-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Piljr35opKm4Cn4y1xKpBwFJXZB5ykm1vDLwPLR6WCLbU9MLnUSIK0i7vyB06Tpd kFPowIpIHOYtbigfrYjkLg== 0000930661-00-000544.txt : 20000315 0000930661-00-000544.hdr.sgml : 20000315 ACCESSION NUMBER: 0000930661-00-000544 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BB&T CORP CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10853 FILM NUMBER: 568887 BUSINESS ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 BUSINESS PHONE: 3367332000 MAIL ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ---------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1999 Commission File Number: 1-10853 BB&T CORPORATION (Exact name of Registrant as specified in its Charter) North Carolina 56-0939887 (State of Incorporation) (I.R.S. Employer Identification No.) 200 West Second Street Winston-Salem, North Carolina 27101 (Address of Principal Executive Offices) (Zip Code)
(336) 733-2000 (Registrant's Telephone Number, Including Area Code) ---------------- Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $5 par value New York Stock Exchange Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant at January 31, 2000, was approximately $9.2 billion. The number of shares of the Registrant's Common Stock outstanding on January 31, 2000, was 331,442,010. No shares of preferred stock were outstanding at January 31, 2000. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 25, 2000, are incorporated by reference in Part III of this report. ---------------- The Exhibit Index begins on page 109. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE INDEX
Page ------ PART I Item 1 Business 4 Item 2 Properties 18, 76 Item 3 Legal Proceedings 90 Item 4 Submission of Matters to a Vote of Shareholders 2 None. PART II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters 48-49 Item 6 Selected Financial Data 51 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Quantitative and Qualitative Disclosures About Item 7A Market Risk 40 Item 8 Financial Statements and Supplementary Data 50 Consolidated Balance Sheets at December 31, 1999 and 54 1998 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1999 55 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 1999 56 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1999 57 Notes to Consolidated Financial Statements 58 Report of Independent Public Accountants 53 Quarterly Financial Summary for 1999 and 1998 50 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None. PART III Item 10 Directors and Executive Officers of the Registrant *, 18 Item 11 Executive Compensation * Item 12 Security Ownership of Certain Beneficial Owners and * Management
2
Page ---- Item 13 Certain Relationships and Related Transactions * PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements (See Item 8 for reference). (2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8. (3) Exhibits have been filed separately with the Commission and are available upon written request. (b) Current Reports on Form 8-K filed during the fourth quarter of 1999.
Type Date Filed Reporting Purpose ---- ---------- ----------------- Item 5. October 12, 1999 To report the results of operations and financial condition for the 3rd Quarter of 1999. Item 5. November 17, 1999 To report plans to acquire Hardwick Holding Company of Dalton, Georgia. Item 5. December 15, 1999 To report plans to acquire First Banking Company of Southeast Georgia.
- -------- * The information required by Item 10 is incorporated herein by reference to the information that appears under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders. The information required by Item 11 is incorporated herein by reference to the information that appears under the headings "Compensation of Executive Officers", "Retirement Plans" and "Compensation Committee Report on Executive Compensation" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders. The information required by Item 12 is incorporated herein by reference to the information that appears under the headings "Security Ownership" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders. The information required by Item 13 is incorporated herein by reference to the information that appears under the headings "Compensation Committee Interlocks and Insider Participation" and "Transactions with Executive Officers and Directors" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders. 3 DESCRIPTION OF BUSINESS General BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Kentucky and the metropolitan Washington, D.C. area. At December 31, 1999, the principal assets of BB&T included all of the outstanding shares of common stock of: . Branch Banking and Trust Company, of Winston-Salem, North Carolina; . BB&T Financial Corporation of South Carolina, located in Greenville, South Carolina, which in turn owns all the outstanding shares of Branch Banking and Trust Company of South Carolina; . BB&T Financial Corporation of Virginia, which in turn owns all the outstanding shares of Branch Banking and Trust Company of Virginia; . First Citizens Bank of Georgia, of Newnan, Georgia; . Carroll County Bank and Trust Company, of Westminster, Maryland; . The Matewan National Bank, of Williamson, West Virginia; . First Liberty Bank, of Macon, Georgia; . Regional Acceptance Corporation, of Greenville, North Carolina; . Scott & Stringfellow, Inc., of Richmond, Virginia; . Refloat Incorporated, of Mount Airy, North Carolina; and . BB&T Factors Corporation, of High Point, North Carolina. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged; (5) costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected; (6) expected cost savings associated with pending mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending mergers may be greater than expected; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (9) adverse changes may occur in the securities markets. 4 Significant Subsidiaries Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. At December 31, 1999, BB&T-NC operated through 339 banking offices throughout North Carolina and, excluding home office deposits, held the largest share of deposits in North Carolina. BB&T-NC also operated 50 banking offices in Maryland and six offices in Washington, D.C. BB&T-NC's principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North Carolina, which specializes in lease financing to commercial businesses and municipalities; BB&T Investment Services, Inc., located in Charlotte, North Carolina, which offers nondeposit investment alternatives, including discount brokerage services, fixed-rate and variable-rate annuities, mutual funds and government and municipal bonds; BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which is the 12th largest independent insurance agency network in the country; and W.E. Stanley, Inc., an actuarial and employee benefits consulting firm headquartered in Greensboro, North Carolina. BB&T-NC has a number of additional subsidiaries, including Prime Rate Premium Finance Corporation, Inc. ("Prime Rate"), located in Florence, South Carolina, which provides insurance premium financing and other services to customers in Virginia and the Carolinas. BB&T-NC also owns 51% of AutoBase Information Systems, Inc., ("AutoBase") a Charlotte, North Carolina-based company that uses advanced technologies to simplify the car-buying and selling process for consumers and automotive dealers. Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 88 banking offices at December 31, 1999. BB&T-SC is the third largest bank in South Carolina in terms of deposit market share. Branch Banking and Trust Company of Virginia ("BB&T-VA") operated 104 banking offices in Virginia at December 31, 1999. BB&T-VA is the sixth largest bank in Virginia in terms of deposit market share. Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow") is an investment banking and full-service brokerage firm located in Richmond, Virginia. Scott & Stringfellow operated 23 full-service brokerage offices in Virginia, one in West Virginia, ten in North Carolina and two in South Carolina at December 31, 1999. Scott & Stringfellow specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Scott & Stringfellow also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional tax- exempt issuers. The primary services offered by BB&T's subsidiaries include: . small business lending . commercial middle market lending . retail lending . home equity lending . sales finance . mortgage lending . leasing . trust services . agency insurance 5 . treasury services . investment sales and mutual fund products . capital markets . factoring . asset-based lending . international banking services . merchant banking . cash management . bankcard 6 The following table discloses selected financial information related to BB&T's significant banking subsidiaries: Table 1 Selected Financial Data of Significant Banking & Thrift Subsidiaries As of / For the Years Ended December 31, 1999, 1998 and 1997
First BB&T-NC BB&T-SC BB&T-VA Liberty ----------- ---------- ---------- ---------- (Dollars in thousands) 1999 Total assets $29,631,391 $4,842,462 $5,098,872 $1,765,277 Securities 7,740,265 477,705 1,308,673 399,005 Loans and leases, net of unearned income* 19,402,829 3,698,046 3,294,038 1,201,689 Deposits 18,021,189 3,686,484 3,462,041 1,047,686 Shareholder's equity 2,130,303 364,060 471,938 123,658 Net interest income 968,187 216,781 188,522 59,626 Provision for loan and lease losses 43,053 15,491 6,689 9,728 Noninterest income 564,174 68,473 51,170 22,072 Noninterest expense 896,799 126,689 145,242 59,615 Net income 417,751 91,059 54,457 8,463 1998 Total assets $26,868,711 $4,641,393 $5,257,737 $1,506,352 Securities 6,735,729 783,727 1,177,446 322,152 Loans and leases, net of unearned income* 17,845,119 3,266,871 3,321,677 1,034,511 Deposits 17,858,406 3,702,383 3,496,787 1,075,832 Shareholder's equity 2,170,812 429,572 612,083 123,333 Net interest income 902,319 201,132 187,189 49,653 Provision for loan and lease losses 47,167 13,455 12,227 5,116 Noninterest income 459,246 71,945 52,550 20,080 Noninterest expense 801,036 119,224 143,515 40,632 Net income 365,517 89,653 52,526 15,057 1997 Total assets $23,253,933 $4,364,982 $5,260,598 $1,269,997 Securities 5,590,186 1,020,554 1,469,392 245,277 Loans and leases, net of unearned income* 15,749,571 3,052,755 3,274,679 910,502 Deposits 16,419,895 3,401,236 3,507,108 936,502 Shareholder's equity 1,816,733 374,871 574,742 101,457 Net interest income 867,392 184,341 123,738 43,105 Provision for loan and lease losses 54,197 14,109 8,537 6,316 Noninterest income 439,772 70,916 27,008 15,650 Noninterest expense 825,898 135,018 90,649 35,320 Net income 285,209 68,024 34,089 8,850
- -------- * Includes loans held for sale. 7 Merger Strategy BB&T's profitability and market share have been enhanced through both internal growth and acquisitions in recent years. The acquisition strategy of BB&T is focused on three primary objectives: . to pursue in-market acquisitions of high-quality banks and thrifts with assets in the $250 million to $10 billion range, . to acquire companies in niche markets that provide products or services that can be offered through the existing distribution system to BB&T's current customer base, and . to consider strategic acquisitions in new markets that are economically feasible and provide positive long-term benefits. BB&T has consummated 43 acquisitions of community banks and thrifts, acquired 49 insurance agencies and completed 12 acquisitions of nonbank financial services providers over the last ten years. BB&T expects to continue to take advantage of the consolidation of the financial services industry and expand and enhance its franchise through mergers and acquisitions. The consideration paid for these acquisitions may be in the form of cash, debt or BB&T stock. The amount of consideration paid to complete these transactions may entail payments in excess of the book value of the underlying net assets acquired, which could have a dilutive effect on earnings per share or book value. In addition, such acquisitions sometimes result in significant front- end charges against earnings. However, cost savings, especially incident to in-market acquisitions, are also frequently anticipated. Competition The banking industry is highly competitive and dramatic change continues to occur. The banking subsidiaries of BB&T compete actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies and insurance companies. Competition for financial products continues to grow as customers select from a variety of traditional and nontraditional alternatives. The industry continues to consolidate at a fast pace, which affects competition by eliminating some regional and local institutions. For additional information concerning markets, BB&T's competitive position and business strategies, see "Market Area" and "Lending Activities" below. Market Area BB&T's market area consists of North and South Carolina, Virginia, Maryland, Georgia, West Virginia, eastern Kentucky and the metropolitan Washington, D.C. area. The area's employment base is diverse and consists of manufacturing, general services, agricultural, wholesale/retail, high tech and financial services. BB&T believes its current market area is economically strong and will support consistent growth in assets and deposits in the future. Even so, management expects to continue to employ aggressive growth strategies, including possible expansion into neighboring states. Management believes that maintaining a community bank approach to customer service as asset size and available services grow will strengthen the Corporation's ability to move into new states and communities and continue to market services to small to mid- sized commercial customers and individuals in these markets. Lending Activities The primary goal of the BB&T lending function is to help clients achieve their financial goals and secure their financial futures on terms that are fair to the clients and profitable to the Corporation. This purpose can best be accomplished by building strong, profitable customer relationships over 8 time, with BB&T becoming an important contributor to the prosperity and well being of its customers. BB&T's philosophy of lending is to attempt to meet all legitimate business and consumer credit needs within defined market segments where standards of safety, profitability and liquidity can be met. Based on internal analyses, BB&T's loan portfolio consistently outperforms an average of our national peers in terms of asset quality, yield and rate of growth. BB&T focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and consumer loans. Typically, fixed-rate residential mortgage loans are sold in the secondary mortgage market and adjustable-rate residential mortgages are retained in the portfolio. Servicing rights on mortgage loans sold are typically retained by BB&T. As of December 31, 1999, BB&T's total mortgage servicing portfolio exceeded $17.0 billion. BB&T conducts the majority of its lending activities in the context of the Corporation's community bank focus, with decentralized lending decisions made as close to the customer as practicable. The following table reflects BB&T's loan portfolio based on the source of the underlying collateral, rather than the primary purpose of the loan. Table 2 Composition of Loan and Lease Portfolio*
December 31, ----------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Loans: Commercial, financial and agricultural $ 4,592,691 $ 4,128,455 $ 3,816,252 $ 3,331,333 $ 2,844,598 Real estate-- construction and land development 3,310,561 2,570,017 2,453,380 1,816,520 1,343,621 Real estate--mortgage 16,010,893 14,604,025 13,395,782 11,918,118 11,651,183 Consumer 3,635,267 3,231,827 3,217,073 3,261,604 2,874,951 ----------- ----------- ----------- ----------- ----------- Loans held for investment 27,549,412 24,534,324 22,882,487 20,327,575 18,714,353 Loans held for sale 285,025 1,171,415 553,662 267,082 294,967 ----------- ----------- ----------- ----------- ----------- Total loans 27,834,437 25,705,739 23,436,149 20,594,657 19,009,320 Leases 2,602,819 1,620,326 788,462 576,991 376,152 ----------- ----------- ----------- ----------- ----------- Total loans and leases $30,437,256 $27,326,065 $24,224,611 $21,171,648 $19,385,472 =========== =========== =========== =========== ===========
- -------- * Balances include unearned income. Mortgage Banking BB&T continues to be the largest originator of residential mortgage loans in the Carolinas, with 1999 originations of $4.6 billion. BB&T engages in mortgage loan originations by offering various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale of substantially all fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and mortgage insurance. BB&T also purchases mortgage loans from more than 100 correspondent originators and subjects them to the same underwriting and risk management criteria as loans originated internally. 9 Commercial Lending BB&T's commercial lending program is generally targeted to serve small-to- middle market businesses with sales of $200 million or less, although in-house limits do allow lending to larger customers, including national customers who have some reasonable business connections with the Corporation's geographically-served markets. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Pricing on commercial loans, driven largely by competition, is usually tied to market indexes, such as the prime rate, LIBOR or rates on U.S. Treasury securities. BB&T has received recognition from the U.S. Small Business Administration for the last two years as the #1 "small business friendly" bank in the eastern United States. Management believes that small to mid-sized commercial lending is BB&T's strongest market, as BB&T has the largest market share in all types of small business lending in the Carolinas. Construction Lending Real estate construction loans include twelve-month contract housing loans, which are intended to convert to permanent one-to-four family residential mortgage loans upon completion of the construction, and commercial construction loans. These loans are usually to in-market developers, businesses, individuals or real estate investors for the construction of commercial structures in the Corporation's market area. They are made for purposes including, but not limited to, the construction of industrial facilities, apartments, shopping centers, office buildings, hotels and warehouses. The properties may be for sale, lease or owner-occupancy. Consumer Lending BB&T offers a wide variety of consumer loan products. Various types of secured and unsecured loans are marketed to qualifying, existing clients and to other creditworthy candidates in BB&T's market area. Home equity loans and lines are underwritten with note amounts and credit limits that ensure consistency with the Corporation's policies. Numerous forms of unsecured loans, including revolving credits (e.g. bankcards, checking accounts, overdraft protection and personal lines of credit) are provided and various installment loan products, such as vehicle loans, are offered. BB&T is the largest home equity lender in North and South Carolina. Leasing BB&T provides commercial leasing products and services through BB&T Leasing Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases for vehicles, rolling stock and tangible personal property. Leasing provides lease-related services for small to medium-sized commercial customers. BB&T also engages in leasing transactions with municipalities directly through its subsidiary banks and has the largest market share of municipal leasing in the Carolinas. 10 The following table presents BB&T's total loan portfolio based on the primary purpose of the loan, rather than the underlying collateral: Table 3 Composition of Loan Portfolio Based on Loan Purpose
December 31, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Business loans $13,680,978 $11,761,770 Lease Financing 1,471,194 986,885 ----------- ----------- Total commercial loans 15,152,172 12,748,655 ----------- ----------- Sales Finance 2,120,403 1,695,286 Revolving Credit 628,118 543,172 Direct Retail 5,341,104 4,723,745 ----------- ----------- Total consumer loans 8,089,625 6,962,203 ----------- ----------- Mortgage loans 5,955,658 6,893,267 ----------- ----------- Total loans $29,197,455 $26,604,125 =========== ===========
- -------- * Loans and leases are net of unearned income and include loans held for sale. The following table reflects the scheduled maturities of commercial, financial and agricultural loans, as well as construction loans. Table 4 Selected Loan Maturities and Interest Sensitivity(3)
December 31, 1999 ------------------------------------ Commercial, Financial and Real Estate: Agricultural Construction Total ------------ ------------ ---------- (Dollars in thousands) Fixed rate: 1 year or less (2) $ 232,560 $ 494,929 $ 727,489 1-5 years 987,493 266,500 1,253,993 After 5 years 255,579 -- 255,579 ---------- ---------- ---------- Total 1,475,632 761,429 2,237,061 ---------- ---------- ---------- Variable rate: 1 year or less (2) 1,631,780 1,733,410 3,365,190 1-5 years 1,343,452 815,722 2,159,174 After 5 years 141,827 -- 141,827 ---------- ---------- ---------- Total 3,117,059 2,549,132 5,666,191 ---------- ---------- ---------- Total loans and leases (1) $4,592,691 $3,310,561 $7,903,252 ========== ========== ==========
- --------
(Dollars in thousands) ----------- (1)The table excludes: (i) consumer loans to individuals for household, family and other personal expenditures $ 3,635,267 (ii) real estate mortgage loans 16,010,893 (iii)loans held for sale 285,025 (iv) leases 2,602,819 ----------- $22,534,004 =========== (2)Includes loans due on demand.
(3)Balances include unearned income. 11 Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T's credit policy does not permit automatic renewals of loans. At the scheduled maturity date (including balloon payment date), the customer must request a new loan to replace the matured loan and execute a new note with rate, terms and conditions negotiated at that time. Allowance for Loan and Lease Losses The allowance for loan and lease losses is established through a provision for loan and lease losses charged against earnings. The level of the allowance for loan and lease losses is based on management's evaluation of the risk inherent in the loan portfolio at the balance sheet date and changes in the nature and volume of loan activity. This evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans' "risk grades," the estimated fair value of the underlying collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. BB&T's objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to reduce overall credit risk by minimizing the adverse impact of any single event or combination of related events. Reserve Policy and Methodology The allowance for loan and lease losses is composed of general reserves, specific reserves and an unallocated reserve. General reserves are established on the commercial loan portfolio based on loss percentages that are determined based on management's evaluation of the losses inherent in the various risk grades of the commercial loans. Commercial loans are categorized in one of ten risk grades based on management's assessment of the overall credit quality of the loan, including the payment history, the financial position of the borrower, underlying collateral, internal credit reviews and the results of external regulatory examinations. The general reserve percentages described above are then applied to each risk grade to calculate the necessary allowance to cover inherent losses in each risk category. The following table presents the risk grades and reserve percentages applicable to each grade at December 31, 1999: Table 5 General Reserves for Commercial Loans December 31, 1999
Percentage of Commercial General Loans by Reserve Risk Grade Risk Grade Percentage ---------- ---------- ---------- Risk 0 (Loans from acquired institutions) 0.05% 1.30% Risk 1 (Superior Quality) 4.25 0.10 Risk 2 (High Quality) 16.13 0.20 Risk 3 (Very Good Quality--Normal Risk) 30.48 0.60 Risk 4 (Good Quality--Normal Risk) 32.26 1.30 Risk 5 (Acceptable Quality) 11.75 2.25 Risk 6 (Management Attention) 2.85 3.25 Risk 7 (Special Mention) 0.73 5.00 Risk 8 (Substandard) 1.48 15.00 Risk 9 (Doubtful) 0.02 50.00
12 The general reserve percentages used have been determined by management to be appropriate based primarily on historical loan losses and the level of risk assumed for the various risk grades. The reserve percentages for Special Mention, Substandard and Doubtful are based on the preferred rates used by banking regulators, and the other risk grades are "stepped down" from these percentages as loan quality improves. The process of classifying commercial loans into the appropriate risk grades is performed initially as a component of the approval of the loan by the appropriate credit officer. Based on the size of the loan, senior credit officers and / or the loan committee may review the classification to ensure accuracy and consistency of classification. Loan classifications are frequently reviewed by internal credit examiners to determine if any changes in the circumstances of the loan require a different risk grade. To determine the most appropriate risk grade classification for each loan, the credit officers examine the borrower's liquidity level, asset quality, the amount of the borrower's other indebtedness, cash flow, earnings, sources of financing and existing lending relationships. Specific reserves are provided on certain commercial loans that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of BB&T's loss exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations described above to prevent redundant reserves. The calculations of specific reserves on commercial loans also incorporates specific reserves based on the results of measuring impaired loans pursuant to the requirements of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. A loan is impaired when, based on current information and events, it is probable that BB&T will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded through a valuation allowance. It is BB&T's policy to classify and disclose all commercial loans greater than $250,000 that are on nonaccrual status as impaired loans. Substantially all other loans made by BB&T are excluded from the scope of SFAS No. 114 as they are comprised of large groups of smaller balance homogeneous loans (residential mortgage and consumer installment) that are collectively evaluated for impairment. General reserves are provided for noncommercial loans based on a three-year weighted average of actual loss experience of each major loan category, which is then applied to the total outstanding loan balance of each loan category. The weighted average loss experience for each category is determined by assigning a 50% weight to the most recent year's loss experience for each category, a 30% weight to the loss ratio from two years ago, and the remaining 20% weight is applied to the loss ratio from three years ago. This methodology places greater emphasis on more recent loss trends and, therefore, provides a self-correcting mechanism for the differences between estimated and actual losses. There are two primary components considered in determining an appropriate level for the unallocated reserve. First, a portion of the unallocated reserve is established to cover the elements of imprecision and estimation risk inherent in the general and specific reserves described above. Second, the remaining portion of the unallocated allowance is determined based on management's evaluation of various conditions that are not directly measured by any other component of the allowance, including current general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal credit examinations and results from external bank regulatory examinations. 13 While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance or to the reserving methodology may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. The following table discloses an allocation of the allowance for loan and leases losses at the end of each of the past five years. The allowance has been allocated applying the methodologies described above to the loan portfolios based on the underlying collateral of the loans. This allocation is calculated on an approximate basis and is not necessarily indicative of future losses. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. Table 6 Allocation of Allowance for Loan and Lease Losses by Category
1999 1998 1997 1996 1995 ----------------- ----------------- ----------------- ----------------- ----------------- % Loans % Loans % Loans % Loans % Loans in each in each in each in each in each Amount category Amount category Amount category Amount category Amount category -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Balance at end of period applicable to: Commercial, financial and agricultural $ 58,046 15% $ 52,745 16% $ 55,188 16% $ 54,279 16% $ 57,232 15% Real estate: Construction and land development 39,576 11 33,065 10 24,792 10 17,962 10 21,531 8 Mortgage 139,837 53 111,099 54 109,765 56 96,429 56 92,213 60 -------- --- -------- --- -------- --- -------- --- -------- --- Real estate--total 179,413 64 144,164 64 134,557 66 114,391 66 113,744 68 -------- --- -------- --- -------- --- -------- --- -------- --- Consumer 26,384 12 33,010 13 29,181 14 24,581 15 17,424 15 Leases 21,726 9 12,737 7 8,021 4 5,207 3 3,325 2 Unallocated 102,394 -- 119,213 -- 89,603 -- 78,162 -- 63,254 -- -------- --- -------- --- -------- --- -------- --- -------- --- Total $387,963 100% $361,869 100% $316,550 100% $276,620 100% $254,979 100% ======== === ======== === ======== === ======== === ======== ===
14 The following table sets forth information with respect to BB&T's allowance for loan and lease losses for the most recent five years. Table 7 Analysis of Allowance for Loan and Lease Losses
December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Balance, beginning of period $ 361,869 $ 316,550 $ 276,620 $ 254,979 $ 245,326 ----------- ----------- ----------- ----------- ----------- Charge-offs: Commercial, financial and agricultural (21,803) (15,602) (20,204) (14,154) (13,570) Real estate (14,825) (12,523) (14,708) (12,242) (13,481) Consumer (66,843) (73,363) (74,274) (53,281) (32,729) Lease receivables (993) (1,167) (671) (768) (614) ----------- ----------- ----------- ----------- ----------- Total charge-offs (104,464) (102,655) (109,857) (80,445) (60,394) ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial, financial and agricultural 10,837 8,423 6,949 9,464 7,149 Real estate 3,961 3,792 5,287 6,521 3,825 Consumer 13,979 12,170 8,893 8,139 7,757 Lease receivables 107 425 232 136 395 ----------- ----------- ----------- ----------- ----------- Total recoveries 28,884 24,810 21,361 24,260 19,126 ----------- ----------- ----------- ----------- ----------- Net charge-offs (75,580) (77,845) (88,496) (56,185) (41,268) ----------- ----------- ----------- ----------- ----------- Provision charged to expense 92,097 101,842 110,913 70,359 47,108 ----------- ----------- ----------- ----------- ----------- Allowance of loans acquired in purchase transactions 9,272 21,258 17,513 7,467 3,813 Reconciliation of fiscal year of merged companies to calendar year 305 64 -- -- -- ----------- ----------- ----------- ----------- ----------- Balance, end of period $ 387,963 $ 361,869 $ 316,550 $ 276,620 $ 254,979 =========== =========== =========== =========== =========== Average loans and leases* $27,729,172 $25,065,207 $22,438,508 $20,223,203 $18,900,682 Net charge-offs as a percentage of average loans and leases .27% .31% .39% .28% .22% =========== =========== =========== =========== ===========
- -------- * Loans and leases are net of unearned income and include loans held for sale. Nonperforming Assets and Classified Assets Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessed collateral. It is BB&T's policy to place commercial loans and leases on nonaccrual status when full collection of principal and interest becomes doubtful, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period and any prior year interest is charged off against the allowance for loan and lease losses. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual status when full collection of principal and interest becomes doubtful, or they become delinquent for a specified period of time. 15 Investment Activities BB&T maintains a significant portion of its assets as investment securities. BB&T's subsidiary banks are allowed to purchase, sell, deal in and hold certain investment securities as prescribed by bank regulations. These investments include all obligations of the U.S. Treasury, agencies of the Federal government, obligations of any state or political subdivision, various types of corporate debt, mutual funds, limited types of equity securities and certain derivative securities. Scott & Stringfellow, BB&T's full-service brokerage and investment banking subsidiary, is permitted to engage in the underwriting, trading and sales of equity and debt securities subject only to the risk management policies of the Corporation. BB&T's investment activities are governed internally by a written, board- approved investment policy. Investment policy is carried out by the Corporation's Asset and Liability Committee ("ALCO") which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities, which are discussed in "Market Risk Management", in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Investment strategies are established by the ALCO in consideration of the interest rate cycle, balance sheet mix, actual and anticipated loan demand, funding options and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to cover unanticipated deposit and loan fluctuations, seasonal funds flow variations and overall funds management objectives; (ii) to provide eligible securities to secure public funds and trust deposits as prescribed by law; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii). The following table provides information regarding the composition of BB&T's securities portfolio at the end of each of the past three years. BB&T's trading securities, reflected in the accompanying table, represent positions held primarily by Scott & Stringfellow. Table 8 Composition of Securities Portfolio
December 31, --------------------------------- 1999 1998 1997 ----------- ---------- ---------- (Dollars in thousands) Trading Securities (at estimated fair value): $ 93,221 $ 60,422 $ 67,878 ----------- ---------- ---------- Securities held to maturity (at amortized cost): U.S. Treasury, government and agency obligations 23,117 51,102 105,236 States and political subdivisions 74,005 232,406 271,993 Mortgage-backed securities -- 70,355 142,164 Other securities -- 6,920 1,315 ----------- ---------- ---------- Total securities held to maturity 97,122 360,783 520,708 ----------- ---------- ---------- Securities available for sale (at estimated fair value): U.S. Treasury, government and agency obligations 4,529,221 3,838,080 4,632,400 States and political subdivisions 540,219 185,056 78,856 Mortgage-backed securities 3,793,185 4,204,668 3,361,852 Other securities 1,619,419 1,270,682 503,162 ----------- ---------- ---------- Total securities available for sale 10,482,044 9,498,486 8,576,270 ----------- ---------- ---------- Total securities $10,672,387 $9,919,691 $9,164,856 =========== ========== ==========
16 Sources of Funds Deposits are the primary source of funds for lending and investing activities. Scheduled loan payments and maturities and prepayments from portfolios of loans and investment securities also provide a stable source of funds. Federal Home Loan Bank ("FHLB") advances, foreign deposits, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. Deposits Deposits are attracted principally from customers within BB&T's market area through the offering of a broad selection of deposit instruments including demand deposits, negotiable order of withdrawal accounts, savings accounts, money rate savings, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are set by the ALCO and are determined based on (i) the interest rates offered by competitors, (ii) anticipated amount and timing of funding needs (iii) availability of and cost of alternative sources of funding and (iv) anticipated future economic conditions and interest rates. Customer deposits are attractive sources of liquidity because of their stability, cost and the ability to generate fee income through the cross-sale of other services to the depositors. Table 9 Scheduled Maturities of Time Deposits December 31, 1999 (Dollars in thousands) Time Deposits $100,000 and Over Maturity Schedule Less than three months $1,514,247 Three through six months 719,615 Seven through twelve months 807,005 Over twelve months 642,444 ---------- Total $3,683,311 ==========
Total Time Deposits Time Deposits Due to Mature by December 31, 2000 $10,525,443 2001 1,785,389 2002 585,374 2003 187,808 2004 272,954 2005 and later 39,347 ----------- Total $13,396,315 ===========
Short-Term Borrowed Funds BB&T's ability to borrow funds through nondeposit sources provides additional flexibility in meeting the liquidity needs of customers. Components of short- term borrowed funds at year end were master notes, securities sold under repurchase agreements, FHLB advances, Federal funds 17 purchased and U.S. Treasury tax and loan depository note accounts. The following table summarizes certain pertinent information for the past three years regarding BB&T's short-term borrowed funds: Table 10 Short-Term Borrowed Funds
1999 1998 1997 ---------- ---------- ---------- (Dollars in thousands) Maximum outstanding at any month-end during the year $6,875,290 $5,681,846 $4,157,911 Average outstanding during the year 5,311,658 4,430,989 3,430,232 Average interest rate during the year 4.86% 5.23% 5.28% Average interest rate at end of year 4.11 4.86 5.49
Employees At December 31, 1999, BB&T had approximately 13,700 full-time-equivalent employees compared to approximately 10,400 full-time equivalent employees at December 31, 1998. Properties BB&T and its significant subsidiaries occupy headquarters offices that are either owned or operated under long-term leases and also own free-standing operations centers in Winston-Salem, Wilson, Charlotte and Lumberton, North Carolina. At December 31, 1999, BB&T and its subsidiary banks operated 655 banking offices in the Carolinas, Virginia, Maryland, Georgia, West Virginia, eastern Kentucky and Washington, D.C. Branch office locations are variously owned or leased. Management believes that the premises occupied by BB&T and its subsidiaries are well-located and suitably equipped to serve as financial services facilities. See Note F. "Premises and Equipment" of the "Notes to Consolidated Financial Statements" in this report for additional disclosures related to BB&T's properties and other fixed assets. Executive Officers of BB&T BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr. Allison is 51 and has 29 years of service with the Corporation. Henry G. Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr. Williamson is 52 and has 28 years of service with the Corporation. Kelly S. King is the President of BB&T Corporation and is the Senior Executive Vice President for the Branch Network. Mr. King is 51 and has 28 years of service with the Corporation. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 51 and has served the Corporation for 27 years. W. Kendall Chalk is the Senior Executive Vice President for the Lending Group. Mr. Chalk is 54 and has served the Corporation for 25 years. Scott E. Reed is a Senior Executive Vice President and the Corporation's Chief Financial Officer. Mr. Reed is 51 and has 28 years of service with the Corporation. Sherry A. Kellett is a Senior Executive Vice President and the Corporation's Controller. Ms. Kellett is 55 and has 15 years of service with the Corporation. C. Leon Wilson is a Senior Executive Vice President and is the Corporation's Operations Division Manager. Mr. Wilson is 44 and has served BB&T for 23 years. 18 REGULATORY CONSIDERATIONS General As a bank holding company, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the "BHCA") and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities. As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the "State-Chartered Banks") are subject to regulation, supervision and examination by state bank regulatory authorities in their respective home states. These authorities include the North Carolina Commissioner of Banks, in the case of BB&T-NC, the South Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia State Corporation Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of the State-Chartered Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC"). BB&T also operates seven banks that were subsidiaries of bank holding companies acquired by BB&T during 1999 that will be merged into either BB&T-NC, BB&T-SC or BB&T-VA, as appropriate, during 2000. These banks include First Citizens Bank of Georgia, First Citizens Bank of Newnan and First Liberty Bank, state- chartered banks subject to supervision by the Georgia Department of Banking and Finance; Carroll County Bank and Trust Company and the Bank of Maryland, state- chartered banks supervised by Maryland's Commissioner of Financial Regulation; The Matewan National Bank, a Federally-chartered bank subject to regulation, supervision and examination by the U.S. Office of the Comptroller of the Currency (the "OCC"); and Matewan Bank, FSB, a Federally-chartered thrift institution supervised by the Office of Thrift Supervision ("OTS"). (References herein to the "Banks" include these acquired banks and the State-Chartered Banks). State and Federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks' operations. The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which BB&T and the Banks are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. Payment of Dividends BB&T is a legal entity separate and distinct from its banking and other subsidiaries. The majority of BB&T's revenues are from dividends paid to BB&T by its banking subsidiaries. BB&T's banking subsidiaries are subject to laws and regulations that limit the amount of dividends they can pay. In addition, both BB&T and its banking subsidiaries are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of 19 earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. BB&T does not expect that any of these laws, regulations or policies will materially affect the ability of the Banks to pay dividends. During the year ended December 31, 1999, the Banks declared $589.3 million in dividends payable to BB&T. Capital The Federal Reserve Board, the Federal Deposit Insurance Corporation ("FDIC") and the Office of the Comptroller of the Currency ("OCC") have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements, BB&T and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off- balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance ("Tier 2 capital" which, together with Tier 1 capital, composes "total capital"). The ratios of Tier 1 capital and total capital to risk-adjusted assets for BB&T and the subsidiary banks as of December 31, 1999 are shown in the following table. In addition, each of the Federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Pursuant to these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to Federal Bank regulatory evaluation of an organization's overall safety and soundness. The leverage ratios of BB&T and the subsidiary banks as of December 31, 1999 are reflected in the accompanying table. Table 11 Capital Adequacy for BB&T Corporation and Principal Banking and Thrift Subsidiaries
Regulatory BB&T- BB&T- BB&T- First Minimums BB&T NC SC VA Liberty ---------- ---- ----- ----- ----- ------- Risk-based capital ratios: Tier 1 capital (1) 4.0% 9.3% 9.8% 9.7% 11.3% 9.3% Total risk-based capital (2) 8.0 13.0 11.0 11.0 12.5 10.5 Tier 1 leverage ratio (3) 3.0 6.6 6.7 7.7 7.5 6.9
- -------- (1) Shareholders' equity less nonqualifying intangible assets; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines. (2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets as defined in the risk-based capital guidelines. (3) Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles. The risk-based capital standards of the Federal Reserve Board, the FDIC and the OCC explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization's capital adequacy. 20 Deposit Insurance Assessments The deposits of the Banks are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC. However, a portion of the Banks' deposits (relating to the acquisitions of various savings associations) are subject to assessments imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1998. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. Legislation was enacted in 1997 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"). The FDIC currently assesses BIF-insured and SAIF-insured deposits an additional 2.12 basis points per $100 of deposits to cover those obligations. Other Safety and Soundness Regulations There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the "cross- guarantee" provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC's claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions. The Federal banking agencies also have broad powers under current Federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law. As of December 31, 1999, BB&T and each of the Banks were classified as well capitalized. State banking regulators and the OCC also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of North Carolina) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner also has the authority to take possession of a state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock. 21 Interstate Banking and Branching Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1998, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law. Gramm-Leach-Bliley Act of 1999 The Gramm-Leach-Bliley Act of 1999 (the "Act") was signed into law on November 12, 1999. The Act covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. Most of the Act's provisions require the federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement the Act, and for that reason an assessment of the full impact on BB&T of the Act must await completion of that regulatory process. The provisions of the Act that are believed to be of most significance to BB&T are discussed below. The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations between banks and securities firms. The Act also permits bank holding companies to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and insurance underwriting, sales and brokerage activities. In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating. The Act provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross- marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain areas identified in the Act. The Act directs the federal bank regulatory agencies to adopt insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures. The Act adopts a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. The Act repeals the broad exemption of banks from the definitions of "broker" and "dealer" for purposes of the Securities Exchange Act of 1934, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a "broker", and a set of activities in which a bank may engage without being deemed a "dealer". The Act also makes conforming changes in the definitions of "broker" and "dealer" for purposes of the Investment Company Act of 1940 and the Investment Advisers Act of 1940. The Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' 22 nonpublic personal financial information. The Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The Act also provides that the states may adopt customer privacy protections that are more strict than those contained in the Act. The Act also makes a criminal offense, except in limited circumstances, obtaining or attempting to obtain customer information of a financial nature by fraudulent or deceptive means. The Act also contains requirements for the posting of notices by operators of automated teller machines regarding fees charged for the use of such machines. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion and analysis of the consolidated financial condition and results of operations of BB&T Corporation and subsidiaries ("BB&T" or the "Corporation") for each of the three years in the period ended December 31, 1999, and related financial information are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T's 1999 performance. Stock Split On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the Corporation's common stock effected in the form of a 100% stock dividend paid August 3, 1998. All references to the number of common shares and all per share amounts contained herein have been adjusted, as appropriate, to retroactively reflect the stock split. Reclassifications In certain circumstances, reclassifications have been made to prior period information to conform to the 1999 presentation. Recently Completed Mergers and Acquisitions On March 5, 1999, BB&T completed its merger with MainStreet Financial Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction was accounted for as a pooling of interests. BB&T issued 16.8 million shares of common stock in exchange for all of the outstanding shares of MainStreet common stock. On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in Richmond, Virginia. To consummate the acquisition, which was accounted for as a purchase, BB&T issued 3.6 million shares of common stock in exchange for all of the outstanding shares of Scott & Stringfellow common stock. BB&T recorded goodwill totaling $72.8 million in connection with this acquisition, which is being amortized using the straight-line method over a period of 15 years. On July 9, 1999, BB&T completed its merger with First Citizens Corporation ("First Citizens"), of Newnan, Georgia. The transaction was accounted for as a pooling of interests. BB&T issued 3.2 million shares of common stock in exchange for all of the outstanding shares of First Citizens common stock. On July 14, 1999, BB&T completed its merger with Mason-Dixon Bancshares, Inc. ("Mason-Dixon") of Westminster, Maryland. The transaction was accounted for as a pooling of interests. In conjunction with the merger, BB&T issued 6.6 million shares of common stock in exchange for all of the outstanding common stock of Mason-Dixon. On August 27, 1999, BB&T completed its acquisition of Matewan BancShares, Inc. ("Matewan") of Williamson, West Virginia. To consummate the transaction, which was accounted for as a purchase, BB&T issued 3.2 million shares of common stock in exchange for all of the outstanding common and preferred shares of Matewan. BB&T recorded goodwill totaling $92.8 million in connection with this acquisition, which is being amortized using the straight-line method over 15 years. 24 On November 10, 1999, BB&T merged with First Liberty Financial Corp. ("First Liberty"), based in Macon, Georgia. The transaction was accounted for as a pooling of interests. BB&T issued 12.4 million shares of common stock in exchange for all of the outstanding stock of First Liberty. On January 13, 2000, BB&T completed its merger with Premier Bancshares ("Premier") of Atlanta, Georgia. The transaction, which was completed through the issuance of 16.8 million shares of BB&T common stock in exchange for all of the outstanding common and preferred stock of Premier, was accounted for as a pooling of interests. Pending Mergers and Acquisitions On November 17, 1999, BB&T announced plans to merge with Hardwick Holding Company of Dalton, Georgia ("Hardwick"). Hardwick has $518 million in assets and operates nine banking offices in northwest Georgia. In exchange for each share of Hardwick common stock held, shareholders of Hardwick will receive between .9010 and .9320 shares of BB&T common stock depending on the average closing price of BB&T common stock over a five-day pricing period ending shortly before the effective time of the merger. The transaction, which is expected to be accounted for as a pooling of interests, is planned for completion in the second quarter of 2000. On December 15, 1999, BB&T announced plans to merge with First Banking Company of Southeast Georgia ("First Banking Company"), which is based in Statesboro. The transaction is expected to be accounted for as a pooling of interests. With $419 million in assets, First Banking Company operates 12 banking offices in southeast Georgia. Shareholders of First Banking Company will receive .74 shares of BB&T common stock in exchange for each share of First Banking Company common stock held. The merger is expected to be completed in the second quarter of 2000. On February 7, 2000, BB&T announced plans to merge with One Valley Bancorp, Inc. ("One Valley") of Charleston, West Virginia. The acquisition, which is expected to be completed in the third quarter of 2000, will be accounted for as a pooling of interests. One Valley, which has $6.6 billion in assets, operates 123 branches in West Virginia and Virginia. Shareholders of One Valley will receive 1.28 shares of BB&T common stock in exchange for each share of One Valley common stock held. Analysis of Financial Condition BB&T's average assets totaled $41.9 billion for the year ended December 31, 1999, an increase of $4.6 billion, or 12.4%, compared to the 1998 average of $37.3 billion. The major balance sheet categories with increases in average balances were: loans and leases, up $2.7 billion, or 10.6%; securities, which increased $1.6 billion, or 16.9%; and other earning assets, which increased $27.1 million, or 10.7%. The primary components of growth in average loans were a $2.2 billion, or 18.4% increase in commercial loans and a $779.7 million, or 12.6%, increase in consumer loans, partially offset by a $331.3 million, or 5.0%, decrease in mortgage loans. BB&T's average deposits totaled $27.0 billion, reflecting growth of $2.2 billion, or 8.9%, compared to 1998. The categories of deposits with the highest growth rates were money rate savings, which increased $1.3 billion, or 20.4%, noninterest-bearing deposits, which increased $373.0 million, or 11.0%, and domestic time deposits, which increased $698.1 million, or 5.8%. The growth realized in these areas was slightly offset by declines in savings and interest checking of $217.0 million, or 9.8%. BB&T has increasingly utilized nondeposit funding sources in recent years to support balance sheet growth. Short-term borrowed funds include federal funds purchased, securities sold under repurchase agreements, master notes and Federal Home Loan Bank ("FHLB") advances. Average short-term borrowed funds totaled $5.3 billion for the year ended December 31, 1999, an increase of $880.7 million, or 19.9%, over the 1998 average. BB&T has also utilized long- term debt based on the 25 flexibility and cost-effectiveness of the alternatives available. Long-term funding sources also include FHLB advances, subordinated debt issued by the Corporation and subordinated notes issued by the subsidiary banks. Average long-term debt totaled $5.8 billion for 1999, up $1.2 billion, or 26.8%, compared to 1998. The compound annual rate of growth in average total assets for the five-year period ended December 31, 1999, was 9.9%. Over the same five-year period, average loans and leases increased at the compound annual rate of 10.3%, securities increased at an 8.9% annual rate, and deposits grew at an annual compound rate of 6.0%. All growth rates have been enhanced by acquisitions accounted for as purchases. Securities The securities portfolios provide earnings and liquidity, as well as providing an effective tool in managing interest rate risk. Management has historically emphasized investments with a duration of five years or less to provide greater flexibility in balance sheet management in changing interest rate environments. U.S. Treasury securities and U.S. government agency obligations, excluding mortgage backed securities, comprised 42.7% of the portfolio at December 31, 1999, and provided adequate current yields with minimal risk, and maturities structured to address liquidity concerns. Mortgage-backed securities, which composed 35.5% of the total investment portfolio at year-end 1999, have higher yields and longer durations. Total securities increased 7.6% in 1999 to a total of $10.7 billion at the end of the year. BB&T holds trading securities as a normal part of its operations. At December 31, 1999, BB&T had trading securities totaling $93.2 million that are reflected on BB&T's consolidated balance sheet. Market valuation gains and losses in BB&T's trading portfolio are reflected in current earnings. Securities held to maturity, which are primarily composed of investments in obligations of states and municipalities, made up less than 1% of the total portfolio at December 31, 1999. Securities held to maturity are carried at amortized cost and totaled $97.1 million at December 31, 1999, compared to $360.8 million outstanding at the end of 1998. Market valuation gains and losses in the Corporation's held-to-maturity category affect neither earnings nor capital. The held-to-maturity portfolio had a net unrealized gain of $.9 million at December 31, 1999. Securities available for sale totaled $10.5 billion at year-end 1999 and are carried at estimated fair value. The available-for-sale portfolio is primarily composed of investments in U.S. Treasuries and government agency obligations, including mortgage-backed securities. The available-for-sale portfolio also contains investments in obligations of states and municipalities, which composed 5.2% of the available-for-sale portfolio, and equity and other securities, which comprised 15.4% of the portfolio. 26 The following table presents BB&T securities portfolio by category with maturities and average yields. Table 12 Securities
December 31, 1999 -------------------------------- Carrying Value Average Yield (3) -------------- ----------------- (Dollars in thousands) U.S. Treasury, government and agency obligations (1): Within one year $ 963,355 6.41% One to five years 2,741,709 6.26 Five to ten years 1,293,428 6.56 After ten years 3,347,031 6.47 ----------- ---- Total 8,345,523 6.41 ----------- ---- States and political subdivisions: Within one year 32,127 8.49 One to five years 115,044 8.15 Five to ten years 218,154 7.18 After ten years 248,899 7.54 ----------- ---- Total 614,224 7.57 ----------- ---- Other securities: Within one year 510 6.82 One to five years 11,678 7.34 Five to ten years 6,602 6.19 After ten years 342,191 6.54 ----------- ---- Total 360,981 6.56 ----------- ---- Securities with no stated maturity 1,351,659 5.84 ----------- ---- Total securities (2) $10,672,387 6.41% =========== ====
- -------- (1) Included in U.S. Treasury, government and agency obligations are mortgage- backed securities totaling $3.8 billion classified as available for sale and disclosed at estimated fair value. These securities are included in each of the categories based upon final stated maturity dates. The original contractual lives of these securities range from five to 30 years; however, a more realistic average maturity would be substantially shorter because of the monthly return of principal on certain securities. (2) Includes securities held to maturity of $97.1 million carried at amortized cost and securities available for sale and trading securities carried at estimated fair values of $10.5 billion and $93.2 million, respectively. (3) Fully tax-equivalent basis as applied to amortized cost. The available-for-sale portfolio composed 98.2% of total securities at December 31, 1999. Management believes that the high concentration of securities in the available-for-sale portfolio allows greater flexibility in the day-to-day management of the overall portfolio than the held-to-maturity classification. The market value of the available-for-sale portfolio at year-end 1999 was $441.5 million less than the amortized cost of these securities. At December 31, 1999, BB&T's available-for-sale portfolio had net unrealized depreciation, net of deferred income taxes, of $276.2 million, which is reported as a separate component of shareholders' equity. At December 31, 1998, the available-for-sale portfolio 27 had net unrealized appreciation of $64.6 million, net of deferred taxes. The net unrealized losses recorded in the available-for-sale portfolio at year-end 1999 reflect higher interest rates during the year, which sharply decreased the fair market value of fixed income investments. The unrealized losses in the available-for-sale portfolio at the end of 1999 were considered by management to be of a temporary nature and caused by increased market interest rates, not by concerns about the ability of the issuers to meet their obligations. The fully taxable equivalent ("FTE") yield on the total securities portfolio was 6.61% for the year ended December 31, 1999, compared to 6.76% for the prior year. The decline in FTE yield reflects lower yields earned on all categories of securities due to the higher market interest rates during the year. The yield on U.S. Treasury and U.S. government agency obligations decreased from 6.74% in 1998 to 6.62% in 1999, while the yield on mortgage-backed securities decreased from 6.68% to 6.48% and the FTE yield on state and municipal securities decreased from 8.45% last year to 7.71% in the current year. Loans And Leases Loans and leases, including loans held for sale, totaled $29.2 billion at the end of 1999, an increase of $2.6 billion, or 9.7%, compared to 1998. Average loans and leases were $27.7 billion for the year ended December 31, 1999, an increase of $2.7 billion, or 10.6%, over the prior year. The 1999 growth includes the effects of a mortgage loan securitization program, which totaled $465.3 million during 1998 and $304.8 million during 1999, and the effects of loans acquired through the acquisitions accounted for as purchases totaling $414.6 million in 1999 in 1999 and $1.0 billion in 1998. Excluding the impact of these items, BB&T' "internal" growth rate in average loans for 1999 was 9.6% compared with 1998. By category, excluding the securitizations and the purchase acquisitions, average mortgage loans decreased 6.1% during 1999, average commercial loans grew 17.8%, and average consumer loans increased 8.6%. While BB&T's overall loan growth was good during 1999, the mix of the loan portfolio changed in comparison to 1998. As a result of increases in interest rates, mortgage lending decreased during the year. During 1999, mortgage loan originations fell to $4.6 billion from $5.6 billion in 1998. Mortgage loans in the loan portfolio, including loans held for sale, decreased 5.0% on average in 1999. BB&T's other loan categories, however, experienced growth at a strong pace during the year. Average commercial loans, including leases, increased 18.4% in 1999 compared to 1998, while average consumer loans, which includes sales finance, revolving credit and direct retail, increased 12.3% over the same time frame. The FTE yield on average total loans decreased from 9.08% for the year ended December 31, 1998 to 8.85% for 1999. The average yield on mortgage loans for 1999 was 7.50%, down .14% from the yield for 1998. Over the same time frame, the yields from commercial loans decreased .28% to 8.87% and consumer loan yields decreased .44% to 9.95%. Asset Quality BB&T's asset quality was excellent at December 31, 1999. Nonperforming assets totaled $131.7 million at year end, a decrease of $9.9 million, or 7.0%, compared to 1998. As a percentage of total assets, nonperforming assets were .30% at December 31, 1999, compared to .36% at the end of 1998. As a percentage of loans plus foreclosed properties, nonperforming assets totaled .45% at December 31, 1999, compared to .53% at the end of 1998. Loans 90 days or more past due and still accruing interest decreased slightly to $54.2 million at year-end 1999 compared to $54.3 million at December 31, 1998. 28 The allowance for loan and lease losses, as a percentage of loans and leases, was 1.33% at December 31, 1999, compared to 1.36% at year-end 1998. Net charge-offs as a percentage of average loans and leases also improved during 1999, decreasing to .27% from .31% in 1998. The improvements in credit quality measures during 1999 reflect a decrease in nonaccrual loans and leases, which fell 2.5% to $103.5 million and a 15.9% decline in assets acquired through foreclosure and repossession, to $27.1 million. BB&T also enjoyed a higher recovery rate for loan charge-offs during 1999. Recoveries of loans previously charged-off increased $4.1 million, or 16.4%, compared to 1998 recoveries. The following table reflects relevant asset quality information for BB&T for the past three years. Table 13 Asset Quality
December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) Nonaccrual loans and leases* $103,487 $106,123 $115,674 Restructured loans 1,094 3,214 2,492 Foreclosed property 27,121 32,245 41,784 -------- -------- -------- Nonperforming assets $131,702 $141,582 $159,950 ======== ======== ======== Loans 90 days or more past due and still accruing $ 54,244 $ 54,299 $ 49,318 ======== ======== ======== Asset Quality Ratios: Nonaccrual and restructured loans and leases as a percentage of loans and leases .36% .41% .49% Nonperforming assets as a percentage of: Total assets .30 .36 .44 Loans and leases plus foreclosed property .45 .53 .67 Net charge-offs as a percentage of average loans and leases .27 .31 .39 Allowance for losses as a percentage of loans and leases 1.33 1.36 1.32 Ratio of allowance for losses to: Net charge-offs 5.13x 4.65x 3.58x Nonaccrual and restructured loans and leases 3.71 3.31 2.68
- -------- NOTE: Items referring to loans and leases are net of unearned income and include loans held for sale. * Includes $22.6 million, $41.8 million and $47.1 million of impaired loans at December 31, 1999, 1998 and 1997, respectively. See Note D in the "Notes to Consolidated Financial Statements." Allowance for Loan and Lease Losses BB&T's allowance for loan losses totaled $388.0 million at December 31, 1999, compared to $361.9 million at the end of 1998, or an increase of 7.2%. As a percentage of loans and leases, the allowance decreased from 1.36% at December 31, 1998, to 1.33% at the end of 1999 as a result of improving asset quality measures, both in terms of loans charged off and nonperforming assets. The ratio of the allowance to net charge-offs increased from 4.65 times for 1998 to 5.13 times during 1999 because of lower net charge-offs in the current year. 29 The changes in the elements and components of the loan loss allowance related to commercial loans are summarized as follows: Commercial Loans--General Reserves--The general reserve percentages disclosed in Table 5 did not change from 1998 to 1999. The general reserve applied to commercial loans increased from $138.1 million at December 31, 1998, to $168.1 million at December 31, 1999, primarily because of the 18.5% growth in end of period commercial loans and leases. The percentage of commercial loans in the higher risk grades (grades 5-9) also did not change from 1998 to 1999, indicating a very stable level of asset quality and risk associated with the commercial loan portfolio. Commercial Loans--Specific Reserves--Specific reserves applied to commercial loans increased from $10.8 million at December 31, 1998, to $14.3 million at December 31, 1999. This increase is due to the aforementioned 18.5% increase in commercial loans and a 14.1% increase in commercial loans with specific reserves. The percentage of specific reserves to total reserves on commercial loans increased from 7.2% to 7.8% at December 31, 1998 and 1999, respectively. The reserves established to cover losses inherent in the noncommercial categories of the loan portfolio are derived based on a weighted average of actual loan losses over the last three years. Thus, these rates change each year based on trends in actual losses. To calculate the reserve rate, a weight of 50% is given to the most current year's loan loss percentage. A weight of 30% is applied to the loan loss ratio from two years ago, and the remaining 20% weight is applied to the loan loss percentage from three years ago. Mortgage Loans--The weighted average rate applied to the mortgage loan portfolio at December 31, 1999, was .035%, down slightly from the 1998 reserve rate of .042%. The resulting allowance decreased from $2.5 million at December 31, 1998, to $1.8 million at December 31, 1999. Direct Retail--The weighted average rate applied to direct retail loans at December 31, 1999, was .205%, compared to .271% at December 31, 1998. The resulting allowance decreased from $11.0 million to $9.9 million from December 31, 1998, to December 31, 1999. Sales Finance--The weighted average rate applied to sales finance loans at December 31, 1999, was .85%, compared to .927% at December 31, 1998. The resulting allowance increased from $12.5 million to $14.8 million from December 31, 1998, to December 31, 1999, because of an 18.6% increase in sales finance loans outstanding. Revolving Credit--The weighted average rate applied to revolving credit loans at December 31, 1999, was 3.193%, compared to 3.5% at December 31, 1998. The resulting allowance increased from $16.8 million to $18.3 million from December 31, 1998, to December 31, 1999, because of a 9.2% increase in revolving credit loans outstanding. Bankcard--BB&T's allowance for bankcards at December 31, 1999, totaled $1.9 million, which reflects a reserve rate of 3.9944% of the outstanding balance of bankcard loans. At December 31, 1998, the reserve associated with bankcard loans was $1.8 million, calculated based on a rate of 3.9955%. Subsidiaries--Other subsidiaries are considered separately for purposes of calculating the allowance for loan losses. These subsidiaries include BB&T's sub-prime lending subsidiaries, and subsidiaries that have been merged with BB&T, but whose accounting systems have not been converted to BB&T's systems. The sub-prime lending subsidiaries are considered separately because their operations, loan loss experience and credit management procedures are substantially different than the general loan portfolio. Merged-but-unconverted subsidiaries are considered separately because the related loans have not yet been subjected to BB&T's credit monitoring policies and 30 procedures, nor have they been assigned an appropriate BB&T risk grade. Management considers historical loan loss experience in determining reserves for all of these subsidiaries. For merged-but-unconverted subsidiaries, evidence gathered during due diligence is also considered in calculating the reserve. At December 31, 1999 and 1998, these subsidiaries had $2.9 billion and $2.6 billion in total loans outstanding, respectively, and related reserves totaling $54.8 million and $48.9 million, respectively. Unallocated--The unallocated allowance totaled $102.4 million at December 31, 1999, down from $119.2 million, or 14.1%, from the unallocated balance at December 31, 1998. This decrease resulted because the entire allowance from the subsidiary banks acquired during 1999 was allocated to the appropriate loan categories. In prior years, the unallocated balances determined by the acquired banking subsidiaries were combined with BB&T's unallocated calculations, since these subsidiaries were accounted for as poolings of interests. Excluding these restatements associated with the acquired banks, the unallocated allowance was flat, up less than 1%. Management does not believe that the level of risk inherent in the categories of the portfolio at year-end 1999 changed substantially compared to year-end 1998. Because of this, there were no changes in the estimation methods or fundamental assumptions used in the calculations. The higher outstanding balance of commercial loans and lower balance of mortgage loans at December 31, 1999, compared to year-end 1998, resulted in the fluctuations in specific and general reserves applicable to those loan types. There were no reallocations of the allowance from 1998, nor were there any significant changes in asset quality trends other than the overall improvements noted above. Deposits and Other Borrowings Client deposits generated through the BB&T branch network are the largest source of funds used to support loan and other asset growth. Core deposits compose BB&T's primary source of funding as depositors have sought greater returns on their funds for investment, growth rates of core deposits have not kept pace with asset growth and nondeposit sources have increasingly been used to fund balance sheet growth. Total deposits at December 31, 1999, were $27.3 billion, an increase of $801.5 million, or 3.0%, compared to year-end 1998. The increase in deposits was driven by an 11.7% increase in money rate savings accounts, a 2.0% increase in certificates of deposit and a 3.6% increase in noninterest-bearing deposits. For the year ended December 31, 1999, average total deposits were $27.0 billion, an increase of $2.2 billion, or 8.9%, compared to 1998. This increase was led by an 11.0% increase in average noninterest-bearing deposits and a 20.4% increase in money rate savings accounts. These increases were offset somewhat by a 9.8% decrease in average savings and interest checking accounts. Other time deposits, including individual retirement accounts and certificates of deposit, increased 5.8% on average in 1999 and remain BB&T's largest category of average deposits, comprising 47.6% of total deposits. Average foreign deposits totaled $954.4 million for 1999, an increase of $82.3 million, or 9.4%, from the prior year average balance. The average rates paid on interest-bearing deposits decreased during 1999 to 4.14% from 4.40% in 1998. The decrease resulted from lower average rates paid on all major categories of interest-bearing deposits. The average cost of certificates of deposit and other time deposits decreased from 5.47% in 1998 to 5.15% in the current year; the cost of interest checking decreased from 1.84% to 1.51%; savings deposits decreased from 2.08% to 1.75% and money rate savings accounts decreased from 3.03% in 1999 to 2.92% in 1999. BB&T continued to focus on restructuring the mix of deposits toward more cost-effective transaction and savings deposits during 1999. BB&T has acquired a significant number of thrift institutions over the past several years, which has resulted in a higher percentage of deposits comprised of certificates of deposit than many of BB&T's peers. The continued restructuring of the mix of deposits has reduced that concentration and also reduced the overall cost of deposits. 31 BB&T also uses various types of short-term borrowed funds to supplement deposits to fulfill funding needs. The types of short-term borrowings utilized by the Corporation include Federal funds purchased, which composed 5.6% of total short-term borrowed funds and securities sold under repurchase agreements, which comprised 25.9% of short-term borrowed funds at year-end 1999. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank notes and short-term Federal Home Loan Bank ("FHLB") advances are also utilized to meet short-term funding needs. Average short-term borrowed funds totaled $5.3 billion during 1999, an increase of $880.7 million, or 19.9%, during 1999, while short-term borrowed funds at year-end 1999 were $6.9 billion, an increase of $3.0 billion, or 76.9%, compared to year-end 1998. This significant increase in end of period short-term borrowed funds reflects the issuance of $1.6 billion in short-term bank notes during 1999. Management also uses foreign deposits and, to a lesser degree, brokered certificates of deposit as sources of funds. The rates paid on average short-term borrowed funds decreased from 5.23% in 1998 to 4.86% during 1999. BB&T also employs long-term debt to provide funding and, to a lesser extent, provide Tier 2 capital. Total outstanding long-term debt at December 31, 1999 totaled $5.5 billion, an increase of $78.9 million, or 1.5%, from year-end 1998. For the year ended December 31, 1999, average long-term debt increased $1.2 billion, or 26.8%, compared to the average for 1998. BB&T's long-term debt consists primarily of FHLB advances, which composed 64.9% of total outstanding long-term debt at December 31, 1999, and medium-term bank notes, which composed 17.7% of the year-end balance. FHLB advances are cost-effective long-term funding sources that provide BB&T the flexibility to structure the debt in a manner that aids in the management of interest rate risk and liquidity. In an effort to diversify long-term funding sources and to take advantage of favorable interest rates, BB&T issued $350 million of subordinated corporate debt in June 1998 that is puttable to BB&T in 2005. The proceeds of the corporate debt issuance were primarily used to repurchase shares of BB&T's common stock subsequently reissued in connection with business combinations. The average rate paid on long-term debt decreased from 5.77% during 1998 to 5.46% during 1999. Liquidity needs are a primary consideration in evaluating funding sources. BB&T's strategy is to maintain funding flexibility, in order for the Corporation to react rapidly to opportunities that may become available in the marketplace. BB&T will continue to focus on traditional core funding strategies, including targeting growth in noninterest-bearing deposits and money rate savings accounts. Also, if rates and terms are deemed attractive, additional long-term funding may be pursued. Analysis of Results of Operations Consolidated net income for 1999 totaled $612.8 million, which generated basic earnings per share of $1.86 and diluted earnings per share of $1.83. Net income for 1998 was $543.2 million and net income for 1997 totaled $408.4 million. Basic earnings per share were $1.67 in 1998 and $1.26 in 1997, while diluted earnings per share were $1.63 and $1.24, respectively. BB&T incurred significant expenses related principally to the consummation of mergers and acquisitions during 1999, 1998 and 1997, which are reflected in reported earnings. During 1999, BB&T recorded $46.2 million in after-tax nonrecurring charges primarily associated with the mergers of MainStreet, Mason-Dixon, First Citizens and First Liberty. These charges were associated with the consolidation of branch offices and bank operating functions, merger- related personnel costs and other expenses. Excluding the effects of these items, BB&T's net income for 1999 would have been $659.1 million, or $1.97 per diluted share. In 1998, BB&T incurred $17.9 million in net after-tax charges primarily incurred in conjunction with mergers and acquisitions. These expenses included personnel-related expenses, such as staff 32 relocation, early retirement packages and contract settlements; occupancy, furniture and equipment expenses including branch consolidation; and other costs, such as operational charge-offs, professional fees, etc. Excluding the effects of these charges, BB&T's net income for 1998 would have totaled $561.1 million, or $1.69 per diluted share. During 1997, BB&T incurred $68.1 million in after-tax costs associated with mergers and acquisitions, primarily the merger with United Carolina Bancshares Corporation ("UCB"). These costs were similar in type to those outlined in the preceding paragraph, however, the expenses were offset by a $47.8 million gain from the divestiture of 23 branch locations, including $505.8 million in deposits and $232.3 million in loans, in order to comply with anti-trust regulations. Excluding the net impact of these items, BB&T's net income for 1997 would have been $473.7 million, or $1.43 per diluted share. Excluding the effect of the above nonrecurring items from the three years presented, BB&T's net income for 1999 increased $97.9 million, or 17.5%, compared to 1998, while diluted earnings per share increased $.28, or 16.6%. Net income for 1998, excluding nonrecurring items, increased $87.4 million, or 18.5%, while diluted earnings per share increased $.26, or 18.2%, compared to 1997. Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and return on equity (net income as a percentage of average common shareholders' equity). The returns on average assets produced by BB&T's earnings, excluding the nonrecurring charges discussed above, were 1.57% for 1999, 1.51% for 1998 and 1.43% for 1997. BB&T's returns on average equity, excluding the nonrecurring charges, were 20.60%, 19.11% and 17.80%, for the years ended December 31, 1999, 1998 and 1997, respectively. Net Interest Income Net interest income is BB&T's primary source of revenue. Net interest income is influenced by a number of factors, including the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on earning assets and the interest rates paid to obtain funding to support the assets. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the "FTE" adjustment) and the cost of the supporting funds is measured by the net interest margin. The accompanying table presents the dollar amount of changes in interest income and interest expense and distinguishes between the changes related to average outstanding balances of interest-earning assets and interest-bearing liabilities (volume) and the changes related to average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately. 33 Table 14 FTE Net Interest Income and Rate / Volume Analysis For the Years Ended December 31, 1999, 1998 and 1997
Average Balances Yield/Rate Income/Expense ----------------------------------- ---------------- -------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- (Dollars in thousands) Assets Securities (1): U.S. Treasury, government and other (5) $10,505,953 $ 9,167,307 $ 8,308,770 6.55% 6.70% 6.72% $ 688,262 $ 614,522 $ 558,360 States and political subdivisions 600,240 330,713 313,320 7.71 8.45 8.29 46,282 27,934 25,981 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total securities (5) 11,106,193 9,498,020 8,622,090 6.61 6.76 6.78 734,544 642,456 584,341 Other earning assets (2) 281,773 254,629 148,956 4.51 5.56 6.66 12,700 14,162 9,917 Loans and leases, net of unearned income (1)(3)(4)(5) 27,729,172 25,065,207 22,438,508 8.85 9.08 9.19 2,455,237 2,276,310 2,063,114 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total earning assets 39,117,138 34,817,856 31,209,554 8.19 8.42 8.51 3,202,481 2,932,928 2,657,372 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Non-earning assets 2,790,806 2,452,898 1,979,315 ----------- ----------- ----------- Total assets $41,907,944 $37,270,754 $33,188,869 =========== =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking $ 1,991,050 $ 2,208,008 $ 2,690,514 1.66 1.99 1.91 33,075 44,047 51,462 Money rate savings 7,452,072 6,187,274 5,102,950 2.92 3.03 3.19 217,612 187,503 162,675 Other time deposits 13,790,625 13,010,224 12,616,259 5.15 5.47 5.50 710,272 711,200 694,417 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total interest- bearing deposits 23,233,747 21,405,506 20,409,723 4.14 4.40 4.45 960,959 942,750 908,554 Short-term borrowed funds 5,311,658 4,430,989 3,430,232 4.86 5.23 5.28 258,169 231,659 181,140 Long-term debt 5,768,516 4,549,118 3,201,818 5.46 5.77 5.93 314,937 262,564 189,950 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Total interest- bearing liabilities 34,313,921 30,385,613 27,041,773 4.47 4.73 4.73 1,534,065 1,436,973 1,279,644 ----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------- Noninterest- bearing deposits 3,754,025 3,381,007 3,058,444 Other liabilities 641,003 567,945 427,261 Shareholders' equity 3,198,995 2,936,189 2,661,391 ----------- ----------- ----------- Total liabilities and shareholders' equity $41,907,944 $37,270,754 $33,188,869 =========== =========== =========== Average interest rate spread 3.72 3.69 3.78 Net yield on earning assets 4.27% 4.30% 4.41% $1,668,416 $1,495,955 $1,377,728 ==== ==== ==== ========== ========== ========== Taxable equivalent adjustment $ 86,701 $ 69,302 $ 57,195 ========== ========== ========== 1999 v. 1998 1998 v. 1997 ------------------------------ ------------------------------ Change due to Change due to Increase ------------------- Increase ------------------- (Decrease) Rate Volume (Decrease) Rate Volume ---------- --------- --------- ---------- --------- --------- Assets Securities (1): U.S. Treasury, government and other (5) $ 73,740 $(14,231) $ 87,971 $ 56,162 $ (1,393) $ 57,555 States and political subdivisions 18,348 (2,626) 20,974 1,953 491 1,462 ---------- --------- --------- ---------- --------- --------- Total securities (5) 92,088 (16,857) 108,945 58,115 (902) 59,017 Other earning assets (2) (1,462) (2,869) 1,407 4,245 (1,850) 6,095 Loans and leases, net of unearned income (1)(3)(4)(5) 178,927 (58,103) 237,030 213,196 (25,631) 238,827 ---------- --------- --------- ---------- --------- --------- Total earning assets 269,553 (77,829) 347,382 275,556 (28,383) 303,939 ---------- --------- --------- ---------- --------- --------- Non-earning assets Total assets Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking (10,972) (6,912) (4,060) (7,415) 2,134 (9,549) Money rate savings 30,109 (7,036) 37,145 24,828 (8,354) 33,182 Other time deposits (928) (42,332) 41,404 16,783 (4,780) 21,563 ---------- --------- --------- ---------- --------- --------- Total interest- bearing deposits 18,209 (56,280) 74,489 34,196 (11,000) 45,196 Short-term borrowed funds 26,510 (17,141) 43,651 50,519 (1,819) 52,338 Long-term debt 52,373 (14,840) 67,213 72,614 (5,280) 77,894 ---------- --------- --------- ---------- --------- --------- Total interest- bearing liabilities 97,092 (88,261) 185,353 157,329 (18,099) 175,428 ---------- --------- --------- ---------- --------- --------- Noninterest- bearing deposits Other liabilities Shareholders' equity Total liabilities and shareholders' equity Average interest rate spread Net yield on earning assets $172,461 $ 10,432 $162,029 $118,227 $(10,284) $128,511 ========== ========= ========= ========== ========= ========= Taxable equivalent adjustment
- ---- (1) Yields related to securities, loans and leases exempt from both Federal and state income taxes, Federal income taxes only or state income taxes only are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. 34 For 1999, net interest income on an FTE adjusted basis totaled $1.7 billion, compared with $1.5 billion in 1998 and $1.4 billion in 1997. The increase in net interest income during 1999 resulted from increased interest income from loans, up $178.9 million and from investment securities, up $92.1 million. During the same period, higher volumes of funding sources, partially offset by lower interest rates, resulted in an increase of $97.1 million in total interest expense. The FTE-adjusted net interest margin is the primary measure used in evaluating the effectiveness of the management of earning assets and the liabilities funding those assets. The FTE adjusted net interest margin was 4.27% in 1999, 4.30% in 1998 and 4.41% in 1997. The 3 basis point decrease in margin during 1999 resulted from two principal factors. First, BB&T has had a very active common stock repurchase program in recent years. For acquisitions accounted for under the purchase method of accounting, it is BB&T's policy to acquire the shares of its common stock that will be issued to consummate those transactions, as allowed under generally accepted accounting standards. The cost of funds related to share repurchases accounted for substantially all of the decline in 1999 margin. Provision for Loan and Lease Losses A provision for loan and lease losses is charged against earnings in order to maintain the allowance for loan and lease losses at a level that reflects management's evaluation of the risk inherent in the portfolio as discussed above. The amount of the provision is based on continuing assessments of nonperforming and "watch list" loans, analytical reviews of loan loss experience in relation to outstanding loans, and management's judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The provision for loan and lease losses recorded by BB&T in 1999 was $92.1 million, compared with $101.8 million in 1998 and $110.9 million in 1997. The decrease in the current year provision for loan and lease losses resulted from improved asset quality, as discussed in the "Asset Quality" section, and lower net charge-offs during the year. Net charge-offs were .27% of average loans and leases for 1999 compared to .31% during 1998. The allowance for loan and lease losses was 1.33% of loans and leases outstanding and was at 3.71 times total nonaccrual and restructured loans and leases at year-end 1999, compared to 1.36% and 3.31 times, respectively, during 1998. Noninterest Income Noninterest income includes service charges on deposit accounts, trust revenues, mortgage banking income, investment banking and brokerage fees, insurance commissions, gains and losses on securities transactions and other commissions and fees derived from bank-related activities. Noninterest income for 1999 totaled $761.4 million, compared with $579.7 million in 1998 and $503.1 million in 1997. The 1999 noninterest income reflects an increase of $181.7 million, or 31.3%, compared to 1998. Excluding a $47.5 million nonrecurring gain from the divestiture of branch locations (including related loans and deposits) from 1997 results, noninterest income for 1998 increased $124.1 million, or 27.2%, compared to the previous year. The increases in noninterest income for both 1999 and 1998 resulted from growth in all major categories of noninterest revenues, as explained in the following paragraphs. Service charges on deposit accounts represent BB&T's largest single source of noninterest revenue. Such revenues totaled $206.6 million in 1999, an increase of $21.1 million, or 11.4%, compared to 1998. Service charges during 1998 totaled $185.6 million, which represented a 12.1% increase compared with 1997. The primary factors contributing to these increases were changes in 35 the fee structure for deposit-related services and higher fees earned from commercial account analysis and overdrafts, as well as personal account service charges. Mortgage banking income (which includes revenues from originating, marketing and servicing mortgage loans) totaled $130.1 million in 1999, $92.4 million in 1998 and $61.4 million in 1997. In 1999, mortgage banking income increased $37.7 million, or 40.8%, compared to 1998. The primary components of the 1999 increase were servicing fees, which increased $6.7 million, and the recapture of valuation allowances established in prior years related to capitalized mortgage servicing rights. In 1999, $18.2 million in valuation allowances were recaptured, which, when compared with the $15 million provision recorded in 1998, resulted in a $33.2 million increase in revenue reported for 1999. The recapture of valuation allowances resulted from rising mortgage rates in the last half of 1999, which slowed prepayment speeds on mortgage loans and increased the value of the servicing portfolio. This rising interest rate environment, while beneficial to the value of servicing rights, resulted in a slowing of mortgage loan originations in the last half of 1999, which resulted in a decline in origination fees and marketing gains compared to 1998. The increase in 1998 mortgage banking income compared to 1997 was the result of increases in servicing revenue, origination fees and marketing gains, partially offset by an increase in the valuation allowance related to capitalized mortgage servicing rights. BB&T has an extensive insurance agency network, which, according to a report published in the July 19, 1999, issue of Business Insurer Magazine, ranks as the 12th largest in the nation based on revenues. Commission income from the agency network totaled $78.9 million in 1999, an increase of $26.8 million, or 51.3%, compared to $52.2 million earned in 1998 and $40.1 million in 1997. During 1999, BB&T continued to acquire quality insurance agencies in current markets. These acquisitions, accounted for as purchases, resulted in an increase of $21.0 million in agency insurance commissions during 1999. In addition to acquisition activity, commissions have increased through the expansion of the product line to include group health coverage, title insurance and surety bonds, as well as internal growth in the existing agency network and products. Revenue from corporate and personal trust services totaled $55.4 million in 1999, $42.6 million in 1998 and $36.8 million in 1997. The 1999 revenue reflects an increase of $12.8 million, or 30.1% over 1998, which was $5.8 million, or 15.6%, more than 1997. Managed assets totaled $10.3 billion at the end of 1999 compared to $9.6 billion at December 31, 1998. The revenue increases in 1999 and 1998 are primarily the result of internal growth, driven by increased general trust services income and higher revenues from estate management and higher mutual fund fees. In addition, the purchase of W.E. Stanley in June 1998, resulted in $4.8 million of the increase in 1998 revenues compared to 1997. BB&T manages its own family of mutual funds, which are marketed through its broker / dealer subsidiaries. Investment banking and brokerage fees and commissions totaled $127.3 million in 1999, $44.3 million in 1998 and $27.2 million in 1997. This income category increased $83.0 million, or 187.3%, in 1999 and $17.1 million, or 63.1%, in 1998. The large increase in 1999 revenue was primarily the result of the acquisition of Scott & Stringfellow Financial, Inc., on March 26, 1999. The Scott & Stringfellow acquisition was accounted for as a purchase; therefore, its operating results were only included in BB&T's accounts in periods following the acquisition. The increase in 1998 revenue compared to 1997 was the result of internal growth from BB&T Investment Services and, also, the full-year effect of revenues from Craigie, Incorporated, which was acquired on October 1, 1997, and accounted for as a purchase. Other nondeposit fees and commissions including bankcard fees and merchant discounts, totaled $102.0 million in 1999, an increase of $14.4 million, or 16.5%, compared with $87.6 million earned in 1998, which represented an increase of $17.9 million, or 25.8%, over the $69.6 million in 1997 revenue. Major sources of nondeposit fees and commissions generating the increase in 1999 revenue include merchant discount and other bankcard fees, which 36 increased $7.1 million, or 23.3%, and ATM and Point Of Sale fees, which increased $3.5 million, or 15.8%. The increase in ATM and Point Of Sale fees was due primarily to a significant increase in the number of ATMs in service. At December 31, 1999, BB&T had 952 ATMs compared to 770 at the end of 1998. BB&T's international banking unit also enjoyed a strong year, with revenues up $1.2 million, or 23.7%, compared to 1998. The increase in this category of revenue in 1998 compared to 1997 was primarily the result of higher bankcard fees and merchant discount and increased ATM and Point of Sale fees. The ability to generate significant amounts of noninterest revenues in the future will be very important to the ultimate success of BB&T. Through its subsidiaries, BB&T will continue to focus on mortgage banking, trust, insurance, investment and brokerage services, as well as other fee-producing products and services. BB&T plans to continue to pursue acquisitions of additional insurance agencies and explore strategic acquisitions of other nonbank entities as a means of continuing to expand fee-based revenues. Also, among BB&T's principal strategies following the acquisition of a financial institution is the cross-sell of noninterest-income generating products and services to the acquired institution's client base. BB&T will continue to focus on this strategy in the future. The following table provides additional information on BB&T's noninterest income: Table 15 Noninterest Income
% Change ------------- Years Ended December 31, 1999 1998 --------------------------- v. v. 1999 1998 1997 1998 1997 -------- -------- -------- ------ ----- (Dollars in thousands) Service charges on deposits $206,649 $185,571 $165,489 11.4% 12.1% Mortgage banking income 130,084 92,387 61,415 40.8 50.4 Trust income 55,416 42,603 36,849 30.1 15.6 Agency insurance commissions 78,945 52,186 40,149 51.3 30.0 Other insurance commissions 11,806 11,284 14,069 4.6 (19.8) Securities (losses) gains, net (5,131) 8,822 4,833 (158.2) 82.5 Bankcard fees and merchant discounts 37,707 30,579 24,104 23.3 26.9 Investment banking and brokerage fees and commissions 127,336 44,326 27,180 187.3 63.1 Other bank service fees and commissions 58,175 52,433 41,839 11.0 25.3 International income 6,120 4,563 3,685 34.1 23.8 Amortization of negative goodwill 6,243 6,243 6,180 -- 1.0 Other noninterest income 48,006 48,673 77,299 (1.4) (37.0) -------- -------- -------- ------ ----- Total noninterest income $761,356 $579,670 $503,091 31.3% 15.2% ======== ======== ======== ====== =====
Noninterest Expense Noninterest expense totaled $1.3 billion in 1999 and $1.1 billion in both 1998 and 1997, respectively. Certain material, nonrecurring items stemming from mergers and acquisitions were recorded as noninterest expenses during 1999, 1998 and 1997. In 1999, $59.3 million in pretax merger-related charges were recorded as charges to noninterest expenses, while 1998 included $19.9 million in these types of costs and $136.0 million in nonrecurring charges were recognized in 1997. Excluding the impact of these nonrecurring charges from all years, noninterest expense increased $198.3 million, or 18.2%, from 1998 to 1999 and $132.3 million, or 13.8%, from 1997 to 1998. These growth rates include the effects of acquisitions accounted for as purchases, including Scott & Stringfellow, Matewan and the insurance agencies, during both 1999 and 1998. Excluding the growth in expenses 37 from these purchase transactions, BB&T's noninterest expense would have increased 5.4% from 1998 to 1999, and would have decreased 3.3% from 1997 to 1998, reflecting efficiencies from mergers and effective expense control. The control of noninterest expenses is a management priority. The primary measure of the effectiveness of noninterest expense control is the efficiency ratio, which is calculated by dividing total noninterest expenses by tax equivalent net interest income plus noninterest income. The efficiency ratio measures the percentage of revenues that are absorbed by costs of production. For 1999, BB&T's efficiency ratio, excluding nonrecurring items, was 52.7%. Comparable ratios for 1998 and 1997 were 52.6% and 52.1%, respectively. The relatively flat trend in efficiency ratios during recent years is a positive reflection on expense control because, during this time period, BB&T has substantially increased its noninterest revenue-producing lines of business, which typically have substantially higher efficiency ratios than traditional banking operations. Additionally, acquisitions of traditional financial institutions generally cause the efficiency ratio to increase until merger synergies are realized, which typically does not fully occur in the first year of the combination. Total personnel expense, the largest component of noninterest expense, totaled $684.9 million in 1999, $562.9 million in 1998 and $534.7 million in 1997. Total personnel expense includes salaries and wages, as well as pension and other employee benefits costs. Personnel expenses for 1999, 1998 and 1997 include nonrecurring merger-related costs in the form of severance pay, contract termination payments, costs of funding early retirement packages and other related benefits. Total personnel expense, excluding nonrecurring charges, increased $119.1 million, or 21.5% in 1999. A significant portion of this increase is the result of acquisitions accounted for as purchases in both 1999 and 1998. Excluding the effect of these transactions, personnel expense increased $29.2 million, or 5.3%, which reflects normal annual adjustments to compensation and increased incentive-related compensation. Net occupancy and equipment expense totaled $206.2 million in 1999, $173.3 million in 1998 and $179.5 million in 1997. These amounts include nonrecurring charges of $6.0 million in 1999, $1.1 million in 1998 and $24.5 million in 1997 related to branch closings and consolidations of backroom operations and information systems associated with mergers. Excluding nonrecurring charges, net occupancy and equipment expense for 1999 increased $28.1 million, or 16.3% compared to 1998, which was an increase of $17.1 million, or 11.0% over 1997. Excluding the impact of purchase accounting transactions, net occupancy and equipment expense in 1999 increased $15.3 million, or 8.8%, compared to 1998. Increased expenses associated with telecommunications and information technology initiatives were primarily responsible for the remainder of the increases in this cost category incurred during the past two years. Amortization expense associated with intangible assets, primarily goodwill, and the amortization of mortgage servicing rights, totaled $73.5 million in 1999, $54.7 million in 1998 and $27.2 million in 1997. The significant current year increase reflects substantially higher levels of goodwill resulting from purchase accounting transactions completed during 1999 and 1998. At December 31, 1999, BB&T's unamortized goodwill totaled $597.1 million, up $184.7 million, or 44.8%, compared to 1998. This increase resulted from the 1999 purchases of Scott & Stringfellow Financial, Inc., Matewan BancShares, Inc and twelve insurance agencies. Mortgage servicing rights also increased during 1999, up a substantial $70.4 million, or 61.1%. The increase during 1998 compared to 1997 resulted from higher goodwill, which resulted from the purchases of Maryland Federal, W.E. Stanley and Dealers' Credit, as well as a 52.7% increase in mortgage servicing rights. Other noninterest expense totaled $382.3 million for 1999, $318.4 million in 1998 and $351.7 million in 1997. These amounts include nonrecurring charges principally related to mergers and acquisitions totaling $41.3 million in 1999, $9.6 million in 1998 and $72.5 million in 1997. The nonrecurring items include losses on disposals of fixed assets, operational charge-offs, branch and departmental supplies, donations, legal fees, accounting fees, printing costs, regulatory filing fees and 38 other professional services. Excluding these costs, other noninterest expense increased $33.1 million, or 10.7% from 1998 to 1999. The increases for both 1999 and 1998 were driven by higher advertising and marketing expenses, increases in professional fees, growth in expenses resulting from purchase accounting transactions and costs associated with upgrading BB&T's systems to make them Year 2000 compliant. The following table presents a breakdown of BB&T's noninterest expenses for the past three years: Table 16 Noninterest Expense
% Change --------------- Years Ended December 31, -------------------------------- 1999 v. 1998 v. 1999 1998 1997 1998 1997 ---------- ---------- ---------- ------- ------- (Dollars in thousands) Salaries and wages $ 563,767 $ 461,908 $ 424,181 22.1% 8.9% Pension and other employee benefits 121,123 100,953 110,506 20.0 (8.6) Net occupancy expense on bank premises 85,941 69,238 87,163 24.1 (20.6) Furniture and equipment expense 120,256 104,045 92,316 15.6 12.7 Federal deposit insurance premiums 9,070 5,329 6,237 70.2 (14.6) Foreclosed property expense 3,864 2,264 3,518 70.7 (35.6) Amortization of intangibles and mortgage servicing rights 73,468 54,673 27,245 34.4 100.7 Software 16,487 11,560 15,494 42.6 (25.4) Telephone 27,273 23,324 20,745 16.9 12.4 Donations 7,918 6,581 7,206 20.3 (8.7) Advertising and public relations 22,648 28,992 29,477 (21.9) (1.6) Travel and transportation 14,645 11,054 9,425 32.5 17.3 Professional services 59,411 53,052 52,298 12.0 1.4 Supplies 19,534 18,593 17,732 5.1 4.9 Loan and lease expense 31,063 26,565 42,805 16.9 (37.9) Deposit related expense 15,635 15,220 16,936 2.7 (10.1) Other noninterest expenses 154,801 115,816 129,784 33.7 (10.8) ---------- ---------- ---------- ----- ----- Total noninterest expense $1,346,904 $1,109,167 $1,093,068 21.4% 1.5% ========== ========== ========== ===== =====
Provision for Income Taxes BB&T's provision for income taxes totaled $291.2 million for 1999, an increase of $39.1 million, or 15.5%, compared to 1998. The provision for income taxes totaled $252.1 million in 1998 and $211.3 million in 1997. Excluding the income tax effect related to the nonrecurring items discussed previously, BB&T's tax provision would have been $314.0 million in 1999, $259.0 million in 1998 and $239.8 million in 1997. Excluding the effect of the nonrecurring items on pretax income and the income tax provision, BB&T's effective tax rates for the years ended December 31, 1999, 1998 and 1997 were 32.3%, 31.6% and 33.5%, respectively. Year 2000 Project Based on the results of extensive testing following January 1, 2000, BB&T was very successful in its three-year effort to prepare its systems for the Year 2000 date change. BB&T has undergone several system-wide tests following year end, and management has noted no significant problems for any of BB&T's systems, including the branch network, nonbank subsidiaries, and back room 39 operations. All of BB&T's systems, including the ATM network, were operating normally through the date change. BB&T began planning its Year 2000 strategy in 1996. Management determined that it would be required to modify or replace significant portions of BB&T's information technology platform and other systems in order for them to be Year 2000 ready. BB&T's Year 2000 strategy was divided into five major phases: inventory, assessment, remediation, testing and clean management ("Year 2000 Project"). During the inventory and assessment phases, BB&T identified all specific systems that required modification or replacement and assessed the steps necessary to remediate the Year 2000 Issue. In the remediation phase, the systems requiring remediation were replaced, modified or retired, as appropriate. The testing phase included internal and external testing with third parties to ensure that the remediated systems would accurately process dates and date data before, on and after January 1, 2000. Finally, the clean management phase included placing the remediated systems back into production and the implementation of processes and procedures to monitor continued Year 2000 readiness and to protect remediated systems from alterations that might affect Year 2000 readiness. As BB&T completed testing for its systems during 1999, the clean management phase was implemented. Clean management will be an ongoing process that will continue into the Year 2000. Current Status of Year 2000 Project BB&T has completed all phases of the Year 2000 Project, including substantial post date change testing. BB&T continues to be in contact with third parties (as described below) to ensure that none have identified any Year 2000-related problems. The clean management phase will continue as a general policy of BB&T's operations division. Third Party Assessments BB&T works with numerous third parties in the ordinary course of business, including clients, providers of systems-related products and services; external agents, which include government agencies and other agents requiring systems interfaces; infrastructure-related third parties, including utilities and telecommunications providers, landlords and miscellaneous suppliers; and capital markets partners, which includes any third parties requiring financial settlement. BB&T has been conducting numerous tests with these third parties before and after the January 1, 2000 date change, and no significant problems have been noted. The Year 2000 Program Office will continue discussions with these third parties throughout 2000 to ensure that no systems-related problems arise. Costs BB&T's total incremental cost for the Year 2000 project was $29.4 million. Management does not expect any additional material expenses as the project nears completion. These expenses were funded through operating cash flows. These costs were incurred to remediate existing systems and replace systems and equipment where this approach was more cost-effective. During the process, BB&T acquired and implemented 7,500 new PCs, upgraded existing computer code and made other systems enhancements, which will benefit the company in the future. Market Risk Management The effective management of market risk is essential to achieving BB&T's strategic objectives. As a financial institution, BB&T's most significant market risk exposure is interest rate risk. The primary objective of interest rate risk management is to minimize the effect that changes in interest rates have on net interest income. This is accomplished through active management of asset and 40 liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T's portfolios of assets and liabilities that will produce consistent net interest income during periods of changing interest rates. BB&T's Asset / Liability Management Committee ("ALCO") monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. BB&T also uses off-balance sheet financial instruments to manage interest rate sensitivity and net interest income. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, financial forward and futures contracts and options written and purchased. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose BB&T to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. Credit risk arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with strong credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the derivatives contracts to which BB&T is a party settle monthly, quarterly or semiannually. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T's off- balance sheet credit risk exposure at December 31, 1999 was immaterial. Derivatives contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risks. On December 31, 1999, BB&T had interest rate swaps, caps and floors outstanding with notional amounts totaling $1.3 billion. The estimated fair value of open contracts used for risk management purposes at December 31, 1999 had net unrealized losses of $.3 million. BB&T uses these derivatives as synthetic instruments to hedge specified assets or groups of assets, liabilities or groups of liabilities, forward commitments and anticipated transactions. BB&T's derivatives are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and floating rate notes. These hedges resulted in an increase in net 41 interest expense of $2.9 million in 1999, compared with an increase in net interest income of $.9 million in 1998 and $1.1 million in 1997. BB&T utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. BB&T also utilizes over-the-counter purchased put options and written call options in its mortgage banking activities. Purchased put options are used to hedge fixed rate mortgage loan originations against increasing interest rates. Written call options are used to reduce the premiums paid for purchased put options thereby reducing the cost of the hedge. SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments" requires, among other things, certain quantitative and qualitative disclosures with regard to the amounts, nature and terms of derivative financial instruments. See Note Q. "Derivatives and Off- Balance Sheet Financial Instruments" for the required quantitative disclosures. BB&T's interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions at December 31, 1999, and is not necessarily indicative of positions on other dates. The carrying amounts of interest-rate-sensitive assets and liabilities and the notional amounts of swaps and other derivative financial instruments are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual maturity payment dates. Table 17 Interest Sensitivity Simulation Analysis
Annualized Interest Hypothetical Rate Percentage Scenario Change in -------- Prime Net Interest Linear Rate Income ------ ----- ------------ 3.00% 11.50% -1.73% 1.50 10.00 -1.21 No change 8.50 .25 (1.50) 7.00 -.23 (3.00) 5.50 -.46
Liquidity, Inflation and Changing Interest Rates The majority of assets and liabilities of financial institutions are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and the efforts of the Board of Governors of the Federal Reserve System ("FRB") to regulate money and credit conditions have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, BB&T is positioned to respond to changing interest rates and inflationary trends. Management uses Interest Sensitivity Simulation Analysis ("Simulation") to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T's interest sensitivity by means of a computer model that incorporates current volumes and 42 rates, scheduled maturities and payments, projected prepayments, repricing opportunities and anticipated growth. The model projects earnings based on current and projected portfolio balances and rates. This level of detail is needed to correctly simulate the effect that changes in interest rates and portfolio balances will have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. The asset/liability management process involves various analyses. Management determines the most likely outlook for the economy and interest rates by analyzing environmental factors including regulatory changes, monetary and fiscal policies and the overall state of the economy. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are all considered, given the current environmental situation. This data is combined with various interest rate scenarios to provide management with information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals. 43 The following table represents the interest sensitivity position of BB&T as of December 31, 1999. Key assumptions in the preparation of the table include prepayment speeds on mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market condition, loan volumes and pricing; deposit sensitivity; customer preferences; and capital plans. This tabular data does not reflect the impact of a change in the credit quality of BB&T's assets and liabilities. To attempt to quantify the potential change in net interest income, given a change in interest rates, various interest rate scenarios are applied to projected balances, maturities and repricing opportunities. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. Table 18 Interest Rate Sensitivity Gap Analysis December 31, 1999
Expected Repricing or Maturity Date ------------------------------------------------------------- Within One to Three to After Five One Year Three Years Five Years Years Total ----------- ----------- ---------- ---------- ----------- (Dollars in thousands) Assets Securities and other interest-earning assets* $ 2,824,247 $ 2,698,973 $3,779,457 $1,882,458 $11,185,135 Federal funds sold and securities purchased under resale agreements or similar arrangements 225,786 -- -- -- 225,786 Loans and leases** 16,271,742 4,426,334 4,788,383 3,710,996 29,197,455 ----------- ----------- ---------- ---------- ----------- Total interest-earning assets 19,321,775 7,125,307 8,567,840 5,593,454 40,608,376 ----------- ----------- ---------- ---------- ----------- Liabilities Savings and interest checking*** -- 1,051,835 350,612 350,612 1,753,059 Money rate savings*** 4,096,844 4,096,844 -- -- 8,193,688 Other time deposits 10,332,132 2,216,969 258,625 59,188 12,866,914 Foreign deposits 529,401 -- -- -- 529,401 Federal funds purchased and securities sold under repurchase agreements or similar arrangements 2,161,563 -- -- -- 2,161,563 Long-term debt and other borrowings 6,304,934 433,732 142,876 3,323,919 10,205,461 ----------- ----------- ---------- ---------- ----------- Total interest-bearing liabilities 23,424,874 7,799,380 752,113 3,733,719 $35,710,086 ----------- ----------- ---------- ---------- =========== Asset-liability gap (4,103,099) (674,073) 7,815,727 1,859,735 ----------- ----------- ---------- ---------- Derivatives affecting interest rate sensitivity: Pay fixed interest rate swaps 476,146 (4,361) (441,036) (30,749) Receive fixed interest rate swaps (560,000) -- 270,000 290,000 Caps, floors and collars (47,250) -- 47,250 -- ----------- ----------- ---------- ---------- (131,104) (4,361) (123,786) 259,251 ----------- ----------- ---------- ---------- Interest rate sensitivity gap $(4,234,203) $ (678,434) $7,691,941 $2,118,986 =========== =========== ========== ========== Cumulative interest rate sensitivity gap $(4,234,203) $(4,912,637) $2,779,304 $4,898,290 =========== =========== ========== ==========
- -------- * Securities based on amortized cost. ** Loans and leases include loans held for sale and are net of unearned income. *** Projected runoff of deposits that do not have a contractual maturity date was computed based upon decay rate assumptions developed by bank regulators to assist banks in addressing FDICIA rule 305. 44 Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over six months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. Liquidity represents the continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to its level of liquid assets, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, capital position and general market conditions. Traditional sources of liquidity include proceeds from maturity of securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements, FHLB advances and other short-term borrowed funds, as well as long-term debt instruments, supplement these traditional sources. Management believes liquidity obtainable from these sources is adequate to meet current requirements. Capital Adequacy and Resources The maintenance of appropriate levels of capital is a management priority and is monitored on an ongoing basis. BB&T's principal goals related to capital are to provide an adequate return to shareholders while retaining a sufficient base from which to support future growth and to comply with all regulatory standards. Shareholders' equity totaled $3.2 billion at December 31, 1999, an increase of .9% from year-end 1998. Factors which significantly affected growth in shareholders' equity during 1999 were: earnings retained after dividends to shareholders, which totaled $354.2 million; the market value of common shares issued in connection with acquisitions accounted for as purchases, which amounted to $290.1 million; exercises of stock options and other incentive plan transactions totaling $58.0 million; the repurchase of 8.5 million shares of common stock at a cost of $326.1 million that were reissued in connection with mergers and acquisitions; and unrealized losses incurred during 1999 on securities available for sale, which totaled $340.8 million, net of deferred income tax benefits. Bank holding companies and their subsidiaries are subject to risk-based measures of capital adequacy. The risk-based capital ratios measure capital as a percentage of a combination of balance sheet and off-balance sheet risk. The risk-weighted values of both balance sheet and off-balance sheet items are determined in accordance with risk factors specified by Federal bank regulatory pronouncements. Tier 1 capital (common shareholders' equity, excluding unrealized gains (losses) on debt securities available for sale, net of tax effect, less nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (the sum of Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk-weighted assets. The Tier 1 capital ratio for BB&T at the end of 1999 was 9.3%, and the total capital ratio was 13.0%. At the end of 1998, those ratios were 10.5% and 14.9%, respectively. 45 In addition to the risk-based capital measures described above, regulators have also established minimum leverage capital requirements for banking organizations. This is the primary measure of capital adequacy used by management and is calculated by dividing period-end Tier 1 capital by average tangible assets for the most recent quarter. BB&T's Tier 1 leverage ratio at year-end 1999 was 6.6%, compared to 7.1% at the end of 1998. The minimum required Tier 1 leverage ratio ranges from 3% to 5% depending upon Federal bank regulatory agency evaluation of an organization's overall safety and soundness. BB&T's regulatory capital and ratios are set forth in the following table. Table 19 Capital--Components and Ratios
December 31, ------------------------ 1999 1998 ----------- ----------- (Dollars in thousands) Tier 1 capital $ 2,845,786 $ 2,747,687 Tier 2 capital 1,140,185 1,159,405 ----------- ----------- Total regulatory capital $ 3,985,971 $ 3,907,092 =========== =========== Risk-based capital ratios: Tier 1 capital 9.3% 10.5% Total regulatory capital 13.0 14.9 Tier 1 leverage ratio 6.6 7.1
Segment Results BB&T's operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage and Treasury. These operating segments have been identified based primarily on BB&T's existing organizational structure. See Note S. "Operating Segments", in the "Notes to Consolidated Financial Statements" herein for a full discussion of the segments, the internal accounting and reporting practices utilized by BB&T to manage these segments and financial disclosures by segment. Fluctuations in noninterest income related to external customers and noninterest expense are more fully discussed in the "Noninterest Income" and "Noninterest Expense" sections of this discussion and analysis. Banking Network The banking network grew internally during 1999 as well as through four mergers, three of which were accounted for as poolings of interests. 1998 balances have been restated to reflect the impact of these transactions. The total banking network is composed of 655 banking offices, down from 657 banking offices at December 31, 1998. This decrease reflects management's efforts to operate the branch network as efficiently as possible, by combining or closing redundant branches acquired through mergers. Net interest income for the banking network totaled $1.2 billion, an increase of $109.1 million, or 9.6%, from 1998. This increase is composed of an 8.1% increase in net interest income from external customers and a 14.0% increase in the net credit generated by the internal funds transfer pricing system. This increase reflects adjustments in the rates credited and charged for deposits and loans and a shift in the mix of deposits into products with higher funds credit rates. The provision for loan and lease losses increased $3.8 million, or 3.7%, to $108.0 million. Noninterest income produced from external customers through the banking network increased $26.0 million, or 8.7% during 1999, while noninterest income allocated from other segments decreased $27.1 million, or 18.0%. Noninterest expenses incurred within the banking network increased $63.7 million, or 11.3%, while noninterest expenses allocated from the other operating segments increased $51.6 46 million, or 24.6%. The provision for income taxes allocated to the banking network decreased $36.0 million, or 13.6%, because of lower pretax income, principally for the institutions acquired during 1999. Total identifiable assets for the banking network increased 9.1% to a total of $23.9 billion. Mortgage Banking BB&T's mortgage banking segment experienced excellent results in 1999 because of favorable mortgage rates early in the year and a strong economy. Mortgage originations slowed during the second half of 1999, however, as rising interest rates began to negatively affect mortgage loan volumes. BB&T's mortgage banking segment remains the largest originator of mortgage loans in the Carolinas, with 1999 originations totaling $4.6 billion, down from a record $5.6 billion in 1998. BB&T's mortgage servicing portfolio totaled $17.0 billion at year-end 1999. Net interest income for the mortgage banking segment totaled $115.4 million, a decrease of $24.3 million, or 17.4%, from 1998. This decrease is composed of a 3.2% increase in net interest income from external customers and a 13.8% increase in the net charge for funds as calculated by BB&T's internal funds transfer pricing system. This increase reflects higher funds transfer rates for adjustable-rate loans, which increased as interest rates increased during 1999. The provision for loan and lease losses decreased $1.1 million, or 28.9%, to $2.7 million. Noninterest income produced from external customers increased $37.0 million, or 48.4% during 1999. Noninterest expenses incurred within the mortgage banking segment increased $3.1 million, or 5.5%, while noninterest expenses allocated from the other operating segments increased $2.7 million, or 16.7%. The provision for income taxes allocated to the mortgage banking segment decreased $7.3 million, or 13.8%. Total identifiable assets for the mortgage banking segment decreased 10.8% to a total of $5.6 billion because of the significant reduction in mortgage loan originations and a resulting decrease in loans held for sale of $886.4 million. Trust Services Net interest income for the trust services segment totaled $8.5 million, an increase of $4.3 million, or 99.6%, compared to 1998. This increase is due to an 11.1% increase in the net credit for funds as calculated by BB&T's internal funds transfer pricing system. This increase is due to a 10.1% increase in total deposits held in trust and a shift in deposit mix to categories that receive a higher funds credit. Noninterest income produced from external customers increased $13.7 million, or 31.3% during 1999. Noninterest expenses incurred within the trust services segment increased $9.4 million, or 32.6%, while noninterest expenses allocated from the other operating segments increased $.6 million, or 30.0%. These increases in noninterest income and noninterest expenses were due, to a large extent, to the purchase of W.E. Stanley & Company in mid-1998. The provision for income taxes allocated to trust services increased $1.5 million, or 23.1%. Total identifiable assets for trust services increased 88.6% to a total of $31.5 million. Agency Insurance Noninterest income produced from external customers increased $27.9 million, or 55.5% during 1999, due to the acquisitions of twelve insurance agencies during the year and the purchase of a book of business of a thirteenth agency, as well as internal growth. Noninterest expenses incurred within the agency insurance segment increased $20.3 million, or 51.4%, while noninterest expenses allocated from the other operating segments increased $.3 million, or 13.8%. The increase in expenses incurred within the segment results from the purchased agencies discussed above. The provision for income taxes allocated to agency insurance increased $2.9 million consistent with the growth in pretax income. Total identifiable assets for agency insurance increased 58.6% to a total of $63.9 million, primarily due to the acquired insurance agencies. 47 Investment Banking and Brokerage Net interest income for the investment banking and brokerage segment totaled $7.6 million, an increase of $6.4 million compared to 1998. This substantial increase reflects the March 26, 1999 purchase of Scott & Stringfellow Financial, Inc., an investment banking firm and full-service brokerage headquartered in Richmond, Virginia. Noninterest income produced from external customers increased $83.9 million, or 172.7% during 1999, also principally because of the acquisition of Scott & Stringfellow. Noninterest expenses incurred within the investment banking and brokerage segment increased $87.4 million, also primarily due to the Scott & Stringfellow purchase, while noninterest expenses allocated from the other operating segments increased $.8 million, or 89.0%. The provision for income taxes allocated to investment banking and brokerage increased $2.0 million, consistent with the increase in pretax income. Total identifiable assets for the investment banking and brokerage segment increased 193.0% to a total of $699.1 million principally due to the acquisition of Scott & Stringfellow. Treasury Net interest income for the treasury segment totaled $140.3 million, an increase of $13.7 million, or 10.8%, compared to 1998. This increase is comprised of a 28.2% increase in net interest income from external customers, offset by a $22.0 million increase in the net charge for funds as calculated by BB&T's internal funds transfer pricing system. This increase is principally due to changes in the mix of securities held by the treasury segment. Noninterest income produced from external customers decreased $10.6 million, or 91.1% during 1999. Noninterest expenses incurred within the treasury segment increased $.5 million, or 10.6%, while noninterest expenses allocated from the other operating segments increased $2.9 million, or 53.4%. The provision for income taxes allocated to the treasury segment decreased $14.0 million, or 30.2%, due to higher levels of tax-advantaged investments during 1999. Total identifiable assets for the treasury segment increased 22.2% to a total of $11.5 billion. Common Stock and Dividends BB&T's ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution. BB&T's ability to generate liquid assets for distribution is primarily dependent on the ability of the banking subsidiaries to pay dividends to BB&T. BB&T's payment of cash dividends is an integral part of management's goals to retain sufficient capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to shareholders. BB&T's common dividend payout ratio, computed by dividing dividends paid per common share by basic earnings per common share, was 40.32% in 1999. Excluding the impact of the nonrecurring charges discussed in "Analysis of Results of Operations," the dividend payout ratio would have been 37.5%. BB&T's cash dividends per common share increased 13.6% during 1999 to $.75 per common share for the year. This increase marked the 27th consecutive year that BB&T's annual cash dividend has been increased. A discussion of dividend restrictions is included in Note N.--"Regulatory Requirements and Other Restrictions." BB&T's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "BBT". BB&T's common stock was held by 68,703 shareholders of record at December 31, 1999. The accompanying table, "Quarterly Common Stock Summary," sets forth the quarterly high, low and last sales prices for the common stock based on the daily closing price and the dividends paid per share of common stock for each of the last eight quarters. 48 Table 20 Quarterly Common Stock Summary
1999 1998 ------------------------------ ------------------------------ Sales Prices Sales Prices -------------------- Dividends -------------------- Dividends High Low Last Paid High Low Last Paid ------ ------ ------ --------- ------ ------ ------ --------- Quarter Ended: March 31 $40.44 $34.94 $36.19 $.175 $33.84 $29.03 $33.84 $.155 June 30 40.25 33.81 36.69 .175 34.06 32.03 33.81 .155 September 30 36.63 30.50 32.38 .20 36.03 28.00 29.94 .175 December 31 36.94 27.31 27.38 .20 40.63 27.31 40.31 .175 ----- ----- Year 40.44 27.31 27.38 .75 40.63 27.31 40.31 .66 ===== =====
Fourth Quarter Results Net income for the fourth quarter of 1999 was $158.8 million, compared to earnings of $139.6 million for the comparable period of 1998. On a per share basis, diluted net income was $.47 for the quarter compared to $.42 a year ago. Annualized returns on average assets and average shareholders' equity were 1.45% and 19.41%, respectively, for the fourth quarter of 1999. The fourth quarter of 1999 included $16.1 million, after tax benefits, of nonrecurring charges primarily associated with the completion of mergers and acquisitions. If these items are excluded, net income for the fourth quarter of 1999 would have been $174.9 million, an increase of $28.3 million, or 19.3%, compared to recurring results for the fourth quarter of 1998. Diluted earnings per share, excluding the merger-related charges, would have been $.52, an increase of 18.2% compared to recurring diluted earnings per share in the fourth quarter of 1998. Net interest income on an FTE basis amounted to $435.0 million for the fourth quarter of 1999, an increase of 11.7% compared to $389.4 million for the same period of 1998. Noninterest income totaled $198.3 million for the fourth quarter of 1999, up 30.6% from $151.8 million earned during the fourth quarter of 1998. BB&T's noninterest expense totaled $347.6 million, up 18.5% from the $293.3 million recorded in the fourth quarter of the prior year. Excluding the merger-related charges from both years, noninterest expense for the fourth quarter of 1999 would have increased 15.2% from the fourth quarter of 1998. The fourth quarter 1999 provision for loan and lease losses totaled $27.1 million for the fourth quarter of 1999 compared to $25.6 million for the fourth quarter of 1998, an increase of 5.7%. 49 The accompanying table, "Quarterly Financial Summary--Unaudited," presents condensed information relating to eight quarters in the period ended December 31, 1999. Table 21 Quarterly Financial Summary--Unaudited
1999 1998 -------------------------------------------------- ----------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except per share data) Consolidated Summary of Operations: Net interest income FTE $ 434,963 $ 426,564 $ 414,943 $ 391,946 $ 389,423 $ 376,251 $ 369,692 $ 360,589 FTE adjustment 22,154 23,104 22,322 19,121 18,946 17,276 16,773 16,307 Provision for loan and lease losses 27,091 21,145 22,789 21,072 25,632 22,716 27,889 25,605 Securities gains (losses), net (826) (1,575) (2,897) 167 2,120 2,537 1,348 2,817 Other noninterest income 199,118 195,986 198,527 172,856 149,667 148,137 141,973 131,071 Noninterest expense 347,593 361,300 330,303 307,708 293,308 284,635 267,291 263,933 Provision for income taxes 77,665 69,182 74,837 69,539 63,713 64,110 64,040 60,240 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income $ 158,752 $ 146,244 $ 160,322 $ 147,529 $ 139,611 $ 138,188 $ 137,020 $ 128,392 =========== =========== =========== =========== =========== =========== =========== =========== Diluted net income per share $ .47 $ .44 $ .48 $ .44 $ .42 $ .42 $ .41 $ .39 =========== =========== =========== =========== =========== =========== =========== =========== Selected Average Balances: Assets $43,403,097 $42,641,925 $41,702,966 $39,836,528 $39,215,677 $36,909,565 $36,913,104 $36,013,448 Securities, at amortized cost 11,279,693 11,634,168 11,323,830 10,169,073 10,069,846 9,247,122 9,394,130 9,275,008 Loans and leases * 28,912,360 27,902,034 27,321,501 26,755,188 26,165,119 25,068,155 24,905,173 24,099,650 Total earning assets 40,481,016 39,914,306 38,906,583 37,120,961 36,455,615 34,534,554 34,575,582 33,678,267 Deposits 27,466,801 27,254,994 26,782,661 26,432,327 25,889,172 24,552,080 24,595,254 24,092,389 Short-term borrowed funds 5,963,911 5,686,621 5,390,937 4,181,454 4,412,067 4,199,609 4,737,809 4,376,625 Long-term debt 6,055,124 5,906,736 5,683,714 5,419,991 5,127,292 4,739,993 4,153,541 4,162,956 Total interest-bearing liabilities 35,572,456 35,055,282 34,147,798 32,437,550 31,796,118 30,080,277 30,159,791 29,484,230 Shareholders' equity 3,245,485 3,143,726 3,216,861 3,189,904 3,184,574 2,847,241 2,848,133 2,862,246
- ---- * Loans and leases are net of unearned income and include loans held for sale. 50 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS (Dollars in thousands, except per share data)
As of/For the Years Ended December 31, ---------------------------------------------------------------------------- Compound 1999 1998 1997 1996 1995 1994 Growth Rate ----------- ----------- ----------- ----------- ----------- ----------- ----------- Summary of Operations Interest income $ 3,115,780 $ 2,863,626 $ 2,600,177 $ 2,342,835 $ 2,217,961 $ 1,852,378 11.0% Interest expense 1,534,065 1,436,973 1,279,644 1,137,637 1,120,695 806,274 13.7 ----------- ----------- ----------- ----------- ----------- ----------- ---- Net interest income 1,581,715 1,426,653 1,320,533 1,205,198 1,097,266 1,046,104 8.6 Provision for loan and lease losses 92,097 101,842 110,913 70,359 47,108 31,857 23.7 ----------- ----------- ----------- ----------- ----------- ----------- ---- Net interest income after provision for loan and lease losses 1,489,618 1,324,811 1,209,620 1,134,839 1,050,158 1,014,247 8.0 Noninterest income 761,356 579,670 503,091 377,462 286,709 292,435 21.1 Noninterest expense 1,346,904 1,109,167 1,093,068 941,583 922,221 837,970 10.0 ----------- ----------- ----------- ----------- ----------- ----------- ---- Income before income taxes 904,070 795,314 619,643 570,718 414,646 468,712 14.0 Provision for income taxes 291,223 252,103 211,252 186,941 136,653 159,509 12.8 ----------- ----------- ----------- ----------- ----------- ----------- ---- Net income before extraordinary item* $ 612,847 $ 543,211 $ 408,391 $ 383,777 $ 277,993 $ 309,203 14.7 =========== =========== =========== =========== =========== =========== ==== Per Common Share Average shares outstanding (000's): Basic 329,306 325,735 324,799 323,913 322,060 316,158 0.8 Diluted 335,298 332,336 330,565 331,039 335,602 329,984 0.3 Basic earnings per share $ 1.86 $ 1.67 $ 1.25 $ 1.17 $ 0.85 $ 0.98 13.7 =========== =========== =========== =========== =========== =========== ==== Diluted earnings per share $ 1.83 $ 1.63 $ 1.23 $ 1.16 $ 0.83 $ 0.94 14.3 =========== =========== =========== =========== =========== =========== ==== Cash dividends paid $ .75 $ .66 $ .58 $ .50 $ .43 $ .37 15.2 Shareholders' equity 9.66 9.64 8.62 7.93 7.48 6.65 7.8 Average Balances Securities, at amortized cost $11,106,193 $ 9,498,020 $ 8,622,090 $ 7,886,144 $ 7,683,291 $ 7,251,139 8.9 Loans and leases** 27,729,172 25,065,207 22,438,508 20,223,203 18,900,682 16,980,793 10.3 Other assets 3,072,579 2,707,527 2,128,271 1,979,823 1,895,776 1,924,205 9.8 ----------- ----------- ----------- ----------- ----------- ----------- ---- Total assets $41,907,944 $37,270,754 $33,188,869 $30,089,170 $28,479,749 $26,156,137 9.9 =========== =========== =========== =========== =========== =========== ==== Deposits $26,987,772 $24,786,513 $23,468,167 $22,383,475 $20,841,946 $20,183,593 6.0 Other liabilities 5,952,661 4,998,934 3,857,493 3,026,237 3,934,678 2,954,670 15.0 Long-term debt 5,768,516 4,549,118 3,201,818 2,196,747 1,369,453 957,829 43.2 Common shareholders' equity 3,198,995 2,936,189 2,657,619 2,459,988 2,253,763 1,978,338 10.1 Preferred shareholders' equity -- -- 3,772 22,723 79,909 81,707 NM ----------- ----------- ----------- ----------- ----------- ----------- ---- Total liabilities and shareholders' equity $41,907,944 $37,270,754 $33,188,869 $30,089,170 $28,479,749 $26,156,137 9.9 =========== =========== =========== =========== =========== =========== ==== Period End Balances Total assets $43,480,996 $39,470,135 $35,997,812 $31,659,938 $29,536,083 $27,482,489 9.6 Deposits 27,251,142 26,449,632 24,593,981 23,064,759 21,921,901 20,503,018 5.9 Long-term debt 5,491,734 5,412,850 4,023,062 2,521,854 1,625,406 1,168,675 36.3 Shareholders' equity 3,199,159 3,171,145 2,808,423 2,590,357 2,512,683 2,198,560 7.8 Selected Ratios Rate of return on: Average total assets 1.46% 1.46% 1.23% 1.28% 0.98% 1.18% Average common shareholders' equity 19.16 18.50 15.36 15.56 12.07 15.32 Dividend payout 40.32 39.52 46.03 42.74 50.59 38.54 Average equity to average assets 7.63 7.88 8.02 8.25 8.19 7.88
- ---- * Net income for 1997 is presented before the impact of an extraordinary loss on extinguishment of debt, which totaled $2.8 million, net of income tax benefits of $1.5 million. ** Loans and leases are net of unearned income and include loans held for sale. NM Not meaningful. 51 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of BB&T is responsible for the preparation of the financial statements, related financial data and other information in this Annual Report on Form 10-K. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this Annual Report on Form 10-K is consistent with the financial statements. BB&T's accounting system, which records, summarizes and reports financial transactions, is supported by an internal control structure which provides reasonable assurance that assets are safeguarded and that transactions are recorded in accordance with BB&T's policies and established accounting procedures. As an integral part of the internal control structure, BB&T maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure. The Audit Committee of BB&T's Board of Directors, composed solely of outside directors, meets regularly with BB&T's management, internal auditors and independent public accountants to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent public accountants and the internal auditors have access to the Audit Committee with or without management present. The financial statements have been audited by Arthur Andersen LLP, independent public accountants, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which BB&T's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing the internal control structure to determine the timing and scope of audit procedures and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects. John A. Allison Scott E. Reed Sherry A. Kellett Chairman and Chief Financial Officer Controller Chief Executive Officer 52 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To BB&T Corporation: We have audited the accompanying consolidated balance sheets of BB&T Corporation (a North Carolina corporation), and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BB&T Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of operations and cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Arthur Andersen LLP Charlotte, North Carolina, January 24, 2000. 53 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 (Dollars in thousands, except per share data)
1999 1998 ----------- ----------- Assets Cash and due from banks $ 1,138,820 $ 1,100,381 Interest-bearing deposits with banks 71,214 19,749 Federal funds sold and securities purchased under resale agreements or similar arrangements 225,786 122,460 Trading securities at market value 93,221 60,422 Securities available for sale at market value 10,482,044 9,498,486 Securities held to maturity at amortized cost (market value: $98,070 at December 31, 1999 and $368,655 at December 31, 1998) 97,122 360,783 Loans held for sale 285,025 1,171,415 Loans and leases, net of unearned income 28,912,430 25,432,710 Allowance for loan and lease losses (387,963) (361,869) ----------- ----------- Loans and leases, net 28,524,467 25,070,841 ----------- ----------- Premises and equipment, net 555,866 525,239 Other assets 2,007,431 1,540,359 ----------- ----------- Total assets $43,480,996 $39,470,135 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing deposits $ 3,908,080 $ 3,771,421 Savings and interest checking 1,753,059 2,082,879 Money rate savings 8,193,688 7,337,066 Other time deposits 12,866,914 12,619,590 Foreign deposits 529,401 638,676 ----------- ----------- Total deposits 27,251,142 26,449,632 Short-term borrowed funds 6,875,290 3,885,737 Long-term debt 5,491,734 5,412,850 Accounts payable and other liabilities 663,671 550,771 ----------- ----------- Total liabilities 40,281,837 36,298,990 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued or outstanding -- -- Common stock, $5 par, 500,000,000 shares authorized; issued and outstanding, 331,170,260 at December 31, 1999 and 328,948,902 at December 31, 1998 1,655,851 1,644,745 Additional paid-in capital 189,440 189,032 Retained earnings 1,640,970 1,272,776 Loan to employee stock ownership plan and unvested restricted stock (10,891) (14) Accumulated other nonshareholder changes in equity, net of deferred income taxes of $(165,368) at December 31, 1999 and $40,492 at December 31, 1998 (276,211) 64,606 ----------- ----------- Total shareholders' equity 3,199,159 3,171,145 ----------- ----------- Total liabilities and shareholders' equity $43,480,996 $39,470,135 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 54 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------------- --------------- --------------- (Dollars in thousands, except per share data) Interest Income Interest and fees on loans and leases $ 2,429,750 $ 2,245,961 $ 2,036,733 Interest and dividends on securities 673,330 603,545 553,589 Interest on short-term investments 12,700 14,120 9,855 --------------- --------------- --------------- Total interest income 3,115,780 2,863,626 2,600,177 --------------- --------------- --------------- Interest Expense Interest on deposits 960,959 942,750 908,554 Interest on short-term borrowed funds 258,169 231,659 181,140 Interest on long-term debt 314,937 262,564 189,950 --------------- --------------- --------------- Total interest expense 1,534,065 1,436,973 1,279,644 --------------- --------------- --------------- Net Interest Income 1,581,715 1,426,653 1,320,533 Provision for loan and lease losses 92,097 101,842 110,913 --------------- --------------- --------------- Net Interest Income After Provision for Loan and Lease Losses 1,489,618 1,324,811 1,209,620 --------------- --------------- --------------- Noninterest Income Service charges on deposits 206,649 185,571 165,489 Mortgage banking income 130,084 92,387 61,415 Trust income 55,416 42,603 36,849 Investment banking and brokerage fees and commissions 127,336 44,326 27,180 Agency insurance commissions 78,945 52,186 40,149 Other insurance commissions 11,806 11,284 14,069 Bankcard fees and merchant discounts 37,707 30,579 24,104 Other nondeposit fees and commissions 64,295 56,996 45,524 Securities (losses) gains, net (5,131) 8,822 4,833 Other income 54,249 54,916 83,479 --------------- --------------- --------------- Total noninterest income 761,356 579,670 503,091 --------------- --------------- --------------- Noninterest Expense Personnel expense 684,890 562,861 534,687 Occupancy and equipment expense 206,197 173,283 179,479 Federal deposit insurance expense 9,070 5,329 6,237 Amortization of intangibles and mortgage servicing rights 73,468 54,673 27,245 Advertising and public relations expense 22,648 28,992 29,477 Professional services 59,411 53,052 52,298 Other expense 291,220 230,977 263,645 --------------- --------------- --------------- Total noninterest expense 1,346,904 1,109,167 1,093,068 --------------- --------------- --------------- Earnings Income before income taxes 904,070 795,314 619,643 Provision for income taxes 291,223 252,103 211,252 --------------- --------------- --------------- Income before extraordinary item 612,847 543,211 408,391 Extraordinary loss on extinguishment of debt, net of income tax benefit of $1,514 -- -- 2,811 --------------- --------------- --------------- Net income 612,847 543,211 405,580 Preferred dividend requirements -- -- 113 --------------- --------------- --------------- Income applicable to common shares $ 612,847 $ 543,211 $ 405,467 =============== =============== =============== Per Common Share Income before extraordinary item: Basic $ 1.86 $ 1.67 $ 1.26 =============== =============== =============== Diluted $ 1.83 $ 1.63 $ 1.24 =============== =============== =============== Extraordinary loss on extinguishment of debt: Basic $ -- $ -- $ 0.01 =============== =============== =============== Diluted $ -- $ -- $ 0.01 =============== =============== =============== Net income: Basic $ 1.86 $ 1.67 $ 1.25 =============== =============== =============== Diluted $ 1.83 $ 1.63 $ 1.23 =============== =============== =============== Cash dividends paid $ .75 $ .66 $ .58 =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 55 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997
Accumulated Other Shares of Additional Retained Nonshareholder Total Common Preferred Common Paid-In Earnings Changes Shareholders' Stock Stock Stock Capital and Other* in Equity Equity ----------- --------- ---------- ---------- ----------- -------------- ------------- (Dollars in thousands) Balance, December 31, 1996, as previously reported 157,119,544 $ -- $ 785,599 $ 300,017 $ 1,385,233 $ 14,163 $2,485,012 Merger with First Liberty Financial Corp. 5,716,335 7,564 28,582 16,725 52,632 (158) 105,345 ----------- ------- ---------- --------- ----------- --------- ---------- Balance, December 31, 1996, restated 162,835,879 7,564 814,181 316,742 1,437,865 14,005 2,590,357 ----------- ------- ---------- --------- ----------- --------- ---------- Add (Deduct): Nonshareholder changes in equity:** Net income -- -- -- -- 405,580 -- 405,580 Unrealized holding gains arising during the period -- -- -- -- -- 44,539 44,539 Less: reclassification adjustment, net of tax of $2,454 -- -- -- -- -- (2,918) (2,918) ----------- --------- ---------- Total nonshareholder changes in equity -- -- -- -- 405,580 41,621 447,201 ----------- --------- ---------- Common stock issued 6,795,759 -- 33,978 241,084 5,470 -- 280,532 Redemption of common stock (7,114,730) -- (35,574) (291,264) -- -- (326,838) Preferred stock redemptions and conversions 350,610 (7,564) 1,753 5,811 -- -- -- Cash dividends declared on common stock -- -- -- -- (182,914) -- (182,914) Other, net -- -- -- (2,786) 2,871 -- 85 ----------- ------- ---------- --------- ----------- --------- ---------- Balance, December 31, 1997 162,867,518 -- 814,338 269,587 1,668,872 55,626 2,808,423 Add (Deduct): Nonshareholder changes in equity:** Net income -- -- -- -- 543,211 -- 543,211 Unrealized holding gains arising during the period -- -- -- -- -- 14,040 14,040 Less: reclassification adjustment, net of tax of $3,548 -- -- -- -- -- (5,044) (5,044) ----------- --------- ---------- Total nonshareholder changes in equity -- -- -- -- 543,211 8,996 552,207 ----------- --------- ---------- Common stock issued 11,667,939 -- 58,340 311,963 (1,045) -- 369,258 Redemption of common stock (6,736,880) -- (33,684) (311,345) -- -- (345,029) 2-for-1 stock split effective August 3, 1998 161,183,057 -- 805,915 (84,002) (721,913) -- -- Reconciliation of fiscal year of First Citizens to calendar year (32,732) -- (164) (211) (1,177) (16) (1,568) Cash dividends declared on common stock -- -- -- -- (213,608) -- (213,608) Other, net -- -- -- 3,040 (1,578) -- 1,462 ----------- ------- ---------- --------- ----------- --------- ---------- Balance, December 31, 1998 328,948,902 -- 1,644,745 189,032 1,272,762 64,606 3,171,145 Add (Deduct): Nonshareholder changes in equity:** Net income -- -- -- -- 612,847 -- 612,847 Unrealized holding losses arising during the period -- -- -- -- -- (343,233) (343,233) Less: reclassification adjustment, net of tax benefit of $1,796 -- -- -- -- -- 3,335 3,335 ----------- --------- ---------- Total nonshareholder changes in equity -- -- -- -- 612,847 (339,898) 272,949 ----------- --------- ---------- Common stock issued 10,752,814 -- 53,764 283,738 10,570 -- 348,072 Redemption of common stock (8,535,544) -- (42,678) (283,330) -- -- (326,008) Reconciliation of fiscal year of First Liberty to calendar year 4,088 -- 20 -- 3,460 (919) 2,561 Cash dividends declared on common stock -- -- -- -- (258,683) -- (258,683) Other, net -- -- -- -- (10,877) -- (10,877) ----------- ------- ---------- --------- ----------- --------- ---------- Balance, December 31, 1999 331,170,260 $ -- $1,655,851 $ 189,440 $ 1,630,079 $(276,211) $3,199,159 =========== ======= ========== ========= =========== ========= ==========
- -------- * Other includes unearned income, unvested restricted stock and a loan to the employee stock ownership plan. ** Comprehensive income as defined by SFAS No. 130. The accompanying notes are an integral part of these consolidated financial statements. 56 BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
1999 1998 1997 ----------- ----------- ----------- Cash Flows From Operating Activities: Net income $ 612,847 $ 543,211 $ 405,580 Extraordinary loss on extinguishment of debt -- -- 4,325 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 92,097 101,842 110,913 Depreciation of premises and equipment 83,083 71,954 66,052 Amortization of intangibles and mortgage servicing rights 73,468 54,673 27,245 Accretion of negative goodwill (6,243) (6,243) (6,180) Amortization of unearned stock compensation 3,873 1,171 8,133 Discount accretion and premium amortization on securities, net 1,190 1,984 3,598 Net decrease (increase) in trading account securities (20,774) 7,456 (25,688) Loss (gain) on sales of securities, net 5,131 (8,822) (4,833) Loss (gain) on sales of loans and mortgage loan servicing rights, net (26,213) (36,227) (17,687) Loss (gain) on disposals of premises and equipment, net (5,754) (15,352) 28,263 Proceeds from sales of loans held for sale 3,874,226 5,119,437 1,903,172 Purchases of loans held for sale (961,404) (1,749,648) (906,824) Origination of loans held for sale, net of principal collected (2,000,219) (3,887,322) (1,167,108) Reconciliation of fiscal year of merged companies to calendar year 3,216 4,991 -- Decrease (increase) in: Accrued interest receivable (43,648) (21,852) (378) Other assets (180,664) (81,562) (199,063) Increase (decrease) in: Accrued interest payable 36,997 18,045 6,024 Accounts payable and other liabilities 122,642 75,907 102,161 Other, net 3,625 (6,511) (9,299) ----------- ----------- ----------- Net cash provided by operating activities 1,667,476 187,132 328,406 ----------- ----------- ----------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale 771,045 1,511,163 1,900,158 Proceeds from maturities, calls and paydowns of securities available for sale 2,644,672 2,512,294 1,823,432 Purchases of securities available for sale (4,247,311) (4,239,309) (4,493,416) Proceeds from sales of securities held to maturity -- -- 26,170 Proceeds from maturities, calls and paydowns of securities held to maturity 36,815 137,712 70,139 Purchases of securities held to maturity (4,765) (79,479) (69,448) Leases made to customers (126,066) (94,615) (74,420) Principal collected on leases 74,314 65,186 57,581 Loan originations, net of principal collected (3,221,285) (1,400,799) (1,446,199) Purchases of loans (196,010) (110,108) (205,232) Net cash acquired in transactions accounted for under the purchase method 302,032 73,369 95,205 Purchases and originations of mortgage servicing rights (78,527) (85,113) (42,599) Proceeds from disposals of premises and equipment 37,540 25,559 14,579 Purchases of premises and equipment (123,416) (118,553) (158,955) Proceeds from sales of foreclosed property 28,190 28,902 17,333 Proceeds from sales of other real estate held for development or sale 10,128 513 15,248 Other, net -- (41,067) (3,412) ----------- ----------- ----------- Net cash used in investing activities (4,092,644) (1,814,345) (2,473,836) ----------- ----------- ----------- Cash Flows From Financing Activities: Net increase in deposits 226,435 1,019,274 628,544 Net increase (decrease) in short-term borrowed funds 2,851,287 (452,946) 575,335 Proceeds from long-term debt 2,658,991 3,428,689 6,328,829 Repayments of long-term debt (2,592,003) (2,034,525) (4,734,838) Net proceeds from common stock issued 39,594 34,916 27,274 Redemption of common stock (326,008) (345,029) (326,838) Preferred stock cancellations and conversions -- -- (38) Cash dividends paid on common and preferred stock (239,898) (202,740) (170,081) Other, net -- 1,306 (20,533) ----------- ----------- ----------- Net cash provided by financing activities 2,618,398 1,448,945 2,307,654 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 193,230 (178,268) 162,224 Cash and Cash Equivalents at Beginning of Year 1,242,590 1,420,858 1,258,634 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year $ 1,435,820 $ 1,242,590 $ 1,420,858 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 1,499,140 $ 1,413,515 $ 1,226,679 Income taxes 109,197 150,194 162,480 Noncash financing and investing activities: Transfer of securities from held to maturity to available for sale 231,529 106,819 -- Transfer of loans to foreclosed property 25,644 26,211 23,476 Transfer of fixed assets to other real estate owned 6,005 10,351 13,761 Restricted stock issued -- -- 74 Securitization of mortgage loans 304,795 478,768 --
The accompanying notes are an integral part of these consolidated financial statements. 57 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 BB&T Corporation ("BB&T" or "Parent Company") is a bank holding company organized under the laws of North Carolina and registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Branch Banking and Trust Company ("BB&T-NC"); BB&T Financial Corporation of South Carolina, parent company of Branch Banking and Trust Company of South Carolina ("BB&T-SC"); BB&T Financial Corporation of Virginia, parent company of Branch Banking and Trust Company of Virginia ("BB&T-VA"), (collectively, the "Banks"), Regional Acceptance Corporation ("Regional Acceptance") and Scott & Stringfellow Financial, Inc., ("Scott & Stringfellow") comprise BB&T's principal direct subsidiaries. The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The following is a summary of the more significant policies. NOTE A. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of BB&T include the accounts of BB&T Corporation and its subsidiaries. In consolidation, all significant intercompany accounts and transactions have been eliminated. Prior period financial statements have been restated to include the accounts of companies acquired in material transactions accounted for as poolings of interests. The results of operations of companies acquired in transactions accounted for as purchases are included only from the dates of acquisition. (See Note B). On November 10, 1999, BB&T completed its merger with First Liberty Financial Corporation ("First Liberty"), of Macon, Georgia. To consummate the merger, First Liberty's shareholders received .87 shares of BB&T common stock in exchange for each share of First Liberty common stock held, resulting in the issuance of 12.4 million shares of BB&T common stock. The transaction was accounted for as a pooling of interests. Accordingly, the consolidated financial statements (including the notes to the consolidated financial statements), and supplemental financial information contained in BB&T's Current Report on Form 8-K dated September 3, 1999, restated for the accounts of First Liberty, are included in this Annual Report on Form 10-K. As permitted under generally accepted accounting principles, the restatement of BB&T's consolidated financial statements to reflect the pooling of interest merger with First Liberty is presented herein by combining the September 30 fiscal year ends of First Liberty with BB&T's calendar year ends for years prior to 1999. This method of combination did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In certain instances, amounts reported in prior years' consolidated financial statements have been reclassified to conform to statement presentations selected for 1999. Such reclassifications had no effect on previously reported shareholders' equity or net income. Nature of Operations BB&T is a multi-bank holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Kentucky and the metropolitan Washington, D.C. area primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. BB&T's subsidiaries provide a full range of traditional commercial banking services and additional services including investment brokerage, investment banking, trust services, agency insurance, credit-related insurance and leasing. 58 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest-bearing bank balances, Federal funds sold and securities purchased under resale agreements or similar arrangements. Generally, both cash and cash equivalents are considered to have maturities of three months or less. Accordingly, the carrying amount of such instruments is considered a reasonable estimate of fair value. Securities BB&T classifies investment securities as held to maturity, available for sale or trading. Debt securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost. Gains or losses realized from the sale of securities held to maturity, if any, are determined by specific identification and are included in noninterest income. Debt securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or unforeseen changes in market conditions, including interest rates, market values or inflation rates, are classified as available for sale. In addition, all investments in equity securities are classified as available for sale. Securities available for sale are reported at estimated fair value, with unrealized gains and losses reported as a separate component of shareholders' equity, net of deferred income taxes. Gains or losses realized from the sale of securities available for sale are determined by specific identification and are included in noninterest income. Trading account securities are primarily held by Scott & Stringfellow, BB&T's investment banking and full-service brokerage subsidiary. Trading account securities are reported on the Consolidated Balance Sheets at fair value. Market adjustments, fees, and gains or losses earned on trading account securities are included in noninterest income. Interest income on trading account securities is included in other interest income. Gains or losses realized from the sale of trading securities are determined by specific identification. During 1999 and 1998, BB&T transferred securities with amortized costs of $231.5 million and $106.8 million, respectively, from the held-to-maturity portfolio to the available-for-sale portfolio. These securities were previously classified as held-to-maturity by entities that merged into BB&T under the pooling-of-interests method of accounting. BB&T transferred these amounts pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," to conform the combined investment portfolios to BB&T's existing policies. Loans Held for Sale Loans held for sale are reported at the lower of cost or market value on an aggregate loan basis. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Any resulting deferred premium or discount is amortized, as an adjustment of servicing income, over the estimated lives of the loans using the level-yield method. 59 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Loans and Leases Loans and leases that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances adjusted for any deferred fees or costs and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees, commitment fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate level-yield, with adjustments for prepayments as they occur. If the loan commitment expires unexercised, the income is recognized upon expiration of the commitment. Discounts and premiums are amortized to interest income over the estimated life of the loans using methods that approximate level-yield. Commercial loans and substantially all installment loans accrue interest on the unpaid balance of the loans. Lease receivables consist primarily of direct financing leases on rolling stock, equipment and real property. Lease receivables are stated at the total amount of lease payments receivable plus guaranteed residual values, less unearned income. Recognition of income over the lives of the lease contracts approximates the level-yield method. As of January 1, 1995, BB&T adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. A loan is impaired when, based on current information and events, it is probable that BB&T will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the fair value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. It is BB&T's policy to classify and disclose all commercial loans greater than $250,000 that are on nonaccrual status as impaired loans. Substantially all other loans made by BB&T are excluded from the scope of SFAS No. 114 as they are comprised of large groups of smaller balance homogeneous loans (residential mortgage and consumer installment) that are collectively evaluated for impairment. Allowance for Loan and Lease Losses The allowance for loan and lease losses is the estimated amount considered adequate to cover credit losses inherent in the outstanding loan and lease portfolio at the balance sheet date. The allowance is established through the provision for loan and lease losses, which is reflected in the Consolidated Statements of Income. The allowance is composed of general reserves, specific reserves and an unallocated reserve. General reserves for commercial loans are determined by applying loss percentages to the portfolio based on management's evaluation and "risk grading" of the commercial loan portfolio. General reserves are provided for noncommercial loan categories based on a three-year weighted average of actual loss experience, which is applied to the total outstanding loan balance of each loan category. Specific reserves are provided on all commercial loans that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of BB&T's exposure for each credit, given the current payment 60 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) status of the loan and the value of any underlying collateral. Commercial loans for which a specific reserve is provided are excluded from the calculations of general reserves. The allowance calculation also incorporates specific reserves based on the results of measuring impaired loans as required by SFAS No. 114, as described above. The unallocated reserve consists of an amount deemed appropriate to cover the elements of imprecision and estimation risk inherent in the general and specific reserves and an amount determined based on management's evaluation of various conditions that are not directly measured by any other component of the allowance. This evaluation includes general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of our internal credit examiners and results from external bank regulatory examinations. While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. Nonperforming Assets Nonperforming assets include loans and leases on which interest is not being accrued and foreclosed property. Foreclosed property consists of real estate and other assets acquired through customers' loan defaults. Commercial and unsecured consumer loans and leases are generally placed on nonaccrual status when concern exists that principal or interest is not fully collectible, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. Mortgage loans and most other consumer loans past due 90 days or more may remain on accrual status if management determines that concern over the collectibility of principal and interest is not significant. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of principal or interest. Assets acquired as a result of foreclosure are carried at the lower of cost or fair value less estimated selling costs. Cost is determined based on the sum of unpaid principal, accrued but unpaid interest and acquisition costs associated with the loan. Any excess of unpaid principal over fair value at the time of foreclosure is charged to the allowance for loan and lease losses. Generally, such properties are appraised annually and the carrying value, if greater than the fair value, less selling costs, is adjusted with a charge to income. Routine maintenance costs, declines in market value and net losses on disposal are included in other noninterest expense. Premises and Equipment Premises, equipment, capital leases and leasehold improvements are stated at cost less accumulated depreciation or amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are 61 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements. Capitalized leases are amortized by the same methods as premises and equipment over the estimated useful lives or the lease term, whichever is less. Obligations under capital leases are amortized using the interest method to allocate payments between principal reduction and interest expense. Income Taxes BB&T and its subsidiaries file a consolidated Federal income tax return. Each subsidiary pays its proportional share of Federal income taxes to BB&T based on its taxable income. Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes. Deferred tax assets and liabilities are recognized based on future tax consequences of the differences arising from their carrying values and respective tax bases. In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Institutions acquired during the current fiscal year file separate Federal income tax returns for the periods prior to consummation of the acquisitions. Derivatives and Off-Balance Sheet Instruments BB&T utilizes a variety of derivative financial instruments to manage various financial risks. These instruments include financial forward and futures contracts, options written and purchased, interest rate caps and floors and interest rate swaps. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose BB&T to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. The net interest payable or receivable on interest rate swaps, caps and floors that are designated as hedges is accrued and recognized as an adjustment to the interest income or expense of the related asset or liability. For interest rate forwards, futures and options qualifying as a hedge, gains and losses are deferred and are recognized in income as an adjustment of yield. Gains and losses from early terminations of derivatives are deferred and amortized as yield adjustments over the shorter of the remaining term of the hedged asset or liability or the remaining term of the derivative instrument. Upon disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any gains or losses are recognized in income. Derivative financial instruments that fail to qualify as a hedge are carried at fair value with gains and losses recognized in current earnings. BB&T utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. Fees received are deferred and recognized in noninterest income upon exercise or expiration. Written options are carried at estimated fair value. Unrealized and realized gains and losses on written call options are included in the Consolidated Statements of Income as securities gains and losses. BB&T also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. 62 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) These options are used to hedge the mortgage loan inventory and applications and mortgage loans in process against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. Net unrealized gains and losses on purchased put options and net purchased put options are included with loans held for sale at the lower of cost or market on an aggregate basis. Realized gains and losses on purchased put options and net purchased put options are included in mortgage banking income. Per Share Data Effective December 31, 1997, BB&T adopted the provisions of SFAS No. 128, "Earnings Per Share." This statement established standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computation previously found in Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share," making them more comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS (which replaces the former fully diluted EPS) for all entities with complex capital structures. The EPS information reported herein reflects the implementation of SFAS No. 128. Prior periods have been restated to include the provisions of the statement. Basic net income per common share has been computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the years presented. Diluted net income per common share has been computed by dividing net income, as adjusted for the interest expense related to convertible debt where applicable, by the weighted average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding. Restricted stock grants are considered as issued for purposes of calculating net income per share. Weighted average numbers of shares were as follows:
1999 1998 1997 ----------- ----------- ----------- Basic 329,305,820 325,735,189 324,799,136 Diluted 335,298,333 332,336,113 330,564,863
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 stock split in the Corporation's common stock effected in the form of a 100% stock dividend paid August 3, 1998. All per share amounts presented herein and the weighted average shares reflected above have been restated as appropriate to retroactively reflect the stock split. Intangible Assets BB&T's intangible assets consist of the cost in excess of the fair value of net assets acquired in transactions accounted for as purchases (goodwill), premiums paid for acquisitions of deposits (core deposit intangibles) and other identifiable intangible assets. Such assets are included in other assets in the "Consolidated Balance Sheets," and are being amortized on straight-line or accelerated bases over periods ranging from 5 to 25 years. At December 31, 1999, BB&T had $597.1 million in unamortized goodwill and $11.6 million in unamortized core deposit and other intangibles. Negative goodwill is created when the fair value of the net assets purchased exceeds the purchase price. Such balances are included in other liabilities in the "Consolidated Balance Sheets" and are being 63 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) amortized over periods ranging from 10 to 15 years. At December 31, 1999, BB&T had negative goodwill totaling $20.5 million, net of accumulated amortization. Mortgage Servicing Rights In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." This statement was superseded by SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which BB&T adopted on January 1, 1997. SFAS No. 122, as superseded by SFAS No. 125, requires that mortgage banking enterprises recognize, as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. Amounts paid to acquire the right to service mortgage loans are capitalized and amortized over the estimated lives of the loans to which they relate. BB&T also capitalizes servicing rights on loans originated internally as required under the statement. SFAS No. 122 further requires mortgage banking enterprises to assess their capitalized mortgage servicing rights for impairment based on the fair value of those rights. At December 31, 1999, BB&T had capitalized mortgage servicing rights totaling $185.6 million. Income from mortgage servicing fees is reflected as mortgage banking income on the Consolidated Statements of Income. Changes in Accounting Principles and Effects of New Accounting Pronouncements In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for such transactions based on consistent application of a financial components approach. This approach recognizes the financial and servicing assets an entity controls and the liabilities it has incurred, as well as derecognizes financial assets when control has been surrendered and liabilities when they are extinguished. The statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This statement allows the implementation of certain provisions of SFAS No. 125 to be deferred for one year. BB&T adopted SFAS No. 125, as amended by SFAS No. 127, effective January 1, 1997. The adoption of these statements did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share," as discussed above. The statement was effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior periods presented. Accordingly, BB&T adopted the provisions of the statement effective December 31, 1997, including retroactive restatement of prior periods. The implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In February of 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which establishes standards for disclosing information about an entity's capital structure by continuing and amending existing standards. The statement was effective for financial statements for periods ending after December 15, 1997. Management determined that BB&T was and is in 64 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) compliance with the disclosure requirements of SFAS No. 129, and, therefore, the implementation of the statement did not affect the capital structure disclosures made by BB&T. In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Comprehensive income is the nonshareholder-related change in equity (net assets) of a company during a period from transactions and other events. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, including interim periods, and requires restatement of all prior periods presented. BB&T adopted the provisions of the statement effective January 1, 1998, including retroactive application to prior periods. The standard does not address issues of recognition or measurement of comprehensive income; therefore, the implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. BB&T adopted the provisions of the statement effective December 31, 1998. The standard does not address issues of recognition or measurement and, therefore, the implementation of the statement did not have an impact on the consolidated financial position or consolidated results of operations of BB&T. See Note S. in the "Notes to Consolidated Financial Statements" for disclosures related to the implementation of this statement. In March of 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises the disclosure requirements for pensions and other postretirement benefit plans. BB&T adopted the provisions of this statement effective December 31, 1998, including restatement of all prior periods presented. The statement does not address issues of recognition or measurement and, therefore, the implementation of the statement did not have an impact on BB&T's consolidated financial position or consolidated results of operations. See Note L. in the "Notes to Consolidated Financial Statements" for disclosures related to the implementation of this statement. During the first quarter of 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires capitalization of computer software costs that meet certain criteria. BB&T adopted the provisions of this statement effective January 1, 1999. This implementation of the SOP did not have a material effect on BB&T's consolidated financial position or consolidated results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that 65 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) receive hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which delays the original effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. Management has not yet quantified the impact of adopting SFAS No. 133 and has not determined the timing of or method of adoption of the statement. However, management does not anticipate that the implementation of the statement will have a material effect on BB&T's consolidated financial position or consolidated results of operations. During the second quarter of 1998, the American Institute of Certified Public Accountants issued SOP 98-5, "Accounting for Start-up Costs." SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs and requires start-up costs to be expensed as incurred. BB&T adopted the provisions of the SOP effective January 1, 1999. The adoption of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. During October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage- Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." BB&T adopted the provisions of the statement effective January 1, 1999. The implementation of the statement did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. Supplemental Disclosures of Cash Flow Information As referenced in the "Consolidated Statements of Cash Flows," BB&T acquired assets and assumed liabilities in transactions accounted for under the purchase method of accounting. The fair values of these assets acquired and liabilities assumed, at acquisition, were as follows:
1999 1998 1997 --------- --------- --------- (Dollars in thousands) Fair Value of Net Assets acquired $ 80,193 $ 116,701 $ 138,029 Purchase Price (236,238) (310,618) (287,031) --------- --------- --------- Excess of Purchase Price over Net Assets acquired $(156,045) $(193,917) $(149,002) ========= ========= =========
Income and Expense Recognition Items of income and expense are recognized using the accrual basis of accounting, except for some immaterial amounts that are recognized when received or paid. NOTE B. Acquisitions and Mergers Completed Mergers and Acquisitions Certain of the acquisitions detailed below were acquired by companies that were subsequently acquired by BB&T and accounted for as poolings of interests. Purchase Transactions On March 1, 1997, BB&T completed its acquisition of Fidelity Financial Bankshares Corporation ("Fidelity") of Richmond, Virginia, in a transaction accounted for as a purchase. BB&T issued 3.2 66 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) million shares for all of the shares of Fidelity's common stock outstanding. In conjunction with the acquisition, BB&T recorded $37.9 million in goodwill, which is being amortized using the straight-line method over 15 years. On March 31, 1997, First Citizens Corporation ("First Citizens"), which merged into BB&T on July 9, 1999, acquired Tara Bankshares Corporation ("Tara"). To consummate the acquisition, First Citizens issued common stock which was later converted to approximately 239,000 shares of BB&T common stock, and paid $5.1 million in cash. As a result of the acquisition, goodwill totaling $2.2 million was recorded and is being amortized using the straight- line method over 20 years. On May 20, 1997, BB&T purchased Phillips Factors Corporation ("Phillips") and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips purchases and manages receivables in the temporary staffing industry nationwide. It also provides payroll processing services to that industry. Phillips also buys and manages account receivables primarily in the furniture, textiles and home furnishings- related industries. In conjunction with the acquisition, BB&T recorded $11.1 million of goodwill, which is being amortized using the straight-line method over 15 years. On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp. (collectively, "Refloat"), a finance company that specializes in loans to small commercial lawn care businesses across the country. The acquisition, which was completed through the issuance of 750,000 shares of common stock, was accounted for as a purchase. BB&T recorded $3.0 million of goodwill, which is being amortized using the straight-line method over 15 years, in conjunction with this transaction. On October 1, 1997, BB&T completed its acquisition of Craigie Incorporated ("Craigie"), an investment banking firm located in Richmond, Virginia. Craigie specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Craigie also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional tax-exempt issuers. The acquisition, which was accounted for as a purchase, was accomplished through the issuance of approximately 926,000 shares of BB&T's common stock. In conjunction with the acquisition, BB&T recorded $6.8 million of goodwill, which is being amortized using the straight-line method over a period of 25 years. On December 1, 1997, BB&T completed its acquisition of Virginia First Financial Corporation of Petersburg, Virginia ("Virginia First"), a financial institution with $822.9 million in assets at the time the merger was consummated. The merger, which was accounted for under the purchase method of accounting, was effected through the issuance of 3.8 million shares of BB&T's common stock and the payment of $44.8 million. In conjunction with the acquisition, BB&T recorded $89.5 million in goodwill, which is being amortized using the straight-line method over a period of 15 years. On February 11, 1998, Mason-Dixon Bancshares, Inc. ("Mason-Dixon"), which merged into BB&T on July 14, 1999, purchased substantially all of the assets of Rose Shanis Companies ("Rose Shanis"), a consumer finance company located in Baltimore, Maryland. Mason-Dixon paid cash totaling $15.4 million to acquire Rose Shanis. In conjunction with the merger, goodwill totaling $5.5 million was recorded and is being amortized using the straight-line method over 10 years. 67 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On February 28, 1998, MainStreet Financial Corporation ("MainStreet"), which merged into BB&T on March 5, 1999, completed the acquisition of Tysons Financial Corporation ("Tysons") of McLean, Virginia. Tysons, with $102.1 million in assets, was acquired through the issuance of MainStreet common stock which was later converted to 721,187 shares of BB&T common stock. In conjunction with the acquisition, goodwill totaling $9.3 million was recorded, which is being amortized using the straight-line method over a period of 15 years. On June 18, 1998, BB&T completed the acquisition of Dealers' Credit Inc. ("DCI"), of Menomonee Falls, Wisconsin. DCI specializes in extending credit to commercial, agricultural, municipal and consumer users for the purchase of lawn care equipment. In conjunction with the transaction, BB&T recorded $9.5 million of goodwill, which is being amortized using the straight-line method over 15 years. On June 30, 1998, BB&T completed its acquisition of W.E. Stanley & Company Inc., and its subsidiaries, (collectively, "Stanley"), located in Greensboro, North Carolina. Stanley, the largest actuarial, consulting and administration firm headquartered in the Carolinas, primarily manages retirement plans for companies and has more than 700 clients located mostly in the Carolinas, Virginia, Maryland and Tennessee. In conjunction with the acquisition, BB&T recorded $10.3 million of goodwill, which is being amortized using the straight-line method over 15 years. On September 30, 1998, BB&T completed its acquisition of Maryland Federal Bancorp, Inc. ("Maryland Federal") located in Hyattsville, Maryland. In conjunction with the merger, BB&T issued 8.7 million shares of BB&T common stock in exchange for all of the outstanding shares of Maryland Federal common stock. BB&T recorded $158.8 million of goodwill, which is being amortized using the straight-line method over a period of 15 years. On January 5, 1999, Mason-Dixon, which merged into BB&T on July 14, 1999, completed its acquisition of Sterling Bancorp, a privately held commercial bank headquartered in Baltimore, Maryland. To complete the transaction, Mason-Dixon paid $10.3 million in cash. In conjunction with the acquisition, goodwill totaling $3.7 million was recorded, which is being amortized using the straight-line method over 15 years. On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in Richmond, Virginia. The transaction was accounted for as a purchase. In conjunction with the acquisition, BB&T issued 3.6 million shares of BB&T common stock in exchange for all of the outstanding shares of Scott & Stringfellow common stock. BB&T recorded goodwill totaling $72.8 million, which is being amortized using the straight-line method over a period of 15 years. On August 27, 1999, BB&T completed its acquisition of Matewan BancShares, Inc. ("Matewan") of Williamson, West Virginia. In conjunction with the merger, BB&T issued 3.2 million shares of common stock in exchange for all of the outstanding shares of Matewan common and preferred stock. As a result of the acquisition, BB&T recorded $92.8 million of goodwill, which is being amortized using the straight-line method over a period of 15 years. 68 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The above-discussed acquisitions were accounted for under the purchase method of accounting, and, therefore, the financial information contained herein includes data relevant to the acquirees since the date of acquisition. The following unaudited presentation reflects key line items on a Pro Forma basis as if these purchase transactions had been acquired as of the beginning of the years presented:
For the Years Ended --------------------- 1999 1998 ---------- ---------- (Dollars in thousands, except per share data) Total revenues $2,393,457 $2,172,354 ========== ========== Net income $ 604,994 $ 537,906 ========== ========== Basic EPS $ 1.84 $ 1.65 ========== ========== Diluted EPS $ 1.80 $ 1.62 ========== ==========
Under the provisions of SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchase Enterprises," BB&T typically provides an allocation period, not to exceed one year, to identify and quantify the assets acquired and liabilities assumed in business combinations accounted for as purchases. Management currently does not anticipate any material adjustments to the assigned values of the assets and liabilities of acquired companies. Pooling of Interests Transactions On July 1, 1997, BB&T completed its merger with United Carolina Bancshares Corporation ("UCB") of Whiteville, North Carolina, in a stock transaction accounted for as a pooling of interests. To consummate the merger, BB&T issued 55.4 million shares of common stock in exchange for all of the shares of UCB common stock outstanding. On December 1, 1997, MainStreet, which merged into BB&T on March 5, 1999, completed its merger with Commerce Bank Corporation ("Commerce") in a transaction accounted for as a pooling of interests. In conjunction with the merger, MainStreet issued common stock, which was later converted to approximately 676,000 shares of BB&T common stock, in exchange for all of the outstanding common stock of Commerce. On March 1, 1998, BB&T completed its merger with Life Bancorp, Inc. ("Life") of Norfolk, Virginia. The transaction was accounted for as a pooling of interests. In conjunction with the merger, BB&T issued 11.6 million shares of common stock in exchange for all of the shares of Life common stock outstanding. On March 10, 1998, MainStreet, which merged into BB&T on March 5, 1999, completed its merger with Regency Financial Shares, Incorporated ("Regency") of Richmond, Virginia, in a transaction accounted for as a pooling of interests. In conjunction with the merger, MainStreet issued common stock, which was later converted to approximately 801,000 shares of BB&T common stock, in exchange for all of the shares of Regency. On July 1, 1998, BB&T completed its merger with Franklin Bancorporation Inc. ("Franklin") of Washington, D.C. in a stock transaction accounted for under the pooling-of-interests method of accounting. In conjunction with the merger, BB&T issued 4.9 million shares of common stock in exchange for all of the shares of Franklin common stock outstanding. 69 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On July 7, 1998, MainStreet, which merged into BB&T on March 5, 1999, completed a merger with Ballston Bancorp, Inc. ("Ballston") of Washington, D.C., in a transaction accounted for as a pooling of interests. In conjunction with the merger, MainStreet issued common stock, which later converted to approximately 824,000 shares of BB&T common stock, in exchange for all of the outstanding common stock of Ballston. On March 5, 1999, BB&T completed a merger with MainStreet, based in Martinsville, Virginia. The transaction was accounted for as a pooling of interests. BB&T issued approximately 16.8 million shares of BB&T common stock in exchange for all of the outstanding shares of MainStreet. On April 1, 1999, First Liberty Financial Corp. ("First Liberty"), which merged into BB&T on November 10, 1999, completed a merger with Vidalia Bankshares, Inc. ("Vidalia"), based in Vidalia, Georgia. The transaction was accounted for as a pooling of interests. First Liberty issued common stock, which later converted to approximately 568,000 shares of BB&T common stock, in exchange for all of the outstanding shares of Vidalia. On July 9, 1999, BB&T completed its merger with First Citizens, of Newnan, Georgia. The transaction was accounted for as a pooling of interests. BB&T issued approximately 3.2 million shares of common stock in exchange for all of the outstanding shares of First Citizens. On July 14, 1999, BB&T completed its merger with Mason-Dixon of Westminster, Maryland. The transaction was accounted for as a pooling of interests. BB&T issued approximately 6.6 million shares of BB&T common stock in exchange for all of the outstanding shares of Mason-Dixon. On November 10, 1999, BB&T completed its merger with First Liberty of Macon, Georgia. In conjunction with the transaction, which was accounted for as a pooling of interests, BB&T issued 12.4 million shares of BB&T common stock in exchange for all of the outstanding shares of First Liberty common stock. 70 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following presentation reflects key line items on an historical basis for BB&T and First Liberty on a pro forma combined basis assuming the merger was effective as of and for the periods presented. See Principles of Consolidation in Note A.
Historical Basis ------------------------- BB&T BB&T First Liberty restated ----------- ------------- ----------- (Dollars in thousands, except per share data) As of/For the Year Ended December 31, 1998 Net interest income $ 1,369,989 $ 56,187 $ 1,426,653 Net income 527,254 15,480 543,211 Net earnings per share Basic 1.68 1.10 1.67 Diluted 1.65 1.09 1.63 Assets 37,903,119 1,567,016 39,470,135 Deposits 25,263,311 1,186,321 26,449,632 Shareholders' equity 3,044,330 126,899 3,171,145 As of/For the Year Ended December 31, 1997 Net interest income $ 1,267,848 $ 52,685 $ 1,320,533 Net income 394,661 10,919 405,580 Net earnings per share Basic 1.26 .79 1.25 Diluted 1.24 .77 1.23 Assets 34,523,133 1,474,679 35,997,812 Deposits 23,474,381 1,119,600 24,593,981 Shareholders' equity 2,694,714 113,709 2,808,423
On January 13, 2000, BB&T completed its merger with Premier Bancshares, Inc. ("Premier") of Atlanta, Georgia. In connection with the merger, which was accounted for as a pooling of interests, BB&T issued 16.8 million shares of BB&T common stock in exchange for all of the outstanding shares of Premier common stock. Pending Mergers On November 17, 1999, BB&T announced plans to merge with Hardwick Holding Company ("Hardwick") of Dalton, Georgia. In exchange for each share of Hardwick common stock held, Hardwick's shareholders will receive between .9010 and .9320 shares of BB&T common stock depending on the average closing price of BB&T common stock over a five-day pricing period ending shortly before the effective time of the Merger. The transaction is expected to be completed during the second quarter of 2000 and accounted for as a pooling of interests. On December 15, 1999, BB&T announced plans to merge with First Banking Company of Southeast Georgia ("First Banking Company") of Statesboro, Georgia. First Banking Company's shareholders will receive .74 shares of BB&T common stock for each share of First Banking Company common stock held. The transaction is expected to be completed during the second quarter of 2000 and accounted for as a pooling of interests. On February 7, 2000, BB&T announced plans to merge with One Valley Bancorp, Inc. ("One Valley") of Charleston, West Virginia. The acquisition, which is expected to be completed in the third quarter of 2000, is expected to be accounted for as a pooling of interests. One Valley, which has $6.6 billion in assets, operates 123 branches in West Virginia and Virginia. Shareholders of One Valley will receive 1.28 shares of BB&T common stock in exchange for each share of One Valley common stock held. 71 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE C. Securities The amortized costs and approximate fair values of securities held to maturity and available for sale were as follows:
December 31, 1999 December 31, 1998 ---------------------------------------- -------------------------------------- Gross Unrealized Estimated Gross Unrealized Estimated Amortized ---------------- Fair Amortized ---------------- Fair Cost Gains Losses Value Cost Gains Losses Value ----------- ------- -------- ----------- ---------- -------- ------- ---------- (Dollars in thousands) Securities held to maturity: U.S. Treasury, government and agency obligations $ 23,117 $ 1 $ 6 $ 23,112 $ 51,102 $ 235 $ 2 $ 51,335 Mortgage-backed securities -- -- -- -- 70,355 937 351 70,941 States and political subdivisions 74,005 974 21 74,958 232,406 7,167 329 239,244 Other securities -- -- -- -- 6,920 215 -- 7,135 ----------- ------- -------- ----------- ---------- -------- ------- ---------- Total securities held to maturity 97,122 975 27 98,070 360,783 8,554 682 368,655 ----------- ------- -------- ----------- ---------- -------- ------- ---------- Securities available for sale: U.S. Treasury, government and agency obligations 4,664,395 1,548 136,722 4,529,221 3,783,815 57,035 2,770 3,838,080 Mortgage-backed securities 3,901,774 3,970 112,559 3,793,185 4,175,502 41,859 12,693 4,204,668 Equity and other securities 1,795,534 120 176,235 1,619,419 1,252,768 21,612 3,698 1,270,682 States and political subdivisions 561,875 8,467 30,123 540,219 181,303 3,951 198 185,056 ----------- ------- -------- ----------- ---------- -------- ------- ---------- Total securities available for sale 10,923,578 14,105 455,639 10,482,044 9,393,388 124,457 19,359 9,498,486 ----------- ------- -------- ----------- ---------- -------- ------- ---------- Total securities $11,020,700 $15,080 $455,666 $10,580,114 $9,754,171 $133,011 $20,041 $9,867,141 =========== ======= ======== =========== ========== ======== ======= ==========
Securities with a book value of approximately $5.5 billion and $5.2 billion at December 31, 1999 and 1998, respectively, were pledged to secure municipal deposits, securities sold under agreements to repurchase, Federal Reserve discount window borrowings and for other purposes as required by law. At December 31, 1999 and 1998, there were no concentrations of investments in obligations of states and political subdivisions that were payable from the same taxing authority or secured by the same revenue source that exceeded ten percent of shareholders' equity. Trading securities totaling $93.2 million are excluded from the accompanying tables. Proceeds from sales of securities during 1999, 1998 and 1997 were $771.0 million, $1.5 billion and $1.9 billion, respectively. Gross gains of $3.5 million, $14.8 million and $8.7 million and gross losses of $8.7 million, $6.0 million and $3.8 million were realized on those sales in 1999, 1998 and 1997, respectively. 72 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The amortized cost and estimated fair value of the securities portfolio at December 31, 1999, by contractual maturity, are shown in the accompanying table. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted average contractual maturities of underlying collateral.
December 31, 1999 ----------------------------------------- Held to Maturity Available for Sale ------------------- --------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- ---------- ---------- (Dollars in thousands) Debt Securities: Due in one year or less $45,906 $45,994 $ 950,028 $ 950,086 Due after one year through five years 46,871 47,548 2,893,025 2,821,560 Due after five years through ten years 2,151 2,194 1,578,928 1,516,033 Due after ten years 2,194 2,334 4,243,159 3,935,927 ------- ------- ---------- ---------- Total debt securities $97,122 $98,070 $9,665,140 $9,223,606 ======= ======= ========== ==========
NOTE D. Loans and Leases Loans and leases were composed of the following:
December 31, ------------------------ 1999 1998 ----------- ----------- (Dollars in thousands) Loans: Commercial, financial and agricultural $ 4,592,691 $ 4,128,455 Real estate--construction and land development 3,310,561 2,570,017 Real estate--mortgage 16,010,893 14,604,025 Consumer 3,635,267 3,231,827 ----------- ----------- Loans held for investment 27,549,412 24,534,324 Leases: 2,602,819 1,620,326 ----------- ----------- Total loans and leases 30,152,231 26,154,650 Less: unearned income (1,239,801) (721,940) ----------- ----------- Loans and leases, net of unearned income $28,912,430 $25,432,710 =========== ===========
The net investment in direct financing leases was $1.5 billion and $986.9 million at December 31, 1999 and 1998, respectively. BB&T had loans held for sale at December 31, 1999 and 1998 totaling $285.0 million and $1.2 billion, respectively. BB&T had $19.6 billion in loans secured by real estate at December 31, 1999. However, these loans were not concentrated in any specific market or geographic area other than the Banks' primary markets. 73 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth certain information regarding BB&T's impaired loans as defined under SFAS No. 114.
December 31, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Total recorded investment--impaired loans $ 22,619 $ 41,791 ----------- ----------- Total recorded investment with related valuation allowance 22,619 40,410 Valuation allowance assigned to impaired loans 5,001 9,013 ----------- ----------- Net carrying value--impaired loans $ 17,618 $ 31,397 =========== =========== Average balance of impaired loans $ 22,252 $ 47,001 =========== =========== Cash basis interest income recognized on impaired loans $ 363 $ 169 =========== ===========
The following table provides an analysis of loans made to directors, executive officers and their interests, which in the aggregate exceeded $60,000 at any time during 1999. All amounts shown represent loans made by BB&T's subsidiary banks in the ordinary course of business at the Banks' normal credit terms, including interest rate and collateralization prevailing at the time for comparable transactions with other persons.
(Dollars in thousands) Balance, December 31, 1998 $180,511 Additions 81,581 Reductions (71,896) -------- Balance, December 31, 1999 $190,196 ========
74 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE E. Allowance for Loan and Lease Losses An analysis of the allowance for loan and lease losses is presented in the following table:
For the Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) Beginning Balance $361,869 $316,550 $276,620 Provision for losses charged to expense 92,097 101,842 110,913 Allowances of purchased companies 9,272 21,258 17,513 Loans and leases charged-off (104,464) (102,655) (109,857) Recoveries of previous charge-offs 28,884 24,810 21,361 -------- -------- -------- Net loans and leases charged-off (75,580) (77,845) (88,496) -------- -------- -------- Reconciliation of fiscal year of merged companies to calander year 305 64 -- -------- -------- -------- Ending Balance $387,963 $361,869 $316,550 ======== ======== ========
At December 31, 1999, 1998 and 1997, loans not currently accruing interest totaled $103.5 million, $106.1 million and $115.7 million, respectively. Loans 90 days or more past due and still accruing interest totaled $54.2 million, $54.3 million and $49.3 million, at December 31, 1999, 1998 and 1997, respectively. The gross interest income that would have been earned during 1999 if the outstanding nonaccrual loans and leases had been current in accordance with the original terms and had been outstanding throughout the period (or since origination, if held for part of the period) was approximately $9.9 million. Foreclosed property totaled $27.1 million, $32.2 million and $41.8 million at December 31, 1999, 1998 and 1997, respectively. 75 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE F. Premises and Equipment A summary of premises and equipment is presented in the accompanying table:
December 31, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Land and land improvements $ 102,530 $ 91,618 Buildings and building improvements 407,859 385,896 Furniture and equipment 453,951 442,838 Capitalized leases on premises and equipment 2,965 4,089 ----------- ----------- 967,305 924,441 Less--accumulated depreciation and amortization 411,439 399,202 ----------- ----------- Net premises and equipment $ 555,866 $ 525,239 =========== ===========
Depreciation expense, which is included in occupancy and equipment expense, was $83.1 million, $72.0 million and $66.1 million in 1999, 1998 and 1997, respectively. BB&T has noncancelable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $51.0 million, $32.6 million and $49.8 million for 1999, 1998 and 1997, respectively. Future minimum lease payments for operating and capitalized leases for years subsequent to 1999 are as follows:
Leases -------------------------- Operating Capitalized ------------ ------------ (Dollars in thousands) Years ended December 31: 2000 $ 29,677 $ 394 2001 28,038 394 2002 25,512 395 2003 22,780 355 2004 21,322 303 2005 and years later 102,458 2,784 ------------ ---------- Total minimum lease payments $ 229,787 4,625 ============ Less--amount representing interest 2,129 ---------- Present value of net minimum payments on capitalized leases (Note I) $ 2,496 ==========
76 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE G. Loan Servicing The following is an analysis of capitalized mortgage servicing rights included in other assets in the Consolidated Balance Sheets:
Capitalized Mortgage Servicing Rights -------------------------- 1999 1998 ------------ ------------ (Dollars in thousands) Balance, January 1, $ 115,218 $ 75,471 Amount capitalized 78,527 85,113 Amount sold -- (1,118) Amortization expense (27,628) (26,817) Change in valuation allowance 19,489 (17,431) ------------ ------------ Balance, December 31, $ 185,606 $ 115,218 ============ ============ Capitalized mortgage servicing rights are being amortized on a disaggregated loan basis using an accelerated method over the estimated life of the underlying loans. The servicing rights portfolio is analyzed each quarter to identify possible impairment using a disaggregated discounted cash flow methodology that is stratified by predominant risk characteristics. These characteristics include stratification based on interest rates in intervals of 150 basis points, type of loan and maturity of loan. Following is an analysis of the aggregate changes in the valuation allowance for mortgage servicing rights in 1999 and 1998 including the effects of related hedging instruments: Valuation Allowance for Mortgage Servicing Rights -------------------------- 1999 1998 ------------ ------------ (Dollars in thousands) Balance, January 1, $ 21,031 $ 3,600 Additions 462 17,704 Reductions (19,951) (273) ------------ ------------ Balance, December 31, $ 1,542 $ 21,031 ============ ============
Mortgage loans serviced for others are not included in loans on the accompanying Consolidated Balance Sheets. The unpaid principal balances of mortgage loans serviced for others were $13.9 billion and $11.4 billion at December 31, 1999 and 1998, respectively. 77 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE H. Short-Term Borrowed Funds Short-term borrowed funds are summarized as follows:
December 31, --------------------- 1999 1998 ---------- ---------- (Dollars in thousands) Federal funds purchased $ 287,131 $ 924,307 Term Federal funds purchased -- 25,000 Securities sold under agreements to repurchase 1,874,432 1,683,737 Master notes 698,704 675,141 U.S. Treasury tax and loan deposit notes payable 1,202,924 182,741 Short-term Federal Home Loan Bank advances 241,926 218,579 Short-term bank notes 1,645,000 73,181 Other short-term borrowed funds 925,173 103,051 ---------- ---------- Total short-term borrowed funds $6,875,290 $3,885,737 ========== ==========
Federal funds purchased represent unsecured borrowings from other banks and generally mature daily. Term Federal funds purchased are identical to Federal funds; however, maturities vary and are greater than one day. Securities sold under agreements to repurchase are borrowings collateralized by securities of the U.S. Government or its agencies and have maturities ranging from one to ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon demand to the U.S. Treasury. Master notes are unsecured, non-negotiable obligations of BB&T (variable rate commercial paper). Short-term Federal Home Loan Bank advances generally mature daily. Short-term bank notes are unsecured borrowings issued by the banking subsidiaries that generally mature in less than one year. 78 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE I. Long-Term Debt Long-term debt is summarized as follows:
December 31, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Capitalized leases, varying maturities to 2028 with rates from 8.11% to 12.65%. Balance represents the unamortized amounts due on leases of various facilities. $ 2,496 $ 3,462 Medium-term bank notes, unsecured, varying maturities to 2008 with variable rates from 5.279% to 7.48%. 969,945 1,389,890 Advances from Federal Home Loan Bank, varying maturities to 2018 with rates from 1.00% to 8.75%. 3,562,207 3,056,502 Subordinated Notes, unsecured, dated May 21, 1996, June 3, 1997 and June 30, 1998(1); maturing May 23, 2003, June 15, 2007 and June 30, 2025; with interest rates of 7.05%, 7.25% and 6.375%, respectively. (2) 857,272 858,303 CMO Bonds, secured by investments, dated 1985, callable July 1, 2001, with an interest rate of 11.25%. 8,128 10,558 Corporation-obligated mandatorily redeemable capital securities, dated June 15, 1997, maturing June 15, 2027, with interest at 10.07%; June 15, 1997, maturing June 15, 2028, with interest at 8.40%; and Nov. 19, 1997, maturing Nov. 19, 2027, with interest at 8.90%.(3) 89,237 88,000 Other mortgage indebtedness 2,449 6,135 ----------- ----------- Total long-term debt $ 5,491,734 $ 5,412,850 =========== ===========
- -------- Excluding the capitalized leases set forth in Note F, future debt maturities are $1.1 billion, $554.1 million, $75.7 million, $293.4 million and $.5 million for the next five years. The maturities for 2005 and later years total $3.4 billion. (1) The $350 million in subordinated debt, issued June 30, 1998, is mandatorally puttable to BB&T on June 30, 2005, and contains a remarketing option that allows the debt to be reissued by the holder of the option to the stated maturity of June 30, 2025. (2) Subordinated notes qualify under the risk-based capital guidelines as Tier 2 supplementary capital. (3) Securities qualify under the risk-based capital guidelines as Tier 1 capital. NOTE J. Shareholders' Equity The authorized capital stock of BB&T consists of 500,000,000 shares of common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At December 31, 1999, 331,170,260 shares of common stock and no shares of preferred stock were issued and outstanding. Stock Option Plans At December 31, 1999, BB&T had the following stock-based compensation plans: the 1994 and 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan ("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors' Plan"), which are described below. BB&T accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these 79 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) plans been determined based on the fair value at the grant dates for awards under those plans granted after December 31, 1994, consistent with the method described by SFAS No. 123, BB&T's pro forma net income and pro forma earnings per share would have been as follows:
For the Years Ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ---------- (Dollars in thousands, except per share data) Net income applicable to common shares: As reported $ 612,847 $ 543,211 $ 405,467 Pro Forma 594,588 531,668 396,125 Basic EPS: As reported 1.86 1.67 1.25 Pro Forma 1.81 1.63 1.22 Diluted EPS: As reported 1.83 1.63 1.23 Pro Forma 1.78 1.60 1.20
The SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995; therefore, the weighted average fair value of options granted prior to that date has not been calculated. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 2.5% in 1999, 2.4% in 1998 and 2.7% in 1997; expected volatility of 25% in 1999, 24% in 1998 and 22% in 1997; risk free interest rates of 5.3%, 5.7% and 6.2% for 1999, 1998 and 1997, respectively; and expected lives of 6.0 years, 6.3 years and 6.3 years for 1999, 1998 and 1997, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. In April, 1994 and February, 1995, the shareholders approved the Omnibus Plans which cover the award of incentive stock options, non-qualified stock options, shares of restricted stock, performance shares and stock appreciation rights. In April 1996, the shareholders approved an amendment to the 1995 Omnibus Plan that increased the maximum number of shares issuable under the terms of the plan, after giving effect to the August 3, 1998, 2-for-1 stock split, to 12,000,000. The provisions of the 1995 Omnibus Plan also provide for an automatic increase in the authorized number of shares issuable, equal to 3% of any increase in the Corporation's outstanding common shares. Including options authorized under these provisions, the maximum number of shares issuable under the plan was 16,601,000 at December 31, 1999. The combined shares issuable under both Omnibus Plans, after giving effect to the 2-for-1 stock split and the automatic increase provided by the terms of the 1995 Omnibus Plan, is 24,601,000 at December 31, 1999. The Omnibus Plans are intended to allow BB&T to recruit and retain employees with ability and initiative and to associate the employees' interests with those of BB&T and its shareholders. At December 31, 1999, 9,041,313 qualified stock options at prices ranging from $4.29 to $40.31 and 2,957,749 non-qualified stock options at prices ranging from $.005 to $33.26 were outstanding. The stock options generally vest over 3 years and have a 10-year term. The ISOP and the NQSOP were established to retain key officers and key management employees and to offer them the incentive to use their best efforts on behalf of BB&T. The plans, which expire on December 19, 2000, further provide for up to 2,202,000 shares of common stock to be 80 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) reserved for the granting of options, which have a four year vesting schedule and must be exercised within ten years from the date granted. Incentive stock options granted must have an exercise price equal to at least 100% of the fair market value of common stock on the date granted, and the non-qualified stock options must have an exercise price equal to at least 85% of the fair market value on the date granted. At December 31, 1999, options to purchase 142,526 shares of common stock at prices ranging from $4.75 to $8.375 were outstanding pursuant to the NQSOP. At December 31, 1999, options to purchase 102,546 shares of common stock at an exercise price of $9.8885 were outstanding pursuant to the ISOP. The Directors' Stock Option Plan is intended to provide incentives to non- employee directors to remain on the Board of Directors and share in the profitability of BB&T. The plan creates a deferred compensation system for participating non-employee directors. Each non-employee director may elect to defer 0%, 50% or 100% of the annual retainer fee for each calendar year and apply that percentage toward the grant of options to purchase BB&T common stock. Such elections are required to be in writing and are irrevocable for each calendar year. The exercise price at which shares of BB&T common stock may be purchased shall be equal to 75% of the market value of the common stock as of the date of grant. Options are vested in six months and may be exercised anytime thereafter until the expiration date, which is 10 years from the date of grant. The Directors' Plan provides for the reservation of up to 1,800,000 shares of BB&T common stock. At December 31, 1999, options to purchase 814,370 shares of common stock at prices ranging from $6.3578 to $28.8719 were outstanding pursuant to the Directors' Plan. BB&T also has options outstanding that were granted by certain acquired companies. These options, which have not been included in the plans described above, totaled 166,742 as of December 31, 1999, with option prices ranging from $1.3334 to $11.8535. A summary of the status of the Company's stock option plans at December 31, 1999, 1998 and 1997 and changes during the years then ended is presented below:
1999 1998 1997 --------------------- --------------------- --------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year 12,910,599 $14.57 13,637,818 $11.08 14,092,315 $ 9.17 Granted 2,634,990 32.34 2,701,139 26.30 2,480,564 17.92 Exercised (2,171,907) 11.13 (3,318,063) 9.14 (2,798,102) 7.39 Forfeited or Expired (148,436) 31.85 (119,891) 20.63 (136,959) 13.73 Reconciliation of fiscal year to calendar year -- -- 9,596 -- -- -- ---------- ------ ---------- ------ ---------- ------ Outstanding at end of year 13,225,246 $18.47 12,910,599 $14.57 13,637,818 $11.08 ========== ====== ========== ====== ========== ====== Options exercisable at year-end 10,761,544 $15.32 9,920,136 $11.22 11,084,467 $ 9.64 ---------- ------ ---------- ------ ---------- ------
The weighted average fair value of options granted was $8.96, $8.07 and $4.88 per option at December 31, 1999, 1998 and 1997, respectively. 81 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about the options outstanding at December 31, 1999:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices 12/31/99 Life Price 12/31/99 Price --------------- ----------- ----------- --------- ----------- --------- $ 0.01 to $ 2.50 6,384 4.7yrs $ 1.13 6,384 $ 1.13 $ 2.51 to $ 3.75 9,202 3.4 3.23 9,202 3.23 $ 3.76 to $ 5.50 78,144 2.4 4.61 72,494 4.62 $ 5.51 to $ 8.25 1,224,692 2.3 6.91 1,224,692 6.91 $ 8.26 to $12.25 4,218,578 4.5 10.36 4,218,578 10.36 $12.26 to $18.25 2,134,633 6.2 13.61 2,134,633 13.61 $18.26 to $27.25 1,917,377 7.6 21.05 1,553,826 21.23 $27.26 to $40.31 3,636,236 8.7 33.65 1,541,735 32.63 ---------- --- ------ ---------- ------ 13,225,246 6.2yrs $18.47 10,761,544 $15.32 ========== === ====== ========== ======
Shareholder Rights Plan On January 17, 1997, pursuant to the Rights Agreement approved by the Board of Directors, BB&T distributed to shareholders one preferred stock purchase right for each share of BB&T's common stock then outstanding. Subsequent to this date, all shares issued are accompanied by a stock purchase right. Initially, the rights, which expire in 10 years, are not exercisable and are not transferable apart from the common stock. The rights will become exercisable only if a person or group acquires 20% or more of BB&T's common stock, or BB&T's Board of Directors determines, pursuant to the terms of the Rights Agreement, that any person or group that has acquired 10% or more of BB&T's common stock is an "Adverse Person." Each right would then enable the holder to purchase 1/100th of a share of a new series of BB&T preferred stock at an initial exercise price of $145.00. The Board of Directors will be entitled to redeem the rights at $.01 per right under certain circumstances specified in the Rights Agreement. Under the terms of the Rights Agreement, if any person or group becomes the beneficial owner of 25% or more of BB&T's common stock, with certain exceptions, or if the Board of Directors determines that any 10% or more stockholder is an "Adverse Person," each right will entitle its holder (other than the person triggering exercisability of the rights) to purchase, at the right's then-current exercise price, shares of BB&T's common stock having a value of twice the right's exercise price. In addition, if after any person or group has become a 20% or more stockholder, BB&T is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right's then-current exercise price, shares of common stock of such other person having a value of twice the right's exercise price. 82 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note K. Income Taxes The provision for income taxes was composed of the following:
Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) Current expense: Federal $102,118 $193,830 $216,703 State 7,498 10,051 10,094 -------- -------- -------- 109,616 203,881 226,797 Deferred expense (benefit) 181,607 48,222 (15,545) -------- -------- -------- Provision for income taxes $291,223 $252,103 $211,252 ======== ======== ======== The reasons for the difference between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows: Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) Federal income taxes at statutory rates of 35% $316,425 $278,308 $216,767 Tax-exempt income from securities, loans and leases less related non-deductible interest expense (17,822) (13,821) (13,098) State income taxes, net of Federal tax benefit 7,699 8,576 6,285 Other, net (15,079) (20,960) 1,298 -------- -------- -------- Provision for income taxes $291,223 $252,103 $211,252 ======== ======== ======== Effective income tax rate 32.2% 31.7% 34.1% ======== ======== ========
83 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that gave rise to significant portions of the net deferred tax assets (liabilities) in the "Consolidated Balance Sheets" were:
December 31, ------------------------ 1999 1998 ----------- ----------- (Dollars in thousands) Deferred tax assets: Allowance for loan and lease losses $ 143,945 $ 133,115 Net unrealized depreciation on securities available for sale 165,368 -- Deferred compensation 38,140 30,723 Postretirement benefits other than pensions 19,973 19,217 Other 57,583 41,503 ----------- ----------- Total tax deferred assets 425,009 224,558 ----------- ----------- Deferred tax liabilities: Depreciation (14,007) (18,029) Net unrealized appreciation on securities available for sale -- (40,492) Lease financing (254,197) (75,933) Mortgage servicing rights (41,359) (3,807) Other (25,283) (27,938) ----------- ----------- Total tax deferred liabilities (334,846) (166,199) ----------- ----------- Net deferred tax asset $ 90,163 $ 58,359 =========== ===========
Securities transactions resulted in income tax (benefits) expense of $(2.0 million), $3.4 million and $1.8 million related to securities (losses) gains for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE L. Benefit Plans BB&T provides various benefit plans to existing employees and employees of acquired entities. Employees of acquired entities generally participate in existing BB&T plans upon consummation of the business combinations. Credit is usually given to these employees for years of service at the acquired institution. The following table discloses expenses relating to employee benefit plans restated for transactions accounted for as poolings of interests.
1999 1998 1997 ------- ------- ------- (Dollars in thousands) Defined benefit plans $15,309 $ 9,201 $14,225 Defined contribution and ESOP plans 16,571 19,922 28,475 ------- ------- ------- Total expense related to benefit plans $31,880 $29,123 $42,700 ======= ======= =======
84 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Retirement Plans BB&T provides a defined benefit retirement plan qualified under the Internal Revenue Code that covers substantially all employees. Benefits are based on years of service, age at retirement and the employee's compensation during the five highest consecutive years of earnings within the last ten years of employment. BB&T's contributions to the plan are in amounts between the minimum required for funding standard accounts and the maximum deductible for federal income tax purposes. Supplemental retirement benefits are provided to certain key officers under supplemental defined benefit executive retirement plans, which are not qualified under the Internal Revenue Code. Although technically unfunded plans, insurance policies on the lives of the covered employees partially fund future benefits. The tables below summarize data relative to the plans for the years as indicated:
1999 1998 1997 -------- -------- -------- (Dollars in thousands) Net Periodic Pension Cost - ------------------------- Service cost $ 18,935 $ 15,059 $ 12,412 Interest cost 22,456 19,765 17,971 Estimated return on plan assets (26,017) (22,869) (17,987) Net amortization and other (2,133) 1,257 790 -------- -------- -------- Net periodic pension cost $ 13,241 $ 13,212 $ 13,186 ======== ======== ========
Plans for which Plans for which assets exceed accumulated accumulated benefits exceed benefits assets ------------------ ---------------- 1999 1998 1999 1998 -------- -------- ------- ------- (Dollars in thousands) Change in Projected Benefit Obligation - -------------------------------------- Projected benefit obligation, January 1, $300,136 $244,769 $32,820 $24,188 Service cost 17,784 13,932 1,151 1,127 Interest cost 20,420 17,765 2,037 2,000 Actuarial (gain) loss (57,384) 26,529 (6,606) 6,190 Benefits paid (16,522) (10,502) (669) (685) Change in plan provisions (2,418) 2,813 75 -- Other, net 6,384 4,830 (1) -- -------- -------- ------- ------- Projected benefit obligation, December 31, $268,400 $300,136 $28,807 $32,820 ======== ======== ======= ======= 1999 1998 1999 1998 -------- -------- ------- ------- (Dollars in thousands) Change in Plan Assets - --------------------- Fair value of plan assets, January 1, $321,474 $284,905 $ -- $ -- Accrual return on plan assets 15,091 35,965 -- -- Employer contributions 1,693 5,349 669 685 Benefits paid (16,522) (10,502) (669) (685) Other, net 6,384 5,757 -- -- -------- -------- ------- ------- Fair value of plan assets, December 31, $328,120 $321,474 $ -- $ -- ======== ======== ======= =======
85 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plans for which Plans for which assets exceed accumulated accumulated benefits exceed benefits assets ---------------- ------------------ 1999 1998 1999 1998 ------- ------- -------- -------- (Dollars in thousands) Net Amount Recognized --------------------- Funded status $59,719 $21,338 $(28,807) $(32,820) Unrecognized transition (asset) obligation (4,262) (5,400) 191 234 Unrecognized prior service cost (20,949) (20,909) 2,781 3,114 Unrecognized net loss (26,890) 19,568 3,678 11,215 ------- ------- -------- -------- Net amount recognized $ 7,618 $14,597 $(22,157) $(18,257) ======= ======= ======== ======== 1999 1998 1999 1998 ------- ------- -------- -------- (Dollars in thousands) Reconciliation of Net Pension Asset (Liability) ----------------------------------- Prepaid pension cost, January 1, $14,597 $16,446 $(18,257) $(13,086) Contributions 1,693 5,349 517 519 Net periodic pension cost (8,672) (8,126) (4,452) (4,489) Other, net -- 928 35 (1,201) ------- ------- -------- -------- Prepaid (accrued) pension cost, December 31, $ 7,618 $14,597 $(22,157) $(18,257) ======= ======= ======== ========
December 31, -------------- 1999 1998 ------ ------ Weighted Average Assumptions ---------------------------- Weighted average assumed discount rate 7.75% 6.75% Weighted average expected long-term rate of return on plan assets 8.00 8.00 Assumed rate of annual compensation increases 5.50 5.50
Pension plan assets consist primarily of investments in mutual funds consisting of equity investments, obligations of the U.S. Treasury and Federal agencies and corporations. Plan assets included $18.5 million and $26.8 million of BB&T common stock at December 31, 1999 and 1998 respectively. The market value of total plan assets was $328.1 million and $321.5 million at December 31, 1999 and 1998, respectively. Postretirement Benefits BB&T revised its retiree health care plans in preparation for the implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other Than Pensions." The new plan covers employees retiring after December 31, 1995 who are eligible for participation in the BB&T pension plan and have at least ten years of service. The plan requires retiree contributions, with a subsidy by BB&T based upon years of service of the employee at the time of retirement. The subsidy is periodically reviewed for adjustment. The plan provides flexible benefits to retirees or their dependents. 86 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following tables set forth the components of the retiree benefit plan and the amount recognized in the consolidated financial statements at December 31, 1999, 1998 and 1997.
1999 1998 1997 ------- ------- ------- (Dollars in thousands) Net Periodic Postretirement Benefit Cost ---------------------------------------- Service cost $ 1,126 $ 1,550 $ 733 Interest cost 3,314 3,422 2,586 Amortization and other 518 519 (37) ------- ------- ------- Total expense $ 4,958 $ 5,491 $ 3,282 ======= ======= =======
1999 1998 ----------- ----------- (Dollars in thousands) Change in Projected Benefit Obligation -------------------------------------- Projected benefit obligation, January 1, $ 53,630 $ 38,342 Service cost 1,126 1,550 Interest cost 3,314 3,422 Plan participants' contributions 727 475 Actuarial loss (gain) (8,286) 4,958 Benefits paid (1,793) (1,859) Other, net 2,480 6,742 ----------- ----------- Projected benefit obligation, December 31, $ 51,198 $ 53,630 =========== =========== 1999 1998 ----------- ----------- (Dollars in thousands) Change in Plan Assets --------------------- Fair value of plan assets, January 1, $ -- $ -- Actual return on plan assets -- -- Employer contributions 1,066 1,384 Plan participants' contributions 727 475 Benefits paid (1,793) (1,859) ----------- ----------- Fair value of plan assets, December 31, $ -- $ -- =========== =========== 1999 1998 ----------- ----------- (Dollars in thousands) Net Amount Recognized --------------------- Funded status $ (51,198) $ (53,630) Unrecognized prior service cost 5,704 6,223 Unrecognized net (gain) loss (7,740) 600 ----------- ----------- Net amount recognized $ (53,234) $ (46,807) =========== ===========
87 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 1998 ----------- ----------- (Dollars in thousands) Reconciliation of Postretirement Benefit Cost --------------------------------------------- Prepaid (accrued) postretirement benefit cost, January 1, $(46,807) $(42,700) Contributions 1,066 1,384 Net periodic postretirement benefit cost (4,958) (5,491) Other, net (2,535) -- -------- -------- Prepaid (accrued) postretirement benefit cost, December 31, $(53,234) $(46,807) ======== ======== December 31, ----------------------- 1999 1998 ----------- ----------- Weighted Average Assumptions Weighted average assumed discount rate 7.75% 6.75% Medical trend rate--initial year 8.00 9.00 Medical trend rate--ultimate 5.00 5.00 Select period 3 yrs 4 yrs 1% Increase 1% Decrease ----------- ----------- Impact of a 1% change in assumed health care cost on: Service and interest costs 1.90% (1.70)% Accumulated postretirement benefit obligation 1.80 (1.60)
401-k Savings Plan Effective January 1, 1996, BB&T's Employee Stock Ownership Plan was merged into the former BB&T Financial Corporation Savings and Thrift Plan to form the BB&T Corporation 401-k Savings Plan. The plan permits employees to contribute up to 16% of their compensation. BB&T matches up to 6% of the employee's compensation with a 100% matching contribution. Settlement Agreements In connection with a merger, an executive officer of a merged institution agreed to retire during 1997. BB&T entered into a settlement and noncompetition agreement with this executive officer to settle an existing employment contract and to require the officer not to compete with BB&T. The settlement agreement provides for annual payments of $769,392 (to be adjusted annually in accordance with the Consumer Price Index) until the executive reaches the age of 65 in 2002, at which time the annual payments will be reduced to 70% of the amount paid during the final year pursuant the agreement, estimated to be approximately $623,000, less the company-provided portion of benefits payable under certain existing benefit plans. The reduced payments will continue for the life of the executive. If the executive's current wife survives him, payments will continue to her in the annual amount equal to 35% of the amount paid to the executive during the final year pursuant to the agreement. The executive officer has agreed not to compete in a defined geographic area for ten years. Other There are various other employment contracts, deferred compensation arrangements and covenants not to compete with selected members of management and certain retirees. 88 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE M. Commitments and Contingencies BB&T is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of clients and to reduce exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, options written, standby letters of credit and financial guarantees, interest rate caps and floors written, interest rate swaps and forward and futures contracts. BB&T's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. BB&T uses the same credit policies in making commitments and conditional obligations as it does for on- balance sheet transactions.
Notional Amount at December 31, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend, originate or purchase credit $12,109,347 $10,678,283 Standby letters of credit and financial guarantees written 463,106 386,151 Commercial letters of credit 40,417 36,277 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Forward and futures contracts $ 319,411 $ 1,274,620 Foreign exchange contracts 72,228 136,628
Commitments to extend credit are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the total commitment amounts shown in the above table are not necessarily indicative of future cash requirements. BB&T evaluates each customer's creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by BB&T upon extension of credit, is based on management's evaluation of the creditworthiness of the counterparty. Standby letters of credit and financial guarantees written are conditional commitments issued by BB&T to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers, and letters of credit are collateralized when necessary. Forward commitments to sell mortgage loans and mortgage-backed securities are contracts for delayed delivery of securities in which BB&T agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' values and interest rates. 89 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Legal Proceedings The nature of the business of BB&T's banking subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of BB&T are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities, if any, arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of BB&T. NOTE N. Regulatory Requirements and Other Restrictions BB&T's subsidiary banks are required by the Board of Governors of the Federal Reserve System to maintain reserve balances in the form of vault cash or deposits with the Federal Reserve Bank based on certain percentages of deposit types, subject to various adjustments. At December 31, 1998, the net reserve requirement amounted to $264.2 million. BB&T's subsidiary banks are prohibited from paying dividends from their capital stock and additional paid-in capital accounts and are required by regulatory authorities to maintain minimum capital levels. Subject to restrictions imposed by state laws and federal regulations, the Boards of Directors of the subsidiary banks could have declared dividends from their retained earnings up to $1.4 billion at December 31, 1999. BB&T is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on BB&T's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of BB&T's assets, liabilities and certain off-balance-sheet items calculated pursuant to regulatory directives. BB&T's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. BB&T was in compliance with these requirements at December 31, 1999. Quantitative measures established by regulation to ensure capital adequacy require BB&T to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets. 90 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table provides summary information regarding regulatory capital for BB&T and its significant banking subsidiaries as of December 31, 1999 and 1998:
December 31, 1999 December 31, 1998 ----------------------------- ----------------------------- For Minimum For Minimum Actual Capital Actual Capital ----------------- Adequacy ----------------- Adequacy Ratio Amount Purposes Ratio Amount Purposes ----- ---------- ----------- ----- ---------- ----------- (Dollars in thousands) Tier 1 Capital BB&T 9.3% $2,845,786 $1,223,794 10.5% $2,747,687 $1,051,106 BB&T--NC 9.8 1,977,275 806,531 10.9 1,839,894 675,643 BB&T--SC 9.7 366,991 151,036 12.7 421,891 133,225 BB&T--VA 11.3 373,412 132,495 14.8 477,894 129,551 First Liberty 9.3 122,272 52,684 10.3 111,660 43,321 Total Capital BB&T 13.0% $3,985,971 $2,447,589 14.9% $3,907,092 $2,102,212 BB&T--NC 11.0 2,209,849 1,613,062 12.2 2,059,494 1,351,286 BB&T--SC 11.0 413,911 302,071 13.9 463,895 266,451 BB&T--VA 12.5 415,120 264,990 16.0 518,525 259,103 First Liberty 10.5 138,046 105,369 11.6 125,185 86,642 Leverage Capital BB&T 6.6% $2,845,786 $1,287,471 7.1% $2,747,687 $1,160,476 BB&T--NC 6.7 1,977,275 879,741 7.2 1,839,894 764,608 BB&T--SC 7.7 366,991 142,148 9.3 421,891 135,789 BB&T--VA 7.5 373,412 148,745 9.4 477,894 153,013 First Liberty 6.9 122,272 53,018 7.5 111,660 44,843
91 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE O. Parent Company Financial Statements Condensed Balance Sheets December 31, 1999 and 1998
1999 1998 ----------- ----------- (Dollars in thousands) Assets Cash and due from banks $ 8,120 $ 4,323 Interest-bearing bank balances 548,615 607,389 Securities 15,850 21,539 Investment in banking subsidiaries 3,198,063 3,499,484 Investment in other subsidiaries 554,749 170,855 ----------- ----------- Total investments in subsidiaries 3,752,812 3,670,339 ----------- ----------- Advances to subsidiaries 348,000 359,600 Premises and equipment 5,201 5,366 Receivables from subsidiaries and other assets 266,927 183,972 ----------- ----------- Total assets $ 4,945,525 $ 4,852,528 =========== =========== Liabilities and Shareholders' Equity Short-term borrowed funds $ 698,704 $ 677,141 Dividends payable 69,589 52,110 Accounts payable and accrued liabilities 27,873 26,542 Long-term debt 950,200 925,590 ----------- ----------- Total liabilities 1,746,366 1,681,383 ----------- ----------- Total shareholders' equity 3,199,159 3,171,145 ----------- ----------- Total liabilities and shareholders' equity $ 4,945,525 $ 4,852,528 =========== ===========
92 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed Income Statements For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------- -------- -------- (Dollars in thousands) Income Dividends from subsidiaries $589,329 $421,774 $265,442 Interest and other income from subsidiaries 91,521 95,232 74,911 Interest on investment securities 322 971 1,782 Other income 498 17,914 2,647 -------- -------- -------- Total income 681,670 535,891 344,782 -------- -------- -------- Expenses Interest expense 81,815 89,903 56,127 Other expenses 23,646 37,202 30,372 -------- -------- -------- Total expenses 105,461 127,105 86,499 -------- -------- -------- Income before income taxes and equity in undistributed earnings of subsidiaries 576,209 408,786 258,283 Income tax benefit 1,352 3,877 1,075 -------- -------- -------- Income before equity in undistributed earnings of subsidiaries 577,561 412,663 259,358 Equity in undistributed earnings of subsidiaries 35,286 130,548 146,222 -------- -------- -------- Net income $612,847 $543,211 $405,580 ======== ======== ========
93 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------- --------- --------- (Dollars in thousands) Cash Flows Operating Activities: Net income $ 612,847 $ 543,211 $ 405,580 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries less than (in excess of) dividends from subsidiaries (35,286) (130,548) (146,222) Depreciation of premises and equipment 165 171 272 Amortization of unearned compensation 3,873 1,171 8,133 Discount secretion and premium amortization -- -- 421 Loss (gain) on sales of securities 955 (37) -- Loss on disposals of other real estate owned -- 191 47 Reconciliation of fiscal year of merged company to calendar year -- (158) -- Decrease (increase) in other assets (88,109) (117,903) (27,526) Increase (decrease) in accounts payable and accrued liabilities (25) 5,832 (38) --------- --------- --------- Net cash provided by operating activities 494,420 301,930 240,667 --------- --------- --------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale 4,729 64,984 10,206 Proceeds from maturities, calls and paydowns of securities available for sale -- -- 35,482 Purchases of securities available for sale -- (54,804) (214,064) Investment in subsidiaries (81,371) (82,677) (12,024) Advances to subsidiaries (728,586) (677,728) (446,844) Proceeds from repayment of advances to subsidiaries 740,186 530,967 369,435 Net cash (paid) received in purchase accounting transactions 588 (6,051) (45,852) Other, net -- 143 594 --------- --------- --------- Net cash used in investing activities (64,454) (225,166) (303,067) --------- --------- --------- Cash Flows From Financing Activities: Net increase in long-term debt 19,806 393,178 393,192 Net increase in short-term borrowed funds 21,563 27,750 161,581 Advances from subsidiaries -- 4,191 -- Repayment of advances from subsidiaries -- (3,260) -- Net proceeds from common stock issued 39,594 34,916 27,274 Redemption of common stock (326,008) (345,029) (326,838) Cash dividends paid on common and preferred stock (239,898) (202,740) (170,081) Other, net -- 264 (1,259) --------- --------- --------- Net cash (used in) provided by financing activities (484,943) (90,730) 83,869 --------- --------- --------- Net (Decrease) Increase in Cash and Cash Equivalents (54,977) (13,966) 21,469 Cash and Cash Equivalents at Beginning of Year 611,712 625,678 604,209 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 556,735 $ 611,712 $ 625,678 ========= ========= =========
94 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note P. Disclosures about Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the estimated fair value of on- and off-balance sheet financial instruments. A financial instrument is defined by SFAS No. 107 as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. No readily available market exists for a significant portion of BB&T's financial instruments. Fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used by BB&T in estimating the fair value of its financial instruments: Cash and cash equivalents: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values. Securities: Fair values for securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. The carrying amounts of accrued interest approximate fair values. Deposit liabilities: The fair values for demand deposits, interest-checking accounts, savings accounts and certain money market accounts are, by definition, equal to the amount payable on demand at the reporting date, i.e., their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. Short-term borrowed funds: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements, master notes and other short-term borrowed funds approximate their fair values. Long-term debt: The fair values of long-term debt are estimated based on quoted market prices for similar instruments or by using discounted cash flow analyses, based on BB&T's current incremental borrowing rates for similar types of instruments. Interest rate swap agreements: The fair values of interest rate swaps (used for hedging purposes) are the estimated amounts that BB&T would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. 95 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Commitments to extend credit, standby letters of credit and financial guarantees written: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair values also consider the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are estimated based on fees currently charged for similar agreements. Other off-balance sheet instruments: The fair values for off-balance sheet instruments (futures, forwards, options, and commitments to sell or purchase financial instruments) are estimated based on quoted prices, if available. For instruments for which there are no quoted prices, fair values are estimated using current settlement values or pricing models. The following is a summary of the carrying amounts and fair values of BB&T's financial assets and liabilities as of the periods indicated:
1999 1998 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- (Dollars in thousands) Financial assets: Cash and cash equivalents $ 1,435,820 $ 1,435,820 $ 1,242,590 $ 1,242,590 Trading securities 93,221 93,221 60,422 60,422 Securities available for sale 10,482,044 10,482,044 9,498,486 9,498,486 Securities held to maturity 97,122 98,070 360,783 368,655 Loans and leases: Loans 27,726,261 27,269,164 25,617,240 26,211,686 Leases 1,471,194 N/A 986,885 N/A Allowance for losses (387,963) N/A (361,869) N/A ----------- ----------- Net loans and leases $28,809,492 $26,242,256 ----------- ----------- Financial liabilities: Deposits $27,251,142 27,289,977 $26,449,632 26,503,491 Short-term borrowed funds 6,875,290 6,875,290 3,885,737 3,885,737 Long-term debt 5,489,238 5,471,527 5,409,388 5,472,523 Capitalized leases 2,496 N/A 3,462 N/A
- -------- N/A--not applicable. 96 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is a summary of the notional or contractual amounts and fair values of BB&T's off-balance sheet financial instruments as of the periods indicated:
1999 1998 -------------------- -------------------- Notional/ Notional/ Contract Fair Contract Fair Amount Value Amount Value ----------- -------- ----------- -------- (Dollars in thousands) Off balance sheet financial instruments: Interest rate swaps, caps and floors $ 1,301,611 $ (301) $ 3,825,596 $ 35,938 Commitments to extend, originate or purchase credit 12,109,347 (25,492) 10,678,283 374,928 Standby and commercial letters of credit and financial guarantees written 503,523 (7,553) 422,428 (4,650) Forward and futures contracts 319,411 2,544 1,274,620 196,952 Foreign exchange contracts 72,228 1,149 136,628 319 Option contracts purchased 15,000 (10) 35,000 623 Option contracts written 47,250 236 1,267,250 (257)
NOTE Q. Derivatives and Off-Balance Sheet Financial Instruments BB&T utilizes interest rate swaps, caps, floors and collars in the management of interest rate risk. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to alter the repricing characteristics of assets or liabilities without affecting the underlying principal positions. Through the use of a swap assets and liabilities may be transformed from fixed to a floating rate, from floating rates to fixed rates, or from one type of floating rate to another. Swap terms generally range from one year to ten years depending on the need. At December 31, 1999, derivatives with a total notional value of $1.3 billion, with terms ranging up to sixteen years, were outstanding. 97 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following tables set forth certain information concerning BB&T's interest rate swaps at December 31, 1999: Interest Rate Swaps, Caps, Floors and Collars December 31, 1999 (Dollars in thousands)
Notional Receive Pay Fair Type Amount Rate Rate Value - ---- ----------- ----------- ------------ ----------- Receive fixed swaps $ 745,000 6.35% 6.20% $ (6,712) Pay fixed swaps 494,361 5.74 5.31 6,411 Caps, Floors & Collars 62,250 -- -- -- ---------- ----------- ---------- ----------- Total $1,301,611 6.11% 5.84% $ (301) ========== =========== ========== =========== Receive Pay Fixed Caps, Floors Year-to-date Activity Fixed Swaps Swaps & Collars Total - --------------------- ----------- ----------- ------------ ----------- Balance, December 31, 1998 $1,286,200 $ 1,242,146 $1,297,250 $ 3,825,596 Additions 40,000 385,175 15,000 440,175 Maturities/amortizations (581,200) (1,051,553) (550,000) (2,182,753) Terminations -- (81,407) (700,000) (781,407) ---------- ----------- ---------- ----------- Balance, December 31, 1999 $ 745,000 $ 494,361 $ 62,250 $ 1,301,611 ========== =========== ========== =========== One Year One to Five Five to 10 Maturity Schedule or Less Years Years Total - ----------------- ----------- ----------- ------------ ----------- Receive fixed swaps $ 185,000 $ 270,000 $ 290,000 $ 745,000 Pay fixed swaps 18,215 445,397 30,749 494,361 Caps, Floors & Collars 15,000 47,250 -- 62,250 ---------- ----------- ---------- ----------- Total $ 218,215 $ 762,647 $ 320,749 $ 1,301,611 ========== =========== ========== ===========
As of December 31, 1999, deferred gains from new swap transactions initiated during 1999 were $195,000. There were no unamortized deferred gains or losses from terminated transactions remaining at year end. Active transactions resulted in a pretax net loss of $2.9 million. In addition to interest rate swaps, BB&T utilizes written covered over-the- counter call options on specific securities in the available-for-sale portfolio in order to enhance returns. During 1999, options were written on securities totaling $1.7 billion. Option fee income was $2.5 million for 1999. There were no unexercised options outstanding at December 31, 1999 or 1998. BB&T also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. These options are used to hedge the mortgage warehouse and mortgage applications and loans in process against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. At December 31, 1999, net purchased put option contracts with a notional value of $15.0 million were outstanding. The $1.3 billion notional amount of derivatives used in interest rate risk management are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and fixed rate notes. BB&T does not utilize derivatives for trading purposes. 98 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Although off-balance sheet derivative financial instruments do not expose BB&T to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. Such risk is minimized based on the creditworthiness of the counterparties and the consistent monitoring of these agreements. The counterparties to these arrangements were primarily large commercial banks and investment banks. All counterparties are reviewed annually for creditworthiness by BB&T's credit policy group. Where appropriate, master netting agreements are arranged or collateral is obtained in the form of rights to securities. At December 31, 1999, BB&T's interest rate swaps, caps, floors and collars reflected an unrealized loss of $301,000. Other risks associated with interest-sensitive derivatives include the impact on fixed rate positions during periods of changing interest rates. Indexed amortizing swaps' notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall the notional amounts decline more rapidly, and as rates increase notional amounts decline more slowly. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result from an environment of rising interest rates in which derivatives produce negative cash flows while being offset by increased cash flows from variable rate loans. Such risk is considered insignificant due to the relatively small derivative positions held by BB&T. At December 31, 1999, BB&T had no indexed amortizing swaps outstanding. 99 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note R. Calculations of Earnings Per Share The basic and diluted earnings per share calculations are presented in the following table:
Years Ended December 31, ----------------------------------- 1999 1998 1997 ----------- ----------- ----------- (Dollars in thousands, except per share data) Basic Earnings Per Share: Net income $ 612,847 $ 543,211 $ 405,580 Less: Preferred dividend requirement -- -- 113 ----------- ----------- ----------- Income available for common shares $ 612,847 $ 543,211 $ 405,467 =========== =========== =========== Weighted average number of common shares outstanding during the period 329,305,820 325,735,189 324,799,136 ----------- ----------- ----------- Basic earnings per share $ 1.86 $ 1.67 $ 1.25 =========== =========== =========== Diluted Earnings Per Share: Net income $ 612,847 $ 543,211 $ 405,580 =========== =========== =========== Weighted average number of common shares 329,305,820 325,735,189 324,799,136 Add: Shares issuable assuming conversion of convertible preferred stock -- -- 305,370 Dilutive effect of outstanding options (as determined by application of treasury stock method) 5,992,513 6,600,924 5,315,769 Issuance of additional shares under share repurchase agreement, contingent upon market price -- -- 144,588 ----------- ----------- ----------- Weighted average number of common shares, as adjusted 335,298,333 332,336,113 330,564,863 =========== =========== =========== Diluted earnings per share $ 1.83 $ 1.63 $ 1.23 =========== =========== ===========
Note S. Operating Segments BB&T's operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage and Treasury. These operating segments have been identified based primarily on BB&T's existing organizational structure. The segments require unique technology and marketing strategies and offer different products and services. While BB&T is managed as an integrated organization, individual executive managers are held accountable for the operations of these business segments. BB&T measures and presents information for internal reporting purposes in a variety of different ways. Information for BB&T's reportable segments is available based on organizational structure, product offerings and customer relationships. The internal reporting system presently utilized by management in the planning and measuring of operating activities, as well as the system to which most managers are held accountable, is based on organizational structure. 100 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) BB&T emphasizes revenue growth by focusing on client service, sales effectiveness and relationship management. The segment results contained herein are presented based on internal management accounting policies, which were designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the segments is not necessarily comparable with BB&T's consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not necessarily indicative of the segments' financial performance if they operated as independent entities. BB&T's internal reporting system was significantly modified during 1999 and 1998, and information from 1997 has not been presented herein to reflect the new reporting system because it is not practicable to restate prior period results. During 1999, BB&T revised the methods used to allocate noninterest expenses among the various segments. The information presented for 1998 has been restated to reflect these revisions. Also, BB&T has completed various mergers and acquisitions accounted for as poolings of interests, which present additional practical limitations to the presentation of comparable 1997 information. The management accounting process uses various estimates and allocation methodologies to measure the performance of the operating segments. To determine financial performance for each segment, BB&T allocates capital, funding charges and credits, an economic provision for loan and lease losses, certain noninterest expenses and income tax provisions to each segment, as applicable. Also, to promote revenue growth, certain revenues of Mortgage Banking, Trust Services, Agency Insurance and Investment Banking and Brokerage segments are reflected in the individual segments and also allocated to the Banking Network. This double counting of revenue is reflected in intersegment noninterest revenues and eliminated to arrive at consolidated results. Allocation methodologies are subject to periodic adjustment as the internal management accounting system is revised and business or product lines within the segments change. Also, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised. BB&T's overall objective is to maximize shareholder value by optimizing return on equity and limiting risk. Allocations of capital and the economic provision for loan and lease losses are designed to address this objective. Capital is assigned to each segment on an economic basis, using management's assessment of the inherent risks associated with the segment. Required economic capital allocations are made to cover the following risk categories: credit risk, funding risk, interest rate risk, option risk, basis risk, market risk and operational risk. Each segment is evaluated based on a risk-adjusted return on capital. Capital assignments are not equivalent to regulatory capital guidelines and the total amount assigned to all segments may vary from consolidated shareholders' equity. All unallocated capital is retained in the Treasury segment. The economic provision for loan and lease losses is also allocated to the relevant segments based on management's assessment of the segments' risks as described above. Unlike the provision for loan and lease losses recorded pursuant to generally accepted accounting principles, the economic provision adjusts for the impact of expected credit losses over the effective lives of the related loans and leases. Any unallocated provision for loan and lease losses is retained in the Corporate Office, reflected in the accompanying table as "other revenues and expenses." 101 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) BB&T has implemented an extensive noninterest expense allocation process to support organizational and product profitability. BB&T allocates expenses to the reportable segments based on various cost allocation methodologies, including the number of items processed, overall percentage of time spent, full-time equivalent employees assigned to functions, functional position surveys and activity-based costing. A portion of corporate overhead expenses is not allocated, but is retained in corporate accounts reflected as other expenses in the accompanying tables. Income taxes are allocated to the various segments using effective tax rates. BB&T utilizes a funds transfer pricing ("FTP") system to eliminate the effect of interest rate risk from the segments' net interest income because such risk is centrally managed within the Treasury segment. The FTP system credits or charges the segments with the true value or cost of the funds the segments create or use. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The net FTP credit or charge is reflected as net intersegment interest income (expense) in the accompanying tables. Banking Network BB&T's Banking Network, which operates in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Kentucky and Washington, D.C., serves commercial and retail clients by offering a variety of loan and deposit products and other financial services. The Banking Network is primarily responsible for client relationships, and, therefore, is credited with revenue from the Mortgage Banking, Trust Services, Agency Insurance and Investment Banking and Brokerage segments, which is reflected in intersegment noninterest income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion concerning the functions of the Banking Network. Mortgage Banking The Mortgage Banking segment retains and services mortgage loans originated by the Banking Network and purchased from various correspondent originators. Mortgage loan products include fixed- and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Fixed-rate mortgage loans are typically sold to government agencies and private investors with servicing rights retained by BB&T, while adjustable-rate loans are typically held in the portfolio. The Mortgage Banking segment earns interest on loans held in the warehouse and portfolio, fee income from the origination and servicing of mortgage loans and reflects gains or losses from the sale of mortgage loans. The Banking Network receives an interoffice credit for the origination of loans and servicing rights, with the corresponding charge remaining in the Corporate Office. Trust Services BB&T's Trust Services segment provides personal trust administration and estate planning, investment counseling and management, employee benefits services, and corporate trust services to individuals, corporations, institutions, foundations and government entities. The Banking Network receives an interoffice credit for trust fees in the initial year the account is referred, with the corresponding charge remaining in the Corporate Office. 102 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Agency Insurance BB&T has the largest independent insurance agency network in the Carolinas. BB&T Insurance Services provides property and casualty, life and health insurance to businesses and individuals. It also provides small business and corporate products, such as workers compensation and professional liability, as well as provides surety coverage and title insurance. The Banking Network receives credit for insurance commissions on referred accounts, with the corresponding charge retained in the Corporate Office. These revenues and expenses are reflected in the accompanying tables as intersegment noninterest income and expense. Investment Banking and Brokerage BB&T's Investment Banking and Brokerage segment offers customers investment alternatives, including discount brokerage services, fixed-rate and variable- rate annuities, mutual funds and government and municipal bonds and various other investment products through BB&T Investment Services Inc., a subsidiary of BB&T-NC. The Investment Banking and Brokerage segment includes Scott & Stringfellow, Inc., a full-service brokerage and investment banking firm headquartered in Richmond, Virginia. Scott & Stringfellow specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Scott & Stringfellow also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional tax-exempt issuers. The Banking Network is credited for investment service revenues on referred accounts, with the corresponding charge retained in the Corporate Office. These revenues and expenses are reflected in the accompanying tables as intersegment noninterest income and expense. Treasury BB&T's Treasury segment is responsible for the management of the securities portfolios, overall balance sheet funding and liquidity, and overall management of interest rate risk. See the Market Risk Management section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information about the responsibilities of the Treasury segment. 103 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following tables disclose selected financial information for BB&T's reportable business segments:
For the Year Ended December 31, 1999 -------------------------------- -------------------------------------------------------------- Investment Total Banking Mortgage Trust Agency Banking All Other Segment Network Banking Services Insurance and Brokerage Treasury Segments(/1/) Results ----------- ---------- -------- --------- ------------- ----------- ------------- ----------- (Dollars in thousands) Net interest income (expense) from external customers $ 916,201 $ 422,910 $(33,668) $ -- $ 7,561 $ 162,459 $ 222,397 $ 1,697,860 Net intersegment interest income (expense) 327,072 (307,484) 42,197 -- -- (22,111) -- 39,674 ----------- ---------- -------- ------- -------- ----------- ---------- ----------- Net interest income 1,243,273 115,426 8,529 -- 7,561 140,348 222,397 1,737,534 ----------- ---------- -------- ------- -------- ----------- ---------- ----------- Provision for loan and lease losses 108,013 2,737 -- -- -- 90 16,631 127,471 Noninterest income from external customers 323,972 113,486 57,290 78,125 132,519 1,031 28,850 735,273 Intersegment noninterest income 123,549 -- -- -- -- -- -- 123,549 Noninterest expense 626,060 59,297 38,022 59,688 124,900 4,783 53,406 966,156 Intersegment noninterest expense 261,420 18,918 2,532 2,748 1,792 8,258 4,910 300,578 ----------- ---------- -------- ------- -------- ----------- ---------- ----------- Income before income taxes 695,301 147,960 25,265 15,689 13,388 128,248 176,300 1,202,151 Provision for income taxes 229,449 45,555 8,039 6,278 6,506 32,403 47,284 375,514 ----------- ---------- -------- ------- -------- ----------- ---------- ----------- Net income $ 465,852 $ 102,405 $ 17,226 $ 9,411 $ 6,882 $ 95,845 $ 129,016 $ 826,637 =========== ========== ======== ======= ======== =========== ========== =========== Identifiable segment assets $23,927,142 $5,597,514 $ 31,469 $63,873 $699,100 $11,510,760 $1,056,125 $42,885,983 =========== ========== ======== ======= ======== =========== ========== =========== --------------------------------------------- Other Reconciling Revenues and Items & Consolidated Expenses(/2/) Eliminations Totals ------------- ------------------ ------------ Net interest income (expense) from external customers $ 90,143 $ (206,288)(/4/) $ 1,581,715 Net intersegment interest income (expense) (12,170) (27,504)(/3/) -- ------------- ------------------ ------------ Net interest income 77,973 (233,792) 1,581,715 ------------- ------------------ ------------ Provision for loan and lease losses 5,690 (41,064)(/4/) 92,097 Noninterest income from external customers 15,721 10,362 (/4/) 761,356 Intersegment noninterest income -- (123,549)(/3/) -- Noninterest expense 288,278 92,470 (/4/) 1,346,904 Intersegment noninterest expense (60,682) (239,896)(/3/) -- ------------- ------------------ ------------ Income before income taxes (139,592) (158,489) 904,070 Provision for income taxes (45,814) (38,477)(/4/) 291,223 ------------- ------------------ ------------ Net income $ (93,778) $ (120,012) $ 612,847 ============= ================== ============ Identifiable segment assets $2,835,382 $(2,240,369)(/4/) $43,480,996 ============= ================== ============
- ---- (1) Financial data from segments below the quantitative thresholds requiring disclosure are attributable to a number of smaller operating segments. Those segments include BB&T's nonbank consumer finance operations, a factoring subsidiary, a subsidiary specializing in financing commercial lawn care equipment and a leasing company. (2) Other revenues and expenses include amounts incurred by BB&T's support functions not allocated to the various segments. Amounts include any unallocated provision for loan and lease losses and unallocated general corporate expenses, as well as costs associated with BB&T's Year 2000 compliance efforts. (3) BB&T's reconciliation of total segment results to consolidated results requires the elimination of the internal management accounting practices. These adjustments include the elimination of the FTP credits and charges, the elimination of the intersegment noninterest income described above and the elimination of intersegment noninterest expense allocated to the various segments. (4) To reflect elimination entries necessary to consolidate the segment data. 104 BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year Ended December 31, 1998 -------------------------------- ------------------------------------------------------------- Investment Total Banking Mortgage Trust Agency Banking All Other Segment Network Banking Services Insurance and Brokerage Treasury Segments(/1/) Results ----------- ---------- -------- --------- ------------- ---------- ------------- ----------- (Dollars in thousands) Net interest income (expense) from external customers $ 847,315 $ 409,944 $(33,717) $ -- $ 1,127 $ 126,762 $ 203,497 $ 1,554,928 Net intersegment interest income (expense) 286,820 (270,173) 37,989 -- -- (135) -- 54,501 ----------- ---------- -------- ------- -------- ---------- ---------- ----------- Net interest income 1,134,135 139,771 4,272 -- 1,127 126,627 203,497 1,609,429 ----------- ---------- -------- ------- -------- ---------- ---------- ----------- Provision for loan and lease losses 104,168 3,851 -- -- -- 103 20,557 128,679 Noninterest income from external customers 297,995 76,491 43,635 50,252 48,604 11,631 24,648 553,256 Intersegment noninterest income 150,672 -- -- -- -- -- -- 150,672 Noninterest expense 562,336 56,211 28,666 39,420 37,472 4,325 49,109 777,539 Intersegment noninterest expense 209,820 16,207 1,947 2,415 948 5,383 7,279 243,999 ----------- ---------- -------- ------- -------- ---------- ---------- ----------- Income before income taxes 706,478 139,993 17,294 8,417 11,311 128,447 151,200 1,163,140 Provision for income taxes 265,495 52,847 6,528 3,367 4,524 46,415 9,990 389,166 ----------- ---------- -------- ------- -------- ---------- ---------- ----------- Net income $ 440,983 $ 87,146 $ 10,766 $ 5,050 $ 6,787 $ 82,032 $ 141,210 $ 773,974 =========== ========== ======== ======= ======== ========== ========== =========== Identifiable segment assets $21,933,645 $6,274,100 $ 26,664 $40,262 $238,622 $9,417,056 $2,374,665 $40,305,014 =========== ========== ======== ======= ======== ========== ========== =========== --------------------------------------------- Other Reconciling Revenues and Items & Consolidated Expenses(/2/) Eliminations Totals ------------- ------------------ ------------ Net interest income (expense) from external customers $ 59,802 $ (188,077)(/4/) $ 1,426,653 Net intersegment interest income (expense) (12,238) (42,263)(/3/) -- ------------- ------------------ ------------ Net interest income 47,564 (230,340) 1,426,653 ------------- ------------------ ------------ Provision for loan and lease losses 1,829 (28,666)(/4/) 101,842 Noninterest income from external customers (30,172) 56,586 (/4/) 579,670 Intersegment noninterest income -- (150,672)(/3/) -- Noninterest expense 265,921 65,707 (/4/) 1,109,167 Intersegment noninterest expense (55,464) (188,535)(/3/) -- ------------- ------------------ ------------ Income before income taxes (194,894) (172,932) 795,314 Provision for income taxes (71,359) (65,704)(/4/) 252,103 ------------- ------------------ ------------ Net income $ (123,535) $ (107,228) $ 543,211 ============= ================== ============ Identifiable segment assets $1,651,609 $(2,486,488)(/4/) $39,470,135 ============= ================== ============
- ---- (1) Financial data from segments below the quantitative thresholds requiring disclosure are attributable to a number of smaller operating segments. Those segments include BB&T's nonbank consumer finance operations, a factoring subsidiary, a subsidiary specializing in financing commercial lawn care equipment and a leasing company. (2) Other revenues and expenses include amounts incurred by BB&T's support functions not allocated to the various segments. Amounts include any unallocated provision for loan and lease losses and unallocated general corporate expenses, as well as costs associated with BB&T's Year 2000 compliance efforts. (3) BB&T's reconciliation of total segment results to consolidated results requires the elimination of the internal management accounting practices. These adjustments include the elimination of the FTP credits and charges, the elimination of the intersegment noninterest income described above and the elimination of intersegment noninterest expense allocated to the various segments. (4) To reflect elimination entries necessary to consolidate the segment data. 105 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, as of March 14, 2000: BB&T CORPORATION (Registrant) /s/ John A. Allison, IV By: _________________________________ John A. Allison, IV Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 14, 2000. /s/ John A. Allison, IV By: _________________________________ John A. Allison, IV Chairman of the Board and Chief Executive Officer /s/ Scott E. Reed By: _________________________________ Scott E. Reed Senior Executive Vice President and Chief Financial Officer /s/ Sherry A. Kellett By: _________________________________ Sherry A. Kellett Senior Executive Vice President and Controller A Majority of the Directors of the Registrant are included. /s/ Paul B. Barringer By: _________________________________ Paul B. Barringer Director /s/ Alfred E. Cleveland By: _________________________________ Alfred E. Cleveland Director /s/ W. R. Cuthbertson, Jr. By: _________________________________ W. R. Cuthbertson, Jr. Director 106 /s/ Ronald E. Deal By: _________________________________ Ronald E. Deal Director /s/ A. J. Dooley, Sr. By: _________________________________ A. J. Dooley, Sr. Director /s/ Tom D. Efird By: _________________________________ Tom D. Efird Director /s/ Paul S. Goldsmith By: _________________________________ Paul S. Goldsmith Director /s/ Lloyd Vincent Hackley By: _________________________________ Lloyd Vincent Hackley Director /s/ Jane P. Helm By: _________________________________ Jane P. Helm Director /s/ Richard Janeway, M.D. By: _________________________________ Richard Janeway, M.D. Director /s/ J. Ernest Lathem, M.D. By: _________________________________ J. Ernest Lathem, M.D. Director /s/ James H. Maynard By: _________________________________ James H. Maynard Director By: _________________________________ Joseph A. McAleer, Jr. Director /s/ Albert O. McCauley By: _________________________________ Albert O. McCauley Director 107 /s/ Richard L. Player, Jr. By: _________________________________ Richard L. Player, Jr. Director /s/ C. Edward Pleasants, Jr. By: _________________________________ C. Edward Pleasants, Jr. Director /s/ Nido R. Qubein By: _________________________________ Nido R. Qubein Director /s/ E. Rhone Sasser By: _________________________________ E. Rhone Sasser Director /s/ Jack E. Shaw By: _________________________________ Jack E. Shaw Director /s/ Harold B. Wells By: _________________________________ Harold B. Wells Director 108 EXHIBIT INDEX
Exhibit No. Description Location ------- ----------- -------- 2(a) Agreement and Plan of Incorporated herein by Reorganization dated as of July 29, reference to Registration 1994 and amended and restated as of No. 33-56437. October 22, 1994 between the Registrant and BB&T Financial Corporation. 2(b) Plan of Merger as of July 29, 1994 Incorporated herein by as amended and restated on October reference to Registration 22, 1994 between the Registrant and No. 33-56437. BB&T Financial Corporation. 2(c) Agreement and Plan of Incorporated herein by Reorganization dated as of November reference to Exhibit 3(a) 1, 1996 between the Registrant and filed in the Annual Report on United Carolina Bancshares Form 10-K, filed March 17, Corporation, as amended. 1997. 2(d) Agreement of Plan of Reorganization Incorporated herein by dated as of October 29, 1997 reference to Registration between the Registrant and Life No. 33-44183. Bancorp, Inc. 2(e) Agreement and Plan of Incorporated herein by Reorganization dated as of February reference to Exhibit 99.1 6, 2000 between the Registrant and filed in the Current Report on One Valley Bancorp, Inc. Form 8-K, dated February 9, 2000. 3(a)(i) Amended and Restated Articles of Incorporated herein by Incorporation of the Registrant, as reference to Exhibit 3(a) amended. filed in the Annual Report on Form 10-K, filed March 17, 1997. 3(a)(ii) Articles of Amendment of Articles Incorporated herein by of Incorporation. reference to Exhibit 3(a)(ii) filed in the Annual Report on Form 10-K, filed March 18, 1998. 3(b) Bylaws of the Registrant, as Incorporated herein by amended. reference to Exhibit 3(b) filed in the Annual Report on Form 10-K, filed March 18, 1998. 4(a) Articles of Amendment to Amended Incorporated herein by and Restated Articles of reference to Exhibit 3(a) Incorporation of the Registrant filed in the Annual Report on related to Junior Participating Form 10-K, filed March 17, Preferred Stock. 1997. 4(b) Rights Agreement dated as of Incorporated herein by December 17, 1996 between the reference to Exhibit 1 filed Registrant and Branch Banking and under Form 8-A, filed Trust Company, Rights Agent. January 10, 1997. 4(c) Subordinated Indenture (including Incorporated herein by Form of Subordinated Debt Security) reference to Exhibit 4(d) of between the Registrant and State Registration No. 333-02899. Street Bank and Trust Company, Trustee, dated as of May 24, 1996.
109
Exhibit No. Description Location ------- ----------- -------- 4(d) Senior Indenture (including Form of Incorporated herein by Senior Debt Security) between the reference to Exhibit 4(c) of Registrant and State Street Bank and Registration No. 333-02899. Trust company, Trustee, dated as of May 24, 1996. 10(a)* Death Benefit Only Plan, Dated April Incorporated herein by 23, 1990, by and between Branch reference to Registration No. Banking and Trust Company (as 33-33984. successor to Southern National Bank of North Carolina) and L. Glenn Orr, Jr. 10(b)* BB&T Corporation Non-Employee Incorporated herein by Directors' Deferred Compensation and reference to Exhibit 10(b) of Stock Option Plan. the Annual Report on Form 10- K, filed March 17, 1997. 10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by Incentive Plan. reference to Registration No. 33-57865. 10(d)* Settlement and Non-Compete Agreement, Incorporated herein by dated February 28, 1995, by and reference to Registration No. between the Registrant and L. Glenn 33-56437. Orr, Jr. 10(e)* Settlement Agreement, Waiver and Incorporated herein by General Release dated September 19, reference to Registration No. 1994, by and between the Registrant, 33-56437. Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton. 10(f) BB&T Corporation 401(k) Savings Plan. Incorporated herein by reference to Registration No. 33-57867. 10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by Incentive Plan. reference to Exhibit 10(g) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(h)* Form of Branch Banking and Trust Incorporated by reference to Company Long-Term Incentive Plan. the identified exhibit under the Quarterly Report on Form 10-Q, filed May 14, 1991. 10(i)* Form of Branch Banking and Trust Incorporated by reference to Company Executive Incentive the identified exhibit under Compensation Plan. the Annual Report on Form 10- K, filed February 22, 1985. 10(j)* Southern National Deferred Incorporated herein by Compensation Plan for Key Employees. reference to Exhibit 10(j) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by reference to Exhibit 10(k) filed in the Annual Report on Form 10-K, filed March 17, 1997.
110
Exhibit No. Description Location ------- ----------- -------- 10(l)* BB&T Corporation Supplemental Incorporated herein by Executive Retirement Plan. reference to Exhibit 10(l) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(m)* Settlement and Noncompetition Incorporated herein by Agreement, dated July 1, 1997, by and reference to Exhibit 10(m) between the Registrant and E. Rhone filed in the Annual Report on Sasser. Form 10-K, filed March 18, 1998. 10(n)* BB&T Corporation Supplemental Defined Incorporated herein by Contribution Plan for Highly reference to Registration No. Compensated Employees. 333-69823. 10(o)* Scott & Stringfellow, Inc. Executive Incorporated herein by and Employee Retention Plan. reference to Registration No. 333-81471. 10(p)* BB&T Corporation Non-Qualified Defined Incorporated herein by Contribution Plan. reference to Registration No. 333-50035. 11 Statement re Computation of Earnings Filed herewith as Note R. of Per Share. the "Notes to Consolidated Financial Statements." 21 Subsidiaries of the Registrant. Filed herewith. 22 Proxy Statement for the 2000 Annual Future filing incorporated by Meeting of Shareholders. reference pursuant to the General Instruction G(3). 23(a) Consent of Independent Public Filed herewith. Accountants. 23(b) Opinion of Independent Public Filed herewith on page 53. Accountants. 27 Financial Data Schedule. Filed as an exhibit to the electronically-filed document as required.
- -------- * Management compensatory plan or arrangement. 111 EX-21 2 SUBSIDARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT BB&T Corporation, a North Carolina corporation, is a multi-bank holding company. The table below sets forth all of BB&T's subsidiaries as to State or Jurisdiction of Organization and Percentage of Voting Securities Owned as well as their relationship to BB&T. All of the subsidiaries listed below are included in the consolidated financial statements, and no separate financial statements are submitted for any subsidiary.
Percentage State or Jurisdiction of Voting Subsidiary of Organization Shares Owned - ---------- --------------------- ------------ Branch Banking and Trust Company North Carolina 100% BB&T Financial Corporation of South Carolina South Carolina 100% BB&T Financial Corporation of Virginia Virginia 100% Regional Acceptance Corporation North Carolina 100% Money 24, Inc. North Carolina 100% Scott & Stringfellow, Inc. Virginia 100% Scott & Stringfellow Realty, Inc. Virginia 100% Scott & Stringfellow Capital Management Virginia 100% Phillips Factors Corporation North Carolina 100% Refloat, Inc. North Carolina 100% Unified Investors Life Insurance Company Arizona 100% BB&T Bankcard Corporation Georgia 100% Grey Hawk, Inc. Nevada 100% First Citizens Bank of Georgia Georgia 100% First Citizens Bank (Newnan) Georgia 100% Carroll County Bank and Trust Company Maryland 100% Mason-Dixon Merger Sub, Inc. Maryland 100% Mason-Dixon Capital Trust Maryland 100% Mason-Dixon Capital Trust II Maryland 100% Mason-Dixon Business Services, LLC Maryland 100% Rose Shanis Financial Services, LLC Maryland 100% Buy Insurance, LLC Maryland 100% The Matewan National Bank West Virginia 100% Matewan Bank, FSB Kentucky 100% Matewan Venture Fund, Inc. West Virginia 100% First Liberty Bank Georgia 100% Liberty Properties Georgia 100% MainStreet Capital Trust Virginia 100% BB&T Savings Corporation North Carolina 100%(21) Franklin Community Development Corporation Washington, D.C. 100%(21) BB&T Leasing Corporation North Carolina 100%(1) BB&T Investment Services, Inc. North Carolina 100%(1) BB&T Insurance Services, Inc. North Carolina 100%(1) Grey Eagle, Inc. Delaware 100%(1) Prime Rate Premium Finance Corporation, Inc. South Carolina 100%(1) Agency Technologies, Inc. South Carolina 100%(1) Farr Associates, Inc. North Carolina 100%(1) AutoBase Information Systems, Inc. North Carolina 51%(1) W.E. Stanley, Inc. North Carolina 100%(1) BB&T Credit Participation Company Georgia 100%(1) BB&T Small Business Loan Company Maryland 100%(1) BB&T Service Corp Nevada 100%(1) Workmen's Service Corporation North Carolina 100%(1,21) First Savings Service Corporation North Carolina 100%(1,21) Fay-Charl Corporation North Carolina 100%(1,21) Peoples Service Corporation of Thomasville North Carolina 100%(1,21) Guaranty Financial Services, Inc. North Carolina 100%(1,21) North Carolina Trustee Company North Carolina 100%(1,21)
Percentage State or Jurisdiction of Voting Subsidiary of Organization Shares Owned - ---------- ---------------------- ------------ BT Financial Corporation North Carolina 100%(1,21) MASSLA Corporation Maryland 100%(1,21) 150 Corporation North Carolina 100%(1,21) Branch Banking and Trust Company of South Carolina South Carolina 100%(2) Investor Services, Inc. South Carolina 100%(4,21) FICORP of South Carolina South Carolina 100%(4,21) BB&T Realty Corporation North Carolina 100%(4,21) Branch Banking and Trust Company of Virginia Virginia 100%(3) Freedom Financial Services, Inc. Virginia 100%(5) Southside Services Corporation Virginia 100%(5,21) Century Mortgage Inc. Virginia 100%(5,21) Virginia First Investment Corp. Virginia 100%(5,21) Colony Financial Virginia 100%(5,21) Fidelity Service Corporation Virginia 100%(5,21) Life Financial Services Corporation Virginia 100%(5,21) Regional Acceptance Investment Corporation of Nevada Nevada 100%(7) Regu Insurance Services, Inc. North Carolina 100%(7) Greenville Car Mart, Inc. North Carolina 100%(7) Regional Fidelity Reinsurance Limited British Virgin Islands 99%(7) Mountain Financial Corporation Virginia 100%(6) National Mortgage Acceptance Corp Virginia 51%(6) Phillips Financial Corporation North Carolina 100%(8) Sheffield Financial Corporation North Carolina 100%(9) BB&T Loan Participation Company Georgia 100%(20) Newnan Financial Services, Inc. Georgia 100%(10) Citizens Mortgage Group, Inc. Georgia 100%(10) Arnall Insurance Agency Georgia 100%(11) Jefferson Ventures, Inc. Georgia 100%(11) Carrollco Insurance, Inc. Maryland 100%(12) Skylight Investment Corporation Delaware 100%(12) Bank of Maryland Maryland 100%(13) Sterling Title Holdings, Inc. Maryland 100%(14) Sterling I, Inc. Maryland 100%(15) Sterling III, Inc. Maryland 100%(15) Matewan Insurance and Investments, Inc. West Virginia 100%(16) Matewan Title Agency, LLC West Virginia 60%(17) Matewan Real Estate Holdings, Inc. West Virginia 100%(16) Matewan Realty Inc. West Virginia 100%(18) Green and Gold Investments Delaware 100%(19) OFC Capital Georgia 100%(19) Liberty Mortgage Corp Georgia 100%(19) First Freedom Investments Georgia 100%(19) First Freedom Insurance Agency Georgia 100%(19) New South Financial Services Georgia 100%(19)
- -------- (1)Owned by Branch Banking and Trust Company (North Carolina) (2)Owned by BB&T Financial Corporation of South Carolina (3)Owned by BB&T Financial Corporation of Virginia (4)Owned by Branch Banking and Trust Company of South Carolina (5)Owned by Branch Banking and Trust Company of Virginia (6)Owned by Scott & Stringfellow, Inc. (7)Owned by Regional Acceptance Corporation (8)Owned by Phillips Factors Corporation (9)Owned by Refloat, Inc. (10)Owned by First Citizens Bank (Newnan) (11)Owned by Newnan Financial Services, Inc. (12)Owned by Carroll County Bank and Trust (13) Owned by Mason-Dixon Merger Sub, Inc. (14) Owned by Bank of Maryland (15) Owned by Sterling Title Holdings, Inc. (16) Owned by The Matewan National Bank (17) Owned by Matewan Insurance and Investments, Inc. (18) Owned by Matewan Real Estate Holdings, Inc. (19) Owned by First Liberty Bank (20) Owned by BB&T Small Business Loan Company (21) Inactive EX-23.A 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into BB&T Corporation's previously filed Registration Statement File Nos. 33-57871, 33-52367, 33-57865, 33-57867 333-03989, 333-50035, 333-69823 and 333-81471 filed on Form S-8 and Registration Statement File Nos. 33-57859, 33-57861, 333-35879, 333-27755 and 333-02899 filed on Form S-3. Charlotte, North Carolina, March 14, 2000. EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,138,820 71,214 225,786 93,221 10,482,044 97,122 98,070 29,197,455 387,963 43,480,996 27,251,142 6,875,290 663,671 5,491,734 0 0 1,655,851 1,543,308 43,480,996 2,429,750 673,330 12,700 3,115,780 960,959 1,534,065 1,581,715 92,097 (5,131) 1,346,904 904,070 612,847 0 0 612,847 1.86 1.83 4.27 103,487 54,244 1,094 0 361,869 104,464 28,884 387,963 387,963 0 102,394
-----END PRIVACY-ENHANCED MESSAGE-----