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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 2000
Commission File Number: 1-10853
BB&T CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of principal executive offices) (Zip Code)
(336) 733-2000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of each exchange
Title of each class on which registered
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Common Stock, $5 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by references in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 2001, was approximately $14.8 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 2001, was
409,584,752. No shares of preferred stock were outstanding at January 31, 2001.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 24, 2001, are incorporated by reference in
Part III of this report.
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The Exhibit Index begins on page 107.
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CROSS REFERENCE INDEX
Page
------
PART I Item 1 Description of Business........................................ 5
Item 2 Properties..................................................... 18, 72
Item 3 Legal Proceedings.............................................. 87
Item 4 Submission of Matters to a Vote of Shareholders
None
PART II Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters............................................ 49
Item 6 Selected Financial Data........................................ 52
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 41, 94
Item 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 2000 and 1999...... 55
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2000...................... 56
Consolidated Statements of Changes in Shareholders' Equity for
each of the years in the three-year period ended December 31,
2000........................................................... 57
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 2000.................. 58
Notes to Consolidated Financial Statements..................... 59
Report of Independent Public Accountants....................... 54
Quarterly Financial Summary for 2000 and 1999.................. 51
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III Item 10 Directors and Executive Officers of the Registrant............. *, 19
Item 11 Executive Compensation......................................... *
Security Ownership of Certain Beneficial Owners and
Item 12 Management..................................................... *
2
Page
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Item 13 Certain Relationships and Related Transactions......... *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
(2) Financial Statement Schedules normally required on Form
10-K are omitted since they are not applicable, except
as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission
and are available upon written request.
(b) Current Reports on Form 8-K filed during the fourth
quarter of 2000
Type Date Filed Reporting Purpose
---- ---------- -----------------
Item 5. October 12, 2000 To report the financial results for BB&T
Corporation ("BB&T") for the third quarter
of 2000.
Item 5. October 26, 2000 To report that BB&T's board of directors
had authorized a program to repurchase up
to 20 million shares of BB&T common stock
to be reissued in purchase accounting
transactions.
Item 5. October 27, 2000 To restate BB&T's Annual Report on Form 10-
K for December 31, 1999 for the accounts of
One Valley Bancorp, Inc., Hardwick Holding
Company and First Banking Company of
Southeast Georgia.
Item 5. October 30, 2000 To issue supplemental financial
information, restated to include the
accounts of One Valley Bancorp, Inc.,
Hardwick Holding Company and First Banking
Company of Southeast Georgia.
Item 5. December 5, 2000 To report plans to acquire Century South
Banks, Inc., of Alpharetta, Georgia.
(c) Exhibits -- See Item 14(a)(3)
(d) Financial Statement Schedules -- See Item 14(a)(2)
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* The information required by Item 10 is incorporated herein by reference to
the information that appears under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by reference to
the information that appears under the headings "Compensation of Executive
Officers", "Retirement Plans" and "Compensation Committee Report on
Executive Compensation" in the Registrant's Proxy Statement for the 2001
Annual Meeting of Shareholders.
3
The information required by Item 12 is incorporated herein by reference to
the information that appears under the headings "Security Ownership" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders.
The information required by Item 13 is incorporated herein by reference to
the information that appears under the headings "Compensation Committee
Interlocks and Insider Participation" and "Transactions with Executive
Officers and Directors" in the Registrant's Proxy Statement for the 2001
Annual Meeting of Shareholders.
4
DESCRIPTION OF BUSINESS
General
BB&T Corporation ("BB&T" or "the Corporation") is a financial holding company
headquartered in Winston-Salem, North Carolina. BB&T conducts its business
operations through its subsidiaries primarily in North Carolina, South
Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky and
the metropolitan Washington, D.C. area.
Forward-Looking Statements
This report contains forward-looking statements with respect to the financial
condition, results of operations and business of BB&T. These forward-looking
statements involve risks and uncertainties and are based on the beliefs and
assumptions of the management of BB&T, and on the information available to
management at the time that these disclosures were prepared. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
increase significantly; (2) changes in the interest rate environment may reduce
margins; (3) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (4)
legislative or regulatory changes, including changes in accounting standards,
may adversely affect the businesses in which BB&T is engaged; (5) costs or
difficulties related to the integration of the businesses of BB&T and its
merger partners may be greater than expected; (6) expected cost savings
associated with pending mergers may not be fully realized or realized within
the expected time frame; (7) deposit attrition, customer loss or revenue loss
following pending mergers may be greater than expected; (8) competitors may
have greater financial resources and develop products that enable such
competitors to compete more successfully than BB&T; and (9) adverse changes may
occur in the securities markets.
Significant Subsidiaries
At December 31, 2000, the principal assets of BB&T included all of the
outstanding shares of common stock of:
. Branch Banking and Trust Company, Winston-Salem, North Carolina;
. Branch Banking and Trust Company of South Carolina, Greenville, South
Carolina;
. Branch Banking and Trust Company of Virginia, Richmond, Virginia;
. Hardwick Bank and Trust Company, Dalton, Georgia;
. First National Bank of Northwest Georgia, Calhoun, Georgia;
. First Bulloch Bank & Trust Company, Statesboro, Georgia;
. First National Bank of Effingham, Springfield, Georgia;
. Metter Banking Company, Metter, Georgia;
. Wayne National Bank, Jesup, Georgia;
. BankFirst, Knoxville, Tennessee;
. First National Bank and Trust Company of Athens, Athens, Tennessee;
. Regional Acceptance Corporation, Greenville, North Carolina;
. Scott & Stringfellow, Inc., Richmond, Virginia;
. Edgar M. Norris & Co., Inc., Greenville, South Carolina;
. Sheffield Financial Corporation, Clemmons, North Carolina; and
. BB&T Factors Corporation, High Point, North Carolina.
5
Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was
chartered in 1872 and is the oldest bank headquartered in North Carolina. At
December 31, 2000, BB&T-NC operated 335 banking offices in North Carolina, 53
in Maryland, six in Washington, D.C., 102 in Georgia, 85 in West Virginia, 32
in Tennessee, and ten banking offices in Kentucky. At December 31, 2000, BB&T-
NC held the largest share of deposits, excluding home office deposits, in North
Carolina, and the largest share of deposits in West Virginia. BB&T-NC's
principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North
Carolina, which specializes in lease financing to commercial businesses; BB&T
Investment Services, Inc., located in Charlotte, North Carolina, which offers
nondeposit investment alternatives, including fixed-rate and variable-rate
annuities, mutual funds and discount brokerage services; BB&T Insurance
Services, Inc., headquartered in Raleigh, North Carolina, which is the 11th
largest independent insurance agency network in the country; and W.E. Stanley,
Inc., an actuarial and employee benefits consulting firm headquartered in
Greensboro, North Carolina.
BB&T-NC has a number of additional subsidiaries including but not limited to
the following: Prime Rate Premium Finance Corporation, Inc. ("Prime Rate"),
located in Florence, South Carolina, which provides insurance premium financing
primarily to clients in BB&T's principal market area; and Laureate Capital
Corp. ("Laureate"), located in Charlotte, North Carolina. Laureate principally
specializes in arranging financing of commercial and multi-family real estate.
Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 90
banking offices at December 31, 2000. BB&T-SC is the third largest bank in
South Carolina in terms of deposit market share.
Branch Banking and Trust Company of Virginia ("BB&T-VA") operated 141 banking
offices in Virginia at December 31, 2000. BB&T-VA is the sixth largest bank in
Virginia in terms of deposit market share.
Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow") is an
investment banking and full-service brokerage firm headquartered in Richmond,
Virginia. On November 15, 2000, BB&T consummated the acquisition of Edgar M.
Norris & Co., a full-service brokerage firm based in Greenville, South
Carolina. Edgar M. Norris will be merged into Scott & Stringfellow in 2001.
Scott & Stringfellow and Edgar M. Norris together operated 23 full-service
brokerage offices in Virginia, one in West Virginia, eleven in North Carolina,
seven in South Carolina, one in Maryland, and one in Tennessee at December 31,
2000. Scott & Stringfellow specializes in the origination, trading and
distribution of fixed-income securities and equity products in both the public
and private capital markets. Scott & Stringfellow also has a public finance
department that provides investment banking, financial advisory and debt
underwriting services to a variety of regional tax-exempt issuers.
The primary services offered by BB&T's subsidiaries include:
. small business lending
. commercial middle market lending
. retail lending
. home equity lending
. sales finance
. mortgage lending
. leasing
. asset management
. trust services
6
. agency insurance
. treasury services
. investment and mutual fund sales
. capital markets
. factoring
. asset-based lending
. international banking services
. cash management
. electronic payment services
. credit and debit card services
7
The following table discloses selected financial information related to
BB&T's significant banking subsidiaries. Additionally, please see Note S. in
the "Notes to Consolidated Financial Statements" for further discussion
relating to BB&T's reportable business segments.
Table 1
Selected Financial Data of Significant Banking Subsidiaries
As of / For the Year Ended December 31, 2000
BB&T-NC BB&T-SC BB&T-VA
----------- ---------- ----------
(Dollars in thousands)
Total assets $46,991,799 $5,249,100 $6,254,434
Securities 12,557,947 389,331 564,472
Loans and leases, net of unearned income* 30,452,881 4,008,789 4,028,827
Deposits 28,540,937 3,952,819 4,877,131
Shareholder's equity 3,690,959 378,740 595,603
Net interest income 1,421,898 230,877 235,543
Provision for loan and lease losses 79,612 12,554 12,529
Noninterest income 633,992 55,306 23,704
Noninterest expense 1,323,816 125,123 178,203
Net income 458,903 95,175 42,122
As of / For the Year Ended December 31, 1999
BB&T-NC BB&T-SC BB&T-VA
----------- ---------- ----------
Total assets $41,060,416 $4,842,462 $6,550,666
Securities 10,196,460 477,705 1,681,540
Loans and leases, net of unearned income* 26,852,336 3,698,046 4,265,276
Deposits 25,765,790 3,686,484 4,563,833
Shareholder's equity 3,053,222 364,060 617,758
Net interest income 1,349,554 216,781 237,715
Provision for loan and lease losses 75,796 15,491 7,376
Noninterest income 700,251 68,473 59,324
Noninterest expense 1,228,596 126,689 180,430
Net income 519,577 91,059 68,756
As of / For the Year Ended December 31, 1998
BB&T-NC BB&T-SC BB&T-VA
----------- ---------- ----------
Total assets $36,404,453 $4,641,393 $6,669,554
Securities 9,067,377 783,727 1,607,902
Loans and leases, net of unearned income* 24,143,314 3,266,871 4,159,735
Deposits 25,131,437 3,702,383 4,636,337
Shareholder's equity 2,932,664 429,572 765,964
Net interest income 1,255,010 201,132 236,198
Provision for loan and lease losses 66,652 13,455 13,915
Noninterest income 570,295 71,945 59,549
Noninterest expense 1,059,878 119,224 176,466
Net income 489,572 89,653 66,155
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* Includes loans held for sale.
8
Merger Strategy
BB&T's profitability and market share have been enhanced through both
internal growth and acquisitions in recent years. BB&T's acquisition strategy
is focused on three primary objectives:
. to pursue in-market acquisitions of high-quality banks and thrifts with
assets in the $250 million to $10 billion range,
. to acquire companies in niche markets that provide products or services
that can be offered through the existing distribution system to BB&T's
current customer base, and
. to consider strategic acquisitions in new markets that are economically
feasible and provide positive long-term benefits.
BB&T has consummated the acquisitions of 48 community banks and thrifts, 47
insurance agencies and 14 nonbank financial services providers over the last
ten years. BB&T expects to continue to take advantage of the consolidation of
the financial services industry and expand and enhance its franchise through
mergers and acquisitions. The consideration paid for these acquisitions may be
in the form of cash, debt or BB&T stock. The amount of consideration paid to
complete these transactions may be in excess of the book value of the
underlying net assets acquired, which could have a dilutive effect on BB&T's
earnings per share or book value. In addition, acquisitions sometimes result in
significant front-end charges against earnings. However, cost savings,
especially incident to in-market acquisitions, are also anticipated.
Competition
The financial services industry is highly competitive and dramatic change
continues to occur. BB&T's subsidiaries compete actively with national and
state banks, savings and loan associations, securities dealers, mortgage
bankers, finance companies and insurance companies. Competition for financial
products and services continues to grow as clients select from a variety of
traditional and nontraditional alternatives. The industry continues to rapidly
consolidate which affects competition by eliminating some regional and local
institutions, while strengthening the franchise of acquirers. For additional
information concerning markets, BB&T's competitive position and business
strategies, see "Market Area" and "Lending Activities" below.
Market Area
BB&T's market area consists of North and South Carolina, Virginia, Maryland,
Georgia, eastern Tennessee, West Virginia, eastern Kentucky and Washington,
D.C. The area's employment base is diverse and primarily consists of
manufacturing, general services, agricultural, wholesale/retail trade,
technology and financial services. BB&T believes its current market area is
economically strong and will support consistent growth in assets and deposits
in the future. Even so, management intends to continue expanding the BB&T
franchise. Management strongly believes that BB&T's community bank approach to
providing client service is a competitive advantage which strengthens the
Corporation's ability to enter new markets and effectively provide products and
services to businesses and individuals in these markets.
Lending Activities
The primary goal of the BB&T lending function is to help clients achieve
their financial goals and secure their financial futures on terms that are fair
to the clients and profitable to the Corporation. This purpose can best be
accomplished by building strong, profitable client relationships over time,
with BB&T becoming an important contributor to the prosperity and well being of
their clients. BB&T's philosophy of lending is to attempt to meet all
legitimate business and consumer credit needs within defined market segments
where standards of profitability, growth and quality can be met. Based on
internal analyses, this philosophy has resulted in BB&T's loan portfolio
consistently outperforming the average of our national peers in terms of asset
quality, yield and rate of growth.
9
BB&T focuses lending efforts on small to intermediate commercial and
industrial loans, one-to-four family residential mortgage loans and consumer
loans. Typically, fixed-rate residential mortgage loans are sold in the
secondary mortgage market and adjustable-rate residential mortgages are
generally retained in the portfolio. Servicing rights on mortgage loans sold
are typically retained by BB&T. As of December 31, 2000, BB&T's total mortgage
servicing portfolio exceeded $23.6 billion. BB&T conducts the majority of its
lending activities in the context of the Corporation's community bank focus,
with lending decisions made as close to the client as practicable.
The following table summarizes BB&T's loan portfolio based on the source of
the underlying collateral, rather than the primary purpose of the loan.
Table 2
Composition of Loan and Lease Portfolio*
December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans and leases:
Commercial, financial
and agricultural $ 5,893,808 $ 5,382,373 $ 5,055,051 $ 4,602,571 $ 4,013,399
Lease receivables 4,453,589 2,606,002 1,620,326 788,462 576,991
Real estate--
construction and land
development 3,789,309 3,818,396 2,932,284 2,790,483 2,125,963
Real estate--mortgage 22,428,312 20,237,959 18,272,695 16,424,868 14,616,876
Consumer 5,368,810 4,589,510 4,035,015 3,952,321 3,997,544
----------- ----------- ----------- ----------- -----------
Loans and leases
held for investment 41,933,828 36,634,240 31,915,371 28,558,705 25,330,773
Loans held for sale 846,323 367,243 1,340,420 627,900 303,632
----------- ----------- ----------- ----------- -----------
Total loans and
leases $42,780,151 $37,001,483 $33,255,791 $29,186,605 $25,634,405
=========== =========== =========== =========== ===========
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* Balances include unearned income.
Mortgage Banking
BB&T is the largest originator of residential mortgage loans in the
Carolinas. Originations in 2000 were $4.7 billion. BB&T offers various types of
fixed- and adjustable-rate loans for the purpose of constructing, purchasing or
refinancing owner-occupied properties. Risks associated with the residential
lending function include interest rate risk, which is mitigated through the
sale of substantially all fixed-rate loans, and default risk by the borrower,
which is lessened through underwriting procedures and mortgage insurance. BB&T
also purchases mortgage loans from more than 100 correspondent originators. The
loans purchased from third-party originators are subject to the same
underwriting and risk management criteria as loans originated internally.
Commercial Lending
BB&T's commercial lending program is generally targeted to serve small-to-
middle market businesses with sales of $200 million or less, although in-house
limits do allow lending to larger customers, including national customers who
have business connections with the Corporation's geographically-served markets.
Commercial lending includes commercial, financial, agricultural, industrial and
real estate loans. Pricing on commercial loans, driven largely by competition,
is usually tied to market indexes, such as the prime rate, the London Interbank
Offer Rate ("LIBOR") or rates on U.S. Treasury securities. For the second time
in three years, BB&T received recognition from the U.S. Small Business
Administration as the #1 "small business friendly" bank in the United States.
Management believes that commercial lending to small and mid-sized businesses
is BB&T's strongest market, as BB&T has the largest market share in all types
of small business lending in the Carolinas.
10
Construction Lending
Real estate construction loans include twelve-month contract home
construction loans, which are intended to convert to permanent one-to-four
family residential mortgage loans upon completion of the construction. BB&T is
also in the commercial construction lending business. These loans are usually
to in-market developers, businesses, individuals or real estate investors for
the construction of commercial structures in BB&T's market area. They are made
for purposes including, but not limited to, the construction of industrial
facilities, apartments, shopping centers, office buildings, hotels and
warehouses. The properties may be constructed for sale, lease or owner-
occupancy.
Consumer Lending
BB&T offers a wide variety of consumer loan products. Various types of
secured and unsecured loans are marketed to qualifying, existing clients and to
other creditworthy candidates in BB&T's market area. Home equity loans and
lines are underwritten with note amounts and credit limits that ensure
consistency with the Corporation's policies. Numerous forms of unsecured loans,
including revolving credits (e.g. credit cards, checking account overdraft
protection and personal lines of credit) are provided and various installment
loan products, such as vehicle loans, are offered. As a home equity lender,
BB&T ranks third in portfolio size in the Southeast, and 12th nationwide.
Leasing
BB&T provides commercial leasing products and services through BB&T Leasing
Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary
products: finance or capital leases, true leases (as defined under the Internal
Revenue Code) and other operating leases for vehicles, rolling stock and
tangible personal property. Leasing also provides lease-related services for
small to medium-sized commercial customers. In addition, various other BB&T
subsidiaries provide leases to municipalities and invest in leveraged lease
transactions.
The following table presents BB&T's total loan portfolio based on the primary
purpose of the loan, rather than the underlying collateral:
Table 3
Composition of Loan and Lease Portfolio Based on Loan Purpose
December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Business loans $19,395,921 $16,668,979 $14,256,857 $14,055,066 $10,995,072
Lease receivables 2,100,956 1,508,396 992,684 616,302 470,456
----------- ----------- ----------- ----------- -----------
Total commercial
loans and leases 21,496,877 18,177,375 15,249,541 14,671,368 11,465,528
----------- ----------- ----------- ----------- -----------
Sales Finance 2,700,858 2,433,717 2,131,190 1,657,487 1,575,049
Revolving Credit 840,613 693,133 583,083 553,179 552,425
Direct Retail 7,407,112 6,701,607 5,705,966 5,020,877 5,482,505
----------- ----------- ----------- ----------- -----------
Total consumer loans 10,948,583 9,828,457 8,420,239 7,231,543 7,609,979
----------- ----------- ----------- ----------- -----------
Mortgage loans 7,855,174 7,749,397 8,860,821 6,773,779 6,353,609
----------- ----------- ----------- ----------- -----------
Total loans and
leases $40,300,634 $35,755,229 $32,530,601 $28,676,690 $25,429,116
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
11
The following table reflects the scheduled maturities of commercial,
financial and agricultural loans, as well as construction loans:
Table 4
Selected Loan Maturities and Interest Sensitivity (1)
December 31, 2000
------------------------------------
Commercial,
Financial
and Real Estate:
Agricultural Construction Total
------------ ------------ ----------
(Dollars in thousands)
Fixed rate:
1 year or less (2) $ 456,120 $ 566,502 $1,022,622
1-5 years 1,094,008 305,039 1,399,047
After 5 years 257,500 -- 257,500
---------- ---------- ----------
Total 1,807,628 871,541 2,679,169
========== ========== ==========
Variable rate:
1 year or less (2) 2,050,324 1,984,082 4,034,406
1-5 years 1,701,641 933,686 2,635,327
After 5 years 334,215 -- 334,215
---------- ---------- ----------
Total 4,086,180 2,917,768 7,003,948
---------- ---------- ----------
Total loans and leases (3) $5,893,808 $3,789,309 $9,683,117
========== ========== ==========
- --------
(1) Balances include unearned income
(2) Includes loans due on demand.
(Dollars in
thousands)
-----------
(3) This table excludes:
(i) consumer loans to individuals for household, family and
other personal expenditures $ 5,368,810
(ii)real estate mortgage loans 22,428,312
(iii)loans held for sale 846,323
(iv)lease receivables 4,453,589
-----------
$33,097,034
===========
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
BB&T's credit policy does not permit automatic renewals of loans. At the
scheduled maturity date (including balloon payment date), the customer must
request a new loan to replace the matured loan and execute a new note with
rate, terms and conditions negotiated at that time.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged against earnings. The level of the allowance
for loan and lease losses reflects management's estimate of losses incurred in
the portfolio as of the balance sheet date and is based on management's
evaluation of the risks inherent in the loan portfolio and changes in the
nature and volume of loan activity. Management's evaluation, which includes a
review of loans for which full collectibility may not be reasonably assured,
considers the loans' "risk grades," the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and
other current factors that warrant consideration in determining an adequate
allowance. BB&T's
12
objective is to maintain a loan portfolio that is diverse in terms of loan
type, industry concentration, geographic distribution and borrower
concentration in order to reduce overall credit risk by minimizing the adverse
impact of any single event or combination of related events.
Reserve Policy and Methodology
The allowance for loan and lease losses is composed of general reserves,
specific reserves and an unallocated reserve. General reserves are established
for the commercial loan portfolio using loss percentages that are determined
based on management's evaluation of the losses inherent in the various risk
grades of commercial loans. Commercial loans are categorized as one of ten risk
grades based on management's assessment of the overall credit quality of the
loan, including the payment history, the financial position of the borrower,
underlying collateral, internal credit reviews and the results of external
regulatory examinations. The general reserve percentages described above are
then applied to each risk grade to calculate the necessary allowance to cover
inherent losses in each risk category. The following table presents the risk
grades and reserve percentages applicable to each grade at December 31, 2000
and 1999:
Table 5
General Reserves for Commercial Loans
December 31, 2000 and 1999
Percentage of General
Commercial Loans Reserve
Risk Grade by Risk Grade Percentage
- ---------- ------------------ ------------
2000 1999 2000 1999
-------- -------- ----- -----
Risk 0 (Loans from recently acquired
institutions*) 1.22% 0.03% 1.30% 1.30%
Risk 1 (Superior Quality) 3.17 4.25 0.10 0.10
Risk 2 (High Quality) 14.41 16.13 0.20 0.20
Risk 3 (Very Good Quality--Normal Risk) 28.43 30.49 0.60 0.60
Risk 4 (Good Quality--Normal Risk) 33.76 32.27 1.30 1.30
Risk 5 (Acceptable Quality) 13.50 11.75 2.25 2.25
Risk 6 (Management Attention) 3.02 2.85 3.25 3.25
Risk 7 (Special Mention) 0.55 0.73 5.00 5.00
Risk 8 (Substandard) 1.91 1.48 15.00 15.00
Risk 9 (Doubtful) 0.03 0.02 50.00 50.00
- --------
* Acquired companies that had not been converted to BB&T's operating systems at
the dates indicated.
The general reserve percentages used have been determined by management to be
appropriate based primarily on historical loan losses and the level of risk
assumed for the various risk grades. The reserve percentages for Special
Mention, Substandard and Doubtful are based on the preferred rates used by
banking regulators, and the other risk grades are "stepped down" from these
percentages as loan quality improves.
The process of classifying commercial loans into the appropriate risk grades
is performed initially as a component of the approval of the loan by the
appropriate credit officer. Based on the size of the loan, senior credit
officers and/or the loan committee may review the classification to ensure
accuracy and consistency of classification. Loan classifications are frequently
reviewed by internal credit examiners to determine if any changes in the
circumstances of the loan require a different risk grade. To determine the most
appropriate risk grade classification for each loan, the credit officers
examine the borrower's liquidity level, the quality of any collateral, the
amount of the borrower's other indebtedness, cash flow, earnings, sources of
financing and existing lending relationships.
Specific reserves are provided on certain commercial loans that are
classified in the Special Mention, Substandard or Doubtful risk grades. The
specific reserves are determined on a loan-by-
13
loan basis based on management's evaluation of BB&T's loss exposure for each
credit, given the current payment status of the loan and the value of any
underlying collateral. Loans for which specific reserves are provided are
excluded from the general allowance calculations described above to prevent
redundant reserves. The calculations of specific reserves on commercial loans
also incorporate specific reserves based on the results of measuring impaired
loans pursuant to the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan."
SFAS No. 114, as amended, requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral-dependent.
A loan is impaired when, based on current information and events, it is
probable that BB&T will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When the measure of the impaired loan
is less than the recorded investment in the loan, the amount of the impairment
is recorded through a specific reserve. It is BB&T's policy to classify and
disclose all commercial loans greater than $300,000 that are on nonaccrual
status as impaired loans. Substantially all other loans made by BB&T are
excluded from the scope of SFAS No. 114 as they are comprised of large groups
of smaller balance homogeneous loans (e.g. residential mortgage and consumer
installment) that are collectively evaluated for impairment.
General reserves are provided for noncommercial loans based on a four-year
weighted average of actual loss experience of each major loan category, which
is then applied to the total outstanding loan balance of each loan category.
The weighted average loss experience for each category is determined as
follows: assigning a 40% weight to the most recent year's loss experience for
each category, a 30% weight to the loss ratio from two years ago, a 20% weight
to the loss ratio from three years ago, and the remaining 10% weight applied to
the loss ratio from four years ago. This methodology places greater emphasis on
more recent loss trends and, therefore, provides a self-correcting mechanism
for the differences between estimated and actual losses.
There are two primary components considered in determining an appropriate
level for the unallocated reserve. A portion of the unallocated reserve is
established to cover the elements of imprecision and estimation risk inherent
in the calculations of the general and specific reserves described above. The
remaining portion of the unallocated allowance is determined based on
management's evaluation of various conditions that are not directly measured by
any other component of the allowance, including current general economic and
business conditions affecting key lending areas, credit quality trends,
collateral values, loan volumes and concentrations, seasoning of the loan
portfolio, the findings of internal credit examinations and results from
external bank regulatory examinations.
While management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the allowance or to
the reserving methodology may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations or, if
required by regulators, based upon information at the time of their
examinations. Such adjustments to original estimates, as necessary, are made in
the period in which these factors and other relevant considerations indicate
that loss levels may vary from previous estimates.
The following table discloses an allocation of the allowance for loan and
lease losses at the end of each of the past five years. The allowance has been
allocated applying the methodologies described above to the loan portfolios
based on the underlying purpose of the loans. Amounts applicable to years prior
to 2000 have been restated for acquisitions accounted for as poolings of
interests. The allowances for acquired companies that have been converted to
BB&T's operating systems have been allocated to the various loan categories
based on historic percentages applicable to BB&T's loan categories. This
allocation of the allowance for loan and lease losses is calculated on an
approximate basis and is not necessarily indicative of future losses. The
entire amount of the allowance is available to absorb losses occurring in any
category of loans and leases.
14
Table 6
Allocation of Allowance for Loan and Lease Losses by Category
December 31,
------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ----------------- -----------------
% Loans % Loans % Loans % Loans % Loans
in each in each in each in each in each
Amount category Amount category Amount category Amount category Amount category
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Business loans and
leases $ 295,918 53% $247,005 51% $212,472 47% $191,337 50% $169,256 45%
--------- --- -------- --- -------- --- -------- --- -------- ---
Direct Retail 20,665 19 23,174 19 19,041 18 16,769 18 12,935 22
Sales Finance 28,058 7 30,620 7 27,701 7 29,082 6 22,418 6
Revolving Credit 25,901 2 26,664 2 25,805 2 20,093 2 13,973 2
--------- --- -------- --- -------- --- -------- --- -------- ---
Total Consumer 74,624 28 80,458 28 72,547 27 65,944 26 49,326 30
--------- --- -------- --- -------- --- -------- --- -------- ---
Mortgage 2,700 19 2,420 21 3,533 26 2,757 24 2,647 25
Recently Acquired
Subsidiaries* 27,112 -- 11,952 -- 11,538 -- 11,178 -- 11,017 --
Unallocated 121,606 -- 135,461 -- 142,251 -- 117,651 -- 113,865 --
--------- --- -------- --- -------- --- -------- --- -------- ---
Total $ 521,960 100% $477,296 100% $442,341 100% $388,867 100% $346,111 100%
========= === ======== === ======== === ======== === ======== ===
- --------
* Acquired companies that had not been converted to BB&T's operating systems at
the dates indicated.
Table 7
Analysis of Allowance for Loan and Lease Losses
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of
period $ 477,296 $ 442,341 $ 388,867 $ 346,111 $ 320,599
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural (23,943) (29,147) (18,765) (24,094) (16,793)
Real estate (15,775) (17,192) (13,831) (16,226) (13,306)
Consumer (86,892) (75,146) (80,989) (82,495) (59,862)
Lease receivables (3,502) (993) (1,167) (671) (768)
----------- ----------- ----------- ----------- -----------
Total charge-offs (130,112) (122,478) (114,752) (123,486) (90,729)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural 11,066 11,994 9,269 8,138 10,454
Real estate 3,136 4,146 4,153 5,882 7,171
Consumer 19,897 16,056 14,499 11,455 10,868
Lease receivables 312 107 425 232 136
----------- ----------- ----------- ----------- -----------
Total recoveries 34,411 32,303 28,346 25,707 28,629
----------- ----------- ----------- ----------- -----------
Net charge-offs (95,701) (90,175) (86,406) (97,779) (62,100)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense 127,431 114,433 114,729 123,096 77,919
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions 12,934 10,697 25,151 17,439 9,693
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 521,960 $ 477,296 $ 442,341 $ 388,867 $ 346,111
=========== =========== =========== =========== ===========
Average loans and
leases* $37,569,941 $33,904,694 $30,543,475 $27,100,788 $24,438,883
Net charge-offs as a
percentage of average
loans and leases .25% .27% .28% .36% .25%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
15
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessed collateral. It is BB&T's policy to place
commercial loans and leases on nonaccrual status when full collection of
principal and interest becomes doubtful, or when any portion of principal or
interest becomes 90 days past due, whichever occurs first. When loans are
placed on nonaccrual status, interest receivable is reversed against interest
income in the current period and any prior year interest is charged off against
the allowance for loan and lease losses. Interest payments received thereafter
are applied as a reduction of the remaining principal balance so long as doubt
exists as to the ultimate collection of the principal. Loans and leases are
removed from nonaccrual status when they become current as to both principal
and interest and when the collectibility of principal or interest is no longer
doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual
status when full collection of principal and interest becomes doubtful, or they
become delinquent for a specified period of time.
Investment Activities
BB&T maintains a portion of its assets as investment securities. BB&T's
subsidiary banks are allowed to invest and deal in securities as prescribed by
bank regulations. These securities include all obligations of the U.S.
Treasury, agencies of the U.S. government, obligations of any state or
political subdivision, various types of corporate debt, mutual funds, limited
types of equity securities and certain derivative securities. Scott &
Stringfellow, BB&T's full-service brokerage and investment banking subsidiary,
is permitted to engage in the underwriting, trading and sales of equity and
debt securities subject only to the risk management policies of the
Corporation.
BB&T's investment activities are governed internally by a written, board-
approved policy. Investment policy is carried out by the Corporation's
Asset/Liability Committee ("ALCO") which meets regularly to review the economic
environment, assess current activities for appropriateness and establish
investment strategies. The ALCO also has much broader responsibilities, which
are discussed in "Market Risk Management", and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following goals: (i) to provide a
sufficient margin of liquid assets to meet unanticipated deposit and loan
fluctuations and overall funds management objectives; (ii) to provide eligible
securities to secure public funds and trust deposits as prescribed by law; and
(iii) to earn the maximum return on funds invested that is commensurate with
meeting the requirements of (i) and (ii).
16
The following table provides information regarding the composition of BB&T's
securities portfolio at the end of each of the past three years. Note that
BB&T's trading securities, reflected in the accompanying table, represent
positions held primarily by Scott & Stringfellow.
Table 8
Composition of Securities Portfolio
December 31,
-----------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
Trading Securities (at estimated fair
value): $ 96,719 $ 93,221 $ 60,422
----------- ----------- -----------
Securities held to maturity (at
amortized cost):
U.S. Treasury, government and agency
obligations 33,739 23,184 59,823
States and political subdivisions 35,535 379,822 533,371
Mortgage-backed securities -- -- 71,663
Other securities -- 1,891 8,786
----------- ----------- -----------
Total securities held to maturity 69,274 404,897 673,643
----------- ----------- -----------
Securities available for sale (at
estimated fair value):
U.S. Treasury, government and agency
obligations 8,815,848 5,588,786 4,924,593
States and political subdivisions 953,379 615,878 229,343
Mortgage-backed securities 2,562,917 4,257,004 4,605,457
Other securities 1,449,719 1,796,154 1,414,361
----------- ----------- -----------
Total securities available for sale 13,781,863 12,257,822 11,173,754
----------- ----------- -----------
Total securities $13,947,856 $12,755,940 $11,907,819
=========== =========== ===========
Sources of Funds
Deposits are the primary source of funds for lending and investing
activities. Scheduled loan payments and maturities and prepayments from
portfolios of loans and investment securities also provide a stable source of
funds. Federal Home Loan Bank ("FHLB") advances, Federal funds purchased and
other short-term borrowed funds, as well as longer-term debt issued through the
capital markets, all provide supplemental liquidity sources.
Deposits
Deposits are attracted principally from clients within BB&T's market area
through the offering of a broad selection of deposit instruments including
noninterest-bearing checking accounts, interest-bearing checking accounts,
savings accounts, money rate savings, certificates of deposit and individual
retirement accounts. Deposit account terms vary with respect to the minimum
balance required, the time period the funds must remain on deposit and service
charge schedules. Interest rates paid on specific deposit types are set by the
ALCO and are determined based on (i) the interest rates offered by competitors,
(ii) anticipated amount and timing of funding needs, (iii) availability of and
cost of alternative sources of funding and (iv) anticipated future economic
conditions and interest rates. Client deposits are attractive sources of
liquidity because of their stability, relative cost and the ability to generate
fee income through service charges and the cross-sale of other services.
17
Table 9
Scheduled Maturities of Time Deposits $100,000 and Greater
December 31, 2000
(Dollars in thousands)
Maturity Schedule
Less than three months $1,546,922
Three through six months 1,013,942
Seven through twelve months 1,124,876
Over twelve months 1,308,131
----------
Total $4,993,871
==========
Other Borrowed Funds
BB&T's ability to borrow funds through nondeposit sources provides additional
flexibility in meeting the liquidity needs of customers. Components of short-
term borrowed funds at year end were master notes, securities sold under
repurchase agreements, short-term FHLB advances, Federal funds purchased and
U.S. Treasury tax and loan depository note accounts. See Note H. in the "Notes
to Consolidated Financial Statements" for additional disclosures related to
short-term borrowed funds. The following table summarizes certain pertinent
information for the past three years with respect to BB&T's short-term borrowed
funds:
Table 10
Short-Term Borrowings
As of / For the Year Ended
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Maximum outstanding at any month-end
during the year $8,111,010 $8,101,034 $6,851,348
Balance outstanding at end of year 6,956,696 7,971,873 4,815,734
Average outstanding during the year 6,684,688 6,270,755 5,255,111
Average interest rate during the year 6.01% 4.89% 5.20%
Average interest rate at end of year 6.12 4.28 4.82
BB&T also utilizes longer-term borrowings when management determines that the
pricing and maturity options available through these sources create more cost-
effective options for funding asset growth and satisfying capital needs. BB&T's
long-term borrowings include capitalized leases, medium term bank notes, long-
term FHLB advances, subordinated debt issued by BB&T Corporation and trust
preferred securities. See Note I. in the "Notes to Consolidated Financial
Statements" for additional disclosures related to long-term borrowings.
Employees
At December 31, 2000, BB&T had approximately 17,500 full-time equivalent
employees compared to approximately 13,700 full-time equivalent employees at
December 31, 1999, on an originally-reported basis.
Properties
BB&T and its significant subsidiaries occupy headquarters offices that are
either owned or operated under long-term leases, and also own free-standing
operations centers, with its primary operations and information technology
center located in Wilson, North Carolina. BB&T also owns or
18
leases significant office space used as the Corporation's headquarters in
Winston-Salem, North Carolina. At December 31, 2000, BB&T's subsidiary banks
operated 854 branch offices in the Carolinas, Virginia, Maryland, Georgia, West
Virginia, Tennessee, eastern Kentucky and Washington, D.C. Branch office
locations are variously owned or leased. Management believes that the premises
occupied by BB&T and its subsidiaries are well-located and suitably equipped to
serve as financial services facilities. See Note F. "Premises and Equipment" of
the "Notes to Consolidated Financial Statements" in this report for additional
disclosures related to BB&T's properties and other fixed assets.
Executive Officers of BB&T
BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr.
Allison is 52 and has 30 years of service with the Corporation. Henry G.
Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr.
Williamson is 53 and has 29 years of service with the Corporation. Kelly S.
King is the President of BB&T Corporation and is the Senior Executive Vice
President for the Branch Network. Mr. King is 52 and has 29 years of service
with the Corporation. W. Kendall Chalk is the Senior Executive Vice President
for the Lending Group. Mr. Chalk is 55 and has served the Corporation for 26
years. Scott E. Reed is a Senior Executive Vice President and the Corporation's
Chief Financial Officer. Mr. Reed is 52 and has 29 years of service with the
Corporation. Robert E. Greene is the President of Branch Banking and Trust
Company and is the Senior Executive Vice President for Administrative Services
for the Corporation. Mr. Greene is 52 and has served the Corporation for 28
years. Sherry A. Kellett is a Senior Executive Vice President and the
Corporation's Controller. Ms. Kellett is 56 and has 16 years of service with
the Corporation. C. Leon Wilson is a Senior Executive Vice President and is the
Corporation's Operations Division Manager. Mr. Wilson is 45 and has served BB&T
for 24 years.
19
REGULATORY CONSIDERATIONS
General
As a bank holding company and, effective June 14, 2000, a financial holding
company under the Gramm-Leach-Bliley Act of 1999, BB&T is subject to regulation
under the Bank Holding Company Act of 1956, as amended, (the "BHCA") and the
examination and reporting requirements of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). As state-chartered commercial
banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the "State-Chartered Banks")
are subject to regulation, supervision and examination by state bank regulatory
authorities in their respective home states. These authorities include the
North Carolina Commissioner of Banks, in the case of BB&T-NC, the South
Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia
State Corporation Commission's Bureau of Financial Institutions, in the case of
BB&T-VA. Each of the State-Chartered Banks is also subject to regulation,
supervision and examination by the Federal Deposit Insurance Corporation (the
"FDIC"). At December 31, 2000, BB&T also operated eight financial institutions
that were subsidiaries of bank holding companies acquired by BB&T during 2000
(the "Acquired Banks") that will be merged into either BB&T-NC, BB&T-SC or
BB&T-VA, as appropriate, during 2001. These banks include Hardwick Bank and
Trust Company, First National Bank of Northwest Georgia, First Bulloch Bank &
Trust Company, First National Bank of Effingham, Metter Banking Company, Wayne
National Bank, BankFirst, and First National Bank and Trust Company. Hardwick
Bank and Trust Company, First Bulloch Bank & Trust Company, and Metter Banking
Company are state-chartered banks subject to supervision by the Georgia
Department of Banking and Finance; BankFirst is a state-chartered bank subject
to supervision by the State of Tennessee Department of Financial Institutions;
First National Bank of Northwest Georgia, First National Bank of Effingham,
Wayne National Bank, and First National Bank and Trust Company are Federally-
chartered banks subject to regulation, supervision and examination by the U.S.
Office of the Comptroller of the Currency (the "OCC"). In addition to the state
regulators discussed herein, each of the Acquired Banks that is state-chartered
is also subject to regulation, supervision, and examination by the FDIC.
(References herein to the "Banks" include these Acquired Banks and the State-
Chartered Banks). State and Federal law also govern the activities in which the
Banks engage, the investments they make and the aggregate amount of loans that
may be granted to one borrower. Various consumer and compliance laws and
regulations also affect the Banks' operations.
In addition to banking laws, regulations and regulatory agencies, BB&T and
certain of its subsidiaries and affiliates are subject to various other laws
and regulations and supervision and examination by other state and federal
regulatory agencies. These include the regulation, examination and supervision
of BB&T's subsidiaries and affiliates engaged in securities underwriting,
dealing, brokerage, investment advisory activities and insurance activities.
The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are
affected by general economic conditions, management policies, changes in state
and Federal legislation and actions of various regulatory authorities,
including those referred to above. The following description summarizes the
significant state and Federal laws to which BB&T and the Banks are subject. To
the extent statutory or regulatory provisions or proposals are described, the
description is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
The Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act" or the "Act"), signed into
law on November 12, 1999, amended a number of Federal banking laws that affect
BB&T and its subsidiary banks, and the provisions of the Act that are believed
to be of most significance to BB&T are discussed below. In particular, the GLB
Act permits a bank holding company to elect to become a
20
financial holding company. In order to become and maintain its status as a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating. BB&T filed an election
and on June 14, 2000, became a financial holding company.
Under the BHCA, a bank holding company, including a financial holding
company, may not directly or indirectly acquire ownership or control of more
than 5% of the voting shares or substantially all of the assets of any bank or
merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve Board. The BHCA, as amended by the GLB Act, now
generally limits the activities of a bank holding company that is a financial
holding company to that of banking, managing or controlling banks; performing
certain servicing activities for subsidiaries; and engaging in any activity, or
acquiring and retaining the shares of any company engaged in any activity, that
is either (1) financial in nature or incidental to such financial activity, as
determined by the Federal Reserve Board in consultation with the Secretary of
the Treasury; or (2) complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally, as determined by the Federal Reserve Board.
Activities that are "financial in nature" include those activities that the
Federal Reserve Board had determined, by order or regulation in effect prior to
enactment of the GLB Act, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The GLB Act covers a broad range of issues, including a repeal of most of the
restrictions on affiliations among depository institutions, securities firms
and insurance companies. In particular, the GLB Act repeals sections 20 and 32
of the Glass-Stegall Act, thus permitting unrestricted affiliations between
banks and securities firms. The Act also provides that, while the states
continue to have the authority to regulate insurance activities, in most
instances they are prohibited from preventing or significantly interfering with
the ability of a bank, directly or through an affiliate, to engage in insurance
sales, solicitations or cross-marketing activities. A financial holding
company, therefore, may engage in or acquire companies that engage in a broad
range of financial services, including securities activities such as
underwriting, dealing, brokerage, investment and merchant banking; and
insurance underwriting, sales and brokerage activities. Although the states
generally must regulate bank insurance activities in a nondiscriminatory
manner, the states may continue to adopt and enforce rules that specifically
regulate bank insurance activities in certain areas identified in the Act. The
Act directs the Federal bank regulatory agencies to adopt insurance consumer
protection regulations that apply to sales practices, solicitations,
advertising and disclosures, and such regulations have been adopted and will
become effective April 1, 2001.
The GLB Act includes a system of functional regulation under which the
Federal Reserve Board is confirmed as the umbrella regulator for bank holding
companies, but bank holding company affiliates are to be principally regulated
by functional regulators such as the FDIC for state nonmember bank affiliates,
the Securities and Exchange Commission for securities affiliates and state
insurance regulators for insurance affiliates. The Act repealed the broad
exemption of banks from the definitions of "broker" and "dealer" for purposes
of the Securities Exchange Act of 1934, but identifies a set of specific
activities, including traditional bank trust and fiduciary activities, in which
a bank may engage without being deemed a "broker", and a set of activities in
which a bank may engage without being deemed a "dealer". The Act also makes
conforming changes in the definitions of "broker" and "dealer" for purposes of
the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
The GLB Act contains extensive customer privacy protection provisions. Under
these provisions, a financial institution must provide to its customers, at the
inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third
21
parties unless the institution discloses to the customer that such information
may be so provided and the customer is given the opportunity to opt out of such
disclosure. An institution may not disclose to a non-affiliated third party,
other than to a consumer reporting agency, customer account numbers or other
similar account identifiers for marketing purposes. The Act also provides that
the states may adopt customer privacy protections that are more strict than
those contained in the Act. The Act also makes a criminal offense, except in
limited circumstances, obtaining or attempting to obtain customer information
of a financial nature by fraudulent or deceptive means. The Act also contains
requirements for the posting of notices by operators of automated teller
machines regarding fees charged for the use of such machines.
Many of the GLB Act's provisions, including the customer privacy protection
provisions, require the Federal bank regulatory agencies and other regulatory
bodies to adopt regulations to implement those respective provisions. Most of
the required implementing regulations have been proposed and/or adopted by the
bank regulatory agencies as of December 31, 2000. Neither the provisions of the
GLB Act nor the Act's implementing regulations as proposed or adopted have had
a material impact on BB&T's or the Banks' regulatory capital ratios or well
capitalized status (as discussed below) or ability to continue to operate in a
safe and sound manner.
Payment of Dividends
BB&T is a legal entity separate and distinct from its subsidiaries. The
majority of BB&T's revenue is from dividends paid to BB&T by its banking
subsidiaries. BB&T's banking subsidiaries are subject to laws and regulations
that limit the amount of dividends they can pay. In addition, both BB&T and its
banking subsidiaries are subject to various regulatory restrictions relating to
the payment of dividends, including requirements to maintain capital at or
above regulatory minimums. Banking regulators have indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fully fund the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition. BB&T does not expect that any of these laws,
regulations or policies will materially affect the ability of the Banks to pay
dividends. During the year ended December 31, 2000, the Banks declared $578.0
million in dividends payable to BB&T.
Capital
The Federal Reserve Board, the FDIC and the OCC have issued substantially
similar risk-based and leverage capital guidelines applicable to banking
organizations they supervise. Additionally as noted above, under the Gramm-
Leach-Bliley Act of 1999, a bank holding company that elects to become a
financial holding company must be well-managed, have at least a satisfactory
Community Reinvestment Act rating, and be well-capitalized. Under the risk-
based capital requirements, BB&T and the Banks are each generally required to
maintain a minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) of 8%.
At least half of the total capital must be composed of common equity, retained
earnings and qualifying perpetual preferred stock, less certain intangibles
("Tier 1 capital"). The remainder may consist of certain subordinated debt,
certain hybrid capital instruments, qualifying preferred stock and a limited
amount of the loan loss allowance ("Tier 2 capital" which, together with Tier 1
capital, composes "total capital"). The ratios of Tier 1 capital and total
capital to risk-adjusted assets for BB&T and the subsidiary banks as of
December 31, 2000, are shown in the following table.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations must maintain a minimum ratio of Tier
1 capital to adjusted average quarterly assets equal to 3% to 5% subject to
federal bank regulatory evaluation of an organization's overall safety
22
and soundness. The leverage ratios of BB&T and the subsidiary banks as of
December 31, 2000, also are reflected in the following table.
Table 11
Capital Adequacy Ratios of BB&T Corporation and Principal Banking Subsidiaries
December 31, 2000
Regulatory
Minimums to
Regulatory be Well- BB&T- BB&T- BB&T-
Minimums Capitalized BB&T NC SC VA
---------- ----------- ---- ----- ----- -----
Risk-based capital ratios:
Tier 1 capital (1) 4.0% 6.0% 9.3% 9.6% 9.0% 10.2%
Total risk-based capital
(2) 8.0 10.0 12.0 10.7 10.2 11.4
Tier 1 leverage ratio (3) 3.0 5.0 7.1 6.9 7.4 7.4
- --------
(1) Shareholders' equity less nonqualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a percentage of fourth quarter average assets
less nonqualifying intangibles.
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), among other
things, identifies five capital categories for insured depository institutions:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. As of December 31, 2000, BB&T
and each of the Banks are classified as "well capitalized". FDICIA also
requires the bank regulatory agencies to implement systems for "prompt
corrective action" for institutions that fail to meet minimum capital
requirements within these five categories, with progressively more severe
restrictions on operations, management and capital distributions according to
the category in which an institution is placed. Failure to meet capital
requirements can also cause an institution to be directed to raise additional
capital. FDICIA also mandates that the agencies adopt safety and soundness
standards relating generally to operations and management, asset quality and
executive compensation, and authorizes administrative action against an
institution that fails to meet such standards.
In addition, the Federal Reserve Board, the FDIC and the OCC each by
regulation has adopted risk-based capital standards that explicitly identify
concentrations of credit risk and the risk arising from non-traditional
activities, as well as an institution's ability to manage these risks, as
important factors to be taken into account by each agency in assessing an
institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agency as a
factor in evaluating a banking organization's capital adequacy.
In addition to the "prompt corrective action" directives, failure to meet
capital guidelines can subject a banking organization to a variety of other
enforcement remedies, including additional substantial restrictions on its
operations and activities, termination of deposit insurance by the FDIC, and
under certain conditions the appointment of a conservator or receiver.
Deposit Insurance Assessments
The deposits of the Banks are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, a portion of the Banks' deposits (relating to
23
the acquisitions of various savings associations) are subject to assessments
imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured
deposits effective January 1, 1998. The assessments imposed on all FDIC
deposits for deposit insurance have an effective rate ranging from 0 to 27
basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. Legislation was enacted in 1997
requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion
of the interest due on the obligations issued by the Financing Corporation
("FICO"). The FDIC currently assesses BIF-insured and SAIF-insured deposits an
additional 1.96 basis points per $100 of deposits to cover those obligations.
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is insolvent or is in danger of becoming
insolvent. For example, under requirements of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the insolvency of
commonly controlled insured depository institutions or for any assistance
provided by the FDIC to commonly controlled insured depository institutions in
danger of failure. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement under the cross
guarantee provisions is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and nonaffiliated holders of subordinated debt of
the commonly controlled insured depository institutions.
State banking regulators and the OCC also have broad enforcement powers over
the Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator (with the approval of the Governor in
the case of North Carolina) in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state bank
in certain circumstances, including, among other things, when it appears that
such bank has violated its charter or any applicable laws, is conducting its
business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
Interstate Banking and Branching
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1998, a bank
headquartered in one state was authorized to merge with a bank headquartered in
another state, as long as neither of the states had opted out of such
interstate merger authority prior to such date, and subject to any state
requirement that the target bank shall have been in existence and operating for
a minimum period of time, not to exceed five years; and certain deposit market-
share limitations. After a bank has established branches in a state through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where a bank headquartered in that state
could have established or acquired branches under applicable Federal or state
law.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of the consolidated financial condition
and consolidated results of operations of BB&T Corporation and subsidiaries
("BB&T" or the "Corporation") for each of the three years in the period ended
December 31, 2000, and related financial information, are presented in
conjunction with the consolidated financial statements and related notes to
assist in the evaluation of BB&T's 2000 performance.
Stock Split
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend paid
August 3, 1998. All references to the number of common shares and all per share
amounts contained herein have been adjusted, as appropriate, to retroactively
reflect the stock split.
Reclassifications
In certain circumstances, reclassifications have been made to prior period
information to conform to the 2000 presentation.
Mergers and Acquisitions Completed during 2000
On January 13, 2000, BB&T completed its merger with Premier Bancshares, Inc.
("Premier"), based in Atlanta, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 16.8 million shares of common stock in
exchange for all of the outstanding common and preferred shares of Premier.
On June 13, 2000, BB&T completed its merger with Hardwick Holding Company
("Hardwick"), based in Dalton, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 3.9 million shares of common stock in
exchange for all of the outstanding common shares of Hardwick.
On June 15, 2000, BB&T completed its merger with First Banking Company of
Southeast Georgia ("First Banking"), of Statesboro, Georgia. The transaction
was accounted for as a pooling of interests. BB&T issued 4.1 million shares of
common stock in exchange for all of the outstanding common shares of First
Banking.
On July 6, 2000, BB&T completed its merger with One Valley Bancorp, Inc.
("One Valley") of Charleston, West Virginia. The transaction was accounted for
as a pooling of interests. In conjunction with the merger, BB&T issued 43.1
million shares of common stock in exchange for all of the outstanding common
shares of One Valley.
On September 29, 2000, BB&T completed its acquisition of Laureate Capital
Corp. ("Laureate"), a commercial mortgage banking firm based in Charlotte,
North Carolina. The transaction was accounted for as a purchase.
On November 15, 2000, BB&T completed its acquisition of Edgar M. Norris & Co.
("Edgar Norris"), a brokerage firm based in Greenville, South Carolina. The
transaction was accounted for as a purchase.
25
On December 27, 2000, BB&T completed its acquisition of BankFirst Corporation
("BankFirst") of Knoxville, Tennessee. To consummate the transaction, which was
accounted for as a purchase, BB&T issued 5.3 million shares of common stock in
exchange for all of the outstanding common and preferred shares of BankFirst.
BB&T recorded goodwill totaling $71.0 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
Mergers and Acquisitions Pending at December 31, 2000
On July 27, 2000, BB&T announced plans to acquire FCNB Corp. ("FCNB") of
Frederick, Maryland. FCNB has $1.6 billion in assets and operates 34 banking
offices primarily in Frederick and Montgomery counties in central Maryland. The
transaction, which was accounted for as a pooling of interests, was consummated
on January 7, 2001. BB&T issued 8.7 million shares of common stock in exchange
for all of the outstanding common shares of FCNB. The financial statements
presented herein have not been restated to reflect the accounts of FCNB.
On September 6, 2000, BB&T announced plans to acquire FirstSpartan Financial
Corp. ("FirstSpartan") of Spartanburg, South Carolina. FirstSpartan has $591
million in assets and operates eleven banking offices in Spartanburg and
Greenville counties. The transaction, which was accounted for as a purchase,
was consummated on March 2, 2001. BB&T issued 3.8 million shares of common
stock in exchange for all of the outstanding common shares of FirstSpartan.
BB&T recorded goodwill totaling $46.0 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
On December 5, 2000, BB&T announced plans to merge with Century South Banks
Inc. ("Century South") of Alpharetta, Georgia. Century South has $1.6 billion
in assets and operates 40 banking offices in Georgia, North Carolina,
Tennessee, and Alabama. Shareholders of Century South will receive .93 shares
of BB&T common stock in exchange for each share of Century South common stock
held. The transaction, which is expected to be accounted for as a pooling of
interests, is planned for completion in the second quarter of 2001.
On January 24, 2001, BB&T announced plans to acquire Virginia Capital
Bancshares Inc. ("VCAP") of Fredericksburg, Virginia. VCAP has $532.7 million
in assets and operates four banking offices in the Washington-Baltimore
combined metropolitan statistical area. Shareholders of VCAP will receive
between .4958 and .6060 shares of BB&T common stock depending on a pricing
period prior to the VCAP shareholders' meeting to vote on the proposed merger.
The transaction, which is expected to be accounted for as a purchase, is
planned for completion in the second quarter of 2001.
On January 24, 2001, BB&T announced plans to merge with F&M National
Corporation ("F&M") of Winchester, Virginia. F&M has $4 billion in assets and
operates 163 banking offices, 13 mortgage banking offices, three trust offices,
and six insurance offices. Shareholders of F&M will receive 1.09 shares of BB&T
common stock in exchange for each share of F&M common stock held. The
transaction, which is expected to be accounted for as a pooling of interests,
is planned for completion in the third quarter of 2001.
Analysis of Financial Condition
BB&T's average assets totaled $55.0 billion for the year ended December 31,
2000, an increase of $4.1 billion, or 8.1%, compared to the 1999 average of
$50.9 billion. The major balance sheet categories with increases in average
balances were: loans and leases, up $3.7 billion, or 10.8%, and securities,
which increased $173.6 million, or 1.3%. Total other earning assets decreased
$122.7 million, or 28.2%, compared to 1999. Total earning assets averaged $51.3
billion in 2000, an increase of
26
$3.7 billion, or 7.8%, compared to 1999. The primary components of growth in
average total earning assets were commercial loans and leases, which increased
$2.6 billion, or 15.2%, and consumer loans, which increased $1.1 billion, or
13.0%. These increases were partially offset by a $129.5 million, or 1.7%
decrease in average mortgage loans compared to 1999.
BB&T's average deposits totaled $35.9 billion, reflecting growth of $2.2
billion, or 6.4%, compared to 1999. The categories of deposits with the highest
growth rates were money rate savings, which increased $994.0 million, or 11.3%,
noninterest-bearing deposits, which increased $210.7 million, or 4.5%, and
domestic time deposits, which increased $688.9 million, or 4.3%. The growth
realized in these areas was offset by declines in savings and interest checking
of $558.5 million, or 17.4%.
BB&T has increasingly utilized nondeposit funding sources in recent years to
support balance sheet growth. Short-term borrowed funds include federal funds
purchased, securities sold under repurchase agreements, master notes and
Federal Home Loan Bank ("FHLB") advances. Average short-term borrowed funds
totaled $6.7 billion for the year ended December 31, 2000, an increase of
$414.0 million, or 6.6%, over the 1999 average. BB&T has also utilized long-
term debt based on the flexibility and cost-effectiveness of the alternatives
available. Long-term funding sources also include FHLB advances, subordinated
debt issued by the Corporation and subordinated notes issued by the subsidiary
banks. Average long-term debt totaled $7.3 billion for 2000, up $1.2 billion,
or 18.9%, compared to 1999, with the majority of the increase comprised of FHLB
advances.
The compound annual rate of growth in average total assets for the five-year
period ended December 31, 2000, was 9.8%. Over the same five-year period,
average loans and leases increased at a compound annual rate of 10.6%,
securities increased at a compound annual rate of 7.5%, and deposits grew at a
compound annual rate of 6.9%. All growth rates have been enhanced by
acquisitions accounted for as purchases, as well as by internal growth.
Securities
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a duration of five years or less to
provide greater flexibility in balance sheet management in changing interest
rate environments. U.S. Treasury securities and U.S. government agency
obligations, excluding mortgage-backed securities, comprised 63.4% of the
portfolio at December 31, 2000, and provided improved yields compared to 1999.
These securities had an average duration of 2.5 years at December 31, 2000.
Mortgage-backed securities, which composed 18.4% of the total investment
portfolio at year-end 2000, also provided improved yields compared to 1999, and
generally have longer durations than BB&T's other investments. Total securities
increased 9.3% in 2000, to a total of $13.9 billion at the end of the year.
BB&T holds trading securities as a normal part of its operations. At December
31, 2000, BB&T had trading securities totaling $96.7 million that are reflected
on BB&T's consolidated balance sheet. Market valuation gains and losses in
BB&T's trading portfolio are reflected in current earnings.
Securities held to maturity, which are composed of investments in obligations
of states and municipalities, as well as investments in U.S. Treasuries, made
up less than 1% of the total portfolio at December 31, 2000. Securities held to
maturity are carried at amortized cost and totaled $69.3 million at December
31, 2000, compared to $404.9 million outstanding at the end of 1999. Market
valuation gains and losses in the Corporation's held-to-maturity category
affect neither earnings nor capital. The held-to-maturity portfolio had a net
unrealized gain of $.5 million at December 31, 2000.
Securities available for sale totaled $13.8 billion at year-end 2000 and are
carried at estimated fair value. The available-for-sale portfolio is primarily
composed of investments in U.S. Treasuries, government agency obligations and
mortgage-backed securities. The available-for-sale portfolio also
27
contains investments in obligations of states and municipalities, which
composed 6.9% of the available-for-sale portfolio, and equity and other
securities, which comprised 10.5% of the available-for-sale portfolio.
During the second and third quarters of 2000, BB&T restructured the
available-for-sale securities portfolio. This restructuring was undertaken to
improve the overall yield of the portfolio, improve the liquidity, and reduce
the average duration of the portfolio. BB&T sold $5.9 billion of U.S.
Treasuries, obligations of U.S. government agencies, and mortgage-backed
securities. BB&T incurred approximately $222 million in pretax losses as a
result of these sales. The proceeds from these sales were reinvested in higher
yielding securities, primarily obligations of U.S. government agencies. The
restructuring improved the yield on the restructured portion of the portfolio
by 133 basis points, from 6.31% to 7.64%. Management expects to recover the
losses incurred over a three-year period through increased interest income
generated as a result of the restructuring. As of December 31, 2000, the
securities purchased as part of the restructuring had unrealized pretax gains
of $203.0 million.
The following table presents BB&T's securities portfolio by category
disclosing maturities and average yields.
Table 12
Securities
December 31, 2000
---------------------
Carrying Average
Value Yield (3)
----------- ---------
(Dollars in
thousands)
U.S. Treasury,
government and agency
obligations (1):
Within one year $ 322,915 6.63%
One to five years 4,962,833 7.35
Five to ten years 3,830,162 7.63
After ten years 2,296,594 6.99
----------- ----
Total 11,412,504 7.35
----------- ----
States and political
subdivisions:
Within one year 26,773 7.48
One to five years 163,319 7.63
Five to ten years 500,284 7.55
After ten years 298,538 7.52
----------- ----
Total 988,914 7.55
----------- ----
Other securities:
Within one year 5,393 6.35
One to five years 20,928 7.00
Five to ten years 10,280 6.75
After ten years 88,711 6.75
----------- ----
Total 125,312 6.77
----------- ----
Securities with no
stated maturity 1,421,126 5.80
----------- ----
Total securities (2) $13,947,856 7.20%
=========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $2.6 billion classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, a more realistic average maturity would be substantially
shorter because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $69.3 million carried at amortized
cost, and securities available for sale and trading securities carried at
estimated fair values of $13.8 billion and $96.7 million, respectively.
(3) Taxable equivalent basis as applied to amortized cost.
28
The available-for-sale portfolio composed 98.8% of total securities at
December 31, 2000. Management believes that the high concentration of
securities in the available-for-sale portfolio allows greater flexibility in
the day-to-day management of the overall portfolio than the held-to-maturity
classification.
The market value of the available-for-sale portfolio at year-end 2000 was
$175.0 million greater than the amortized cost of these securities. At December
31, 2000, BB&T's available-for-sale portfolio had net unrealized appreciation,
net of deferred income taxes, of $103.5 million, which is reported as a
separate component of shareholders' equity. At December 31, 1999, the
available-for-sale portfolio had net unrealized depreciation of $309.4 million,
net of deferred taxes. The net unrealized gains recorded in the available-for-
sale portfolio at year-end 2000 reflect the results of the portfolio
restructuring undertaken during the year.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 7.00% for the year ended December 31, 2000, compared to 6.57% for the prior
year. The increase in the FTE yield reflects higher yields earned on U.S.
Treasuries, agency obligations and mortgage-backed securities due to the
successful restructuring of the portfolio. The yield on U.S. Treasury and
government agency obligations increased from 6.51% in 1999 to 7.02% in 2000,
while the yield on mortgage-backed securities increased from 6.49% to 6.90% and
the FTE yield on state and municipal securities decreased from 7.65% last year
to 7.49% in the current year. As previously mentioned, the restructuring
improved the yield on the restructured portion of the portfolio by 133 basis
points, which contributed significantly to the overall securities yield.
Loans and Leases
BB&T continued to enjoy strong loan growth during 2000, with end of period
loans, excluding loans held for sale, increasing $4.1 billion, or 11.5%, as
compared to 1999. Average total loans and leases for 2000 increased $3.7
billion, or 10.8%, as compared to 1999.
Commercial and consumer loan portfolios grew at a much faster rate than
mortgage loans during 2000, which reflected a slow-down in the mortgage market
due to rising interest rates as well as the securitization of a part of the
existing mortgage portfolio. BB&T acquired a number of community banks and
thrift institutions in recent years, which resulted in a significant percentage
of the consolidated loan portfolio being composed of mortgages. Also, BB&T is
the largest originator of mortgage loans in the Carolinas. Through the use of
securitization programs and sales of fixed-rate mortgage loan originations,
combined with BB&T's commercial and consumer lending focus, the mix of the loan
portfolio has changed in recent periods compared to prior years. The change in
the weighting of the portfolio to a higher percentage of commercial and
consumer loans and a lower percentage of mortgage loans has had a positive
effect on the overall yield of the portfolio. Average mortgage loans decreased
$129.5, million or 1.7%, in 2000 as compared to 1999, and represented 20.2% of
average total loans, compared to 22.7% a year ago. Average commercial loans,
including lease receivables, increased 15.2% in 2000 as compared to 1999, and
now compose 52.2% of the loan portfolio, compared to 50.2% in 1999. Average
consumer loans, which includes sales finance, revolving credit and direct
retail, increased $1.2 billion, or 13.2%, for the year ended December 31, 2000
as compared to the same period in 1999 and compose the remaining 27.6% of
average loans.
The growth rates of average loans in the current year were affected by loan
portfolios held by companies that were acquired during 2000 and accounted for
as purchases. Also, the securitization of $304.8 million of mortgage loans
during 1999 and $984.5 million in 2000 affected the reported growth in average
mortgage loans. During 2000, loans totaling $612.7 million were acquired
through the purchase of BankFirst Corporation ("BankFirst"). Excluding the
effect of these purchase accounting transactions and the loan securitizations,
average "internal" loan growth for the year ended
29
December 31, 2000, was 11.9% compared to 1999. Excluding the effects of
purchase accounting transactions and loan securitizations, average mortgage
loans, including loans held for sale, increased 7.1%, commercial loans grew
14.7%, and consumer loans increased 10.5% in 2000 as compared to 1999.
The combination of the change in loan mix to a higher percentage of
commercial and consumer loans, the growth of the overall loan portfolio and the
increase in the yield of the portfolio, from 8.79% for the twelve months of
1999 to 9.34% in 2000, resulted in a 17.2% increase in interest income from
loans and leases in the current year. The average annualized fully taxable
equivalent ("FTE") yields on commercial, consumer and mortgage loans for 2000
were 9.56%, 10.14%, and 7.73%, respectively. The 55 basis point increase in the
average yield on loans resulted from the aforementioned more profitable mix of
loan portfolio and generally higher interest rates prevalent during 2000,
including a higher average prime rate, compared to 1999. For the year ended
2000, the prime rate, which is the basis for pricing many commercial and
consumer loans, averaged 9.24%, compared to 8.00% for 1999.
Asset Quality
BB&T's asset quality remained excellent at December 31, 2000. Nonperforming
assets totaled $193.5 million at year-end, as compared to $152.6 million in
1999, an increase of 26.8%. Nonaccrual and restructured loans and leases at
year-end 2000 increased to $150.5 million, or 24.7%, over 1999, while assets
acquired through foreclosure and repossession increased to $43.0 million, an
increase of 34.9% over 1999. As a percentage of total assets, nonperforming
assets were .33% at December 31, 2000, compared to .29% at the end of 1999. As
a percentage of loans plus foreclosed properties, nonperforming assets totaled
.48% at December 31, 2000, compared to .43% at the end of 1999. The allowance
for loan and lease losses, as a percentage of loans and leases, was 1.30% at
December 31, 2000, compared to 1.33% at year-end 1999. Loans 90 days or more
past due and still accruing interest increased to $72.3 million at year-end
2000 compared to $60.0 million at December 31, 1999. Net charge- offs as a
percentage of average loans and leases also improved during 2000, decreasing to
.25% from .27% in 1999.
30
The following table reflects relevant asset quality information for BB&T for
the past three years.
Table 13
Asset Quality
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Nonaccrual loans and leases* $149,945 $118,975 $119,138
Restructured loans 492 1,681 3,744
Foreclosed property 43,033 31,894 37,231
-------- -------- --------
Nonperforming assets $193,470 $152,550 $160,113
======== ======== ========
Loans 90 days or more past due and still
accruing $ 72,256 $ 59,974 $ 63,316
======== ======== ========
Asset Quality Ratios:
Nonaccrual and restructured loans and leases
as a percentage of loans and leases .37% .34% .38%
Nonperforming assets as a percentage of:
Total assets .33 .29 .33
Loans and leases plus foreclosed property .48 .43 .49
Net charge-offs as a percentage of average
loans and leases .25 .27 .28
Allowance for losses as a percentage of loans
and leases 1.30 1.33 1.37
Ratio of allowance for losses to:
Net charge-offs 5.45x 5.29x 5.12x
Nonaccrual and restructured loans and leases 3.47 3.96 3.60
- --------
NOTE: Items referring to loans and leases are net of unearned income and
include loans held for sale.
* Includes $42.7 million, $39.1 million and $50.7 million of impaired loans at
December 31, 2000, 1999 and 1998, respectively. See Note D in the "Notes to
Consolidated Financial Statements."
Allowance for Loan and Lease Losses
BB&T's allowance for loan and lease losses totaled $522.0 million at December
31, 2000, compared to $477.3 million at the end of 1999, an increase of 9.4%.
As a percentage of loans and leases outstanding, the allowance decreased from
1.33% at December 31, 1999, to 1.30% at the end of 2000, as a result of
continued strong asset quality. The ratio of the allowance to net charge-offs
increased from 5.29 times for 1999 to 5.45 times in 2000.
BB&T provides specific allowances for certain business loans and lease
receivables and provides general allowances for all types of loans to provide
for losses inherent in the loan portfolios. As disclosed in Table 5 in
"Description of Business," the general reserve percentages applied to the
various risk grades of commercial loans did not change from 1999 to 2000,
reflecting management's determination that the overall risk associated with
each risk grade did not change substantially during 2000. As is also visible in
the table, the percentages of commercial loans in each risk grade did not
significantly change from 1999 to 2000. Specific reserves are typically
provided on all loans classified as Special Mention, Substandard or Doubtful.
The general reserve percentages disclosed in Table 5 are applied to the
commercial loan balances in each risk grade to determine the total general
reserves on commercial loans and lease receivables. Please refer to the
discussion preceding and following Table 5 for BB&T's reserve policy and
methodology.
General reserves established to cover losses inherent in noncommercial loan
categories are derived based on a weighted average of actual loan losses over
the last four years. Thus, these rates
31
change each year based on trends in actual observed loan losses. To calculate
the reserve rate applied to each category, a weight of 40% is given to the most
current year's loan loss percentage. A weight of 30% is applied to the loan
loss ratio from two years ago, a 20% weight to the loss ratio from three years
ago, and the remaining 10% weight is applied to the loan loss percentage from
four years ago. The resulting reserves are applied to the outstanding loan
balances at period end to determine the total general reserves on noncommercial
loans. Specific reserves may be established for noncommercial loans as
considered necessary.
Recently acquired subsidiaries are considered separately for purposes of
calculating the allowance for loan losses. At December 31, 2000, these
subsidiaries included Hardwick Holding Company and First Banking Company of
Southeast Georgia, which were acquired in June, 2000 and accounted for as
poolings of interests, and BankFirst Corporation, which was acquired in
December, 2000 and accounted for as a purchase. These recently acquired
subsidiaries, which have not yet been converted to BB&T's operating systems,
are considered separately because the related loans have not yet been subjected
to BB&T's credit monitoring policies and procedures, nor have they been
assigned a BB&T risk grade. Management considers historical loan loss
experience in determining reserves for these subsidiaries. Also, evidence
gathered during due diligence performed in connection with the mergers is
considered in calculating the reserve. At December 31, 2000 and 1999, these
subsidiaries had $1.3 billion and $637.7 million in total loans outstanding,
respectively, and related reserves totaling $27.1 million and $12.0 million,
respectively.
The unallocated allowance totaled $121.6 million at December 31, 2000, down
from $135.5 million, or 10.2%, from the unallocated balance at December 31,
1999, as restated for business combinations accounted for as poolings of
interests. The unallocated allowance was 23.3% of the total allowance at 2000,
compared to 28.4% in 1999. Due to the effects of mergers and acquisitions,
which in many cases had higher relative allowance levels than BB&T in the
period preceding completion of the transaction, together with BB&T's continued
strong credit quality, the overall allowance as a percentage of outstanding
loans and leases decreased slightly, from 1.33% of total loans and leases at
December 31, 1999, to 1.30% of total loans at year-end 2000. As a result of the
methodology utilized by BB&T in restating prior year allowance allocations for
merged companies, the portion of these companies' allowance considered
unallocated for periods prior to 2000 is typically higher in relation to their
total allowance than that of BB&T. This contributed to the decline in this
element of the allowance at year-end 2000 compared to 1999.
Please refer to Table 6 in the "Description of Business" section, which
reflects BB&T's allowance allocations for the last five years.
Management does not believe that the level of risk inherent in the categories
of the portfolio at year-end 2000 changed substantially compared to year-end
1999. Because of this, there were no changes in the estimation methods or
fundamental assumptions used in the calculations. The higher outstanding
balance of commercial loans and lower balance of mortgage loans at December 31,
2000, compared to year-end 1999, resulted in the fluctuations in specific and
general reserves applicable to those loan types. There were no reallocations of
the allowance from 1999, nor were there any significant changes in asset
quality trends other than as discussed in "Asset Quality."
Deposits and Other Borrowings
Client deposits generated through the BB&T branch network are the largest
source of funds to support loan and other asset growth. Core deposits compose
BB&T's primary source of funding; however, as depositors have sought greater
returns on their investment growth rates of core deposits have not kept pace
with asset growth. Therefore, nondeposit funding sources have increasingly been
used to fund balance sheet growth.
Total deposits at December 31, 2000, were $38.0 billion, an increase of $3.9
billion, or 11.3%, compared to year-end 1999. The increase in deposits was
driven by a 15.9% increase in money rate savings accounts, a 17.9% increase in
certificates of deposit and other time deposits, and a 4.5% increase in
noninterest-bearing deposits. For the year ended December 31, 2000, total
deposits
32
averaged $35.9 billion, an increase of $2.2 billion, or 6.4%, compared to 1999.
This increase was led by a 4.5% increase in average noninterest-bearing
deposits and an 11.3% increase in money rate savings accounts. These increases
were offset by a 17.4% decrease in average savings and interest-checking
accounts. Other time deposits, including individual retirement accounts and
certificates of deposit, increased 8.9% on average in 2000 and remain BB&T's
largest category of average deposits, comprising 51.7% of average total
deposits.
The average rates paid on interest-bearing deposits increased during 2000 to
4.77% from 4.14% in 1999. The increase resulted from higher average rates paid
on most major categories of interest-bearing deposits. The average rate paid on
certificates of deposit and other time deposits increased from 5.16% in 1999 to
5.82% in the current year and the average cost of money rate savings increased
from 2.97% to 3.63% in 2000. These increases were offset somewhat by decreases
in the average cost of interest-checking from 1.93% to 1.77% and savings
deposits from 1.88% to 1.61%.
BB&T also uses various types of short-term borrowed funds to supplement
deposits in order to fulfill funding needs. The types of short-term borrowings
utilized by the Corporation include Federal funds purchased, which composed
20.0% of total short-term borrowed funds and securities sold under repurchase
agreements, which comprised 37.3% of short-term borrowed funds at year-end
2000. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank
notes and short-term Federal Home Loan Bank ("FHLB") advances are also utilized
to meet short-term funding needs. Average short-term borrowed funds totaled
$6.7 billion during 2000, an increase of $413.9 million, or 6.6%, from 1999,
while short-term borrowed funds at year-end 2000 were $7.0 billion, an decrease
of $1.0 billion, or 12.7%, compared to year-end 1999. The rates paid on average
short-term borrowed funds increased from 4.89% in 1999 to 6.01% during 2000.
The increase in the cost of short-term borrowed funds resulted from the higher
interest rate environment during 2000, resulting in a 127 basis point increase
in the average Federal funds rate for 2000.
BB&T also utilizes long-term debt to provide both funding and, to a lesser
extent, regulatory capital. Total outstanding long-term debt at December 31,
2000, totaled $8.4 billion, an increase of $2.3 billion, or 37.6%, from year-
end 1999. After long-term rates peaked in May, BB&T systematically added longer
term debt in order to take advantage of declining rates. For the year ended
December 31, 2000, average long-term debt increased $1.2 billi