BB&T Second Quarter 2004 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



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

For the quarterly period ended:

June 30, 2004


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 Exchange Act).    Yes  [ X ]   No  [__]

At July 31, 2004, 554,433,468 shares of the registrant's common stock, $5 par value, were outstanding.




BB&T CORPORATION

FORM 10-Q

June 30, 2004


INDEX


Page No.

   
Part I. FINANCIAL INFORMATION  
   
  Item 1. Financial Statements (Unaudited) 2 
   
          Notes to Consolidated Financial Statements 6 
   
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 
   
          Executive Summary 24 
   
          Analysis of Financial Condition 25 
   
          Market Risk Management 33 
   
          Capital Adequacy and Resources 37 
   
          Analysis of Results of Operations 39 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 52 
   
  Item 4. Controls and Procedures 53 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 53 
   
  Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 53 
   
  Item 4. Submission of Matters to a Vote of Security Holders 53 
   
  Item 6. Exhibits and Reports on Form 8-K 56 
   
SIGNATURES 60 
   
CERTIFICATIONS 61 



BB&T Corporation           Page 1          Second Quarter 2004 10-Q




Item 1. Financial Statements

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

June 30, December 31,
2004 2003
     
Assets
        Cash and due from banks     $ 1,967,249   $ 2,217,961  
        Interest-bearing deposits with banks    314,229    271,157  
        Federal funds sold and securities purchased under resale agreements or                
               similar arrangements    176,509    332,849  
        Trading securities at fair value    388,998    693,819  
        Securities available for sale at fair value    17,477,628    15,562,954  
        Securities held to maturity at amortized cost (fair value: $125 at June 30, 2004  
               and $60,125 at December 31, 2003)    125    60,122  
        Loans held for sale    813,760    725,459  
        Loans and leases, net of unearned income    66,222,891    61,579,927  
        Allowance for loan and lease losses    (816,330 )  (784,937 )
               Loans and leases, net    65,406,561    60,794,990  
        Premises and equipment, net of accumulated depreciation    1,270,680    1,201,342  
        Goodwill    4,076,888    3,616,526  
        Core deposit and other intangible assets    586,199    401,944  
        Other assets    4,869,459    4,587,490  
                             Total assets   $97,348,285   $90,466,613  
 
Liabilities and Shareholders' Equity  
        Deposits:  
               Noninterest-bearing deposits   $12,017,270   $11,098,251  
               Savings and interest checking    4,506,042    4,307,069  
               Money rate savings    22,428,015    20,348,969  
               Certificates of deposit and other time deposits    27,711,563    23,595,496  
                             Total deposits    66,662,890    59,349,785  
        Short-term borrowed funds    6,232,126    7,334,900  
        Long-term debt    10,524,646    10,807,700  
        Accounts payable and other liabilities    3,403,910    3,039,497  
                             Total liabilities    86,823,572    80,531,882  
        Shareholders' equity:  
               Preferred stock, $5 par, 5,000,000 shares authorized, none issued or                
                     outstanding at June 30, 2004 or at December 31, 2003    --    --  
               Common stock, $5 par, 1,000,000,000 shares authorized;  
                     555,337,965 issued and outstanding at June 30, 2004, and  
                     541,942,987 issued and outstanding at December 31, 2003    2,776,690    2,709,715  
               Additional paid-in capital    3,322,014    2,893,812  
               Retained earnings    4,668,657    4,309,635  
               Unvested restricted stock    (219 )  (310 )
               Accumulated other comprehensive income, net of deferred income  
                     taxes of $(131,865) at June 30, 2004, and $13,010 at December 31, 2003    (242,429 )  21,879  
                             Total shareholders' equity    10,524,713    9,934,731  
                             Total liabilities and shareholders' equity   $97,348,285   $90,466,613  

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


BB&T Corporation           Page 2          Second Quarter 2004 10-Q




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

For the Three Months Ended For the Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Interest Income
         Interest and fees on loans and leases     $945,561   $841,961   $1,857,717   $1,688,632  
         Interest and dividends on securities    171,826    201,826    337,610    408,234  
         Interest on short-term investments    2,067    1,744    4,576    3,545  
              Total interest income    1,119,454    1,045,531    2,199,903    2,100,411  
Interest Expense  
         Interest on deposits    172,689    192,505    339,466    400,129  
         Interest on short-term borrowed funds    17,968    15,494    35,363    29,158  
         Interest on long-term debt    89,094    134,112    178,548    275,526  
              Total interest expense    279,751    342,111    553,377    704,813  
Net Interest Income    839,703    703,420    1,646,526    1,395,598  
         Provision for loan and lease losses    64,000    61,500    126,500    124,500  
Net Interest Income After Provision for Loan and Lease Losses    775,703    641,920    1,520,026    1,271,098  
Noninterest Income  
         Service charges on deposits    131,445    96,645    254,208    193,423  
         Mortgage banking income (loss)    67,535    (32,711 )  74,645    27,261  
         Trust income    31,519    26,248    61,504    52,257  
         Investment banking and brokerage fees and commissions    63,624    60,597    140,222    112,922  
         Insurance commissions    164,712    101,500    288,418    190,158  
         Bankcard fees and merchant discounts    25,285    18,828    48,130    35,548  
         Other nondeposit fees and commissions    54,180    41,942    102,969    81,494  
         Securities gains (losses), net    2    109,500    (509 )  143,734  
         Other income    35,353    38,547    82,246    69,220  
              Total noninterest income    573,655    461,096    1,051,833    906,017  
Noninterest Expense  
         Personnel expense    433,866    367,497    856,832    720,198  
         Occupancy and equipment expense    103,428    85,625    203,575    173,352  
         Amortization of intangibles    28,670    6,806    52,726    13,560  
         Professional services    19,348    17,566    38,756    33,612  
         Merger-related and restructuring charges    791    10,775    10,441    15,504  
         Other expense    164,548    162,651    326,307    298,782  
              Total noninterest expense    750,651    650,920    1,488,637    1,255,008  
Earnings  
         Income before income taxes    598,707    452,096    1,083,222    922,107  
         Provision for income taxes    198,601    135,859    354,616    278,122  
         Net income   $400,106   $316,237   $728,606   $643,985  
Per Common Share  
         Net Income:  
              Basic   $.72   $.67   $1.32   $1.37  
              Diluted   $.72   $.67   $1.32   $1.36  
         Cash dividends paid   $.32   $.29   $.64   $.58  
Weighted Average Shares Outstanding  
              Basic    554,041,770    471,713,450    550,309,127    471,124,675  
              Diluted    557,485,680    475,293,564    554,016,363    474,823,495  

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


BB&T Corporation           Page 3          Second Quarter 2004 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2004 and 2003
(Unaudited)
(Dollars in thousands)

Accumulated
Shares of Additional Retained Other Total
Common Common Paid-In Earnings Comprehensive Shareholders'
Stock Stock Capital and Other (1) Income Equity
Balance, December 31, 2002      470,452,260   $ 2,352,261   $ 793,123   $ 3,911,821   $ 330,709   $ 7,387,914  
Add (Deduct):  
      Comprehensive income:  
           Net income    --    --    --    643,985    --    643,985  
                Unrealized holding gains (losses) arising during the period  
                     on securities available for sale, net of tax of $637    --    --    --    --    (997 )  (997 )
                Reclassification adjustment for losses (gains)                                        
                     on securities available for sale included in net                                        
                     income, net of tax of $56,056      --    --    --    --    (87,678 )  (87,678 )
           Change in unrealized gains (losses) on securities, net of tax    --    --    --    --    (88,675 )  (88,675 )
           Change in unrecognized gain (loss) on cash flow hedge,                                        
                net of tax of $29,374    --    --    --    --    45,015    45,015  
      Total comprehensive income    --    --    --    643,985    (43,660 )  600,325  
      Common stock issued:  
           In purchase acquisitions    2,117,334    10,587    60,097    --    --    70,684  
           In connection with stock option exercises  
                and other employee benefits, net of cancellations    1,140,426    5,702    12,149    --    --    17,851  
      Redemption of common stock    (1,591,800 )  (7,959 )  (57,504 )  --    --    (65,463 )
      Cash dividends declared on common stock    --    --    --    (315,708 )  --    (315,708 )
      Other, net    --    --    7,720    101    --    7,821  
Balance, June 30, 2003    472,118,220   $2,360,591   $815,585   $4,240,199   $287,049   $7,703,424  
 
Balance, December 31, 2003    541,942,987   $2,709,715   $2,893,812   $4,309,325   $21,879   $9,934,731  
Add (Deduct):  
      Comprehensive income:  
           Net income    --    --    --    728,606    --    728,606  
                Unrealized holding gains (losses) arising during the  
                     period on securities available for sale, net of tax of  
                     $129,284    --    --    --    --    (239,889 )  (239,889 )
                Reclassification adjustment for losses (gains)                                        
                     on securities available for sale included in net                                        
                     income, net of tax of $199    --    --    --    --    310    310  
           Change in unrealized gains (losses) on securities, net of tax    --    --    --    --    (239,579 )  (239,579 )
           Change in unrecognized gain (loss) on cash flow hedge,                                        
                net of tax of $14,165    --    --    --    --    (21,711 )  (21,711 )
           Change in minimum pension liability, net of tax of $1,625    --    --    --    --    (3,018 )  (3,018 )
      Total comprehensive income    --    --    --    728,606    (264,308 )  464,298  
      Common stock issued:  
           In purchase acquisitions    15,547,445    77,737    513,122    --    --    590,859  
           In connection with stock option exercises  
                and other employee benefits, net of cancellations    1,346,333    6,732    17,620    --    --    24,352  
      Redemption of common stock    (3,498,800 )  (17,494 )  (111,138 )  --    --    (128,632 )
      Cash dividends declared on common stock    --    --    --    (369,584 )  --    (369,584 )
      Other, net    --    --    8,598    91    --    8,689  
Balance, June 30, 2004    555,337,965   $ 2,776,690   $ 3,322,014   $ 4,668,438   $ (242,429 ) $ 10,524,713  


(1)   Other includes unvested restricted stock.

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


BB&T Corporation           Page 4          Second Quarter 2004 10-Q




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

For the Six Months Ended
June 30,
2004 2003
Cash Flows From Operating Activities:
      Net income     $728,606   $643,985  
      Adjustments to reconcile net income to net cash provided by operating activities:  
                Provision for loan and lease losses    126,500    124,500  
                Depreciation of premises and equipment    79,877    71,578  
                Amortization of intangibles    52,726    13,560  
                Discount accretion and premium amortization on securities, net    26,360    14,299  
                Net decrease (increase) in trading account securities    346,884    (32,223 )
                Loss (gain) on sales of securities, net    509    (143,734 )
                Loss (gain) on sales of loans held for sale    (38,167 )  (142,825 )
                Loss (gain) on disposals of premises and equipment, net    (339 )  (350 )
                Proceeds from sales of loans held for sale    2,913,470    8,646,408  
                Purchases of loans held for sale    (611,749 )  (1,580,365 )
                Origination of loans held for sale, net of principal collected    (2,351,855 )  (7,570,439 )
                Tax benefit from exercise of stock options    8,598    7,720  
                Decrease (increase) in:  
                    Accrued interest receivable    (224 )  52,507  
                    Other assets    (60,356 )  60,392  
                Increase (decrease) in:  
                    Accrued interest payable    2,030    (21,650 )
                    Accounts payable and other liabilities    187,603    376,315  
                Other, net    2,398    4,762  
                        Net cash provided by (used in) operating activities    1,412,871    524,440  
 
Cash Flows From Investing Activities:  
      Proceeds from sales of securities available for sale    143,700    8,340,562  
      Proceeds from maturities, calls and paydowns of securities available for sale    2,153,750    3,891,881  
      Purchases of securities available for sale    (3,667,689 )  (10,555,519 )
      Proceeds from maturities, calls and paydowns of securities held to maturity    59,997    4,447  
      Purchases of securities held to maturity    --    (4,023 )
      Leases made to customers    (124,073 )  (54,282 )
      Principal collected on leases    72,837    68,539  
      Loan originations, net of principal collected    (2,943,137 )  (548,694 )
      Purchases of loans    (84,206 )  (74,935 )
      Net cash acquired in business combinations accounted for under the purchase method    8,689    3,782  
      Purchases and originations of mortgage servicing rights    (52,869 )  (139,347 )
      Proceeds from disposals of premises and equipment    18,633    25,422  
      Purchases of premises and equipment    (133,365 )  (97,148 )
      Proceeds from sales of foreclosed property    37,280    27,290  
      Proceeds from sales of other real estate held for development or sale    10,995    11,348  
                Net cash provided by (used in) investing activities    (4,499,458 )  899,323  
 
Cash Flows From Financing Activities:  
      Net increase (decrease) in deposits    4,763,862    775,445  
      Net increase (decrease) in short-term borrowed funds    (1,186,032 )  (886,189 )
      Proceeds from issuance of long-term debt    1,897,000    3,200,700  
      Repayment of long-term debt    (2,296,816 )  (3,967,591 )
      Net proceeds from common stock issued    24,352    17,851  
      Redemption of common stock    (128,632 )  (65,463 )
      Cash dividends paid on common stock    (351,127 )  (273,771 )
                Net cash provided by (used in) financing activities    2,722,607    (1,199,018 )
 
Net Increase (Decrease) in Cash and Cash Equivalents    (363,980 )  224,745  
Cash and Cash Equivalents at Beginning of Period    2,821,967    2,372,220  
Cash and Cash Equivalents at End of Period   $2,457,987   $2,596,965  
 
Supplemental Disclosure of Cash Flow Information:  
 
      Cash paid during the period for:  
           Interest   $551,347   $726,463  
           Income taxes    55,146    66,723  
      Noncash investing and financing activities:  
           Transfer of securities available for sale to trading securities    42,063    --  
           Transfer of loans to foreclosed property    43,758    38,963  
           Transfer of fixed assets to other real estate owned    4,718    5,035  
           Transfer of other real estate owned to fixed assets    --    33  
           Common stock issued in purchase accounting transactions    590,859    70,684  

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

Back to Index

BB&T Corporation           Page 5          Second Quarter 2004 10-Q




BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004

(Unaudited)

A. Basis of Presentation

          In the opinion of management, the accompanying unaudited consolidated balance sheets, the consolidated statements of income, the consolidated statements of changes in shareholders’ equity, and the consolidated statements of cash flows of BB&T Corporation and subsidiaries (referred to herein as “BB&T”, “the Corporation” or “the Company”), present fairly in all material respects BB&T’s financial position at June 30, 2004 and December 31, 2003; BB&T’s results of operations for the three months and six months ended June 30, 2004 and 2003; and BB&T’s cash flows for the six months ended June 30, 2004 and 2003. 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 2003 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 2003 financial statements were reclassified to conform to the 2004 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 majority-owned by BB&T or over which BB&T otherwise 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 material wholly owned and majority-owned subsidiaries are consolidated unless control does not rest with BB&T or deconsolidation is required by generally accepted accounting principles. The Company has investments in certain entities for which BB&T does not have a controlling interest. BB&T accounts for these investments using the equity method whereby its ownership interest in the entities’ income or loss is recorded in other noninterest income on the Consolidated Statements of Income. The Company periodically evaluates the carrying value of these investments for impairment.

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 relate to the determination of the allowance for loan and lease losses, valuation of mortgage servicing rights, valuation of goodwill, other intangible assets, other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets and liabilities.

BB&T Corporation           Page 6          Second Quarter 2004 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 subsidiary banks, 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 subsidiary banks provide a wide range of banking services to individuals and businesses and offer a variety of loans to businesses and consumers, including mortgage loans. BB&T’s loans are primarily to individuals residing in the market areas described above or to businesses located in this geographic area. BB&T’s subsidiary banks also market a wide range of deposit services to individuals and businesses. BB&T’s subsidiary banks either directly, or through their subsidiaries, offer lease financing to businesses and municipal governments; discount brokerage services, annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis; insurance premium financing; permanent financing arrangements for commercial real estate and loan servicing for third-party investors; direct consumer finance loans to individuals; payroll processing; trust services and asset management. The nonbank subsidiaries of BB&T Corporation provide a variety of financial services including automobile financing, equipment financing, factoring, full-service securities brokerage and capital markets services.

C. Changes in Accounting Principles and Effects of New Accounting Pronouncements

           In January 2003, the Financial Accounting Standards Board (“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. Due to significant implementation issues, the FASB modified the wording of FIN 46 and issued FIN 46R in December of 2003. FIN 46R deferred the effective date for the provisions of FIN 46 to entities other than Special Purpose Entities (“SPEs”) until financial statements issued for periods ending after March 15, 2004. SPEs were subject to the provisions of either FIN 46 or FIN 46R as of December 15, 2003. Management has evaluated 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 (“LIHTC investments”) and trust preferred securities structures because these entities or transactions constitute BB&T’s primary FIN 46 and FIN 46R exposure. Under FIN 46, it was determined that BB&T is not the primary beneficiary of the trusts that issued trust preferred securities; thus BB&T’s trust preferred securities were deconsolidated as of September 30, 2003. As a result, other assets and long-term debt each increased by $8.9 million. As of December 31, 2003, BB&T had adopted FIN 46R. The adoption of FIN 46 and FIN 46R did not have a material effect on BB&T’s consolidated financial position or consolidated results of operations beyond the impact on trust preferred securities because it was determined that BB&T is not the primary beneficiary of the LIHTC investments. BB&T’s involvement with variable interest entities at June 30, 2004, is primarily limited to $26.9 million in outstanding balances in LIHTC investments, with an additional $191.1 million in future funding commitments. BB&T has utilized LIHTC investments to invest in areas serving low to moderate-income communities since 1994. Because these investments generate tax credits which minimize the financial impact of a loss of capital, BB&T has chosen to utilize established syndicators to reduce this risk. Interpretive guidance relating to FIN 46R 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.

BB&T Corporation           Page 7          Second Quarter 2004 10-Q




          In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). 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 was 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, were required to be applied prospectively. The initial implementation of the Statement did not have a material effect on BB&T’s consolidated financial position or consolidated results of operations and management does not anticipate any such impact in the future.

          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.

           In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement requires additional annual disclosures about the assets, obligations and cash flows of defined benefit pension and postretirement plans, as well as quarterly and annual disclosures with respect to the expense recorded for such plans. The revised disclosures, which are required to be provided on a quarterly basis, are presented herein.

BB&T Corporation           Page 8          Second Quarter 2004 10-Q




          In December 2003, the Accounting Standards Executive Committee (“AcSEC”) issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in business combinations. The SOP does not apply to loans originated by BB&T. BB&T intends to adopt the provisions of SOP 03-3 effective January 1, 2005, and does not expect the initial implementation to have a significant effect on BB&T’s consolidated financial position or consolidated results of operations. Management is currently assessing the long-term effect of the SOP.

          On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (“IRLC”), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, “Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133.” Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. BB&T early adopted the provisions of SAB 105 effective January 1, 2004. The initial impact upon adoption was a $2.3 million reduction of mortgage banking income. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, management does not anticipate that this guidance will have a material adverse effect on either BB&T’s consolidated financial position or consolidated results of operations.

          In May 2004, the FASB issued FASB Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). This Staff Position provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide prescription drug benefits. Management currently does not anticipate that the implementation of the Staff Position will materially affect BB&T’s consolidated financial position or consolidated results of operations.

          In the second quarter of 2004, the Emerging Issues Task Force (“EITF”) released EITF Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” The Issue provided guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. On June 30, 2004, BB&T held certain investments having continuous unrealized loss positions for more than 12 months totaling $224.4 million. Substantially all of these investments were in U.S. Treasuries and U.S. government agency obligations, the cash flows of which are guaranteed by the U.S. government or its agencies and, therefore, it is expected that the securities would not be settled at a price less than their amortized cost. Because the decline in market value was caused by interest rate increases and not credit quality, and because BB&T has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, BB&T has not recognized any other-than-temporary impairment in connection with these investments.

BB&T Corporation           Page 9          Second Quarter 2004 10-Q




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 2003 and thus far during 2004:

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
April 14, 2004     Republic Bancshares Inc.     St. Petersburg, Fla.   $ 2.9 billion   $ 260.3 million   $ 433.4 million (2)       6.5 million  
February 1, 2004     McGriff, Seibels &                                  
        Williams Inc.     Birmingham, Ala.     226.6 million     413.2 million     350.5 million (1)       8.2 million  
 
 
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  
 

(1)   Includes cash consideration totaling $50.0 million
(2)   Includes cash consideration totaling $171.1 million

          The intangibles related to transactions completed in 2004 in the above table include $218.4 million of other identifiable intangibles, which are being amortized on an accelerated basis over their estimated useful lives. The table above does not include mergers and acquisitions made by any acquired company.

Insurance and Other Non-Bank Acquisitions

          In addition to the financial institutions and other significant financial services companies presented in the table above, BB&T acquired three insurance agencies that were accounted for as purchases during the six months ended June 30, 2004. In conjunction with these transactions, BB&T issued approximately 396 thousand shares of common stock and paid approximately $4.1 million in cash, recording approximately $12.8 million in goodwill and $12.2 million in identifiable intangible assets with an average life of 10 years. BB&T acquired six insurance agencies during 2003 which were accounted for as purchases. In conjunction with these transactions, BB&T issued approximately 1.7 million shares of common stock and paid approximately $1.0 million in cash. Approximately $42.3 million in goodwill and $30.9 million of identifiable intangible assets with an average life of 10 years were recorded in conjunction with these transactions.

BB&T Corporation           Page 10          Second Quarter 2004 10-Q




          On June 10, 2004, BB&T Asset Management completed its acquisition of privately held investment advisory firm de Garmo & Kelleher of Washington D.C. With more than $630 million in assets under management, de Garmo & Kelleher provides investment counsel to individuals, families, professional corporations and charities in more than 25 states.

          On April 30, 2004, BB&T completed its acquisition of Capitol Premium Plan Inc., an insurance premium finance company based in Charlotte, North Carolina, which was combined with BB&T’s wholly owned insurance premium finance subsidiary, Prime Rate Premium Finance Corporation Inc.

          The acquisitions described above do not exceed the pro forma disclosure thresholds prescribed by SFAS No. 141, “Business Combinations.”

          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; therefore, the purchase accounting information presented herein may subsequently be adjusted to reflect changes in allocations of purchase price.

Merger-Related and Restructuring 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 table presents an analysis of accrued merger costs. This account includes amounts accrued that were reflected as expenses and amounts recorded through purchase accounting adjustments:

Merger Accrual Activity

Balance Balance
December 31, Additions in Utilized in June 30,
2003 2004 2004 2004
(Dollars in thousands)
         
Severance and personnel-related charges     $ 27,850   $ 5,342   $ 11,053   $ 22,139  
Occupancy and equipment charges    48,696    3,397    23,417    28,676  
Systems conversions and related charges    20,735    4,207    21,055    3,887  
Other merger-related charges    11,070    2,960    7,106    6,924  
       Total   $ 108,351   $ 15,906   $ 62,631   $ 61,626  

BB&T Corporation           Page 11          Second Quarter 2004 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 Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
        Weighted average number of common shares       554,041,770     471,713,450     550,309,127     471,124,675  
                Net income   $400,106   $316,237   $728,606   $643,985  
        Basic earnings per share   $.72   $.67   $1.32   $1.37  
Diluted Earnings Per Share:  
        Weighted average number of common shares    554,041,770    471,713,450    550,309,127    471,124,675  
        Add:  
                Dilutive effect of outstanding options (as determined by  
                         application of treasury stock method)    3,443,910    3,580,114    3,707,236    3,698,820  
        Weighted average number of diluted common shares    557,485,680    475,293,564    554,016,363    474,823,495  
                Net income   $400,106   $316,237   $728,606   $643,985  
        Diluted earnings per share   $.72   $.67   $1.32   $1.36  

          For the quarters ending June 30, 2004 and 2003, respectively, options to purchase an additional 16.6 million shares and 10.0 million shares of common stock were outstanding, but were not included in the computation of dilutes earnings per share because their inclusion would have had an antidilutive effect. For the first six months of 2004 and 2003, respectively, antidilutive options to purchase 14.4 million shares and 10.1 million shares of common stock were outstanding.

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 these business segments.

BB&T Corporation           Page 12          Second Quarter 2004 10-Q




          BB&T emphasizes revenue growth by focusing on client service, sales effectiveness and relationship management. The segment results contained herein are presented based on internal management accounting policies that were designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the segments is not comparable with BB&T’s consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

          Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2003, for a description of internal accounting policies and the basis of segmentation, including a description of the segments presented in the accompanying tables.

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








BB&T Corporation           Page 13          Second Quarter 2004 10-Q




BB&T Corporation
Reportable Segments

For the Three Months Ended June 30, 2004 and 2003

Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
(Dollars in thousands)
Net interest income (expense)     $ 512,483   $ 404,570   $ 182,900   $ 158,843   $ (529 ) $ (3,943 ) $ 933   $ 283   $ 66,493   $ 56,104  
    Net intersegment interest income (expense)    265,109    163,449    (94,065 )  (66,358 )  2,271    11,300    --    --    --    --  
Total net interest income    777,592    568,019    88,835    92,485    1,742    7,357    933    283    66,493    56,104  
Provision for loan and lease losses    63,475    54,568    2,292    1,897    --    --    --    --    22,150    22,217  
Noninterest income    207,080    153,731    65,191    (29,194 )  38,019    28,733    159,827    95,612    13,624    12,602  
    Intersegment noninterest income    100,047    130,469    --    --    --    --    --    --    --    --  
Noninterest expense    329,476    279,721    11,945    14,757    25,238    21,856    108,196    67,035    30,788    28,365  
    Allocated corporate expenses    138,496    123,798    4,836    2,920    7,450    2,078    4,787    3,724    4,236    2,246  
Income before income taxes    553,272    394,132    134,953    43,717    7,073    12,156    47,777    25,136    22,943    15,878  
    Income tax provision (benefit)    183,859    119,727    44,749    14,089    2,406    3,754    18,768    9,562    6,869    4,715  
Segment net income (loss)   $369,413   $274,405   $90,204   $29,628   $4,667   $8,402   $29,009   $15,574   $16,074   $11,163  
Identifiable segment assets   $50,576,349   $40,773,040   $13,045,280   $11,068,743   $96,613   $87,539   $981,638   $686,404   $2,301,676   $1,926,210  

Investment Banking Intersegment
and Brokerage Treasury All Other Segments (1) Eliminations Total Segments
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
 
Net interest income (expense)     $ 1,760   $ 1,643   $ 66,367   $ 37,004   $ 41,088   $ 40,845   $ --   $ --   $ 871,495   $ 695,349  
    Net intersegment interest income (expense)    --    --    (1,542 )  4,878    --    --    (171,773 )  (113,269 )  --    --  
Total net interest income    1,760    1,643    64,825    41,882    41,088    40,845    (171,773 )  (113,269 )  871,495    695,349  
Provision for loan and lease losses    --    --    41    38    14,608    9,813    --    --    102,566    88,533  
Noninterest income    64,488    60,486    18,552    127,447    30,391    81,988    --    --    597,172    531,405  
    Intersegment noninterest income    --    --    --    --    --    --    (100,047 )  (130,469 )  --    --  
Noninterest expense    56,938    51,394    4,075    3,846    16,588    40,183    --    --    583,244    507,157  
    Allocated corporate expenses    3,506    3,384    184    249    3,836    3,433    --    --    167,331    141,832  
Income before income taxes    5,804    7,351    79,077    165,196    36,447    69,404    (271,820 )  (243,738 )  615,526    489,232  
    Income tax provision (benefit)    2,240    2,731    21,332    44,869    12,790    21,847    (58,030 )  (44,516 )  234,983    176,778  
Segment net income (loss)   $3,564   $4,620   $57,745   $120,327   $23,657   $47,557   $(213,790 ) $(199,222 ) $380,543   $312,454  
Identifiable segment assets   $951,954   $1,021,428   $24,466,367   $21,517,943   $4,328,363   $5,864,294   $--   $--   $96,748,240   $82,945,601  



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

BB&T Corporation           Page 14          Second Quarter 2004 10-Q




BB&T Corporation
Reportable Segments

For the Six Months Ended June 30, 2004 and 2003

Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
(Dollars in thousands)
Net interest income (expense)     $ 996,561   $ 792,014   $ 359,084   $ 326,950   $ (1,604 ) $ (7,810 ) $ 1,752   $ 739   $ 128,453   $ 106,760  
    Net intersegment interest income (expense)    485,883    337,308    (181,195 )  (134,028 )  4,472    23,168    --    --    --    --  
Total net interest income    1,482,444    1,129,322    177,889    192,922    2,868    15,358    1,752    739    128,453    106,760  
Provision for loan and lease losses    124,890    108,550    4,436    2,818    --    --    --    --    41,648    41,611  
Noninterest income    394,439    301,372    70,359    29,083    73,626    56,077    278,075    178,104    24,878    24,237  
    Intersegment noninterest income    185,079    237,774    --    --    --    --    --    --    --    --  
Noninterest expense    636,565    560,782    23,492    28,040    50,067    44,516    207,617    135,244    62,156    55,097  
    Allocated corporate expenses    268,597    244,424    9,678    5,867    11,634    4,031    9,570    7,456    7,232    4,488  
Income before income taxes    1,031,910    754,712    210,642    185,280    14,793    22,888    62,640    36,143    42,295    29,801  
    Income tax provision (benefit)    338,363    229,055    69,270    57,809    4,932    7,040    24,652    14,322    12,566    9,673  
Segment net income (loss)   $693,547   $525,657   $141,372   $127,471   $9,861   $15,848   $37,988   $21,821   $29,729   $20,128  
Identifiable segment assets   $50,576,349   $40,773,040   $13,045,280   $11,068,743   $96,613   $87,539   $981,638   $686,404   $2,301,676   $1,926,210  

Investment Banking Intersegment
and Brokerage Treasury All Other Segments (1) Eliminations Total Segments
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
                     
Net interest income (expense)     $ 3,335   $ 3,024   $ 124,674   $ 82,541   $ 80,211   $ 79,742   $ --   $ --   $ 1,692,466   $ 1,383,960  
    Net intersegment interest income (expense)    --    --    (4,142 )  7,243    --    --    (305,018 )  (233,691 )  --    --  
Total net interest income    3,335    3,024    120,532    89,784    80,211    79,742    (305,018 )  (233,691 )  1,692,466    1,383,960  
Provision for loan and lease losses    --    --    83    77    29,660    18,113    --    --    200,717    171,169  
Noninterest income    142,529    114,547    35,371    179,484    69,390    103,056    --    --    1,088,667    985,960  
    Intersegment noninterest income    --    --    --    --    --    --    (185,079 )  (237,774 )  --    --  
Noninterest expense    119,866    98,862    8,117    7,735    31,110    49,731    --    --    1,138,990    980,007  
    Allocated corporate expenses    7,007    6,766    369    495    7,769    6,857    --    --    321,856    280,384  
Income before income taxes    18,991    11,943    147,334    260,961    81,062    108,097    (490,097 )  (471,465 )  1,119,570    938,360  
    Income tax provision (benefit)    7,367    4,556    38,657    68,362    24,988    32,952    (158,567 )  (141,714 )  362,228    282,055  
Segment net income (loss)   $11,624   $7,387   $108,677   $192,599   $56,074   $75,145   $(331,530 ) $(329,751 ) $757,342   $656,305  
Identifiable segment assets   $951,954   $ 1,021,428   $24,466,367   $21,517,943   $ 4,328,363   $ 5,864,294   $--   $--   $96,748,240   $82,945,601  



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

BB&T Corporation           Page 15          Second Quarter 2004 10-Q




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

For the Six Months Ended For the Three Months Ended
June 30, June 30,
  2004 2003 2004 2003
  (Dollars in thousands)
Net Interest Income
      Net interest income from segments     $ 1,692,466   $ 1,383,960   $ 871,495   $ 695,349  
      Other net interest income (expense) (1)    154,308    178,760    76,593    95,148  
      Elimination of management accounting practices (2)    (197,153 )  (172,804 )  (99,332 )  (86,278 )
      Other, net (3)    (3,095 )  5,682    (9,053 )  (799 )
           Consolidated net interest income   $ 1,646,526   $ 1,395,598   $ 839,703   $ 703,420  
Net income  
      Net income from segments   $ 757,342   $ 656,305   $ 380,543   $ 312,454  
      Other net income (loss) (1)    97,032    172,874    55,636    101,574  
      Elimination of management accounting practices (2)    50,415    37,731    37,805    17,705  
      Other, net (3)    (176,183 )  (222,925 )  (73,878 )  (115,496 )
           Consolidated net income   $ 728,606   $ 643,985   $ 400,106   $ 316,237  
                             
                    June 30,     June 30,  
                    2004     2003  
Total Assets                            
      Total assets from segments                 $ 96,748,240   $ 82,945,601  
      Other, net (1,3)                   600,045     (2,500,795 )
           Consolidated total assets                 $ 97,348,285   $ 80,444,806  


(1) Other net interest income (expense), other net income (loss) and other, net, include amounts applicable to BB&T's support functions that are not allocated to the reported segments.
(2) BB&T's reconciliation of total segment results to consolidated results requires the elimination of the internal management accounting practices. These adjustments include the elimination of the funds transfer pricing credits and charges and the elimination of allocated corporate expenses.
(3) Reflect intercompany eliminations to arrive at consolidated results.

G. Stock-Based Compensation

          BB&T maintains various stock-based compensation plans. These plans provide for the granting of stock options, 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” (“SFAS No. 123”).

BB&T Corporation           Page 16          Second Quarter 2004 10-Q




For the Three Months Ended For the Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(Dollars in thousands, except per share data)
Net income:
       Net income as reported     $ 400,106   $ 316,237   $ 728,606   $ 643,985  
            Add: Stock-based compensation expense  
                  included in reported net income, net of tax    115    154    242    308  
            Deduct: Total stock-based employee                            
                  compensation expense determined under                            
                  fair value based method for all awards,                            
                  net of tax    (5,106 )  (6,281 )  (13,894 )  (15,945 )
       Pro forma net income   $ 395,115   $ 310,110   $ 714,954   $ 628,348  
 
Basic EPS:  
       As reported   $ .72   $ .67   $ 1.32   $ 1.37  
       Pro forma    .71    .66    1.30    1.33  
Diluted EPS:  
       As reported    .72    .67    1.32    1.36  
       Pro forma    .71    .65    1.29    1.32  

          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 2004 and 2003, respectively: dividend yield of 3.0% in 2004 and 2003; expected volatility of 27% in 2004 and 2003; risk free interest rates of 3.9% and 3.5% for the second quarter and first six months of 2004; risk free interest rates of 3.0% and 3.1% for the second quarter and first six months of 2003; and expected lives of 6.0 years for both 2004 and 2003.

          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 significant 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 relating to its investments. At June 30, 2004, and December 31, 2003, BB&T’s investments in such projects totaled $26.9 million and $12.7 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 typically 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. Outstanding commitments to fund low-income housing investments totaled $191.1 million and $215.0 million at June 30, 2004 and December 31, 2003, respectively.

BB&T Corporation           Page 17          Second Quarter 2004 10-Q




Guarantees

          Standby letters of credit, which include performance and financial guarantees, are unconditional commitments issued by BB&T to guarantee the performance of customers to third parties. 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 appropriate. As of June 30, 2004, BB&T had issued a total of $1.2 billion in standby letters of credit, which were entered into subsequent to December 31, 2002. As a result of BB&T’s adoption of FIN 45 at January 1, 2003, BB&T’s estimated liability for such guarantees was $.5 million at June 30, 2004, which was included in other liabilities.

          In the ordinary course of business, BB&T indemnifies its officers and directors to the fullest extent permitted by law against liabilities arising from pending or threatened litigation. BB&T also issues standard representations, warranties and indemnifications in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnifications provide similar indemnifications to BB&T. Although these agreements often do not specify limitations, BB&T has not been required to act on the guarantees and does not believe that any payments pursuant to them would materially change the financial condition or results of operations as presented herein.

          Merger and acquisition agreements for businesses other than financial institutions occasionally 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 typically issued for terms of three to eight years. In the aggregate, the maximum potential contingent consideration payable under such agreements is $145.9 million over the next five years.








BB&T Corporation           Page 18          Second Quarter 2004 10-Q




I. Goodwill and Other Intangibles

          The changes in the carrying amount of goodwill attributable to each of BB&T’s operating segments for the six months ended June 30, 2004, and the year ended December 31, 2003, are as follows:

Goodwill Activity by Operating Segment
(Dollars in thousands)

Investment
Banking Mortgage Trust Insurance Banking and Specialized
Network Banking Services Services Brokerage Lending Total
Balance, December 31, 2002     $1,361,988   $7,459   $27,330   $227,723   $70,905   $27,974   $1,723,379  
            Acquired goodwill, net    1,913,358    --    --    41,529    --    1,739    1,956,626  
            Adjustments to goodwill (1)    (62,829 )  --    --    --    (650 )  --    (63,479 )
Balance, December 31, 2003    3,212,517    7,459    27,330    269,252    70,255    29,713    3,616,526  
            Acquired goodwill, net    213,980    --    4,380    254,334    --    3,694    476,388  
            Adjustments to goodwill (1)    (16,475 )  --    --    (799 )  692    556    (16,026 )
Balance, June 30, 2004   $3,410,022   $7,459   $31,710   $522,787   $70,947   $33,963   $4,076,888  

(1)  Adjustments reflect allocations of purchase price subsequent to the dates of acquisition.

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

Identifiable Intangible Assets
(Dollars in thousands)
             
As of June 30, 2004 As of December 31, 2003
  Gross   Net Gross   Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
             
Identifiable intangible assets:
     Core deposit intangibles     $364,937   $(104,963 ) $259,974   $321,851   $(77,447 ) $244,404  
     Other (1)    381,538    (55,313 )  326,225    187,644    (30,104 )  157,540  
        Totals   $746,475   $(160,276 ) $586,199   $509,495   $(107,551 ) $401,944  

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

          During the six months ended June 30, 2004, and 2003, BB&T recorded $52.7 million and $13.6 million, respectively, in amortization expenses associated with identifiable intangible assets.

BB&T Corporation           Page 19          Second Quarter 2004 10-Q




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

Estimated Amortization Expense
of Identifiable Intangible Assets
(Dollars in thousands)
 
For the Year Ending December 31:
   2004     $ 111,084  
   2005    103,055  
   2006    90,527  
   2007    78,869  
   2008    67,911  

J. Benefit Plans

          BB&T provides various benefit plans to substantially all employees. Employees of acquired entities generally participate in existing BB&T plans soon after consummation of the business combinations. The plans of acquired institutions are typically merged into the BB&T plans upon consummation of the mergers, and, under these circumstances, credit is usually given to these employees for years of service at the acquired institution for vesting and eligibility purposes. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2003, for detailed descriptions and disclosures about the various benefit plans offered by BB&T.

          The following table summarizes the components of net periodic benefit cost recognized for the three-month and six-month periods ended June 30, 2004, and 2003, respectively:










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BB&T Corporation           Page 20          Second Quarter 2004 10-Q




Pension Plans Other Postretirement
Qualified Nonqualified Benefit Plans
             
Six months ended June 30, Six months ended June 30, Six months ended June 30,
2004 2003 2004 2003 2004 2003
(Dollars in thousands)
 
Service cost     $ 27,058   $ 18,812   $ 1,544   $ 1,775   $ 1,985   $ 1,190  
Interest cost    25,306    17,052    2,880    3,029    3,820    2,551  
Estimated return on plan assets    (33,948 )  (21,384 )  --    --    --    --  
Amortization of unrecognized  
  transition (asset) obligation    --    (722 )  30    46    110    110  
Amortization of prior service cost    (2,296 )  (1,926 )  2,466    4    384    384  
Amortization of net (gain) loss    7,880    6,130    674    1,046    199    --  
Net periodic benefit cost   $24,000   $17,962   $7,594   $5,900   $6,498   $4,235  


Pension Plans Other Postretirement
Qualified Nonqualified Benefit Plans
             
Quarter ended June 30, Quarter ended June 30, Quarter ended June 30,
2004 2003 2004 2003 2004 2003
(Dollars in thousands)
 
Service cost     $ 13,529   $ 9,406   $ 772   $ 887   $ 993   $ 595  
Interest cost    12,653    8,526    1,660    1,515    1,911    1,276  
Estimated return on plan assets    (17,224 )  (10,694 )  --    --    --    --  
Amortization of unrecognized  
  transition (asset) obligation    --    (361 )  15    23    55    55  
Amortization of prior service cost    (1,148 )  (963 )  (17 )  2    192    192  
Amortization of net (gain) loss    3,940    3,065    337    523    100    --  
Net periodic benefit cost   $11,750   $8,979   $2,767   $2,950   $3,251   $ 2,118  


          BB&T previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003, that it did not anticipate making a contribution to the defined benefit pension plans during 2004 and is not required to make any contributions. However, management elected to make a discretionary contribution of $25.0 million in the second quarter of 2004. Management currently has no firm plans to make additional discretionary contributions during the remainder of 2004.

          BB&T previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003, that it anticipated contributing $8.1 million to the postretirement benefit plan during 2004. Based on projections at June 30, 2004, the expected contributions to the plan total $5.3 million.

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BB&T Corporation           Page 21          Second Quarter 2004 10-Q




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

Forward-Looking Statements

          This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce net interest margins and/or the volumes and 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 frames; (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.

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 and expenses. 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, valuing intangible assets associated with mergers and acquisitions, costs and benefit obligations associated with BB&T’s pension and postretirement benefit plans, and income taxes. Understanding BB&T’s accounting policies is fundamental to understanding BB&T’s consolidated financial position and consolidated results of operations. Accordingly, BB&T’s significant accounting policies are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements” in BB&T’s 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

BB&T Corporation           Page 22          Second Quarter 2004 10-Q




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

          It is the policy of BB&T to maintain an allowance for loan and lease losses that equals management’s best estimate of probable losses that are inherent in the portfolio at the balance sheet date. Estimates of loan and lease losses are determined by analyzing historical loan and lease losses, current trends in delinquencies and charge-offs, plans for problem loan and lease administration, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease portfolio. Also included in management’s estimates of loan and lease losses are considerations with respect to the impact of economic events, the outcome of which is uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that directly or indirectly affects the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business.

          BB&T has a mortgage loan servicing portfolio and related mortgage servicing rights. Mortgage servicing rights represent the present value of the future net servicing fees from servicing mortgage 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 mortgage servicing rights, which requires the development of a number of assumptions, including anticipated loan principal amortization and prepayments of principal. The value of mortgage servicing rights is significantly affected by mortgage interest rates available in the marketplace, which influence the speed of mortgage loan prepayments. 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 quarterly based on actual results and updated projections.

          BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. 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.

BB&T Corporation           Page 23          Second Quarter 2004 10-Q




          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 analysis 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 and the estimates and judgments utilized in determining the income tax provision and records adjustments as necessary.

          BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used.

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EXECUTIVE SUMMARY

          BB&T’s total assets at June 30, 2004, were $97.3 billion, an increase of $6.9 billion, or 7.6%, from December 31, 2003. The asset categories that experienced the largest increases were securities available for sale and loans and leases, including loans held for sale, which grew $1.9 billion, or 12.3%, and $4.7 billion, or 7.6%, respectively, during the first half of 2004.

          Total deposits at June 30, 2004 were $66.7 billion, an increase of $7.3 billion, or 12.3%, from December 31, 2003. Short-term borrowed funds decreased $1.1 billion, or 15.0%, and long-term debt decreased $283.1 million, or 2.6%, during the first six months of 2004. Total shareholders’ equity increased $590.0 million, or 5.9%, during the same time frame.

          Consolidated net income for the second quarter of 2004 totaled $400.1 million, an increase of 26.5% compared to the $316.2 million earned during the comparable quarter of 2003. On a diluted per share basis, earnings for the three months ended June 30, 2004, were $.72, compared to $.67 for the same period in 2003, an increase of 7.5%. BB&T’s results of operations for the second quarter of 2004 produced an annualized return on average assets of 1.65% and an annualized return on average shareholders’ equity of 15.17% compared to prior year ratios of 1.57% and 16.38%, respectively.

          Consolidated net income for the first six months of 2004 totaled $728.6 million, an increase of 13.1% compared to the $644.0 million earned during the same period in 2003. On a diluted per share basis, earnings for the first six months of 2004 and 2003 were $1.32 and $1.36, respectively, which represents a decrease of 2.9%. BB&T’s results of operations for the first six months of 2004 produced an annualized return on average assets of 1.55% and an annualized return on average shareholders’ equity of 14.07% compared to prior year ratios of 1.62% and 17.06%, respectively.

BB&T Corporation           Page 24          Second Quarter 2004 10-Q




          Results during the second quarter reflect improvements in several key drivers of BB&T's profitability. Among these were stronger loan growth, particularly in comparison with the first quarter of 2004, higher revenues from noninterest income generating businesses, continued improvement in asset quality and improving expense control. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2003, for additional information with respect to BB&T’s recent accomplishments and significant challenges. The factors causing the fluctuations in the major balance sheet and income statement categories for the second quarter and first six months of 2004 are further discussed in the following sections.

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ANALYSIS OF FINANCIAL CONDITION

Loans and Leases

          BB&T emphasizes commercial lending to small and medium-sized businesses, consumer lending and mortgage lending with an overall goal of maximizing the profitability of the loan portfolio while maintaining strong asset quality. For the first six months of 2004, average total loans were $65.0 billion, an increase of $11.0 billion, or 20.3%, compared to the same period in 2003. During the first six months of 2004, average commercial loans, including lease receivables, increased $3.2 billion, or 10.8%, compared to the same period in 2003 and composed 49.6% of the loan portfolio compared to 53.9% for the first six months of 2003. Average consumer loans, which include sales finance, revolving credit and direct retail, totaled $20.1 billion during the second quarter of 2004, an increase of $6.0 billion, or 43.1%, compared to the same period in 2003. During the first half of 2004, consumer loans composed 30.9% of average loans compared to 26.0% for the first six months of 2003. Average mortgage loans totaled $12.7 billion for the first six months of 2004, which represents an increase of $1.8 billion, or 16.5%, from the 2003 average and composed the remaining 19.5% of the loan and lease portfolio compared to 20.1% for the same period of 2003.

          For the second quarter of 2004, average total loans were $66.9 billion, an increase of $12.5 billion, or 23.0%, compared to the same period in 2003. Average commercial loans and leases for the second quarter of 2004 totaled $33.1 billion, up $3.9 billion, or 13.2%, compared to the same period in 2003 and composed 49.5% of the loan and lease portfolio compared to 53.8% for the second quarter of 2003. Average consumer loans totaled $20.5 billion for the second quarter of 2004, an increase of $6.4 billion, or 45.4%, compared to the same period in 2003 and composed 30.7% of the loan and lease portfolio compared to 26.0% in 2003. Average mortgage loans totaled $13.2 billion for the current quarter, which represents an increase of $2.2 billion, or 20.1%, from the 2003 average and composed the remaining 19.8% of the loan and lease portfolio compared to 20.2% for the same period of 2003.

          The growth rates of the average loans described above were affected by loan portfolios held by companies that were acquired in purchase transactions during the second half of 2003 and first half of 2004. In particular, on July 1, 2003, loans totaling $6.3 billion were acquired through the purchase of First Virginia. On April 14, 2004, loans totaling $1.7 billion were acquired through the purchase of Republic Bancshares, Inc. (“Republic”). Excluding the effect of purchase accounting transactions, the average “internal” loan growth for the three months ended June 30, 2004, was approximately 7.6% compared to the same period in 2003. By category, excluding the effects of purchase accounting transactions, average mortgage loans, including loans held for sale, increased 15.1%, average commercial loans and leases grew 5.0%, and average consumer loans increased 7.4% in the second quarter of 2004 compared to the second quarter of 2003.

BB&T Corporation           Page 25          Second Quarter 2004 10-Q




           During the second quarter of 2004, BB&T’s average loan portfolio grew 23.2% on an annualized basis compared to the first quarter of 2004 because of a significant increase in loan demand across BB&T’s footprint. Excluding the impact of growth resulting from acquisitions, average loans and leases grew at an annualized growth rate of approximately 12.3% compared to the first quarter of 2004. This increase reflects the strongest internal quarterly growth rate since 2000. The acceleration in loan growth was spread across all major loan categories. Average commercial loans grew at approximately 9.1% on an annualized basis, excluding acquisitions, compared to the first quarter. Average direct retail loans grew approximately 13.5% on an annualized basis, excluding acquisitions. The internal growth rate in average mortgage loans, which was approximately 22.9% compared to the first quarter, was partially affected by the fluctuation in loans held for sale and the retention of mortgage loans in recent quarters. Average revolving credit loans increased at an annualized rate of approximately 5.4% compared to the first quarter, excluding acquisitions, which reflected expected seasonal fluctuations. Finally, average sales finance internal growth significantly improved compared to recent quarters, with average balances increasing at an annualized rate of 5.7% during the second quarter of 2004 compared to the first quarter.

          The annualized fully taxable equivalent (“FTE”) yields on commercial, consumer and mortgage loans for the first six months of 2004 were 5.26%, 6.71%, and 5.63%, respectively, resulting in an annualized yield on the total loan portfolio of 5.78%. The FTE yields on commercial, consumer and mortgage loans for the first six months of 2003 were 5.68%, 7.90%, and 6.26%, respectively, resulting in an annualized yield on the total loan portfolio of 6.37%. This reflects a decrease of 59 basis points in the annualized yield on the total loan portfolio during the first six months of 2004 in comparison to 2003. For the second quarter of 2004, the annualized yield on the total loan portfolio was 5.72%, reflecting a decrease of 57 basis points compared to the second quarter of 2003. The decreases in yields for both the six months and the second quarter were partially due to a lower average prime rate, which is used in the pricing of many loans. During the first six months of 2004, the prime rate averaged 4.00% compared to 4.25% during the same period in 2003. In addition to the decline in the prime rate, the runoff of higher-yielding fixed-rate loans and more competition in loan pricing produced the remainder of the decrease in loan yields. The impact on interest income from loans and leases from the decrease in the yield on the portfolio was more than offset by the acquisition of First Virginia and strong internal loan growth thus far during 2004 and, as a result, interest income from loans and leases on an FTE basis increased 11.6% and 9.4% in the second quarter and first six months of 2004, respectively, compared to the same periods of 2003.

BB&T Corporation           Page 26          Second Quarter 2004 10-Q




Securities

          Securities available for sale totaled $17.5 billion at June 30, 2004, an increase of $1.9 billion, or 12.3%, compared with December 31, 2003. Securities available for sale had net unrealized losses, net of deferred income taxes, of $228.1 million at June 30, 2004, compared to net unrealized gains, net of deferred income taxes, of $11.5 million at December 31, 2003. Average total securities for the first six months of 2004 amounted to $17.8 billion, an increase of 5.0% compared to the average balance during the first six months of 2003. Average total securities for the second quarter of 2004 amounted to $18.4 billion, an increase of 5.4% compared to the average balance for the second quarter of 2003. The increase in securities available for sale was the result of a combination of factors including the reinvestment of sales proceeds from the trading securities portfolio, the investment of funds generated by strong deposit growth and the reinvestment of proceeds from sales, calls and maturities of securities during the first six months of 2004.

          Trading securities totaled $389.0 million, down $304.8 million compared to the balance at December 31, 2003. The decrease in trading securities primarily resulted from management’s decision to liquidate the portion of the trading portfolio being used as an economic risk management strategy in connection with BB&T’s mortgage servicing rights.

          The annualized FTE yield on the average securities portfolio for the first six months of 2004 was 4.11%, a decrease of 113 basis points from the annualized yield earned in the first six months of 2003. During the second quarter of 2004, the annualized yield on the securities portfolio was 4.04%, a decrease of 98 basis points compared to the second quarter of 2003. These decreases 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.

          On June 30, 2004, BB&T held certain investments having continuous unrealized loss positions for more than 12 months totaling $224.4 million. Substantially all of these investments were in U.S. Treasuries and U.S. government agency obligations, the cash flows of which are guaranteed by the U.S. government or its agencies and, therefore, it is expected that the securities would not be settled at a price less than their amortized cost. Because the decline in market value was caused by interest rate increases and not credit quality, and because BB&T has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, BB&T has not recognized any other-than-temporary impairment in connection with these investments.

Other Interest Earning Assets

          Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $176.5 million at June 30, 2004, a decrease of $156.3 million, or 47.0%, compared to December 31, 2003. Interest-bearing deposits with banks increased $43.1 million, or 15.9%, compared to year-end 2003. These categories of earning assets are subject to large daily fluctuations based on the availability of these types of funds. The average yield on other interest-earning assets for the first six months of 2004 was 1.47%, unchanged compared to the first six months of 2003. For the second quarter of 2004, the average yield on other interest-earning assets was 1.50%, up from 1.36% in the second quarter last year.

BB&T Corporation           Page 27          Second Quarter 2004 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 $926.6 million from December 31, 2003, to June 30, 2004. The increase was due primarily to additional goodwill and other intangibles resulting from the acquisitions of McGriff, Seibels & Williams, Inc. (“McGriff”) and Republic, which totaled $413.2 million and $260.3 million, respectively.

           Other noninterest-earning assets also include commercial mortgage servicing rights totaling $14.7 million and residential mortgage servicing rights totaling $356.4 million, net of an allowance for impairment, which totaled $85.1 million at June 30, 2004.

Deposits

          Deposits totaled $66.7 billion at June 30, 2004, an increase of $7.3 billion, or 12.3%, from December 31, 2003. Average deposits for the first six months of 2004 increased $11.5 billion, or 22.1%, to $63.8 billion compared to the first six months of 2003. The categories of deposits with the highest average rates of growth were money rate savings accounts, including investor deposit accounts, which increased $4.7 billion, or 28.8%, and noninterest-bearing deposits, which increased $3.2 billion, or 39.9%.

          For the second quarter of 2004, average deposits increased $13.1 billion, or 24.8%, compared to the second quarter of 2003. The categories of deposits with the highest average rates of growth were similar to the ones noted above for the six-month periods ending June 30, 2004 and 2003. Average money rate savings accounts, noninterest-bearing deposits, and savings and interest checking accounts increased $5.4 billion, $3.3 billion, and $1.7 billion, respectively, for the second quarter of 2004, which represent increases of 32.9%, 40.1%, and 52.4%, respectively, compared to the second quarter of 2003.

          The growth in average deposits during the first half of 2004 compared to the corresponding period of 2003 includes the effect of deposits acquired in purchase accounting transactions completed during 2004 and the second half of 2003. In particular, the purchase of First Virginia at the beginning of the third quarter of 2003 and the purchase of Republic during the second quarter of 2004 added $9.5 billion and $2.5 billion, respectively, in deposits. If the effects of purchase accounting transactions are excluded, average deposits for the six months ended June 30, 2004, increased approximately 3.5% compared to the same time period in 2003. For the second quarter of 2004, total average deposits, excluding the effects of purchase accounting transactions, increased approximately 4.1% compared to the same period last year.

          In addition to the positive growth in client deposits over the last two years, there has been a shift in the overall deposit mix from certificate accounts and other time deposits to lower-cost transaction accounts such as noninterest-bearing deposits and money rate savings accounts. This shift reflects the reduced attractiveness of time deposits and client preferences for more liquid investments in a low interest rate environment as well as BB&T’s efforts to emphasize growth in noninterest-bearing accounts.

BB&T Corporation           Page 28          Second Quarter 2004 10-Q




          The annualized average rate paid on total interest-bearing deposits during the first six months of 2004 was 1.30%, a decrease of 52 basis points compared to 2003. For the second quarter of 2004, the average rate paid on total interest-bearing deposits was 1.28%, a decrease of 45 basis points compared to the second quarter of 2003. These decreases in the average rates paid resulted from the lower interest rate environment that existed during 2004 compared to 2003, which included a 25 basis point decrease in the average federal funds rate, and the shift in deposit mix from certificates of deposit and higher-cost time deposits to lower-cost savings and transaction accounts.

Borrowings

          While client deposits remain the primary source for funding loan originations, management uses short-term borrowings as a supplementary funding source for loan growth. At June 30, 2004, short-term borrowed funds totaled $6.2 billion, a decrease of $1.1 billion, or 15.0%, compared to December 31, 2003. The decrease in short-term borrowed funds compared to December 31, 2003, which are mainly composed of federal funds purchased, was primarily a result of healthy deposit growth, which provided sufficient resources for funding loan growth. For the second quarter of 2004, average short-term borrowed funds were $6.7 billion, an increase of $1.9 billion, or 40.8%, from the comparable period of 2003. For the six months ended June 30, 2004, average short-term borrowed funds increased $2.3 billion, or 51.5%, compared to the same period in 2003.

          The average annualized rate paid on short-term borrowed funds was 1.07% for the first six months of 2004, a decrease of 25 basis points from the average rate of 1.32% paid in the comparable period of 2003. The average rate paid on short-term borrowed funds was 1.08% in the second quarter of 2004, a decrease of 21 basis points compared to the rate paid in the second quarter of 2003. These decreases in the cost of short-term borrowed funds resulted from the lower interest rate environment that has existed during 2004 compared to 2003, which included a 25 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 $10.5 billion at June 30, 2004, down $283.1 million, or 2.6%, from the balance at December 31, 2003. For the second quarter of 2004, average long-term debt totaled $10.7 billion, a decrease of $2.5 billion, or 19.0%, compared to the second quarter of 2003. For the six months ended June 30, 2004, average long-term borrowed funds were $10.6 billion, down $2.7 billion, or 20.4%, compared to the first six months of 2003. The average annualized rate paid on long-term borrowed funds was 3.37% for the first six months of 2004, a decrease of 73 basis points from the average rate of 4.10% paid during the first six months of 2003. The average annualized rate paid on long-term debt for the second quarter of 2004 was 3.36%, a decrease of 68 basis points compared to the second quarter of 2003.

BB&T Corporation           Page 29          Second Quarter 2004 10-Q




          The decrease in the average balance of long-term debt and average annualized interest rate paid compared to the first six months of 2003 were primarily the result of a balance sheet restructuring completed during the second and third quarters of 2003, which was intended to improve net interest income and the net interest margin. As part of the restructuring, BB&T refinanced $3.0 billion of long-term FHLB advances, thus lowering the current annual interest rate paid on these advances during the next five years, after which the FHLB has an option to increase the interest rate paid on such advances depending on market rates then available. In addition, BB&T prepaid $2.9 billion in long-term FHLB advances as part of the restructuring in 2003 and restructured an additional $1.9 billion in the first quarter of 2004 because of the availability of more cost-effective funding sources.

Asset Quality

          Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $412.9 million at June 30, 2004, compared to $447.1 million at December 31, 2003. As a percentage of loans and leases plus foreclosed property, nonperforming assets were .62% at June 30, 2004, down from ..72% at December 31, 2003. Loans 90 days or more past due and still accruing interest totaled $95.7 million at June 30, 2004, compared to $116.8 million at year-end 2003.

          BB&T’s net charge-offs totaled $57.2 million for the second quarter and amounted to ..34% of average loans and leases, on an annualized basis, compared to $58.2 million, or .43% of average loans and leases, on an annualized basis, in the corresponding period in 2003. For the six months ended June 30, 2004 and 2003, net charge-offs totaled $114.4 million and $120.9 million, respectively, and represented .35% and .45%, respectively, of average loans and leases on an annualized basis.

          The allowance for loan and lease losses totaled $816.3 million at June 30, 2004, compared to $784.9 million at December 31, 2003, an increase of 4.0%. The allowance amounted to 1.22% of loans and leases outstanding at June 30, 2004, compared to 1.26% at year-end 2003. Excluding loans held for sale, the allowance for loan and lease losses was 1.23% and 1.27% of loans and leases at June 30, 2004 and December 31, 2003, respectively.

          The above levels of nonperforming assets as a percentage of total assets and quarterly net charge-offs as a percentage of average loans are the lowest since 2000. During the last five quarters, BB&T’s credit quality has steadily improved as demonstrated by the successive quarterly declines in the levels of nonperforming assets and quarterly net charge-offs over that time period. These positive trends in asset quality are the primary factor that has resulted in a lower allowance for loan and lease losses as a percentage of total loans. Other factors include management’s decision to retain, rather than sell, $3.6 billion of fixed rate residential mortgage loans, which normally have lower credit risk and, therefore, require a lower relative allowance in comparison to commercial or consumer loans. Also, the acquisition of First Virginia, which had strong credit quality, including lower net charge-offs and lower nonperforming assets than BB&T, further improved the overall risk profile of BB&T’s loan portfolio, producing decreases in the allowance for loan and lease losses as a percentage of total loans and leases.

BB&T Corporation           Page 30          Second Quarter 2004 10-Q




          The provision for loan and lease losses for the second quarter of 2004 was $64.0 million compared to $61.5 million during the same period in 2003. For the six months ended June 30, 2004, the provision for loan and lease losses totaled $126.5 million compared to $124.5 million in 2003.

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








BB&T Corporation           Page 31          Second Quarter 2004 10-Q




ASSET QUALITY ANALYSIS
(Dollars in thousands)

For the Three Months Ended
6/30/04 3/31/04 12/31/03 9/30/03 6/30/03
           
Allowance For Loan & Lease Losses
     Beginning balance     $790,271   $784,937   $791,527   $719,576   $716,276  
     Allowance for acquired loans, net    19,284    --    --    68,768    --  
     Provision for loan and lease losses    64,000    62,500    58,500    65,000    61,500  
        Charge-offs  
            Commercial loans and leases    (23,740 )  (22,176 )  (38,577 )  (27,194 )  (27,853 )
            Direct retail loans    (11,538 )  (11,295 )  (12,395 )  (10,340 )  (10,078 )
            Sales finance loans    (21,664 )  (22,518 )  (21,856 )  (23,309 )  (24,751 )
            Revolving credit loans    (12,531 )  (14,286 )  (12,279 )  (12,387 )  (12,955 )
            Mortgage loans    (1,916 )  (1,375 )  (1,733 )  (1,523 )  (1,178 )
        Total charge-offs    (71,389 )  (71,650 )  (86,840 )  (74,753 )  (76,815 )
        Recoveries  
            Commercial loans and leases    4,216    6,057    13,703    4,102    10,668  
            Direct retail loans    2,675    2,489    2,442    3,269    2,857  
            Sales finance loans    4,165    3,511    3,279    3,305    2,848  
            Revolving credit loans    2,557    2,178    2,205    2,155    2,159  
            Mortgage loans    551    249    121    105    83  
        Total recoveries    14,164    14,484    21,750    12,936    18,615  
     Net charge-offs    (57,225 )  (57,166 )  (65,090 )  (61,817 )  (58,200 )
        Ending balance   $816,330   $790,271   $784,937   $791,527   $719,576  
Nonperforming Assets  
     Nonaccrual loans and leases:  
            Commercial loans and leases   $199,718   $218,111   $219,558   $226,655   $233,938  
            Direct retail loans    50,968    52,426    50,085    47,618    43,023  
            Sales finance loans    13,152    12,062    13,082    14,182    15,794  
            Revolving credit loans    369    367    342    354    278  
            Mortgage loans    61,132    62,756    67,373    66,611    70,491  
     Total nonaccrual loans and leases    325,339    345,722    350,440    355,420    363,524  
     Foreclosed real estate    68,035    74,832    78,964    70,178    64,347  
     Other foreclosed property    18,995    21,247    17,106    20,902    17,575  
     Restructured loans    566    573    592    613    145  
        Total nonperforming assets   $412,935   $442,374   $447,102   $447,113   $445,591  
     Loans 90 days or more past due  
        and still accruing:  
            Commercial loans and leases   $11,180   $18,885   $17,759   $34,965   $19,925  
            Direct retail loans    21,015    20,359    25,695    24,019    20,934  
            Sales finance loans    20,732    26,091    27,863    18,379    15,688  
            Revolving credit loans    4,116    4,644    5,601    4,626    4,466  
            Mortgage loans    38,698    33,917    39,840    39,918    36,466  
        Total loans 90 days or more past due  
            and still accruing   $95,741   $103,896   $116,758   $121,907   $97,479  
 
ASSET QUALITY RATIOS
Loans 90 days or more past due and still                                  
     accruing as a percentage of total loans                                  
     and leases*    .14  %  .16  %  .19  %  .20  %  .18  %
Nonaccrual and restructured loans and leases  
     as a percentage of total loans and leases*    .49    .54    .56    .58    .66  
Total nonperforming assets as a percentage of:                                    
     Total assets    .42    .47    .49    .49    .55  
     Loans and leases plus foreclosed property*    .62    .69    .72    .73    .81  
Net charge-offs as a percentage of                                  
     average loans and leases*    .34    .36    .42    .40    .43  
Net charge-offs excluding specialized  
     lending as a percentage of average  
     loans and leases**    .24    .25    .31    .30    .31  
Allowance for loan and lease losses as a                                  
     percentage of loans and leases*    1.22    1.23    1.26    1.29    1.31  
Allowance for loan and lease losses as a  
     percentage of loans and leases  
     held for investment    1.23    1.25    1.27    1.32    1.39  
Ratio of allowance for loan and lease losses to:  
     Net charge-offs*    3.55  x  3.44  x  3.04  x  3.23  x  3.08  x
     Nonaccrual and restructured loans and leases    2.50    2.28    2.24    2.22    1.98  

* 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.



Back to Index


BB&T Corporation           Page 32          Second Quarter 2004 10-Q





MARKET RISK MANAGEMENT

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

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

BB&T Corporation           Page 33          Second Quarter 2004 10-Q




          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 or inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve System (“FRB”) to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by ALCO, BB&T positions itself to respond to changing needs for liquidity, changes in 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.

          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 12 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.

BB&T Corporation           Page 34          Second Quarter 2004 10-Q




Interest Sensitivity Simulation Analysis

.
Interest Rate Scenario Annualized Hypothetical
Percentage Change in
Linear Prime Rate Net Interest Income
Change in June 30, June 30,
Prime Rate 2004 2003 2004 2003
 
  3.00  %   7.25  %   7.00  %   0.75  %   (0.18 ) %
  1.50     5.75     5.50     0.52     0.12  
  No Change 4.25   4.00   --   --  
  (1.00 )   NA  (1)   3.00     NA  (1)   (2.00 )
  (1.25 )   3.00     NA  (1)   (2.29 )   NA  (1)

(1) BB&T's model did not calculate a 1% decrease in 2004 or a 1.25% decrease in 2003.

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

Derivative Financial Instruments

          BB&T utilizes a variety of derivative financial instruments to manage various financial risks. These derivatives primarily consist of interest rate swaps, swaptions, caps, floors, collars, financial forward and futures contracts, when-issued securities 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, federal funds purchased, long-term debt, mortgage servicing rights, mortgage banking operations, and certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients.

          Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties. Notional amounts do not represent amounts to be exchanged between parties and are therefore not a measure of financial risk. On June 30, 2004, BB&T had derivative financial instruments outstanding with notional amounts totaling $20.0 billion. The estimated net fair value of open contracts was $23.3 million at June 30, 2004.

BB&T Corporation           Page 35          Second Quarter 2004 10-Q




          Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or 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 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. In addition, counterparties are required to provide cash collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. All of the derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T’s credit risk exposure related to derivative contracts at June 30, 2004, was not material.

          The following tables set forth certain information concerning BB&T’s derivative financial instruments at June 30, 2004:

Derivative Classifications and Hedging Relationships
June 30, 2004

(Dollars in thousands)

Notional Fair Value
Amount Gain Loss
Derivatives Designated as Cash Flow Hedges:
   Hedging business loans     $ 4,150,000   $ 22,197   $ (21,836 )
   Hedging certificates of deposit and short-term borrowed funds    3,500,000    14,986    (1,270 )
                       
Derivatives Designated as Fair Value Hedges:  
   Hedging business loans    4,767    --    (159 )
   Hedging long-term debt    2,400,000    47,932    (54,899 )
                       
Derivatives not designated as hedges    9,926,106    45,177    (28,783 )
     Total   $ 19,980,873   $ 130,292   $ (106,947 )








BB&T Corporation           Page 36          Second Quarter 2004 10-Q




Derivative Financial Instruments
June 30, 2004

(Dollars in thousands)

Average Average Estimated
Notional Receive Pay Fair
Amount Rate Rate Value
Receive fixed swaps     $ 7,235,645     4.27  %   1.53  % $ 608  
Pay fixed swaps    690,412    1.33    3.75    (7,373 )
Forward starting pay fixed swaps    2,250,000    --    3.19    11,386  
Caps, floors and collars    1,365,466    N/A    N/A    2,330  
Foreign exchange contracts    235,304    N/A    N/A    489  
Futures contracts    9,500    N/A    N/A    (103 )
Interest rate lock commitments    659,746    N/A    N/A    3,608  
Forward commitments    1,076,300    N/A    N/A    (5,277 )
Forward starting swaps    550,000    N/A    N/A    (3,007 )
Swaptions    4,400,000    N/A    N/A    9,653  
When-issued securities    967,000    N/A    N/A    7,530  
Options on contracts purchased    66,500    N/A    N/A    542  
TBA Options    300,000    N/A    N/A    2,428  
TRS Options    175,000    N/A    N/A    531  
 
   Total     $ 19,980,873               $ 23,345  

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, floors and collars, interest rate swaps, swaptions, when-issued securities, and forward and futures contracts. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2003, for discussion with respect to BB&T’s quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Items disclosed in the Annual Report on Form 10-K have not materially changed since that report was filed. A discussion of BB&T’s derivative financial instruments is included in the “Derivative Financial Instruments” section herein.


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CAPITAL ADEQUACY AND RESOURCES

           The maintenance of appropriate levels of capital is a management priority and is monitored on an ongoing basis. BB&T’s principal goals related to capital are to provide an adequate return to shareholders while retaining a sufficient base from which to support future growth and to comply with all regulatory standards.

BB&T Corporation           Page 37          Second Quarter 2004 10-Q




           Total shareholders’ equity was $10.5 billion at June 30, 2004, compared to $9.9 billion at December 31, 2003, an increase of 5.9%. BB&T’s book value per common share at June 30, 2004 was $18.95 compared to $18.33 at December 31, 2003. BB&T’s tangible shareholders’ equity was $5.86 billion at June 30, 2004, a slight decrease from $5.92 billion at December 31, 2003. BB&T’s tangible book value per common share at June 30, 2004 was $10.56 compared to $10.92 at December 31, 2003.

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

           Tier 1 capital 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 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, 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:

CAPITAL RATIOS

2004 2003
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
Risk-based capital ratios:
         Tier 1 capital       9.2  %   9.2  %   9.4  %   9.6  %   9.8  %
         Total capital     12.1    12.3    12.5    13.3    13.8  
Tier 1 leverage ratio    7.0    7.1    7.2    7.2    7.2  

BB&T Corporation           Page 38          Second Quarter 2004 10-Q




Share Repurchase Activity

          BB&T has periodically repurchased shares of its own common stock. In accordance with North Carolina law, repurchased shares cannot be held as treasury stock, but revert to the status of authorized and unissued shares upon repurchase.

          On August 26, 2003, BB&T’s Board of Directors granted authority for the repurchase of up to 50 million shares of BB&T’s common stock as needed for general corporate purposes. The plan remains in effect until all the authorized shares are repurchased unless modified by the Board of Directors.

          The following table presents the common stock repurchases made by BB&T during the second quarter of 2004:

Share Repurchase Activity

2004
Maximum Remaining
Number of Shares
Total Average Total Shares Purchased Available for Repurchase
Shares Price Paid Pursuant to Pursuant to
Repurchased Per Share Publicly-Announced Plan Publicly-Announced Plan
April       376,000   $ 34.31     376,000     43,405,500  
May    207,000   $ 34.74    207,000    43,198,500  
June (1)    9,989   $ 37.23    --    43,198,500  
  Total    592,989   $ 34.51    583,000    43,198,500  

(1)   Repurchases reflect shares exchanged or surrendered in connection with the exercise of
        stock options under BB&T's stock option plans.


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ANALYSIS OF RESULTS OF OPERATIONS

          Consolidated net income for the second quarter of 2004 totaled $400.1 million, an increase of 26.5% compared to the $316.2 million earned during the comparable quarter of 2003. On a diluted per share basis, earnings for the three months ended June 30, 2004, were $.72, compared to $.67 for the same period in 2003, an increase of 7.5%. BB&T’s results of operations for the second quarter of 2004 produced an annualized return on average assets of 1.65% and an annualized return on average shareholders’ equity of 15.17% compared to prior year ratios of 1.57% and 16.38%, respectively.

BB&T Corporation           Page 39          Second Quarter 2004 10-Q




          Consolidated net income for the first six months of 2004 totaled $728.6 million, an increase of 13.1% compared to the $644.0 million earned during the same period in 2003. On a diluted per share basis, earnings for the first six months of 2004 and 2003 were $1.32 and $1.36, respectively, which represents a decrease of 2.9%. BB&T’s results of operations for the first six months of 2004 produced an annualized return on average assets of 1.55% and an annualized return on average shareholders’ equity of 14.07% compared to prior year ratios of 1.62% and 17.06%, respectively.

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

ANNUALIZED
PROFITABILITY MEASURES

2004 2003
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
Return on average assets       1.65  %   1.43  %   1.34  %   .51  %   1.57  %
Return on average shareholders' equity    15.17    12.93    11.98    4.50    16.38  
Net interest margin (taxable equivalent)    4.02    4.09    3.89    4.17    4.06  

   Merger-Related and Restructuring Charges

          Mergers and acquisitions have played an important role in the development of BB&T’s franchise. BB&T recorded certain merger-related and restructuring costs during both 2004 and 2003. During the second quarter of 2004, BB&T recorded $351 thousand in net after-tax charges primarily associated with the acquisition of Republic. During the second quarter of 2003, BB&T incurred $7.0 million in net after-tax charges primarily associated with the acquisition of First Virginia and the acquisitions and systems conversions of Equitable Bank and Regional Financial Corporation. Merger-related charges and expenses include personnel-related expenses such as staff relocation costs, severance benefits, early retirement packages and contract settlements. They also include furniture, equipment and occupancy costs related to department and branch consolidations as well as costs related to converting the data processing systems of the acquired companies to BB&T’s automation platform. For the six months ended June 30, 2004 and 2003, BB&T incurred $6.5 million and $10.0 million, respectively, in net after-tax charges primarily associated with the same purchase acquisitions that affected the respective second quarters of 2004 and 2003. The above expenses are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expenses.

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

BB&T Corporation           Page 40          Second Quarter 2004 10-Q




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

For the Six Months Ended June 30,
2004 2003
Severance and personnel-related charges     $ 7,828   $ 1,630  
Occupancy and equipment charges    (5,890 )  4,231  
Systems conversions and related charges    802    2,758  
Marketing and public relations    3,711    5,712  
Asset write-offs, comforming policies                
       and other merger-related charges    3,990    1,173  
Total   $ 10,441   $ 15,504  

          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 occur in corporate support and data processing functions.

          Occupancy and equipment charges represent merger-related costs or credits associated with lease terminations, obsolete equipment write-offs, and the sale of duplicate facilities and equipment. Credits may result when obsolete properties or equipment are sold for more than originally estimated. Systems conversions and related charges include expenses necessary to convert and combine the acquired branches and operations of merged companies. Marketing and public relations costs represent direct media advertising related to the acquisitions. The other merger-related charges are comprised of asset and supply inventory write-offs, litigation accruals, costs to conform an acquired institution’s accounting policies to those of BB&T and other similar charges.

          In conjunction with the consummation of an acquisition and the completion of other requirements, BB&T typically accrues certain merger-related expenses related to estimated severance costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition. The following tables present a summary of activity with respect to BB&T’s merger and restructuring accruals related to the mergers listed above, with the more significant mergers (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 41          Second Quarter 2004 10-Q




First Virginia Banks, Inc.
(Dollars in thousands)
         
Balance Balance
December 31, Additions in Utilized in June 30,
2003 2004 2004 2004
Severance and personnel-related charges     $ 18,895   $ --   $ 8,944   $ 9,951  
Occupancy and equipment charges    23,689    413    9,912    14,190  
Systems conversions and related charges    20,735    8    20,743    --  
Other merger-related charges    2,675    786    3,145    316  
       Total   $ 65,994   $ 1,207   $ 42,744   $ 24,457  

           Merger-related and restructuring accruals related to First Virginia are generally expected to be utilized during 2004, 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 to complete.

F&M National Corporation
(Dollars in thousands)
       
Balance Balance
December 31, Utilized in June 30,
2003 2004 2004
 
Severance and personnel-related charges     $ 63   $ 45   $ 18  
Occupancy and equipment charges    7,097    5,385    1,712  
Systems conversions and related charges    --    --    --  
Other merger-related charges    987    --    987  
       Total   $ 8,147   $ 5,430   $ 2,717  

          The remaining accruals at June 30, 2004, 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 2004 unless they relate to specific contracts expiring in later years.

          Activity with respect to the merger and restructuring accruals for all other mergers is presented in the accompanying table:

BB&T Corporation           Page 42          Second Quarter 2004 10-Q




All Other Merger Activity
(Dollars in thousands)
         
Balance Balance
December 31, Additions in Utilized in June 30,
2003 2004 2004 2004
 
Severance and personnel-related charges     $ 8,892   $ 5,342   $ 2,064   $ 12,170  
Occupancy and equipment charges    17,910    2,984    8,120    12,774  
Systems conversions and related charges    --    4,199    312    3,887  
Other merger-related charges    7,408    2,174    3,961    5,621  
       Total   $ 34,210   $ 14,699   $ 14,457   $ 34,452  

          The liabilities for severance and personnel-related costs relate to severance liabilities that will be paid out based on such factors as expected termination dates, the provisions of employment contracts and the terms of BB&T’s severance plans. The remaining occupancy and equipment accruals relate to costs to exit certain leases and to dispose of excess facilities and equipment. 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. These liabilities will be utilized as the contracts are paid out and expire. The other merger-related liabilities relate to litigation, accruals to conform the accounting policies of acquired institutions to those of BB&T, and other similar charges.

          Because BB&T often has multiple merger integrations in process, and due to limited resources must schedule in advance significant events in the merger conversion and integration process, BB&T’s merger process and utilization of merger accruals may cover an extended period of time. In general, a major portion of accrued costs are utilized in conjunction with or immediately following the systems conversion, when most of the duplicate positions are 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 remaining accruals at June 30, 2004, are expected to be utilized during 2004, unless they relate to specific contracts that expire in later years.

          The accruals utilized during 2004 in the tables above include reversals of $29.5 million of previously recorded merger-related and restructuring accruals principally related to the finalization of estimates for employee terminations, contract cancellations and occupancy costs. The above reversals include $16.6 million of pre-tax adjustments to goodwill that had no effect on BB&T’s consolidated results of operations. The remaining $12.8 million was included as a reduction of merger-related and restructuring charges during 2004 in the Consolidated Statements of Income.

BB&T Corporation           Page 43          Second Quarter 2004 10-Q




Net Interest Income and Net Interest Margin

          Net interest income on an FTE basis was $860.2 million for the second quarter of 2004 compared to $731.6 million for the same period in 2003, an increase of $128.6 million, or 17.6%. For the three months ended June 30, 2004, average earning assets increased $13.5 billion, or 18.6%, compared to the same period of 2003, while average interest-bearing liabilities increased $9.2 billion, or 14.8%, and the net interest margin decreased from 4.06% in the second quarter of 2003 to 4.02% in the current quarter. The decrease in the net interest margin was caused by a combination of several factors. The reinvestment of proceeds from the sales, maturities and prepayments of securities in lower yielding securities, additional interest expense incurred in connection with BB&T’s stock buy-back program, net loan and deposit premium amortization related to the purchase of First Virginia and Republic all adversely affected the net interest margin in the second quarter of 2004. At the same time, the margin was positively affected by the balance sheet restructuring completed during 2003, which consisted of BB&T refinancing or prepaying approximately $5.9 billion of long-term FHLB advances and retaining an additional $3.6 billion in fixed-rate mortgage loans from originations made during the second half of 2003 and the first quarter of 2004.

          For the six months ended June 30, 2004, net interest income on an FTE basis was $1.7 billion compared to $1.5 billion for the same period in 2003, an increase of $234.0 million, or 16.1%. Average earning assets for the first six months of 2004 increased $12.0 billion, or 16.8%, compared to the same period of 2003, while average interest-bearing liabilities increased $7.9 billion, or 12.7%. The net interest margin for the six months ended June 30, 2004 was 4.06%, down from 4.09% for the first six months of 2003. The decrease resulted largely from the same factors that affected the quarterly comparison described above.

          The following tables set forth the major components of net interest income and the related annualized yields and rates for the second quarter and first six months of 2004 compared to the same periods in 2003, and the variances between the periods caused by changes in interest rates versus changes in volumes.




BB&T Corporation           Page 44          Second Quarter 2004 10-Q




Net Interest Income and Rate / Volume Analysis
For the Three Months Ended June 30, 2004 and 2003

Average Balances Annualized Yield / Rate Income / Expense Increase Change due to
2004 2003 2004 2003 2004 2003 (Decrease) Rate (6) Volume (6)
(Dollars in thousands)
Assets
Securities (1):
      U.S. Treasury, government and other (5)     $ 17,534,149   $ 16,615,559     3.91  %   4.90  % $ 171,583   $ 203,478   $ (31,895 ) $ (42,791 ) $ 10,896  
      States and political subdivisions    844,356    817,364    6.58    7.53    13,893    15,394    (1,501 )  (1,987 )  486  
           Total securities (5)    18,378,505    17,432,923    4.04    5.02    185,476    218,872    (33,396 )  (44,778 )  11,382  
Other earning assets (2)    554,295    514,879    1.50    1.36    2,067    1,744    323    183    140  
Loans and leases, net                                                          
      of unearned income (1)(3)(4)(5)    66,863,486    54,380,475    5.72    6.29    952,389    853,094    99,295    (82,301 )  181,596  
           Total earning assets    85,796,286    72,328,277    5.33    5.95    1,139,932    1,073,710    66,222    (126,896 )  193,118  
           Non-earning assets    11,490,119    8,684,685  
               Total assets   $97,286,405   $81,012,962  
Liabilities and Shareholders' Equity  
Interest-bearing deposits:  
      Savings and interest-checking   $5,034,541   $3,303,608    0.20    0.38    2,515    3,167    (652 )  (1,851 )  1,199  
      Money rate savings    21,801,020    16,406,576    0.64    0.86    34,604    35,064    (460 )  (10,294 )  9,834  
      Certificates of deposit and other time deposits    27,497,580    24,824,328    1.98    2.49    135,570    154,274    (18,704 )  (33,792 )  15,088  
           Total interest-bearing deposits    54,333,141    44,534,512    1.28    1.73    172,689    192,505    (19,816 )  (45,937 )  26,121  
Short-term borrowed funds    6,682,835    4,744,761    1.08    1.29    17,968    15,494    2,474    (2,773 )  5,247  
Long-term debt    10,668,414    13,173,214    3.36    4.04    89,094    134,112    (45,018 )  (22,041 )  (22,977 )
           Total interest-bearing liabilities    71,684,390    62,452,487    1.57    2.19    279,751    342,111    (62,360 )  (70,751 )  8,391  
           Noninterest-bearing deposits    11,663,685    8,326,827  
           Other liabilities    3,330,199    2,488,253  
           Shareholders' equity    10,608,131    7,745,395  
           Total liabilities and                
               shareholders' equity   $97,286,405   $81,012,962  
Interest rate spread                   3.76     3.76
Net yield on earning assets                   4.02  %   4.06  % $ 860,181   $ 731,599   $ 128,582   $ (56,145 ) $ 184,727