- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: JUNE 30, 2001 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 (Zip Code) Offices) (336) 733-2000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At July 31, 2001, 424,136,157 shares of the registrant's common stock, $5 par value, were outstanding. This Form 10-Q has 35 pages. The Exhibit Index begins on page 31. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
BB&T CORPORATION FORM 10-Q June 30, 2001 INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> <C> Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)....................................................... 2 Consolidated Financial Statements...................................................... 2 Notes to Consolidated Financial Statements............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15 Analysis of Financial Condition........................................................ 15 Market Risk Management................................................................. 19 Capital Adequacy and Resources......................................................... 22 Analysis of Results of Operations...................................................... 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 19 Part II. OTHER INFORMATION Item 1. Legal Proceedings...................................................................... 30 Item 4. Submission of Matters to a Vote of Security Holders.................................... 30 Item 6. Exhibits and Reports on Form 8-K....................................................... 31 SIGNATURES...................................................................................... 35 </TABLE> 1
Part I. FINANCIAL INFORMATION Item 1. Financial Statements BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) <TABLE> <CAPTION> June 30, December 2001 31, 2000 ----------- ----------- (unaudited) <S> <C> <C> Assets Cash and due from banks.............................. $ 1,448,252 $ 1,562,745 Interest-bearing deposits with banks................. 116,899 57,006 Federal funds sold and securities purchased under resale agreements or similar arrangements........... 193,022 263,706 Trading securities................................... 120,381 96,719 Securities available for sale........................ 14,490,894 14,495,830 Securities held to maturity (approximate market values of $38,235 at June 30, 2001, and $89,440 at December 31, 2000).................................. 38,249 88,578 Loans held for sale.................................. 1,685,185 846,830 Loans and leases, net of unearned income............. 42,869,163 41,679,591 Allowance for loan and lease losses................ (588,926) (550,599) ----------- ----------- Loans and leases, net............................. 42,280,237 41,128,992 ----------- ----------- Premises and equipment, net.......................... 875,846 834,119 Other assets......................................... 3,484,804 3,200,608 ----------- ----------- Total assets..................................... $64,733,769 $62,575,133 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing deposits....................... $ 5,643,208 $ 5,480,778 Savings and interest checking...................... 2,421,322 2,580,923 Money rate savings................................. 12,349,867 11,505,630 Time deposits...................................... 20,970,361 20,945,956 ----------- ----------- Total deposits................................... 41,384,758 40,513,287 ----------- ----------- Short-term borrowed funds............................ 5,553,996 7,139,003 Long-term debt....................................... 10,864,249 8,625,100 Accounts payable and other liabilities............... 1,488,974 1,263,909 ----------- ----------- Total liabilities................................ 59,291,977 57,541,299 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding........... -- -- Common stock, $5 par, 1,000,000,000 shares authorized; issued and outstanding 424,987,963 at June 30, 2001, and 423,049,641 at December 31, 2000.............................................. 2,124,940 2,115,248 Additional paid-in capital......................... 421,070 417,048 Retained earnings.................................. 2,655,397 2,408,383 Unearned income and unvested restricted stock...... (4,600) (7,071) Accumulated other comprehensive income, net of deferred income taxes of $160,285 at June 30, 2001 and $69,618 at December 31, 2000.................. 244,985 100,226 ----------- ----------- Total shareholders' equity....................... 5,441,792 5,033,834 ----------- ----------- Total liabilities and shareholders' equity....... $64,733,769 $62,575,133 =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 2
BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ----------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Interest Income Interest and fees on loans and leases................ $ 913,376 $ 905,644 $ 1,863,918 $ 1,763,684 Interest and dividends on securities................ 236,401 217,459 477,347 431,618 Interest on short-term investments............... 3,619 6,088 8,451 12,357 ----------- ----------- ----------- ----------- Total interest income..... 1,153,396 1,129,191 2,349,716 2,207,659 ----------- ----------- ----------- ----------- Interest Expense Interest on deposits....... 394,369 378,092 812,792 731,046 Interest on short-term borrowed funds............ 58,465 106,510 146,455 207,648 Interest on long-term debt...................... 152,050 104,890 300,288 195,926 ----------- ----------- ----------- ----------- Total interest expense.... 604,884 589,492 1,259,535 1,134,620 ----------- ----------- ----------- ----------- Net Interest Income.......... 548,512 539,699 1,090,181 1,073,039 Provision for loan and lease losses.............. 43,898 29,076 84,924 56,526 ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan and Lease Losses...................... 504,614 510,623 1,005,257 1,016,513 ----------- ----------- ----------- ----------- Noninterest Income Service charges on deposit accounts.................. 83,893 67,788 159,372 131,056 Investment banking and brokerage fees and commissions............... 42,584 41,653 85,930 87,585 Mortgage banking income.... 49,774 25,173 55,040 52,524 Trust income............... 23,000 19,639 47,143 38,385 Agency insurance commissions............... 42,796 32,579 82,261 64,118 Other insurance commissions............... 3,444 3,785 6,194 7,145 Other nondeposit fees and commissions............... 44,519 36,864 85,949 70,161 Securities gains (losses), net....................... 16,777 (41,114) 88,771 (41,137) Other income............... 26,400 26,419 41,405 45,094 ----------- ----------- ----------- ----------- Total noninterest income.. 333,187 212,786 652,065 454,931 ----------- ----------- ----------- ----------- Noninterest Expense Personnel expense.......... 274,303 241,798 540,746 485,951 Occupancy and equipment expense................... 73,186 67,975 150,482 138,886 Amortization of intangibles............... 17,729 15,774 34,967 31,530 Other noninterest expense.. 153,445 140,029 296,778 270,497 ----------- ----------- ----------- ----------- Total noninterest expense.................. 518,663 465,576 1,022,973 926,864 ----------- ----------- ----------- ----------- Earnings Income before income taxes..................... 319,138 257,833 634,349 544,580 Provision for income taxes..................... 88,333 83,737 181,221 175,620 ----------- ----------- ----------- ----------- Net income................. $ 230,805 $ 174,096 $ 453,128 $ 368,960 =========== =========== =========== =========== Per Common Share Net income: Basic...................... $ .55 $ .41 $ 1.08 $ .88 =========== =========== =========== =========== Diluted.................... $ .54 $ .41 $ 1.06 $ .87 =========== =========== =========== =========== Cash dividends paid........ $ .23 $ .20 $ .46 $ .40 =========== =========== =========== =========== Average Shares Outstanding Basic...................... 420,692,786 421,190,364 421,294,032 420,911,258 =========== =========== =========== =========== Diluted.................... 426,623,357 426,399,394 427,515,463 425,867,326 =========== =========== =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Six Months Ended June 30, 2001 and 2000 (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Accumulated Shares of Additional Retailed Other Total Common Common Paid-In Earnings Comprehensive Shareholders' Stock Stock Capital and Other* Income Equity ----------- ---------- ---------- ---------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1999, as restated...... 419,772,712 $2,098,864 $388,670 $2,124,271 $(322,336) $4,289,469 Add (Deduct) Other comprehensive income: Net income............. -- -- -- 368,960 -- 368,960 Unrealized holding gains (losses) arising during the period............... -- -- -- -- (20,400) (20,400) Less: reclassification adjustment, net of tax of ($14,398)..... -- -- -- -- (26,739) (26,739) ----------- ---------- -------- ---------- --------- ---------- Net unrealized gains (losses) on securities............ -- -- -- -- 6,339 6,339 ----------- ---------- -------- ---------- --------- ---------- Total other comprehensive income.. -- -- -- 368,960 6,339 375,299 ----------- ---------- -------- ---------- --------- ---------- Common stock issued.... 1,930,611 9,653 30,212 -- -- 39,865 Redemption of common stock................. (344,000) (1,720) (7,335) -- -- (9,055) Cash dividends declared on common stock....... -- -- -- (180,621) -- (180,621) Other.................. -- -- -- (1,574) -- (1,574) ----------- ---------- -------- ---------- --------- ---------- Balance, June 30, 2000.. 421,359,323 $2,106,797 $411,547 $2,311,036 $(315,997) $4,513,383 =========== ========== ======== ========== ========= ========== Balance, December 31, 2000, as restated...... 423,049,641 $2,115,248 $417,048 $2,401,312 $ 100,226 $5,033,834 Add (Deduct) Other comprehensive income: Net income............. -- -- -- 453,128 -- 453,128 Unrealized holding gains (losses) arising during the period............... -- -- -- -- 197,644 197,644 Less: reclassification adjustment, net of tax of $31,070....... -- -- -- -- 57,701 57,701 ----------- ---------- -------- ---------- --------- ---------- Net unrealized gains (losses) on securities............ -- -- -- -- 139,943 139,943 Unrecognized gain on cash flow hedge, net of tax of $2,593...... -- -- -- -- 4,816 4,816 ----------- ---------- -------- ---------- --------- ---------- Total other comprehensive income.. -- -- -- 453,128 144,759 597,887 ----------- ---------- -------- ---------- --------- ---------- Common stock issued.... 10,683,122 53,416 259,817 -- -- 313,233 Redemption of common stock................. (8,744,800) (43,724) (272,203) -- -- (315,927) Cash dividends declared on common stock....... -- -- -- (206,596) -- (206,596) Other.................. -- -- 16,408 2,953 -- 19,361 ----------- ---------- -------- ---------- --------- ---------- Balance, June 30, 2001.. 424,987,963 $2,124,940 $421,070 $2,650,797 $ 244,985 $5,441,792 =========== ========== ======== ========== ========= ========== </TABLE> - -------- * Other includes unearned income and unvested restricted stock. The accompanying notes are an integral part of these consolidated financial statements. 4
BB&T CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2001 and 2000 (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> 2001 2000 ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: Net income........................................... $ 453,128 $ 368,960 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses................. 84,924 56,526 Depreciation of premises and equipment.............. 56,034 47,684 Amortization of intangibles......................... 34,967 31,530 Accretion of negative goodwill...................... (3,121) (3,122) Amortization of unearned stock compensation......... 7,287 3,278 Discount accretion and premium amortization on securities, net.................................... (3,354) (2,338) Net decrease (increase) in trading account securities......................................... (23,662) (34,123) Loss (gain) on sales of securities, net............. (88,771) (41,137) Loss (gain) on disposals of premises and equipment, net................................................ (6,182) 2,621 Proceeds from sales of loans held for sale.......... 3,243,488 922,182 Purchases of loans held for sale.................... (1,014,445) (250,245) Origination of loans held for sale, net of principal collected.......................................... (3,038,973) (568,658) Decrease (increase) in: Accrued interest receivable........................ 23,297 (49,093) Other assets....................................... 706,306 (266,949) Increase (decrease) in: Accrued interest payable........................... (26,634) 3,450 Accounts payable and other liabilities............. 151,567 200,340 Other, net.......................................... (26,611) 2,758 ---------- ---------- Net cash provided by (used in) operating activities........................................ 529,245 423,664 ---------- ---------- Cash Flows From Investing Activities: Proceeds from sales of securities available for sale............................................... 668,832 1,113,803 Proceeds from maturities, calls and paydowns of securities available for sale...................... 874,068 1,238,120 Purchases of securities available for sale.......... (1,026,880) (2,047,693) Proceeds from maturities, calls and paydowns of securities held to maturity........................ 1,100 44,559 Purchases of securities held to maturity............ (4,510) (6,715) Leases made to customers............................ (68,499) (61,827) Principal collected on leases....................... 51,119 45,068 Loan originations, net of principal collected....... (1,207,219) (2,455,538) Purchases of loans.................................. (66,200) (273,386) Net cash acquired (paid) in transactions accounted for under the purchase method...................... 109,000 (12,611) Purchases and originations of mortgage servicing rights............................................. (102,945) (11,842) Proceeds from disposals of premises and equipment... 10,168 6,996 Purchases of premises and equipment................. (95,045) (59,398) Proceeds from sales of foreclosed property.......... 21,213 13,183 Proceeds from sales of other real estate held for development or sale................................ 3,688 1,033 Other, net.......................................... -- (210) ---------- ---------- Net cash used in (provided by) investing activities........................................ (832,110) (2,466,458) ========== ========== Cash Flows From Financing Activities: Net increase (decrease) in deposits................. 53,751 2,328,657 Net increase (decrease) in short-term borrowed funds.............................................. (1,585,007) (1,597,629) Proceeds from long-term debt........................ 2,576,795 4,570,457 Repayments of long-term debt........................ (390,969) (3,296,670) Net proceeds from common stock issued............... 28,872 11,572 Redemption of common stock.......................... (315,927) (9,055) Cash dividends paid on common stock................. (189,934) (158,103) Other, net.......................................... -- (6,133) ---------- ---------- Net cash provided by (used in) financing activities........................................ 177,581 1,843,096 ========== ========== Net Increase (Decrease) in Cash and Cash Equivalents......................................... (125,284) (199,698) Cash and Cash Equivalents at Beginning of Period..... 1,883,457 2,134,481 ---------- ---------- Cash and Cash Equivalents at End of Period........... $1,758,173 $1,934,783 ========== ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest........................................... $1,202,242 $1,014,705 Income taxes....................................... 22,369 74,497 Noncash financing and investing activities: Transfer of securities held to maturity to available for sale................................ 53,739 21,445 Transfer of loans to foreclosed property........... 19,793 13,561 Transfer of other real estate owned to fixed assets............................................ 143 3,616 Transfer of fixed assets to other real estate owned............................................. 4,413 735 Tax benefit from exercise of stock options......... 12,967 3,088 Securitization of mortgage loans................... 122,616 493,269 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) A. Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of BB&T Corporation and subsidiaries (referred to herein as "BB&T", "the Corporation" or "the Company") as of June 30, 2001, and December 31, 2000; the consolidated statements of income for the three and six months ended June 30, 2001 and 2000; the consolidated statements of changes in shareholders' equity for the six months ended June 30, 2001 and 2000; and the consolidated statements of cash flows for the six months ended June 30, 2001 and 2000. The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T's 2000 Annual Report on Form 10-K, as restated in BB&T's Current Report on Form 8-K filed on July 25, 2001, amended on July 27, 2001, should be referred to in connection with the reading of these unaudited interim consolidated financial statements. In certain instances, amounts reported in the 2000 financial statements have been reclassified to conform to the 2001 statement presentation. Such reclassifications had no effect on shareholders' equity or net income. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and / or a reduced demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged; (5) costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected; (6) expected cost savings associated with pending mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending mergers may be greater than expected; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (9) adverse changes may occur in the securities markets. B. Nature of Operations BB&T is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations primarily through its commercial banking subsidiaries which do business in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama and Washington, D.C. BB&T's principal banking subsidiaries, Branch Banking and Trust Company ("BB&T-NC"), Branch Banking 6
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) and Trust Company of South Carolina ("BB&T-SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"), provide a wide range of traditional banking services to individuals and commercial customers. At June 30, 2001, BB&T was the parent company for 16 subsidiary banks acquired through mergers with BankFirst Corporation, FirstSpartan Financial Corp., Century South Banks, Inc. and Virginia Capital Bancshares, Inc. These banks are expected to be merged with and into BB&T-NC, BB&T-SC or BB&T-VA, as appropriate, based on the location of their operations. Substantially all of BB&T's loans are to individuals residing in the market areas described above or to businesses that are located in this geographic area. Subsidiaries of BB&T's commercial banking units offer lease financing to commercial businesses and municipal governments, investment services (including discount brokerage services, annuities, mutual funds and government and municipal bonds), life insurance and property and casualty insurance on an agency basis and insurance premium financing. Direct nonbank subsidiaries of BB&T provide a variety of financial services including automobile lending, equipment financing, factoring, full- service securities brokerage, investment banking and corporate finance services. C. New Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. SFAS No. 133 established accounting and reporting standards that require every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In 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 on January 1, 2001. There was no material impact on net income at the date of adoption. Substantially all of the transition adjustment is expected to be reversed into net income during 2001. The notional amount of derivative financial instruments held by BB&T at June 30, 2001, was $3.4 billion with unrealized net gains of $8.7 million, compared to a total notional value of $2.2 billion with unrealized net losses of $12.3 million at December 31, 2000. The transition adjustment and second quarter 2001 impact of the statement are based on the interpretive guidance issued thus far by the Financial Accounting Standards Board ("FASB"). However, the FASB continues to issue guidance that could affect BB&T's application of the statement and require adjustments to the transition amount or amounts and disclosures in the consolidated financial statements. See "Derivative Financial Instruments" herein for additional disclosures related to the adoption of SFAS No. 133. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The statements provide accounting and reporting standards for such transactions based on consistent application of a financial components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Certain portions of the statement became effective for transactions occurring after March 31, 2001. The adoption of these provisions did not have a material impact on BB&T's consolidated financial position or consolidated results of operations. 7
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, " Accounting for Preacquisition Contingencies of Purchased Enterprises." The provisions of the Statement apply to all business combinations initiated after June 30, 2001. SFAS No. 141 requires that all business combinations be accounted for by the purchase method of accounting. This method requires the accounts of an acquired institution to be 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 acquired to be capitalized as goodwill. The Statement also requires that the assets of an acquired institution be recognized as assets apart from goodwill if they meet specific criteria presented in the Statement. The Statement ends the use of the pooling-of-interests method of accounting for business combinations, which required the restatement of all prior period information for the accounts of the acquired institution. BB&T has historically been a frequent acquirer and has used both the pooling-of-interests and purchase methods of accounting. Following the adoption of the Statement, BB&T will account for all future acquisitions using the purchase method. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition, and addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Statement eliminates the requirement to amortize goodwill and other intangible assets that have indefinite useful lives, instead requiring the assets be tested at least annually for impairment based on the specific guidance in the Statement. BB&T will adopt the provisions of the Statement effective January 1, 2002, as required, and apply the provisions of the Statement to all goodwill and other intangible assets recognized in the financial statements. The Statement requires a transition impairment test of goodwill and other intangibles in conjunction with the initial application of the Statement. Any resulting impairment loss will be reflected as a change in accounting principle. As of June 30, 2001, BB&T had unamortized goodwill totaling $795.2 million, unamortized other intangible assets of $14.8 million, and unamortized negative goodwill of $11.1 million, all of which will be subject to the transition provisions of Statement Nos. 141 and 142. Amortization expense related to goodwill was $62.9 million and $35.0 million for the year ended December 31, 2000, and the six months ended June 30, 2001, respectively. Management has not yet determined the impact of adopting SFAS No. 142, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 8
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) D. Mergers and Acquisitions The following table presents summary information with respect to mergers and acquisitions completed by BB&T Corporation during 2000 and thus far during 2001: Summary of Completed Mergers and Acquisitions (Dollars in millions) <TABLE> <CAPTION> Goodwill Date of Accounting Goodwill Amortization Acquisition Acquired Company Headquarters Total Assets Method Recorded Period ----------- --------------------------------- ------------------ -------------- ---------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> June 27, 2001 Virginia Capital Bancshares, Inc. Fredericksburg, VA $532.7 million Purchase $15.2 million 15 years June 7, 2001 Century South Banks, Inc. Alpharetta, GA 1.7 billion Pooling N/A N/A March 2, 2001 FirstSpartan Financial Corp. Spartanburg, SC 591.0 million Purchase 42.0 million 15 years January 8, 2001 FCNB Corp. Frederick, MD 1.6 billion Pooling N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- December 27, 2000 BankFirst Corporation Knoxville, TN $929.5 million Purchase $71.0 million 15 years November 15, 2000 Edgar M. Norris & Co. Greenville, SC 3.7 million Purchase N/A N/A September 29, 2000 Laureate Capital Corp. Charlotte, NC 13.8 million Purchase N/A N/A July 6, 2000 One Valley Bancorp, Inc. Charleston, W.Va. 6.4 billion Pooling N/A N/A June 15, 2000 First Banking Company of Southeast Georgia Statesboro, GA 420.0 million Pooling N/A N/A June 13, 2000 Hardwick Holding Company Dalton, GA 507.2 million Pooling N/A N/A January 13, 2000 Premier Bancshares, Inc. Atlanta, GA 2.0 billion Pooling N/A N/A <CAPTION> BB&T Common Shares Issued to Date of Complete Acquisition Transaction ----------- ------------ <S> <C> June 27, 2001 4.7 million June 7, 2001 12.7 million March 2, 2001 3.8 million January 8, 2001 8.7 million - ---------------------------------------------------------------------------------------------------------------------------- December 27, 2000 5.3 million November 15, 2000 N/A September 29, 2000 N/A July 6, 2000 43.1 million June 15, 2000 4.1 million June 13, 2000 3.9 million January 13, 2000 16.8 million </TABLE> N/A--Not applicable or terms not disclosed. The table above does not include mergers and acquisitions of acquired companies prior to their acquisition by BB&T or insurance agency acquisitions, which are summarized below. During the six months ended June 30, 2001, BB&T acquired two insurance agencies that were accounted for as purchases. In conjunction with these two transactions, BB&T issued approximately 229,000 shares of common stock and recorded $7.7 million in goodwill, which is being amortized using the straight-line method over 15 years. BB&T acquired six insurance agencies during 2000, which were accounted for as purchases. In conjunction with these 2000 transactions, BB&T issued 1.4 million shares of common stock and recorded $38.9 million in goodwill, which is being amortized using the straight-line method over 15 years. BB&T typically provides an allocation period, not to exceed one year, to identify and quantify the assets acquired and liabilities assumed in business combinations accounted for as purchases. Management currently does not anticipate any material adjustments to the assigned values of the assets and liabilities of acquired companies. Pending Mergers and Acquisitions On January 24, 2001, BB&T announced plans to merge with F&M National Corporation ("F&M") of Winchester, Virginia. F&M has $4 billion in assets and operates 163 banking offices, 13 mortgage banking offices, three trust offices and six insurance agencies. Shareholders of F&M will receive 1.09 shares of BB&T common stock in exchange for each share of F&M common stock held. The transaction, which was accounted for as a pooling of interests, closed on August 9, 2001. On July 10, 2001, BB&T announced plans to acquire Community First Banking Company ("CFBC") of Carrollton, Georgia. CFBC has $548.1 million in assets and operates nine banking offices, a consumer finance company, an insurance 9
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) agency and a full-service brokerage subsidiary. Shareholders of CFBC will receive .98 shares of BB&T common stock in exchange for each share of CFBC common stock held. The transaction, which is expected to be accounted for as a purchase, is planned for completion in the fourth quarter of 2001. E. Calculation of Earnings Per Common Share BB&T's basic and diluted earnings per common share amounts were calculated as follows: BB&T CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Periods as Indicated <TABLE> <CAPTION> For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ----------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> Basic Earnings Per Share: Weighted average number of common shares outstanding during the period............ 420,692,786 421,190,364 421,294,032 420,911,258 ----------- ----------- ----------- ----------- Net income.................... $ 230,805 $ 174,096 $ 453,128 $ 368,960 ----------- ----------- ----------- ----------- Basic earnings per share...... $ .55 $ .41 $ 1.08 $ .88 =========== =========== =========== =========== Diluted Earnings Per Share: Weighted average number of common shares................ 420,692,786 421,190,364 421,294,032 420,911,258 Add: Dilutive effect of outstanding options (as determined by application of treasury stock method).. 5,930,571 5,209,030 6,221,431 4,956,068 ----------- ----------- ----------- ----------- Weighted average number of common shares, as adjusted... 426,623,357 426,399,394 427,515,463 425,867,326 ----------- ----------- ----------- ----------- Net income.................... $ 230,805 $ 174,096 $ 453,128 $ 368,960 =========== =========== =========== =========== Diluted earnings per share.... $ .54 $ .41 $ 1.06 $ .87 =========== =========== =========== =========== </TABLE> F. Segment Disclosures BB&T's operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage, and Treasury. These operating segments have been identified based primarily on BB&T's existing organizational structure. The segments require unique technology and marketing strategies and offer different products and services. While BB&T is managed as an integrated organization, individual executive managers are held accountable for the operations of the business segments that report to them. BB&T's strategies for revenue growth are focused on developing and expanding client relationships through quality service delivery and an effective sales culture. The segment results presented herein are based on internal 10
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) management accounting policies that are designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the individual segments is not comparable with BB&T's consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not necessarily indicative of the segments' financial performance if they operated as independent entities. Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's Current Report on Form 8-K, filed on July 25, 2001, and amended on July 27, 2001, for a description of internal accounting policies and the basis of segmentation, including a description of the segments presented in the accompanying tables. There have been no significant changes from the methods used to develop the segment disclosures contained therein. 11
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) The following tables disclose selected financial information for BB&T's reportable business segments for the periods as indicated: BB&T Corporation Reportable Segments For the Three Months Ended June 30, 2001 and 2000 <TABLE> <CAPTION> Investment Banking and Banking Network Mortgage Banking Trust Services Agency Insurance Brokerage ----------------------- ---------------------- ---------------- ---------------- ----------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ----------- ----------- ---------- ---------- ------- ------- -------- ------- -------- -------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net interest income (expense) from external customers....... $ 332,870 $ 423,137 $ 153,116 $ 115,083 $(9,086) $(9,752) $ 303 $ 9 $ 2,295 $ 2 ,982 Net intersegment interest income (expense)....... 167,279 117,317 (118,117) (91,391) 12,367 13,298 -- -- -- -- ----------- ----------- ---------- ---------- ------- ------- -------- ------- -------- -------- Net interest income.......... 500,149 540,454 34,999 23,692 3,281 3,546 303 9 2,295 2,982 ----------- ----------- ---------- ---------- ------- ------- -------- ------- -------- -------- Provision for loan and lease losses.......... 47,995 35,556 819 675 -- -- -- -- -- -- Noninterest income from external customers....... 126,646 68,600 43,351 6,933 24,288 12,629 41,218 23,025 46,319 41,516 Intersegment noninterest income.......... 55,162 31,459 -- -- -- -- -- -- -- -- Noninterest expense......... 259,939 262,009 14,109 1,000 13,767 9,255 29,495 16,384 46,624 40,780 Intersegment noninterest expense......... 129,037 82,237 6,235 4,787 776 871 1,057 1,025 380 378 ----------- ----------- ---------- ---------- ------- ------- -------- ------- -------- -------- Income before income taxes.... 244,986 260,711 57,187 24,163 13,026 6,049 10,969 5,625 1,610 3,340 Provision for income taxes.... 73,225 77,863 16,238 6,371 4,602 2,008 4,321 2,241 1,439 1,728 ----------- ----------- ---------- ---------- ------- ------- -------- ------- -------- -------- Net income...... $ 171,761 $ 182,848 $ 40,949 $ 17,792 $ 8,424 $ 4,041 $ 6,648 $ 3,384 $ 171 $ 1,612 =========== =========== ========== ========== ======= ======= ======== ======= ======== ======== Identifiable segment assets.. $35,482,959 $37,653,222 $8,511,201 $6,074,890 $50,404 $31,367 $112,581 $76,974 $658,067 $673,325 =========== =========== ========== ========== ======= ======= ======== ======= ======== ======== <CAPTION> Treasury All Other Segments(1) Total Segments ----------------------- --------------------- ----------------------- 2001 2000 2001 2000 2001 2000 ----------- ----------- ---------- ---------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Net interest income (expense) from external customers....... $ 47,746 $ 20,210 $ 70,587 $ 90,989 $ 597,831 $ 642,658 Net intersegment interest income (expense)....... 8,806 19,091 -- -- 70,335 58,315 ----------- ----------- ---------- ---------- ----------- ----------- Net interest income.......... 56,552 39,301 70, 587 90,989 668,166 700,973 ----------- ----------- ---------- ---------- ----------- ----------- Provision for loan and lease losses.......... 34 31 16,390 13,693 65,238 49,955 Noninterest income from external customers....... 9,331 7,105 23,088 52,959 314,241 212,767 Intersegment noninterest income.......... -- -- -- -- 55,162 31,459 Noninterest expense......... 1,783 1,833 22,681 25,125 388,398 356,386 Intersegment noninterest expense......... 486 138 2,850 3,780 140,821 93,216 ----------- ----------- ---------- ---------- ----------- ----------- Income before income taxes.... 63,580 44 ,404 51,754 101,350 443,112 445,642 Provision for income taxes.... 16,977 12,701 4 ,612 29,093 121,414 132,005 ----------- ----------- ---------- ---------- ----------- ----------- Net income...... $ 46,603 $ 31,703 $ 47,142 $ 72,257 $ 321,698 $ 313,637 =========== =========== ========== ========== =========== =========== Identifiable segment assets.. $19,304,014 $14,266,529 $4,212,077 $3,017,242 $68,331,303 $61,793,549 =========== =========== ========== ========== =========== =========== </TABLE> - ---- (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. 12
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) BB&T Corporation Reportable Segments For the Six Months Ended June 30, 2001 and 2000 <TABLE> <CAPTION> Investment Banking and Banking Network Mortgage Banking Trust Services Agency Insurance Brokerage ----------------------- ---------------------- ------------------ ---------------- ----------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- -------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net interest income (expense) from external customers....... $ 669,146 $ 797,972 $ 299,831 $ 224,176 $(19,007) $(19,252) $ 327 $ -- $ 4,667 $ 6,030 Net intersegment interest income (expense)....... 314,394 211,448 (231,066) (165,199) 25,260 25,855 -- -- -- -- ----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- -------- Net interest income.......... 983,540 1,009,420 68,765 58,977 6,253 6,603 327 -- 4,667 6,030 ----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- -------- Provision for loan and lease losses.......... 88,359 66,542 1,519 1,380 -- -- -- -- -- -- Noninterest income from external customers....... 239,352 189,986 47,785 35,653 48,861 32,185 79,509 53,458 89,253 85,999 Intersegment noninterest income.......... 93,577 56,324 -- -- -- -- -- -- -- -- Noninterest expense......... 473,012 512,120 32,792 22,453 29,115 22,032 59,631 38,030 88,847 84,531 Intersegment noninterest expense......... 243,707 155,423 13,052 10,484 1,551 1,814 2,114 2,049 761 752 ----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- -------- Income before income taxes.... 511,391 521,645 69,187 60,313 24,448 14,942 18,091 13,379 4,312 6,746 Provision for income taxes.... 142,668 161,988 20,297 18,599 6,802 5,023 7,167 5,310 2,487 3,299 ----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- -------- Net income...... $ 368,723 $ 359,657 $ 48,890 $ 41,714 $ 17,646 $ 9,919 $ 10,924 $ 8,069 $ 1,825 $ 3,447 =========== =========== ========== ========== ======== ======== ======== ======= ======== ======== Identifiable segment assets.. $35,482,959 $37,653,222 $8,511,201 $6,074,890 $ 50,404 $ 31,367 $112,581 $76,974 $658,067 $673,325 =========== =========== ========== ========== ======== ======== ======== ======= ======== ======== <CAPTION> Treasury All Other Segments(1) Total Segments ----------------------- --------------------- ----------------------- 2001 2000 2001 2000 2001 2000 ----------- ----------- ---------- ---------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Net interest income (expense) from external customers....... $ 80,787 $ 45,938 $ 141,546 $ 128,034 $ 1,177,297 $ 1,182,898 Net intersegment interest income (expense)....... 21,838 33,686 -- -- 130,426 105,790 ----------- ----------- ---------- ---------- ----------- ----------- Net interest income.......... 102,625 79,624 141,546 128,034 1,307,723 1,288,688 ----------- ----------- ---------- ---------- ----------- ----------- Provision for loan and lease losses.......... 67 61 29,006 19,482 118,951 87,465 Noninterest income from external customers....... 15,730 13,231 63,504 61,786 583,994 472,298 Intersegment noninterest income.......... -- -- -- -- 93,577 56,324 Noninterest expense......... 3, 553 2,588 50,777 41,706 737,727 723,460 Intersegment noninterest expense......... 972 276 5,700 4 ,456 267,857 175,254 ----------- ----------- ---------- ---------- ----------- ----------- Income before income taxes.... 113,763 89,930 119,567 124,176 860,759 831,131 Provision for income taxes.... 27,391 20,299 14,710 36,573 221,522 251,091 ----------- ----------- ---------- ---------- ----------- ----------- Net income...... $ 86,372 $ 69,631 $ 104,857 $ 87,603 $ 639,237 $ 580,040 =========== =========== ========== ========== =========== =========== Identifiable segment assets.. $19,304,014 $14,266,529 $4,212,077 $3,017,242 $68,331,303 $61,793,549 =========== =========== ========== ========== =========== =========== </TABLE> - ---- (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. 13
BB&T CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) June 30, 2001 (Unaudited) The following table presents a reconciliation of total segment results to consolidated results: <TABLE> <CAPTION> For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------- ---------------------- 2001 2000 2001 2000 ------------ ----------- ---------- ---------- <S> <C> <C> <C> <C> Net Interest Income Net interest income from segments................. $ 668,166 $ 700,973 $1,307,723 $1,288,688 Other net interest income(1)................ 33,629 34,674 69,720 55,523 Elimination of net intersegment interest income(2)................ (153,283) (195,948) (287,262) (271,172) ------------ ----------- ---------- ---------- Consolidated net interest income........ $ 548,512 $ 539,699 $1,090,181 $1,073,039 ============ =========== ========== ========== Net income Net income from segments.. $ 321,698 $ 313,637 $ 639,237 $ 580,040 Other net income (loss)(1)................ 335,208 45,590 333,129 13,837 Elimination of intersegment net income(2)................ (426,101) (185,131) (519,238) (224,917) ------------ ----------- ---------- ---------- Consolidated net income................. $ 230,805 $ 174,096 $ 453,128 $ 368,960 ============ =========== ========== ========== <CAPTION> June 30, June 30, 2001 2000 ------------ ----------- <S> <C> <C> <C> <C> Total Assets Total assets from segments................. $ 68,331,303 $61,793,549 Other assets(1)........... 9,824,948 2,591,720 Elimination of intersegment assets(2)... (13,422,482) (6,147,182) ------------ ----------- Consolidated total assets................. $ 64,733,769 $58,238,087 ============ =========== </TABLE> - -------- (1) Other net interest income, other net income (loss) and other assets include amounts associated with BB&T's support functions not allocated to the various reportable segments. (2) BB&T's reconciliation of total segment results to consolidated results requires the elimination of internal management accounting practices. These adjustments include the elimination of funds transfer pricing credits and charges and the elimination of intersegment noninterest income and noninterest expense, which are allocated to the various segments using BB&T's internal accounting methods. 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION BB&T's total assets at June 30, 2001, were $64.7 billion, a $2.2 billion, or 3.4%, increase from December 31, 2000. The asset category that produced the majority of the increase was loans and leases, including loans held for sale, which grew $2.0 billion, or 4.8%. Total deposits at June 30, 2001, increased $871.5 million, or 2.2%, from December 31, 2000. Short-term borrowed funds declined $1.6 billion, or 22.2%, while long-term debt increased $2.2 billion, or 26.0%, during the first six months of 2001. Total shareholders' equity increased $408.0 million, or 8.1%, during the same time frame. The factors causing the fluctuations in the major balance sheet categories are further discussed in the following sections. Loans and Leases BB&T had strong loan growth during the second quarter and first six months of 2001 compared to the previous year. Average total loans for the quarter ended June 30, 2001, increased 12.0% compared to the same period of 2000. Average total loans for the six months ended June 30 were $43.5 billion, or 12.2% greater than the average for the first six months of 2000. Management continues to emphasize commercial lending in order to improve the profitability of the overall loan portfolio. As a result, BB&T has become the leading small business lender in the Carolinas. BB&T is a frequent acquirer of community banks and thrift institutions, which results in a significant percentage of the consolidated loan portfolio being composed of mortgage loans. Additionally, BB&T is the largest originator of mortgage loans in the Carolinas, with second quarter 2001 originations totaling $2.7 billion. On a relative basis, mortgage loans are less profitable than commercial or consumer loans. For this reason, management utilizes securitization programs and sells fixed-rate mortgage loans to improve the profitability of the overall loan portfolio. However, due to the low interest rate environment and resulting high volumes of mortgage loan originations and the inventory of mortgage loans held for sale, the mix of loans in the portfolio was very similar to that of one year ago. Average mortgage loans increased 12.3% during the first six months of 2001 compared to the same period of 2000 and represented 19.6% of average total loans and leases at June 30, 2001, compared to 19.6% a year ago. Average commercial loans, including lease receivables, increased 14.4% during the first six months of 2001, and now compose 53.9% of the loan portfolio compared to 52.9% in the second quarter of 2000. Average consumer loans, which include sales finance, revolving credit and direct retail, increased 7.9% for the six months ended June 30, 2001, compared to the same period in 2000 and compose the remaining 26.5% of average loans, as compared to 27.5% for the same period in 2000. These trends are also evident in the second quarter of 2001. For the second quarter of 2001, average loans totaled $44.0 billion, an increase of $4.7 billion, or 12.0%, compared to the second quarter of 2000. Average commercial loans and leases increased 13.5% in the second quarter of 2001 to a total of $23.6 billion, an increase of $2.8 billion, compared to the second quarter of 2000; average consumer loans increased 6.9% in the second quarter of 2001 to a total of $11.6 billion, an increase of $747.1 million, compared to the second quarter of 2000; and average mortgage loans increased 15.1% in the second quarter of 2001 to a total of $8.8 billion, an increase of $1.2 billion, compared to the second quarter of 2000. The growth rates of average loans are affected by loan portfolios held by companies that were acquired in purchase transactions during the last six months of 2000 and the first six months of 2001. The securitization of $984.5 million of mortgage loans during 2000 and $122.6 million thus far in 2001 also affected the reported growth in average mortgage loans. During the first six months of 2001, loans totaling $502.3 million and $451.9 million were acquired through the purchase of FirstSpartan Financial Corp. ("FirstSpartan") and Virginia Capital Bancshares, Inc. ("VCAP"), respectively. Excluding the effect of purchase accounting transactions completed 15
during 2000 and 2001 and mortgage loan securitizations, average "internal" loan growth for the three months ended June 30, 2001, was 11.0% compared to the second quarter of 2000. By category, excluding the effects of purchase accounting transactions and loan securitizations, average mortgage loans, including loans held for sale, increased 19.9%, commercial loans and leases grew 10.8%, and consumer loans increased 4.3% in the second quarter of 2001 compared to the same period of 2000. The average annualized fully taxable equivalent ("FTE") yields on commercial, consumer and mortgage loans for the first six months of 2001 were 8.83%, 10.01%, and 7.50%, respectively, resulting in an average annualized yield on the total loan portfolio of 8.88%. This reflects a decrease of 33 basis points over the 9.21% annualized yield on total average loans during the first six months of 2000. The decrease in yields resulted from a lower average prime rate during 2001, as well as generally lower interest rates produced by aggressive action from the Federal Reserve Board during 2001. During 2001, the Federal Reserve has reduced the target Federal funds rate six times for a total of 2.75%, with reductions of 1.25% occurring in the second quarter. As a result of the Federal Reserve Board's actions, the average prime rate, which is the basis for pricing many commercial and consumer loans, declined to 7.34% during the three months ended June 30, 2001, compared to 9.25% for the comparable period of 2000. For the first half of 2001, the prime rate averaged 7.98%, compared to 8.97% during the first six months of 2000. The growth in the overall loan portfolio and the decrease in the yield of the portfolio, from 9.33% in the second quarter and 9.21% in the first six months of 2000 to 8.59% in the second quarter and 8.88% in the first half of 2001, resulted in a relatively flat effect on interest income from loans and leases in the current quarter and a 5.7% increase in interest income from loans and leases during the first six months of 2001 compared to the 2000 periods. Securities Securities available for sale totaled $14.5 billion at June 30, 2001, a decrease of $4.9 million from December 31, 2000. Securities available for sale had net unrealized gains, net of deferred income taxes, of $240.2 million at June 30, 2001, compared to net unrealized gains, net of deferred income taxes, of $100.2 million at December 31, 2000. Securities held to maturity totaled $38.2 million, down $50.3 million, or 56.8%, from year-end 2000. Trading securities totaled $120.4 million, an increase of $23.7 million, or 24.5%, compared to the balance at December 31, 2000. Average total securities for the first six months amounted to $14.5 billion, up 3.2% from the average during the first half of 2000. For the second quarter of 2001, average securities totaled $14.4 billion, or 2.5% higher than the average balance for the second quarter of 2000. The mix of the investment portfolio has changed significantly during 2001 compared to 2000. This change is a result of a restructuring of the securities portfolio in the second and third quarters of 2000. The restructuring was undertaken in order to improve the overall yield of the portfolio, improve the liquidity, and reduce the average duration of the portfolio. As part of the restructuring, BB&T sold $5.9 billion in securities and reinvested the proceeds in higher yielding securities, primarily U.S. Government securities. At June 30, 2001, average U.S. Government securities composed 72.4% of the total portfolio compared to 58.8% in 2000. Mortgage-backed securities composed 19.7% at June 30, 2001, and state and municipal securities made up 7.0%, compared to 32.9% and 7.5%, respectively, in 2000. The annualized FTE yield on the average total securities portfolio for the first half of 2001 was 7.26%, an increase of 57 basis points from the yield earned in the first half of 2000. This increase resulted primarily from the restructuring of the securities portfolio. Other Interest Earning Assets Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $193.0 million at June 30, 2001, a decrease of $70.7 million, or 26.8%, compared to December 31, 2000. Interest-bearing deposits with banks increased $59.9 million from December 31, 2000. These categories of earning assets 16
are subject to large daily fluctuations based on the availability of these types of funds. The average yield on other interest-earning assets for the first six months of 2001 was 5.22%, a decrease from the 6.25% earned during the first six months of 2000. The decrease in the yield on other interest- earning assets is principally the result of the decrease in the average Federal funds rate from 5.98% for the first six months of 2000 to 4.96% for the first six months of 2001. Other Assets BB&T's other noninterest-earning assets, excluding premises and equipment and noninterest-bearing cash and due from banks, increased $284.2 million from December 31, 2000, to June 30, 2001. The increase results primarily from the purchases of additional bank-owned life insurance, which is used as a funding source for certain post-retirement benefits, at a cost of $199.8 million. Additionally, goodwill from purchase acquisitions increased $34.9 million and capitalized mortgage servicing rights increased $56.3 million. Deposits Total end of period deposits increased $871.5 million, or 2.2%, from December 31, 2000, to June 30, 2001. Average deposits for the first six months of 2001 increased $2.7 billion, or 7.1%, compared to the first six months of 2000. The categories of deposits with the highest average rates of growth in 2001 compared to 2000 were: certificates of deposit and other time deposits, which grew $1.5 billion, or 8.0%, and money rate savings accounts, including investor deposit accounts, which increased $1.9 billion, or 19.2%. The growth realized in these deposit categories was partially offset by declines of $754.7 million, or 22.2%, in average savings and interest checking. For the second quarter, average deposits increased $3.0 billion, or 7.8%. Total transaction accounts, which include noninterest-bearing deposits, savings, interest checking and money rate savings, totaled $20.0 billion for the second quarter, an increase of $1.3 billion, or 7.1%, compared to the second quarter of 2000. Average time deposits for the second quarter totaled $21.1 billion, an increase of $1.7 billion, or 8.5%, compared to the second quarter of 2000. The growth in average deposits for 2001 includes the effect of deposits acquired in purchase accounting transactions completed during the last six months of 2000 and the first six months of 2001. The purchase of FirstSpartan and VCAP resulted in the addition of $436.1 million and $381.6 million in deposits, respectively. Growth rates for noninterest-bearing deposits are also affected by an official check outsourcing program, which improves fee income, but reduces the balance of noninterest-bearing deposits. Excluding the effects of purchase accounting transactions and official check outsourcing, average deposits for the six months ended June 30, 2001, would have increased 5.0% compared to the same time period one year ago. Excluding purchase accounting, transaction account deposits would have increased 4.7% compared to the six months ended June 30, 2000. Certificate accounts and other time deposits would have increased 5.2%, excluding purchase accounting transactions. For the second quarter, total average deposits, excluding the effects of purchase accounting transactions and official check outsourcing, would have increased 5.4% compared to the second quarter of 2000. The annualized average cost of total interest-bearing deposits during the first six months of 2001 was 4.67%, an increase of 14 basis points compared to 2000. Other Borrowings The growth in loans, securities and other assets in recent years have exceeded the growth of total deposits. As a result, cost-effective alternative funding sources, such as Federal Home Loan Bank ("FHLB") advances, master notes, purchases of Federal funds and sales of securities under repurchase agreements have been increasingly utilized to support balance sheet growth. At June 30, 2001, short-term borrowed funds totaled $5.6 billion, a decrease of $1.6 billion, or 22.2%, compared to December 31, 2000. For the second quarter of 2001, average short-term borrowed funds totaled 17
$5.5 billion, a decrease of $1.6 billion, or 22.8%, from the comparable period of 2000. For the six months ended June 30, 2001, total average short-term borrowed funds totaled $6.0 billion, a decrease of $1.3 billion, or 17.7%, compared to the first half of 2000. The average annualized rate paid on short- term borrowed funds was 4.25% for the second quarter of 2001, a decrease of 174 basis points from the average rate of 5.99% paid in the second quarter of 2000. This decrease in the cost of short-term borrowed funds resulted from the lower interest rate environment that has existed during 2001 compared to 2000, which included a 194 basis point decrease in the average Federal funds rate from the second quarter of 2000 to the second quarter of 2001. Long-term debt consists primarily of FHLB advances, medium term bank notes and corporate subordinated debt. These borrowings provide BB&T with the flexibility to structure borrowings in a manner that aids in the management of interest rate risk and liquidity. Long-term debt totaled $10.9 billion at June 30, 2001, an increase of $2.2 billion, or 26.0%, from the balance at December 31, 2000. For the second quarter of 2001, average long-term debt totaled $10.9 billion, an increase of $3.9 billion, or 56.6%, compared to the prior year. For the six months ended June 30, 2001, total average long-term borrowed funds totaled $10.6 billion, an increase of $4.0 billion, or 59.7%, compared to the first half of 2000. Long-term debt has been utilized for a variety of funding needs, including the repurchase of common stock in conjunction with certain acquisitions. The substantial increase in long-term borrowings during the year reflects BB&T's efforts to take advantage of declining interest rates and lock in lower funding costs for a longer period of time. The average annualized rate paid on long-term borrowed funds was 5.60% for the second quarter of 2001, a decrease of 46 basis points from the average rate of 6.06% paid in the second quarter of 2000. Asset Quality Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $281.8 million at June 30, 2001, compared to $214.0 million at December 31, 2000. Nonperforming assets, as a percentage of loan-related assets, were .63% at June 30, 2001, compared to .50% at December 31, 2000. Loans 90 days or more past due and still accruing interest totaled $82.5 million at June 30, 2001, compared to $75.2 million at year-end 2000. BB&T's net charge-offs totaled $38.3 million for the second quarter and amounted to .35% of average loans and leases, on an annualized basis, compared to $24.3 million, or .25% of average loans and leases, on an annualized basis, in the corresponding period in 2000. For the six months ended June 30, 2001, net charge-offs totaled $66.2 million, or .31% of average loans and leases, compared to $44.6 million, or .23% of average loans and leases, in 2000. The increases in nonperforming assets and net charge-offs during the second quarter reflect the slowdown in the economy. However, BB&T's asset quality, as measured by relative levels of nonperforming assets and net charge-offs, has remained favorable compared to published industry averages. The allowance for loan and lease losses was $588.9 million, or 1.32% of loans and leases, at June 30, 2001, compared to $550.6 million, or 1.29% of loans and leases, at December 31, 2000. The slight increase in the allowance as a percentage of loans and leases reflects higher provisions for loan and lease losses given the economic slowdown and the impact of acquiring institutions with higher allowance to loan ratios. The provision for loan and lease losses for the second quarter of 2001 was $43.9 million, compared to $29.1 million in the comparable quarter of 2000. For the six months, the provision for loan and lease losses totaled $84.9 million compared to $56.5 million in 2000. The increased provision during 2001 was necessary to cover higher net charge-offs, maintain the allowance at a level considered adequate to absorb losses inherent in the loan portfolio at the balance sheet date and to provide additional allowances for acquired entities to align their collection and charge-off policies and procedures with those of BB&T. Asset quality statistics for the last five calendar quarters are presented in the accompanying table. 18
ASSET QUALITY ANALYSIS (Dollars in thousands) <TABLE> <CAPTION> For the Three Months Ended ------------------------------------------------ 6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Allowance For Loan & Lease Losses Beginning balance......... $573,877 $550,599 $532,344 $515,806 $511,066 Allowance for acquired loans.................... 9,470 10,084 12,934 -- -- Provision for loan and lease losses............. 43,898 41,026 46,398 39,303 29,076 Net charge-offs........... (38,319) (27,832) (41,077) (22,765) (24,336) -------- -------- -------- -------- -------- Ending balance.......... $588,926 $573,877 $550,599 $532,344 $515,806 ======== ======== ======== ======== ======== Risk Assets Nonaccrual loans and leases................... $236,387 $189,642 $167,249 $138,192 $134,650 Foreclosed real estate.... 24,989 31,325 29,324 22,831 19,585 Other foreclosed property................. 20,068 22,681 16,903 16,042 13,694 Restructured loans........ 324 2,261 492 445 501 -------- -------- -------- -------- -------- Total nonperforming assets................. $281,768 $245,909 $213,968 $177,510 $168,430 -------- -------- -------- -------- -------- Loans 90 days or more past due and still accruing... $ 82,507 $ 79,780 $ 75,191 $ 77,108 $ 64,767 ======== ======== ======== ======== ======== Asset Quality Ratios Nonaccrual loans and leases as a percentage of total loans and leases*.......... .53% .44% .39% .34% .34% Total nonperforming assets as a percentage of: Total assets.............. .44 .39 .34 .30 .29 Loans and leases plus foreclosed property*..... .63 .56 .50 .44 .42 Annualized net charge-offs as a percentage of average loans and leases*.......... .35 .26 .40 .23 .25 Allowance for loan and lease losses as a percentage of loans and leases*.......... 1.32 1.31 1.29 1.31 1.29 Ratio of allowance for loan and lease losses to: Net charge-offs........... 3.83x 5.08x 3.37x 5.88x 5.27x Nonaccrual and restructured loans and leases........... 2.49 2.99 3.28 3.84 3.82 </TABLE> - -------- * All items referring to loans and leases include loans held for sale and are net of unearned income. MARKET RISK MANAGEMENT As a financial institution, BB&T's most significant market risk exposure is interest rate risk. The primary objective of interest rate risk management is to minimize the effect that changes in interest rates have on net interest income. This is accomplished through active management of asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of maturity mixes for assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T's portfolios of assets and liabilities that will produce consistent net interest income during periods of changing interest rates. BB&T's Asset / Liability Management Committee ("ALCO") monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO also sets policy guidelines and establishes long- 19
term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. The majority of assets and liabilities of financial institutions are monetary in nature and differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve System ("FRB") to regulate the availability and cost of credit have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, BB&T is positioned to respond to changing interest rates and inflationary trends. Management uses Interest Sensitivity Simulation Analysis ("Simulation") to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T's interest sensitivity by means of a computer model that incorporates the current volumes, average rates and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios of projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, however, 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 of mortgage-related assets; cash flows and maturities of derivative financial instruments, changes in market condition, loan volumes and pricing, deposit sensitivity; customer preferences and capital plans. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. Interest Sensitivity Simulation Analysis June 30, 2001 <TABLE> <CAPTION> Annualized Interest Rate Scenario Hypothetical --------------------------------------- Percentage Linear Change in Change in Prime Net Interest Prime Rate Rate Income ---------- ----- ------------ <S> <C> <C> +3.00% 9.75% -0.54% +1.50 8.25 -0.17 -1.50 5.25 -1.88 -3.00 3.75 -3.20 </TABLE> 20
Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over six months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management's ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. At June 30, 2001, the sensitivity of BB&T's net interest income to changes in interest rates was within management's targets, as illustrated in the accompanying table. Derivative Financial Instruments BB&T utilizes a variety of financial instruments to aid in the management of interest rate risk. 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 to hedge business loans, forecasted sales of mortgage loans and certificates of deposit. Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with strong credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T's credit risk exposure at June 30, 2001, was not material. Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risks. On June 30, 2001, BB&T had derivative financial instruments outstanding with notional amounts totaling $3.4 billion. The estimated fair value of open contracts reflected net unrealized gains of $8.7 million at June 30, 2001. 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 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"), of which BB&T has none, 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. During the first six months of 2001, there was no impact on net income resulting from hedge ineffectiveness. As of June 30, 2001, BB&T had recorded unrecognized gains on cash flow hedges of $4.8 million as a separate component increasing shareholders' equity. Substantially all of this amount is attributable to forward commitments and options hedging the cash flows from forecasted sales of mortgage loans. The ultimate sale of the related loans will result in reclassification of these unrecognized amounts into earnings. If the cash flow hedge is discontinued because the forecasted transactions do not occur, these amounts will be immediately reclassified into earnings. BB&T expects to reclassify substantially all of the $4.8 million of unrecognized gains into earnings within the next 12 months. BB&T has a notional amount of $892.7 million of derivatives that do not meet the requirements for hedge accounting treatment under SFAS No. 133. Accordingly, these derivatives have been recorded at fair value in 21
accordance with the statement. The related net gains or losses for these derivatives are recorded in current period earnings as other noninterest income. The impact on earnings for the first six months of 2001 was not material. The following table sets forth certain information concerning BB&T's derivative financial instruments at June 30, 2001: Derivative Financial Instruments June 30, 2001 (Dollars in thousands) <TABLE> <CAPTION> Average Average Estimated Notional Receive Pay Fair Type Amount Rate Rate Value ---- ---------- ------- ------- --------- <S> <C> <C> <C> <C> Receive fixed swaps................... $ 104,950 5.67% 4.16% $ 533 Pay fixed swaps....................... 75,317 4.21 5.05 (120) Caps, floors & collars................ 98,550 -- -- -- Foreign exchange contracts............ 154,212 -- -- 665 Forward contracts on mortgage loans... 2,305,700 -- -- 8,165 Mortgage loan commitments............. 562,567 -- -- (479) Options on mortgage lending commitments.......................... 60,000 -- -- (97) ---------- ------ Total................................. $3,361,296 $8,667 ========== ====== </TABLE> CAPITAL ADEQUACY AND RESOURCES The maintenance of appropriate levels of capital is a management priority and is monitored on an ongoing basis. BB&T's principal goals related to capital are to provide an adequate return to shareholders while retaining a sufficient base to support future growth and comply with all regulatory standards. Total shareholders' equity was $5.4 billion at June 30, 2001, and $5.0 billion at December 31, 2000. BB&T's book value per common share at June 30, 2001, was $12.80 compared to $11.90 at December 31, 2000. Financial holding companies and their subsidiaries are subject to regulatory requirements with respect to risk-based capital adequacy. Risk- based capital ratios measure capital as a percentage of a combination of risk- weighted balance sheet and off-balance sheet risk. The risk-weighted values of both balance sheet and off-balance sheet items are determined in accordance with risk factors specified by Federal regulatory pronouncements. Tier 1 capital (total shareholders' equity excluding unrealized gains or losses on debt securities available for sale, net of tax effect, plus certain mandatorily redeemable capital securities, less nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk- weighted assets, with one half of the minimum consisting of Tier 1 capital. In addition to the risk-based capital measures described above, regulators have also established minimum leverage capital requirements for banking organizations. This is the primary measure of capital adequacy used by BB&T's management, and is calculated by dividing period-end Tier 1 capital by average tangible assets for the most recent quarter. The minimum required Tier 1 leverage ratio ranges from 3% to 5% depending upon Federal bank regulatory agency evaluation of an organization's overall safety and soundness. 22
BB&T's capital adequacy ratios at the end of the last five quarters are presented in the accompanying table: CAPITAL ADEQUACY RATIOS <TABLE> <CAPTION> 2001 2000 --------------- ----------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Risk-based capital ratios: Tier 1 capital................... 9.5% 9.3% 9.4% 9.5% 10.1% Total capital.................... 11.9 11.9 12.1 12.2 12.9 Tier 1 leverage ratio.............. 7.1 6.9 7.2 7.0 7.3 </TABLE> ANALYSIS OF RESULTS OF OPERATIONS Net income for the second quarter of 2001 totaled $230.8 million, an increase of 32.6% compared to the $174.1 million earned during the comparable quarter of 2000. On a diluted per share basis, earnings for the three months ended June 30, 2001, were $.54, compared to $.41 for the same period in 2000, an increase of 31.7%. BB&T's operating results for the second quarter of 2001 produced an annualized return on average assets of 1.45% and an annualized return on average shareholders' equity of 17.66% compared to prior year ratios of 1.22% and 15.70%, respectively. BB&T incurred significant special expenses, charges, income and securities losses related principally to the consummation of mergers and acquisitions during both 2001 and 2000, which significantly affected net income during both years. For the second quarter of 2001, BB&T recorded $24.3 million in net after-tax special charges primarily associated with the merger of Century South Banks, Inc. of Alpharetta, Georgia, and systems conversion costs related to other mergers. During the second quarter of 2000, BB&T incurred $46.1 million in after-tax special charges primarily associated with the acquisitions of Premier Bancshares, Inc., of Atlanta, Georgia; Hardwick Holding Company of Dalton, Georgia; First Banking Company of Southeast Georgia, Statesboro, Georgia, as well as losses incurred in restructuring the company's debt securities portfolio. Merger-related charges typically include, but are not limited to, personnel-related expenses such as staff relocation, early retirement packages and contract settlements; occupancy, furniture and equipment expenses including branch consolidation; and other costs, such as operational charge-offs, professional fees, etc. Excluding the effect of the above-described special items on 2001 and 2000 operating results, BB&T's net income for the second quarter of 2001 would have totaled $255.1 million, an increase of 15.9% over the $220.2 million that would have been earned during the second quarter of 2000. On a diluted per share basis, earnings for the three months ended June 30, 2001, excluding merger charges, were $.60, compared to $.52 for the same period in 2000, an increase of 15.4%. BB&T's operating results for the first quarter of 2001, excluding the items described above, produced an annualized return on average assets of 1.60% and an annualized return on average shareholders' equity of 19.52% compared to prior year ratios of 1.54% and 19.85%, respectively. For the six months ended June 30, 2001, BB&T incurred $49.3 million in net after-tax special charges related to the mergers with Century South Banks, Inc. and FCNB Corp. of Frederick, Maryland, as well as a one-time gain from the sale of the Company's investment in an electronic payment processing company. During the first six months of 2000, BB&T incurred $65.8 million in after-tax merger-related charges associated primarily with the 2000 acquisitions noted above and the bond portfolio restructuring. FTE net interest income increased 6.6% during the second quarter and 6.2% for the six months of 2001 compared to the 2000 periods due to growth in average earning assets, partially offset by a decline in the net yield on interest-earning assets. Fluctuations in net interest income, noninterest income and noninterest expenses will be further discussed in the following paragraphs. 23
The following table sets forth selected financial ratios for the last five calendar quarters: PROFITABILITY MEASURES <TABLE> <CAPTION> 2001 2000 --------------- ----------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Return on average assets........... 1.45% 1.43% 1.45% 0.40% 1.22% Return on average equity........... 17.66 17.73 18.52 5.01 15.70 Net interest margin................ 4.10 4.10 4.18 4.17 4.21 Fee income ratio (taxable equivalent)*...................... 34.4 32.9 31.1 31.3 31.0 Efficiency ratio (taxable equivalent)*...................... 51.4 51.1 49.9 51.9 53.6 </TABLE> - -------- * Excludes securities gains (losses), foreclosed property expense and special items. Net Interest Income and Net Interest Margin Net interest income on an FTE basis was $601.6 million for the second quarter of 2001 compared to $564.6 million for the same period in 2000, an increase of $37.0 million, or 6.6%. For the three months ended June 30, 2001, average earning assets increased $5.0 billion, or 9.3%, compared to the same period of 2000, while average interest-bearing liabilities increased by $5.3 billion, or 11.3%, and the net interest margin decreased from 4.21% in the second quarter of 2000 to 4.10% in the current quarter. The 11 basis point decline in the net interest margin resulted primarily from increased investments in bank owned life insurance, which add to funding costs but produce revenue that is classified as noninterest income, and BB&T's share repurchase program. For the six months ended June 30, 2001, FTE net income income increased 6.2%. Average interest earning assets for the six months ended June 30, 2001, increased $5.1 billion, or 9.6%, while interest-bearing liabilities increased $5.4 billion, or 11.6%, compared to the first half of 2000. The net interest margin for the six months ended June 30, 2001, was 4.10%, down from 4.23% in the first six months of 2000. The decrease resulted from the same factors that affected the quarterly margin. 24
The following tables set forth the major components of net interest income and the related yields for the second quarter and first half of 2001 compared to the same periods in 2000, and the variances between the periods caused by changes in interest rates versus changes in volumes. Net Interest Income and Rate/Volume Analysis For the Three Months Ended June 30, 2001 and 2000 <TABLE> <CAPTION> Average Balances Yield/Rate Income/Expense Change due to ----------------------- ------------ ------------------- ------------------ Fully Taxable Equivalent-- Increase (Dollars in thousands) 2001 2000 2001 2000 2001 2000 (Decrease) Rate Volume - -------------------------- ----------- ----------- ----- ----- --------- --------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Securities(1): U.S. Treasury, government and other (5)............ $13,419,692 $13,034,611 7.20% 6.66% $ 241,676 $ 216,884 $ 24,792 $ 18,281 $ 6,511 States and political subdivisions............. 1,000,489 1,040,155 7.50 7.48 18,763 19,454 (691) 49 (740) ----------- ----------- ----- ----- --------- --------- -------- -------- -------- Total securities (5)..... 14,420,181 14,074,766 7.17 6.72 260,439 236,338 24,101 18,330 5,771 Other earning assets (2).. 317,206 359,098 4.58 6.82 3,619 6,088 (2,469) (1,830) (639) Loans and leases, net of unearned income (1)(3)(4)(5).............. 43,982,044 39,268,042 8.59 9.33 942,418 911,624 30,794 (75,983) 106,777 ----------- ----------- ----- ----- --------- --------- -------- -------- -------- Total earning assets..... 58,719,431 53,701,906 8.23 8.63 1,206,476 1,154,050 52,426 (59,483) 111,909 ----------- ----------- ----- ----- --------- --------- -------- -------- -------- Non-earning assets....... 5,302,007 3,730,089 ----------- ----------- Total assets........... $64,021,438 $57,431,995 =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking................. $ 2,585,498 $ 3,297,466 1.52 1.76 9,766 14,420 (4,654) (1,803) ( 2,851) Money rate savings....... 12,042,107 9,984,073 2.79 3.56 83,804 88,363 (4,559) (21,082) 16,523 Time deposits............ 21,092,464 19,437,476 5.72 5.70 300,799 275,309 25,490 1,135 24,355 ----------- ----------- ----- ----- --------- --------- -------- -------- -------- Total interest-bearing deposits................. 35,720,069 32,719,015 4.43 4.65 394,369 378,092 16,277 (21,750) 38,027 Short-term borrowed funds..................... 5,518,060 7,146,093 4.25 5.99 58,465 106,510 (48,045) (27,041) (21,004) Long-term debt............ 10,877,561 6,945,887 5.60 6.06 152,050 104,890 47,160 (8,609) 55,769 ----------- ----------- ----- ----- --------- --------- -------- -------- -------- Total interest-bearing liabilities.............. 52,115,690 46,810,995 4.65 5.06 604,884 589,492 15,392 (57,400) 72,792 ----------- ----------- ----- ----- --------- --------- -------- -------- -------- Noninterest-bearing deposits................. 5,340,196 5,365,422 Other liabilities........ 1,323,553 794,438 Shareholders' equity..... 5,241,999 4,461,140 ----------- ----------- Total liabilities and shareholders' equity..... $64,021,438 $57,431,995 =========== =========== Average interest rate spread.................... 3.58 3.57 Net yield on earning assets.................... 4.10% 4.21% $ 601,592 $ 564,558 $ 37,034 $ (2,083) $ 39,117 ===== ===== ========= ========= ======== ======== ======== Taxable equivalent adjustment................ $ 53,080 $ 24,859 ========= ========= </TABLE> - ---- (1) Yields related to securities, loans and leases exempt from income taxes are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. 25
Net Interest Income and Rate / Volume Analysis For the Six Months Ended June 30, 2001 and 2000 <TABLE> <CAPTION> Average Balances Yield/Rate Income/Expense Change due to ----------------------- ------------ --------------------- ---------------- Fully Taxable Equivalent-- Increase (Dollars in thousands) 2001 2000 2001 2000 2001 2000 (Decrease) Rate Volume - -------------------------- ----------- ----------- ----- ----- ---------- ---------- ---------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Securities(1): U.S. Treasury, government and other (5)............ $13,462,405 $12,976,899 7.25% 6.62% $ 488,271 $ 429,502 $58,769 $42,358 $16,411 States and political subdivisions............. 1,015,649 1,053,167 7.40 7.53 37,556 39,650 (2,094) (706) (1,388) ----------- ----------- ----- ----- ---------- ---------- ------- ------- ------- Total securities (5)..... 14,478,054 14,030,066 7.26 6.69 525,827 469,152 56,675 41,652 15,023 Other earning assets (2).. 326,652 397,569 5.22 6.25 8,451 12,357 (3,906) (1,891) (2,015) Loans and leases, net of unearned income (1)(3)(4)(5).............. 43,457,795 38,740,170 8.88 9.21 1,917,121 1,775,459 141,662 (63,376) 205,038 ----------- ----------- ----- ----- ---------- ---------- ------- ------- ------- Total earning assets..... 58,262,501 53,167,805 8.46 8.52 2,451,399 2,256,968 194,431 (23,615) 218,046 ----------- ----------- ----- ----- ---------- ---------- ------- ------- ------- Non-earning assets....... 5,199,966 3,643,742 ----------- ----------- Total assets........... $63,462,467 $56,811,547 =========== =========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings and interest- checking................. $ 2,641,991 $ 3,396,733 1.64 1.82 21,495 30,773 (9,278) (2,910) (6,368) Money rate savings....... 11,739,360 9,844,975 3.16 3.48 183,727 170,228 13,499 (16,702) 30,201 Time deposits............ 20,753,287 19,210,761 5.90 5.55 607,570 530,045 77,525 35,137 42,388 ----------- ----------- ----- ----- ---------- ---------- ------- ------- ------- Total interest-bearing deposits................. 35,134,638 32,452,469 4.67 4.53 812,792 731,046 81,746 15,525 66,221 Short-term borrowed funds..................... 5,994,985 7,282,625 4.93 5.73 146,455 207,648 (61,193) (27,357) (33,836) Long-term debt............ 10,616,315 6,647,988 5.69 5.91 300,288 195,926 104,362 (7,622) 111,984 ----------- ----------- ----- ----- ---------- ---------- ------- ------- ------- Total interest-bearing liabilities.............. 51,745,938 46,383,082 4.91 4.92 1,259,535 1,134,620 124,915 (19,454) 144,369 ----------- ----------- ----- ----- ---------- ---------- ------- ------- ------- Noninterest-bearing deposits................. 5,225,668 5,231,789 Other liabilities........ 1,326,266 790,910 Shareholders' equity..... 5,164,595 4,405,766 ----------- ----------- Total liabilities and shareholders' equity..... $63,462,467 $56,811,547 =========== =========== Average interest rate spread.................... 3.55 3.60 Net yield on earning assets.................... 4.10% 4.23% $1,191,864 $1,122,348 $69,516 $(4,161) $73,677 ===== ===== ========== ========== ======= ======= ======= Taxable equivalent adjustment................ $ 101,683 $ 49,309 ========== ========== </TABLE> - ---- (1) Yields related to securities, loans and leases exempt from income taxes are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost and trading securities at estimated fair value. 26
Noninterest Income Noninterest income for the three months ended June 30, 2001, was $333.2 million compared to $212.8 million for the same period in 2000, an increase of $120.4 million, or 56.6%. This increase was driven by substantially higher mortgage banking income, growth in service charges on deposits, increased trust revenue, growth in insurance commissions from BB&T's agency network, as well as a gain from the sale of the Company's investment in an electronic payment processing company. Excluding special items of the type described above and the growth in noninterest income that resulted from the timing of purchase accounting transactions, noninterest income would have increased 19.6% in the second quarter of 2001 compared to the second quarter of 2000. For the six months, noninterest income was $652.1 million, an increase of $197.1 million, or 43.3%, compared to the same period in 2000. Excluding special items and growth due to purchase accounting transactions, noninterest income would have increased 17.0% for the period end June 30, 2001. Noninterest income, excluding special items, as a percentage of net interest income plus noninterest income excluding special items, or the "fee income ratio", was 34.4% for the second quarter of 2001, compared to 31.0% in the second quarter of 2000. This increase indicates that BB&T is deriving a greater percentage of its revenues from noninterest income sources. Service charges on deposits totaled $83.9 million for the second quarter of 2001, an increase of $16.1 million, or 23.8%, compared to the second quarter of 2000. For the six months, service charges on deposits totaled $159.4 million, an increase of $28.3 million, or 21.6%, compared to the first six months of 2000. The largest components of the growth within service charges on deposits in the 2001 period were NSF and overdraft charges on personal and commercial accounts, which contributed $8.8 million to the increase in the second quarter of 2001 compared to 2000, as well as higher transaction volume. Account analysis fees on commercial transaction accounts contributed $5.4 million. BankFirst Corporation of Knoxville, Tennessee ("BankFirst"), was acquired and accounted for as a purchase on December 27, 2000, which contributed $1.2 million to the increase in service charges on deposits in the second quarter of 2001 compared to the prior year quarter. Additionally, FirstSpartan was acquired and accounted for as a purchase on March 2, 2001, and contributed .7 million. The 21.6% increase in service charges on deposits for the six months of 2001 was driven by the same factors that affected quarterly growth. Trust income totaled $23.0 million for the current quarter, an increase of $3.4 million, or 17.1%, compared to the same period a year ago. For the six months, trust income totaled $47.1 million, an increase of $8.8 million, or 22.8%, compared to the same period in 2000. The increase in trust income for both the quarter and the six months reflects healthy growth in personal and corporate trust fees compared to 2000. Assets under management totaled $15.5 billion at June 30, 2001, up from $14.6 billion at June 30, 2000. Investment banking and brokerage fees and commissions totaled $42.6 million during the second quarter of 2001, an increase of $.9 million, or 2.2%, compared to the second quarter of 2000. For the six months, investment banking and brokerage fees and commissions totaled $85.9 million, a decrease of $1.7 million, or 1.9%, compared to the same period in 2000. The increase in income for the second quarter resulted primarily from revenue generated by Edgar M. Norris & Co., an independent broker/dealer based in Greenville, South Carolina, which was purchased on November 15, 2000. This acquisition was accounted for as a purchase; therefore its operating results were only included in BB&T's accounts in periods following the acquisition. The decrease in year to date income resulted from a decline in trading income and fee income at BB&T's full-service brokerage operation. Agency insurance commissions totaled $42.8 million for the second quarter of 2001, an increase of $10.2 million, or 31.4%, compared to the same three- month period of 2000. For the six months, agency insurance commissions totaled $82.3 million, an increase of $18.1 million, or 28.3%, compared to the same period in 2000. This substantial growth in revenue resulted from the purchase of additional agencies during 2000 and 2001, as well as internal growth. During the second quarter of 2001, property and casualty insurance commissions increased $5.6 million, contingent insurance commissions, group health, surety and other miscellaneous fees and 27
commissions increased a collective $4.6 million. The 28.3% increase in agency insurance commissions for the six months of 2001 was driven by the same factors that affected quarterly growth. Income from mortgage banking activities totaled $49.8 million for the second quarter of 2001, an increase of $24.6 million, or 97.7%, compared to the same period of 2000. For the six months, mortgage banking activities totaled $55.0 million, an increase of $2.5 million, or 4.8%, compared to the same period in 2000. This increase resulted from higher volumes of mortgage loan originations in 2001 as a result of lower interest rates, and the recapture of $5.9 million in valuation allowances related to capitalized mortgage servicing rights. Additionally, servicing fee income increased $1.7 million; origination fees on loans sold increased $2.4 million; mortgage loan wholesale and underwriting fees increased $2.4 million; commercial loan servicing income increased $3.5 million; and gains from loan sales increased $9.5 million. Other nondeposit fees and commissions totaled $44.5 million for the second quarter of 2001, an increase of $7.7 million, or 20.8%, compared to the three months ended June 30, 2000. For the six months, other nondeposit fees and commissions totaled $85.9 million, an increase of $15.8 million, or 22.5%, compared to the same period in 2000. The principal drivers of the increase were: higher income from the outsourcing of official checks, which added $5.1 million to revenue for the quarter; ATM network fees and debit card income, which increased $1.6 million; commercial standby letter of credit fees, which increased $.7 million; and bankcard income, which increased $.4 million. The 22.5% increase in other nondeposit fees and commissions for the six months of 2001 was driven by the same factors that affected quarterly growth. BB&T realized a $16.8 million gain from sales of securities in the second quarter of 2001 compared to a loss of $41.1 million in the second quarter last year. For the six months, BB&T recorded an $88.8 million gain in 2001, compared to a loss of $41.1 million in 2000. The 2001 gain includes a $76.1 million gain from the sale of BB&T's ownership interest in an electronic payment processing company. The loss recorded in 2000 includes $40.8 million related to the previously discussed restructuring. Other income totaled $26.4 million in the second quarter of 2001 and 2000, reflecting minimal change. For the six months ended 2001 and 2000, other income totaled $41.4 million and $45.1 million, respectively. Noninterest Expense Noninterest expenses totaled $518.7 million for the second quarter of 2001 compared to $465.6 million for the same period a year ago, an increase of $53.1 million, or 11.4%. Noninterest expense for the second quarter of 2001 includes $45.2 million of special expenses principally associated with the acquisition of Century South and costs to integrate other acquisitions. Excluding these costs, noninterest expenses would have totaled $473.5 million, an increase of $33.8 million, or 7.7%, over the same period one year ago. Excluding the effects of business combinations accounted for as purchases that were completed in the second half of 2000 and first half of 2001, and the aforementioned special expenses, noninterest expenses for the second quarter of 2001 would have increased 1.8% from the comparable period of 2000. For the six months ended June 30, 2001, noninterest expenses totaled $1.0 billion, an increase of $96.1 million, or 10.4%, over the same period one year ago. Noninterest expense for the first six months of 2001 includes $99.0 million of special merger-related charges. Excluding these costs, noninterest expenses would have totaled $924.0 million, an increase of $53.6 million, or 6.2%, over the first half of 2000. Excluding the effects of business combinations accounted for as purchases and the effect of special charges, noninterest expenses for the first half of 2001 would have actually increased .9% from the comparable period of 2000. BB&T's efficiency ratio (noninterest expenses, excluding the special expenses referred to above and costs related to foreclosed assets, as a percentage of FTE net interest income plus noninterest income excluding special items and securities gains and losses) improved to 51.4% for the second quarter of 2001 compared to 53.6% for the second quarter of 2000. For the six months, the efficiency ratio improved to 51.3% compared to 53.7% in 2000. 28
Personnel expense, the largest component of noninterest expense, was $274.3 million for the second quarter of 2001 compared to $241.8 million for the same period in 2000, an increase of $32.5 million, or 13.4%. These amounts include merger-related costs of $13.7 million in the second quarter of 2001 and $6.8 million in the second quarter of 2000. Excluding the merger-related charges, personnel expense in the 2001 quarter would have increased $25.6 million, or 10.9%, from the 2000 period. This growth included the effect of acquisitions completed in the last two quarters of 2000 and first two quarters of 2001 that were accounted for as purchases. Excluding the effects of the merger-related charges and purchase acquisitions, personnel expense for the second quarter of 2001 would have increased $13.4 million, or 5.7%, over the second quarter of 2000. This increase was primarily the result of a 4% average annual salary adjustment for exempt and non-exempt employees, an increase of approximately 300 full-time equivalent employees compared to 2000, higher mortgage loan incentive compensation resulting from significantly higher volumes of mortgage loan originations, and higher social security taxes. For the six months, personnel expense totaled $540.7 million, an increase of $54.8 million, or 11.3%, compared to 2000. Excluding merger-related charges, personnel expense for the first half of 2001 would have increased $42.5 million, or 9.0%, compared to 2000. Excluding merger-related charges and purchase accounting transactions, personnel expense would have increased only 4.1% for the reasons outlined above. Occupancy and equipment expense for the three months ended June 30, 2001, totaled $73.2 million, an increase of $5.2 million, or 7.7%, compared to 2000. These amounts include merger-related charges of $3.4 million in the second quarter of 2001 and $3.0 million in the second quarter of 2000. Excluding the merger-related charges, occupancy and equipment expense would have been $69.8 million, an increase of $4.8 million, or 7.4%, compared to the same period in 2000. This growth included the effect of acquisitions completed in the last two quarters of 2000 and first two quarters of 2001 that were accounted for as purchases. Excluding the effects of the merger-related charges and purchase acquisitions, occupancy and equipment expense for the second quarter of 2001 would have increased $2.3 million, or 3.5%, over the second quarter of 2000. The increase was principally the result of higher rent expense and an increase in information technology equipment expense. For the six months, occupancy and equipment expense totaled $150.5 million, an increase of $11.6 million, or 8.3%, compared to 2000. These amounts include merger-related charges of $10.8 million and $8.6 million for 2001 and 2000, respectively. Excluding the merger-related charges, occupany and equipment expense would have been $139.7 million and $130.2 million for 2001 and 2000, respectively, reflecting growth of 7.2%. This growth included the effect of acquisitions completed in the last two quarters of 2000 and first two quarters of 2001 that were accounted for as purchases. Excluding the effects of the merger-related charges and purchase acquisitions, occupancy and equipment expense for the six months of 2001 would have increased $4.7 million, or 3.6%, over the six months of 2000. The amortization of intangible assets totaled $17.7 million for the three months ended June 30, 2001, an increase of $2.0 million, or 12.4%, from the amount incurred in the second quarter of 2000. For the six months, amortization of intangible assets totaled $35.0 million, an increase of $3.4 million, or 10.9%, compared to 2000. This increase is primarily due to the acquisitions of BankFirst in the fourth quarter of 2000, FirstSpartan in the first quarter of 2001 and VCAP in the second quarter, consummated using purchase accounting. These acquisitions added $128.2 million in goodwill, which is being amortized over 15 years. Other noninterest expenses for the second quarter of 2001 totaled $153.4 million, an increase of $13.4 million, or 9.6%, compared to 2000. These amounts include merger-related costs of $28.0 million in the second quarter of 2001 and $16.0 million in the second quarter of 2000. Excluding these costs, other noninterest expenses for the three months ended June 30, 2001 would have been $125.4 million, an increase of $1.4 million, or 1.1%, from the comparable 2000 period. This increase is due to amortization of mortgage servicing rights, which increased $5.4 million, and the acquisitions of FirstSpartan and BankFirst, consummated using purchase accounting, which generated a collective increase of $2.3 million. Offsets to this increase include reductions in expenses relating to advertising, public relations and professional services, which decreased a collective $6.5 million. For the six months ended 2001, other noninterest expenses totaled $296.8 million, an increase of $26.3 million, or 9.7%, over 2000. These amounts include merger-related charges of $62.5 million for 2001, and $34.4 million for 2000. Excluding these costs, other noninterest expenses for the six months ended June 30, 2001, would have been $234.2 million, a decrease of $2.3 million from the comparable 2000 period. 29
Provision for Income Taxes The provision for income taxes totaled $88.3 million for the second quarter of 2001, an increase of $4.6 million, or 5.5%, compared to the second quarter of 2000. For the first six months of 2001, the provision for income taxes totaled $181.2 million, an increase of $5.6 million, or 3.2%, compared to 2000. Excluding the tax benefits associated with merger-related charges and other special items from all periods presented, the provision for income taxes would have been $101.2 million during the second quarter and $205.7 million for the six months ended June 30, 2001. These amounts represent a decrease of $6.9 million, or 6.4%, compared to the second quarter of 2000, and a decrease of $6.9 million, or 3.3%, compared to the first six months of 2000. The effective tax rates on pretax income were 27.7% and 32.5% for the three months ended June 30, 2001 and 2000, respectively, and 28.6% and 32.2% for the six months of 2001 and 2000, respectively. Excluding the effect of merger-related charges and other special items on pretax income and the income tax provision, BB&T's effective income tax rates were 28.4% and 32.9% for the three months ended June 30, 2001 and 2000, respectively, and 29.0% and 32.8% for the six months of 2001 and 2000, respectively. During the first and second quarters of 2001, BB&T transferred responsibility for the management of certain operations to a subsidiary in a tax-advantaged jurisdiction, thereby lowering the effective income tax rate applicable to certain lease investments. In accordance with SFAS No. 13, "Accounting for Leases", 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 and the tax provision for 2001, as reflected in the lower effective tax rates. BB&T intends to permanently reinvest the earnings of this subsidiary and, therefore, in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes", deferred income taxes associated with the current year's income tax benefit have not been provided. PART II. OTHER INFORMATION Item 1. Legal Proceedings The nature of the business of BB&T's banking subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of BB&T are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of BB&T. Item 4. Submission of Matters to a Vote of Security Holders BB&T held its annual meeting of the shareholders on April 24, 2001, to consider and vote upon the following matters: (1) To elect seven Directors for three-year terms expiring in 2004 and one Director for a two-year term expiring in 2003. Of shares represented by proxy, votes in favor were 311,503,546; and votes withheld were 2,513,100. (2) To approve the Corporation's Amended and Restated 1996 Short-Term Incentive Plan. Of shares represented by proxy, votes in favor were 293,081,788; votes opposed were 17,029,373; and abstentions were 3,913,675. (3) To approve an amendment to the Corporation's Articles of Incorporation to increase its authorized Common Stock from 500,000,000 shares to 1,000,000,000 shares. Of shares represented by proxy, votes in favor were 295,888,723; votes opposed were 14,822,637; and abstentions were 3,319,755. (4) To ratify the reappointment of Arthur Andersen LLP as the Corporation's independent auditors for 2001. Of shares represented by proxy, votes in favor were 310,432,746; votes opposed were 1,644,416; and abstentions were 2,006,349. 30
Item 6. Exhibits and Reports on Form 8-K (a) <TABLE> <CAPTION> Exhibit No. Description Location ------- ----------- -------- <C> <S> <C> 2(a) Agreement and Plan of Reorganization Incorporated herein by dated as of July 29, 1994 and amended reference to Registration and restated as of October 22, 1994 No. 33-56437. between the Registrant and BB&T Financial Corporation. 2(b) Plan of Merger as of July 29, 1994 as Incorporated herein by amended and restated on October 22, reference to Registration 1994 between the Registrant and BB&T No. 33-56437. Financial Corporation. 2(c) Agreement and Plan of Reorganization Incorporated herein by dated as of November 1, 1996 between reference to Exhibit 3(a) the Registrant and United Carolina filed in the Annual Report Bancshares Corporation, as amended. on Form 10-K, filed March 17, 1997. 2(d) Agreement of Plan of Reorganization Incorporated herein by dated as of October 29, 1997 between reference to Registration the Registrant and Life Bancorp, Inc. No. 33-44183. 2(e) Agreement and Plan of Reorganization Incorporated herein by dated as of February 6, 2000 between reference to Exhibit 99.1 the Registrant and One Valley filed in the Current Report Bancorp, Inc. on Form 8-K, dated February 9, 2000. 3(a)(i) Amended and Restated Articles of Incorporated herein by Incorporation of the Registrant, as reference to Exhibit 3(a) amended. filed in the Annual Report on Form 10-K, filed March 17, 1997. 3(a)(ii) Articles of Amendment of Articles of Incorporated herein by Incorporation. reference to Exhibit 3(a)(ii) filed in the Annual Report on Form 10-K, filed March 18, 1998. 3(b) Bylaws of the Registrant, as amended. Incorporated herein by reference to Exhibit 3(b) filed in the Annual Report on Form 10-K, filed March 18, 1998. 4(a) Articles of Amendment to Amended and Incorporated herein by Restated Articles of Incorporation of reference to Exhibit 3(a) the Registrant related to Junior filed in the Annual Report Participating Preferred Stock. on Form 10-K, filed March 17, 1997. 4(b) Rights Agreement dated as of December Incorporated herein by 17, 1996 between the Registrant and reference to Exhibit 1 filed Branch Banking and Trust Company, under Form 8-A, filed Rights Agent. January 10, 1997. 4(c) Subordinated Indenture (including Incorporated herein by Form of Subordinated Debt Security) reference to Exhibit 4(d) of between the Registrant and State Registration No. 333-02899. Street Bank and Trust Company, Trustee, dated as of May 24, 1996. 4(d) Senior Indenture (including Form of Incorporated herein by Senior Debt Security) between the reference to Exhibit 4(c) of Registrant and State Street Bank and Registration No. 333-02899. Trust company, Trustee, dated as of May 24, 1996. </TABLE> 31
<TABLE> <CAPTION> Exhibit No. Description Location ------- ----------- -------- <C> <S> <C> 10(a)* Death Benefit Only Plan, Dated April Incorporated herein by 23, 1990, by and between Branch Banking reference to Registration and Trust Company (as successor to No. 33-33984. Southern National Bank of North Carolina) and L. Glenn Orr, Jr. 10(b)* BB&T Corporation Non-Employee Incorporated herein by Directors' Deferred Compensation and reference to Exhibit 10(b) Stock Option Plan. of the Annual Report on Form 10-K, filed March 17, 1997. 10(c)* BB&T Corporation 1994 Omnibus Stock Incorporated herein by Incentive Plan. reference to Registration No. 33-57865. 10(d)* Settlement and Non-Compete Agreement, Incorporated herein by dated February 28, 1995, by and between reference to Registration the Registrant and L. Glenn Orr, Jr. No. 33-56437. 10(e)* Settlement Agreement, Waiver and Incorporated herein by General Release dated September 19, reference to Registration 1994, by and between the Registrant, No. 33-56437. Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton. 10(f) BB&T Corporation 401(k) Savings Plan Incorporated herein by (amended effective January 1, 2000). reference to Exhibit 10(f) in BB&T Corporation's Annual Report on Form 10-K filed on March 16, 2001. 10(g)* BB&T Corporation 1995 Omnibus Stock Incorporated herein by Incentive Plan. reference to Exhibit 10(g) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(h)* Form of Branch Banking and Trust Incorporated by reference to Company Long-Term Incentive Plan. the identified exhibit under the Quarterly Report on Form 10-Q, filed May 14, 1991. 10(i)* Form of Branch Banking and Trust Incorporated by reference to Company Executive Incentive the identified exhibit under Compensation Plan. the Annual Report on Form 10-K, filed February 22, 1985. 10(j)* Southern National Deferred Compensation Incorporated herein by Plan for Key Employees. reference to Exhibit 10(j) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by reference to Exhibit 10(k) filed in the Annual Report on Form 10-K, filed March 17, 1997. 10(l)* BB&T Corporation Supplemental Executive Incorporated herein by Retirement Plan. reference to Exhibit 10(l) filed in the Annual Report on Form 10-K, filed March 17, 1997. </TABLE> 32
<TABLE> <CAPTION> Exhibit No. Description Location ------- ----------- -------- <C> <S> <C> 10(m)* Settlement and Noncompetition Incorporated herein by Agreement, dated July 1, 1997, by and reference to Exhibit 10(m) between the Registrant and E. Rhone filed in the Annual Report Sasser. on Form 10-K, filed March 18, 1998. 10(n)* BB&T Corporation Supplemental Defined Incorporated herein by Contribution Plan for Highly reference to Registration Compensated Employees. No. 333-69823. 10(o)* Scott & Stringfellow, Inc. Executive Incorporated herein by and Employee Retention Plan. reference to Registration No. 333-81471. 10(p)* BB&T Corporation Non-Qualified Defined Incorporated herein by Contribution Plan. reference to Registration No. 333-50035. 10(q)* BB&T Corporation Amended and Restated Incorporated herein by 1996 Short-term Incentive Plan. reference to Exhibit 10(q) in BB&T Corporation's Quarterly Report on Form 10- Q filed on May 11, 2001. 10(r)* Amendment to 1995 Omnibus Stock Incorporated herein by Incentive Plan. reference to Registration No. 333-36540. 10(s)* Employment Agreement dated February 6, Incorporated herein by 2000, by and between the Registrant and reference to Exhibit 10(s) J. Holmes Morrison. in BB&T Corporation's Annual Report on Form 10-K filed on March 16, 2001. 10(t) BB&T Corporation Pension Plan (amended Incorporated herein by effective January 1, 2000). reference to Exhibit 10(t) in BB&T Corporation's Annual Report on Form 10-K filed on March 16, 2001. 10(u)* Amendment to BB&T Corporation Incorporated herein by Nonqualified Defined Contribution Plan. reference to Exhibit 10(u) in BB&T Corporation's Annual Report on Form 10-K filed on March 16, 2001. 10(v)* Amendment to BB&T Corporation Non- Incorporated herein by Employee Directors' Deferred reference to Exhibit 10(v) Compensation and Stock Option Plan. in BB&T Corporation's Annual Report on Form 10-K filed on March 16, 2001. 10(w)* Amendment to the BB&T Corporation Incorporated herein by Supplemental Defined Contribution Plan reference to Exhibit 10(w) for Highly Compensated Employees. in BB&T Corporation's Annual Report on Form 10-K filed on March 16, 2001. 11 Statement re Computation of Earnings Filed herewith as Note E. Per Share. 22 Proxy Statement for the 2001 Annual Incorporated herein by Meeting of Shareholders. reference to BB&T Corporation's Proxy Statement filed on March 16, 2001. </TABLE> - -------- * Management compensatory plan or arrangement. 33
(b) Current Reports on Form 8-K during and following the quarter ended June 30, 2001. On April 11, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to report the results of operations for the first quarter of 2001. On April 27, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to report BB&T's operations and financial condition restated for the accounts of FCNB Corp., which merged into BB&T on January 8, 2001. On July 10, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to announce that BB&T had entered into a definitive agreement to acquire Community First Banking Company of Carrollton, Georgia, and to file certain presentation material related to this transaction. On July 12, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to report the results of operations for the second quarter of 2001. On July 25, 2001, BB&T filed a Current Report on Form 8-K under Item 5, which was amended on July 27, 2001, to report BB&T's results of operations and financial condition restated for the accounts of Century South Banks, Inc., which merged into BB&T on June 7, 2001. On July 31, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to announce a public offering of debt securities and to file the related underwriting agreement. 34
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BB&T CORPORATION (Registrant) Date: August 13, 2001 /s/ Scott E. Reed ___________________________ By: _________________________________ Scott E. Reed, Senior Executive Vice President and Chief Financial Officer Date: August 13, 2001 /s/ Sherry A. Kellett ___________________________ By: _________________________________ Sherry A. Kellett, Senior Executive Vice President and Controller (Principal Accounting Officer) 35