ten basis point decline in the net interest margin was primarily the result of increased costs of interest- bearing deposits and borrowed funds, as well as the previously mentioned investments in bank owned life insurance products, which add to the cost of funds, but produce revenue that is classified as noninterest income. These additional investments resulted in a decline in the quarterly net interest margin of approximately 8 basis points. For the nine months ended September 30, 2000, FTE net interest income increased 6.3%. Over the first nine months of 2000, average interest earning assets increased $3.8 billion, or 8.0%, while interest-bearing liabilities increased $3.5 billion, or 8.5%, compared to the first nine months of 1999. The net interest margin for the nine months ended September 30, 2000, was 4.20%, down from 4.27% in the first nine months of 1999. The decrease in net interest margin resulted from the same factors that affected the third quarter results. The following tables set forth the major components of net interest income and the related yields for the third quarter and first nine months of 2000 compared to the same periods in 1999 and the variances between the periods caused by changes in interest rates versus changes in volumes. 24 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS For the Three Months Ended September 30, 2000 and 1999
Average Balances Yield/Rate Income/Expense Change due to ----------------------- ------------ ------------------- Increase ----------------- 2000 1999 2000 1999 2000 1999 (Decrease) Rate Volume ----------- ----------- ----- ----- ---------- -------- ---------- ------- -------- Fully Taxable Equivalent--(Dollars in thousands) Assets Securities(1): U.S. Treasury, government and other(5)................ $12,528,056 $12,819,041 7.23% 6.49% $ 226,328 $208,082 $ 18,246 $23,098 $ (4,852) States and political subdivisions................ 951,816 995,459 7.50 7.60 17,853 18,920 (1,067) (239) (828) ----------- ----------- ----- ----- ---------- -------- -------- ------- -------- Total securities(5)......... 13,479,872 13,814,500 7.25 6.51 244,181 227,002 17,179 22,859 (5,680) Other earning assets(2)...... 269,495 499,254 7.50 4.80 5,084 6,038 (954) 2,529 (3,483) Loans and leases, net of unearned income(1)(3)(4)(5).. 37,970,855 34,133,559 9.44 8.82 900,423 757,455 142,968 56,559 86,409 ----------- ----------- ----- ----- ---------- -------- -------- ------- -------- Total earning assets........ 51,720,222 48,447,313 8.86 8.13 1,149,688 990,495 159,193 81,947 77,246 ----------- ----------- ----- ----- ---------- -------- -------- ------- -------- Non-earning assets.......... 3,859,313 3,219,292 ----------- ----------- Total assets............... $55,579,535 $51,666,605 =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking.................... $ 2,486,434 $ 3,120,399 1.60 1.86 10,013 14,619 (4,606) (1,880) (2,726) Money rate savings.......... 9,774,421 8,892,400 3.79 2.98 93,044 66,741 26,303 19,202 7,101 Other time deposits......... 19,216,597 17,251,262 6.01 5.11 290,140 222,236 67,904 40,838 27,066 ----------- ----------- ----- ----- ---------- -------- -------- ------- -------- Total interest-bearing deposits.................... 31,477,452 29,264,061 4.97 4.12 393,197 303,596 89,601 58,160 31,441 Short-term borrowed funds.... 5,756,069 6,676,203 6.31 4.97 91,328 83,576 7,752 20,323 (12,571) Long-term debt............... 8,173,862 6,316,154 6.17 5.41 126,512 85,758 40,754 13,450 27,304 ----------- ----------- ----- ----- ---------- -------- -------- ------- -------- Total interest-bearing liabilities................. 45,407,383 42,256,418 5.36 4.44 611,037 472,930 138,107 91,933 46,174 ----------- ----------- ----- ----- ---------- -------- -------- ------- -------- Noninterest-bearing deposits.................... 4,948,690 4,727,917 Other liabilities........... 804,884 714,964 Shareholders' equity........ 4,418,578 3,967,306 ----------- ----------- Total liabilities and shareholders' equity....... $55,579,535 $51,666,605 =========== =========== Average interest rate spread....................... 3.50 3.69 Net yield on earning assets.. 4.16% 4.26% $ 538,651 $517,565 $ 21,086 $(9,986) $ 31,072 ===== ===== ========== ======== ======== ======= ======== Taxable equivalent adjustment................... $ 28,286 $ 25,620 ========== ========
---- (1) Yields related to securities, loans and leases exempt from income taxes are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. 25 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS For the Nine Months Ended September 30, 2000 and 1999
Average Balances Yield/Rate Income/Expense Change due to ----------------------- ------------ --------------------- Increase ------------------ 2000 1999 2000 1999 2000 1999 (Decrease) Rate Volume ----------- ----------- ----- ----- ---------- ---------- ---------- -------- -------- Fully Taxable Equivalent--(Dollars in thousands) Assets Securities(1): U.S. Treasury, government and other(5)............... $12,382,596 $12,202,336 6.83% 6.46% $ 634,299 $ 591,427 $ 42,872 $ 34,057 $ 8,815 States and political subdivisions........... 977,820 937,842 7.53 7.67 55,215 53,922 1,293 (974) 2,267 ----------- ----------- ----- ----- ---------- ---------- -------- -------- -------- Total securities(5).... 13,360,416 13,140,178 6.88 6.55 689,514 645,349 44,165 33,083 11,082 Other earning assets(2)............... 324,560 450,516 6.57 4.77 15,975 16,077 (102) 5,115 (5,217) Loans and leases, net of unearned income(1)(3)(4)(5)...... 37,099,461 33,418,166 9.28 8.74 2,577,125 2,186,848 390,277 137,593 252,684 ----------- ----------- ----- ----- ---------- ---------- -------- -------- -------- Total earning assets... 50,784,437 47,008,860 8.63 8.09 3,282,614 2,848,274 434,340 175,791 258,549 ----------- ----------- ----- ----- ---------- ---------- -------- -------- -------- Non-earning assets..... 3,576,861 3,257,727 ----------- ----------- Total assets........... $54,361,298 $50,266,587 =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking............... $ 2,774,643 $ 3,247,926 1.69 1.88 35,091 45,744 (10,653) (4,389) (6,264) Money rate savings..... 9,573,843 8,667,572 3.55 2.90 254,719 187,959 66,760 45,703 21,057 Other time deposits.... 18,440,684 17,000,937 5.71 5.14 788,085 653,912 134,173 76,145 58,028 ----------- ----------- ----- ----- ---------- ---------- -------- -------- -------- Total interest-bearing deposits............... 30,789,170 28,916,435 4.68 4.10 1,077,895 887,615 190,280 117,459 72,821 Short-term borrowed funds................... 6,681,733 6,045,154 5.90 4.80 295,067 216,928 78,139 53,647 24,492 Long-term debt.......... 6,943,975 5,959,604 6.00 5.41 312,394 241,435 70,959 28,168 42,791 ----------- ----------- ----- ----- ---------- ---------- -------- -------- -------- Total interest-bearing liabilities............ 44,414,878 40,921,193 5.07 4.40 1,685,356 1,345,978 339,378 199,274 140,104 ----------- ----------- ----- ----- ---------- ---------- -------- -------- -------- Noninterest-bearing deposits................ 4,916,887 4,625,242 Other liabilities....... 774,305 695,708 Shareholders' equity.... 4,255,228 4,024,444 ----------- ----------- Total liabilities and shareholders' equity... $54,361,298 $50,266,587 =========== =========== Average interest rate spread.................. 3.56 3.69 Net yield on earning assets.................. 4.20% 4.27% $1,597,258 $1,502,296 $ 94,962 $(23,483) $118,445 ===== ===== ========== ========== ======== ======== ======== Taxable equivalent adjustment.............. $ 76,971 $ 71,933 ========== ==========
---- (1) Yields related to securities, loans and leases exempt from income taxes are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. 26 Noninterest Income Noninterest income for the three months ended September 30, 2000, was $72.0 million compared to $222.6 million for the same period in 1999, a decrease of 67.7%. Excluding the bond losses discussed previously, noninterest income would have totaled $252.4 million for the third quarter of 2000, an increase of 12.7% compared to 1999. Excluding purchase accounting transactions and the bond losses, noninterest income would have increased 9.2% in the third quarter compared to the third quarter of 1999. Noninterest income as a percentage of net interest income plus noninterest income, or the "fee income ratio", was 31.9% for the third quarter of 2000, compared to 30.3% in the third quarter of 1999. For the nine months, noninterest income, excluding nonrecurring items and bond losses, totaled $734.9 million, an increase of $81.8 million, or 12.5%, compared to 1999. The fee income ratio for the first nine months of 2000 was 31.5% compared to 30.4% for the first nine months of 1999. Service charges on deposits totaled $69.2 million for the third quarter of 2000, an increase of $8.2 million, or 13.4%, compared to the third quarter of 1999. For the nine months, service charges on deposits totaled $196.4 million, an increase of 10.0% compared to the first nine months of 1999. The largest components of the growth within service charges on deposits included account analysis fees on commercial transaction accounts, service charges on demand deposit accounts and NSF and overdraft charges on personal and commercial accounts, as well as higher transaction volume. Also, in June 2000, a new rate schedule for deposit-related services became effective. Trust income totaled $20.3 million for the current quarter, an increase of $2.3 million, or 12.9%, compared to the same period a year ago. The increase in trust income reflects a record quarter of institutional trust sales, as well as healthy growth in personal and corporate trust fees compared to 1999. Assets under management totaled $15.4 billion at September 30, 2000, up from $14.4 billion at September 30, 1999. For the nine months, trust income totaled $58.4 million, an increase of $6.4 million, or 12.3%, compared to the same period in 1999. The full year growth principally resulted from the same factors that created the quarterly increase. Investment banking and brokerage fees and commissions totaled $36.5 million during the third quarter of 2000, a decrease of $1.6 million, or 4.2%, compared to the third quarter of 1999. The decrease resulted from a $3.5 million decline in trading income and fee income at BB&T's full-service brokerage operation, partially offset by higher commission revenue generated by BB&T's limited service brokerage subsidiary. For the nine months, investment banking and brokerage fees and commissions totaled $123.3 million, an increase of 34.8% compared to the same period in 1999. This significant increase was primarily the result of the timing of the acquisition of Scott & Stringfellow, which was completed on March 26, 1999. This acquisition was accounted for as a purchase; therefore, its operating results were only included in BB&T's accounts in periods following the acquisition. Agency insurance commissions totaled $34.3 million for the third quarter of 2000, an increase of $13.7 million, or 66.3%, compared to the same three-month period of 1999. This substantial growth in revenue resulted from the purchase of additional agencies during 1999 and 2000, internal growth in property and casualty insurance commissions, which increased $4.3 million, life insurance commissions, up $1.4 million, and increased contingent insurance commissions, group health and other fees, up a collective $5.4 million. Excluding the effects of purchase accounting transactions, agency insurance commissions for the third quarter of 2000 would have increased 36.0% compared to 1999. For the nine months, agency insurance commissions totaled $94.7 million, an increase of $40.1 million, or 73.5%. Excluding purchase accounting transactions, growth in agency insurance commissions for the nine months would have been 42.6%. The increase in year-to-date revenue was produced by similar growth in the types of commissions outlined above. Income from mortgage banking activities totaled $24.2 million for the third quarter of 2000, a decrease of $13.3 million, or 35.4%, from the same period of 1999. This decline resulted from losses on sales of mortgage loans totaling $15.4 million, lower origination fees compared to 1999, and the recapture in 1999 of $5 million in valuation allowances related to capitalized mortgage servicing rights. The recapture of valuation allowances 27 during the 1999 period, which were established in 1998, resulted from a slowing in prepayment speeds related to the mortgage loans underlying the capitalized servicing rights. For the nine months ended September 30, 2000, mortgage banking income totaled $76.6 million, a decrease of $57.3 million, or 42.8%, compared to 1999, principally due to lower mortgage loan originations during 2000 and the recapture in 1999 of $13 million in valuation allowances related to mortgage servicing rights established in 1998. Other nondeposit fees and commissions totaled $37.5 million for the third quarter of 2000, an increase of $7.4 million, or 24.5%, compared to the three months ended September 30, 1999. The principal drivers of the increase were: income from the outsourcing of official checks, which added $1.9 million to revenue for the quarter; ATM network fees and debit card income, which increased $1.6 million; and debit card interchange fees, which were up $1.9 million. For the nine months, other nondeposit fees and commissions totaled $103.4 million, up $14.2 million, or 15.9%, compared to 1999. The increase was created by similar growth in the types of commission and fee income that affected the quarterly increase. Other income totaled $27.5 million for the quarter, an increase of $12.0 million, or 78.1%, compared to the third quarter of 1999. Included in this total is the cash value buildup of bank-owned life insurance, which increased $8.7 million as a result of additional purchases during 2000. BB&T also recorded $3.4 million in fee income from termination of Federal Home Loan Bank advances. For the nine months, other income totaled $72.4 million, an increase of $26.7 million, or 58.5%, compared to 1999. The increase in revenues during the nine months was principally the result of the income items that favorably affected the third quarter. Noninterest Expense Noninterest expenses totaled $479.0 million for the third quarter of 2000 compared to $433.6 million for the same period a year ago, an increase of 10.5%. Noninterest expense for the third quarter of 2000 includes $72.5 million of nonrecurring expenses principally associated with the acquisition of One Valley. Excluding these costs, noninterest expenses would have totaled $406.5 million, basically unchanged from the noninterest expenses incurred in the third quarter of 1999. Excluding the effects of business combinations accounted for as purchases that were completed in 1999, and the aforementioned merger-related expenses, noninterest expenses for the third quarter of 2000 would have actually decreased 2.4% from the comparable period of 1999. For the nine months ended September 30, 2000, noninterest expense totaled $1.4 billion, an increase of $144.9 million, or 12.0%, compared to the first nine months of 1999. Excluding $129.0 million in nonrecurring charges from 2000 and $43.1 million of similar merger-related charges from 1999, noninterest expenses would have increased 5.0%. Excluding these charges and the effect of acquisitions accounted for as purchases, noninterest expense for the first nine months of 2000 would have decreased less than 1% compared to 1999. BB&T's efficiency ratio (noninterest expenses, excluding the nonrecurring expenses referred to above and costs related to foreclosed assets, as a percentage of FTE net interest income plus noninterest income excluding securities gains and losses) improved to 51.3% for the third quarter of 2000 compared to 54.6% for the third quarter of 1999. For the nine months, the efficiency ratio improved to 52.6% compared to 54.0% in 1999. Personnel expense, the largest component of noninterest expense, was $238.6 million for the third quarter of 2000 compared to $218.2 million for the same period in 1999, an increase of $20.4 million, or 9.3%. These amounts include merger-related costs of $17.2 million in the third quarter of 2000. Excluding the merger-related charges, personnel expense in the 2000 quarter would have increased $6.5 million, or 3.0%, from the 1999 period. This growth included the effect of acquisitions completed in the fourth quarter of 1999 and 2000 that were accounted for as purchases. Excluding the effects of the merger- related charges and the purchase acquisitions, personnel expense for the third quarter of 2000 would have increased $2.3 million, or 1.1%, over the third quarter of 1999. This increase was primarily the result of a 4% average annual salary adjustment, higher social security taxes, staff relocation expenses, fringe benefits and 401(k) plan contributions. For the nine months, personnel expense totaled $700.0 million, an increase of $81.2 million, or 13.1%, compared to 1999. Excluding nonrecurring charges, personnel expense for the first nine months of 2000 would have increased 9.7% compared to 1999. Excluding nonrecurring charges and purchase accounting transactions, personnel expense would have increased only 3.7% for the reasons outlined above. 28 Occupancy and equipment expense for the three months ended September 30, 2000, totaled $70.9 million, an increase of $7.3 million, or 11.5%, compared to 1999. These amounts include merger-related charges of $8.3 million in the third quarter of 2000. Excluding the merger-related charges, occupancy and equipment expense would have been basically unchanged compared to the 1999 period. For the nine months, occupancy and equipment expense totaled $201.7 million, an increase of $17.4 million, or 9.5%. Excluding nonrecurring merger- related charges, occupancy and equipment expense would have increased $5.5 million, or 3.1%. This increase was principally the result of higher rent expenses for both the quarter and the nine months. The amortization of intangible assets and mortgage servicing rights totaled $20.0 million for the three months ended September 30, 2000, a decrease of $206,000, or 1.0%, from the amount incurred in the third quarter of 1999. This decrease was the result of a $2.0 million decline in mortgage servicing rights amortization. The majority of the reduction in the amortization of mortgage servicing rights resulted from lower volumes of loan prepayments in 2000 compared to the third quarter of 1999. BB&T amortizes the full amount of any unamortized capitalized mortgage servicing rights associated with the prepaid loan in the period the prepayment occurs. As mortgage rates have increased during 2000, loan prepayments have significantly decreased, and the accelerated amortization of mortgage servicing rights has substantially decreased compared to 1999. This decrease in the amortization of mortgage servicing was largely offset by a $1.8 million increase in amortization of goodwill and other intangibles, due to acquisitions consummated using purchase accounting. Total goodwill and other intangibles, including mortgage servicing rights, have increased from $848.2 million at September 30, 1999, to $908.4 million at September 30, 2000. For the nine months ended September 30, 2000, amortization of intangibles and mortgage servicing rights totaled $59.5 million, a decrease of $251,000, or less than one percent, compared to 1999. Other noninterest expenses for the third quarter of 2000 totaled $149.7 million, an increase of $18.0 million, or 13.6%, compared to 1999. These amounts include merger-related costs of $47.0 million in the third quarter of 2000. Excluding these costs, other noninterest expenses for the three months ended September 30, 2000 would have decreased $6.1 million, or 5.9%, from the comparable 1999 period. This decrease is entirely related to lower professional services expenses, which were elevated in 1999 because of costs associated with BB&T's Year 2000 readiness program, and lower advertising and public relations expenses. For the nine months ended September 30, 2000, other expense totaled $395.9 million, an increase of $46.5 million, or 13.3%. Excluding nonrecurring charges from both 2000 and 1999, other expense would have decreased $5.7 million, or 1.8%, compared to last year. Provision for Income Taxes The provision for income taxes totaled $15.9 million for the third quarter of 2000, a decrease of $67.0 million, or 80.9%, compared to the third quarter of 1999. For the first nine months of 2000, the provision for income taxes totaled $183.2 million, a decrease of $73.6 million, or 28.6%, compared to 1999. Excluding the tax benefits associated with the merger-related charges from 2000 and 1999 and bond losses from 2000, the provision for income taxes would have been $107.3 million during the third quarter and $311.7 million for the nine months ended September 30, 2000. These amounts represent increases of $15.5 million, or 16.8%, compared to the third quarter of 1999, and an increase of $40.5 million, or 14.9%, compared to the first nine months of 1999. Excluding the effect of nonrecurring items on pretax income and the income tax provision, BB&T's effective income tax rate was 32.3% for the third quarter and 32.7% for the first nine months of 2000 compared to effective tax rates of 32.2% for the third quarter of 1999 and 32.3% for the first nine months of 1999. 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings The nature of the business of BB&T's banking subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of BB&T are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of BB&T. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11--"Computation of Earnings Per Share" is included herein as Note E. Exhibit 27--"Financial Data Schedule" is included in the electronically- filed document as required. (b) Current Reports on Form 8-K during and following the quarter ended September 30, 2000. On July 18, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to report the financial condition and results of operations for the second quarter of 2000. On July 27, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to announce plans to acquire FCNB Corp of Frederick, Maryland. On August 23, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to report plans to acquire BankFirst Corp., of Knoxville, Tennessee. On September 6, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to report plans to acquire FirstSpartan Financial Corp., of Spartanburg, South Carolina. On October 12, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to report the financial condition and results of operations for the third quarter of 2000. On October 26, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to announce the authorization of the board of directors to repurchase up to 20 million shares of BB&T's common stock to be reissued in acquisitions to be accounted for as purchases. On October 27, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to restate BB&T's 1999 Annual Report on Form 10-K for the accounts of Hardwick Holding Company, First Banking Company of Southeast Georgia and One Valley Bancorp, Inc. On October 30, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to restate the first and second quarters of 1999 for the merger with One Valley Bancorp, Inc. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BB&T CORPORATION (Registrant) /s/ Scott E. Reed Date: November 14, 2000 By: _________________________________ Scott E. Reed Senior Executive Vice President and Chief Financial Officer /s/ Sherry A. Kellett Date: November 14, 2000 By: _________________________________ Sherry A. Kellett Senior Executive Vice President and Controller (Principal Accounting Officer) 31