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