10-K 1 d10k.htm ANNUAL REPORT ANNUAL REPORT

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 


 

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the fiscal year ended:

 

December 31, 2002

 

Commission File Number: 1-10853

 

BB&T CORPORATION

(Exact name of Registrant as specified in its Charter)

 

North Carolina

 

56-0939887

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

200 West Second Street

   

Winston-Salem, North Carolina

 

27101

(Address of principal executive offices)

 

(Zip Code)

 

(336) 733-2000

(Registrant's telephone number, including area code)

 


 

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class


 

Name of each exchange

on which registered


Common Stock, $5 par value

 

New York Stock Exchange

Share Purchase Rights

 

New York Stock Exchange

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x  NO ¨

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 30, 2002, was approximately $18.2 billion. The number of shares of the Registrant's Common Stock outstanding on January 31, 2003, was 470,949,530. No shares of preferred stock were outstanding at January 31, 2003.

 

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 22, 2003, are incorporated by reference in Part III of this report.

 

The Exhibit Index begins on page 114.

 


 



CROSS REFERENCE INDEX

 

              

Page


PART I

  

Item 1

  

Business

  

4

    

Item 2

  

Properties

  

16, 74

    

Item 3

  

Legal Proceedings

  

92

    

Item 4


  

Submission of Matters to a Vote of Shareholders

 

None.

    

PART II

  

Item 5

  

Market for the Registrant’s Common Stock and Related Shareholder Matters

  

48

    

Item 6

  

Selected Financial Data

  

51

    

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

22

    

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risk

  

40

    

Item 8

  

Financial Statements and Supplementary Data

    
         

Consolidated Balance Sheets at December 31, 2002 and 2001

  

56

         

Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002

  

57

         

Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2002

  

58

         

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002

  

59

         

Notes to Consolidated Financial Statements

  

60

         

Reports of Independent Public Accountants

  

54, 55

         

Quarterly Financial Summary for 2002 and 2001

  

50

    

Item 9


  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.

 

None.

    

PART III

  

Item 10

  

Directors and Executive Officers of the Registrant

  

*, 16

    

Item 11

  

Executive Compensation

  

*

    

Item 12

  

Security Ownership of Certain Beneficial Owners and Management

  

*

    

Item 13

  

Certain Relationships and Related Transactions

  

*

    

Item 14

  

Controls and Procedures

  

108

PART IV

  

Item 15

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

114

         

Signatures

  

109

         

Certification of Chief Executive Officer

  

112

         

Certification of Chief Financial Officer

  

113

 

2


 

  (a)   See Item 8

 

  (b)   Current Reports on Form 8-K filed during the fourth quarter of 2002.

 

Type


  

Date Filed


  

Reporting Purpose


Item 9.

  

October 3, 2002

  

To announce the signing of a definitive agreement to acquire FloridaFirst Bancorp, Inc. of Lakeland, Florida

Item 9.

  

October 11, 2002

  

To announce BB&T’s third quarter earnings.

Item 5.

  

October 31, 2002

  

To announce that the merger agreement between BB&T and FloridaFirst Bancorp had been terminated.

 

  (c)   Exhibits—See Item 15

 

  (d)   Financial Statement Schedules—See Item 15

 

   *   The information required by Item 10 is incorporated herein by reference to the information that appears under the headings “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

 

The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation of Executive Officers”, “Retirement Plans” and “Compensation Committee Report on Executive Compensation” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

 

The information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Security Ownership” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

 

The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Compensation Committee Interlocks and Insider Participation” and “Transactions with Executive Officers and Directors” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

 

3


DESCRIPTION OF BUSINESS

 

General

 

BB&T Corporation (“BB&T” or “the Corporation”) is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its banking subsidiaries, which have offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and the metropolitan Washington, D.C. area.

 

Forward-Looking Statements

 

This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce net interest margins and/or the volumes and values of loans made or held as well as the value of other financial assets held; (3) general economic or business 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 or other services; (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 or recently completed mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending or recently completed mergers may be greater than expected; (8) competitors of BB&T may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (9) adverse changes may occur in the securities markets.

 

Significant Subsidiaries

 

At December 31, 2002, the principal assets of BB&T included all of the outstanding shares of common stock of:

 

  ·   Branch Banking and Trust Company, Winston-Salem, North Carolina;

 

  ·   Branch Banking and Trust Company of South Carolina, Greenville, South Carolina;

 

  ·   Branch Banking and Trust Company of Virginia, Richmond, Virginia;

 

  ·   Regional Acceptance Corporation, Greenville, North Carolina;

 

  ·   Scott & Stringfellow, Inc., Richmond, Virginia;

 

  ·   MidAmerica Gift Certificate Company, Louisville, Kentucky;

 

  ·   Sheffield Financial LLC, Clemmons, North Carolina; and

 

  ·   BB&T Factors Corporation, High Point, North Carolina.

 

4


 

Branch Banking and Trust Company (“Branch Bank”), BB&T’s largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. The following table reflects BB&T’s deposit market share and branch locations by state at December 31, 2002.

 

Table 1

BB&T Deposit Market Share and Branch Locations by State

December 31, 2002

 

      

% of BB&T’s Deposits


    

Deposit Market Share Rank


    

Number of Branches


North Carolina *

    

32 

%

  

2nd

    

335

Virginia

    

19

 

  

4th

    

241

Georgia

    

11

 

  

6th

    

117

Kentucky

    

8

 

  

3rd

    

105

South Carolina

    

10

 

  

3rd

    

94

West Virginia

    

9

 

  

1st

    

88

Maryland

    

7

 

  

6th

    

76

Tennessee

    

2

 

  

12th

    

38

Florida

    

1

 

  

33rd

    

18

Washington, D.C.

    

1

 

  

6th

    

7


  *   Excludes home office deposits
      Source:   SNL Financial

 

In addition to the markets described in the table above, BB&T operated two branches in Alabama and one branch in Indiana. After the completion of pending acquisitions with Equitable Bank and First Virginia Banks, Inc., BB&T will operate 539 branches in Virginia, 136 branches in Maryland and 49 branches in Tennessee, and increase its deposits market share rank to 2nd, 10th, and 4th in Virginia, Tennessee and the Washington D.C. area, respectively. BB&T’s presence and deposit market share in other states listed in the table above will not change as a result of these pending acquisitions.

 

Branch Bank’s principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North Carolina, which provides lease financing to commercial businesses; BB&T Investment Services, Inc., located in Charlotte, North Carolina, which offers nondeposit investment alternatives, including fixed-rate and variable-rate annuities, mutual funds and discount brokerage services; BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which was the 10th largest retail insurance broker in the country at December 31, 2002, and offers property and casualty, life, employee benefits, surety, title, and other insurance products through its 71 agencies in 8 states; and Stanley, Hunt, DuPree & Rhine Inc., with dual headquarters in Greensboro, North Carolina and Greenville, South Carolina, which offers group medical plans, insurance and investment consulting, and actuarial services.

 

Branch Bank has a number of additional subsidiaries including but not limited to the following: Prime Rate Premium Finance Corporation, Inc. (“Prime Rate”), located in Florence, South Carolina, which provides insurance premium financing primarily to clients in BB&T’s principal market area; Laureate Capital Corp. (“Laureate”), located in Charlotte, North Carolina, which principally specializes in arranging and servicing commercial mortgage loans; Lendmark Financial Services, Inc. (“Lendmark”), located in Conyers, Georgia, which offers alternative consumer and mortgage loans to clients unable to meet BB&T’s normal consumer and mortgage loan guidelines; and Cooney Rikard & Curtin Inc. (“CRC”), based in Birmingham, Alabama, which was the 4th largest wholesale insurance broker in the country with 14 offices and representation in 47 states at December 31, 2002.

 

Branch Banking and Trust Company of South Carolina (“BB&T-SC”) operated 94 banking offices at December 31, 2002. BB&T-SC is the third largest bank in South Carolina in terms of deposit market share.

 

Branch Banking and Trust Company of Virginia (“BB&T-VA”) operated 241 banking offices in Virginia at December 31, 2002. BB&T-VA is the fourth largest bank in Virginia in terms of deposit market share.

 

5


 

Scott & Stringfellow, Inc. (“Scott & Stringfellow”) is an investment banking and full-service brokerage firm located in Richmond, Virginia. At December 31, 2002, Scott & Stringfellow operated 23 full-service retail brokerage offices in Virginia, 12 in North Carolina, and 7 in South Carolina. Scott & Stringfellow specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Scott & Stringfellow also has a public finance department that provides investment banking, financial advisory services, and debt underwriting services to a variety of regional tax-exempt issuers.

 

The primary services offered by BB&T’s subsidiaries include:

 

  ·   small business lending

 

  ·   commercial middle market lending

 

  ·   real estate lending

 

  ·   retail lending

 

  ·   home equity lending

 

  ·   sales finance

 

  ·   mortgage lending

 

  ·   leasing

 

  ·   asset management

 

  ·   trust services

 

  ·   agency insurance

 

  ·   wholesale insurance brokerage

 

  ·   treasury services

 

  ·   investment brokerage services

 

  ·   capital markets services

 

  ·   factoring

 

  ·   asset-based lending

 

  ·   international banking services

 

  ·   cash management

 

  ·   electronic payment services

 

  ·   credit and debit card services

 

  ·   consumer finance

 

  ·   payroll processing

 

  ·   gift certificate services

 

6


The following table discloses selected financial information related to BB&T’s significant banking subsidiaries. Additionally, please see Note 20 in the “Notes to Consolidated Financial Statements” for further discussion relating to BB&T’s reportable business segments.

 

Table 2

Selected Financial Data of Significant Banking Subsidiaries

(Dollars in thousands)

 

    

As of / For the Year Ended

December 31, 2002


    

Branch Bank


  

BB&T-SC


  

BB&T-VA


Total assets

  

$

65,629,555

  

$

6,279,959

  

$

11,797,675

Securities

  

 

13,679,859

  

 

127,567

  

 

3,287,671

Loans and leases, net of unearned income (1)

  

 

43,659,450

  

 

5,303,769

  

 

7,394,505

Deposits

  

 

39,486,381

  

 

4,372,746

  

 

9,053,880

Shareholder’s equity

  

 

6,462,209

  

 

542,184

  

 

1,017,837

Net interest income

  

 

2,151,764

  

 

191,355

  

 

329,163

Provision for loan and lease losses

  

 

173,322

  

 

34,925

  

 

9,463

Noninterest income

  

 

1,446,179

  

 

93,646

  

 

139,253

Noninterest expense

  

 

1,925,328

  

 

147,560

  

 

291,387

Net income

  

 

1,107,470

  

 

65,874

  

 

110,831

    

As of / For the Year Ended

December 31, 2001


    

Branch Bank


  

BB&T-SC


  

BB&T-VA


Total assets

  

$

54,887,883

  

$

6,294,110

  

$

10,945,076

Securities

  

 

13,226,304

  

 

232,304

  

 

2,711,756

Loans and leases, net of unearned income (1)

  

 

36,384,003

  

 

4,723,568

  

 

6,165,161

Deposits

  

 

32,900,901

  

 

4,569,321

  

 

8,297,098

Shareholder’s equity

  

 

4,939,604

  

 

504,439

  

 

1,009,316

Net interest income

  

 

1,821,086

  

 

211,839

  

 

335,451

Provision for loan and lease losses

  

 

138,533

  

 

21,666

  

 

33,933

Noninterest income

  

 

1,164,030

  

 

81,792

  

 

147,343

Noninterest expense

  

 

1,691,672

  

 

151,143

  

 

370,451

Net income

  

 

811,182

  

 

80,759

  

 

48,889

    

As of / For the Year Ended

December 31, 2000


    

Branch Bank


  

BB&T-SC


  

BB&T-VA


Total assets

  

$

50,094,076

  

$

5,249,100

  

$

9,785,950

Securities

  

 

13,132,843

  

 

389,331

  

 

1,696,508

Loans and leases, net of unearned income (1)

  

 

32,603,764

  

 

4,008,789

  

 

6,018,130

Deposits

  

 

30,966,539

  

 

3,952,819

  

 

7,827,976

Shareholder’s equity

  

 

4,033,970

  

 

378,740

  

 

913,019

Net interest income

  

 

1,515,718

  

 

230,877

  

 

369,419

Provision for loan and lease losses

  

 

85,852

  

 

12,554

  

 

16,414

Noninterest income

  

 

653,004

  

 

55,306

  

 

73,968

Noninterest expense

  

 

1,391,964

  

 

125,123

  

 

288,042

Net income

  

 

484,347

  

 

95,175

  

 

88,844


(1)   Includes loans held for sale.

 

7


 

Merger Strategy

 

BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. BB&T’s acquisition strategy is focused on three primary objectives:

 

  ·   to pursue acquisitions of banks and thrifts in the Carolinas, Virginia, Maryland, Washington D.C., Georgia, West Virginia, Tennessee, Kentucky, Ohio and Florida, generally with assets in the $250 million to $10 billion range,

 

  ·   to acquire companies in niche markets that provide products or services that can be offered through the existing distribution system to BB&T’s current customer base, and

 

  ·   to consider strategic acquisitions in new markets that are economically feasible and provide positive long-term benefits.

 

BB&T has consummated acquisitions of 56 community banks and thrifts, 60 insurance agencies and 21 non-bank financial services providers over the last fifteen years. BB&T expects, in the long-term, to continue to take advantage of the consolidation in the financial services industry and expand and enhance its franchise through mergers and acquisitions. The consideration paid for these acquisitions may be in the form of cash, debt or BB&T stock. The amount of consideration paid to complete these transactions may be in excess of the book value of the underlying net assets acquired, which could have a dilutive effect on BB&T’s earnings per share or book value. In addition, acquisitions often result in significant front-end charges against earnings; however, cost savings and revenue enhancements, especially incident to in-market bank and thrift acquisitions, are also typically anticipated.

 

Competition

 

The financial services industry is highly competitive and dramatic change continues to occur. BB&T’s subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies and insurance companies. Competition among providers of financial products and services continues to increase with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The industry continues to rapidly consolidate, which affects competition by eliminating some regional and local institutions, while strengthening the franchise of acquirers. For additional information concerning markets, BB&T’s competitive position and business strategies, see “Market Area” and “Lending Activities” below.

 

Market Area

 

BB&T’s primary market area consists of North and South Carolina, Virginia, Maryland, Georgia, eastern Tennessee, West Virginia, Kentucky, northern Florida and Washington, D.C. The area’s employment base is diverse and primarily consists of manufacturing, general services, agricultural, wholesale/retail trade, technology and financial services. BB&T believes its current market area is economically stable and will support consistent growth in assets and deposits in the future. Even so, management intends to continue expanding and diversifying the BB&T franchise. Management strongly believes that BB&T’s community bank approach to providing client service is a competitive advantage, which strengthens the Corporation’s ability to enter new markets and effectively provide financial products and services to businesses and individuals in these markets.

 

Lending Activities

 

The primary goal of the BB&T lending function is to help clients achieve their financial goals by providing quality loans that are fair to the clients and profitable to the Corporation. This purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well being of its clients. BB&T’s philosophy of lending is to attempt to meet the business and consumer credit needs within defined market segments where standards of profitability, client relationships and credit quality can be met. Based on internal analyses, this philosophy has resulted in BB&T’s loan portfolio consistently outperforming the average of a group of BB&T’s peer banks in terms of asset quality, portfolio yield and rate of growth.

 

 

8


BB&T focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and consumer loans. Typically, fixed-rate conforming residential mortgage loans are sold in the secondary mortgage market and adjustable-rate residential mortgages are generally retained in the portfolio. Servicing rights on mortgage loans sold are typically retained by BB&T. As of December 31, 2002, BB&T’s total residential mortgage servicing portfolio was approximately $34.8 billion. BB&T conducts the majority of its lending activities in the context of the Corporation’s community bank operating model, with lending decisions made as close to the client as practicable.

 

The following table summarizes BB&T’s loan portfolio based on the underlying collateral, rather than the primary purpose of the loan.

 

Table 3

Composition of Loan and Lease Portfolio

 

    

December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(Dollars in thousands)

 

Commercial, financial and agricultural loans

  

$

7,061,493

 

  

$

6,551,073

 

  

$

6,555,578

 

  

$

6,025,337

 

  

$

5,675,978

 

Lease receivables

  

 

5,156,307

 

  

 

5,012,110

 

  

 

4,453,598

 

  

 

2,606,002

 

  

 

1,620,326

 

Real estate—construction and land development loans

  

 

5,291,719

 

  

 

5,334,108

 

  

 

4,264,275

 

  

 

4,227,146

 

  

 

3,288,411

 

Real estate—mortgage loans

  

 

30,023,470

 

  

 

25,542,288

 

  

 

25,239,698

 

  

 

22,712,509

 

  

 

20,574,669

 

Consumer loans

  

 

6,412,563

 

  

 

5,965,010

 

  

 

5,891,059

 

  

 

5,091,840

 

  

 

4,505,704

 

    


  


  


  


  


Total loans and leases held for investment

  

 

53,945,552

 

  

 

48,404,589

 

  

 

46,404,208

 

  

 

40,662,834

 

  

 

35,665,088

 

Loans held for sale

  

 

2,377,707

 

  

 

1,907,416

 

  

 

906,244

 

  

 

390,338

 

  

 

1,375,135

 

    


  


  


  


  


Total loans and leases

  

 

56,323,259

 

  

 

50,312,005

 

  

 

47,310,452

 

  

 

41,053,172

 

  

 

37,040,223

 

Less: unearned income

  

 

(2,805,246

)

  

 

(2,868,832

)

  

 

(2,483,377

)

  

 

(1,250,129

)

  

 

(746,031

)

    


  


  


  


  


Net loans and leases

  

$

53,518,013

 

  

$

47,443,173

 

  

$

44,827,075

 

  

$

39,803,043

 

  

$

36,294,192

 

    


  


  


  


  


 

Mortgage Banking

 

Branch Bank is a large originator of residential mortgage loans, with originations in 2002 of $14.1 billion. Branch Bank offers various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale of substantially all conforming fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and mortgage insurance. Branch Bank also purchases residential mortgage loans from more than 100 correspondent originators. The loans purchased from third-party originators are subject to the same underwriting and risk management criteria as loans originated internally.

 

Laureate Capital, a wholly owned subsidiary of Branch Bank, provides commercial mortgage banking services that include arranging and servicing permanent commercial mortgage loans for third party investors.

 

Commercial Lending

 

BB&T’s commercial lending program is generally targeted to serve small-to-middle market businesses with sales of $200 million or less. The bank also makes loans to larger corporate customers where requirements of quality, profitability and relationship are met. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Pricing on commercial loans is usually tied to market indexes, such as the prime rate and the London Interbank Offered Rate (“LIBOR”). For the fifth consecutive year, BB&T received recognition from the U.S. Small Business Administration as one of the top two “small business friendly” banks in the United States. Management believes that commercial lending to small and mid-sized businesses is among BB&T’s strongest markets.

 

9


 

Construction Lending

 

Real estate construction loans include construction / permanent loans, which are intended to convert to permanent one-to-four family residential mortgage loans upon completion of the construction and loans to builders and developers of residential properties. BB&T is also a commercial construction lender. Loans for commercial construction are usually granted to in-market developers, businesses, individuals or real estate investors for the construction of commercial structures in BB&T’s market area. They are made for purposes including, but not limited to, the construction of industrial facilities, apartments, shopping centers, office buildings, hotels and warehouses. The properties may be constructed for sale, lease or owner-occupancy.

 

Consumer Lending

 

BB&T offers a wide variety of consumer loan products. Various types of secured and unsecured loans are marketed to qualifying, existing clients and to other creditworthy candidates in BB&T’s market area. Home equity loans and lines are underwritten with note amounts and credit limits that ensure consistency with the Corporation’s policies. Numerous forms of unsecured loans, including revolving credits (e.g. credit cards, checking account overdraft protection and personal lines of credit) are provided and various installment loan products, such as vehicle loans, are offered.

 

Leasing

 

BB&T provides commercial leasing services through BB&T Leasing Corp. (“Leasing”), a subsidiary of Branch Bank. Leasing provides three primary products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases for vehicles, rolling stock and tangible personal property. Leasing also provides lease-related services for small to medium-sized commercial customers. In addition to the services offered by Leasing, other BB&T subsidiaries provide leases to municipalities and invest in various types of leveraged lease transactions.

 

The following table presents BB&T’s total loan portfolio based on the primary purpose of the loan, rather than the underlying collateral:

 

Table 4

Composition of Loan and Lease Portfolio Based on Loan Purpose

 

    

December 31,


    

2002


  

2001


  

2000


  

1999


  

1998


    

(Dollars in thousands)

Loans and leases, net of unearned income

                                  

Business loans

  

$

26,441,309

  

$

23,640,081

  

$

21,885,646

  

$

18,884,501

  

$

16,308,568

Lease receivables

  

 

2,527,173

  

 

2,319,061

  

 

2,100,965

  

 

1,508,396

  

 

992,684

    

  

  

  

  

Total commercial loans and leases

  

 

28,968,482

  

 

25,959,142

  

 

23,986,611

  

 

20,392,897

  

 

17,301,252

    

  

  

  

  

Sales Finance

  

 

3,374,419

  

 

2,940,364

  

 

2,844,970

  

 

2,565,439

  

 

2,254,190

Revolving Credit

  

 

1,050,738

  

 

951,319

  

 

863,089

  

 

713,585

  

 

602,521

Direct Retail

  

 

9,522,451

  

 

8,273,829

  

 

8,336,368

  

 

7,526,163

  

 

6,466,926

    

  

  

  

  

Total consumer loans

  

 

13,947,608

  

 

12,165,512

  

 

12,044,427

  

 

10,805,187

  

 

9,323,637

    

  

  

  

  

Residential mortgage loans

  

 

10,601,923

  

 

9,318,519

  

 

8,796,037

  

 

8,604,959

  

 

9,669,303

    

  

  

  

  

Total loans and leases (1)

  

$

53,518,013

  

$

47,443,173

  

$

44,827,075

  

$

39,803,043

  

$

36,294,192

    

  

  

  

  


(1)   Includes loans held for sale.

 

10


 

The following table reflects the scheduled maturities of commercial, financial and agricultural loans, as well as construction loans:

 

Table 5

Selected Loan Maturities and Interest Sensitivity (1)

 

    

December 31, 2002


    

Commercial,

Financial

and

Agricultural


  

Real Estate:

Construction


  

Total


    

(Dollars in thousands)

Fixed rate:

                    

1 year or less (2)

  

$

406,565

  

$

145,528

  

$

552,093

1-5 years

  

 

692,026

  

 

249,139

  

 

941,165

After 5 years

  

 

137,169

  

 

76,296

  

 

213,465

    

  

  

Total

  

 

1,235,760

  

 

470,963

  

 

1,706,723

    

  

  

Variable rate:

                    

1 year or less (2)

  

 

3,227,456

  

 

2,781,576

  

 

6,009,032

1-5 years

  

 

2,184,650

  

 

1,721,010

  

 

3,905,660

After 5 years

  

 

413,627

  

 

318,170

  

 

731,797

    

  

  

Total

  

 

5,825,733

  

 

4,820,756

  

 

10,646,489

    

  

  

Total loans and leases (3)

  

$

7,061,493

  

$

5,291,719

  

$

12,353,212

    

  

  


(1)   Balances include unearned income.
(2)   Includes loans due on demand.

 

    

(Dollars in thousands)


(3)    The above table excludes:

      

(i)       consumer loans to individuals for household, family and other personal expenditures

  

$

6,412,563

(ii)      real estate mortgage loans

  

 

30,023,470

(iii)     loans held for sale

  

 

2,377,707

(iv)     lease receivables

  

 

5,156,307

    

Total

  

$

43,970,047

    

 

Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T’s credit policy does not permit automatic renewals of loans. At the scheduled maturity date (including balloon payment date), the customer must request a new loan to replace the matured loan and execute a new note with rate, terms and conditions negotiated at that time.

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses is management’s estimate of probable inherent credit losses in the loan and lease portfolios at the balance sheet date. The Company determines the allowance based on an ongoing evaluation of the loan and lease portfolios. This evaluation is inherently subjective because it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Increases to the allowance are made by charges to the provision for loan and lease losses, which is reflected in the Consolidated Statements of Income. Loans or leases deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance.

 

The allowance is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent estimates performed pursuant to either SFAS  No. 5, “Accounting for Contingencies,” or SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Management’s estimate of each SFAS No. 5 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry loan concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. Reserves for commercial loans are determined by applying loss percentages to the portfolio based

 

11


on management’s evaluation and “risk grading” of the commercial loan portfolio adjusted to give effect to current economic trends. Reserves are provided for noncommercial loan categories based on a four-year weighted average of actual loss experience adjusted to give effect to current economic trends, which is applied to the total outstanding loan balance of each loan category. Specific reserves are typically provided on all impaired commercial loans in excess of a defined threshold that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of BB&T’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. Loans for which specific reserves are provided under SFAS No. 114 are excluded from the reserves calculated in accordance with SFAS No. 5 to prevent duplicate reserves. BB&T’s objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to manage overall credit risk by minimizing the adverse impact of any single event or combination of related events.

 

A portion of the Corporation’s allowance for loan and lease losses is not allocated to any specific category of loans. This unallocated portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion of the allowance considered unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current economic conditions, industry or borrower concentrations and the status of merged institutions. While the unallocated allowance is available to absorb losses in excess of the amounts allocated to specific loan categories, allocated portions of the allowance are also available to absorb losses in any loan or lease category. Management evaluates the adequacy of the allowance for loan and lease losses based on the combined total of the allocated and unallocated components.

 

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance or to the reserving methodology may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

 

The following table presents an allocation of the allowance for loan and lease losses at the end of each of the past five years. The allowance has been allocated by applying the methodologies described above to the loan portfolios based on the underlying collateral of the loans. Amounts applicable to years prior to 2002 have been restated for acquisitions accounted for as poolings of interests. This allocation of the allowance for loan and lease losses is calculated on an approximate basis and is not necessarily indicative of future losses. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.

 

Table 6

Allocation of Allowance for Loan and Lease Losses by Category

 

   

December 31,


 
   

2002


  
   

2001


  
   

2000


  
   

1999


  
   

1998


  
 
   

Amount


  

% Loans

in each

category


   

Amount


  

% Loans

in each

category


   

Amount


  

% Loans

in each

category


   

Amount


  

% Loans

in each

category


   

Amount


  

% Loans

in each

category


 
   

(Dollars in thousands)

 

Balances at end of period applicable to:

                                                                

Commercial, financial and agricultural

 

$

150,700

  

12.5

%

 

$

133,238

  

13.0

%

 

$

120,486

  

13.9

%

 

$

99,424

  

14.7

%

 

$

81,641

  

15.3

%

Real estate:

                                                                

Construction and land development

 

 

85,525

  

9.4

 

 

 

79,443

  

10.6

 

 

 

55,874

  

9.0

 

 

 

42,041

  

10.3

 

 

 

30,484

  

8.9

 

Mortgage

 

 

332,490

  

57.5

 

 

 

234,872

  

54.6

 

 

 

199,864

  

55.3

 

 

 

173,862

  

56.3

 

 

 

170,578

  

59.3

 

   

  

 

  

 

  

 

  

 

  

Total real estate

 

 

418,015

  

66.9

 

 

 

314,315

  

65.2

 

 

 

255,738

  

64.3

 

 

 

215,903

  

66.6

 

 

 

201,062

  

68.2

 

   

  

 

  

 

  

 

  

 

  

Consumer

 

 

64,209

  

11.4

 

 

 

54,668

  

11.9

 

 

 

49,575

  

12.5

 

 

 

60,255

  

12.4

 

 

 

58,939

  

12.2

 

Lease receivables

 

 

45,173

  

9.2

 

 

 

38,098

  

9.9

 

 

 

30,702

  

9.3

 

 

 

18,193

  

6.3

 

 

 

6,726

  

4.3

 

Unallocated

 

 

45,588

  

—  

 

 

 

104,099

  

—  

 

 

 

121,606

  

—  

 

 

 

135,461

  

—  

 

 

 

142,251

  

—  

 

   

  

 

  

 

  

 

  

 

  

Total

 

$

723,685

  

100.0

%

 

$

644,418

  

100.0

%

 

$

578,107

  

100.0

%

 

$

529,236

  

100.0

%

 

$

490,619

  

100.0

%

   

  

 

  

 

  

 

  

 

  

 

12


 

Information relevant to BB&T’s allowance for loan and lease losses for the last five years is presented in the following table.

 

Table 7

Analysis of Allowance for Loan and Lease Losses

 

    

December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(Dollars in thousands)

 

 

Balance, beginning of period

  

$

644,418

 

  

$

578,107

 

  

$

529,236

 

  

$

490,619

 

  

$

435,693

 

    


  


  


  


  


Charge-offs:

                                            

Commercial, financial and agricultural

  

 

(84,967

)

  

 

(63,387

)

  

 

(33,214

)

  

 

(34,693

)

  

 

(23,605

)

Real estate

  

 

(61,608

)

  

 

(41,035

)

  

 

(20,759

)

  

 

(19,239

)

  

 

(16,165

)

Consumer

  

 

(144,609

)

  

 

(124,359

)

  

 

(93,040

)

  

 

(79,075

)

  

 

(85,505

)

Lease receivables

  

 

(5,965

)

  

 

(2,448

)

  

 

(3,502

)

  

 

(993

)

  

 

(1,167

)

    


  


  


  


  


Total charge-offs

  

 

(297,149

)

  

 

(231,229

)

  

 

(150,515

)

  

 

(134,000

)

  

 

(126,442

)

    


  


  


  


  


Recoveries:

                                            

Commercial, financial and agricultural

  

 

18,029

 

  

 

14,985

 

  

 

12,358

 

  

 

13,087

 

  

 

9,649

 

Real estate

  

 

6,345

 

  

 

4,824

 

  

 

3,788

 

  

 

4,823

 

  

 

4,787

 

Consumer

  

 

24,890

 

  

 

23,955

 

  

 

21,430

 

  

 

17,344

 

  

 

15,645

 

Lease receivables

  

 

1,353

 

  

 

375

 

  

 

312

 

  

 

107

 

  

 

425

 

    


  


  


  


  


Total recoveries

  

 

50,617

 

  

 

44,139

 

  

 

37,888

 

  

 

35,361

 

  

 

30,506

 

    


  


  


  


  


Net charge-offs

  

 

(246,532

)

  

 

(187,090

)

  

 

(112,627

)

  

 

(98,639

)

  

 

(95,936

)

    


  


  


  


  


Provision charged to expense

  

 

263,700

 

  

 

224,318

 

  

 

147,187

 

  

 

126,559

 

  

 

126,269

 

    


  


  


  


  


Allowance of loans acquired in purchase transactions, net

  

 

62,099

 

  

 

29,083

 

  

 

14,311

 

  

 

10,697

 

  

 

24,593

 

    


  


  


  


  


Balance, end of period

  

$

723,685

 

  

$

644,418

 

  

$

578,107

 

  

$

529,236

 

  

$

490,619

 

    


  


  


  


  


Average loans and leases (1)

  

$

50,851,417

 

  

$

46,587,780

 

  

$

41,933,641

 

  

$

37,819,870

 

  

$

34,216,258

 

    


  


  


  


  


Net charge-offs as a percentage of average loans and leases

  

 

.48

%

  

 

.40

%

  

 

.27

%

  

 

.26

%

  

 

.28

%

    


  


  


  


  



(1)   Loans and leases are net of unearned income and include loans held for sale.

 

Nonperforming Assets and Classified Assets

 

Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessed collateral. BB&T generally places loans and leases on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest become doubtful. Loans past due 90 days or more may remain on accrual status if management determines that concern over the collectibility of principal and interest is not significant. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as the ultimate collection of the principal remains in doubt. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful.

 

Investment Activities

 

Investment securities represent a sizeable portion of BB&T’s assets. BB&T’s subsidiary banks invest in securities as allowable under bank regulations. These securities include all obligations of the U.S. Treasury, agencies of the U.S. government, including mortgage-backed securities and certain derivatives, bank eligible

 

13


obligations of any state or political subdivision, bank eligible corporate obligations, including commercial paper, negotiable certificates of deposit, bankers acceptances, mutual funds and limited types of equity securities. BB&T’s bank subsidiaries may also deal in securities subject to the provisions of the GLB Act. Scott & Stringfellow, Inc., BB&T’s full-service brokerage and investment banking subsidiary, engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Corporation.

 

BB&T’s investment activities are governed internally by a written, board-approved policy. Investment policy is carried out by the Corporation’s Asset/Liability Committee (“ALCO”), which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities, which are discussed in “Market Risk Management”, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Investment strategies are established by the ALCO in consideration of the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).

 

The following table provides information regarding the composition of BB&T’s securities portfolio at the end of each of the past three years. The trading securities reflected in the accompanying table represent positions held primarily by Scott & Stringfellow, Inc.

 

Table 8

Composition of Securities Portfolio

 

    

December 31,


    

2002


  

2001


  

2000


    

(Dollars in thousands)

Trading Securities (at estimated fair value):

  

$

148,488

  

$

97,675

  

$

96,719

    

  

  

Securities held to maturity (at amortized cost):

                    

U.S. Treasury and U.S. government agency obligations

  

 

55,523

  

 

40,496

  

 

536,863

States and political subdivisions

  

 

—  

  

 

—  

  

 

80,479

Mortgage-backed securities

  

 

—  

  

 

—  

  

 

1,739

Other securities

  

 

—  

  

 

—  

  

 

3,021

    

  

  

Total securities held to maturity

  

 

55,523

  

 

40,496

  

 

622,102

    

  

  

Securities available for sale (at estimated fair value):

                    

U.S. Treasury and U.S. government agency obligations

  

 

11,560,414

  

 

10,918,219

  

 

9,727,118

States and political subdivisions

  

 

912,598

  

 

1,008,973

  

 

1,038,555

Mortgage-backed securities

  

 

3,869,037

  

 

3,425,288

  

 

2,805,607

Other securities

  

 

1,257,428

  

 

1,269,204

  

 

1,659,843

    

  

  

Total securities available for sale

  

 

17,599,477

  

 

16,621,684

  

 

15,231,123

    

  

  

Total securities

  

$

17,803,488

  

$

16,759,855

  

$

15,949,944

    

  

  

 

Sources of Funds

 

Deposits are the primary source of funds for lending and investing activities. Scheduled payments, as well as prepayments, loan sales and maturities from portfolios of loans and investment securities also provide a stable source of funds. Federal Home Loan Bank (“FHLB”) advances, other secured borrowings, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources.

 

14


 

Deposits

 

Deposits are attracted principally from clients within BB&T’s market area through the offering of a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money rate savings, investor deposit accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) anticipated amount and timing of funding needs, (iii) availability of and cost of alternative sources of funding, and (iv) anticipated future economic conditions and interest rates. Client deposits are attractive sources of liquidity because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other BB&T services.

 

The following table provides information regarding the scheduled maturities of time deposits that are $100,000 and greater at December 31, 2002.

 

Table 9

Scheduled Maturities of Time Deposits $100,000 and Greater

December 31, 2002

(Dollars in thousands)

 

Maturity Schedule

      

Less than three months

  

$

2,138,248

Three through six months

  

 

1,156,286

Seven through twelve months

  

 

926,910

Over twelve months

  

 

2,092,191

    

Total

  

$

6,313,635

    

 

Borrowed Funds

 

BB&T’s ability to borrow funds from nondeposit sources provides additional flexibility in meeting the liquidity needs of customers. Short-term borrowed funds include master notes, securities sold under repurchase agreements, short-term FHLB advances, Federal funds purchased and U.S. Treasury tax and loan depository note accounts. See Note 9. in the “Notes to Consolidated Financial Statements” for additional disclosures related to short-term borrowed funds. The following table summarizes certain pertinent information for the past three years with respect to BB&T’s short-term borrowed funds:

 

Table 10

Short-Term Borrowed Funds

 

    

As of / For the Year Ended December 31,


 
  

2002


      

2001


      

2000


 
    

(Dollars in thousands)

 

Securities Sold Under Agreements to Repurchase

                              

Maximum outstanding at any month-end during the year

  

$

2,568,897

 

    

$

2,532,813

 

    

$

2,401,223

 

Balance outstanding at end of year

  

 

2,511,530

 

    

 

2,175,510

 

    

 

2,371,054

 

Average outstanding during the year

  

 

2,479,185

 

    

 

2,162,917

 

    

 

2,220,242

 

Average interest rate during the year

  

 

2.02

%

    

 

3.76

%

    

 

5.74

%

Average interest rate at end of year

  

 

1.64

 

    

 

2.07

 

    

 

5.76

 

Other Short-term Borrowed Funds

                              

Maximum outstanding at any month-end during the year

  

$

4,542,536

 

    

$

4,866,565

 

    

$

6,421,042

 

Balance outstanding at end of year

  

 

2,885,429

 

    

 

4,473,590

 

    

 

4,938,924

 

Average outstanding during the year

  

 

2,914,294

 

    

 

4,101,183

 

    

 

4,690,607

 

Average interest rate during the year

  

 

1.58

%

    

 

3.82

%

    

 

6.05

%

Average interest rate at end of year

  

 

1.00

 

    

 

4.39

 

    

 

6.22

 

 

15


 

BB&T also utilizes longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost-effective options for funding asset growth and satisfying capital needs. BB&T’s long-term borrowings include capitalized leases, medium-term bank notes, long-term FHLB advances, and other secured borrowings, subordinated debt issued by BB&T Corporation or the subsidiary banks and trust preferred securities. See Note 10. in the “Notes to Consolidated Financial Statements” for additional disclosures related to long-term borrowings.

 

Employees

 

At December 31, 2002, BB&T had approximately 22,500 full-time equivalent employees compared to approximately 20,400 full-time equivalent employees at December 31, 2001.

 

Properties

 

BB&T and its significant subsidiaries occupy headquarters offices that are either owned or operated under long-term leases, and also own free-standing operations centers, with its primary operations and information technology center located in Wilson, North Carolina. BB&T also owns or leases significant office space used as the Corporation’s headquarters in Winston-Salem, North Carolina. At December 31, 2002, BB&T’s subsidiary banks operated 1,122 branch offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and Washington, D.C. BB&T also operates numerous insurance agencies and other facilities. Office locations are owned or leased. Management believes that the premises occupied by BB&T and its subsidiaries are well-located and suitably equipped to serve as financial services facilities. See Note 6. “Premises and Equipment” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to BB&T’s properties and other fixed assets.

 

Executive Officers of BB&T

 

BB&T’s Chairman and Chief Executive Officer is John A. Allison, IV. As of December 31, 2002, Mr. Allison is 54 and has 32 years of service with the Corporation. Henry G. Williamson, Jr., is BB&T’s Chief Operating Officer. Mr. Williamson is 55 and has 31 years of service with the Corporation. Kelly S. King is the President of BB&T Corporation and is the Senior Executive Vice President for the Branch Network. Mr. King is 54 and has 31 years of service with the Corporation. W. Kendall Chalk is a Senior Executive Vice President and the Corporation’s Chief Credit Officer. Mr. Chalk is 57 and has served the Corporation for 28 years. Scott E. Reed is a Senior Executive Vice President and the Corporation’s Chief Financial Officer. Mr. Reed is 54 and has 31 years of service with the Corporation. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 52 and has served the Corporation for 30 years. Sherry A. Kellett is a Senior Executive Vice President and the Corporation’s Controller. Ms. Kellett is 58 and has 18 years of service with the Corporation. C. Leon Wilson III is a Senior Executive Vice President and is the Corporation’s Operations Division Manager. Mr. Wilson is 47 and has served BB&T for 26 years.

 

Web Site Access to BB&T’s Filings with the Securities and Exchange Commission

 

All of BB&T’s electronic filings with the Securities and Exchange Commission (“SEC”), including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available at no cost on the Corporation’s web site, www.bbandt.com, through the Investor Relations link as soon as reasonably practicable after BB&T files such material with, or furnishes it to, the SEC. BB&T’s SEC filings are also available through the SEC’s web site at www.sec.gov.

 

16


REGULATORY CONSIDERATIONS

 

General

 

As a financial holding company under the Gramm-Leach-Bliley Act of 1999, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the “BHCA”) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As state-chartered commercial banks, Branch Bank, BB&T-SC and BB&T-VA (collectively, the “Banks”) are subject to regulation, supervision and examination by state bank regulatory authorities in their respective home states. These authorities include the North Carolina Commissioner of Banks, in the case of Branch Bank, the South Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia State Corporation Commission’s Bureau of Financial Institutions, in the case of BB&T-VA. Each of the State-Chartered Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”). State and Federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks’ operations.

 

In addition to banking laws, regulations and regulatory agencies, BB&T and certain of its subsidiaries and affiliates are subject to various other laws and regulations, and supervision and examination by other state and federal regulatory agencies. These include the regulation, examination and supervision of BB&T’s subsidiaries and affiliates engaged in securities underwriting, dealing, brokerage, investment advisory activities and insurance activities.

 

The earnings of BB&T’s subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which BB&T and the Banks are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

 

The Gramm-Leach-Bliley Act of 1999

 

The Gramm-Leach-Bliley Act of 1999 (the “GLB Act” or the “Act”), signed into law on November 12, 1999, amended a number of Federal banking laws that affect BB&T and its subsidiary banks, and the provisions of the Act that are believed to be of most significance to BB&T are discussed below. In particular, the GLB Act permits a bank holding company to elect to become a financial holding company. In order to become and maintain its status as a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating. BB&T filed an election and on June 14, 2000, became a financial holding company.

 

Under the BHCA, a financial holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA, as amended by the GLB Act, now generally limits the activities of a bank holding company that is a financial holding company to that of banking, managing or controlling banks; performing certain servicing activities for subsidiaries; and engaging in any activity, or acquiring and retaining the shares of any company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity, as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury; or (2) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, as determined by the Federal Reserve Board. Activities that are “financial in nature” include those activities that the Federal Reserve Board had determined, by order or regulation in effect prior to enactment of the GLB Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

 

The GLB Act covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. In particular, the GLB Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations between banks and securities

 

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firms. The Act also provides that, while the states continue to have the authority to regulate insurance activities, in most instances they are prohibited from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. A financial holding company, therefore, may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and insurance underwriting, sales and brokerage activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain areas identified in the Act. The Act directs the Federal bank regulatory agencies to adopt insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures, and such regulations have been adopted and became effective April 1, 2001.

 

The GLB Act includes a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. The Act repealed the broad exemption of banks from the definitions of “broker” and “dealer” for purposes of the Securities Exchange Act of 1934, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a “broker”, and a set of activities in which a bank may engage without being deemed a “dealer”. The Act also makes conforming changes in the definitions of “broker” and “dealer” for purposes of the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

 

The GLB Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The Act also provides that the states may adopt customer privacy protections that are stricter than those contained in the Act. The Act also makes a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. The Act also contains requirements for the posting of notices by operators of automated teller machines regarding fees charged for the use of such machines.

 

Many of the GLB Act’s provisions, including the customer privacy protection provisions, require the Federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement those respective provisions, and the required implementing regulations have been adopted by the bank regulatory agencies. Neither the provisions of the GLB Act nor the Act’s implementing regulations, as proposed or adopted, have had a material impact on BB&T’s or the Banks’ regulatory capital ratios or well capitalized status (as discussed below) or ability to continue to operate in a safe and sound manner.

 

Payment of Dividends

 

BB&T is a legal entity separate and distinct from its subsidiaries. The majority of BB&T’s revenue is from dividends paid to BB&T by its banking subsidiaries. BB&T’s banking subsidiaries are subject to laws and regulations that limit the amount of dividends they can pay. In addition, both BB&T and its Subsidiary Banks are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. BB&T does not expect that any of these laws, regulations or policies will materially affect the ability of the Banks to pay dividends. During the year ended December 31, 2002, the Banks declared $974.5 million in dividends payable to

 

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BB&T. Subject to restrictions imposed by state laws and federal regulations, the Boards of Directors of the Subsidiary Banks could have declared dividends from their retained earnings up to $2.8 billion at December 31, 2002.

 

Capital

 

The Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency (the “OCC”) have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Additionally, as noted above under the GLB Act, a bank holding company that elects to become a financial holding company must be well-managed, have at least a satisfactory Community Reinvestment Act rating, and be well-capitalized. Under the risk-based capital requirements, BB&T and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles (“Tier 1 capital”). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance (“Tier 2 capital” which, together with Tier 1 capital, composes “total capital”). To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total risk-weighted capital ratio of at least 10% and a Tier 1 risk-weighted ratio of 6% or greater. The ratios of Tier 1 capital and total capital to risk-adjusted assets for BB&T and the Subsidiary Banks as of December 31, 2002, are shown in the following table.

 

In addition, each of the Federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Pursuant to these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. The leverage ratios of BB&T and the Subsidiary Banks as of December 31, 2002, also are reflected in the following table.

 

Table 11

Capital Adequacy Ratios of BB&T Corporation and Principal Banking Subsidiaries

December 31, 2002

 

      

Regulatory Minimums


      

Regulatory Minimums

to be Well-Capitalized


    

BB&T


    

Branch Bank


    

BB&T-

SC


    

BB&T-

VA


 

Risk-based capital ratios:

                                             

Tier 1 capital (1)

    

4.0

%

    

6.0

%

  

9.2

%

  

10.2

%

  

10.3

%

  

10.8

%

Total risk-based capital (2)

    

8.0

 

    

10.0

 

  

13.4

 

  

11.9

 

  

11.6

 

  

12.1

 

Tier 1 leverage ratio (3)

    

3.0

 

    

5.0

 

  

6.9

 

  

7.4

 

  

7.8

 

  

7.0

 


(1)   Shareholders’ equity plus corporation-obligated mandatorily redeemable capital securities, less unrealized gains (losses) on debt securities available for sale, net of deferred income taxes, less nonqualifying intangible assets; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.
(2)   Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.
(3)   Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles.

 

The Federal Deposit Insurance Corporation Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. BB&T and each of the Banks are classified as “well-capitalized”. FDICIA also requires the bank regulatory agencies to implement systems for “prompt corrective action” for institutions that fail to meet minimum capital requirements within these five categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Failure to meet capital requirements can also cause an institution to be directed to raise additional capital. FDICIA also mandates that the agencies adopt safety and soundness

 

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standards relating generally to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.

 

In addition, the Federal Reserve Board, the FDIC and the OCC each by regulation has adopted risk-based capital standards that explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by each agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy. The agencies also jointly adopted a regulation, effective January 1, 2002, amending their regulatory capital standards to change the treatment of certain recourse obligations, direct credit subsidies, residual interest and other positions in securitized transactions that expose banking organizations to credit risk. The regulation amends the agencies’ regulatory capital standards to align more closely the risk-based capital treatment of recourse obligations and direct credit subsidies, to vary the capital requirements for positions in securitized transactions (and certain other credit exposures) according to their relative risk, and to require capital commensurate with the risks associated with residual interests.

 

In addition to the “prompt corrective action” directives, failure to meet capital guidelines can subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC, and under certain conditions the appointment of a conservator or receiver.

 

Deposit Insurance Assessments

 

The deposits of the Banks are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC. However, a portion of the Banks’ deposits (relating to the acquisitions of various savings associations) are subject to assessments imposed by the Savings Association Insurance Fund (“SAIF”) of the FDIC.

 

The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1998. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. Legislation was enacted in 1997 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”). At December 31, 2002, the FDIC assessed BIF-insured and SAIF-insured deposits an additional 1.70 basis points per $100 of deposits to cover those obligations. At December 31, 2002, BB&T’s assessment is limited to this 1.70 basis points.

 

Other Safety and Soundness Regulations

 

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.

 

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State banking regulators and the OCC also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of a North Carolina state bank) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner of Banks also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.

 

Interstate Banking and Branching

 

Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1998, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years; and certain deposit market-share limitations. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law.

 

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

 

On October 26, 2001, the USA Patriot Act of 2001 was signed into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. BB&T does not expect that compliance with the IMLAFA will have a material impact on BB&T’s or the Banks’ results of operations or financial condition.

 

Sarbanes-Oxley Act of 2002

 

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Many of the provisions became effective immediately while other provisions become effective over a period of 30 to 270 days and are subject to rulemaking by the Securities and Exchange Commission. Although BB&T anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, BB&T does not expect that such compliance will have a material impact on BB&T’s or the Banks’ results of operations or financial condition.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

The following discussion and analysis of the consolidated financial condition and consolidated results of operations of BB&T Corporation and subsidiaries (“BB&T” or the “Corporation”) for each of the three years in the period ended December 31, 2002, and related financial information, are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T’s 2002 performance.

 

Reclassifications

 

In certain circumstances, reclassifications have been made to prior period information to conform to the 2002 presentation.

 

Mergers and Acquisitions Completed during 2002

 

During 2002, BB&T completed the following mergers and acquisitions, all of which were accounted for as purchases as required by current accounting regulations.

 

On January 1, 2002, BB&T completed its acquisition of Cooney, Rickard & Curtin, Inc. (“CRC”), the largest independently owned wholesale insurance broker in the nation based in Birmingham, Alabama. In connection with the transaction, BB&T issued 2.5 million shares of common stock valued at $85.6 million. CRC’s assets totaled $108.6 million at time of acquisition. BB&T recorded $59.4 million in goodwill and $42.7 million in other intangible assets in connection with the acquisition.

 

On March 8, 2002, BB&T completed its acquisition of Louisville, Kentucky-based MidAmerica Bancorp (“MidAmerica”). To complete the acquisition, BB&T paid $94.9 million in cash and issued 8.2 million shares of common stock valued at $284.9 million in exchange for all of the outstanding common shares of MidAmerica. MidAmerica’s assets totaled $2.0 billion at the time of acquisition and BB&T recorded $230.4 million in goodwill and other intangible assets in connection with the acquisition.

 

On March 20, 2002, BB&T completed its acquisition of AREA Bancshares Corporation (“AREA”) of Owensboro, Kentucky. BB&T issued 13.2 million shares of common stock valued at $448.9 million in exchange for all of the outstanding common shares of AREA. AREA’s assets totaled $2.9 billion at the time of acquisition and BB&T recorded $279.2 million in goodwill and other intangible assets in connection with the acquisition.

 

On September 13, 2002, BB&T completed its acquisition of Regional Financial Corp. (“Regional”), the parent company for First South Bank based in Tallahassee, Florida. BB&T issued 7.3 million shares of common stock valued at $276.3 million in exchange for all of the outstanding common shares of Regional. Regional’s assets totaled $1.6 billion at the time of acquisition and BB&T recorded $235.7 million in goodwill and other intangible assets in connection with the acquisition.

 

BB&T also acquired the following nonbank financial services companies during 2002, all of which were immaterial in relation to BB&T: Ryan, Lee & Co. Inc., an investment banking and brokerage firm based in McLean, Virginia; The Pfefferkorn Company (“Pfefferkorn”), a mortgage banking company based in Winston-Salem, North Carolina; Virginia Investment Counselors, Inc. (“VIC”), an investment advisory firm based in Norfolk, Virginia; Hunt, DuPree, Rhine & Associates, Inc., an employee benefits and investment advisory firm based in Greenville, South Carolina; and American Marketing Center, Inc., a New York City-based wholesale insurance broker specializing in real estate products.

 

In addition to the mergers and acquisitions noted above, BB&T acquired a number of insurance agencies during 2002. See Note 2. in the “Notes to Consolidated Financial Statements” for further information regarding mergers and acquisitions.

 

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Pending Mergers and Acquisitions

 

On September 27, 2002, BB&T announced plans to acquire Equitable Bank (“Equitable”), based in Wheaton, Maryland. At the time of the announcement, Equitable had $477 million in assets and operated five full-service banking offices in Montgomery and Prince George’s counties. Shareholders of Equitable will receive one share of BB&T common stock in exchange for each share of Equitable. The transaction is expected to be completed in the first quarter of 2003. BB&T expects to issue $1.4 million shares of common stock to consummate the transaction.

 

On December 4, 2002, BB&T announced plans to acquire Southeastern Fidelity Corporation (“SEFCO”), an insurance premium finance company based in Tallahassee, Florida. Pending regulatory approval, the transaction is planned to be completed in the first quarter of 2003.

 

On January 21, 2003, BB&T announced plans to acquire First Virginia Banks, Inc. (“First Virginia”), a bank holding company headquartered in Falls Church, Virginia. First Virginia was the parent company to eight community banks and operated 364 branches in Virginia, Maryland, and northeast Tennessee at the time of the announcement. At December 31, 2002, First Virginia had $11.2 billion in assets, including $6.4 billion in loans and $4.0 billion in investment securities, and $9.2 billion of deposits. Shareholders of First Virginia will receive 1.26 BB&T shares in exchange for each share of First Virginia. The merger, which is subject to regulatory and shareholder approval, is expected to be completed in the second quarter of 2003. BB&T expects to issue $89.3 million shares of common stock to consummate the transaction.

 

Critical Accounting Policies

 

The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. BB&T’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in BB&T’s consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include BB&T’s accounting for the allowance for loan and lease losses, valuation of mortgage servicing rights, mergers and acquisitions, and income taxes. BB&T’s accounting policies are fundamental to understanding BB&T’s consolidated financial position and consolidated results of operations. Accordingly, BB&T’s significant accounting policies are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements”.

 

The following is a summary of BB&T’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.

 

The allowance for loan and lease losses is established and maintained at levels management deems adequate to cover probable losses inherent in the portfolio as of the balance sheet date and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates for loan losses are determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan administration, the opinions of our regulators, changes in the size, composition and risk assessment of the loan portfolio. Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which is uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business.

 

BB&T has a significant mortgage loan-servicing portfolio and has capitalized the associated servicing rights. Mortgage servicing rights represent the present value of the future servicing fees from the right to service loans in the portfolio. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires the development of a number of estimates, including anticipated loan principal amortization and prepayments of principal. The value of capitalized mortgage servicing rights is significantly affected by interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the

 

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value of mortgage servicing assets declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing assets generally increases due to reduced refinance activity. BB&T amortizes mortgage servicing rights over the estimated period that servicing income is expected to be received based on projections of the amount and timing of future cash flows. The amount and timing of servicing asset amortization is adjusted periodically based on actual results and updated projections. Please refer to Note 8 in the “Notes to Consolidated Financial Statements” for quantitative disclosures reflecting the effect that changes in management’s assumptions would have on the fair value of capitalized mortgage servicing rights.

 

BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. Prior to 2002, BB&T’s acquisitions were accounted for using the pooling-of-interests and purchase business combination methods of accounting. Effective July 1, 2001, BB&T adopted SFAS No. 141, “Business Combinations,” which allows only the use of the purchase method of accounting. For purchase acquisitions, BB&T is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective as is the appropriate amortization period for such intangible assets. These estimates also include the establishment of various accruals and allowances based on planned facilities dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill.

 

The calculation of BB&T’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of the Company’s overall business strategy, management must consider tax laws and regulations that apply to the specific facts and circumstances under consideration. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management closely monitors tax developments in order to evaluate the effect they may have on the Company’s overall tax position.

 

BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and the determination of future market values of plan assets are subject to management judgment and may differ significantly if different assumptions are used. Please refer to Note 13 in the “Notes to Consolidated Financial Statements” for disclosures related to BB&T’s benefit plans, including quantitative disclosures reflecting the impact that changes in certain assumptions would have on service and interest costs and benefit obligations.

 

Analysis of Financial Condition

 

For the year ended December 31, 2002, BB&T’s average assets totaled $75.8 billion, an increase of $7.0 billion, or 10.1%, compared to the 2001 average of $68.8 billion. The major balance sheet categories with increases in average balances were loans and leases, up $4.3 billion, or 9.2%, and securities, which increased $1.1 billion, or 6.6%. The primary components of growth in average loans and leases were commercial loans and leases, which increased $2.7 billion, or 10.7%; mortgage loans, which increased $325.1 million, or 3.5%; revolving credit loans, which increased $97.7 million, or 11.0%; and consumer loans, which increased $1.1 billion, or 10.1%. Total earning assets averaged $68.2 billion in 2002, an increase of $5.3 billion, or 8.5%, compared to 2001.

 

BB&T’s average deposits totaled $49.1 billion, reflecting growth of $4.9 billion, or 11.0%, compared to 2001. The categories of deposits with the highest growth rates were: money rate savings, which increased $2.3 billion, or 18.6%, noninterest-bearing deposits, which increased $995.4 million, or 16.0%, and certificates of deposit and other time deposits, which increased $1.6 billion, or 7.0%.

 

Short-term borrowed fund include Federal funds purchased, securities sold under repurchase agreements, master notes, short-term bank notes and Federal Home Loan Bank (“FHLB”) advances. Average short-term borrowed funds totaled $5.4 billion for the year ended December 31, 2002, a decrease of $870.6 million, or 13.9%, from the 2001 average. BB&T has also utilized long-term debt based on the flexibility and cost-effectiveness of

 

24


the alternatives available. Long-term debt includes FHLB advances, other secured borrowings by subsidiary banks and subordinated debt issued by the Corporation and Branch Bank. Average long-term debt totaled $12.1 billion for the year ended December 31, 2002, up $1.1 billion, or 10.0%, compared to 2001.

 

The compound annual rate of growth in average total assets for the five-year period ended December 31, 2002, was 10.6%. Over the same five-year period, average loans and leases increased at a compound annual rate of 10.7%, average securities increased at a compound annual rate of 7.5%, and average deposits grew at a compound annual rate of 7.9%. All balance sheet growth rates referred to include the effect of acquisitions accounted for as purchases, as well as internal growth.

 

Securities

 

The securities portfolios provide earnings and liquidity, as well as an effective tool in managing interest rate risk. Management has historically emphasized investments with a duration of five years or less to provide greater flexibility in managing the balance sheet in changing interest rate environments. U.S. Treasury securities and U.S. government agency obligations, excluding mortgage-backed securities, comprised 65.2% of the portfolio at December 31, 2002. The combined duration of the U.S. Treasury and U.S. government agency portfolios was 1.61 years at December 31, 2002. Mortgage-backed securities composed 21.7% of the total investment portfolio at year-end 2002. The effective duration of the mortgage-backed securities was 1.46 years at December 31, 2002. Total securities increased 6.2% in 2002, to a total of $17.8 billion at the end of the year. The duration of the total portfolio at December 31, 2002 was 1.74 years.

 

BB&T’s full-service brokerage subsidiary holds trading securities as a normal part of its operations. At December 31, 2002, trading securities reflected on BB&T’s consolidated balance sheet totaled $148.5 million. Market valuation gains and losses in the trading portfolio are reflected in current earnings.

 

Securities held to maturity are composed of investments in U.S. Treasury securities and made up less than 1% of the total portfolio at December 31, 2002. Securities held to maturity are carried at amortized cost and totaled $55.5 million at December 31, 2002, compared to $40.5 million outstanding at the end of 2001. During 2001, substantially all the securities in the held-to-maturity portfolio were transferred to the available-for-sale portfolio in connection with the implementation of SFAS No. 133. This was done to provide greater flexibility in the management of the overall securities portfolio. Unrealized market valuation gains and losses on securities in the Corporation’s held-to-maturity category affect neither earnings nor shareholders’ equity.

 

Securities available for sale totaled $17.6 billion at year-end 2002 and are carried at estimated fair value. Securities available for sale at year-end 2001 totaled $16.6 billion. Unrealized market valuation gains and losses on securities classified as available for sale are recorded as a separate component of shareholders’ equity, net of deferred income taxes. The available-for-sale portfolio is primarily composed of investments in U.S. Treasury securities, government agency obligations and mortgage-backed securities. This portfolio also contains investments in obligations of states and municipalities, which composed 5.2% of the available-for-sale portfolio, and equity and other securities, which comprised 7.1% of the available-for-sale portfolio.

 

During the year ended December 31, 2002, BB&T sold $2.6 billion of available-for-sale securities and realized net gains totaling $170.1 million. The majority of these gains were taken to economically offset increases in the valuation allowance necessary to reduce the carrying value of BB&T’s capitalized mortgage servicing rights.

 

During the first quarter of 2001, BB&T sold its ownership interest in an electronic transaction processing company to Concord EFS, Inc. (“Concord”), exchanging nonmarketable equity securities for unregistered Concord common stock. The Concord common shares were subsequently registered by Concord, and BB&T sold its holdings of Concord, which were included in securities available for sale. As a result of the transaction, BB&T recognized gains of $82.4 million that are reflected in securities gains (losses), net, in the Consolidated Statements of Income.

 

During the second and third quarters of 2000, BB&T restructured the available-for-sale securities portfolio. The restructuring was undertaken to improve the overall yield and liquidity of the portfolio, and reduce the overall duration of the portfolio. BB&T sold $5.9 billion of U.S. Treasuries, obligations of U.S. government agencies and mortgage-backed securities, and incurred approximately $222 million in pretax losses as a result of these sales. The proceeds from these sales were reinvested in higher yielding securities, primarily obligations of U.S. government agencies.

 

25


 

The following table presents BB&T’s securities portfolio at December 31, 2002, segregated by major category with ranges of maturities and average yields disclosed.

 

Table 12

Securities

 

    

December 31, 2002


 
    

Carrying Value


  

Weighted Average Yield (3)


 
    

(Dollars in thousands)

 

U.S. Treasury and U.S. government agency obligations (1):

             

Within one year

  

$

2,131,005

  

4.93

%

One to five years

  

 

8,174,216

  

4.84

 

Five to ten years

  

 

1,439,088

  

5.20

 

After ten years

  

 

3,740,665

  

5.39

 

    

  

Total

  

 

15,484,974

  

5.02

 

    

  

Obligations of states and political subdivisions:

             

Within one year

  

 

66,919

  

7.42

 

One to five years

  

 

209,955

  

6.93

 

Five to ten years

  

 

454,581

  

6.67

 

After ten years

  

 

181,143

  

7.43

 

    

  

Total

  

 

912,598

  

6.94

 

    

  

Other securities:

             

Within one year

  

 

91,953

  

1.43

 

One to five years

  

 

617

  

6.32

 

Five to ten years

  

 

50,000

  

5.01

 

After ten years

  

 

52,204

  

5.58

 

    

  

Total

  

 

194,774

  

3.48

 

    

  

Securities with no stated maturity (2)

  

 

1,211,142

  

4.72

 

    

  

Total securities (4)

  

$

17,803,488

  

5.08

%

    

  


(1)   Included in U.S. Treasury and U.S. government agency obligations are mortgage-backed securities totaling $3.9 billion classified as available for sale and carried at fair value. These securities are included in each of the maturity categories based upon final stated maturity dates. The original contractual lives of these securities range from five to 30 years; however, a more realistic average maturity would be substantially shorter because of the monthly return of principal on certain securities.
(2)   Securities with no stated maturity includes equity investments which totalled $1.1 billion and trading securities which totalled $148.5 million.
(3)   Yields on tax-exempt securities are calculated on a taxable-equivalent basis.
(4)   Includes securities held to maturity of $55.5 million carried at amortized cost and securities available for sale and trading securities carried at estimated fair values of $17.6 billion and $148.5 million, respectively.

 

The available-for-sale portfolio composed 98.9% of total securities at December 31, 2002. Management believes that the high concentration of securities in the available-for-sale portfolio allows greater flexibility in the day-to-day management of the overall investment portfolio.

 

The market value of the available-for-sale portfolio at year-end 2002 was $536.1 million greater than the amortized cost of these securities. At December 31, 2002, BB&T’s available-for-sale portfolio had net unrealized appreciation, net of deferred income taxes, of $329.1 million, which is reported as a separate component of shareholders’ equity. At December 31, 2001, the available-for-sale portfolio had net unrealized appreciation of $288.1 million, net of deferred income taxes.

 

26


 

The fully taxable equivalent (“FTE”) yield on the total securities portfolio was 6.22% for the year ended December 31, 2002, compared to 7.06% for the prior year. The decrease in FTE yield was caused by the lower interest rate environment, which resulted in cash flows from the payments, prepayments, sales, calls and maturities of higher yielding securities being reinvested at lower interest rates during 2002. The yield on U.S. Treasury and government agency obligations decreased from 7.09% in 2001 to 6.12% in 2002, while the yield on mortgage-backed securities decreased from 6.97% to 6.49% and the FTE yield on state and municipal securities increased from 7.37% last year to 7.47% in the current year.

 

Loans and Leases

 

BB&T’s loan growth was negatively affected by the continued weakness in general economic conditions during 2002. End of period loans, excluding loans held for sale, increased $5.6 billion, or 12.3%, as compared to 2001. Average total loans and leases for 2002 increased $4.3 billion, or 9.2%, compared to 2001.

 

BB&T is a full-service lender with approximately one-half of its loan portfolio composed of business loans and one-half composed of loans to individual consumers. BB&T’s management emphasizes loans to small business, commercial middle market, direct retail and residential mortgage borrowers. Average commercial loans, including lease receivables, increased $2.7 billion, or 10.7%, in 2002 as compared to 2001, and now compose 55.0% of the loan portfolio, compared to 54.0% in 2001. Average consumer loans, which include sales finance, revolving credit and direct retail, increased $1.2 billion, or 10.2%, for the year ended December 31, 2002 as compared to the same period in 2001, and compose 26.1% of average loans, compared to 25.8% in 2001. Average mortgage loans increased $325.1 million, or 3.5%, in 2002 as compared to 2001, and represented the remaining 18.9% of average total loans for 2002, compared to 20.2% a year ago. BB&T is a large originator of residential mortgage loans, with 2002 originations of $14.1 billion. To improve the overall yield of the loan portfolio and to mitigate interest rate risk, BB&T sells most of its fixed-rate mortgage loans in the secondary market or securitizes the loans and transfers them to the securities portfolio. At December 31, 2002, BB&T was servicing $34.8 billion in residential mortgages. The mix of the consolidated loan portfolio in 2002 was very similar to that of one year ago.

 

The growth rates of average loans in the current year were affected by loan portfolios held by companies that were acquired during 2002. Also, the securitization of $377.4 million in loans during 2001 affected the reported growth in average mortgage loans. During 2002, loans totaling $1.2 billion, $1.9 billion and $1.2 billion were acquired through the purchases of Regional, AREA and MidAmerica, respectively. Excluding the effect of these purchase accounting transactions and the mortgage loan securitizations, average “internal” loan growth for the year ended December 31, 2002, was 2.0% compared to 2001. Excluding the effects of purchase accounting transactions and loan securitizations, average mortgage loans, including loans held for sale, decreased 3.6%, commercial loans and leases grew 3.1%, and consumer loans increased 4.5% in 2002 as compared to 2001.

 

The average annualized fully taxable equivalent (“FTE”) yields on commercial, consumer and mortgage loans for 2002 were 6.17%, 8.49% and 6.97%, respectively, resulting in a yield for the total loan portfolio of 6.93%, compared to 8.37% for the total portfolio in 2001. The 144 basis point decrease in the average yield on loans resulted from a lower average prime rate during late 2001 and throughout 2002, which was the product of continued aggressive actions taken by the Federal Reserve Board to stimulate the economy. During 2001, the Federal Reserve reduced the target Federal Funds Rate from 6.50% to 1.75%. During 2002, the Federal Reserve further reduced the intended Federal Funds Rate to 1.25% late in the year. As a result of the Federal Reserve Board’s actions, the average prime rate, which is the basis for pricing many commerical and consumer loans, averaged 4.68% in 2002, compared to 6.92% for 2001.

 

Asset Quality

 

While the slowdown in the economy has resulted in higher levels of nonperforming assets and net charge-offs, BB&T’s lending strategy, which focuses on relationship-based lending within our markets and smaller individual loan balances, continues to produce strong credit quality. BB&T’s asset quality, as measured by relative levels of nonperforming assets and net charge-offs, has remained approximately one-half that of published industry averages.

 

Nonperforming assets, which are composed of foreclosed real estate, repossessions, nonaccrual loans and leases and restructured loans, totaled $451.7 million at December 31, 2002, as compared to $373.6 million at

 

27


year-end 2001, an increase of 20.9%. As a percentage of total assets, nonperforming assets were .56% at December 31, 2002, compared to .53% at the end of 2001. As a percentage of loans and leases plus foreclosed property, nonperforming assets totaled .84% at December 31, 2002, compared to .79% at the end of 2001. The allowance for loan and lease losses, as a percentage of loans and leases, was 1.35% at December 31, 2002, compared to 1.36% at year-end 2001. Excluding loans held for sale, the ratio of the allowance for loan and lease losses to total loans and leases was 1.42% at both December 31, 2002 and 2001. Loans 90 days or more past due and still accruing interest increased to $115.0 million at year-end 2002 compared to $101.8 million at December 31, 2001. Net charge-offs as a percentage of average loans and leases increased to .48% for the year ended December 31, 2002, from .40% in 2001. As a result of the increase in net charge-offs, the ratio of the allowance for loan and lease losses to net charge-offs decreased from a multiple of 3.44 at the end of 2001 to a multiple of 2.94 as of December 31, 2002.

 

The following table summarizes asset quality information for BB&T for the past five years.

 

Table 13

Asset Quality

 

    

December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(Dollars in thousands)

 

Nonaccrual loans and leases (1)

  

$

374,842

 

  

$

316,607

 

  

$

180,638

 

  

$

144,247

 

  

$

145,599

 

Restructured loans

  

 

175

 

  

 

—  

 

  

 

492

 

  

 

1,681

 

  

 

3,744

 

Foreclosed property

  

 

76,647

 

  

 

56,964

 

  

 

55,199

 

  

 

47,143

 

  

 

60,030

 

    


  


  


  


  


Nonperforming assets

  

$

451,664

 

  

$

373,571

 

  

$

236,329

 

  

$

193,071

 

  

$

209,373

 

    


  


  


  


  


Loans 90 days or more past due and still accruing

  

$

115,047

 

  

$

101,778

 

  

$

81,629

 

  

$

66,241

 

  

$

68,360

 

    


  


  


  


  


Asset Quality Ratios: (2)

                                            

Nonaccrual and restructured loans and leases as a percentage of loans and leases

  

 

.70

%

  

 

.67

%

  

 

.40

%

  

 

.37

%

  

 

.41

%

Nonperforming assets as a percentage of:

                                            

Total assets

  

 

.56

 

  

 

.53

 

  

 

.36

 

  

 

.33

 

  

 

.39

 

Loans and leases plus foreclosed property

  

 

.84

 

  

 

.79

 

  

 

.53

 

  

 

.48

 

  

 

.58

 

Net charge-offs as a percentage of average loans and leases

  

 

.48

 

  

 

.40

 

  

 

.27

 

  

 

.26

 

  

 

.28

 

Net charge-offs excluding specialized lending as a percentage of average loans and leases (3)

  

 

.39

 

  

 

.34

 

  

 

.22

 

  

 

.22

 

  

 

.25

 

Allowance for losses as a percentage of loans and leases

  

 

1.35

 

  

 

1.36

 

  

 

1.29

 

  

 

1.33

 

  

 

1.35

 

Allowance for losses as a percentage of loans and leases held for investment

  

 

1.42

 

  

 

1.42

 

  

 

1.32

 

  

 

1.34

 

  

 

1.40

 

Ratio of allowance for losses to:

                                            

Net charge-offs

  

 

2.94

x

  

 

3.44

x

  

 

5.13

x

  

 

5.37

x

  

 

5.11

x

Nonaccrual and restructured loans and leases

  

 

1.93

 

  

 

2.04

 

  

 

3.19

 

  

 

3.63

 

  

 

3.29

 


NOTE:   (1)   Includes $144.8 million, $130.7 million, $73.4 million, $68.4 million and $77.5 million of impaired loans at December 31, 2002, 2001, 2000, 1999 and 1998, respectively. See Note 4 in the “Notes to Consolidated Financial Statements.”
  (2)   Items referring to loans and leases are net of unearned income and include loans held for sale.
  (3)   Excludes net charge-offs and average loans from BB&T’s sub-prime indirect automobile lending operations, insurance premium finance business and direct consumer finance operations.

 

Allowance for Loan and Lease Losses

 

BB&T’s allowance for loan and lease losses totaled $723.7 million at December 31, 2002, compared to $644.4 million at the end of 2001, an increase of 12.3%. As a percentage of loans and leases outstanding, the allowance decreased slightly from 1.36% at December 31, 2001, to 1.35% at the end of 2002. Excluding loans held for sale, the percentage was 1.42% at both period ends. The relatively steady ratio of the allowance as a percentage of loans and leases was a result of continued strong asset quality, including relatively stable levels of nonperforming assets as a percentage of total assets.

 

28


 

There were no significant changes in the estimation methods or fundamental assumptions used in the calculation of the allowance for loan losses at December 31, 2002 compared to 2001. See “Asset Quality” for disclosures regarding changes in the trends of credit quality.

 

Please refer to “Allowance for Loan and Lease Losses” in the “Description of Business” section, which describes BB&T’s allowance policy and methodologies and provides disclosures with respect to allowance allocations.

 

Deposits and Other Borrowings

 

Client deposits generated through the BB&T branch network are the largest source of funds used to support asset growth. While core deposits are BB&T’s primary source of funding, growth rates of core deposits have generally not kept pace with asset growth and, therefore, nondeposit funding sources have increasingly been used to support balance sheet growth.

 

Total deposits at December 31, 2002, were $51.3 billion, an increase of $6.5 billion, or 14.6%, compared to year-end 2001. The increase in deposits was driven by a $3.3 billion, or 23.6% increase in money rate savings accounts, a $924.7 million, or 13.3% increase in noninterest-bearing deposits, and a $2.3 billion, or 10.9% increase in certificates of deposits and other time deposits. For the year ended December 31, 2002, total deposits averaged $49.1 billion, an increase of $4.9 billion, or 11.0%, compared to 2001. The increase was the result of a $2.3 billion, or 18.6%, increase in average money rate savings, an increase of $1.6 billion, or 7%, in other time deposits, and a $995.4 million, or 16.0%, increase in noninterest-bearing deposits. During the same time periods, average savings and interest checking accounts remained flat at $3.4 billion. Other time deposits, including individual retirement accounts and certificates of deposit, remain BB&T’s largest category of deposits, comprising 48.3% of average total deposits for the year.

 

The average rates paid on interest-bearing deposits decreased to 2.39% during 2002, from 4.12% in 2001. The declining interest rate in 2002 was caused by the general slowdown in economic activity and aggressive actions by the Federal Reserve to lower short-term interest rates. The average rate paid on other time deposits, including individual retirement accounts and certificates of deposit, decreased to 3.42% in the current year from 5.45% in 2001. The average cost of money rate savings accounts decreased to 1.13% in the current year from 2.48% in 2001; interest checking decreased from 1.47% in 2001 to .67% in the current year; and the average cost of savings deposits decreased to .80% in 2002 from 1.42% in 2001.

 

During 2000, BB&T contracted with an independent third party for the disbursement of official checks. Under the terms of the agreement, BB&T acts as an agent for the third party in the issuance of official checks. Funds received from the buyers of official checks are transferred to the third party issuer to cover the checks when they are ultimately presented for payment. But for this arrangement with the third party, these funds would have remained at BB&T in the form of noninterest-bearing deposits. The official check program is contractually arranged to substantially limit BB&T’s exposure to loss, as the third party is required to invest the funds received and maintain a 1:1 relationship between outstanding checks and the balances available to cover the checks. BB&T monitors this relationship through a reconciliation process. The third party provided a letter of credit from another bank in favor of BB&T and has access to a revolving line of credit to further mitigate any risk that there would be inadequate funds to cover the outstanding balance of official checks sold. However, in the event that the third party failed to honor official checks BB&T had sold as its agent, it is likely that BB&T would choose to reimburse the purchasers, though not contractually obligated to do so. At December 31, 2002, the third party issuer had outstanding official checks that had been sold by BB&T totaling $580.1 million.

 

29


 

BB&T also uses various types of short-term borrowed funds to supplement deposits in order to fulfill funding needs. See Note 9. “Short-Term Borrowed Funds” in the “Notes to Consolidated Financial Statements” herein for further disclosure. The types of short-term borrowings utilized by the Corporation include Federal funds purchased, which composed 29.6% of total short-term borrowed funds, and securities sold under repurchase agreements, which comprised 46.5% of short-term borrowed funds at year-end 2002. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank notes and short-term Federal Home Loan Bank (“FHLB”) advances are also utilized to meet short-term funding needs. Average short-term borrowed funds totaled $5.4 billion during 2002, a decrease of $870.6 million, or 13.9%, from 2001, while short-term borrowed funds at year-end 2002 were $5.4 billion, a decrease of $1.3 billion, or 18.8%, compared to year-end 2001. The rates paid on average short-term borrowed funds decreased from 3.80% in 2001 to 1.78% during 2002. The decrease in the cost of short-term borrowed funds resulted from the lower interest rate environment during 2002, including a 222 basis point decrease in the average Federal funds rate for 2002 compared to 2001.

 

BB&T also utilizes long-term debt to provide both funding and, to a lesser extent, regulatory capital. See Note 10. “Long-Term Debt” in the “Notes to Consolidated Financial Statements” herein for further disclosure. Long-term debt at December 31, 2002 totaled $13.6 billion, an increase of $1.9 billion, or 15.9%, from year-end 2001. The substantial increase in long-term borrowing during 2002 reflects BB&T’s efforts to take advantage of historically low interest rates. For the year ended December 31, 2002, average long-term debt increased $1.1 billion, or 10.0%, compared to the average for 2001. BB&T’s long-term debt consists primarily of FHLB advances to the Subsidiary Banks, which composed 70.5% of total outstanding long-term debt at December 31, 2002, and subordinated notes, which composed 17.3% of the year-end balance. FHLB advances are cost-effective long-term funding sources that provide BB&T with the flexibility to structure the debt in a manner that aids in the management of interest rate risk and liquidity. The remaining long-term debt consists of secured borrowings by Branch Bank, redeemable capital securities issued by the Corporation, mortgage indebtedness and capital leases. The average rate paid on long-term debt decreased from 5.53% during 2001 to 4.84% during 2002 because of the overall declining interest rate environment previously discussed.

 

Liquidity needs are a primary consideration in evaluating funding sources. BB&T’s strategy is to maintain funding flexibility, in order that the Corporation may react rapidly to opportunities that may become available in the marketplace. BB&T will continue to focus on traditional core funding strategies, supplemented by short-term and long-term borrowings. See “Liquidity, Inflation and Changing Interest Rates” for additional discussion.

 

Analysis of Results of Operations

 

Consolidated net income for 2002 totaled $1.3 billion, which generated basic earnings per share of $2.75 and diluted earnings per share of $2.72. Net income for 2001 was $973.6 million and net income for 2000 totaled $698.5 million. Basic earnings per share were $2.15 in 2001 and $1.55 in 2000, while diluted earnings per share were $2.12 and $1.53 for 2001 and 2000, respectively.

 

Two important and commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets) and return on average shareholders’ equity (net income as a percentage of average common shareholders’ equity). BB&T’s returns on average assets were 1.72%, 1.41% and 1.13% for the years ended December 31, 2002, 2001 and 2000, respectively. The returns on average common shareholders’ equity were 18.32%, 16.78% and 14.22% for the last three years.

 

Mergers and acquisitions have played an important role in the development of BB&T’s franchise. BB&T has been an active acquirer of financial institutions, insurance agencies and other nonbank fee income producing businesses. Refer to Note 2. in the “Notes to Consolidated Financial Statements” for a summary of mergers and acquisitions consummated during the three years ended December 31, 2002. As a result of this activity, the consolidated results of operations for the three year period covered by this discussion include the effects of merger-related and restructuring charges, expenses and certain gains related to the consummation of the transactions.

 

Merger-related charges and expenses include personnel-related items such as staff relocation costs, severance benefits, early retirement packages and contract settlements. They also include furniture, equipment and occupancy costs related to department and branch consolidations as well as costs related to converting the

 

30


data processing systems of the acquired companies to BB&T’s automation platform. Merger-related charges also include professional fees, advertising and asset write-offs incurred in connection with the mergers.

 

Merger-Related and Restructuring Charges

 

During 2002, BB&T recorded merger-related and restructuring charges of $39.3 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses. These expenses were recorded in connection with the first quarter systems conversion of F&M National Corporation, the second quarter systems conversion of Community First Banking Company, and the mergers with MidAmerica, AREA, and Regional.

 

During 2001, BB&T recorded merger-related and restructuring charges of $199.0 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses. In addition, $36.4 million was recorded as a provision for loan and lease losses in connection with the mergers with FCNB Corporation, Century South Banks, Inc., and F&M National Corporation. This provision was recorded to conform the merged entities’ credit policies to those of BB&T, including underwriting and risk rating standards, charge-offs, past due and nonaccrual loans, as well as to reflect impending changes in the management of problem loans.

 

During 2000, the Company recorded merger-related and restructuring charges totaling $143.2 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses. In addition, $29.9 million of provision for loan and lease losses was recorded associated with BB&T’s mergers with Premier Bancshares, Inc., Hardwick Holding Company, First Banking Company of Southeast Georgia and One Valley Bancorp, Inc. These provisions were recorded to conform the merged entities’ credit policies to those of BB&T, including underwriting and risk rating standards, charge-offs, past due and nonaccrual loans, as well as to reflect impending changes in the management of problem loans.

 

The following table presents the components of merger-related and restructuring charges included in noninterest expenses. This table includes increases to previously recorded merger-related accruals and period expenses for merger-related items that must be expensed as incurred. Items that are required to be expensed as incurred include certain expenses associated with systems conversions, data processing, training, travel and other costs.

 

Summary of Merger-Related and Restructuring Charges

(Dollars in thousands)

 

    

For the Year Ended December 31,


    

2002


  

2001


  

2000


Severance and personnel-related costs

  

$

4,527

  

$

46,497

  

$

32,536

Occupancy and equipment charges

  

 

9,510

  

 

50,065

  

 

35,084

Systems conversions and related charges

  

 

11,700

  

 

35,025

  

 

31,880

Marketing and public relations

  

 

6,446

  

 

15,311

  

 

18,713

Asset write-offs, conforming policies and other merger-related charges

  

 

7,097

  

 

52,090

  

 

24,972

    

  

  

Total

  

$

39,280

  

$

198,988

  

$

143,185

    

  

  

 

Severance and personnel-related costs include severance, employee retention, payments related to change-in-control provisions of employment contracts, outplacement services and other benefits associated with employee termination, which typically occurs in corporate support and data processing functions. During 2002, BB&T estimated that 372 positions would be eliminated and 370 employees were, in fact, terminated prior to December 31, 2002. Approximately 90 of these employees will continue to receive severance payments during 2003. During 2001, BB&T estimated that approximately 400 positions would be eliminated and approximately 350 employees were terminated and received severance by the end of 2001. During 2000, BB&T estimated that 450 positions would be eliminated in connection with mergers and approximately 430 employees were terminated and received severance.

 

Occupancy and equipment charges represent merger-related costs associated with lease terminations, obsolete equipment write-offs, and the sale of duplicate facilities and equipment. Systems conversions and related charges include expenses necessary to convert and combine the acquired branches and operations of merged

 

31


companies. Marketing and public relations costs represent direct media advertising relative to the acquisitions and local charitable contributions that are required by the merger agreements. The other merger-related charges are composed of asset and supply inventory write-offs, which are primarily composed of unreconciled differences in an acquired institution’s accounts or unreconciled differences identified during systems conversions, litigation accruals, costs to conform an acquired institution’s accounting policies to those of BB&T and other similar charges.

 

In conjunction with the consummation of an acquisition and the completion of other requirements, BB&T typically accrues certain merger-related expenses related to estimated severance costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition. The following tables present a summary of activity with respect to BB&T’s merger and restructuring accruals related to the mergers listed above, with the more significant mergers (One Valley Bancorp, Inc. and F&M National Corporation) presented separately. These tables include costs reflected as expenses, as presented in the table above, and accruals recorded through purchase accounting adjustments.

 

    

One Valley Bancorp, Inc.


    

(Dollars in thousands)

 

    

Balance December 31, 2000


  

Utilized in 2001


    

Balance December 31, 2001


  

Utilized in 2002


    

Balance December 31, 2002


Severance and personnel-related charges

  

$

3,719

  

$

3,719

    

$

—  

  

$

—  

    

$

—  

Occupancy and equipment charges

  

 

4,737

  

 

97

    

 

4,640

  

 

3,912

    

 

728

Systems conversions and related charges

  

 

128

  

 

117

    

 

11

  

 

11

    

 

—  

Other merger-related charges

  

 

10,009

  

 

10,009

    

 

—  

  

 

—  

    

 

—  

    

  

    

  

    

Total

  

$

18,593

  

$

13,942

    

$

4,651

  

$

3,923

    

$

728

    

  

    

  

    

 

   

F&M National Corporation


   

(Dollars in thousands)

 

   

Expensed in 2001


 

Utilized in 2001


  

Balance December 31, 2001


  

Expensed in 2002


 

Utilized in 2002


  

Balance December 31, 2002


Severance and personnel-related charges

 

$

15,830

 

$

4,775

  

$

11,055

  

$

1,417

 

$

11,592

  

$

880

Occupancy and equipment charges

 

 

20,455

 

 

9,463

  

 

10,992

  

 

—  

 

 

797

  

 

10,195

Systems conversions and related charges

 

 

5,165

 

 

790

  

 

4,375

  

 

2,825

 

 

7,200

  

 

—  

Other merger-related charges

 

 

11,099

 

 

7,989

  

 

3,110

  

 

—  

 

 

2,113

  

 

997

   

 

  

  

 

  

Total

 

$

52,549

 

$

23,017

  

$

29,532

  

$

4,242

 

$

21,702

  

$

12,072

   

 

  

  

 

  

 

The remaining accruals at December 31, 2002 for One Valley Bancorp, Inc. and F&M National Corporation are related primarily to costs to exit certain leases and to dispose of excess facilities and equipment. These liabilities will be utilized in the future upon termination of the various leases and sale of duplicate property. These accruals are expected to be utilized in 2003 unless they relate to specific contracts expiring in later years.

 

Activity with respect to the merger and restructuring accruals for all other mergers, which are discussed above, is presented in the accompanying table:

 

      

All Other Merger Accrual Activity


      

(Dollars in thousands)

 

      

Balance December 31, 2000


  

Additions in 2001


  

Utilized in 2001


    

Balance December 31, 2001


  

Additions in 2002


  

Utilized in 2002


    

Balance December 31, 2002


Severance and personnel-related charges

    

$

9,317

  

$

33,956

  

$

22,957

    

$

20,316

  

$

38,597

  

$

42,964

    

$

15,949

Occupancy and equipment charges

    

 

16,602

  

 

18,514

  

 

13,685

    

 

21,431

  

 

31,668

  

 

22,269

    

 

30,830

Systems conversions and related charges

    

 

3,601

  

 

11,935

  

 

8,583

    

 

6,953

  

 

9,453

  

 

14,668

    

 

1,738

Other merger-related charges

    

 

7,711

  

 

16,237

  

 

11,948

    

 

12,000

  

 

21,438

  

 

23,154

    

 

10,284

      

  

  

    

  

  

    

Total

    

$

37,231

  

$

80,642

  

$

57,173

    

$

60,700

  

$

101,156

  

$

103,055

    

$

58,801

      

  

  

    

  

  

    

 

The liabilities for severance and personnel-related costs relate to severance liabilities that will be paid out based on such factors as expected termination dates, the provisions of employment contracts and the terms of BB&T’s severance plans. The remaining occupancy and equipment accruals relate to costs to exit certain leases

 

32


and to dispose of excess facilities and equipment. This liability will be utilized upon termination of the various leases and sale of duplicate property. The liabilities associated with systems conversions relate to termination penalties on contracts with information technology service providers. These liabilities will be utilized as the contracts are paid out and expire. The other merger-related liabilities relate to litigation accruals, accruals to conform the accounting policies of acquired institutions to those of BB&T, and other similar charges.

 

Because BB&T often has multiple merger integrations in process, and, due to limited resources, must schedule in advance significant events in the merger conversion and integration process, BB&T’s merger process and utilization of merger accruals may cover an extended period of time. In general, a major portion of accrued costs are utilized in conjunction with or immediately following the systems conversion, when most of the duplicate positions are eliminated and the terminated employees begin to receive severance. Other accruals are utilized over time based on the sale, closing or disposal of duplicate facilities or equipment or the expiration of lease contracts. Merger accruals are re-evaluated periodically and adjusted as necessary. Most of the remaining accruals at December 31, 2002 are expected to be utilized during 2003, unless they relate to specific contracts that expire in later years.

 

The accruals utilized during 2002 in the table entitled “All Other Merger Accrual Activity” above include $10.5 million of accrual reversals resulting from revisions to BB&T’s initial estimates of merger accruals for facilities and personnel-related costs. There were no other material adjustments to merger-related accruals for any of the periods presented.

 

Net Interest Income

 

Net interest income is BB&T’s primary source of revenue. Net interest income is influenced by a number of factors, including the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the “FTE” adjustment) and the cost of the supporting funds is measured by the net interest margin. The accompanying table presents the dollar amount of changes in interest income and interest expense, and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately.

 

33


Table 14

FTE Net Interest Income and Rate Volume Analysis

For the Years Ended December 31, 2002, 2001 and 2000

 

                                                

2002 vs. 2001


    

2001 vs. 2000


 
   

Average Balances


 

Yield / Rate


    

Income / Expense


  

Increase

(Decrease)


   

Change due to


    

Increase (Decrease)


   

Change due to


 
   

2002


 

2001


 

2000


 

2002


   

2001


    

2000


    

2002


 

2001


 

2000


    

Rate


   

Volume


      

Rate


   

Volume


 

Assets

 

(Dollars in thousands)

Securities (1):

                                                                                                         

U.S. Treasury, U.S. government agency and other (5)

 

$

16,005,557

 

$

14,830,331

 

$

14,144,391

 

6.15

%

 

7.04

%

  

6.90

%

  

$

983,967

 

$

1,043,583

 

$

976,057

  

$

(59,616

)

 

$

(138,287

)

 

$

78,671

 

  

$

67,526

 

 

$

19,528

 

 

$

47,998

 

States and political subdivisions

 

 

933,532

 

 

1,056,401

 

 

1,096,852

 

7.47

 

 

7.37

 

  

7.49

 

  

 

69,743

 

 

77,868

 

 

82,143

  

 

(8,125

)

 

 

1,042

 

 

 

(9,167

)

  

 

(4,275

)

 

 

(1,279

)

 

 

(2,996

)

   

 

 

 

 

  

  

 

 

  


 


 


  


 


 


Total securities (5)

 

 

16,939,089

 

 

15,886,732

 

 

15,241,243

 

6.22

 

 

7.06

 

  

6.94

 

  

 

1,053,710

 

 

1,121,451

 

 

1,058,200

  

 

(67,741

)

 

 

(137,245

)

 

 

69,504

 

  

 

63,251

 

 

 

18,249

 

 

 

45,002

 

Other earning assets (2)

 

 

439,097

 

 

430,912

 

 

440,804

 

1.79

 

 

3.99

 

  

6.67

 

  

 

7,848

 

 

17,185

 

 

29,384

  

 

(9,337

)

 

 

(9,657

)

 

 

320

 

  

 

(12,199

)

 

 

(11,554

)

 

 

(645

)

Loans and leases, net of unearned income (1)(3)(4)(5)

 

 

50,851,417

 

 

46,587,780

 

 

41,933,641

 

6.93

 

 

8.37

 

  

9.36

 

  

 

3,523,050

 

 

3,900,844

 

 

3,924,491

  

 

(377,794

)

 

 

(713,443

)

 

 

335,649

 

  

 

(23,647

)

 

 

(435,680

)

 

 

412,033

 

   

 

 

 

 

  

  

 

 

  


 


 


  


 


 


Total earning assets

 

 

68,229,603

 

 

62,905,424

 

 

57,615,688

 

6.72

 

 

8.01

 

  

8.70

 

  

 

4,584,608

 

 

5,039,480

 

 

5,012,075

  

 

(454,872

)

 

 

(860,345

)

 

 

405,473

 

  

 

27,405

 

 

 

(428,985

)

 

 

456,390

 

   

 

 

 

 

  

  

 

 

  


 


 


  


 


 


Non-earning assets

 

 

7,549,430

 

 

5,917,605

 

 

4,197,727

                                                                                       
   

 

 

                                                                                       

Total assets

 

$

75,779,033

 

$

68,823,029

 

$

61,813,415

                                                                                       
   

 

 

                                                                                       

Liabilities and Shareholders' Equity

                                                                                                         

Interest-bearing deposits:

                                                                                                         

Savings and interest checking

 

$

3,363,118

 

$

3,361,694

 

$

3,888,958

 

0.75

 

 

1.44

 

  

1.89

 

  

 

25,062

 

 

48,408

 

 

73,470

  

 

(23,346

)

 

 

(23,366

)

 

 

20

 

  

 

(25,062

)

 

 

(15,961

)

 

 

(9,101

)

Money rate savings

 

 

14,824,396

 

 

12,502,120

 

 

10,494,588

 

1.13

 

 

2.48

 

  

3.68

 

  

 

167,329

 

 

310,196

 

 

386,635

  

 

(142,867

)

 

 

(192,504

)

 

 

49,637

 

  

 

(76,439

)

 

 

(141,478

)

 

 

65,039

 

Other time deposits

 

 

23,728,465

 

 

22,171,321

 

 

21,135,213

 

3.42

 

 

5.45

 

  

5.80

 

  

 

810,667

 

 

1,207,665

 

 

1,225,143

  

 

(396,998

)

 

 

(476,803

)

 

 

79,805

 

  

 

(17,478

)

 

 

(75,914

)

 

 

58,436

 

   

 

 

 

 

  

  

 

 

  


 


 


  


 


 


Total interest-bearing deposits

 

 

41,915,979

 

 

38,035,135

 

 

35,518,759

 

2.39

 

 

4.12

 

  

4.74

 

  

 

1,003,058

 

 

1,566,269

 

 

1,685,248

  

 

(563,211

)

 

 

(692,673

)

 

 

129,462

 

  

 

(118,979

)

 

 

(233,353

)

 

 

114,374

 

Short-term borrowed funds

 

 

5,393,479

 

 

6,264,100

 

 

6,910,849

 

1.78

 

 

3.80

 

  

5.95

 

  

 

95,823

 

 

238,315

 

 

411,528

  

 

(142,492

)

 

 

(113,021

)

 

 

(29,471

)

  

 

(173,213

)

 

 

(137,563

)

 

 

(35,650

)

Long-term debt

 

 

12,134,712

 

 

11,030,312

 

 

7,705,449

 

4.84

 

 

5.53

 

  

6.06

 

  

 

587,703

 

 

610,352

 

 

467,136

  

 

(22,649

)

 

 

(80,366

)

 

 

57,717

 

  

 

143,216

 

 

 

(43,721

)

 

 

186,937

 

   

 

 

 

 

  

  

 

 

  


 


 


  


 


 


Total interest-bearing liabilities

 

 

59,444,170

 

 

55,329,547

 

 

50,135,057

 

2.84

 

 

4.36

 

  

5.11

 

  

 

1,686,584

 

 

2,414,936

 

 

2,563,912

  

 

(728,352

)

 

 

(886,060

)

 

 

157,708

 

  

 

(148,976

)

 

 

(414,637

)

 

 

265,661

 

   

 

 

 

 

  

  

 

 

  


 


 


  


 


 


Noninterest-bearing deposits

 

 

7,202,129

 

 

6,206,746

 

 

5,897,181

                                                                                       

Other liabilities

 

 

2,019,244

 

 

1,484,547

 

 

869,742

                                                                                       

Shareholders' equity

 

 

7,113,490

 

 

5,802,189

 

 

4,911,435

                                                                                       
   

 

 

                                                                                       

Total liabilities and shareholders' equity

 

$

75,779,033

 

$

68,823,029

 

$

61,813,415

                                                                                       
   

 

 

                                                                                       

Average interest rate spread

                   

3.88

 

 

3.65

 

  

3.59

 

                                                                    

Net interest margin

                   

4.25

%

 

4.17

%

  

4.25

%

  

$

2,898,024

 

$

2,624,544

 

$

2,448,163

  

$

273,480

 

 

$

25,715

 

 

$

247,765

 

  

$

176,381

 

 

$

(14,348

)

 

$

190,729

 

                     

 

  

  

 

 

  


 


 


  


 


 


Taxable equivalent adjustment

                                       

$

150,564

 

$

190,865

 

$

133,666

                                                 
                                         

 

 

                                                 

(1)   Yields related to securities based on amortized cost, loans and leases exempt from income taxes are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented which approximate 39% in total.
(2)   Includes Federal funds sold and securities purchased under resale agreements or similar arrangements.
(3)   Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.
(4)   Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.
(5)   Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value.

 

 

34


For 2002, net interest income on an FTE-adjusted basis totaled $2.9 billion, compared with $2.6 billion in 2001 and $2.4 billion in 2000. The increase in net interest income during 2002 resulted primarily from a decrease in total interest expense, which was caused by substantially lower interest rates during 2002 as compared to 2001. The lower average cost of funds resulted in a decrease of $728.4 million in total interest expense. Interest income from loans decreased $377.8 million, and interest income from investment securities decreased $67.7 million.

 

The FTE-adjusted net interest margin is the primary measure used in evaluating the effectiveness of the management of earning assets and the liabilities funding those assets. The FTE-adjusted net interest margin was 4.25% in 2002, 4.17% in 2001 and 4.25% in 2000. In addition to changes in the composition of BB&T’s earning assets and interest bearing liabilities, the primary reason for the fluctuations in the net interest margin was the rapidly declining interest rate environment prevailing during 2002 and 2001 as the Federal Reserve reduced short-term interest rates due to a weakening economy. Throughout 2001, the Federal Reserve took aggressive actions to lower the level of interest rates by reducing the benchmark federal funds rate by 475 basis points from 6.50% at the beginning of the year to 1.75% at year-end where it remained through the first eleven months of 2002. As a result, the prime rate, which is the basis for pricing many commercial and consumer loans, also declined by 475 basis points from 9.50% at the beginning of 2001 to 5.00% at year-end and remained at 4.75% during most of 2002. During the fourth quarter of 2002, the Federal Reserve further reduced the federal funds rate by 50 basis points to 1.25%, which in turn lowered the prime rate to 4.25% at the end of 2002. Such actions initially contributed to BB&T’s interest sensitive assets repricing more quickly overall than its interest-bearing liabilities during 2001, which resulted in an eight basis points decrease in the FTE-adjusted net interest margin during 2001 compared to 2000. During 2002, as interest rates stabilized, BB&T’s interest-bearing liabilities also repriced at the lower interest rates, which, together with a shift in the composition of deposits toward lower cost transaction accounts, resulted in an eight basis points increase in the FTE-adjusted net interest margin during 2002 compared to 2001.

 

Provision for Loan and Lease Losses

 

A provision for loan and lease losses is charged against earnings in order to maintain the allowance for loan and lease losses at a level that reflects management’s evaluation of the incurred losses inherent in the portfolio. The amount of the provision is based on continuing assessments of nonperforming and “watch list” loans, analytical reviews of loan loss experience in relation to outstanding loans, loan charge-offs, nonperforming asset trends and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The provision for loan and lease losses recorded by BB&T in 2002 was $263.7 million, compared with $224.3 million in 2001 and $147.2 million in 2000.

 

The 17.6% increase in the current year provision for loan and lease losses resulted from a combination of factors, including a 31.8% increase in net charge-offs during the year and growth in the loan portfolio. Net charge-offs were .48% of average loans and leases for 2002 compared to .40% of average loans during 2001. The allowance for loan and lease losses was 1.35% of loans and leases outstanding and was 1.93x total nonaccrual and restructured loans and leases at year-end 2002, compared to 1.36% and 2.04x, respectively, at December 31, 2001.

 

Noninterest Income

 

Noninterest income includes service charges on deposit accounts, trust revenue, mortgage banking income, investment banking and brokerage fees, insurance commissions, gains and losses on securities transactions and other commissions and fees derived from bank-related activities.

 

Noninterest income for 2002 totaled $1.7 billion, compared with $1.4 billion in 2001 and $846.8 million in 2000. The 2002 noninterest income reflects an increase of $312.1 million, or 22.6%, compared to 2001. Noninterest income for 2001 was $533.6 million, or 63.0%, higher than 2000. The increase in noninterest income for 2002 is primarily the result of substantial growth in insurance commissions from BB&T’s agency network and gains from sales of securities available for sale as well as increased service charges on deposits, increased mortgage banking income, and higher levels of investment banking and brokerage fees and commissions. The 2000 results include the effect of the restructuring of the securities portfolio during the second and third quarters of the year (as further discussed in the “Securities” section), which reduced total noninterest income by $222 million. The major categories of noninterest income and their fluctuations are discussed in the following paragraphs.

 

35


 

Service charges on deposit accounts represent BB&T’s largest category of noninterest revenue. Such revenues totaled $402.5 million in 2002, an increase of $53.0 million, or 15.2%, compared to 2001. Service charges during 2001 totaled $349.5 million, which represented an increase of $57.0 million, or 19.5% compared to 2000. The primary factors contributing to the 2002 increase were NSF and overdraft charges on personal accounts, which were $34.9 million more than in 2001, and commercial account analysis fees, which grew $20.9 million. Increases in these same categories composed the bulk of the growth in this category of revenue in 2001 compared to 2000.

 

Income from mortgage banking activities (which includes revenues from originating, marketing and servicing mortgage loans and valuation adjustments related to capitalized mortgage servicing rights) totaled $172.8 million in 2002, $148.9 million in 2001 and $104.6 million in 2000. In 2002, mortgage banking income increased $23.9 million, or 16.0%, compared to 2001. The increase in mortgage banking income in 2002 resulted from substantially higher mortgage loan originations as a result of the continued low interest rate environment, which brought about increases in origination fees, underwriting fees and servicing fees, which rose $7.8 million, $8.2 million and $24.5 million, respectively, compared to 2001. BB&T originated a record $14.1 billion in mortgage loans in 2002 compared to $10.5 billion in 2001 and $4.7 billion in 2000. Accordingly, gains from the sale of mortgage loans increased by $62.9 million compared to 2001. While lower interest rates in 2002 produced record originations volume, they also led to increased prepayment rates which lowered the value of existing mortgage servicing rights. As a result, BB&T recorded net impairment charges of $152.4 million during 2002, compared to net impairment charges of $61.6 million in 2001. Mortgage revenues for 2002 included a $14.5 million gain due to a new accounting requirement to record interest rate lock commitments at fair value with related changes recorded in earnings. In 2001, mortgage banking income increased $44.4 million, or 42.4%, compared to 2000 as a result of factors caused by the 123% increase in mortgage loan origination volume.

 

BB&T has an extensive insurance agency network, which is the 10th largest in the nation. Commission income from BB&T’s insurance operations totaled $313.4 million in 2002, an increase of $123.0 million, or 64.6%, compared to 2001. Commission income for 2001 totaled $190.4 million, an increase of $28.4 million, or 17.5% compared to 2000. During 2002 and 2001, BB&T continued to expand its insurance operations through acquisitions of additional agencies in the Company’s market area. These acquisitions, all of which were accounted for as purchases, were responsible for $96.9 million of the increase in agency insurance commissions during 2002 and $24.6 million in 2001. Including growth from acquired agencies, BB&T’s property and casualty commissions increased $96.4 million. Similar growth in these product lines also drove the 2001 increase.

 

Revenue from corporate and personal trust services totaled $94.5 million in 2002, $90.9 million in 2001 and $80.0 million in 2000. The 2002 revenue reflects an increase of $3.6 million, or 3.9% over 2001, which was $10.9 million, or 13.6%, more than 2000. Managed assets totaled $20.9 billion at the end of 2002 compared to $16.7 billion at December 31, 2001. The revenue increase in 2002 was driven by higher general trust services income and revenues from the management of estates. The majority of the growth in trust revenue and managed assets in 2002 resulted from the acquisitions of AREA and MidAmerica. Growth in revenues and managed assets have been depressed during the last two years by declining equity markets. The revenue increase in 2001 was primarily the result of internal growth driven by increased general trust services income and mutual fund management fees.

 

Net gains on sales of securities totaled $170.1 million in 2002 and $122.1 million in 2001 compared to net losses of $219.4 million in 2000. Excluding the effect of gains realized during 2002 and 2001 to economically offset increases in the valuation allowance of mortgage servicing rights, the gain realized from the sale of BB&T’s investment in an electronic transaction processing company in 2001, and losses incurred as a result of the restructuring of the available-for-sale securities portfolio during 2000, all previously discussed in the “Securities” section, net gains on sales of securities were $13.7 million, $10.8 million, and $2.6 million for the years ended December 31, 2002, 2001, and 2000, respectively.

 

Investment banking and brokerage fees and commissions totaled $210.6 million in 2002, $175.3 million in 2001 and $163.5 million in 2000. The 2002 revenue reflects an increase of $35.3 million, or 20.1% over 2001, which was $11.8 million, or 7.2% greater than 2000. The large increase in 2002 over 2001 was due to higher fixed income securities underwriting fees, retail brokerage fees and investment banking income at BB&T’s full-service brokerage and investment banking subsidiary, Scott & Stringfellow. The increase in 2001 over 2000 resulted in part from the purchase of Edgar M. Norris & Co., which added $4.8 million in revenues, as well as internal growth in fees and commissions from brokerage and underwriting services.

 

36


 

Other nondeposit fees and commissions, including bankcard fees and merchant discounts, totaled $208.5 million in 2002, an increase of $21.0 million, or 11.2%, compared with $187.5 million earned in 2001, which represented an increase of $21.0 million, or 12.6%, over the $166.5 million in 2000 revenue. Major sources of the increase in 2002 revenue include bankcard fees and merchant discounts, which increased $6.0 million, or 9.8%, check card interchange fees, which increased $8.4 million, or 31.7%, and gift card income, which increased $5.1 million. The increase in other nondeposit fees and commissions in 2001 compared to 2000 was primarily the result of higher bankcard fees and merchant discounts, increased ATM and point of sale fees, and income from the official check outsourcing program, which began mid-year 2000.

 

Other income totaled $120.1 million in 2002, an increase of $4.5 million, or 3.9%, compared with $115.6 million earned in 2001, which represented an increase of $18.6 million, or 19.1%, over the $97.0 million earned in 2000. The primary components of the increase in 2002 were higher income from life insurance, which increased $22.7 million, or 34.5%, and higher income from check sales, which grew by $3.3 million. These increases were partially offset by a write-down in the value of investments in limited partnerships totaling $11.1 million, a decrease in amortization of negative goodwill in the amount of $4.8 million compared to 2001, and a loss on non-hedging derivatives in the amount of $5.6 million. The primary component of the increase in 2001 was income from life insurance, which increased $26.2 million, or 66.2%. This increase was partially offset a decrease in amortization of negative goodwill in the amount of $3.7 million, or 34.0%, compared to 2000.

 

The ability to generate significant amounts of noninterest revenues in the future will be very important to the continued success of BB&T. Through its subsidiaries, BB&T will continue to focus on asset management, mortgage banking, trust, insurance, investment and brokerage services, as well as other fee-producing products and services. BB&T plans to continue to pursue acquisitions of additional insurance agencies and asset management companies, as well as explore strategic acquisitions of other nonbank entities as a means of expanding fee-based revenues. Also, among BB&T’s principal strategies following the acquisition of a financial institution is the cross-sell of noninterest income generating products and services to the acquired institution’s client base.

 

The following table provides a breakdown of BB&T’s noninterest income:

 

Table 15

Noninterest Income

 

                     

% Change


 
    

Years Ended December 31,


    

2002 v. 2001


    

2001 v. 2000


 
    

2002


  

2001


  

2000


       
    

(Dollars in thousands)

 

Service charges on deposits

  

$

402,476

  

$

349,522

  

$

292,492

 

  

15.2

%

  

19.5

%

Mortgage banking income

  

 

172,829

  

 

148,936

  

 

104,579

 

  

16.0

 

  

42.4

 

Trust income

  

 

94,463

  

 

90,898

  

 

80,039

 

  

3.9

 

  

13.6

 

Insurance commissions

  

 

313,436

  

 

190,446

  

 

162,054

 

  

64.6

 

  

17.5

 

Securities gains (losses), net

  

 

170,100

  

 

122,126

  

 

(219,366

)

  

39.3

 

  

NM

 

Bankcard fees and merchant discounts

  

 

66,848

  

 

60,859

  

 

57,851

 

  

9.8

 

  

5.2

 

Investment banking and brokerage fees and commissions

  

 

210,586

  

 

175,296

  

 

163,480

 

  

20.1

 

  

7.2

 

Other bank service fees and commissions

  

 

132,945

  

 

118,832

  

 

101,284

 

  

11.9

 

  

17.3

 

International income

  

 

8,709

  

 

7,806

  

 

7,337

 

  

11.6

 

  

6.4

 

Other noninterest income

  

 

120,083

  

 

115,618

  

 

97,037

 

  

3.9

 

  

19.1

 

    

  

  


  

  

Total noninterest income

  

$

1,692,475

  

$

1,380,339

  

$

846,787

 

  

22.6

%

  

63.0

%

    

  

  


  

  


NM—not meaningful

 

Noninterest Expense

 

Noninterest expense totaled $2.4 billion in 2002, $2.2 billion in 2001 and $2.0 billion in 2000. Certain significant items principally stemming from mergers and acquisitions were recorded as charges to noninterest expense during 2002, 2001 and 2000. In 2002, $39.3 million in pretax merger-related charges were recorded, while 2001 included $199.0 million in merger-related charges and $143.2 million were recognized in 2000. Additional

 

37


disclosures related to these merger-related charges are presented above in “Merger-Related and Restructuring Charges.” Total noninterest expense increased $156.3 million, or 7.0%, from 2001 to 2002 and $228.2 million, or 11.4%, from 2000 to 2001. The 2002 growth rate includes the effects of acquisitions accounted for as purchases during 2002, including Regional, AREA, MidAmerica, CRC, and several nonbank financial services companies and insurance agencies, which added costs of $67.9 million. Excluding the effects of the timing of such purchase acquisitions, noninterest expense increased by 4.4% compared to 2001. The growth in 2001 was similarly affected by acquisitions accounted for as purchases during 2001, including Community First Banking Company, Virginia Capital Bancshares, Inc., FirstSpartan Financial Corp., BankFirst Corporation, Edgar M. Norris & Co., Laureate Capital Corp., and several insurance agencies. The categories of noninterest expense creating these increases are further explained below.

 

Total personnel expense, the largest component of noninterest expense, totaled $1.3 billion in 2002, an increase of 15.2%, compared to the $1.1 billion in personnel expense incurred in 2001. The 2001 expense reflected an increase of $111.1 million, or 10.9%, compared to the $1.0 billion recorded in 2000. Total personnel expense includes salaries and wages, as well as pension and other employee benefit costs. The 2002 increase in personnel expenses was primarily caused by the effect of acquisitions, which accounted for $137.2 million of the increase, as well as higher mortgage loan production incentive compensation and investment banking incentive compensation, which grew $15.1 million and $14.8 million, respectively. In addition, pension plan expense more than doubled, increasing $15.8 million, or 117%, compared to 2001. The increase in 2001 compared to 2000 was primarily due to the same factors that caused the 2002 increase.

 

Net occupancy and equipment expense totaled $341.1 million in 2002, $303.4 million in 2001 and $282.5 million in 2000. The net occupancy and equipment expense for 2002 reflects an increase of $37.7 million, or 12.4% compared to 2001, which was $20.9 million, or 7.4% greater than the expense incurred in 2000. The increase during 2002 was due to higher rent on buildings and premises, information technology equipment expenses, maintenance and utility expenses and real estate taxes, which increased $11.3 million, $8.3 million, $4.5 million, and $4.0 million, respectively, from 2001. The increase in 2001 compared to 2000 was generally due to the same factors that caused the 2002 increase.

 

Amortization expense associated with intangible assets totaled $20.9 million in 2002, $72.7 million in 2001 and $64.6 million in 2000. The decrease in 2002 is due to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, which ended the amortization of goodwill effective January 1, 2002. Amortization of capitalized mortgage servicing rights totaled $100.1 million, $46.0 million and $18.8 million during 2002, 2001 and 2000, respectively. These increases were caused by significant growth in the balance of capitalized mortgage servicing rights as a result of substantially higher mortgage loan originations during 2002 and 2001 as a result of favorable historically low interest rates.

 

Professional services expenses totaled $73.5 million, an increase of $14.2 million, or 24.0%, compared to the $59.3 million incurred in 2001. This increase was primarily driven by higher legal expenses and accounting fees. The 2001 professional services expenses reflect a $9.2 million, or 18.4%, increase over 2000. The increase was caused by the same factors that affected the 2002 increase.

 

Other noninterest expense totaled $512.9 million for 2002, an increase of $90.8 million, or 21.5%, compared to 2001, which reflected an increase of $4.1 million, or 1.0% compared to the $426.2 million incurred in 2000. The majority of the 2002 increase resulted from higher software expenses, deposit related expenses, employee travel, courier and postage expenses. The 2001 increase was caused by increases in the same categories that affected the 2002 expenses.

 

38


 

The following table presents a breakdown of BB&T’s noninterest expenses for the past three years:

 

Table 16

Noninterest Expense

 

                   

% Change


 
    

Years Ended December 31,


  

2002 v.

2001


    

2001 v.

2000


 
    

2002


  

2001


  

2000


     
    

(Dollars in thousands)

 

             

Salaries and wages

  

$

1,063,261

  

$

932,635

  

$

840,263

  

14.0

%

  

11.0

%

Pension and other employee benefits

  

 

234,586

  

 

194,223

  

 

175,512

  

20.8

 

  

10.7

 

Net occupancy expense on bank premises

  

 

156,670

  

 

133,768

  

 

125,402

  

17.1

 

  

6.7

 

Furniture and equipment expense

  

 

184,402

  

 

169,618

  

 

157,105

  

8.7

 

  

8.0

 

Regulatory charges

  

 

11,807

  

 

11,684

  

 

11,311

  

1.1

 

  

3.3

 

Foreclosed property expense

  

 

7,321

  

 

2,745

  

 

5,489

  

166.7

 

  

(50.0

)

Amortization of intangibles

  

 

20,885

  

 

72,693

  

 

64,634

  

(71.3

)

  

12.5

 

Software

  

 

36,608

  

 

28,415

  

 

21,956

  

28.8

 

  

29.4

 

Telephone

  

 

44,005

  

 

43,010

  

 

45,308

  

2.3

 

  

(5.1

)

Advertising and public relations

  

 

27,537

  

 

26,134

  

 

28,517

  

5.4

 

  

(8.4

)

Travel and transportation

  

 

24,012

  

 

23,555

  

 

20,149

  

1.9

 

  

16.9

 

Professional services

  

 

73,496

  

 

59,255

  

 

50,039

  

24.0

 

  

18.4

 

Supplies

  

 

32,464

  

 

32,484

  

 

30,559

  

(0.1

)

  

6.3

 

Loan and lease expense

  

 

64,225

  

 

52,007

  

 

41,295

  

23.5

 

  

25.9

 

Deposit related expense

  

 

25,750

  

 

20,492

  

 

17,950

  

25.7

 

  

14.2

 

Merger-related and restructuring charges

  

 

39,280

  

 

198,988

  

 

143,185

  

(80.3

)

  

39.0

 

Amortization of mortgage servicing rights

  

 

100,080

  

 

46,032

  

 

18,767

  

117.4

 

  

145.3

 

Other noninterest expenses

  

 

239,149

  

 

181,534

  

 

203,650

  

31.7

 

  

(10.9

)

    

  

  

  

  

Total noninterest expense

  

$

2,385,538

  

$

2,229,272

  

$

2,001,091

  

7.0

%

  

11.4

%

    

  

  

  

  

 

Provision for Income Taxes

 

BB&T’s provision for income taxes totaled $497.5 million for 2002, an increase of $110.7 million, or 28.6%, compared to 2001. The provision for income taxes totaled $386.8 million in 2001 and $314.5 million in 2000. BB&T’s effective tax rates for the years ended 2002, 2001 and 2000 were 27.8%, 28.4% and 31.0%, respectively. The decline in the effective rates reflected the elimination of nondeductible goodwill amortization in connection with the adoption of SFAS No. 142 in 2002 and the implementation of certain business and investment strategies that resulted in a reduction in the consolidated income tax provision. The increase in the provisions for both 2002 and 2001 compared to prior years results from higher pretax income, offset in part by lower effective tax rates.

 

During the last three years, BB&T entered into option contracts which legally transferred part of the responsibility for the management of future residuals of certain leveraged lease investments including the future remarketing or re-leasing of these assets to a wholly-owned subsidiary in a foreign jurisdiction having a lower income tax rate, thereby lowering the effective income tax rate applicable to these lease investments. These option contracts provide that the foreign subsidiary may purchase the lease investments at expiration of the existing leveraged leases for a fixed price. As a result, a portion of the residual value included in the consolidated leveraged lease analysis should be taxed at a lower tax rate than originally anticipated, resulting in a change in the total net income from the lease. The net income from the affected leases was recalculated from inception based on the new effective income tax rate. The recalculation had the effect of reducing net interest income for the years ended December 31, 2002, 2001, and 2000, by $9.7 million, $40.6 million and $14.3 million, respectively, and reducing the income tax provisions for the last three years by $20.2 million, $56.6 million and $19.8 million, respectively. BB&T intends to permanently reinvest the earnings of this subsidiary and, therefore, deferred income taxes associated with the foreign subsidiary arising from these transactions have not been provided.

 

During 2001, Branch Bank transferred certain securities and real estate secured loans to a subsidiary in exchange for additional common equity in the subsidiary. The transaction resulted in a difference between Branch Bank’s tax basis in the equity investment in the subsidiary and the assets transferred to the subsidiary. This difference in basis resulted in a net reduction in the provision for income taxes of $34.8 million for the year ended December 31, 2002.

 

 

39


The Internal Revenue Service (“IRS”) is conducting an examination of BB&T’s federal income tax returns for the years ended December 31, 1996, 1997 and 1998. In connection with this examination the IRS has issued Notices of Proposed Adjustment with respect to BB&T’s income tax treatment of certain leveraged lease investments that were entered into during the years under examination. Management believes that BB&T’s treatment of these leveraged leases was appropriate and in compliance with existing tax laws and regulations, and intends to vigorously defend this position. In addition, inasmuch as the proposed adjustments relate primarily to the timing of taxable revenue recognition and amortization expense, deferred taxes have been provided. Management does not expect that BB&T’s consolidated financial position or consolidated results of operations will be materially adversely affected as a result of the IRS examination.

 

Market Risk Management

 

The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a financial institution, BB&T’s most significant market risk exposure is interest rate risk. The primary objective of interest rate risk management is to minimize the effect that changes in interest rates have on net interest income. This is accomplished through active management of asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T’s portfolios of assets and liabilities that will produce consistent net interest income during periods of changing interest rates. BB&T’s Asset / Liability Management Committee (“ALCO”) monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.

 

The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards.

 

BB&T utilizes a variety of financial instruments to manage various financial risks. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, collars, financial forward and futures contracts and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. BB&T uses derivatives primarily to hedge business loans, forecasted sales of mortgage loans, federal funds purchased, long-term debt and certificates of deposit. These hedges resulted in an increase in net interest income of $44.8 million and $.9 million in 2002 and 2001, respectively, and a decrease in net interest income of $8.1 million in 2000.

 

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 risk. On December 31, 2002, BB&T had derivative financial instruments outstanding with notional amounts totaling $11.7 billion. The estimated fair value of open contracts used for risk management purposes at December 31, 2002 had net unrealized gains of $149.5 million.

 

See Note 18. “Derivative Financial Instruments” in the Notes to Consolidated Financial Statements for additional disclosures.

 

40


 

Liquidity, Inflation and Changing Interest Rates

 

The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and 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, which is monitored by the ALCO, BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.

 

BB&T’s interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions at December 31, 2002, and is not necessarily indicative of positions on other dates. The carrying amounts of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows. The table does not reflect the impact of hedging strategies.

 

Table 17

Interest Rate Sensitivity Gap Analysis

December 31, 2002

 

   

Within

One Year


 

One to

Three Years


   

Three to

Five Years


 

After

Five Years


   

Total


Assets

 

(Dollars in thousands)

Securities and other interest-earning assets (1)

 

$

3,983,311

 

$

6,775,206

 

 

$

4,916,390

 

$

1,740,561

 

 

$

17,415,468

Federal funds sold and securities purchased under resale agreements or similar arrangements

 

 

294,448

 

 

—  

 

 

 

—  

 

 

—  

 

 

 

294,448

Loans and leases (2)

 

 

38,819,351

 

 

8,282,776

 

 

 

3,180,609

 

 

3,235,277

 

 

 

53,518,013

   

 


 

 


 

Total interest-earning assets

 

 

43,097,110

 

 

15,057,982

 

 

 

8,096,999

 

 

4,975,838

 

 

 

71,227,929

   

 


 

 


 

Liabilities

                                 

Savings and interest checking (3)

 

 

—  

 

 

1,842,931

 

 

 

614,310

 

 

614,310

 

 

 

3,071,551

Money rate savings (3)

 

 

8,594,471

 

 

8,594,471

 

 

 

—  

 

 

—  

 

 

 

17,188,942

Other time deposits

 

 

15,699,224

 

 

5,876,269

 

 

 

1,527,405

 

 

52,287

 

 

 

23,155,185

Federal funds purchased and securities sold under repurchase agreements or similar arrangements

 

 

4,107,170

 

 

—  

 

 

 

—  

 

 

—  

 

 

 

4,107,170

Long-term debt and other borrowings

 

 

1,585,987

 

 

248,840

 

 

 

2,426,456

 

 

10,616,347

 

 

 

14,877,630

   

 


 

 


 

Total interest-bearing liabilities

 

 

29,986,852

 

 

16,562,511

 

 

 

4,568,171

 

 

11,282,944

 

 

 

62,400,478

   

 


 

 


 

Asset-liability gap

 

 

13,110,258

 

 

(1,504,529

)

 

 

3,528,828

 

 

(6,307,106

)

     
   

 


 

 


     

Cumulative interest rate sensitivity gap

 

$

13,110,258

 

$

11,605,729

 

 

$

15,134,557

 

$

8,827,451

 

     
   

 


 

 


     

(1)   Securities based on amortized cost.
(2)   Loans and leases include loans held for sale and are net of unearned income.
(3)   Projected runoff of deposits that do not have a contractual maturity date was computed based upon decay rate assumptions developed by bank regulators to assist banks in addressing FDICIA rule 305.

 

Management uses Interest Sensitivity Simulation Analysis (“Simulation”) to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T’s interest sensitivity by means of a computer model that incorporates current volumes, average rates earned and paid, 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

 

41


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 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.

 

The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months under the “most likely” interest rate scenario incorporated into the Interest Sensitivity Simulation computer model. Key assumptions in the preparation of the table include prepayment speeds on mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market conditions, loan volumes and pricing; deposit sensitivity; customer preferences; and capital plans. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates.

 

Table 18

Interest Sensitivity Simulation Analysis

 

Interest Rate Scenario


 

Annualized Hypothetical

Percentage Change in

Net Interest Income


Linear


 

Prime Rate


 
 

December 31,


 

December 31,


 

2002


 

2001


 

2002


 

2001


  3.00%

 

7.25%

 

    7.75%

 

    0.52%

 

    2.83%

1.50

 

 5.75

 

6.25

 

0.52

 

2.45

No Change

 

 4.25

 

4.75

 

—  

 

—  

(1.50)

 

 2.75

 

3.25

 

-2.99

 

-2.80

(3.00)

 

 1.25

 

1.75

 

-3.99

 

-4.27

 

Management has established parameters for asset/liability management, which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over six months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management’s ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings.

 

Liquidity represents BB&T’s continuing ability to meet funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to the level of liquid assets, such as trading securities and securities available for sale, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity in national money markets, growing core deposits, the repayment of loans and the capability to securitize or package loans for sale.

 

Traditional sources of liquidity also include Federal funds purchased, repurchase agreements, FHLB advances and other short-term borrowed funds, commercial paper, revolving credit and long-term debt at both the corporate and bank level.

 

BB&T Corporation (“Parent Company”) uses dividends and returns of investments in its subsidiaries, funds from master note agreements with commercial clients of subsidiary banks and access to the capital markets as its major sources of funding to meet liquidity needs.

 

42


 

The primary source of funds used for parent company cash requirements has been dividends from the subsidiary banks, which totaled $974.5 million during 2002, and proceeds from the issuance of subordinated notes, which totaled $493 million in 2002. Funds raised through master note agreements with commercial clients also support the short-term cash needs of the parent company and bank as well as nonbank subsidiaries. At December 31, 2002 and 2001, master note balances totaled $721.1 million and $763.7 million, respectively.

 

The Parent Company has a $250 million revolving credit agreement with a group of unaffiliated banks, which serves as a backup liquidity facility for the master note program referred to above. This agreement has historically been negotiated annually with the current agreement scheduled to expire April 4, 2003, with a provision to extend the expiration date under certain circumstances. No borrowings have occurred under this backup facility.

 

The Parent Company has five issues of subordinated notes outstanding, which collectively totaled $2.0 billion at December 31, 2002, and $1.5 billion at December 31, 2001. Please refer to Note 10 in the “Notes to Consolidated Financial Statements” for additional information with respect to these subordinated notes.

 

BB&T’s subsidiary banks have several major sources of funding to meet their liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional certificates of deposit, availability to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, participation in the Treasury, Tax and Loan and Special Direct Investment programs with the Federal Reserve, availability to the overnight and term Federal funds markets, use of the Cayman branch facility for access to European deposits, access to retail brokered certificates of deposit and a borrower in custody program with the Federal Reserve for availability to the discount window.

 

Management believes current sources of liquidity are adequate to meet BB&T’s current requirements and plans for continued growth. See Note 6 “Premises and Equipment”, Note 10 “Long-Term Debt” and Note 14 “Commitments and Contingencies” in the “Notes to Consolidated Financial Statements” for additional information regarding outstanding balances on sources of liquidity and contractual commitments and obligations.

 

Contractual Obligations, Commitments, Contingent Liabilities, Off-Balance Sheet Arrangements, and Related Party Transactions

 

BB&T’s significant off-balance sheet arrangements include certain investments in low-income housing and historic building rehabilitation projects throughout its market area. BB&T enters into such arrangements as a means of supporting local communities and recognizes tax credits relating to its investments. At December 31, 2002, BB&T’s investments in such projects totaled $14.2 million. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. BB&T’s subsidiary banks typically provide financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project. Outstanding commitments to fund low income housing investments totaled $168.9 million at December 31, 2002. BB&T’s risk exposure relating to such off-balance sheet arrangements is generally limited to the amount of investments and commitments made. Please refer to Note 1 in the “Notes to Consolidated Financial Statements” for further discussion of these investments in limited partnerships.

 

A summary of BB&T’s significant fixed and determinable contractual obligations by payment date is presented in Table 19 in the “Liquidity, Inflation and Changing Interest Rates” section herein.

 

In the normal course of business, BB&T is also a party to financial instruments to meet the financing needs of clients and to mitigate exposure to interest rate risk. Such financial instruments include commitments to extend credit and certain contractual agreements, including standby letters of credit and financial guarantee arrangements. Further discussion of these commitments is included in Note 14 in the “Notes to Consolidated Financial Statements”.

 

In addition, BB&T enters into derivative contracts to manage various financial risks. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. Derivative contracts are carried at fair value on the consolidated balance sheet

 

43


with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure financial risk. Therefore, the derivative liabilities recorded on the balance sheet as of December 31, 2002 do not represent the amounts that may ultimately be paid under these contracts. Further discussion of derivative instruments is included in Notes 1 and 18 in the “Notes to Consolidated Financial Statements”.

 

BB&T’s contractual obligations are summarized in the accompanying table. Other commitments includes commitments to lend. Not all of these commitments will be drawn upon, thus the actual cash requirements are likely to be significantly less than the amounts reported for “Other Commitments” in the accompanying table.

 

Table 19

Contractual Obligations and Other Commitments

December 31, 2002

    

Total


  

Less than One Year


  

1 to 3 Years


  

3 to 5 Years


  

After 5 Years


    

(dollars in thousands)

Contractual Cash Obligations

                                  

Long-term debt

  

$

13,586,037

  

$

296,158

  

$

248,807

  

$

2,426,134

  

$

10,614,938

Capital lease obligations

  

 

3,276

  

 

372

  

 

598

  

 

514

  

 

1,792

Operating Leases

  

 

364,585

  

 

55,217

  

 

97,702

  

 

61,413

  

 

150,253

Commitments to fund low income housing developments

  

 

168,879

  

 

19,415

  

 

74,454

  

 

65,476

  

 

9,534

    

  

  

  

  

Total contractual cash obligations

  

$

14,122,777

  

$

371,162

  

$

421,561

  

$

2,553,537

  

$

10,776,517

    

  

  

  

  

Other Commitments

                                  

Lines of credit

  

$

7,096,743

  

$

7,093,447

  

$

69

  

$

—  

  

$

3,227

Commercial letters of credit

  

 

36,742

  

 

36,742

  

 

—  

  

 

—  

  

 

—  

Standby letters of credit

  

 

1,156,516

  

 

1,148,338

  

 

6,623

  

 

102

  

 

1,453

Other commitments (1)

  

 

9,721,955

  

 

6,422,772

  

 

2,307,842

  

 

567,347

  

 

423,994

    

  

  

  

  

Total other commitments

  

$

18,011,956

  

$

14,701,299

  

$

2,314,534

  

$

567,449

  

$

428,674

    

  

  

  

  


(1)   Other commitments include unfunded business loan commitments, unfunded overdraft protection on demand deposit accounts and other unfunded commitments to lend.

 

Related Party Transactions

 

BB&T has no material related party transactions. The Corporation may extend credit to certain officers and directors in the ordinary course of business. These loans are made under substantially the same terms as comparable third-party lending arrangements and are in compliance with applicable banking regulations.

 

Capital Adequacy and Resources

 

The maintenance of appropriate levels of capital is a management priority and is monitored on an ongoing basis. BB&T’s principal goals related to capital are to provide an adequate return to shareholders while retaining a sufficient base from which to support future growth and to comply with all regulatory standards.

 

Shareholders’ equity totaled $7.4 billion at December 31, 2002, an increase of $1.2 billion, or 20.1%, from year-end 2001. During 2002, BB&T issued 36.6 million shares in connection with acquisitions accounted for as purchases, the exercise of stock options and other stock-based incentive plans, which increased shareholders’ equity by $1.2 billion. This growth was partially offset by the repurchase of 21.8 million shares of common stock at a cost, including commissions of $801.2 million. Growth of $763.8 million in shareholders’ equity resulted from BB&T’s earnings retained after dividends to shareholders. Additionally, shareholders’ equity was increased by unrealized gains on securities available for sale, which increased $41.0 million during 2002, net of deferred income taxes.

 

44


 

Bank 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 bank regulatory pronouncements.

 

Tier 1 capital (common shareholders’ equity, excluding unrealized gains or losses on debt securities available for sale and unrealized gains or losses on cash flow hedges, net of deferred income taxes, plus certain mandatorily redeemable capital securities, less nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (the sum of Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk-weighted assets, with one half of the minimum consisting of Tier 1 capital. The Tier 1 capital ratio for BB&T at the end of 2002 was 9.2%, and the total capital ratio was 13.4%. At the end of 2001, these ratios were 9.8% and 13.3%, respectively.

 

In addition to the risk-based capital measures described above, regulators have also established minimum leverage capital requirements for banking organizations. This is the primary measure of capital adequacy used by management and is calculated by dividing period-end Tier 1 capital by average tangible assets for the most recent quarter. BB&T’s Tier 1 leverage ratio at year-end 2002 was 6.9%, compared to 7.2% at year-end 2001. The minimum required Tier 1 leverage ratio ranges from 3% to 5% depending upon Federal bank regulatory agency evaluation of an organization’s overall safety and soundness. BB&T’s regulatory capital and ratios are set forth in the following table.

 

Table 20

Capital—Components and Ratios

    

December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Tier 1 capital

  

$

5,290,310

 

  

$

5,002,896

 

Tier 2 capital

  

 

2,450,738

 

  

 

1,794,062

 

    


  


Total regulatory capital

  

$

7,741,048

 

  

$

6,796,958

 

    


  


Risk-based capital ratios:

                 

Tier 1 capital

  

 

9.2

%

  

 

9.8

%

Total regulatory capital

  

 

13.4

 

  

 

13.3

 

Tier 1 leverage ratio

  

 

6.9

 

  

 

7.2

 

 

Segment Results

 

BB&T’s operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage, and Treasury. These operating segments have been identified based primarily on BB&T’s existing organizational structure. See Note 20. “Operating Segments”, in the “Notes to Consolidated Financial Statements” herein, for a full discussion of the segments, the internal accounting and reporting practices utilized by BB&T to manage these segments and financial disclosures by segment as required by SFAS No. 131. Fluctuations in noninterest income and expense earned and incurred related to external customers are more fully discussed in the “Noninterest Income” and “Noninterest Expense” sections of this discussion and analysis. Expenses that are considered to be merger-related or restructuring charges and a gain from the sale of an equity investment in an electronic transaction processing company during 2001, as previously discussed, are retained in the Corporate Office and are excluded from these segments.

 

Banking Network

 

The Banking Network grew internally during 2002 as well as through mergers of three banking companies. The total Banking Network was composed of 1,122 banking offices at the end of 2002, up from 1,081 banking offices at December 31, 2001. Net interest income for the Banking Network totaled $2.2 billion, an increase of

 

45


$167.1 million, or 8.3%, compared to 2001. The 2001 balance represented an increase of $87.6 million, or 4.5%, compared to 2000. The increase in net interest income in 2002 is composed of a 6.5% increase from external customers and a 12.7% increase in the net credit generated by the internal funds transfer pricing (“FTP”) system. The increase in net intersegment interest income reflects the addition of FTP adjustments associated with the loan and deposit balances of the institutions acquired during 2002 and strong internal growth in deposits during 2002 resulting in an increase in the credit for funds received through the FTP system.

 

The provision for loan and lease losses increased $1.8 million, or .9%, from 2001 to 2002. This slight increase reflects the relatively stable levels of nonperforming assets as a percentage of total assets during 2002. The 2001 provision reflected an increase of $65.0 million, or 43.7%, compared to 2000. This increase resulted from added provisions from acquired institutions, and higher provision necessary to cover significant net charge-off growth in 2001 compared to 2000.

 

Noninterest income produced from external customers through the Banking Network increased $158.0 million, or 29.0% during 2001 due primarily to growth in service charges on deposits, while noninterest income allocated from other segments increased $106.5 million, or 44.4% due to intersegment revenue received as a result of substantially higher mortgage loan originations. Comparing 2001 to 2000, noninterest income from external customers increased $88.6 million, or 19.4%, and intersegment noninterest income increased $119.2 million, or 99.0%. Noninterest expenses incurred within the Banking Network increased $38.4 million, or 3.7%, because of increased employee related expenses, while noninterest expenses allocated from the other operating segments increased $74.9 million, or 14.9%, over the same time frame, because of financial institutions acquired during the year and a substantial increase in full time equivalent employees in the Banking Network, upon which certain expense allocations are based. Comparing 2001 to 2000, noninterest expense increased $87.1 million, or 9.2%, and noninterest expenses allocated to the Banking Network from intercompany sources increased $178.9 million, or 55.0%.

 

The provision for income taxes allocated to the Banking Network increased $63.4 million, or 20.9%, because of a 30.1% increase in pretax income, which was partially offset by lower effective tax rates, which reflect lower consolidated effective tax rates. Effective tax rates declined from 28.8% in 2001 to 26.8% in 2002 due to the elimination of nondeductible goodwill amortization in connection with the adoption of SFAS No. 142 in 2002 and the implementation of various business strategies, as discussed in the “Provision for Income Taxes” section herein. The 2001 provision for income taxes decreased $49.9 million, or 14.1%, compared to 2000 because of decreases in pretax income and the effective tax rate.

 

Total identifiable assets for the Banking Network increased $9.7 billion, or 25.4%, to a total of $47.8 billion, compared to 2001, which reflected an increase of $577.3 million, or 1.5%, compared to 2000. These increases were largely due to acquisitions.

 

Mortgage Banking

 

BB&T’s Mortgage Banking segment further expanded during 2002 compared to 2001 because of the continued favorable low interest rate environment. BB&T’s mortgage originations totaled $14.1 billion for 2002, up 34.3% compared to 2001. BB&T’s residential mortgage servicing portfolio totaled $34.8 billion at year-end 2002 compared with $29.0 billion in 2001.

 

Net interest income for the Mortgage Banking segment totaled $309.3 million, up $150.6 million, or 94.9%, compared to 2001. The 2001 amount reflected an increase of 37.8% compared with 2000. These increases reflect the continued growth in mortgage originations as a result of historically low interest rates. The continued strong credit quality of the mortgage portfolio has resulted in the Mortgage Banking segment’s provision for loan and lease losses being relatively stable during the years ended December 31, 2002, 2001, and 2000.

 

Noninterest income produced from external customers increased $30.9 million, or 24.2% compared to 2001, which in turn reflected an increase of $42.2 million, or 49.5%, from 2000. The increases were the result of record origination volume in 2001 and 2002. Noninterest expenses incurred within the Mortgage Banking segment increased $78.7 million, or 97.1%, as a result of higher amortization of mortgage servicing rights while noninterest expenses allocated from the other operating segments increased $3.2 million, or 12.0%. The increase in expenses allocated to the Mortgage Banking segment during 2002 reflects the results of acquired institutions. Comparing 2001 and 2000, noninterest expenses from external sources increased $22.3 million, or 37.9%, and intersegment noninterest expenses increased $3.4 million, or 14.8%.

 

46


 

The provision for income taxes allocated to the Mortgage Banking segment increased $22.9 million, or 42.4%, principally due to higher pretax income. For 2001, the provision for income taxes increased $21.9 million, or 68.2%, compared to 2000 due to the same reasons that caused the 2002 increase.

 

Total identifiable assets for the Mortgage Banking segment increased $1.7 billion, or 19.2%, from 2001 to 2002, and $686.4 million, or 8.3%, from 2001 to 2000, due to acquisitions and mortgage origination volumes during the last two years.

 

Trust Services

 

Net interest income for the Trust Services segment totaled $27.5 million, an increase of $15.1 million, or 122.1%, compared to 2001. This increase is composed of a 43.8% decrease in net interest expense paid to external customers and a 1.7% decrease in the net credit for funds as calculated by BB&T’s internal FTP system. This decrease is due to lower average carrying values of assets under administration compared to 2001, which resulted from the depressed markets. The net interest income in 2001, which totaled $12.4 million, was $1.4 million, or 10.3% less than the balance for 2000. This decrease is due to lower average carrying values of assets under administration compared to 2000, which resulted from the lower interest rate environment.

 

Noninterest income produced from external customers increased $5.7 million, or 6.2% during 2002, while noninterest income for 2001 reflected an increase of $11.9 million, or 14.9%, compared to 2000. Noninterest expenses incurred within the Trust Services segment increased $19.8 million, or 33.0%, while noninterest expenses allocated from the other operating segments increased $5.4 million. For 2001, noninterest expense increased $8.1 million, or 15.6%, while expenses allocated to the Trust Services segment decreased $.6 million, or 15.1%.

 

The provision for income taxes allocated to Trust Services decreased $1.0 million, or 9.1%, primarily due to lower pretax income. Comparing 2001 and 2000, the provision for income taxes increased $.9 million, or 8.7%. Total identifiable segment assets for Trust Services increased 25.4% to a total of $78.7 million at December 31, 2002 compared to 2001, and increased 58.8% from 2000 to 2001 primarily due to acquisitions of financial institutions during 2002 and 2001.

 

Agency Insurance

 

Noninterest income produced from external sources increased $118.7 million, or 69.8% during 2002 primarily due to the acquisitions of CRC and eight other insurance agencies during the year along with internally-generated growth. For 2001, noninterest income increased $47.8 million, or 39.1%, compared to 2000 due to these same factors. Noninterest expenses incurred within the Agency Insurance segment increased $97.7 million, or 79.2%, while noninterest expenses allocated from other operating segments grew to $23.7 million. The increase in expenses allocated to Agency Insurance primarily resulted from the purchased agencies discussed above. For 2001, noninterest expenses increased $36.1 million, or 41.4%, and intersegment noninterest expenses increased 3.1%.

 

The provision for income taxes allocated to Agency Insurance increased $1.1 million in 2002 and $4.8 million in 2001 consistent with the growth in pretax income. Total identifiable segment assets for Agency Insurance more than tripled to a total of $551.7 million, primarily due to the acquisition of CRC, which is the 4th largest wholesale insurance broker in the country. In 2001, total identifiable segment assets increased 25.7%.

 

Investment Banking and Brokerage

 

Net interest income for the Investment Banking and Brokerage segment totaled $7.5 million, a decrease of $1.3 million compared to 2001, which was $2.9 million lower than 2000 due to lower interest rates. Noninterest income produced from external customers increased $34.8 million, or 19.2% during 2002. For 2001, noninterest income increased $17.0 million compared to 2000. This increase resulted from higher fixed income securities underwriting fees, retail brokerage fees and investment banking income. Noninterest expenses incurred within the Investment Banking and Brokerage segment increased $10.9 million, while noninterest expenses allocated from the other operating segments increased $13.2 million primarily due to the acquisition of Ryan Lee and the corresponding increase in full time equivalent employees in the Investment Banking and Brokerage segment,

 

47


upon which certain expense allocations are based. Comparing 2001 and 2000, noninterest expenses increased $21.1 million due to higher compensation expense, and intersegment noninterest expenses increased 6.3%.

 

The provision for income taxes allocated to Investment Banking and Brokerage increased $3.9 million, due to substantially higher pretax income from 2001. For 2001, the provision for income taxes decreased $.7 million compared to 2000. Total identifiable assets for the Investment Banking and Brokerage segment increased 40.0% to a total of $982.8 million primarily due to the acquisition previously discussed. For 2001, total identifiable segment assets decreased $49.7 million.

 

Treasury

 

Net interest income for the Treasury segment totaled $222.1 million, a decrease of $52.2 million, or 19.0%, compared to 2001. This significant decrease is comprised of a $32.4 million decrease in net interest income from external customers and a $19.8 million decrease in the net charge for funds allocated to the Treasury segment as calculated by BB&T’s internal FTP system. This large decrease is principally due to changes in the mix and profitability of securities held by the Treasury segment. For 2001, net interest income increased $35.1 million compared to 2000. Noninterest income from external customers increased $201.6 million during 2002, principally due to securities gains taken during 2002 to economically offset writedowns in the carrying value of BB&T’s capitalized mortgage servicing rights. For 2001, noninterest income increased $237.4 million compared to 2000 principally because of a restructuring of the securities portfolio, which resulted in securities losses of approximately $222.2 million in 2000. Noninterest expenses incurred within the Treasury segment increased $7.4 million, while noninterest expenses allocated from the other operating segments decreased $.3 million. For 2001, noninterest expenses increased $1.5 million and intersegment noninterest expenses increased $1.4 million.

 

The provision for income taxes allocated to the Treasury segment increased $45.5 million and $78.5 million in 2002 and 2001, respectively, due to increases in pretax income. Total identifiable assets for the Treasury segment increased 26.4% during 2002 to a total of $20.5 billion. For 2001, total identifiable segment assets for the Treasury segment decreased $875.3 million, or 5.1%.

 

Common Stock and Dividends

 

BB&T’s ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution. BB&T’s ability to generate liquid assets for distribution is dependent on the ability of the Subsidiary Banks to pay dividends to the Parent Company. The payment of cash dividends is an integral part of providing a competitive return on shareholders’ investments. The Corporation’s policy is to accomplish this while retaining sufficient capital to support future growth and to meet regulatory requirements. BB&T’s common dividend payout ratio, computed by dividing dividends paid per common share by basic earnings per common share, was 40.00% in 2002 as compared to 45.58% in 2001. BB&T’s annual cash dividends paid per common share increased 12.2% during 2002 to $1.10 per common share for the year, as compared to $.98 per common share in 2001. This increase marked the 31st consecutive year that the Corporation’s annual cash dividend paid to shareholders has been increased. A discussion of dividend restrictions is included in Note 15.—“Regulatory Requirements and Other Restrictions,” in the “Notes to Consolidated Financial Statements” and “Regulatory Considerations.”

 

48


 

BB&T’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “BBT”. BB&T’s common stock was held by 145,174 shareholders of record at December 31, 2002 compared to 114,464 at December 31, 2001. The accompanying table, “Quarterly Summary of Market Prices and Dividends Paid on Common Stock,” sets forth the quarterly high, low and last sales prices for BB&T’s common stock based on the daily closing price and the dividends paid per share of common stock for each of the last eight quarters.

 

Table 21

Quarterly Summary of Market Prices and Cash Dividends Paid on Common Stock

 

    

2002


  

2001


    

Closing Sales Prices


  

Cash

Dividends Paid


  

Closing Sales Prices


    

Cash

Dividends Paid


    

High


  

Low


  

Last


     

High


  

Low


  

Last


    

Quarter Ended:

                                                         

March 31

  

$

39.11

  

$

34.47

  

$

38.11

  

$

.26

  

$

37.88

  

$

31.42

  

$

35.17

    

$

.23

June 30

  

 

39.23

  

 

36.60

  

 

38.60

  

 

.26

  

 

37.01

  

 

34.25

  

 

36.70

    

 

.23

September 30

  

 

38.40

  

 

32.18

  

 

35.04

  

 

.29

  

 

38.48

  

 

33.57

  

 

36.45

    

 

.26

December 31

  

 

38.23

  

 

31.26

  

 

36.99

  

 

.29

  

 

36.96

  

 

32.10

  

 

36.11

    

 

.26

                         

                         

Year

  

$

39.23

  

$

31.26

  

$

36.99

  

$

1.10

  

$

38.48

  

$

31.42

  

$

36.11

    

$

.98

                         

                         

 

Fourth Quarter Results

 

Net income for the fourth quarter of 2002 was $337.3 million, compared to $277.9 million for the comparable period of 2001. On a per share basis, diluted net income for the fourth quarter of 2002 was $.70 compared to $.61 for the same period a year ago. Annualized returns on average assets and average shareholders’ equity were 1.71% and 17.97%, respectively, for the fourth quarter of 2002, compared to 1.56% and 17.93%, respectively, for the fourth quarter of 2001.

 

Net interest income on an FTE basis amounted to $742.9 million for the fourth quarter of 2002, an increase of 10.1% compared to $675.0 million for the same period of 2001. Noninterest income totaled $491.4 million for the fourth quarter of 2002, up 34.4% from $365.7 million earned during the fourth quarter of 2001. BB&T’s noninterest expense for the fourth quarter of 2002 totaled $654.3 million, up 20.1% from the $545.0 million recorded in the fourth quarter of 2001.

 

Due to an increased level of charge-offs, nonperforming assets and other factors considered by management, the fourth quarter 2002 provision for loan and lease losses increased 30.3% to $84.7 million, compared to $65.0 million for the fourth quarter of 2001.

 

The fourth quarter 2002 provision for income taxes totaled $123.2 million compared to $109.8 million for the fourth quarter of 2001, an increase of 12.2%.

 

The accompanying table, “Quarterly Financial Summary—Unaudited,” presents condensed information relating to quarterly periods in the years ended December 31, 2002 and 2001.

 

49


 

Table 22

Quarterly Financial Summary—Unaudited

 

    

2002


  

2001


    

Fourth Quarter


  

Third Quarter


  

Second Quarter


  

First Quarter


  

Fourth Quarter


  

Third Quarter


  

Second Quarter


  

First Quarter


    

(Dollars in thousands, except per share data)

Consolidated Summary of Operations:

                                                       

Net interest income FTE

  

$

742,872

  

$

742,655

  

$

727,241

  

$

685,256

  

$

675,005

  

$

667,263

  

$

647,871

  

$

634,405

FTE adjustment

  

 

34,801

  

 

40,563

  

 

37,210

  

 

37,990

  

 

42,938

  

 

45,572

  

 

53,404

  

 

48,951

Provision for loan and lease losses

  

 

84,700

  

 

64,000

  

 

58,500

  

 

56,500

  

 

65,000

  

 

68,500

  

 

48,798

  

 

42,020

Securities (losses) gains, net

  

 

1,508

  

 

135,519

  

 

19,666

  

 

13,407

  

 

30,375

  

 

2,423

  

 

16,644

  

 

72,684

Other noninterest income

  

 

489,862

  

 

286,728

  

 

384,466

  

 

371,099

  

 

335,304

  

 

333,559

  

 

330,023

  

 

259,327

Noninterest expense

  

 

654,315

  

 

606,061

  

 

576,852

  

 

548,310

  

 

545,021

  

 

581,911

  

 

563,842

  

 

538,498

Provision for income taxes

  

 

123,171

  

 

126,121

  

 

130,859

  

 

117,317

  

 

109,782

  

 

85,296

  

 

91,265

  

 

100,447

    

  

  

  

  

  

  

  

Net income

  

$

337,255

  

$

328,157

  

$

327,952

  

$

309,645

  

$

277,943

  

$

221,966

  

$

237,229

  

$

236,500

    

  

  

  

  

  

  

  

Basic earnings per share

  

$

.71

  

$

.69

  

$

.69

  

$

.67

  

$

.61

  

$

.49

  

$

.53

  

$

.52

    

  

  

  

  

  

  

  

Diluted earnings per share

  

$

.70

  

$

.68

  

$

.68

  

$

.66

  

$

.61

  

$

.48

  

$

.52

  

$

.51

    

  

  

  

  

  

  

  

Selected Average Balances:

                                                       

Assets

  

$

78,428,911

  

$

77,571,231

  

$

75,538,200

  

$

71,481,754

  

$

70,610,330

  

$

69,590,582

  

$

68,087,219

  

$

66,955,391

Securities, at amortized cost

  

 

16,103,478

  

 

17,574,918

  

 

17,593,605

  

 

16,481,523

  

 

16,239,595

  

 

16,015,660

  

 

15,542,138

  

 

15,742,659

Loans and leases (1)

  

 

53,606,266

  

 

51,628,276

  

 

50,265,837

  

 

47,833,312

  

 

47,422,232

  

 

47,183,864

  

 

46,415,430

  

 

45,299,720

Total earning assets

  

 

70,198,735

  

 

69,659,668

  

 

68,214,187

  

 

64,770,455

  

 

64,016,441

  

 

63,637,483

  

 

62,410,954

  

 

61,521,357

Deposits

  

 

50,798,562

  

 

50,553,087

  

 

49,350,903

  

 

45,698,065

  

 

44,874,398

  

 

44,524,669

  

 

44,517,413

  

 

43,027,642

Short-term borrowed funds

  

 

4,626,091

  

 

5,245,126

  

 

5,788,023

  

 

5,930,643

  

 

6,427,523

  

 

6,451,865

  

 

5,572,755

  

 

6,604,135

Long-term debt

  

 

13,344,191

  

 

12,313,297

  

 

11,287,626

  

 

11,572,300

  

 

11,492,851

  

 

11,174,903

  

 

10,975,583

  

 

10,465,027

Total interest-bearing liabilities

  

 

61,015,807

  

 

60,728,200

  

 

59,268,830

  

 

56,702,333

  

 

56,234,141

  

 

55,831,654

  

 

54,946,227

  

 

54,279,165

Shareholders' equity

  

 

7,444,431

  

 

7,370,304

  

 

7,156,600

  

 

6,469,084

  

 

6,150,335

  

 

5,903,303

  

 

5,659,565

  

 

5,487,154


(1)   Loans and leases are net of unearned income and include loans held for sale.

 

50


SIX YEAR FINANCIAL SUMMARY AND SELECTED RATIOS

(Dollars in thousands, except per share data)

 

    

As of / For the Years Ended December 31,


    

Five Year Compound Growth Rate


 
    

2002


  

2001


  

2000


  

1999


  

1998


  

1997


    

Summary of Operations

                                                  

Interest income

  

$

4,434,044

  

$

4,848,615

  

$

4,878,409

  

$

4,233,162

  

$

3,936,661

  

$

3,576,789

    

4.4

%

Interest expense

  

 

1,686,584

  

 

2,414,936

  

 

2,563,912

  

 

2,038,453

  

 

1,928,441

  

 

1,720,647

    

(0.4

)

    

  

  

  

  

  

    

Net interest income

  

 

2,747,460

  

 

2,433,679

  

 

2,314,497

  

 

2,194,709

  

 

2,008,220

  

 

1,856,142

    

8.2

 

Provision for loan and lease losses

  

 

263,700

  

 

224,318

  

 

147,187

  

 

126,559

  

 

126,269

  

 

136,863

    

14.0

 

    

  

  

  

  

  

    

Net interest income after provision for loan and lease losses

  

 

2,483,760

  

 

2,209,361

  

 

2,167,310

  

 

2,068,150

  

 

1,881,951

  

 

1,719,279

    

7.6

 

Noninterest income

  

 

1,692,475

  

 

1,380,339

  

 

846,787

  

 

957,428

  

 

765,712

  

 

645,572

    

21.3

 

Noninterest expense

  

 

2,385,538

  

 

2,229,272

  

 

2,001,091

  

 

1,869,668

  

 

1,582,845

  

 

1,510,803

    

9.6

 

    

  

  

  

  

  

    

Income before income taxes and cumulative effect of change in accounting principle

  

 

1,790,697

  

 

1,360,428

  

 

1,013,006

  

 

1,155,910

  

 

1,064,818

  

 

854,048

    

16.0

 

Provision for income taxes

  

 

497,468

  

 

386,790

  

 

314,518

  

 

377,185

  

 

343,854

  

 

288,945

    

11.5

 

    

  

  

  

  

  

    

Income before cumulative effect of change in accounting principle

  

 

1,293,229

  

 

973,638

  

 

698,488

  

 

778,725

  

 

720,964

  

 

565,103

    

18.0

 

Add: cumulative effect of change in accounting principle

  

 

9,780

  

 

—  

  

 

—  

  

 

—  

  

 

—  

  

 

—  

    

NM

 

    

  

  

  

  

  

        

Net income

  

$

1,303,009

  

$

973,638

  

$

698,488

  

$

778,725

  

$

720,964

  

$

565,103

    

18.2

 

    

  

  

  

  

  

        

Per Common Share

                                                  

Average shares outstanding (000's):

                                                  

Basic

  

 

473,304

  

 

453,188

  

 

450,789

  

 

447,569

  

 

442,423

  

 

438,808

    

1.5

 

Diluted

  

 

478,793

  

 

459,269

  

 

456,214

  

 

454,771

  

 

451,001

  

 

446,846

    

1.4

 

Basic earnings per share

                                                  

Income before cumulative effect of change in accounting principle

  

$

2.73

  

$

2.15

  

$

1.55

  

$

1.74

  

$

1.63

  

$

1.29

    

16.2

 

Cumulative effect of change in accounting principle

  

 

.02

  

 

—  

  

 

—  

  

 

—  

  

 

—  

  

 

—  

    

NM

 

    

  

  

  

  

  

    

Net income

  

$

2.75

  

$

2.15

  

$

1.55

  

$

1.74

  

$

1.63

  

$

1.29

    

16.3

 

    

  

  

  

  

  

        

Diluted earnings per share

                                                  

Income before cumulative effect of change in accounting principle

  

$

2.70

  

$

2.12

  

$

1.53

  

$

1.71

  

$

1.60

  

$

1.26

    

16.5

 

Cumulative effect of change in accounting principle

  

 

.02

  

 

—  

  

 

—  

  

 

—  

  

 

—  

  

 

—  

    

NM

 

    

  

  

  

  

  

    

Net income

  

$

2.72

  

$

2.12

  

$

1.53

  

$

1.71

  

$

1.60

  

$

1.26

    

16.6

 

    

  

  

  

  

  

        

Cash dividends paid

  

$

1.10

  

$

.98

  

$

.86

  

$

.75

  

$

.66

  

$

.58

    

13.7

 

Book value per share

  

 

15.70

  

 

13.50

  

 

11.96

  

 

10.30

  

 

10.33

  

 

9.38

    

10.9

 

 

51


SIX YEAR FINANCIAL SUMMARY AND SELECTED RATIOS—Continued

(Dollars in thousands, except per share data)

 

    

As of / For the Years Ended December 31,


      

Five Year Compound Growth Rate


 
    

2002


    

2001


    

2000


    

1999


    

1998


    

1997


      

Average Balances

                                                              

Securities, at amortized cost

  

$

16,939,089

 

  

$

15,886,732

 

  

$

15,241,243

 

  

$

14,820,477

 

  

$

12,936,731

 

  

$

11,791,115

 

    

7.5

%

Loans and leases (1)

  

 

50,851,417

 

  

 

46,587,780

 

  

 

41,933,641

 

  

 

37,819,870

 

  

 

34,216,258

 

  

 

30,534,941

 

    

10.7

 

Other assets

  

 

7,988,527

 

  

 

6,348,517

 

  

 

4,638,531

 

  

 

4,410,712

 

  

 

4,137,790

 

  

 

3,423,680

 

    

18.5

 

    


  


  


  


  


  


    

Total assets

  

$

75,779,033

 

  

$

68,823,029

 

  

$

61,813,415

 

  

$

57,051,059

 

  

$

51,290,779

 

  

$

45,749,736

 

    

10.6

 

    


  


  


  


  


  


        

Deposits

  

$

49,118,108

 

  

$

44,241,881

 

  

$

41,415,940

 

  

$

38,741,240

 

  

$

35,977,426

 

  

$

33,658,603

 

    

7.9

 

Other liabilities

  

 

7,412,723

 

  

 

7,748,647

 

  

 

7,780,591

 

  

 

7,469,542

 

  

 

6,300,849

 

  

 

4,855,886

 

    

8.8

 

Long-term debt

  

 

12,134,712

 

  

 

11,030,312

 

  

 

7,705,449

 

  

 

6,207,966

 

  

 

4,694,418

 

  

 

3,329,176

 

    

29.5

 

Common shareholders' equity

  

 

7,113,490

 

  

 

5,802,189

 

  

 

4,911,435

 

  

 

4,632,311

 

  

 

4,318,086

 

  

 

3,902,299

 

    

12.8

 

Preferred shareholders' equity

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

3,772

 

    

NM

 

    


  


  


  


  


  


    

Total liabilities and shareholders' equity

  

$

75,779,033

 

  

$

68,823,029

 

  

$

61,813,415

 

  

$

57,051,059

 

  

$

51,290,779

 

  

$

45,749,736

 

    

10.6

 

    


  


  


  


  


  


        

Period End Balances

                                                              

Total assets

  

$

80,216,816

 

  

$

70,869,945

 

  

$

66,552,823

 

  

$

59,380,433

 

  

$

54,373,105

 

  

$

49,240,765

 

    

10.3

 

Deposits

  

 

51,280,016

 

  

 

44,733,275

 

  

 

43,877,319

 

  

 

39,319,012

 

  

 

38,204,833

 

  

 

35,268,689

 

    

7.8

 

Long-term debt

  

 

13,587,841

 

  

 

11,721,076

 

  

 

8,646,018

 

  

 

6,222,561

 

  

 

5,561,216

 

  

 

4,202,137

 

    

26.5

 

Shareholders' equity

  

 

7,387,914

 

  

 

6,150,209

 

  

 

5,419,809

 

  

 

4,640,189

 

  

 

4,621,543

 

  

 

4,095,395

 

    

12.5

 

Selected Ratios

                                                              

Rate of return on:

                                                              

Average total assets

  

 

1.72

%

  

 

1.41

%

  

 

1.13

%

  

 

1.36

%

  

 

1.41

%

  

 

1.24

%

        

Average common shareholders' equity

  

 

18.32

 

  

 

16.78

 

  

 

14.22

 

  

 

16.81

 

  

 

16.70

 

  

 

14.48

 

        

Dividend payout

  

 

40.00

 

  

 

45.58

 

  

 

55.48

 

  

 

43.10

 

  

 

40.49

 

  

 

44.96

 

        

Average equity to average assets

  

 

9.39

 

  

 

8.43

 

  

 

7.95

 

  

 

8.12

 

  

 

8.42

 

  

 

8.54

 

        

(1)   Loans and leases are net of unearned income and include loans held for sale.

NM—not meaningful.

 

52


MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

 

The management of BB&T is responsible for the preparation of the financial statements, related financial data and other information in this Annual Report on Form 10-K. The financial statements are prepared in accordance with accounting principles generally accepted in the United States and include amounts based on management’s estimates and judgment where appropriate. Financial information appearing throughout this Annual Report on Form 10-K is consistent with the financial statements.

 

BB&T’s accounting system, which records, summarizes and reports financial transactions, is supported by an internal control structure that provides reasonable assurance that assets are safeguarded and transactions are recorded in accordance with BB&T’s policies and established accounting procedures. As an integral part of the internal control structure, BB&T maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure. Any system of internal control has inherent limitations and, because of the dynamic nature of other systems within the Corporation, the effectiveness of BB&T’s internal control systems may vary over time.

 

The Audit Committee of BB&T’s Board of Directors, composed solely of outside directors, meets regularly with BB&T’s management, internal auditors and independent public accountants to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent public accountants and the internal auditors have access to the Audit Committee with or without management present.

 

The financial statements as of and for the period ended December 31, 2002 have been audited by PricewaterhouseCoopers LLP, independent accountants, who render an independent opinion on management’s financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which BB&T’s management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing the internal control structure to determine the timing and scope of audit procedures and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects.

 

Management assessed the effectiveness of internal control over financial reporting as of December 31, 2002. Based on the results of that assessment, management believes that BB&T’s system of internal controls provides reasonable assurance that assets are safeguarded and transactions are recorded in accordance with BB&T’s policies and established accounting procedures.

 

John A. Allison

    

Scott E. Reed

    

Sherry A. Kellett

Chairman and Chief Executive Officer

    

Chief Financial Officer

    

Controller

 

53


Report of Independent Accountants

 

To the Board of Directors and Shareholders of BB&T Corporation:

 

In our opinion, the accompanying consolidated balance sheet as of December 31, 2002 and the related consolidated statements of income, of changes in shareholders’ equity, and of cash flows present fairly, in all material respects, the financial position of BB&T Corporation and its subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of BB&T Corporation as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, prior to the revisions described in Note 7, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 28, 2002.

 

As discussed in Note 1 to the consolidated financial statements, upon adoption of new accounting pronouncements effective during 2002 the Company changed its method of accounting for goodwill and intangible assets, and its method of accounting for loan commitments to be accounted for as derivatives.

 

As discussed above, the financial statements of BB&T Corporation as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Note 7, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002, and Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, which was adopted by the Company as of October 1, 2002. We audited the transitional disclosures described in Note 7. In our opinion, the transitional disclosures for 2001 and 2000 in Note 7 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole.

 

PRICEWATERHOUSECOOPERS LLP

 

Greensboro, North Carolina

January 28, 2003

 

54


The following report is a copy of a report previously issued by Arthur Andersen LLP (Andersen). This report has not been reissued by Andersen and Andersen did not consent to the incorporation by reference of this report (as included in this Form 10-K) into any of the Company’s registration statements.

 

As discussed in Note 7, the Company has revised its financial statements for the years ended December 31, 2001 and 2000 to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets, and Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. The Andersen report does not extend to these changes. The revisions to the 2001 and 2000 financial statements related to these transitional disclosures were reported on by PricewaterhouseCoopers LLP, as stated in their report appearing herein.

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To BB&T Corporation:

 

We have audited the accompanying consolidated balance sheets of BB&T Corporation (a North Carolina corporation), and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2001.* These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BB&T Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2001* in conformity with accounting principles generally accepted in the United States.

 

ARTHUR ANDERSEN LLP

 

Charlotte, North Carolina

January 28, 2002

 

*   The 1999 consolidated financial statements are not required to be presented in the 2002 Annual Report on Form 10-K.

 

55


BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

(Dollars in thousands, except per share data)

 

    

2002


    

2001


 

Assets

                 

Cash and due from banks

  

$

1,929,650

 

  

$

1,871,437

 

Interest-bearing deposits with banks

  

 

148,122

 

  

 

114,749

 

Federal funds sold and securities purchased under resale agreements or similar arrangements

  

 

294,448

 

  

 

246,040

 

Trading securities at fair value

  

 

148,488

 

  

 

97,675

 

Securities available for sale at fair value

  

 

17,599,477

 

  

 

16,621,684

 

Securities held to maturity at amortized cost (fair value: $55,512 at December 31, 2002 and $40,488 at December 31, 2001)

  

 

55,523

 

  

 

40,496

 

Loans held for sale

  

 

2,377,707

 

  

 

1,907,416

 

Loans and leases, net of unearned income

  

 

51,140,306

 

  

 

45,535,757

 

Allowance for loan and lease losses

  

 

(723,685

)

  

 

(644,418

)

    


  


Loans and leases, net

  

 

50,416,621

 

  

 

44,891,339

 

    


  


Premises and equipment, net of accumulated depreciation

  

 

1,072,101

 

  

 

989,611

 

Goodwill

  

 

1,723,379

 

  

 

879,903

 

Other assets

  

 

4,451,300

 

  

 

3,209,595

 

    


  


Total assets

  

$

80,216,816

 

  

$

70,869,945

 

    


  


Liabilities and Shareholders’ Equity

                 

Deposits:

                 

Noninterest-bearing deposits

  

$

7,864,338

 

  

$

6,939,640

 

Savings and interest checking

  

 

3,071,551

 

  

 

3,013,702

 

Money rate savings

  

 

17,188,942

 

  

 

13,902,088

 

Certificates of deposit and other time deposits

  

 

23,155,185

 

  

 

20,877,845

 

    


  


Total deposits

  

 

51,280,016

 

  

 

44,733,275

 

    


  


Short-term borrowed funds

  

 

5,396,959

 

  

 

6,649,100

 

Long-term debt

  

 

13,587,841

 

  

 

11,721,076

 

Accounts payable and other liabilities

  

 

2,564,086

 

  

 

1,616,285

 

    


  


Total liabilities

  

 

72,828,902

 

  

 

64,719,736

 

    


  


Commitments and contigencies (Note 14)

                 

Shareholders’ equity:

                 

Preferred stock, $5 par, 5,000,000 shares authorized, none issued or outstanding at December 31, 2002 or at December 31, 2001

  

 

—  

 

  

 

—  

 

Common stock, $5 par, 1,000,000,000 shares authorized; 470,452,260 issued and outstanding at December 31, 2002 and 455,682,560 issued and outstanding at December 31, 2001

  

 

2,352,261

 

  

 

2,278,413

 

Additional paid-in capital

  

 

793,123

 

  

 

418,565

 

Retained earnings

  

 

3,912,320

 

  

 

3,148,501

 

Unvested restricted stock

  

 

(499

)

  

 

(2,669

)

Accumulated other comprehensive income, net of deferred income taxes of $208,008 at December 31, 2002 and $201,207 at December 31, 2001

  

 

330,709

 

  

 

307,399

 

    


  


Total shareholders’ equity

  

 

7,387,914

 

  

 

6,150,209

 

    


  


Total liabilities and shareholders’ equity

  

$

80,216,816

 

  

$

70,869,945

 

    


  


 

The accompanying notes are an integral part of these consolidated financial statements.

 

56


BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2002, 2001 and 2000

(Dollars in thousands, except per share data)

 

    

2002


  

2001


  

2000


 

Interest Income

                      

Interest and fees on loans and leases

  

$

3,468,386

  

$

3,806,924

  

$

3,876,263

 

Interest and dividends on securities

  

 

957,810

  

 

1,024,506

  

 

972,762

 

Interest on short-term investments

  

 

7,848

  

 

17,185

  

 

29,384

 

    

  

  


Total interest income

  

 

4,434,044

  

 

4,848,615

  

 

4,878,409

 

    

  

  


Interest Expense

                      

Interest on deposits

  

 

1,003,058

  

 

1,566,269

  

 

1,685,248

 

Interest on short-term borrowed funds

  

 

95,823

  

 

238,315

  

 

411,528

 

Interest on long-term debt

  

 

587,703

  

 

610,352

  

 

467,136

 

    

  

  


Total interest expense

  

 

1,686,584

  

 

2,414,936

  

 

2,563,912

 

    

  

  


Net Interest Income

  

 

2,747,460

  

 

2,433,679

  

 

2,314,497

 

Provision for loan and lease losses

  

 

263,700

  

 

224,318

  

 

147,187

 

    

  

  


Net Interest Income After Provision for Loan and Lease Losses

  

 

2,483,760

  

 

2,209,361

  

 

2,167,310

 

Noninterest Income

                      

Service charges on deposits

  

 

402,476

  

 

349,522

  

 

292,492

 

Mortgage banking income

  

 

172,829

  

 

148,936

  

 

104,579

 

Trust income

  

 

94,463

  

 

90,898

  

 

80,039

 

Investment banking and brokerage fees and commissions

  

 

210,586

  

 

175,296

  

 

163,480

 

Insurance commissions

  

 

313,436

  

 

190,446

  

 

162,054

 

Bankcard fees and merchant discounts

  

 

66,848

  

 

60,859

  

 

57,851

 

Other nondeposit fees and commissions

  

 

141,654

  

 

126,638

  

 

108,621

 

Securities gains (losses), net

  

 

170,100

  

 

122,126

  

 

(219,366

)

Other income

  

 

120,083

  

 

115,618

  

 

97,037

 

    

  

  


Total noninterest income

  

 

1,692,475

  

 

1,380,339

  

 

846,787

 

    

  

  


Noninterest Expense

                      

Personnel expense

  

 

1,297,847

  

 

1,126,858

  

 

1,015,775

 

Occupancy and equipment expense

  

 

341,072

  

 

303,386

  

 

282,507

 

Amortization of intangibles

  

 

20,885

  

 

72,693

  

 

64,634

 

Professional services

  

 

73,496

  

 

59,255

  

 

50,039

 

Merger-related and restructuring charges

  

 

39,280

  

 

198,988

  

 

143,185

 

Amortization of mortgage servicing rights

  

 

100,080

  

 

46,032

  

 

18,767

 

Other expense

  

 

512,878

  

 

422,060

  

 

426,184

 

    

  

  


Total noninterest expense

  

 

2,385,538

  

 

2,229,272

  

 

2,001,091

 

    

  

  


Earnings

                      

Income before income taxes and cumulative effect of change in accounting principle

  

 

1,790,697

  

 

1,360,428

  

 

1,013,006

 

Provision for income taxes

  

 

497,468

  

 

386,790

  

 

314,518

 

    

  

  


Income before cumulative effect of change in accounting principle

  

 

1,293,229

  

 

973,638

  

 

698,488

 

Cumulative effect of change in accounting principle

  

 

9,780

  

 

—  

  

 

—  

 

    

  

  


Net income

  

$

1,303,009

  

$

973,638

  

$

698,488

 

    

  

  


Per Common Share

                      

Basic Earnings:

                      

Income before cumulative effect of change in accounting principle

  

$

2.73

  

$

2.15

  

$

1.55

 

Cumulative effect of change in accounting principle

  

 

0.02

  

 

—  

  

 

—  

 

    

  

  


Net income

  

$

2.75

  

$

2.15

  

$

1.55

 

    

  

  


Diluted Earnings:

                      

Income before cumulative effect of change in accounting principle

  

$

2.70

  

$

2.12

  

$

1.53

 

Cumulative effect of change in accounting principle

  

 

0.02

  

 

—  

  

 

—  

 

    

  

  


Net income

  

$

2.72

  

$

2.12

  

$

1.53

 

    

  

  


Cash dividends paid

  

$

1.10

  

$

0.98

  

$

0.86

 

    

  

  


Average Shares Outstanding

                      

Basic

  

 

473,303,770

  

 

453,188,403

  

 

450,789,079

 

    

  

  


Diluted

  

 

478,792,558

  

 

459,269,330

  

 

456,213,609

 

    

  

  


 

The accompanying notes are an integral part of these consolidated financial statements.

 

57


BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2002, 2001 and 2000

(Dollars in thousands)

 

    

Shares of Common Stock


    

Common Stock


    

Additional Paid-In Capital


    

Retained Earnings and Other(1)


    

Accumulated Other Comprehensive Income


    

Total Shareholders’ Equity


 

Balance, December 31, 1999

  

450,349,937

 

  

$

2,251,750

 

  

$

400,215

 

  

$

2,323,297

 

  

$

(335,073

)

  

$

4,640,189

 

Add (Deduct):

                                                   

Comprehensive income:

                                                   

Net income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

698,488

 

  

 

—  

 

  

 

698,488

 

Unrealized holding gains (losses) arising during the period, net of tax of $120,023

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

307,750

 

  

 

307,750

 

Less: reclassification adjustment, net of tax of $87,747

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(131,620

)

  

 

(131,620

)

    

  


  


  


  


  


Total comprehensive income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

698,488

 

  

 

439,370

 

  

 

1,137,858

 

    

  


  


  


  


  


Common stock issued

  

10,053,342

 

  

 

50,264

 

  

 

199,202

 

  

 

(154

)

  

 

—  

 

  

 

249,312

 

Redemption of common stock

  

(7,095,900

)

  

 

(35,477

)

  

 

(182,065

)

  

 

—  

 

  

 

—  

 

  

 

(217,542

)

Cash dividends declared on common stock

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

(400,757

)

  

 

—  

 

  

 

(400,757

)

Other, net

  

—  

 

  

 

—  

 

  

 

6,052

 

  

 

4,697

 

  

 

—  

 

  

 

10,749

 

    

  


  


  


  


  


Balance, December 31, 2000

  

453,307,379

 

  

 

2,266,537

 

  

 

423,404

 

  

 

2,625,571

 

  

 

104,297

 

  

 

5,419,809

 

    

  


  


  


  


  


Add (Deduct):

                                                   

Comprehensive income:

                                                   

Net income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

973,638

 

  

 

—  

 

  

 

973,638

 

Unrealized holding gains (losses) arising during the period, net of tax of $100,760

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

258,360

 

  

 

258,360

 

Less: reclassification adjustment, net of tax of $47,663

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

74,550

 

  

 

74,550

 

    

  


  


  


  


  


Net unrealized gains (losses) on securities

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

183,810

 

  

 

183,810

 

Unrecognized gain on cash flow hedge, net of tax of $12,586

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

19,292

 

  

 

19,292

 

    

  


  


  


  


  


Total comprehensive income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

973,638

 

  

 

203,102

 

  

 

1,176,740

 

    

  


  


  


  


  


Common stock issued

  

16,381,881

 

  

 

81,910

 

  

 

412,379

 

  

 

—  

 

  

 

—  

 

  

 

494,289

 

Redemption of common stock

  

(14,006,700

)

  

 

(70,034

)

  

 

(440,271

)

  

 

—  

 

  

 

—  

 

  

 

(510,305

)

Cash dividends declared on common stock

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

(457,780

)

  

 

—  

 

  

 

(457,780

)

Other, net

  

—  

 

  

 

—  

 

  

 

23,053

 

  

 

4,403

 

  

 

—  

 

  

 

27,456

 

    

  


  


  


  


  


Balance, December 31, 2001

  

455,682,560

 

  

 

2,278,413

 

  

 

418,565

 

  

 

3,145,832

 

  

 

307,399

 

  

 

6,150,209

 

    

  


  


  


  


  


Add (Deduct):

                                                   

Comprehensive income:

                                                   

Net income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,303,009

 

  

 

—  

 

  

 

1,303,009

 

Unrealized holding gains (losses) arising during the period, net of tax of $56,473

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

144,803

 

  

 

144,803

 

Less: reclassification adjustment, net of tax of $66,339

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

103,761

 

  

 

103,761

 

    

  


  


  


  


  


Net unrealized gains (losses) on securities

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

41,042

 

  

 

41,042

 

Unrecognized gain (loss) on cash flow hedge, net of tax of $(11,570)

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(17,732

)

  

 

(17,732

)

    

  


  


  


  


  


Total comprehensive income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,303,009

 

  

 

23,310

 

  

 

1,326,319

 

    

  


  


  


  


  


Common stock issued

  

36,580,900

 

  

 

182,904

 

  

 

1,049,723

 

  

 

—  

 

  

 

—  

 

  

 

1,232,627

 

Redemption of common stock

  

(21,811,200

)

  

 

(109,056

)

  

 

(691,611

)

  

 

—  

 

  

 

—  

 

  

 

(800,667

)

Cash dividends declared on common stock

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

(539,190

)

  

 

—  

 

  

 

(539,190

)

Other, net

  

—  

 

  

 

—  

 

  

 

16,446

 

  

 

2,170

 

  

 

—  

 

  

 

18,616

 

    

  


  


  


  


  


Balance, December 31, 2002

  

470,452,260

 

  

$

2,352,261

 

  

$

793,123

 

  

$

3,911,821

 

  

$

330,709

 

  

$

7,387,914

 

    

  


  


  


  


  



(1)   Other includes unvested restricted stock.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

58


BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002, 2001 and 2000

(Dollars in thousands)

 

    

2002


    

2001


    

2000


 

Cash Flows From Operating Activities:

                          

Net income

  

$

1,303,009

 

  

$

973,638

 

  

$

698,488

 

Adjustments to reconcile net income to net cash provided by operating activities:

                          

Provision for loan and lease losses

  

 

263,700

 

  

 

224,318

 

  

 

147,187

 

Depreciation of premises and equipment

  

 

143,960

 

  

 

122,190

 

  

 

116,247

 

Amortization of intangibles and mortgage servicing rights

  

 

120,965

 

  

 

118,725

 

  

 

83,401

 

Adjustment/accretion of negative goodwill

  

 

(9,780

)

  

 

(4,484

)

  

 

(6,243

)

Amortization of unearned stock compensation

  

 

2,052

 

  

 

4,402

 

  

 

4,605

 

Discount accretion and premium amortization on securities, net

  

 

5,030

 

  

 

(7,432

)

  

 

(5,779

)

Net decrease (increase) in trading account securities

  

 

(50,813

)

  

 

(956

)

  

 

(1,200

)

Loss (gain) on sales of securities, net

  

 

(170,100

)

  

 

(122,126

)

  

 

219,366

 

Loss (gain) on sales of loans held for sale

  

 

(146,092

)

  

 

(75,040

)

  

 

(14,622

)

Loss (gain) on disposals of premises and equipment, net

  

 

(6,604

)

  

 

9,973

 

  

 

5,832

 

Proceeds from sales of loans held for sale

  

 

10,965,120

 

  

 

8,707,395

 

  

 

2,692,522

 

Purchases of loans held for sale

  

 

(2,079,875

)

  

 

(2,135,494

)

  

 

(1,014,372

)

Origination of loans held for sale, net of principal collected

  

 

(9,209,444

)

  

 

(7,498,033

)

  

 

(2,179,434

)

Tax benefit from exercise of stock options

  

 

16,446

 

  

 

19,612

 

  

 

6,170

 

Decrease (increase) in:

                          

Accrued interest receivable

  

 

57,031

 

  

 

44,410

 

  

 

(134,931

)

Other assets

  

 

(925,552

)

  

 

(472,886

)

  

 

(631,249

)

Increase (decrease) in:

                          

Accrued interest payable

  

 

(5,356

)

  

 

(56,411

)

  

 

38,826

 

Accounts payable and other liabilities

  

 

560,493

 

  

 

242,113

 

  

 

283,447

 

Other, net

  

 

(17,732

)

  

 

9

 

  

 

(8,442

)

    


  


  


Net cash provided by operating activities

  

 

816,458

 

  

 

93,923

 

  

 

299,819

 

    


  


  


Cash Flows From Investing Activities:

                          

Proceeds from sales of securities available for sale

  

 

3,570,905

 

  

 

2,969,929

 

  

 

5,222,899

 

Proceeds from maturities, calls and paydowns of securities available for sale

  

 

5,347,939

 

  

 

1,895,041

 

  

 

1,533,606

 

Purchases of securities available for sale

  

 

(9,097,256

)

  

 

(4,805,145

)

  

 

(6,584,173

)

Proceeds from maturities, calls and paydowns of securities held to maturity

  

 

10

 

  

 

1,100

 

  

 

97,570

 

Purchases of securities held to maturity

  

 

(15,037

)

  

 

(6,757

)

  

 

(136,791

)

Leases made to customers

  

 

(177,732

)

  

 

(140,681

)

  

 

(119,017

)

Principal collected on leases

  

 

149,148

 

  

 

107,394

 

  

 

91,791

 

Loan originations, net of principal collected

  

 

(1,354,857

)

  

 

(641,512

)

  

 

(4,510,575

)

Purchases of loans

  

 

(234,406

)

  

 

(219,076

)

  

 

(381,219

)

Net cash acquired in business combinations accounted for under the purchase method

  

 

827,682

 

  

 

140,730

 

  

 

239,620

 

Purchases and originations of mortgage servicing rights

  

 

(203,376

)

  

 

(228,753

)

  

 

(69,404

)

Proceeds from disposals of premises and equipment

  

 

33,199

 

  

 

10,214

 

  

 

10,992

 

Purchases of premises and equipment

  

 

(183,961

)

  

 

(189,964

)

  

 

(170,465

)

Proceeds from sales of foreclosed property

  

 

46,475

 

  

 

44,231

 

  

 

39,375

 

Proceeds from sales of other real estate held for development or sale

  

 

12,769

 

  

 

7,425

 

  

 

5,565

 

Other, net

  

 

—  

 

  

 

4,033

 

  

 

13,549

 

    


  


  


Net cash used in investing activities

  

 

(1,278,498

)

  

 

(1,051,791

)

  

 

(4,716,677

)

    


  


  


Cash Flows From Financing Activities:

                          

Net increase (decrease) in deposits

  

 

2,290,333

 

  

 

(390,141

)

  

 

3,411,190

 

Net increase (decrease) in short-term borrowed funds

  

 

(1,984,723

)

  

 

(662,406

)

  

 

(1,004,349

)

Proceeds from long-term debt

  

 

2,953,291

 

  

 

3,742,059

 

  

 

6,650,026

 

Repayments of long-term debt

  

 

(1,394,400

)

  

 

(722,332

)

  

 

(4,358,813

)

Net proceeds from common stock issued

  

 

60,078

 

  

 

61,359

 

  

 

44,821

 

Redemption of common stock

  

 

(800,667

)

  

 

(510,305

)

  

 

(217,542

)

Cash dividends paid on common stock

  

 

(521,878

)

  

 

(433,570

)

  

 

(374,596

)

Other, net

  

 

—  

 

  

 

(1,197

)

  

 

(19

)

    


  


  


Net cash provided by financing activities

  

 

602,034

 

  

 

1,083,467

 

  

 

4,150,718

 

    


  


  


Net Increase (Decrease) in Cash and Cash Equivalents

  

 

139,994

 

  

 

125,599

 

  

 

(266,140

)

Cash and Cash Equivalents at Beginning of Year

  

 

2,232,226

 

  

 

2,106,627

 

  

 

2,372,767

 

    


  


  


Cash and Cash Equivalents at End of Year

  

$

2,372,220

 

  

$

2,232,226

 

  

$

2,106,627

 

    


  


  


Supplemental Disclosure of Cash Flow Information:

                          

Cash paid during the year for:

                          

Interest

  

$

1,686,880

 

  

$

2,383,951

 

  

$

2,479,389

 

Income taxes

  

 

235,124

 

  

 

147,984

 

  

 

90,109

 

Noncash investing and financing activities:

                          

Transfer of securities from held to maturity to available for sale

  

 

—  

 

  

 

587,263

 

  

 

324,734

 

Transfer of loans to foreclosed property

  

 

66,634

 

  

 

46,064

 

  

 

44,574

 

Transfer of fixed assets to other real estate owned

  

 

17,780

 

  

 

9,465

 

  

 

4,307

 

Transfer of other real estate owned to fixed assets

  

 

242

 

  

 

182

 

  

 

3,675

 

Securitization of mortgage loans

  

 

—  

 

  

 

377,429

 

  

 

984,518

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

59


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

BB&T Corporation (“BB&T” or “Parent Company”) is a financial holding company organized under the laws of North Carolina. Branch Banking and Trust Company (“Branch Bank”); Branch Banking and Trust Company of South Carolina (“BB&T-SC”); Branch Banking and Trust Company of Virginia (“BB&T-VA”), (collectively, the “Banks” or “Subsidiary Banks”), Regional Acceptance Corporation (“Regional Acceptance”), and Scott & Stringfellow, Inc., (“Scott & Stringfellow”) comprise BB&T’s principal direct subsidiaries.

 

The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The following is a summary of the more significant policies.

 

NOTE 1.    Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements of BB&T include the accounts of BB&T Corporation and those subsidiaries that are majority-owned by BB&T and over which BB&T exercises control. In consolidation, all significant intercompany accounts and transactions have been eliminated. The results of operations of companies acquired in transactions accounted for as purchases are included only from the dates of acquisition. (See Note 2). All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with BB&T. At December 31, 2002, there were no majority-owned subsidiaries that were not consolidated.

 

BB&T has certain investments in low-income housing and historic building rehabilitation projects that totaled $14.2 million at December 31, 2002. BB&T also has investments in limited partnerships and limited liability corporations, including a small business investment company, venture capital funds and an electronic check processing consortium. These investments totaled $61.1 million at December 31, 2002. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. BB&T accounts for its investments in these entities using the equity method.

 

Reclassifications

 

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to statement presentations for 2002. Such reclassifications had no effect on previously reported shareholders’ equity or net income.

 

Nature of Operations

 

BB&T is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations primarily through its Subsidiary Banks, which have branches in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Florida, Alabama, Indiana and Washington, D.C. and, to a lesser extent, through its other subsidiaries. BB&T’s Subsidiary Banks provide a wide range of banking services to individuals and businesses. BB&T’s Subsidiary Banks offer a variety of loans to businesses and consumers, including an array of mortgage loan products. BB&T’s loans are primarily to individuals residing in the market areas described above or to businesses located in this geographic area. BB&T’s Subsidiary Banks also market a wide range of deposit services to individuals and businesses. BB&T’s Subsidiary Banks either directly or through their subsidiaries offer lease financing to businesses and municipal governments; discount brokerage services and sales of annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis; insurance premium financing; arranging permanent financing for commercial real estate and providing loan servicing for third party investors; direct consumer finance loans to individuals; and asset management. The direct nonbank subsidiaries of BB&T provide a variety of financial services including automobile lending, equipment financing, factoring, full-service securities brokerage, and capital markets services.

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses, valuation of mortgage servicing rights, valuation of goodwill and other intangibles and related impairment analyses, benefit plan obligations and expenses, and deferred tax assets or liabilities.

 

Business Combinations

 

Following the implementation of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” BB&T has accounted for all business combinations using the purchase method of accounting as required by the Statement. Under this method of accounting, the accounts of an acquired institution are included with the acquirer’s accounts as of the date of acquisition with any excess of purchase price over the fair value of the net assets recorded as goodwill. BB&T typically provides an allocation period, not to exceed one year, to identify and determine the fair values of 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.

 

To consummate an acquisition, BB&T typically issues common stock or pays cash, depending on the terms of the merger agreement, in exchange for all of the outstanding shares of acquired entities. The value of shares issued in connection with purchase business combinations is determined based on the market price of the securities issued over a reasonable period of time, not to exceed three days before and three days after the terms of the acquisition are agreed to and announced.

 

For acquisitions in years prior to 2002 accounted for as poolings of interests, the financial information contained herein has been restated to include the accounts of the merged institutions for all periods presented.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks, Federal funds sold and securities purchased under resale agreements or similar arrangements. Both cash and cash equivalents have maturities of three months or less. Accordingly, the carrying amount of such instruments is considered a reasonable estimate of fair value.

 

Securities

 

BB&T classifies investment securities as held to maturity, available for sale or trading. Debt securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost.

 

Debt securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions, are classified as available for sale. In addition, all investments in equity securities are classified as available for sale. Equity securities are primarily comprised of investments in stock issued by the FHLB of Atlanta, and preferred stocks issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”). Securities available for sale are reported at estimated fair value, with unrealized gains and losses reported as accumulated other comprehensive income, net of deferred income taxes, in the shareholders’ equity section of the consolidated balance sheets. Gains or losses realized from the sale of securities

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

available for sale are determined by specific identification and are included in noninterest income. Premiums and discounts associated with securities are amortized using the interest method.

 

Trading account securities are primarily held by Scott & Stringfellow, BB&T’s investment banking and full-service brokerage subsidiary. Trading account securities are reported at fair value. Market value adjustments, fees, and gains or losses from trading account activities are included in noninterest income. Interest income on trading account securities is included in interest and dividends from securities. Gains or losses realized from the sale of trading securities are determined by specific identification and are included in noninterest income.

 

During 2001 and 2000, BB&T transferred securities with amortized costs of $587.3 million and $324.7 million, respectively, from the held-to-maturity portfolio to the available-for-sale portfolio. These securities were previously classified as held-to-maturity either by BB&T or by entities which merged into BB&T. BB&T transferred these amounts pursuant to the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” in 2001, which permitted such transfers in conjunction with the adoption of the statement, and pursuant to the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in 2000 to conform the combined investment portfolios of acquired entities to BB&T’s existing policies. The unrealized gains or losses on these transferred securities were reflected as a component of shareholders’ equity.

 

Loans Held for Sale

 

Loans held for sale are reported at the lower of cost or market value on an aggregate loan portfolio basis. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability retained. Gains and losses on sales of loans are included in other noninterest income.

 

Loans and Leases

 

Loans and leases that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. The net amount of nonrefundable loan origination fees, commitment fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate the interest method. Discounts and premiums are amortized to interest income over the estimated life of the loans using methods that approximate the interest method. Commercial loans and substantially all installment loans accrue interest on the unpaid balance of the loans. Lease receivables consist primarily of direct financing leases on rolling stock, equipment and real property, leases to municipalities and investments in leveraged lease transactions. Lease receivables are stated at the total amount of lease payments receivable plus guaranteed residual values, less unearned income. Leveraged leases are carried net of nonrecourse debt. Recognition of income over the lives of the lease contracts approximates the interest method.

 

A loan is impaired when, based on current information and events, it is probable that BB&T will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. When the fair value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a specific reserve allocation which is a component of the allowance for loan and lease losses.

 

Nonperforming Assets

 

Nonperforming assets include loans and leases on which interest is not being accrued and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of customers’ loan

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

defaults. Loans and leases are generally placed on nonaccrual status when concern exists that principal or interest is not fully collectible, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. Loans past due 90 days or more may remain on accrual status if management determines that concern over the collectibility of principal and interest is not significant. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of principal or interest.

 

Assets acquired as a result of foreclosure are carried at the lower of cost or fair value less estimated selling costs. Cost is determined based on the sum of unpaid principal, accrued but unpaid interest and acquisition costs associated with the loan. Any excess of unpaid principal over fair value at the time of foreclosure is charged to the allowance for loan and lease losses. Generally, such properties are appraised annually and the carrying value, if greater than the fair value, less selling costs, is adjusted with a charge to noninterest expense. Routine maintenance costs, declines in market value and net losses on disposal are included in other noninterest expense.

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses is management’s estimate of probable inherent credit losses in the loan and lease portfolios at the balance sheet date. The Company determines the allowance based on an ongoing evaluation. This evaluation is inherently subjective because it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Increases to the allowance are made by charges to the provision for loan and lease losses, which is reflected in the Consolidated Statements of Income. Loans or leases deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance.

 

The allowance is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either SFAS No. 5 or SFAS No. 114. Management’s estimate of each SFAS No. 5 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. Reserves for commercial loans are determined by applying loss percentages to the portfolio based on management’s evaluation and “risk grading” of the commercial loan portfolio. Reserves are provided for noncommercial loan categories based on a four-year weighted average of actual loss experience, which is applied to the total outstanding loan balance of each loan category. Specific reserves are typically provided on all impaired commercial loans in excess of a defined threshold that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of BB&T’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.

 

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

 

Premises and Equipment

 

Premises, equipment, capital leases and leasehold improvements are stated at cost less accumulated depreciation or amortization. Land is stated at cost. In addition, purchased software and costs of computer

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

software developed for internal use are capitalized provided certain criteria are met. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements. Capitalized leases are amortized by the same methods as premises and equipment over the estimated useful lives or the lease term, whichever is less. Obligations under capital leases are amortized using the interest method to allocate payments between principal reduction and interest expense.

 

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase, which are classified as secured short-term borrowed funds, generally mature less than one year from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. BB&T may be required to provide additional collateral if the fair value of the underlying securities declines during the term of the repurchase agreement.

 

Income Taxes

 

The provision for income taxes is based upon income before taxes for financial statement purposes, adjusted for nontaxable income and nondeductible expenses. Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes. Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax bases. In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with the cumulative effects included in the current year’s income tax provision.

 

Derivative Financial Instruments

 

BB&T utilizes a variety of financial instruments to manage various financial risks. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, collars, financial forwards and futures contracts and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. BB&T uses derivatives primarily to hedge business loans, forecasted sales of mortgage loans, federal funds purchased, long-term debt and certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients.

 

BB&T accounts for derivatives in accordance with SFAS No. 133, as amended, which was implemented January 1, 2001, and requires all derivative instruments to be carried at fair value on the balance sheet. On the date of adoption, BB&T reassessed and designated derivative instruments used for risk management as fair value hedges, cash flow hedges and derivatives not qualifying for hedge accounting treatment, as appropriate. On January 1, 2001, BB&T had derivatives with a notional value of $2.3 billion. In conjunction with the adoption of SFAS No. 133, BB&T recorded a transition adjustment of $7.9 million, after taxes, to accumulated other comprehensive income. There was no material impact on net income at the date of adoption. The transition adjustment and BB&T’s accounting policies with regard to derivatives have been determined based on the interpretive guidance issued thus far by the FASB. However, the FASB continues to issue guidance that could affect BB&T’s application of the Statement and require adjustments in the future.

 

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 or a measure of financial risk. As required by SFAS No. 133, BB&T classifies its derivative financial instruments as either (1) a hedge of an exposure to changes in the fair value of a recorded asset or

 

64


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

liability (“fair value hedge”), (2) a hedge of an exposure to changes in the cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”), (3) a hedge of a foreign currency exposure (“foreign currency hedge”), or (4) derivatives not designated as hedges. For a qualifying fair value hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the value of the designated hedged item attributable to the risk being hedged. For a qualifying cash flow hedge, the effective portion of changes in the value of the derivatives that have been highly effective are recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. For either fair value hedges or cash flow hedges, net income may be affected to the extent that changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. See Note 18 for additional disclosures related to derivative financial instruments.

 

During 2002, BB&T adopted Derivatives Implementation Group (“DIG”) Issue C-13 “When a Loan Commitment is included in the Scope of Statement 133,” which required that residential mortgage loan commitments for loans to be sold be accounted for as derivatives, and these derivatives were accounted for as non-hedging instruments. The impact upon adoption was a $14.5 million increase to mortgage banking income.

 

Per Share Data

 

Basic net income per common share has been computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the years presented. Diluted net income per common share has been computed by dividing net income, by the weighted average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding. Restricted stock grants are considered as issued for purposes of calculating net income per share. See Note 19 for the calculation of basic and diluted earnings per share.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the cost in excess of the fair value of net assets acquired in transactions accounted for as purchases. Other intangible assets represent premiums paid for acquisitions of core deposits (core deposit intangibles) and other identifiable intangible assets. Such assets are included in other assets in the Consolidated Balance Sheets. Effective January 1, 2002, BB&T adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, which requires that goodwill no longer be amortized over an estimated useful life, but rather be tested at least annually for impairment. Intangible assets other than goodwill, which are determined to have finite lives, continue to be amortized on straight-line or accelerated bases over periods ranging from one to nine years. SFAS No. 142 required the reversal of $9.8 million of remaining negative goodwill, which was recorded as a cumulative effect of change in accounting principle in the Consolidated Statements of Income. Please refer to Note 7 for additional information with respect to BB&T’s goodwill and other intangible assets.

 

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9,” which addresses the financial accounting and reporting for the acquisition of all or part of a financial institution. SFAS No. 147 removes acquisitions of financial institutions, except for transactions between two or more mutual enterprises, from the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 147 also amends SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term customer-relationship and credit cardholder intangible assets, and requires companies to cease amortization of unidentifiable intangible assets associated with certain branch acquisitions. The provisions of this Statement were effective beginning October 1, 2002. The implementation of this Statement resulted in a reversal of $3.7 million of pre-tax goodwill amortization during 2002. The provisions of the statement will not have a materially adverse impact on either BB&T’s consolidated financial position or consolidated results of operations in the future.

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Loan Securitizations

 

BB&T periodically securitizes mortgage loans and transfers them to securities available for sale. This is accomplished by exchanging the loans for mortgage-backed securities issued primarily by Freddie Mac. Following the transfers, the securities are reported at estimated fair value based on quoted market prices, with unrealized gains and losses in accumulated other comprehensive income, net of deferred income taxes. Since the transfers are not considered a sale, no gain or loss is recorded in conjunction with these transactions. BB&T also securitizes and sells loans to third party investors. BB&T retains the mortgage servicing on the loans sold and loans exchanged for securities which are recorded based on the allocation of the carrying amounts of the assets sold between the assets sold and the servicing rights retained based on the relative fair value of the assets sold and the rights retained. Gains or losses incurred on the loans sold to third party investors are included in mortgage banking income on the Consolidated Statements of Income.

 

Mortgage Servicing Rights

 

The carrying value of mortgage servicing rights are included as other assets in the Consolidated Balance Sheets. The mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing revenue. The amortization is adjusted prospectively in response to changes in estimated projections of future cash flows. BB&T periodically assesses mortgage servicing rights for impairment based on the fair value of those rights. Impairment is evaluated by strata, which are based on predominant risk characteristics, such as interest rates, loan term and type. The fair value is significantly affected by interest rates, prepayment speeds, expected losses and other terms. To the extent the carrying value of the servicing rights exceed the fair value by strata, impairment is recognized through a valuation allowance established through a charge to mortgage banking income. The valuation allowance may be adjusted in the future as the value of the mortgage servicing rights increases or decreases. Revenues from originating, marketing and servicing mortgage loans as well as valuation adjustments related to capitalized mortgage servicing rights are included in mortgage banking income on the Consolidated Statements of Income. See Note 8 for additional disclosures related to mortgage servicing rights.

 

Supplemental Disclosures of Cash Flow Information

 

The following table presents data with respect to the fair values of assets acquired and liabilities assumed in purchase transactions:

 

    

December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Purchase Price

  

$

1,281,701

 

  

$

427,577

 

  

$

  223,047

 

Fair Value of Net Assets Acquired

  

 

(330,504

)

  

 

(256,286

)

  

 

(117,790

)

    


  


  


Excess of Purchase Price over Net Assets Acquired

  

$

951,197

 

  

$

171,291

 

  

$

105,257

 

    


  


  


 

The estimated fair values of the significant asset balances acquired and significant liabilities assumed at the dates of acquisition for the institutions acquired during 2002 are as follows: cash and cash equivalents totaling $952.7 million; investment securities of $574.9 million; loans and leases of $4.3 billion; deposits totaling $4.3 billion; short-term borrowed funds totaling $732.6 million; and long-term debt of $307.9 million.

 

Stock-Based Compensation

 

BB&T maintains various stock-based compensation plans. These plans provide for the granting of stock options to BB&T’s employees and directors. All of BB&T’s stock-based compensation plans have been presented to and approved by BB&T’s shareholders. BB&T accounts for its stock option plans based on the intrinsic value method set forth in APB Opinion No. 25 and related Interpretations, under which no compensation cost has been recognized for any of the periods presented, except with respect to restricted stock plans as disclosed in the accompanying table. The following table presents BB&T’s net income, basic and diluted earnings per share as reported and pro forma net income and pro forma earnings per share assuming compensation cost for BB&T’s stock options plans had been determined based on the fair value at the grant dates for awards under those plans

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

granted after December 31, 1994, consistent with the method described by SFAS No. 123 “Accounting for Stock-Based Compensation”:

 

    

For the Years Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands, except per share data)

 

Net income:

                          

Net income as reported

  

$

1,303,009

 

  

$

973,638

 

  

$

698,488

 

Add: Stock-based compensation expense included in reported net income, net of tax

  

 

1,231

 

  

 

2,198

 

  

 

2,359

 

Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of tax

  

 

(31,117

)

  

 

(22,893

)

  

 

(23,409

)

    


  


  


Pro forma net income

  

$

1,273,123

 

  

$

952,943

 

  

$

677,438

 

    


  


  


Basic EPS:

                          

As reported

  

$

2.75

 

  

$

2.15

 

  

$

1.55

 

Pro forma

  

 

2.69

 

  

 

2.10

 

  

 

1.50

 

Diluted EPS:

                          

As reported

  

 

2.72

 

  

 

2.12

 

  

 

1.53

 

Pro forma

  

 

2.66

 

  

 

2.08

 

  

 

1.49

 

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield of 3.0% in 2002 and 2.5% in 2001 and 2000; expected volatility of 27% in 2002, 28% in 2001 and 29% in 2000; risk free interest rates of 4.7%, 4.9% and 6.6% for 2002, 2001 and 2000, respectively; and expected lives of 6.0 years, 6.0 years and 6.1 years for 2002, 2001 and 2000, respectively.

 

Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.

 

Changes in Accounting Principles and Effects of New Accounting Pronouncements

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of the statement, which were adopted January 1, 2003, did not have a material impact on either BB&T’s consolidated financial position or consolidated results of operations.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The Statement establishes a single accounting model for long-lived assets to be disposed of by a sale, and resolves significant implementation issues related to SFAS No. 121. The provisions of the Statement were adopted by BB&T on January 1, 2002. The implementation did not have a material impact on either BB&T’s consolidated financial position or consolidated results of operations.

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002”. This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement,

 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers” and amends SFAS No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. BB&T adopted the provisions of this Statement effective January 1, 2003. This implementation did not initially have a material impact on either BB&T’s consolidated financial position or consolidated results of operations, and management does not expect any such impact in the future.

 

In August 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. This Statement nullifies the guidance of the Emerging Issues Task Force (“EITF”) in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In SFAS No. 146, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. BB&T adopted the provisions of this Statement effective January 1, 2003. The initial adoption of the statement did not materially affect BB&T, and management does not anticipate that provisions of the Statement will have a materially adverse impact on either BB&T’s consolidated financial position or consolidated results of operations in the future although its provisions will affect the timing of the recognition of merger-related costs.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, which amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The provisions of the statement were effective December 31, 2002. Management currently intends to continue to account for stock-based compensation under the intrinsic value method set forth in Accounting Principles Board (“APB”) Opinion 25 and related interpretations. For this reason, the transition guidance of SFAS No. 148 does not have an impact on BB&T’s consolidated financial position or consolidated results of operations. The Statement does amend existing guidance with respect to required disclosures, regardless of the method of accounting used. The revised disclosure requirements are presented herein.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of the Interpretation are effective and were adopted by BB&T as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. Please refer to Note 14 for disclosures with respect to BB&T’s guarantees. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the implementation of the recognition requirements of the Interpretation will have a significant effect on BB&T’s consolidated financial position or consolidated results of operations.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a company’s consolidated financial statements. The Interpretation requires consolidation by

 

68


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity’s activities through voting rights, the obligation to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. BB&T’s management is currently assessing the impact that the Interpretation will have on BB&T’s consolidated financial position and consolidated results of operations. In particular, BB&T is a limited partner in low income housing developments throughout its market area, which as previously discussed, are not included in BB&T’s consolidated financial statements. Based on an initial assessment, management believes BB&T may be required to consolidate a portion of these investments effective July 1, 2003 to comply with Interpretation No. 46. As of December 31, 2002, BB&T’s maximum potential exposure to loss with respect to these partnerships was $15.7 million.

 

NOTE 2.    Business Combinations

 

The following table presents summary information with respect to mergers and acquisitions of financial institutions and other significant financial services companies completed during the last three years:

 

Summary of Completed Mergers and Acquisitions

 

Date of

Acquisition


  

Acquired Institution


  

Headquarters


  

Total Assets


 

Accounting

Method


  

Intangibles Recorded


  

Total

Purchase

Price


    

BB&T

Common

Shares

Issued to

Complete

Transaction


September 13, 2002

  

Regional Financial Corp.

  

Tallahassee, Fla.

  

$

1.5 billion 

 

Purchase

  

$

235.7 million 

  

$

276.3 million 

 

  

7.3 million

March 20, 2002

  

Area Bancshares Corporation

  

Owensboro, Ky.

  

 

2.6 billion

 

Purchase

  

 

279.2 million

  

 

448.9 million

 

  

13.2 million

March 8, 2002

  

MidAmerica Bancorp

  

Louisville, Ky.

  

 

1.8 billion

 

Purchase

  

 

230.4 million

  

 

379.8 million 

(1)

  

8.2 million

January 1, 2002

  

Cooney, Rikard & Curtin, Inc.

  

Birmingham, Al.

  

 

110.5 million

 

Purchase

  

 

102.1 million

  

 

85.6 million

 

  

2.5 million


December 12, 2001

  

Community First Banking Company

  

Carrollton, Ga.

  

$

548.1 million 

 

Purchase

  

$

102.1 million 

  

$

132.2 million 

 

  

3.5 million

August 9, 2001

  

F&M National Corporation

  

Winchester, Va.

  

 

4.0 billion

 

Pooling

  

 

N/A

  

 

N/A

 

  

31.1 million

June 27, 2001

  

Virginia Capital Bancshares, Inc.

  

Fredericksburg, Va.

  

 

532.7 million

 

Purchase

  

 

15.2 million

  

 

172.8 million

 

  

4.7 million

June 7, 2001

  

Century South Banks, Inc.

  

Alpharetta, Ga.

  

 

1.7 billion

 

Pooling

  

 

N/A

  

 

N/A

 

  

12.7 million

March 2, 2001

  

FirstSpartan Financial Corp.

  

Spartanburg, S.C.

  

 

591.0 million

 

Purchase

  

 

42.0 million

  

 

107.6 million

 

  

3.8 million

January 8, 2001

  

FCNB Corp.

  

Frederick, Md.

  

 

1.6 billion

 

Pooling

  

 

N/A

  

 

N/A

 

  

8.7 million


December 27, 2000

  

BankFirst Corporation

  

Knoxville, Tenn.

  

$

929.5 million 

 

Purchase

  

$

71.0 million 

  

$

147.3 million 

 

  

5.3 million

November 15, 2000

  

Edgar M. Norris & Co.

  

Greenville, S.C.

  

 

3.7 million

 

Purchase

  

 

N/A

  

 

N/A

 

  

N/A

September 29, 2000

  

Laureate Capital Corp.

  

Charlotte, N.C.

  

 

13.8 million

 

Purchase

  

 

N/A

  

 

N/A

 

  

N/A

July 6, 2000

  

One Valley Bancorp, Inc.

  

Charleston, W.Va.

  

 

6.4 billion

 

Pooling

  

 

N/A

  

 

N/A

 

  

43.1 million

June 15, 2000

  

First Banking Company of Southeast Georgia

  

Statesboro, Ga.

  

 

420.0 million

 

Pooling

  

 

N/A

  

 

N/A

 

  

4.1 million

June 13, 2000

  

Hardwick Holding Company

  

Dalton, Ga.

  

 

507.2 million

 

Pooling

  

 

N/A

  

 

N/A

 

  

3.9 million

January 13, 2000

  

Premier Bancshares, Inc.

  

Atlanta, Ga.

  

 

2.0 billion

 

Pooling

  

 

N/A

  

 

N/A

 

  

16.8 million


N/A—Not applicable or undisclosed terms.

(1)   Includes cash totaling $94.9 million to complete this acquisition.

 

The intangibles in the above table include $89.5 million of core deposit and other intangibles for the 2002 acquisitions with an estimated life of seven years. The table above does not include mergers and acquisitions made by any acquired company.

 

69


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Insurance Acquisitions

 

In addition to the mergers and acquisitions summarized in the above table, BB&T acquired eight insurance agencies during 2002, which were accounted for as purchases. In conjunction with these transactions, BB&T issued approximately 1.7 million shares of common stock and paid $1.9 million in cash, and recorded $43.7 million in goodwill and $30.4 million of other intangible assets with an average life of 10 years. During 2001, BB&T acquired seven insurance agencies that were accounted for as purchases. In conjunction with these transactions, BB&T issued approximately 325 thousand shares of common stock and recorded $16.5 million in goodwill and other intangible assets. During 2000, BB&T acquired six insurance agencies, which were accounted for as purchases. In conjunction with these transactions, BB&T issued 1.4 million shares of common stock and recorded $38.9 million in goodwill. These insurance acquisitions did not materially affect BB&T’s consolidated financial position or consolidated results of operations.

 

BB&T also acquired four nonbank financial services companies during 2002, all accounted for as purchases. In connection with these acquisitions, BB&T issued approximately 500 thousand shares of common stock and paid $10.3 million in cash. Goodwill totaling $20.7 million and other intangibles totaling $9.0 million with a life of 10 years were initially recorded in connection with the transactions.

 

The following unaudited presentation reflects selected information from the Consolidated Income Statements on a Pro Forma basis as if the purchase transactions had been completed as of the beginning of the years presented:

 

    

For the Years Ended


    

2002


  

2001


    

(Dollars in thousands, except per share data)

Total revenues

  

$

4,554,504

  

$

4,243,600

    

  

Income before cumulative effect of change in accounting principle

  

$

1,317,272

  

$

1,063,631

    

  

Net income

  

$

1,327,052

  

$

1,063,631

    

  

Basic EPS

  

$

2.74

  

$

2.19

    

  

Diluted EPS

  

$

2.71

  

$

2.16

    

  

 

Merger-Related and Restructuring Charges

 

In conjunction with the consummation of an acquisition and the completion of other requirements, BB&T typically accrues certain merger-related expenses related to estimated severance costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition. The following table presents costs reflected as expenses and accruals recorded through purchase accounting adjustments.

 

    

Merger Accrual Activity


    

(Dollars in thousands)

    

Balance

December 31, 2000


 

Additions in

2001


 

Utilized in

2001


  

Balance

December 31, 2001


 

Additions in

2002


 

Utilized in

2002


  

Balance

December 31, 2002


Severance and personnel-related charges

  

$

13,036

 

$

49,786

 

$

31,451

  

$

31,371

 

$

40,014

 

$

54,556

  

$

16,829

Occupancy and equipment charges

  

 

21,339

 

 

38,969

 

 

23,245

  

 

37,063

 

 

31,668

 

 

26,978

  

 

41,753

Systems conversions and related charges

  

 

3,729

 

 

17,100

 

 

9,490

  

 

11,339

 

 

12,278

 

 

21,879

  

 

1,738

Other merger-related charges

  

 

17,720

 

 

27,336

 

 

29,946

  

 

15,110

 

 

21,438

 

 

25,267

  

 

11,281

    

 

 

  

 

 

  

Total

  

$

55,824

 

$

133,191

 

$

94,132

  

$

94,883

 

$

105,398

 

$

128,680

  

$

71,601

    

 

 

  

 

 

  

 

The liabilities for severance and personnel-related costs relate to severance liabilities that will be paid out based on such factors as termination dates, the provisions of employment contracts and the terms of BB&T’s

 

70


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

severance plans. The occupancy and equipment accruals relate to costs to exit certain leases and to dispose of excess facilities and equipment. This liability will be utilized upon termination of the various leases and sale of redundant property. The liabilities associated with systems conversions relate to termination penalties on contracts with information technology service providers. These liabilities will be utilized as the contracts are paid out and expire. The other merger-related liabilities relate to litigation accruals, accruals to conform the accounting policies of acquired institutions to those of BB&T, and other similar charges. The merger-related accruals presented above are expected to be utilized in 2003 unless they relate to specific contracts that expire in later years.

 

During 2002, BB&T estimated that 372 positions would be eliminated and 370 employees were terminated prior to December 31, 2002. Approximately 90 of these employees will continue to receive severance payments during 2003. During 2001, BB&T estimated that approximately 400 positions would be eliminated and approximately 350 employees were terminated and received severance by the end of 2001. During 2000, BB&T estimated that 450 positions would be eliminated in connection with mergers and approximately 430 employees were terminated and received severance.

 

Because BB&T often has multiple merger integrations in process, and, due to limited resources, must schedule in advance significant events in the merger conversion and integration process, BB&T’s merger process and utilization of merger accruals may cover an extended period of time. In general, a major portion of accrued costs are utilized in conjunction with or immediately following the systems conversion, when most of the duplicate positions are eliminated and the terminated employees begin to receive severance. Other accruals are utilized over time based on the sale, closing or disposal of duplicate facilities or equipment or the expiration of lease contracts. Merger accruals are re-evaluated regularly and adjusted as necessary.

 

Since BB&T is a frequent acquirer of financial institutions, the Company has a number of employees who have among their primary responsibilities the analysis of mergers and acquisitions, the acquisition approval process and/or converting the systems of acquired entities to BB&T’s automation platform. Substantially all of the expenses associated with these employees are on-going and are not classified as merger-related.

 

The accruals utilized during 2002 in the table above include $10.5 million of accrual reversals resulting from revisions to BB&T’s initial estimates of merger accruals for facilities and personnel-related costs. There were no other material adjustments to merger-related accruals for any of the periods presented.

 

Pending Mergers (unaudited)

 

On September 27, 2002, BB&T announced plans to acquire Equitable Bank (“Equitable”), based in Wheaton, Maryland. At the time of the announcement, Equitable had $477 million in assets and operated five full-service banking offices in Montgomery and Prince George’s counties. Shareholders of Equitable will receive one share of BB&T common stock in exchange for each share of Equitable. The transaction will be accounted for as a purchase, and is expected to be completed in the first quarter of 2003.

 

On December 4, 2002, BB&T announced plans to acquire Southeastern Fidelity Corporation (“SEFCO”), an insurance premium finance company based in Tallahassee, Florida. The transaction will be accounted for as a purchase, and, pending regulatory approval, is planned to be completed in the first quarter of 2003.

 

On January 21, 2003, BB&T announced plans to acquire First Virginia Banks, Inc. (“First Virginia”), a bank holding company headquartered in Falls Church, Virginia. First Virginia is the parent company to eight community banks and operated 364 branches in Virginia, Maryland, and northeast Tennessee at the time of the announcement. At December 31, 2002, First Virginia had $11.2 billion in assets, including $6.4 billion in loans and $4.0 billion in investment securities, and total deposits of $9.2 billion. Shareholders of First Virginia will receive 1.26 BB&T shares in exchange for each share of First Virginia. The merger, which is subject to regulatory and shareholder approval, is expected to be completed in the second quarter of 2003.

 

71


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 3.    Securities

 

The amortized costs and approximate fair values of securities held to maturity and available for sale were as follows:

 

   

December 31, 2002


 

December 31, 2001


   

Amortized Cost


 

Gross Unrealized


 

Estimated Fair

Value


 

Amortized Cost


 

Gross Unrealized


 

Estimated Fair

Value


     

Gains


 

Losses


     

Gains


 

Losses


 
   

(Dollars in thousands)

Securities held to maturity:

                                         

U.S. Treasury and U.S. government agency obligations

 

$

55,523

 

$

1

 

$

12

 

$

55,512

 

$

40,496

 

$

—  

 

$

8

 

$

40,488

   

 

 

 

 

 

 

 

Total securities held to maturity

 

 

55,523

 

 

1

 

 

12

 

 

55,512

 

 

40,496

 

 

—  

 

 

8

 

 

40,488

   

 

 

 

 

 

 

 

Securities available for sale:

                                         

U.S. Treasury and U.S. government agency obligations

 

 

11,154,231

 

 

406,183

 

 

—  

 

 

11,560,414

 

 

10,413,895

 

 

505,162

 

 

838

 

 

10,918,219

Mortgage-backed securities

 

 

3,749,977

 

 

119,062

 

 

2

 

 

3,869,037

 

 

3,360,729

 

 

67,786

 

 

3,227

 

 

3,425,288

States and political subdivisions

 

 

868,011

 

 

44,752

 

 

165

 

 

912,598

 

 

1,003,621

 

 

10,178

 

 

4,826

 

 

1,008,973

Equity and other securities

 

 

1,291,116

 

 

3,827

 

 

37,515

 

 

1,257,428

 

 

1,366,711

 

 

2,228

 

 

99,735

 

 

1,269,204

   

 

 

 

 

 

 

 

Total securities available for sale

 

 

17,063,335

 

 

573,824

 

 

37,682

 

 

17,599,477

 

 

16,144,956

 

 

585,354

 

 

108,626

 

 

16,621,684

   

 

 

 

 

 

 

 

Total securities

 

$

17,118,858

 

$

573,825

 

$

37,694

 

$

17,654,989

 

$

16,185,452

 

$

585,354

 

$

108,634

 

$

16,662,172

   

 

 

 

 

 

 

 

 

Securities with book values of approximately $9.2 billion and $7.6 billion at December 31, 2002 and 2001, respectively, were pledged to secure municipal deposits, securities sold under agreements to repurchase, other borrowings, and for other purposes as required or permitted by law.

 

Excluding securities issued by the U.S. Government and its agencies and corporations, there were no investments in securities from one issuer that exceeded 10% of shareholders’ equity at December 31, 2002 or 2001. Trading securities totaling $148.5 million at December 31, 2002 and $97.7 million at December 31, 2001 are excluded from the accompanying tables. Equity securities are primarily composed of investments in stock issued by the FHLB of Atlanta and preferred stocks issued by FHLMC and FNMA.

 

Proceeds from sales of securities available for sale during 2002, 2001 and 2000 were $3.6 billion, $3.0 billion and $5.2 billion, respectively. Gross gains of $181.1 million, $130.6 million and $7.2 million and gross losses of $11.0 million, $8.4 million and $226.6 million were realized on those sales in 2002, 2001 and 2000, respectively.

 

The amortized cost and estimated fair value of the debt securities portfolio at December 31, 2002, by contractual maturity, are shown in the accompanying table. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted average contractual maturities of underlying collateral.

 

    

December 31, 2002


    

Held to Maturity


  

Available for Sale


    

Amortized

Cost


  

Estimated

Fair

Value


  

Amortized

Cost


  

Estimated

Fair

Value


    

(Dollars in thousands)

Debt Securities:

                           

Due in one year or less

  

$

55,523

  

$

55,512

  

$

2,193,847

  

$

2,234,354

Due after one year through five years

  

 

—  

  

 

—  

  

 

8,022,015

  

 

8,384,788

Due after five years through ten years

  

 

—  

  

 

—  

  

 

1,893,359

  

 

1,943,669

Due after ten years

  

 

—  

  

 

—  

  

 

3,858,798

  

 

3,974,012

    

  

  

  

Total debt securities

  

$

55,523

  

$

55,512

  

$

15,968,019

  

$

16,536,823

    

  

  

  

Total equity securities

  

 

—  

  

 

—  

  

 

1,095,316

  

 

1,062,654

    

  

  

  

Total securities

  

$

55,523

  

$

55,512

  

$

17,063,335

  

$

17,599,477

    

  

  

  

 

72


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 4.    Loans and Leases

 

The following is a breakdown of the loan and lease portfolio at year-end by major category:

 

    

December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Loans:

                 

Commercial, financial and agricultural

  

$

7,061,493

 

  

$

6,551,073

 

Lease receivables

  

 

5,156,307

 

  

 

5,012,110

 

Real estate—construction and land development

  

 

5,291,719

 

  

 

5,334,108

 

Real estate—mortgage

  

 

30,023,470

 

  

 

25,542,288

 

Consumer

  

 

6,412,563

 

  

 

5,965,010

 

Less: unearned income

  

 

(2,805,246

)

  

 

(2,868,832

)

    


  


Loans and leases held for investment

  

 

51,140,306

 

  

 

45,535,757

 

Loans held for sale

  

 

2,377,707

 

  

 

1,907,416

 

    


  


Total loans and leases

  

$

53,518,013

 

  

$

47,443,173

 

    


  


 

The net investment in lease receivables was $2.5 billion and $2.3 billion at December 31, 2002 and 2001, respectively.

 

At December 31, 2002 and 2001, BB&T had investments of approximately $14.2 million and $11.4 million, respectively in multi-family low income housing developments throughout its market area as a means of supporting its communities. BB&T’s subsidiary banks typically provide financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project.

 

BB&T had $37.7 billion in loans secured by real estate at December 31, 2002. However, these loans were not concentrated in any specific industry, market or geographic area other than the Banks' primary markets.

 

The following table sets forth certain information regarding BB&T's impaired loans:

 

    

December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Total recorded investment—impaired loans

  

$

144,808

 

  

$

130,680

 

    


  


Total recorded investment with related valuation allowance

  

 

144,808

 

  

 

130,680

 

Allowance for loan and lease losses assigned to impaired loans

  

 

(24,096

)

  

 

(24,180

)

    


  


Net carrying value—impaired loans

  

$

120,712

 

  

$

106,500

 

    


  


Average balance of impaired loans

  

$

126,708

 

  

$

99,218

 

    


  


Cash basis interest income recognized on impaired loans

  

$

—  

 

  

$

—  

 

    


  


 

73


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 5.    Allowance for Loan and Lease Losses

 

An analysis of the allowance for loan and lease losses for each of the past three years is presented in the following table:

 

    

For the Years Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Beginning Balance

  

$

644,418

 

  

$

578,107

 

  

$

529,236

 

Allowances of purchased companies

  

 

62,099

 

  

 

29,083

 

  

 

14,311

 

Provision for losses charged to expense

  

 

263,700

 

  

 

224,318

 

  

 

147,187

 

Loans and leases charged-off

  

 

(297,149

)

  

 

(231,229

)

  

 

(150,515

)

Recoveries of previous charge-offs

  

 

50,617

 

  

 

44,139

 

  

 

37,888

 

    


  


  


Net loans and leases charged-off

  

 

(246,532

)

  

 

(187,090

)

  

 

(112,627

)

    


  


  


Ending Balance

  

$

723,685

 

  

$

644,418

 

  

$

578,107

 

    


  


  


 

At December 31, 2002, 2001 and 2000, loans and leases not currently accruing interest totaled $374.8 million, $316.6 million and $180.6 million, respectively. Loans 90 days or more past due and still accruing interest totaled $115.0 million, $101.8 million and $81.6 million at December 31, 2002, 2001 and 2000, respectively. The gross interest income that would have been earned during 2002, 2001 and 2000 if the loans and leases then classified as nonaccrual had been current in accordance with the original terms was approximately $22.0 million, $23.9 million and $14.2 million, respectively. Foreclosed property totaled $76.6 million, $57.0 million and $55.2 million at December 31, 2002, 2001 and 2000, respectively.

 

NOTE 6.    Premises and Equipment

 

A summary of premises and equipment is presented in the accompanying table:

 

    

December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Land and land improvements

  

$

224,691

 

  

$

197,877

 

Buildings and building improvements

  

 

862,640

 

  

 

818,951

 

Furniture and equipment

  

 

723,606

 

  

 

662,891

 

Capitalized leases on premises and equipment

  

 

2,885

 

  

 

2,885

 

    


  


    

 

1,813,822

 

  

 

1,682,604

 

Less—accumulated depreciation and amortization

  

 

(741,721

)

  

 

(692,993

)

    


  


Net premises and equipment

  

$

1,072,101

 

  

$

989,611

 

    


  


 

Premises and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Useful lives for premises and equipment are as follows: buildings and building improvements—40 years; furniture and equipment—5 to 10 years; and capitalized leases on premises and equipment—estimated useful life or remaining term of tenant lease, whichever is less.

 

Depreciation expense, which is included in occupancy and equipment expense, was $144.0 million, $122.2 million and $116.2 million in 2002, 2001 and 2000, respectively. BB&T has noncancelable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $77.8 million, $68.0 million and $66.4 million for 2002, 2001 and 2000, respectively. Future minimum lease payments for operating and capitalized leases for years subsequent to 2002 are as follows:

 

74


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

    

Leases


 
    

Operating


  

Capitalized


 
    

(Dollars in thousands)

 

Years ended December 31:

               

2003

  

$

55,217

  

$

372

 

2004

  

 

51,600

  

 

328

 

2005

  

 

46,102

  

 

270

 

2006

  

 

34,291

  

 

269

 

2007

  

 

27,122

  

 

245

 

2008 and later

  

 

150,253

  

 

1,792

 

    

  


Total minimum lease payments

  

$

364,585

  

 

3,276

 

    

        

Less—amount representing interest

         

 

(1,472

)

           


Present value of net minimum payments on capitalized leases (Note 10)

         

$

1,804

 

           


 

NOTE 7.    Goodwill and Other Intangible Assets

 

The changes in the carrying amounts of goodwill attributable to each of BB&T’s operating segments for the years ended December 31, 2002 and 2001 are as follows:

 

   

Goodwill Activity by Operating Segment


 
   

Banking Network


    

Mortgage Banking


   

Trust Services


   

Agency Insurance


    

Investment Banking and Brokerage


    

All Other Segments


   

Total


 
   

(Dollars in thousands)

 

 

Balance, January 1, 2001

 

$

536,681

 

  

$

1,039

 

 

$

8,691

 

 

$

115,916

 

  

$

70,974

 

  

$

30,576

 

 

$

763,877

 

Acquired goodwill

 

 

156,875

 

  

 

764

 

 

 

5,105

 

 

 

15,099

 

  

 

5,063

 

  

 

—  

 

 

 

182,906

 

Amortization expense

 

 

(48,122

)

  

 

(35

)

 

 

(691

)

 

 

(9,292

)

  

 

(5,443

)

  

 

(3,297

)

 

 

(66,880

)

   


  


 


 


  


  


 


Balance, December 31, 2001

 

 

645,434

 

  

 

1,768

 

 

 

13,105

 

 

 

121,723

 

  

 

70,594

 

  

 

27,279

 

 

 

879,903

 

Acquired goodwill

 

 

713,938

 

  

 

6,438

 

 

 

14,225

 

 

 

106,000

 

  

 

311

 

  

 

2,564

 

 

 

843,476

 

   


  


 


 


  


  


 


Balance, December 31, 2002

 

$

1,359,372

 

  

$

8,206

 

 

$

27,330

 

 

$

227,723

 

  

$

70,905

 

  

$

29,843

 

 

$

1,723,379

 

   


  


 


 


  


  


 


 

The following table presents the gross carrying amounts and accumulated amortization for BB&T’s intangible assets subject to amortization at the dates presented:

 

    

Acquired Intangible Assets


 
    

As of

December 31, 2002


    

As of

December 31, 2001


 
    

Gross Carrying Amount


  

Accumulated Amortization


    

Gross Carrying Amount


  

Accumulated Amortization


 
    

(Dollars in thousands)

 

 

Amortizing intangible assets

                               

Core deposit intangibles

  

$

99,893

  

$

(41,601

)

  

$

69,574

  

$

(31,021

)

Other(1)

  

 

100,853

  

 

(10,321

)

  

 

18,963

  

 

(3,060

)

    

  


  

  


Totals

  

$

200,746

  

$

(51,922

)

  

$

88,537

  

$

(34,081

)

    

  


  

  



(1)   Other amortizing intangibles are primarily composed of customer relationship intangibles.

 

During the years ended December 31, 2002 and 2001, BB&T incurred $20.9 million and $72.7 million, respectively, in pretax amortization expenses associated with goodwill, core deposit intangibles and other intangible assets.

 

75


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The following table presents estimated amortization expense for each of the next five years:

 

 

      

Estimated Amortization Expense


      

(Dollars in thousands)

For the Year Ended December 31:

        

2003

    

$

25,898

2004

    

 

23,256

2005

    

 

21,158

2006

    

 

19,375

2007

    

 

15,675

 

The following tables present actual results for the year ended December 31, 2002 and adjusted net income and earnings per share for the years ended December 31, 2001 and 2000, respectively, assuming the nonamortization provisions of SFAS No. 142 were effective at the beginning of the periods presented:

 

    

For the Year Ended December 31,


    

2002


    

2001


  

2000


    

(Dollars in thousands)

 

Reported net income

  

$

1,303,009

 

  

$

973,638

  

$

698,488

Add back:

                      

Goodwill amortization, net of tax

  

 

—  

 

  

 

60,121

  

 

53,883

Cumulative effect of change in accounting principle

  

 

(9,780

)

  

 

—  

  

 

—  

    


  

  

Adjusted net income

  

$

1,293,229

 

  

$

1,033,759

  

$

752,371

    


  

  

Basic earnings per share:

                      

Reported net income

  

$

2.75

 

  

$

2.15

  

$

1.55

Goodwill amortization, net of tax

  

 

—  

 

  

 

0.13

  

 

0.12

Cumulative effect of change in accounting principle

  

 

(.02

)

  

 

—  

  

 

—  

    


  

  

Adjusted net income

  

$

2.73

 

  

$

2.28

  

$

1.67

    


  

  

Diluted earnings per share:

                      

Reported net income

  

$

2.72

 

  

$

2.12

  

$

1.53

Goodwill amortization, net of tax

  

 

—  

 

  

 

0.13

  

 

0.12

Cumulative effect of change in accounting principle

  

 

(.02

)

  

 

—  

  

 

—  

    


  

  

Adjusted net income

  

$

2.70

 

  

$

2.25

  

$

1.65

    


  

  

 

NOTE 8.    Loan Servicing

 

The following is an analysis of BB&T’s mortgage servicing rights included in other assets in the Consolidated Balance Sheets:

 

      

Mortgage Servicing Rights For the Years Ended December 31,


 
      

2002


      

2001


      

2000


 
      

(Dollars in thousands)

 

 

Balance, January 1,

    

$

359,037

 

    

$

239,251

 

    

$

189,809

 

Amount capitalized

    

 

203,376

 

    

 

228,753

 

    

 

57,251

 

Acquired in purchase transactions

    

 

9,270

 

    

 

—  

 

    

 

12,153

 

Amortization expense

    

 

(100,080

)

    

 

(46,032

)

    

 

(18,767

)

Change in valuation allowance

    

 

(152,764

)

    

 

(62,935

)

    

 

(1,195

)

      


    


    


Balance, December 31,

    

$

318,839

 

    

$

359,037

 

    

$

239,251

 

      


    


    


 

76


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The table above includes mortgage servicing rights arising from BB&T’s residential mortgage operations and commercial mortgage banking activities. Following is an analysis of the aggregate changes in the valuation allowance for mortgage servicing rights in 2002, 2001 and 2000:

 

      

Valuation Allowance for

Mortgage Servicing Rights

For the Years Ended December 31,


 
      

2002


      

2001


      

2000


 
      

(Dollars in thousands)

 

 

Balance, January 1,

    

$

65,222

 

    

$

2,287

 

    

$

1,092

 

Additions

    

 

156,756

 

    

 

67,500

 

    

 

1,301

 

Reductions

    

 

(3,992

)

    

 

(4,565

)

    

 

(106

)

      


    


    


Balance, December 31,

    

$

217,986

 

    

$

65,222

 

    

$

2,287

 

      


    


    


 

The unpaid principal balances of BB&T’s total residential mortgage servicing portfolio were $34.8 billion, $29.0 billion and $23.6 billion at December 31, 2002, 2001 and 2000, respectively. The unpaid principal balances of mortgage loans serviced for others were $24.2 billion, $20.4 billion and $15.8 billion at December 31, 2002, 2001, and 2000, respectively. Mortgage loans serviced for others are not included in loans on the accompanying Consolidated Balance Sheets.

 

During 2002 and 2001, BB&T securitized and sold $10.8 billion and $8.7 billion, respectively of principally fixed rate residential mortgage loans and recognized pretax gains of $48.8 million and $5.2 million, respectively, which was recorded in noninterest income. BB&T retained the related mortgage servicing rights and receives annual servicing fees. At December 31, 2002 and 2001, the approximate weighted average servicing fee was .39% and .41%, respectively, of the outstanding balance of the residential mortgage loans.

 

At December 31, 2002, BB&T had $1.1 billion of mortgage loans sold with limited recourse liability. In the event of nonperformance by the borrower, BB&T has exposure of approximately $448.1 million on these mortgage loans.

 

BB&T also arranges and services commercial real estate mortgages through Laureate Capital, the commercial mortgage banking subsidiary of Branch Bank. During the years ended December 31, 2002 and 2001, Laureate Capital originated $1.4 billion and $1.1 billion, respectively, of commercial real estate mortgages, all of which are arranged for third party investors and serviced by Laureate Capital. Laureate Capital’s exposure to credit risk or interest rate risk as a result of these loans is minimal. As of December 31, 2002 and 2001, Laureate Capital’s portfolio of commercial real estate mortgages serviced for others totaled $6.4 billion and $5.5 billion, respectively. Commercial mortgage loans serviced for others are not included in loans on the accompanying Consolidated Balance Sheets.

 

BB&T uses assumptions and estimates in determining the fair value of capitalized mortgage servicing rights. These assumptions include prepayment speeds, net charge-off experience and discount rates commensurate with the risks involved.

 

77


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

At December 31, 2002, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% adverse changes in key economic assumptions are included in the accompanying table.

 

      

Key Assumptions in the Valuation of Residential Mortgage Servicing Rights
December 31, 2002


 
      

(Dollars in thousands)

 

 

Fair Value of Residential Mortgage Servicing Rights

    

$

305,849

 

      


Weighted Average Life

    

 

3.6 yrs

 

      


Prepayment Speed

    

 

26.8

%

Effect on fair value of a 10% increase

    

$

(19,514

)

Effect on fair value of a 20% increase

    

 

(36,623

)

Expected Credit Losses

    

 

0.4

%

Effect on fair value of a 10% increase

    

$

(324

)

Effect on fair value of a 20% increase

    

 

(647

)

Weighted Average Discount Rate

    

 

9.10

%

Effect on fair value of a 10% increase

    

$

(5,850

)

Effect on fair value of a 20% increase

    

 

(11,488

)

 

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the effect of the change.

 

In 2001 and prior, the Company also has securitized residential mortgage loans and retained the resulting securities in securities available for sale. As of December 31, 2002, the remaining unpaid principle balance of the underlying loans totalled $501.0 million. Based on the performance of the underlying loans and general liquidity of the securities, the Company’s recovery of the cost basis in the securities has not been significantly impacted by changes in interest rates, prepayment speeds or credit losses.

 

The following table includes a summary of mortgage loans managed or securitized and related delinquencies and net charge-offs.

 

    

As of/For the Years Ended December 31,


    

2002


  

2001


    

(Dollars in thousands)

 

Mortgage Loans Managed or Securitized (1)

  

$

12,157,868

  

$

12,081,689

               

Less: Loans Securitized and Transferred to
Securities Available for Sale

  

 

501,000

  

 

1,003,061

Less: Loans Held for Sale

  

 

2,377,707

  

 

1,907,416

Less: Mortgage Loans Sold with Recourse

  

 

1,054,945

  

 

1,760,109

    

  

Mortgage Loans Held for Investment

  

$

8,224,216

  

$

7,411,103

    

  

Mortgage Loans on Nonaccrual Status

  

$

75,658

  

$

72,587

    

  

Mortgage Loans Past Due 90 Days and Still Accruing

  

$

38,386

  

$

29,453

    

  

Mortgage Loan Net Charge-offs

  

$

1,888

  

$

5,761

    

  


(1)   Balances exclude loans serviced for others, with no other continuing involvement.

 

78


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 9.    Short-Term Borrowed Funds

 

Short-term borrowed funds are summarized as follows:

 

    

December 31,


    

2002


  

2001


    

(Dollars in thousands)

 

Federal funds purchased

  

$

1,595,640

  

$

1,956,284

Securities sold under agreements to repurchase

  

 

2,511,530

  

 

2,175,510

Master notes

  

 

721,073

  

 

763,655

U.S. Treasury tax and loan deposit notes payable

  

 

213,341

  

 

1,091,018

Short-term Federal Home Loan Bank advances

  

 

—  

  

 

17,699

Short-term bank notes

  

 

—  

  

 

500,000

Other short-term borrowed funds

  

 

355,375

  

 

144,934

    

  

Total short-term borrowed funds

  

$

5,396,959

  

$

6,649,100

    

  

 

Federal funds purchased represent unsecured borrowings from other banks and generally mature daily. Securities sold under agreements to repurchase are borrowings collateralized by securities of the U.S. government or its agencies and have maturities ranging from one to ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon demand to the U.S. Treasury. Master notes are unsecured, non-negotiable obligations of BB&T Corporation (variable rate commercial paper) that mature in less than one year. Short-term Federal Home Loan Bank advances generally mature daily. Short-term bank notes are unsecured borrowings issued by the Banking Subsidiaries that mature in less than one year.

 

A summary of selected data related to short-term borrowed funds follows:

 

      

As of / For the Year Ended December 31,


 
      

2002


      

2001


      

2000


 
      

(Dollars in thousands)

 

 

Maximum outstanding at any month-end

    

$

7,111,433

 

    

$

7,399,378

 

    

$

8,822,265

 

Balance outstanding at end of year

    

 

5,396,959

 

    

 

6,649,100

 

    

 

7,309,978

 

Average outstanding during the year

    

 

5,393,479

 

    

 

6,264,100

 

    

 

6,910,849

 

Average interest rate during the year

    

 

1.78

%

    

 

3.80

%

    

 

5.95

%

Average interest rate at end of year

    

 

1.30

 

    

 

3.67

 

    

 

6.07

 

 

79


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 10.    Long-Term Debt

 

Long-term debt is summarized as follows:

 

    

December 31,


    

2002


  

2001


    

(Dollars in thousands)

Advances from Federal Home Loan Bank to Subsidiary Banks, varying maturities to 2019 with rates from .99% to 8.50%, callable at various dates beginning in 2003 subject to a premium

  

$

9,578,317

  

$

9,292,986

Medium-term bank notes issued by Branch Bank, unsecured, matured in 2002 with variable rates from 1.85% to 2.111%

  

 

—  

  

 

767,000

Subordinated Notes2 issued by Branch Bank, unsecured, dated December 23, 2002, maturing January 15, 2013 with an interest rate of 4.875%

  

 

250,000

  

 

—  

Borrowings by Branch Bank, secured primarily by automobile loans, maturing August 15, 2007 with interest at variable rates based on LIBOR

  

 

1,500,000

  

 

—  

Subordinated Notes2 issued by BB&T, unsecured, dated May 21, 1996, June 3, 1997, June 30,19981, July 25, 2001 and September 24, 2002; maturing May 23, 2003, June 15, 2007, June 30, 2025, July 25, 2011 and October 1, 2012 with interest rates of 7.05%,7.25%, 6.375%, 6.50% and 4.75%, respectively

  

 

2,094,442

  

 

1,499,360

Corporation-obligated mandatorily redeemable capital securities3, dated July 16, 1997, maturing June 15, 2027, with interest at 10.07%; November 19, 1997, maturing December 1, 2027, with interest at 8.90%; November 13, 1997, maturing December 31, 2027, with interest at 9.00%; April 22, 1998, maturing June 30, 2028, with interest at 8.40%; and July 13, 1998, maturing July 31, 2028, with interest at 8.25%

  

 

155,000

  

 

155,000

Capitalized leases, varying maturities to 2028 with fixed rates from 4.75% to 12.65%, represents the unamortized amounts due on leases of various facilities

  

 

1,804

  

 

2,000

Other mortgage indebtedness

  

 

8,278

  

 

4,730

    

  

Total long-term debt

  

$

13,587,841

  

$

11,721,076

    

  

 

Excluding the capitalized leases set forth in Note 6; future debt maturities are $296.2 million, $72.9 million, $175.9 million, $123.4 million and $2.3 billion for the next five years. The maturities for 2008 and later years total $10.6 billion.

 

(1)   The $350 million in subordinated debt, issued June 30, 1998, is mandatorily puttable to BB&T on June 30, 2005, and contains a remarketing option that allows the debt to be reissued by the holder of the option to the stated maturity of June 30, 2025.
(2)   Subordinated notes qualify under the risk-based capital guidelines as Tier 2 supplementary capital.
(3)   Securities qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.

 

 

80


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Mandatorily Redeemable Capital Securities

 

In July, 1997, Mason-Dixon Capital Trust (“MDCT”) issued $20 million of 10.07% Preferred Securities. MDCT, a statutory business trust created under the laws of the State of Delaware, was formed by Mason-Dixon Bancshares, Inc., (“Mason-Dixon”) for the sole purpose of issuing the Preferred Securities and investing the proceeds thereof in 10.07% Junior Subordinated Debentures issued by Mason-Dixon. Mason Dixon, which merged into BB&T on July 14, 1999, entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of MDCT’s obligations under the Preferred Securities. MDCT’s sole asset is the Junior Subordinated Debentures issued by Mason-Dixon and assumed by BB&T, which mature June 15, 2027, but are subject to early mandatory redemption in whole under certain limited circumstances and are callable in whole or part anytime after June 15, 2007. The Preferred Securities of MDCT, are subject to mandatory redemption in whole on June 15, 2027, or such earlier date in the event the Junior Subordinated Debentures are redeemed by BB&T pursuant to one of the prescribed limited circumstances or pursuant to the call provisions.

 

In November, 1997, MainStreet Capital Trust I (“MSCT I”) issued $50 million of 8.90% Trust Securities. MSCT I, a statutory business trust created under the laws of the State of Delaware, was formed by MainStreet Financial Corporation, (“MainStreet”) for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 8.90% Junior Subordinated Debentures issued by MainStreet. MainStreet, which merged into BB&T on March 5, 1999, entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of MSCT I’s obligations under the Trust Securities. MSCT I’s sole asset is the Junior Subordinated Debentures issued by MainStreet and assumed by BB&T, which mature December 1, 2027, but are subject to early mandatory redemption in whole under certain limited circumstances and are callable in whole or part anytime after December 1, 2007. The Trust Securities of MSCT I, are subject to mandatory redemption in whole on December 1, 2027, or such earlier date in the event the Junior Subordinated Debentures are redeemed by BB&T pursuant to one of the prescribed limited circumstances or pursuant to the call provisions. One Valley Bancorp, Inc., which merged into BB&T Corporation on July 6, 2000 and a subsidiary of Mason-Dixon Bancshares, Inc, which merged into BB&T on July 14, 1999, each owned $2 million of the Trust Securities issued by MSCT I. As a result of these mergers, the outstanding balance of the MSCT I Trust Securities included in the consolidated balance sheets was $46 million.

 

In November, 1997, Premier Capital Trust I (“PCT I”) issued $28.75 million of 9.00% Preferred Securities. PCT I, a statutory business trust created under the laws of the State of Delaware, was formed by Premier Bancshares, Inc., (“Premier”) for the purpose of issuing the Preferred Securities and investing the proceeds thereof in 9.00% Junior Subordinated Debentures issued by Premier. Premier, which merged into BB&T on January 13, 2000, entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of PCT I’s obligations under the Preferred Securities. PCT I’s sole asset is the Junior Subordinated Debentures issued by Premier and assumed by BB&T, which mature December 31, 2027, but are subject to early mandatory redemption in whole under certain limited circumstances and are callable in whole or part anytime after December 31, 2007. The Preferred Securities of PCT I, are subject to mandatory redemption in whole on December 31, 2027, or such earlier date in the event the Junior Subordinated Debentures are redeemed by BB&T pursuant to one of the prescribed limited circumstances or pursuant to the call provisions.

 

In April, 1998, Mason-Dixon Capital Trust II (“MDCT II”) issued $20 million of 8.40% Preferred Securities. MDCT II, a Delaware statutory business trust, was formed by Mason-Dixon Bancshares, Inc., (“Mason-Dixon”) for the sole purpose of issuing the Preferred Securities and investing the proceeds thereof in 8.40% Junior Subordinated Debentures issued by Mason-Dixon. Mason Dixon, which merged into BB&T on July 14, 1999, entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of MDCT II’s obligations under the Preferred Securities. MDCT II’s sole asset is the Junior Subordinated Debentures issued by Mason-Dixon and assumed by BB&T, which mature June 30, 2028, but are subject to early mandatory redemption in whole under certain limited circumstances and are callable in whole

 

81


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

or part anytime after June 30, 2003. The Preferred Securities of MDCT II, are subject to mandatory redemption in whole on June 30, 2028, or such earlier date in the event the Junior Subordinated Debentures are redeemed by BB&T pursuant to one of the prescribed limited circumstances or pursuant to the call provisions.

 

In July, 1998, FCNB Capital Trust (“FCNBCT”) issued $40.25 million of 8.25% Trust Preferred Securities. FCNBCT, a statutory business trust created under the laws of the State of Delaware, was formed by FCNB Corp, (“FCNB”) for the purpose of issuing the Trust Preferred Securities and investing the proceeds thereof in 8.25% Subordinated Debentures issued by FCNB. FCNB, which merged into BB&T on January 7, 2001, entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of FCNBCT’s obligations under the Trust Preferred Securities. FCNBCT’s sole asset is the Subordinated Debentures issued by FCNB and assumed by BB&T, which mature July 31, 2028, but are subject to early mandatory redemption in whole under certain limited circumstances and are callable in whole or part anytime after July 31, 2003. The Trust Preferred Securities of FCNBCT, are subject to mandatory redemption in whole on July 31, 2028, or such earlier date in the event the Subordinated Debentures are redeemed by BB&T pursuant to one of the prescribed limited circumstances or pursuant to the call provisions.

 

As a result of the mergers with MainStreet Financial Corporation, Mason-Dixon Bancshares, Inc., Premier Bancshares, Inc. and FCNB Corp, BB&T is the sole owner of the common stock of the above statutory Delaware business trusts and has assumed agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of the trusts’ obligations under the Trust and Preferred Securities. The proceeds from the issuance of these securities qualify as Tier I capital under the risk-based capital guidelines established by the Federal Reserve.

 

NOTE 11.    Shareholders’ Equity

 

The authorized capital stock of BB&T consists of 1,000,000,000 shares of common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At December 31, 2002, 470,452,260 shares of common stock and no shares of preferred stock were issued and outstanding.

 

Stock Option Plans

 

At December 31, 2002, BB&T had the following stock-based compensation plans: the 1994 and 1995 Omnibus Stock Incentive Plans (“Omnibus Plans”), the Incentive Stock Option Plan (“ISOP”), the Non-Qualified Stock Option Plan (“NQSOP”) and the Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”), which are described below.

 

BB&T issues options to purchase shares of its common stock in exchange for options outstanding at acquired entities at the time the merger is completed. To the extent vested, the options are considered to be part of the purchase price paid. There is no change in the aggregate intrinsic value of the options issued compared to the intrinsic value of the options held immediately before the exchange, nor does the ratio of the exercise price per option to the market value per share change.

 

The shareholders have previously approved the Omnibus Plans which cover the award of incentive stock options, non-qualified stock options, shares of restricted stock, performance shares and stock appreciation rights.

 

The provisions of the 1995 Omnibus Plan also provide for an automatic increase in the authorized number of shares issuable, equal to 3% of any increase in the Corporation’s outstanding common shares. Including options authorized under these provisions and various shareholder amendments to the plan, the maximum number of shares issuable under the 1995 Omnibus Plan was 37.6 million at December 31, 2002. The combined shares issuable under both Omnibus Plans is 45.6 million at December 31, 2002. The Omnibus Plans are intended to allow BB&T to recruit and retain employees with ability and initiative and to associate the employees’ interests with

 

82


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

those of BB&T and its shareholders. At December 31, 2002, 13.9 million qualified stock options at prices ranging from $6.86 to $51.41 and 7.7 million non-qualified stock options at prices ranging from no cost to $53.10 were outstanding. The stock options generally vest over 3 years and have a 10-year term.

 

The ISOP and the NQSOP were established to retain key officers and key management employees and to offer them the incentive to use their best efforts on behalf of BB&T. The plans further provided for up to 2.2 million shares of common stock to be reserved for the granting of options, which have a four year vesting schedule and must be exercised within ten years from the date granted. These plans expired on December 19, 2000; however, any options previously granted under the plans will be available to be exercised for ten years. No additional grants will be made pursuant to these plans. Incentive stock options granted had an exercise price equal to at least 100% of the fair market value of common stock on the date granted, and the non-qualified stock options were required to have an exercise price equal to at least 85% of the fair market value on the date granted. At December 31, 2002, options to purchase 28,554 shares of common stock at an exercise price of $9.1875 were outstanding pursuant to the NQSOP. At December 31, 2002, options to purchase 51,098 shares of common stock at an exercise price of $9.8885 were outstanding pursuant to the ISOP.

 

The Directors’ Stock Option Plan is intended to provide incentives to non-employee directors to remain on the Board of Directors and share in the profitability of BB&T. The plan creates a deferred compensation system for participating non-employee directors. Each non-employee director may elect to defer 0%, 50% or 100% of the annual retainer fee for each calendar year and apply that percentage toward the grant of options to purchase BB&T common stock. Such elections are required to be in writing and are irrevocable for each calendar year. The exercise price at which shares of BB&T common stock may be purchased shall be equal to 75% of the market value of the common stock as of the date of grant. Options are vested after six months and may be exercised anytime thereafter until the expiration date, which is ten years from the date of grant. The Directors’ Plan provides for the reservation of up to 1.8 million shares of BB&T common stock. At December 31, 2002, options to purchase 895,116 shares of common stock at prices ranging from $6.9156 to $28.8719 were outstanding pursuant to the Directors’ Plan.

 

BB&T also has options outstanding that were granted by certain acquired companies. These options, which have not been included in the plans described above, totaled 77,094 as of December 31, 2002, with option prices ranging from $8.083 to $10.53.

 

A summary of the status of the Company’s stock option plans at December 31, 2002, 2001 and 2000 and changes during the years then ended is presented below:

 

    

2002


  

2001


  

2000


    

Shares


    

Wtd. Avg. Exercise Price


  

Shares


    

Wtd. Avg. Exercise Price


  

Shares


    

Wtd. Avg. Exercise Price


Outstanding at beginning of year

  

20,679,803

 

  

$

24.75

  

18,683,370

 

  

$

20.80

  

16,505,624

 

  

$

19.33

Issued in purchase transactions

  

1,103,089

 

  

 

24.55

  

1,374,493

 

  

 

24.75

  

645,342

 

  

 

13.95

Granted

  

4,732,504

 

  

 

36.71

  

4,196,006

 

  

 

36.10

  

4,753,707

 

  

 

23.79

Exercised

  

(3,408,760

)

  

 

18.31

  

(3,160,288

)

  

 

14.90

  

(2,689,869

)

  

 

12.49

Forfeited or Expired

  

(428,258

)

  

 

34.92

  

(413,778

)

  

 

34.31

  

(531,434

)

  

 

34.25

    

  

  

  

  

  

Outstanding at end of year

  

22,678,378

 

  

$

28.00

  

20,679,803

 

  

$

24.75

  

18,683,370

 

  

$

20.80

    

  

  

  

  

  

Options exercisable at year-end

  

14,518,667

 

  

$

24.24

  

15,005,927

 

  

$

21.87

  

14,303,728

 

  

$

18.92

    

  

  

  

  

  

 

83


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The weighted average fair value of options granted was $9.07, $10.00 and $7.78 per option for the years ended December 31, 2002, 2001 and 2000, respectively.

 

The following table summarizes information about the options outstanding at December 31, 2002:

 

              

Options Outstanding


  

Options Exercisable


Range of

Exercise Prices


    

Number Outstanding 12/31/02


    

Weighted-Average Remaining Contractual Life


      

Weighted-Average Exercise Price


  

Number Exercisable 12/31/02


    

Weighted-Average Exercise Price


$   —  

 

to

 

$   4.75

    

7,872

    

3.9

 yrs

    

$

0.81

  

7,872

    

$

0.81

4.76

 

to

 

7.25

    

117,995

    

1.6

 

    

 

6.33

  

117,995

    

 

6.33

7.26

 

to

 

10.75

    

1,377,343

    

1.7

 

    

 

9.34

  

1,377,343

    

 

9.34

10.76

 

to

 

16.00

    

2,468,728

    

3.0

 

    

 

12.97

  

2,468,728

    

 

12.97

16.01

 

to

 

24.00

    

5,385,337

    

5.9

 

    

 

22.51

  

4,148,144

    

 

22.08

24.01

 

to

 

36.00

    

3,240,460

    

6.0

 

    

 

30.02

  

3,138,132

    

 

30.10

36.01

 

to

 

56.98

    

10,080,643

    

8.2

 

    

 

36.78

  

3,260,453

    

 

36.85

              
    

    

  
    

              

22,678,378

    

6.4

 yrs

    

$

28.00

  

14,518,667

    

$

24.24

              
    

    

  
    

 

Share Repurchase Activity

 

BB&T has periodically repurchased shares of its own common stock. Prior to the adoption of SFAS No. 141, principally all repurchased shares were reissued in business combinations accounted for as purchases. During the years ended December 31, 2002, 2001 and 2000, BB&T repurchased 21.8 million shares, 14.0 million shares and 7.1 million shares of common stock, respectively. In accordance with North Carolina law, repurchased shares cannot be held as treasury stock, but revert to the status of authorized and unissued shares upon repurchase.

 

Shareholder Rights Plan

 

On January 17, 1997, pursuant to the Rights Agreement approved by the Board of Directors, BB&T distributed to shareholders one preferred stock purchase right for each share of BB&T’s common stock then outstanding. Subsequent to this date, all shares issued are accompanied by a stock purchase right. Initially, the rights, which expire in 10 years, are not exercisable and are not transferable apart from the common stock. The rights will become exercisable only if a person or group acquires 20% or more of BB&T’s common stock, or BB&T’s Board of Directors determines, pursuant to the terms of the Rights Agreement, that any person or group that has acquired 10% or more of BB&T’s common stock is an “Adverse Person.” Each right would then enable the holder to purchase 1/100th of a share of a new series of BB&T preferred stock at an initial exercise price of $145.00. The Board of Directors will be entitled to redeem the rights at $.01 per right under certain circumstances specified in the Rights Agreement.

 

Under the terms of the Rights Agreement, if any person or group becomes the beneficial owner of 25% or more of BB&T’s common stock, with certain exceptions, or if the Board of Directors determines that any 10% or more stockholder is an “Adverse Person,” each right will entitle its holder (other than the person triggering exercisability of the rights) to purchase, at the right’s then-current exercise price, shares of BB&T’s common stock having a value of twice the right’s exercise price. In addition, if after any person or group has become a 20% or more stockholder, BB&T is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right’s then-current exercise price, shares of common stock of such other person having a value of twice the right’s exercise price.

 

84


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 12.    Income Taxes

 

The provision for income taxes was composed of the following:

 

    

Years Ended December 31,


    

2002


  

2001


  

2000


    

(Dollars in thousands)

Current expense:

                    

Federal

  

$

192,843

  

$

185,455

  

$

124,378

State

  

 

13,814

  

 

11,805

  

 

12,635

Foreign

  

 

38,699

  

 

—  

  

 

—  

    

  

  

Total current income tax expense

  

 

245,356

  

 

197,260

  

 

137,013

Deferred income tax expense

  

 

252,112

  

 

189,530

  

 

177,505

    

  

  

Provision for income taxes

  

$

497,468

  

$

386,790

  

$

314,518

    

  

  

 

The income tax provisions in the above table do not include the effects of income tax deductions resulting from exercises of stock options, which amounted to $16.4 million, $19.6 million and $6.2 million in 2002, 2001 and 2000, respectively and were recorded as increases in shareholders' equity. The foreign income tax expense included in the 2002 provision for income taxes is related to income generated on assets controlled by a foreign subsidiary of Branch Bank.

 

The reasons for the difference between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:

 

    

Years Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Federal income taxes at statutory rate of 35%

  

$

626,744

 

  

$

476,150

 

  

$

354,204

 

Increase (decrease) in provision for income taxes as a result of:

                          

Tax-exempt income from securities, loans and leases, net of related non-deductible interest expense

  

 

(53,585

)

  

 

(82,696

)

  

 

(56,724

)

Tax-exempt life insurance income

  

 

(31,696

)

  

 

(22,736

)

  

 

(14,404

)

Basis difference in subsidiary stock

  

 

(34,751

)

  

 

—  

 

  

 

—  

 

Amortization of goodwill

  

 

—  

 

  

 

19,672

 

  

 

16,642

 

State income taxes, net of Federal tax benefit

  

 

13,859

 

  

 

12,416

 

  

 

9,482

 

Other, net

  

 

(23,103

)

  

 

(16,016

)

  

 

5,318

 

    


  


  


Provision for income taxes

  

$

497,468

 

  

$

386,790

 

  

$

314,518

 

    


  


  


Effective income tax rate

  

 

27.8

%

  

 

28.4

%

  

 

31.0

%

    


  


  


 

During the last three years, BB&T entered into option contracts which legally transferred responsibility for the management of future residuals of certain leveraged lease investments including the future remarketing or re-leasing of these assets to a wholly-owned subsidiary in a foreign jurisdiction having a lower income tax rate, thereby lowering the effective income tax rate applicable to these lease investments. These option contracts provide that the foreign subsidiary may purchase the lease investments at expiration of the existing leveraged leases for a fixed price. As a result, a portion of the residual value included in the consolidated leverage lease analysis should be taxed at a lower tax rate than originally anticipated, resulting in a change in the total net income from the lease. The net income from the affected leases was recalculated from inception based on the new

 

85


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

effective income tax rate. The recalculation had the effect of reducing net interest income for the years ended December 31, 2002, 2001 and 2000, by $9.7 million, $40.6 million and $14.3 million, respectively, and reducing the income tax provisions for the last three years by $20.2 million, $56.6 million and $19.8 million, respectively. BB&T intends to permanently reinvest the earnings of this subsidiary and, therefore, deferred income taxes associated with the foreign subsidiary arising from these transactions have not been provided.

 

During 2001, Branch Bank transferred certain securities and real estate secured loans to a subsidiary in exchange for additional common equity in the subsidiary. The transaction resulted in a difference between Branch Bank’s tax basis in the equity investment in the subsidiary and the assets transferred to the subsidiary. This difference in basis resulted in a net reduction in the provision for income taxes of $34.8 million for the year ended December 31, 2002.

 

The tax effects of temporary differences that gave rise to significant portions of the net deferred tax assets (liabilities) included in other liabilities in the "Consolidated Balance Sheets" were:

 

    

December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Deferred tax assets:

                 

Allowance for loan and lease losses

  

$

269,762

 

  

$

242,126

 

Deferred compensation

  

 

71,149

 

  

 

51,754

 

Other

  

 

117,945

 

  

 

87,835

 

    


  


Total tax deferred assets

  

 

458,856

 

  

 

381,715

 

    


  


Deferred tax liabilities:

                 

Net unrealized appreciation on securities available for sale

  

 

(207,046

)

  

 

(188,622

)

Lease financing

  

 

(788,220

)

  

 

(615,218

)

Mortgage servicing rights

  

 

(35,195

)

  

 

(64,649

)

Other

  

 

(178,428

)

  

 

(86,292

)

    


  


Total tax deferred liabilities

  

 

(1,208,889

)

  

 

(954,781

)

    


  


Net deferred tax asset (liability)

  

$

(750,033

)

  

$

(573,066

)

    


  


 

Securities transactions resulted in income tax expense (benefits) of $65.3 million, $46.5 million and ($76.8 million) related to securities gains (losses) for the years ended December 31, 2002, 2001 and 2000, respectively.

 

The Internal Revenue Service (“IRS”) is conducting an examination of BB&T’s Federal income tax returns for the years ended December 31, 1996, 1997 and 1998. In connection with this examination the IRS has issued Notices of Proposed Adjustment with respect to BB&T’s income tax treatment of certain leveraged lease investments that were entered into during the years under examination. Management believes that BB&T’s treatment of these leveraged leases was appropriate and in compliance with existing tax laws and regulations, and intends to vigorously defend this position. In addition, inasmuch as the proposed adjustments relate primarily to the timing of taxable revenue recognition and amortization expense, deferred taxes have been provided. Management does not expect that BB&T’s consolidated financial position or consolidated results of operations will be materially adversely affected as a result of the IRS examination.

 

86


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 13.    Benefit Plans

 

BB&T provides various benefit plans to all employees, including employees of acquired entities. Employees of acquired entities generally participate in existing BB&T plans upon consummation of the business combinations. The plans of acquired institutions are typically merged into the BB&T plans upon consummation of the mergers, and, under these circumstances, credit is usually given to these employees for years of service at the acquired institution for vesting and eligibility purposes.

 

The following table summarizes expenses relating to employee retirement plans.

 

    

For the Years Ended December 31,


    

2002


  

2001


    

2000


    

(Dollars in thousands)

Defined benefit plans

  

$

36,486

  

$

19,847

 

  

$

13,176

Defined contribution and ESOP plans

  

 

37,743

  

 

31,508

 

  

 

23,824

Postretirement benefit plans

  

 

7,463

  

 

8,635

 

  

 

7,200

Other

  

 

4,168

  

 

(280

)

  

 

1,938

    

  


  

Total expense related to benefit plans

  

$

85,860

  

$

59,710

 

  

$

46,138

    

  


  

 

Defined Benefit Retirement Plans

 

BB&T provides a defined benefit retirement plan qualified under the Internal Revenue Code that covers substantially all employees. Benefits are based on years of service, age at retirement and the employee’s compensation during the five highest consecutive years of earnings within the last ten years of employment. BB&T’s contributions to the plan are in amounts between the minimum required for funding standard accounts and the maximum deductible for federal income tax purposes.

 

In addition, supplemental retirement benefits are provided to certain key officers under supplemental defined benefit executive retirement plans, which are not qualified under the Internal Revenue Code. Although technically unfunded plans, insurance policies on the lives of the covered employees partially fund future benefits.

 

Financial data relative to the defined benefit pension plans is summarized in the following tables for the years indicated:

 

    

For the Years Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Net Periodic Pension Cost


                          

Service cost

  

$

34,509

 

  

$

24,619

 

  

$

19,391

 

Interest cost

  

 

36,567

 

  

 

30,713

 

  

 

28,176

 

Estimated return on plan assets

  

 

(35,416

)

  

 

(31,612

)

  

 

(31,728

)

Net amortization and other

  

 

826

 

  

 

(3,873

)

  

 

(2,663

)

    


  


  


Net periodic pension cost

  

$

36,486

 

  

$

19,847

 

  

$

13,176

 

    


  


  


 

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BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

    

Qualified
Pension Plans


    

Nonqualified Pension Plans


 
    

Years Ended December 31,


    

Years Ended December 31,


 
    

2002


    

2001


    

2002


    

2001


 
    

(Dollars in thousands)

 

Change in Projected Benefit Obligation


                                   

Projected benefit obligation, January 1,

  

$

425,601

 

  

$

362,888

 

  

$

49,511

 

  

$

40,395

 

Service cost

  

 

32,391

 

  

 

22,790

 

  

 

2,117

 

  

 

1,829

 

Interest cost

  

 

32,778

 

  

 

27,310

 

  

 

3,789

 

  

 

3,403

 

Actuarial (gain) loss

  

 

16,359

 

  

 

26,343

 

  

 

1,051

 

  

 

6,056

 

Benefits paid

  

 

(23,962

)

  

 

(15,881

)

  

 

(1,027

)

  

 

(802

)

Change in plan provisions

  

 

(7,909

)

  

 

2,151

 

  

 

(1,602

)

  

 

(1,370

)

Plans of acquired entities

  

 

33,722

 

  

 

—  

 

  

 

2,651

 

  

 

—  

 

    


  


  


  


Projected benefit obligation, December 31,

  

$

508,980

 

  

$

425,601

 

  

$

56,490

 

  

$

49,511

 

    


  


  


  


    

Years Ended December 31,


    

Years Ended December 31,


 
    

2002


    

2001


    

2002


    

2001


 
    

(Dollars in thousands)

 

Change in Plan Assets


                                   

Fair value of plan assets, January 1,

  

$

379,881

 

  

$

403,211

 

  

$

—  

 

  

$

—  

 

Actual return on plan assets

  

 

(44,776

)

  

 

(19,790

)

  

 

—  

 

  

 

—  

 

Employer contributions

  

 

132,661

 

  

 

12,341

 

  

 

1,027

 

  

 

802

 

Benefits paid

  

 

(23,962

)

  

 

(15,881

)

  

 

(1,027

)

  

 

(802

)

Plans of acquired entities

  

 

27,459

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

    


  


  


  


Fair value of plan assets, December 31,

  

$

471,263

 

  

$

379,881

 

  

$

—  

 

  

$

—  

 

    


  


  


  


    

Years Ended December 31,


    

Years Ended December 31,


 
    

2002


    

2001


    

2002


    

2001


 
    

(Dollars in thousands)

 

Net Amount Recognized


                                   

Funded status

  

$

(37,717

)

  

$

(45,720

)

  

$

(56,490

)

  

$

(49,511

)

Unrecognized transition (asset) obligation

  

 

(1,445

)

  

 

(2,891

)

  

 

152

 

  

 

245

 

Unrecognized prior service cost

  

 

(31,526

)

  

 

(27,809

)

  

 

(1,216

)

  

 

394

 

Unrecognized net loss (gain)

  

 

179,533

 

  

 

87,994

 

  

 

11,893

 

  

 

12,195

 

    


  


  


  


Net amount recognized

  

$

108,845

 

  

$

11,574

 

  

$

(45,661

)

  

$

(36,677

)

    


  


  


  


    

Years Ended December 31,


    

Years Ended December 31,


 
    

2002


    

2001


    

2002


    

2001


 
    

(Dollars in thousands)

 

Reconciliation of Net Pension Asset (Liability)


                                   

Prepaid pension cost, January 1,

  

$

11,574

 

  

$

11,968

 

  

$

(36,677

)

  

$

(30,368

)

Contributions

  

 

132,661

 

  

 

12,341

 

  

 

1,027

 

  

 

802

 

Net periodic pension cost

  

 

(29,126

)

  

 

(12,735

)

  

 

(7,360

)

  

 

(7,111

)

Purchase accounting recognition

  

 

(6,264

)

  

 

—  

 

  

 

(2,651

)

  

 

—  

 

    


  


  


  


Prepaid (accrued) pension cost, December 31,

  

$

108,845

 

  

$

11,574

 

  

$

(45,661

)

  

$

(36,677

)

    


  


  


  


 

88


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    

December 31,


 

Weighted Average Assumptions


  

2002


    

2001


 

Weighted average assumed discount rate

  

6.75

%

  

7.25

%

Weighted average expected long-term rate of return on plan assets

  

8.00

 

  

8.00

 

Assumed rate of annual compensation increases

  

4.00

 

  

5.50

 

 

Pension plan assets consist primarily of investments in mutual funds consisting of equity investments, corporate bonds, obligations of the U.S. Treasury and U.S. government agencies. Plan assets included $31.8 million and $28.3 million of BB&T common stock at December 31, 2002 and 2001, respectively.

 

Postretirement Benefits Other than Pension

 

BB&T provides certain postretirement benefits that cover employees retiring after December 31, 1995, who are eligible for participation in the BB&T pension plan and have at least ten years of service. The plan requires retiree contributions, with a subsidy by BB&T based upon years of service of the employee at the time of retirement. The subsidy may be reviewed for adjustment. The plan provides health care and life insurance benefits to retirees or their dependents.

 

The following tables set forth the components of the retiree benefit plan and the amounts recognized in the consolidated financial statements at December 31, 2002, 2001 and 2000.

 

    

For the Years Ended December 31,


    

2002


  

2001


  

2000


    

(Dollars in thousands)

Net Periodic Postretirement Benefit Cost:


                    

Service cost

  

$

2,482

  

$

2,885

  

$

2,141

Interest cost

  

 

4,530

  

 

5,001

  

 

4,426

Amortization and other

  

 

451

  

 

749

  

 

633

    

  

  

Total expense

  

$

7,463

  

$

8,635

  

$

7,200

    

  

  

 

    

Years Ended December 31,


 
    

2002


      

2001


 
    

(Dollars in thousands)

 

Change in Projected Benefit Obligation


                   

Projected benefit obligation, January 1,

  

$

73,239

 

    

$

65,492

 

Service cost

  

 

2,482

 

    

 

2,885

 

Interest cost

  

 

4,530

 

    

 

5,001

 

Plan participants’ contributions

  

 

1,787

 

    

 

1,033

 

Actuarial loss (gain)

  

 

(4,424

)

    

 

3,015

 

Benefits paid

  

 

(3,700

)

    

 

(4,187

)

    


    


Projected benefit obligation, December 31,

  

$

73,914

 

    

$

73,239

 

    


    


 

89


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    

Years Ended December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Change in Plan Assets


                 

Fair value of plan assets, January 1,

  

$

—  

 

  

$

—  

 

Actual return on plan assets

  

 

—  

 

  

 

—  

 

Employer contributions

  

 

1,913

 

  

 

3,154

 

Plan participants’ contributions

  

 

1,787

 

  

 

1,033

 

Benefits paid

  

 

(3,700

)

  

 

(4,187

)

    


  


Fair value of plan assets, December 31,

  

$

—  

 

  

$

—  

 

    


  


    

Years Ended December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Net Amount Recognized


                 

Funded status

  

$

(73,914

)

  

$

(73,239

)

Unrecognized prior service cost

  

 

4,285

 

  

 

4,816

 

Unrecognized net actuarial (gain) loss

  

 

(5,455

)

  

 

(1,330

)

Unrecognized transition obligation

  

 

2,185

 

  

 

2,404

 

    


  


Net amount recognized

  

$

(72,899

)

  

$

(67,349

)

    


  


    

Years Ended December 31,


 
    

2002


    

2001


 
    

(Dollars in thousands)

 

Reconciliation of Postretirement Benefit


                 

Prepaid (accrued) postretirement benefit, January 1,

  

$

(67,349

)

  

$

(61,868

)

Contributions

  

 

1,913

 

  

 

3,154

 

Net periodic postretirement benefit cost

  

 

(7,463

)

  

 

(8,635

)

    


  


Prepaid (accrued) postretirement benefit cost, December 31,

  

$

(72,899

)

  

$

(67,349

)

    


  


                   
    

December 31,


 
    

2002


    

2001


 

Weighted Average Assumptions


                 

Weighted average assumed discount rate

  

 

6.75

%

  

 

7.25

%

Medical trend rate—initial year

  

 

5.00

 

  

 

6.00

 

Medical trend rate—ultimate

  

 

5.00

 

  

 

5.00

 

Select period

  

 

N/A

 

  

 

1yr

 

    

December 31, 2002


 
    

1% Increase


    

1% Decrease


 

Impact of a 1% change in assumed health care cost on:

                 

Service and interest costs

  

 

1.9

%

  

 

(1.8

) %

Accumulated postretirement benefit obligation

  

 

1.8

 

  

 

(1.6

)

 

N/A- not applicable

 

90


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

401(k) Savings Plan

 

BB&T offers a 401(k) Savings Plan that permits employees with more than 90 days service to contribute from 1% to 25% of their compensation. For full-time employees who are 21 years of age or older with one year or more of service, BB&T makes matching contributions of up to 6% of the employee’s compensation. BB&T’s contribution to the 401(k) Savings Plan totaled $37.0 million, $31.2 million and $20.6 million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Other

 

There are various other employment contracts, deferred compensation arrangements and covenants not to compete with selected members of management and certain retirees.

 

Note 14.    Commitments and Contingencies

 

BB&T utilizes a variety of financial instruments to meet the financing needs of clients and to reduce exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, options written, standby letters of credit and financial guarantees, interest rate caps and floors written, interest rate swaps and forward and futures contracts. The following table presents the contractual or notional amount of these instruments:

 

    

Contract or

Notional Amount at

December 31,


    

2002


  

2001


    

(Dollars in thousands)

Financial instruments whose contract amounts represent credit risk:

             

Commitments to extend, originate or purchase credit

  

$

16,818,698

  

$

18,533,864

Standby letters of credit and financial guarantees written

  

 

1,156,516

  

 

874,829

Commercial letters of credit

  

 

36,742

  

 

37,091

Financial instruments whose notional or contract amounts exceed the amount of credit risk:

             

Derivative financial instruments

  

 

11,697,739

  

 

5,654,502

Commitments to fund low income housing investments

  

 

168,879

  

 

169,249

Mortgage loans sold with recourse

  

 

1,054,945

  

 

1,760,109

 

Standby letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. As of December 31, 2002, BB&T had issued $1.2 billion in such guarantees predominantly for terms of one year or less. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions. The credit risk involved in issuance of these guarantees is essentially the same as that involved in extending loan facilities to customers and as such, are collateralized when necessary.

 

In the ordinary course of business, BB&T enters into indemnification agreements for legal proceedings against its directors and officers and those of acquired entities. BB&T also issues standard representation warranties in underwriting agreements, merger and acquisition agreements, loan sales (See Note 8), brokerage activities and other similar arrangements. Counterparties in many of these indemnifications provide similar indemnifications to BB&T. Although these agreements often do not specify limitations, BB&T has not been required to act on the guarantees and does not believe that any payments pursuant to them would materially change the financial condition or results of operations as presented herein.

 

Merger and acquisition agreements of businesses other than financial institutions occasionally include additional incentives to the acquired entities to offset the loss of future cash flows previously received through

 

91


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

ownership positions. Typically, these incentives are based on the acquired entity’s contribution to BB&T’s earnings compared to agreed-upon amounts. When offered, these incentives are issued for terms of three to eight years. In the aggregate, the maximum potential contingent consideration included in these agreements is $14.2 million over the next five years.

 

Forward commitments to sell mortgage loans and mortgage-backed securities are contracts for delayed delivery of securities in which BB&T agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities’ values and interest rates.

 

BB&T invests in certain low income housing and historic building rehabilitation projects throughout its market area as a means of supporting local communities, and receives tax credits related to these investments. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. BB&T’s subsidiary banks typically provide financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project. BB&T’s outstanding commitments to fund low income housing investments totaled $168.9 million and $169.2 million at December 31, 2002 and 2001, respectively.

 

Legal Proceedings

 

The nature of the business of BB&T’s banking and other subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of BB&T are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities, if any, arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of BB&T.

 

NOTE 15.    Regulatory Requirements and Other Restrictions

 

BB&T’s subsidiary banks are required by the Board of Governors of the Federal Reserve System to maintain reserve balances in the form of vault cash or deposits with the Federal Reserve Bank based on specified percentages of certain deposit types, subject to various adjustments. At December 31, 2002, the net reserve requirement amounted to $508.2 million.

 

BB&T’s subsidiary banks are prohibited from paying dividends from their capital stock and additional paid-in capital accounts and are required by regulatory authorities to maintain minimum capital levels. Subject to restrictions imposed by state laws and federal regulations, the Boards of Directors of the subsidiary banks could have declared dividends to the parent company from their retained earnings up to $2.8 billion at December 31, 2002.

 

BB&T is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on BB&T’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of BB&T’s assets, liabilities and certain off-balance-sheet items calculated pursuant to regulatory directives. BB&T’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. BB&T is in full compliance with these requirements. Banking regulations also identify five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. BB&T and each of the Subsidiary Banks are classified as “well-capitalized”.

 

92


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Quantitative measures established by regulation to ensure capital adequacy require BB&T to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average tangible assets.

 

The following table provides summary information regarding regulatory capital for BB&T and its significant banking subsidiaries as of December 31, 2002 and 2001:

 

 

 

    

December 31, 2002


  

December 31, 2001


    

Actual Capital


  

Minimum Capital Requirement


  

Actual Capital


  

Minimum Capital Requirement


    

Ratio


    

Amount


     

Ratio


    

Amount


  
    

(Dollars in thousands)

Tier 1 Capital

                                         

BB&T

  

9.2

%

  

$

5,290,310

  

$

2,308,052

  

9.8

%

  

$

5,002,896

  

$

2,038,663

Branch Bank

  

10.2

 

  

 

4,605,285

  

 

1,812,952

  

10.2

 

  

 

4,000,251

  

 

1,565,735

BB&T—SC

  

10.3

 

  

 

488,599

  

 

188,914

  

9.7

 

  

 

447,956

  

 

185,279

BB&T—VA

  

10.8

 

  

 

781,546

  

 

288,180

  

11.5

 

  

 

799,513

  

 

277,730

Total Capital

                                         

BB&T

  

13.4

 

  

 

7,741,048

  

 

4,616,105

  

13.3

 

  

 

6,796,958

  

 

4,077,325

Branch Bank

  

11.9

 

  

 

5,385,759

  

 

3,625,904

  

11.3

 

  

 

4,438,611

  

 

3,131,470

BB&T—SC

  

11.6

 

  

 

547,882

  

 

377,827

  

10.9

 

  

 

505,988

  

 

370,559

BB&T—VA

  

12.1

 

  

 

871,821

  

 

576,360

  

12.7

 

  

 

882,483

  

 

555,460

Leverage Capital

                                         

BB&T

  

6.9

 

  

 

5,290,310

  

 

2,286,287

  

7.2

 

  

 

5,002,896

  

 

2,077,887

Branch Bank

  

7.4

 

  

 

4,605,285

  

 

1,863,808

  

7.3

 

  

 

4,000,251

  

 

1,637,063

BB&T—SC

  

7.8

 

  

 

488,599

  

 

188,000

  

7.3

 

  

 

447,956

  

 

184,333

BB&T—VA

  

7.0

 

  

 

781,546

  

 

335,829

  

7.8

 

  

 

799,513

  

 

307,601

 

93


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 16.    Parent Company Financial Statements

 

Parent Company

Condensed Balance Sheets

December 31, 2002 and 2001

 

    

2002


  

2001


    

(Dollars in thousands)

Assets

             

Cash and due from banks

  

$

12,104

  

$

23,380

Interest-bearing bank balances

  

 

721,202

  

 

651,054

Securities available for sale at fair value

  

 

13,706

  

 

3,825

Investment in banking subsidiaries

  

 

8,041,583

  

 

6,466,134

Investment in other subsidiaries

  

 

1,166,072

  

 

932,882

    

  

Total investments in subsidiaries

  

 

9,207,655

  

 

7,399,016

    

  

Advances to banking subsidiaries

  

 

100,500

  

 

—  

Advances to other subsidiaries

  

 

356,000

  

 

336,250

Premises and equipment

  

 

4,707

  

 

4,871

Other assets

  

 

159,755

  

 

329,804

    

  

Total assets

  

$

10,575,629

  

$

8,748,200

    

  

Liabilities and Shareholders’ Equity

             

Short-term borrowed funds

  

$

786,273

  

$

763,655

Dividends payable

  

 

136,473

  

 

119,119

Accounts payable and accrued liabilities

  

 

12,869

  

 

50,377

Long-term debt

  

 

2,252,100

  

 

1,664,840

    

  

Total liabilities

  

 

3,187,715

  

 

2,597,991

    

  

Total shareholders’ equity

  

 

7,387,914

  

 

6,150,209

    

  

Total liabilities and shareholders' equity

  

$

10,575,629

  

$

8,748,200

    

  

 

94


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Parent Company

Condensed Income Statements

For the Years Ended December 31, 2002, 2001 and 2000

 

    

2002


  

2001


  

2000


    

(Dollars in thousands)

Income

                    

Dividends from subsidiaries

  

$

1,162,709

  

$

701,762

  

$

632,628

Interest and other income from subsidiaries

  

 

66,179

  

 

118,373

  

 

110,045

Other income

  

 

1,094

  

 

5,484

  

 

20,094

    

  

  

Total income

  

 

1,229,982

  

 

825,619

  

 

762,767

    

  

  

Expenses

                    

Interest expense

  

 

98,019

  

 

103,562

  

 

105,120

Other expenses

  

 

20,391

  

 

43,503

  

 

62,780

    

  

  

Total expenses

  

 

118,410

  

 

147,065

  

 

167,900

    

  

  

Income before income taxes and equity in undistributed earnings of subsidiaries

  

 

1,111,572

  

 

678,554

  

 

594,867

Income tax benefit

  

 

16,906

  

 

6,435

  

 

9,373

    

  

  

Income before equity in undistributed earnings of subsidiaries

  

 

1,128,478

  

 

684,989

  

 

604,240

Equity in undistributed earnings of subsidiaries

  

 

174,531

  

 

288,649

  

 

94,248

    

  

  

Net income

  

$

1,303,009

  

$

973,638

  

$

698,488

    

  

  

 

95


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Parent Company

Condensed Statements of Cash Flows

For the Years Ended December 31, 2002, 2001 and 2000

 

    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Cash Flows From Operating Activities:

                          

Net income

  

$

1,303,009

 

  

$

973,638

 

  

$

698,488

 

Adjustments to reconcile net income to net cash provided by operating activities:

                          

Net income of subsidiaries less than (in excess of) dividends from

                          

subsidiaries

  

 

(174,531

)

  

 

(288,649

)

  

 

(94,248

)

Depreciation of premises and equipment

  

 

164

 

  

 

417

 

  

 

1,195

 

Amortization of unearned compensation

  

 

2,052

 

  

 

4,402

 

  

 

4,605

 

Discount accretion and premium amortization

  

 

(707

)

  

 

(845

)

  

 

—  

 

Loss (gain) on sales of securities

  

 

(74

)

  

 

(2,944

)

  

 

872

 

Decrease (increase) in other assets

  

 

217,997

 

  

 

(21,734

)

  

 

52,105

 

Increase (decrease) in accounts payable and accrued liabilities

  

 

(35,142

)

  

 

(7,483

)

  

 

(13,845

)

Other, net

  

 

2,395

 

  

 

—  

 

  

 

—  

 

    


  


  


Net cash provided by operating activities

  

 

1,315,163

 

  

 

656,802

 

  

 

649,172

 

    


  


  


Cash Flows From Investing Activities:

                          

Proceeds from sales of securities available for sale

  

 

582

 

  

 

37,583

 

  

 

40,168

 

Proceeds from maturities, calls and paydowns of securities available for sale

  

 

—  

 

  

 

—  

 

  

 

12,619

 

Purchases of securities available for sale

  

 

(37

)

  

 

(185

)

  

 

(33,325

)

Investment in subsidiaries

  

 

(231,600

)

  

 

(503,216

)

  

 

(153,359

)

Advances to subsidiaries

  

 

(1,372,630

)

  

 

(1,703,339

)

  

 

(393,061

)

Proceeds from repayment of advances to subsidiaries

  

 

1,257,895

 

  

 

1,696,839

 

  

 

465,311

 

Net cash (paid) received in purchase accounting transactions

  

 

(101,151

)

  

 

42,123

 

  

 

(6,950

)

Other, net

  

 

2,189

 

  

 

—  

 

  

 

2,169

 

    


  


  


Net cash used in investing activities

  

 

(444,752

)

  

 

(430,195

)

  

 

(66,428

)

    


  


  


Cash Flows From Financing Activities:

                          

Net increase (decrease) in long-term debt

  

 

493,510

 

  

 

644,298

 

  

 

(342

)

Net increase (decrease) in short-term borrowed funds

  

 

(42,582

)

  

 

29,724

 

  

 

4,645

 

Net proceeds from common stock issued

  

 

60,078

 

  

 

61,359

 

  

 

44,821

 

Redemption of common stock

  

 

(800,667

)

  

 

(510,305

)

  

 

(217,542

)

Cash dividends paid on common stock

  

 

(521,878

)

  

 

(433,570

)

  

 

(374,596

)

Other, net

  

 

—  

 

  

 

—  

 

  

 

3,228

 

    


  


  


Net cash (used in) provided by financing activities

  

 

(811,539

)

  

 

(208,494

)

  

 

(539,786

)

    


  


  


Net Increase (Decrease) in Cash and Cash Equivalents

  

 

58,872

 

  

 

18,113

 

  

 

42,958

 

Cash and Cash Equivalents at Beginning of Year

  

 

674,434

 

  

 

656,321

 

  

 

613,363

 

    


  


  


Cash and Cash Equivalents at End of Year

  

$

733,306

 

  

$

674,434

 

  

$

656,321

 

    


  


  


 

96


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 17.    Disclosures about Fair Value of Financial Instruments

 

A financial instrument is defined by SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms.

 

Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. No readily available market exists for a significant portion of BB&T’s financial instruments. Fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates.

 

The following methods and assumptions were used by BB&T in estimating the fair value of its financial instruments:

 

Cash and cash equivalents: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.

 

Securities: Fair values for securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

 

Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. The carrying amounts of accrued interest approximate fair values. The fair values of loans held for sale approximate their carrying values.

 

Deposit liabilities: The fair values for demand deposits, interest-checking accounts, savings accounts and certain money market accounts are, by definition, equal to the amount payable on demand at the reporting date, i.e., their carrying amounts. Fair values for certificates of deposit and other time deposits are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities.

 

Short-term borrowed funds: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements, master notes and other short-term borrowed funds approximate their fair values.

 

Long-term debt: The fair values of long-term debt are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on BB&T’s current incremental borrowing rates for similar types of instruments.

 

Derivative financial instruments: The fair values of derivative financial instruments are determined based on dealer quotes.

 

Commitments to extend credit, standby letters of credit and financial guarantees written: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair values also consider the difference between current levels of interest rates and the committed

 

97


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

rates. The fair values of guarantees and letters of credit are estimated based on fees currently charged for similar agreements.

 

The following is a summary of the carrying amounts and fair values of BB&T’s financial assets and liabilities:

 

    

December 31,


    

2002


  

2001


    

Carrying Amount


    

Fair Value


  

Carrying Amount


    

Fair Value


    

(Dollars in thousands)

Financial assets:

                               

Cash and cash equivalents

  

$

2,372,220

 

  

$

2,372,220

  

$

2,232,226

 

  

$

2,232,226

Trading securities

  

 

148,488

 

  

 

148,488

  

 

97,675

 

  

 

97,675

Securities available for sale

  

 

17,599,477

 

  

 

17,599,477

  

 

16,621,684

 

  

 

16,621,684

Securities held to maturity

  

 

55,523

 

  

 

55,512

  

 

40,496

 

  

 

40,488

Derivative assets

  

 

216,221

 

  

 

216,221

  

 

47,502

 

  

 

47,502

Loans and leases, net of unearned income:

                               

Loans

  

 

50,990,840

 

  

 

51,453,640

  

 

45,124,112

 

  

 

44,760,100

Leases

  

 

2,527,173

 

  

 

N/A

  

 

2,319,061

 

  

 

N/A

Allowance for losses

  

 

(723,685

)

  

 

N/A

  

 

(644,418

)

  

 

N/A

    


         


      

Net loans and leases

  

$

52,794,328

 

         

$

46,798,755

 

      
    


         


      

Financial liabilities:

                               

Deposits

  

$

51,280,016

 

  

 

51,642,234

  

$

44,733,275

 

  

 

45,069,012

Short-term borrowed funds

  

 

5,396,959

 

  

 

5,396,959

  

 

6,649,100

 

  

 

6,649,100

Derivative liabilities

  

 

66,723

 

  

 

66,723

  

 

3,529

 

  

 

3,529

Long-term debt

  

 

13,586,037

 

  

 

15,033,010

  

 

11,719,076

 

  

 

11,202,549

Capitalized leases

  

 

1,804

 

  

 

N/A

  

 

2,000

 

  

 

N/A


N/A—not available. 

 

The following is a summary of the notional or contractual amounts and fair values of BB&T’s off-balance sheet financial instruments:

 

    

December 31,


 
    

2002


    

2001


 
    

Notional/Contract Amount


  

Fair Value


    

Notional/ Contract Amount


  

Fair Value


 
    

(Dollars in thousands)

 

Off-balance sheet contractual commitments

                               

Commitments to extend, originate or purchase credit

  

$

16,818,698

  

$

(21,274

)

  

$

18,533,864

  

$

(38,650

)

Standby and commercial letters of credit and financial guarantees written

  

 

1,193,258

  

 

(2,983

)

  

 

911,920

  

 

(13,679

)

 

98


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 18.    Derivative Financial Instruments

 

The following table sets forth certain information concerning BB&T’s derivative financial instruments at December 31, 2002:

 

Derivative Financial Instruments

December 31, 2002

(Dollars in thousands)

Type

  

Notional Amount


  

Average Receive Rate


    

Average Pay Rate


    

Estimated Fair Value


 

Receive fixed swaps

  

$

4,878,146

  

4.45

%

  

2.10

%

  

$

187,309

 

Pay fixed swaps

  

 

351,413

  

1.55

 

  

4.48

 

  

 

(14,946

)

Caps, floors & collars

  

 

1,364,550

  

—  

 

  

—  

 

  

 

8,395

 

Foreign exchange contracts

  

 

118,852

  

—  

 

  

—  

 

  

 

49

 

Futures contracts

  

 

10,024

  

—  

 

  

—  

 

  

 

229

 

Interest rate lock commitments

  

 

747,054

  

—  

 

  

—  

 

  

 

14,458

 

Forward mortgage loan contracts

  

 

3,777,700

  

—  

 

  

—  

 

  

 

(43,248

)

Options on contracts purchased

  

 

450,000

  

—  

 

  

—  

 

  

 

(2,748

)

    

                


Total

  

$

11,697,739

                

$

149,498

 

    

                


 

The following table discloses data with respect to BB&T’s derivative financial instruments:

 

Derivative Classifications and Hedging Relationships

December 31, 2002

(Dollars in thousands)

    

Notional Amount


  

Fair Value


       

Gain


  

Loss


Derivatives Designated as Cash Flow Hedges:

                    

Hedging Business Loans

  

$

3,150,000

  

$

71,098

  

$

—  

Hedging Short-term Borrowed Funds

  

 

1,250,000

  

 

8,395

  

 

—  

Hedging Forecasted Sales of Mortgage Loans

  

 

4,227,700

  

 

—  

  

 

45,996

Derivatives Designated as Fair Value Hedges:

                    

Hedging Business Loans

  

 

23,266

         

 

924

Hedging Long-term Debt

  

 

1,400,000

  

 

102,189

  

 

—  

Derivatives Not Designated as Hedges

  

 

1,646,773

  

 

34,539

  

 

19,803

    

  

  

Total

  

$

11,697,739

  

$

216,221

  

$

66,723

    

  

  

 

At December 31, 2002, BB&T had designated $1.4 billion in notional value of derivatives as fair value hedges. These instruments had a net unrealized gain of approximately $101.3 million at December 31, 2002. Derivatives in a gain position with a fair value of $102.2 million are recorded in other assets and derivatives in a loss position with a fair value of $0.9 million are recorded in other liabilities. There was no impact on earnings during the period resulting from fair value hedge ineffectiveness since all BB&T’s fair value hedges qualify for the “short cut method” assumption of no ineffectiveness under the provisions of SFAS No. 133.

 

99


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

BB&T had also designated $8.6 billion in notional value of derivatives as cash flow hedges at December 31, 2002. These instruments had a net estimated fair value of $33.5 million at the end of the year. The effect on earnings resulting from the ineffectiveness of cash flow hedges was not material.

 

Accumulated other comprehensive income includes $1.6 million of net after-tax unrecognized gains attributable to cash flow hedges. A total of $7.3 million of unrecognized losses is expected to be reclassified into earnings within the next 12 months. Unrecognized losses on mandatory forward commitments and long put options hedging the cash flows of forecasted sales of mortgage loans totaled $27.8 million after-tax. BB&T typically sells fixed-rate mortgage loans shortly after origination. BB&T is exposed to variability in cash flows from the forecasted sale due to interest rate risk. The risk management objective is to hedge the price at which the loans will ultimately be sold. This objective is met by entering into mandatory forward commitments and long put options that establish the proceeds from the sale of mortgage loans at inception. The ultimate sale of the related loans will result in reclassification of these amounts into earnings. If the cash flow hedge is discontinued because the forecasted sales of mortgage loans will not occur, this amount would be immediately reclassified into earnings.

 

Accumulated other comprehensive income included $43.0 million in after-tax unrecognized gains on interest rate swaps hedging variable interest payments on business loans and $13.6 million in unrecognized losses on interest rate caps hedging variable interest payments on overnight borrowings. BB&T has substantial business loans and overnight borrowings that expose it to variability in cash flows for interest payments. The risk management objective is to hedge the variability in these interest payments. This objective is met by entering into interest swaps that fix the interest payments and interest rate caps that fix the interest payments when interest rates on the hedged item exceed the predetermined rate. These gains or losses will be reclassified from accumulated other comprehensive income to earnings as the interest payments on the hedged item affect earnings. Immediate reclassification would only be required if it becomes probable the hedged transactions will not occur.

 

BB&T also held $1.6 billion in notional value of derivatives not designated as hedges at December 31, 2002. These instruments were in a net gain position with a net estimated fair value of $14.7 million. In connection with the adoption of DIG Issue C-13, income from interest rate lock commitments for residential mortgage loans to be sold accounted for $14.5 million of this gain. Changes in the fair value of these derivatives are reflected in current period earnings. Substantially all derivatives not designated as a hedge have been entered into to facilitate transactions on behalf of BB&T’s clients. Excluding the interest rate lock commitments, BB&T typically also simultaneously enters into a derivative financial instrument with substantially similar offsetting terms with an unrelated third party. Therefore, these other derivatives have minimal impact on earnings.

 

The maximum length of time over which BB&T is hedging its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is less than one year and is 4.9 years including those forecasted transactions related to the payment of variable interest on existing financial instruments.

 

Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or 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. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T’s credit risk exposure related to derivatives contracts at December 31, 2002, was not material.

 

100


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 19.    Computation of Earnings Per Share

 

The basic and diluted earnings per share calculations are presented in the following table:

 

      

Years Ended December 31,


      

2002


    

2001


    

2000


      

(Dollars in thousands, except per share data)

Basic Earnings Per Share:

                          

Income before cumulative effect of change in accounting principle

    

$

1,293,229

    

$

973,638

    

$

698,488

Cumulative effect of change in accounting principle

    

 

9,780

    

 

—  

    

 

—  

      

    

    

Net income

    

$

1,303,009

    

$

973,638

    

$

698,488

      

    

    

Weighted average number of common shares outstanding during the period

    

 

473,303,770

    

 

453,188,403

    

 

450,789,079

      

    

    

Basic earnings per share

                          

Income before cumulative effect of change in accounting principle

    

$

2.73

    

$

2.15

    

$

1.55

Cumulative effect of change in accounting principle

    

 

.02

    

 

—  

    

 

—  

      

    

    

Net income

    

$

2.75

    

$

2.15

    

$

1.55

      

    

    

Diluted Earnings Per Share:

                          

Income before cumulative effect of change in accounting principle

    

$

1,293,229

    

$

973,638

    

$

698,488

Cumulative effect of change in accounting principle

    

 

9,780

    

 

—  

    

 

—  

      

    

    

Net income

    

$

1,303,009

    

$

973,638

    

$

698,488

      

    

    

Weighted average number of common shares

    

 

473,303,770

    

 

453,188,403

    

 

450,789,079

Add:

                          

Dilutive effect of outstanding options (as determined by application of treasury stock method)

    

 

5,488,788

    

 

6,080,927

    

 

5,424,530

      

    

    

Weighted average number of common shares, as adjusted

    

 

478,792,558

    

 

459,269,330

    

 

456,213,609

      

    

    

Diluted earnings per share

                          

Income before cumulative effect of change in accounting principle

    

$

2.70

    

$

2.12

    

$

1.53

Cumulative effect of change in accounting principle

    

 

.02

    

 

—  

    

 

—  

      

    

    

Net income

    

$

2.72

    

$

2.12

    

$

1.53

      

    

    

 

NOTE 20.    Operating Segments

 

BB&T’s operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage, and Treasury. These operating segments have been identified based on BB&T’s organizational structure. The segments require unique technology and marketing strategies and offer different products and services. While BB&T is managed as an integrated organization, individual executive managers are held accountable for the operations of these business segments.

 

BB&T measures and presents information for internal reporting purposes in a variety of different ways. Information for BB&T’s reportable segments is available based on organizational structure, product offerings and customer relationships. The internal reporting system presently utilized by management in the planning and measuring of operating activities, as well as the system to which most managers are held accountable, is based on organizational structure.

 

101


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

BB&T emphasizes revenue growth by focusing on client service, sales effectiveness and relationship management. The segment results contained herein are presented based on internal management accounting policies that were designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the segments is not necessarily comparable with BB&T’s consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

 

The management accounting process uses various estimates and allocation methodologies to measure the performance of the operating segments. To determine financial performance for each segment, BB&T allocates capital, funding charges and credits, an economic provision for loan and lease losses, certain noninterest expenses and income tax provisions to each segment, as applicable. Also, to promote revenue growth and provide a basis for employee incentives, certain revenues of Mortgage Banking, Trust Services, Agency Insurance and the Investment Banking and Brokerage segments are reflected in the individual segment results and also allocated to the Banking Network. This double counting of revenue is reflected in intersegment noninterest revenues and eliminated to arrive at consolidated results. Allocation methodologies are subject to periodic adjustment as the internal management accounting system is revised and business or product lines within the segments change. Also, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised.

 

BB&T’s overall objective is to maximize shareholder value by optimizing return on equity and managing risk. Allocations of capital and the economic provision for loan and lease losses are designed to address this objective. Capital is assigned to each segment on an economic basis, using management’s assessment of the inherent risks associated with the segment. Economic capital allocations are made to cover the following risk categories: credit risk, funding risk, interest rate risk, option risk, basis risk, market risk and operational risk. Each segment is evaluated based on a risk-adjusted return on capital. Capital assignments are not equivalent to regulatory capital guidelines and the total amount assigned to all segments typically varies from total consolidated shareholders’ equity. All unallocated capital is retained in the Treasury segment.

 

The economic provision for loan and lease losses is also allocated to the relevant segments based on management’s assessment of the segments’ risks as described above. Unlike the provision for loan and lease losses recorded pursuant to generally accepted accounting principles, the economic provision adjusts for the impact of expected credit losses over the effective lives of the related loans and leases. Any unallocated provision for loan and lease losses is retained in the Corporate Office.

 

BB&T has implemented an extensive noninterest expense allocation process to support organizational profitability measurement. BB&T allocates expenses to the reportable segments based on various methodologies, including the number of items processed, overall percentage of time spent, full-time equivalent employees assigned to functions, functional position surveys and activity-based costing. A portion of corporate overhead expense is not allocated, but is retained in corporate accounts reflected as other expenses in the accompanying tables. Income taxes are allocated to the various segments using effective tax rates.

 

BB&T utilizes a funds transfer pricing (“FTP”) system to eliminate the effect of interest rate risk from the segments’ net interest income because such risk is centrally managed within the Treasury segment. The FTP system credits or charges the segments with the estimated value or cost of the funds the segments create or use. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The net FTP credit or charge is reflected as net intersegment interest income (expense) in the accompanying tables.

 

102


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Banking Network

 

BB&T’s Banking Network serves individual and business clients by offering a variety of loan and deposit products and other financial services. The Banking Network is primarily responsible for serving client relationships, and, therefore, is credited with revenue from the Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage and other segments, which is reflected in intersegment noninterest income.

 

Mortgage Banking

 

The Mortgage Banking segment retains and services mortgage loans originated by the Banking Network as well as those purchased from various correspondent originators. Mortgage loan products include fixed- and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Fixed-rate mortgage loans are typically sold to government agencies with servicing rights retained by BB&T, while adjustable-rate loans are typically held in the portfolio. The Mortgage Banking segment earns interest on loans held in the warehouse and portfolio, fee income from the origination and servicing of mortgage loans and recognizes gains or losses from the sale of mortgage loans. The Banking Network receives an interoffice credit for the origination of loans and servicing rights, with the corresponding charge remaining in the Corporate Office, which is reflected as part of other net income in the accompanying tables reconciling segment results to consolidated results.

 

Trust Services

 

BB&T’s Trust Services segment provides personal trust administration, estate planning, investment counseling, asset management, employee benefits services, and corporate trust services to individuals, corporations, institutions, foundations and government entities. The Banking Network receives an interoffice credit for trust fees in the initial year the account is referred, with the corresponding charge remaining in the Corporate Office, which is reflected as part of other net income in the accompanying tables reconciling segment results to consolidated results.

 

Agency Insurance

 

BB&T operates the 10th largest independent insurance agency network in the nation. BB&T Insurance Services provides property and casualty, life and health insurance to businesses and individuals. It also provides small business and corporate products, such as workers compensation and professional liability, as well as provides surety coverage and title insurance. The Banking Network receives credit for insurance commissions on referred accounts, with the corresponding charge retained in the Corporate Office. These revenues and expenses are reflected in the accompanying tables as intersegment noninterest income and expense.

 

Investment Banking and Brokerage

 

BB&T’s Investment Banking and Brokerage segment offers clients investment alternatives, including discount brokerage services, fixed-rate and variable-rate annuities, and mutual funds through BB&T Investment Services, Inc., a subsidiary of Branch Bank. The Investment Banking and Brokerage segment includes Scott & Stringfellow, Inc., a full-service brokerage and investment banking firm headquartered in Richmond, Virginia. Scott & Stringfellow specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Scott & Stringfellow also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional tax-exempt issuers. The Banking Network is credited for investment service revenues on referred accounts, with the corresponding charge retained in the Corporate Office, which is reflected as part of other net income in the accompanying tables reconciling segment results to consolidated results. These revenues and expenses are reflected in the accompanying tables as intersegment noninterest income and expense.

 

103


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Treasury

 

BB&T’s Treasury segment is responsible for the management of the securities portfolios, overall balance sheet funding and liquidity, and overall management of interest rate risk.

 

The following tables present selected financial information for BB&T’s reportable business segments for the years ended December 31, 2002, 2001 and 2000:

 

104


 

BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   

Banking Network


 

Mortgage Banking


   

Trust Services


   

Agency Insurance


 
   

2002


 

2001


 

2000


 

2002


   

2001


   

2000


   

2002


   

2001


   

2000


   

2002


 

2001


 

2,000


 
   

(Dollars in thousands)

 

Net interest income (expense) from external customers

 

$

1,521,868

 

$

1,429,954

 

$

1,441,523

 

$

636,479

 

 

$

613,636

 

 

$

484,070

 

 

$

(20,445

)

 

$

(36,357

)

 

$

(39,785

)

 

$

1,763

 

$

825

 

$

(16

)

Net intersegment interest income (expense)

 

 

660,390

 

 

585,737

 

 

486,591

 

 

(327,161

)

 

 

(454,908

)

 

 

(368,873

)

 

 

47,908

 

 

 

48,723

 

 

 

53,566

 

 

 

—  

 

 

—  

 

 

—  

 

   

 

 

 


 


 


 


 


 


 

 

 


Net interest income

 

 

2,182,258

 

 

2,015,691

 

 

1,928,114

 

 

309,318

 

 

 

158,728

 

 

 

115,197

 

 

 

27,463

 

 

 

12,366

 

 

 

13,781

 

 

 

1,763

 

 

825

 

 

(16

)

   

 

 

 


 


 


 


 


 


 

 

 


Provision for loan and lease losses

 

 

215,769

 

 

213,924

 

 

148,913

 

 

3,271

 

 

 

3,158

 

 

 

3,183

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

Noninterest income from external customers

 

 

702,427

 

 

544,381

 

 

455,755

 

 

158,395

 

 

 

127,534

 

 

 

85,310

 

 

 

97,914

 

 

 

92,172

 

 

 

80,232

 

 

 

288,658

 

 

170,006

 

 

122,241

 

Intersegment noninterest income

 

 

346,111

 

 

239,608

 

 

120,410

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

Noninterest expense

 

 

1,068,163

 

 

1,029,806

 

 

942,662

 

 

159,726

 

 

 

81,018

 

 

 

58,742

 

 

 

79,896

 

 

 

60,068

 

 

 

51,960

 

 

 

221,051

 

 

123,385

 

 

87,249

 

Intersegment noninterest expense

 

 

579,017

 

 

504,080

 

 

325,185

 

 

29,550

 

 

 

26,390

 

 

 

22,983

 

 

 

8,565

 

 

 

3,165

 

 

 

3,730

 

 

 

23,732

 

 

4,236

 

 

4,107

 

   

 

 

 


 


 


 


 


 


 

 

 


Income before income taxes

 

 

1,367,847

 

 

1,051,870

 

 

1,087,519

 

 

275,166

 

 

 

175,696

 

 

 

115,599

 

 

 

36,916

 

 

 

41,305

 

 

 

38,323

 

 

 

45,638

 

 

43,210

 

 

30,869

 

Provision for income taxes

 

 

366,204

 

 

302,801

 

 

352,660

 

 

76,949

 

 

 

54,020

 

 

 

32,124

 

 

 

10,428

 

 

 

11,476

 

 

 

10,559

 

 

 

18,175

 

 

17,105

 

 

12,315

 

   

 

 

 


 


 


 


 


 


 

 

 


Net income

 

$

1,001,643

 

$

749,069

 

$

734,859

 

$

198,217

 

 

$

121,676

 

 

$

83,475

 

 

$

26,488

 

 

$

29,829

 

 

$

27,764

 

 

$

27,463

 

$

26,105

 

$

18,554

 

   

 

 

 


 


 


 


 


 


 

 

 


Identifiable segment assets

 

$

47,796,060

 

$

38,122,329

 

$

37,544,996

 

$

10,732,898

 

 

$

9,005,182

 

 

$

8,318,744

 

 

$

78,673

 

 

$

62,723

 

 

$

39,508

 

 

$

551,659

 

$

126,803

 

$

100,852

 

   

 

 

 


 


 


 


 


 


 

 

 


 

105


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   

Investment Banking and

Brokerage


 

Treasury


   

All Other Segments (1)


 

Total Segments


   

2002


 

2001


 

2000


 

2002


 

2001


 

2000


   

2002


 

2001


 

2000


 

2002


 

2001


 

2000


   

(Dollars in thousands)

Net interest income (expense) from external customers

 

$

7,474

 

$

8,789

 

$

11,659

 

$

205,301

 

$

237,725

 

$

160,043

 

 

$

359,033

 

$

304,110

 

$

257,133

 

$

2,711,473

 

$

2,558,682

 

$

2,314,627

Net intersegment interest income (expense)

 

 

—  

 

 

—  

 

 

—  

 

 

16,848

 

 

36,591

 

 

79,197

 

 

 

—  

 

 

50

 

 

—  

 

 

397,985

 

 

216,193

 

 

250,481

   

 

 

 

 

 


 

 

 

 

 

 

Net interest income

 

 

7,474

 

 

8,789

 

 

11,659

 

 

222,149

 

 

274,316

 

 

239,240

 

 

 

359,033

 

 

304,160

 

 

257,133

 

 

3,109,458

 

 

2,774,875

 

 

2,565,108

   

 

 

 

 

 


 

 

 

 

 

 

Provision for loan and lease losses

 

 

—  

 

 

—  

 

 

—  

 

 

142

 

 

133

 

 

121

 

 

 

94,155

 

 

64,724

 

 

46,657

 

 

313,337

 

 

281,939

 

 

198,874

Noninterest income (expense) from external customers

 

 

215,747

 

 

180,976

 

 

164,023

 

 

250,179

 

 

48,588

 

 

(188,841

)

 

 

162,011

 

 

136,799

 

 

117,012

 

 

1,875,331

 

 

1,300,456

 

 

835,732

Intersegment noninterest income

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

346,111

 

 

239,608

 

 

120,410

Noninterest expense

 

 

191,638

 

 

180,730

 

 

159,598

 

 

15,054

 

 

7,606

 

 

6,154

 

 

 

130,569

 

 

106,875

 

 

88,169

 

 

1,866,097

 

 

1,589,488

 

 

1,394,534

Intersegment noninterest expense

 

 

14,771

 

 

1,591

 

 

1,497

 

 

1,691

 

 

1,945

 

 

555

 

 

 

24,110

 

 

11,744

 

 

8,917

 

 

681,436

 

 

553,151

 

 

366,974

   

 

 

 

 

 


 

 

 

 

 

 

Income before income taxes

 

 

16,812

 

 

7,444

 

 

14,587

 

 

455,441

 

 

313,220

 

 

43,569

 

 

 

272,210

 

 

257,616

 

 

230,402

 

 

2,470,030

 

 

1,890,361

 

 

1,560,868

Provision for income taxes

 

 

6,474

 

 

2,527

 

 

3,195

 

 

124,764

 

 

79,250

 

 

733

 

 

 

70,287

 

 

40,343

 

 

59,030

 

 

673,281

 

 

507,522

 

 

470,616

   

 

 

 

 

 


 

 

 

 

 

 

Net income

 

$

10,338

 

$

4,917

 

$

11,392

 

$

330,677

 

$

233,970

 

$

42,836

 

 

$

201,923

 

$

217,273

 

$

171,372

 

$

1,796,749

 

$

1,382,839

 

$

1,090,252

   

 

 

 

 

 


 

 

 

 

 

 

Identifiable segment assets

 

$

982,755

 

$

702,050

 

$

751,722

 

$

20,482,087

 

$

16,209,134

 

$

17,084,443

 

 

$

7,524,205

 

$

4,681,399

 

$

3,990,321

 

$

88,148,337

 

$

68,909,620

 

$

67,830,586

   

 

 

 

 

 


 

 

 

 

 

 


(1)   Financial data from segments below the quantitative thresholds requiring disclosure are attributable to nonbank consumer finance operations, factoring, commercial lawn care equipment financing, leasing and other smaller subsidiaries.

 

106


BB&T CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table presents a reconciliation of segment results to consolidated results:

 

    

For the Years Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Net Interest Income

                          

Net interest income from segments

  

$

3,109,458

 

  

$

2,774,875

 

  

$

2,565,108

 

Other net interest income (expense) (1)

  

 

(366,980

)

  

 

(545,679

)

  

 

153,649

 

Elimination of net intersegment interest income (2)

  

 

4,982

 

  

 

204,483

 

  

 

(404,260

)

    


  


  


Consolidated net interest income

  

$

2,747,460

 

  

$

2,433,679

 

  

$

2,314,497

 

    


  


  


Net income

                          

Net income from segments

  

$

1,796,749

 

  

$

1,382,839

 

  

$

1,090,252

 

Other net income (loss) (1)

  

 

857,575

 

  

 

245,514

 

  

 

2,721

 

Elimination of intersegment net income (2)

  

 

(1,351,315

)

  

 

(654,715

)

  

 

(394,485

)

    


  


  


Consolidated net income

  

$

1,303,009

 

  

$

973,638

 

  

$

698,488

 

    


  


  


    

December 31,


 
    

2002


    

2001


    

2000


 
    

(Dollars in thousands)

 

Total Assets

                          

Total assets from segments

  

$

88,148,337

 

  

$

68,909,620

 

  

$

67,830,586

 

Other assets (1)

  

 

27,674,337

 

  

 

14,280,339

 

  

 

4,232,050

 

Elimination of intersegment assets (2)

  

 

(35,605,858

)

  

 

(12,320,014

)

  

 

(5,509,813

)

    


  


  


Consolidated total assets

  

$

80,216,816

 

  

$

70,869,945

 

  

$

66,552,823

 

    


  


  



(1)   Other net interest income, other net income (loss) and other assets include amounts incurred by or applicable to BB&T’s support functions that are not allocated to the various segments.
(2)   BB&T’s reconciliation of total segment results to consolidated results requires the elimination of the internal management accounting practices. These adjustments include the elimination of the funds transfer pricing credits and charges and the elimination of intersegment noninterest income and noninterest expense described above. These amounts are allocated to the various segments using BB&T’s internal accounting methods.

 

107


CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

Within 90 days prior to the date of this report, the Company’s Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-14 under the Exchange Act. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures enable the Company to record, process, summarize and report in a timely manner the information that the Company is required to disclose in its Exchange Act reports.

 

Changes in internal controls

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.

 

 

108


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 7, 2003:

 

BB&T CORPORATION

    (Registrant)

By:

 

/S/    JOHN A. ALLISON, IV


   

John A. Allison, IV

Chairman of the Board and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 7, 2003.

 

 

By:

 

/S/    JOHN A. ALLISON, IV


   

John A. Allison, IV

Chairman of the Board and Chief Executive Officer

 

 

By:

 

/S/ SCOTT E. REED


   

Scott E. Reed

Senior Executive Vice President and

Chief Financial Officer

 

 

By:

 

/S/    SHERRY A. KELLETT


   

Sherry A. Kellett

Senior Executive Vice President and Controller

 

 

109


 

A Majority of the Directors of the Registrant are included.

 

 

 

By:

 

/S/    NELLE RATRIE CHILTON


   

Nelle Ratrie Chilton

Director

 

 

By:

 

/S/    ALFRED E. CLEVELAND


   

Alfred E. Cleveland

Director

 

 

By:

 
   

Ronald E. Deal

Director

 

 

By:

 

/S/    TOM D. EFIRD


   

Tom D. Efird

Director

 

 

By:

 

/s/    PAUL S. GOLDSMITH


   

Paul S. Goldsmith

Director

 

 

By:

 

/S/    LLOYD VINCENT HACKLEY


   

Lloyd Vincent Hackley

Director

 

 

By:

 

/S/    JANE P. HELM


   

Jane P. Helm

Director

 

 

By:

 

/S/    RICHARD JANEWAY, M.D.


   

Richard Janeway, M.D.

Director

 

 

By:

 

/S/    J. ERNEST LATHEM, M.D.


   

J. Ernest Lathem, M.D.

Director

 

110


 

 

By:

 

/S/    JAMES H. MAYNARD


   

James H. Maynard

Director

 

 

By:

 

/S/    ALBERT O. MCCAULEY


   

Albert O. McCauley

Director

 

 

By:

 

/S/    J. HOLMES MORRISON


   

J. Holmes Morrison

Director

 

 

By:

 

/S/    RICHARD L. PLAYER, JR.


   

Richard L. Player, Jr.

Director

 

 

By:

 

/S/    NIDO R. QUBEIN


   

Nido R. Qubein

Director

 

 

By:

 

/s/    E. RHONE SASSER


   

E. Rhone Sasser

Director

 

 

By:

 

/S/    JACK E. SHAW


   

Jack E. Shaw

Director

 

111


CERTIFICATIONS

 

I, John A. Allison, certify that:

 

1.    I have reviewed this annual report on Form 10-K of BB&T Corporation;

 

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c)    presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.    The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 7, 2003

 

 

By:

 

/S/    JOHN A. ALLISON, IV


   

John A. Allison, IV

Chairman and Chief Executive Officer

 

112


CERTIFICATIONS

 

I, Scott E. Reed, certify that:

 

1     I have reviewed this annual report on Form 10-K of BB&T Corporation;

 

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c)    presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.    The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 7, 2003

 

 

By:

 

/S/    SCOTT E. REED


   

Scott E. Reed

Senior Executive Vice President and

Chief Financial Officer

 

113


EXHIBIT INDEX

 

Exhibit No.


  

Description


  

Location


2(a)

  

Agreement and Plan of Reorganization dated as of July 29, 1994 and amended and restated as of October 22, 1994 between the Registrant and BB&T Financial Corporation.

  

Incorporated herein by reference to Registration No. 33-56437.

2(b)

  

Plan of Merger as of July 29, 1994 as amended and restated on October 22, 1994 between the Registrant and BB&T Financial Corporation.

  

Incorporated herein by reference to Registration No. 33-56437.

2(c)

  

Agreement and Plan of Reorganization dated as of November 1, 1996 between the Registrant and United Carolina Bancshares Corporation, as amended.

  

Incorporated herein by reference to Exhibit 3(a) filed in the Annual Report on Form 10-K, filed March 17, 1997.

2(d)

  

Agreement of Plan of Reorganization dated as of October 29, 1997 between the Registrant and Life Bancorp, Inc.

  

Incorporated herein by reference to Registration No. 33-44183.

2(e)

  

Agreement and Plan of Reorganization dated as of February 6, 2000 between the Registrant and One Valley Bancorp, Inc.

  

Incorporated herein by reference to Exhibit 99.1 filed in the Current Report on Form 8-K, dated February 9, 2000.

3(a)(i)

  

Amended and Restated Articles of Incorporation of the Registrant, as amended.

  

Incorporated herein by reference to Exhibit 3(a) filed in the Annual Report on Form 10-K, filed March 17, 1997.

3(a)(ii)

  

Articles of Amendment of Articles of Incorporation.

  

Incorporated herein by reference to Exhibit 3(a)(ii) filed in the Annual Report on Form 10-K, filed March 18, 1998.

3(b)(i)

  

Bylaws of the Registrant, as amended.

  

Incorporated herein by reference to Exhibit 3(b) filed in the Annual Report on Form 10-K, filed March 18, 1998.

3(b)(ii)

  

Articles of Amendment of the Bylaws of the

Registrant.

  

Incorporated herein by reference to Exhibit 3(b)(ii) filed in the Quarterly Report on Form 10-Q, filed May 13, 2002.

4(a)

  

Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant related to Junior Participating Preferred Stock.

  

Incorporated herein by reference to Exhibit 3(a) filed in the Annual Report on Form 10-K, filed March 17, 1997.

4(b)

  

Rights Agreement dated as of December 17, 1996 between the Registrant and Branch Banking and Trust Company, Rights Agent.

  

Incorporated herein by reference to Exhibit 1 filed under Form 8-A, filed January 10, 1997.

4(c)

  

Subordinated Indenture (including Form of Subordinated Debt Security) between the Registrant and State Street Bank and Trust Company, Trustee, dated as of May 24, 1996.

  

Incorporated herein by reference to Exhibit 4(d) of Registration No. 333-02899.

4(d)

  

Senior Indenture (including Form of Senior Debt Security) between the Registrant and State Street Bank and Trust company, Trustee, dated as of May 24, 1996.

  

Incorporated herein by reference to Exhibit 4(c) of Registration No. 333-02899.

10(a)*

  

Death Benefit Only Plan, Dated April 23, 1990, by and between Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and L. Glenn Orr, Jr.

  

Incorporated herein by

reference to Registration

No. 33-33984.

 

114


Exhibit No.


  

Description


  

Location


10(b)*

  

BB&T Corporation Non-Employee Directors’ Deferred Compensation and Stock Option Plan.

  

Incorporated herein by reference to Exhibit 10(b) of the Annual Report on Form 10-K, filed March 17, 1997.

10(c)*

  

BB&T Corporation 1994 Omnibus Stock Incentive Plan.

  

Incorporated herein by reference to Registration No. 33-57865.

10(d)*

  

Settlement and Non-Compete Agreement, dated February 28, 1995, by and between the Registrant and L. Glenn Orr, Jr.

  

Incorporated herein by reference to Registration No. 33-56437.

10(e)*

  

Settlement Agreement, Waiver and General Release dated September 19, 1994, by and between the Registrant, Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton.

  

Incorporated herein by reference to Registration No. 33-56437.

10(f)

  

BB&T Corporation 401(k) Savings Plan (restated effective January 1, 2000, and subsequently amended).

  

Incorporated herein by reference to Exhibit 10(f) filed in the Annual Report on Form 10-K, filed March 16, 2001.

10(g)*

  

BB&T Corporation 1995 Omnibus Stock Incentive Plan.

  

Incorporated herein by reference to Exhibit 10(g) filed in the Annual Report on Form 10-K, filed March 17, 1997.

10(h)*

  

Branch Banking and Trust Company Long-Term Incentive Plan.

  

Incorporated by reference to the identified exhibit under the Quarterly Report on Form 10-Q, filed May 14, 1991.

10(i)*

  

Branch Banking and Trust Company Executive Incentive Compensation Plan.

  

Incorporated by reference to the identified exhibit under the Annual Report on Form 10-K, filed February 22, 1985.

10(j)*

  

Southern National Deferred Compensation Plan for Key Executives.

  

Incorporated herein by reference to Exhibit 10(j) filed in the Annual Report on Form 10-K, filed March 17, 1997.

10(k)*

  

BB&T Corporation Target Pension Plan.

  

Incorporated herein by reference to Exhibit 10(k) filed in the Annual Report on Form 10-K, filed March 17, 1997.

10(l)*

  

BB&T Corporation Supplemental Executive Retirement Plan.

  

Incorporated herein by reference to Exhibit 10(l) filed in the Annual Report on Form 10-K, filed March 17, 1997.

10(m)*

  

Settlement and Noncompetition Agreement, dated July 1, 1997, by and between the Registrant and E. Rhone Sasser.

  

Incorporated herein by reference to Exhibit 10(m) filed in the Annual Report on Form 10-K, filed March 18, 1998.

10(n)*

  

BB&T Corporation Supplemental Defined Contribution Plan for Highly Compensated Employees (amended and restated effective November 1, 2001).

  

Incorporated herein by Reference to Exhibit 10(n) filed in the Annual Report on Form 10-K, filed March 15, 2002.

10(o)

  

Scott & Stringfellow, Inc. Executive and Employee Retention Plan.

  

Incorporated herein by reference to Registration No. 333-81471.

10(p)*

  

BB&T Corporation Non-Qualified Defined Contribution Plan (amended and restated November 1, 2001).

  

Incorporated herein by reference to Exhibit 10(p) filed in the Annual Report on Form 10-K, filed March 15, 2002.

10(q)*

  

BB&T Corporation Amended and Restated 1996 Short-term Incentive Plan.

  

Incorporated herein by reference to Exhibit 10(q) of the Annual Report on Form 10-K, filed on March 16, 2001.

 

115


Exhibit No.


  

Description


  

Location


10(r)*

  

Amendment to 1995 Omnibus Stock Incentive Plan.

  

Incorporated herein by reference to Registration No. 333-36540.

10(s)*

  

Employment Agreement, dated February 6, 2000, by and between the Registrant and J. Holmes Morrison.

  

Incorporated herein by reference to Exhibit 10(s) of the Annual Report on Form 10-K, filed on March 16, 2001.

10(t)

  

BB&T Corporation Pension Plan (restated effective January 1, 2000, and subsequently amended).

  

Incorporated herein by reference to Exhibit 10(t) of the Annual Report on Form 10-K, filed on March 16, 2001.

10(u)*

  

Amendment to BB&T Corporation Nonqualified Defined Contribution Plan.

  

Incorporated herein by reference to Exhibit 10(u) of the Annual Report on Form 10-K, filed on March 16, 2001.

10(v)*

  

BB&T Corporation Non-Employee Directors’ Deferred Compensation and Stock Option Plan (amended and restated effective November 1, 2001).

  

Incorporated herein by reference to Exhibit 10(v) filed in the Annual Report on Form 10-K, filed March 15, 2002.

10(w)*

  

Amendment to the BB&T Corporation Supplemental Defined Contribution Plan for Highly Compensated Employees.

  

Incorporated herein by reference to Exhibit 10(w) of the Annual Report on Form 10-K, filed on March 16, 2001.

10(x)*

  

BB&T Corporation Non-Qualified Deferred Compensation Trust (amended and restated effective November 1, 2001).

  

Incorporated herein by reference to Exhibit 10(x) filed in the Annual Report on Form 10-K, filed March 15, 2002.

10(y)*

  

2001 Declaration of Amendment to BB&T Corporation Non-Employee Directors’ Deferred Compensation and Stock Option Plan

  

Incorporated herein by reference to Exhibit 10(y) filed in the Annual Report on Form 10-K, filed March 15, 2002.

10(z)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and John A. Allison IV

  

Incorporated by reference to Exhibit 10 (z) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(aa)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and W. Kendall Chalk

  

Incorporated by reference to Exhibit 10 (aa) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(ab)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Robert E. Greene

  

Incorporated by reference to Exhibit 10 (ab) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(ac)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Sherry A. Kellett

  

Incorporated by reference to Exhibit 10 (ac) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(ad)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Kelly S. King

  

Incorporated by reference to Exhibit 10 (ad) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(ae)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Scott E. Reed

  

Incorporated by reference to Exhibit 10 (ae) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(af)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Henry G. Williamson, Jr.

  

Incorporated by reference to Exhibit 10 (af) in the Quarterly Report on Form 10-Q filed May 13, 2002.

10(ag)*

  

Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and C. Leon Wilson, III

  

Incorporated by reference to Exhibit 10 (ag) in the Quarterly Report on Form 10-Q filed May 13, 2002.

 

116


Exhibit No.


  

Description


  

Location


11

  

Statement re Computation of Earnings Per Share.

  

Filed herewith as Note 19.

21

  

Subsidiaries of the Registrant

  

Filed herewith.

22

  

Proxy Statement for the 2003 Annual Meeting of Shareholders.

  

Future filing incorporated by reference pursuant to General Instruction G(3).

23(a)

  

Consent of PricewaterhouseCoopers LLP

  

Filed herewith.

23(b)

  

Consent of Arthur Andersen LLP

  

Filed herewith.

23(c)

  

Opinion of PricewaterhouseCoopers LLP

  

Filed herewith.

99.1

  

Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

Filed herewith.

99.2

  

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

Filed herewith.

99.3

  

Explanation Concerning Absence of Current Written Consent of Arthur Andersen LLP

  

Filed herewith.

 

*   Management compensatory plan or arrangement.

 

117