BB&T First Quarter 2006 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:

March 31, 2006


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  [Ö ]   NO  [__]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer   [ Ö ]              Accelerated filer   [__]               Non-accelerated filer   [__]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES  [    ]   NO [Ö]

At April 30, 2006, 535,773,565 shares of the registrant's common stock, $5 par value, were outstanding.




BB&T CORPORATION

FORM 10-Q

March 31, 2006


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 28 
   
          Executive Summary 31 
   
          Analysis of Financial Condition 32 
   
          Analysis of Results of Operations 38 
   
          Market Risk Management 47 
   
          Capital Adequacy and Resources 52 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 54 
   
  Item 4. Controls and Procedures 54 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 55 
   
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55 
   
  Item 6. Exhibits 55 
   
SIGNATURES 56 
   
EXHIBIT INDEX 57 
   
CERTIFICATIONS 58 



BB&T Corporation          Page 1          First Quarter 2006 10-Q




Item 1. Financial Statements

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

  March 31, December 31,
  2006 2005
     
Assets    
      Cash and due from banks     $ 1,933,456   $ 2,185,571  
      Interest-bearing deposits with banks       372,336     410,380  
      Federal funds sold and securities purchased under resale agreements    
          or similar arrangements       410,119     286,233  
      Trading securities at fair value       745,169     706,518  
      Securities available for sale at fair value       19,433,575     19,782,966  
      Loans held for sale       447,674     628,834  
      Loans and leases, net of unearned income       75,831,608     74,394,654  
      Allowance for loan and lease losses       (833,231 )   (825,300 )
          Loans and leases, net       74,998,377     73,569,354  
 
      Premises and equipment, net of accumulated depreciation       1,267,647     1,286,909  
      Goodwill       4,300,396     4,255,998  
      Core deposit and other intangible assets       479,231     487,525  
      Residential mortgage servicing rights (fair value at March 31, 2006,    
          and lower of cost or market at December 31, 2005)       462,920     431,213  
      Other assets       5,182,789     5,138,258  
 
                   Total assets     $ 110,033,689   $ 109,169,759  
 
Liabilities and Shareholders' Equity    
      Deposits:    
          Noninterest-bearing deposits     $ 13,413,099   $ 13,476,939  
          Interest checking       1,338,847     1,426,715  
          Other client deposits       32,074,100     30,959,888  
          Client certificates of deposit       20,352,627     19,309,667  
          Other interest-bearing deposits       8,385,456     9,108,590  
                   Total deposits       75,564,129     74,281,799  
 
      Federal funds purchased, securities sold under repurchase agreements    
              and short-term borrowed funds       6,356,330     6,561,719  
      Long-term debt       13,045,058     13,118,559  
      Accounts payable and other liabilities       4,098,200     4,078,568  
 
                   Total liabilities       99,063,717     98,040,645  
 
      Commitments and contingencies (Note 6)    
      Shareholders' equity:    
 
          Preferred stock, $5 par, 5,000,000 shares authorized, none issued or    
              outstanding at March 31, 2006, or at December 31, 2005            
          Common stock, $5 par, 1,000,000,000 shares authorized;    
              535,588,093 issued and outstanding at March 31, 2006, and    
              543,102,080 issued and outstanding at December 31, 2005       2,677,940     2,715,510  
          Additional paid-in capital       2,577,204     2,818,703  
          Retained earnings       6,179,559     5,951,135  
          Accumulated other comprehensive loss, net of deferred income    
              taxes of $(269,522) at March 31, 2006, and $(207,319) at December 31, 2005       (464,731 )   (356,234 )
 
                   Total shareholders' equity       10,969,972     11,129,114  
 
                   Total liabilities and shareholders' equity     $ 110,033,689   $ 109,169,759  

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

BB&T Corporation           Page 2          First Quarter 2006 10-Q




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

  For the Three Months Ended
  March 31,
  2006 2005
Interest Income    
        Interest and fees on loans and leases     $ 1,333,545   $ 1,052,821  
        Interest and dividends on securities       215,905     186,788  
        Interest on short-term investments       7,220     3,883  
           Total interest income       1,556,670     1,243,492  
 
Interest Expense    
        Interest on deposits       438,420     241,299  
        Interest on federal funds purchased, securities sold under    
           repurchase agreements and short-term borrowed funds       65,081     42,466  
        Interest on long-term debt       155,117     110,544  
           Total interest expense       658,618     394,309  
 
Net Interest Income       898,052     849,183  
        Provision for credit losses       47,571     41,045  
 
Net Interest Income After Provision for Credit Losses       850,481     808,138  
 
Noninterest Income    
        Insurance commissions       176,512     152,290  
        Service charges on deposits       131,241     120,772  
        Other nondeposit fees and commissions       72,953     54,946  
        Investment banking and brokerage fees and commissions       81,311     68,883  
        Trust income       37,020     30,407  
        Mortgage banking income       32,295     30,193  
        Bankcard fees and merchant discounts       28,682     25,436  
        Securities gains, net       2     7  
        Other income       48,179     33,687  
           Total noninterest income       608,195     516,621  
 
Noninterest Expense    
        Personnel expense       513,999     415,116  
        Occupancy and equipment expense       107,785     105,744  
        Amortization of intangibles       25,108     28,102  
        Professional services       26,182     16,289  
        Merger-related and restructuring (gains), net       (2,976 )   (2,557 )
        Other expenses       149,083     168,012  
           Total noninterest expense       819,181     730,706  
 
Earnings    
        Income before income taxes       639,495     594,053  
        Provision for income taxes       207,982     198,669  
 
        Net income     $ 431,513   $ 395,384  
 
 
Per Common Share    
        Net income:    
           Basic     $ .80   $ .72  
           Diluted     $ .79   $ .71  
        Cash dividends paid     $ .38   $ .35  
 
Weighted Average Shares Outstanding    
           Basic       539,952,669     549,282,008  
           Diluted       543,435,830     553,654,679  

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

BB&T Corporation           Page 3          First Quarter 2006 10-Q




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2006 and 2005

(Unaudited)
(Dollars in thousands, except per share data)

 
          Accumulated  
  Shares of   Additional   Other Total
  Common Common Paid-In Retained Comprehensive Shareholders'
  Stock Stock Capital Earnings Income (Loss) Equity
Balance, January 1, 2005       550,406,287   $ 2,752,032   $ 3,121,609   $ 5,112,034   $ (111,201 ) $ 10,874,474  
Add (Deduct):    
     Comprehensive income (loss):    
         Net income                   395,384         395,384  
             Unrealized holding gains (losses) arising during the period    
                on securities available for sale, net of tax of $(106,680)                       (183,216 )   (183,216 )
             Reclassification adjustment for losses (gains)    
                on securities available for sale included in net    
                income, net of tax of $11                       (18 )   (18 )
         Change in unrealized gains (losses) on securities, net of tax                       (183,234 )   (183,234 )
         Change in unrecognized gains (losses) on cash flow hedges,    
             net of tax of $3,747                       5,962     5,962  
         Change in minimum pension liability, net of tax of $(1,572)                       (2,138 )   (2,138 )
     Total comprehensive income (loss)                   395,384     (179,410 )   215,974  
 
     Common stock issued:    
         In purchase acquisitions       646,489     3,232     22,068             25,300  
         In connection with stock option exercises    
             and other employee benefits, net of cancellations       586,046     2,930     10,897             13,827  
     Redemption of common stock       (3,000,000 )   (15,000 )   (103,208 )           (118,208 )
     Cash dividends declared on common stock, $.35 per share                   (192,280 )       (192,280 )
     Tax benefit from exercise of equity-based awards               6,051             6,051  
     Other, net               146             146  
Balance, March 31, 2005       548,638,822   $ 2,743,194   $ 3,057,563   $ 5,315,138   $ (290,611 ) $ 10,825,284  
 
Balance, January 1, 2006       543,102,080   $ 2,715,510   $ 2,818,703   $ 5,951,135   $ (356,234 ) $ 11,129,114  
Add (Deduct):    
     Comprehensive income (loss):    
         Net income                   431,513         431,513  
             Unrealized holding gains (losses) arising during the    
                period on securities available for sale, net of tax of $(64,487)                       (112,191 )   (112,191 )
             Reclassification adjustment for losses (gains)    
                on securities available for sale included in net    
                income, net of tax of $(1)                       (1 )   (1 )
         Change in unrealized gains (losses) on securities, net of tax                       (112,192 )   (112,192 )
         Change in unrecognized gains (losses) on cash flow hedges,    
             net of tax of $1,829                       2,899     2,899  
         Change in minimum pension liability, net of tax of $456                       796     796  
     Total comprehensive income (loss)                   431,513     (108,497 )   323,016  
 
     Common stock issued:    
         In purchase acquisitions       189,045     945     7,057             8,002  
         In connection with stock option exercises    
             and other employee benefits, net of cancellations       604,371     3,022     12,972             15,994  
     Redemption of common stock       (8,307,403 )   (41,537 )   (292,415 )           (333,952 )
     Cash dividends declared on common stock, $.38 per share                   (203,089 )       (203,089 )
     Tax benefit from exercise of equity-based awards               4,355             4,355  
     Equity-based compensation expense               26,532             26,532  
Balance, March 31, 2006       535,588,093   $ 2,677,940   $ 2,577,204   $ 6,179,559   $ (464,731 ) $ 10,969,972  

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

BB&T Corporation           Page 4          First Quarter 2006 10-Q




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

  For the Three Months Ended
  March 31,
  2006 2005
Cash Flows From Operating Activities:    
     Net income     $ 431,513   $ 395,384  
     Adjustments to reconcile net income to net cash provided by operating activities:    
           Provision for credit losses       47,571     41,045  
           Depreciation       43,453     40,000  
           Amortization of intangibles       25,108     28,102  
           Amortization of purchase accounting mark-to-market adjustments, net       4,987     6,933  
           Equity-based compensation       26,532     45  
           Discount accretion and premium amortization on long-term debt, net       29,918     27,182  
           Discount accretion and premium amortization on securities, net       8,918     12,195  
           Net increase in trading account securities       (32,186 )   (144,405 )
           Gain on sales of securities, net       (2 )   (7 )
           Gain on sales of loans and mortgage loan servicing rights, net       (14,902 )   (20,117 )
           Gain on disposals of premises and equipment, net       (29,868 )   (522 )
           Proceeds from sales of loans held for sale       1,121,406     1,223,980  
           Purchases of loans held for sale       (297,044 )   (192,141 )
           Origination of loans held for sale, net of principal collected       (628,300 )   (1,029,238 )
           Tax benefit from exercise of equity-based awards           6,051  
           Decrease in other assets, net       (142,402 )   (109,158 )
           Increase in accounts payable and other liabilities, net       (12,116 )   299,679  
           Other, net       (6,086 )   3,996  
                   Net cash provided by operating activities       576,500     589,004  
 
Cash Flows From Investing Activities:    
     Proceeds from sales of securities available for sale       9,335     563,821  
     Proceeds from maturities, calls and paydowns of securities available for sale       382,302     684,705  
     Purchases of securities available for sale       (204,896 )   (2,274,854 )
     Proceeds from maturities, calls and paydowns of securities held to maturity           125  
     Leases made to customers       (63,836 )   (65,386 )
     Principal collected on leases       48,015     41,583  
     Loan originations, net of principal collected       (1,205,335 )   (1,057,421 )
     Purchases of loans       (144,571 )   (198,786 )
     Net cash paid in business combinations       (33,513 )   (11,456 )
     Purchases and originations of mortgage servicing rights       (24,396 )   (20,804 )
     Proceeds from disposals of premises and equipment       79,635     9,770  
     Purchases of premises and equipment       (54,470 )   (34,730 )
     Proceeds from sales of foreclosed property or other real estate held for sale       28,029     22,954  
           Net cash used in investing activities       (1,183,701 )   (2,340,479 )
 
Cash Flows From Financing Activities:    
     Net increase (decrease) in deposits       1,282,993     (860,929 )
     Net (decrease) increase in federal funds purchased, securities sold under repurchase agreements    
         and short-term borrowed funds       (205,389 )   2,464,227  
     Proceeds from issuance of long-term debt       3,458     —      
     Repayment of long-term debt       (120,029 )   (252,465 )
     Net proceeds from common stock issued       15,994     13,827  
     Redemption of common stock       (333,952 )   (118,208 )
     Cash dividends paid on common stock       (206,502 )   (192,696 )
     Tax benefit from exercise of equity-based awards       4,355      
           Net cash provided by financing activities       440,928     1,053,756  
 
Net Decrease in Cash and Cash Equivalents       (166,273 )   (697,719 )
Cash and Cash Equivalents at Beginning of Period       2,882,184     3,025,835  
Cash and Cash Equivalents at End of Period     $ 2,715,911   $ 2,328,116  
 
 
Supplemental Disclosure of Cash Flow Information:    
 
     Cash paid during the period for:    
        Interest     $ 624,846   $ 351,677  
        Income taxes       82,949     179,136  
     Noncash investing and financing activities:    
        Transfers of loans to foreclosed property       12,223     9,420  
        Transfers of fixed assets to other real estate owned       2,376     2,816  
        Common stock issued in business combinations       8,002     25,300  

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

Back to Index

BB&T Corporation           Page 5          First Quarter 2006 10-Q




BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006

(Unaudited)

NOTE 1. Basis of Presentation

   General

          In the opinion of management, the accompanying unaudited consolidated balance sheets, consolidated statements of income, consolidated statements of changes in shareholders’ equity, and 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 March 31, 2006 and December 31, 2005; BB&T’s results of operations for the three months ended March 31, 2006 and 2005; and BB&T’s cash flows for the three months ended March 31, 2006 and 2005. In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All adjustments during the first three months of 2006 were of a normal recurring nature.

          These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T’s 2005 Annual Report on Form 10-K should be referred to in connection with these unaudited interim consolidated financial statements.

   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, Georgia, West Virginia, Tennessee, Kentucky, Florida, Alabama, Indiana and Washington, D.C. BB&T’s subsidiary banks provide a wide range of banking services to individuals and businesses. BB&T’s subsidiary banks offer a variety of loans to businesses and consumers. Such loans are made primarily to individuals residing in the market areas described above or to businesses located within BB&T’s geographic footprint. BB&T’s subsidiary banks also market a wide range of deposit services to individuals and businesses. BB&T’s subsidiary banks offer, either directly, or through their subsidiaries, lease financing to businesses and municipal governments; factoring; discount brokerage services, annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis and through a wholesale insurance brokerage operation; insurance premium financing; permanent financing arrangements for commercial real estate; loan servicing for third-party investors; direct consumer finance loans to individuals; and trust services. The direct nonbank subsidiaries of BB&T provide a variety of financial services including automobile lending, equipment financing, full-service securities brokerage, payroll processing, asset management and capital markets services.

BB&T Corporation           Page 6          First Quarter 2006 10-Q




   Principles of Consolidation

          The consolidated financial statements of BB&T include the accounts of BB&T Corporation and those subsidiaries that are majority-owned by BB&T and over which BB&T exercises control. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies acquired are included only from the dates of acquisition. All material wholly owned and majority-owned subsidiaries are consolidated unless accounting principles generally accepted in the United States of America require otherwise.

          BB&T evaluates variable interests in entities for which voting interests are not an effective means of identifying controlling financial interests. Variable interests are those in which the value of the interest changes with the fair value of the net assets of the entity exclusive of variable interests. If the results of the evaluation indicate the existence of a primary beneficiary and the entity does not effectively disperse risks among the parties involved, that primary beneficiary is required to consolidate the entity. Likewise, if the evaluation indicates that the requirements for consolidation are not met and the entity has previously been consolidated, then the entity would be deconsolidated.

          BB&T has variable interests in certain entities that were not required to be consolidated, including affordable housing partnership interests, historic tax credit partnerships, other partnership interests and trusts that have issued capital securities.

          BB&T accounts for unconsolidated partnership investments using the equity method of accounting. In addition to affordable housing partnerships, which represent the majority of unconsolidated investments in variable interest entities, BB&T also has investments and future funding commitments to venture capital and other entities. The maximum potential exposure to losses relative to investments in variable interest entities is generally limited to the sum of the outstanding balance, future funding commitments and any related loans to the entity. Loans to these entities are underwritten in substantially the same manner as are other loans and are generally secured.

          BB&T has investments in certain entities for which BB&T does not have controlling interest. For these investments, the Company records its interest using the equity method with its portion of income or loss being recorded in other noninterest income on the Consolidated Statements of Income. BB&T periodically evaluates these investments for impairment.

   Reclassifications

          In certain instances, amounts reported in prior period’s consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported shareholders’ equity or net income.

   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 of America 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 and the reserve for unfunded lending commitments, valuation of mortgage servicing rights, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.

BB&T Corporation           Page 7          First Quarter 2006 10-Q




   Equity-Based Compensation

          BB&T maintains various equity-based compensation plans. These plans provide for the granting of stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to selected BB&T employees and directors. BB&T adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), on January 1, 2006, using the modified-prospective method, which requires the recognition of compensation costs beginning with the effective date based on (a) the requirements of SFAS No. 123(R) for all share-based awards granted after the effective date and (b) the requirements of SFAS No. 123 , “Accounting for Stock-Based Compensation” (“SFAS No. 123”), for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The adoption of SFAS No. 123(R) reduced BB&T’s income before income taxes and net income for the three months ended March 31, 2006, by $26.0 million and $16.1 million, respectively, while basic earnings per share and diluted earnings per share for the same period were reduced by $.03 per share. The adoption of SFAS No. 123(R) also required that excess tax benefits from the exercise of equity-based awards be recorded as a financing cash flow, rather than an operating cash flow. This requirement reduced cash provided by operating activities and increased cash provided by financing activities for the three months ended March 31, 2006, by $4.4 million. Additional disclosures required by SFAS No. 123(R) are included in Note 11 to the consolidated financial statements herein.

          As permitted by SFAS No. 123, BB&T accounted for share-based awards granted to employees prior to January 1, 2006 using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Since the option price equaled the market price on the date of the grant for options awarded by BB&T, compensation cost was not recognized for any of the periods presented, except with respect to restricted stock awards and awards that were modified.

          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 for periods ended prior to January 1, 2006, 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. BB&T’s equity-based awards generally contain a provision that accelerates vesting of awards for holders who retire and have met all retirement eligibility requirements. Prior to the adoption of SFAS No. 123(R), BB&T reported the expense in the pro forma disclosure based on the vesting cycle in the grant agreement and reported an acceleration of the expense for the unrecognized compensation cost in the period that the accelerated vesting occurred. BB&T will continue to account for awards granted prior to the adoption of SFAS No. 123(R) in this manner, with the exception that the unrecognized compensation cost on the date of adoption will be recognized as personnel expense in future periods. For awards granted after January 1, 2006, BB&T has recognized compensation expense based on retirement eligibility dates for all equity-based compensation awards. Therefore, the information presented in the following table is not comparable to the amounts recognized by BB&T in the first quarter of 2006.

BB&T Corporation           Page 8          First Quarter 2006 10-Q




  For the Three
  Months Ended
  March 31, 2005
  (Dollars in thousands,
  except per share data)
   
Net income:  
     Net income as reported     $ 395,384  
         Add: Equity-based compensation expense    
             included in reported net income, net of tax       27  
         Deduct: Total equity-based employee    
             compensation expense determined under    
             fair value based method for all awards,    
             net of tax       (4,415 )
     Pro forma net income     $ 390,996  
 
Basic EPS:    
     As reported     $ .72  
     Pro forma       .71  
 
Diluted EPS:    
     As reported       .71  
     Pro forma       .71  

   Changes in Accounting Principles and Effects of New AccountingPronouncements

          In July 2005, the Financial Accounting Standards Board (“FASB”) issued Proposed FASB Staff Position (“FSP”) FAS 13-a “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease”, which proposes to amend SFAS No. 13, “Accounting for Leases.” The proposed FSP would require recalculations of leveraged leases for changes that affect the timing of cash flows, even if the total amount of cash flows is not affected. If the FSP is finalized as currently proposed, it would require a one-time non-cash charge to be recorded as a cumulative effect of a change in accounting principle. The amount of the charge related to the previously recognized lease income, if any, would then be recognized as income over the remaining lives of the respective leases. While BB&T has entered into leveraged lease transactions in prior years that may require recalculations, any impact on BB&T’s consolidated financial position or consolidated results of operations cannot currently be predicted with certainty, because the final timing and provisions of the proposal have yet to be determined.

          In July 2005, the FASB issued a Proposed Interpretation of SFAS No. 109 “Accounting for Income Taxes” entitled “Accounting for Uncertain Tax Positions”. The proposed Interpretation would clarify the criteria under which tax benefits could be recognized under SFAS No. 109. If the proposed Interpretation is finalized as currently proposed it would require a one-time non-cash charge to be recorded as a cumulative effect of a change in accounting principle. While BB&T is currently evaluating the potential impact of this proposed Interpretation, any impact on BB&T’s consolidated financial position or consolidated results of operations cannot currently be predicted with certainty, because the final timing and provisions of the proposal have yet to be determined.

BB&T Corporation           Page 9          First Quarter 2006 10-Q




          In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” (“SFAS No. 155”), which permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities” and FASB No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement is effective for financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. BB&T adopted the provisions of SFAS No. 155 on January 1, 2006. The adoption did not have an impact on BB&T’s consolidated financial position, results of operations or cash flows.

          In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS No. 156”), which was issued to simplify the accounting for servicing rights and reduce the volatility resulting from the use of different measurement attributes for servicing rights and the related financial instruments used to economically hedge risks associated with those servicing rights. SFAS No. 156 requires separately recognized servicing rights to be initially measured at fair value, and provides the irrevocable option to subsequently account for those servicing rights (by class) at either fair value or under the amortization method previously required under FASB Statement No. 140. BB&T adopted the provisions of SFAS No. 156 effective January 1, 2006. The initial application of the provisions of SFAS No. 156 was immaterial to BB&T’s consolidated financial position, results of operations and cash flows. The disclosures required by SFAS No. 156 are included in Note 12 to the consolidated financial statements herein.

NOTE 2. Business Combinations

   Insurance and Other Nonbank Acquisitions

          During the first three months of 2006, BB&T acquired two nonbank financial services companies. In conjunction with these transactions, BB&T issued approximately 189 thousand shares of common stock and paid $35.0 million in cash. Approximately $17.4 million in goodwill and $16.8 million of identifiable intangibles were recorded in connection with these transactions, pending final valuations. During 2005, BB&T acquired five insurance businesses and four nonbank financial services companies, including the acquisition of a 70% ownership interest in Sterling Capital Management LLC, an investment management services company based in Charlotte, North Carolina. In conjunction with these transactions, BB&T issued approximately 1.2 million shares of common stock and paid approximately $136.4 million in cash. Including subsequent adjustments, approximately $104.4 million in goodwill and $85.2 million of identifiable intangible assets were recorded in connection with these transactions. BB&T also acquires client relationships, primarily from insurance companies. Such acquisitions have not been material to BB&T’s financial condition or results of operations.

BB&T Corporation           Page 10          First Quarter 2006 10-Q




   Merger-Related and Restructuring Activities

          BB&T has incurred certain expenses in connection with business combinations. 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, and other costs.

Summary of Merger-Related and Restructuring Charges (Gains)

  For the Three Months Ended March 31,
  2006 2005
(Dollars in thousands)
Severance and personnel-related items     $ 9   $ (1,287 )
Occupancy and equipment       (3,008 )   (1,213 )
Systems conversions and related items           3  
Other merger-related items       23     (60 )
       Total     $ (2,976 ) $ (2,557 )

          In conjunction with the consummation of an acquisition and completion of other requirements, BB&T typically accrues certain merger-related expenses related to estimated severance and other personnel-related 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 costs related to the acquired entity are accrued in accordance with the guidance in EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”, and generally recorded as adjustments to the purchase price unless they are required to be expensed as incurred. The costs related to existing BB&T facilities and personnel are recorded in accordance with the guidance in SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS 112, “Employers’ Accounting for Postemployment Benefits”, as appropriate, and reflected as merger-related and restructuring charges on the Consolidated Statements of Income. The following table presents a summary of BB&T’s merger accrual activity for 2006:

  Merger Accrual Activity
  (Dollars in thousands)
           
    Merger-related      
  Balance and     Balance
  January 1, restructuring     March 31,
  2006 charges (gains) Utilized Other, net 2006
           
Severance and personnel-related items     $ 6,011   $ 9   $ (952 ) $ (76 ) $ 4,992  
Occupancy and equipment       7,606     (3,008 )   (331 )       4,267  
Other merger-related items       2,924     23     (310 )   123     2,760  
     Total     $ 16,541   $ (2,976 ) $ (1,593 ) $ 47   $ 12,019  

BB&T Corporation           Page 11          First Quarter 2006 10-Q




           The following table provides a summary of BB&T’s merger accrual activity, by acquisition, for 2006:

    Merger-related      
  Balance and     Balance
  January 1, restructuring     March 31,
Acquired Institution 2006 charges (gains) Utilized Other, net 2006
  (Dollars in thousands)
           
Premier Bancshares, Inc.     $ 146   $   $   $   $ 146  
One Valley Bancorp, Inc.       184     (161 )   (23 )        
FCNB Corp.       296     (102 )   (12 )       182  
FirstSpartan Financial Corp.       58     (19 )   (39 )        
Century South Banks, Inc.       737         (31 )       706  
Virginia Capital Bancshares, Inc.       505     (139 )   (101 )       265  
F&M National Corporation       1,528     (81 )   (29 )       1,418  
Community First Banking Company       150     (100 )           50  
Area Bancshares Corporation       417                 417  
Equitable Bank       1,942     (1,942 )            
First Virginia Banks, Inc.       7,221     (483 )   (819 )       5,919  
Nonbank subsidiairies       3,357         (488 )   47     2,916  
Other adjustments           51     (51 )        
Total     $ 16,541   $ (2,976 ) $ (1,593 ) $ 47   $ 12,019  

NOTE 3. Securities

          The amortized cost and approximate fair values of securities available for sale were as follows:

  March 31, 2006
        Estimated
  Amortized Gross Unrealized Fair
  Cost Gains Losses Value
  (Dollars in thousands)
Securities available for sale:        
    U.S. Treasury securities     $ 126,162   $   $ 2,111   $ 124,051  
    U.S. government-sponsored entity securities       11,574,823     46     505,195     11,069,674  
    Mortgage-backed securities       6,507,151     2,264     206,728     6,302,687  
    States and political subdivisions       629,067     10,200     1,186     638,081  
    Equity and other securities       1,306,265     16,509     23,692     1,299,082  
    Total securities available for sale     $ 20,143,468   $ 29,019   $ 738,912   $ 19,433,575  

BB&T Corporation           Page 12          First Quarter 2006 10-Q




  December 31, 2005
        Estimated
  Amortized Gross Unrealized Fair
  Cost Gains Losses Value
  (Dollars in thousands)
Securities available for sale:        
    U.S. Treasury securities     $ 113,625   $ 1   $ 1,721   $ 111,905  
    U.S. government-sponsored entity securities       11,555,055     2,599     403,940     11,153,714  
    Mortgage-backed securities       6,755,920     5,262     150,124     6,611,058  
    States and political subdivisions       660,993     14,964     1,255     674,702  
    Equity and other securities       1,230,587     15,607     14,607     1,231,587  
    Total securities available for sale     $ 20,316,180   $ 38,433   $ 571,647   $ 19,782,966  

          On March 31, 2006, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of March 31, 2006, the unrealized loss on these securities totaled $620.1 million. Substantially all of these investments were in U.S. government-sponsored entity securities and mortgage-backed securities, which primarily consist of securities issued by the Federal Farm Credit Bureau, the Federal Home Loan Bank System, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These agencies are rated AAA and the unrealized losses are the result of increases in market interest rates rather than the credit quality of the issuers. BB&T has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Accordingly, BB&T has not recognized other-than-temporary impairment in connection with these securities.

          The following tables reflect the gross unrealized losses and fair values of BB&T’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented.

  March 31, 2006
  Less than 12 months 12 months or more Total
             
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Losses Value Losses Value Losses
  (Dollars in thousands)
Securities:            
     U.S. Treasury securities     $ 33,877   $ 933   $ 90,174   $ 1,178   $ 124,051   $ 2,111  
     U.S. government-sponsored entity securities       1,782,894     33,494     9,285,341     471,701     11,068,235     505,195  
     Mortgage-backed securities       3,035,915     75,547     3,119,268     131,181     6,155,183     206,728  
     States and political subdivisions       1,752     28     67,900     1,158     69,652     1,186  
     Equity and other securities       350,365     8,766     355,796     14,926     706,161     23,692  
 
           Total temporarily impaired securities     $ 5,204,803   $ 118,768   $ 12,918,479   $ 620,144   $ 18,123,282   $ 738,912  

BB&T Corporation           Page 13          First Quarter 2006 10-Q




  December 31, 2005
  Less than 12 months 12 months or more Total
             
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Losses Value Losses Value Losses
  (Dollars in thousands)
Securities:    
     U.S. Treasury securities     $ 22,353   $ 435   $ 87,388   $ 1,286   $ 109,741   $ 1,721  
     U.S. government-sponsored entity securities       1,529,872     22,283     8,962,648     381,657     10,492,520     403,940  
     Mortgage-backed securities       3,631,731     62,098     2,678,145     88,026     6,309,876     150,124  
     States and political subdivisions       2,915     33     79,198     1,222     82,113     1,255  
     Equity and other securities       509,265     7,673     196,592     6,934     705,857     14,607  
 
           Total temporarily impaired securities     $ 5,696,136   $ 92,522   $ 12,003,971   $ 479,125   $ 17,700,107   $ 571,647  

NOTE 4. Goodwill and Other Intangible Assets

          The changes in the carrying amount of goodwill attributable to each of BB&T’s operating segments for the three months ended March 31, 2006 and the year ended December 31, 2005 are as follows:

  Goodwill Activity by Operating Segment
                 
    Residential     Investment      
  Banking Mortgage Trust Insurance Banking and Specialized All  
  Network Banking Services Services Brokerage Lending Other Total
  (Dollars in thousands)
                 
Balance, January 1, 2005     $ 3,388,881   $ 7,459   $ 31,341   $ 569,114   $ 71,149   $ 30,585   $ 25,712   $ 4,124,241  
        Acquired goodwill, net               45,276     55,063     1,966     933         103,238  
        Adjustments to goodwill       1,967         8,096     15,897     2,031     528         28,519  
Balance, December 31, 2005       3,390,848     7,459     84,713     640,074     75,146     32,046     25,712     4,255,998  
        Acquired goodwill, net                       4,095     13,286         17,381  
        Adjustments to goodwill       (1,595 )       2,323     20,456     5,833             27,017  
Balance, March 31, 2006     $ 3,389,253   $ 7,459   $ 87,036   $ 660,530   $ 85,074   $ 45,332   $ 25,712   $ 4,300,396  

          The adjustments to goodwill recorded during the first three months of 2006 include $26.3 million of contingent consideration paid subsequent to the dates of acquisition based on the terms of the purchase agreements. The adjustments to goodwill recorded during 2005 include $23.2 million of contingent consideration paid subsequent to the dates of acquisition based on the terms of the purchase agreements and $3.1 million related to the accounting for property and equipment leases of acquired companies.

          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:

BB&T Corporation           Page 14          First Quarter 2006 10-Q




  Identifiable Intangible Assets
     
  As of March 31, 2006 As of December 31, 2005
  Gross   Net Gross   Net
  Carrying Accumulated Carrying Carrying Accumulated Carrying
  Amount Amortization Amount Amount Amortization Amount
  (Dollars in thousands)
             
Identifiable intangible assets:            
Core deposit intangibles     $ 364,937   $ (197,348 ) $ 167,589   $ 364,937   $ (185,799 ) $ 179,138  
Other (1)       465,607     (153,965 )   311,642     448,793     (140,406 )   308,387  
   Totals     $ 830,544   $ (351,313 ) $ 479,231   $ 813,730   $ (326,205 ) $ 487,525  

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

           The following table presents estimated amortization expense for the full year 2006 and each of the next four years:

Estimated Amortization Expense
of Identifiable Intangible Assets
(Dollars in thousands)

For the Year Ending December 31:
     2006     $ 99,792  
     2007       87,713  
     2008       73,920  
     2009       60,120  
     2010       48,920  




BB&T Corporation           Page 15          First Quarter 2006 10-Q




Note 5. Long-Term Debt

          Long-term debt is summarized as follows:

  March 31, December 31,
  2006 2005
  (Dollars in thousands)
     
Parent Company    
       7.25% Subordinated Notes Due 2007     $ 249,554   $ 249,465  
       6.50% Subordinated Notes Due 2011 (1,3)       646,498     646,362  
       4.75% Subordinated Notes Due 2012 (1,3)       495,431     495,283  
       5.20% Subordinated Notes Due 2015 (1,3)       996,598     996,531  
       4.90% Subordinated Notes Due 2017 (1,3)       360,300     359,691  
       5.25% Subordinated Notes Due 2019 (1,3)       599,764     599,761  
 
Branch Bank    
 
       Floating Rate Secured Borrowings Due 2007 (5)       1,500,000     1,500,000  
       Floating Rate Senior Notes Due 2007       499,903     499,884  
       Floating Rate Senior Notes Due 2007       499,828     499,801  
       Floating Rate Senior Notes Due 2007       249,986     249,970  
       Floating Rate Senior Notes Due 2008       499,854     499,839  
       4.875% Subordinated Notes Due 2013 (1,3)       249,239     249,211  
 
Federal Home Loan Bank Advances to the Subsidiary Banks (4)    
       Varying maturities to 2025       5,708,690     5,678,694  
 
Capitalized Leases    
       Varying maturities to 2028 with interest rates from 4.06% to 15.78%       1,796     1,831  
 
Junior Subordinated Debt to Unconsolidated Trusts (2)       615,874     615,870  
 
Other Long-Term Debt       2,453     2,483  
 
Hedging (Losses) Gains       (130,710 )   (26,117 )
 
 
             Total Long-Term Debt     $ 13,045,058   $ 13,118,559  

(1)  

Subordinated notes that qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.


(2)  

Securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations. At March 31, 2006, the interest rates paid on these borrowings ranged from 5.85% to 10.07%.


(3)  

These fixed rate notes were swapped to floating rates based on LIBOR. At March 31, 2006, the effective rates paid on these borrowings ranged from 5.02% to 5.51%.


(4)  

At March 31, 2006, the weighted average cost of these advances was 5.27% and the weighted average maturity was 9.9 years.


(5)  

These borrowings are secured primarily by automobile loans and have variable rates based on LIBOR.


BB&T Corporation           Page 16          First Quarter 2006 10-Q




NOTE 6. Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance
Sheet Arrangements

          BB&T utilizes a variety of financial instruments to meet the financing needs of clients and to reduce exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, and derivatives. BB&T also has commitments to fund certain affordable housing investments and contingent liabilities of certain sold loans.

          Standby letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions. The credit risk involved in the issuance of these guarantees is essentially the same as that involved in extending loans to clients and as such, the instruments are collateralized when necessary. As of March 31, 2006, BB&T had issued a total of $2.8 billion in standby letters of credit. The carrying amount of the liability for such guarantees was $5.9 million at March 31, 2006.

          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. These instruments include interest-rate swaps, caps, floors, collars, financial forwards and futures contracts, swaptions, when-issued securities, foreign exchange contracts and options written and purchased. BB&T uses derivatives primarily to manage economic risk related to securities, business loans, mortgage servicing rights and mortgage banking operations, Federal funds purchased, other time deposits, long-term debt and institutional certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients. BB&T held a variety of derivative financial instruments with notional values of $21.1 billion and $23.7 billion, at March 31, 2006 and December 31, 2005, respectively. The fair value of the instruments was $(134.6 million) and $(10.6 million), at March 31, 2006 and December 31, 2005, respectively.

          BB&T invests in certain affordable housing and historic building rehabilitation projects throughout its market area as a means of supporting local communities and receives tax credits related to these investments. 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. BB&T’s outstanding commitments to fund affordable housing investments totaled $159.0 million and $172.4 million at March 31, 2006 and December 31, 2005, respectively. At March 31, 2006, BB&T’s maximum exposure to loss associated with these investments totaled $262.7 million.

          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 litigation. BB&T also issues standard representation warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnification arrangements 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 of the company.

BB&T Corporation           Page 17          First Quarter 2006 10-Q




          Merger and acquisition agreements of 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. As certain provisions of these agreements do not specify dollar limitations, it is not possible to quantify the maximum exposure resulting from these agreements.

NOTE 7. Benefit Plans

          BB&T provides various benefit plans to substantially all employees, including employees of acquired entities. Employees of acquired entities generally participate in existing BB&T plans after consummation of the business combinations. The plans of acquired institutions are typically merged into the BB&T plans after 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, 2005 for 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 periods ended March 31, 2006 and 2005, respectively:

  Pension Plans Other Postretirement
  Qualified Nonqualified Benefit Plans
  For the For the For the
  Three Months Ended Three Months Ended Three Months Ended
  March 31, March 31, March 31,
  2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
             
Service cost     $ 15,304   $ 15,931   $ 998   $ 972   $   $  
Interest cost       14,314     13,364     1,572     1,528     355     348  
Estimated return on plan assets       (21,741 )   (20,097 )                
Amortization of prior service cost       (1,147 )   (1,148 )   (11 )   (7 )   (1,300 )   (1,300 )
Amortization of net loss       3,120     2,633     470     570     309     182  
 
Net periodic benefit cost (income)     $ 9,850   $ 10,683   $ 3,029   $ 3,063   $ (636 ) $ (770 )

          Management elected to make a discretionary contribution of $80.0 million to the qualified pension plan in the first quarter of 2006, and may make additional contributions in 2006 if determined appropriate.

BB&T Corporation           Page 18          First Quarter 2006 10-Q




NOTE 8. Computation of Earnings per Share

          BB&T’s basic and diluted earnings per share amounts for the three month periods ended March 31, 2006 and 2005, respectively, were calculated as follows:

  For the Three Months
  Ended March 31,
  2006 2005
  (Dollars in thousands,
  except per share data)
Basic Earnings Per Share:    
      Weighted average number of common shares       539,952,669     549,282,008  
           Net income     $ 431,513   $ 395,384  
      Basic earnings per share     $ .80   $ .72  
Diluted Earnings Per Share:    
      Weighted average number of common shares       539,952,669     549,282,008  
 
      Add:    
           Effect of dilutive equity awards       3,483,161     4,372,671  
      Weighted average number of diluted common shares       543,435,830     553,654,679  
 
           Net income     $ 431,513   $ 395,384  
 
      Diluted earnings per share     $ .79   $ .71  

          For the three months ended March 31, 2006 and 2005, respectively, antidilutive options to purchase 121 thousand shares and 108 thousand shares of common stock were outstanding. Antidilutive options outstanding were not included in the computation of diluted earnings per share.

NOTE 9. Comprehensive Income (Loss)

          The balances in accumulated other comprehensive loss for the periods indicated are shown in the following tables:

Accumulated Other Comprehensive Loss
March 31, 2006

  Before-Tax Tax After-Tax
  Amount Benefit Amount
(Dollars in thousands)
       
Unrealized losses on securities available for sale     $ (709,893 ) $ (260,123 ) $ (449,770 )
Unrealized losses on cash flow hedges       (17,258 )   (6,658 )   (10,600 )
Minimum pension liability       (7,102 )   (2,741 )   (4,361 )
Total     $ (734,253 ) $ (269,522 ) $ (464,731 )

BB&T Corporation           Page 19          First Quarter 2006 10-Q




Accumulated Other Comprehensive Loss
December 31, 2005

  Before-Tax Tax After-Tax
  Amount Benefit Amount
(Dollars in thousands)
       
Unrealized losses on securities available for sale     $ (533,213 ) $ (195,635 ) $ (337,578 )
Unrealized losses on cash flow hedges       (21,986 )   (8,487 )   (13,499 )
Minimum pension liability       (8,354 )   (3,197 )   (5,157 )
Total     $ (563,553 ) $ (207,319 ) $ (356,234 )

NOTE 10. Operating Segments

          BB&T’s operations are divided into seven reportable business segments: the Banking Network, Residential Mortgage Banking, Trust Services, Insurance Services, Specialized Lending, Investment Banking and Brokerage, and Treasury. These operating segments have been identified based on BB&T’s 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 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 are designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. 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, 2005, 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 20          First Quarter 2006 10-Q




BB&T Corporation
Reportable Segments

For the Three Months Ended March 31, 2006 and 2005

    Residential      
  Banking Network Mortgage Banking Trust Services Insurance Services Specialized Lending
  2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
                     
Net interest income (expense)     $ 658,701   $ 572,394   $ 206,412   $ 170,913   $ (1,409 ) $ (822 ) $ 3,553   $ 1,652   $ 82,224   $ 70,129  
  Net intersegment interest income (expense)       270,882     267,902     (141,327 )   (105,870 )   2,207     1,924                  
 
Total net interest income       929,583     840,296     65,085     65,043     798     1,102     3,553     1,652     82,224     70,129  
 
Economic provision for loan and lease losses       56,908     58,715     2,561     2,180                     31,287     22,952  
Noninterest income       228,387     194,789     32,606     35,613     41,674     33,890     170,006     148,841     16,373     10,189  
  Intersegment noninterest income       94,678     83,546                                  
Noninterest expense       341,604     307,177     12,525     11,596     36,198     25,750     162,337     128,517     36,307     31,061  
  Allocated corporate expenses       183,123     147,397     2,726     8,896     5,491     3,654     6,224     7,084     3,963     4,521  
 
Income before income taxes       671,013     605,342     79,879     77,984     783     5,588     4,998     14,892     27,040     21,784  
 
  Provision for income taxes       214,648     202,366     26,088     26,119     368     2,128     2,186     5,912     7,614     6,661  
 
Segment net income     $ 456,365   $ 402,976   $ 53,791   $ 51,865   $ 415   $ 3,460   $ 2,812   $ 8,980   $ 19,426   $ 15,123  
 
Identifiable segment assets (period end)     $ 56,594,733   $ 52,639,840   $ 15,242,331   $ 12,989,447   $ 196,599   $ 109,584   $ 2,020,688   $ 1,775,441   $ 3,170,296   $ 2,518,638  

  Investment Banking        
  and Brokerage Treasury All Other Segments (1) Intersegment Eliminations Total Segments
  2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
                     
Net interest income (expense)     $ 1,333   $ 2,174   $ (42,338 ) $ 20,235   $ 43,146   $ 63,222   $   $   $ 951,622   $ 899,897  
  Net intersegment interest income (expense)               19,095     14,091     (14,299 )   (10,225 )   (136,558 )   (167,822 )        
 
Total net interest income       1,333     2,174     (23,243 )   34,326     28,847     52,997     (136,558 )   (167,822 )   951,622     899,897  
 
Economic provision for loan and lease losses                       1,268     5,430             92,024     89,277  
Noninterest income       90,380     71,229     11,935     12,297     24,225     36,182             615,586     543,030  
  Intersegment noninterest income                               (94,678 )   (83,546 )        
Noninterest expense       77,729     63,638     2,460     1,355     17,726     24,879             686,886     593,973  
  Allocated corporate expenses       2,676     3,598     1,386     26     1,968     5,457             207,557     180,633  
 
Income before income taxes       11,308     6,167     (15,154 )   45,242     32,110     53,413     (231,236 )   (251,368 )   580,741     579,044  
 
  Provision for income taxes       4,482     2,390     (2,770 )   9,722     5,938     21,313     (73,533 )   (83,706 )   185,021     192,905  
 
Segment net income     $ 6,826   $ 3,777   $ (12,384 ) $ 35,520   $ 26,172   $ 32,100   $ (157,703 ) $ (167,662 ) $ 395,720   $ 386,139  
 
Identifiable segment assets (period end)     $ 1,414,225   $ 1,047,499   $ 20,227,365   $ 19,101,109   $ 5,435,347   $ 5,936,444   $   $   $ 104,301,584   $ 96,118,002  



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

BB&T Corporation           Page 21          First Quarter 2006 10-Q




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

  For the Three Months Ended
  March 31,
  2006 2005
  (Dollars in thousands)
Net Interest Income    
     Net interest income from segments     $ 951,622   $ 899,897  
     Other net interest income (1)       149,120     72,833  
     Elimination of management accounting practices (2)       (122,805 )   (112,171 )
     Other, net (3)       (79,885 )   (11,376 )
        Consolidated net interest income     $ 898,052   $ 849,183  
 
Net income    
     Net income from segments     $ 395,720   $ 386,139  
     Other net income (1)       87,406     72,861  
     Elimination of management accounting practices (2)       8,216     (19,864 )
     Other, net (3)       (59,829 )   (43,752 )
        Consolidated net income     $ 431,513   $ 395,384  

  March 31, March 31,
  2006 2005
  (Dollars in thousands)
Total Assets    
     Total assets from segments     $ 104,301,584   $ 96,118,002  
     Other, net (1,3)       5,732,105     5,897,084  
        Consolidated total assets     $ 110,033,689   $ 102,015,086  

(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 internal management accounting practices. These adjustments include the elimination of the funds transfer pricing credits and charges, the elimination of the economic provision for loan and lease losses and the elimination of allocated corporate expenses.
(3) Amounts reflect intercompany eliminations to arrive at consolidated results.

NOTE 11. Equity-Based Compensation Plans

          At March 31, 2006, BB&T had options, restricted shares and restricted share units outstanding from the following equity-based compensation plans: the 2004 Stock Incentive Plan (“2004 Plan”), the 1995 Omnibus Stock Incentive Plan (“Omnibus Plan”), the Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”), and plans assumed from acquired entities, which are described below. All plans generally allow for accelerated vesting of options, restricted shares or restricted share units for holders who retire and have met all retirement eligibility requirements and in connection with certain other events. BB&T’s shareholders have approved all plans that award incentive stock options, non-qualified stock options, shares of restricted stock, performance shares and stock appreciation rights with the exception of plans assumed from acquired companies. As of March 31, 2006, the 2004 Plan is the only plan that has shares available for future grants.

BB&T Corporation           Page 22          First Quarter 2006 10-Q




          BB&T’s 2004 Plan is intended to assist the Corporation in recruiting and retaining employees, directors and independent contractors and to associate the interests of eligible participants with those of BB&T and its shareholders. At March 31, 2006 there were 6.4 million nonqualified stock options at prices ranging from $38.64 to $42.25 and 2.5 million restricted shares or restricted share units outstanding under the 2004 Plan. The options outstanding under the 2004 Plan generally vest ratably over five years and have a ten-year term. The restricted shares and restricted share units generally vest five years from the date of grant. At March 31, 2006, there were 16.1 million shares remaining available to grant under the 2004 Plan.

          BB&T’s Omnibus Plan was intended to allow BB&T to recruit and retain employees with ability and initiative and to associate the employees’ interests with those of BB&T and its shareholders. At March 31, 2006, 8.0 million qualified stock options at prices ranging from $10.73 to $48.01 and 22.9 million non-qualified stock options at prices ranging from $9.52 to $53.10 were outstanding. The stock options generally vest over 3 to 5 years and have a 10-year term.

          The Directors’ Plan was intended to provide incentives to non-employee directors to remain on the Board of Directors and share in the profitability of BB&T. In 2005, the Directors’ Plan was amended and no future grants will be awarded in connection with this Plan. At March 31, 2006, options to purchase 616 thousand shares of common stock at prices ranging from $11.04 to $31.80 were outstanding pursuant to the Directors’ Plan.

          BB&T also has equity-based plans outstanding as the result of assuming the plans of acquired companies. At March 31, 2006, there were 428 thousand stock options outstanding in connection with these plans, with option prices ranging from $16.53 to $29.54.

          BB&T changed its practices regarding equity-based awards in the first quarter of 2006 and began issuing a combination of restricted share units and nonqualified stock options in connection with its incentive plans. Formerly, the Company had issued substantially all of its equity-based awards in the form of stock options.

          BB&T measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants awarded in the first three months of 2006 and 2005, respectively:

  For the Three Months
  Ended March 31,
  2006 2005
Assumptions:    
                Risk-free interest rate       4.6  %   4.1  %
                Dividend yield       3.8     3.5  
                Volatility factor       16.0     20.0  
                Weighted average expected life       6.5  yrs   6.5  yrs
Fair value of options per share     $ 5.58   $ 6.51  

BB&T Corporation           Page 23          First Quarter 2006 10-Q




          BB&T determines the assumptions used in the Black-Scholes option pricing model as follows: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the historical dividend yield of BB&T’s stock, adjusted to reflect the expected dividend yield over the expected life of the option; the volatility factor is based on the historical volatility of BB&T’s stock, adjusted to reflect the ways in which current information indicates that the future is reasonably expected to differ from the past; the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

          BB&T measures the fair value of restricted shares based on the price of BB&T’s stock on the grant date and restricted share units based on the price of BB&T’s stock on the grant date less the present value of expected dividends that are foregone during the vesting period.

           BB&T recorded $26.5 million and $45 thousand in equity-based compensation during the first quarters of 2006 and 2005, respectively. In connection with this compensation expense, BB&T also recorded $10.2 million and $18 thousand as an income tax benefit during the first quarters of 2006 and 2005, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $9.1 million and $10.0 million, respectively. The total fair value of options vested during the three months ended March 31, 2006 was $27.5 million. As of March 31, 2006, there was $131.0 million of unrecognized compensation costs related to BB&T’s equity-based awards that is expected to be recognized over a weighted-average life of 4.0 years.

          The following table details the activity during the first three months of 2006 related to stock options awarded by BB&T:

  For the Three Months Ended
  March 31, 2006
    Wtd. Avg.
    Exercise
  Shares Price
Outstanding at beginning of period       34,825,984   $ 34.32  
Granted       4,287,564     39.73  
Exercised       (616,379 )   25.72  
Forfeited or expired       (216,468 )   35.60  
Outstanding at end of period       38,280,701   $ 35.06  
 
Exercisable at end of period       21,554,258   $ 32.95  

BB&T Corporation           Page 24          First Quarter 2006 10-Q




           The following tables summarize information about BB&T’s stock option awards as of March 31, 2006:

  Options Outstanding Options Exercisable
    Weighted-     Weighted-  
    Average Weighted-   Average Weighted-
  Number Remaining Average Number Remaining Average
Range of Outstanding Contractual Exercise Exercisable Contractual Exercise
Exercise Prices 3/31/06 Life Price 3/31/06 Life Price
             
             $    0.01   to   $   10.00       16,840     0.8  yrs $ 9.52     16,840     0.8  yrs $ 9.52  
                 10.01   to        15.00       213,396     1.7     12.57     213,396     1.7     12.57  
                 15.01   to        25.00       3,521,686     3.2     22.57     3,521,686     3.2     22.57  
                 25.01   to        35.00       7,707,630     5.7     31.80     5,675,517     5.3     31.46  
                 35.01   to        45.00       26,748,732     7.7     37.80     12,054,402     6.2     36.98  
                 45.01   to        53.10       72,417     2.6     49.05     72,417     2.6     49.05  
        38,280,701     6.8  yrs $ 35.06     21,554,258     5.4  yrs $ 32.95  
 
Aggregate intrinsic value     $ 161,656,060   $ 135,463,656  
 
 
  Options Expected to Vest  
    Weighted-        
    Average Weighted-      
  Number Remaining Average      
Range of Outstanding Contractual Exercise      
Exercise Prices 3/31/06 Life Price      
             
                $   0.01   to   $   10.00       16,840     0.8  yrs $ 9.52    
                   10.01   to        15.00       213,396     1.7     12.57  
                   15.01   to        25.00       3,521,686     3.2     22.57  
                   25.01   to        35.00       7,365,026     5.7     31.76  
                   35.01   to        45.00       24,079,364     7.5     37.71  
                   45.01   to        53.10       72,417     2.6     49.05  
        35,268,729     6.7  yrs $ 34.81    
 
Aggregate intrinsic value     $ 157,417,501  

BB&T Corporation           Page 25          First Quarter 2006 10-Q




          The following table details the activity during the first three months of 2006 related to restricted shares and restricted share units awarded by BB&T:

  For the Three Months Ended
  March 31, 2006
    Wtd. Avg.
    Grant Date
  Shares Fair Value
Nonvested at beginning of period       263,001   $ 40.27  
Granted       2,260,226     31.19  
Vested       (1,477 )   19.28  
Forfeited       (11,022 )   33.47  
Nonvested at end of period       2,510,728   $ 32.14  

          At March 31, 2006, BB&T’s restricted shares and restricted share units had a weighted-average life of 4.8 years. At March 31, 2006, management estimates that 2,052,715 restricted shares or restricted share units will vest over a weighted-average life of 4.8 years.

NOTE 12. Loan Servicing

          BB&T has two classes of mortgage servicing rights for which it separately manages the economic risks: residential and commercial. Commercial mortgage servicing rights are recorded as other assets on the Consolidated Balance Sheets at lower of cost or market and amortized in proportion to and over the estimated period that net servicing income is expected to be received based on projections of the amount and timing of estimated future net cash flows. Commercial mortgage servicing rights were $22.4 million and $20.1 million at March 31, 2006 and December 31, 2005, respectively. Residential mortgage servicing rights are recorded on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage banking income on the Consolidated Statements of Income for each period. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value, due to change in valuation inputs and assumptions, of its residential mortgage servicing rights. The following is an analysis of BB&T’s residential mortgage servicing rights:

  Residential
  Mortgage Servicing Rights
  For the period ended
  March 31, 2006
  (Dollars in thousands)
   
Carrying value, January 1,     $ 431,213  
  Additions       21,211  
  Increase (decrease) in fair value:    
    Due to change in valuation inputs or assumptions       28,883  
    Other changes (1)       (18,387 )
 
Carrying value, March 31,     $ 462,920  

(1)  Represents economic amortization associated with the collection and realization of expected net servicing cash flows, expected borrower payments and the passage of time.

BB&T Corporation           Page 26          First Quarter 2006 10-Q




          The unpaid principal balances of BB&T’s total residential mortgage servicing portfolio were $41.8 billion and $41.1 billion at March 31, 2006 and December 31, 2005, respectively. The unpaid principal balances of residential mortgage loans serviced for others is comprised primarily of agency conforming fixed-rate mortgage loans and totaled $26.0 billion and $25.8 billion at March 31, 2006 and December 31, 2005, respectively. Mortgage loans serviced for others are not included in loans on the accompanying Consolidated Balance Sheets. BB&T recognized servicing fees of $25.1 million and $23.3 million in the first quarter of 2006 and 2005, respectively, as a component of mortgage banking income.

          During the first quarters of 2006 and 2005, BB&T sold residential mortgage loans with unpaid principal balances of $1.1 billion and $1.2 billion, respectively and recognized pretax gains of $8.0 million and $9.8 million, respectively, which were recorded in noninterest income as a component of mortgage banking income. BB&T retained the related mortgage servicing rights and receives servicing fees. At March 31, 2006 and December 31, 2005, the approximate weighted average servicing fee was .35% of the outstanding balance of residential mortgage loans. The weighted average coupon interest rate on the portfolio of mortgage loans serviced for others was 5.84% and 5.83% at March 31, 2006 and December 31, 2005, respectively.

          At March 31, 2006, BB&T had $259.6 million of residential mortgage loans sold with limited recourse liability. In the event of nonperformance by the borrower, BB&T has maximum recourse exposure of approximately $78.3 million on these mortgage loans.

          BB&T uses assumptions and estimates in determining the fair value of capitalized mortgage servicing rights. These assumptions include prepayment speeds, net charge-off experience and discount rates commensurate with the risks involved and comparable to assumptions used by market participants to value and bid servicing rights available for sale in the market. At March 31, 2006 the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% adverse changes in key economic assumptions are included in the accompanying table, which excludes commercial mortgage servicing rights.

  Residential
  Mortgage Servicing Rights
  March 31, 2006
  (Dollars in thousands)
   
Fair Value of Residential Mortgage Servicing Rights     $ 462,920  
           
Composition of Residential Loans Serviced for Others:          
                  Fixed-rate mortgage loans       97.7  %
                  Adjustable-rate mortgage loans       2.3  
                  Total       100.0  
           
Weighted Average Life       8.0  yrs
 
Prepayment Speed       10.6  %
                  Effect on fair value of a 10% increase     $ (19,178 )
                  Effect on fair value of a 20% increase       (36,953 )
 
Expected Credit Losses       .02  %
                  Effect on fair value of a 10% increase     $ (352 )
                  Effect on fair value of a 20% increase       (706 )
 
Weighted Average Discount Rate       9.76  %
                  Effect on fair value of a 10% increase     $ (14,723 )
                  Effect on fair value of a 20% increase       (28,640 )

BB&T Corporation           Page 27          First Quarter 2006 10-Q




          The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the effect of the change.


Back to Index


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

Forward-Looking Statements

          This report on Form 10-Q contains forward-looking statements with respect to the financial condition, results of operations and businesses of BB&T. These forward-looking statements involve certain risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T and 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:

·  

competitive pressures among depository and other financial institutions may increase significantly;


·  

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;


·  

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;


·  

legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged;


·  

adverse changes may occur in the securities markets;


·  

competitors of BB&T may have greater financial resources and develop products that enable them to compete more successfully than BB&T;


·  

costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected;


·  

expected cost savings associated with completed mergers may not be fully realized or realized within the expected time frames; and


·  

deposit attrition, customer loss or revenue loss following completed mergers may be greater than expected.


Regulatory Considerations

          BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., and various state insurance and securities regulators. BB&T and its subsidiaries have from time to time received requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2005 for additional disclosures with respect to laws and regulations affecting the Company’s businesses.

BB&T Corporation           Page 28          First Quarter 2006 10-Q




Critical Accounting Policies

          The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America 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 and related disclosures. The more critical accounting and reporting policies include BB&T’s accounting for the allowance for loan and lease losses and reserve for unfunded lending commitments, valuation of mortgage servicing rights, intangible assets and other purchase accounting related adjustments 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 and changes in accounting principles are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements” in BB&T’s 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

          The following is a summary of BB&T’s critical accounting policies that are highly dependent on estimates, assumptions and judgments. These critical accounting policies are reviewed with the Audit Committee of BB&T’s Corporate Board of Directors on a periodic basis.

   Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments

          It is the policy of BB&T to maintain an allowance for loan and lease losses and a reserve for unfunded lending commitments that equals management’s best estimate of probable credit losses that are inherent in the portfolio at the balance sheet date. Estimates for 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 for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business. The methodology used to determine an estimate for the reserve for unfunded lending commitments is inherently similar to the methodology utilized in calculating the allowance for loans and leases adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding.

BB&T Corporation           Page 29          First Quarter 2006 10-Q




   Valuation of Mortgage Servicing Rights

          BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights. Mortgage servicing rights represent the present value of the future net servicing fees from servicing mortgage loans acquired or originated by BB&T. The methodology used to determine the fair value of mortgage servicing rights is subjective and requires the development of a number of assumptions, including anticipated prepayments of loan principal. The value of mortgage servicing rights is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of mortgage servicing assets declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing assets generally increases due to reduced refinance activity. BB&T has two classes of mortgage servicing rights for which it separately manages the economic risks: residential and commercial. Residential mortgage servicing rights are recorded on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage banking income each period. Commercial mortgage servicing rights are recorded as other assets on the Consolidated Balance Sheets at lower of cost or market and amortized in proportion to and over the estimated period that net servicing income is expected to be received based on projections of the amount and timing of estimated future net cash flows. The amount and timing of estimated future net cash flows is updated based on actual results and updated projections.

   Intangible Assets

          BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. BB&T’s mergers and acquisitions are accounted for using the purchase method of accounting. Under the purchase method, BB&T is required to record the assets acquired, including identified intangible assets and liabilities assumed at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. These estimates also include the establishment of various accruals and allowances based on planned facility dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill. The major assumptions used in the impairment testing process include the estimated future cash flows of each business unit and discount rates. Discount rates are unique to each business unit and are based upon the cost of capital specific to the industry in which the business unit operates.

   Pension and Postretirement Benefit Obligations

          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.

BB&T Corporation           Page 30          First Quarter 2006 10-Q




   Income Taxes

          The calculation of BB&T’s income tax provision is complex and requires the use of estimates and judgments. 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.

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EXECUTIVE SUMMARY

          BB&T’s total assets at March 31, 2006 were $110.0 billion, an increase of $863.9 million, or ..8%, from December 31, 2005. The asset category that experienced the largest increase was loans and leases, including loans held for sale, which grew $1.3 billion, or 1.7%, during the first three months of 2006.

          Total deposits at March 31, 2006, were $75.6 billion, an increase of $1.3 billion, or 1.7%, from December 31, 2005. Long-term debt decreased $73.5 million, or .6%, and shorter-term borrowing decreased $205.4 million or 3.1% during the first three months of 2006. Total shareholders’ equity decreased $159.1 million, or 1.4%, from December 31, 2005.

          Consolidated net income for the first quarter of 2006 totaled $431.5 million, an increase of 9.1% compared to $395.4 million earned during the first quarter of 2005. On a diluted per share basis, earnings for the three months ended March 31, 2006 were $.79, compared to $.71 for the same period in 2005, an increase of 11.3%. BB&T’s results of operations for the first quarter of 2006 produced an annualized return on average assets of 1.60% and an annualized return on average shareholders’ equity of 15.72% compared to prior year ratios of 1.60% and 14.70%, respectively.

          Results during the first quarter of 2006 reflect further improvements in several key drivers of BB&T’s profitability. Among these were strong combined loan and deposit growth, solid performance from noninterest generating businesses and continued excellent asset quality.

          In December 2005, BB&T announced plans to acquire Main Street Banks, Inc. (“Main Street”), based in Atlanta, Georgia. In January 2006, BB&T announced plans to acquire First Citizens Bancorp (“First Citizens”), a bank holding company headquartered in Cleveland, Tennessee. Both transactions are subject to shareholder and regulatory approval and are expected to be completed in the second and third quarters of 2006, respectively.

BB&T Corporation           Page 31          First Quarter 2006 10-Q




          Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2005, 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 first quarter of 2006 are further discussed in the following sections.


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ANALYSIS OF FINANCIAL CONDITION

Securities

          Securities available for sale totaled $19.4 billion at March 31, 2006, a decrease of $349.4 million, or 1.8%, compared with December 31, 2005. Securities available for sale had net unrealized losses, net of deferred income taxes, of $449.8 million and $337.6 million at March 31, 2006 and December 31, 2005, respectively. The decline in the portfolio from December 31, 2005 to March 31, 2006 was a result of management’s decision not to reinvest cash flows generated by the investment portfolio because of the flat yield curve, but to use the cash flows to pay down shorter-term funding sources. Trading securities totaled $745.2 million, up $38.7 million, or 5.5%, compared to the balance at December 31, 2005. BB&T’s trading portfolio can fluctuate significantly from period to period based on market conditions, which affect the timing of purchases and sales of securities classified as trading.

          Average total securities for the first quarter of 2006 amounted to $21.0 billion, an increase of $1.3 billion, or 6.9%, compared to the average balance during the first quarter of 2005. The increase in securities was the result of a combination of factors, including the purchase of securities in 2005 to offset variances in projected loan growth and the securitization of approximately $210 million in mortgage loans in the fourth quarter of 2005 that were held in BB&T’s loan portfolio and subsequently transferred to the securities portfolio.

          The annualized fully taxable equivalent (“FTE”) yield on the average securities portfolio for the first quarter of 2006 was 4.39%, which represents an increase of 31 basis points compared to the annualized yield earned during the first quarter of 2005. The fluctuations in the annualized FTE yield on the average securities portfolio were primarily the result of changes in the overall composition of the securities portfolio with a higher percentage of higher-yielding mortgage-backed securities.

          On March 31, 2006, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of March 31, 2006, the unrealized losses on these securities totaled $620.1 million. Substantially all of these investments were in U.S. government-sponsored entity securities and mortgage-backed securities, which primarily consist of securities issued by the Federal Farm Credit Bureau, the Federal Home Loan Bank System, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These agencies are rated AAA and the unrealized losses are the result of increases in market interest rates rather than the credit quality of the issuers. BB&T has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Accordingly, BB&T has not recognized other-than-temporary impairment in connection with these securities.

BB&T Corporation           Page 32          First Quarter 2006 10-Q




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, maintaining strong asset quality and achieving an equal mix of consumer and commercial loans. For the first three months of 2006, average total loans were $75.4 billion, an increase of $6.9 billion, or 10.0%, compared to the same period in 2005. During the first three months of 2006, average commercial loans, including lease receivables, increased $3.1 billion, or 9.3%, compared to the same period in 2005 and comprised 48.9% of the loan portfolio compared to 49.2% for the first three months of 2005. Average consumer loans, which include sales finance, revolving credit and direct retail, totaled $21.0 billion during the first three months of 2006, an increase of $1.0 billion, or 5.1%, compared to the same period in 2005. During the first three months of 2006, consumer loans comprised 27.9% of average loans compared to 29.2% for the same period of 2005. Average mortgage loans totaled $14.7 billion for the first three months of 2006, an increase of 17.5% compared to the same period of 2005. Mortgage loans comprised 19.4% of the loan and lease portfolio for the first three months of 2006 compared to 18.2% for the first three months of 2005. Average specialized lending loans totaled $2.8 billion for the first three months of 2006, an increase of $530.9 million, or 22.9%, compared to the same period of 2005. These loans comprised the remaining 3.8% of the loan and lease portfolio for the first three months of 2006 compared to 3.4% for the first three months of 2005.

          The slight fluctuation in the mix of the loan portfolio during the first quarter of 2006 compared to the same period of 2005 was primarily due to increased growth in the mortgage portfolio, which grew at a faster pace than the consumer portfolio. The slower growth in the consumer portfolio was the result of decreased demand for home equity loans due to the increase in the prime rate, which is the primary index for most home equity loans. In addition, growth in the sales finance component of the consumer portfolio has slowed due to lower sales of domestic automobiles, which are the primary source of loans for BB&T’s sales finance operations.

          The annualized FTE yields on commercial, consumer, mortgage and specialized lending subsidiary loans for the first three months of 2006 were 7.39%, 6.95%, 5.50%, and 15.14%, respectively, resulting in an annualized yield on the total loan portfolio of 7.19%. This reflects an increase of 94 basis points in the annualized yield on the total loan portfolio during the first three months of 2006 in comparison to 2005. The 94 basis point increase was primarily the result of an increase in yield on commercial loans; as variable-rate loans were repriced and fixed-rate loans with lower-yields matured and were replaced with higher-yielding loans and leases. Starting in the second half of 2004, the Federal Reserve Board began to steadily increase the intended Federal funds rate in response to an increase in economic activity and concerns about inflation. As a result, the prime rate, which is the basis for pricing many commercial and consumer loans, increased to 7.75% at March 31, 2006, compared to 5.75% at March 31, 2005. Therefore, as loans gradually reprice at higher rates or mature and are replaced with higher-yielding loans, the annualized yield of the loan portfolio is expected to increase. Evidence of this trend is visible from the changes in the quarterly annualized interest yield, which improved from 6.25% in the first quarter of 2005 to 7.19% during the first quarter of 2006. The rise in short-term interest rates, however, was not matched by a similar rise in long-term interest rates. Therefore, mortgage rates, which are influenced by long-term interest rates in the marketplace, remained relatively unchanged compared to last year.

BB&T Corporation           Page 33          First Quarter 2006 10-Q




Other Interest Earning Assets

          Federal funds sold and securities purchased under resale agreements totaled $410.1 million at March 31, 2006, an increase of $123.9 million, or 43.3%, compared to December 31, 2005. Interest-bearing deposits with banks decreased $38.0 million, or 9.3%, compared to year-end 2005. 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 was 3.76% for the first quarter of 2006, compared to 2.54% for the same period in 2005. These higher yields were the result of the increase in the Federal funds target rate as previously discussed.

Goodwill and Other Assets

          BB&T’s other noninterest-earning assets, excluding premises and equipment and noninterest-bearing cash and due from banks, increased $112.3 million from December 31, 2005 to March 31, 2006. Other noninterest-earning assets includes commercial mortgage servicing rights totaling $22.4 million and residential mortgage servicing rights totaling $462.9 million at March 31, 2006. The increase was due primarily to an increase in goodwill of $44.4 million, which resulted from two nonbank acquisitions completed during the first quarter of 2006 and certain contingent payments related to prior acquisitions. In addition, residential mortgage servicing rights increased $31.7 million from December 31, 2005.

Deposits

          Client deposits generated through the BB&T branch network are the largest source of funds used to support asset growth. Deposits totaled $75.6 billion at March 31, 2006, an increase of $1.3 billion, or 1.7%, from December 31, 2005. Average deposits for the first quarter of 2006 increased $6.9 billion, or 10.2%, to $74.2 billion compared to the first quarter of 2005. The categories of deposits with the highest average rates of growth were other interest-bearing deposits, which increased 43.2%, client certificates of deposit, which increased $2.5 billion, or 14.1%, and interest checking, which increased $246.9 million, or 14.9%. In addition, noninterest-bearing deposits increased $613.4 million, or 5.0%, and other client deposits, which include money rate savings accounts, investor deposit accounts, savings accounts, individual retirement accounts and other time deposits, increased $890.5 million, or 3.0%, for the first three months of 2006 compared to the same period in 2005.

          Average other client deposits comprised 41.4% of average total deposits for the first quarter of 2006, compared to 44.2% for the same period of 2005. Average client certificates of deposit comprised 26.8% of average total deposits for the first quarter of 2006, compared to 25.9% for the same period of 2005. Average noninterest-bearing accounts comprised 17.3% of average total deposits for the first quarter of 2006, compared to 18.2% for the same period of 2005. Average interest checking comprised 2.6% of average total deposits for the first quarter of 2006, compared to 2.5% for the same period of 2005. Average other interest-bearing deposits comprised 11.9% of average total deposits for the first quarter of 2006, compared to 9.2% for the same period of 2005. The change in deposit mix is primarily due to a shift in noninterest-bearing accounts to interest-bearing products as clients began to show a preference for these items due to the higher rate environment. In addition, other interest-bearing deposits, which is composed of negotiable certificates of deposit and Eurodollar deposits, increased on average compared to the first quarter of 2005 as the Company made a decision to utilize this type of funding source to a greater degree during the early part of 2005. However, management has increased its efforts to gather deposits through its retail delivery channel, which has allowed the Corporation to decrease its reliance on other interest-bearing funding sources and the balance at March 31, 2006 decreased $723.1 million, compared to December 31, 2005.

BB&T Corporation           Page 34          First Quarter 2006 10-Q




          For the first quarter of 2006, the annualized average rate paid on total interest-bearing deposits was 2.90%, an increase of 112 basis points compared to the first quarter of 2005. This increase in the average rate paid resulted primarily from the higher interest rate environment that existed during the first quarter of 2006 compared to 2005, and competition in the pricing of deposit products.

Borrowings

          While client deposits remain the primary source for funding loan originations and other balance sheet growth, management uses shorter-term borrowings as a supplementary funding source for loan growth. Shorter-term borrowings utilized by BB&T include federal funds purchased, securities sold under repurchase agreements, master notes, U.S. Treasury tax and loan deposit notes, short-term bank notes, and short-term Federal Home Loan Bank advances. At March 31, 2006, shorter-term borrowings totaled $6.4 billion, a decrease of $205.4 million, or 3.1%, compared to December 31, 2005. For the first quarter of 2006, average shorter-term borrowed funds were $6.7 billion, a decrease of $401.0 million compared to the same period of 2005. The decrease in these funds compared to December 31, 2005 was primarily due to the decision to utilize other interest-bearing deposit products rather than federal funds purchased and securities sold under repurchase agreements and the paydown of balances from cash flows generated from the investment portfolio that were not reinvested.

          The average annualized rate paid on shorter-term borrowed funds was 3.95% for the first quarter of 2006, an increase of 152 basis points from the average rate of 2.43% paid in the comparable period of 2005. The higher rates paid on shorter-term borrowed funds mirror the increases in the Federal funds rate over the same time periods.

          BB&T also utilizes long-term debt for a variety of funding needs, including the repurchase of common stock, and, to a lesser extent, regulatory capital. 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 totaled $13.0 billion at March 31, 2006, down $73.5 million from the balance at December 31, 2005. The primary reason for the decline was the change in fair value of derivatives used for hedging certain components of the Company’s long-term debt.

          The average annualized rate paid on long-term debt for the first quarter of 2006 was 4.77%, an increase of 85 basis points compared to the first quarter of 2005. The increase in the cost of long-term funds resulted because most of BB&T’s long-term borrowings were either issued as floating rate instruments or BB&T elected to swap their long-term fixed rates to floating.

BB&T Corporation           Page 35          First Quarter 2006 10-Q




Asset Quality

          BB&T’s credit quality has continually improved as demonstrated by successive quarterly declines in the level of nonperforming assets. Nonperforming assets, composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $296.1 million at March 31, 2006, compared to $300.1 million at December 31, 2005. As a percentage of loans and leases plus foreclosed property, nonperforming assets were .39% at March 31, 2006, down from .40% at December 31, 2005. Loans 90 days or more past due and still accruing interest totaled $79.2 million at March 31, 2006, compared to $103.4 million at year-end 2005.

          BB&T’s net charge-offs totaled $47.6 million for the first quarter and amounted to .26% of average loans and leases, on an annualized basis, compared to $46.9 million, or .28% of average loans and leases, on an annualized basis, in the corresponding period in 2005.

          The allowance for credit losses, which totaled $833.4 million and $829.8 million at March 31, 2006 and December 31, 2005, respectively, consists of the allowance for loan and lease losses, which is presented on the Consolidated Balance Sheets, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheets. The allowance for loan and lease losses totaled $833.2 million at March 31, 2006, compared to $825.3 million at December 31, 2005. This amounted to 1.09% of loans and leases outstanding at March 31, 2006, compared to 1.10% at year-end 2005.

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




BB&T Corporation           Page 36          First Quarter 2006 10-Q




Table 1
Asset Quality Analysis

For the Three Months Ended
  3/31/06 12/31/05 9/30/05 6/30/05 3/31/05
  (Dollars in thousands)
Allowance For Credit Losses          
    Beginning balance     $ 829,770   $ 830,344   $ 827,325   $ 822,464   $ 828,301  
    Allowance for acquired (sold) loans, net       3,731     (970 )            
    Provision for credit losses       47,571     69,329     57,465     49,424     41,045  
      Charge-offs    
        Commercial loans and leases       (5,407 )   (20,584 )   (7,440 )   (11,818 )   (9,420 )
        Direct retail loans       (10,597 )   (10,293 )   (20,558 )   (8,148 )   (7,449 )
        Sales finance loans       (5,610 )   (8,617 )   (6,874 )   (3,881 )   (7,292 )
        Revolving credit loans       (11,337 )   (15,994 )   (13,179 )   (12,552 )   (12,693 )
        Mortgage loans       (2,095 )   (1,347 )   (1,502 )   (1,728 )   (1,476 )
        Specialized lending       (27,226 )   (26,923 )   (23,190 )   (22,885 )   (21,904 )
      Total charge-offs       (62,272 )   (83,758 )   (72,743 )   (61,012 )   (60,234 )
      Recoveries    
        Commercial loans and leases       3,203     4,550     4,822     4,291     3,415  
        Direct retail loans       3,065     2,653     5,214     2,159     1,848  
        Sales finance loans       1,739     1,866     2,145     2,404     2,468  
        Revolving credit loans       2,743     2,841     2,740     2,737     2,540  
        Mortgage loans       144     162     340     39     95  
        Specialized lending       3,738     2,753     3,036     4,819     2,986  
      Total recoveries       14,632     14,825     18,297     16,449     13,352  
    Net charge-offs       (47,640 )   (68,933 )   (54,446 )   (44,563 )   (46,882 )
      Ending balance     $ 833,432   $ 829,770   $ 830,344   $ 827,325   $ 822,464  
Nonperforming Assets    
 
    Nonaccrual loans and leases    
        Commercial loans and leases     $ 109,838   $ 103,804   $ 107,121   $ 110,662   $ 121,613  
        Direct retail loans       42,156     40,916     39,334     37,640     39,198  
        Sales finance loans       3,064     4,640     9,864     9,908     9,702  
        Revolving credit loans       177     233     304     348     266  
        Mortgage loans       49,643     48,126     48,301     49,163     58,576  
        Specialized lending       26,508     31,160     25,648     22,033     25,107  
    Total nonaccrual loans and leases       231,386     228,879     230,572     229,754     254,462  
    Foreclosed real estate       41,341     48,315     51,504     62,036     60,147  
    Other foreclosed property       22,895     22,420     21,692     16,550     18,199  
    Restructured loans       507     515     523     531     537  
      Total nonperforming assets     $ 296,129   $ 300,129   $ 304,291   $ 308,871   $ 333,345  
    Loans 90 days or more past due    
      and still accruing    
        Commercial loans and leases     $ 5,727   $ 10,413   $ 5,948   $ 6,040   $ 9,188  
        Direct retail loans       17,686     20,814     18,197     14,718     13,857  
        Sales finance loans       18,347     21,585     16,246     16,015     18,291  
        Revolving credit loans       4,172     4,713     4,840     3,886     4,067  
        Mortgage loans       28,251     38,828     33,385     33,494     31,432  
        Specialized lending       5,050     7,092     5,999     5,164     6,421  
      Total loans 90 days or more past due    
        and still accruing     $ 79,233   $ 103,445   $ 84,615   $ 79,317   $ 83,256  

BB&T Corporation           Page 37          First Quarter 2006 10-Q




Asset Quality Ratios

For the Three Months Ended
  3/31/06 12/31/05 9/30/05 6/30/05 3/31/05
Loans 90 days or more past due and still    
    accruing as a percentage of total loans    
    and leases       .10  %   .14  %   .11  %   .11  %   .12  %
Nonaccrual and restructured loans and leases    
    as a percentage of total loans and leases       .30     .31     .31     .32     .37  
Total nonperforming assets as a percentage of:    
    Total assets       .27     .27     .28     .29     .33  
    Loans and leases plus foreclosed property       .39     .40     .41     .43     .48  
Net charge-offs as a percentage of    
    average loans and leases       .26     .37     .30     .25     .28  
Allowance for loan and lease losses as a    
    percentage of loans and leases       1.09     1.10     1.11     1.13     1.16  
Allowance for loan and lease losses as a    
    percentage of loans and leases    
    held for investment       1.10     1.11     1.12     1.14     1.17  
Ratio of allowance for loan and lease losses to:    
    Net charge-offs       4.31  x   3.02  x   3.79  x   4.53  x   4.22  x
    Nonaccrual and restructured loans and leases       3.59     3.60     3.54     3.51     3.14  


Note: All items referring to loans and leases include loans held for sale and are net of unearned income. Applicable ratios are annualized.


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ANALYSIS OF RESULTS OF OPERATIONS

          Consolidated net income for the first quarter of 2006 totaled $431.5 million, an increase of $36.1 million, or 9.1%, compared to $395.4 million earned during the first quarter of 2005. On a diluted per share basis, earnings for the three months ended March 31, 2006 were $.79, compared to $.71 for the same period in 2005. BB&T’s results of operations for the first quarter of 2006 produced an annualized return on average assets of 1.60% and an annualized return on average shareholders’ equity of 15.72%, compared to prior year ratios of 1.60% and 14.70%, respectively.

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

Table 2
Annualized
Profitability Measures

  2006 2005
  First Fourth Third Second First
  Quarter Quarter Quarter Quarter Quarter
Return on average assets       1.60  %   1.58  %   1.65  %   1.50  %   1.60  %
Return on average shareholders' equity       15.72     15.32     15.69     14.04     14.70  
Net interest margin (taxable equivalent)       3.82     3.82     3.88     3.92     3.95  

BB&T Corporation           Page 38          First Quarter 2006 10-Q




   Merger-Related and Restructuring Activities

          Mergers and acquisitions have played an important role in the development of BB&T’s franchise. BB&T has been an active acquirer of financial institutions, insurance agencies and other nonbank fee income producing businesses for many years. BB&T recorded certain merger-related items and restructuring costs during both 2006 and 2005. During the first quarter of 2006, BB&T recorded $1.8 million in net after-tax gains primarily associated with the reversal of charges for anticipated exit costs for closed facilities related to recent acquisitions. During the first quarter of 2005, BB&T recorded $1.6 million in net after-tax merger-related credits or gains primarily associated with the reversal of charges for anticipated exit costs for closed facilities and the finalization of severance and other personnel-related liabilities associated with recent acquisitions. The above credits and gains are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expense.

          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. Merger-related charges also include professional fees, advertising and asset write-offs incurred in connection with the mergers.

          The following table presents the components of merger-related and restructuring charges (gains) included in noninterest expenses. This table includes changes 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.

Table 3-1
Summary of Merger-Related and Restructuring Charges (Gains)

  For the Three Months Ended March 31,
  2006 2005
  (Dollars in thousands)
   
Severance and personnel-related items     $ 9   $ (1,287 )
Occupancy and equipment       (3,008 )   (1,213 )
Systems conversions and related items           3  
Other merger-related items       23     (60 )
       Total     $ (2,976 ) $ (2,557 )

          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 or reversals of previously estimated amounts, which typically occur in corporate support and data processing functions.

BB&T Corporation           Page 39          First Quarter 2006 10-Q




          Occupancy and equipment charges or credits represent merger-related costs or gains 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. The other merger-related charges are composed of asset and supply inventory write-offs, litigation accruals 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 and other personnel 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 an acquisition. The following tables present a summary of activity with respect to BB&T’s merger and restructuring accruals, with the more significant merger (First Virginia) presented separately. These tables include costs reflected as expenses, as presented in the table above, and accruals recorded through purchase accounting adjustments.

  Table 3-2
  First Virginia Banks, Inc
  (Dollars in thousands)
           
    Merger-related      
  Balance and     Balance
  January 1, restructuring     March 31,
  2006 charges (gains) Utilized Other, net 2006
           
Severance and personnel-related items     $ 4,504   $   $ (538 ) $   $ 3,966  
Occupancy and equipment       2,717     (483 )   (281 )       1,953  
     Total     $ 7,221   $ (483 ) $ (819 ) $   $ 5,919  

          The remaining accruals at March 31, 2006 for First Virginia are related primarily to costs associated with severance payments to certain executive officers and costs to exit certain leases and to dispose of excess facilities and equipment. These liabilities will be utilized in the future because 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.

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

BB&T Corporation           Page 40          First Quarter 2006 10-Q




Table 3-3
  All Other Mergers
  (Dollars in thousands)
           
    Merger-related      
  Balance and     Balance
  January 1, restructuring     March 31,
  2006 charges (gains) Utilized Other, net 2006
           
Severance and personnel-related items     $ 1,507   $ 9   $ (414 ) $ (76 ) $ 1,026  
Occupancy and equipment       4,889     (2,525 )   (50 )       2,314  
Other merger-related items       2,924     23     (310 )   123     2,760  
     Total     $ 9,320   $ (2,493 ) $ (774 ) $ 47   $ 6,100  

          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. The other merger-related liabilities relate to litigation and other similar charges.

          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. 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 March 31, 2006 are expected to be utilized during 2006, unless they relate to specific contracts that expire in later years.

Net Interest Income and Net Interest Margin

          Net interest income on an FTE basis was $919.4 million for the first quarter of 2006 compared to $869.3 million for the same period in 2005, an increase of $50.0 million, or 5.8%. For the three months ended March 31, 2006, average earning assets increased $8.4 billion, or 9.4%, compared to the same period of 2005, while average interest-bearing liabilities increased $7.6 billion, or 10.3%, and the net interest margin decreased from 3.95% in the first quarter of 2005 to 3.82% in the current quarter. The decrease in the net interest margin was caused by a combination of factors. The flattening of the yield curve in recent quarters and more intense price competition for commercial loans and deposits has resulted in an increase in funding costs that has outpaced the rise in yields on earning assets. In addition, the margin was negatively affected by the additional interest expense incurred in connection with BB&T’s stock repurchase program.

          The following tables set forth the major components of net interest income and the related annualized yields and rates for the first quarter of 2006 compared to the same period in 2005, and the variances between the periods caused by changes in interest rates versus changes in volumes.

BB&T Corporation           Page 41          First Quarter 2006 10-Q




Table 4
FTE Net Interest Income and Rate / Volume Analysis
For the Three Months Ended March 31, 2006 and 2005

  Average Balances Annualized Yield / Rate Income / Expense Increase Change due to
  2006 2005 2006 2005 2006 2005 (Decrease) Rate Volume
  (Dollars in thousands)
Assets                  
Securities, at amortized cost (1):                  
     U.S. Treasury securities     $ 123,236   $ 124,921     3.11  %   3.20  % $ 946   $ 986   $ (40 ) $ (27 ) $ (13 )
     U.S. government-sponsored entity securities (6)       11,941,126     12,878,398     3.95     3.76     117,953     120,921     (2,968 )   5,981     (8,949 )
     Mortgage-backed securities       6,588,814     4,893,934     4.81     4.66     79,292     57,049     22,243     1,863     20,380  
     States and political subdivisions       639,539     732,313     6.82     6.71     10,900     12,286     (1,386 )   171     (1,557 )
     Other securities       912,972     569,898     6.01     4.41     13,723     6,277     7,446     2,757     4,689  
     Trading securities       749,327     407,860     3.70     2.43     6,929     2,475     4,454     1,688     2,766  
        Total securities (5)       20,955,014     19,607,324     4.39     4.08     229,743     199,994     29,749     12,433     17,316  
Other earning assets (2)       777,594     620,364     3.76     2.54     7,220     3,883     3,337     2,189     1,148  
Loans and leases, net    
     of unearned income (1)(3)(4)(5)       75,442,649     68,578,138     7.19     6.25     1,341,049     1,059,777     281,272     169,125     112,147  
 
        Total earning assets       97,175,257     88,805,826     6.56     5.75     1,578,012     1,263,654     314,358     183,747     130,611  
 
        Non-earning assets       11,956,905     11,673,166  
 
           Total assets     $ 109,132,162   $ 100,478,992  
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