<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
JUNE 30, 2000
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
Commission file number : 1-10853
----------------
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 West Second Street 27101
Winston-Salem, North Carolina (Zip Code)
(Address of Principal Executive
Offices)
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
At July 31, 2000; 399,893,490 shares of the registrant's common stock, $5
par value, were outstanding.
----------------
This Form 10-Q has 29 pages. The Exhibit Index is included on page 28.
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<PAGE>
BB&T CORPORATION
FORM 10-Q
June 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................ 2
Consolidated Financial Statements................................ 2
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Analysis of Financial Condition.................................. 13
Market Risk Management........................................... 18
Capital Adequacy and Resources................................... 21
Analysis of Results of Operations................................ 21
Item 3.Quantitative and Qualitative Disclosures About Market Risk... 18
Part II. OTHER INFORMATION
Item 1.Legal Proceedings............................................ 28
Item 4.Submission of Matters to a Vote of Security Holders.......... 28
Item 6.Exhibits and Reports on Form 8-K............................. 28
SIGNATURES............................................................ 29
EXHIBIT 11 Calculation of Earnings Per Share.......................... 28
EXHIBIT 27 Financial Data Schedule--Included with electronically-filed
document only.
</TABLE>
1
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Assets
Cash and due from banks............................. $ 1,257,020 $ 1,252,229
Interest-bearing deposits with banks................ 9,789 76,208
Federal funds sold and securities purchased under
resale agreements or similiar arrangements......... 360,258 247,287
Trading securities.................................. 127,344 93,221
Securities available for sale....................... 11,185,310 10,968,969
Securities held to maturity (approximate market
values of $68,727 at June 30, 2000, and $119,172 at
December 31, 1999)................................. 68,241 118,567
Loans held for sale................................. 258,446 363,255
Loans and leases, net of unearned income............ 32,926,012 31,011,154
Allowance for loan and lease losses................. (436,836) (423,140)
----------- -----------
Loans and leases, net.............................. 32,489,176 30,588,014
----------- -----------
Premises and equipment, net......................... 620,877 613,428
Other assets........................................ 2,419,657 2,099,211
----------- -----------
Total assets...................................... $48,796,118 $46,420,389
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits........................ $ 4,513,694 $ 4,287,674
Savings and interest checking....................... 1,817,433 2,176,812
Money rate savings.................................. 8,692,402 8,540,340
Other time deposits................................. 15,754,591 14,032,549
Foreign deposits.................................... 1,047,057 529,401
----------- -----------
Total deposits..................................... 31,825,177 29,566,776
----------- -----------
Short-term borrowed funds............................ 5,569,460 7,119,303
Long-term debt....................................... 6,865,786 5,531,604
Accounts payable and other liabilities............... 851,143 697,816
----------- -----------
Total liabilities.................................. 45,111,566 42,915,499
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued and outstanding............ -- --
Common stock, $5 par, 500,000,000 shares authorized;
356,760,711 issued and outstanding at June 30,
2000, and 355,956,505 at December 31, 1999......... 1,783,804 1,779,783
Additional paid-in capital.......................... 264,650 257,683
Retained earnings................................... 1,937,846 1,764,232
Unearned income and unvested restricted stock....... (8,398) (11,676)
Accumulated other nonshareholder changes in equity,
net of deferred income taxes of $(173,193) at June
30, 2000 and $(169,893) at December 31, 1999....... (293,350) (285,132)
----------- -----------
Total shareholders' equity......................... 3,684,552 3,504,890
----------- -----------
Total liabilities and shareholders' equity......... $48,796,118 $46,420,389
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on
loans and leases...... $ 762,184 $ 636,396 $ 1,482,270 $ 1,250,724
Interest and dividends
on securities......... 181,294 176,422 359,799 336,378
Interest on short-term
investments........... 6,005 5,274 10,769 9,421
------------ ------------ ------------ ------------
Total interest income.. 949,483 818,092 1,852,838 1,596,523
------------ ------------ ------------ ------------
Interest Expense
Interest on deposits... 311,718 253,284 601,350 505,683
Interest on short-term
borrowed funds........ 95,957 65,364 187,947 115,880
Interest on long-term
debt.................. 92,691 77,753 170,595 152,251
------------ ------------ ------------ ------------
Total interest
expense............... 500,366 396,401 959,892 773,814
------------ ------------ ------------ ------------
Net Interest Income..... 449,117 421,691 892,946 822,709
Provision for loan and
lease losses.......... 25,250 23,739 48,914 45,594
------------ ------------ ------------ ------------
Net Interest Income
After Provision for
Loan and Lease Losses.. 423,867 397,952 844,032 777,115
------------ ------------ ------------ ------------
Noninterest Income
Service charges on
deposit accounts...... 59,136 52,888 114,510 105,776
Investment banking and
brokerage fees and
commissions........... 40,652 38,307 85,417 52,318
Mortgage banking
income................ 23,253 44,234 49,071 90,753
Trust income........... 15,534 13,622 30,568 26,920
Agency insurance
commissions........... 29,163 16,831 57,268 33,716
Other insurance
commissions........... 3,315 2,848 6,325 5,987
Other nondeposit fees
and commissions....... 30,946 28,781 58,362 53,615
Securities gains
(losses), net......... (904) (2,895) (1,180) (2,701)
Other income........... 25,660 12,565 42,932 26,553
------------ ------------ ------------ ------------
Total noninterest
income................ 226,755 207,181 443,273 392,937
------------ ------------ ------------ ------------
Noninterest Expense
Personnel expense...... 205,667 187,632 414,578 356,583
Occupancy and equipment
expense............... 58,110 54,483 119,487 109,420
Amortization of
intangibles and
mortgage servicing
rights................ 18,209 18,508 36,333 36,197
Other noninterest
expense............... 110,249 97,064 215,160 189,589
------------ ------------ ------------ ------------
Total noninterest
expense............... 392,235 357,687 785,558 691,789
------------ ------------ ------------ ------------
Earnings
Income before income
taxes................. 258,387 247,446 501,747 478,263
Provision for income
taxes................. 85,643 79,545 163,259 153,831
------------ ------------ ------------ ------------
Net income............. $ 172,744 $ 167,901 $ 338,488 $ 324,432
============ ============ ============ ============
Per Common Share
Net income:
Basic................. $ .48 $ .48 $ .95 $ .92
============ ============ ============ ============
Diluted............... $ .48 $ .47 $ .94 $ .91
============ ============ ============ ============
Cash dividends paid.... $ .20 $ .175 $ .40 $ .35
============ ============ ============ ============
Average Shares
Outstanding
Basic................. 356,648,577 351,436,110 356,452,393 351,416,111
============ ============ ============ ============
Diluted............... 361,367,789 358,314,342 360,965,480 358,331,372
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Shares of Additional Retained Nonshareholder Total
Common Common Paid-In Earnings Changes Shareholders'
Stock Stock Capital and Other* in Equity Equity
----------- ---------- ---------- ---------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998, as restated...... 351,730,921 $1,758,655 $210,112 $1,399,976 $ 66,653 $3,435,396
Add (Deduct)
Nonshareholder changes
in equity:**
Net income............. -- -- -- 324,432 -- 324,432
Unrealized holding
gains (losses)
arising during the
period............... -- -- -- -- (193,869) (193,869)
Less: reclassification
adjustment, net of
tax of $869.......... -- -- -- -- 1,832 1,832
----------- ---------- -------- ---------- --------- ----------
Net unrealized gains
(losses) on
securities............ -- -- -- -- (192,037) (192,037)
----------- ---------- -------- ---------- --------- ----------
Total nonshareholder
changes in equity..... -- -- -- 324,432 (192,037) 132,395
----------- ---------- -------- ---------- --------- ----------
Common stock issued.... 6,250,505 31,252 157,466 -- -- 188,718
Redemption of common
stock................. (6,753,200) (33,766) (241,995) -- -- (275,761)
Cash dividends declared
on common stock....... -- -- -- (116,531) -- (116,531)
Other.................. -- -- -- (12,876) -- (12,876)
----------- ---------- -------- ---------- --------- ----------
Balance, June 30, 1999.. 351,228,226 $1,756,141 $125,583 $1,595,001 $(125,384) $3,351,341
=========== ========== ======== ========== ========= ==========
Balance, December 31,
1999, as restated...... 355,956,505 $1,779,783 $257,683 $1,752,556 $(285,132) $3,504,890
Add (Deduct)
Nonshareholder changes
in equity:**
Net income............. -- -- -- 338,488 -- 338,488
Unrealized holding
gains (losses)
arising during the
period............... -- -- -- -- (9,014) (9,014)
Less: reclassification
adjustment, net of
tax of $384 -- -- -- -- 796 796
----------- ---------- -------- ---------- --------- ----------
Net unrealized gains
(losses) on
securities............ -- -- -- -- (8,218) (8,218)
----------- ---------- -------- ---------- --------- ----------
Total nonshareholder
changes in equity..... -- -- -- 338,488 (8,218) 330,270
----------- ---------- -------- ---------- --------- ----------
Common stock issued.... 1,148,206 5,741 14,302 -- -- 20,043
Redemption of common
stock................. (344,000) (1,720) (7,335) -- -- (9,055)
Cash dividends declared
on common stock....... -- -- -- (164,876) -- (164,876)
Other.................. -- -- -- 3,280 -- 3,280
----------- ---------- -------- ---------- --------- ----------
Balance, June 30, 2000.. 356,760,711 $1,783,804 $264,650 $1,929,448 $(293,350) $3,684,552
=========== ========== ======== ========== ========= ==========
</TABLE>
--------
* Other includes unearned income and unvested restricted stock.
** Comprehensive income as defined by SFAS No. 130.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income........................................... $ 338,488 $ 324,432
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses................. 48,914 45,594
Depreciation of premises and equipment.............. 39,983 43,299
Amortization of intangibles and mortgage servicing
rights............................................. 36,333 36,197
Accretion of negative goodwill...................... (3,122) (3,121)
Amortization of unearned stock compensation......... 3,278 1,022
Discount accretion and premium amortization on
securities, net.................................... (2,134) (530)
Net decrease (increase) in trading account
securities......................................... (34,123) (25,449)
Loss (gain) on sales of securities, net............. 1,180 2,701
Loss (gain) on disposals of premises and equipment,
net................................................ 2,621 (3,796)
Proceeds from sales of loans held for sale.......... 922,182 3,332,414
Purchases of loans held for sale.................... (250,245) (685,362)
Origination of loans held for sale, net of principal
collected.......................................... (569,483) (2,057,780)
Decrease (increase) in:
Accrued interest receivable......................... (52,138) (21,943)
Other assets........................................ (345,205) (168,336)
Increase (decrease) in:
Accrued interest payable............................ 3,450 12,699
Accounts payable and other liabilities.............. 205,144 112,972
Other, net........................................... 2,779 (6,461)
----------- -----------
Net cash provided by operating activities........... 347,902 938,552
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for
sale............................................... 110,990 408,785
Proceeds from maturities, calls and paydowns of
securities available for sale...................... 1,058,338 1,723,507
Purchases of securities available for sale.......... (881,430) (3,963,927)
Proceeds from maturities, calls and paydowns of
securities held to maturity........................ 34,027 61,097
Purchases of securities held to maturity............ (5,235) (32,680)
Leases made to customers............................ (61,827) (63,262)
Principal collected on leases....................... 45,068 35,463
Loan originations, net of principal collected....... (2,179,013) (1,297,029)
Purchases of loans.................................. (273,386) (5,658)
Net cash acquired in transactions accounted for
under the purchase method.......................... -- 146,587
Purchases and originations of mortgage servicing
rights............................................. (11,842) (67,898)
Proceeds from disposals of premises and equipment... 5,797 24,542
Purchases of premises and equipment................. (52,969) (77,137)
Proceeds from sales of foreclosed property.......... 13,016 17,627
Proceeds from sales of other real estate held for
development or sale................................ 1,033 8,510
Other, net.......................................... (623) 561
----------- -----------
Net cash used in investing activities............... (2,198,056) (3,080,912)
----------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits................. 2,258,401 35,531
Net increase (decrease) in short-term borrowed
funds.............................................. (1,549,843) 2,592,041
Proceeds from long-term debt........................ 4,358,813 1,105,672
Repayments of long-term debt........................ (3,024,631) (909,564)
Net proceeds from common stock issued............... 10,170 14,164
Redemption of common stock.......................... (9,055) (275,761)
Cash dividends paid on common stock................. (142,358) (119,847)
Other, net.......................................... -- 4,880
----------- -----------
Net cash provided by financing activities........... 1,901,497 2,447,116
----------- -----------
Net Increase in Cash and Cash Equivalents............ 51,343 304,756
Cash and Cash Equivalents at Beginning of Period..... 1,575,724 1,587,475
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,627,067 $ 1,892,231
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest............................................ $ 956,442 $ 682,282
Income taxes........................................ 69,893 43,698
Noncash financing and investing activities:
Transfer of securities held to maturity to available
for sale........................................... 21,445 47,265
Transfer of loans to foreclosed property............ 12,117 13,328
Transfer of other real estate owned to fixed
assets............................................. 3,616 1,153
Transfer of fixed assets to other real estate
owned.............................................. 735 582
Tax benefit from exercise of stock options.......... 3,088 12,999
Securitization of mortgage loans.................... 493,269 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
A. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated balance sheets of BB&T Corporation and subsidiaries (referred to
herein as "BB&T", "the Corporation" or "the Company") as of June 30, 2000 and
December 31, 1999; the consolidated statements of income for the three and six
months ended June 30, 2000 and 1999; the consolidated statements of changes in
shareholders' equity for the six months ended June 30, 2000 and 1999; and the
consolidated statements of cash flows for the six months ended June 30, 2000
and 1999.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the
footnotes included in BB&T's 1999 Annual Report on Form 10-K, as restated in
BB&T's Current Report on Form 8-K filed on April 28, 2000, should be referred
to in connection with the reading of these unaudited interim consolidated
financial statements. In certain instances, amounts reported in the 1999
financial statements have been reclassified to conform to the 2000 statement
presentation. Such reclassifications, if any, have no effect on shareholders'
equity or net income. In addition, the 1999 consolidated financial statements
included herein have been restated to retroactively reflect BB&T's mergers
with Hardwick Holding Company ("Hardwick"), which was completed on June 13,
2000, and First Banking Company of Southeast Georgia ("First Banking
Company"), which was completed on June 15, 2000. Both transactions were
accounted for as poolings of interests.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Forward-Looking Statements
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These
forward-looking statements involve risks and uncertainties and are based on
the beliefs and assumptions of the management of BB&T, and on the information
available to management at the time that these disclosures were prepared.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) changes in the interest
rate environment may reduce margins; (3) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality and/or a reduced demand
for credit; (4) legislative or regulatory changes, including changes in
accounting standards, may adversely affect the businesses in which BB&T is
engaged; (5) costs or difficulties related to the integration of the
businesses of BB&T and its merger partners may be greater than expected; (6)
expected cost savings associated with pending mergers may not be fully
realized or realized within the expected time frame; (7) deposit attrition,
customer loss or revenue loss following pending mergers may be greater than
expected; (8) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than BB&T;
and (9) adverse changes may occur in the securities markets.
6
<PAGE>
B. Nature of Operations
BB&T Corporation is a financial holding company headquartered in Winston-
Salem, North Carolina. BB&T conducts its operations in North Carolina, South
Carolina, Virginia, Maryland, Georgia, West Virginia, Kentucky and Washington,
D.C. through its commercial banking subsidiaries and other subsidiaries.
BB&T's principal banking subsidiaries, Branch Banking and Trust Company
("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T-SC")
and Branch Banking and Trust Company of Virginia ("BB&T-VA"), provide a wide
range of traditional banking services to individuals and commercial customers.
Substantially all of BB&T's loans are to individuals residing in the market
areas described above or to businesses that are located in this geographic
area. Subsidiaries of BB&T's commercial banking units offer lease financing to
commercial businesses and municipal governments, investment services,
(including discount brokerage services, annuities, mutual funds and government
and municipal bonds), life insurance, property and casualty insurance on an
agency basis and insurance premium financing. Other direct subsidiaries of
BB&T provide a variety of financial services including automobile lending,
equipment financing, factoring, full-service securities brokerage, investment
banking and corporate finance services.
C. New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities --Deferral of the Effective Date of FASB Statement No. 133," which
delays the original effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
which amends SFAS No. 133. SFAS No. 138 addresses a limited number of issues
related to the implementation of SFAS No. 133. The implementation of SFAS No.
133, as amended, is not expected to have a material effect on BB&T's
consolidated financial position or consolidated results of operations.
On January 1, 1999, BB&T adopted the provisions of SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The
implementation of the statement did not have a material impact on BB&T's
consolidated financial position or consolidated results of operations.
7
<PAGE>
D. Mergers and Acquisitions
The following table presents summary information with respect to mergers and
acquisitions completed during 1999 and 2000:
Summary of Completed Mergers and Acquisitions
<TABLE>
<CAPTION>
Goodwill
Date of Accounting Goodwill Amortization
Acquisition Acquired Institution Headquarters Total Assets Method Recorded Period
----------- ------------------------------------ ----------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
July 6, 2000 One Valley Bancorp, Inc. Charleston, W.Va. $ 6.4 billion Pooling $ N/A N/A
June 15, 2000 First Banking Company of
Southeast Georgia Statesboro, Ga. 420.0 million Pooling N/A N/A
June 13, 2000 Hardwick Holding Company Dalton, Ga. 507.2 million Pooling N/A N/A
January 13, 2000 Premier Bancshares, Inc. Atlanta, Ga. 2.0 billion Pooling N/A N/A
November 10, 1999 First Liberty Financial Corp. Macon, Ga. 1.7 billion Pooling N/A N/A
August 27, 1999 Matewan BancShares, Inc. Williamson, W.Va. 734.7 million Purchase 92.8 million 15 Years
July 14, 1999 Mason-Dixon Bancshares, Inc. Westminster, Md. 1.2 billion Pooling N/A N/A
July 9, 1999 First Citizens Corporation Newnan, Ga. 417.8 million Pooling N/A N/A
March 26, 1999 Scott & Stringfellow Financial, Inc. Richmond, Va. 262.1 million Purchase 72.8 million 15 Years
March 5, 1999 MainStreet Financial Corporation Martinsville, Va. 2.0 billion Pooling N/A N/A
<CAPTION>
BB&T Common
Shares
Issued to
Date of Complete
Acquisition Transaction
----------- ------------
<S> <C>
July 6, 2000 43.1 million
June 15, 2000
4.1 million
June 13, 2000 3.9 million
January 13, 2000 16.8 million
November 10, 1999 12.4 million
August 27, 1999 3.2 million
July 14, 1999 6.6 million
July 9, 1999 3.2 million
March 26, 1999 3.6 million
March 5, 1999 16.8 million
</TABLE>
N/A--Not Applicable
Under the provisions of SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchase Enterprises," BB&T typically provides an allocation
period, not to exceed one year, to identify and quantify the assets acquired
and liabilities assumed in business combinations accounted for as purchases.
Management currently does not anticipate any material adjustments to the
assigned values of the assets and liabilities of acquired companies.
BB&T also acquired an insurance agency during June of 2000. To complete the
acquisition, BB&T issued approximately 238,000 shares of common stock. In
conjunction with the transaction, BB&T recorded $6.7 million in goodwill,
which is being amortized using the straight-line method over 15 years. During
the first six months of 1999, BB&T acquired seven insurance agencies. In
total, BB&T issued approximately 950,000 shares of common stock and recorded
$36.1 million in goodwill in conjunction with the transactions. The goodwill
is being amortized using the straight-line method over a period of 15 years.
Pending Merger
On July 27, 2000, BB&T announced plans to merge with FCNB Corp, of
Frederick, Maryland. FCNB Corp has approximately $1.6 billion in assets and
operates 34 banking offices, primarily in central Maryland. FCNB Corp's
shareholders will receive .725 shares of BB&T common stock in exchange for
each share of FCNB Corp held. The transaction is expected to be accounted for
as a pooling of interests and projected to close in the first quarter of 2001.
8
<PAGE>
E. Calculation of Earnings Per Common Share
BB&T's basic and diluted earnings per common share amounts were calculated
as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Weighted average number
of common shares
outstanding during the
period................. 356,648,577 351,436,110 356,452,393 351,416,111
============ ============ ============ ============
Net income.............. $ 172,744 $ 167,901 $ 338,488 $ 324,432
============ ============ ============ ============
Basic earnings per
share.................. $ .48 $ .48 $ .95 $ .92
============ ============ ============ ============
Diluted Earnings Per
Share:
Weighted average number
of common shares....... 356,648,577 351,436,110 356,452,393 351,416,111
Add:
Dilutive effect of
outstanding options
(as determined by
application of
treasury stock
method).............. 4,719,212 6,878,232 4,513,087 6,915,261
------------ ------------ ------------ ------------
Weighted average number
of common shares, as
adjusted............... 361,367,789 358,314,342 360,965,480 358,331,372
============ ============ ============ ============
Net income.............. $ 172,744 $ 167,901 $ 338,488 $ 324,432
============ ============ ============ ============
Diluted earnings per
share.................. $ .48 $ .47 $ .94 $ .91
============ ============ ============ ============
</TABLE>
F. Segment Disclosures
BB&T's operations are divided into six reportable business segments: the
Banking Network, Mortgage Banking, Trust Services, Agency Insurance,
Investment Banking and Brokerage, and Treasury. These operating segments have
been identified based primarily on BB&T's existing organizational structure.
The segments require unique technology and marketing strategies and offer
different products and services. While BB&T is managed as an integrated
organization, individual executive managers are held accountable for the
operations of the business segments that report to them.
BB&T's strategies for revenue growth are focused on developing and expanding
client relationships through quality service delivery coupled with an
effective sales culture. The segment results presented herein are based on
internal management accounting policies that are designed to support these
strategic objectives. Unlike financial accounting, there is no comprehensive
authoritative body of guidance for management accounting equivalent to
generally accepted accounting principles. Therefore, the performance of the
segments is not comparable with BB&T's consolidated results or with similar
information presented by any other financial institution. Additionally,
because of the interrelationships of the various segments, the information
presented is not necessarily indicative of the segments' financial performance
if they operated as independent entities.
Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's
Current Report on Form 8-K, filed on April 28, 2000, for a description of
internal accounting policies and the basis of segmentation, including a
description of the segments presented in the accompanying tables. There have
been no significant changes from the methods used to develop the segment
disclosures contained therein.
The following tables disclose selected financial information for BB&T's
reportable business segments for the periods as indicated:
9
<PAGE>
BB&T Corporation
Reportable Segments
For the Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Investment
Agency Banking and
Banking Network Mortgage Banking Trust Services Insurance Brokerage
----------------------- ---------------------- ---------------- --------------- -----------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
----------- ----------- ---------- ---------- ------- ------- ------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income (expense)
from external
customers....... $ 343,619 $ 267,340 $ 119,054 $ 104,176 $(9,753) $(8,330) $ -- $ -- $ 2,982 $ 2,258
Net intersegment
interest income
(expense)....... 117,317 80,616 (92,102) (75,113) 13,296 10,231 -- -- -- --
----------- ----------- ---------- ---------- ------- ------- ------- ------- -------- --------
Net interest
income.......... 460,936 347,956 26,952 29,063 3,543 1,901 -- -- 2,982 2,258
----------- ----------- ---------- ---------- ------- ------- ------- ------- -------- --------
Provision for
loan and lease
losses.......... 31,893 25,818 727 687 -- -- -- -- -- --
Noninterest
income from
external
customers....... 84,987 59,551 16,615 39,127 16,583 14,373 26,096 16,389 41,516 39,431
Intersegment
noninterest
income.......... 31,499 33,148 -- -- -- -- -- -- -- --
Noninterest
expense......... 196,847 170,605 11,286 21,137 11,107 9,259 18,758 14,029 40,780 37,067
Intersegment
noninterest
expense......... 82,237 61,944 5,231 4,668 907 715 1,025 686 378 448
----------- ----------- ---------- ---------- ------- ------- ------- ------- -------- --------
Income before
income taxes.... 266,445 182,288 26,323 41,698 8,112 6,300 6,313 1,674 3,340 4,174
Provision for
income taxes.... 81,402 46,946 7,383 15,737 2,738 1,809 2,525 688 1,728 2,112
----------- ----------- ---------- ---------- ------- ------- ------- ------- -------- --------
Net income...... $ 185,043 $ 135,342 $ 18,940 $ 25,961 $ 5,374 $ 4,491 $ 3,788 $ 986 $ 1,612 $ 2,062
=========== =========== ========== ========== ======= ======= ======= ======= ======== ========
Identifiable
segment assets.. $28,069,670 $25,118,248 $6,074,890 $5,688,897 $31,367 $21,330 $76,974 $45,573 $673,325 $915,979
=========== =========== ========== ========== ======= ======= ======= ======= ======== ========
<CAPTION>
Treasury All Other Segments(1) Total Segments
------------------------ --------------------- -----------------------
2000 1999 2000 1999 2000 1999
----------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net interest
income (expense)
from external
customers....... $ 20,210 $ 39,183 $ 90,989 $ 60,731 $ 567,101 $ 465,358
Net intersegment
interest income
(expense)....... 19,091 (5,453) -- -- 57,602 10,281
----------- ------------ ---------- ---------- ----------- -----------
Net interest
income.......... 39,301 33,730 90,989 60,731 624,703 475,639
----------- ------------ ---------- ---------- ----------- -----------
Provision for
loan and lease
losses.......... 31 23 13,693 4,127 46,344 30,655
Noninterest
income from
external
customers....... 7,105 (1,659) 52,959 7,358 245,861 174,570
Intersegment
noninterest
income.......... -- -- -- -- 31,499 33,148
Noninterest
expense......... 1,833 1,545 25,125 13,767 305,736 267,409
Intersegment
noninterest
expense......... 138 1,553 3,780 1,654 93,696 71,668
----------- ------------ ---------- ---------- ----------- -----------
Income before
income taxes.... 44,404 28,950 101,350 48,541 456,287 313,625
Provision for
income taxes.... 12,701 11,598 29,093 8,139 137,570 87,029
----------- ------------ ---------- ---------- ----------- -----------
Net income...... $ 31,703 $ 17,352 $ 72,257 $ 40,402 $ 318,717 $ 226,596
=========== ============ ========== ========== =========== ===========
Identifiable
segment assets.. $14,266,529 $11,738,763 $3,017,242 $2,709,394 $52,209,997 $46,238,184
=========== ============ ========== ========== =========== ===========
</TABLE>
10
<PAGE>
BB&T Corporation
Reportable Segments
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Investment
Agency Banking and
Banking Network Mortgage Banking Trust Services Insurance Brokerage
----------------------- ---------------------- ------------------ --------------- -----------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income (expense)
from external
customers....... $ 618,483 $ 494,911 $ 224,176 $ 215,833 $(19,252) $(16,483) $ -- $ -- $ 6,030 $ 2,513
Net intersegment
interest income
(expense)....... 211,448 166,898 (165,199) (152,913) 25,855 20,192 -- -- -- --
----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- --------
Net interest
income.......... 829,931 661,809 58,977 62,920 6,603 3,709 -- -- 6,030 2,513
----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- --------
Provision for
loan and lease
losses.......... 58,929 49,035 1,380 1,490 -- -- -- -- -- --
Noninterest
income from
external
customers....... 177,098 164,969 35,653 79,740 32,185 28,470 53,458 32,880 85,999 55,747
Intersegment
noninterest
income.......... 56,324 69,675 -- -- -- -- -- -- -- --
Noninterest
expense......... 370,239 332,806 22,453 42,276 22,032 18,829 38,030 26,117 84,531 47,942
Intersegment
noninterest
expense......... 155,423 120,740 10,484 9,347 1,814 1,436 2,049 1,373 752 896
----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- --------
Income before
income taxes.... 478,762 393,872 60,313 89,547 14,942 11,914 13,379 5,390 6,746 9,422
Provision for
income taxes.... 149,577 116,128 18,599 33,860 5,023 3,490 5,310 2,166 3,299 4,171
----------- ----------- ---------- ---------- -------- -------- ------- ------- -------- --------
Net income...... $ 329,185 $ 277,744 $ 41,714 $ 55,687 $ 9,919 $ 8,424 $ 8,069 $ 3,224 $ 3,447 $ 5,251
=========== =========== ========== ========== ======== ======== ======= ======= ======== ========
Identifiable
segment assets.. $28,069,670 $25,118,248 $6,074,890 $5,688,897 $ 31,367 $ 21,330 $76,974 $45,573 $673,325 $915,979
=========== =========== ========== ========== ======== ======== ======= ======= ======== ========
<CAPTION>
Treasury All Other Segments(1) Total Segments
------------------------ --------------------- -----------------------
2000 1999 2000 1999 2000 1999
----------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net interest
income (expense)
from external
customers....... $ 45,938 $ 79,216 $ 128,034 $ 110,730 $ 1,003,409 $ 886,720
Net intersegment
interest income
(expense)....... 33,686 (9,802) -- -- 105,790 24,375
----------- ------------ ---------- ---------- ----------- -----------
Net interest
income.......... 79,624 69,414 128,034 110,730 1,109,199 911,095
----------- ------------ ---------- ---------- ----------- -----------
Provision for
loan and lease
losses.......... 61 45 19,482 8,237 79,852 58,807
Noninterest
income from
external
customers....... 13,231 (305) 61,786 13,617 459,410 375,118
Intersegment
noninterest
income.......... -- -- -- -- 56,324 69,675
Noninterest
expense......... 2,588 2,618 41,706 25,776 581,579 496,364
Intersegment
noninterest
expense......... 276 4,012 4,456 3,038 175,254 140,842
----------- ------------ ---------- ---------- ----------- -----------
Income before
income taxes.... 89,930 62,434 124,176 87,296 788,248 659,875
Provision for
income taxes.... 20,299 22,400 36,573 13,348 238,680 195,563
----------- ------------ ---------- ---------- ----------- -----------
Net income...... $ 69,631 $ 40,034 $ 87,603 $ 73,948 $ 549,568 $ 464,312
=========== ============ ========== ========== =========== ===========
Identifiable
segment assets.. $14,266,529 $11,738,763 $3,017,242 $2,709,394 $52,209,997 $46,238,184
=========== ============ ========== ========== =========== ===========
</TABLE>
11
<PAGE>
The following table presents a reconciliation of total segment results to
consolidated results.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ---------------------
2000 1999 2000 1999
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net Interest Income
Net interest income from
segments................... $ 624,703 $ 475,639 $1,109,199 $ 911,095
Other net interest
income(2).................. 34,674 18,244 55,523 31,367
Elimination of net
intersegment interest
income(3).................. (210,260) (72,192) (271,776) (119,753)
----------- ----------- ---------- ---------
Consolidated net interest
income................... $ 449,117 $ 421,691 $ 892,946 $ 822,709
=========== =========== ========== =========
Net income
Net income from segments.... $ 318,717 $ 226,596 $ 549,568 $ 464,312
Other net income (loss)(2).. 45,590 (10,853) 13,837 (29,013)
Elimination of intersegment
net income(3).............. (191,563) (47,842) (224,917) (110,867)
----------- ----------- ---------- ---------
Consolidated net income... $ 172,744 $ 167,901 $ 338,488 $ 324,432
=========== =========== ========== =========
<CAPTION>
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C> <C> <C>
Total Assets
Total assets from segments.. $52,209,997 $46,238,184
Other assets(2)............. 2,591,720 2,246,651
Elimination of intersegment
assets(3).................. (6,005,599) (2,064,446)
----------- -----------
Consolidated total
assets................... $48,796,118 $46,420,389
=========== ===========
</TABLE>
--------
(1) Financial data from segments below the quantitative thresholds requiring
disclosure are attributable to nonbank consumer finance operations,
factoring, lawn care equipment financing, leasing and other smaller
banking subsidiaries.
(2) Other net interest income, other net income (loss) and other assets
include amounts by BB&T's support functions not allocated to the various
segments.
(3) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of internal management accounting practices.
These adjustments include the elimination of funds transfer pricing
credits and charges and the elimination of intersegment noninterest income
and noninterest expense, which are allocated to the various segments using
BB&T's internal accounting methods.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at June 30, 2000, were $48.8 billion, a $2.4 billion
increase from the balance at December 31, 1999. The balance sheet categories
that produced the majority of the increase were loans and leases, including
loans held for sale, which grew $1.8 billion; securities available for sale,
which increased $216.3 million; other earning assets, which include federal
funds sold and securities purchased under resale agreements or similar
arrangements, which increased $113.0 million; and other assets, which
increased $320.4 million. These increases were partially offset by declines in
interest-bearing deposits with banks and securities held to maturity, which
declined by a collective $116.7 million compared to year-end 1999.
Total deposits at June 30, 2000, increased $2.3 billion from December 31,
1999, while short-term borrowed funds declined $1.5 billion and long-term debt
increased $1.3 billion during the first six months of 2000. Total
shareholders' equity increased $179.7 million during the same time frame.
The factors causing the fluctuations in these balance sheet categories are
further discussed in the following sections.
Loans and Leases
BB&T experienced solid loan growth during the second quarter and first six
months of 2000, with end of period loans, excluding loans held for sale,
increasing 13.5% on an annualized basis since the end of 1999. Average total
loans for the quarter ended June 30, 2000 increased 11.6% compared to the same
period of 1999. Average total loans for the six months ended June 30 were
$32.2 billion, or 11.2% greater than the average for the first six months of
1999.
BB&T continues to focus lending efforts on commercial and consumer loans,
which generally have greater profit margins than mortgage loans. BB&T acquired
a number of community banks and thrift institutions in recent years, which
resulted in a significant percentage of the consolidated loan portfolio being
composed of mortgages. Through securitization programs and the sale of fixed-
rate mortgage loan originations, combined with BB&T's commercial and consumer
lending focus, the mix of the loan portfolio has changed in the current period
compared to 1999 and prior years. Also, higher mortgage rates during 2000 have
slowed mortgage lending substantially compared to 1999. The portfolio now
includes a higher percentage of commercial and consumer loans and lower
percentage of mortgage loans compared to prior years. Average mortgage loans
decreased 9.8% during the first six months of 2000 compared to the same period
of 1999 and represented 18.4% of average total loans at June 30, 2000,
compared to 22.7% a year ago. Average commercial loans, including leasing,
increased 17.8% during the first six months of 2000 compared to 1999, and now
compose 54.1% of the loan portfolio. Average consumer loans, which includes
sales finance, revolving credit and direct retail, increased 16.5% for the six
months ended June 30, 2000 compared to the same period in 1999 and make up
27.5% of average loans.
These trends are also evident in the second quarter of 2000. For the second
quarter of 2000, average loans totaled $32.7 billion, an increase of 11.6%
compared to the second quarter of 1999. Average commercial loans and leases
increased 16.6% in the second quarter of 2000 to a total of $17.7 billion;
average consumer loans increased 14.9% to total $9.0 billion; while average
mortgage loans decreased 4.9% to a balance of $6.0 billion compared to the
second quarter of 1999.
The growth rates of average loans for the second quarter of 2000 include the
full effect of loan portfolios held by companies that were acquired during
1999 and accounted for as purchases. Also, the securitization of $304.8
million of mortgage loans during 1999 and $493.3 million in 2000 affected the
reported growth in average mortgage loans. During 1999, loans totaling $414.1
million were acquired through the purchase of Matewan and $75.9 million in
loans were added as a result of Premier's acquisition of Farmers and Merchants
Bank. Excluding the effect of these purchase accounting transactions and the
loan securitizations, average "internal" loan growth
13
<PAGE>
for the three months ended June 30, 2000, was 11.9% compared to the second
quarter of 1999. Excluding the effects of purchase accounting transactions and
loan securitizations, average mortgage loans, including loans held for sale,
increased 3.3%, commercial loans grew 15.7%, and consumer loans increased
11.3% in the second quarter of 2000 compared to 1999.
The change in loan mix to a higher percentage of commercial and consumer
loans, the growth of the overall loan portfolio and the increase in the yield
of the portfolio, from 8.80% in the second quarter and 8.78% in the first six
months of 1999 to 9.44% in the second quarter and 9.31% in the first half of
2000, resulted in a 19.8% increase in interest income from loans and leases in
the current quarter and a 18.5% increase in interest income from loans and
leases during the first six months of 2000 compared to the 1999 periods. The
average annualized fully taxable equivalent ("FTE") yields on commercial,
consumer and mortgage loans for the first six months of 2000 were 9.41%,
10.15%, and 7.75%, respectively, resulting in an average yield on the total
loan portfolio of 9.31%. This reflects an increase of 53 basis points over the
8.78% earned on total average loans during the first six months of 1999. The
increase in yields resulted from a higher average prime rate during 2000, as
well as generally higher interest rates prevalent in the debt securities
markets compared to 1999. During the three months ended June 30, 2000, the
prime rate, which is the basis for pricing many commercial and consumer loans,
averaged 9.24%, compared to 7.75% for the comparable period of 1999. For the
first half of 2000, the prime rate averaged 8.97%, compared to 7.75% during
the first six months of 1999.
Securities
Securities available for sale totaled $11.2 billion at June 30, 2000, an
increase of $216.3 million from December 31, 1999. Securities available for
sale had net unrealized losses, net of deferred income taxes, of $293.4
million at June 30, 2000, compared to unrealized losses of $285.1 million at
December 31, 1999. Securities held to maturity totaled $68.2 million, down
$50.3 million from year-end 1999. Trading securities totaled $127.3 million,
an increase of $34.1 million, or 36.6%, compared to the balance at December
31, 1999.
Average total securities for the first six months totaled $11.7 billion, up
4.8% from the average during the first half of 1999. For the second quarter of
2000, average securities totaled $11.8 billion, basically unchanged from the
average balance for the second quarter of 1999.
The mix of the investment portfolio has not changed substantially during
2000 compared to 1999. U.S. Government securities composed 58.5% of the total
portfolio on average, compared to 56.6% in 1999. Mortgage-backed securities
composed 34.6% and state and municipal securities made up 5.9%, compared to
36.9% and 5.7%, respectively, during the first half of 1999.
The annualized FTE yield on the average total securities portfolio for the
first half of 2000 was 6.72%, an increase of 18 basis points from the yield
earned in the first six months of 1999. The increase in the yield on
securities is the result of the generally higher interest rate environment
that has existed during 2000 compared to 1999.
Early in the third quarter of 2000, BB&T restructured the available-for-sale
securities portfolio. This restructuring was undertaken to improve the overall
yield of the portfolio, reduce the duration and improve the liquidity of the
portfolio. BB&T sold $4.8 billion of securities, including U.S. Treasuries,
government agency securities, mortgage-backed securities and collateralized
mortgage obligations, all of which were in a loss position. BB&T incurred
approximately $183 million in pretax losses as a result of this restructuring.
BB&T reinvested the proceeds from these sales in higher yielding securities,
primarily government agency bonds. The restructuring improved the yield on the
restructured portion of the portfolio by 136 basis points, from 6.27% to
7.63%. Management expects to recover the losses incurred in the third quarter
over a three-year period through increased interest income generated as a
result of these restructurings.
14
<PAGE>
One Valley Bancorp, Inc. ("One Valley"), which merged into BB&T on July 6,
2000, also restructured a portion of its available-for-sale securities
portfolio. In the second quarter of 2000, One Valley sold $1 billion of
securities and incurred a pretax loss of approximately $40 million, which
management expects to be recovered over three years. Combined, BB&T and One
Valley sold $5.8 billion of securities at a pretax loss of $223 million. The
yield on the combined restructured portion of the BB&T and One Valley
securities portfolios increased from 6.31% to 7.65% as a result of the
restructuring.
Other Interest-Earning Assets
Federal funds sold and securities purchased under resale agreements or
similar arrangements totaled $360.3 million at June 30, 2000, an increase of
$113.0 million, or 45.7% compared to December 31, 1999. Interest-bearing
deposits with banks declined $66.4 million from December 31, 1999. These
categories of earning assets are subject to large daily fluctuations based on
the availability of these types of funds. The average yield on other interest-
earning assets for the first half of 2000 was 6.31%, an increase from the
4.71% earned during the first six months of 1999. The increase in the yield on
other interest earning assets is principally the result of the increase in the
average Federal funds rate to 6.24% for the second quarter of 2000 compared to
4.75% for the comparable period of 1999.
Other Assets
BB&T's other noninterest-earning assets, excluding premises and equipment,
increased $320.4 million from December 31, 1999 to June 30, 2000. The increase
resulted primarily from the purchases of additional bank-owned life insurance,
which is used as a funding source for certain post-retirement benefits, at a
cost of $350 million.
Deposits
Total end of period deposits increased $2.3 billion from December 31, 1999
to June 30, 2000. Average deposits for the first six months of 2000 increased
$2.0 billion, or 6.8%, compared to the first half of 1999. The categories of
deposits with the highest average rates of growth compared to 1999 were:
certificates of deposit and other time deposits, which grew $315.6 million, or
2.3%; money rate savings accounts, including investor deposit accounts, which
increased $858.1 million, or 11.4%; and noninterest-bearing deposits, which
grew $318.5 million, or 7.9%. The growth realized in these categories was
partially offset by declines of $336.8 million, or 13.6%, in savings and
interest checking.
For the second quarter, average deposits increased 7.4%. Total transaction
accounts, which include noninterest-bearing deposits, savings, interest
checking and money rate savings, totaled $15.0 billion for the second quarter,
an increase of 6.3% compared to the second quarter of 1999. Average time
deposits for the second quarter totaled $16.1 billion, an increase of 8.5%
compared to the second quarter of 1999.
The growth in average deposits reflects deposits acquired in purchase
accounting transactions completed in the latter quarters of 1999. The August
27, 1999 purchase of Matewan resulted in the addition of $575.1 million in
deposits, while Farmers and Merchants Bank, which was purchased by Premier on
November 5, 1999, accounted for $151.1 million in deposit growth. Excluding
the effects of these purchase accounting transactions, average deposits for
the six months ended June 30, 2000 would have increased 4.8% compared to the
first six months of 1999. Excluding purchase accounting, transaction account
deposits, which include noninterest-bearing deposits, savings, interest
checking and money rate savings, would have increased 4.1%, compared to 6.0%
including purchase accounting. Certificate accounts and other time deposits,
including foreign deposits, would have increased 5.6% excluding purchase
accounting transactions. For the second quarter, total average deposits,
excluding the effects of purchase accounting transactions, would have
increased 5.4% compared to the second quarter of 1999.
15
<PAGE>
The annualized average cost of total interest-bearing deposits during the
first six months of 2000 was 4.58%, an increase of 46 basis points compared to
1999.
Short-Term Borrowed Funds
Growth rates for loans, securities and other assets in recent years have
exceeded the growth rates of total deposits. As a result, cost-effective
alternative funding sources, such as Federal Home Loan Bank ("FHLB") advances,
master notes, purchases of Federal funds and sales of securities under
repurchase agreements have been increasingly utilized to support balance sheet
growth.
At June 30, 2000, short-term borrowed funds totaled $5.6 billion, a decrease
of $1.5 billion, or 21.8%, compared to December 31, 1999. For the second
quarter of 2000, average short-term borrowed funds totaled $6.4 billion, which
reflects an increase of $774.1 million, or 13.8%, from the comparable period
of 1999. For the six months ended June 30, 2000, total average short-term
borrowed funds totaled $6.5 billion, an increase of $1.5 billion, or 30.9%,
compared to the first half of 1999. The overall increase in average short-term
borrowed funds was composed primarily of increases in short-term bank notes,
Federal funds purchased and securities sold under repurchase agreements, and
the Treasury tax and loan depository note account.
The average annualized rate paid on short-term borrowed funds was 6.04% for
the second quarter of 2000, an increase of 137 basis points from the average
rate of 4.67% paid in the second quarter of 1999. The increase in the cost of
short-term borrowed funds results from the higher interest rate environment
during 2000, which included a 149 basis point increase in the Federal funds
rate.
Long-Term Debt
Long-term debt consists primarily of FHLB advances, medium term bank notes
and corporate subordinated debt. These borrowings are relatively cost-
effective funding sources and provide BB&T with the flexibility to structure
borrowings in a manner that aids in the management of interest rate risk and
liquidity. Long-term debt totaled $6.9 billion at June 30, 2000, an increase
of $1.3 billion, or 24.1%, from the balance at December 31, 1999. On average,
long-term debt totaled $6.2 billion in the second quarter of 2000, an increase
of $427.9 million, or 7.5%, compared to the second quarter of 1999. For the
first six months of 2000, average long-term debt totaled $5.8 billion, an
increase of $220.9 million, or 3.9%. Long-term debt has been utilized for a
variety of funding needs, including the repurchase of common stock in
conjunction with certain acquisitions.
Asset Quality
BB&T's asset quality, as measured by relative levels of nonperforming assets
and net charge-offs, has remained excellent compared to historic levels and to
published industry averages. Nonperforming assets, composed of foreclosed real
estate and repossessions, nonaccrual loans and restructured loans, totaled
$141.9 million at June 30, 2000, compared to $140.9 million at December 31,
1999. Nonperforming assets, as a percentage of loan-related assets, were .43%
at June 30, 2000, compared to .45% at December 31, 1999. Loans 90 days or more
past due and still accruing interest totaled $56.2 million compared to $55.0
million at year-end 1999.
BB&T's net charge-offs totaled $17.6 million for the second quarter and
amounted to .22% of average loans and leases, on an annualized basis, compared
to $17.5 million, or .24% of average loans and leases, in the corresponding
period in 1999. For the six months ended June 30, 2000, net charge-offs
totaled $35.2 million, or .22% of average loans and leases, compared to $32.5
million, or .23% of average loans and leases, in 1999. The decrease in net
charge-offs as a percentage of average loans and leases results from improved
overall asset quality.
The allowance for loan and lease losses was $436.8 million, or 1.32% of
loans and leases, at June 30, 2000, compared to $423.1 million, or 1.35% of
loans and leases, at December 31, 1999. The allowance has declined slightly as
a percentage of the loan portfolio during 2000 because of the positive overall
asset quality trends.
16
<PAGE>
The provision for loan and lease losses for the second quarter of 2000 was
$25.3 million, compared to $23.7 million in the comparable quarter of 1999.
For the six months, the provision for loan and lease losses totaled $48.9
million compared to $45.6 million in 1999.
Asset quality statistics for the last five calendar quarters are presented
in the accompanying table.
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance For Loan & Lease
Losses
Beginning balance......... $429,191 $423,140 $412,951 $405,282 $398,920
Allowance for acquired
loans.................... -- -- 1,120 7,473 169
Provision for loan and
lease losses............. 25,250 23,664 37,692 22,027 23,739
Net charge-offs........... (17,605) (17,613) (28,623) (21,831) (17,546)
-------- -------- -------- -------- --------
Ending balance............ $436,836 $429,191 $423,140 $412,951 $405,282
======== ======== ======== ======== ========
Risk Assets
Nonaccrual loans and
leases................... $113,677 $109,698 $110,186 $ 97,429 $ 99,625
Foreclosed real estate.... 15,144 16,628 15,634 19,926 20,278
Other foreclosed
property................. 12,585 14,654 13,409 10,740 8,812
Restructured loans........ 501 1,471 1,681 1,951 2,070
-------- -------- -------- -------- --------
Total nonperforming assets.. $141,907 $142,451 $140,910 $130,046 $130,785
======== ======== ======== ======== ========
Loans 90 days or more past
due and still accruing... $ 56,220 $ 43,714 $ 55,015 $ 50,640 $ 45,371
======== ======== ======== ======== ========
Asset Quality Ratios
Nonaccrual loans and leases
as a percentage of total
loans and leases*.......... .34% .35% .36% .33% .34%
Total nonperforming assets
as a percentage of:
Total assets.............. .29 .30 .30 .28 .29
Loans and leases plus
foreclosed property*..... .43 .44 .45 .43 .44
Annualized net charge-offs
as a percentage of average
loans and leases*.......... .22 .22 .37 .29 .24
Allowance for loan and lease
losses as a percentage of
loans and leases*.......... 1.32 1.34 1.35 1.35 1.37
Ratio of allowance for loan
and lease losses to:
Net charge-offs........... 6.17x 6.06x 3.73x 4.77x 5.76x
Nonaccrual and
restructured loans and
leases................... 3.83 3.86 3.78 4.16 3.99
</TABLE>
--------
* All items referring to loans and leases include loans held for sale and are
net of unearned income.
17
<PAGE>
MARKET RISK MANAGEMENT
As a financial institution, BB&T's most significant market risk exposure is
interest rate risk. The primary objective of interest rate risk management is
to minimize the effect that changes in interest rates have on net interest
income. This is accomplished through active management of asset and liability
portfolios with a focus on the strategic pricing of asset and liability
accounts and management of maturity mixes for assets and liabilities. The goal
of these activities is the development of appropriate maturity and repricing
opportunities in BB&T's portfolios of assets and liabilities that will produce
consistent net interest income during periods of changing interest rates.
BB&T's Asset / Liability Management Committee ("ALCO") monitors loan,
investment and liability portfolios to ensure comprehensive management of
interest rate risk.
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the ALCO to determine and achieve the most
appropriate volume and mix of earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to interest rate risk
exposure and liquidity. The ALCO meets regularly to review BB&T's interest
rate risk and liquidity positions in relation to present and prospective
market and business conditions, and adopts funding and balance sheet
management strategies that are intended to ensure that the potential impact on
earnings and liquidity as a result of fluctuations in interest rates is within
acceptable standards.
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets and
inventories. Fluctuations in interest rates and actions of the Board of
Governors of the Federal Reserve System ("FRB") to regulate the availability
and cost of credit have a greater effect on a financial institution's
profitability than do the effects of higher costs for goods and services.
Through its balance sheet management function, BB&T is positioned to respond
to changing interest rates and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of projected earnings to changes in interest rates.
Simulation takes into account the current contractual agreements that BB&T has
made with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer model that incorporates the
current volumes, average rates and scheduled maturities and payments of asset
and liability portfolios, together with multiple scenarios of projected
prepayments, repricing opportunities and anticipated volume growth. Using this
information, the model projects earnings based on projected portfolio balances
under multiple interest rate scenarios. This level of detail is needed to
simulate the effect that changes in interest rates and portfolio balances may
have on the earnings of BB&T. This method is subject to the accuracy of the
assumptions that underlie the process, but it provides a better illustration
of the sensitivity of earnings to changes in interest rates than other
analyses such as static or dynamic gap.
The asset/liability management process requires the determination of a
number of key assumptions. Management determines the most likely outlook for
the economy and interest rates by analyzing external factors, including
published economic projections and data, the effects of likely monetary and
fiscal policies as well as any enacted or prospective regulatory changes.
BB&T's current and prospective liquidity position, current balance sheet
volumes and projected growth, accessibility of funds for short-term needs and
capital maintenance are also considered. This data is combined with various
interest rate scenarios to provide management with information necessary to
analyze interest sensitivity and to aid in the development of strategies to
reach performance goals.
18
<PAGE>
The following table represents the interest sensitivity of BB&T as of June
30, 2000. Key assumptions in the preparation of the table include prepayment
speeds of mortgage-related assets; cash flows and maturities of derivative
financial instruments; changes in market conditions, loan and deposit volumes
and pricing; customer preferences; and capital plans. This tabular data does
not reflect the impact of any changes in the credit quality of BB&T's assets.
To attempt to quantify the potential change in net interest income, given a
change in interest rates, various interest rate scenarios are applied to
projected balances of assets and liabilities incorporating the projected
effect of maturities and repricing opportunities. The resulting change in net
interest income reflects the level of sensitivity that net interest income has
in relation to changing interest rates.
Interest Sensitivity Simulation Analysis
<TABLE>
<CAPTION>
Annualized
Hypothetical
Interest Rate Scenario Percentage
-------------------------------------- Change in
Change in Prime Net Interest
Prime Rate Rate Income
---------- ----- ------------
<S> <C> <C>
+3.00% 12.50% -2.84%
+1.50 11.00 -1.99
-1.50 8.00 2.00
-3.00 6.50 1.86
</TABLE>
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
parallel change in interest rates over three months from the most likely
interest rate scenario, and a maximum of 6% for a 300 basis point change over
12 months. It is management's ongoing objective to effectively manage the
impact of changes in interest rates and minimize the resulting effect on
earnings as evidenced by the preceding table. At June 30, 2000, the
sensitivity of BB&T's net interest income to changes in interest rates was
within management's targets, as illustrated in the accompanying table.
Derivatives and Off-Balance Sheet Financial Instruments
BB&T utilizes a variety of off-balance sheet financial instruments to manage
interest rate sensitivity and net interest income. These instruments, commonly
referred to as derivatives, primarily consist of interest rate swaps, caps,
floors, financial forward and futures contracts and options written and
purchased. Management accounts for these financial instruments as hedges when
the following conditions are met: (1) the specific assets, liabilities, firm
commitments or anticipated transactions (or an identifiable group of
essentially similar items) to be hedged expose BB&T to interest rate risk or
price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
The net interest payable or receivable on interest rate swaps and floors
that are designated as hedges is accrued and recognized as an adjustment to
the interest income or expense of the related asset or liability. For interest
rate forwards, futures and options qualifying as a hedge, gains and losses are
deferred and are recognized in income as an adjustment of yield. Gains and
losses from early terminations of derivatives are deferred and amortized as
yield adjustments over the shorter of the remaining term of the hedged asset
or liability or the remaining term of the derivative instrument. Upon
disposition or settlement of the asset or liability being hedged, deferral
accounting is discontinued and any gains or losses are recognized in income.
Derivative financial instruments that fail to qualify as a hedge are carried
at fair value with gains and losses recognized in current earnings.
19
<PAGE>
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of
credit. All of the derivative contracts to which BB&T is a party settle
monthly, quarterly or semiannually. Accordingly, the amount of off-balance
sheet credit risk to which BB&T is exposed at any time is immaterial. Further,
BB&T has netting agreements with the dealers with which it does business.
Because of these factors, BB&T's off-balance sheet credit risk exposure at
June 30, 2000 was immaterial.
Derivative contracts are written in amounts referred to as notional amounts.
Notional amounts only provide the basis for calculating payments between
counterparties and do not represent amounts to be exchanged between parties
and are not a measure of financial risks. On June 30, 2000, BB&T had
outstanding interest rate swaps, caps and floors outstanding with notional
amounts totaling $2.1 billion. The estimated fair value of open contracts used
for risk management purposes reflected net unrealized losses of $5.2 million
at June 30, 2000.
BB&T uses derivative contracts as synthetic instruments to hedge specified
assets or groups of assets, liabilities or groups of liabilities, forward
commitments and anticipated transactions. BB&T's derivatives are primarily
used to hedge variable rate commercial loans, adjustable rate mortgage loans,
retail certificates of deposit and floating rate notes. These hedges resulted
in a $2.3 million increase in net interest income in the second quarter of
2000 compared to a decrease of $1.3 million in the comparable period of 1999.
For the six months, hedge activity resulted in a $3.6 million increase in net
interest income compared to a prior year reduction in net interest income of
$2.8 million.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments," requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature
and terms of derivative financial instruments. The following tables set forth
certain information concerning BB&T's interest rate swaps, caps, floors and
collars at June 30, 2000:
Interest Rate Swaps, Caps, Floors and Collars
June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Notional Receive Pay Net Unrealized
Type Amount Rate Rate Gains (Losses)
---- -------- ------- ---- --------------
<S> <C> <C> <C> <C>
Receive fixed swaps $1,643,000 7.66% 7.54% $ (11,687)
Pay fixed swaps 458,779 6.54 5.33 6,453
Caps, floors & collars 47,250 - - -
---------- ---------- -------- ----------
Total $2,149,029 7.25% 6.90% $ (5,234)
========== ========== ======== ==========
<CAPTION>
Receive
Fixed Pay Fixed Caps, Floors
Year-to-date Activity Swaps Swaps & Collars Total
--------------------- ------- --------- ------------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1999 $ 745,000 $ 494,361 $62,250 $1,301,611
Additions 1,083,000 14,100 -- 1,097,100
Maturities/amortizations (185,000) (49,682) (15,000) (249,682)
---------- ---------- -------- ----------
Balance, June 30, 2000 $1,643,000 $458,779 $47,250 $2,149,029
========== ========== ======== ==========
<CAPTION>
One to
One Year Five After Five
Maturity Schedule* or Less Years Years Total
------------------ -------- ------ ---------- -----
<S> <C> <C> <C> <C>
Receive fixed swaps $ 550,000 $ 770,000 $323,000 $1,643,000
Pay fixed swaps 5,000 409,810 43,969 458,779
Caps, floors & collars -- 47,250 -- 47,250
---------- ---------- -------- ----------
Total $ 555,000 $1,227,060 $366,969 $2,149,029
========== ========== ======== ==========
</TABLE>
* Maturities are based on full contract extensions.
20
<PAGE>
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority
and is monitored on an ongoing basis. BB&T's principal goals related to
capital are to provide an adequate return to shareholders, while retaining a
sufficient base to support future growth and comply with all regulatory
standards.
Total shareholders' equity was $3.7 billion at June 30, 2000 and $3.5
billion at December 31, 1999. BB&T's book value per common share at June 30,
2000 was $10.33 compared to $9.85 at December 31, 1999.
Financial holding companies and their subsidiaries are subject to regulatory
requirements with respect to risk-based capital adequacy. Risk-based capital
ratios measure capital as a percentage of a combination of risk-weighted
balance sheet and off-balance sheet risk. The risk-weighted values of both
balance sheet and off-balance sheet items are determined in accordance with
risk factors specified by Federal regulatory pronouncements.
Tier 1 capital (total shareholders' equity excluding unrealized gains or
losses on debt securities available for sale, net of tax effect, plus certain
mandatorily redeemable capital securities, less nonqualifying intangible
assets) is required to be at least 4% of risk-weighted assets, and total
capital (Tier 1 capital, a qualifying portion of the allowance for loan and
lease losses and qualifying subordinated debt) must be at least 8% of risk-
weighted assets, with one half of the minimum consisting of Tier 1 capital.
In addition to the risk-based capital measures described above, regulators
have also established minimum leverage capital requirements for banking
organizations. This is the primary measure of capital adequacy used by BB&T's
management, and is calculated by dividing period-end Tier 1 capital by average
tangible assets for the most recent quarter. The minimum required Tier 1
leverage ratio ranges from 3% to 5% depending upon Federal bank regulatory
agency evaluation of an organization's overall safety and soundness.
BB&T's capital adequacy ratios for the last five quarters are presented in
the accompanying table:
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
2000 1999
--------------- -----------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital....................... 9.6% 9.7% 9.5% 9.7% 9.8%
Total capital........................ 12.7 13.2 13.1 13.4 13.5
Tier 1 leverage ratio.................. 7.1 7.1 6.9 6.9 6.9
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the second quarter of 2000 totaled $172.7 million, an
increase of 2.9% over the $167.9 million earned during the comparable quarter
of 1999. On a diluted per share basis, earnings for the three months ended
June 30, 2000 were $.48, compared to $.47 for the same period in 1999, an
increase of 2.1%. BB&T's operating results for the second quarter of 2000
produced an annualized return on average assets of 1.45% and an annualized
return on average shareholders' equity of 19.02% compared to prior year ratios
of 1.52% and 19.33%, respectively.
BB&T's earnings for the second quarters of 2000 and 1999 were adversely
affected by costs principally associated with consummating mergers and
acquisitions and converting the systems of previously acquired institutions.
During the second quarter of 2000, BB&T incurred $21.0 million in after-tax
merger-related charges, primarily associated with completing the mergers with
Hardwick and First Banking Company. These charges included professional fees,
costs in connection with the reduction of staffing levels, early retirement
packages and other personnel-related expenses, losses on the sale of
securities, losses related to facilities and equipment write-offs, and an
additional provision for loan and lease losses to align the asset quality
policies of the acquired institutions with those of BB&T.
21
<PAGE>
For the six months ended June 30, 2000, BB&T incurred $40.8 million in
after-tax nonrecurring charges. The first quarter 2000 charges were similar in
nature to those recorded in the second quarter, but related to the merger with
Premier. During the first six months of 1999, BB&T incurred $10.4 million in
after-tax merger-related charges associated primarily with the acquisition of
MainStreet Financial Corporation. There were no merger charges in the second
quarter of 1999.
Excluding the impact of these merger-related charges on 2000 and 1999
operating results, BB&T would have had net income for the second quarter of
2000 totaling $193.7 million, an increase of 15.4% over the $167.9 million
earned during the second quarter of 1999. On a diluted per share basis,
earnings for the three months ended June 30, 2000, excluding merger charges,
were $.54, compared to $.47 for the same period in 1999, an increase of 14.9%.
BB&T's recurring operating results for the second quarter of 2000 produced an
annualized return on average assets of 1.62% and an annualized return on
average shareholders' equity of 21.33% compared to prior year ratios of 1.52%
and 19.33%, respectively.
BB&T's growth in earnings in the second quarter and first six months of 2000
resulted from increased FTE net interest income, a lower provision for loan
losses, increased noninterest income and effective control of noninterest
expenses.
FTE net interest income increased 6.1% during the second quarter and 8.4%
for the six months due to solid growth in average loans, greater overall
returns on the loan and securities portfolio and a more profitable mix of
loans. As described above, BB&T's provision for loan and lease losses was 6.4%
greater in the second quarter of 2000 compared to the second quarter of 1999,
and 7.3% higher in the first six months of 2000 compared to 1999. BB&T's
trends in nonperforming assets and credit losses continue to be favorable;
therefore, provisions for loan and leases losses have been commensurate with
the portfolio growth. Fluctuations in net interest income, noninterest income
and noninterest expenses will be further discussed in the following
paragraphs.
PROFITABILITY MEASURES
<TABLE>
<CAPTION>
2000 1999
--------------- -----------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets.............. 1.45% 1.42% 1.26% 1.34% 1.52%
Return on average equity.............. 19.02 18.80 16.48 17.82 19.33
Net interest margin................... 4.22 4.27 4.32 4.29 4.29
Fee income ratio (taxable
equivalent)*......................... 32.6 31.8 30.8 31.0 32.1
Efficiency ratio (taxable
equivalent)*......................... 52.2 53.0 53.5 54.5 54.6
</TABLE>
--------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
Net Interest Income and Net Interest Margin
Net interest income on an FTE basis was $471.4 million for the second
quarter of 2000 compared to $444.2 million for the same period in 1999, a 6.1%
increase. For the three months ended June 30, 2000, average earning assets
increased $3.3 billion, or 8.0%, compared to the same period of 1999, while
average interest-bearing liabilities increased by $3.0 billion, or 8.2%.
During the same time period, the net interest margin decreased from 4.29% in
the second quarter of 1999 to 4.22% in the current quarter. The seven basis
point decline in the margin was primarily the result of increased costs of
interest-bearing deposits and borrowed funds, as well as the previously
mentioned investments in bank owned life insurance products, which add to the
cost of funds included in interest expense, but produce revenue that is
classified as noninterest income.
For the six months ended June 30, 2000, FTE net interest income increased
8.4%. Over the first six months of 2000, average interest earning assets
increased $3.7 billion, or 9.2%, while interest-bearing liabilities increased
$3.4 billion, or 9.7%, compared to the first half of 1999. The net interest
margin for the six months ended June 30, 2000, was 4.24%, down from 4.28% in
the first six months of 1999. The decrease resulted from the same factors that
affected the quarterly margin.
22
<PAGE>
The following tables set forth the major components of net interest income
and the related yields for the second quarter and first six months of 2000
compared to the same periods in 1999 and the variances between the periods
caused by changes in interest rates versus changes in volumes.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
For the Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Average Balances Yield/Rate Income/Expense Change due to
----------------------- ------------ ----------------- Increase ----------------
2000 1999 2000 1999 2000 1999 (Decrease) Rate Volume
----------- ----------- ----- ----- -------- -------- ---------- ------- -------
Fully Taxable Equivalent--(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Securities(1):
U.S. Treasury,
government and
other(5).............. $11,079,369 $11,029,494 6.69% 6.49% $185,175 $178,935 $ 6,240 $ 5,430 $ 810
States and political
subdivisions.......... 680,323 720,125 7.59 7.47 12,908 13,442 (534) 216 (750)
----------- ----------- ----- ----- -------- -------- ------- ------- -------
Total securities(5).... 11,759,692 11,749,619 6.74 6.49 198,083 192,377 5,706 5,646 60
Other earning
assets(2).............. 358,379 434,112 6.74 4.87 6,005 5,274 731 1,761 (1,030)
Loans and leases, net of
unearned
income(1)(3)(4)(5)..... 32,672,525 29,286,806 9.44 8.80 767,634 642,986 124,648 49,090 75,558
----------- ----------- ----- ----- -------- -------- ------- ------- -------
Total earning assets... 44,790,596 41,470,537 8.71 8.12 971,722 840,637 131,085 56,497 74,588
----------- ----------- ----- ----- -------- -------- ------- ------- -------
Non-earning assets..... 3,224,315 2,960,768
----------- -----------
Total assets.......... $48,014,911 $44,431,305
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking.............. $ 2,027,603 $ 2,455,137 1.61 1.76 8,136 10,783 (2,647) (876) (1,771)
Money rate savings..... 8,537,892 7,602,017 3.52 2.82 74,237 53,387 20,850 13,742 7,108
Other time deposits.... 16,077,346 14,822,664 5.74 5.12 229,345 189,114 40,231 23,426 16,805
----------- ----------- ----- ----- -------- -------- ------- ------- -------
Total interest-bearing
deposits.............. 26,642,841 24,879,818 4.71 4.08 311,718 253,284 58,434 36,292 22,142
Short-term borrowed
funds.................. 6,393,323 5,619,225 6.04 4.67 95,957 65,364 30,593 20,744 9,849
Long-term debt.......... 6,153,609 5,725,722 6.04 5.44 92,691 77,753 14,938 8,867 6,071
----------- ----------- ----- ----- -------- -------- ------- ------- -------
Total interest-bearing
liabilities........... 39,189,773 36,224,765 5.13 4.39 500,366 396,401 103,965 65,903 38,062
----------- ----------- ----- ----- -------- -------- ------- ------- -------
Noninterest-bearing
deposits.............. 4,446,756 4,071,044
Other liabilities...... 724,951 651,367
Shareholders' equity... 3,653,431 3,484,129
----------- -----------
Total liabilities and
shareholders' equity.. $48,014,911 $44,431,305
=========== ===========
Average interest rate
spread................. 3.58 3.73
Net yield on earning
assets................. 4.22% 4.29% $471,356 $444,236 $27,120 $(9,406) $36,526
===== ===== ======== ======== ======= ======= =======
Taxable equivalent
adjustment............. $ 22,239 $ 22,545
======== ========
</TABLE>
--------
(1) Yields related to securities, loans and leases exempt from income taxes
are stated on a taxable equivalent basis assuming tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost and trading securities at estimated fair value.
23
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Average Balances Yield/Rate Income/Expense Change due to
----------------------- ------------ ------------------- Increase ----------------
2000 1999 2000 1999 2000 1999 (Decrease) Rate Volume
----------- ----------- ----- ----- --------- --------- ---------- ------- -------
Fully Taxable Equivalent--(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Securities(1):
U.S. Treasury,
government and
other(5).............. $11,013,297 $10,533,536 6.66% 6.48% $ 366,722 $ 341,050 $25,672 $ 9,786 $15,886
States and political
subdivisions.......... 690,756 634,408 7.63 7.58 26,365 24,035 2,330 179 2,151
----------- ----------- ----- ----- --------- --------- ------- ------- -------
Total securities(5).... 11,704,053 11,167,944 6.72 6.54 393,087 365,085 28,002 9,965 18,037
Other earning
assets(2).............. 343,333 403,241 6.31 4.71 10,769 9,421 1,348 2,892 (1,544)
Loans and leases, net of
unearned
income(1)(3)(4)(5)..... 32,226,958 28,980,477 9.31 8.78 1,492,964 1,263,896 229,068 77,857 151,211
----------- ----------- ----- ----- --------- --------- ------- ------- -------
Total earning assets... 44,274,344 40,551,662 8.60 8.12 1,896,820 1,638,402 258,418 90,714 167,704
----------- ----------- ----- ----- --------- --------- ------- ------- -------
Non-earning assets..... 3,135,500 2,922,243
----------- -----------
Total assets.......... $47,409,844 $43,473,905
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking.............. $ 2,136,141 $ 2,472,924 1.69 1.80 17,904 22,059 (4,155) (1,280) (2,875)
Money rate savings..... 8,407,038 7,548,941 3.43 2.84 143,445 106,219 37,226 24,263 12,963
Other time deposits.... 15,864,486 14,735,056 5.58 5.16 440,001 377,405 62,596 32,537 30,059
----------- ----------- ----- ----- --------- --------- ------- ------- -------
Total interest-bearing
deposits.............. 26,407,665 24,756,921 4.58 4.12 601,350 505,683 95,667 55,520 40,147
Short-term borrowed
funds.................. 6,541,752 4,997,749 5.78 4.68 187,947 115,880 72,067 30,960 41,107
Long-term debt.......... 5,815,167 5,594,303 5.89 5.47 170,595 152,251 18,344 12,178 6,166
----------- ----------- ----- ----- --------- --------- ------- ------- -------
Total interest-bearing
liabilities........... 38,764,584 35,348,973 4.98 4.41 959,892 773,814 186,078 98,658 87,420
----------- ----------- ----- ----- --------- --------- ------- ------- -------
Noninterest-bearing
deposits.............. 4,329,801 4,011,299
Other liabilities...... 716,020 643,549
Shareholders' equity... 3,599,439 3,470,084
----------- -----------
Total liabilities and
shareholders' equity.. $47,409,844 $43,473,905
=========== ===========
Average interest rate
spread................. 3.62 3.71
Net yield on earning
assets................. 4.24% 4.28% $ 936,928 $ 864,588 $72,340 $(7,944) $80,284
===== ===== ========= ========= ======= ======= =======
Taxable equivalent
adjustment............. $ 43,982 $ 41,879
========= =========
</TABLE>
--------
(1) Yields related to securities, loans and leases exempt from income taxes
are stated on a taxable equivalent basis assuming tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost and trading securities at estimated fair value.
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<PAGE>
Noninterest Income
Noninterest income for the three months ended June 30, 2000, was $226.8
million compared to $207.2 million for the same period in 1999, an increase of
9.4%. Excluding purchase accounting transactions, noninterest income would
have increased 5.6% in the second quarter compared to the second quarter of
1999.
Noninterest income as a percentage of net interest income plus noninterest
income, or the "fee income ratio", was 32.6% for the second quarter of 2000,
compared to 32.1% in the second quarter of 1999. For the six months,
noninterest income totaled $443.3 million, an increase of $50.3 million, or
12.8%, compared to 1999. The fee income ratio for the first six months of 2000
was 32.2% compared to 31.4% for the first six months of 1999.
Service charges on deposits totaled $59.1 million for the second quarter of
2000, an increase of $6.2 million, or 11.8%, compared to the second quarter of
1999. For the six months, service charges on deposits totaled $114.5 million,
an increase of 8.3% compared to the first six months of 1999. The largest
components of the growth within service charges on deposits included account
analysis fees on commercial transaction accounts and NSF and overdraft charges
on personal and commercial accounts. The growth in service charges for the
quarter and year to date has been negatively affected because of the rise in
short-term interest rates discussed previously. Commercial customers are given
credits against service charges on the collected balance in their accounts
based on the level of short-term interest rates. As interest rates have risen
during the last twelve months, these credits have grown substantially,
depressing the growth in service charges.
Trust income totaled $15.5 million for the current quarter, an increase of
$1.9 million, or 14.0%, compared to the same period a year ago. The increase
in trust income was the result of increased revenues from personal,
institutional and corporate trust fees compared to 1999. The balance of assets
under management was $10.4 billion, up slightly from $10.3 billion at June 30,
1999. For the six months, trust income totaled $30.6 million, an increase of
$3.6 million, or 13.6%, compared to the same period in 1999.
Investment banking and brokerage fees and commissions totaled $40.7 million
during the second quarter of 2000, an increase of $2.3 million, or 6.1%,
compared to the second quarter of 1999. The increase resulted from greater
investment services fees from BB&T's discount brokerage operations. For the
six months, investment banking and brokerage fees and commissions totaled
$85.4 million, an increase of 63.3% compared to the same period in 1999. This
significant increase was primarily the result of the timing of the acquisition
of Scott & Stringfellow, which was completed on March 26, 1999. This
acquisition was accounted for as a purchase; therefore, its operating results
were only included in BB&T's accounts in periods following the acquisition.
Agency insurance commissions totaled $29.2 million for the second quarter of
2000, an increase of $12.3 million, or 73.3%, compared to the same three-month
period of 1999. This substantial growth in revenue resulted from the purchase
of additional agencies during 1999 and 2000, internal growth in property and
casualty insurance commissions and increased contingent insurance commissions.
Excluding the effects of purchase accounting transactions, agency insurance
commissions for the second quarter of 2000 would have increased 47.1% compared
to 1999. This increase consisted of property and casualty insurance
commissions, which were up $6.5 million, contingent insurance commissions, up
$2.2 million, group health commissions and life insurance commissions, which
increased $1.7 million and $1.3 million, respectively. For the six months,
agency insurance commissions totaled $57.3 million, an increase of $23.6
million, or 69.9%. Excluding purchase accounting transactions, growth in
agency insurance commissions for the six months would have been 38.3%. The
increase in year-to-date revenue was produced by similar growth in the types
of commissions outlined above.
Income from mortgage banking activities totaled $23.3 million for the second
quarter of 2000, a decrease of $21.0 million, or 47.4%, from the same period
of 1999. This decline resulted from lower volumes of mortgage loan
originations in 2000, which resulted from higher interest rates, and the
recapture in 1999 of $5 million in valuation allowances related to capitalized
mortgage servicing rights. The recapture of valuation allowances during the
1999 period, which were established in 1998, resulted from a slowing in
prepayment speeds related to
25
<PAGE>
the mortgage loans underlying the capitalized servicing rights. For the six
months, mortgage banking income totaled $49.1 million, a decrease of $41.7
million, or 45.9%, compared to 1999, also due to lower mortgage loan
originations during 2000 and the recapture of $8 million in valuation
allowances related to mortgage servicing rights in 1999.
Other nondeposit fees and commissions totaled $30.9 million for the second
quarter of 2000, an increase of $2.2 million, or 7.5%, compared to the three
months ended June 30, 1999. Bankcard income increased $3.1 million for the
quarter; however, this increase was partially offset by a $1.6 million
decrease in fees from money orders, official checks and other similar fees.
For the six months, other nondeposit fees and commissions totaled $58.4
million, up $4.7 million, or 8.9%, compared to 1999. The increase was driven
by similar growth in bankcard income, as discussed above.
Other income totaled $25.7 million for the quarter, an increase of $13.1
million, or 104.2%, compared to the second quarter of 1999. Included in this
total is the cash value buildup of bank-owned life insurance, which increased
$6.2 million as a result of additional purchases during 2000. BB&T also
recorded a gain of $3.9 million on a stock distribution from a venture capital
investment. For the six months, other income totaled $42.9 million, an
increase of $16.4 million, or 61.7%, compared to 1999 because of growth over
the six months in the income items that favorably affected the second quarter.
Noninterest Expense
Noninterest expenses totaled $392.2 million for the second quarter of 2000
compared to $357.7 million for the same period a year ago, an increase of
9.7%. Noninterest expense for the second quarter of 2000 includes $25.9
million of nonrecurring expenses principally associated with the acquisitions
of Hardwick and First Banking Company. Excluding these costs, noninterest
expenses would have increased $8.7 million, or 2.4%, for the quarter ended
June 30, 2000, compared to the same period in 1999. Excluding the effects of
business combinations accounted for as purchases that were completed in 1999,
and the aforementioned merger-related expenses, noninterest expenses for the
second quarter of 2000 would have actually decreased slightly from the
comparable period of 1999. For the six months ended June 30, 2000, noninterest
expense totaled $785.6 million, an increase of $93.8 million, or 13.6%.
Excluding $56.5 million in nonrecurring charges from 2000 and $15.8 million of
similar merger-related charges from 1999, noninterest expenses would have
increased 7.9%. Excluding these charges and the effect of acquisitions
accounted for as purchases, noninterest expense for the first half of 2000
would have decreased slightly compared to 1999.
BB&T's efficiency ratio (noninterest expenses, excluding the nonrecurring
expenses referred to above and costs related to foreclosed assets, as a
percentage of FTE net interest income plus noninterest income excluding
securities gains and losses) improved to 52.2% for the second quarter of 2000
compared to 54.6% for the second quarter of 1999. For the six months, the
efficiency ratio improved to 52.6% compared to 53.5% in 1999.
Personnel expense, the largest component of noninterest expense, was $205.7
million for the second quarter of 2000 compared to $187.6 million for the same
period in 1999, an increase of $18.0 million, or 9.6%. These amounts include
merger-related charges of $6.8 million in the second quarter of 2000.
Excluding the merger-related charges, personnel expense in the 2000 quarter
would have increased $11.2 million, or 6.0%, from the 1999 period. This growth
included the effect of acquisitions completed in 1999 that were accounted for
as purchases (Matewan, Farmers and Merchants and a number of insurance
agencies). Excluding the effects of the merger-related charges and the
purchase acquisitions, personnel expense for the second quarter of 2000 would
have increased $6.6 million, or 3.5%, over the second quarter of 1999. This
increase was primarily the result of a 4% average annual salary adjustment, an
increase of 400 full-time equivalent employees compared to 1999 and higher
social security taxes. For the six months, personnel expense totaled $414.6
million, an increase of $58.0 million, or 16.3%, compared to 1999. Excluding
nonrecurring charges, personnel expense for the first half of 2000 would have
increased 14.3% compared to 1999. Excluding nonrecurring charges and purchase
accounting transactions, personnel expense would have increased only 4.9% for
the reasons outlined above.
26
<PAGE>
Occupancy and equipment expense for the three months ended June 30, 2000,
totaled $58.1 million, an increase of $3.6 million, or 6.7%, compared to 1999.
These amounts include merger-related charges of $3.0 million in the second
quarter of 2000. Excluding the merger-related charges, occupancy and equipment
expense would have increased $594,000, or 1.1%, from the 1999 period. For the
six months, occupancy and equipment expense totaled $119.5 million, an
increase of $10.1 million, or 9.2%. Excluding nonrecurring merger-related
charges, occupancy and equipment expense would have increased $5.4 million, or
5.1%. This increase was principally the result of higher rent expenses for
both the quarter and the six months.
The amortization of intangible assets and mortgage servicing rights totaled
$18.2 million for the three months ended June 30, 2000, a decrease of
$299,000, or 1.6%, from the amount incurred in the second quarter of 1999.
This decrease was the result of a $3.2 million decline in mortgage servicing
rights amortization. The majority of the reduction in the amortization of
mortgage servicing rights resulted from lower volumes of loan refinancing in
2000 compared to the second quarter of 1999. As mortgage loans prepay in
periods of active refinancing, BB&T amortizes the full amount of any
capitalized mortgage servicing rights associated with the prepaid loan. As
mortgage rates have increased during 2000 and refinancings and the resulting
loan prepayments have significantly decreased, this accelerated amortization
of mortgage servicing rights has substantially decreased compared to 1999.
This decrease in the amortization of mortgage servicing was largely offset by
a $3.1 million increase in amortization of goodwill and other intangibles, due
to acquisitions consummated using purchase accounting. Total goodwill and
other intangibles, including mortgage servicing rights, have increased from
$689.1 million at June 30, 1999, to $815.8 million at June 30, 2000. For the
six months, amortization of intangibles and mortgage servicing rights totaled
$36.3 million, an increase of $136,000, or less than one percent.
Other noninterest expenses for the second quarter of 2000 totaled $110.2
million, an increase of $13.2 million, or 13.6%, compared to 1999. These
amounts include merger-related costs of $16.0 million in the second quarter of
2000. Excluding these costs, other noninterest expenses for the three months
ended June 30, 2000 would have decreased $2.8 million, or 2.9%, from the
comparable 1999 period. This decrease is entirely related to lower
professional services expenses, which were elevated in 1999 because of costs
associated with BB&T's Y2K readiness. For the six months, other expense
totaled $215.2 million, an increase of $25.6 million, or 13.5%. Excluding
nonrecurring charges from both 2000 and 1999, other expense would have
decreased $2.5 million, or 1.4%.
Provision for Income Taxes
The provision for income taxes totaled $85.6 million for the second quarter
of 2000, an increase of $6.1 million, or 7.7%, compared to the second quarter
of 1999. For the first six months of 2000, the provision for income taxes
totaled $163.3 million, an increase of $9.4 million, or 6.1%, compared to
1999. Excluding the tax benefits associated with the merger-related charges
discussed above, the provision for income taxes would have been $95.1 million
during the second quarter and $185.3 million for the six months ended June 30,
2000. These amounts represent increases of $15.5 million, or 19.5%, compared
to the second quarter of 1999, and an increase of $26.0 million, or 16.3%,
compared to the first six months of 1999. Excluding the effect of nonrecurring
items on pretax income and the income tax provision, BB&T's effective income
tax rate was 32.9% for the second quarter and 32.8% for the first six months
of 2000 compared to effective tax rates of 32.1% for the second quarter of
1999 and 32.2% for the first six months of 1999.
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the
normal conduct of business. Management believes that the liabilities arising
from these proceedings will not have a materially adverse effect on the
consolidated financial position or consolidated results of operations of BB&T.
Item 4. Submission of Matters to a Vote of Security Holders
BB&T held its annual meeting of the shareholders on April 25, 2000, to
consider and vote upon the following matters:
(1) To elect seven Directors for three-year terms expiring in 2003. Of
shares represented by proxy, votes in favor were 263,901,820; and votes
withheld were 3,645,293.
(2) To approve amendments to the Corporation's 1995 Omnibus Stock Incentive
Plan. Of shares represented by proxy, votes in favor were 236,635,468;
votes opposed were 27,859,470; and abstentions were 3,029,098.
(3) To ratify the reappointment of Arthur Andersen LLP as the Corporation's
independent auditors for 2000. Of shares represented by proxy, votes in
favor were 265,402,208; votes opposed were 792,920; and abstentions
were 1,331,516.
(4) To transact such other business as may properly come before the
meeting. Of shares represented by proxy, votes in favor were
221,759,475; votes opposed were 37,850,705; and abstentions were
7,848,449.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11--"Computation of Earnings Per Share" is included herein as
Note E.
Exhibit 27--"Financial Data Schedule" is included in the
electronically-filed document as required.
(b) Current Reports on Form 8-K during and following the Quarter ended June
30, 2000.
On April 11, 2000, BB&T filed a Current Report on Form 8-K under Item 5 to
report the financial condition and results of operations for the first quarter
of 2000. On April 28, 2000, BB&T filed a Current Report on Form 8-K under Item
5 to restate BB&T's Annual Report on Form 10-K to include the accounts of
Premier Bancshares, Inc., which was acquired on January 13, 2000, and
accounted for as a pooling of interests. On July 18, 2000, BB&T filed a
Current Report on Form 8-K under Item 5 to report the financial condition and
results of operations for the second quarter of 2000. On July 27, 2000, BB&T
filed a Current Report on Form 8-K under Item 5 to announce plans to acquire
FCNB Corp of Frederick, Maryland.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T CORPORATION
(Registrant)
Date: August 11, 2000 By: /s/ Scott E. Reed
--------------- -----------------------------------
Scott E. Reed, Senior Executive Vice
President and Chief Financial Officer
Date: August 11, 2000 By: /s/ Sherry A. Kellett
--------------- -----------------------------------
Sherry A. Kellett, Senior
Executive Vice
President and Controller
(Principal Accounting Officer)
29
