BB&T Second Quarter 2003 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, 2003


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  [__]


Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  [ X ]   No  [__]

At July 31, 2003, 548,013,359 shares of the registrant's common stock, $5 par value, were outstanding.


This Form 10-Q has 57 pages. The Exhibit Index begins on page 49.




BB&T CORPORATION
FORM 10-Q
June 30, 2003


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 Condition and Results of Operations 20 
   
          Analysis of Financial Condition 22 
   
          Market Risk Management 30 
   
          Capital Adequacy and Resources 34 
   
          Analysis of Results of Operations 35 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 48 
   
  Item 4. Controls and Procedures 48 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 48 
   
  Item 4. Submission of Matters to a Vote of Security Holders 48 
   
  Item 6. Exhibits and Reports on Form 8-K 49 
   
SIGNATURES 53 
   
CERTIFICATIONS 54 




BB&T Corporation          Page 1          Second Quarter 2003 10-Q




Item 1. Financial Statements

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

June 30, December 31,
2003 2002
Assets            
      Cash and due from banks   $ 2,063,487   $ 1,929,650  
      Interest-bearing deposits with banks     326,835     148,122  
      Federal funds sold and securities purchased under resale agreements or                
          similar arrangements     206,643     294,448  
      Trading securities at fair value     180,711     148,488  
      Securities available for sale at fair value     16,030,474     17,599,477  
      Securities held to maturity at amortized cost (fair value:$55,104 at June 30, 2003  
          and $55,512 at December 31, 2002)     55,099     55,523  
      Loans held for sale     3,024,928     2,377,707  
      Loans and leases, net of unearned income     51,919,269     51,140,306  
          Allowance for loan and lease losses     (719,576 )   (723,685 )
      Loans and leases, net     51,199,693     50,416,621  
      Premises and equipment, net of accumulated depreciation     1,068,808     1,072,101  
      Goodwill     1,714,938     1,723,379  
      Other assets     4,573,190     4,451,300  
                   Total assets   $ 80,444,806   $ 80,216,816  
Liabilities and Shareholders' Equity  
      Deposits:  
          Noninterest-bearing deposits   $ 9,238,605   $ 7,864,338  
          Savings and interest checking     2,946,606     3,071,551  
          Money rate savings     16,608,916     17,188,942  
          Certificates of deposit and other time deposits     23,561,639     23,155,185  
                   Total deposits     52,355,766     51,280,016  
      Short-term borrowed funds     4,627,801     5,396,959  
      Long-term debt     12,831,350     13,587,841  
      Accounts payable and other liabilities     2,926,465     2,564,086  
                   Total liabilities     72,741,382     72,828,902  
      Shareholders' equity:  
          Preferred stock, $5 par, 5,000,000 shares authorized, none issued or  
              outstanding at June 30, 2003 or at December 31, 2002     --     --  
          Common stock, $5 par, 1,000,000,000 shares authorized;                
              472,118,220 issued and outstanding at June 30, 2003, and                
              470,452,260 issued and outstanding at December 31, 2002     2,360,591     2,352,261  
          Additional paid-in capital     815,585     793,123  
          Retained earnings     4,240,597     3,912,320  
          Unvested restricted stock     (398 )   (499 )
          Accumulated other comprehensive income, net of deferred income                
              taxes of $182,245 at June 30, 2003, and $208,008 at December 31, 2002     287,049     330,709  
                   Total shareholders' equity     7,703,424     7,387,914  
                   Total liabilities and shareholders' equity   $ 80,444,806   $ 80,216,816  

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


BB&T Corporation          Page 2          Second Quarter 2003 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,
2003 2002 2003 2002
Interest Income                    
       Interest and fees on loans and leases     $ 841,961   $ 869,051   $ 1,688,632   $ 1,700,496  
       Interest and dividends on securities     201,826     251,595     408,234     499,284  
       Interest on short-term investments     1,744     1,554     3,545     4,047  
           Total interest income     1,045,531     1,122,200     2,100,411     2,203,827  
Interest Expense  
       Interest on deposits     192,505     258,187     400,129     517,789  
       Interest on short-term borrowed funds     15,494     26,464     29,158     52,913  
       Interest on long-term debt     134,112     147,518     275,526     295,828  
           Total interest expense     342,111     432,169     704,813     866,530  
Net Interest Income     703,420     690,031     1,395,598     1,337,297  
       Provision for loan and lease losses     61,500     58,500     124,500     115,000  
Net Interest Income After Provision for Loan and Lease Losses     641,920     631,531     1,271,098     1,222,297  
Noninterest Income  
       Service charges on deposits     96,645     101,874     193,423     192,036  
       Mortgage banking income (loss)     (32,711 )   24,695     27,261     58,082  
       Trust income     26,248     24,197     52,257     47,325  
       Investment banking and brokerage fees and commissions     60,094     56,039     112,003     108,932  
       Insurance commissions     101,500     78,049     190,158     145,417  
       Bankcard fees and merchant discounts     18,828     16,579     35,548     30,816  
       Other nondeposit fees and commissions     41,942     35,521     81,494     65,406  
       Securities gains, net     109,500     19,666     143,734     33,073  
       Other income     39,050     28,244     70,139     61,328  
           Total noninterest income     461,096     384,864     906,017     742,415  
Noninterest Expense  
       Personnel expense     367,497     319,622     720,198     624,515  
       Occupancy and equipment expense     85,625     84,688     173,352     168,139  
       Amortization of intangibles     6,806     6,258     13,560     10,609  
       Professional services     17,566     18,134     33,612     32,558  
       Merger-related and restructuring charges     10,775     1,554     15,504     16,173  
       Other expense     162,651     127,328     298,782     236,725  
           Total noninterest expense     650,920     557,584     1,255,008     1,088,719  
Earnings  
       Income before income taxes and cumulative effect of                            
           change in accounting principle     452,096     458,811     922,107     875,993  
       Provision for income taxes     135,859     130,859     278,122     248,176  
       Income before cumulative effect of change in accounting principle     316,237     327,952     643,985     627,817  
       Cumulative effect of change in accounting principle     --     --     --     9,780  
       Net income     $ 316,237   $ 327,952   $ 643,985   $ 637,597  
Per Common Share  
       Basic Earnings:  
           Income before cumulative effect of change in accounting principle     $ .67   $ .69   $ 1.37   $ 1.33  
           Cumulative effect of change in accounting principle       --     --     --     .02
           Net income     $ .67   $ .69   $ 1.37   $ 1.35  
       Diluted Earnings:  
           Income before cumulative effect of change in accounting principle     $ .67   $ .68   $ 1.36   $ 1.32  
           Cumulative effect of change in accounting principle       --     --     --     .02
           Net income     $ .67   $ .68   $ 1.36   $ 1.34  
       Cash dividends paid     $ .29   $ .26   $ .58   $ .52  
Weighted Average Shares Outstanding  
           Basic     471,713,450     478,121,878     471,124,675     470,554,054  
           Diluted     475,293,564     484,009,961     474,823,495     476,349,694  

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



BB&T Corporation          Page 3          Second Quarter 2003 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2003 and 2002
(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, 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 on securities available for sale, net of tax    --    --    --    --    24,491    24,491  
           Less: reclassification adjustment for losses (gains)                                        
               on securities available for sale included in net                                        
               income, net of taxes of $11,576    --    --    --    --    (21,497 )   (21,497 )
        Change in unrealized gains on securities, net of tax    --    --    --    --    2,994    2,994  
        Change in unrecognized gain (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:  
           Stock issued in purchase acquisitions       24,617,048     123,085     724,808     --     --     847,893  
           Stock options exercised and other benefits       2,221,155     11,106     30,417     --     --     41,523  
        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  
                                         
Balance, December 31, 2002    470,452,260   $ 2,352,261   $ 793,123   $ 3,911,821   $ 330,709   $ 7,387,914  
Add (Deduct)  
     Comprehensive income:  
        Net income    --    --    --    643,985    --    643,985  
           Unrealized holding gains (losses) arising during the  
               period on securities available for sale, net of tax    --    --    --    --    (997 )  (997 )
           Less: reclassification adjustment for losses (gains)                                        
               on securities available for sale included in net                                        
               income, net of taxes of $56,056    --    --    --    --    (87,678 )  (87,678 )
        Change in unrealized gains on securities, net of tax    --    --    --    --    (88,675 )   (88,675 )
        Change in unrecognized gain (loss) on cash flow hedge,                                        
           net of tax of $29,374    --    --    --    --    45,015     45,015  
     Total comprehensive income    --    --    --    643,985    (43,660 )   600,325  
        Common stock issued:  
           Stock issued in purchase acquisitions    2,117,334    10,587    60,097    --    --    70,684  
           Stock options exercised and other benefits    1,140,426    5,702    12,149    --    --    17,851  
        Redemption of common stock    (1,591,800 )  (7,959 )  (57,504 )  --    --    (65,463 )
        Cash dividends declared on common stock    --    --    --    (315,708 )  --    (315,708 )
        Other, net    --    --    7,720    101    --    7,821  
Balance, June 30, 2003    472,118,220   $ 2,360,591   $ 815,585   $ 4,240,199   $ 287,049   $ 7,703,424  

* Other includes unvested restricted stock.

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


BB&T Corporation          Page 4          Second Quarter 2003 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(Dollars in thousands)

For the Six Months Ended
June 30,
2003 2002
Cash Flows From Operating Activities:                
    Net income     $ 643,985   $ 637,597  
    Adjustments to reconcile net income to net cash provided by operating activities:                
          Provision for loan and lease losses       124,500     115,000  
          Depreciation of premises and equipment     71,578    68,033  
          Amortization of intangibles     13,560    10,609  
          Adjustment / accretion of negative goodwill     --    (9,780 )
          Amortization of unearned stock compensation     101    1,777  
          Discount accretion and premium amortization on securities, net     14,299    (1,153 )
          Net decrease (increase) in trading account securities     (32,223 )  (34,630 )
          Loss (gain) on sales of securities, net     (143,734 )  (33,073 )
          Loss (gain) on sales of loans held for sale     (142,825 )  (46,523 )
          Loss (gain) on disposals of premises and equipment, net     (350 )  (6,853 )
          Proceeds from sales of loans held for sale     8,646,408    4,446,990  
          Purchases of loans held for sale     (1,580,365 )  (832,266 )
          Origination of loans held for sale, net of principal collected     (7,570,439 )  (2,623,449 )
          Tax benefit from exercise of stock options     7,720    10,225  
          Decrease (increase) in:             
             Accrued interest receivable     52,507    220  
             Other assets     60,392    (285,269 )
          Increase (decrease) in:             
             Accrued interest payable     (21,650 )  (11,243 )
             Accounts payable and other liabilities     376,315    499,700  
          Other, net       4,661     36  
                 Net cash provided by (used in) operating activities       524,440     1,905,948  
Cash Flows From Investing Activities:                
    Proceeds from sales of securities available for sale     8,340,562    913,004  
    Proceeds from maturities, calls and paydowns of securities available for sale     3,891,881    1,485,569  
    Purchases of securities available for sale     (10,555,519 )  (3,233,986 )
    Proceeds from maturities, calls and paydowns of securities held to maturity     4,447    10  
    Purchases of securities held to maturity     (4,023 )  (6,880 )
    Leases made to customers     (54,282 )  (103,573 )
    Principal collected on leases     68,539    71,962  
    Loan originations, net of principal collected     (548,694 )  (935,344 )
    Purchases of loans     (74,935 )  (139,787 )
    Net cash acquired in business combinations accounted for under the purchase method     3,782    611,545  
    Originations of mortgage servicing rights     (139,347 )  (98,856 )
    Proceeds from disposals of premises and equipment     25,422    20,769  
    Purchases of premises and equipment     (97,148 )  (69,716 )
    Proceeds from sales of foreclosed property     27,290    22,316  
    Proceeds from sales of other real estate held for development or sale     11,348    4,964  
          Net cash provided by (used in) investing activities       899,323     (1,458,003 )
                           
Cash Flows From Financing Activities:             
    Net increase (decrease) in deposits     775,445    2,972,690  
    Net increase (decrease) in short-term borrowed funds     (886,189 )  (2,424,045 )
    Proceeds from issuance of long-term debt     3,200,700    43,697  
    Repayment of long-term debt     (3,967,591 )  (798,355 )
    Net proceeds from common stock issued     17,851    41,523  
    Redemption of common stock     (65,463 )  (265,270 )
    Cash dividends paid on common stock       (273,771 )   (244,372 )
          Net cash provided by (used in) financing activities       (1,199,018 )   (674,132 )
Net Increase (Decrease) in Cash and Cash Equivalents       224,745     (226,187 )
Cash and Cash Equivalents at Beginning of Period       2,372,220     2,232,226  
Cash and Cash Equivalents at End of Period     $ 2,596,965   $ 2,006,039  
              
              
Supplemental Disclosure of Cash Flow Information:             
                 
    Cash paid during the period for:                
       Interest   $ 726,463   $ 872,713  
       Income taxes     66,723    98,642  
    Noncash financing and investing activities:             
       Transfer of loans to foreclosed property     38,963    28,136  
       Transfer of fixed assets to other real estate owned     5,035    10,847  
       Transfer of other real estate owned to fixed assets     33    --  
       Common stock issued in purchase accounting transactions     70,684    847,893  

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


Back to Index

BB&T Corporation          Page 5          Second Quarter 2003 10-Q




BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003

(Unaudited)

A. Basis of Presentation

          In the opinion of management, the accompanying unaudited consolidated financial statements 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, 2003 and December 31, 2002; the consolidated statements of income for the three and six months ended June 30, 2003 and 2002; the consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2003 and 2002; and the consolidated statements of cash flows for the six months ended June 30, 2003 and 2002. In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature.

          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 2002 Annual Report on Form 10-K should be referred to in connection with these unaudited interim consolidated financial statements. In certain instances, amounts reported in the 2002 financial statements were reclassified to conform to the 2003 financial statement presentation. Any such reclassifications have had no material effect on the Company’s reported consolidated financial position or consolidated results of operations.

          The consolidated financial statements of BB&T include the accounts of BB&T Corporation and those subsidiaries that are majority-owned by BB&T and over which BB&T exercises control. In consolidation, all significant intercompany accounts and transactions have been eliminated. The results of operations of companies acquired in transactions accounted for as purchases are included only from the dates of acquisition. All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with BB&T. At June 30, 2003, there were no significant majority-owned subsidiaries that were not consolidated.

Use of Estimates in the Preparation of Financial Statements

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

BB&T Corporation          Page 6          Second Quarter 2003 10-Q




B. Nature of Operations

          BB&T is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations primarily through its commercial banking subsidiaries, which have branches in North Carolina, South Carolina, Virginia, Maryland, West Virginia, Kentucky, Tennessee, Georgia, Florida, 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. 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. BB&T’s commercial banking units or their subsidiaries offer lease financing to businesses and municipal governments; discount brokerage services and sales of annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis; insurance premium financing; arranging permanent financing for commercial real estate and providing loan servicing for third-party investors; direct consumer finance loans to individuals; and asset management. 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.

C. New Accounting Pronouncements

          In May 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 adopted the provisions of this Statement effective January 1, 2003. This implementation did not initially have a material impact on either BB&T’s consolidated financial position or consolidated results of operations, and management does not expect any such impact in the future.

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

BB&T Corporation          Page 7          Second Quarter 2003 10-Q




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

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

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

BB&T Corporation          Page 8          Second Quarter 2003 10-Q




          In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a company’s consolidated financial statements. The Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity’s activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities in quarters beginning after June 15, 2003. Management is currently evaluating BB&T’s involvement with such entities or transactions, particularly with limited liability partnerships in low-income housing developments, certain equity investments, subordinated debt, trust preferred securities structures and trust relationships. Depending on the ultimate applicability of the Interpretation on these entities or transactions, the most significant effect of the Interpretation is expected to be on BB&T’s balance sheet, as the potential consolidation of additional entities would increase BB&T’s consolidated assets and liabilities and affect BB&T’s capital ratios. Consolidation of these vehicles would not have a significant impact on BB&T’s results of operations. Any consolidation of previously unconsolidated entities as a result of FIN 46 would represent an accounting change; however, it would not affect BB&T’s legal rights or obligations with respect to these entities. Interpretive guidance relating to FIN 46 is continuing to evolve and BB&T’s management will continue to assess various aspects of consolidations and variable interest entity accounting as additional guidance becomes available.

          In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. In addition, the provisions of the statement, with certain exceptions, are required to be applied prospectively. The initial implementation of the statement did not have a material affect on BB&T’s consolidated financial position or consolidated results of operations.

BB&T Corporation          Page 9          Second Quarter 2003 10-Q




          In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at July 1, 2003. The implementation of the statement did not have a material affect on BB&T’s consolidated financial position or consolidated results of operations.

D. Mergers and Acquisitions

          The following table presents summary information with respect to significant mergers and acquisitions of financial institutions and other significant financial services companies completed by BB&T Corporation during 2002 and through the end of the second quarter of 2003:

Summary of Completed Mergers and Acquisitions

BB&T Common
Total Shares Issued
Date of Total Intangibles Purchase to Complete
Acquisition Acquired Company Headquarters Assets Recorded Price Transaction
             
March 14, 2003     Equitable Bank     Wheaton, Md.     $ 446.9 million   $ 32.4 million   $ 53.8 million     1.5 million  
                                         
                                         
September 13, 2002     Regional Financial Corp.     Tallahassee, Fla.     $ 1.5 billion   $ 237.6 million   $ 294.3 million     7.3 million  
March 20, 2002     Area Bancshares Corporation     Owensboro, Ky.       2.6 billion     244.7 million     446.2 million     13.2 million  
March 8, 2002     MidAmerica Bancorp     Louisville, Ky.       1.8 billion     216.0 million     378.5 million (1)     8.2 million  
January 1, 2002     Cooney, Rikard & Curtin, Inc.     Birmingham, Al.       110.5 million     102.5 million     85.8 million     2.5 million  

(1) Includes cash totaling $94.9 million.


          The intangibles in the above table include $2.3 million and $89.5 million of core deposit and other identifiable intangibles for the 2003 and 2002 acquisitions, respectively, which are being amortized on an accelerated basis over seven years.

Insurance and Other Non-Bank Acquisitions

          In addition to the transactions summarized in the table above, during the six months ended June 30, 2003, BB&T acquired two insurance agencies that were accounted for as purchases. In conjunction with these transactions, BB&T issued approximately 577.1 thousand shares of common stock, recording approximately $24.0 million in goodwill and intangible assets with an average life of ten years. The total purchase price of these insurance agencies was approximately $18.8 million. BB&T acquired eight insurance agencies during 2002, which were accounted for as purchases. In conjunction with these transactions, BB&T issued approximately 1.7 million shares of common stock and paid $1.9 million in cash, recording $43.7 million in goodwill and $30.4 million of other intangible assets with an average life of 10 years.

BB&T Corporation          Page 10          Second Quarter 2003 10-Q




          On April 1, 2003, BB&T acquired Southeastern Fidelity Corporation (“SEFCO”) of Tallahassee, Florida. SEFCO provides insurance premium financing for consumers and businesses in Florida, Georgia, North Carolina and Virginia.

          The acquisitions described above do not exceed the disclosure thresholds prescribed by the pro forma disclosure requirements of SFAS No. 141. BB&T typically provides an allocation period to identify and quantify the fair value of the assets acquired and liabilities assumed in business combinations accounted for as purchases.

          On July 1, 2003, BB&T consummated its merger with First Virginia Banks Inc. (“First Virginia”), a bank holding company headquartered in Falls Church, Virginia. First Virginia was the parent company of eight community banks and operated more than 360 branches in Virginia, Maryland and northeast Tennessee. BB&T issued 87.0 million common shares to consummate the transaction. The aggregate purchase price was $3.1 billion. The value of the common shares issued was determined based on the average market price of BB&T’s common stock over the five-day period beginning two days before and ending two days after the terms of the acquisition were agreed to and announced.

          On July 1, 2003, BB&T acquired Jackson, Miss.-based Southern Cross Underwriters ("SCU") and Kingsport Development Company Insurance Inc., Moore & Walker, Inc. and STHARCO, Inc. of Kingsport, Tenn., collectively referred to as "KDC". SCU's specialty lines include commercial transportation, property and casualty liability, marine liability and liability coverage for directors and officers. KDC is a full-service independent insurance agency specializing in coverage for hotels, restaurants and municipalities.

          On August 1, 2003, BB&T Insurance Services announced plans to acquire Cooper, Love & Jackson of Nashville, Tennessee. Cooper, Love & Jackson specializes in the insurance of commercial risk, employee benefits and personal lines in the economically attractive metropolitan Nashville area.

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          Page 11          Second Quarter 2003 10-Q




BB&T CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE

For the Periods as Indicated

For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
(Dollars in thousands, except per share data)
Basic Earnings Per Share:                    
    Weighted average number of common shares     471,713,450     478,121,878     471,124,675     470,554,054  
         Income before cumulative effect of change in accounting principle   $ 316,237   $ 327,952   $ 643,985   $ 627,817  
         Cumulative effect of change in accounting principle     --     --     --     9,780  
         Net income   $ 316,237   $ 327,952   $ 643,985   $ 637,597  
    Basic earnings per share  
         Income before cumulative effect of change in accounting principle   $ .67   $ .69   $ 1.37   $ 1.33  
         Cumulative effect of change in accounting principle     --     --     --     .02  
         Net income   $ .67   $ .69   $ 1.37   $ 1.35  
Diluted Earnings Per Share:  
    Weighted average number of common shares     471,713,450     478,121,878     471,124,675     470,554,054  
    Add:  
         Dilutive effect of outstanding options (as determined by application of                            
             treasury stock method)     3,580,114     5,888,083     3,698,820     5,795,640  
    Weighted average number of common shares, as adjusted     475,293,564     484,009,961     474,823,495     476,349,694  
         Income before cumulative effect of change in accounting principle   $ 316,237   $ 327,952   $ 643,985   $ 627,817  
         Cumulative effect of change in accounting principle     --     --     --     9,780  
         Net income   $ 316,237   $ 327,952   $ 643,985   $ 637,597  
    Diluted earnings per share  
         Income before cumulative effect of change in accounting principle   $ .67   $ .68   $ 1.36   $ 1.32  
         Cumulative effect of change in accounting principle     --     --     --     .02  
         Net income   $ .67   $ .68   $ 1.36   $ 1.34  


F. Segment Disclosures

          BB&T’s operations are divided into seven reportable business segments: the Banking Network, Mortgage Banking, Trust Services, Insurance Services, Specialized Lending, 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 measure segment performance in relation to 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 12          Second Quarter 2003 10-Q




          Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2002, for a description of internal accounting policies and the basis of segmentation, including a description of the segments (other than the Specialized Lending segment described below) presented in the accompanying tables.

          During the first quarter of 2003, management began disclosing Specialized Lending as a separate segment. BB&T’s Specialized Lending segment consists of seven wholly-owned subsidiaries that provide specialty finance alternatives to consumers and businesses including: commercial factoring services, dealer-based financing of small ticket equipment for both small businesses and consumers, commercial fleet vehicle and equipment leasing, direct consumer finance, insurance premium finance, nonconforming mortgage lending, indirect sub-prime automobile finance, and full service commercial mortgage banking. Bank clients as well as non-bank clients within and outside BB&T’s primary geographic market area are served by these companies. The Banking Network receives credit for referrals to these companies with the corresponding charge retained in the Corporate Office. These revenues and expenses are reflected in the accompanying tables as intersegment noninterest income and expense.

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








BB&T Corporation          Page 13          Second Quarter 2003 10-Q




Reportable Segments
For the Three Months Ended June 30, 2003 and 2002

Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
(Dollars in thousands)
 
Net interest income (expense)     $ 414,836   $ 388,107   $ 158,843   $ 152,971   $ (3,943 ) $ (5,068 ) $ 283   $ 278   $ 56,104   $ 45,292  
   Net intersegment interest income (expense)    163,449    155,759    (66,358 )  (87,557 )  11,300    11,753    --    --    --    --  
                                                        
Net interest income    578,285    543,866    92,485    65,414    7,357    6,685    283    278    56,104    45,292  
                                                     
Provision for loan and lease losses    54,568    52,987    1,897    712    --    --    --    --    22,217    13,559  
Noninterest income    235,805    152,631    (29,194 )  21,639    28,733    27,242    95,612    71,528    12,602    14,527  
   Intersegment noninterest income    131,014    68,749    --    --    --    --    --    --    --    --  
Noninterest expense    279,954    285,231    14,757    9,553    21,856    20,147    67,035    49,368    28,365    26,274  
   Intersegment noninterest expense    123,798    140,368    2,920    7,397    2,078    2,314    3,724    3,200    2,246     3,411  
                                                         
Income before income taxes    486,784    286,660    43,717    69,391    12,156    11,466    25,136    19,238    15,878    16,575  
                                                     
   Income tax provision (benefit)    136,118    82,770    14,089    19,844    3,754    3,758    9,562    7,582    4,715    5,668  
                                                     
Net income (loss)   $ 350,666   $ 203,890   $ 29,628   $ 49,547   $ 8,402   $ 7,708   $ 15,574   $ 11,656   $ 11,163   $ 10,907  
                                                     
Identifiable segment assets   $ 48,767,421   $ 41,002,922   $ 11,068,743   $ 8,742,769   $ 87,539   $ 76,287   $ 686,404   $ 592,677   $ 1,926,210   $ 1,582,516  


Investment Banking
and Brokerage Treasury All Other Segments (1) Total Segments  
  2003 2002 2003 2002 2003 2002 2003 2002    
Net interest income (expense)     $ 1,643   $ 1,834   $ 37,004   $ 53,687   $ 40,845   $ 44,989   $ 705,615   $ 682,090              
   Net intersegment interest income (expense)    --    --    4,878    8,204    --    --    113,269    88,159          
                                                      
Net interest income    1,643    1,834    41,882    61,891    40,845    44,989    818,884     770,249  
                                                   
Provision for loan and lease losses    --    --    38    36    9,813    7,773    88,533     75,067  
Noninterest income    60,486    57,248    127,447    37,812    81,988    30,298    613,479    412,925          
   Intersegment noninterest income    --    --    --    --    --    --    131,014     68,749  
Noninterest expense    51,394    50,144    3,846    3,762    40,183    7,998    507,390    452,477          
   Intersegment noninterest expense    3,384    3,691    249    424    3,433    2,870    141,832     163,675  
                                                          
Income before income taxes    7,351    5,247    165,196    95,481    69,404    56,646    825,622     560,704  
                                                   
   Income tax provision (benefit)    2,731    2,016    44,869    26,422    21,847    13,399    237,685     161,459  
                                                      
Net income (loss)   $ 4,620   $ 3,231   $ 120,327   $ 69,059   $ 47,557   $ 43,247   $ 587,937   $ 399,245  
                                                   
Identifiable segment assets   $ 1,021,428   $ 777,583   $ 21,517,943   $ 21,310,220   $ 5,864,294   $ 6,157,946   $ 90,939,982   $ 80,242,920  


(1) Includes financial data from subsidiaries below the qualitative and quantitative thresholds requiring disclosure.

BB&T Corporation          Page 14          Second Quarter 2003 10-Q




BB&T Corporation
Reportable Segments

For the Six Months Ended June 30, 2003 and 2002

Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
(Dollars in thousands)
                   
Net interest income (expense)     $ 812,123   $ 733,231   $ 326,950   $ 308,248   $ (7,810 ) $ (10,049 ) $ 739   $ 641   $ 106,760   $ 87,218  
   Net intersegment interest income (expense)    337,308    304,427    (134,028 )  (187,337 )  23,168    22,949    --    --    --    --  
                                                        
Net interest income    1,149,431    1,037,658    192,922    120,911    15,358    12,900    739    641    106,760    87,218  
                                                     
Provision for loan and lease losses    108,550    103,282    2,818    1,488    --    --    --    --    41,611    29,809  
Noninterest income    454,899    281,916    29,083    53,076    56,077    52,340    178,104    132,886    24,237    26,664  
   Intersegment noninterest income    238,319    136,863    --    --    --    --    --    --    --    --  
Noninterest expense    560,629    522,756    28,040    20,197    44,516    38,899    135,244    100,859    55,097    51,220  
   Intersegment noninterest expense    244,424    276,909    5,867    14,831    4,031    4,426    7,456    6,408    4,488     6,376  
                                                        
Income before income taxes    929,046    553,490    185,280    137,471    22,888    21,915    36,143    26,260    29,801    26,477  
                                                     
   Income tax provision (benefit)    258,293    158,618    57,809    39,152    7,040    6,594    14,322    10,441    9,673    9,326  
                                                        
Net income (loss)   $ 670,753   $ 394,872   $ 127,471   $ 98,319   $ 15,848   $ 15,321   $ 21,821   $ 15,819   $ 20,128   $ 17,151  
                                                     
Identifiable segment assets   $ 48,767,421   $ 41,002,922   $ 11,068,743   $ 8,742,769   $ 87,539   $ 76,287   $ 686,404   $ 592,677   $ 1,926,210   $ 1,582,516  

  Investment Banking                
  and Brokerage Treasury All Other Segments (1) Total Segments    
  2003 2002 2003 2002 2003 2002 2003 2002    
Net interest income (expense)     $ 3,024   $ 3,722   $ 82,541   $ 106,364   $ 79,742   $ 88,066   $ 1,404,069   $ 1,317,441              
   Net intersegment interest income (expense)    --    --    7,243    14,607    --    --    233,691    154,646            
                                                        
Net interest income    3,024    3,722    89,784    120,971    79,742    88,066    1,637,760    1,472,087  
                                                     
Provision for loan and lease losses    --    --    77    71    18,113    13,919    171,169    148,569  
Noninterest income    114,547    111,225    179,484    64,894    103,056    60,541    1,139,487    783,542            
   Intersegment noninterest income    --    --    --    --    --    --    238,319    136,863  
Noninterest expense    98,862    97,589    7,735    7,244    49,731    15,530    979,854    854,294            
   Intersegment noninterest expense    6,766    7,386    495    847    6,857    5,738    280,384     322,921  
                                                           
Income before income taxes    11,943    9,972    260,961    177,703    108,097    113,420     1,584,159     1,066,708  
                                                     
   Income tax provision (benefit)    4,556    3,808    68,362    48,816    32,952    25,330    453,007     302,085  
                                                        
Net income (loss)   $ 7,387   $ 6,164   $ 192,599   $ 128,887   $ 75,145   $ 88,090   $ 1,131,152   $ 764,623  
                                                     
Identifiable segment assets   $ 1,021,428   $ 777,583   $ 21,517,943   $ 21,310,220   $ 5,864,294   $ 6,157,946   $ 90,939,982   $ 80,242,920  


(1)    Includes financial data from subsidiaries below the qualitative and quantitative thresholds requiring disclosure.

BB&T Corporation          Page 15          Second Quarter 2003 10-Q




 

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


For the Six Months Ended For the Three Months Ended
June 30, June 30,
2003 2002 2003 2002
Net Interest Income                    
      Net interest income from segments     $ 1,637,760   $ 1,472,087   $ 818,884   $ 770,249  
      Other net interest income (expense) (1)    178,760    (243,293 )  95,148    (123,724 )
      Elimination of net intersegment interest income (2)    (420,922 )  108,503    (210,612 )  43,506  
          Consolidated net interest income   $ 1,395,598   $ 1,337,297   $ 703,420   $ 690,031  
                                 
Net income                      
      Net income from segments   $ 1,131,152   $ 764,623   $ 587,937   $ 399,245  
      Other net income (loss) (1)    172,874    297,706    101,574    157,595  
      Elimination of intersegment net income (2)    (660,041 )  (424,732 )  (373,274 )  (228,888 )
          Consolidated net income   $ 643,985   $ 637,597   $ 316,237   $ 327,952  
                                 
                                  
                    June 30,     June 30,  
                    2003     2002  
Total Assets                      
      Total assets from segments                 $ 90,939,982   $ 80,242,920  
      Other assets (1)              14,605,272    18,949,037  
      Elimination of intersegment assets (2)                   (25,100,448 )   (22,858,516 )
          Consolidated total assets             $ 80,444,806   $ 76,333,441  


(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.


G. Stock-Based Compensation

          BB&T maintains various stock-based compensation plans. These plans provide for the granting of stock options (incentive and nonqualified), stock appreciation rights, restricted stock, performance units and performance shares to selected BB&T employees and directors. All of BB&T’s stock-based compensation plans have been presented to and approved by BB&T’s shareholders. BB&T accounts for its stock option plans based on the intrinsic value method set forth in APB Opinion No. 25 and related Interpretations, under which no compensation cost has been recognized for any of the periods presented, except with respect to restricted stock plans as disclosed in the accompanying table. The following table presents BB&T’s net income, basic earnings per share and diluted earnings per share as reported, and pro forma net income and pro forma earnings per share assuming compensation cost for BB&T’s stock option plans had been determined based on the fair value at the grant dates for awards under those plans granted after December 31, 1994, consistent with the method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation.”


BB&T Corporation          Page 16          Second Quarter 2003 10-Q




For the Three Months Ended For the Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Dollars in thousands, except per share data)
Net income:                    
     Net income as reported   $ 316,237   $ 327,952   $ 643,985   $ 637,597  
        Add: Stock-based compensation expense                      
            included in reported net income, net of tax    154    485    308    1,011  
        Deduct: Total stock-based employee                      
            compensation expense determined under                      
            fair value based method for all awards,                      
            net of tax    (6,281 )  (7,335 )  (15,945 )  (16,820 )
     Pro forma net income   $ 310,110   $ 321,102   $ 628,348   $ 621,788  
                                                                                
                                                                                
Basic EPS:                      
     As reported   $ 0.67   $ 0.69   $ 1.37   $ 1.35  
     Pro forma    0.66    0.67    1.33    1.32  
                                                                                
Diluted EPS:                      
     As reported    0.67    0.68    1.36    1.34  
     Pro forma    0.65    0.66    1.32    1.31  

          The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in 2003 and 2002, respectively: dividend yield of 3.0% in 2003 and 2002; expected volatility of 27% in 2003 and 2002; risk free interest rates of 3.0% and 3.1% for the second quarter and first six months of 2003, respectively; risk free interest rates of 4.8% and 4.7% for the second quarter and first six months of 2002, respectively; and expected lives of 6.0 years for options granted in both 2003 and 2002.

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

BB&T Corporation          Page 17          Second Quarter 2003 10-Q




H. Off-Balance Sheet Arrangements and Guarantees

          BB&T’s off-balance sheet arrangements include certain investments in low-income housing and historic building rehabilitation projects throughout its market area. BB&T enters into such arrangements as a means of supporting local communities, and recognizes tax credits related to these investments. At June 30, 2003, and December 31, 2002, BB&T’s investments in such projects totaled $15.3 million and $14.2 million, respectively. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. BB&T’s subsidiary banks may provide financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project. BB&T’s outstanding commitments to fund low income housing investments totaled $227.5 million and $184.7 million at June 30, 2003 and 2002, respectively.

Guarantees

          Standby letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions. The credit risk involved in issuing these guarantees is essentially the same as that involved in extending loans to clients and as such, is collateralized when necessary. As of June 30, 2003, BB&T had issued $1.3 billion in such guarantees predominately for terms of one year or less. Of these commitments, $518.5 million have been issued or renewed since December 31, 2002, and, in accordance with FIN 45, BB&T recorded an immaterial liability on its balance sheet relating to these commitments.

          In the ordinary course of business, BB&T enters into indemnification agreements with respect to legal proceedings against its directors and officers and those of acquired entities. BB&T also issues standard representations and warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnifications provide similar indemnifications or representations and warranties to BB&T. Although these agreements often do not specify limitations, BB&T has not been required to act on the guarantees and it is not considered likely that any payments pursuant to them would materially change BB&T’s results of operations.

          Agreements related to BB&T’s acquisitions of businesses other than financial institutions may include additional incentives to the acquired entities to offset the loss of future cash flows previously received through ownership positions. Typically, these incentives are based on the acquired entity’s contribution to BB&T’s earnings compared to agreed-upon amounts. When offered, these incentives are issued for terms of three to eight years. In the aggregate, the maximum potential contingent consideration included in these agreements is $15.9 million over the next five years.

BB&T Corporation          Page 18          Second Quarter 2003 10-Q




I. Goodwill and Other Intangibles

          The changes in the carrying amount of goodwill attributable to each of BB&T’s operating segments for the six months ended June 30, 2003, and the year ended December 31, 2002, are as follows:

Goodwill Activity by Operating Segment
(Dollars in thousands)

Investment
Banking Mortgage Trust Insurance Banking and Specialized All Other  
Network Banking Services Services Brokerage Lending Segments Total
Balance, January 1, 2002     $ 645,434   $ 1,021   $ 13,105   $ 121,723   $ 70,594   $ 27,974   $ 52   $ 879,903  
       Acquired goodwill, net    713,938    6,438    14,225    106,000    311    --    2,564    843,476  
Balance, December 31, 2002    1,359,372    7,459    27,330    227,723    70,905    27,974    2,616    1,723,379  
       Acquired goodwill, net    10,230    --    --    14,745    --    1,619    --    26,594  
       Adjustments to goodwill    (34,385 )  --    --    --    (650 )  --    --    (35,035 )
Balance, June 30, 2003   $ 1,335,217   $ 7,459   $ 27,330   $ 242,468   $ 70,255   $ 29,593   $ 2,616   $ 1,714,938  

          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, 2003 As of December 31, 2002
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortizing intangible assets                    
      Core deposit intangibles   $ 102,151   $ (49,961 ) $ 99,893   $ (41,601 )
      Other (1)    115,374    (15,510 )  100,853    (10,321 )
         Totals   $ 217,525   $ (65,471 ) $ 200,746   $ (51,922 )

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


          During the six months ended June 30, 2003 and 2002, BB&T recorded $13.6 million and $10.6 million, respectively, in pretax amortization expenses associated with identifiable intangible assets.

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BB&T Corporation          Page 19          Second Quarter 2003 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:
2003     $ 27,139  
2004       24,591  
2005    22,359  
2006    20,506  
2007    16,909  

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

BB&T Corporation          Page 20          Second Quarter 2003 10-Q




Critical Accounting Policies

          The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. BB&T’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in BB&T’s consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include BB&T’s accounting for the allowance for loan and lease losses, valuation of mortgage servicing rights, intangible assets associated with mergers and acquisitions, and income taxes. Understanding BB&T’s accounting policies is fundamental to understanding BB&T’s consolidated financial position and consolidated results of operations. BB&T’s significant accounting policies are discussed in detail in BB&T’s 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

          The allowance for loan and lease losses is established and maintained at levels management deems adequate to cover probable losses inherent in the portfolio as of the balance sheet date, and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates of 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, and changes in the size, composition and risk assessment of the loan portfolio. Also included in management’s estimates of loan losses are considerations with respect to economic uncertainties. These events may include, but are not limited to, fluctuations in interest rates, political conditions, legislation that adversely affects lenders and economic conditions affecting specific geographical areas and industries in which BB&T conducts business.

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


BB&T Corporation          Page 21          Second Quarter 2003 10-Q




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

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

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ANALYSIS OF FINANCIAL CONDITION

          BB&T's total assets at June 30, 2003, were $80.4 billion, an increase of $228.0 million, or .3%, from December 31, 2002. The asset categories that produced the largest increases were loans and leases, including loans held for sale, and cash and interest bearing deposits with banks, which grew $1.4 billion and $312.6 million, or 2.7% and 15.0%, respectively. These increases were largely offset by declines of $1.6 billion in securities available for sale compared to December 31, 2002.

          Total deposits at June 30, 2003, increased $1.1 billion, or 2.1%, from December 31, 2002. Short-term borrowed funds declined $769.2 million, or 14.3%, and long-term debt decreased $756.5 million, or 5.6%, during the first six months of 2003. Total shareholders’ equity increased $315.5 million, or 4.3%, during the same time frame.

 

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


BB&T Corporation          Page 22          Second Quarter 2003 10-Q




          During the third quarter of 2003, management announced plans to restructure the balance sheet in order to enhance future earnings, reduce interest rate risk and exposure to market volatility, improve the net interest margin, and re-align the securities portfolio. The restructuring includes transactions that affect mortgage loans, securities, long-term debt and the common stock repurchase program. These transactions are discussed more fully in the sections that follow.

Loans and Leases

          Management emphasizes commercial lending to small and medium-sized businesses, consumer lending and mortgage lending with an overall goal of maximizing the profitability of the loan portfolio while maintaining strong asset quality. For the first six months of 2003, average total loans were $54.0 billion, an increase of $5.0 billion, or 10.2%, compared to the same period in 2002. During the first six months of 2003, average commercial loans and leases totaled $29.2 billion, an increase of $1.9 billion, or 6.8%, compared to the same period in 2002 and composed 54.1% of the loan and lease portfolio compared to 55.7% for the first six months of 2002. Average mortgage loans totaled $10.9 billion and composed 20.2% of the loan and lease portfolio compared to 18.3% for the first six months of 2002. Average consumer loans, which include sales finance, revolving credit and direct retail, totaled $13.9 billion, an increase of $1.2 billion, or 9.3%, compared to the same period in 2002. Consumer loans composed the remaining 25.7% of the loan and lease portfolio compared to 26.0% for the first six months of 2002. Aided by the very low interest rate environment and resulting high volumes of mortgage loan originations and refinance activity, BB&T originated a record $11.2 billion of mortgage loans during the first six months of 2003 compared to $5.1 billion during the same period of 2002. Consequently, mortgage loans comprised a slightly higher percentage of BB&T’s total loan portfolio compared to 2002 while commercial loans and leases decreased slightly due to lower commercial loan demand.

          For the second quarter of 2003, average total loans were $54.4 billion, an increase of $4.1 billion, or 8.2%, compared to the same period in 2002. Average commercial loans and leases for the second quarter of 2003 totaled $29.3 billion, an increase of $1.1 billion, or 3.7% compared to the same period in 2002 and composed 53.9% of the loan and lease portfolio compared to 56.3% for the second quarter of 2002. Average mortgage loans totaled $11.0 billion and composed 20.3% of the loan and lease portfolio compared to 17.5% for the second quarter of 2002. Average consumer loans totaled $14.0 billion, an increase of $838.6 million, or 6.4%, compared to the same period in 2002 and composed the remaining 25.8% of the loan and lease portfolio compared to 26.2% for the second quarter of 2002.

          The growth rates of the average loans described above were affected by loan portfolios held by companies that were acquired in purchase transactions during the last six months of 2002 and the first six months of 2003. On September 13, 2002, loans totaling $1.2 billion were acquired through the purchase of Regional Financial Corp. (“Regional”). On March 14, 2003, loans totaling $320.5 million were acquired through the purchase of Equitable Bank (“Equitable”). Excluding the effect of purchase accounting transactions completed during 2002 and 2003, the average “internal” loan growth for the three months ended June 30, 2003, was 4.9% compared to the second quarter of 2002. By category, excluding the effects of purchase accounting transactions, average mortgage loans, including loans held for sale, increased 10.0%, average commercial loans and leases grew 2.6%, and average consumer loans increased 6.2% in the second quarter of 2003 compared to the same period of 2002. These rates are lower than BB&T’s historical internal rates for loan growth reflecting the effects of the prolonged economic slowdown.


BB&T Corporation          Page 23          Second Quarter 2003 10-Q




          The annualized fully taxable equivalent ("FTE") yields on commercial, consumer and mortgage loans for the first six months of 2003 were 5.68%, 7.92%, and 6.26%, respectively, resulting in an annualized yield on the total loan portfolio of 6.37%. The FTE yields on commercial, consumer and mortgage loans for the first six months of 2002 were 6.26%, 8.71%, and 7.29%, respectively, resulting in an annualized yield on the total loan portfolio of 7.08%. This reflects a decrease of 71 basis points in the annualized yield on the total loan portfolio during the first six months of 2003 in comparison to 2002. The decrease in yield resulted from a lower average prime rate during the first six months of 2003 compared to the same period in 2002, as well as the overall lower interest rate environment. At the beginning of 2002, after a series of interest rate reductions by the Federal Reserve during 2001, the federal funds rate was 1.75%. During the fourth quarter of 2002 and immediately preceding the end of the second quarter of 2003, the Federal Reserve further reduced the targeted federal funds rate to 1.25% and 1.00%, respectively. As a result of the Federal Reserve Board’s actions, the prime rate, which is the basis for pricing many commercial and consumer loans, averaged 4.25% during both the second quarter and first six months of 2003 compared to 4.75% during the comparable periods of 2002. The slower internal growth in the overall loan portfolio, combined with the decrease in the yield of the loan portfolio from 7.03% in the second quarter and 7.08% in the first six months of 2002 to 6.29% in the second quarter and 6.37% in the first six months of 2003, resulted in a decrease of 3.2% in interest income from loans and leases in the current quarter and a decrease of .8% in interest income from loans and leases during the first six months of 2003 compared to the 2002 periods.

          As part of the balance sheet restructuring discussed above, management intends to retain, rather than sell, up to $2.0 billion of mortgage loans from originations during the remainder of 2003. BB&T plans to retain these mortgage loans, in addition to the mortgage loans BB&T normally holds in the portfolio, in an effort to improve net interest income.

Securities

          Securities available for sale totaled $16.0 billion at June 30, 2003, a decrease of $1.6 billion, or 8.9%, compared with December 31, 2002. Securities available for sale had net unrealized gains, net of deferred income taxes, of $240.5 million at June 30, 2003, compared to net unrealized gains, net of deferred income taxes, of $329.1 million at December 31, 2002. Securities held to maturity totaled $55.1 million, a decrease of $424 thousand, or .8%, from year-end 2002. Trading securities totaled $180.7 million, an increase of $32.2 million, or 21.7%, compared to the balance at December 31, 2002.

          Average total securities for the first six months amounted to $16.9 billion, down .6% from the average during the first six months of 2002. For the second quarter of 2003, average securities totaled $17.4 billion, or .9% lower than the average balance for the second quarter of 2002.


BB&T Corporation          Page 24          Second Quarter 2003 10-Q




          The annualized FTE yield on the average total securities portfolio for the first six months of 2003 was 5.24%, a decrease of 121 basis points from the annualized yield earned in the first six months of 2002. This decrease in yield resulted principally from the prolonged low interest rate environment and purchases of lower-yielding securities. As BB&T’s higher yielding securities matured or were sold to realize gains to offset impairment writedowns on mortgage servicing rights, the resulting cash flows were reinvested in securities paying lower interest rates.

          The decrease in securities available for sale resulted from the sale of securities having a total par value of $5.0 billion and $165 million in the second quarters of 2003 and 2002, respectively, which created net gains totaling $109.5 million and $19.7 million, respectively. The gains were taken principally to economically offset increases in the valuation allowance recorded to reduce the carrying value of BB&T’s mortgage servicing rights to estimated fair value.

          As part of the balance sheet restructuring undertaken in the second and third quarters of 2003, management reduced investments in securities by approximately $4.0 billion, instead utilizing these and other funds to retain up to $2.0 billion in additional mortgage loans over the remainder of 2003, as previously discussed, and to prepay $2.9 billion in long-term debt.

Other Interest Earning Assets

          Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $206.6 million at June 30, 2003, a decrease of $87.8 million, or 29.8%, compared to December 31, 2002. Interest-bearing deposits with banks increased $178.7 million, or 120.7%, compared to year-end 2002. 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 2003 was 1.47%, a decrease of 55 basis points from the 2.02% earned on these assets during the first six months of 2002. The decrease in the yield on other interest-earning assets is principally the result of the decline in the average federal funds rate as previously discussed.

Goodwill and Other Assets

          BB&T’s other noninterest-earning assets, excluding premises and equipment and noninterest-bearing cash and due from banks, increased $113.4 million from December 31, 2002, to June 30, 2003. The increase resulted primarily from higher prepaid expenses and bank owned life insurance, which increased $102.7 million and $49.4 million, respectively. These increases were partially offset by a decrease in the value of mortgage servicing rights of $98.5 million.


BB&T Corporation          Page 25          Second Quarter 2003 10-Q




          Other assets include $220.3 million of net mortgage servicing rights. These assets are reflected net of an allowance for impairment, which totaled $364.0 million at June 30, 2003. Management is currently evaluating BB&T’s mortgage servicing rights and the related valuation allowance to determine whether any portion of the valuation allowance is unrecoverable. If such a determination is made, BB&T will reduce mortgage servicing rights and the associated allowance for impairment by the amount that is determined to be unrecoverable. Any such reduction in mortgage servicing rights will result in a reduction in the future amortization of mortgage servicing rights.

Deposits

          Deposits at June 30, 2003, totaled $52.4 billion, an increase of $1.1 billion, or 2.1%, from December 31, 2002. Average deposits for the first six months of 2003 increased $4.7 billion, or 9.9%, compared to the first six months of 2002. The categories of deposits with the highest average rates of growth were money rate savings accounts, including investor deposit accounts, which increased $2.1 billion, or 15.1%, noninterest-bearing deposits, which increased $1.2 billion, or 17.3%, and CD’s and other time deposits, which increased $1.4 billion, or 6.2%. The growth realized in these deposit categories was slightly offset by a decline of $46.6 million, or 1.4%, in average savings and interest checking accounts.

          For the second quarter, average deposits increased $3.5 billion, or 7.1%. Average total transactions accounts, which include noninterest-bearing deposits, savings, interest checking and money rate savings, totaled $28.0 billion for the second quarter, an increase of $2.7 billion, or 10.6%, compared to the second quarter of 2002. Average time deposits for the second quarter totaled $24.8 billion, which represents an increase of $817.2 million, or 3.4%, compared to the second quarter of 2002.

          The growth in average deposits during the first half of 2003 compared to the corresponding period of 2002 includes the effect of deposits acquired in purchase accounting transactions completed during the last six months of 2002 and the first six months of 2003. The purchase of Equitable in the first quarter of 2003 resulted in the addition of $292.9 million in deposits. During the last six months of 2002, the purchase of Regional added $1.1 billion in deposits. If the effects of purchase accounting transactions were excluded, average deposits for the six months ended June 30, 2003, increased 4.0% compared to the same time period of 2002. For the second quarter of 2003, total average deposits, excluding the effects of purchase accounting transactions, increased 4.2% compared to the second quarter of 2002.

          The annualized average rate paid on total interest-bearing deposits during the first six months of 2003 was 1.82%, a decrease of 75 basis points compared to 2002. The decrease in the average rate paid resulted from the lower interest rate environment that existed during 2003 compared to 2002, which included the previously discussed 75 basis point decrease in the average federal funds rate.


BB&T Corporation          Page 26          Second Quarter 2003 10-Q




Borrowings

          At June 30, 2003, short-term borrowed funds totaled $4.6 billion, a decrease of $769.2 million, or 14.3%, compared to December 31, 2002. For the second quarter of 2003, average short-term borrowed funds totaled $4.7 billion, a decrease of $1.0 billion, or 18.0%, from the comparable period of 2002. For the six months ended June 30, 2003, average short-term borrowed funds totaled $4.4 billion, a decrease of $1.5 billion, or 25.2%, compared to the first six months of 2002. The decrease in short-term borrowed funds resulted from a shift in the Company’s funding mix to borrowings with longer maturities, given the low interest rate environment. The average annualized rate paid on short-term borrowed funds was 1.32% for the first six months of 2003, a decrease of 50 basis points from the average rate of 1.82% paid in the comparable period of 2002. This decrease in the cost of short-term borrowed funds resulted from the lower interest rate environment that has existed during 2003 compared to 2002, which included a 75 basis point decrease in the average federal funds rate.

          Long-term debt consists primarily of Federal Home Loan Bank (“FHLB”) advances to BB&T’s banking subsidiaries and corporate subordinated notes. Long-term debt has been utilized for a variety of funding needs, including the repurchase of common stock. Long-term debt totaled $12.8 billion at June 30, 2003, down $756.5 million, or 5.6%, from the balance at December 31, 2002. For the second quarter of 2003, average long-term debt totaled $13.2 billion, an increase of $1.9 billion, or 16.7%, compared to the second quarter of 2002. For the six months ended June 30, 2003, average long-term borrowed funds were $13.4 billion, up $1.9 billion, or 17.0%, compared to the first six months of 2002. The average annualized rate paid on long-term borrowed funds was 4.10% for the first six months of 2003, a decrease of 111 basis points from the average rate of 5.21% paid for the first six months of 2002.

          In connection with the aforementioned balance sheet restructuring, BB&T refinanced $3.0 billion of FHLB advances during the second quarter of 2003, lowering the current annual interest rate paid on these advances during the next five years, after which the FHLB has the option to increase the interest rate paid on such advances. Because the refinancing gave rise to substantially similar debt, the transaction resulted in no immediate gain or loss. During the third quarter of 2003, BB&T prepaid $2.9 billion in FHLB advances using funds from reducing the size of the securities portfolio. The transaction resulted in prepayment penalties that will reduce third quarter after-tax earnings by $250.1 million. The reduction in higher-cost long-term debt is intended to improve future net interest income and net interest margins.

Asset Quality

          Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $445.6 million at June 30, 2003, compared to $451.7 million at December 31, 2002. As a percentage of loans and leases plus foreclosed property, nonperforming assets were .81% at June 30, 2003, down from ..84% at December 31, 2002. Loans 90 days or more past due and still accruing interest totaled $97.5 million at June 30, 2003, compared to $115.0 million at year-end 2002.


BB&T Corporation          Page 27          Second Quarter 2003 10-Q




          BB&T’s net charge-offs totaled $58.2 million for the second quarter and amounted to ..43% of average loans and leases, on an annualized basis, compared to $58.1 million, or .46% of average loans and leases, on an annualized basis, in the corresponding period in 2002. For the six months ended June 30, 2003 and 2002, net charge-offs totaled $120.9 million and $114.3 million, respectively, and represented .45% and .47%, respectively, of average loans and leases on an annualized basis.

          The allowance for loan and lease losses totaled $719.6 million at June 30, 2003, compared to $723.7 million at December 31, 2002, a decrease of .6%. The allowance amounted to 1.31% of loans and leases outstanding at June 30, 2003, compared to 1.35% at year-end 2002. Excluding loans held for sale, the allowance for loan and lease losses was 1.39% and 1.42% of loans and leases at June 30, 2003 and December 31, 2002, respectively. During the first quarter of 2003, BB&T transferred $9.0 million, or 1.2%, of the allowance for loan and lease losses to other liabilities. The amount transferred related to BB&T’s unfunded commitments. The transfer had no affect on consolidated results of operations.

          The provision for loan and lease losses for the second quarter of 2003 was $61.5 million, compared to $58.5 million during the same period in 2002. For the six months ended June 30, 2003, the provision for loan and lease losses totaled $124.5 million compared to $115.0 million in 2002.

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








BB&T Corporation          Page 28          Second Quarter 2003 10-Q




ASSET QUALITY ANALYSIS
(Dollars in thousands)

For the Three Months Ended
6/30/03 3/31/03 12/31/02 9/30/02 6/30/02
 Allowance For Loan & Lease Losses                        
      Beginning balance     $ 716,276   $ 723,685   $ 723,688   $ 706,446   $ 705,905  
      Allowance for acquired loans, net        1,267    (16,075 )  16,861    136  
      Reclassification of allowance related                            
         to unfunded commitments        (8,986 )            
      Provision for loan and lease losses     61,500    63,000    84,700    64,000    58,500  
      Net charge-offs     (58,200 )  (62,690 )  (68,628 )  (63,619 )  (58,095 )
         Ending balance   $ 719,576   $ 716,276   $ 723,685   $ 723,688   $ 706,446  
                               
 Risk Assets                             
      Nonaccrual loans and leases   $ 363,524   $ 392,701   $ 374,842   $ 358,823   $ 335,287  
      Foreclosed real estate     64,347    60,110    55,448    46,378    49,009  
      Other foreclosed property     17,575    21,714    21,199    17,712    15,803  
      Restructured loans     145    175    175    2,358      
         Total nonperforming assets   $ 445,591   $ 474,700   $ 451,664   $ 425,271   $ 400,099  
      Loans 90 days or more past due                            
         and still accruing   $ 97,479   $ 93,609   $ 115,047   $ 100,147   $ 98,143  
Asset Quality Ratios                                  
Nonaccrual and restructured loans and leases                                  
     as a percentage of total loans and leases*       .66  %   .73  %   .70  %   .68  %   .66  %
Total nonperforming assets as a percentage of:                                  
     Total assets     .55    .60    .56    .54    .52  
     Loans and leases plus foreclosed property*     .81    .88    .84    .80    .79  
Net charge-offs as a percentage of                             
     average loans and leases*     .43    .47    .51    .49    .46  
Net charge-offs excluding specialized                           
     lending as a percentage of average                            
     loans and leases**     .31    .35    .40    .39    .37  
Allowance for loan and lease losses as a                           
     percentage of loans and leases*     1.31    1.33    1.35    1.36    1.40  
Allowance for loan and lease losses as a                           
     percentage of loans and leases                            
     held for investment     1.39    1.39    1.42    1.42    1.43  
Ratio of allowance for loan and lease losses to:                           
     Net charge-offs       3.08  x   2.82  x   2.66  x   2.87  x   3.03  x
     Nonaccrual and restructured loans and leases     1.98    1.82    1.93    2.00    2.11  

* All items referring to loans and leases include loans held for sale and are net of unearned income. Applicable ratios are annualized.
** Excludes net charge-offs and average loans from BB&T's specialized lending operations.




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BB&T Corporation          Page 29          Second Quarter 2003 10-Q




MARKET RISK MANAGEMENT

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

          The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as to 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 BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets 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, which is monitored by the ALCO, BB&T is positioned to respond to changing needs for liquidity, 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 earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios of projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap.


BB&T Corporation          Page 30          Second Quarter 2003 10-Q




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

          The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months under the “most likely” interest rate scenario incorporated into the Interest Sensitivity Simulation computer model. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related assets, cash flows and maturities of derivative financial instruments, changes in market conditions, loan volumes and pricing, deposit sensitivity, customer preferences, and capital plans. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. The interest sensitivity simulation analysis as of June 30, 2003 includes the impact of the First Virginia acquisition, which was consummated July 1, 2003.

Interest Sensitivity Simulation Analysis

Interest Rate Scenario Annualized Hypothetical
Percentage Change in
Linear Prime Rate Net Interest Income
Change in June 30, June 30,
Prime Rate 2003 2002 2003 2002
  3.00     7.00  %   7.75  %   (0.18 ) %   2.92  %
  1.50     5.50     6.25     0.12     1.39  
  (1.00 )   3.00     NA     (2.00 )   NA  
  (1.50 )   NA     3.25     NA     (2.98 )
  (3.00 )   NA     1.75     NA     (3.99 )

NA = Not Applicable

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


BB&T Corporation          Page 31          Second Quarter 2003 10-Q




Derivative Financial Instruments

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

          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, 2003, BB&T had derivative financial instruments outstanding with notional amounts totaling $12.4 billion. The estimated fair value of open contracts reflected net unrealized gains of $274.7 million at June 30, 2003.

          Credit risk related to derivatives arises when notional 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 with national market makers with strong credit ratings and its clients 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 and, in certain instances, collateral agreements, with the dealers with which it does business. Because of these factors, BB&T’s credit risk exposure at June 30, 2003 was not material.

          The following tables set forth certain information concerning BB&T’s derivative financial instruments at June 30, 2003:








BB&T Corporation          Page 32          Second Quarter 2003 10-Q




Derivative Financial Instruments
June 30, 2003
(Dollars in thousands)

Average Average Estimated
Notional Receive Pay Fair
Amount Rate Rate Value
Receive fixed swaps     $ 5,010,303     4.37 %     1.91 %   $ 279,284  
Pay fixed swaps    482,870    1.40 %    3.73 %    (23,562 )
Caps, floors & collars    1,373,467    --    --    3,939  
Foreign exchange contracts    201,666    --    --    438  
Futures contracts    9,139    --    --    117  
Interest rate lock commitments    1,117,780    --    --    14,990  
Forward mortgage loan contracts    3,821,900    --    --    (2,089 )
Options on contracts purchased    360,000    --    --    1,632  
                       
   Total   $ 12,377,125             $ 274,749  


Derivative Classifications and Hedging Relationships
(Dollars in thousands)

June 30, 2003
Notional Fair Value
Amount Gain Loss
Derivatives Designated as Cash Flow Hedges:                      
   Hedging Business Loans   $ 3,150,000   $ 103,040   $ --  
   Hedging Short-term Borrowed Funds    1,250,000    3,939    --  
                     
Derivatives Designated as Fair Value Hedges:                 
   Hedging Business Loans    22,567    --    630  
   Hedging Long-term Debt    1,400,000    153,312    --  
                     
Derivatives Not Designated as Hedges    6,554,558    40,390    25,302  
                  
     Total   $ 12,377,125   $ 300,681   $ 25,932  

Contractual Obligations, Contingent Liabilities and Other Commitments

BB&T utilizes a variety of financial instruments to meet the financial needs of its clients and to reduce exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, options written, standby letters of credit and financial guarantees, interest rate caps and floors written, interest rate swaps and forward and futures contracts. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2002, for discussion with respect to BB&T’s quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Items disclosed in the Annual Report on Form 10-K have not materially changed since that report was filed. A discussion of BB&T’s derivative financial instruments is included in the “Derivative Financial Instruments” section herein.



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BB&T Corporation          Page 33          Second Quarter 2003 10-Q





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 from which to support future growth and to comply with all regulatory standards.

          Total shareholders’ equity was $7.7 billion at June 30, 2003, and $7.4 billion at December 31, 2002. BB&T’s book value per common share at June 30, 2003 was $16.32 compared to $15.70 at December 31, 2002.

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

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

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




BB&T Corporation          Page 34          Second Quarter 2003 10-Q




CAPITAL RATIOS

2003 2002
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
Risk-based capital ratios:                        
       Tier 1 capital     9.7  %  9.5  %  9.2  %  9.7  %  9.7  %
       Total capital       13.8    13.8    13.4    13.5    12.8  
Tier 1 leverage ratio     7.2    7.2    6.9    7.3    7.3  

          During the first six months of 2003 and 2002, BB&T repurchased 1.6 million and 7.0 million shares at a cost, of $65.5 million and $265.3 million, respectively. Also, on July 22, 2003, BB&T repurchased an additional 12.0 million shares of common stock pursuant to an accelerated share repurchase program. The accelerated share repurchase agreement provides for the final settlement of the contract in either cash or additional shares of BB&T’s common stock at BB&T’s sole discretion.


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ANALYSIS OF RESULTS OF OPERATIONS

          Consolidated net income for the second quarter of 2003 totaled $316.2 million, a decrease of 3.6% compared to the $328.0 million earned during the comparable quarter of 2002. On a diluted per share basis, earnings for the three months ended June 30, 2003, were $.67, compared to $.68 for the same period in 2002, a decrease of 1.5%. BB&T’s results of operations for the second quarter of 2003 produced an annualized return on average assets of 1.57% and an annualized return on average shareholders’ equity of 16.38% compared to prior year ratios of 1.74% and 18.38%, respectively.

          Net income for the six months ended June 30, 2003, totaled $644.0 million, an increase of $6.4 million, or 1.0%, compared to the $637.6 million earned during the comparable period of 2002. On a diluted per share basis, earnings for the first six months of 2003 and 2002 were $1.36 and $1.34, respectively, which represents a 1.5% increase. BB&T’s results of operations for the first six months of 2003 produced an annualized return on average assets of 1.62% and an annualized return on average shareholders’ equity of 17.06% compared to prior year ratios of 1.75% and 18.87%, respectively.

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


BB&T Corporation          Page 35          Second Quarter 2003 10-Q




ANNUALIZED
PROFITABILITY MEASURES

2003 2002
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
Return on average assets       1.57  %   1.68  %   1.71  %   1.68  %   1.74  %
Return on average shareholders' equity       16.38    17.78    17.97    17.66    18.38  
Net interest margin (taxable equivalent)       4.06    4.13    4.22    4.25    4.27  

Merger-Related and Restructuring Charges

          BB&T recorded certain merger-related and restructuring costs during both 2003 and 2002. For the second quarter of 2003, BB&T recorded $7.0 million in net after-tax charges primarily associated with the acquisition of First Virginia and the acquisitions and systems conversions of Regional and Equitable. During the second quarter of 2002, BB&T incurred $1.1 million in net after-tax charges primarily associated with the acquisitions of Community First Banking Company (“CFBC”), Area Bancshares Corporation (“AREA”) and MidAmerica Bancorp (“MidAmerica”), as well as 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. For the six months ended June 30, 2003 and 2002, BB&T incurred $10.0 million and $10.4 million, respectively, in net after-tax charges primarily associated with the same purchase acquisitions that affected the respective second quarters of 2003 and 2002.

          During the second quarter of 2003, BB&T recorded pre-tax merger-related and restructuring charges of $10.8 million, which are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expenses. These expenses were recorded in connection with the first quarter acquisition of Equitable and the acquisition of First Virginia, as well as the 2002 merger and systems conversion of Regional. For the six months ended June 30, 2003, BB&T recorded pre-tax merger-related and restructuring charges of $15.5 million, which are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expenses.

          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 systems conversion of CFBC, as well as the first quarter acquisitions of AREA and MidAmerica. For the six months ended June 30, 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 a category of noninterest expenses.

BB&T Corporation          Page 36          Second Quarter 2003 10-Q




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

Summary of Merger-Related and Restructuring Charges

(Dollars in thousands)

For the Six Months Ended June 30,
2003 2002
Severance and personnel-related costs     $ 1,630   $ 860  
Occupancy and equipment charges    4,231    5,379  
Marketing and public relations    5,712    5,716  
Systems conversions, asset write-offs,            
     conforming policies and other    3,931    4,218  
             
Total   $ 15,504   $ 16,173  

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

          Occupancy and equipment charges represent merger-related costs associated with lease terminations, obsolete equipment write-offs, and the sale of duplicate facilities and equipment. Marketing and public relations costs represent direct media advertising related to the acquisitions. Systems conversions and related charges include expenses necessary to convert and combine the acquired branches and operations of merged companies. The other merger-related charges are composed of asset and supply inventory write-offs, which are primarily composed of unreconciled differences in an acquired institution’s accounts or unreconciled differences identified during systems conversions, litigation accruals, costs to conform an acquired institution’s accounting policies to those of BB&T and other similar charges.

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

BB&T Corporation          Page 37          Second Quarter 2003 10-Q




One Valley Bancorp, Inc.
(Dollars in thousands)
           
Balance Balance Balance
December 31, Utilized in December 31, Utilized in June 30,
2001 2002 2002 2003 2003
Severance and personnel-related charges     $ --   $ --   $ --   $ --   $ --  
Occupancy and equipment charges    4,640    3,912    728    728    --  
Systems conversions and related charges    11    11    --    --    --  
Other merger-related charges    --    --    --    --    --  
                            
     Total   $ 4,651   $ 3,923   $ 728   $ 728   $ --  


F&M National Corporation
(Dollars in thousands)
             
Balance Balance Balance
December 31, Additions in Utilized in December 31, Utilized in June 30,
2001 2002 2002 2002 2003 2003
Severance and personnel-related charges     $ 11,055   $ 1,417   $ 11,592   $ 880   $ 445   $ 435  
Occupancy and equipment charges    10,992    --    797    10,195    3,309    6,886  
Systems conversions and related charges    4,375    2,825    7,200    --    --    --  
Other merger-related charges    3,110    --    2,113    997    10    987  
                                 
     Total   $ 29,532   $ 4,242   $ 21,702   $ 12,072   $ 3,764   $ 8,308  

          The remaining accruals at June 30, 2003, for F&M National Corporation are related primarily to costs to exit certain leases and to dispose of excess facilities and equipment. These liabilities will be utilized in the future upon termination of the various leases and sale of duplicate property. These accruals are expected to be utilized in 2003 unless they relate to specific contracts expiring in later years.

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




BB&T Corporation          Page 38          Second Quarter 2003 10-Q




All Other Merger Activity
(Dollars in thousands)
               
Balance Balance Balance
December 31, Additions in Utilized in December 31, Additions in Utilized in June 30,
2001 2002 2002 2002 2003 2003 2003
Severance and personnel-related charges     $ 20,316   $ 38,597   $ 42,964   $ 15,949   $ 3,707   $ 9,208   $ 10,448  
Occupancy and equipment charges    21,431    31,668    22,269    30,830    3,437    20,947    13,320  
Systems conversions and related charges    6,953    9,453    14,668    1,738    940    2,678    --  
Other merger-related charges    12,000    21,438    23,154    10,284    12,714    16,472    6,526  
                                      
     Total   $ 60,700   $ 101,156   $ 103,055   $ 58,801   $ 20,798   $ 49,305   $ 30,294  


          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. Occupancy and equipment accruals relate to costs to exit certain leases and to dispose of excess facilities and equipment. Such liabilities will be utilized upon termination of the various leases and sale of duplicate property. Liabilities associated with systems conversions relate to termination penalties on contracts with information technology service providers. Such liabilities will be utilized as the contracts are paid out and expire. Other merger-related liabilities typically relate to other miscellaneous accruals such as litigation, accruals to conform accounting policies, 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, the majority of accrued costs are utilized in conjunction with or immediately following the systems conversion, when most of the duplicate employment positions are eliminated and the terminated employees begin to receive severance. Other accruals are utilized over time based on the sale, closing or disposal of duplicate facilities or equipment or the expiration of lease contracts. Merger accruals are re-evaluated periodically and adjusted as necessary. Most of the remaining accruals at June 30, 2003, are expected to be utilized during 2003, unless they relate to specific contracts that expire in later years.

          The accruals utilized during 2003 in the table entitled “All Other Merger Accrual Activity” above include reversals of $24.2 million of previously recorded merger-related and restructuring accruals principally related to the finalization of estimates for employee terminations, contract cancellations and occupancy costs primarily in connection with the AREA and MidAmerica acquisitions. Of the above reversals, $21.4 million reflect adjustments to goodwill and had no effect on BB&T’s consolidated results of operations and the remaining $2.8 million are reflected as a reduction of merger-related and restructuring charges.

BB&T Corporation          Page 39          Second Quarter 2003 10-Q




Net Interest Income and Net Interest Margin

          Net interest income on an FTE basis was $731.6 million for the second quarter of 2003 compared to $727.2 million for the same period in 2002, an increase of $4.4 million, or .6%. For the three months ended June 30, 2003, average earning assets increased $4.1 billion, or 6.0%, compared to the same period of 2002, while average interest-bearing liabilities increased by $3.2 billion, or 5.4%, and the net interest margin decreased from 4.27% in the second quarter of 2002 to 4.06% in the current quarter. The 21 basis point decrease in the net interest margin was a result of several factors. During November 2002, the Federal Reserve reduced the targeted federal funds rate by 50 basis points to 1.25% where it remained until mid-June 2003 when it was further reduced by an additional 25 basis points to 1.00%. As a result of the Federal Reserve actions and the prolonged weakness in the economy, interest rates continued to trend downward. These factors, in combination with the reinvestment of the proceeds from the sales, maturities and prepayments of securities and loans, resulted in the average yield on interest earning assets for the second quarter of 2003 declining 86 basis points from the comparable yield in the second quarter of 2002, while the average cost of funds for the 2003 quarter decreased 73 basis points compared to the second quarter of 2002. The net interest margin was also adversely affected by the additional interest expense incurred in connection with BB&T’s stock buy-back program.

          For the six months ended June 30, 2003, net interest income on an FTE basis was $1.5 billion compared to $1.4 billion for the same period in 2002, an increase of $41.3 million, or 2.9%. Average earning assets for the first six months of 2003 increased $5.0 billion, or 7.5%, while average interest-bearing liabilities increased $4.0 billion, or 6.9%, compared to the first six months of 2002. The net interest margin for six months ended June 30, 2003, was 4.09%, down from 4.26% for the first six months of 2002. The decrease resulted 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 2003 compared to the same periods in 2002, and the variances between the periods caused by changes in interest rates versus changes in volumes.








BB&T Corporation          Page 40          Second Quarter 2003 10-Q




Net Interest Income and Rate / Volume Analysis
For the Three Months Ended June 30, 2003 and 2002

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Average Balances Annualized Yield / Rate Income / Expense Increase Change due to
Fully Taxable Equivalent - (Dollars in thousands) 2003 2002 2003 2002 2003 2002 (Decrease) Rate (6) Volume (6)
Assets
Securities (1):                                        
     U.S. Treasury, government and other (5)     $ 16,615,559   $ 16,622,342     4.90  %   6.23  % $ 203,478   $ 258,759   $ (55,281 ) $ (55,024 ) $ (257 )
     States and political subdivisions       817,364     971,263     7.53     7.45     15,394     18,078     (2,684 )   204     (2,888 )
                                                                
        Total securities (5)       17,432,923     17,593,605     5.02     6.29     218,872     276,837     (57,965 )   (54,820 )   (3,145 )
Other earning assets (2)       514,879     354,745     1.36     1.76     1,744     1,554     190     (406 )   596  
Loans and leases, net                                                    
     of unearned income (1)(3)(4)(5)       54,380,475     50,265,837     6.29     7.03     853,094     881,019     (27,925 )   (96,726 )   68,801  
                                                                   
        Total earning assets       72,328,277     68,214,187     5.95     6.81     1,073,710     1,159,410     (85,700 )   (151,952 )   66,252  
                                                                   
        Non-earning assets       8,684,685     7,324,013