Prepared by R.R. Donnelley Financial -- FORM 10-K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 

 
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the fiscal year ended:
 
December 31, 2001
 
Commission File Number: 1-10853
 
BB&T CORPORATION
(Exact name of Registrant as specified in its Charter)
 
North Carolina
 
56-0939887
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
200 West Second Street
   
Winston-Salem, North Carolina
 
27101
(Address of principal executive offices)
 
(Zip Code)
 
(336) 733-2000
(Registrant’s telephone number, including area code)
 

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

Title of each class

 
Name of each exchange
on which registered

Common Stock, $5 par value
 
New York Stock Exchange
Share Purchase Rights
 
New York Stock Exchange
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
The aggregate market value of the voting stock held by non-affiliates of the Registrant at January 31, 2002, was approximately $16.0 billion. The number of shares of the Registrant’s Common Stock outstanding on January 31, 2002, was 458,684,458. No shares of preferred stock were outstanding at January 31, 2002.
 
Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 23, 2002, are incorporated by reference in Part III of this report.
 

 
The Exhibit Index begins on page 114.
 


CROSS REFERENCE INDEX
 
             
Page

PART I
 
Item 1
  
Business
  
5
   
Item 2
  
Properties
  
20, 77
   
Item 3
  
Legal Proceedings
  
94
   
Item 4
  
Submission of Matters to a Vote of Shareholders
    
        
None
    
PART II
 
Item 5
  
Market for the Registrant’s Common Stock and Related Shareholder Matters
  
54
   
Item 6
  
Selected Financial Data
  
57
   
Item 7
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
27
   
Item 7A
  
Quantitative and Qualitative Disclosures About Market Risk
  
45
   
Item 8
  
Financial Statements and Supplementary Data
    
        
Consolidated Balance Sheets at December 31, 2001 and 2000
  
60
        
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2001
  
61
        
Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2001
  
62
        
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001
  
63
        
Notes to Consolidated Financial Statements
  
64
        
Report of Independent Public Accountants
  
59
        
Quarterly Financial Summary for 2001 and 2000
  
56
   
Item 9
  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
    
        
None
    
PART III
 
Item 10
  
Directors and Executive Officers of the Registrant
  
*, 20
   
Item 11
  
Executive Compensation
  
*
   
Item 12
  
Security Ownership of Certain Beneficial Owners and Management
  
*
   
Item 13
  
Certain Relationships and Related Transactions
  
*
PART IV
 
Item 14
  
Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
   
(a)(1)
  
Financial Statements (See Item 8 for reference).
    
   
  (2)
  
Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8.
    
   
  (3)
  
Exhibits have been filed separately with the Commission and are available upon written request.
    
   
(b)
  
Current Reports on Form 8-K filed during the fourth quarter of 2001.
    

2


    
Type

 
Date Filed

  
Reporting Purpose

    
Item 5
 
October 5, 2001
  
To restate BB&T’s Annual Report on Form 10-K for December 31, 2000 for the accounts of F&M National Corporation.
    
 
Item 5

 
 
October 11, 2001

  
 
To report the financial results for BB&T
Corporation (“BB&T”) for the third quarter of 2001.
    
 
Item 5

 
 
November 8, 2001

  
 
To report plans to acquire Mid-America
Bancorp of Louisville, Kentucky.
    
 
Item 5

 
 
November 8, 2001

  
 
To report plans to acquire AREA Bancshares
Corporation of Owensboro, Kentucky.
    
 
Item 5

 
 
November 13, 2001
  
To amend the November 8, 2001 filing announcing plans to acquire Mid-America Bancorp.
 
(c)
  
Exhibits—See Item 14(a)(3)
 
(d)
  
Financial Statement Schedules—See Item 14(a)(2)

3


 
*
 
The information required by Item 10 is incorporated herein by reference to the information that appears under the headings “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders.
 
The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation of Executive Officers”, “Retirement Plans” and “Compensation Committee Report on Executive Compensation” in the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders.
 
The information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Security Ownership” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders.
 
The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Compensation Committee Interlocks and Insider Participation” and “Transactions with Executive Officers and Directors” in the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders.

4


 
DESCRIPTION OF BUSINESS
 
General
 
BB&T Corporation (“BB&T” or “the Corporation”) is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its banking subsidiaries, which have offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama and the metropolitan Washington, D.C. area.
 
Forward-Looking Statements
 
This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins or the volumes or values of loans made or held; (3) general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (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 of BB&T may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (9) adverse changes may occur in the securities markets.
 
Significant Subsidiaries
 
At December 31, 2001, the principal assets of BB&T included all of the outstanding shares of common stock of:
 
 
·
 
Branch Banking and Trust Company, Winston-Salem, North Carolina;
 
 
·
 
Branch Banking and Trust Company of South Carolina, Greenville, South Carolina;
 
 
·
 
Branch Banking and Trust Company of Virginia, Richmond, Virginia;
 
 
·
 
F&M Bank—Atlantic, Gloucester, Virginia;
 
 
·
 
F&M Bank—Central Virginia, Charlottesville, Virginia;
 
 
·
 
F&M Bank—Highlands, Covington, Virginia;
 
 
·
 
F&M Bank—Maryland, Landover, Maryland;
 
 
·
 
F&M Bank—Massanutten, Harrisonburg, Virginia;
 
 
·
 
F&M Bank—Northern Virginia, Fairfax, Virginia;
 
 
·
 
F&M Bank—Peoples, Warrenton, Virginia;
 
 
·
 
F&M Bank—Richmond, Richmond, Virginia;
 
 
·
 
F&M Bank—Southern Virginia, Emporia, Virginia;

5


 
 
·
 
F&M Bank—West Virginia, Ranson, West Virginia;
 
 
·
 
F&M Bank—Winchester, Winchester, Virginia;
 
 
·
 
Community First Bank, Carrollton, Georgia;
 
 
·
 
Regional Acceptance Corporation, Greenville, North Carolina;
 
 
·
 
Scott & Stringfellow, Inc., Richmond, Virginia;
 
 
·
 
Sheffield Financial Corporation, Clemmons, North Carolina; and
 
 
·
 
BB&T Factors Corporation, High Point, North Carolina.
 
Branch Banking and Trust Company (“Branch Bank”), BB&T’s largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. The following table reflects BB&T’s deposit market share and branch locations at December 31, 2001.
 
BB&T Deposit Market Share and Branch Locations
December 31, 2001
 
      
% of BB&T’s Deposits

    
Deposit Market Share Rank

    
Number of Branches

North Carolina*
    
37
%
  
2nd
    
336
Virginia
    
18
 
  
4th
    
278
Georgia
    
11
 
  
6th
    
130
South Carolina
    
9
 
  
3rd
    
93
West Virginia
    
9
 
  
1st
    
98
Maryland
    
6
 
  
8th
    
89
Tennessee
    
2
 
  
11th
    
38
Washington, D.C.
    
1
 
  
6th
    
8

 
  *
 
Excludes home office deposits
 
In addition to the markets described in the table above, BB&T operated nine branches in Kentucky and two branches in Alabama. After the completion of two pending acquisitions, BB&T will operate 108 branches in Kentucky and rank 3rd in the state in deposit market share and will also operate a branch in Indiana.
 
Branch Bank’s principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North Carolina, which specializes in lease financing to commercial businesses; BB&T Investment Services, Inc., located in Charlotte, North Carolina, which offers nondeposit investment alternatives, including fixed-rate and variable-rate annuities, mutual funds and discount brokerage services; BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which is the 10th largest insurance agency network in the country; and W.E. Stanley, Inc., an actuarial and employee benefits consulting firm headquartered in Greensboro, North Carolina.
 
Branch Bank has a number of additional subsidiaries including but not limited to the following: Prime Rate Premium Finance Corporation, Inc. (“Prime Rate”), located in Florence, South Carolina, which provides insurance premium financing primarily to clients in BB&T’s principal market area; Laureate Capital Corp. (“Laureate”), located in Charlotte, North Carolina, which principally specializes in arranging financing of commercial and multi-family real estate; BB&T Asset Management, located in Raleigh, North Carolina, a registered investment adviser which manages customized investment portfolios for affluent individuals, businesses and institutional investors; and Lendmark Financial Services, Inc., located in Conyers, Georgia, which offers alternative consumer and mortgage loans to clients unable to meet BB&T’s normal consumer and mortgage loan guidelines.

6


 
Branch Banking and Trust Company of South Carolina (“BB&T-SC”) operated 93 banking offices at December 31, 2001. BB&T-SC is the third largest bank in South Carolina in terms of deposit market share.
 
Branch Banking and Trust Company of Virginia (“BB&T-VA”) operated 278 banking offices in Virginia at December 31, 2001. BB&T-VA is the fourth largest bank in Virginia in terms of deposit market share.
 
Scott & Stringfellow, Inc. (“Scott & Stringfellow”) is an investment banking and full-service brokerage firm located in Richmond, Virginia. At December 31, 2001, Scott & Stringfellow operated 22 full-service retail brokerage offices in Virginia, 11 in North Carolina, and seven in South Carolina. Scott & Stringfellow specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Scott & Stringfellow also has a public finance department that provides investment banking, financial advisory services, and debt underwriting services to a variety of regional tax-exempt issuers.
 
The primary services offered by BB&T’s subsidiaries include:
 
 
·
 
small business lending
 
 
·
 
commercial middle market lending
 
 
·
 
retail lending
 
 
·
 
home equity lending
 
 
·
 
sales finance
 
 
·
 
mortgage lending
 
 
·
 
leasing
 
 
·
 
asset management
 
 
·
 
trust services
 
 
·
 
agency insurance
 
 
·
 
treasury services
 
 
·
 
investment brokerage services
 
 
·
 
capital markets services
 
 
·
 
factoring
 
 
·
 
asset-based lending
 
 
·
 
international banking services
 
 
·
 
cash management
 
 
·
 
electronic payment services
 
 
·
 
credit and debit card services
 
 
·
 
consumer finance
 
 
·
 
payroll processing
 
The following table discloses selected financial information related to BB&T’s significant banking subsidiaries. Additionally, please see Note S. in the “Notes to Consolidated Financial Statements” for further discussion relating to BB&T’s reportable business segments.

7


 
Table 1
Selected Financial Data of Significant Banking Subsidiaries
(Dollars in thousands)
 
    
As of / For the Year Ended
December 31, 2001

    
Branch Bank

  
BB&T-SC

  
BB&T-VA

Total assets
  
$
54,700,008
  
$
6,294,110
  
$
6,912,008
Securities
  
 
13,125,442
  
 
232,304
  
 
2,203,656
Loans and leases, net of
unearned income(1)
  
 
33,896,309
  
 
4,723,568
  
 
4,143,302
Deposits
  
 
32,103,069
  
 
4,569,321
  
 
5,268,198
Shareholder’s equity
  
 
4,742,168
  
 
504,439
  
 
674,666
Net interest income
  
 
1,797,728
  
 
211,839
  
 
200,643
Provision for loan and
lease losses
  
 
127,648
  
 
21,666
  
 
14,921
Noninterest income
  
 
1,153,281
  
 
81,792
  
 
82,995
Noninterest expense
  
 
1,672,477
  
 
151,143
  
 
219,995
Net income
  
 
808,408
  
 
80,759
  
 
29,025
 
    
As of / For the Year Ended
December 31, 2000

    
Branch Bank

  
BB&T-SC

  
BB&T-VA

Total assets
  
$
49,624,872
  
$
5,249,100
  
$
6,254,434
Securities
  
 
13,010,508
  
 
389,331
  
 
564,472
Loans and leases, net of
unearned income(1)
  
 
32,297,441
  
 
4,008,789
  
 
4,028,827
Deposits
  
 
30,567,633
  
 
3,952,819
  
 
4,877,131
Shareholder’s equity
  
 
3,984,180
  
 
378,740
  
 
595,603
Net interest income
  
 
1,495,116
  
 
230,877
  
 
235,543
Provision for loan and
lease losses
  
 
84,777
  
 
12,554
  
 
12,529
Noninterest income
  
 
649,752
  
 
55,306
  
 
23,704
Noninterest expense
  
 
1,376,967
  
 
125,123
  
 
178,203
Net income
  
 
479,230
  
 
95,175
  
 
42,122
 
    
As of / For the Year Ended
December 31, 1999

    
Branch Bank

  
BB&T-SC

  
BB&T-VA

Total assets
  
$
42,518,374
  
$
4,842,462
  
$
6,550,666
Securities
  
 
10,433,803
  
 
477,705
  
 
1,681,540
Loans and leases, net of
unearned income(1)
  
 
27,912,705
  
 
3,698,046
  
 
4,265,276
Deposits
  
 
27,002,712
  
 
3,686,484
  
 
4,563,833
Shareholder’s equity
  
 
3,177,725
  
 
364,060
  
 
617,758
Net interest income
  
 
1,413,113
  
 
216,781
  
 
237,715
Provision for loan and
lease losses
  
 
78,860
  
 
15,491
  
 
7,376
Noninterest income
  
 
712,732
  
 
68,473
  
 
59,324
Noninterest expense
  
 
1,273,802
  
 
126,689
  
 
180,430
Net income
  
 
538,255
  
 
91,059
  
 
68,756

(1)
 
Includes loans held for sale.
 

8


Merger Strategy
 
BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. BB&T’s acquisition strategy is focused on three primary objectives:
 
 
·
 
to pursue acquisitions of banks and thrifts in the Carolinas, Virginia, Maryland, Washington D.C., Georgia, West Virginia, Tennessee, Kentucky, Ohio and Florida with assets in the $250 million to $10 billion range,
 
 
·
 
to acquire companies in niche markets that provide products or services that can be offered through the existing distribution system to BB&T’s current customer base, and
 
 
·
 
to consider strategic acquisitions in new markets that are economically feasible and provide positive long-term benefits.
 
BB&T has consummated acquisitions of 60 community banks and thrifts, 53 insurance agencies and 16 nonbank financial services providers over the last fifteen years. BB&T expects to continue to take advantage of the consolidation in the financial services industry and expand and enhance its franchise through mergers and acquisitions. The consideration paid for these acquisitions may be in the form of cash, debt or BB&T stock. The amount of consideration paid to complete these transactions may be in excess of the book value of the underlying net assets acquired, which could have a dilutive effect on BB&T’s earnings per share or book value. In addition, acquisitions often result in significant front-end charges against earnings; however, cost savings, especially incident to in-market bank and thrift acquisitions, are also typically anticipated.
 
Competition
 
The financial services industry is highly competitive and dramatic change continues to occur. BB&T’s subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies and insurance companies. Competition among providers of financial products and services continues to increase with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The industry continues to rapidly consolidate, which affects competition by eliminating some regional and local institutions, while strengthening the franchise of acquirers. For additional information concerning markets, BB&T’s competitive position and business strategies, see “Market Area” and “Lending Activities” below.
 
Market Area
 
BB&T’s primary market area consists of North and South Carolina, Virginia, Maryland, Georgia, eastern Tennessee, West Virginia, Kentucky and Washington, D.C. The area’s employment base is diverse and primarily consists of manufacturing, general services, agricultural, wholesale/retail trade, technology and financial services. BB&T believes its current market area is economically strong and will support consistent growth in assets and deposits in the future. Even so, management intends to continue expanding the BB&T franchise. Management strongly believes that BB&T’s community bank approach to providing client service is a competitive advantage which strengthens the Corporation’s ability to enter new markets and effectively provide financial products and services to businesses and individuals in these markets.
 
Lending Activities
 
The primary goal of the BB&T lending function is to help clients achieve their financial goals and secure their financial futures on terms that are fair to the clients and profitable to the Corporation.

9


This purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well being of its clients. BB&T’s philosophy of lending is to attempt to meet the business and consumer credit needs within defined market segments where standards of profitability, client relationships and credit quality can be met. Based on internal analyses, this philosophy has resulted in BB&T’s loan portfolio consistently outperforming the average of a group of BB&T’s peer banks in terms of asset quality, portfolio yield and rate of growth.
 
BB&T focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and consumer loans. Typically, fixed-rate residential mortgage loans are sold in the secondary mortgage market and adjustable-rate residential mortgages are generally retained in the portfolio. Servicing rights on mortgage loans sold are typically retained by BB&T. As of December 31, 2001, BB&T’s total mortgage servicing portfolio was approximately $29.2 billion. BB&T conducts the majority of its lending activities in the context of the Corporation’s community bank focus, with lending decisions made as close to the client as practicable.
 
The following table summarizes BB&T’s loan portfolio based on the underlying collateral, rather than the primary purpose of the loan.
 
Table 2
Composition of Loan and Lease Portfolio
 
    
December 31,

 
    
2001

    
2000

    
1999

    
1998

    
1997

 
    
(Dollars in thousands)
 
Commercial, financial and agricultural loans
  
$
6,551,073
 
  
$
6,555,578
 
  
$
6,025,337
 
  
$
5,675,978
 
  
$
5,210,203
 
Lease receivables
  
 
5,012,110
 
  
 
4,453,598
 
  
 
2,606,002
 
  
 
1,620,326
 
  
 
788,462
 
Real estate—construction and land development loans
  
 
5,334,108
 
  
 
4,264,275
 
  
 
4,227,146
 
  
 
3,288,411
 
  
 
3,085,299
 
Real estate—mortgage loans
  
 
25,542,288
 
  
 
25,239,698
 
  
 
22,712,509
 
  
 
20,574,669
 
  
 
18,643,701
 
Consumer loans
  
 
5,965,010
 
  
 
5,891,059
 
  
 
5,091,840
 
  
 
4,505,704
 
  
 
4,386,600
 
    


  


  


  


  


Total loans and leases held for investment
  
 
48,404,589
 
  
 
46,404,208
 
  
 
40,662,834
 
  
 
35,665,088
 
  
 
32,114,265
 
Loans held for sale
  
 
1,907,416
 
  
 
906,244
 
  
 
390,338
 
  
 
1,375,135
 
  
 
668,732
 
    


  


  


  


  


Total loans and leases
  
 
50,312,005
 
  
 
47,310,452
 
  
 
41,053,172
 
  
 
37,040,223
 
  
 
32,782,997
 
Less: unearned income
  
 
(2,868,832
)
  
 
(2,483,377
)
  
 
(1,250,129
)
  
 
(746,031
)
  
 
(531,920
)
    


  


  


  


  


Net loans and leases
  
$
47,443,173
 
  
$
44,827,075
 
  
$
39,803,043
 
  
$
36,294,192
 
  
$
32,251,077
 
    


  


  


  


  


 
Mortgage Banking
 
BB&T is a large originator of residential mortgage loans, with originations in 2001 of $10.5 billion. BB&T offers various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale of substantially all fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and mortgage insurance. BB&T also purchases residential mortgage loans from more than 100 correspondent originators. The loans purchased from third-party originators are subject to the same underwriting and risk management criteria as loans originated internally.

10


 
Laureate Capital, a wholly-owned subsidiary of BB&T, provides commercial mortgage banking services that include arranging permanent commercial and multi-family real estate loans and servicing loans for third party investors.
 
Commercial Lending
 
BB&T’s commercial lending program is generally targeted to serve small-to-middle market businesses with sales of $200 million or less, although in-house limits do allow lending to larger customers, including national customers who have business connections with the Corporation’s geographically-served markets. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Pricing on commercial loans, driven largely by competition, is usually tied to market indexes, such as the prime rate, the London Interbank Offer Rate (“LIBOR”) or rates on U.S. Treasury securities. For the third time in four years, BB&T received recognition from the U.S. Small Business Administration as the #1 “small business friendly” bank in the United States. Management believes that commercial lending to small and mid-sized businesses is BB&T’s strongest market, as BB&T has the largest market share of small business lending in the Carolinas.
 
Construction Lending
 
Real estate construction loans include construction / permanent loans, which are intended to convert to permanent one-to-four family residential mortgage loans upon completion of the construction. BB&T is also a commercial construction lender. Loans for commercial construction are usually to in-market developers, businesses, individuals or real estate investors for the construction of commercial structures in BB&T’s market area. They are made for purposes including, but not limited to, the construction of industrial facilities, apartments, shopping centers, office buildings, hotels and warehouses. The properties may be constructed for sale, lease or owner-occupancy.
 
Consumer Lending
 
BB&T offers a wide variety of consumer loan products. Various types of secured and unsecured loans are marketed to qualifying, existing clients and to other creditworthy candidates in BB&T’s market area. Home equity loans and lines are underwritten with note amounts and credit limits that ensure consistency with the Corporation’s policies. Numerous forms of unsecured loans, including revolving credits (e.g. credit cards, checking account overdraft protection and personal lines of credit) are provided and various installment loan products, such as vehicle loans, are offered. As a home equity lender, BB&T is ranked third in portfolio size in North Carolina and Virginia, first in portfolio size in South Carolina and 11th nationwide.
 
Leasing
 
BB&T provides commercial leasing products and services through BB&T Leasing Corp. (“Leasing”), a subsidiary of Branch Bank. Leasing provides three primary products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases for vehicles, rolling stock and tangible personal property. Leasing also provides lease-related services for small to medium-sized commercial customers. In addition to the services offered by Leasing, other BB&T subsidiaries provide leases to municipalities and invest in various types of leveraged lease transactions.

11


 
The following table presents BB&T’s total loan portfolio based on the primary purpose of the loan, rather than the underlying collateral:
 
Table 3
Composition of Loan and Lease Portfolio Based on Loan Purpose (1) 
 
    
December 31,

    
2001

  
2000

  
1999

  
1998

  
1997

    
(Dollars in thousands)
Loans and leases, net of unearned income
                                  
Business loans
  
$
23,640,081
  
$
21,885,646
  
$
18,884,501
  
$
16,308,568
  
$
16,001,851
Lease receivables
  
 
2,319,061
  
 
2,100,965
  
 
1,508,396
  
 
992,684
  
 
616,302
    

  

  

  

  

Total commercial loans and leases
  
 
25,959,142
  
 
23,986,611
  
 
20,392,897
  
 
17,301,252
  
 
16,618,153
    

  

  

  

  

Sales Finance
  
 
2,940,364
  
 
2,844,970
  
 
2,565,439
  
 
2,254,190
  
 
1,773,089
Revolving Credit
  
 
951,319
  
 
863,089
  
 
713,585
  
 
602,521
  
 
571,755
Direct Retail
  
 
8,273,829
  
 
8,336,368
  
 
7,526,163
  
 
6,466,926
  
 
5,742,350
    

  

  

  

  

Total consumer loans
  
 
12,165,512
  
 
12,044,427
  
 
10,805,187
  
 
9,323,637
  
 
8,087,194
    

  

  

  

  

Mortgage loans
  
 
9,318,519
  
 
8,796,037
  
 
8,604,959
  
 
9,669,303
  
 
7,545,730
    

  

  

  

  

Total loans and leases
  
$
47,443,173
  
$
44,827,075
  
$
39,803,043
  
$
36,294,192
  
$
32,251,077
    

  

  

  

  


(1)
 
Loans and leases include loans held for sale.
 
The following table reflects the scheduled maturities of commercial, financial and agricultural loans, as well as construction loans:
 
Table 4
Selected Loan Maturities and Interest Sensitivity (1)
 
    
December 31, 2001

    
Commercial, Financial and Agricultural

  
Real Estate: Construction

  
Total

    
(Dollars in thousands)
Fixed rate:
                    
1 year or less (2)
  
$
540,018
  
$
295,722
  
$
835,740
1-5 years
  
 
783,613
  
 
379,511
  
 
1,163,124
After 5 years
  
 
143,809
  
 
146,219
  
 
290,028
    

  

  

Total
  
 
1,467,440
  
 
821,452
  
 
2,288,892
    

  

  

Variable rate:
                    
1 year or less (2)
  
 
2,877,336
  
 
2,712,106
  
 
5,589,442
1-5 years
  
 
1,896,195
  
 
1,520,765
  
 
3,416,960
After 5 years
  
 
310,102
  
 
279,785
  
 
589,887
    

  

  

Total
  
 
5,083,633
  
 
4,512,656
  
 
9,596,289
    

  

  

Total loans and leases (3)
  
$
6,551,073
  
$
5,334,108
  
$
11,885,181
    

  

  


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

12


 
    
(Dollars in thousands)

(3)  The above table excludes:
      
(i)   consumer loans to individuals for household, family and other personal expenditures
  
$
5,965,010
(ii)  real estate mortgage loans
  
 
25,542,288
(iii) loans held for sale
  
 
1,907,416
(iv) leases
  
 
5,012,110
    

Total
  
$
38,426,824
    

 
Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T’s credit policy does not permit automatic renewals of loans. At the scheduled maturity date (including balloon payment date), the customer must request a new loan to replace the matured loan and execute a new note with rate, terms and conditions negotiated at that time.
 
Allowance for Loan and Lease Losses
 
The allowance for loan and lease losses is established through a provision for loan and lease losses charged against earnings. The level of the allowance for loan and lease losses reflects management’s best estimate of probable losses inherent in the portfolio as of the balance sheet date and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Management’s evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans’ “risk grades,” the estimated fair value of the underlying collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. BB&T’s objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to manage overall credit risk by minimizing the adverse impact of any single event or combination of related events.
 
Reserve Policy and Methodology
 
The allowance for loan and lease losses is composed of general reserves, specific reserves and an unallocated reserve. General reserves are established for the commercial loan portfolio using loss percentages that are determined based on management’s evaluation of the losses inherent in the various risk grades of commercial loans. Commercial loans are categorized as one of ten risk grades based on management’s assessment of the overall credit quality of the loan, including the payment history, the financial position of the borrower, underlying collateral, internal credit reviews and the results of external regulatory examinations. The general reserve percentages described above are then applied to each risk grade to calculate the necessary allowance to cover inherent losses in each risk category. The following table presents the risk grades and reserve percentages applicable to each grade at December 31, 2001 and 2000:

13


 
Table 5
General Reserves for Commercial Loans
December 31, 2001 and 2000
 
Risk Grade

  
Percentage of Commercial Loans by Risk Grade

      
General
Reserve Percentage

 
    
2001

      
2000

      
2001

      
2000

 
Risk 0 (Loans from acquired institutions *)
  
0.16
%
    
1.22
%
    
1.30
%
    
1.30
%
Risk 1 (Superior Quality)
  
4.23
 
    
3.17
 
    
0.10
 
    
0.10
 
Risk 2 (High Quality)
  
14.03
 
    
14.41
 
    
0.20
 
    
0.20
 
Risk 3 (Very Good Quality—Normal Risk)
  
28.36
 
    
28.43
 
    
0.60
 
    
0.60
 
Risk 4 (Good Quality—Normal Risk)
  
33.14
 
    
33.76
 
    
1.30
 
    
1.30
 
Risk 5 (Acceptable Quality)
  
11.85
 
    
13.50
 
    
2.25
 
    
2.25
 
Risk 6 (Management Attention)
  
4.42
 
    
3.02
 
    
3.25
 
    
3.25
 
Risk 7 (Special Mention)
  
1.02
 
    
0.55
 
    
5.00
 
    
5.00
 
Risk 8 (Substandard)
  
2.77
 
    
1.91
 
    
15.00
 
    
15.00
 
Risk 9 (Doubtful)
  
0.02
 
    
0.03
 
    
50.00
 
    
50.00
 

*
 
Companies that had been acquired by BB&T but had not been converted to BB&T’s operating systems at the dates indicated.
 
The general reserve percentages used have been determined by management to be appropriate based primarily on historical loan losses and the level of risk assumed for the various risk grades. The
reserve percentages for Special Mention, Substandard and Doubtful are based on rates used by banking regulators in conjunction with their examination of BB&T.
 
The process of classifying commercial loans into the appropriate risk grades is performed initially as a component of the approval of the loan by the appropriate credit officer. Based on the size of the loan, senior credit officers and/or the loan committee may review the classification to ensure accuracy and consistency of classification. Loan classifications are frequently reviewed by internal credit examiners to determine if any changes in the circumstances of the loan require a different risk grade. To determine the most appropriate risk grade classification for each loan, credit officers examine the borrower’s liquidity level, the quality of any collateral, the amount of the borrower’s other indebtedness, cash flow, earnings, sources of financing and existing lending relationships.
 
Specific reserves are provided on impaired commercial loans that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of BB&T’s loss exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations described above to prevent duplicate reserves. The calculations of specific reserves on commercial loans incorporate the results of measuring impaired loans pursuant to the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan.” SFAS No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. A loan is impaired when, based on current information and events, it is probable that BB&T will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded through a specific reserve. It is BB&T’s policy to classify and disclose all commercial loans greater than $300,000 that are on nonaccrual status as impaired loans. See Note D. in the “Notes to Consolidated Financial Statements” for disclosures relating to impaired loans. Substantially all other

14


loans made by BB&T are excluded from the scope of SFAS No. 114 as they are comprised of large groups of smaller balance homogeneous loans (e.g. residential mortgage and consumer installment) that are evaluated collectively for impairment.
 
General reserves are provided for noncommercial loans based on a weighted average of actual loss experience for the most recent four-year period of each major loan category, which is then applied to the total outstanding loan balance of each loan category at the end of the period. The weighted average loss experience, applied to each category of non-commercial loans at December 31, 2001, was determined as follows: a 40% weight was assigned to the 2001 loss experience for each category, a 30% weight to the loss ratio for 2000, a 20% weight to the loss ratio for 1999, and a 10% weight applied to the loss ratio for 1998. This methodology places greater emphasis on more recent loss trends and therefore, provides a self-correcting mechanism for the differences between estimated and actual losses.
 
There are two primary components considered in determining an appropriate level for the unallocated reserve. A portion of the unallocated reserve is established to cover the elements of imprecision and estimation risk inherent in the calculations of the general and specific reserves described above. The remaining portion of the unallocated reserve is determined based on management’s evaluation of various conditions that are not directly measured by any other component of the reserve, including current general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal credit examinations and results from external bank regulatory examinations.
 
While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance or to the reserving methodology may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.
 
The following table discloses an allocation of the allowance for loan and lease losses at the end of each of the past five years. The allowance has been allocated by applying the methodologies described above to the loan portfolios based on the underlying purpose of the loans. Amounts applicable to years prior to 2001 have been restated for acquisitions accounted for as poolings of interests, except for recent acquisitions not yet converted to BB&T’s systems. The allowance for merged companies that have been converted to BB&T’s operating systems have been allocated to the various loan categories based on the historic percentages applied to BB&T’s loan categories. This allocation of the allowance for loan and lease losses is calculated on an approximate basis and is not necessarily indicative of future losses. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.

15


 
Table 6
Allocation of Allowance for Loan and Lease Losses by Category
 
   
December 31,

 
   
2001

   
2000

   
1999

   
1998

   
1997

 
   
Amount

  
% Loans in each category

   
Amount

  
% Loans in each category

   
Amount

  
% Loans in each category

   
Amount

  
% Loans in each
category

   
Amount

  
% Loans in each category

 
   
(Dollars in thousands)
 
Business loans and leases
 
$
393,085
  
55
%
 
$
295,918
  
54
%
 
$
247,005
  
51
%
 
$
212,472
  
48
%
 
$
191,337
  
52
%
   

  

 

  

 

  

 

  

 

  

Direct Retail
 
 
31,060
  
17
 
 
 
20,665
  
19
 
 
 
23,174
  
19
 
 
 
19,041
  
18
 
 
 
16,769
  
18
 
Sales Finance
 
 
32,060
  
6
 
 
 
28,058
  
6
 
 
 
30,620
  
6
 
 
 
27,701
  
5
 
 
 
29,082
  
5
 
Revolving Credit
 
 
29,823
  
2
 
 
 
25,901
  
2
 
 
 
26,664
  
2
 
 
 
25,805
  
2
 
 
 
20,093
  
2
 
   

  

 

  

 

  

 

  

 

  

Total Consumer
 
 
92,943
  
25
 
 
 
74,624
  
27
 
 
 
80,458
  
27
 
 
 
72,547
  
25
 
 
 
65,944
  
25
 
   

  

 

  

 

  

 

  

 

  

Mortgage
 
 
2,477
  
20
 
 
 
2,700
  
19
 
 
 
2,420
  
22
 
 
 
3,533
  
27
 
 
 
2,757
  
23
 
Acquired Subsidiaries (1)
 
 
51,814
  
—  
 
 
 
83,259
  
—  
 
 
 
63,892
  
—  
 
 
 
59,816
  
—  
 
 
 
58,004
  
—  
 
Unallocated
 
 
104,099
  
—  
 
 
 
121,606
  
—  
 
 
 
135,461
  
—  
 
 
 
142,251
  
—  
 
 
 
117,651
  
—  
 
   

  

 

  

 

  

 

  

 

  

Total
 
$
644,418
  
100
%
 
$
578,107
  
100
%
 
$
529,236
  
100
%
 
$
490,619
  
100
%
 
$
435,693
  
100
%
   

  

 

  

 

  

 

  

 

  


(1)
 
Companies that had been acquired by BB&T but had not been converted to BB&T’s operating system at the dates indicated.

16


 
The following table discloses information relevant to BB&T’s allowance for loan and lease losses for the last five years.
 
Table 7
Analysis of Allowance for Loan and Lease Losses
 
    
December 31,

 
    
2001

    
2000

    
1999

    
1998

    
1997

 
    
(Dollars in thousands)
 
Balance, beginning of period
  
$
578,107
 
  
$
529,236
 
  
$
490,619
 
  
$
435,693
 
  
$
387,280
 
    


  


  


  


  


Charge-offs:
                                            
Commercial, financial and agricultural
  
 
(63,387
)
  
 
(33,214
)
  
 
(34,693
)
  
 
(23,605
)
  
 
(26,531
)
Real estate
  
 
(41,035
)
  
 
(20,759
)
  
 
(19,239
)
  
 
(16,165
)
  
 
(19,670
)
Consumer
  
 
(124,359
)
  
 
(93,040
)
  
 
(79,075
)
  
 
(85,505
)
  
 
(87,212
)
Lease receivables
  
 
(2,448
)
  
 
(3,502
)
  
 
(993
)
  
 
(1,167
)
  
 
(671
)
    


  


  


  


  


Total charge-offs
  
 
(231,229
)
  
 
(150,515
)
  
 
(134,000
)
  
 
(126,442
)
  
 
(134,084
)
    


  


  


  


  


Recoveries:
                                            
Commercial, financial and agricultural
  
 
14,985
 
  
 
12,358
 
  
 
13,087
 
  
 
9,649
 
  
 
9,537
 
Real estate
  
 
4,824
 
  
 
3,788
 
  
 
4,823
 
  
 
4,787
 
  
 
6,117
 
Consumer
  
 
23,955
 
  
 
21,430
 
  
 
17,344
 
  
 
15,645
 
  
 
12,310
 
Lease receivables
  
 
375
 
  
 
312
 
  
 
107
 
  
 
425
 
  
 
232
 
    


  


  


  


  


Total recoveries
  
 
44,139
 
  
 
37,888
 
  
 
35,361
 
  
 
30,506
 
  
 
28,196
 
    


  


  


  


  


Net charge-offs
  
 
(187,090
)
  
 
(112,627
)
  
 
(98,639
)
  
 
(95,936
)
  
 
(105,888
)
    


  


  


  


  


Provision charged to expense
  
 
224,318
 
  
 
147,187
 
  
 
126,559
 
  
 
126,269
 
  
 
136,863
 
    


  


  


  


  


Allowance of loans acquired in purchase transactions
  
 
29,083
 
  
 
14,311
 
  
 
10,697
 
  
 
24,593
 
  
 
17,438
 
    


  


  


  


  


Balance, end of period
  
$
644,418
 
  
$
578,107
 
  
$
529,236
 
  
$
490,619
 
  
$
435,693
 
    


  


  


  


  


Average loans and leases (1)
  
$
46,589,966
 
  
$
41,933,641
 
  
$
37,819,870
 
  
$
34,216,258
 
  
$
30,534,941
 
    


  


  


  


  


Net charge-offs as a percentage of average loans and leases
  
 
.40
%
  
 
.27
%
  
 
.26
%
  
 
.28
%
  
 
.35
%
    


  


  


  


  



(1)
 
Loans and leases are net of unearned income and include loans held for sale.
 
Nonperforming Assets and Classified Assets
 
Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessed collateral. It is BB&T’s policy to place commercial loans and leases on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest become doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual status when full collection of principal and interest becomes doubtful, or they become delinquent for a specified period of time.

17


 
Investment Activities
 
BB&T maintains a portion of its assets as investment securities. BB&T’s subsidiary banks invest in securities as allowable under bank regulations. These securities include all obligations of the U.S. Treasury, agencies of the U.S. government, including mortgage-backed securities and allowed derivatives, bank eligible obligations of any state or political subdivision, bank eligible corporate obligations, including commercial paper, negotiable certificates of deposit, bankers acceptances, mutual funds and limited types of equity securities. BB&T’s bank subsidiaries may also deal in securities subject to the provisions of the GLB Act. Scott & Stringfellow, BB&T’s full-service brokerage and investment banking subsidiary, is permitted to engage in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Corporation.
 
BB&T’s investment activities are governed internally by a written, board-approved policy. Investment policy is carried out by the Corporation’s Asset/Liability Committee (“ALCO”), which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities, which are discussed in “Market Risk Management”, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Investment strategies are established by the ALCO in consideration of the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).
 
The following table provides information regarding the composition of BB&T’s securities portfolio at the end of each of the past three years. BB&T’s trading securities reflected in the accompanying table represent positions held primarily by Scott & Stringfellow.
 
Table 8
Composition of Securities Portfolio
 
    
December 31,

    
2001

  
2000

  
1999

    
(Dollars in thousands)
Trading Securities (at estimated fair value):
  
$
97,675
  
$
96,719
  
$
93,221
    

  

  

Securities held to maturity (at amortized cost):
                    
U.S. Treasury and U.S. government agency obligations
  
 
40,496
  
 
536,863
  
 
468,243
States and political subdivisions
  
 
—  
  
 
80,479
  
 
441,772
Mortgage-backed securities
  
 
—  
  
 
1,739
  
 
7,542
Other securities
  
 
—  
  
 
3,021
  
 
5,158
    

  

  

Total securities held to maturity
  
 
40,496
  
 
622,102
  
 
922,715
    

  

  

Securities available for sale (at estimated fair value):
                    
U.S. Treasury and U.S. government agency obligations
  
 
10,918,219
  
 
9,727,118
  
 
6,316,552
States and political subdivisions
  
 
1,008,973
  
 
1,038,555
  
 
684,833
Mortgage-backed securities
  
 
3,425,288
  
 
2,805,607
  
 
4,426,303
Other securities
  
 
1,269,204
  
 
1,659,843
  
 
1,974,566
    

  

  

Total securities available for sale
  
 
16,621,684
  
 
15,231,123
  
 
13,402,254
    

  

  

Total securities
  
$
16,759,855
  
$
15,949,944
  
$
14,418,190
    

  

  

18


 
Sources of Funds
 
Deposits are the primary source of funds for lending and investing activities. Scheduled payments and maturities, as well as prepayments from portfolios of loans and investment securities also provide a stable source of funds. Federal Home Loan Bank (“FHLB”) advances, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources.
 
Deposits
 
Deposits are attracted principally from clients within BB&T’s market area through the offering of a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money rate savings, investor deposit accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are set by the ALCO and are determined based on (i) the interest rates offered by competitors, (ii) anticipated amount and timing of funding needs (iii) availability of and cost of alternative sources of funding and (iv) anticipated future economic conditions and interest rates. Client deposits are attractive sources of liquidity because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other BB&T services.
 
The following table provides information regarding the scheduled maturities of time deposits that are $100,000 and greater at December 31, 2001.
 
Table 9
Scheduled Maturities of Time Deposits $100,000 and Greater
December 31, 2001
(Dollars in thousands)
 
Maturity Schedule
      
Less than three months
  
$
1,532,182
Three through six months
  
 
1,138,629
Seven through twelve months
  
 
1,354,816
Over twelve months
  
 
872,596
    

Total
  
$
4,898,223
    

 
Borrowed Funds
 
BB&T’s ability to borrow funds through nondeposit sources provides additional flexibility in meeting the liquidity needs of customers. Short-term borrowed funds include master notes, securities sold under repurchase agreements, short-term FHLB advances, Federal funds purchased and U.S. Treasury tax and loan depository note accounts. See Note H. in the “Notes to Consolidated Financial Statements” for additional disclosures related to short-term borrowed funds. The following table summarizes certain pertinent information for the past three years with respect to BB&T’s short-term borrowed funds:
 
Table 10
Short-Term Borrowed Funds
 
    
As of / For the Year Ended December 31,

 
    
2001

      
2000

      
1999

 
    
(Dollars in thousands)
 
Maximum outstanding at any month-end during the year
  
$
7,399,378
 
    
$
8,822,265
 
    
$
8,648,596
 
Balance outstanding at end of year
  
 
6,649,100
 
    
 
7,309,978
 
    
 
8,392,344
 
Average outstanding during the year
  
 
6,239,137
 
    
 
6,910,849
 
    
 
6,709,177
 
Average interest rate during the year
  
 
3.78
%
    
 
5.95
%
    
 
4.88
%
Average interest rate at end of year
  
 
3.67
 
    
 
6.07
 
    
 
4.31
 

19


 
BB&T also utilizes longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost-effective options for funding asset growth and satisfying capital needs. BB&T’s long-term borrowings include capitalized leases, medium-term bank notes, long-term FHLB advances, subordinated debt issued by BB&T Corporation and trust preferred securities. See Note I. in the “Notes to Consolidated Financial Statements” for additional disclosures related to long-term borrowings.
 
Employees
 
At December 31, 2001, BB&T had approximately 20,400 full-time equivalent employees compared to approximately 17,500 full-time equivalent employees at December 31, 2000.
 
Properties
 
BB&T and its significant subsidiaries occupy headquarters offices that are either owned or operated under long-term leases, and also own free-standing operations centers, with its primary operations and information technology center located in Wilson, North Carolina. BB&T also owns or leases significant office space used as the Corporation’s headquarters in Winston-Salem, North Carolina. At December 31, 2001, BB&T’s subsidiary banks operated 1,081 branch offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama and Washington, D.C. Branch office locations are owned or leased. Management believes that the premises occupied by BB&T and its subsidiaries are well-located and suitably equipped to serve as financial services facilities. See Note F. “Premises and Equipment” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to BB&T’s properties and other fixed assets.
 
Executive Officers of BB&T
 
BB&T’s Chairman and Chief Executive Officer is John A. Allison, IV. Mr. Allison is 53 and has 31 years of service with the Corporation. Henry G. Williamson, Jr., is the Chief Operating Officer for the Corporate Group. Mr. Williamson is 54 and has 30 years of service with the Corporation. Kelly S. King is the President of BB&T Corporation and is the Senior Executive Vice President for the Branch Network. Mr. King is 53 and has 30 years of service with the Corporation. W. Kendall Chalk is the Senior Executive Vice President for the Lending Group. Mr. Chalk is 56 and has served the Corporation for 27 years. Scott E. Reed is a Senior Executive Vice President and the Corporation’s Chief Financial Officer. Mr. Reed is 53 and has 30 years of service with the Corporation. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 53 and has served the Corporation for 29 years. Sherry A. Kellett is a Senior Executive Vice President and the Corporation’s Controller. Ms. Kellett is 57 and has 17 years of service with the Corporation. C. Leon Wilson III is a Senior Executive Vice President and is the Corporation’s Operations Division Manager. Mr. Wilson is 46 and has served BB&T for 25 years.

20


REGULATORY CONSIDERATIONS
 
General
 
As a financial holding company under the Gramm-Leach-Bliley Act of 1999, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the “BHCA”) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As state-chartered commercial banks, Branch Bank, BB&T-SC and BB&T-VA (collectively, the “State-Chartered Banks”) are subject to regulation, supervision and examination by state bank regulatory authorities in their respective home states. These authorities include the North Carolina Commissioner of Banks, in the case of Branch Bank, the South Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia State Corporation Commission’s Bureau of Financial Institutions, in the case of BB&T-VA. Each of the State-Chartered Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”). At December 31, 2001, BB&T also operated twelve depository institutions that were subsidiaries of bank holding companies acquired by BB&T during 2001 (the “Acquired Banks”) that will be merged into either Branch Bank, BB&T-SC or BB&T-VA, as appropriate, during 2002. These banks include F&M Bank – Atlantic, F&M Bank – Central Virginia, F&M Bank – Highlands, F&M Bank – Maryland, F&M Bank – Massanutten, F&M Bank – Northern Virginia, F&M Bank – Peoples, F&M Bank – Richmond, F&M Bank – Southern Virginia, F&M Bank – West Virginia, F&M Bank –Winchester, and Community First Bank. Community First Bank is a state-chartered bank subject to supervision by the Georgia Department of Banking and Finance; F&M Bank – Maryland is a state-chartered bank subject to supervision by the Maryland Division of Financial Regulation of the Department of Labor, Licensing and Regulation; F&M Bank – West Virginia is a state-chartered bank subject to supervision by the West Virginia Division of Banking; and F&M Bank – Atlantic, F&M Bank – Central Virginia, F&M Bank – Massanutten, F&M Bank – Northern Virginia, F&M Bank – Peoples, F&M Bank – Richmond, F&M Bank – Southern Virginia, F&M Bank – Highlands, and F&M Bank – Winchester, are state-chartered banks subject to supervision by the Virginia Bureau of Financial Institutions. In addition to the state regulators discussed herein, each of the Acquired Banks that is state-chartered is also subject to regulation, supervision, and examination by the FDIC (in the case of Community First Bank) or the Federal Reserve Board (in the case of the above-referenced F&M Banks). (References herein to the “Banks” include these Acquired Banks and the State-Chartered Banks). State and Federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks’ operations.
 
In addition to banking laws, regulations and regulatory agencies, BB&T and certain of its subsidiaries and affiliates are subject to various other laws, regulations, supervision and examination by other state and federal regulatory agencies. These include the regulation, examination and supervision of BB&T’s subsidiaries and affiliates engaged in securities underwriting, dealing, brokerage, investment advisory activities and insurance activities.
 
The earnings of BB&T’s subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which BB&T and the Banks are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.
 
The Gramm-Leach-Bliley Act of 1999
 
The Gramm-Leach-Bliley Act of 1999 (the “GLB Act” or the “Act”), signed into law on November 12, 1999, amended a number of Federal banking laws that affect BB&T and its subsidiary banks, and

21


the provisions of the Act that are believed to be of most significance to BB&T are discussed below. In particular, the GLB Act permits a bank holding company to elect to become a financial holding company. In order to become and maintain its status as a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating. BB&T filed an election and on June 14, 2000, became a financial holding company.
 
Under the BHCA, a financial holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA, as amended by the GLB Act, now generally limits the activities of a bank holding company that is a financial holding company to that of banking, managing or controlling banks; performing certain servicing activities for subsidiaries; and engaging in any activity, or acquiring and retaining the shares of any company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity, as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury; or (2) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, as determined by the Federal Reserve Board. Activities that are “financial in nature” include those activities that the Federal Reserve Board had determined, by order or regulation in effect prior to enactment of the GLB Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
 
The GLB Act covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. In particular, the GLB Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations between banks and securities firms. The Act also provides that, while the states continue to have the authority to regulate insurance activities, in most instances they are prohibited from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. A financial holding company, therefore, may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking; insurance underwriting, sales and brokerage activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain areas identified in the Act. The Act directs the Federal bank regulatory agencies to adopt insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures, and such regulations have been adopted and became effective April 1, 2001.
 
The GLB Act includes a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. The Act repealed the broad exemption of banks from the definitions of “broker” and “dealer” for purposes of the Securities Exchange Act of 1934, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a “broker”, and a set of activities in which a bank may engage without being deemed a “dealer”. The Act also makes conforming changes in the definitions of “broker” and “dealer” for purposes of the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
 
The GLB Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and

22


annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The Act also provides that the states may adopt customer privacy protections that are more strict than those contained in the Act. The Act also makes a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. The Act also contains requirements for the posting of notices by operators of automated teller machines regarding fees charged for the use of such machines.
 
Many of the GLB Act’s provisions, including the customer privacy protection provisions, require the Federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement those respective provisions. Most of the required implementing regulations had been proposed and/or adopted by the bank regulatory agencies as of December 31, 2000. Additional regulations and guidelines were adopted during calendar year 2001. Neither the provisions of the GLB Act nor the Act’s implementing regulations as proposed or adopted have had a material impact on BB&T’s or the Banks’ regulatory capital ratios or well capitalized status (as discussed below) or ability to continue to operate in a safe and sound manner.
 
Payment of Dividends
 
BB&T is a legal entity separate and distinct from its subsidiaries. The majority of BB&T’s revenue is from dividends paid to BB&T by its banking subsidiaries. BB&T’s banking subsidiaries are subject to laws and regulations that limit the amount of dividends they can pay. In addition, both BB&T and its banking subsidiaries are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. BB&T does not expect that any of these laws, regulations or policies will materially affect the ability of the Banks to pay dividends. During the year ended December 31, 2001, the Banks declared $621.8 million in dividends payable to BB&T.
 
Capital
 
The Federal Reserve Board, the FDIC and the OCC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Additionally as noted above, under the Gramm-Leach-Bliley Act of 1999, a bank holding company that elects to become a financial holding company must be well-managed, have at least a satisfactory Community Reinvestment Act rating, and be well-capitalized. Under the risk-based capital guidelines, BB&T and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common equity, retained earnings, qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles (“Tier 1 capital”). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance (“Tier 2 capital” which, together with Tier 1 capital, composes “total capital”). To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total risk-weighted capital ratio of at least 10% and a Tier 1

23


risk-weighted capital ratio of 6% or greater. The ratios of Tier 1 capital and total capital to risk-adjusted assets for BB&T and the subsidiary banks as of December 31, 2001, are shown in the following table.
 
In addition, each of the Federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Pursuant to these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. The leverage ratios of BB&T and the subsidiary banks as of December 31, 2001, are reflected in the following table.
 
Table 11
Capital Adequacy Ratios of BB&T Corporation and Principal Banking Subsidiaries
December 31, 2001
 
      
Regulatory
Minimums

      
Regulatory
Minimums
to be Well-
Capitalized

    
BB&T

    
Branch
Bank

    
BB&T-
SC

    
BB&T-
VA

 
Risk-based capital ratios:
                                             
Tier 1 capital (1)
    
4.0
%
    
6.0
%
  
9.8
%
  
10.2
%
  
9.7
%
  
10.5
%
Total risk-based capital (2)
    
8.0
 
    
10.0
 
  
13.3
 
  
11.3
 
  
10.9
 
  
11.8
 
Tier 1 leverage ratio (3)
    
3.0
 
    
5.0
 
  
7.2
 
  
7.3
 
  
7.3
 
  
7.8
 

(1)
 
Shareholders’ equity plus corporation-obligated mandatorily redeemable capital securities, less unrealized gains (losses) on debt securities available for sale, net of deferred income taxes, less nonqualifying intangible assets; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.
(2)
 
Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets as defined in the risk-based capital guidelines.
(3)
 
Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles.
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. BB&T and each of the Banks are classified as “well-capitalized”. FDICIA also requires the bank regulatory agencies to implement systems for “prompt corrective action” for institutions that fail to meet minimum capital requirements within these five categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Failure to meet capital requirements can also cause an institution to be directed to raise additional capital. FDICIA also mandates that the agencies adopt safety and soundness standards relating generally to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.
 
In addition, the Federal Reserve Board, the FDIC and the OCC each has adopted risk-based capital standards that explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by each agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy. The agencies also jointly adopted a regulation, effective January 1, 2002, amending their regulatory capital standards to change the treatment of certain recourse obligations, direct credit substitutes, residual interest and other positions in securitized transactions that expose banking organizations to credit risk. The regulation amends the agencies’ regulatory

24


capital standards to align more closely the risk-based capital treatment of recourse obligations and direct credit substitutes, to vary the capital requirements for positions in securitized transactions (and certain other credit exposures) according to their relative risk, and to require capital commensurate with the risks associated with residual interests.
 
In addition to the “prompt corrective action” directives, failure to meet capital guidelines can subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC, and under certain conditions the appointment of a conservator or receiver.
 
Deposit Insurance Assessments
 
The deposits of the Banks are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC. However, a portion of the Banks’ deposits (relating to the acquisitions of various savings associations) are subject to assessments imposed by the Savings Association Insurance Fund (“SAIF”) of the FDIC.
 
The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1998. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. Legislation was enacted in 1997 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”). At December 31, 2001, the FDIC assessed BIF-insured and SAIF-insured deposits an additional 1.84 basis points per $100 of deposits to cover those obligations.
 
Other Safety and Soundness Regulations
 
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC’s claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.
 
State banking regulators and the OCC also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of a North Carolina state bank) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner of Banks also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its

25


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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
The following discussion and analysis of the consolidated financial condition and consolidated results of operations of BB&T Corporation and subsidiaries (“BB&T” or the “Corporation”) for each of the three years in the period ended December 31, 2001, and related financial information, are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T’s 2001 performance.
 
Reclassifications
 
In certain circumstances, reclassifications have been made to prior period information to conform to the 2001 presentation.
 
Mergers and Acquisitions Completed during 2001
 
During 2001, BB&T completed the following mergers and acquisitions. The financial information contained herein has been restated to include the accounts of merged institutions for all periods presented for mergers accounted for as poolings of interests. For acquisitions accounted for as purchases, the financial information contained herein includes all data relevant to the acquirees since the dates of acquisition.
 
On January 8, 2001, BB&T completed its merger with FCNB Corp. (“FCNB”), based in Frederick, Maryland. The transaction was accounted for as a pooling of interests. BB&T issued 8.7 million shares of common stock in exchange for all of the outstanding common shares of FCNB.
 
On March 2, 2001, BB&T completed its acquisition of FirstSpartan Financial Corp. (“FirstSpartan”), based in Spartanburg, South Carolina. The transaction was accounted for as a purchase. BB&T issued 3.8 million shares of common stock in exchange for all of the outstanding common shares of FirstSpartan.
 
On June 7, 2001, BB&T completed its merger with Century South Banks, Inc. (“CSBI”), of Alpharetta, Georgia. The transaction was accounted for as a pooling of interests. BB&T issued 12.7 million shares of common stock in exchange for all of the outstanding common shares of CSBI.
 
On June 27, 2001, BB&T completed its acquisition of Virginia Capital Bancshares, Inc. (“VCAP”), of Fredericksburg, Virginia. The transaction was accounted for as a purchase. BB&T issued 4.7 million shares of common stock in exchange for all of the outstanding common shares of VCAP.
 
On August 9, 2001, BB&T completed its merger with F&M National Corporation (“F&M”), based in Winchester, Virginia. The transaction was accounted for as a pooling of interests. BB&T issued 31.1 million shares of common stock in exchange for all of the outstanding common shares of F&M.
 
On November 2, 2001, BB&T completed its acquisition of Horizon Mortgage & Investment Company (“Horizon”), a commercial mortgage banking company based in Atlanta, Georgia. The transaction was accounted for as a purchase.
 
On November 8, 2001, BB&T completed its acquisition of The Southeastern Trust Company (“Southeastern”), a trust and asset management firm located in Greenville, South Carolina. The transaction was accounted for as a purchase.

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On December 12, 2001, BB&T completed its acquisition of Community First Banking Company (“CFBC”), based in Carrollton, Georgia. The transaction was accounted for as a purchase. BB&T issued 3.5 million shares of common stock in exchange for all of the outstanding common shares of CFBC.
 
In addition to the mergers and acquisitions noted above, BB&T acquired a number of insurance agencies during 2001. See Note B. in the “Notes to Consolidated Financial Statements” for further information regarding mergers and acquisitions.
 
Mergers and Acquisitions Pending at December 31, 2001
 
On November 2, 2001, BB&T announced plans to acquire Cooney, Rikard & Curtin, Inc. (“CRC”), based in Birmingham, Alabama. CRC is the largest independently owned wholesale insurance broker in the nation, with sales of property, casualty and professional insurance company placements, primarily for commercial businesses. CRC operates in 45 states, with regional offices in Chicago, Illinois, Los Angeles, California, Houston, Texas, Redondo Beach, California, Metairie, Louisiana, and Boca Raton, Florida. The transaction, which was accounted for as a purchase, was consummated on January 1, 2002.
 
On November 8, 2001, BB&T announced plans to acquire Mid-America Bancorp (“Mid-America”), based in Louisville, Kentucky. At the time of the announcement, Mid-America had $1.8 billion in assets and operated 30 banking offices in the Louisville metropolitan statistical area. Shareholders of Mid-America received .7187 shares of BB&T common stock and $8.34 per share in cash in exchange for each share of Mid-America common stock held. The transaction was accounted for as a purchase, and was completed on March 8, 2002.
 
On November 8, 2001, BB&T announced plans to acquire AREA Bancshares Corporation (“AREA”), based in Owensboro, Kentucky. On the date of the announcement, AREA had $2.95 billion in assets and operated 72 banking offices in 39 communities. Shareholders of AREA will receive .55 shares of BB&T common stock in exchange for each share of AREA common stock held. The transaction will be accounted for as a purchase, and is planned for completion in the first quarter of 2002.
 
Critical Accounting Policies
 
The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include BB&T’s accounting for securities, loans and leases, the allowance for loan and lease losses and income taxes. In particular, BB&T’s accounting policies relating to the allowance for loan and lease losses and income taxes involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in BB&T’s consolidated financial position or consolidated results of operations. See “Allowance for Loan and Lease Losses” herein for a complete discussion of BB&T’s accounting methodologies related to the allowance. Please also refer to Note A. in the “Notes to Consolidated Financial Statements” for details regarding all of BB&T’s critical and significant accounting policies.
 
Analysis of Financial Condition
 
For the year ended December 31, 2001, BB&T’s average assets totaled $68.8 billion, an increase of $7.0 billion, or 11.4%, compared to the 2000 average of $61.8 billion. The major balance sheet categories with increases in average balances were: loans and leases, up $4.7 billion, or 11.1%, and securities,

28


which increased $645.5 million, or 4.2%. The primary components of growth in average loans and leases were commercial loans and leases, which increased $2.9 billion, or 13.2%; mortgage loans, which increased $1.0 billion, or 12.4%; revolving credit loans, which increased $132.7 million, or 17.6%; and consumer loans, which increased $558.5 million, or 5.3%. Total earning assets averaged $62.9 billion in 2001, an increase of $5.3 billion, or 9.2%, compared to 2000.
 
BB&T’s average deposits totaled $44.3 billion, reflecting growth of $2.9 billion, or 7.0%, compared to 2000. The categories of deposits with the highest growth rates were: money rate savings, which increased $2.1 billion, or 19.7%, noninterest-bearing deposits, which increased $308.9 million, or 5.2%, and certificates of deposit and other time deposits, which increased $1.0 billion, or 4.9%. The growth realized in these areas was partially offset by a decline in savings and interest checking of $527.7 million, or 13.6%.
 
BB&T has increasingly utilized nondeposit funding sources in recent years to support balance sheet growth. Short-term borrowed funds include federal funds purchased, securities sold under repurchase agreements, master notes, short-term bank notes and Federal Home Loan Bank (“FHLB”) advances. Average short-term borrowed funds totaled $6.2 billion for the year ended December 31, 2001, a decrease of $671.7 million, or 9.7%, from the 2000 average. BB&T has also utilized long-term debt based on the flexibility and cost-effectiveness of the alternatives available. Long-term debt includes FHLB advances, subordinated debt issued by the Corporation and subordinated notes issued by the subsidiary banks. Average long-term debt totaled $11.0 billion for the year ended December 31, 2001, up $3.3 billion, or 42.9%, compared to 2000. The majority of the increase in average long-term debt was comprised of FHLB advances.
 
The compound annual rate of growth in average total assets for the five-year period ended December 31, 2001, was 10.6%. Over the same five-year period, average loans and leases increased at a compound annual rate of 11.0%, average securities increased at a compound annual rate of 8.1%, and average deposits grew at a compound annual rate of 6.9%. All balance sheet growth rates referred to include the effect of acquisitions accounted for as purchases, as well as internal growth.
 
Securities
 
The securities portfolios provide earnings and liquidity, as well as an effective tool in managing interest rate risk. Management has historically emphasized investments with a duration of five years or less to provide greater flexibility in managing the balance sheet in changing interest rate environments. U.S. Treasury securities and U.S. government agency obligations, excluding mortgage-backed securities, comprised 68.6% of the portfolio at December 31, 2001. The combined duration of the U.S. Treasury and U.S. government agency portfolios was .85 years at December 31, 2001. Mortgage-backed securities composed 20.4% of the total investment portfolio at year-end 2001. The duration of the mortgage-backed securities was 1.77 years at December 31, 2001. Total securities increased 5.1% in 2001, to a total of $16.8 billion at the end of the year. The duration of the total portfolio at December 31, 2001, was 2.05 years.
 
BB&T holds trading securities as a normal part of its operations. At December 31, 2001, BB&T had trading securities totaling $97.7 million that are reflected on BB&T’s consolidated balance sheet. Market valuation gains and losses in BB&T’s trading portfolio are reflected in current earnings.
 
Securities held to maturity are composed of investments in U.S. Treasury securities and made up less than 1% of the total portfolio at December 31, 2001. Securities held to maturity are carried at amortized cost and totaled $40.5 million at December 31, 2001, compared to $622.1 million outstanding at the end of 2000. During 2001, substantially all the securities in the held-to-maturity portfolio were transferred to the available-for-sale portfolio in connection with a window permitting such transfers during the implementation of SFAS No. 133. This was done to provide greater flexibility in the management of the overall securities portfolio. Unrealized market valuation gains and losses on securities in the Corporation’s held-to-maturity category affect neither earnings nor shareholders’ equity.

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Securities available for sale totaled $16.6 billion at year-end 2001 and are carried at estimated fair value. Securities available for sale at year-end 2000 totaled $15.2 billion. Unrealized market valuation gains and losses on securities classified as available for sale are recorded as a separate component of shareholders’ equity, net of deferred income taxes. The available-for-sale portfolio is primarily composed of investments in U.S. Treasury securities, government agency obligations and mortgage-backed securities. This portfolio also contains investments in obligations of states and municipalities, which composed 6.1% of the available-for-sale portfolio, and equity and other securities, which comprised 4.4% of the available-for-sale portfolio.
 
During the first quarter of 2001, BB&T sold its ownership interest in an electronic transaction processing company to Concord EFS, Inc. (‘‘Concord’’), exchanging nonmarketable equity securities for unregistered Concord common stock. The Concord common shares were subsequently registered by Concord, and BB&T sold its holdings of Concord, which were included in securities available for sale. As a result of the transaction, BB&T recognized gains of $82.4 million that are reflected in securities gains (losses), net, in the Consolidated Statements of Income.
 
During the second and third quarters of 2000, BB&T restructured the available-for-sale securities portfolio. The restructuring was undertaken to improve the overall yield of the portfolio, improve the liquidity, and reduce the average duration of the portfolio. BB&T sold $5.9 billion of U.S. Treasuries, obligations of U.S. government agencies, and mortgage-backed securities, and incurred approximately $222 million in pretax losses as a result of these sales. The proceeds from these sales were reinvested in higher yielding securities, primarily obligations of U.S. government agencies.

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The following table presents BB&T’s securities portfolio at December 31, 2001, segregated by major category with ranges of maturities and average yields disclosed.
 
Table 12
Securities
 
    
December 31, 2001

 
    
Carrying Value

    
Average Yield (3)

 
    
(Dollars in thousands)
 
U.S. Treasury and U.S. government agency obligations (1):
               
Within one year
  
$
495,013
    
5.99
%
One to five years
  
 
7,975,295
    
6.24
 
Five to ten years
  
 
3,312,259
    
6.74
 
After ten years
  
 
2,601,436
    
6.36
 
    

    

Total
  
 
14,384,003
    
6.37
 
    

    

Obligations of states and political subdivisions:
               
Within one year
  
 
69,011
    
7.33
 
One to five years
  
 
215,776
    
7.28
 
Five to ten years
  
 
511,037
    
7.09
 
After ten years
  
 
213,149
    
7.17
 
    

    

Total
  
 
1,008,973
    
7.16
 
    

    

Other securities:
               
Within one year
  
 
20,091
    
6.55
 
One to five years
  
 
37,001
    
6.37
 
Five to ten years
  
 
79,446
    
6.70
 
After ten years
  
 
36,534
    
6.71
 
    

    

Total
  
 
173,072
    
6.41
 
    

    

Securities with no stated maturity
  
 
1,193,807
    
5.19
 
    

    

Total securities (2)
  
$
16,759,855
    
6.38
%
    

    


(1)
 
Included in U.S. Treasury and U.S. government agency obligations are mortgage-backed securities totaling $3.4 billion classified as available for sale and disclosed at estimated fair value. These securities are included in each of the categories based upon final stated maturity dates. The original contractual lives of these securities range from five to 30 years; however, a more realistic average maturity would be substantially shorter because of the monthly return of principal on certain securities.
(2)
 
Includes securities held to maturity of $40.5 million carried at amortized cost and securities available for sale and trading securities carried at estimated fair values of $16.6 billion and $97.7 million, respectively.
(3)
 
Taxable equivalent basis as applied to amortized cost.
 
The available-for-sale portfolio composed 99.2% of total securities at December 31, 2001. Management believes that the high concentration of securities in the available-for-sale portfolio allows greater flexibility in the day-to-day management of the overall investment portfolio.
 
The market value of the available-for-sale portfolio at year-end 2001 was $476.7 million greater than the amortized cost of these securities. At December 31, 2001, BB&T’s available-for-sale portfolio had net unrealized appreciation, net of deferred income taxes, of $288.1 million, which is reported as a separate component of shareholders’ equity. At December 31, 2000, the available-for-sale portfolio had net unrealized appreciation of $104.3 million, net of deferred income taxes.

31


 
The fully taxable equivalent (“FTE”) yield on the total securities portfolio was 7.06% for the year ended December 31, 2001, compared to 6.94% for the prior year. The increase in the FTE yield reflects higher yields earned on all U.S. Treasuries, agency obligations and mortgage-backed securities due to the successful restructuring of the portfolio in 2000. The yield on U.S. Treasury and government agency obligations increased from 6.95% in 2000 to 7.12% in 2001, while the yield on mortgage-backed securities increased from 6.83% to 6.87% and the FTE yield on state and municipal securities decreased from 7.49% last year to 7.37% in the current year.
 
Loans and Leases
 
BB&T’s loan growth slowed during 2001 as a result of the slowing economy in BB&T’s market area. End of period loans, excluding loans held for sale, increased $1.6 billion, or 3.7%, as compared to 2000. Average total loans and leases for 2001 increased $4.7 billion, or 11.1%, compared to 2000.
 
Management emphasizes commercial and consumer lending in order to improve the overall profitability of the loan portfolio. As a result, average commercial loans, including lease receivables, increased $2.9 billion, or 13.2%, in 2001 as compared to 2000, and now compose 54.0% of the loan portfolio, compared to 53.0% in 2000. Average consumer loans, which include sales finance, revolving credit and direct retail, increased $691.1 million, or 6.1%, for the year ended December 31, 2001 as compared to the same period in 2000, and compose 25.8% of average loans, compared to 27.0% in 2000. BB&T is a large originator of mortgage loans, with 2001 originations of $10.5 billion and has also historically been a frequent acquirer of community banks and thrifts. The combination of these factors drives up the percentage of mortgage loans in BB&T’s portfolio, which, on a relative basis, are less profitable than commercial or consumer loans. To improve the overall yield of the loan portfolio, BB&T sells most of its fixed-rate mortgage loan originations in the secondary market or securitizes the loans and retains them in its investment portfolio. However, due to the low interest rate environment and resulting high volumes of mortgage loan originations and the inventory of mortgage loans held for sale, the percentage of the consolidated loan portfolio comprised of mortgage loans at December 31, 2001, was very similar to that of one year ago. Average mortgage loans increased $1.0 billion, or 12.4%, in 2001 as compared to 2000, and represented the remaining 20.2% of average total loans for 2001, compared to 20.0% a year ago.
 
The growth rates of average loans in the current year were affected by loan portfolios held by companies that were acquired during 2001 in transactions accounted for as purchases. Also, the securitization of $984.5 million of mortgage loans during 2000 and $377.4 million in 2001 affected the reported growth in average mortgage loans. During 2001, loans totaling $492.2 million were acquired through the purchase of FirstSpartan, $442.4 million were acquired through the purchase of VCAP, and $368.8 million were acquired through the purchase of CFBC. Excluding the effect of these purchase accounting transactions and the mortgage loan securitizations, average “internal” loan growth for the year ended December 31, 2001, was 9.6% compared to 2000. Excluding the effects of purchase accounting transactions and loan securitizations, average mortgage loans, including loans held for sale, increased 14.6%, commercial loans and leases grew 10.3%, and consumer loans increased 4.0% in 2001 as compared to 2000.
 
The average annualized fully taxable equivalent (“FTE”) yields on commercial, consumer and mortgage loans for 2001 were 8.06%, 9.61%, and 7.64%, respectively, resulting in a yield for the total loan portfolio of 8.37%, compared to 9.36% for the total portfolio in 2000. The 99 basis point decrease in the average yield on loans resulted from a lower average prime rate throughout 2001, which resulted from aggressive action taken by the Federal Reserve Board to address a weakening economy. During 2001 the Federal Reserve reduced the intended Federal Funds Rate from 6.50% at the beginning of the year to 1.75% at year-end. As a result of the Federal Reserve Board’s actions, the average prime rate, which is the basis for pricing many commerical and consumer loans, averaged 6.92% in 2001, compared to 9.23% for 2000.

32


 
Asset Quality
 
While the slowdown in the economy has resulted in higher levels of nonperforming assets and net charge-offs, BB&T’s lending strategy, which focuses on relationship-based lending within our markets and smaller individual loan balances, has historically provided credit quality superior to the industry average. BB&T’s asset quality, as measured by relative levels of nonperforming assets and net charge-offs, has remained approximately half that of published industry averages, which are available through September 30, 2001.
 
Nonperforming assets, which are composed of foreclosed real estate, repossessions, nonaccrual loans and leases and restructured loans, totaled $373.6 million at December 31, 2001, as compared to $236.3 million at year-end 2000, an increase of 58.1%. As a percentage of total assets, nonperforming assets were .53% at December 31, 2001, compared to .36% at the end of 2000. As a percentage of loans and leases plus foreclosed property, nonperforming assets totaled .79% at December 31, 2001, compared to .53% at the end of 2000. The allowance for loan and lease losses, as a percentage of loans and leases, was 1.36% at December 31, 2001, compared to 1.29% at year-end 2000. Loans 90 days or more past due and still accruing interest increased to $101.8 million at year-end 2001 compared to $81.6 million at December 31, 2000. Net charge-offs as a percentage of average loans and leases increased to .40% for the year ended December 31, 2001, from .27% in 2000. As a result, the ratio of the allowance for loan and lease losses to net charge-offs decreased from 5.13 times at the end of 2000 to 3.44 times as of December 31, 2001.
 
The following table summarizes asset quality information for BB&T for the past three years.
 
Table 13
Asset Quality
 
    
December 31,

 
    
2001

    
2000

    
1999

 
    
(Dollars in thousands)
 
Nonaccrual loans and leases (1)
  
$
316,607
 
  
$
180,638
 
  
$
144,247
 
Restructured loans
  
 
—  
 
  
 
492
 
  
 
1,681
 
Foreclosed property
  
 
56,964
 
  
 
55,199
 
  
 
47,143
 
    


  


  


Nonperforming assets
  
$
373,571
 
  
$
236,329
 
  
$
193,071
 
    


  


  


Loans 90 days or more past due and still accruing
  
$
101,778
 
  
$
81,629
 
  
$
66,241
 
    


  


  


Asset Quality Ratios: (2)
                          
Nonaccrual and restructured loans and leases as a percentage of loans and leases
  
 
.67
%
  
 
.40
%
  
 
.37
%
Nonperforming assets as a percentage of:
                          
Total assets
  
 
.53
 
  
 
.36
 
  
 
.33
 
Loans and leases plus foreclosed property
  
 
.79
 
  
 
.53
 
  
 
.48
 
Net charge-offs as a percentage of average loans and leases
  
 
.40
 
  
 
.27
 
  
 
.26
 
Allowance for losses as a percentage of loans and leases
  
 
1.36
 
  
 
1.29
 
  
 
1.33
 
Ratio of allowance for losses to:
                          
Net charge-offs
  
 
3.44
x
  
 
5.13
x
  
 
5.37
x
Nonaccrual and restructured loans and leases
  
 
2.04
 
  
 
3.19
 
  
 
3.63
 

                          
NOTE:  (1)  Includes $130.7 million, $73.4 million and $68.4 million of impaired loans at December 31, 2001, 2000 and 1999, respectively. See Note D. in the “Notes to Consolidated Financial Statements.”
 
(2)
 
Items referring to loans and leases are net of unearned income and include loans held for sale.

33


 
Allowance for Loan and Lease Losses
 
BB&T’s allowance for loan and lease losses totaled $644.4 million at December 31, 2001, compared to $578.1 million at the end of 2000, an increase of 11.5%. As a percentage of loans and leases outstanding, the allowance increased from 1.29% at December 31, 2000, to 1.36% at the end of 2001. The increase in the allowance as a percentage of loans and leases reflects higher provisions for loan and lease losses, as a result of higher nonperforming assets and net charge-offs as previously discussed, and the effect of acquired institutions that had higher allowance to loan ratios than that of BB&T prior to their acquisition.
 
It is BB&T’s policy to maintain an allowance for credit losses based on management’s best estimate of losses that are inherent in the portfolio at the balance sheet date. This “best estimate” is the product of a well-defined and consistently applied process that includes such factors as individual borrower creditworthiness, historical loss ratios, environmental dynamics (such as industry, geographic, political, and economic factors), and guidance provided by federal regulators.
 
BB&T provides specific allowances for certain business loans and lease receivables and provides general allowances for all types of loans to provide for losses inherent in the loan portfolios. Specific reserves are typically provided on all impaired loans classified as Special Mention, Substandard or Doubtful based on the results of quarterly loan reviews. As disclosed in Table 5 in ‘‘Description of Business,’’ the general reserve percentages applied to the various risk grades of commercial loans did not change from 2000 to 2001, reflecting management’s determination that the overall risk associated with each risk grade did not change substantially during 2001. As is also visible in Table 5, the percentages of commercial loans in each risk grade did not significantly change from 2000 to 2001. The general reserve percentages disclosed in Table 5 are applied to the commercial loan balances in each risk grade to determine the total general reserves on commercial loans and lease receivables. Please refer to the discussion preceding and following Table 5 for additional discussion on BB&T’s reserve policy and methodology.
 
General reserves established to cover losses inherent in noncommercial loan categories are determined based on a weighted average of actual loan loss experience over the last four years. Thus, these rates change each year based on trends in actual loan losses incurred. To calculate the reserve rate applied to each category, a weight of 40% is given to the current year’s loan loss percentage. A weight of 30% is applied to the loan loss ratio from two years ago, a 20% weight to the loss ratio from three years ago, and the remaining 10% weight is applied to the loan loss percentage from four years ago. The resulting reserves are applied to the outstanding loan balances in each category at period end to determine the total general reserves on noncommercial loans. Specific reserves may be established for noncommercial loans as considered necessary.
 
Recently acquired subsidiaries are considered separately for purposes of calculating the allowance for loan losses. At December 31, 2001, these subsidiaries included F&M National Corporation, which was acquired in August, 2001 and accounted for as a pooling of interests, and Community First Banking Company, which was acquired in December, 2001 and accounted for as a purchase. These recently acquired subsidiaries, which have not yet been converted to BB&T’s operating systems, are considered separately because the related loans have not yet been subjected to BB&T’s credit monitoring policies and procedures, nor have they been assigned a BB&T risk grade. Management considers historical loan loss experience in determining these reserves. Also, evidence gathered during due diligence performed in connection with the mergers is considered in calculating the reserve. At December 31, 2001, these subsidiaries had $2.7 billion in total loans outstanding and related reserves totaling $51.8 million.

34


 
The unallocated allowance for loan losses totaled $104.1 million at December 31, 2001, down from $121.6 million, or 14.4%, from the unallocated balance at December 31, 2000. The unallocated allowance was 16.2% of the total allowance at 2001, compared to 21.0% in 2000. The total allowance, as a percentage of outstanding loans and leases, increased from 1.29% of total loans and leases at December 31, 2000, to 1.36% of total loans at year-end 2001. As a result of the methodology utilized by BB&T in restating prior year allowance allocations for merged companies, the portion of these companies’ allowances considered unallocated for periods prior to 2001 is typically higher in relation to their total allowance than that of BB&T. This contributed to the decline in this element of the allowance at year-end 2001 compared to 2000.
 
Please refer to Table 6 in the ‘‘Description of Business’’ section, which reflects BB&T’s allowance allocations for the last five years.
 
There were no significant changes in the estimation methods or fundamental assumptions used in the calculation of the allowance for loan losses at December 31, 2001, compared to 2000. The higher outstanding balance of total loans and leases at December 31, 2001, compared to year-end 2000, and higher levels of nonperforming assets and net charge-offs resulted in higher provisions for loan and lease losses and additional specific and general reserves. There were no reallocations of the allowance from 2000. See “Asset Quality” for disclosures regarding changes in the trends of credit quality.
 
Deposits and Other Borrowings
 
Client deposits generated through the BB&T branch network are the largest source of funds used to support asset growth. Core deposits compose BB&T’s primary source of funding; however, as depositors have sought greater returns on their investments, growth rates of core deposits have not kept pace with asset growth. Therefore, nondeposit funding sources have increasingly been used to support balance sheet growth.
 
Total deposits at December 31, 2001, were $44.7 billion, an increase of $856.0 million, or 2.0%, compared to year-end 2000. The increase in deposits was driven by increases in money rate savings accounts of $2.0 billion, or 17.3%, and $761.4 million, or 12.3%, in noninterest-bearing deposits. These increases were offset by declines in certificates of deposit and other time deposits of $1.6 billion, or 7.0%, and savings and interest checking of $384.3 million, or 11.3%. For the year ended December 31, 2001, total deposits averaged $44.3 billion, an increase of $2.9 billion, or 7.0%, compared to 2000. The increase was led by a $2.1 billion, or 19.7%, increase in average money rate savings, and a $308.9 million, or 5.2%, increase in noninterest-bearing deposits. These increases were offset by a decrease in average savings and interest checking accounts of $527.7 million, or 13.6%. Other time deposits, including individual retirement accounts and certificates of deposit, increased $1.0 billion, or 4.9% on average, in 2001 and remain BB&T’s largest category of average deposits, comprising 50.0% of average total deposits.
 
The average rates paid on interest-bearing deposits decreased to 4.12% during 2001, from 4.74% in 2000. The declining interest rate in 2001 was caused by the general slowdown in economic activity and aggressive actions by the Federal Reserve to lower short-term interest rates. The average rate paid on other time deposits, including individual retirement accounts and certificates of deposit, decreased to 5.45% in the current year from 5.80% in 2000. The average cost of money rate savings accounts decreased to 2.49% in the current year from 3.68% in 2000; interest checking decreased from 1.93% in 2000 to 1.47% in the current year; and the average cost of savings deposits decreased to 1.42% in 2001 from 1.85% in 2000.
 
BB&T also uses various types of short-term borrowed funds to supplement deposits in order to fulfill funding needs. See Note H. “Short-Term Borrowed Funds” in the “Notes to Consolidated

35


Financial Statements” herein for further disclosure. The types of short-term borrowings utilized by the Corporation include Federal funds purchased, which composed 29.4% of total short-term borrowed funds, and securities sold under repurchase agreements, which comprised 32.7% of short-term borrowed funds at year-end 2001. Master notes, U.S. Treasury tax and loan deposit notes, short-term bank notes and short-term Federal Home Loan Bank (“FHLB”) advances are also utilized to meet short-term funding needs. Average short-term borrowed funds totaled $6.2 billion during 2001, a decrease of $671.7 million, or 9.7%, from 2000, while short-term borrowed funds at year-end 2001 were $6.6 billion, a decrease of $660.9 million, or 9.0%, compared to year-end 2000. The rates paid on average short-term borrowed funds decreased from 5.95% in 2000 to 3.78% during 2001. The decrease in the cost of short-term borrowed funds resulted from the lower interest rate environment during 2001, including a 231 basis point decrease in the average Federal funds rate for 2001 compared to 2000.
 
BB&T also utilizes long-term debt to provide both funding and, to a lesser extent, regulatory capital. See Note I. “Long-Term Debt” in the “Notes to Consolidated Financial Statements” herein for further disclosure. Total outstanding long-term debt at December 31, 2001, totaled $11.7 billion, an increase of $3.1 billion, or 35.6%, from year-end 2000. The substantial increase in long-term borrowing during 2001 reflects BB&T’s efforts to take advantage of declining interest rates. For the year ended December 31, 2001, average long-term debt increased $3.3 billion, or 42.9%, compared to the average for 2000. BB&T’s long-term debt consists primarily of FHLB advances, which composed 79.3% of total outstanding long-term debt at December 31, 2001, and subordinated notes, which composed 12.8% of the year-end balance. FHLB advances are cost-effective long-term funding sources that provide BB&T with the flexibility to structure the debt in a manner that aids in the management of interest rate risk and liquidity. The average rate paid on long-term debt decreased from 6.06% during 2000 to 5.54% during 2001 because of the overall declining interest rate environment previously discussed.
 
Liquidity needs are a primary consideration in evaluating funding sources. BB&T’s strategy is to maintain funding flexibility, in order that the Corporation may react rapidly to opportunities that may become available in the marketplace. BB&T will continue to focus on traditional core funding strategies, supplemented by short-term and long-term borrowings. See “Liquidity, Inflation and Changing Interest Rates” for additional discussion.
 
Analysis of Results of Operations
 
Consolidated net income for 2001 totaled $973.6 million, which generated basic earnings per share of $2.15 and diluted earnings per share of $2.12. Net income for 2000 was $698.5 million and net income for 1999 totaled $778.7 million. Basic earnings per share were $1.55 in 2000 and $1.74 in 1999, while diluted earnings per share were $1.53 and $1.71 for 2000 and 1999, respectively.
 
Mergers and acquisitions have played an important role in the development of BB&T’s franchise. As described in Note B. in the “Notes to Consolidated Financial Statements”, during the three years ended December 31, 2001, BB&T has consummated mergers accounted for as poolings of interests with eleven financial institutions and completed the acquisitions of five community banks, two securities brokerage firms, one mortgage company and 24 insurance agencies that were accounted for as purchases. As a result of this activity, the consolidated results of operations for the three year period covered by this discussion include the effects of charges, expenses and certain gains related to the consummation of the transactions, as well as the integration of the merged entities into BB&T.
 
Merger-related charges and expenses include personnel-related items such as staff relocation costs, severance benefits, early retirement packages and contract settlements. They also include furniture, equipment and occupancy costs related to department and branch consolidations as well as costs related to converting the data processing systems of the acquired companies to BB&T’s automation platform. Merger-related charges also include professional fees and operational losses incurred in connection with the mergers.

36


 
Additional provisions for loan and lease losses are typically recorded by merged entities to align their credit, charge-off and loss allowance methodologies with those of BB&T. Also, losses are often incurred on sales of securities in order to restructure the merged institutions’ portfolios to comply with BB&T’s investment and balance sheet management strategies. These additional provisions and securities losses are also considered to be merger-related charges. Finally, gains from divestures, which are sometimes required as a condition of receiving regulatory approval for the transaction, are considered as a reduction in total merger-related charges and expenses.
 
In addition to merger-related charges and expenses, BB&T realized a pretax gain of $82.4 million in 2001 from the sale of an investment in an electronic transaction processing company that was included in securities available for sale. On an after-tax basis, this gain added $53.5 million to 2001 net income. BB&T also incurred pretax losses of $222.2 million during the year ended December 31, 2000, in connection with a restructuring of a substantial portion of the available-for-sale securities portfolio. The effect of this restructuring reduced net income for 2000 by $143.3 million.
 
During the year ended December 31, 2001, BB&T recorded $179.9 million in net after tax charges and expenses primarily associated with the mergers of FCNB, Century South and F&M. In addition, net after-tax gains from the sale of an investment in an electronic transaction processing company increased 2001’s operating results by $53.5 million. Excluding the effects of these items, BB&T’s net income for 2001 would have been $1.1 billion, or $2.40 per diluted share.
 
In 2000, BB&T incurred $116.3 million in net after tax charges and expenses primarily in connection with the mergers of Premier Bancshares, Inc., Hardwick Holding Company, First Banking Company of Southeast Georgia and One Valley Bancorp, Inc. In addition, net after-tax losses of $143.3 million from restructuring the available-for-sale securities portfolio were also recognized, as discussed above. Excluding the effect of these items, BB&T’s net income for 2000 would have been $957.9 million, or $2.10 per diluted share.
 
During 1999, BB&T recorded $61.7 million in net after tax charges and expenses principally associated with the mergers of MainStreet Financial Corporation, Mason-Dixon Bancshares, Inc., First Citizens Corporation and First Liberty Financial Corp. Excluding the effect of these items, BB&T’s net income for 1999 would have been $840.4 million, or $1.85 per diluted share.
 
Excluding the effects on net income of the net after tax charges, expenses and gains primarily associated with merger activity, the gain on the sale of the equity investment in an electronic transaction processing company in 2001 and the available-for-sale securities portfolio restructuring undertaken during 2000 (collectively referred to hereinafter as the “Special Items”), which are discussed above, from the three years presented, BB&T’s net income for 2001 increased $142.3 million, or 14.9% compared to 2000, while diluted earnings per share increased $.30, or 14.3%. Net income for 2000, excluding special items, increased $117.4 million, or 14.0%, from 1999, while diluted earnings per share increased $.25, or 13.5%.
 
Two important and commonly used measures of profitability are return on average assets (net income as a percentage of average total assets) and return on average shareholders’ equity (net income as a percentage of average common shareholders’ equity). BB&T’s returns on average assets were 1.41%, 1.13% and 1.36% for the years ended December 31, 2001, 2000 and 1999, respectively. The returns on average common shareholders’ equity were 16.78%, 14.22% and 16.81% for the last three years. The returns on average assets produced by BB&T’s earnings, excluding the Special Items discussed above, were 1.60% for 2001, 1.55% for 2000 and 1.47% for 1999. BB&T’s returns on average shareholders’ equity, excluding the special items, were 18.96%, 19.50% and 18.14%, for the years ended December 31, 2001, 2000 and 1999, respectively.

37


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

38


Table 14
FTE Net Interest Income and Rate / Volume Analysis
For the Years Ended December 31, 2001, 2000 and 1999
 
                                             
2001 vs. 2000

   
2000 vs. 1999

 
   
Average Balances

 
Yield / Rate

   
Income / Expense

 
Increase
(Decrease)

   
Change due to

   
Increase
(Decrease)

   
Change due to

 
   
2001

 
2000

 
1999

 
2001

   
2000

   
1999

   
2001

 
2000

 
1999

   
Rate

   
Volume

     
Rate

   
Volume

 
   
(Dollars in thousands)
 
Assets
                                                                                                     
Securities (1):
                                                                                                     
U.S. Treasury, U.S. government agencies and other
 
$
14,830,335
 
$
14,144,391
 
$
13,737,216
 
7.04
%
 
6.90
%
 
6.45
%
 
$
1,043,583
 
$
976,057
 
$
886,367
 
$
67,526
 
 
$
19,527
 
 
$
47,999
 
 
$
89,690
 
 
$
62,872
 
 
$
26,818
 
States and political subdivisions
 
 
1,056,401
 
 
1,096,852
 
 
1,083,261
 
7.37
 
 
7.49
 
 
7.61
 
 
 
77,866
 
 
82,143
 
 
82,428
 
 
(4,277
)
 
 
(1,281
)
 
 
(2,996
)
 
 
(285
)
 
 
(1,312
)
 
 
1,027
 
   

 

 

 

 

 

 

 

 

 


 


 


 


 


 


Total securities (5)
 
 
15,886,736
 
 
15,241,243
 
 
14,820,477
 
7.06
 
 
6.94
 
 
6.54
 
 
 
1,121,449
 
 
1,058,200
 
 
968,795
 
 
63,249
 
 
 
18,246
 
 
 
45,003
 
 
 
89,405
 
 
 
61,560
 
 
 
27,845
 
Other earning assets (2)
 
 
443,615
 
 
440,804
 
 
617,589
 
3.86
 
 
6.67
 
 
5.14
 
 
 
17,104
 
 
29,384
 
 
31,774
 
 
(12,280
)
 
 
(12,466
)
 
 
186
 
 
 
(2,390
)
 
 
8,028
 
 
 
(10,418
)
Loans and leases, net of unearned income (1)(3)(4)(5)
 
 
46,589,966
 
 
41,933,641
 
 
37,819,870
 
8.37
 
 
9.36
 
 
8.80
 
 
 
3,901,850
 
 
3,924,491
 
 
3,329,646
 
 
(22,641
)
 
 
(434,884
)
 
 
412,243
 
 
 
594,845
 
 
 
218,218
 
 
 
376,627
 
   

 

 

 

 

 

 

 

 

 


 


 


 


 


 


Total earning assets
 
 
62,920,317
 
 
57,615,688
 
 
53,257,936
 
8.01
 
 
8.70
 
 
8.13
 
 
 
5,040,403
 
 
5,012,075
 
 
4,330,215
 
 
28,328
 
 
 
(429,104
)
 
 
457,432
 
 
 
681,860
 
 
 
287,806
 
 
 
394,054
 
   

 

 

 

 

 

 

 

 

 


 


 


 


 


 


Non-earning assets
 
 
5,921,321
 
 
4,197,727
 
 
3,793,123
                                                                                   
   

 

 

                                                                                   
Total assets
 
$
68,841,638
 
$
61,813,415
 
$
57,051,059
                                                                                   
   

 

 

                                                                                   
Liabilities and Shareholders’ Equity
                                                                                                     
Interest-bearing deposits:
                                                                                                     
Savings and interest checking
 
$
3,361,286
 
$
3,888,958
 
$
4,592,046
 
1.44
 
 
1.89
 
 
2.08
 
 
 
48,402
 
 
73,470
 
 
95,489
 
 
(25,068
)
 
 
(15,960
)
 
 
(9,108
)
 
 
(22,019
)
 
 
(8,236
)
 
 
(13,783
)
Money rate savings
 
 
12,564,986
 
 
10,494,588
 
 
9,297,377
 
2.49
 
 
3.68
 
 
3.00
 
 
 
312,648
 
 
386,635
 
 
278,656
 
 
(73,987
)
 
 
(140,904
)
 
 
66,917
 
 
 
107,979
 
 
 
69,138
 
 
 
38,841
 
Other time deposits
 
 
22,171,613
 
 
21,135,213
 
 
19,278,553
 
5.45
 
 
5.80
 
 
5.17
 
 
 
1,207,787
 
 
1,225,143
 
 
996,189
 
 
(17,356
)
 
 
(75,809
)
 
 
58,453
 
 
 
228,954
 
 
 
127,854
 
 
 
101,100
 
   

 

 

 

 

 

 

 

 

 


 


 


 


 


 


Total interest-bearing deposits
 
 
38,097,885
 
 
35,518,759
 
 
33,167,976
 
4.12
 
 
4.74
 
 
4.13
 
 
 
1,568,837
 
 
1,685,248
 
 
1,370,334
 
 
(116,411
)
 
 
(232,673
)
 
 
116,262
 
 
 
314,914
 
 
 
188,756
 
 
 
126,158
 
Short-term borrowed funds
 
 
6,239,137
 
 
6,910,849
 
 
6,709,177
 
3.78
 
 
5.95
 
 
4.88
 
 
 
235,924
 
 
411,528
 
 
327,148
 
 
(175,604
)
 
 
(138,675
)
 
 
(36,929
)
 
 
84,380
 
 
 
74,286
 
 
 
10,094
 
Long-term debt
 
 
11,011,408
 
 
7,705,449
 
 
6,207,966
 
5.54
 
 
6.06
 
 
5.49
 
 
 
610,292
 
 
467,136
 
 
340,971
 
 
143,156
 
 
 
(42,937
)
 
 
186,093
 
 
 
126,165
 
 
 
37,949
 
 
 
88,216
 
   

 

 

 

 

 

 

 

 

 


 


 


 


 


 


Total interest-bearing liabilities
 
 
55,348,430
 
 
50,135,057
 
 
46,085,119
 
4.36
 
 
5.11
 
 
4.42
 
 
 
2,415,053
 
 
2,563,912
 
 
2,038,453
 
 
(148,859
)
 
 
(414,285
)
 
 
265,426
 
 
 
525,459
 
 
 
300,991
 
 
 
224,468
 
   

 

 

 

 

 

 

 

 

 


 


 


 


 


 


Noninterest-bearing deposits
 
 
6,206,120
 
 
5,897,181
 
 
5,573,264
                                                                                   
Other liabilities
 
 
1,484,899
 
 
869,742
 
 
760,365
                                                                                   
Shareholders’ equity
 
 
5,802,189
 
 
4,911,435
 
 
4,632,311
                                                                                   
   

 

 

                                                                                   
Total liabilities and shareholders’ equity
 
$
68,841,638
 
$
61,813,415
 
$
57,051,059
                                                                                   
   

 

 

                                                                                   
Average interest rate spread
                   
3.65
 
 
3.59
 
 
3.71
 
                                                                 
Net yield on earning assets
                   
4.17
%
 
4.25
%
 
4.30
%
 
$
2,625,350
 
$
2,448,163
 
$
2,291,762
 
$
177,187
 
 
$
(14,819
)
 
$
192,006
 
 
$
156,401
 
 
$
(13,185
)
 
$
169,586
 
                     

 

 

 

 

 

 


 


 


 


 


 


Taxable equivalent adjustment
                                     
$
190,865
 
$
133,666
 
$
97,053
                                               
                                       

 

 

                                               

(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.

39


 
For 2001, net interest income on an FTE adjusted basis totaled $2.6 billion, compared with $2.4 billion in 2000 and $2.3 billion in 1999. The increase in net interest income during 2001 resulted primarily from a decrease in total interest expense, which resulted from substantially lower interest rates during 2001 as compared to 2000. This lower average cost for these funds resulted in a decrease of $148.9 million in total interest expense. Interest income from loans decreased $22.6 million, and interest income from investment securities increased $63.2 million.
 
The FTE-adjusted net interest margin is the primary measure used in evaluating the effectiveness of the management of earning assets and the liabilities funding those assets. The FTE adjusted net interest margin was 4.17% in 2001, 4.25% in 2000 and 4.30% in 1999. The eight basis point decrease in margin during 2001 resulted from four principal factors. First, the most substantial component of the decline was the rapidly declining interest rate environment prevailing during 2001 as the Federal Reserve aggressively reduced short-term interest rates due to a weakening economy. This scenario resulted in BB&T’s interest sensitive assets repricing more quickly overall than its interest-bearing liabilities, creating a portion of the decrease. Second, during 2001, additional investments in bank owned life insurance products were made. These investments add to the cost of funds included in interest expense, but produce revenue that is classified as noninterest income. Third, BB&T began to outsource the issuance of official checks in mid-2000. This outsourcing involves transferring noninterest-bearing deposits to a third party to issue BB&T’s official checks. BB&T receives enhanced fee income and net income from the program, but loses access to the less costly source of funds. Fourth, BB&T continues to have a very active common stock repurchase program. For acquisitions accounted for under the purchase method of accounting, it is BB&T’s policy to acquire the shares of its common stock that will be issued to consummate those transactions, as allowed under generally accepted accounting principles. The cost of funds related to share repurchases resulted in an approximate three basis point decline in 2001 margin.
 
The improved yield in the securities portfolio reflects the impact of the restructuring of the available-for-sale securities portfolio, as referred to in “Securities” above.
 
Provision for Loan and Lease Losses
 
A provision for loan and lease losses is charged against earnings in order to maintain the allowance for loan and lease losses at a level that reflects management’s evaluation of the risk inherent in the portfolio as discussed above. The amount of the provision is based on continuing assessments of nonperforming and “watch list” loans, analytical reviews of loan loss experience in relation to outstanding loans, loan charge-offs and nonperforming asset trends and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The provision for loan and lease losses recorded by BB&T in 2001 was $224.3 million, compared with $147.2 million in 2000 and $126.6 million in 1999.
 
The 52.4% increase in the current year provision for loan and lease losses resulted from a 53.6% increase in charge-offs during the year, as well as adjustments for acquired companies in order to conform with BB&T’s assessment of the acquired companies’ loan portfolio. Net charge-offs were .40% of average loans and leases for 2001 compared to .27% of average loans during 2000. The allowance for loan and lease losses was 1.36% of loans and leases outstanding and was 2.04 times total nonaccrual and restructured loans and leases at year-end 2001, compared to 1.29% and 3.19 times, respectively, at December 31, 2000.
 
Noninterest Income
 
Noninterest income includes service charges on deposit accounts, trust revenue, mortgage banking income, investment banking and brokerage fees, insurance commissions, gains and losses on securities transactions and other commissions and fees derived from bank-related activities.

40


 
Noninterest income, excluding Special Items and securities gains or losses, as a percentage of net interest income plus noninterest income excluding the items referred to above, or the “fee income ratio”, was 33.4% for the twelve months ended 2001, compared to 30.3% for the twelve months ended 2000. This increase indicates that BB&T is deriving a greater percentage of its revenues from noninterest income sources. It is a primary goal of BB&T to increase the proportion of revenue derived from sources that are less dependent on movements in interest rates than traditional lending and deposit gathering. An increased fee income ratio is the primary indicator that this goal is being accomplished.
 
Noninterest income for 2001 totaled $1.4 billion, compared with $846.8 million in 2000 and $957.4 million in 1999. The 2001 noninterest income reflects an increase of $531.9 million, or 62.8%, compared to 2000. Noninterest income for 2000 was $110.6 million, or 11.6%, lower than 1999. The increase in noninterest income for 2001 is primarily the result of substantially higher mortgage banking income, growth in service charges on deposits, increased trust revenue, increased insurance commissions and net securities gains. The 2000 results include the effect of the restructuring of the securities portfolio during the second and third quarters of the year (as further discussed in the “Securities” section), which reduced total noninterest income by $222 million. Excluding the effect of the securities portfolio restructuring and other Special Items, 2001 noninterest income would have increased $260.4 million, or 24.3%, compared to 2000. Excluding the effect of the restructuring of the securities portfolio discussed above, noninterest income for 2000 would have increased $111.4 million, or 11.6%, over 1999. The major categories of noninterest income for 2001 and their fluctuations are discussed in the following paragraphs.
 
Service charges on deposit accounts represent BB&T’s largest category of noninterest revenue. Such revenues totaled $349.8 million in 2001, an increase of $57.3 million, or 19.6%, compared to 2000. Service charges during 2000 totaled $292.5 million, which represented an increase of $23.9 million, or 8.9% compared to 1999. The primary factors contributing to the 2001 increases were NSF and overdraft charges on personal accounts, which were $17.9 million more than in 2000, and account analysis fees on commercial accounts which grew $21.5 million. Growth in these items composed the bulk of the growth in this category of revenue in 2000 compared to 1999.
 
Income from mortgage banking activities (which includes revenues from originating, marketing and servicing mortgage loans and valuation adjustments related to capitalized mortgage servicing rights) totaled $147.8 million in 2001, $104.6 million in 2000 and $167.1 million in 1999. In 2001, mortgage banking income increased $43.3 million, or 41.4%, compared to 2000. The substantial increase in mortgage banking income resulted from substantially higher mortgage loan originations in 2001 as a result of the lower interest rate environment and the resulting increases in origination fees and servicing fees. BB&T originated a record $10.5 billion in mortgage loans in 2001 compared to $4.7 billion in 2000 and $4.6 billion in 1999. While lower interest rates in 2001 produced record originations volume, they also led to increased prepayment rates which lowered the value of existing mortgage servicing rights. As a result, BB&T recorded net impairment charges of $58.9 million during 2001, compared to net impairment charges of $1.2 million in 2000. In 2000, mortgage banking income decreased $62.5 million, or 37.4%, compared to 1999 due to a higher interest rate environment. This decline resulted from losses on sales of mortgage loans, lower origination fees as compared to 1999, and the recapture of $19.5 million in valuation allowances related to capitalized mortgage servicing rights in 1999.
 
BB&T has an extensive insurance agency network which is the 10th largest in the nation. Commission income from the agency network totaled $176.9 million in 2001, an increase of $30.2 million, or 20.6%, compared to 2000. Commission income for 2000 totaled $146.7 million, an increase of $52.2 million, or 55.2% compared to 1999. During 2001 and 2000, BB&T continued to expand its insurance operations through acquisitions of additional agencies in the Company’s market area. These acquisitions, all of which were accounted for as purchases, were responsible for $24.6 million of the income in agency insurance commissions during 2001 and $23.2 million in 2000. In addition to acquisition activity, commissions have increased due to internal growth in group health coverage, property and casualty insurance, life insurance and surety commissions.

41


 
Revenue from corporate and personal trust services totaled $90.9 million in 2001, $80.0 million in 2000 and $73.4 million in 1999. The 2001 revenue reflects an increase of $10.9 million, or 13.6% over 2000, which was $6.7 million, or 9.1%, more than 1999. Managed assets totaled $16.7 billion at the end of 2001 compared to $15.3 billion at December 31, 2000. The revenue increases in 2001 and 2000 are primarily the result of internal growth, driven by increased general trust services income and higher revenues from the management of estates and mutual funds. BB&T manages its own family of mutual funds, which are marketed through its broker/dealer subsidiaries. Fees from the management of these funds increased $3.0 million, or 21.6%, during 2001.
 
Net gains on sales of securities totaled $122.2 million in 2001 compared to net losses of $219.4 million in 2000 and net losses of $1.6 million in 1999. Excluding the effect of the Special Items previously discussed, net gains on sales of securities were $43.3 million in 2001, compared to net gains of $5.8 million in 2000 and $1.7 million in 1999.
 
Investment banking and brokerage fees and commissions totaled $174.6 million in 2001, $163.5 million in 2000 and $129.7 million in 1999. The 2001 revenue reflects an increase of $11.1 million, or 6.8% over 2000, which was $33.7 million, or 26.0% greater than 1999. The increase in 2001 over 2000 resulted from the purchase of Edgar M. Norris & Co., which added $4.8 million, and internal growth in fees and commissions from brokerage and underwriting services. The large increase in 2000 over 1999 revenue was primarily the result of the acquisition of Scott & Stringfellow, Inc., on March 26, 1999. The Scott & Stringfellow acquisition was accounted for as a purchase; therefore, its operating results were only included in BB&T’s accounts in periods following the acquisition.
 
Other nondeposit fees and commissions totaled $188.1 million in 2001, an increase of $21.7 million, or 13.0%, compared with $166.5 million earned in 2000, which represented an increase of $29.1 million, or 21.2%, over the $137.4 million in 1999 revenue. Major sources of nondeposit fees and commissions generating the increase in 2001 revenue include bankcard fees and merchant discounts, which increased $3.0 million, or 5.2%, ATM and point of sale fees, which increased $3.6 million, or 9.3%, and official check outsourcing (a program which began mid-year 2000), which increased $11.4 million, or 185.4%. The increase in ATM and point of sale fees was due primarily to a significant increase in the number of transactions processed. Point of sale transactions increased 39.3% from 2000 to 2001. Additionally, standby letter of credit fees increased $2.3 million, or 51.1%, over the $4.6 million earned in 2000. The increase in other nondeposit fees and commissions in 2000 compared to 1999 was primarily the result of higher bankcard fees and merchant discount and increased ATM and point of sale fees.
 
Other income totaled $114.8 million in 2001, an increase of $17.7 million, or 18.3%, compared with $97.0 million earned in 2000, which represented an increase of $23.0 million, or 31.1%, over the $74.0 million in 1999 revenue. The primary component of the increase in 2001 was income from investments in bank owned life insurance, which increased $26.2 million, or 66.2%. This increase was partially offset by a decrease in income from a deferred compensation program and a decrease in amortization of negative goodwill, in the amount of $3.7 million, or 34.0%, over 2000. BB&T’s international banking unit revenues totaled $7.8 million in 2001, an increase of 6.4% compared to the $7.3 million earned in 2000.
 
The ability to generate significant amounts of noninterest revenues in the future will be very important to the continued success of BB&T. Through its subsidiaries, BB&T will continue to focus on asset management, mortgage banking, trust, insurance, investment and brokerage services, as well as other fee-producing products and services. BB&T plans to continue to pursue acquisitions of additional insurance agencies and asset management companies, as well as explore strategic acquisitions of other nonbank entities as a means of expanding fee-based revenues. Also, among BB&T’s principal strategies following the acquisition of a financial institution is the cross-sell of noninterest-income generating products and services to the acquired institution’s client base.

42


 
The following table provides a breakdown of BB&T’s noninterest income:
 
Table 15  Noninterest Income
 
                       
% Change

 
    
Years Ended December 31,

    
2001 v.
2000

    
2000 v.
1999

 
    
2001

  
2000

    
1999

       
    
(Dollars in thousands)
 
Service charges on deposits
  
$
349,758
  
$
292,492
 
  
$
268,620
 
  
19.6
%
  
8.9
%
Mortgage banking income
  
 
147,835
  
 
104,579
 
  
 
167,056
 
  
41.4
 
  
(37.4
)
Trust income
  
 
90,898
  
 
80,039
 
  
 
73,361
 
  
13.6
 
  
9.1
 
Agency insurance commissions
  
 
176,905
  
 
146,684
 
  
 
94,484
 
  
20.6
 
  
55.2
 
Other insurance commissions
  
 
13,600
  
 
15,370
 
  
 
14,349
 
  
(11.5
)
  
7.1
 
Securities (losses) gains, net
  
 
122,213
  
 
(219,366
)
  
 
(1,630
)
  
NM
 
  
NM
 
Bankcard fees and merchant discounts
  
 
60,859
  
 
57,851
 
  
 
47,825
 
  
5.2
 
  
21.0
 
Investment banking and brokerage fees and
commissions
  
 
174,589
  
 
163,480
 
  
 
129,746
 
  
6.8
 
  
26.0
 
Other bank service fees and commissions
  
 
127,271
  
 
108,621
 
  
 
89,572
 
  
17.2
 
  
21.3
 
International income
  
 
7,806
  
 
7,337
 
  
 
6,120
 
  
6.4
 
  
19.9
 
Amortization of negative goodwill
  
 
4,785
  
 
6,243
 
  
 
6,243
 
  
(23.4
)
  
—  
 
Other noninterest income
  
 
102,172
  
 
83,457
 
  
 
61,682
 
  
22.4
 
  
35.3
 
    

  


  


  

  

Total noninterest income
  
$
1,378,691
  
$
846,787
 
  
$
957,428
 
  
62.8
%
  
(11.6
)%
    

  


  


  

  


NM—not meaningful
 
Noninterest Expense
 
Noninterest expense totaled $2.2 billion in 2001, $2.0 billion in 2000 and $1.9 billion in 1999. Certain material items principally stemming from mergers and acquisitions were recorded as charges to noninterest expenses during 2001, 2000 and 1999. In 2001, $199.0 million in pretax Special Items were recorded as charges to noninterest expense, while 2000 included $143.2 million in these types of items and $71.5 million in Special Items were recognized in 1999. Excluding the impact of these Special Items from all years, noninterest expense increased $171.5 million, or 9.2%, from 2000 to 2001 and $59.7 million, or 3.3%, from 1999 to 2000. These growth rates include the effects of acquisitions accounted for as purchases, including Community First Banking Company, Virginia Capital Bancshares, Inc., FirstSpartan, BankFirst Corporation, Edgar M. Norris & Co., Laureate Capital Corp., Scott & Stringfellow, Inc., Matewan BancShares, Inc. and numerous insurance agencies. Excluding the special items and the growth in expenses from these purchase transactions, BB&T’s noninterest expense would have increased 4.5% from 2000 to 2001.
 
The control of noninterest expense is a management priority. The primary measure of the effectiveness of noninterest expense control is the efficiency ratio, which is calculated by dividing total noninterest expense by tax equivalent net interest income plus noninterest income. The efficiency ratio measures the percentage of revenues that are absorbed by costs of production. For 2001, BB&T’s efficiency ratio, excluding the effects of special items, foreclosed property expense, securities gains and losses and losses resulting from the 2000 restructuring of the securities portfolio, was 51.4%. Comparable ratios for 2000 and 1999 were 52.7% and 55.1%, respectively. The downward trend in the efficiency ratio is positive as it indicates that less revenues were absorbed by overhead costs in each of the past two years. After considering that BB&T has substantially increased its noninterest revenue-producing lines of business, which typically have higher efficiency ratios than traditional banking

43


operations, the declining trend is even more significant. Also, given that acquisitions of traditional financial institutions generally cause the efficiency ratio to increase until merger synergies are realized, which typically does not fully occur in the first year of the combination, the recent downward trend in the ratio is even more favorable.
 
Total personnel expense, the largest component of noninterest expense, totaled $1.2 billion in 2001, $1.0 billion in 2000 and $957.4 million in 1999. Total personnel expense includes salaries and wages, as well as pension and other employee benefit costs. Personnel expenses for 2001, 2000 and 1999 include Special Items in the form of merger-related severance pay, contract termination payments, costs of funding early retirement packages and other related benefits. Total personnel expense, excluding Special Items, increased $111.4 million, or 11.0% in 2001. A significant portion of this increase is the result of acquisitions accounted for as purchases in both 2001 and 2000. Excluding the effect of these purchase transactions, personnel expense increased $66.3 million, or 6.5%, which reflects normal annual adjustments to compensation, increased incentive-related compensation and benefit costs.
 
Net occupancy and equipment expense totaled $324.7 million in 2001, $302.2 million in 2000 and $282.4 million in 1999. These amounts include Special Items of $19.6 million in 2001, $19.7 million in 2000 and $6.1 million in 1999 related to branch closings and consolidations of backroom operations and information systems associated with mergers. Excluding these Special Items, net occupancy and equipment expense for 2001 increased $22.6 million, or 8.0% compared to 2000, which was an increase of $6.2 million, or 2.2% over 1999. Increased expenses associated with telecommunications and information technology initiatives were primarily responsible for the remainder of the increases in this cost category incurred during the past two years.
 
Amortization expense associated with intangible assets, primarily goodwill, totaled $75.5 million in 2001, $65.2 million in 2000 and $55.0 million in 1999. At December 31, 2001, BB&T’s unamortized goodwill totaled $879.9 million, up $109.3 million, or 14.2%, compared to 2000. This increase resulted from the 2001 purchases of FirstSpartan, Virginia Capital Bancshares, Inc., Community First Banking Company and seven insurance agencies.
 
Other noninterest expense totaled $654.6 million for 2001, $585.4 million in 2000 and $574.9 million in 1999. These amounts include Special Items totaling $132.9 million in 2001, $91.0 million in 2000 and $51.8 million in 1999. The Special Items include losses on disposals of fixed assets, operational charge-offs, branch and departmental supplies, donations, legal fees, accounting fees, printing costs, regulatory filing fees and other professional services. Excluding Special Items, other noninterest expense increased $29.5 million, or 6.0% from 2000 to 2001.

44


 
The following table presents a breakdown of BB&T’s noninterest expenses for the past three years:
 
Table 16
Noninterest Expense
 
                   
% Change

 
    
Years Ended December 31,

  
2001 v.
    
2000 v.
 
    
2001

  
2000

  
1999

  
2000

    
1999

 
    
(Dollars in thousands)
 
Salaries and wages
  
$
976,041
  
$
870,932
  
$
798,388
  
12.1
%
  
9.1
%
Pension and other employee benefits
  
 
197,672
  
 
177,378
  
 
158,978
  
11.4
 
  
11.6
 
Net occupancy expense on bank premises
  
 
138,114
  
 
133,770
  
 
122,156
  
3.2
 
  
9.5
 
Furniture and equipment expense
  
 
186,564
  
 
168,431
  
 
160,231
  
10.8
 
  
5.1
 
Federal deposit insurance premiums
  
 
12,529
  
 
12,007
  
 
11,798
  
4.3
 
  
1.8
 
Foreclosed property expense
  
 
2,896
  
 
6,354
  
 
5,992
  
(54.4
)
  
6.0
 
Amortization of intangibles
  
 
75,459
  
 
65,156
  
 
55,045
  
15.8
 
  
18.4
 
Software
  
 
28,762
  
 
22,147
  
 
20,070
  
29.9
 
  
10.3
 
Telephone
  
 
43,521
  
 
45,600
  
 
37,317
  
(4.6
)
  
22.2
 
Donations
  
 
6,821
  
 
13,607
  
 
15,195
  
(49.9
)
  
(10.5
)
Advertising and public relations
  
 
35,522
  
 
37,098
  
 
36,630
  
(4.2
)
  
1.3
 
Travel and transportation
  
 
25,430
  
 
22,305
  
 
17,538
  
14.0
 
  
27.2
 
Professional services
  
 
88,478
  
 
71,677
  
 
86,090
  
23.4
 
  
(16.7
)
Supplies
  
 
34,824
  
 
34,634
  
 
31,846
  
0.5
 
  
8.8
 
Loan and lease expense
  
 
52,098
  
 
43,183
  
 
43,324
  
20.6
 
  
(0.3
)
Deposit related expense
  
 
21,566
  
 
20,945
  
 
20,749
  
3.0
 
  
0.9
 
Other noninterest expenses
  
 
302,133
  
 
255,867
  
 
248,321
  
18.1
 
  
3.0
 
    

  

  

  

  

Total noninterest expense
  
$
2,228,430
  
$
2,001,091
  
$
1,869,668
  
11.4
%
  
7.0
%
    

  

  

  

  

 
Provision for Income Taxes
 
BB&T’s provision for income taxes totaled $386.8 million for 2001, an increase of $72.3 million, or 23.0%, compared to 2000. The provision for income taxes totaled $314.5 million in 2000 and $377.2 million in 1999. Excluding the income taxes related to the Special Items discussed previously, BB&T’s tax provision would have been $450.4 million in 2001, $452.4 million in 2000 and $406.6 million in 1999. Excluding the effect of the Special Items referred to above on pretax income and the income tax provisions related to these items, BB&T’s effective tax rates for the years ended December 31, 2001, 2000 and 1999 were 29.0%, 32.1% and 32.6%, respectively.
 
During 2001 and 2000, BB&T transferred responsibility for the management of certain operations to a subsidiary in a tax-advantaged jurisdiction, thereby lowering the effective income tax rate applicable to certain lease investments. In accordance with SFAS No. 13, “Accounting for Leases”, the net income from the affected leases was recalculated from inception based on the new effective income tax rate. The recalculation had the effect of reducing net interest income for 2001 and 2000 by $40.6 million and $14.3 million, respectively, and reducing the 2001 income tax provision by $56.6 million and the tax provision for 2000 by $19.8 million. BB&T intends to permanently reinvest the earnings of this subsidiary and, therefore, in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes”, deferred income taxes associated with these transactions have not been provided.
 
Market Risk Management
 
The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a financial institution, BB&T’s most significant market risk exposure is interest rate

45


risk. The primary objective of interest rate risk management is to minimize the effect that changes in interest rates have on net interest income. This is accomplished through active management of asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T’s portfolios of assets and liabilities that will produce consistent net interest income during periods of changing interest rates. BB&T’s Asset / Liability Management Committee (“ALCO”) monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
 
The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards.
 
BB&T utilizes a variety of financial instruments to manage various financial risks. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, collars, financial forward and futures contracts and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. BB&T uses derivatives primarily to hedge business loans, forecasted sales of mortgage loans, federal funds purchased, long-term debt and certificates of deposit. These hedges resulted in an increase in net interest income of $.9 million in 2001 and increases in net interest expense of $8.1 million in 2000 and $2.9 million in 1999.
 
Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risk. On December 31, 2001, BB&T had derivative financial instruments outstanding with notional amounts totaling $5.6 billion. The estimated fair value of open contracts used for risk management purposes at December 31, 2001, had net unrealized gains of $44.0 million.
 
See Note Q. “Derivative Financial Instruments” in the Notes to Consolidated Financial Statements for additional disclosures.
 
Liquidity, Inflation and Changing Interest Rates
 
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 or inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve System (“FRB”) to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by ALCO, BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.

46


 
BB&T’s interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions at December 31, 2001, and is not necessarily indicative of positions on other dates. The carrying amounts of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.
 
Table 17
Interest Rate Sensitivity Gap Analysis
December 31, 2001
 
    
Expected Repricing or Maturity Date

    
Within
One Year

  
One to Three Years

  
Three to Five Years

  
After Five Years

    
Total

    
(Dollars in thousands)
Assets
                                    
Securities and other interest-earning assets (1)
  
$
1,243,141
  
$
7,112,195
  
$
5,159,574
  
$
2,882,965
 
  
$
16,397,875
Federal funds sold and securities purchased under resale agreements or similar arrangements
  
 
246,040
  
 
—  
  
 
—  
  
 
—  
 
  
 
246,040
Loans and leases (2)
  
 
32,828,913
  
 
8,132,226
  
 
2,814,858
  
 
3,667,176
 
  
 
47,443,173
    

  

  

  


  

Total interest-earning assets
  
 
34,318,094
  
 
15,244,421
  
 
7,974,432
  
 
6,550,141
 
  
 
64,087,088
    

  

  

  


  

Liabilities
                                    
Savings and interest checking (3)
  
 
—  
  
 
1,808,221
  
 
602,740
  
 
602,741
 
  
 
3,013,702
Money rate savings (3)
  
 
6,951,044
  
 
6,951,044
  
 
—  
  
 
—  
 
  
 
13,902,088
Other time deposits
  
 
17,946,407
  
 
2,157,126
  
 
764,697
  
 
9,615
 
  
 
20,877,845
Federal funds purchased and securities sold under repurchase agreements or similar arrangements
  
 
4,131,794
  
 
—  
  
 
—  
  
 
—  
 
  
 
4,131,794
Long-term debt and other borrowings
  
 
3,312,013
  
 
359,705
  
 
297,407
  
 
10,269,257
 
  
 
14,238,382
    

  

  

  


  

Total interest-bearing liabilities
  
 
32,341,258
  
 
11,276,096
  
 
1,664,844
  
 
10,881,613
 
  
$
56,163,811
    

  

  

  


  

Asset-liability gap
  
 
1,976,836
  
 
3,968,325
  
 
6,309,588
  
 
(4,331,472
)
      
    

  

  

  


      
Cumulative interest rate sensitivity gap
  
$
1,976,836
  
$
5,945,161
  
$
12,254,749
  
$
7,923,277
 
      
    

  

  

  


      

(1)
 
Securities based on amortized cost.
(2)
 
Loans and leases include loans held for sale and are net of unearned income.
(3)
 
Projected runoff of deposits that do not have a contractual maturity date was computed based upon decay rate assumptions developed by bank regulators to assist banks in addressing FDICIA rule 305.
 
Management uses Interest Sensitivity Simulation Analysis (“Simulation”) to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T’s

47


interest sensitivity by means of a computer model that incorporates current volumes, average rates earned and paid, and scheduled maturities, 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 a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies as well as any enacted or prospective regulatory changes. BB&T’s current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals.
 
The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months under the “most likely” interest rate scenario incorporated into the Interest Sensitivity Simulation computer model. Key assumptions in the preparation of the table include prepayment speeds on mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market conditions, loan volumes and pricing; deposit sensitivity; customer preferences; and capital plans. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates.
 
Table 18
Interest Sensitivity Simulation Analysis
 
Interest Rate Scenario

      
Annualized Hypothetical Percentage Change in
Net Interest Income

 
Linear

    
Prime Rate

      
 3.00%
    
7.75
%
    
2.83
%
 1.50 
    
6.25
 
    
2.45
 
No Change
    
4.75
 
    
—  
 
(1.50)
    
3.25
 
    
-2.80
 
(3.00)
    
1.75
 
    
-4.27
 
 
Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point parallel change in interest rates over six months from the most likely interest rate scenario, and a maximum of 6% for a 300 basis point change over 12 months. It is management’s ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table.
 
Liquidity represents BB&T’s continuing ability to meet funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to the level of liquid assets, such as trading securities and securities available for sale, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity in national money markets, growing core deposits, the repayment of loans and the capability to securitize or package loans for sale.

48


 
Traditional sources of liquidity also include Federal funds purchased, repurchase agreements, FHLB advances and other short-term borrowed funds, commercial paper, revolving credit and long-term debt at both the corporate and bank level.
 
BB&T Corporation (“Parent Company”) uses dividends and returns on investments in its subsidiaries, funds from master note agreements with commercial clients of subsidiary banks and access to the capital markets as its major sources of funding to meet liquidity needs.
 
The primary source of funds for parent company cash requirements has been dividends from the subsidiary banks, which totaled $621.8 million during 2001. Funds raised through master note agreements with commercial clients also support the short-term cash needs of the parent company and nonbank subsidiaries. At December 31, 2001 and 2000, master note balances were $763.7 million and $731.1 million, respectively.
 
The Parent Company has a $300 million revolving credit agreement with a group of unaffiliated banks, which serves as a backup liquidity facility for the master note program referred to above. This agreement has historically been negotiated annually with the current agreement scheduled to expire April 1, 2002, with a provision to extend the expiration date under certain circumstances. No borrowings have occurred under this backup facility.
 
The Parent Company has four issues of subordinated notes outstanding, which collectively totaled $1.5 billion at December 31, 2001, and $850 million at December 31, 2000. Additionally, BB&T has a universal shelf registration filed with the Securities and Exchange Commission permitting the issuance of $500 million in additional securities to the public, subject to the distribution of a prospectus supplement.
 
BB&T’s subsidiary banks have several major sources of funding to meet their liquidity requirements, including access to capital markets through issuance of senior level bank notes and institutional certificates of deposit, availability to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, participation in the Treasury, Tax and Loan and Special Direct Investment programs with the Federal Reserve, availability to the overnight and term Federal funds markets, use of the Cayman branch facility for access to European deposits, access to retail brokered certificates of deposit and a borrower in custody program with the Federal Reserve for availability to the discount window.
 
Management believes current liquidity resources, together with unused sources of liquidity, are adequate to meet BB&T’s current requirements and plans for continued growth. See Note F. “Premises and Equipment”, Note I. “Long-Term Debt” and Note M. “Commitments and Contingencies” in the “Notes to Consolidated Financial Statements” for additional information regarding outstanding balances on sources of liquidity and contractual commitments and obligations.

49


 
BB&T’s contractual obligations are summarized in the accompanying table:
 
Table 19
Contractual Obligations and Other Commitments
December 31, 2001
 
   
Total

 
Less than One Year

 
1 to 3 Years

 
3 to 5 Years

 
After 5 Years

   
(Dollars in thousands)
Contractual Cash Obligations
                             
Long-term debt
 
$
11,719,076
 
$
794,499
 
$
359,360
 
$
297,103
 
$
10,268,114
Capital lease obligations
 
 
3,656
 
 
380
 
 
631
 
 
555
 
 
2,090
Operating Leases
 
 
306,302
 
 
46,363
 
 
79,854
 
 
59,138
 
 
120,947
   

 

 

 

 

Total contractual cash obligations
 
$
12,029,034
 
$
841,242
 
$
439,845
 
$
356,796
 
$
10,391,151
   

 

 

 

 

Other Commitments
                             
Lines of credit
 
$
7,465,953
 
$
7,457,103
 
$
  —  
 
$
—  
 
$
8,850
Commercial letters of credit
 
 
37,091
 
 
37,091
 
 
—  
 
 
—  
 
 
—  
Standby letters of credit
 
 
874,829
 
 
871,826
 
 
2,935
 
 
68
 
 
—  
Other commitments
 
 
11,067,911
 
 
7,229,437
 
 
2,551,609
 
 
918,040
 
 
368,825
   

 

 

 

 

Total other commitments
 
$
19,445,784
 
$
15,595,457
 
$
2,554,544
 
$
918,108
 
$
377,675
   

 

 

 

 

 
Capital Adequacy and Resources
 
The maintenance of appropriate levels of capital is a management priority and is monitored on an ongoing basis. BB&T’s principal goals related to capital are to provide an adequate return to shareholders while retaining a sufficient base from which to support future growth and to comply with all regulatory standards.
 
Shareholders’ equity totaled $6.2 billion at December 31, 2001, an increase of $730.4 million, or 13.5%, from year-end 2000. During 2001, BB&T issued 16.4 million shares in connection with acquisitions accounted for as purchases and the exercise of stock options and other stock-based incentive plans, which increased shareholders’ equity by $494.3 million. This growth was partially offset by the repurchase of 14.0 million shares of common stock at a cost of $510.3 million that were reissued in connection with acquisitions accounted for as purchases. Growth of $515.9 million in shareholders’ equity resulted from BB&T’s earnings retained after dividends to shareholders. Additionally, shareholders’ equity was increased by higher unrealized gains on securities available for sale, which increased $183.8 million during 2001, net of deferred income taxes.
 
Bank holding companies and their subsidiaries are subject to regulatory requirements with respect to risk-based capital adequacy. Risk-based capital ratios measure capital as a percentage of a combination of risk-weighted balance sheet and off-balance sheet risk. The risk-weighted values of both balance sheet and off-balance sheet items are determined in accordance with risk factors specified by Federal bank regulatory pronouncements.
 
Tier 1 capital (common shareholders’ equity, excluding unrealized gains (losses) on debt securities available for sale, net of deferred income taxes, plus certain mandatorily redeemable capital securities, less nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (the sum of Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk-weighted assets, with one half of the minimum consisting of Tier 1 capital. The Tier 1 capital ratio for BB&T at the end of 2001 was 9.8%, and the total capital ratio was 13.3%. At the end of 2000, these ratios were 9.7% and 12.2%, respectively.

50


 
In addition to the risk-based capital measures described above, regulators have also established minimum leverage capital requirements for banking organizations. This is the primary measure of capital adequacy used by management and is calculated by dividing period-end Tier 1 capital by average tangible assets for the most recent quarter. BB&T’s Tier 1 leverage ratio at year-end 2001 was 7.2%, compared to 7.3% at year-end 2000. The minimum required Tier 1 leverage ratio ranges from 3% to 5% depending upon Federal bank regulatory agency evaluation of an organization’s overall safety and soundness. BB&T’s regulatory capital and ratios are set forth in the following table.
 
Table 20
Capital—Components and Ratios
 
    
December 31,

 
    
2001

    
2000

 
    
(Dollars in thousands)
 
Tier 1 capital
  
$
5,002,896
 
  
$
4,591,023
 
Tier 2 capital
  
 
1,794,062
 
  
 
1,209,645
 
    


  


Total regulatory capital
  
$
6,796,958
 
  
$
5,800,668
 
    


  


Risk-based capital ratios:
                 
Tier 1 capital
  
 
9.8
%
  
 
9.7
%
Total regulatory capital
  
 
13.3
 
  
 
12.2
 
Tier 1 leverage ratio
  
 
7.2
 
  
 
7.3
 
 
Segment Results
 
BB&T’s operations are divided into six reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment Banking and Brokerage, and Treasury. These operating segments have been identified based primarily on BB&T’s existing organizational structure. See Note S. “Operating Segments”, in the “Notes to Consolidated Financial Statements” herein for a full discussion of the segments, the internal accounting and reporting practices utilized by BB&T to manage these segments and financial disclosures by segment as required by SFAS No. 131. Fluctuations in noninterest income and expense earned and incurred related to external customers are more fully discussed in the “Noninterest Income” and “Noninterest Expense” sections of this discussion and analysis. Charges and expenses that are considered to be merger-related and a gain from the sale of an equity investment in an electronic transaction processing company, as previously discussed, are retained in the Corporate Office and are excluded from these segments.
 
Banking Network
 
The Banking Network grew internally during 2001 as well as through six mergers or acquisitions of banking companies, three of which were accounted for as poolings of interests. Prior period balances have been restated to reflect the impact of these pooling-of-interest transactions, except for internal management accounting practices, for which it is not practicable to restate balances for these pooling-of-interest transactions. Please refer to Note S. in the “Notes to Consolidated Financial Statements” for a discussion regarding internal management accounting practices. The total Banking Network is composed of 1,081 banking offices, down from 1,091 banking offices at December 31, 2000. Net interest income for the Banking Network totaled $2.0 billion, an increase of $87.6 million, or 4.5%, compared to 2000. The 2000 balance reflected an increase of $68.6 million, or 3.7%, compared to 1999. The increase in 2001 is composed of a 20.4% increase in the net credit generated by the internal funds transfer pricing (“FTP”) system and a slight decrease in net interest income from external customers, which resulted from a rapidly declining interest rate environment. The increase in net intersegment interest income reflects the addition of FTP adjustments associated with the loan and deposit balances of the institutions acquired during 2001.

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The provision for loan and lease losses increased $65.0 million, or 43.7%, from 2000 to 2001. This increase mirrors the increase in the consolidated provision for loan and lease losses, as previously discussed herein. The 2000 provision reflected an increase of $7.5 million, or 5.3%, compared to 1999. This increase also reflects the increased consolidated provision.
 
Noninterest income produced from external customers through the Banking Network increased $88.6 million, or 19.4% during 2001, while noninterest income allocated from other segments increased $119.2 million, or 99.0% due to substantially higher mortgage loan branch incentives. Comparing 2000 to 1999, noninterest income from external customers decreased $57.9 million, or 11.3% in 2000 and intersegment noninterest income decreased $3.1 million, or 2.5%. Noninterest expenses incurred within the Banking Network increased $87.1 million, or 9.2%, during 2001 because of increased employee-related expenses, while noninterest expenses allocated from the other operating segments increased $178.9 million, or 55.0%, over the same time frame, due to a change in the method of allocation. The increases in intersegment noninterest expense also reflect a significant increase in the amount of expenses allocated to the Banking Network during 2001 because of the additional allocations for financial institutions acquired during the year. Comparing 2000 to 1999, noninterest expense decreased $202.8 million, or 17.7%, and noninterest expenses allocated to the Banking Network from intercompany sources increased $63.8 million, or 24.4%.
 
The provision for income taxes allocated to the Banking Network decreased $49.9 million, or 14.1%, because of lower effective tax rates, which reflect the change in consolidated effective tax rates. The 2000 provision for income taxes increased $36.8 million, or 11.7%, compared to 1999 due to a 14.7% increase in pretax income.
 
Total identifiable assets for the Banking Network increased $577.3 million, or 1.5%, to a total of $38.1 billion, compared to 2000. Total identifiable assets for the Banking Network decreased 2.2 billion, or 5.5%, compared to 1999.
 
Mortgage Banking
 
BB&T’s Mortgage Banking segment experienced a stronger 2001 compared to 2000 primarily because of a more favorable interest rate environment. BB&T’s mortgage originations totaled $10.5 billion for 2001, up 123% compared to 2000. BB&T’s mortgage servicing portfolio totaled $29.2 billion at year-end 2001.
 
Net interest income for the Mortgage Banking segment totaled $158.7 million, up $43.5 million, or 37.8%, compared to 2000. The 2000 amount reflected a slight decrease from 1999, due to a slowdown in originations. The continued strong credit quality of the mortgage portfolio has resulted in the Mortgage Banking segment’s provision for loan and lease losses being relatively stable from 2000 to 2001. Compared to 1999, the segment’s provision for loan and lease losses in 2000 was down 16.3% to a balance of $3.2 million. This reduction was because of strong credit quality in the mortgage lending portfolio as evidenced by lower charge-offs compared to 1999.
 
Noninterest income produced from the Mortgage Banking segment’s external customers increased $42.2 million, or 49.5% during 2001, because of the record origination volume in 2001. Noninterest income from external sources decreased $29.5 million, or 25.7%, from 1999 to 2000 because of the decrease in mortgage loan originations that occurred in 2000. Noninterest expenses incurred within the Mortgage Banking segment increased $22.3 million, or 37.9%, in 2001 due to higher amortization of mortgage servicing rights, while noninterest expenses allocated from the other operating segments increased $3.4 million, or 14.8% compared to 2000. The increase in expenses allocated to the Mortgage Banking segment during 2001 reflects the results of acquired institutions and higher incentive compensation paid to mortgage loan originators during the year. In 2000, noninterest expenses from external sources decreased $2.4 million, or 4.0%, from 1999 and intersegment noninterest expenses for 2000 increased $4.1 million, or 21.5% from the previous year.
 

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The provision for income taxes allocated to the Mortgage Banking segment increased $21.9 million, or 68.2%, due to higher pretax income. For 2000, the provision for income taxes decreased $13.0 million, or 28.8%, compared to 1999, due to lower pretax income.
 
Total identifiable assets for the Mortgage Banking segment increased $686.4 million, or 8.3%, from 2000 to 2001 due to the acquisitions completed during the year. For 2000, the identifiable segment assets increased $2.6 billion, or 46.2%, compared to 1999, due to acquisitions of One Valley Bancorp, Inc., Laureate Capital and the mortgage operations of Premier Bancshares, Inc.
 
Trust Services
 
Net interest income for the Trust Services segment in 2001 totaled $12.4 million, a decrease of $1.4 million, or 10.3%, compared to 2000. This decrease is composed of an 8.6% decrease in net interest expense paid to external customers due to lower interest rates and a 9.0% decrease in the net credit for funds as calculated by BB&T’s internal FTP system. This decrease is due to lower average carrying values of assets under administration compared to 2000, which resulted from the lower interest rate environment. The Trust Services segment net interest income in 2000, which totaled $13.8 million, was $5.3 million, or 61.6% greater than the balance for 1999. This increase reflects higher average values of assets under management during 2000.
 
Noninterest income produced from external customers increased $11.9 million, or 14.9% during 2001, while noninterest income for 2000 reflected an increase of $22.9 million, or 40.0%, compared to 1999. Noninterest expenses incurred within the Trust Services segment increased $8.1 million, or 15.6%, in 2001 due to higher employee-related costs while noninterest expenses allocated from the other operating segments decreased $.6 million, or 15.1%, compared to the prior year. For 2000, noninterest expense increased $13.9 million, or 36.7%, from 1999 while expenses allocated to the Trust Services segment increased $1.2 million, or 47.3% from the previous year. This increase reflects additional expenses allocated due to the trust operations acquired from One Valley.
 
The provision for income taxes allocated to Trust Services increased $900 thousand, or 8.7%, in 2001 and increased $2.5 million, or 31.3%, in 2000 due to higher pretax income in both years. Total identifiable segment assets for Trust Services increased 58.8% to a total of $62.7 million at December 31, 2001, compared to 2000, and increased 25.5% from 1999 to 2000. The increase during 2000 resulted from greater securities holdings.
 
Agency Insurance
 
Noninterest income produced from external sources increased $47.8 million, or 39.1% during 2001 due to the acquisitions of seven insurance agencies during the year, as well as internal growth. For 2000, noninterest income increased $44.1 million, or 56.5%, compared to 1999. This increase also resulted from purchase acquisitions along with internally-generated growth. Noninterest expenses incurred within the Agency Insurance segment in 2001 increased $36.1 million, or 41.4%, from 2000, while noninterest expenses allocated from the other operating segments in 2000 increased 3.1% compared to the prior year. The increase in expenses allocated to Agency Insurance results from the purchased agencies discussed above. For 2000, noninterest expenses increased $27.6 million, or 46.2%, compared to 1999, and intersegment noninterest expenses for 2000 increased 49.5% from the previous year, again primarily due to purchase acquisitions.
 
The provision for income taxes allocated to Agency Insurance increased $4.8 million in 2001 and $6.0 million in 2000, consistent with growth in pretax income. Total identifiable segment assets for Agency Insurance increased 25.7% to a total of $126.8 million, primarily due to the acquired insurance agencies. For 2000, total identifiable segment assets increased 57.9%.
 
Investment Banking and Brokerage
 
Net interest income for the Investment Banking and Brokerage segment in 2001 totaled $8.8 million, a decrease of $2.9 million compared to 2000. This decrease reflects slower business activity in

53


retail brokerage services and capital markets. For the prior year, net interest income increased $4.1 million from 1999 to 2000. Noninterest income produced from external customers increased $17.0 million, or 10.3% during 2001 due to higher fees earned by Scott & Stringfellow. For 2000, noninterest income increased $31.5 million compared to 1999. Noninterest expenses incurred within the Investment Banking and Brokerage segment in 2001 increased $21.1 million due to higher compensation expense, while noninterest expenses allocated from the other operating segments during 2001 increased 6.3% from the previous year. In 2000, noninterest expenses increased $41.7 million, and intersegment noninterest expenses decreased $295 thousand from the previous year.
 
The provision for income taxes allocated to Investment Banking and Brokerage decreased $700 thousand and $4.5 million in 2001 and 2000, respectively, due to substantial declines in pretax income in both years. Total identifiable assets for the Investment Banking and Brokerage segment decreased 6.6% to a total of $702.1 million. For 2000, total identifiable segment assets increased $52.6 million.
 
Treasury
 
Net interest income for the Treasury segment totaled $274.3 million in 2001, an increase of $35.1 million, or 14.7%, compared to 2000. This increase is comprised of a $77.7 million increase in net interest income from external customers, offset by a $42.6 million decrease in the net credit for funds as calculated by BB&T’s internal FTP system. This increase is principally due to changes in the mix and profitability of securities held by the Treasury segment. For 2000, net interest income increased $98.9 million compared to 1999 due to allocations to this segment resulting from mergers. Noninterest income produced from external customers increased $237.4 million during 2001, principally because of a restructuring of the securities portfolio during 2000, which resulted in securities losses of approximately $222.2 million. For 2000, noninterest income decreased $189.9 million because of the losses from the restructuring. Noninterest expenses incurred within the Treasury segment increased $1.5 million, or 23.6%, while noninterest expenses allocated from the other operating segments increased $1.4 million. For 2000, noninterest expenses increased $1.4 million, or 28.7%, and intersegment noninterest expenses decreased $7.7 million.
 
The provision for income taxes allocated to the Treasury segment increased $78.5 million due to the substantially higher pretax income compared to 2000. In 2000, the provision for income taxes decreased $31.7 million, consistent with a decline in pretax income for that year. Total identifiable assets for the Treasury segment decreased 5.1% during 2001 to a total of $16.2 billion. For 2000, total identifiable segment assets for the Treasury segment increased $5.6 billion.
 
Common Stock and Dividends
 
BB&T’s ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution. BB&T’s ability to generate liquid assets for distribution is dependent on the ability of the banking subsidiaries to pay dividends to the Parent Company. The payment of cash dividends is an integral part of the Corporation’s policy of retaining sufficient capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to shareholders. BB&T’s common dividend payout ratio, computed by dividing dividends paid per common share by basic earnings per common share, was 45.58% in 2001 as compared to 55.48% in 2000. Excluding the impact of the Special Items discussed in “Analysis of Results of Operations,” the dividend payout ratio would have been 40.33% in 2001 as compared to 40.57% in 2000. BB&T’s cash dividends per common share increased 14.0% during 2001 to $.98 per common share for the year, as compared to $.86 per common share in 2000. This increase marked the 30th consecutive year that the Corporation’s annual cash dividend paid to shareholders has been increased. A discussion of dividend restrictions is included in Note N.—“Regulatory Requirements and Other Restrictions,” in the “Notes to Consolidated Financial Statements” and “Regulatory Considerations.”

54


 
BB&T’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “BBT”. BB&T’s common stock was held by 114,464 shareholders of record at December 31, 2001 compared to 83,993 at December 31, 2000. The accompanying table, “Quarterly Summary of Market Prices and Dividends Paid on Common Stock,” sets forth the quarterly high, low and last sales prices for BB&T’s common stock based on the daily closing price and the dividends paid per share of common stock for each of the last eight quarters.
 
Table 21
Quarterly Summary of Market Prices and Cash Dividends Paid on Common Stock
 
    
2001

  
2000

    
Closing Sales Prices

    
Cash
Dividends
Paid

  
Closing Sales Prices

    
Cash
Dividends
Paid

    
High

  
Low

  
Last

       
High

  
Low

  
Last

    
Quarter Ended:
                                                           
March 31
  
$
37.88
  
$
31.42
  
$
35.17
    
$
.23
  
$
29.19
  
$
22.00
  
$
28.06
    
$
.20
June 30
  
 
37.01
  
 
34.25
  
 
36.70
    
 
.23
  
 
31.75
  
 
23.88
  
 
23.88
    
 
.20
September 30
  
 
38.48
  
 
33.57
  
 
36.45
    
 
.26
  
 
30.44
  
 
24.06
  
 
30.13
    
 
.23
December 31
  
 
36.96
  
 
32.10
  
 
36.11
    
 
.26
  
 
38.25
  
 
27.38
  
 
37.31
    
 
.23
                           

                         

Year
  
$
38.48
  
$
31.42
  
$
36.11
    
$
.98
  
$
38.25
  
$
22.00
  
$
37.31
    
$
.86
                           

                         

 
Fourth Quarter Results
 
Net income for the fourth quarter of 2001 was $277.9 million, compared to $231.7 million for the comparable period of 2000. On a per share basis, diluted net income for the fourth quarter of 2001 was $.61 compared to $.51 for the same period a year ago. Annualized returns on average assets and average shareholders’ equity were 1.56% and 17.93%, respectively, for the fourth quarter of 2001, compared to 1.44% and 18.14%, respectively, for the fourth quarter of 2000. The fourth quarter of 2001 and 2000 included $9.8 million and $17.8 million, respectively, of after-tax items primarily associated with the consummation and integration of mergers and acquisitions. Excluding these items, net income for the fourth quarter of 2001 would have been $287.7 million, an increase of $38.2 million, or 15.3%, compared to the fourth quarter 2000 results. Diluted earnings per share, excluding the special items, would have been $.63, an increase of 14.5% compared to the fourth quarter of 2000.
 
Net interest income on an FTE basis amounted to $675.1 million for the fourth quarter of 2001, an increase of 7.4% compared to $628.5 million for the same period of 2000. Noninterest income totaled $364.3 million for the fourth quarter of 2001, up 31.3% from $277.5 million earned during the fourth quarter of 2000. Excluding purchase accounting, noninterest income for the fourth quarter of 2001 would have increased $66.6 million, or 23.8%, compared to the fourth quarter of 2000. BB&T’s noninterest expense for the fourth quarter of 2001 totaled $543.8 million, up 14.7% from the $474.2 million recorded in the fourth quarter of 2000. Excluding the special items from both years, noninterest expense for the fourth quarter of 2001 would have increased 13.0% from the fourth quarter of 2000. Excluding purchase accounting, noninterest expense would have increased $40.6 million, or 8.8%, compared to the fourth quarter of 2000.
 
Excluding purchase accounting, noninterest income for the fourth quarter of 2001 would have increased $66.6 million, or 23.8%, over the fourth quarter of 2000.
 
Due to an increased level of charge-offs, the fourth quarter 2001 provision for loan and lease losses increased 35.5% to $65.0 million, compared to $48.0 million for the fourth quarter of 2000.
 
The fourth quarter 2001 provision for income taxes totaled $109.8 million compared to $98.2 million for the fourth quarter of 2000, an increase of 11.8%.

55


The accompanying table, “Quarterly Financial Summary—Unaudited,” presents condensed information relating to the quarterly periods in the years ended December 31, 2001 and 2000.
 
Table 22
Quarterly Financial Summary—Unaudited
 
    
2001

  
2000

 
    
Fourth Quarter

  
Third Quarter

  
Second Quarter

  
First Quarter

  
Fourth Quarter

  
Third Quarter

    
Second Quarter

    
First Quarter

 
    
(Dollars in thousands, except per share data)
 
Consolidated Summary of Operations:
                                                             
Net interest income FTE
  
$
675,147
  
$
667,850
  
$
647,993
  
$
634,360
  
$
628,523
  
$
615,191
 
  
$
606,706
 
  
$
597,743
 
FTE adjustment
  
 
42,938
  
 
45,572
  
 
53,404
  
 
48,951
  
 
53,971
  
 
29,177
 
  
 
25,464
 
  
 
25,054
 
Provision for loan and lease losses
  
 
65,000
  
 
68,500
  
 
48,798
  
 
42,020
  
 
47,958
  
 
40,714
 
  
 
30,232
 
  
 
28,283
 
Securities (losses) gains, net
  
 
30,462
  
 
2,423
  
 
16,644
  
 
72,684
  
 
2,544
  
 
(180,778
)
  
 
(41,109
)
  
 
(23
)
Other noninterest income
  
 
333,833
  
 
333,283
  
 
329,973
  
 
259,389
  
 
274,987
  
 
271,562
 
  
 
267,155
 
  
 
252,449
 
Noninterest expense
  
 
543,779
  
 
582,222
  
 
563,914
  
 
538,515
  
 
474,210
  
 
536,013
 
  
 
499,229
 
  
 
491,639
 
Provision for income taxes
  
 
109,782
  
 
85,296
  
 
91,265
  
 
100,447
  
 
98,193
  
 
27,597
 
  
 
90,596
 
  
 
98,132
 
    

  

  

  

  

  


  


  


Net income
  
$
277,943
  
$
221,966
  
$
237,229
  
$
236,500
  
$
231,722
  
$
72,474
 
  
$
187,231
 
  
$
207,061
 
    

  

  

  

  

  


  


  


Diluted net income per share
  
$
.61
  
$
.48
  
$
.52
  
$
.51
  
$
.51
  
$
.16
 
  
$
.41
 
  
$
.45
 
    

  

  

  

  

  


  


  


Selected Average Balances:
                                                             
Assets
  
$
70,651,064
  
$
69,607,180
  
$
68,086,413
  
$
66,973,065
  
$
63,917,592
  
$
62,558,010
 
  
$
61,050,669
 
  
$
59,696,087
 
Securities, at amortized cost
  
 
16,239,595
  
 
16,015,659
  
 
15,542,138
  
 
15,742,675
  
 
15,482,384
  
 
15,341,496
 
  
 
15,126,092
 
  
 
15,011,249
 
Loans and leases(1)
  
 
47,423,174
  
 
47,188,382
  
 
46,415,420
  
 
45,303,013
  
 
43,472,712
  
 
42,428,208
 
  
 
41,473,500
 
  
 
40,337,792
 
Total earning assets
  
 
64,056,107
  
 
63,655,051
  
 
62,409,045
  
 
61,525,178
  
 
59,349,356
  
 
58,183,365
 
  
 
57,040,202
 
  
 
55,866,969
 
Deposits
  
 
44,956,808
  
 
44,597,561
  
 
44,565,034
  
 
43,072,688
  
 
42,221,110
  
 
42,001,836
 
  
 
41,153,215
 
  
 
40,272,313
 
Short-term borrowed funds
  
 
6,401,138
  
 
6,412,413
  
 
5,543,707
  
 
6,599,566
  
 
6,954,172
  
 
6,002,295
 
  
 
7,218,250
 
  
 
7,478,188
 
Long-term debt
  
 
11,475,259
  
 
11,155,640
  
 
10,955,001
  
 
10,446,846
  
 
8,697,105
  
 
8,650,595
 
  
 
7,031,414
 
  
 
6,421,398
 
Total interest-bearing liabilities
  
 
56,272,464
  
 
55,845,885
  
 
54,946,550
  
 
54,301,699
  
 
52,017,185
  
 
50,690,975
 
  
 
49,371,788
 
  
 
48,433,486
 
Shareholders’ equity
  
 
6,150,335
  
 
5,903,303
  
 
5,659,565
  
 
5,487,154
  
 
5,081,679
  
 
5,031,614
 
  
 
4,821,823
 
  
 
4,707,434
 

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

56


 
SIX YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
(Dollars in thousands, except per share data)
 
    
As of / For the Years Ended December 31,

      
Five Year Compound Growth Rate

 
    
2001

    
2000

    
1999

    
1998

    
1997

    
1996

      
Summary of Operations
                                                              
Interest income
  
$
4,849,538
 
  
$
4,878,409
 
  
$
4,233,162
 
  
$
3,936,661
 
  
$
3,576,789
 
  
$
3,235,788
 
    
8.4
%
Interest expense
  
 
2,415,053
 
  
 
2,563,912
 
  
 
2,038,453
 
  
 
1,928,441
 
  
 
1,720,647
 
  
 
1,533,867
 
    
9.5
 
    


  


  


  


  


  


        
Net interest income
  
 
2,434,485
 
  
 
2,314,497
 
  
 
2,194,709
 
  
 
2,008,220
 
  
 
1,856,142
 
  
 
1,701,921
 
    
7.4
 
Provision for loan and lease losses
  
 
224,318
 
  
 
147,187
 
  
 
126,559
 
  
 
126,269
 
  
 
136,863
 
  
 
83,931
 
    
21.7
 
    


  


  


  


  


  


        
Net interest income after provision for loan and lease losses
  
 
2,210,167
 
  
 
2,167,310
 
  
 
2,068,150
 
  
 
1,881,951
 
  
 
1,719,279
 
  
 
1,617,990
 
    
6.4
 
Noninterest income
  
 
1,378,691
 
  
 
846,787
 
  
 
957,428
 
  
 
765,712
 
  
 
645,572
 
  
 
492,435
 
    
22.9
 
Noninterest expense
  
 
2,228,430
 
  
 
2,001,091
 
  
 
1,869,668
 
  
 
1,582,845
 
  
 
1,510,803
 
  
 
1,328,167
 
    
10.9
 
    


  


  


  


  


  


        
Income before income taxes
  
 
1,360,428
 
  
 
1,013,006
 
  
 
1,155,910
 
  
 
1,064,818
 
  
 
854,048
 
  
 
782,258
 
    
11.7
 
Provision for income taxes
  
 
386,790
 
  
 
314,518
 
  
 
377,185
 
  
 
343,854
 
  
 
288,945
 
  
 
255,085
 
    
8.7
 
    


  


  


  


  


  


        
Net income
  
$
973,638
 
  
$
698,488
 
  
$
778,725
 
  
$
720,964
 
  
$
565,103
 
  
$
527,173
 
    
13.1
 
    


  


  


  


  


  


        
Per Common Share
                                                              
Average shares outstanding (000’s):
                                                              
Basic
  
 
453,188
 
  
 
450,789
 
  
 
447,569
 
  
 
442,423
 
  
 
438,808
 
  
 
438,627
 
    
0.7
 
Diluted
  
 
459,269
 
  
 
456,214
 
  
 
454,771
 
  
 
451,001
 
  
 
446,846
 
  
 
447,810
 
    
0.5
 
Basic earnings per share
  
$
2.15
 
  
$
1.55
 
  
$
1.74
 
  
$
1.63
 
  
$
1.29
 
  
$
1.20
 
    
12.4
 
    


  


  


  


  


  


        
Diluted earnings per share
  
$
2.12
 
  
$
1.53
 
  
$
1.71
 
  
$
1.60
 
  
$
1.26
 
  
$
1.18
 
    
12.4
 
    


  


  


  


  


  


        
Cash dividends paid
  
$
.98
 
  
$
.86
 
  
$
.75
 
  
$
.66
 
  
$
.58
 
  
$
.50
 
    
14.4
 
Shareholders’ equity
  
 
13.50
 
  
 
11.96
 
  
 
10.30
 
  
 
10.33
 
  
 
9.38
 
  
 
8.80
 
    
8.9
 
Average Balances
                                                              
Securities, at amortized cost
  
$
15,886,736
 
  
$
15,241,243
 
  
$
14,820,477
 
  
$
12,936,731
 
  
$
11,791,115
 
  
$
10,779,101
 
    
8.1
 
Loans and leases(1)
  
 
46,589,966
 
  
 
41,933,641
 
  
 
37,819,870
 
  
 
34,216,258
 
  
 
30,534,941
 
  
 
27,595,056
 
    
11.0
 
Other assets
  
 
6,364,936
 
  
 
4,638,531
 
  
 
4,410,712
 
  
 
4,137,790
 
  
 
3,423,680
 
  
 
3,170,760
 
    
15.0
 
    


  


  


  


  


  


        
Total assets
  
$
68,841,638
 
  
$
61,813,415
 
  
$
57,051,059
 
  
$
51,290,779
 
  
$
45,749,736
 
  
$
41,544,917
 
    
10.6