BB&T Third 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:

September 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 October 31, 2003, 546,606,886 shares of the registrant's common stock, $5 par value, were outstanding.


This Form 10-Q has 58 pages. The Exhibit Index begins on page 50.




BB&T CORPORATION

FORM 10-Q

September 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 Condidion and Results of Operations 21 
   
              Analysis of Financial Condition 23 
   
              Market Risk Management 30 
   
              Capital Adequacy and Resources 35 
   
              Analysis of Results of Operations 36 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 49 
   
  Item 4. Controls and Procedures 49 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 50 
   
  Item 6. Exhibits and Reports on Form 8-K 50 
   
SIGNATURES 54 
   
CERTIFICATIONS 55 



BB&T Corporation          Page 1          Third Quarter 2003 Form 10-Q




Item 1. Financial Statements

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Dollars in thousands, except per share data)

September 30, December 31,
2003 2002
Assets            
     Cash and due from banks     $ 2,113,640   $ 1,929,650  
     Interest-bearing deposits with banks    281,439    148,122  
     Federal funds sold and securities purchased under resale agreements or                
         similar arrangements    321,986    294,448  
     Trading securities at fair value    710,387    148,488  
     Securities available for sale at fair value    16,032,688    17,599,477  
     Securities held to maturity at amortized cost (fair value:$57,074 at September 30, 2003  
         and $55,512 at December 31, 2002)    57,076    55,523  
     Loans held for sale    1,419,173    2,377,707  
     Loans and leases, net of unearned income    59,753,304    51,140,306  
         Allowance for loan and lease losses    (791,527 )  (723,685 )
     Loans and leases, net    58,961,777    50,416,621  
     Premises and equipment, net of accumulated depreciation    1,221,089    1,072,101  
     Goodwill    3,642,068    1,723,379  
     Core deposit and other intangible assets    422,716    148,824  
     Other assets    5,171,092    4,302,476  
                 Total assets   $90,355,131   $80,216,816  
Liabilities and Shareholders' Equity  
     Deposits:  
         Noninterest-bearing deposits   $10,909,953   $7,864,338  
         Savings and interest checking    4,217,404    3,071,551  
         Money rate savings    20,231,596    17,188,942  
         Certificates of deposit and other time deposits    25,936,345    23,155,185  
                 Total deposits    61,295,298    51,280,016  
     Short-term borrowed funds    6,294,995    5,396,959  
     Long-term debt    9,837,910    13,587,841  
     Accounts payable and other liabilities    2,712,096    2,564,086  
                 Total liabilities    80,140,299    72,828,902  
     Shareholders' equity:  
         Preferred stock, $5 par, 5,000,000 shares authorized, none issued or                
             outstanding at September 30, 2003 or at December 31, 2002    --    --  
         Common stock, $5 par, 1,000,000,000 shares authorized;  
             548,886,598 issued and outstanding at September 30, 2003, and  
             470,452,260 issued and outstanding at December 31, 2002    2,744,433    2,352,261  
         Additional paid-in capital    3,152,668    793,123  
         Retained earnings    4,180,674    3,912,320  
         Unvested restricted stock    (355 )  (499 )
         Accumulated other comprehensive income, net of deferred income  
             taxes of $92,510 at September 30, 2003, and $208,008 at December 31, 2002    137,412    330,709  
                 Total shareholders' equity    10,214,832    7,387,914  
                 Total liabilities and shareholders' equity   $90,355,131   $80,216,816  

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


BB&T Corporation          Page 2          Third Quarter 2003 Form 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Interest Income                    
       Interest and fees on loans and leases     $ 920,451   $ 881,761   $ 2,609,083   $ 2,582,257  
       Interest and dividends on securities    176,319    243,312    584,553    742,596  
       Interest on short-term investments    1,798    1,922    5,343    5,969  
           Total interest income    1,098,568    1,126,995    3,198,979    3,330,822  
 
Interest Expense  
       Interest on deposits    184,168    254,248    584,297    772,037  
       Interest on short-term borrowed funds    14,651    24,140    43,809    77,053  
       Interest on long-term debt    93,291    146,515    368,817    442,343  
           Total interest expense    292,110    424,903    996,923    1,291,433  
 
Net Interest Income    806,458    702,092    2,202,056    2,039,389  
       Provision for loan and lease losses    65,000    64,000    189,500    179,000  
Net Interest Income After Provision for Loan and Lease Losses    741,458    638,092    2,012,556    1,860,389  
 
Noninterest Income  
       Service charges on deposits    121,981    104,754    315,404    296,790  
       Mortgage banking income (loss)    117,463    (88,343 )  144,724    (30,261 )
       Trust income    31,871    27,388    84,128    74,713  
       Investment banking and brokerage fees and commissions    65,306    47,912    177,309    156,844  
       Insurance commissions    103,592    80,401    293,750    225,818  
       Bankcard fees and merchant discounts    23,348    17,584    58,896    48,400  
       Other nondeposit fees and commissions    49,964    36,561    131,458    101,967  
       Securities gains (losses), net    (29,127 )  135,519    114,607    168,592  
       Other income    27,705    31,583    97,844    92,911  
           Total noninterest income    512,103    393,359    1,418,120    1,135,774  
 
Noninterest Expense  
       Personnel expense    412,350    323,119    1,132,548    947,634  
       Occupancy and equipment expense    97,352    85,550    270,704    253,689  
       Amortization of intangibles    20,990    7,073    34,550    17,682  
       Professional services    17,309    17,958    50,921    50,516  
       Merger-related and restructuring charges    22,820    12,694    38,324    28,867  
       Loss on early extinguishment of debt    384,898    --    384,898    --  
       Other expense    161,247    130,779    460,029    367,504  
           Total noninterest expense    1,116,966    577,173    2,371,974    1,665,892  
 
Earnings  
       Income before income taxes and cumulative effect of                            
           change in accounting principle    136,595    454,278    1,058,702    1,330,271  
       Provision for income taxes    20,704    126,121    298,826    374,297  
       Income before cumulative effect of change in accounting principle    115,891    328,157    759,876    955,974  
       Cumulative effect of change in accounting principle    --    --    --    9,780  
       Net income   $115,891   $328,157   $759,876   $965,754  
 
Per Common Share  
       Basic Earnings:  
           Income before cumulative effect of change in accounting principle   $.21   $.69   $1.53   $2.02  
           Cumulative effect of change in accounting principle    --    --    --    .02  
           Net income   $.21   $.69   $1.53   $2.04  
 
       Diluted Earnings:  
           Income before cumulative effect of change in accounting principle   $.21   $.68   $1.51   $2.00  
           Cumulative effect of change in accounting principle    --    --    --    .02  
           Net income   $.21   $.68   $1.51   $2.02  
 
       Cash dividends paid   $.32   $.29   $.90   $.81  
 
Weighted Average Shares Outstanding  
           Basic    551,018,984    477,112,074    498,048,765    472,764,083  
           Diluted    555,543,993    482,325,535    502,026,007    478,363,530  

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


BB&T Corporation          Page 3          Third Quarter 2003 Form 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 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    --    --    --    965,754    --    965,754  
           Unrealized holding gains (losses) arising during the  
               period on securities available for sale, net of tax    --    --    --    --    154,954    154,954  
           Less: reclassification adjustment for losses (gains)                                        
               on securities available for sale included in net                                        
               income, net of tax of $59,007    --    --    --    --    (109,585 )  (109,585 )
        Change in unrealized gains (losses) on securities, net of tax    --    --    --    --    45,369    45,369  
        Change in unrecognized gain (loss) on cash flow hedge,                                        
           net of tax of ($25,670)    --    --    --    --    (39,344 )  (39,344 )
 
     Total comprehensive income    --    --    --    965,754    6,025    971,779  
 
        Common stock issued:  
           In purchase acquisitions    32,481,207    162,406    985,485    --    --    1,147,891  
           In connection with stock option  
               exercises and other employee benefits    2,769,934    13,850    35,609    --    --    49,459  
        Redemption of common stock    (10,493,900 )  (52,470 )  (344,740 )  --    --    (397,210 )
        Cash dividends declared on common stock    --    --    --    (403,167 )  --    (403,167 )
        Other, net    --    --    13,732    2,124    --    15,856  
Balance, September 30, 2002    480,439,801   $ 2,402,199   $ 1,108,651   $ 3,710,543   $ 313,424   $ 7,534,817  
 
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    --    --    --    759,876    --    759,876  
           Unrealized holding gains (losses) arising during the  
               period on securities available for sale, net of tax    --    --    --    --    (161,046 )  (161,046 )
           Less: reclassification adjustment for losses (gains)                                        
               on securities available for sale included in net                                        
               income, net of tax of $44,697    --    --    --    --    (69,910 )  (69,910 )
 
        Change in unrealized gains (losses) on securities, net of tax    --    --    --    --    (230,956 )  (230,956 )
        Change in unrecognized gain (loss) on cash flow hedge,  
           net of tax of $24,572    --    --    --    --    37,659    37,659  
 
     Total comprehensive income    --    --    --    759,876    (193,297 )  566,579  
 
        Common stock issued:  
           In purchase acquisitions    90,191,640    450,959    2,754,336    --    --    3,205,295  
           In connection with stock option  
               exercises and other employee benefits    1,834,498    9,172    21,884    --    --    31,056  
        Redemption of common stock    (13,591,800 )  (67,959 )  (426,607 )  --    --    (494,566 )
        Cash dividends declared on common stock    --    --    --    (491,522 )  --    (491,522 )
        Other, net    --    --    9,932    144    --    10,076  
Balance, September 30, 2003    548,886,598   $ 2,744,433   $ 3,152,668   $ 4,180,319   $ 137,412   $ 10,214,832  


*  Other includes unvested restricted stock.

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


BB&T Corporation          Page 4          Third Quarter 2003 Form 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Dollars in thousands)

For the Nine Months Ended
September 30,
2003 2002
Cash Flows From Operating Activities:            
     Net income     $ 759,876   $ 965,754  
     Adjustments to reconcile net income to net cash provided by operating activities:  
           Provision for loan and lease losses    189,500    179,000  
           Depreciation of premises and equipment    107,677    106,352  
           Amortization of intangibles    34,550    17,682  
           Adjustment / accretion of negative goodwill    --    (9,780 )
           Amortization of unearned stock compensation    144    2,124  
           Discount accretion and premium amortization on securities, net    22,746    1,441  
           Net decrease (increase) in trading account securities    (29,706 )  (23,850 )
           Loss (gain) on sales of securities, net    (114,607 )  (168,592 )
           Loss (gain) on sales of loans held for sale    (208,633 )  (74,863 )
           Loss (gain) on disposals of premises and equipment, net    (185 )  (6,905 )
           Proceeds from sales of loans held for sale    12,411,725    6,848,650  
           Purchases of loans held for sale    (2,374,351 )  (1,326,306 )
           Origination of loans held for sale, net of principal collected    (8,870,207 )  (5,498,356 )
           Tax benefit from exercise of stock options    9,932    13,732  
           Decrease (increase) in:                
              Accrued interest receivable    3,605    44,324  
              Other assets    (357,226 )  (506,463 )
           Increase (decrease) in:                
              Accrued interest payable    (58,649 )  (1,388 )
              Accounts payable and other liabilities    81,753    513,049  
           Other, net    2,972    27,904  
                  Net cash provided by (used in) operating activities    1,610,916    1,103,509  
 
Cash Flows From Investing Activities:  
     Proceeds from sales of securities available for sale    13,138,964    3,297,501  
     Proceeds from maturities, calls and paydowns of securities available for sale    4,722,736    3,011,933  
     Purchases of securities available for sale    (13,229,791 )  (5,162,206 )
     Proceeds from maturities, calls and paydowns of securities held to maturity    4,447    10  
     Purchases of securities held to maturity    (6,000 )  (10,915 )
     Leases made to customers    (81,631 )  (139,637 )
     Principal collected on leases    103,751    110,001  
     Loan originations, net of principal collected    (2,251,577 )  (1,250,928 )
     Purchases of loans    (119,871 )  (193,155 )
     Acquisitions, net of cash and cash equivalents acquired    920,783    765,694  
     Originations of mortgage servicing rights    (192,336 )  (143,935 )
     Proceeds from disposals of premises and equipment    27,193    27,061  
     Purchases of premises and equipment    (145,203 )  (122,480 )
     Proceeds from sales of foreclosed property    40,193    35,965  
     Proceeds from sales of other real estate held for development or sale    17,350    8,494  
           Net cash provided by (used in) investing activities    2,949,008    233,403  
 
Cash Flows From Financing Activities:  
     Net increase (decrease) in deposits     289,280    821,788  
     Net increase (decrease) in short-term borrowed funds    199,738    (2,581,487 )
     Proceeds from issuance of long-term debt    3,200,700    2,402,327  
     Repayment of long-term debt    (6,988,096 )  (1,046,451 )
     Net proceeds from common stock issued    31,056    49,459  
     Redemption of common stock    (494,566 )  (397,210 )
     Cash dividends paid on common stock    (453,191 )  (382,468 )
           Net cash provided by (used in) financing activities    (4,215,079 )  (1,134,042 )
 
Net Increase (Decrease) in Cash and Cash Equivalents       344,845    202,870  
Cash and Cash Equivalents at Beginning of Period    2,372,220    2,232,226  
Cash and Cash Equivalents at End of Period   $2,717,065   $2,435,096  
 
Supplemental Disclosure of Cash Flow Information:  
 
     Cash paid during the period for:  
        Interest   $1,055,572   $1,287,761  
        Income taxes    136,658    171,325  
     Noncash financing and investing activities:  
        Transfer of loans to foreclosed property    62,712    41,285  
        Transfer of fixed assets to other real estate owned    7,470    14,778  
        Transfer of other real estate owned to fixed assets    33    --  
        Transfer of securities available for sale to trading securities    532,193    --  
        Common stock issued in purchase accounting transactions    3,205,295    1,146,381  

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

Back to Index

BB&T Corporation          Page 5          Third Quarter 2003 Form 10-Q





BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2003 and December 31, 2002; the consolidated statements of income for the three and nine months ended September 30, 2003 and 2002; the consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 2003 and 2002; and the consolidated statements of cash flows for the nine months ended September 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 thereto 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. Such reclassifications 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 wholly owned or 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 wholly owned and majority-owned subsidiaries are consolidated unless control is temporary or does not rest with BB&T. At September 30, 2003, there were no significant wholly owned or 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, valuation of other intangible assets, purchase accounting adjustments, benefit plan obligations and expenses, and deferred tax assets and liabilities.

BB&T Corporation          Page 6          Third Quarter 2003 Form 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 financing, equipment financing, factoring, leasing, full-service securities brokerage and capital markets services.

C. New Accounting Pronouncements

          In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 7          Third Quarter 2003 Form 10-Q




          In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). 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. On October 9, 2003, the FASB issued Staff Position FIN 46-6, which effectively deferred the implementation of the provisions of FIN 46 to existing variable interest entities created before February 1, 2003 until the fourth quarter of 2003, if certain conditions are met. Management has determined that BB&T meets such conditions and will defer the adoption of FIN 46 until December 31, 2003. Management is currently evaluating BB&T’s investments in variable interest entities and potential variable interest entities or transactions, particularly in limited liability partnerships involved in low-income housing development and trust preferred securities structures. Depending on the ultimate applicability of the Interpretation to 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 thereby affect BB&T’s capital ratios. BB&T’s primary FIN 46 exposure relates to its investments in limited liability partnerships involved in low-income housing development. The consolidation of these limited partnerships during the current quarter would have affected BB&T’s financial position and results of operations by increasing total assets and liabilities by $209.0 million and $217.0 million, respectively, and reducing third quarter pre-tax income by $1.2 million. Management believes that the ultimate implementation of FIN 46 will not have a significant impact on either BB&T’s consolidated financial position or consolidated 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 8          Third Quarter 2003 Form 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. On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) 150-3, “Effective Date and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities.” FSP 150-3 defers the effective date of certain provisions of SFAS No. 150, specifically the provisions that apply to mandatorily redeemable noncontrolling interests. This deferral is expected to remain in effect indefinitely until the accounting for these interests is addressed in later guidance. The remaining provisions of SFAS No. 150 were effective for financial instruments entered into or modified after May 31, 2003, and otherwise were effective and adopted by BB&T on July 1, 2003. The implementation of these portions of the Statement did not have a material effect on BB&T”s consolidated financial position or consolidated results of operations. Management is currently evaluating the potential impact of the deferred portion of the Statement.

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 third 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
                                               
   July 1, 2003     First Virginia Banks, Inc.     Falls Church, Va.     $ 11.3 billion   $ 2.2 billion   $ 3.1 billion     87.0 million    
  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 $222.0 million of core deposit intangibles and $140.4 million of other identifiable intangibles, which are being amortized on an accelerated basis over their estimated useful lives.

BB&T Corporation          Page 9          Third Quarter 2003 Form 10-Q




Acquisition of First Virginia Banks, Inc.

          On July 1, 2003, BB&T completed its acquisition of First Virginia Banks, Inc. (“First Virginia”), a bank holding company headquartered in Falls Church, Virginia. The merger enabled the Company to substantially increase its market share and branch presence in Virginia, Maryland and Tennessee. BB&T issued 87.0 million common shares to consummate the transaction. The total purchase price of $3.1 billion 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. As required by purchase accounting rules, the balance sheet accounts and results of operations of First Virginia were included in BB&T’s Consolidated Financial Statements beginning on July 1, 2003. The estimated fair values of the significant asset balances acquired and significant liabilities assumed in connection with the acquisition of First Virginia are as follows: $859.2 million of cash and cash equivalents, $3.8 billion of securities, $6.3 billion of loans, $9.5 billion of deposits and $581.3 million of short-term borrowings.

          The following unaudited pro forma financial information for the three and nine months ended September 30, 2003 and 2002 assumes that the First Virginia acquisition occurred as of January 1, 2002. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the First Virginia acquisition been consummated on the date indicated.

BB&T Corporation
First Virginia Banks, Inc.
Pro Forma Financial Information

For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
(dollars in thousands, except per share data)
Total Revenues*     $ 1,318,561   $ 1,246,107   $ 3,915,250   $ 3,620,753  
Income before cumulative effect of change in                            
accounting principle   $ 115,891   $ 362,498   $ 820,317   $ 1,053,179  
Net Income   $ 115,891   $ 362,498   $ 820,317   $ 1,062,959  
Basic EPS   $ .21   $ .64   $ 1.47   $ 1.89  
Diluted EPS   $ .21   $ .63   $ 1.46   $ 1.87  


* Total revenues is composed of net interest income and noninterest income.

Insurance and Other Non-Bank Acquisitions

          In addition to the financial institutions and other significant financial services companies acquired in the last two years, BB&T acquired six insurance agencies during the first nine months of 2003. In conjunction with these transactions, BB&T issued approximately 1.7 million shares of common stock and paid approximately $1.0 million in cash, recording approximately $28.4 million in goodwill and $20.8 million in other intangible assets with an average life of 10 years. The total purchase price of these insurance agencies was approximately $59.0 million. During 2002, BB&T acquired eight insurance agencies. 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          Third Quarter 2003 Form 10-Q




          On July 1, 2003, BB&T acquired Jackson, Mississippi-based Southern Cross Underwriters (“SCU”) and BB&T also acquired Kingsport Development Company Insurance Inc., Moore & Walker, Inc. and STHARCO, Inc., all of Kingsport, Tennessee, collectively referred to as “KDC”. SCU specializes in arranging insurance coverage on 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 September 2, 2003, BB&T Insurance Services acquired Cooper, Love & Jackson (“CLJ”) of Nashville, Tennessee, and Surety Land Title based in Raleigh, N.C. CLJ specializes in the insurance of commercial risk, employee benefits and personal lines in the metropolitan Nashville area.

          On November 11, 2003, BB&T announced plans to acquire McGriff, Seibels & Williams, Inc., of Birmingham, Alabama (“McGriff”). McGriff is a privately held commercial insurance broker with projected 2003 premiums of $1.8 billion, making it the 13th largest insurance broker in the nation. Its specialty areas include energy, marine, financial services, commercial, construction, surety, employee benefits, healthcare and public entity. BB&T will issue $304 million of its common stock and $50 million in cash to complete the acquisition. The transaction also allows for an additional payment to McGriff’s shareholders of up to $102 million in cash over a five-year period if McGriff exceeds certain performance targets. The merger will create the sixth largest insurance broker in the nation and is expected to be completed in the first quarter of 2004.

          The insurance 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 for all purchase acquisitions to identify and quantify the fair value of the assets acquired and liabilities assumed in business combinations accounted for as purchases.








BB&T Corporation          Page 11          Third Quarter 2003 Form 10-Q




Merger-Related and Restructuring Charges

          In connection with the consummation of acquisitions 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 acquisitions. The following table summarizes BB&T’s merger-related accruals for the periods as indicated:

  Merger Accrual Activity
(Dollars in thousands)
               
Balance Balance
December 31, Additions in Utilized in December 31, Additions in Utilized in September 30,
2001 2002 2002 2002 2003 2003 2003
                                               
Severance and personnel-related charges     $ 31,371   $ 40,014   $ 54,556   $ 16,829   $ 31,305   $ 14,072   $ 34,062  
Occupancy and equipment charges    37,063    31,668    26,978    41,753    33,522    31,619    43,656  
Systems conversions and related charges    11,339    12,278    21,879    1,738    21,534    2,678    20,594  
Other merger-related charges    15,110    21,438    25,267    11,281    18,289    16,875    12,695  
                                      
     Total    $ 94,883   $ 105,398   $ 128,680   $ 71,601   $ 104,650   $ 65,244   $ 111,007  









BB&T Corporation          Page 12          Third Quarter 2003 Form 10-Q




E. Calculation of Earnings per Common Share

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

BB&T CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE

For the Periods as Indicated

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
    Weighted average number of common shares       551,018,984     477,112,074     498,048,765     472,764,083  
                               
        Income before cumulative effect of change in accounting principle   $115,891   $328,157   $759,876   $955,974  
        Cumulative effect of change in accounting principle    --    --    --    9,780  
                               
        Net income   $115,891   $328,157   $759,876   $965,754  
                               
    Basic earnings per share  
        Income before cumulative effect of change in accounting principle   $.21   $.69   $1.53   $2.02  
        Cumulative effect of change in accounting principle    --    --    --    .02  
                               
        Net income   $.21   $.69   $1.53   $2.04  
                               
Diluted Earnings Per Share:  
    Weighted average number of common shares    551,018,984    477,112,074    498,048,765    472,764,083  
                               
    Add:  
        Dilutive effect of outstanding options (as determined by                            
            application of treasury stock method)    4,525,009    5,213,461    3,977,242    5,599,447  
    Weighted average number of diluted common shares    555,543,993    482,325,535    502,026,007    478,363,530  
        Income before cumulative effect of change in accounting principle   $115,891   $328,157   $759,876   $955,974  
        Cumulative effect of change in accounting principle    --    --    --    9,780  
                               
        Net income   $115,891   $328,157   $759,876   $965,754  
                               
    Diluted earnings per share  
        Income before cumulative effect of change in accounting principle   $.21   $.68   $1.51   $2.00  
        Cumulative effect of change in accounting principle    --    --    --    .02  
                               
        Net income   $.21   $.68   $1.51   $ 2.02  


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 13          Third Quarter 2003 Form 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, indirect financing of 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 14          Third Quarter 2003 Form 10-Q




Reportable Segments
For the Three Months Ended September 30, 2003 and 2002
(Dollars in thousands)

Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
 
Net interest income (expense) $ 506,790 $ 405,535 $ 174,073 $ 158,023 $ (3,848 ) $ (5,235 ) $ 368 $ 469 $ 58,646 $ 48,152
  Net intersegment interest income (expense)  177,019   180,569   (78,370 ) (69,062 ) 10,276   12,328   --   --   --   --  
                                            
Net interest income  683,809   586,104   95,703   88,961   6,428   7,093   368   469   58,646   48,152  
                                           
Provision for loan and lease losses  57,071   57,356   2,068   841   --   --   --   --   20,408   15,525  
Noninterest income  272,038   213,916   95,446   (90,618 ) 29,104   24,237   98,964   75,548   13,592   13,235  
  Intersegment noninterest income  130,314   88,349   --   --   --   --   --   --   --   --  
Noninterest expense  373,650   265,080   14,967   10,798   21,074   17,707   69,967   56,944   29,823   27,618  
  Intersegment noninterest expense  123,966   154,601   2,906   7,339   2,039   1,958   3,724   3,197   2,256   2,731  
                                            
Income before income taxes  531,474   411,332   171,208   (20,635 ) 12,419   11,665   25,641   15,876   19,751   15,513  
                                           
  Income tax provision (benefit)  149,528   109,696   52,638   (7,127 ) 3,750   3,322   10,687   6,301   5,839   5,933  
                                            
Net income (loss) $ 381,946 $ 301,636 $ 118,570 $ (13,508 ) $ 8,669 $ 8,343 $ 14,954 $ 9,575 $ 13,912 $ 9,580  
                                          
Identifiable segment assets $ 62,150,117 $ 48,720,890 $ 11,679,332 $ 9,864,161 $ 80,035 $ 75,265 $ 642,527 $ 664,379 $ 2,012,796 $ 1,720,986  

Investment Banking
and Brokerage Treasury All Other Segments (1) Total Segments
2003 2002 2003 2002 2003 2002 2003 2002    
Net interest income (expense)  $ 1,957  $ 1,772  $ 42,617  $ 54,852  $ 40,179  $ 44,264  $ 820,782  $ 707,832          
  Net intersegment interest income (expense)  --   --   1,107   2,218   --   --   110,032   126,053          
                                            
Net interest income   1,957   1,772   43,724   57,070   40,179   44,264   930,814   833,885          
                                          
Provision for loan and lease losses   --   --   39   35   10,587   8,132   90,173   81,889          
Noninterest income  66,824   49,563   9,307   166,023   32,872   37,501   618,147   489,405          
  Intersegment noninterest income   --   --   --   --   --   --   130,314   88,349          
Noninterest expense  56,195   46,530   4,024   3,625   15,204   12,772   584,904   441,074          
  Intersegment noninterest expense   3,383   3,692   247   422   3,433   3,432   141,954   177,372          
                                            
Income before income taxes   9,203   1,113   48,721   219,011   43,827   57,429   862,244   711,304          
                                          
  Income tax provision (benefit)   3,555   539   10,079   61,080   11,041   11,387   247,117   191,131          
                                            
Net income (loss) $ 5,648 $ 574 $ 38,642 $ 157,931 $ 32,786 $ 46,042 $ 615,127 $ 520,173          
                                          
Identifiable segment assets $ 1,084,749 $ 931,953 $ 16,386,171 $ 20,030,487 $ 4,078,667 $ 6,633,813 $ 98,114,394 $ 88,641,934          


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



BB&T Corporation          Page 15          Third Quarter 2003 Form 10-Q




BB&T Corporation
Reportable Segments

For the Nine Months Ended September 30, 2003 and 2002
(Dollars in thousands)

Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
 
Net interest income (expense) $ 1,318,913 $ 1,138,766 $ 501,023 $ 466,271 $ (11,658 ) $ (15,284 ) $ 1,107 $ 1,110 $ 165,406 $ 135,370  
  Net intersegment interest income (expense)  514,327   484,996   (212,398 ) (256,399 ) 33,444   35,277   --   --   --   --  
                                            
Net interest income  1,833,240   1,623,762   288,625   209,872   21,786   19,993   1,107   1,110   165,406   135,370  
                                          
Provision for loan and lease losses  165,621   160,638   4,886   2,329   --   --   --   --   62,019   45,334  
Noninterest income  726,937   495,832   124,529   (37,542 ) 85,181   76,577   277,068   208,434   37,829   39,899  
  Intersegment noninterest income  368,633   225,212   --   --   --   --   --   --   --   --  
Noninterest expense  934,279   787,836   43,007   30,995   65,590   56,606   205,211   157,803   84,920   78,838  
  Intersegment noninterest expense  368,390   431,510   8,773   22,170   6,070   6,384   11,180   9,605   6,744   9,107  
                                            
Income before income taxes  1,460,520   964,822   356,488   116,836   35,307   33,580   61,784   42,136   49,552   41,990  
                                          
  Income tax provision (benefit)  407,821   268,314   110,447   32,025   10,790   9,916   25,009   16,742   15,512   15,259  
                                            
Net income (loss) $ 1,052,699 $ 696,508 $ 246,041 $ 84,811 $ 24,517 $ 23,664 $ 36,775 $ 25,394 $ 34,040 $ 26,731  
                                          
Identifiable segment assets $ 62,150,117 $ 48,720,890 $ 11,679,332 $ 9,864,161 $ 80,035 $ 75,265 $ 642,527 $ 664,379 $ 2,012,796 $ 1,720,986  

Investment Banking
and Brokerage Treasury All Other Segments (1) Total Segments
2003 2002 2003 2002 2003 2002 2003 2002    
 
Net interest income (expense) $ 4,981 $ 5,494 $ 125,158 $ 161,216 $ 119,921 $ 132,330 $ 2,224,851 $ 2,025,273          
  Net intersegment interest income (expense)  --   --   8,350   16,825   --   --   343,723   280,699          
                                            
Net interest income   4,981   5,494   133,508   178,041   119,921   132,330   2,568,574   2,305,972          
                                          
Provision for loan and lease losses   --   --   116   106   28,700   22,051   261,342   230,458          
Noninterest income  181,371   160,788   188,791   230,917   135,928   98,042   1,757,634   1,272,947          
  Intersegment noninterest income   --   --   --   --   --   --   368,633   225,212          
Noninterest expense   155,057   144,119   11,759   10,869   64,935   28,302   1,564,758   1,295,368          
  Intersegment noninterest expense   10,149   11,078   742   1,269   10,290   9,170   422,338   500,293          
                                            
Income before income taxes   21,146   11,085   309,682   396,714   151,924   170,849   2,446,403   1,778,012          
                                          
  Income tax provision (benefit)   8,111   4,347   78,441   109,896   43,993   36,717   700,124   493,216          
                                            
Net income (loss) $ 13,035 $ 6,738 $ 231,241 $ 286,818 $ 107,931 $ 134,132 $ 1,746,279 $ 1,284,796          
                                           
Identifiable segment assets $ 1,084,749 $ 931,953 $ 16,386,171 $ 20,030,487 $ 4,078,667 $ 6,633,813 $ 98,114,394 $ 88,641,934          


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



BB&T Corporation          Page 16          Third Quarter 2003 Form 10-Q




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

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(Dollars in thousands)
Net Interest Income                            
    Net interest income from segments     $ 930,814   $ 833,885   $ 2,568,574   $ 2,305,972  
    Other net interest income (expense) (1)    23,330    (80,766 )  202,090     (324,059 )
    Elimination of net intersegment interest income (2)    (147,686 )  (51,027 )  (568,608 )   57,476  
       Consolidated net interest income     $ 806,458   $ 702,092   $ 2,202,056   $ 2,039,389  
                        
Net income                       
    Net income from segments     $ 615,127   $ 520,173   $ 1,746,279   $ 1,284,796  
    Other net income (loss) (1)    (13,545 )  278,842    159,329     576,548  
    Elimination of intersegment net income (2)    (485,691 )  (470,858 )  (1,145,732 )   (895,590 )
       Consolidated net income     $ 115,891   $ 328,157   $ 759,876   $ 965,754  
                             
                                                                                                September 30,   September 30,
                                                                                                2003     2002  
Total Assets                      
    Total assets from segments                 $ 98,114,394   $ 88,641,934  
    Other assets (1)              11,520,784     28,653,295  
    Elimination of intersegment assets (2)                   (19,280,047 )   (39,108,398 )
       Consolidated total assets                 $ 90,355,131   $ 78,186,831  


(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 17          Third Quarter 2003 Form 10-Q




For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
(Dollars in thousands, except per share data)
Net income:                    
    Net income as reported     $ 115,891   $ 328,157   $ 759,876   $ 965,754  
       Add: Stock-based compensation expense                      
           included in reported net income, net of tax    133    193    441    1,204  
       Deduct: Total stock-based employee                      
           compensation expense determined under                      
           fair value based method for all awards,                      
           net of tax    (6,540 )  (7,230 )  (22,485 )  (24,051 )
    Pro forma net income   $109,484   $321,120   $737,832   $942,907  
                       
Basic EPS:                      
    As reported   $.21   $.69   $1.53   $2.04  
    Pro Forma    .20    .67    1.48    1.99  
                       
Diluted EPS:                      
    As reported    .21    .68    1.51    2.02  
    Pro Forma    .20    .67    1.47    1.98  


          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 3.7% and 3.1% for the third quarter and first nine months of 2003, respectively; risk free interest rates of 4.6% and 4.7% for the third quarter and first nine months of 2002, respectively; and expected lives of 6.8 years for options granted in both the third quarter of 2003 and the third quarter of 2002 and 6.0 years for options granted in the first nine months of 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.

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 September 30, 2003, and December 31, 2002, BB&T’s investments in such projects totaled $5.0 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 $214.8 million and $172.6 million at September 30, 2003 and 2002, respectively. Certain of these off-balance-sheet investments are currently being evaluated based on the consolidation provisions of FIN 46 as discussed in Note C.


BB&T Corporation          Page 18          Third Quarter 2003 Form 10-Q




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 September 30, 2003, BB&T had issued $1.4 billion in such guarantees predominately for terms of one year or less. Of these commitments, $767.5 million have been issued or renewed since December 31, 2002, and, in accordance with FIN 45, BB&T has 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 19          Third Quarter 2003 Form 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 nine months ended September 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    1,913,615    --    --    40,905    --    1,739    --    1,956,259  
      Adjustments to goodwill    (36,920 )  --    --    --    (650 )  --    --    (37,570 )
Balance, September 30, 2003   $ 3,236,067   $ 7,459   $ 27,330   $ 268,628   $ 70,255   $ 29,713   $ 2,616   $ 3,642,068  



          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 September 30, 2003 As of December 31, 2002
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortizing intangible assets
Core deposit intangibles     $ 321,851   $ (63,792 ) $ 99,893   $ (41,601 )
Other (1)    187,321    (22,664 )  100,853    (10,321 )
   Totals   $ 509,172   $ (86,456 ) $ 200,746   $ (51,922 )

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


           During the nine months ended September 30, 2003 and 2002, BB&T recorded $34.6 million and $17.7 million, respectively, in pretax amortization expenses associated with identifiable intangible assets.


BB&T Corporation          Page 20          Third Quarter 2003 Form 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     $ 58,478  
2004    76,207  
2005    67,962  
2006    60,197  
2007    51,499  

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations

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 21          Third Quarter 2003 Form 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 mortgage 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 22          Third Quarter 2003 Form 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 either the pooling-of-interests or 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 September 30, 2003, were $90.4 billion, an increase of $10.1 billion, or 12.6%, from December 31, 2002. The asset categories that produced the largest increases were loans and leases, including loans held for sale, goodwill, and other assets, which grew $7.7 billion, or 14.3%, $1.9 billion, or 111.3%, and $1.1 billion, or 25.7%, respectively. These increases were partially offset by a decline of $1.6 billion in securities available for sale compared to December 31, 2002.

          Total deposits at September 30, 2003, increased $10.0 billion, or 19.5%, from December 31, 2002. Short-term borrowed funds increased $898.0 million, or 16.6%, and long-term debt decreased $3.7 billion, or 27.6%, during the first nine months of 2003. Total shareholders’ equity increased $2.8 billion, or 38.3%, 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 23          Third Quarter 2003 Form 10-Q




          During the third quarter of 2003, management largely completed a balance sheet restructuring designed 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 included transactions that affected mortgage loans, securities, long-term debt and repurchases of BB&T’s common stock. 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 nine months of 2003, average total loans were $56.6 billion, an increase of $6.6 billion, or 13.3%, compared to the same period in 2002. During the first nine months of 2003, average commercial loans and leases totaled $29.8 billion, an increase of $2.0 billion, or 7.3%, compared to the same period in 2002 and composed 52.6% of the loan and lease portfolio compared to 55.6% for the first nine months of 2002. Average mortgage loans totaled $11.2 billion and composed 19.8% of the loan and lease portfolio compared to 18.3% for the first nine months of 2002. Average consumer loans, which include sales finance, revolving credit and direct retail, totaled $15.6 billion, an increase of $2.6 billion, or 19.9%, compared to the same period in 2002. Consumer loans composed the remaining 27.6% of the loan and lease portfolio compared to 26.1% for the first nine months of 2002. Aided by the very low interest rate environment and strong housing market, BB&T originated a record $17.1 billion of mortgage loans during the first nine months of 2003 compared to $8.6 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 third quarter of 2003, average total loans were $61.5 billion, an increase of $9.9 billion, or 19.2%, compared to the same period in 2002. Average commercial loans and leases for the third quarter of 2003 totaled $30.8 billion, an increase of $2.3 billion, or 8.0% compared to the same period in 2002 and composed 50.1% of the loan and lease portfolio compared to 55.3% for the third quarter of 2002. Average mortgage loans totaled $11.8 billion and composed 19.1% of the loan and lease portfolio compared to 18.4% for the third quarter of 2002. Average consumer loans totaled $18.9 billion, an increase of $5.3 billion, or 39.4%, compared to the same period in 2002 and composed the remaining 30.8% of the loan and lease portfolio compared to 26.3% for the third 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 2002 and 2003.In particular, on July 1, 2003, loans totaling $6.2 billion were acquired through the purchase of First Virginia. Excluding the effect of purchase accounting transactions, the average “internal” loan growth for the three months ended September 30, 2003, was 3.8% compared to the third quarter of 2002. By category, excluding the effects of purchase accounting transactions, average mortgage loans, including loans held for sale, increased 11.4%, average commercial loans and leases grew 1.8%, and average consumer loans increased 2.7% in the third 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 weaker loan demand in BB&T’s core markets.


BB&T Corporation          Page 24          Third Quarter 2003 Form 10-Q




          The annualized fully taxable equivalent ("FTE") yields on commercial, consumer and mortgage loans for the first nine months of 2003 were 5.60%, 7.57%, and 6.11%, respectively, resulting in an annualized yield on the total loan portfolio of 6.24%. The FTE yields on commercial, consumer and mortgage loans for the first nine months of 2002 were 6.23%, 8.63%, and 7.16%, respectively, resulting in an annualized yield on the total loan portfolio of 7.02%. This reflects a decrease of 78 basis points in the annualized yield on the total loan portfolio during the first nine months of 2003 in comparison to 2002. The decrease in yield resulted from a lower average prime rate during the first nine 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 target 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 4.00% and 4.16% during the third quarter and first nine months of 2003, respectively, 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 6.91% in the third quarter and 7.02% in the first nine months of 2002 to 6.02% in the third quarter and 6.24% in the first nine months of 2003, was more than offset by the substantial increase in the overall loan portfolio as a result of the acquisition of First Virginia. As a result, interest income from loans and leases on an FTE basis in the current quarter and the first nine months of 2003 increased 3.8% and .7%, respectively, compared to the 2002 periods.

          As part of the balance sheet restructuring discussed above, management plans to retain, rather than sell, $2.0 billion to $3.0 billion of mortgage loans from originations during 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. Through the end of the third quarter, BB&T had retained approximately $1.7 billion of mortgages in the loan portfolio pursuant to this strategy.

Securities

          Securities available for sale totaled $16.0 billion at September 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 $98.2 million at September 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 $57.1 million, an increase of $1.6 million, or 2.8%, from year-end 2002. Trading securities totaled $710.4 million, up $561.9 million compared to the balance at December 31, 2002.

          Average total securities for the first nine months amounted to $17.1 billion, down .7% from the average during the first nine months of 2002. For the third quarter of 2003, average securities totaled $17.4 billion, or .9% lower than the average balance for the third quarter of 2002.


BB&T Corporation          Page 25          Third Quarter 2003 Form 10-Q




          The decrease in securities available for sale and the increase in trading securities resulted from the sale of securities having a total par value of $453.0 million and the transfer of securities available for sale having a total par value of $522.5 million to the trading securities portfolio. These two transactions resulted in the recognition of $29.1 million of net securities losses, which were used to partially offset a recapture of the impairment of mortgage servicing rights during the third quarter of 2003. The transfer of securities available for sale to the trading portfolio was made pursuant to a change in management’s intent related to those securities, including more frequent trading activity as part of an economic hedging strategy related to mortgage servicing rights. During the third quarter of 2002, BB&T sold securities available for sale having a total par value of $2.0 billion, which created net gains totaling $135.9 million. These 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 during the third quarter of 2002.

          The annualized FTE yield on the average total securities portfolio for the first nine months of 2003 was 4.95%, a decrease of 137 basis points from the annualized yield earned in the first nine 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, sold, or were called, the resulting cash flows were reinvested in securities paying lower interest rates.

          As part of the balance sheet restructuring undertaken in the second and third quarters of 2003, management used the proceeds from the second quarter sale or maturity of securities available for sale having a total par value of $4.0 billion and certain other funds to prepay $2.9 billion in FHLB long-term advances bearing high interest rates and to retain $2.0 billion to $3.0 billion in additional mortgage loans.

Other Interest Earning Assets

Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $322.0 million at September 30, 2003, an increase of $27.5 million, or 9.4%, compared to December 31, 2002. Interest-bearing deposits with banks increased $133.3 million, or 90.0%, 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 and also reflect growth from the purchase of First Virginia. The average yield on other interest-earning assets for the first nine months of 2003 was 1.33%, a decrease of 56 basis points from the 1.89% earned on these assets during the first nine months of 2002. The decrease in the yield of other interest-earning assets is principally the result of the decline in the average federal funds rate as previously discussed.


BB&T Corporation          Page 26          Third Quarter 2003 Form 10-Q




Goodwill and Other Assets

          BB&T’s other noninterest-earning assets, excluding premises and equipment and noninterest-bearing cash and due from banks, increased $3.1 billion from December 31, 2002, to September 30, 2003. The increase was due primarily to additional goodwill and other intangibles resulting from the acquisition of First Virginia in the amount of $1.9 billion and $270.6 million, as well as increased bank owned life insurance and other assets, which grew $72.0 million and $287.3 million, respectively.

          Other assets include mortgage servicing rights totaling $327.4 million, net of an allowance for impairment, which totaled $172.6 million at September 30, 2003. During the third quarter management evaluated BB&T’s mortgage servicing rights and the related valuation allowance to determine whether any portion of the valuation allowance was unrecoverable. As a result of this evaluation, mortgage servicing rights and an associated allowance in the amount of $102.5 million were determined to be unrecoverable and were written off. This reduction had no impact on BB&T’s consolidated results of operation other than a reduction of future amortization of mortgage servicing rights.

Deposits

          Deposits at September 30, 2003, totaled $61.3 billion, an increase of $10.0 billion, or 19.5%, from December 31, 2002. Average deposits for the first nine months of 2003 increased $6.9 billion, or 14.3%, compared to the first nine 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 $3.1 billion, or 21.3%, noninterest-bearing deposits, which increased $2.0 billion, or 28.4%, and CDs and other time deposits, which increased $1.5 billion, or 6.3%.

          For the third quarter, average deposits increased $11.3 billion, or 22.4%. Average total transaction accounts, which include noninterest-bearing deposits, savings, interest checking and money rate savings, totaled $35.5 billion for the third quarter, an increase of $9.7 billion, or 37.5%, compared to the third quarter of 2002. Average time deposits for the third quarter totaled $26.4 billion, which represents an increase of $1.6 billion, or 6.6%, compared to the third quarter of 2002.

          The growth in average deposits during the first nine months of 2003 compared to the corresponding period of 2002 includes the effect of deposits acquired in purchase accounting transactions completed during 2003 and 2002. In particular, the purchase of First Virginia at the beginning of the third quarter of 2003 added $9.4 billion in deposits. If the effects of purchase accounting transactions were excluded, average deposits for the nine months ended September 30, 2003, increased 3.6% compared to the same time period of 2002. For the third quarter of 2003, total average deposits, excluding the effects of purchase accounting transactions, increased 2.2% compared to the third quarter of 2002.


BB&T Corporation          Page 27          Third Quarter 2003 Form 10-Q




          The annualized average rate paid on total interest-bearing deposits during the first nine months of 2003 was 1.68%, a decrease of 81 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.

Borrowings

          At September 30, 2003, short-term borrowed funds totaled $6.3 billion, an increase of $898.0 million, or 16.6%, compared to December 31, 2002. For the third quarter of 2003, average short-term borrowed funds totaled $5.8 billion, an increase of $518.9 million, or 9.9%, from the comparable period of 2002. For the nine months ended September 30, 2003, average short-term borrowed funds totaled $4.8 billion, a decrease of $803.0 million, or 14.2%, compared to the first nine months of 2002. The increase in short-term borrowed funds was primarily caused by the purchase of First Virginia at the beginning of the third quarter, which had $581.3 million in short-term borrowings at the time of the acquisition. The average annualized rate paid on short-term borrowed funds was 1.19% for the first nine months of 2003, a decrease of 63 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 $9.8 billion at September 30, 2003, down $3.7 billion, or 27.6%, from the balance at December 31, 2002. For the third quarter of 2003, average long-term debt totaled $10.2 billion, a decrease of $2.1 billion, or 17.1%, compared to the third quarter of 2002. For the nine months ended September 30, 2003, average long-term borrowed funds were $12.3 billion, up $580.9 million, or 5.0%, compared to the first nine months of 2002. The average annualized rate paid on long-term borrowed funds was 3.96% for the first nine months of 2003, a decrease of 108 basis points from the average rate of 5.04% paid for the first nine 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 totaling $384.9 million that reduced third quarter after-tax earnings by $248.5 million. The prepayment penalties are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expenses. The reduction in higher-cost long-term debt is intended to improve net interest income and net interest margins. In the third quarter of 2003, the long-term debt transactions contributed approximately 20 basis points to the net interest margin.


BB&T Corporation          Page 28          Third Quarter 2003 Form 10-Q




Asset Quality

          Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $447.1 million at September 30, 2003, compared to $451.7 million at December 31, 2002. As a percentage of loans and leases plus foreclosed property, nonperforming assets were .73% at September 30, 2003, down from .84% at December 31, 2002. Loans 90 days or more past due and still accruing interest totaled $121.9 million at September 30, 2003, compared to $115.0 million at year-end 2002.

          BB&T’s net charge-offs totaled $61.8 million for the third quarter and amounted to .40% of average loans and leases, on an annualized basis, compared to $63.6 million, or .49% of average loans and leases, on an annualized basis, in the corresponding period in 2002. For the nine months ended September 30, 2003 and 2002, net charge-offs totaled $182.7 million and $177.9 million, respectively, and represented .43% and .48%, respectively, of average loans and leases on an annualized basis.

          The allowance for loan and lease losses totaled $791.5 million at September 30, 2003, compared to $723.7 million at December 31, 2002, an increase of 9.4%. The allowance amounted to 1.29% of loans and leases outstanding at September 30, 2003, compared to 1.35% at year-end 2002. Excluding loans held for sale, the allowance for loan and lease losses was 1.32% and 1.42% of loans and leases at September 30, 2003 and December 31, 2002, respectively. The overall trends in the allowance for loan and lease losses were partially aided by the acquisition of First Virginia, which had strong credit quality including lower net charge-offs and lower nonperforming assets in recent quarters compared to BB&T. This strong credit history, combined with a post-acquisition loan portfolio mix with a lower risk profile and improvements in BB&T’s net charge-off ratio and ratio of nonperforming assets to total assets, led to the reduction in the allowance as a percentage of outstanding loans and leases.

          During the first quarter of 2003, BB&T transferred $9.0 million, or 1.2% of the March 31, 2003 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 BB&T’s consolidated results of operations.

          The provision for loan and lease losses for the third quarter of 2003 was $65.0 million, compared to $64.0 million during the same period in 2002. For the nine months ended September 30, 2003, the provision for loan and lease losses totaled $189.5 million compared to $179.0 million in 2002.

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


BB&T Corporation          Page 29          Third Quarter 2003 Form 10-Q




ASSET QUALITY ANALYSIS
(Dollars in thousands)

For the Three Months Ended
9/30/03 6/30/03 3/31/03 12/31/02 9/30/02
Allowance For Loan & Lease Losses
    Beginning balance     $ 719,576   $ 716,276   $ 723,685   $ 723,688   $ 706,446  
    Allowance for acquired loans, net    68,768    --    1,267    (16,075 )  16,861  
    Reclassification of allowance related                                  
       to unfunded commitments    --    --    (8,986 )  --    --  
    Provision for loan and lease losses    65,000    61,500    63,000    84,700    64,000  
    Net charge-offs    (61,817 )  (58,200 )  (62,690 )  (68,628 )  (63,619 )
       Ending balance   $791,527   $719,576   $716,276   $723,685   $723,688  
Risk Assets  
    Nonaccrual loans and leases   $355,420   $363,524   $392,701   $374,842   $358,823  
    Foreclosed real estate    70,178    64,347    60,110    55,448    46,378  
    Other foreclosed property    20,902    17,575    21,714    21,199    17,712  
    Restructured loans    613    145    175    175    2,358  
       Total nonperforming assets   $447,113   $445,591   $474,700   $451,664   $425,271  
    Loans 90 days or more past due                                  
       and still accruing   $121,907   $97,479   $93,609   $115,047   $100,147  
Asset Quality Ratios  
Nonaccrual and restructured loans and leases                                  
    as a percentage of total loans and leases*       .58  %   .66  %   .73  %   .70  %   .68  %
Total nonperforming assets as a percentage of:  
    Total assets    .49    .55    .60    .56    .54  
    Loans and leases plus foreclosed property*    .73    .81    .88    .84    .80  
Net charge-offs as a percentage of  
    average loans and leases*    .40    .43    .47    .51    .49  
Net charge-offs excluding specialized                                  
    lending as a percentage of average                                  
    loans and leases**    .30    .31    .35    .40    .39  
Allowance for loan and lease losses as a                                  
    percentage of loans and leases*    1.29    1.31    1.33    1.35    1.36  
Allowance for loan and lease losses as a                                  
    percentage of loans and leases                                  
    held for investment    1.32    1.39    1.39    1.42    1.42  
Ratio of allowance for loan and lease losses to:  
    Net charge-offs       3.23  x   3.08  x   2.82  x   2.66  x   2.87  x
    Nonaccrual and restructured loans and leases    2.22    1.98    1.82    1.93    2.00  

* Includes loans held for sale and is 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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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.


BB&T Corporation          Page 30          Third Quarter 2003 Form 10-Q




          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 31          Third Quarter 2003 Form 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.

Interest Sensitivity Simulation Analysis

Interest Rate Scenario Annualized Hypothetical
Percentage Change in
Linear Prime Rate Net Interest Income
Change in September 30, September 30,
Prime Rate 2003 2002 2003 2002
  3.00     7.00  %   7.75     (1.65 ) %   1.51  
  1.50     5.50     6.25     (1.12 )   0.83  
  (1.00 )  3.00    NA    (1.16 )  NA  
  (1.50 )  NA    3.25    NA     (2.99 )
  (3.00 )  NA    1.75    NA     (3.47 )

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.

Derivative Financial Instruments

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


BB&T Corporation          Page 32          Third Quarter 2003 Form 10-Q




          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 September 30, 2003, BB&T had derivative financial instruments outstanding with notional amounts totaling $9.6 billion. The estimated fair value of open contracts was $184.5 million at September 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 September 30, 2003 was not material.

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

Derivative Classifications and Hedging Relationships
(Dollars in thousands)

September 30, 2003
Notional Fair Value
Amount Gain Loss
Derivatives Designated as Cash Flow Hedges:                
   Hedging Business Loans     $ 4,150,000   $ 89,089   $ --  
   Hedging Short-term Borrowed Funds    1,250,000    5,270    --  
                     
Derivatives Designated as Fair Value Hedges:                 
   Hedging Business Loans    22,216    --    437  
   Hedging Long-term Debt    1,400,000    98,777    --  
                     
Derivatives Not Designated as Hedges    2,802,819    28,188    36,420  
                     
     Total   $9,625,035   $221,324   $36,857  





BB&T Corporation          Page 33          Third Quarter 2003 Form 10-Q





Derivative Financial Instruments
September 30, 2003

(Dollars in thousands)

Average Average Estimated
Notional Receive Pay Fair
Amount Rate Rate Value
Receive fixed swaps     $ 6,122,938     4.54  %   1.83  % $ 207,885  
Pay fixed swaps       595,155     1.19  %   3.72  %   (20,456 )
Caps, floors & collars    1,250,000    N/A    N/A    5,270  
Foreign exchange contracts    174,832    N/A    N/A    706  
Futures contracts    2,762    N/A    N/A    (40 )
Interest rate lock commitments    186,982    N/A    N/A    3,337  
Forward mortgage loan contracts    1,145,900    N/A    N/A    (12,289 )
Options on contracts purchased    146,466    N/A    N/A    54  
                       
   Total     $ 9,625,035               $ 184,467  

N/A - not applicable.

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, with the exception of short and long-term debt, have not materially changed since that report was filed. BB&T’s total borrowings were affected by the acquisition of First Virginia on July 1, which resulted in the assumption of additional $581.3 million of short-term borrowings and $8.5 million in long-term debt, principally FHLB advances. In addition, as part of a balance sheet restructuring during the current quarter, BB&T prepaid and modified the terms of a portion of its outstanding long-term debt. Detailed discussion of the effects of the balance sheet restructuring on BB&T’s outstanding debt is included in the “Borrowings” section herein. 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 34          Third Quarter 2003 Form 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 $10.2 billion at September 30, 2003, and $7.4 billion at December 31, 2002. BB&T’s book value per common share at September 30, 2003 was $18.61 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 is calculated as 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 net of applicable deferred income taxes, and certain nonfinancial equity investments. Tier 1 capital 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 35          Third Quarter 2003 Form 10-Q




CAPITAL RATIOS

2003 2002
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
Risk-based capital ratios:                        
      Tier 1 capital       9.6  %   9.7  %   9.5  %   9.2  %   9.7  %
      Total capital       13.3    13.8    13.8    13.4    13.5  
Tier 1 leverage ratio       7.2    7.2    7.2    6.9    7.3  

          During the first nine months of 2003 and 2002, BB&T repurchased 13.6 million and 10.5 million shares of BB&T common stock at a cost of $494.6 million and $397.6 million, respectively.


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ANALYSIS OF RESULTS OF OPERATIONS

          Consolidated net income for the third quarter of 2003 totaled $115.9 million, a decrease of 64.7% compared to the $328.2 million earned during the comparable quarter of 2002. On a diluted per share basis, earnings for the three months ended September 30, 2003, were $.21, compared to $.68 for the same period in 2002, a decrease of 69.1%. BB&T’s results of operations for the third quarter of 2003 produced an annualized return on average assets of .51% and an annualized return on average shareholders’ equity of 4.50% compared to prior year ratios of 1.68% and 17.66%, respectively.

          Net income for the nine months ended September 30, 2003, totaled $759.9 million, a decrease of $205.9 million, or 21.3%, compared to the $965.8 million earned during the comparable period of 2002. On a diluted per share basis, earnings for the first nine months of 2003 and 2002 were $1.51 and $2.02, respectively, which represents a 25.2% decrease. BB&T’s results of operations for the first nine months of 2003 produced an annualized return on average assets of 1.21% and an annualized return on average shareholders’ equity of 11.97% compared to prior year ratios of 1.72% and 18.44%, respectively.

          The decreases in net income and diluted earnings per share during the three and nine month periods ending September 30, 2003 compared to the same periods in 2002 were primarily caused by prepayment penalties in the amount of $248.5 million, on an after-tax basis, resulting from an early extinguishment of debt completed in connection with the previously discussed balance sheet restructuring during the third quarter of 2003.




BB&T Corporation          Page 36          Third Quarter 2003 Form 10-Q




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

ANNUALIZED
PROFITABILITY MEASURES

2003 2002
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
Return on average assets       .51  %   1.57  %   1.68  %   1.71  %   1.68  %
Return on average shareholders' equity       4.50    16.38    17.78    17.97    17.66  
Net interest margin (taxable equivalent)       4.17    4.06    4.13    4.22    4.25  


Merger-Related and Restructuring Charges

          BB&T recorded certain merger-related and restructuring costs during both 2003 and 2002. For the third quarter of 2003, BB&T recorded $14.8 million in net after-tax charges primarily associated with the acquisition of First Virginia. During the third quarter of 2002, BB&T incurred $7.8 million in net after-tax charges primarily associated with the acquisitions of Regional Financial Corp. (“Regional”), 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 nine months ended September 30, 2003 and 2002, BB&T incurred $24.9 million and $18.2 million, respectively, in net after-tax charges primarily associated with the same purchase acquisitions that affected the respective third quarters of 2003 and 2002.

          During the third quarter of 2003, BB&T recorded pre-tax merger-related and restructuring charges of $22.8 million. These expenses were recorded in connection with the third quarter acquisition of First Virginia. For the nine months ended September 30, 2003, BB&T recorded pre-tax merger-related and restructuring charges of $38.3 million in connection with the first quarter acquisition and systems conversion of Equitable and the third quarter acquisition of First Virginia. The above expenses are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expenses.

          During the third quarter of 2002, BB&T recorded pre-tax merger-related and restructuring charges of $12.7 million. These expenses were recorded in connection with the third quarter acquisition of Regional, as well as the third quarter systems conversions of AREA and MidAmerica. For the nine months ended September 30, 2002, BB&T recorded pre-tax merger-related and restructuring charges of $28.9 million. The above expenses are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expenses.


BB&T Corporation          Page 37          Third Quarter 2003 Form 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 Nine Months Ended September 30,
2003 2002
Severance and personnel-related costs     $ 11,385   $ 2,326  
Occupancy and equipment charges    9,291    8,475  
Marketing and public relations expenses    7,565    7,834  
Systems conversions costs, asset write-offs,  
     charges to conform policies of an acquired  
     entity and other costs    10,083    10,232  
Total   $ 38,324   $ 28,867  

          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, charges 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 (F&M National Corporation and First Virginia) 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 38          Third Quarter 2003 Form 10-Q




F&M National Corporation
(Dollars in thousands)
             
Balance Balance Balance
  December 31, Additions in Utilized in December 31, Utilized in September 30,
  2001 2002 2002 2002 2003 2003
 
Severance and personnel-related charges     $ 11,055   $ 1,417   $ 11,592   $ 880   $ 633   $ 247  
Occupancy and equipment charges    10,992    --    797    10,195    3,590    6,605  
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   $ 4,233   $ 7,839  

           The remaining accruals at September 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 substantially utilized in 2003 unless they relate to specific contracts expiring in later years.

  First Virginia Banks, Inc.
  (Dollars in thousands)
       
Balance
Additions in Utilized in September 30,
2003 2003 2003
Severance and personnel-related charges     $ 26,723   $ 2,605   $ 24,118  
Occupancy and equipment charges       29,579     5,516     24,063  
Systems conversions and related charges     20,594     --     20,594  
Other merger-related charges      4,245     --     4,245  
                  
     Total   $ 81,141   $ 8,121   $ 73,020  

           Merger-related and restructuring accruals related to First Virginia are generally expected to be utilized over the next 12 months, unless they relate to specific contracts or legal obligations that expire in later years, or they relate to the disposal of duplicate facilities and equipment, which may take longer than 12 months to complete.


BB&T Corporation          Page 39          Third Quarter 2003 Form 10-Q




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

  All Other Merger Activity
  (Dollars in thousands)
               
Balance Balance Balance
December 31, Additions in Utilized in December 31, Additions in Utilized in September 30,
2001 2002 2002 2002 2003 2003 2003
                                               
Severance and personnel-related charges   $ 20,316   $ 38,597   $ 42,964   $ 15,949   $ 4,582   $ 10,834   $ 9,697  
Occupancy and equipment charges    21,431    31,668    22,269    30,830    3,943    21,785    12,988  
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    14,044    16,865    7,463  
                                      
     Total   $ 60,700   $ 101,156   $ 103,055   $ 58,801   $ 23,509   $ 52,162   $ 30,148  

          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 staff positions are eliminated and the terminated employees begin to receive severance payments. 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.

          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 40          Third Quarter 2003 Form 10-Q




Net Interest Income and Net Interest Margin

          Net interest income on an FTE basis was $832.9 million for the third quarter of 2003 compared to $742.7 million for the same period in 2002, an increase of $90.3 million, or 12.2%. For the three months ended September 30, 2003, average earning assets increased $9.9 billion, or 14.2%, compared to the same period of 2002, while average interest-bearing liabilities increased by $6.2 billion, or 10.1%, and the net interest margin decreased from 4.25% in the third quarter of 2002 to 4.17% in the current quarter. This decrease in the net interest margin resulted primarily because of two factors. The reinvestment of proceeds from the sales, maturities and prepayments of securities, particularly sales of securities in previous quarters that produced gains to economically offset writedowns in mortgage servicing rights, and the additional interest expense incurred in connection with BB&T’s stock buy-back program negatively affected the net interest margin for the third quarter of 2003 by 6 basis points and 2 basis points, respectively.

          For the nine months ended September 30, 2003, net interest income on an FTE basis was $2.3 billion compared to $2.2 billion for the same period in 2002, an increase of $131.6 million, or 6.1%. Average earning assets for the first nine months of 2003 increased $6.6 billion, or 9.8%, while average interest-bearing liabilities increased $4.7 billion, or 8.0%, compared to the first nine months of 2002. The net interest margin for the first nine months of 2002 compared to the same period in 2003 decreased 14 basis points from 4.26% to 4.12%. This decrease in margin was the 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%. In the declining interest rate environment, the average yield on interest earning assets declined 90 basis points, while the average cost of funds over the same time frame declined 85 basis points, causing a reduction in the margin. In addition, the reinvestment of proceeds from the sales, maturities and prepayments of securities, particularly sales of securities taken to produce gains to economically offset writedowns in mortgage servicing rights, and the additional interest expense incurred in connection with BB&T’s stock buy-back program negatively affected the net interest margin for the first nine months of 2003 by 6 basis points and 3 basis points, respectively.

          The following tables set forth the major components of net interest income and the related annualized yields and rates for the third quarter and first nine 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 41          Third Quarter 2003 Form 10-Q




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

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)     $ 16,425,338   $ 16,675,988     4.28  %   6.02  % $ 175,594   $ 250,917   $ (75,323 ) $ (72,194 ) $ (3,129 )
    States and political subdivisions    997,878    898,930    6.28    7.45    15,667    16,750    (1,083 )  (2,830 )  1,747  
                                                    
       Total securities (5)    17,423,216    17,574,918    4.39    6.09    191,261    267,667    (76,406 )  (75,024 )  (1,382 )
Other earning assets (2)    633,744    456,474    1.13    1.67    1,798    1,922    (124 )  (738 )  614  
Loans and leases, net                                               
    of unearned income (1)(3)(4)(5)    61,519,643    51,628,276    6.02    6.91    931,997    897,969    34,028    (124,743 )  158,771  
                                                    
       Total earning assets    79,576,603    69,659,668    5.62    6.67    1,125,056    1,167,558    (42,502 )  (200,505 )  158,003  
                                                       
       Non-earning assets       11,269,213     7,911,563                                      
                                                       
         Total assets     $ 90,845,816   $ 77,571,231                                      
                                                
Liabilities and Shareholders' Equity                                               
Interest-bearing deposits:                                               
    Savings and interest-checking   $ 4,535,667   $ 3,350,476    0.26    0.77    3,000    6,518    (3,518 )  (5,293 )  1,775  
    Money rate savings    20,029,818    15,110,502    0.65    1.17