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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 1999
Commission File Number: 1-10853
BB&T CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of Principal Executive Offices) (Zip Code)
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
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Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $5 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by references in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 2000, was approximately $9.2 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 2000, was
331,442,010. No shares of preferred stock were outstanding at January 31, 2000.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 25, 2000, are incorporated by reference in
Part III of this report.
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The Exhibit Index begins on page 109.
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CROSS REFERENCE INDEX
Page
------
PART I Item 1 Business 4
Item 2 Properties 18, 76
Item 3 Legal Proceedings 90
Item 4 Submission of Matters to a Vote of Shareholders 2
None.
PART II Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 48-49
Item 6 Selected Financial Data 51
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Quantitative and Qualitative Disclosures About
Item 7A Market Risk 40
Item 8 Financial Statements and Supplementary Data 50
Consolidated Balance Sheets at December 31, 1999 and 54
1998
Consolidated Statements of Income for each of the
years in the three-year period ended December 31,
1999 55
Consolidated Statements of Changes in Shareholders'
Equity for each of the years in the three-year
period ended December 31, 1999 56
Consolidated Statements of Cash Flows for each of
the years in the three-year period ended December
31, 1999 57
Notes to Consolidated Financial Statements 58
Report of Independent Public Accountants 53
Quarterly Financial Summary for 1999 and 1998 50
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.
None.
PART III Item 10 Directors and Executive Officers of the Registrant *, 18
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and *
Management
2
Page
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Item 13 Certain Relationships and Related Transactions *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form
10-K are omitted since they are not applicable, except
as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission
and are available upon written request.
(b) Current Reports on Form 8-K filed during the fourth
quarter of 1999.
Type Date Filed Reporting Purpose
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Item 5. October 12, 1999 To report the results of operations and
financial condition for the 3rd Quarter of
1999.
Item 5. November 17, 1999 To report plans to acquire Hardwick
Holding Company of Dalton, Georgia.
Item 5. December 15, 1999 To report plans to acquire First Banking
Company of Southeast Georgia.
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* The information required by Item 10 is incorporated herein by reference to
the information that appears under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by reference to
the information that appears under the headings "Compensation of Executive
Officers", "Retirement Plans" and "Compensation Committee Report on
Executive Compensation" in the Registrant's Proxy Statement for the 2000
Annual Meeting of Shareholders.
The information required by Item 12 is incorporated herein by reference to
the information that appears under the headings "Security Ownership" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.
The information required by Item 13 is incorporated herein by reference to
the information that appears under the headings "Compensation Committee
Interlocks and Insider Participation" and "Transactions with Executive
Officers and Directors" in the Registrant's Proxy Statement for the 2000
Annual Meeting of Shareholders.
3
DESCRIPTION OF BUSINESS
General
BB&T Corporation ("BB&T" or "the Corporation") is a multi-bank holding
company headquartered in Winston-Salem, North Carolina. BB&T conducts its
operations in North Carolina, South Carolina, Virginia, Maryland, Georgia,
West Virginia, Kentucky and the metropolitan Washington, D.C. area.
At December 31, 1999, the principal assets of BB&T included all of the
outstanding shares of common stock of:
. Branch Banking and Trust Company, of Winston-Salem, North Carolina;
. BB&T Financial Corporation of South Carolina, located in Greenville,
South Carolina, which in turn owns all the outstanding shares of Branch
Banking and Trust Company of South Carolina;
. BB&T Financial Corporation of Virginia, which in turn owns all the
outstanding shares of Branch Banking and Trust Company of Virginia;
. First Citizens Bank of Georgia, of Newnan, Georgia;
. Carroll County Bank and Trust Company, of Westminster, Maryland;
. The Matewan National Bank, of Williamson, West Virginia;
. First Liberty Bank, of Macon, Georgia;
. Regional Acceptance Corporation, of Greenville, North Carolina;
. Scott & Stringfellow, Inc., of Richmond, Virginia;
. Refloat Incorporated, of Mount Airy, North Carolina; and
. BB&T Factors Corporation, of High Point, North Carolina.
Forward-Looking Statements
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve risks and uncertainties and are based on
the beliefs and assumptions of the management of BB&T, and on the information
available to management at the time that these disclosures were prepared.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) changes in the interest
rate environment may reduce margins; (3) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality and/or a reduced demand
for credit; (4) legislative or regulatory changes, including changes in
accounting standards, may adversely affect the businesses in which BB&T is
engaged; (5) costs or difficulties related to the integration of the
businesses of BB&T and its merger partners may be greater than expected; (6)
expected cost savings associated with pending mergers may not be fully
realized or realized within the expected time frame; (7) deposit attrition,
customer loss or revenue loss following pending mergers may be greater than
expected; (8) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than BB&T;
and (9) adverse changes may occur in the securities markets.
4
Significant Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), BB&T's largest subsidiary, was
chartered in 1872 and is the oldest bank headquartered in North Carolina. At
December 31, 1999, BB&T-NC operated through 339 banking offices throughout
North Carolina and, excluding home office deposits, held the largest share of
deposits in North Carolina. BB&T-NC also operated 50 banking offices in
Maryland and six offices in Washington, D.C. BB&T-NC's principal subsidiaries
include BB&T Leasing Corp., based in Charlotte, North Carolina, which
specializes in lease financing to commercial businesses and municipalities;
BB&T Investment Services, Inc., located in Charlotte, North Carolina, which
offers nondeposit investment alternatives, including discount brokerage
services, fixed-rate and variable-rate annuities, mutual funds and government
and municipal bonds; BB&T Insurance Services, Inc., headquartered in Raleigh,
North Carolina, which is the 12th largest independent insurance agency network
in the country; and W.E. Stanley, Inc., an actuarial and employee benefits
consulting firm headquartered in Greensboro, North Carolina.
BB&T-NC has a number of additional subsidiaries, including Prime Rate Premium
Finance Corporation, Inc. ("Prime Rate"), located in Florence, South Carolina,
which provides insurance premium financing and other services to customers in
Virginia and the Carolinas. BB&T-NC also owns 51% of AutoBase Information
Systems, Inc., ("AutoBase") a Charlotte, North Carolina-based company that uses
advanced technologies to simplify the car-buying and selling process for
consumers and automotive dealers.
Branch Banking and Trust Company of South Carolina ("BB&T-SC") operated 88
banking offices at December 31, 1999. BB&T-SC is the third largest bank in
South Carolina in terms of deposit market share.
Branch Banking and Trust Company of Virginia ("BB&T-VA") operated 104 banking
offices in Virginia at December 31, 1999. BB&T-VA is the sixth largest bank in
Virginia in terms of deposit market share.
Scott & Stringfellow Financial, Inc. ("Scott & Stringfellow") is an
investment banking and full-service brokerage firm located in Richmond,
Virginia. Scott & Stringfellow operated 23 full-service brokerage offices in
Virginia, one in West Virginia, ten in North Carolina and two in South Carolina
at December 31, 1999. Scott & Stringfellow specializes in the origination,
trading and distribution of fixed-income securities and equity products in both
the public and private capital markets. Scott & Stringfellow also has a public
finance department that provides investment banking services, financial
advisory services and municipal bond financing to a variety of regional tax-
exempt issuers.
The primary services offered by BB&T's subsidiaries include:
. small business lending
. commercial middle market lending
. retail lending
. home equity lending
. sales finance
. mortgage lending
. leasing
. trust services
. agency insurance
5
. treasury services
. investment sales and mutual fund products
. capital markets
. factoring
. asset-based lending
. international banking services
. merchant banking
. cash management
. bankcard
6
The following table discloses selected financial information related to
BB&T's significant banking subsidiaries:
Table 1
Selected Financial Data of Significant Banking & Thrift Subsidiaries
As of / For the Years Ended December 31, 1999, 1998 and 1997
First
BB&T-NC BB&T-SC BB&T-VA Liberty
----------- ---------- ---------- ----------
(Dollars in thousands)
1999
Total assets $29,631,391 $4,842,462 $5,098,872 $1,765,277
Securities 7,740,265 477,705 1,308,673 399,005
Loans and leases, net of unearned
income* 19,402,829 3,698,046 3,294,038 1,201,689
Deposits 18,021,189 3,686,484 3,462,041 1,047,686
Shareholder's equity 2,130,303 364,060 471,938 123,658
Net interest income 968,187 216,781 188,522 59,626
Provision for loan and lease
losses 43,053 15,491 6,689 9,728
Noninterest income 564,174 68,473 51,170 22,072
Noninterest expense 896,799 126,689 145,242 59,615
Net income 417,751 91,059 54,457 8,463
1998
Total assets $26,868,711 $4,641,393 $5,257,737 $1,506,352
Securities 6,735,729 783,727 1,177,446 322,152
Loans and leases, net of unearned
income* 17,845,119 3,266,871 3,321,677 1,034,511
Deposits 17,858,406 3,702,383 3,496,787 1,075,832
Shareholder's equity 2,170,812 429,572 612,083 123,333
Net interest income 902,319 201,132 187,189 49,653
Provision for loan and lease
losses 47,167 13,455 12,227 5,116
Noninterest income 459,246 71,945 52,550 20,080
Noninterest expense 801,036 119,224 143,515 40,632
Net income 365,517 89,653 52,526 15,057
1997
Total assets $23,253,933 $4,364,982 $5,260,598 $1,269,997
Securities 5,590,186 1,020,554 1,469,392 245,277
Loans and leases, net of unearned
income* 15,749,571 3,052,755 3,274,679 910,502
Deposits 16,419,895 3,401,236 3,507,108 936,502
Shareholder's equity 1,816,733 374,871 574,742 101,457
Net interest income 867,392 184,341 123,738 43,105
Provision for loan and lease
losses 54,197 14,109 8,537 6,316
Noninterest income 439,772 70,916 27,008 15,650
Noninterest expense 825,898 135,018 90,649 35,320
Net income 285,209 68,024 34,089 8,850
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* Includes loans held for sale.
7
Merger Strategy
BB&T's profitability and market share have been enhanced through both
internal growth and acquisitions in recent years. The acquisition strategy of
BB&T is focused on three primary objectives:
. to pursue in-market acquisitions of high-quality banks and thrifts with
assets in the $250 million to $10 billion range,
. to acquire companies in niche markets that provide products or services
that can be offered through the existing distribution system to BB&T's
current customer base, and
. to consider strategic acquisitions in new markets that are economically
feasible and provide positive long-term benefits.
BB&T has consummated 43 acquisitions of community banks and thrifts,
acquired 49 insurance agencies and completed 12 acquisitions of nonbank
financial services providers over the last ten years. BB&T expects to continue
to take advantage of the consolidation of the financial services industry and
expand and enhance its franchise through mergers and acquisitions. The
consideration paid for these acquisitions may be in the form of cash, debt or
BB&T stock. The amount of consideration paid to complete these transactions
may entail payments in excess of the book value of the underlying net assets
acquired, which could have a dilutive effect on earnings per share or book
value. In addition, such acquisitions sometimes result in significant front-
end charges against earnings. However, cost savings, especially incident to
in-market acquisitions, are also frequently anticipated.
Competition
The banking industry is highly competitive and dramatic change continues to
occur. The banking subsidiaries of BB&T compete actively with national and
state banks, savings and loan associations, securities dealers, mortgage
bankers, finance companies and insurance companies. Competition for financial
products continues to grow as customers select from a variety of traditional
and nontraditional alternatives. The industry continues to consolidate at a
fast pace, which affects competition by eliminating some regional and local
institutions. For additional information concerning markets, BB&T's
competitive position and business strategies, see "Market Area" and "Lending
Activities" below.
Market Area
BB&T's market area consists of North and South Carolina, Virginia, Maryland,
Georgia, West Virginia, eastern Kentucky and the metropolitan Washington, D.C.
area. The area's employment base is diverse and consists of manufacturing,
general services, agricultural, wholesale/retail, high tech and financial
services. BB&T believes its current market area is economically strong and
will support consistent growth in assets and deposits in the future. Even so,
management expects to continue to employ aggressive growth strategies,
including possible expansion into neighboring states. Management believes that
maintaining a community bank approach to customer service as asset size and
available services grow will strengthen the Corporation's ability to move into
new states and communities and continue to market services to small to mid-
sized commercial customers and individuals in these markets.
Lending Activities
The primary goal of the BB&T lending function is to help clients achieve
their financial goals and secure their financial futures on terms that are
fair to the clients and profitable to the Corporation. This purpose can best
be accomplished by building strong, profitable customer relationships over
8
time, with BB&T becoming an important contributor to the prosperity and well
being of its customers. BB&T's philosophy of lending is to attempt to meet all
legitimate business and consumer credit needs within defined market segments
where standards of safety, profitability and liquidity can be met. Based on
internal analyses, BB&T's loan portfolio consistently outperforms an average of
our national peers in terms of asset quality, yield and rate of growth.
BB&T focuses lending efforts on small to intermediate commercial and
industrial loans, one-to-four family residential mortgage loans and consumer
loans. Typically, fixed-rate residential mortgage loans are sold in the
secondary mortgage market and adjustable-rate residential mortgages are
retained in the portfolio. Servicing rights on mortgage loans sold are
typically retained by BB&T. As of December 31, 1999, BB&T's total mortgage
servicing portfolio exceeded $17.0 billion. BB&T conducts the majority of its
lending activities in the context of the Corporation's community bank focus,
with decentralized lending decisions made as close to the customer as
practicable.
The following table reflects BB&T's loan portfolio based on the source of the
underlying collateral, rather than the primary purpose of the loan.
Table 2
Composition of Loan and Lease Portfolio*
December 31,
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1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans:
Commercial, financial
and agricultural $ 4,592,691 $ 4,128,455 $ 3,816,252 $ 3,331,333 $ 2,844,598
Real estate--
construction and
land development 3,310,561 2,570,017 2,453,380 1,816,520 1,343,621
Real estate--mortgage 16,010,893 14,604,025 13,395,782 11,918,118 11,651,183
Consumer 3,635,267 3,231,827 3,217,073 3,261,604 2,874,951
----------- ----------- ----------- ----------- -----------
Loans held for
investment 27,549,412 24,534,324 22,882,487 20,327,575 18,714,353
Loans held for sale 285,025 1,171,415 553,662 267,082 294,967
----------- ----------- ----------- ----------- -----------
Total loans 27,834,437 25,705,739 23,436,149 20,594,657 19,009,320
Leases 2,602,819 1,620,326 788,462 576,991 376,152
----------- ----------- ----------- ----------- -----------
Total loans and
leases $30,437,256 $27,326,065 $24,224,611 $21,171,648 $19,385,472
=========== =========== =========== =========== ===========
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* Balances include unearned income.
Mortgage Banking
BB&T continues to be the largest originator of residential mortgage loans in
the Carolinas, with 1999 originations of $4.6 billion. BB&T engages in mortgage
loan originations by offering various types of fixed- and adjustable-rate loans
for the purpose of constructing, purchasing or refinancing owner-occupied
properties. Risks associated with the residential lending function include
interest rate risk, which is mitigated through the sale of substantially all
fixed-rate loans, and default risk by the borrower, which is lessened through
underwriting procedures and mortgage insurance. BB&T also purchases mortgage
loans from more than 100 correspondent originators and subjects them to the
same underwriting and risk management criteria as loans originated internally.
9
Commercial Lending
BB&T's commercial lending program is generally targeted to serve small-to-
middle market businesses with sales of $200 million or less, although in-house
limits do allow lending to larger customers, including national customers who
have some reasonable business connections with the Corporation's
geographically-served markets. Commercial lending includes commercial,
financial, agricultural, industrial and real estate loans. Pricing on
commercial loans, driven largely by competition, is usually tied to market
indexes, such as the prime rate, LIBOR or rates on U.S. Treasury securities.
BB&T has received recognition from the U.S. Small Business Administration for
the last two years as the #1 "small business friendly" bank in the eastern
United States. Management believes that small to mid-sized commercial lending
is BB&T's strongest market, as BB&T has the largest market share in all types
of small business lending in the Carolinas.
Construction Lending
Real estate construction loans include twelve-month contract housing loans,
which are intended to convert to permanent one-to-four family residential
mortgage loans upon completion of the construction, and commercial construction
loans. These loans are usually to in-market developers, businesses, individuals
or real estate investors for the construction of commercial structures in the
Corporation's market area. They are made for purposes including, but not
limited to, the construction of industrial facilities, apartments, shopping
centers, office buildings, hotels and warehouses. The properties may be for
sale, lease or owner-occupancy.
Consumer Lending
BB&T offers a wide variety of consumer loan products. Various types of
secured and unsecured loans are marketed to qualifying, existing clients and to
other creditworthy candidates in BB&T's market area. Home equity loans and
lines are underwritten with note amounts and credit limits that ensure
consistency with the Corporation's policies. Numerous forms of unsecured loans,
including revolving credits (e.g. bankcards, checking accounts, overdraft
protection and personal lines of credit) are provided and various installment
loan products, such as vehicle loans, are offered. BB&T is the largest home
equity lender in North and South Carolina.
Leasing
BB&T provides commercial leasing products and services through BB&T Leasing
Corp. ("Leasing"), a subsidiary of BB&T-NC. Leasing provides three primary
products: finance or capital leases, true leases (as defined under the Internal
Revenue Code) and other operating leases for vehicles, rolling stock and
tangible personal property. Leasing provides lease-related services for small
to medium-sized commercial customers. BB&T also engages in leasing transactions
with municipalities directly through its subsidiary banks and has the largest
market share of municipal leasing in the Carolinas.
10
The following table presents BB&T's total loan portfolio based on the primary
purpose of the loan, rather than the underlying collateral:
Table 3
Composition of Loan Portfolio Based on Loan Purpose
December 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands)
Business loans $13,680,978 $11,761,770
Lease Financing 1,471,194 986,885
----------- -----------
Total commercial loans 15,152,172 12,748,655
----------- -----------
Sales Finance 2,120,403 1,695,286
Revolving Credit 628,118 543,172
Direct Retail 5,341,104 4,723,745
----------- -----------
Total consumer loans 8,089,625 6,962,203
----------- -----------
Mortgage loans 5,955,658 6,893,267
----------- -----------
Total loans $29,197,455 $26,604,125
=========== ===========
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* Loans and leases are net of unearned income and include loans held for sale.
The following table reflects the scheduled maturities of commercial,
financial and agricultural loans, as well as construction loans.
Table 4
Selected Loan Maturities and Interest Sensitivity(3)
December 31, 1999
------------------------------------
Commercial,
Financial
and Real Estate:
Agricultural Construction Total
------------ ------------ ----------
(Dollars in thousands)
Fixed rate:
1 year or less (2) $ 232,560 $ 494,929 $ 727,489
1-5 years 987,493 266,500 1,253,993
After 5 years 255,579 -- 255,579
---------- ---------- ----------
Total 1,475,632 761,429 2,237,061
---------- ---------- ----------
Variable rate:
1 year or less (2) 1,631,780 1,733,410 3,365,190
1-5 years 1,343,452 815,722 2,159,174
After 5 years 141,827 -- 141,827
---------- ---------- ----------
Total 3,117,059 2,549,132 5,666,191
---------- ---------- ----------
Total loans and leases (1) $4,592,691 $3,310,561 $7,903,252
========== ========== ==========
- --------
(Dollars in
thousands)
-----------
(1)The table excludes:
(i) consumer loans to individuals for household, family and
other personal expenditures $ 3,635,267
(ii) real estate mortgage loans 16,010,893
(iii)loans held for sale 285,025
(iv) leases 2,602,819
-----------
$22,534,004
===========
(2)Includes loans due on demand.
(3)Balances include unearned income.
11
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
BB&T's credit policy does not permit automatic renewals of loans. At the
scheduled maturity date (including balloon payment date), the customer must
request a new loan to replace the matured loan and execute a new note with
rate, terms and conditions negotiated at that time.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged against earnings. The level of the allowance
for loan and lease losses is based on management's evaluation of the risk
inherent in the loan portfolio at the balance sheet date and changes in the
nature and volume of loan activity. This evaluation, which includes a review of
loans for which full collectibility may not be reasonably assured, considers
the loans' "risk grades," the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and
other current factors that warrant consideration in determining an adequate
allowance. BB&T's objective is to maintain a loan portfolio that is diverse in
terms of loan type, industry concentration, geographic distribution and
borrower concentration in order to reduce overall credit risk by minimizing the
adverse impact of any single event or combination of related events.
Reserve Policy and Methodology
The allowance for loan and lease losses is composed of general reserves,
specific reserves and an unallocated reserve. General reserves are established
on the commercial loan portfolio based on loss percentages that are determined
based on management's evaluation of the losses inherent in the various risk
grades of the commercial loans. Commercial loans are categorized in one of ten
risk grades based on management's assessment of the overall credit quality of
the loan, including the payment history, the financial position of the
borrower, underlying collateral, internal credit reviews and the results of
external regulatory examinations. The general reserve percentages described
above are then applied to each risk grade to calculate the necessary allowance
to cover inherent losses in each risk category. The following table presents
the risk grades and reserve percentages applicable to each grade at December
31, 1999:
Table 5
General Reserves for Commercial Loans
December 31, 1999
Percentage
of
Commercial General
Loans by Reserve
Risk Grade Risk Grade Percentage
---------- ---------- ----------
Risk 0 (Loans from acquired institutions) 0.05% 1.30%
Risk 1 (Superior Quality) 4.25 0.10
Risk 2 (High Quality) 16.13 0.20
Risk 3 (Very Good Quality--Normal Risk) 30.48 0.60
Risk 4 (Good Quality--Normal Risk) 32.26 1.30
Risk 5 (Acceptable Quality) 11.75 2.25
Risk 6 (Management Attention) 2.85 3.25
Risk 7 (Special Mention) 0.73 5.00
Risk 8 (Substandard) 1.48 15.00
Risk 9 (Doubtful) 0.02 50.00
12
The general reserve percentages used have been determined by management to be
appropriate based primarily on historical loan losses and the level of risk
assumed for the various risk grades. The reserve percentages for Special
Mention, Substandard and Doubtful are based on the preferred rates used by
banking regulators, and the other risk grades are "stepped down" from these
percentages as loan quality improves.
The process of classifying commercial loans into the appropriate risk grades
is performed initially as a component of the approval of the loan by the
appropriate credit officer. Based on the size of the loan, senior credit
officers and / or the loan committee may review the classification to ensure
accuracy and consistency of classification. Loan classifications are frequently
reviewed by internal credit examiners to determine if any changes in the
circumstances of the loan require a different risk grade. To determine the most
appropriate risk grade classification for each loan, the credit officers
examine the borrower's liquidity level, asset quality, the amount of the
borrower's other indebtedness, cash flow, earnings, sources of financing and
existing lending relationships.
Specific reserves are provided on certain commercial loans that are
classified in the Special Mention, Substandard or Doubtful risk grades. The
specific reserves are determined on a loan-by-loan basis based on management's
evaluation of BB&T's loss exposure for each credit, given the current payment
status of the loan and the value of any underlying collateral. Loans for which
specific reserves are provided are excluded from the general allowance
calculations described above to prevent redundant reserves. The calculations of
specific reserves on commercial loans also incorporates specific reserves based
on the results of measuring impaired loans pursuant to the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent. A loan is impaired when, based
on current information and events, it is probable that BB&T will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When the measure of the impaired loan is less than the recorded
investment in the loan, the amount of the impairment is recorded through a
valuation allowance. It is BB&T's policy to classify and disclose all
commercial loans greater than $250,000 that are on nonaccrual status as
impaired loans. Substantially all other loans made by BB&T are excluded from
the scope of SFAS No. 114 as they are comprised of large groups of smaller
balance homogeneous loans (residential mortgage and consumer installment) that
are collectively evaluated for impairment.
General reserves are provided for noncommercial loans based on a three-year
weighted average of actual loss experience of each major loan category, which
is then applied to the total outstanding loan balance of each loan category.
The weighted average loss experience for each category is determined by
assigning a 50% weight to the most recent year's loss experience for each
category, a 30% weight to the loss ratio from two years ago, and the remaining
20% weight is applied to the loss ratio from three years ago. This methodology
places greater emphasis on more recent loss trends and, therefore, provides a
self-correcting mechanism for the differences between estimated and actual
losses.
There are two primary components considered in determining an appropriate
level for the unallocated reserve. First, a portion of the unallocated reserve
is established to cover the elements of imprecision and estimation risk
inherent in the general and specific reserves described above. Second, the
remaining portion of the unallocated allowance is determined based on
management's evaluation of various conditions that are not directly measured by
any other component of the allowance, including current general economic and
business conditions affecting key lending areas, credit quality trends,
collateral values, loan volumes and concentrations, seasoning of the loan
portfolio, the findings of internal credit examinations and results from
external bank regulatory examinations.
13
While management uses the best information available to establish the
allowance for loan and lease losses, future adjustments to the allowance or to
the reserving methodology may be necessary if economic conditions differ
substantially from the assumptions used in making the valuations or, if
required by regulators, based upon information at the time of their
examinations. Such adjustments to original estimates, as necessary, are made in
the period in which these factors and other relevant considerations indicate
that loss levels may vary from previous estimates.
The following table discloses an allocation of the allowance for loan and
leases losses at the end of each of the past five years. The allowance has been
allocated applying the methodologies described above to the loan portfolios
based on the underlying collateral of the loans. This allocation is calculated
on an approximate basis and is not necessarily indicative of future losses. The
entire amount of the allowance is available to absorb losses occurring in any
category of loans and leases.
Table 6
Allocation of Allowance for Loan and Lease Losses by Category
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
% Loans % Loans % Loans % Loans % Loans
in each in each in each in each in each
Amount category Amount category Amount category Amount category Amount category
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Balance at end of period
applicable to:
Commercial, financial
and agricultural $ 58,046 15% $ 52,745 16% $ 55,188 16% $ 54,279 16% $ 57,232 15%
Real estate:
Construction and land
development 39,576 11 33,065 10 24,792 10 17,962 10 21,531 8
Mortgage 139,837 53 111,099 54 109,765 56 96,429 56 92,213 60
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total 179,413 64 144,164 64 134,557 66 114,391 66 113,744 68
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer 26,384 12 33,010 13 29,181 14 24,581 15 17,424 15
Leases 21,726 9 12,737 7 8,021 4 5,207 3 3,325 2
Unallocated 102,394 -- 119,213 -- 89,603 -- 78,162 -- 63,254 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total $387,963 100% $361,869 100% $316,550 100% $276,620 100% $254,979 100%
======== === ======== === ======== === ======== === ======== ===
14
The following table sets forth information with respect to BB&T's allowance
for loan and lease losses for the most recent five years.
Table 7
Analysis of Allowance for Loan and Lease Losses
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of
period $ 361,869 $ 316,550 $ 276,620 $ 254,979 $ 245,326
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural (21,803) (15,602) (20,204) (14,154) (13,570)
Real estate (14,825) (12,523) (14,708) (12,242) (13,481)
Consumer (66,843) (73,363) (74,274) (53,281) (32,729)
Lease receivables (993) (1,167) (671) (768) (614)
----------- ----------- ----------- ----------- -----------
Total charge-offs (104,464) (102,655) (109,857) (80,445) (60,394)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural 10,837 8,423 6,949 9,464 7,149
Real estate 3,961 3,792 5,287 6,521 3,825
Consumer 13,979 12,170 8,893 8,139 7,757
Lease receivables 107 425 232 136 395
----------- ----------- ----------- ----------- -----------
Total recoveries 28,884 24,810 21,361 24,260 19,126
----------- ----------- ----------- ----------- -----------
Net charge-offs (75,580) (77,845) (88,496) (56,185) (41,268)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense 92,097 101,842 110,913 70,359 47,108
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions 9,272 21,258 17,513 7,467 3,813
Reconciliation of fiscal
year of merged
companies to calendar
year 305 64 -- -- --
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 387,963 $ 361,869 $ 316,550 $ 276,620 $ 254,979
=========== =========== =========== =========== ===========
Average loans and
leases* $27,729,172 $25,065,207 $22,438,508 $20,223,203 $18,900,682
Net charge-offs as a
percentage of average
loans and leases .27% .31% .39% .28% .22%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
Nonperforming Assets and Classified Assets
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessed collateral. It is BB&T's policy to place
commercial loans and leases on nonaccrual status when full collection of
principal and interest becomes doubtful, or when any portion of principal or
interest becomes 90 days past due, whichever occurs first. When loans are
placed on nonaccrual status, interest receivable is reversed against interest
income in the current period and any prior year interest is charged off against
the allowance for loan and lease losses. Interest payments received thereafter
are applied as a reduction of the remaining principal balance so long as doubt
exists as to the ultimate collection of the principal. Loans and leases are
removed from nonaccrual status when they become current as to both principal
and interest and when the collectibility of principal or interest is no longer
doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual
status when full collection of principal and interest becomes doubtful, or they
become delinquent for a specified period of time.
15
Investment Activities
BB&T maintains a significant portion of its assets as investment securities.
BB&T's subsidiary banks are allowed to purchase, sell, deal in and hold certain
investment securities as prescribed by bank regulations. These investments
include all obligations of the U.S. Treasury, agencies of the Federal
government, obligations of any state or political subdivision, various types of
corporate debt, mutual funds, limited types of equity securities and certain
derivative securities. Scott & Stringfellow, BB&T's full-service brokerage and
investment banking subsidiary, is permitted to engage in the underwriting,
trading and sales of equity and debt securities subject only to the risk
management policies of the Corporation.
BB&T's investment activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset and Liability Committee ("ALCO") which meets regularly to
review the economic environment, assess current activities for appropriateness
and establish investment strategies. The ALCO also has much broader
responsibilities, which are discussed in "Market Risk Management", in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
funding options and the overall interest rate sensitivity of the Corporation.
In general, the investment portfolio is managed in a manner appropriate to the
attainment of the following goals: (i) to provide a sufficient margin of liquid
assets to cover unanticipated deposit and loan fluctuations, seasonal funds
flow variations and overall funds management objectives; (ii) to provide
eligible securities to secure public funds and trust deposits as prescribed by
law; and (iii) to earn the maximum return on funds invested that is
commensurate with meeting the requirements of (i) and (ii).
The following table provides information regarding the composition of BB&T's
securities portfolio at the end of each of the past three years. BB&T's trading
securities, reflected in the accompanying table, represent positions held
primarily by Scott & Stringfellow.
Table 8
Composition of Securities Portfolio
December 31,
---------------------------------
1999 1998 1997
----------- ---------- ----------
(Dollars in thousands)
Trading Securities (at estimated fair
value): $ 93,221 $ 60,422 $ 67,878
----------- ---------- ----------
Securities held to maturity (at
amortized cost):
U.S. Treasury, government and agency
obligations 23,117 51,102 105,236
States and political subdivisions 74,005 232,406 271,993
Mortgage-backed securities -- 70,355 142,164
Other securities -- 6,920 1,315
----------- ---------- ----------
Total securities held to maturity 97,122 360,783 520,708
----------- ---------- ----------
Securities available for sale (at
estimated fair value):
U.S. Treasury, government and agency
obligations 4,529,221 3,838,080 4,632,400
States and political subdivisions 540,219 185,056 78,856
Mortgage-backed securities 3,793,185 4,204,668 3,361,852
Other securities 1,619,419 1,270,682 503,162
----------- ---------- ----------
Total securities available for sale 10,482,044 9,498,486 8,576,270
----------- ---------- ----------
Total securities $10,672,387 $9,919,691 $9,164,856
=========== ========== ==========
16
Sources of Funds
Deposits are the primary source of funds for lending and investing
activities. Scheduled loan payments and maturities and prepayments from
portfolios of loans and investment securities also provide a stable source of
funds. Federal Home Loan Bank ("FHLB") advances, foreign deposits, Federal
funds purchased and other short-term borrowed funds, as well as longer-term
debt issued through the capital markets, all provide supplemental liquidity
sources.
Deposits
Deposits are attracted principally from customers within BB&T's market area
through the offering of a broad selection of deposit instruments including
demand deposits, negotiable order of withdrawal accounts, savings accounts,
money rate savings, certificates of deposit and individual retirement accounts.
Deposit account terms vary with respect to the minimum balance required, the
time period the funds must remain on deposit and service charge schedules.
Interest rates paid on specific deposit types are set by the ALCO and are
determined based on (i) the interest rates offered by competitors, (ii)
anticipated amount and timing of funding needs (iii) availability of and cost
of alternative sources of funding and (iv) anticipated future economic
conditions and interest rates. Customer deposits are attractive sources of
liquidity because of their stability, cost and the ability to generate fee
income through the cross-sale of other services to the depositors.
Table 9
Scheduled Maturities of Time Deposits
December 31, 1999
(Dollars in thousands)
Time Deposits $100,000 and Over
Maturity Schedule
Less than three months $1,514,247
Three through six months 719,615
Seven through twelve months 807,005
Over twelve months 642,444
----------
Total $3,683,311
==========
Total Time Deposits
Time Deposits Due to Mature by December 31,
2000 $10,525,443
2001 1,785,389
2002 585,374
2003 187,808
2004 272,954
2005 and later 39,347
-----------
Total $13,396,315
===========
Short-Term Borrowed Funds
BB&T's ability to borrow funds through nondeposit sources provides additional
flexibility in meeting the liquidity needs of customers. Components of short-
term borrowed funds at year end were master notes, securities sold under
repurchase agreements, FHLB advances, Federal funds
17
purchased and U.S. Treasury tax and loan depository note accounts. The
following table summarizes certain pertinent information for the past three
years regarding BB&T's short-term borrowed funds:
Table 10
Short-Term Borrowed Funds
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
Maximum outstanding at any month-end
during the year $6,875,290 $5,681,846 $4,157,911
Average outstanding during the year 5,311,658 4,430,989 3,430,232
Average interest rate during the year 4.86% 5.23% 5.28%
Average interest rate at end of year 4.11 4.86 5.49
Employees
At December 31, 1999, BB&T had approximately 13,700 full-time-equivalent
employees compared to approximately 10,400 full-time equivalent employees at
December 31, 1998.
Properties
BB&T and its significant subsidiaries occupy headquarters offices that are
either owned or operated under long-term leases and also own free-standing
operations centers in Winston-Salem, Wilson, Charlotte and Lumberton, North
Carolina. At December 31, 1999, BB&T and its subsidiary banks operated 655
banking offices in the Carolinas, Virginia, Maryland, Georgia, West Virginia,
eastern Kentucky and Washington, D.C. Branch office locations are variously
owned or leased. Management believes that the premises occupied by BB&T and its
subsidiaries are well-located and suitably equipped to serve as financial
services facilities. See Note F. "Premises and Equipment" of the "Notes to
Consolidated Financial Statements" in this report for additional disclosures
related to BB&T's properties and other fixed assets.
Executive Officers of BB&T
BB&T's Chairman and Chief Executive Officer is John A. Allison, IV. Mr.
Allison is 51 and has 29 years of service with the Corporation. Henry G.
Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr.
Williamson is 52 and has 28 years of service with the Corporation. Kelly S.
King is the President of BB&T Corporation and is the Senior Executive Vice
President for the Branch Network. Mr. King is 51 and has 28 years of service
with the Corporation. Robert E. Greene is the President of Branch Banking and
Trust Company and is the Senior Executive Vice President for Administrative
Services for the Corporation. Mr. Greene is 51 and has served the Corporation
for 27 years. W. Kendall Chalk is the Senior Executive Vice President for the
Lending Group. Mr. Chalk is 54 and has served the Corporation for 25 years.
Scott E. Reed is a Senior Executive Vice President and the Corporation's Chief
Financial Officer. Mr. Reed is 51 and has 28 years of service with the
Corporation. Sherry A. Kellett is a Senior Executive Vice President and the
Corporation's Controller. Ms. Kellett is 55 and has 15 years of service with
the Corporation. C. Leon Wilson is a Senior Executive Vice President and is the
Corporation's Operations Division Manager. Mr. Wilson is 44 and has served BB&T
for 23 years.
18
REGULATORY CONSIDERATIONS
General
As a bank holding company, BB&T is subject to regulation under the Bank
Holding Company Act of 1956, as amended, (the "BHCA") and the examination and
reporting requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). Under the BHCA, a bank holding company may not
directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any bank or merge or
consolidate with another bank holding company without the prior approval of the
Federal Reserve Board. The BHCA also generally limits the activities of a bank
holding company to that of banking, managing or controlling banks, or any other
activity which is determined to be so closely related to banking or to managing
or controlling banks that an exception is allowed for those activities.
As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA
(collectively, the "State-Chartered Banks") are subject to regulation,
supervision and examination by state bank regulatory authorities in their
respective home states. These authorities include the North Carolina
Commissioner of Banks, in the case of BB&T-NC, the South Carolina Commissioner
of Banking, in the case of BB&T-SC, and the Virginia State Corporation
Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of
the State-Chartered Banks is also subject to regulation, supervision and
examination by the Federal Deposit Insurance Corporation (the "FDIC"). BB&T
also operates seven banks that were subsidiaries of bank holding companies
acquired by BB&T during 1999 that will be merged into either BB&T-NC, BB&T-SC
or BB&T-VA, as appropriate, during 2000. These banks include First Citizens
Bank of Georgia, First Citizens Bank of Newnan and First Liberty Bank, state-
chartered banks subject to supervision by the Georgia Department of Banking and
Finance; Carroll County Bank and Trust Company and the Bank of Maryland, state-
chartered banks supervised by Maryland's Commissioner of Financial Regulation;
The Matewan National Bank, a Federally-chartered bank subject to regulation,
supervision and examination by the U.S. Office of the Comptroller of the
Currency (the "OCC"); and Matewan Bank, FSB, a Federally-chartered thrift
institution supervised by the Office of Thrift Supervision ("OTS"). (References
herein to the "Banks" include these acquired banks and the State-Chartered
Banks). State and Federal law also govern the activities in which the Banks
engage, the investments they make and the aggregate amount of loans that may be
granted to one borrower. Various consumer and compliance laws and regulations
also affect the Banks' operations.
The earnings of BB&T's subsidiaries, and therefore the earnings of BB&T, are
affected by general economic conditions, management policies, changes in state
and Federal legislation and actions of various regulatory authorities,
including those referred to above. The following description summarizes the
significant state and Federal laws to which BB&T and the Banks are subject. To
the extent statutory or regulatory provisions or proposals are described, the
description is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
Payment of Dividends
BB&T is a legal entity separate and distinct from its banking and other
subsidiaries. The majority of BB&T's revenues are from dividends paid to BB&T
by its banking subsidiaries. BB&T's banking subsidiaries are subject to laws
and regulations that limit the amount of dividends they can pay. In addition,
both BB&T and its banking subsidiaries are subject to various regulatory
restrictions relating to the payment of dividends, including requirements to
maintain capital at or above regulatory minimums. Banking regulators have
indicated that banking organizations should generally pay dividends only if (1)
the organization's net income available to common shareholders over the past
year has been sufficient to fully fund the dividends and (2) the prospective
rate of
19
earnings retention appears consistent with the organization's capital needs,
asset quality and overall financial condition. BB&T does not expect that any
of these laws, regulations or policies will materially affect the ability of
the Banks to pay dividends. During the year ended December 31, 1999, the Banks
declared $589.3 million in dividends payable to BB&T.
Capital
The Federal Reserve Board, the Federal Deposit Insurance Corporation
("FDIC") and the Office of the Comptroller of the Currency ("OCC") have issued
substantially similar risk-based and leverage capital guidelines applicable to
banking organizations they supervise. Under the risk-based capital
requirements, BB&T and the Banks are each generally required to maintain a
minimum ratio of total capital to risk-weighted assets (including certain off-
balance sheet activities, such as standby letters of credit) of 8%. At least
half of the total capital must be composed of common equity, retained earnings
and qualifying perpetual preferred stock, less certain intangibles ("Tier 1
capital"). The remainder may consist of certain subordinated debt, certain
hybrid capital instruments, qualifying preferred stock and a limited amount of
the loan loss allowance ("Tier 2 capital" which, together with Tier 1 capital,
composes "total capital"). The ratios of Tier 1 capital and total capital to
risk-adjusted assets for BB&T and the subsidiary banks as of December 31, 1999
are shown in the following table.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations must maintain a minimum ratio of
Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject
to Federal Bank regulatory evaluation of an organization's overall safety and
soundness. The leverage ratios of BB&T and the subsidiary banks as of December
31, 1999 are reflected in the accompanying table.
Table 11
Capital Adequacy for BB&T Corporation and Principal Banking and Thrift
Subsidiaries
Regulatory BB&T- BB&T- BB&T- First
Minimums BB&T NC SC VA Liberty
---------- ---- ----- ----- ----- -------
Risk-based capital ratios:
Tier 1 capital (1) 4.0% 9.3% 9.8% 9.7% 11.3% 9.3%
Total risk-based capital (2) 8.0 13.0 11.0 11.0 12.5 10.5
Tier 1 leverage ratio (3) 3.0 6.6 6.7 7.7 7.5 6.9
- --------
(1) Shareholders' equity less nonqualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a percentage of fourth quarter average assets
less nonqualifying intangibles.
The risk-based capital standards of the Federal Reserve Board, the FDIC and
the OCC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines
also provide that an institution's exposure to a decline in the economic value
of its capital due to changes in interest rates be considered by the agency as
a factor in evaluating a banking organization's capital adequacy.
20
Deposit Insurance Assessments
The deposits of the Banks are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, a portion of the Banks' deposits (relating to the acquisitions
of various savings associations) are subject to assessments imposed by the
Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured
deposits effective January 1, 1998. The assessments imposed on all FDIC
deposits for deposit insurance have an effective rate ranging from 0 to 27
basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. Legislation was enacted in 1997
requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion
of the interest due on the obligations issued by the Financing Corporation
("FICO"). The FDIC currently assesses BIF-insured and SAIF-insured deposits an
additional 2.12 basis points per $100 of deposits to cover those obligations.
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is insolvent or is in danger of becoming
insolvent. For example, under requirements of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the insolvency of
commonly controlled insured depository institutions or for any assistance
provided by the FDIC to commonly controlled insured depository institutions in
danger of failure. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement under the cross
guarantee provisions is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and nonaffiliated holders of subordinated debt of
the commonly controlled insured depository institutions.
The Federal banking agencies also have broad powers under current Federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institution
in question is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by
the law. As of December 31, 1999, BB&T and each of the Banks were classified as
well capitalized.
State banking regulators and the OCC also have broad enforcement powers over
the Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator (with the approval of the Governor in
the case of North Carolina) in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state bank
in certain circumstances, including, among other things, when it appears that
such bank has violated its charter or any applicable laws, is conducting its
business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
21
Interstate Banking and Branching
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1998, a bank
headquartered in one state was authorized to merge with a bank headquartered in
another state, as long as neither of the states had opted out of such
interstate merger authority prior to such date. After a bank has established
branches in a state through an interstate merger transaction, the bank may
establish and acquire additional branches at any location in the state where a
bank headquartered in that state could have established or acquired branches
under applicable Federal or state law.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (the "Act") was signed into law on
November 12, 1999. The Act covers a broad range of issues, including a repeal
of most of the restrictions on affiliations among depository institutions,
securities firms and insurance companies. Most of the Act's provisions require
the federal bank regulatory agencies and other regulatory bodies to adopt
regulations to implement the Act, and for that reason an assessment of the full
impact on BB&T of the Act must await completion of that regulatory process. The
provisions of the Act that are believed to be of most significance to BB&T are
discussed below.
The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting
unrestricted affiliations between banks and securities firms. The Act also
permits bank holding companies to elect to become financial holding companies.
A financial holding company may engage in or acquire companies that engage in a
broad range of financial services, including securities activities such as
underwriting, dealing, brokerage, investment and merchant banking; and
insurance underwriting, sales and brokerage activities. In order to become a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating.
The Act provides that the states continue to have the authority to regulate
insurance activities, but prohibits the states in most instances from
preventing or significantly interfering with the ability of a bank, directly or
through an affiliate, to engage in insurance sales, solicitations or cross-
marketing activities. Although the states generally must regulate bank
insurance activities in a nondiscriminatory manner, the states may continue to
adopt and enforce rules that specifically regulate bank insurance activities in
certain areas identified in the Act. The Act directs the federal bank
regulatory agencies to adopt insurance consumer protection regulations that
apply to sales practices, solicitations, advertising and disclosures.
The Act adopts a system of functional regulation under which the Federal
Reserve Board is confirmed as the umbrella regulator for bank holding
companies, but bank holding company affiliates are to be principally regulated
by functional regulators such as the FDIC for state nonmember bank affiliates,
the Securities and Exchange Commission for securities affiliates and state
insurance regulators for insurance affiliates. The Act repeals the broad
exemption of banks from the definitions of "broker" and "dealer" for purposes
of the Securities Exchange Act of 1934, but identifies a set of specific
activities, including traditional bank trust and fiduciary activities, in which
a bank may engage without being deemed a "broker", and a set of activities in
which a bank may engage without being deemed a "dealer". The Act also makes
conforming changes in the definitions of "broker" and "dealer" for purposes of
the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
The Act contains extensive customer privacy protection provisions. Under
these provisions, a financial institution must provide to its customers, at the
inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
22
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The Act also provides that the states may adopt customer privacy
protections that are more strict than those contained in the Act. The Act also
makes a criminal offense, except in limited circumstances, obtaining or
attempting to obtain customer information of a financial nature by fraudulent
or deceptive means.
The Act also contains requirements for the posting of notices by operators of
automated teller machines regarding fees charged for the use of such machines.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of the consolidated financial condition
and results of operations of BB&T Corporation and subsidiaries ("BB&T" or the
"Corporation") for each of the three years in the period ended December 31,
1999, and related financial information are presented in conjunction with the
consolidated financial statements and related notes to assist in the evaluation
of BB&T's 1999 performance.
Stock Split
On June 23, 1998, BB&T's Board of Directors approved a 2-for-1 split in the
Corporation's common stock effected in the form of a 100% stock dividend paid
August 3, 1998. All references to the number of common shares and all per share
amounts contained herein have been adjusted, as appropriate, to retroactively
reflect the stock split.
Reclassifications
In certain circumstances, reclassifications have been made to prior period
information to conform to the 1999 presentation.
Recently Completed Mergers and Acquisitions
On March 5, 1999, BB&T completed its merger with MainStreet Financial
Corporation ("MainStreet"), based in Martinsville, Virginia. The transaction
was accounted for as a pooling of interests. BB&T issued 16.8 million shares of
common stock in exchange for all of the outstanding shares of MainStreet common
stock.
On March 26, 1999, BB&T completed its acquisition of Scott & Stringfellow
Financial, Inc. ("Scott & Stringfellow"), an investment banking firm based in
Richmond, Virginia. To consummate the acquisition, which was accounted for as a
purchase, BB&T issued 3.6 million shares of common stock in exchange for all of
the outstanding shares of Scott & Stringfellow common stock. BB&T recorded
goodwill totaling $72.8 million in connection with this acquisition, which is
being amortized using the straight-line method over a period of 15 years.
On July 9, 1999, BB&T completed its merger with First Citizens Corporation
("First Citizens"), of Newnan, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 3.2 million shares of common stock in
exchange for all of the outstanding shares of First Citizens common stock.
On July 14, 1999, BB&T completed its merger with Mason-Dixon Bancshares, Inc.
("Mason-Dixon") of Westminster, Maryland. The transaction was accounted for as
a pooling of interests. In conjunction with the merger, BB&T issued 6.6 million
shares of common stock in exchange for all of the outstanding common stock of
Mason-Dixon.
On August 27, 1999, BB&T completed its acquisition of Matewan BancShares,
Inc. ("Matewan") of Williamson, West Virginia. To consummate the transaction,
which was accounted for as a purchase, BB&T issued 3.2 million shares of common
stock in exchange for all of the outstanding common and preferred shares of
Matewan. BB&T recorded goodwill totaling $92.8 million in connection with this
acquisition, which is being amortized using the straight-line method over 15
years.
24
On November 10, 1999, BB&T merged with First Liberty Financial Corp. ("First
Liberty"), based in Macon, Georgia. The transaction was accounted for as a
pooling of interests. BB&T issued 12.4 million shares of common stock in
exchange for all of the outstanding stock of First Liberty.
On January 13, 2000, BB&T completed its merger with Premier Bancshares
("Premier") of Atlanta, Georgia. The transaction, which was completed through
the issuance of 16.8 million shares of BB&T common stock in exchange for all of
the outstanding common and preferred stock of Premier, was accounted for as a
pooling of interests.
Pending Mergers and Acquisitions
On November 17, 1999, BB&T announced plans to merge with Hardwick Holding
Company of Dalton, Georgia ("Hardwick"). Hardwick has $518 million in assets
and operates nine banking offices in northwest Georgia. In exchange for each
share of Hardwick common stock held, shareholders of Hardwick will receive
between .9010 and .9320 shares of BB&T common stock depending on the average
closing price of BB&T common stock over a five-day pricing period ending
shortly before the effective time of the merger. The transaction, which is
expected to be accounted for as a pooling of interests, is planned for
completion in the second quarter of 2000.
On December 15, 1999, BB&T announced plans to merge with First Banking
Company of Southeast Georgia ("First Banking Company"), which is based in
Statesboro. The transaction is expected to be accounted for as a pooling of
interests. With $419 million in assets, First Banking Company operates 12
banking offices in southeast Georgia. Shareholders of First Banking Company
will receive .74 shares of BB&T common stock in exchange for each share of
First Banking Company common stock held. The merger is expected to be completed
in the second quarter of 2000.
On February 7, 2000, BB&T announced plans to merge with One Valley Bancorp,
Inc. ("One Valley") of Charleston, West Virginia. The acquisition, which is
expected to be completed in the third quarter of 2000, will be accounted for as
a pooling of interests. One Valley, which has $6.6 billion in assets, operates
123 branches in West Virginia and Virginia. Shareholders of One Valley will
receive 1.28 shares of BB&T common stock in exchange for each share of One
Valley common stock held.
Analysis of Financial Condition
BB&T's average assets totaled $41.9 billion for the year ended December 31,
1999, an increase of $4.6 billion, or 12.4%, compared to the 1998 average of
$37.3 billion. The major balance sheet categories with increases in average
balances were: loans and leases, up $2.7 billion, or 10.6%; securities, which
increased $1.6 billion, or 16.9%; and other earning assets, which increased
$27.1 million, or 10.7%. The primary components of growth in average loans were
a $2.2 billion, or 18.4% increase in commercial loans and a $779.7 million, or
12.6%, increase in consumer loans, partially offset by a $331.3 million, or
5.0%, decrease in mortgage loans.
BB&T's average deposits totaled $27.0 billion, reflecting growth of $2.2
billion, or 8.9%, compared to 1998. The categories of deposits with the highest
growth rates were money rate savings, which increased $1.3 billion, or 20.4%,
noninterest-bearing deposits, which increased $373.0 million, or 11.0%, and
domestic time deposits, which increased $698.1 million, or 5.8%. The growth
realized in these areas was slightly offset by declines in savings and interest
checking of $217.0 million, or 9.8%.
BB&T has increasingly utilized nondeposit funding sources in recent years to
support balance sheet growth. Short-term borrowed funds include federal funds
purchased, securities sold under repurchase agreements, master notes and
Federal Home Loan Bank ("FHLB") advances. Average short-term borrowed funds
totaled $5.3 billion for the year ended December 31, 1999, an increase of
$880.7 million, or 19.9%, over the 1998 average. BB&T has also utilized long-
term debt based on the
25
flexibility and cost-effectiveness of the alternatives available. Long-term
funding sources also include FHLB advances, subordinated debt issued by the
Corporation and subordinated notes issued by the subsidiary banks. Average
long-term debt totaled $5.8 billion for 1999, up $1.2 billion, or 26.8%,
compared to 1998.
The compound annual rate of growth in average total assets for the five-year
period ended December 31, 1999, was 9.9%. Over the same five-year period,
average loans and leases increased at the compound annual rate of 10.3%,
securities increased at an 8.9% annual rate, and deposits grew at an annual
compound rate of 6.0%. All growth rates have been enhanced by acquisitions
accounted for as purchases.
Securities
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a duration of five years or less to
provide greater flexibility in balance sheet management in changing interest
rate environments. U.S. Treasury securities and U.S. government agency
obligations, excluding mortgage backed securities, comprised 42.7% of the
portfolio at December 31, 1999, and provided adequate current yields with
minimal risk, and maturities structured to address liquidity concerns.
Mortgage-backed securities, which composed 35.5% of the total investment
portfolio at year-end 1999, have higher yields and longer durations. Total
securities increased 7.6% in 1999 to a total of $10.7 billion at the end of the
year.
BB&T holds trading securities as a normal part of its operations. At December
31, 1999, BB&T had trading securities totaling $93.2 million that are reflected
on BB&T's consolidated balance sheet. Market valuation gains and losses in
BB&T's trading portfolio are reflected in current earnings.
Securities held to maturity, which are primarily composed of investments in
obligations of states and municipalities, made up less than 1% of the total
portfolio at December 31, 1999. Securities held to maturity are carried at
amortized cost and totaled $97.1 million at December 31, 1999, compared to
$360.8 million outstanding at the end of 1998. Market valuation gains and
losses in the Corporation's held-to-maturity category affect neither earnings
nor capital. The held-to-maturity portfolio had a net unrealized gain of $.9
million at December 31, 1999.
Securities available for sale totaled $10.5 billion at year-end 1999 and are
carried at estimated fair value. The available-for-sale portfolio is primarily
composed of investments in U.S. Treasuries and government agency obligations,
including mortgage-backed securities. The available-for-sale portfolio also
contains investments in obligations of states and municipalities, which
composed 5.2% of the available-for-sale portfolio, and equity and other
securities, which comprised 15.4% of the portfolio.
26
The following table presents BB&T securities portfolio by category with
maturities and average yields.
Table 12
Securities
December 31, 1999
--------------------------------
Carrying Value Average Yield (3)
-------------- -----------------
(Dollars in thousands)
U.S. Treasury, government and agency
obligations (1):
Within one year $ 963,355 6.41%
One to five years 2,741,709 6.26
Five to ten years 1,293,428 6.56
After ten years 3,347,031 6.47
----------- ----
Total 8,345,523 6.41
----------- ----
States and political subdivisions:
Within one year 32,127 8.49
One to five years 115,044 8.15
Five to ten years 218,154 7.18
After ten years 248,899 7.54
----------- ----
Total 614,224 7.57
----------- ----
Other securities:
Within one year 510 6.82
One to five years 11,678 7.34
Five to ten years 6,602 6.19
After ten years 342,191 6.54
----------- ----
Total 360,981 6.56
----------- ----
Securities with no stated maturity 1,351,659 5.84
----------- ----
Total securities (2) $10,672,387 6.41%
=========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $3.8 billion classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, a more realistic average maturity would be substantially
shorter because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $97.1 million carried at amortized
cost and securities available for sale and trading securities carried at
estimated fair values of $10.5 billion and $93.2 million, respectively.
(3) Fully tax-equivalent basis as applied to amortized cost.
The available-for-sale portfolio composed 98.2% of total securities at
December 31, 1999. Management believes that the high concentration of
securities in the available-for-sale portfolio allows greater flexibility in
the day-to-day management of the overall portfolio than the held-to-maturity
classification.
The market value of the available-for-sale portfolio at year-end 1999 was
$441.5 million less than the amortized cost of these securities. At December
31, 1999, BB&T's available-for-sale portfolio had net unrealized depreciation,
net of deferred income taxes, of $276.2 million, which is reported as a
separate component of shareholders' equity. At December 31, 1998, the
available-for-sale portfolio
27
had net unrealized appreciation of $64.6 million, net of deferred taxes. The
net unrealized losses recorded in the available-for-sale portfolio at year-end
1999 reflect higher interest rates during the year, which sharply decreased the
fair market value of fixed income investments. The unrealized losses in the
available-for-sale portfolio at the end of 1999 were considered by management
to be of a temporary nature and caused by increased market interest rates, not
by concerns about the ability of the issuers to meet their obligations.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.61% for the year ended December 31, 1999, compared to 6.76% for the prior
year. The decline in FTE yield reflects lower yields earned on all categories
of securities due to the higher market interest rates during the year. The
yield on U.S. Treasury and U.S. government agency obligations decreased from
6.74% in 1998 to 6.62% in 1999, while the yield on mortgage-backed securities
decreased from 6.68% to 6.48% and the FTE yield on state and municipal
securities decreased from 8.45% last year to 7.71% in the current year.
Loans And Leases
Loans and leases, including loans held for sale, totaled $29.2 billion at the
end of 1999, an increase of $2.6 billion, or 9.7%, compared to 1998. Average
loans and leases were $27.7 billion for the year ended December 31, 1999, an
increase of $2.7 billion, or 10.6%, over the prior year. The 1999 growth
includes the effects of a mortgage loan securitization program, which totaled
$465.3 million during 1998 and $304.8 million during 1999, and the effects of
loans acquired through the acquisitions accounted for as purchases totaling
$414.6 million in 1999 in 1999 and $1.0 billion in 1998. Excluding the impact
of these items, BB&T' "internal" growth rate in average loans for 1999 was 9.6%
compared with 1998. By category, excluding the securitizations and the purchase
acquisitions, average mortgage loans decreased 6.1% during 1999, average
commercial loans grew 17.8%, and average consumer loans increased 8.6%.
While BB&T's overall loan growth was good during 1999, the mix of the loan
portfolio changed in comparison to 1998. As a result of increases in interest
rates, mortgage lending decreased during the year. During 1999, mortgage loan
originations fell to $4.6 billion from $5.6 billion in 1998. Mortgage loans in
the loan portfolio, including loans held for sale, decreased 5.0% on average in
1999. BB&T's other loan categories, however, experienced growth at a strong
pace during the year. Average commercial loans, including leases, increased
18.4% in 1999 compared to 1998, while average consumer loans, which includes
sales finance, revolving credit and direct retail, increased 12.3% over the
same time frame.
The FTE yield on average total loans decreased from 9.08% for the year ended
December 31, 1998 to 8.85% for 1999. The average yield on mortgage loans for
1999 was 7.50%, down .14% from the yield for 1998. Over the same time frame,
the yields from commercial loans decreased .28% to 8.87% and consumer loan
yields decreased .44% to 9.95%.
Asset Quality
BB&T's asset quality was excellent at December 31, 1999. Nonperforming assets
totaled $131.7 million at year end, a decrease of $9.9 million, or 7.0%,
compared to 1998. As a percentage of total assets, nonperforming assets were
.30% at December 31, 1999, compared to .36% at the end of 1998. As a percentage
of loans plus foreclosed properties, nonperforming assets totaled .45% at
December 31, 1999, compared to .53% at the end of 1998. Loans 90 days or more
past due and still accruing interest decreased slightly to $54.2 million at
year-end 1999 compared to $54.3 million at December 31, 1998.
28
The allowance for loan and lease losses, as a percentage of loans and
leases, was 1.33% at December 31, 1999, compared to 1.36% at year-end 1998.
Net charge-offs as a percentage of average loans and leases also improved
during 1999, decreasing to .27% from .31% in 1998.
The improvements in credit quality measures during 1999 reflect a decrease
in nonaccrual loans and leases, which fell 2.5% to $103.5 million and a 15.9%
decline in assets acquired through foreclosure and repossession, to $27.1
million. BB&T also enjoyed a higher recovery rate for loan charge-offs during
1999. Recoveries of loans previously charged-off increased $4.1 million, or
16.4%, compared to 1998 recoveries.
The following table reflects relevant asset quality information for BB&T for
the past three years.
Table 13
Asset Quality
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Nonaccrual loans and leases* $103,487 $106,123 $115,674
Restructured loans 1,094 3,214 2,492
Foreclosed property 27,121 32,245 41,784
-------- -------- --------
Nonperforming assets $131,702 $141,582 $159,950
======== ======== ========
Loans 90 days or more past due and still
accruing $ 54,244 $ 54,299 $ 49,318
======== ======== ========
Asset Quality Ratios:
Nonaccrual and restructured loans and leases
as a percentage of loans and leases .36% .41% .49%
Nonperforming assets as a percentage of:
Total assets .30 .36 .44
Loans and leases plus foreclosed property .45 .53 .67
Net charge-offs as a percentage of average
loans and leases .27 .31 .39
Allowance for losses as a percentage of loans
and leases 1.33 1.36 1.32
Ratio of allowance for losses to:
Net charge-offs 5.13x 4.65x 3.58x
Nonaccrual and restructured loans and leases 3.71 3.31 2.68
- --------
NOTE: Items referring to loans and leases are net of unearned income and
include loans held for sale.
* Includes $22.6 million, $41.8 million and $47.1 million of impaired loans at
December 31, 1999, 1998 and 1997, respectively.
See Note D in the "Notes to Consolidated Financial Statements."
Allowance for Loan and Lease Losses
BB&T's allowance for loan losses totaled $388.0 million at December 31,
1999, compared to $361.9 million at the end of 1998, or an increase of 7.2%.
As a percentage of loans and leases, the allowance decreased from 1.36% at
December 31, 1998, to 1.33% at the end of 1999 as a result of improving asset
quality measures, both in terms of loans charged off and nonperforming assets.
The ratio of the allowance to net charge-offs increased from 4.65 times for
1998 to 5.13 times during 1999 because of lower net charge-offs in the current
year.
29
The changes in the elements and components of the loan loss allowance related
to commercial loans are summarized as follows:
Commercial Loans--General Reserves--The general reserve percentages disclosed
in Table 5 did not change from 1998 to 1999. The general reserve applied to
commercial loans increased from $138.1 million at December 31, 1998, to $168.1
million at December 31, 1999, primarily because of the 18.5% growth in end of
period commercial loans and leases. The percentage of commercial loans in the
higher risk grades (grades 5-9) also did not change from 1998 to 1999,
indicating a very stable level of asset quality and risk associated with the
commercial loan portfolio.
Commercial Loans--Specific Reserves--Specific reserves applied to commercial
loans increased from $10.8 million at December 31, 1998, to $14.3 million at
December 31, 1999. This increase is due to the aforementioned 18.5% increase in
commercial loans and a 14.1% increase in commercial loans with specific
reserves. The percentage of specific reserves to total reserves on commercial
loans increased from 7.2% to 7.8% at December 31, 1998 and 1999, respectively.
The reserves established to cover losses inherent in the noncommercial
categories of the loan portfolio are derived based on a weighted average of
actual loan losses over the last three years. Thus, these rates change each
year based on trends in actual losses. To calculate the reserve rate, a weight
of 50% is given to the most current year's loan loss percentage. A weight of
30% is applied to the loan loss ratio from two years ago, and the remaining 20%
weight is applied to the loan loss percentage from three years ago.
Mortgage Loans--The weighted average rate applied to the mortgage loan
portfolio at December 31, 1999, was .035%, down slightly from the 1998 reserve
rate of .042%. The resulting allowance decreased from $2.5 million at December
31, 1998, to $1.8 million at December 31, 1999.
Direct Retail--The weighted average rate applied to direct retail loans at
December 31, 1999, was .205%, compared to .271% at December 31, 1998. The
resulting allowance decreased from $11.0 million to $9.9 million from December
31, 1998, to December 31, 1999.
Sales Finance--The weighted average rate applied to sales finance loans at
December 31, 1999, was .85%, compared to .927% at December 31, 1998. The
resulting allowance increased from $12.5 million to $14.8 million from December
31, 1998, to December 31, 1999, because of an 18.6% increase in sales finance
loans outstanding.
Revolving Credit--The weighted average rate applied to revolving credit loans
at December 31, 1999, was 3.193%, compared to 3.5% at December 31, 1998. The
resulting allowance increased from $16.8 million to $18.3 million from December
31, 1998, to December 31, 1999, because of a 9.2% increase in revolving credit
loans outstanding.
Bankcard--BB&T's allowance for bankcards at December 31, 1999, totaled $1.9
million, which reflects a reserve rate of 3.9944% of the outstanding balance of
bankcard loans. At December 31, 1998, the reserve associated with bankcard
loans was $1.8 million, calculated based on a rate of 3.9955%.
Subsidiaries--Other subsidiaries are considered separately for purposes of
calculating the allowance for loan losses. These subsidiaries include BB&T's
sub-prime lending subsidiaries, and subsidiaries that have been merged with
BB&T, but whose accounting systems have not been converted to BB&T's systems.
The sub-prime lending subsidiaries are considered separately because their
operations, loan loss experience and credit management procedures are
substantially different than the general loan portfolio. Merged-but-unconverted
subsidiaries are considered separately because the related loans have not yet
been subjected to BB&T's credit monitoring policies and
30
procedures, nor have they been assigned an appropriate BB&T risk grade.
Management considers historical loan loss experience in determining reserves
for all of these subsidiaries. For merged-but-unconverted subsidiaries,
evidence gathered during due diligence is also considered in calculating the
reserve. At December 31, 1999 and 1998, these subsidiaries had $2.9 billion and
$2.6 billion in total loans outstanding, respectively, and related reserves
totaling $54.8 million and $48.9 million, respectively.
Unallocated--The unallocated allowance totaled $102.4 million at December 31,
1999, down from $119.2 million, or 14.1%, from the unallocated balance at
December 31, 1998. This decrease resulted because the entire allowance from the
subsidiary banks acquired during 1999 was allocated to the appropriate loan
categories. In prior years, the unallocated balances determined by the acquired
banking subsidiaries were combined with BB&T's unallocated calculations, since
these subsidiaries were accounted for as poolings of interests. Excluding these
restatements associated with the acquired banks, the unallocated allowance was
flat, up less than 1%.
Management does not believe that the level of risk inherent in the categories
of the portfolio at year-end 1999 changed substantially compared to year-end
1998. Because of this, there were no changes in the estimation methods or
fundamental assumptions used in the calculations. The higher outstanding
balance of commercial loans and lower balance of mortgage loans at December 31,
1999, compared to year-end 1998, resulted in the fluctuations in specific and
general reserves applicable to those loan types. There were no reallocations of
the allowance from 1998, nor were there any significant changes in asset
quality trends other than the overall improvements noted above.
Deposits and Other Borrowings
Client deposits generated through the BB&T branch network are the largest
source of funds used to support loan and other asset growth. Core deposits
compose BB&T's primary source of funding as depositors have sought greater
returns on their funds for investment, growth rates of core deposits have not
kept pace with asset growth and nondeposit sources have increasingly been used
to fund balance sheet growth.
Total deposits at December 31, 1999, were $27.3 billion, an increase of
$801.5 million, or 3.0%, compared to year-end 1998. The increase in deposits
was driven by an 11.7% increase in money rate savings accounts, a 2.0% increase
in certificates of deposit and a 3.6% increase in noninterest-bearing deposits.
For the year ended December 31, 1999, average total deposits were $27.0
billion, an increase of $2.2 billion, or 8.9%, compared to 1998. This increase
was led by an 11.0% increase in average noninterest-bearing deposits and a
20.4% increase in money rate savings accounts. These increases were offset
somewhat by a 9.8% decrease in average savings and interest checking accounts.
Other time deposits, including individual retirement accounts and certificates
of deposit, increased 5.8% on average in 1999 and remain BB&T's largest
category of average deposits, comprising 47.6% of total deposits. Average
foreign deposits totaled $954.4 million for 1999, an increase of $82.3 million,
or 9.4%, from the prior year average balance.
The average rates paid on interest-bearing deposits decreased during 1999 to
4.14% from 4.40% in 1998. The decrease resulted from lower average rates paid
on all major categories of interest-bearing deposits. The average cost of
certificates of deposit and other time deposits decreased from 5.47% in 1998 to
5.15% in the current year; the cost of interest checking decreased from 1.84%
to 1.51%; savings deposits decreased from 2.08% to 1.75% and money rate savings
accounts decreased from 3.03% in 1999 to 2.92% in 1999.
BB&T continued to focus on restructuring the mix of deposits toward more
cost-effective transaction and savings deposits during 1999. BB&T has acquired
a significant number of thrift institutions over the past several years, which
has resulted in a higher percentage of deposits comprised of certificates of
deposit than many of BB&T's peers. The continued restructuring of the mix of
deposits has reduced that concentration and also reduced the overall cost of
deposits.
31
BB&T also uses various types of short-term borrowed funds to supplement
deposits to fulfill funding needs. The types of short-term borrowings utilized
by the Corporation include Federal funds purchased, which composed 5.6% of
total short-term borrowed funds and securities sold under repurchase
agreements, which comprised 25.9% of short-term borrowed funds at year-end
1999. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank
notes and short-term Federal Home Loan Bank ("FHLB") advances are also utilized
to meet short-term funding needs. Average short-term borrowed funds totaled
$5.3 billion during 1999, an increase of $880.7 million, or 19.9%, during 1999,
while short-term borrowed funds at year-end 1999 were $6.9 billion, an increase
of $3.0 billion, or 76.9%, compared to year-end 1998. This significant increase
in end of period short-term borrowed funds reflects the issuance of $1.6
billion in short-term bank notes during 1999. Management also uses foreign
deposits and, to a lesser degree, brokered certificates of deposit as sources
of funds. The rates paid on average short-term borrowed funds decreased from
5.23% in 1998 to 4.86% during 1999.
BB&T also employs long-term debt to provide funding and, to a lesser extent,
provide Tier 2 capital. Total outstanding long-term debt at December 31, 1999
totaled $5.5 billion, an increase of $78.9 million, or 1.5%, from year-end
1998. For the year ended December 31, 1999, average long-term debt increased
$1.2 billion, or 26.8%, compared to the average for 1998. BB&T's long-term debt
consists primarily of FHLB advances, which composed 64.9% of total outstanding
long-term debt at December 31, 1999, and medium-term bank notes, which composed
17.7% of the year-end balance. FHLB advances are cost-effective long-term
funding sources that provide BB&T the flexibility to structure the debt in a
manner that aids in the management of interest rate risk and liquidity. In an
effort to diversify long-term funding sources and to take advantage of
favorable interest rates, BB&T issued $350 million of subordinated corporate
debt in June 1998 that is puttable to BB&T in 2005. The proceeds of the
corporate debt issuance were primarily used to repurchase shares of BB&T's
common stock subsequently reissued in connection with business combinations.
The average rate paid on long-term debt decreased from 5.77% during 1998 to
5.46% during 1999.
Liquidity needs are a primary consideration in evaluating funding sources.
BB&T's strategy is to maintain funding flexibility, in order for the
Corporation to react rapidly to opportunities that may become available in the
marketplace. BB&T will continue to focus on traditional core funding
strategies, including targeting growth in noninterest-bearing deposits and
money rate savings accounts. Also, if rates and terms are deemed attractive,
additional long-term funding may be pursued.
Analysis of Results of Operations
Consolidated net income for 1999 totaled $612.8 million, which generated
basic earnings per share of $1.86 and diluted earnings per share of $1.83. Net
income for 1998 was $543.2 million and net income for 1997 totaled $408.4
million. Basic earnings per share were $1.67 in 1998 and $1.26 in 1997, while
diluted earnings per share were $1.63 and $1.24, respectively.
BB&T incurred significant expenses related principally to the consummation of
mergers and acquisitions during 1999, 1998 and 1997, which are reflected in
reported earnings. During 1999, BB&T recorded $46.2 million in after-tax
nonrecurring charges primarily associated with the mergers of MainStreet,
Mason-Dixon, First Citizens and First Liberty. These charges were associated
with the consolidation of branch offices and bank operating functions, merger-
related personnel costs and other expenses. Excluding the effects of these
items, BB&T's net income for 1999 would have been $659.1 million, or $1.97 per
diluted share.
In 1998, BB&T incurred $17.9 million in net after-tax charges primarily
incurred in conjunction with mergers and acquisitions. These expenses included
personnel-related expenses, such as staff
32
relocation, early retirement packages and contract settlements; occupancy,
furniture and equipment expenses including branch consolidation; and other
costs, such as operational charge-offs, professional fees, etc. Excluding the
effects of these charges, BB&T's net income for 1998 would have totaled $561.1
million, or $1.69 per diluted share.
During 1997, BB&T incurred $68.1 million in after-tax costs associated with
mergers and acquisitions, primarily the merger with United Carolina Bancshares
Corporation ("UCB"). These costs were similar in type to those outlined in the
preceding paragraph, however, the expenses were offset by a $47.8 million gain
from the divestiture of 23 branch locations, including $505.8 million in
deposits and $232.3 million in loans, in order to comply with anti-trust
regulations. Excluding the net impact of these items, BB&T's net income for
1997 would have been $473.7 million, or $1.43 per diluted share.
Excluding the effect of the above nonrecurring items from the three years
presented, BB&T's net income for 1999 increased $97.9 million, or 17.5%,
compared to 1998, while diluted earnings per share increased $.28, or 16.6%.
Net income for 1998, excluding nonrecurring items, increased $87.4 million, or
18.5%, while diluted earnings per share increased $.26, or 18.2%, compared to
1997.
Two important and commonly used measures of profitability are return on
assets (net income as a percentage of average total assets) and return on
equity (net income as a percentage of average common shareholders' equity). The
returns on average assets produced by BB&T's earnings, excluding the
nonrecurring charges discussed above, were 1.57% for 1999, 1.51% for 1998 and
1.43% for 1997. BB&T's returns on average equity, excluding the nonrecurring
charges, were 20.60%, 19.11% and 17.80%, for the years ended December 31, 1999,
1998 and 1997, respectively.
Net Interest Income
Net interest income is BB&T's primary source of revenue. Net interest income
is influenced by a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned on
earning assets and the interest rates paid to obtain funding to support the
assets. The difference between rates earned on interest-earning assets (with an
adjustment made to tax-exempt income to provide comparability with taxable
income, i.e. the "FTE" adjustment) and the cost of the supporting funds is
measured by the net interest margin. The accompanying table presents the dollar
amount of changes in interest income and interest expense and distinguishes
between the changes related to average outstanding balances of interest-earning
assets and interest-bearing liabilities (volume) and the changes related to
average interest rates on such assets and liabilities (rate). Changes
attributable to both volume and rate have been allocated proportionately.
33
Table 14
FTE Net Interest Income and Rate / Volume Analysis
For the Years Ended December 31, 1999, 1998 and 1997
Average Balances Yield/Rate Income/Expense
----------------------------------- ---------------- --------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
(Dollars in thousands)
Assets
Securities (1):
U.S. Treasury,
government and
other (5) $10,505,953 $ 9,167,307 $ 8,308,770 6.55% 6.70% 6.72% $ 688,262 $ 614,522 $ 558,360
States and
political
subdivisions 600,240 330,713 313,320 7.71 8.45 8.29 46,282 27,934 25,981
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total
securities (5) 11,106,193 9,498,020 8,622,090 6.61 6.76 6.78 734,544 642,456 584,341
Other earning
assets (2) 281,773 254,629 148,956 4.51 5.56 6.66 12,700 14,162 9,917
Loans and
leases, net of
unearned
income (1)(3)(4)(5) 27,729,172 25,065,207 22,438,508 8.85 9.08 9.19 2,455,237 2,276,310 2,063,114
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total earning
assets 39,117,138 34,817,856 31,209,554 8.19 8.42 8.51 3,202,481 2,932,928 2,657,372
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Non-earning
assets 2,790,806 2,452,898 1,979,315
----------- ----------- -----------
Total assets $41,907,944 $37,270,754 $33,188,869
=========== =========== ===========
Liabilities and
Shareholders'
Equity
Interest-bearing
deposits:
Savings and
interest-
checking $ 1,991,050 $ 2,208,008 $ 2,690,514 1.66 1.99 1.91 33,075 44,047 51,462
Money rate
savings 7,452,072 6,187,274 5,102,950 2.92 3.03 3.19 217,612 187,503 162,675
Other time
deposits 13,790,625 13,010,224 12,616,259 5.15 5.47 5.50 710,272 711,200 694,417
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total interest-
bearing
deposits 23,233,747 21,405,506 20,409,723 4.14 4.40 4.45 960,959 942,750 908,554
Short-term
borrowed funds 5,311,658 4,430,989 3,430,232 4.86 5.23 5.28 258,169 231,659 181,140
Long-term debt 5,768,516 4,549,118 3,201,818 5.46 5.77 5.93 314,937 262,564 189,950
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Total interest-
bearing
liabilities 34,313,921 30,385,613 27,041,773 4.47 4.73 4.73 1,534,065 1,436,973 1,279,644
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ----------
Noninterest-
bearing deposits 3,754,025 3,381,007 3,058,444
Other
liabilities 641,003 567,945 427,261
Shareholders'
equity 3,198,995 2,936,189 2,661,391
----------- ----------- -----------