BB&T Second Quarter 2002 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended:

June 30, 2002


Commission file number: 1-10853


BB&T CORPORATION
(exact name of registrant as specified in its charter)


North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
   
200 West Second Street 27101
Winston-Salem, North Carolina (Zip Code)
(Address of Principal Executive Offices)  

(336) 733-2000
(Registrant's Telephone Number, Including Area Code)



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


At July 31, 2002, 476,241,929 shares of the registrant's common stock, $5 par value, were outstanding.


This Form 10-Q has 50 pages. The Exhibit Index begins on page 42.




BB&T CORPORATION

FORM 10-Q

June 30, 2002


INDEX


Page No.

   
Part I. FINANCIAL INFORMATION  
   
  Item 1. Financial Statements (Unaudited)
   
          Consolidated Financial Statements
   
          Notes to Consolidated Financial Statements
   
  Item 2. Management's Discussion and Analysis of Financial Condidion and Results of Operations 17 
   
          Analysis of Financial Condition 19 
   
          Market Risk Management 25 
   
          Capital Adequacy and Resources 28 
   
          Analysis of Results of Operations 30 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 41 
   
  Item 4. Submission of Matters to a Vote of Security Holders 41 
   
  Item 6. Exhibits and Reports on Form 8-K 42 
   
SIGNATURES 50 



BB&T Corporation          Page 1          Second Quarter 2002 10-Q




Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)


June 30, December 31,
2002 2001

(unaudited)
Assets
      Cash and due from banks     $ 1,675,484   $ 1,871,437  
      Interest-bearing deposits with banks    82,331    114,749  
      Federal funds sold and securities purchased under resale agreements or                
           similar arrangements    248,224    246,040  
      Trading securities at fair value    132,305    97,675  
      Securities available for sale at fair value    18,076,387    16,621,684  
      Securities held to maturity (fair values of $47,375 at  
           June 30, 2002, and $40,488 at December 31, 2001)    47,366    40,496  
      Loans held for sale, lower of cost or fair value    962,664    1,907,416  
      Loans and leases, net of unearned income    49,567,270    45,535,757  
           Allowance for loan and lease losses    (706,446 )  (644,418 )

                Loans and leases, net    48,860,824    44,891,339  

      Premises and equipment, net of accumulated depreciation    1,033,590    989,611  
      Goodwill    1,457,257    879,903  
      Other assets    3,757,009    3,209,595  

                      Total assets     $ 76,333,441   $ 70,869,945

     
Liabilities and Shareholders' Equity  
      Deposits:  
           Noninterest-bearing deposits     $ 7,625,530   $ 6,939,640  
           Savings and interest checking    3,290,255    3,013,702  
           Money rate savings    14,632,630    13,902,088  
           Certificates of deposit and other time deposits    25,360,774    20,877,845  

                      Total deposits    50,909,189    44,733,275  

      Short-term borrowed funds    4,930,434    6,649,100  
      Long-term debt    10,979,492    11,721,076  
      Accounts payable and other liabilities    2,385,970    1,616,285  

                      Total liabilities    69,205,085    64,719,736  

      Shareholders' equity:  
           Preferred stock, $5 par, 5,000,000 shares authorized, none issued and  
                outstanding    --    --  
           Common stock, $5 par, 1,000,000,000 shares authorized;                
                issued and outstanding 475,535,863 at June 30, 2002, and                
                455,682,560 at December 31, 2001      2,377,679    2,278,413  
           Additional paid-in capital    953,670    418,565  
           Retained earnings    3,522,727    3,148,501  
           Unvested restricted stock    (892 )  (2,669 )
           Accumulated other comprehensive income, net of income                
                taxes of $176,929 at June 30, 2002, and $201,207 at December 31, 2001    275,172    307,399  

                      Total shareholders' equity    7,128,356    6,150,209  

                      Total liabilities and shareholders' equity     $ 76,333,441   $ 70,869,945  


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





BB&T Corporation          Page 2          Second Quarter 2002 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)


For the Three Months Ended For the Six Months Ended
June 30, June 30,

2002 2001 2002 2001

Interest Income          
       Interest and fees on loans and leases $ 869,116 $ 968,842 $ 1,700,567 $ 1,973,269  
       Interest and dividends on securities  251,595   254,187   499,284   514,854  
       Interest on short-term investments  1,554   4,988   4,047   11,443  

           Total interest income  1,122,265   1,228,017   2,203,898   2,499,566  

Interest Expense 
       Interest on deposits  258,187   421,861   517,789   869,328  
       Interest on short-term borrowed funds  26,540   58,251   52,989   146,951  
       Interest on long-term debt  147,442   153,438   295,752   303,366  

           Total interest expense  432,169   633,550   866,530   1,319,645  

Net Interest Income  690,096   594,467   1,337,368   1,179,921  
       Provision for loan and lease losses  58,500   48,798   115,000   90,818  

Net Interest Income After Provision for Loan and Lease Losses  631,596   545,669   1,222,368   1,089,103  

Noninterest Income 
       Service charges on deposit accounts  101,476   87,992   191,638   167,444  
       Investment banking and brokerage fees and commissions  56,039   42,904   108,932   86,612  
       Mortgage banking income  43,963   51,482   94,525   57,674  
       Trust income  24,197   23,929   47,325   49,005  
       Agency insurance commissions  74,063   45,049   137,946   87,002  
       Other insurance commissions  3,986   3,549   7,471   6,389  
       Other nondeposit fees and commissions  52,480   47,750   96,596   92,190  
       Securities gains (losses), net  19,666   16,644   33,073   89,328  
       Other income  28,197   27,368   61,281   43,034  

           Total noninterest income  404,067   346,667   778,787   678,678  

Noninterest Expense 
       Personnel expense  319,622   282,484   624,515   556,793  
       Occupancy and equipment expense  84,688   75,102   168,139   150,274  
       Amortization of intangibles  6,258   18,404   10,609   36,275  
       Merger-related and restructuring charges  1,554   54,191   16,173   108,047  
       Other noninterest expense  164,730   133,661   305,726   250,951  

           Total noninterest expense  576,852   563,842   1,125,162   1,102,340  

Earnings 
       Income before income taxes and change in accounting principle  458,811   328,494   875,993   665,441  
       Provision for income taxes  130,859   91,265   248,176   191,712  

           Income before cumulative effect of change in accounting principle  327,952   237,229   627,817   473,729  
           Cumulative effect of change in accounting principle  --   --   9,780   --  

       Net income $ 327,952 $ 237,229 $ 637,597 $ 473,729  

Per Common Share 
       Basic Earnings: 
           Income before cumulative effect of change in accounting principle $ .69 $ .53 $ 1.33 $ 1.05  
           Cumulative effect of change in accounting principle   --   --   .02 --

           Net Income $ .69 $ .53 $ 1.35 $ 1.05  

       Diluted Earnings: 
           Income before cumulative effect of change in accounting principle $ .68 $ .52   1.32 1.03  
           Cumulative effect of change in accounting principle  --   --   .02 --

           Net Income $ .68 $ .52 $ 1.34 $ 1.03  

       Cash dividends paid $ .26 $ .23 $ .52 $ .46  

Average Shares Outstanding 
           Basic   478,121,878   451,712,342   470,554,054   452,171,070  

           Diluted  484,009,961   457,879,467   476,349,694   458,649,989  


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




BB&T Corporation          Page 3          Second Quarter 2002 10-Q




BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2002 and 2001
(Unaudited)
(Dollars in thousands)

Accumulated
Shares of Additional Retained Other Total
Common Common Paid-In Earnings Comprehensive Shareholders'
Stock Stock Capital and Other* Income Equity

Balance, December 31, 2000       453,307,379   $ 2,266,537   $ 423,404   $ 2,625,571   $ 104,297   $ 5,419,809  
Add (Deduct)  
     Comprehensive income:  
        Net income    --    --    --    473,729    --    473,729  
           Unrealized holding gains (losses) arising during                                        
              the period    --    --    --    --    204,314    204,314  
           Less: reclassification adjustment, net of tax  
              of $31,265    --    --    --    --    58,063    58,063  

        Net unrealized gains (losses) on securities    --    --    --    --    146,251    146,251  
        Unrecognized gain on cash flow hedges, net of  
           tax of $2,593    --    --    --    --    4,816    4,816  

     Total comprehensive income    --    --    --    473,729    151,067    624,796  

        Common stock issued    11,468,897    57,344    271,712    --    --    329,056  
        Redemption of common stock    (8,744,800 )  (43,724 )  (272,203 )  --    --    (315,927 )
        Cash dividends declared on common stock    --    --    --    (221,396 )  --    (221,396 )
        Other, net    --    --    16,408    2,953    --    19,361  

Balance, June 30, 2001    456,031,476   $ 2,280,157   $ 439,321   $ 2,880,857   $ 255,364   $ 5,855,699  

Balance, December 31, 2001    455,682,560   $ 2,278,413   $ 418,565   $ 3,145,832   $ 307,399   $ 6,150,209  
Add (Deduct)  
     Comprehensive income:  
        Net income    --    --    --    637,597    --    637,597  
           Unrealized holding gains (losses) arising during                                        
              the period    --    --    --    --    24,491    24,491  
           Less: reclassification adjustment, net of tax    
              of $11,576    --    --    --    --    21,497    21,497  

        Net unrealized gains (losses) on securities    --    --    --    --    2,994    2,994  
        Unrecognized loss on cash flow hedge, net of                                        
           tax of $22,979    --    --    --    --    (35,221 )  (35,221 )

     Total comprehensive income    --    --    --    637,597    (32,227 )  605,370  

        Common stock issued    26,838,203    134,191    755,225    --    --    889,416  
        Redemption of common stock    (6,984,900 )  (34,925 )  (230,345 )  --    --    (265,270 )
        Cash dividends declared on common stock    --    --    --    (263,371 )  --    (263,371 )
        Other, net    --    --    10,225    1,777    --    12,002  

Balance, June 30, 2002    475,535,863   $ 2,377,679   $ 953,670   $ 3,521,835   $ 275,172   $ 7,128,356  



* Other includes unvested restricted stock.

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




BB&T Corporation          Page 4          Second Quarter 2002 10-Q




BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2002 and 2001
(Unaudited)
(Dollars in thousands)

2002 2001

Cash Flows From Operating Activities:            
    Net income   $ 637,597   $ 473,729  
    Adjustments to reconcile net income to net cash provided  
       by operating activities:  
          Provision for loan and lease losses    115,000    90,818  
          Depreciation of premises and equipment    68,033    61,576  
          Amortization of intangibles    10,609    36,275  
          Adjustment / Accretion of negative goodwill    (9,780 )  (3,121 )
          Amortization of unearned stock compensation    1,777    7,287  
          Discount accretion and premium amortization on securities, net    (1,153 )  (3,354 )
          Net decrease (increase) in trading account securities    (34,630 )  (23,662 )
          Loss (gain) on sales of securities, net    (33,073 )  (89,328 )
          Loss (gain) on sales of loans held for sale    (46,523 )  --  
          Loss (gain) on disposals of premises and equipment, net    (6,853 )  (6,182 )
          Proceeds from sales of loans held for sale    4,446,990    3,243,488  
          Purchases of loans held for sale    (832,266 )  (1,014,445 )
          Origination of loans held for sale, net of principal collected    (2,623,449 )  (3,038,973 )
          Tax benefit from exercise of stock options    10,225    12,967  
          Decrease (increase) in:  
             Accrued interest receivable    220    23,297  
             Other assets    (285,269 )  508,659  
          Increase (decrease) in:  
             Accrued interest payable    (11,243 )  (26,634 )
             Accounts payable and other liabilities    499,700    151,567  
          Other, net    36    (26,611 )

                 Net cash provided by (used in) operating activities    1,905,948    377,353  

Cash Flows From Investing Activities:  
    Proceeds from sales of securities available for sale    913,004    668,832  
    Proceeds from maturities, calls and paydowns of securities available for sale    1,485,569    1,008,167  
    Purchases of securities available for sale    (3,233,986 )  (1,082,734 )
    Proceeds from maturities, calls and paydowns of securities held to maturity    10    124,295  
    Purchases of securities held to maturity    (6,880 )  (4,810 )
    Leases made to customers    (103,573 )  (68,499 )
    Principal collected on leases    71,962    51,119  
    Loan originations, net of principal collected    (935,344 )  (1,379,542 )
    Purchases of loans    (139,787 )  (66,200 )
    Net cash acquired (paid) in transactions accounted for under the purchase method    611,545    113,125  
    Purchases and originations of mortgage servicing rights    (98,856 )  (102,945 )
    Proceeds from disposals of premises and equipment    20,769    10,168  
    Purchases of premises and equipment    (69,716 )  (99,980 )
    Proceeds from sales of foreclosed property    22,316    21,654  
    Proceeds from sales of other real estate held for development or sale    4,964    3,688  

          Net cash used in (provided by) investing activities    (1,458,003 )  (803,662 )

Cash Flows From Financing Activities:  
    Net increase (decrease) in deposits    2,972,690    214,868  
    Net increase (decrease) in short-term borrowed funds    (2,424,045 )  (1,566,751 )
    Proceeds from issuance of long-term debt    43,697    2,610,833  
    Repayments of long-term debt    (798,355 )  (390,969 )
    Net proceeds from common stock issued    41,523    88,134  
    Redemption of common stock    (265,270 )  (315,927 )
    Cash dividends paid on common stock    (244,372 )  (204,734 )

          Net cash provided by (used in) financing activities    (674,132 )  435,454  

Net Increase (Decrease) in Cash and Cash Equivalents    (226,187 )  9,145  
Cash and Cash Equivalents at Beginning of Period    2,232,226    2,123,602  

Cash and Cash Equivalents at End of Period   $ 2,006,039   $ 2,132,747  

Supplemental Disclosure of Cash Flow Information:  
    Cash paid during the period for:  
       Interest   $ 872,713   $ 1,263,255  
       Income taxes    98,642    32,859  
    Noncash financing and investing activities:  
       Transfer of securities held to maturity to available for sale    --    53,739  
       Transfer of loans to foreclosed property    28,136    19,793  
       Transfer of other real estate owned to fixed assets    --    143  
       Transfer of fixed assets to other real estate owned    10,847    4,413  
       Securitization of mortgage loans    --    122,616  

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




BB&T Corporation          Page 5          Second Quarter 2002 10-Q

Back to Index




BB&T CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002
(Unaudited)


A. Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated balance sheets of BB&T Corporation and subsidiaries (referred to herein as “BB&T”, “the Corporation” or “the Company”) as of June 30, 2002, and December 31, 2001; the consolidated statements of income for the three and six months ended June 30, 2002 and 2001; the consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2002 and 2001; and the consolidated statements of cash flows for the six months ended June 30, 2002 and 2001.

The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T’s 2001 Annual Report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements. In certain instances, amounts reported in the 2001 financial statements have been reclassified to conform to the 2002 statement presentation. Such reclassifications had no effect on shareholders’ equity or net income.

Use of Estimates

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

B. Nature of Operations

BB&T is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its commercial banking subsidiaries, which do business in North Carolina, South Carolina, Virginia, Maryland, West Virginia, Kentucky, Tennessee, Georgia, Alabama, Indiana and Washington, D.C. BB&T’s principal banking subsidiaries, Branch Banking and Trust Company (“Branch Bank”), Branch Banking and Trust Company of South Carolina (“BB&T-SC”) and Branch Banking and Trust Company of Virginia (“BB&T-VA”), provide a wide range of banking services to individuals and businesses. At June 30, 2002, BB&T was also the parent company for two subsidiary banks acquired through mergers with AREA Bancshares Corporation (“AREA”) and MidAmerica Bancorp (“MidAmerica”). These banks are expected to be merged with and into Branch Bank. BB&T’s subsidiary banks offer a variety of loans to businesses and consumers, including an array of mortgage loan products. BB&T’s loans are primarily to individuals residing in the market areas described above or to businesses that are located in this geographic area. BB&T’s banking subsidiaries also market a wide range of deposit services to individuals and businesses. Subsidiaries of BB&T’s commercial banking units offer lease financing to businesses and municipal governments; discount brokerage services and sales of annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis; insurance premium financing; arranging permanent financing for commercial real estate and providing loan servicing for third-party investors; and asset management. Direct nonbank subsidiaries of BB&T provide a variety of financial services including automobile lending, equipment financing, factoring, full-service securities brokerage and capital markets services.




BB&T Corporation          Page 6          Second Quarter 2002 10-Q





C. New Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” which supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,” and SFAS No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises.” The provisions of the Statement apply to all business combinations initiated after June 30, 2001. SFAS No. 141 requires that all business combinations be accounted for by the purchase method of accounting. This method requires the accounts of an acquired business to be included with the acquirer’s accounts as of the date of acquisition with any excess of purchase price over the fair value of the net assets acquired to be capitalized as goodwill or other intangibles. The Statement requires that the assets of an acquired company be recognized as assets apart from goodwill if they meet specific criteria presented in the Statement. The Statement ends the use of the pooling-of-interests method of accounting for business combinations, which required the restatement of all prior period information for the accounts of the acquired institution. BB&T has historically been a frequent acquirer and has used both the pooling-of-interests and purchase methods of accounting. As a result of the adoption of this statement, BB&T will account for all mergers and acquisitions initiated after June 30, 2001, using the purchase method.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets.” SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition, and addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Statement eliminates the requirement to amortize goodwill and other intangible assets that have indefinite useful lives, instead requiring that the assets be tested at least annually for impairment based on the specific guidance in the Statement. BB&T adopted the provisions of the Statement effective January 1, 2002, as required, and applied the provisions of the Statement to all goodwill and other intangible assets recognized in the financial statements. The impact of adoption was reflected as a cumulative effect of a change in accounting principle in the Consolidated Statements of Income, resulting in the reversal of unamortized negative goodwill as required by paragraph 62 of SFAS No. 141. Following the adoption of SFAS No. 142, BB&T expects the amortization of goodwill and other intangibles to be reduced by approximately $50 million for 2002. SFAS No. 142 also requires a transitional impairment test of all goodwill and other indefinite-lived intangible assets in conjunction with its initial application. The Statement required this test to be performed prior to June 30, 2002, with any resulting impairment loss to be reported as a change in accounting principle. No impairment was recorded based on the results of these tests.




BB&T Corporation          Page 7          Second Quarter 2002 10-Q




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

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

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002". This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers” and amends SFAS No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. BB&T will adopt the provisions of this Statement effective January 1, 2003. Management does not anticipate that the implementation of this Statement will have a material impact on BB&T’s consolidated financial position or consolidated results of operations.

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




BB&T Corporation          Page 8          Second Quarter 2002 10-Q





D. Mergers and Acquisitions

The following table presents summary information with respect to significant mergers and acquisitions completed by BB&T Corporation during 2001 and thus far during 2002:

Summary of Completed Mergers and Acquisitions
(Dollars in millions)

BB&T Common
Total Shares Issued
Date of Total Accounting Intangibles Purchase to Complete
Acquisition Acquired Company Headquarters Assets Method Recorded Price Transaction

  March 20, 2002     Area Bancshares Corporation     Owensboro, Ky.     $ 2.9 billion     Purchase   $ 283.4 million $ 448.9 million   $ 13.2 million  
  March 8, 2002   MidAmerica Bancorp   Louisville, Ky.    2.0 billion   Purchase  203.3 million  379.8 million  8.2 million (1) 
 January 1, 2002     Cooney, Rikard & Curtin, Inc.     Birmingham, Al.       108.6 million   Purchase   101.9 million   85.6 million   2.5 million  

December 12, 2001     Community First Banking    
           Company     Carrollton, Ga.     $ 548.1 million   Purchase   $ 102.1 million   $ 132.2 million   3.5 million  
  August 9, 2001   F&M National Corporation   Winchester, Va.    4.0 billion   Pooling   N/A  N/A  31.1 million 
  June 27, 2001   Virginia Capital Bancshares, Inc.   Fredericksburg, Va.    532.7 million   Purchase  15.2 million  15.2 million  4.7 million 
   June 7, 2001   Century South Banks, Inc.   Alpharetta, Ga.    1.7 billion   Pooling  N/A  N/A  12.7 million 
  March 2, 2001   FirstSpartan Financial Corp.   Spartanburg, S.C.    591.0 million   Purchase  42.9 million  107.6 million  3.8 million 
 January 8, 2001   FCNB Corp.   Frederick, Md.    1.6 billion   Pooling  N/A N/A  8.7 million  


N/A - Not applicable or terms not disclosed.

(1) BB&T also paid cash totaling $68.2 million to complete this acquistion.

The table above does not include mergers and acquisitions of acquired companies prior to their acquisition by BB&T or insurance agency acquisitions, which are summarized below.

During the six months ended June 30, 2002, BB&T acquired four insurance agencies that were accounted for as purchases. In conjunction with these transactions, BB&T issued approximately .3 million shares of common stock and paid $1.4 million in cash, recording approximately $17.1 million in intangible assets. The total purchase price of these four insurance agencies was $12.7 million. BB&T acquired seven insurance agencies during 2001, which were accounted for as purchases. In conjunction with these 2001 transactions, BB&T issued .3 million shares of common stock and recorded $16.5 million in goodwill and other intangible assets. The total purchase price of these seven insurance agencies was $15.7 million.

BB&T typically provides an allocation period, not to exceed one year, to identify and quantify the fair value of the assets acquired and liabilities assumed in business combinations accounted for as purchases. Management currently does not anticipate any material adjustments to the assigned values of the assets and liabilities of acquired companies.

Pending Mergers and Acquisitions

On May 22, 2002, BB&T announced plans to acquire Regional Financial Corporation (“Regional”) of Tallahassee, Florida. Regional is the holding company for First South Bank, a $1.6 billion thrift, which operates 11 full-service retail branches, three limited-service branches, and eight mortgage loan production offices. BB&T will issue 7.265 million shares of its stock in exchange for all outstanding shares of Regional. The transaction, which is subject to regulatory approval, is expected to close in the third quarter.




BB&T Corporation          Page 9          Second Quarter 2002 10-Q





E. Calculation of Earnings Per Common Share

BB&T’s basic and diluted earnings per common share amounts were calculated as follows:


BB&T CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE

For the Three Months For the Six Months
Ended June 30, Ended June 30,

2002 2001 2002 2001

(Dollars in thousands, except per share data)
Basic Earnings Per Share:
     Weighted average number of common shares outstanding during the period       478,121,878     451,712,342     470,554,054     452,171,070  

         Income before cumulative effect of change in accounting principle   $ 327,952   $ 237,229   $ 627,817   $ 473,729  
         Cumulative effect of change in accounting principle    --    --    9,780    --  

         Net income     $ 327,952   $ 237,229   $ 637,597   $ 473,729  

     Basic earnings per share  
         Income before cumulative effect of change in accounting principle     $ .69   $ .53   $ 1.33   $ 1.05  
         Cumulative effect of change in accounting principle       --     --     .02   --

         Net income     $ .69   $ .53   $ 1.35   $ 1.05  

Diluted Earnings Per Share:  
     Weighted average number of common shares    478,121,878    451,712,342    470,554,054    452,171,070  
     Add:  
         Dilutive effect of outstanding options (as determined by application of                            
              treasury stock method)    5,888,083    6,167,125    5,795,640    6,478,919  

     Weighted average number of common shares, as adjusted    484,009,961    457,879,467    476,349,694    458,649,989  

         Income before cumulative effect of change in accounting principle   $ 327,952   $ 237,229   $ 627,817   $ 473,729  
         Cumulative effect of change in accounting principle    --    --    9,780    --  

         Net income   $ 327,952   $ 237,229   $ 637,597   $ 473,729  

     Diluted earnings per share  
         Income before cumulative effect of change in accounting principle     $ .68   $ .52   $ 1.32   $ 1.03  
         Cumulative effect of change in accounting principle       --     --     .02   --  

         Net income     $ .68   $ .52   $ 1.34   $ 1.03  


F. Segment Disclosures

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

BB&T’s strategies for revenue growth are focused on developing and expanding client relationships through quality service delivery and an effective sales culture. The segment results presented herein are based on internal management accounting policies that are designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the individual segments is not comparable with BB&T’s consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not necessarily indicative of the segments’ financial performance if they operated as independent entities.




BB&T Corporation          Page 10          Second Quarter 2002 10-Q





Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2001, for a description of internal accounting policies and the basis of segmentation, including a description of the segments presented in the accompanying tables. There have been no significant changes from the methods used to develop the segment disclosures contained therein.

The following tables disclose selected financial information for BB&T’s reportable business segments for the periods as indicated:






















BB&T Corporation          Page 11          Second Quarter 2002 10-Q






BB&T Corporation
Reportable Segments

For the Three Months Ended June 30, 2002 and 2001

Banking Network Mortgage Banking Trust Services Agency Insurance

2002 2001 2002 2001 2002 2001 2002 2001

(Dollars in thousands)
Net interest income (expense)                                    
   from external customers   $ 388,107   $ 384,461   $ 153,069   $ 153,116   $ (5,068 ) $ (9,086 ) $ 278   $ 303  
   Net intersegment interest income (expense)    155,759    167,279    (87,557 )  (118,117 )  11,753    12,367    --    --  

Net interest income    543,866    551,740    65,512    34,999    6,685    3,281    278    303  

Provision for loan and lease losses    52,987    52,895    712    819    --    --    --    --  
Noninterest income from external customers    152,631    134,806    44,293    43,351    27,242    24,288    71,528    41,218  
   Intersegment noninterest income    68,749    53,067    --    --    --    --    --    --  
Noninterest expense    285,231    304,755    31,567    14,109    20,147    13,767    49,368    29,495  
   Intersegment noninterest expense    140,368    129,037    7,403    6,235    2,314    776    3,200    1,057  

Income before income taxes    286,660    252,926    70,123    57,187    11,466    13,026    19,238    10,969  
   Provision for income taxes    82,770    76,157    19,844    16,238    3,758    4,602    7,582    4,321  

Net income   $ 203,890   $ 176,769   $ 50,279   $ 40,949   $ 7,708   $ 8,424   $ 11,656   $ 6,648  

Identifiable segment assets   $ 41,002,922   $ 39,650,976   $ 8,761,041   $ 8,511,201   $ 76,287   $ 50,404   $ 592,677   $ 112,581  


Investment Banking
and Brokerage Treasury All Other Segments (1) Total Segments

2002 2001 2002 2001 2002 2001 2002 2001

Net interest income (expense)                                    
   from external customers   $ 1,834   $ 2,295   $ 53,687   $ 47,746   $ 90,183   $ 70,587   $ 682,090   $ 649,422  
   Net intersegment interest income (expense)    --    --    8,204    8,806    (1,321 )  --    86,838    70,335  

Net interest income    1,834    2,295    61,891    56,552    88,862    70,587    768,928    719,757  

Provision for loan and lease losses    --    --    36    34    20,011    16,390    73,746    70,138  
Noninterest income from external customers    57,248    46,319    37,812    9,331    40,519    23,088    431,273    322,401  
   Intersegment noninterest income    --    --    --    --    --    --    68,749    53,067  
Noninterest expense    50,144    46,624    3,762    1,783    30,956    22,681    471,175    433,214  
   Intersegment noninterest expense    3,691    380    424    486    5,925    2,850    163,325    140,821  

Income before income taxes    5,247    1,610    95,481    63,580    72,489    51,754    560,704    451,052  
   Provision for income taxes    2,016    1,439    26,422    16,977    19,067    4,612    161,459    124,346  

Net income   $ 3,231   $ 171   $ 69,059   $ 46,603   $ 53,422   $ 47,142   $ 399,245   $ 326,706  

Identifiable segment assets   $ 777,583   $ 658,067   $ 21,310,220   $ 19,304,014   $ 7,722,190   $ 4,212,077   $ 80,242,920   $ 72,499,320  


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





BB&T Corporation          Page 12          Second Quarter 2002 10-Q






BB&T Corporation
Reportable Segments

For the Six Months Ended June 30, 2002 and 2001

Banking Network Mortgage Banking Trust Services Agency Insurance

2002 2001 2002 2001 2002 2001 2002 2001

(Dollars in thousands)
Net interest income (expense)                                    
   from external customers   $ 733,231   $ 758,988   $ 308,352   $ 299,831   $ (10,049 ) $ (19,007 ) $ 641   $ 327  
   Net intersegment interest income (expense)    304,427    314,394    (187,337 )  (231,066 )  22,949    25,260    --    --  

Net interest income    1,037,658    1,073,382    121,015    68,765    12,900    6,253    641    327  

Provision for loan and lease losses    103,282    94,253    1,488    1,519    --    --    --    --  
Noninterest income from external customers    281,916    265,871    94,992    47,785    52,340    48,861    132,886    79,509  
   Intersegment noninterest income    136,863    92,161    --    --    --    --    --    --  
Noninterest expense    522,756    552,387    62,065    32,792    38,899    29,115    100,859    59,631  
   Intersegment noninterest expense    276,909    243,707    14,843    13,052    4,426    1,551    6,408    2,114  

Income before income taxes    553,490    541,067    137,611    69,187    21,915    24,448    26,260    18,091  
   Provision for income taxes    158,618    153,159    39,152    20,297    6,594    6,802    10,441    7,167  

Net income   $ 394,872   $ 387,908   $ 98,459   $ 48,890   $ 15,321   $ 17,646   $ 15,819   $ 10,924  

Identifiable segment assets   $ 41,002,922   $ 39,650,976   $ 8,761,041   $ 8,511,201   $ 76,287   $ 50,404   $ 592,677   $ 112,581  


Investment Banking
and Brokerage Treasury All Other Segments (1) Total Segments

2002 2001 2002 2001 2002 2001 2002 2001

Net interest income (expense)                                    
   from external customers   $ 3,722   $ 4,667   $ 106,364   $ 80,787   $ 175,180   $ 141,546   $ 1,317,441   $ 1,267,139  
   Net intersegment interest income (expense)    --    --    14,607    21,838    (1,321 )  --    153,325    130,426  

Net interest income    3,722    4,667    120,971    102,625    173,859    141,546    1,470,766    1,397,565  

Provision for loan and lease losses    --    --    71    67    42,407    29,006    147,248    124,845  
Noninterest income from external customers    111,225    89,253    64,894    15,730    80,046    63,504    818,299    610,513  
   Intersegment noninterest income    --    --    --    --    --    --    136,863    92,161  
Noninterest expense    97,589    88,847    7,244    3,553    59,989    50,777    889,401    817,102  
   Intersegment noninterest expense    7,386    761    847    972    11,752    5,700    322,571    267,857  

Income before income taxes    9,972    4,312    177,703    113,763    139,757    119,567    1,066,708    890,435  
   Provision for income taxes    3,808    2,487    48,816    27,391    34,656    14,710    302,085    232,013  

Net income   $ 6,164   $ 1,825   $ 128,887   $ 86,372   $ 105,101   $ 104,857   $ 764,623   $ 658,422  

Identifiable segment assets   $ 777,583   $ 658,067   $ 21,310,220   $ 19,304,014   $ 7,722,190   $ 4,212,077   $ 80,242,920   $ 72,499,320  


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



BB&T Corporation          Page 13          Second Quarter 2002 10-Q




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




For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001

Net Interest Income                    
     Net interest income from segments   $ 768,928   $ 719,757   $ 1,470,766   $ 1,397,565  
     Other net interest income (1)    (123,724 )  33,629    (243,293 )  69,720  
     Elimination of net intersegment interest income (2)    44,892    (158,919 )  109,895    (287,364 )

         Consolidated net interest income   $ 690,096   $ 594,467   $ 1,337,368   $ 1,179,921  

Net income  
     Net income from segments   $ 399,245   $ 326,706   $ 764,623   $ 658,422  
     Other net income (loss) (1)    157,595    335,208    297,706    333,129  
     Elimination of intersegment net income (2)    (228,888 )  (424,685 )  (424,732 )  (517,822 )

         Consolidated net income   $ 327,952   $ 237,229   $ 637,597   $ 473,729  

                     
                    June 30,   June 30,  
                  2002   2001

Total Assets  
     Total assets from segments                 $ 80,242,920   $ 72,499,320  
     Other assets (1)                   18,949,037     9,824,948  
     Elimination of intersegment assets (2)                   (22,858,516 )   (13,512,898 )

         Consolidated total assets                 $ 76,333,441   $ 68,811,370  



(1)  

Other net interest income (expense), other net income (loss) and other assets include amounts associated with BB&T’s support functions not allocated to the various reportable segments.


(2)  

BB&T’s reconciliation of total segment results to consolidated results requires the elimination of internal management accounting practices. These adjustments include the elimination of funds transfer pricing credits and charges and the elimination of intersegment noninterest income and noninterest expense, which are allocated to the various segments using BB&T’s internal accounting methods.














BB&T Corporation          Page 14          Second Quarter 2002 10-Q




G. Goodwill and Other Intangible Assets

          The changes in the carrying amounts of goodwill attributable to each of BB&T’s operating segments for the twelve months ended December 31, 2001, and the six months ended June 30, 2002, are as follows:


Goodwill Activity by Operating Segment
(Dollars in thousands)

Investment
Banking Mortgage Trust Agency Banking All Other
Network Banking Services Insurance and Brokerage Segments Total

Balance, January 1, 2001     $ 536,681   $ 1,039   $ 8,691   $ 115,916   $ 70,974   $ 30,576   $ 763,877  
       Acquired goodwill    156,875    764    5,105    15,099    5,063    --    182,906  
       Amortization expense    (48,122 )  (35 )  (691 )  (9,292 )  (5,443 )  (3,297 )  (66,880 )

Balance, December 31, 2001       645,434     1,768     13,105     121,723     70,594     27,279     879,903  

       Acquired goodwill       499,401     6,347     4,997     68,688     312     --     579,745  
       Amortization expense (1)    (2,391 )  --    --    --    --    --    (2,391 )

Balance, June 30, 2002   $ 1,142,444   $ 8,115   $ 18,102   $ 190,411   $ 70,906   $ 27,279   $ 1,457,257  

(1) This amortization expense relates to goodwill recorded under SFAS No. 72.


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


Acquired Intangible Assets
(Dollars in thousands)

As of June 30, 2002 As of December 31, 2001

Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization

Amortizing intangible assets
       Core deposit intangibles     $ 85,701   $ (33,075 ) $ 69,574   $ (31,021 )
       Other    72,290    (5,383 )  18,963    (3,060 )

          Totals   $ 157,991   $ (38,458 ) $ 88,537   $ (34,081 )


During the quarters ended June 30, 2002 and 2001, BB&T incurred $6.3 million and $18.4 million, respectively, in pretax amortization expenses associated with goodwill, core deposit intangibles and other intangible assets.





BB&T Corporation          Page 15          Second Quarter 2002 10-Q




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

Estimated Amortization Expense
(Dollars in thousands)

For the Year Ended December 31:
       2002   $       23,953  
       2003   24,953  
       2004  22,534  
       2005  21,757  
       2006  21,143  


The following tables present actual results for the three months and six months ended June 30, 2002, and adjusted net income and adjusted earnings per share for the three months and six months ended June 30, 2001, assuming the nonamortization provisions of SFAS No. 142 were effective January 1, 2001:


For the Three Months Ended June 30, For the Six Months Ended June 30,

2002 2001 2002 2001

(Dollars in thousands) (Dollars in thousands)
Reported Net Income     $ 327,952   $ 237,229   $ 637,597   $ 473,729  
      Add back: Goodwill amortization    --    17,005    --    33,495  

      Adjusted Net Income   $ 327,952   $ 254,234   $ 637,597   $ 507,224  

Basic earnings per share:  
      Reported net income   $ 0.69   $ 0.53   $ 1.35   $ 1.05  
      Add back: Goodwill amortization    --    0.04    --    0.07  

      Adjusted net income   $ 0.69   $ 0.57   $ 1.35   $ 1.12  

Diluted earnings per share:  
      Reported net income   $ 0.68   $ 0.52   $ 1.34   $ 1.03  
      Add back: Goodwill amortization    --    0.04    --    0.07  

      Adjusted net income   $ 0.68   $ 0.56   $ 1.34   $ 1.10  




BB&T Corporation          Page 16          Second Quarter 2002 10-Q

Back to Index




Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

          This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged; (5) costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected; (6) expected cost savings associated with pending mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending mergers or recently completed mergers may be greater than expected; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (9) adverse changes may occur in the securities markets.

Critical Accounting Policies

          The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. BB&T’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in BB&T’s consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include BB&T’s accounting for securities, loans and leases, the allowance for loan and lease losses, valuation of mortgage servicing rights, mergers and acquisitions and income taxes. BB&T’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Accordingly, BB&T’s significant accounting policies are discussed in detail in BB&T’s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

          The following is a summary of BB&T’s more subjective and complex accounting policies.




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          The allowance for loan and lease losses is established and maintained at levels management deems adequate to cover 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 change in the nature and volume of loan activity. Estimates for loan losses are determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan administration, the opinions of our regulators, changes in the size and composition of the loan portfolio and peer group information. Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. These events may include, but are not limited to, a general slowdown in the economy, fluctuations in overall lending rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas in which BB&T conducts business.

          BB&T has a significant loan servicing portfolio and has capitalized the associated mortgage servicing rights. Mortgage servicing rights represent the present value of the future servicing fees arising from the right to service loans in the portfolio. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the valuation of mortgage servicing rights. Application of this methodology requires the development of a number of estimates, including anticipated principal amortization and prepayments of principal. The value of mortgage servicing rights is significantly affected by interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. In general, during periods of declining interest rates, the value of mortgage servicing assets declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing assets generally increases due to reduced refinance activity. BB&T amortizes mortgage servicing rights over the period of estimated net servicing income based on projections of the amount and timing of future cash flows. The amount and timing of servicing asset amortization is adjusted periodically based on actual results and updated projections.

          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 has historically utilized the pooling-of-interests and purchase business combination methods of accounting. Effective July 1, 2001, BB&T adopted SFAS No. 141, “Business Combinations,” which allows only the use of the purchase combination method of accounting. For purchase acquisitions, BB&T is required to record the assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. These estimates also include the establishment of various reserves based on planned facilities dispositions and employee benefit related considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill or other intangible assets, which are subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill and other intangibles. Furthermore, the determination of which intangible assets have finite lives is subjective, as well as the determination of the amortization period for such intangible assets.




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          The determination of BB&T’s overall income tax provision is complex and requires careful analysis. As part of the Company’s overall business strategy, BB&T may enter into business transactions that require management to consider tax laws and regulations that apply to the specific facts and circumstances under consideration. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management closely monitors tax developments as they affect the Company’s overall tax position.

ANALYSIS OF FINANCIAL CONDITION

          BB&T’s total assets at June 30, 2002, were $76.3 billion, a $5.5 billion, or 7.7%, increase from December 31, 2001. The asset category that produced the majority of the increase was loans and leases, including loans held for sale, which grew $3.1 billion, or 6.5%. Average total loans for the six months ended June 30, 2002, were $49.1 billion, or 7.0% greater than the average for the first six months of 2001. Additionally, securities available for sale increased $1.5 billion, or 8.8%, from December 31, 2001.

          Total deposits at June 30, 2002, increased $6.2 billion, or 13.8%, from December 31, 2001. Short-term borrowed funds declined $1.7 billion, or 25.8%, and long-term debt decreased $741.6 million, or 6.3%, during the first six months of 2002. Total shareholders’ equity increased $978.1 million, or 15.9%, during the same time frame.

          The factors causing the fluctuations in the major balance sheet categories are further discussed in the following sections.

Loans and Leases

          Management emphasizes lending to small and medium-sized businesses and consumer lending in order to improve the overall profitability of the loan portfolio. For the first six months of 2002, average total loans were $49.1 billion, an increase of $3.2 billion, or 7.0%, compared to the same period in 2001. During the first six months of 2002, average commercial loans and leases totaled $27.3 billion, an increase of $2.4 billion, or 9.6%, compared to the same period in 2001 and composed 55.6% of the loan and lease portfolio compared to 54.2% for the first six months of 2001. Average mortgage loans totaled $9.1 billion and composed 18.5% of the loan and lease portfolio compared to 19.8% for the first six months of 2001. Average consumer loans, which include sales finance, revolving credit and direct retail, totaled $12.7 billion, an increase of $806.3 million, or 6.8%, compared to the same period in 2001. Consumer loans composed the remaining 25.9% of the loan and lease portfolio compared to 26.0% for the first six months of 2001. BB&T is a large originator of mortgage loans, with second quarter 2002 originations totaling $2.3 billion and has also historically been a frequent acquirer of community banks and thrift institutions. The combination of these factors results in a high percentage of mortgage loans in BB&T’s portfolio. To improve the overall yield and profitability of the loan portfolio and to mitigate interest rate risk, BB&T sells most of its fixed-rate mortgage loans in the secondary market or securitizes the loans and transfers them to the securities portfolio. However, due to the continued low interest rate environment and resulting high volumes of mortgage loan originations and the inventory of mortgage loans held for sale, the mix of the consolidated loan portfolio, as indicated above, was very similar to that of one year ago.




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          For the second quarter of 2002, average total loans were $50.3 billion, an increase of $3.8 billion, or 8.3%, compared to the same period in 2001. Average commercial loans and leases for the second quarter of 2002 totaled $28.2 billion, an increase of $3.1 billion, or 12.3%, compared to the same period in 2001 and composed 56.0% of the loan and lease portfolio compared to 54.0% for the second quarter of 2001. Average mortgage loans totaled $9.0 billion and composed 17.8% of the loan and lease portfolio compared to 20.1% for the second quarter of 2001. Average consumer loans, which include sales finance, revolving credit and direct retail, totaled $13.1 billion, an increase of $1.2 billion, or 9.6%, compared to the same period in 2001 and composed the remaining 26.2% of the loan and lease portfolio compared to 25.9% for the second quarter of 2001.

          The growth rates of the average loans described above were affected by securitization programs and by loan portfolios held by companies that were acquired in purchase transactions during the last six months of 2001 and the first six months of 2002. During the first six months of 2002, loans totaling $1.9 billion and $1.2 billion were acquired through the purchases of AREA and MidAmerica, respectively. During the last six months of 2001, loans totaling $368.8 million were acquired through the purchase of Community First Banking Company (“CFBC”). Excluding the effect of purchase accounting transactions completed during 2001 and 2002 and mortgage loan securitizations, average “internal” loan growth for the three months ended June 30, 2002, was .8% compared to the second quarter of 2001. By category, excluding the effects of purchase accounting transactions and loan securitizations, average mortgage loans, including loans held for sale, decreased 11.3%, average commercial loans and leases grew 4.3%, and average consumer loans increased 3.5% in the second quarter of 2002 compared to the same period of 2001.

          The annualized fully taxable equivalent (“FTE”) yields on commercial, consumer and mortgage loans for the first six months of 2002 were 6.26%, 8.67%, and 7.31%, respectively, resulting in an annualized yield on the total loan portfolio of 7.08%. The FTE yields on commercial, consumer and mortgage loans for the first six months of 2001 were 8.86%, 10.01%, and 7.55%, respectively, resulting in an annualized yield on the total loan portfolio of 8.90%. This reflects a decrease of 182 basis points in the annualized yield on the total loan portfolio during the first six months of 2002 in comparison to 2001. The decrease in yield resulted from a lower average prime rate during 2001 and 2002, as well as an overall lower interest rate environment. 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 where it has remained throughout the first six months of 2002. As a result of the Federal Reserve Board’s actions, the average prime rate, which is the basis for pricing many commercial and consumer loans, averaged 7.34% in the second quarter of 2001 compared to 4.75% in the second quarter of 2002. For the first six months of 2002, the prime rate averaged 4.75%, compared to 7.98% during the first six months of 2001. The growth in the overall loan portfolio, combined with the decrease in the yield of the portfolio, from 8.62% in the second quarter and 8.90% in the first six months of 2001 to 7.03% in the second quarter and 7.08% in the first six months of 2002, resulted in a decrease of 10.3% in interest income from loans and leases in the current quarter and a decrease of 13.8% in interest income from loans and leases during the first six months of 2002 compared to the 2001 periods.




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Securities

          Securities available for sale totaled $18.1 billion at June 30, 2002, an increase of $1.5 billion, or 8.8%, compared with December 31, 2001. Securities available for sale had net unrealized gains, net of deferred income taxes, of $291.1 million at June 30, 2002, compared to net unrealized gains, net of deferred income taxes, of $288.1 million at December 31, 2001. Securities held to maturity totaled $47.4 million, an increase of $6.9 million, or 17.0%, from year-end 2001. Trading securities totaled $132.3 million, an increase of $34.6 million, or 35.5%, compared to the balance at December 31, 2001.

          Average total securities for the first six months amounted to $17.0 billion, up 8.9% from the average during the first six months of 2001. For the second quarter of 2002, average securities totaled $17.6 billion, or 13.2% higher than the average balance for the second quarter of 2001.

          The annualized FTE yield on the average total securities portfolio for the first six months of 2002 was 6.45%, a decrease of 76 basis points from the yield earned in the first six months of 2001. This decrease in yield resulted principally from the lower interest rate environment, which resulted in cash flows from the maturity of higher yielding securities, callable bonds and prepayments of mortgage backed securities during 2001 being reinvested at lower interest rates during 2002.

Other Interest Earning Assets

          Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $248.2 million at June 30, 2002, an increase of $2.2 million, or .9%, compared to December 31, 2001. Interest-bearing deposits with banks decreased $32.4 million, or 28.3%, compared to December 31, 2001. These categories of earning assets are subject to large daily fluctuations based on the availability of these types of funds. The average yield on other interest-earning assets for the first six months of 2002 was 2.02%, a decrease from the 4.95% earned during the first six months of 2001. The decrease in the yield on other interest-earning assets is principally the result of the decline in the average Federal funds rate from 4.96% for the first six months of 2001 to 1.74% for the first six months of 2002.

Other Assets

          BB&T’s other noninterest-earning assets, excluding premises and equipment and noninterest-bearing cash and due from banks, increased $1.1 billion from December 31, 2001, to June 30, 2002. The increase resulted primarily from goodwill, which increased $577.4 million due to acquisitions of AREA, MidAmerica and CRC; increased core deposit and other intangibles, which grew $65.1 million because of the aforementioned acquisitions; and higher capitalized mortgage servicing rights, which increased $36.6 million.




BB&T Corporation          Page 21          Second Quarter 2002 10-Q




Deposits

          Deposits at June 30, 2002, totaled $50.9 billion, an increase of $6.2 billion, or 13.8%, from December 31, 2001. The purchase acquisitions of AREA and MidAmerica generated $3.2 billion of the increase. Average deposits for the first six months of 2002 increased $3.8 billion, or 8.6%, compared to the first six months of 2001. The categories of deposits with the highest average rates of growth in 2002 compared to 2001 were: money rate savings accounts, including investor deposit accounts, which increased $2.1 billion, or 17.5%, and noninterest-bearing deposits, which increased $857.5 million, or 14.4%. The growth realized in these deposit categories was partially offset by a decline of $61.6 million, or 1.8%, in average savings and interest checking.

          For the second quarter, average deposits increased $4.8 billion, or 10.8%. Average total transaction accounts, which include noninterest-bearing deposits, savings, interest checking and money rate savings, totaled $25.3 billion for the second quarter, an increase of $3.4 billion, or 15.8%, compared to the second quarter of 2001. Average time deposits for the second quarter totaled $24.0 billion, an increase of $1.4 billion, or 6.1%, compared to the second quarter of 2001.

          The growth in average deposits for 2002 includes the effect of deposits acquired in purchase accounting transactions completed during the last six months of 2001 and the first six months of 2002. The purchase of AREA and MidAmerica in the first quarter of 2002 resulted in the addition of $2.1 billion and $1.1 billion in deposits, respectively. During the last six months of 2001, the purchase of CFBC added $428.4 million in deposits. Growth rates for noninterest-bearing deposits are also affected by an official check outsourcing program, which has improved fee income, but reduced the balance of noninterest-bearing deposits. Excluding the effects of purchase accounting transactions and official check outsourcing, average deposits for the six months ended June 30, 2002, would have increased 2.4% compared to the same time period of 2001. Excluding the effects of purchase accounting, transaction account deposits increased 8.0% compared to the six months ended June 30, 2001, and certificate accounts and other time deposits would have decreased 2.9%. For the second quarter of 2002, total average deposits, excluding the effects of purchase accounting transactions and official check outsourcing, increased 1.8% compared to the second quarter of 2001.

          The annualized average rate paid on total interest-bearing deposits during the first six months of 2002 was 2.57%, a decrease of 207 basis points compared to 2001. The decrease in the average rate paid resulted from the lower interest rate environment that has existed during 2002 compared to 2001, which included the previously discussed 322 basis point decrease in the average Federal funds rate.

Other Borrowings

          At June 30, 2002, short-term borrowed funds totaled $4.9 billion, a decrease of $1.7 billion, or 25.8%, compared to December 31, 2001. For the second quarter of 2002, average short-term borrowed funds totaled $5.8 billion, an increase of $219.0 million, or 3.9%, from the comparable period of 2001. For the six months ended June 30, 2002, average short-term borrowed funds totaled $5.9 billion, a decrease of $224.7 million, or 3.7%, compared to the first six months of 2001. The average annualized rate paid on short-term borrowed funds was 1.82% for the first six months of 2002, a decrease of 305 basis points from the average rate of 4.87% paid in the comparable period of 2001. This decrease in the cost of short-term borrowed funds resulted from the lower interest rate environment that has existed during 2002 compared to 2001, which included a 322 basis point decrease in the average Federal funds rate.




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          Long-term debt consists primarily of Federal Home Loan Bank advances, medium term bank notes and corporate subordinated debt. These borrowings provide BB&T with the flexibility to structure borrowings in a manner that aids in the management of interest rate risk and liquidity. Long-term debt totaled $11.0 billion at June 30, 2002, a decrease of $741.6 million, or 6.3%, from the balance at December 31, 2001. For the second quarter of 2002, average long-term debt totaled $11.3 billion, an increase of $308.3 million, or 2.8%, compared to the second quarter of 2001. For the six months ended June 30, 2002, total average long-term borrowed funds were $11.4 billion, an increase of $705.5 million, or 6.6%, compared to the first six months of 2001. Long-term debt has been utilized for a variety of funding needs, including the repurchase of common stock. The average annualized rate paid on long-term borrowed funds was 5.21% for the first six months of 2002, a decrease of 49 basis points from the average rate of 5.70% paid for the first six months of 2001.

Asset Quality

          Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $400.1 million at June 30, 2002, compared to $373.6 million at December 31, 2001. Nonperforming assets, as a percentage of loan-related assets, were .79% at both June 30, 2002, and December 31, 2001. Loans 90 days or more past due and still accruing interest totaled $98.1 million at June 30, 2002, compared to $101.8 million at year-end 2001.

          BB&T’s net charge-offs totaled $58.1 million for the second quarter and amounted to ..46% of average loans and leases, on an annualized basis, compared to $49.9 million, or .43% of average loans and leases, on an annualized basis, in the corresponding period in 2001. For the six months ended June 30, 2002, net charge-offs totaled $114.3 million, or .47% of average loans and leases, compared to $78.8 million, or .35% of average loans and leases, in 2001.

          While the slowdown in the economy has resulted in increases in nonperforming assets and net charge-offs during the second quarter, BB&T’s lending strategy, which focuses on relationship-based lending within our markets and smaller individual loan balances, continues to produce superior credit quality in good and bad economic times. 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 and demonstrated improvement compared to the first quarter of 2002.




BB&T Corporation          Page 23          Second Quarter 2002 10-Q




          The allowance for loan and lease losses was $706.4 million, or 1.40% of loans and leases, at June 30, 2002, compared to $644.4 million, or 1.36% of loans and leases, at December 31, 2001. The increase in the allowance as a percentage of loans and leases reflects higher provisions for loan and lease losses in view of the economic slowdown and resulting higher nonperforming assets and net charge-offs.

          The provision for loan and lease losses for the second quarter of 2002 was $58.5 million, compared to $48.8 million in the comparable quarter of 2001. For the six months, the provision for loan and lease losses totaled $115.0 million compared to $90.8 million in 2001. The increased provision during 2002 was necessary to cover higher net charge-offs and to maintain the allowance at a level considered adequate to absorb losses inherent in the loan portfolio at the balance sheet date.













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          Asset quality statistics for the last five calendar quarters are presented in the accompanying table.


ASSET QUALITY ANALYSIS
(Dollars in thousands)

For the Three Months Ended

6/30/02 3/31/02 12/31/01 9/30/01 6/30/01

Allowance For Loan & Lease Losses
    Beginning balance     $ 705,905   $ 644,418   $ 634,552     610,171   $ 601,788  
    Allowance for acquired loans, net    136    61,177    9,047    --    9,470  
    Provision for loan and lease losses      58,500    56,500    65,000    68,500    48,798  
    Net charge-offs    (58,095 )  (56,190 )  (64,181 )  (44,119 )  (49,885 )

       Ending balance     $ 706,446     705,905   $ 644,418     634,552   $ 610,171  

Risk Assets  
    Nonaccrual loans and leases     $ 335,287     354,916   $ 316,607     266,384   $ 244,711  
    Foreclosed real estate    49,009    46,687    39,106    34,601    27,725  
    Other foreclosed property    15,803    20,734    17,858    17,733    20,494  
    Restructured loans    --    --    --    183    521  

       Total nonperforming assets     $ 400,099     422,337   $ 373,571     318,901   $ 293,451  

    Loans 90 days or more past due                                  
       and still accruing     $ 98,143 $   100,962   $ 101,778     93,968   $ 84,399  

Asset Quality Ratios
Nonaccrual loans and leases as a                                  
    percentage of total loans and leases*       .66  %   .71  %   .67  %   .57  %   .52  %
Total nonperforming assets as a percentage of:  
    Total assets    .52    .56    .53    .45    .43  
    Loans and leases plus foreclosed property*    .79    .84    .79    .68    .62  
Annualized net charge-offs as a percentage of  
    average loans and leases*    .46    .48    .54    .37    .43  
Allowance for loan and lease losses as a                                  
    percentage of loans and leases*    1.40    1.41    1.36    1.35    1.30  
Ratio of allowance for loan and lease losses to:  
    Annualized net charge-offs       3.03  x   3.10  x   2.53  x   3.63  x   3.05  x
    Nonaccrual and restructured loans and leases    2.11    1.99    2.04    2.38    2.49  


*All items referring to loans and leases include loans held for sale and are net of unearned income.



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MARKET RISK MANAGEMENT

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




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

          The majority of assets and liabilities of financial institutions are monetary in nature and differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve System (“FRB”) to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, BB&T is positioned to respond to changing interest rates and inflationary trends.

          Management uses Interest Sensitivity Simulation Analysis (“Simulation”) to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the current contractual agreements that BB&T has with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors BB&T’s interest sensitivity by means of a computer model that incorporates the current volumes, average rates and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios of projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, however, it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap.

          The asset/liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies as well as any enacted or prospective regulatory changes. BB&T’s current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals.




BB&T Corporation          Page 26          Second Quarter 2002 10-Q




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

Interest Sensitivity Simulation Analysis
June 30, 2002

Interest  
Rate Annualized
Scenario Hypothetical

Percentage
Linear Change in
Change in Prime Net Interest
Prime Rate Rate Income

+3.00  %   7.75  %     2.92  %
+1.50     6.25       1.39  
-1.50     3.25       -2.98  
-3.00     1.75       -3.99  

Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income, using the most likely interest rate scenario, of 3% for a 150 basis point parallel change in interest rates over six months and 6% for a 300 basis point change over 12 months. It is management’s ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. At June 30, 2002, the sensitivity of BB&T’s net interest income to changes in interest rates was within the guidelines established by management, as illustrated in the accompanying table.

Derivative Financial Instruments

          BB&T utilizes a variety of financial instruments to manage various financial risks. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, collars, financial 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.




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          Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T deals only with national market makers with “investment grade” credit ratings in its derivatives activities. BB&T further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T’s credit risk exposure at June 30, 2002 was not material.

          Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties or a measure of financial risk. On June 30, 2002, BB&T had derivative financial instruments outstanding with notional amounts totaling $5.8 billion. The estimated fair value of open contracts reflected net unrealized gains of $40.8 million at June 30, 2002.

          The following table sets forth certain information concerning BB&T’s derivative financial instruments at June 30, 2002:

Derivative Financial Instruments
June 30, 2002
(Dollars in thousands)

Average Average
Notional Receive Pay Estimated
Type Amount Rate Rate Fair Value

Receive fixed swaps     $ 2,093,872     4.31  %   0.80  % $ 40,750  
Pay fixed swaps    267,839    1.77    4.93    (4,862 )
Caps, floors & collars    1,317,550    --    --    20,852  
Foreign exchange contracts    148,806    --    --    294  
Forward contracts and futures    1,450,651    --    --    (15,350 )
Interest rate lock commitments    364,234    --    --    --  
Options on contracts purchased    145,000    --    --    (836 )

Total     $ 5,787,952           $ 40,848



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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 management are to provide an adequate return to shareholders while retaining a sufficient base to support future growth and comply with all regulatory standards.




BB&T Corporation          Page 28          Second Quarter 2002 10-Q




          Total shareholders’ equity was $7.1 billion at June 30, 2002, and $6.2 billion at December 31, 2001. BB&T’s book value per common share at June 30, 2002 was $14.99 compared to $13.50 at December 31, 2001.

          Financial holding companies and their subsidiaries are subject to regulatory requirements with respect to risk-based capital adequacy. Risk-based capital ratios measure capital as a percentage of balance sheet risk. The risk-weighted values of balance sheet items are determined in accordance with risk factors specified by Federal regulatory pronouncements.

          Tier 1 capital (total shareholders’ equity excluding unrealized gains or losses on debt securities available for sale and unrealized gains or losses on cash flow hedges, net of tax effects, plus certain mandatorily redeemable capital securities, less nonqualifying intangible assets) is required to be at least 4% of risk-weighted assets, and total capital (Tier 1 capital, a qualifying portion of the allowance for loan and lease losses and qualifying subordinated debt) must be at least 8% of risk-weighted assets, with one half of the minimum consisting of Tier 1 capital.

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

          BB&T’s capital ratios at the end of the last five quarters are presented in the accompanying table:

CAPITAL RATIOS

2002 2001


Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter

Risk-based capital ratios:
       Tier 1 capital   9.7  % 9.9  % 9.8  % 9.6  % 9.7  %
       Total capital  12.8   13.3   13.3   13.2   12.0  
Tier 1 leverage ratio  7.3   7.7   7.2   7.1   7.2  



BB&T Corporation          Page 29          Second Quarter 2002 10-Q


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ANALYSIS OF RESULTS OF OPERATIONS

          Net income for the second quarter of 2002 totaled $328.0 million, an increase of 38.2% compared to the $237.2 million earned during the comparable quarter of 2001. On a diluted per share basis, earnings for the three months ended June 30, 2002, were $.68, compared to $.52 for the same period in 2001, an increase of 30.8%. BB&T’s operating results for the second quarter of 2002 produced an annualized return on average assets of 1.74% and an annualized return on average shareholders’ equity of 18.38% compared to prior year ratios of 1.40% and 16.81%, respectively.

          Net income for the six months ended June 30, 2002, totaled $637.6 million, an increase of $163.9 million, or 34.6%, compared to the $473.7 million earned during the comparable period of 2001. On a diluted per share basis, earnings for the six months ended June 30, 2002, were $1.34 compared to $1.03 for the same period in 2001, an increase of 30.1%. BB&T’s operating results for the first six months of 2002 produced an annualized return on average assets of 1.75% and an annualized return on average shareholders’ equity of 18.87% compared to prior year ratios of 1.41% and 17.14%, respectively.

          The following table sets forth selected financial ratios for the last five calendar quarters:

PROFITABILITY MEASURES


2002 2001


Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter

Return on average assets      1.74  %  1.76  %  1.56  %  1.27  %  1.40  %
Return on average equity    18.38    19.41    17.93    14.92    16.81  
Net interest margin    4.27    4.26    4.20    4.18    4.16  


          BB&T recorded certain merger-related and restructuring costs during both 2002 and 2001. For the second quarter of 2002, BB&T recorded $1.1 million in net after-tax charges primarily associated with the mergers of AREA and MidAmerica, as well as systems conversion costs related to other mergers. During the second quarter of 2001, BB&T incurred $30.2 million in net after-tax charges primarily associated with the acquisitions of Century South Banks, Inc. (“CSBI”) and F&M National Corporation (“F&M”), and systems conversion costs related to other mergers. Merger-related and restructuring charges typically include, but are not limited to, personnel-related expenses such as staff relocation, severance benefits, early retirement packages and contract settlements; occupancy, furniture and equipment expenses including branch consolidation; and other costs, such as asset write-offs, professional fees, etc.




BB&T Corporation          Page 30          Second Quarter 2002 10-Q




          For the six months ended June 30, 2002, BB&T incurred $10.4 million in net after-tax charges primarily associated with the mergers of AREA, MidAmerica and CFBC, as well as systems conversion costs related to other mergers. For the six months ended June 30, 2001, BB&T incurred $55.1 million in net after-tax charges primarily associated with the mergers of FCNB Corp. (“FCNB”), CSBI and F&M, and systems conversion costs related to other mergers. Additionally, during the first quarter of 2002, BB&T recorded a $9.8 million gain resulting from the implementation of SFAS No. 141, which required any existing negative goodwill to be recognized as income effective January 1, 2002. This gain is classified separately as a cumulative effect of a change in accounting principle.

Merger-Related and Restructuring Charges

          During the second quarter of 2002, BB&T recorded pre-tax merger-related and restructuring charges of $1.6 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses. These expenses were recorded in connection with the second quarter conversion of CFBC, as well as first quarter acquisitions of AREA and MidAmerica. For the six months ended 2002, BB&T recorded pre-tax merger-related and restructuring charges of $16.2 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses.

          During the second quarter of 2001, in connection with the acquisitions of CSBI and F&M, the Company recorded pre-tax merger-related and restructuring charges of $54.2 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses. For the six months ended 2001, BB&T recorded $108.0 million, which are reflected in BB&T’s Consolidated Statements of Income as noninterest expenses. In addition, a provision for loan and lease losses totaling $4.5 million for the second quarter of 2001, and $13.4 million for the first six months of 2001, was recorded to conform the acquired entities’ credit policies to those of BB&T, including underwriting and risk rating standards, charge-offs, past due and nonaccrual loans, as well as to reflect impending changes in the management of the acquired institutions’ problem loans.

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

Summary of Merger-Related and Restructuring Charges
(Dollars in thousands)

For the Six Months Ended June 30,

2002 2001

Severance and personnel-related costs $ 860 $ 26,923  
Occupancy and equipment charges  5,379   23,214  
Marketing and public relations  5,716   3,501  
Systems conversions, asset write-offs,         
    conforming policies and other  4,218   54,409  
           

Total $ 16,173 $ 108,047  





BB&T Corporation          Page 31          Second Quarter 2002 10-Q




          Severance and personnel-related costs include severance, employee retention, payments related to change-in-control provisions of employment contracts, outplacement services and other benefits associated with the termination of employees primarily in corporate support and data processing functions.

          Occupancy and equipment charges represent merger-related costs associated with lease terminations, obsolete equipment write-offs, and the sale of duplicate facilities and equipment. Systems conversions and related charges included expenses necessary to convert and combine the acquired branches and operations of merged companies. Marketing and public relations represented direct media advertising relative to the acquisitions and local charitable contributions that were required by the merger agreements. The other merger-related charges are composed of asset and inventory write-offs, which are primarily composed of unreconcilable differences in an acquired institution’s accounts or unreconcilable differences identified during systems conversions, litigation accruals, costs to conform an acquired institution’s accounting policies, and other similar charges.

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

Summary of Merger-Related and Restructuring Accrual Activity
(Dollars in thousands)

One Valley Bancorp, Inc.

Balance Balance Balance
December 31, Utilized in December 31, Utilized in June 30,
2000 2001 2001 2002 2002

Severance and personnel-related charges $ 3,719 $ 3,719 $ -- $ -- $ --  
Occupancy and equipment charges  4,737   97   4,640   3,821   819  
Systems conversions and related charges  128   117   11   11   --  
Other merger-related charges  10,009   10,009   --   --   --  

    Total $ 18,593 $ 13,942 $ 4,651 $ 3,832 $ 819  


          The remaining accrual at June 30, 2002 for One Valley Bancorp, Inc. related primarily to costs to exit certain leases and to dispose of excess facilities and equipment. This liability will be utilized in the future upon termination of the various leases and sale of duplicate property.




BB&T Corporation          Page 32          Second Quarter 2002 10-Q




F&M National Corporation

Balance Balance
Additions in Utilized in December 31, Additions in Utilized in June 30,
2001 2001 2001 2002 2002 2002

Severance and personnel-related charges     $ 15,830   $ 4,775   $ 11,055   $ --   $ 8,939   $ 2,116  
Occupancy and equipment charges       20,455     9,463     10,992     --     57     10,935  
Systems conversions and related charges       5,165     790     4,375     2,800     7,175     --
Other merger-related charges       11,099     7,989     3,110     --     1,227     1,883  

    Total   $ 52,549   $ 23,017   $ 29,532   $ 2,800   $ 17,398   $ 14,934  


          The liabilities associated with F&M National Corporation are expected to be substantially utilized during 2002 in connection with the systems conversion.

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

All Other Merger Activity

Balance Balance Balance
December 31, Additions in Utilized in December 31, Additions in Utilized in June 30,
2000 2001 2001 2001 2002 2002 2002

Severance and personnel-related charges     $ 9,317   $ 33,956   $ 22,957   $ 20,316   $ 16,662   $ 9,142   $ 27,836  
Occupancy and equipment charges       16,602     18,513     13,685     21,431     29,266     16,630     34,067  
Systems conversions and related charges       3,601     11,936     8,583     6,953     8,378     5,548     9,783  
Other merger-related charges       7,711     16,238     11,948     12,000     10,381     9,395     12,986  

    Total     $ 37,231   $ 80,643   $ 57,173   $ 60,700   $ 64,687   $ 40,715   $ 84,672  


          The liabilities for severance and personnel-related costs relate to severance liabilities that will be paid out based on such factors as expected termination dates, the provisions of employment contracts and the terms of BB&T’s severance plans. The remaining occupancy and equipment accruals relate to costs to exit certain leases and to dispose of excess facilities and equipment. This liability will be utilized upon termination of the various leases and sale of duplicate property. The liabilities associated with systems conversions relate to termination penalties on contracts with information technology service providers. These liabilities will be utilized as the contracts are paid out and expire. The other merger-related liabilities relate to asset and inventory write-offs, litigation accruals, accruals to conform the accounting policies of an acquired institution with those of BB&T and other similar charges.

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




BB&T Corporation          Page 33          Second Quarter 2002 10-Q



Net Interest Income and Net Interest Margin

          Net interest income on a fully taxable equivalent (“FTE”) basis was $727.3 million for the second quarter of 2002 compared to $647.9 million for the same period in 2001, an increase of $79.4 million, or 12.3%. For the three months ended June 30, 2002, average earning assets increased $5.8 billion, or 9.3%, compared to the same period of 2001, while average interest-bearing liabilities increased by $4.3 billion, or 7.9%, and the net interest margin increased from 4.16% in the second quarter of 2001 to 4.27% in the current quarter. The eleven basis point increase in the net interest margin resulted because the average cost of funds decreasing faster than yields earned on interest-earning assets. The average cost of funds in the second quarter of 2002 decreased 170 basis points compared to the first quarter of 2001, while the average yield earned on interest-earning assets decreased 142 basis points, increasing the interest rate spread by 28 basis points.

          For the six months ended June 30, 2002, net interest income on an FTE basis was $1.4 billion compared to $1.3 billion for the same period in 2001, an increase of $130.3 million, or 10.2%. Average interest earning assets for the six months ended June 30, 2002, increased $4.5 billion, or 7.3%, while interest-bearing liabilities increased $3.4 billion, or 6.2%, compared to the first six months of 2001. The net interest margin for the six months ended June 30, 2002, was 4.26%, up from 4.15% in the first six months of 2001. The increase resulted principally from the same factors that affected the quarterly comparison described above.

          The following tables set forth the major components of net interest income and the related annualized yields and rates for the second quarter and first six months of 2002 compared to the same periods in 2001, and the variances between the periods caused by changes in interest rates versus changes in volumes.



BB&T Corporation          Page 34          Second Quarter 2002 10-Q






Net Interest Income and Rate / Volume Analysis
For the Three Months Ended June 30, 2002 and 2001

Average Balances Annualized Yield / Rate Income / Expense Increase Change due to

Fully Taxable Equivalent - (Dollars in thousands) 2002 2001 2002 2001 2002 2001 (Decrease) Rate (6) Volume (6)

Assets
Securities (1):
   U.S. Treasury, government and other (5)     $ 16,622,342   $ 14,472,035     6.23     7.15   $ 258,759   $ 258,775   $ (16 ) $ (35,708 ) $ 35,692  
   States and political subdivisions    971,263    1,070,103    7.45    7.32    18,078    19,581    (1,503 )  327    (1,830 )

      Total securities (5)    17,593,605    15,542,138    6.29    7.16    276,837    278,356    (1,519 )  (35,381 )  33,862  
Other earning assets (2)    354,745    453,386    1.76    4.41    1,554    4,988    (3,434 )  (2,522 )  (912 )
Loans and leases, net                                                          
   of unearned income (1)(3)(4)(5)    50,265,129    46,415,430    7.03    8.62    881,084    998,077    (116,993 )  (195,034 )  78,041  

      Total earning assets    68,213,479    62,410,954    6.81    8.23    1,159,475    1,281,421    (121,946 )  (232,937 )  110,991  

      Non-earning assets       7,324,507     5,676,265  

         Total assets   $ 75,537,986   $ 68,087,219  

Liabilities and Shareholders' Equity  
Interest-bearing deposits:  
   Savings and interest-checking   $ 3,568,247   $ 3,398,441    0.76    1.56    6,746    13,213    (6,467 )  (7,097 )  630  
   Money rate savings    14,617,809    12,371,408    1.13    2.78    41,191    85,668    (44,477 )  (57,870 )  13,393  
   Certificates of deposit and other time deposits    24,007,049    22,628,040    3.51    5.73    210,250    322,980    (112,730 )  (131,377 )  18,647  

      Total interest-bearing deposits    42,193,105    38,397,889    2.45    4.41    258,187    421,861    (163,674 )  (196,344 )  32,670  
Short-term borrowed funds    5,791,792    5,572,755    1.84    4.19    26,540    58,251    (31,711 )  (33,916 )  2,205  
Long-term debt    11,283,857    10,975,583    5.24    5.60    147,442    153,438    (5,996 )  (9,940 )  3,944  

      Total interest-bearing liabilities    59,268,754    54,946,227    2.92    4.62    432,169    633,550    (201,381 )  (240,200 )  38,819  

      Noninterest-bearing deposits    7,151,674    6,119,524  
      Other liabilities    1,960,958    1,361,903  
      Shareholders' equity    7,156,600    5,659,565  

      Total liabilities and                
         shareholders' equity   $ 75,537,986   $ 68,087,219  

Average interest rate spread                 3.89   3.61
Net yield on earning assets               4.27  % 4.16  % $ 727,306   $ 647,871   $ 79,435   $ 7,263   $ 72,172  

Taxable equivalent adjustment                             $ 37,210   $ 53,404  


(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.
(6) Changes in interest income and expense attributable to both changes in interest rates and changes in volumes are allocated proportionately.




BB&T Corporation          Page 35          Second Quarter 2002 10-Q




Net Interest Income and Rate / Volume Analysis
For the Six Months Ended June 30, 2002 and 2001

Average Balances Annualized Yield / Rate Income / Expense Increase Change due to

Fully Taxable Equivalent - (Dollars in thousands) 2002 2001 2002 2001 2002 2001 (Decrease) Rate (6) Volume (6)

Assets
Securities (1):
   U.S. Treasury, government and other (5)     $ 16,061,776   $ 14,556,605     6.38     7.20   $ 512,583   $ 524,022   $ (11,439 ) $ (62,177 ) $ 50,738  
   States and political subdivisions    978,860    1,085,239    7.47    7.30    36,580    39,590    (3,010 )  914    (3,924 )

      Total securities (5)    17,040,636    15,641,844    6.45    7.21    549,163    563,612    (14,449 )  (61,263 )  46,814  
Other earning assets (2)    404,904    466,111    2.02    4.95    4,047    11,443    (7,396 )  (6,055 )  (1,341 )
Loans and leases, net                                                          
   of unearned income (1)(3)(4)(5)    49,055,889    45,860,658    7.08    8.90    1,725,888    2,026,866    (300,978 )  (434,867 )  133,889  

      Total earning assets    66,501,429    61,968,613    6.89    8.44    2,279,098    2,601,921    (322,823 )  (502,186 )  179,363  

      Non-earning assets    7,019,610    5,555,818  

         Total assets   $ 73,521,039   $ 67,524,431  

Liabilities and Shareholders' Equity  
Interest-bearing deposits:  
   Savings and interest-checking   $ 3,385,771   $ 3,447,388    0.78    1.70    13,129    29,129    (16,000 )  (15,488 )  (512 )
   Money rate savings    14,171,994    12,065,884    1.13    3.14    79,660    187,850    (108,190 )  (136,484 )  28,294  
   Certificates of deposit and other time deposits    23,146,738    22,293,957    3.70    5.90    425,000    652,349    (227,349 )  (251,437 )  24,088  

      Total interest-bearing deposits    40,704,503    37,807,229    2.57    4.64    517,789    869,328    (351,539 )  (403,409 )  51,870  
Short-term borrowed funds    5,860,857    6,085,596    1.82    4.87    52,989    146,951    (93,962 )  (88,724 )  (5,238 )
Long-term debt    11,427,259    10,721,715    5.21    5.70    295,752    303,366    (7,614 )  (26,836 )  19,222  

      Total interest-bearing liabilities    57,992,619    54,614,540    3.01    4.87    866,530    1,319,645    (453,115 )  (518,969 )  65,854  

      Noninterest-bearing deposits    6,826,917    5,969,416  
      Other liabilities    1,886,762    1,366,639  
      Shareholders' equity    6,814,741    5,573,836  

      Total liabilities and                
         shareholders' equity   $ 73,521,039   $ 67,524,431  

Average interest rate spread                 3.88   3.57
Net yield on earning assets                 4.26 % 4.15 %  $ 1,412,568   $ 1,282,276   $ 130,292   $ 16,784   $ 113,508  

Taxable equivalent adjustment                             $ 75,200   $ 102,355  


(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.
(6) Changes in interest income and expense attributable to both changes in interest rates and changes in volumes are allocated proportionately.


BB&T Corporation          Page 36          Second Quarter 2002 10-Q




Noninterest Income

          Noninterest income for the three months ended June 30, 2002, was $404.1 million compared to $346.7 million for the same period in 2001, an increase of $57.4 million, or 16.6%. Noninterest income increased primarily due to substantial growth in insurance commissions from BB&T’s agency network, growth in service charges on deposits, and higher investment banking and brokerage fees and commissions. For the six months ended June 30, 2002, noninterest income was $778.8 million, an increase of $100.1 million, or 14.8%, compared to the same period in 2001. The increase in noninterest income for the period ended June 30, 2002, resulted primarily from higher mortgage banking income, growth in service charges on deposits, growth in insurance commissions from BB&T’s agency network, and higher investment banking and brokerage fees and commissions.

          Service charges on deposits totaled $101.5 million for the second quarter of 2002, an increase of $13.5 million, or 15.3%, compared to the second quarter of 2001. For the first six months of 2002, service charges on deposits totaled $191.6 million, an increase of $24.2 million, or 14.4%, compared to the first six months of 2001. The largest components of the growth within service charges on deposits in the 2002 period were NSF and overdraft charges on personal accounts and account analysis fees on commercial accounts, which contributed $4.3 million and $4.4 million, respectively, to the increase in the second quarter of 2002 compared to 2001. MidAmerica was acquired and accounted for as a purchase on March 8, 2002, which contributed $2.6 million to the increase in service charges on deposits in the second quarter of 2002 compared to the prior year quarter. Additionally, AREA was acquired and accounted for as a purchase on March 20, 2002, which contributed $3.6 million. The 14.4% increase in service charges on deposits for the six months of 2002 was driven primarily by the same factors that affected quarterly growth.

          Trust income totaled $24.2 million for the current quarter, an increase of $.3 million, or 1.1%, compared to the same period a year ago. For the six months, trust income totaled $47.3 million, a decrease of $1.7 million, or 3.4%, compared to the same period in 2001. The decrease in trust income for the first half of 2002 is due primarily to a decline in the value of trust assets under management, which was the result of the significant decline in the overall market value of equity securities held in trust. Assets under management totaled $20.4 billion at June 30, 2002, up from $15.5 billion at June 30, 2001. The increase in trust assets under management reflects trust assets at companies acquired through purchase accounting, which offset the declines in market value previously discussed. Through the acquisitions of AREA and MidAmerica, BB&T acquired trust assets totaling $1.8 million.

          Investment banking and brokerage fees and commissions totaled $56.0 million during the second quarter of 2002, an increase of $13.1 million, or 30.6%, compared to the second quarter of 2001. For the six months, investment banking and brokerage fees and commissions totaled $108.9 million, an increase of $22.3 million, or 25.8%, compared to the same period in 2001. The increase in this category of revenue for the second quarter and the six month period of 2002 resulted primarily from growth in revenues at Edgar M. Norris & Co. and Scott & Stringfellow, which collectively contributed $9.2 million of the increase. Also, growth in revenues from fixed income underwriting fees and higher trading and retail brokerage fees contributed to the increase.




BB&T Corporation          Page 37          Second Quarter 2002 10-Q




          Agency insurance commissions totaled $74.1 million for the second quarter of 2002, an increase of $29.0 million, or 64.4%, compared to the same three-month period of 2001. For the six months, agency insurance commissions totaled $137.9 million, an increase of $50.9 million, or 58.6%, compared to the same period in 2001. The purchase of Cooney, Rikard & Curtin, Inc. (“CRC”), a wholesale insurance broker, in January 2002 contributed $19.8 million in revenue growth for the second quarter and $32.9 million for the first six months of 2002. In addition, other agencies were acquired in the last half of 2001 and first half of 2002 which added $3.9 million in revenues in the second quarter of 2002 and $7.8 million for the first six months of 2002. Finally, property and casualty insurance commissions increased $7.1 million and group health insurance commissions increased $1.8 million. The 58.6% increase in agency insurance commissions for the six months of 2002 was driven by the same factors that affected quarterly growth.

          Income from mortgage banking activities totaled $44.0 million for the second quarter of 2002, a decrease of $7.5 million, or 14.6%, compared to the same period of 2001. For the current quarter, servicing fee income increased $8.4 million; origination fees on loans sold increased $6.5 million; and gains from loan sales decreased $1.2 million compared to the second quarter of 2001. These increases were offset by a $15.8 million valuation allowance recorded to reduce the value of BB&T’s capitalized mortgage servicing rights as a result of the declining interest rate environment. In comparison, in the second quarter of 2001, a reversal of $5.9 million in previously recorded mortgage servicing rights valucation allowances were recorded due to increased mortgage rates. For the first six months of 2002, income from mortgage banking activities totaled $94.5 million, an increase of $36.9 million, or 63.9%, compared to the same period in 2001. The increase in year-to-date mortgage banking income resulted from higher mortgage loan originations in 2002, which have resulted from the lower interest rate environment. For the six months ended 2002, a $25.5 million valuation allowance was provided, reducing mortgage income, compared to a valuation allowance of $29.1 million recorded during the first half of 2001. During the first six months of 2002, BB&T has originated $5.1 billion of mortgage loans, compared to $4.5 billion in the same period of 2001.

          Other nondeposit fees and commissions totaled $52.5 million for the second quarter of 2002, an increase of $4.7 million, or 9.9%, compared to the three months ended June 30, 2001. For the six months, other nondeposit fees and commissions totaled $96.6 million, an increase of $4.4 million, or 4.8%, compared to the same period in 2001. The principal drivers of the increase were check card interchange fees, which increased $1.6 million; an increase in bankcard income of $1.1 million; business check card interchange fee income, which contributed $.6 million. Additionally, the purchase of AREA and MidAmerica contributed $2.0 million and $2.2 million, respectively, to the growth in other nondeposit fees and commissions. The higher nondeposit fees and commissions were offset by a decrease in income from the outsourcing of official checks, which declined $2.4 million for the quarter. The 4.8% increase in other nondeposit fees and commissions for the six months of 2002 was primarily driven by the same factors that affected quarterly growth.




BB&T Corporation          Page 38          Second Quarter 2002 10-Q




          Securities gains totaled $19.7 million for the second quarter of 2002, an increase of $3.0 million, or 18.2%, compared with the same period one year ago. For the six months ended June 30, 2002 and 2001, securities gains totaled $33.1 million and $89.3 million, respectively. In the first six months of 2001, BB&T realized a pretax gain of $82.4 million on an investment in an electronic transaction processing company. Excluding the gain, securities gains for the six months ended 2001 would have been $6.9 million.

          Other income totaled $28.2 million for the second quarter of 2002, an increase of $.8 million, or 3.0%, compared with the same period one year ago. The more significant components of this increase were income from bank owned life insurance, which increased $5.2 million, and a decrease in income from the amortization of negative goodwill, which decreased $1.6 million. For the six months ended 2002 and 2001, other income totaled $61.3 million and $43.0 million, respectively. During the six months, income from bank owned life insurance increased $10.9 million, and a $5.8 million gain for stock received from the demutualization of Principal Financial Group was recognized.

Noninterest Expense

          Noninterest expenses totaled $576.9 million for the second quarter of 2002 compared to $563.8 million for the same period a year ago, an increase of $13.0 million, or 2.3%. Noninterest expense for the second quarter of 2002 includes $1.6 million of pretax merger-related and restructuring expenses principally associated with the mergers of CFBC, AREA and MidAmerica. For the six months ended June 30, 2002, noninterest expenses totaled $1.1 billion, an increase of $22.8 million, or 2.1%, over the same period one year ago. Noninterest expense for the six months of 2002 includes $16.2 million of pretax merger-related and restructuring expenses.

          Personnel expense, the largest component of noninterest expense, was $319.6 million for the second quarter of 2002 compared to $282.5 million for the same period in 2001, an increase of $37.1 million, or 13.1%. This increase was primarily the result of the effect of purchase acquisitions, which added costs of $11.0 million, $7.5 million and $10.2 million for the acquisitions of CRC, MidAmerica and AREA, respectively. Additionally, employee investment incentive compensation increased $6.3 million and flex fringe benefit expense increased $4.6 million. These increases in personnel expense were partially offset by a decrease of $2.7 million in annual performance expense. For the six months, personnel expense totaled $624.5 million, an increase of $67.7 million, or 12.2%, compared to 2001. The increase resulted from the same factors that produced the second quarter increase.

          Occupancy and equipment expense for the three months ended June 30, 2002, totaled $84.7 million, an increase of $9.6 million, or 12.8%, compared to 2001. The increase was the result of an increase in communications equipment expense and information technology equipment expense of $2.5 million and rent on buildings and premises in the amount of $3.4 million. Additionally, the purchase acquisitions of MidAmerica and AREA resulted in added costs of $1.8 million and $2.5 million, respectively. For the six months, occupancy and equipment expense totaled $168.1 million, an increase of $17.9 million, or 11.9%, compared to 2001. This increase was created by similar growth in the same categories that produced the quarterly increase.




BB&T Corporation          Page 39          Second Quarter 2002 10-Q




          The amortization of goodwill and other intangible assets totaled $6.3 million for the three months ended June 30, 2002, a decrease of $12.1 million, or 66.0%, from the amount incurred in the second quarter of 2001. For the first six months of 2002, amortization of goodwill and other intangible assets totaled $10.6 million, a decrease of $25.7 million, or 70.8%, compared to 2001. This decrease is due to the adoption of SFAS No. 142, which ended the amortization of goodwill effective July 1, 2001.

          Other noninterest expenses for the second quarter of 2002 totaled $164.7 million, an increase of $31.1 million, or 23.2%, compared to 2001. This increase is due to the acquisitions of CRC, MidAmerica, and AREA, consummated using purchase accounting, added $1.8 million, $3.1 million, and $6.3 million, respectively. Additionally, the amortization of mortgage servicing rights increased $8.8 million; data processing software expense increased $3.5 million; and loan and lease expense increased $3.9 million. For the first six months of 2002, other noninterest expenses totaled $305.7 million, an increase of $54.8 million, or 21.8%, compared with 2001.

Provision for Income Taxes

          The provision for income taxes totaled $130.9 million for the second quarter of 2001, an increase of $39.6 million, or 43.4%, compared to the second quarter of 2001. For the first six months of 2002, the provision for income taxes totaled $248.2 million, an increase of $56.5 million, or 29.5%, compared to 2001. BB&T’s effective income tax rates were 28.5% and 27.8% for the three months ended June 30, 2002 and 2001, respectively, and 28.3% and 28.8% for the six months of 2002 and 2001, respectively.

          During the last three years, BB&T entered into option contracts which legally transferred part of the responsibility for the future residual management of certain leveraged lease investments including the future remarketing or re-leasing of these assets to a wholly-owned subsidiary in a foreign jurisdiction having a lower income tax rate, thereby lowering the effective income tax rate applicable to these lease investments. These option contracts provide that the foreign subsidiary may purchase the lease investments at expiration of the existing leveraged leases for a fixed price. As a result, a portion of the residual value included in the consolidated leveraged lease analysis should be taxed at a lower tax rate than originally anticipated, resulting in a change in the total net income from the lease. In accordance with SFAS No. 13, “Accounting for Leases”, the net income from the affected leases was recalculated from inception based on the new effective income tax rate. The recalculation had the effect of reducing net interest income and the income tax provision for the first six months of 2002 by $4.9 million and $9.7 million, respectively. BB&T intends to permanently reinvest the earnings of this subsidiary and, therefore, in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes”, deferred income taxes associated with the foreign subsidiary arising from these transactions have not been provided.




BB&T Corporation          Page 40          Second Quarter 2002 10-Q




          BB&T transferred certain securities and real estate secured loans to a wholly owned subsidiary in exchange for additional common equity in the subsidiary. The transaction produced a difference between BB&T’s tax basis in the equity investment in the subsidiary and the assets transferred to the subsidiary, resulting in a net reduction in the income tax provision of $17.4 million for the first six months of 2002.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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



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Item 4. Submission of Matters to a Vote of Security Holders

          BB&T held its annual meeting of the shareholders on April 23, 2002, to consider and vote upon the following matters:

(1)  

To elect six Directors for three-year terms expiring in 2005. Of shares represented by proxy, votes in favor were 342,319,180; and votes withheld were 5,334,274.


(2)  

To ratify the appointment of PricewaterhouseCoopers LLP as the Corporation’s Independent Auditors for 2002. Of shares represented by proxy, votes in favor were 337,705,853; votes opposed were 7,933,165; and abstentions were 1,976,575.



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BB&T Corporation          Page 41          Second Quarter 2002 10-Q





Item 6. Exhibits and Reports on Form 8-K




EXHIBIT INDEX



Exhibit No.   Description   Location
 
2(a)   Agreement and Plan of Reorganization dated as of July 29, 1994 and amended and restated as of October 22, 1994 between the Registrant and BB&T Financial Corporation.   Incorporated herein by reference to Registration No. 33-56437.
 
2(b) Plan of Merger as of July 29, 1994 as amended and restated on October 22, 1994 between the Registrant and BB&T Financial Corporation. Incorporated herein by reference to Registration No. 33-56437.
 
2(c) Agreement and Plan of Reorganization dated as of November 1, 1996 between the Registrant and United Carolina Bancshares Corporation, as amended. Incorporated herein by reference to Exhibit 3(a) filed in the Annual Report on Form 10-K, filed March 17, 1997.
 
2(d) Agreement of Plan of Reorganization dated as of October 29, 1997 between the Registrant and Life Bancorp, Inc. Incorporated herein by reference to Registration No. 33-44183.
 
2(e) Agreement and Plan of Reorganization dated as of February 6, 2000 between the Registrant and One Valley Bancorp, Inc. Incorporated herein by reference to Exhibit 99.1 filed in the Current Report on Form 8-K, dated February 9, 2000
 
3(a)(i) Amended and Restated Articles of Incorporation of the Registrant, as amended. Incorporated herein by reference to Exhibit 3(a) filed in the Annual Report on Form 10-K, filed March 17, 1997.



BB&T Corporation          Page 42          Second Quarter 2002 10-Q




 
3(a)(ii) Articles of Amendment of Articles of Incorporation. Incorporated herein by reference to Exhibit 3(a)(ii) filed in the Annual Report on Form 10-K, filed March 18, 1998
 
3(b)(i) Bylaws of the Registrant, as amended. Incorporated herein by reference to Exhibit 3(b) filed in the Annual Report on Form 10-K, filed March 18, 1998
 
3(b)(ii) Incorporated herein by reference to Exhibit 3(b)(ii) filed in the Quarterly Report on Form 10-Q, filed May 13, 2002. Incorporated herein by reference to Exhibit 3(b)(ii) filed in the Quarterly Report on Form 10-Q, filed May 13, 2002.
 
4(a) Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant related to Junior Participating Preferred Stock. Incorporated herein by reference to Exhibit 3(a) filed in the Annual Report on Form 10-K, filed March 17, 1997.
 
  4(b) Rights Agreement dated as of December 17, 1996 between the Registrant and Branch Banking and Trust Company, Rights Agent. Incorporated herein by reference to Exhibit 1 filed under Form 8-A, filed January 10, 1997.
 
4(c) Subordinated Indenture (including Form of Subordinated Debt Security) between the Registrant and State Street Bank and Trust Company, Trustee, dated as of May 24, 1996. Incorporated herein by reference to Exhibit 4(d) of Registration No. 333-02899.
 
  4(d) Senior Indenture (including Form of Senior Debt Security) between the Registrant and State Street Bank and Trust company, Trustee, dated as of May 24, 1996. Incorporated herein by reference to Exhibit 4(c) of Registration No. 333-02899.
 
10 (a)* Death Benefit Only Plan, Dated April 23, 1990, by and between Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and L. Glenn Orr, Jr. Incorporated herein by reference to Registration No. 33-33984.



BB&T Corporation          Page 43          Second Quarter 2002 10-Q




 
10 (b)* BB&T Corporation Non-Employee Directors' Deferred Compensation and Stock Option Plan. Incorporated herein by reference to Exhibit 10(b) of the Annual Report on Form 10-K, filed March 17, 1997.
 
10 (c)* BB&T Corporation 1994 Omnibus Stock Incentive Plan. Incorporated herein by reference to Registration No. 33-57865.
 
10 (d)* Settlement and Non-Compete Agreement, dated February 28, 1995, by and between the Registrant and L. Glenn Orr, Jr. Incorporated herein by reference to Registration No. 33-56437.
 
10 (e)* Settlement Agreement, Waiver and General Release dated September 19, 1994, by and between the Registrant, Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton. Incorporated herein by reference to Registration No. 33-56437.
 
10 (f) BB&T Corporation 401(k) Savings Plan (restated effective January 1, 2000, and subsequently amended). Incorporated herein by reference to Exhibit 10(f) filed in the Annual Report on Form 10-K, filed March 16, 2001.
 
10 (g)* BB&T Corporation 1995 Omnibus Stock Incentive Plan. Incorporated herein by reference to Exhibit 10(g) filed in the Annual Report on Form 10-K, filed March 17, 1997.
 
10 (h)* Branch Banking and Trust Company Long-Term Incentive Plan. Incorporated by reference to the identified exhibit under the Quarterly Report on Form 10-Q, filed May 14, 1991.



BB&T Corporation          Page 44          Second Quarter 2002 10-Q




 
10 (i)* Branch Banking and Trust Company Executive Incentive Compensation Plan. Incorporated by reference to the identified exhibit under the Annual Report on Form 10-K, filed February 22, 1985.
 
10 (j)* Southern National Deferred Compensation Plan for Key Executives. Incorporated herein by reference to Exhibit 10(j) filed in the Annual Report on Form 10-K, filed March 17, 1997.
 
10 (k)* BB&T Corporation Target Pension Plan. Incorporated herein by reference to Exhibit 10(k) filed in the Annual Report on Form 10-K, filed March 17, 1997.
 
10 (l)* BB&T Corporation Supplemental Executive Retirement Plan. Incorporated herein by reference to Exhibit 10(l) filed in the Annual Report on Form 10-K, filed March 17, 1997.
 
10 (m)* Settlement and Noncompetition Agreement, dated July 1, 1997, by and between the Registrant and E. Rhone Sasser. Incorporated herein by reference to Exhibit 10(m) filed in the Annual Report on Form 10-K, filed March 18, 1998.
 
10 (n)* BB&T Corporation Supplemental Defined Contribution Plan for Highly Compensated Employees (amended and restated effective November 1, 2001). Incorporated herein by Reference to Exhibit 10 (n) filed in the Annual Report on Form 10-K, filed March 15, 2002.
 
10 (o)* Scott & Stringfellow, Inc. Executive and Employee Retention Plan. Incorporated herein by reference to Registration No. 333-81471.



BB&T Corporation          Page 45          Second Quarter 2002 10-Q




 
10 (p)* BB&T Corporation Non-Qualified Defined Contribution Plan (amended and restated November 1, 2001). Incorporated herein by reference to Exhibit 10 (p) filed in the Annual Report on Form 10-K, filed March 15, 2002.
 
10 (q)* BB&T Corporation Amended and Restated 1996 Short-term Incentive Plan. Incorporated herein by reference to Exhibit 10(q) of the Annual Report on Form 10-K, filed on March 16, 2001.
 
10 (r)* Amendment to 1995 Omnibus Stock Incentive Plan. Incorporated herein by reference to Registration No. 333-36540.
 
10 (s)* Employment Agreement dated February 6, 2000, by and between the Registrant and J. Holmes Morrison. Incorporated herein by reference to Exhibit 10(s) of the Annual Report on Form 10-K, filed on March 16, 2001.
 
 10 (t) BB&T Corporation Pension Plan (restated effective January 1, 2000, and subsequently amended). Incorporated herein by reference to Exhibit 10(t) of the Annual Report on Form 10-K, filed on March 16, 2001.
 
10 (u)* Amendment to BB&T Corporation Nonqualified Defined Contribution Plan. Incorporated herein by reference to Exhibit 10(u) of the Annual Report on Form 10-K, filed on March 16, 2001.
 
10 (v)* BB&T Corporation Non-Employee Directors' Deferred Compensation and Stock Option Plan (amended and restated effective November 1, 2001). Incorporated herein by reference to Exhibit 10 (v) filed in the Annual Report on Form 10-K, filed March 15, 2002.



BB&T Corporation          Page 46          Second Quarter 2002 10-Q




 
10 (w)* Amendment to the BB&T Corporation Supplemental Defined Contribution Plan for Highly Compensated Employees. Incorporated herein by reference to Exhibit 10(w) of the Annual Report on Form 10-K, filed on March 16, 2001.
 
10 (x)* BB&T Corporation Non-Qualified Deferred Compensation Trust (amended and restated effective Incorporated herein by reference to Exhibit November 1, 2001). 10 (x) filed in the Annual Report on Form 10-K, filed March 15, 2002.
 
10 (y)* 2001 Declaration of Amendment to BB&T Corporation Non-Employee Directors' Deferred Compensation and Stock Option Plan Incorporated herein by reference to Exhibit 10 (y) filed in the Annual Report on Form 10-K, filed March 15, 2002.
 
10 (z)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and John A. Allison IV Incorporated by reference to 10 (z) in the Quarterly Report on Form 10-Q filed May 13, 2002.
 
10 (aa)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and W. Kendall Chalk Incorporated by reference to 10 (aa) in the Quarterly Report on Form 10-Q filed May 13, 2002.
 
10 (ab)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Robert E. Greene Incorporated by reference to 10 (ab) in the Quarterly Report on Form 10-Q filed May 13, 2002.
 
10 (ac)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Sherry A. Kellett Incorporated by reference to 10 (ac) in the Quarterly Report on Form 10-Q filed May 13, 2002.



BB&T Corporation          Page 47          Second Quarter 2002 10-Q




 
10 (ad)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Kelly S. King Incorporated by reference to 10 (ad) in the Quarterly Report on Form 10-Q filed May 13, 2002.
 
10 (ae)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Scott E. Reed Incorporated by reference to the identified exhibit under the Quarterly Report on Form 10-Q filed May 13, 2002.
 
10 (af)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and Henry G. Williamson, Jr. Incorporated by reference to 10 (ae) in the Quarterly Report on Form 10-Q filed May 13, 2002.
 
10 (ag)* Amended and Restated Employment Agreement by and among the Registrant, Branch Banking and Trust Co. and C. Leon Wilson, III Incorporated by reference to 10 (ag) in the Quarterly Report on Form 10-Q filed May 13, 2002.
 
11 Statement re Computation of Earnings Per Share. Filed herewith as Note E.
 
22 Proxy Statement for the 2002 Annual Meeting of Shareholders. Incorporated herein by reference to BB&T's Definitive Proxy Statement filed on Schedule 14A on March 21, 2002.
 
 
99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith.
 
99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith.
 
  * Management compensatory plan or arrangement.




BB&T Corporation          Page 48          Second Quarter 2002 10-Q

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          (b)      Current Reports on Form 8-K during and following the quarter ended June 30, 2002.

On April 11, 2002, BB&T filed a Current Report on Form 8-K under Item 5 to report the results of operations for the first quarter of 2002. On May 22, 2002, BB&T filed a Current Report on Form 8-K under Item 9 to announce that BB&T had entered into a definitive agreement to acquire Regional Financial Corporation of Tallahassee, Florida, holding company for First South Bank, and to file certain presentation material related to this transaction. On July 11, 2002, BB&T filed a Current Report on Form 8-K under Item 9 to report the results of operations for the second quarter of 2002.




BB&T Corporation          Page 49          Second Quarter 2002 10-Q




SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  BB&T CORPORATION  
           (Registrant) 
   
Date:   August 14, 2002         By:        /s/ Scott E. Reed        
  Scott E. Reed, Senior Executive Vice President and Chief 
  Financial Officer 
   
Date:   August 14, 2002         By:        /s/ Sherry A. Kellett        
  Sherry A. Kellett, Senior Executive Vice President and 
  Controller (Principal Accounting Officer) 









BB&T Corporation          Page 50          Second Quarter 2002 10-Q

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Exhibit 99.1


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002


I, John A. Allison, IV, state and attest that:

(1)  

I am the Chairman and Chief Executive Officer of BB&T Corporation (the "issuer").


(2)  

Accompanying this certification is BB&T Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, a periodic report (the “periodic report”) filed by the issuer with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), which contains financial statements.


(3)  

I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that


·  

the periodic report containing the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and


·  

the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer for the periods presented.




/s/ John A. Allison, IV



John A. Allison, IV
Chairman and Chief Executive Officer
August 14, 2002




BB&T Corporation          Page 51          Second Quarter 2002 10-Q



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Exhibit 99.2


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002


I, Scott E. Reed, state and attest that:

(1)  

I am the Chief Financial Officer of BB&T Corporation (the "issuer").


(2)  

Accompanying this certification is BB&T Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, a periodic report (the “periodic report”) filed by the issuer with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), which contains financial statements.


(3)  

I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that


·  

the periodic report containing the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and


·  

the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer for the periods presented.



/s/ Scott E. Reed


Scott E. Reed
Senior Executive Vice President and
Chief Financial Officer
August 14, 2002




BB&T Corporation          Page 52          Second Quarter 2002 10-Q



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