BB&T Second 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:

June 30, 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 July 31, 2006, 537,040,937 shares of the registrant's common stock, $5 par value, were outstanding.




BB&T CORPORATION

FORM 10-Q

June 30, 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 31 
   
          Executive Summary 34 
   
          Analysis of Financial Condition 36 
   
          Analysis of Results of Operations 44 
   
          Market Risk Management 58 
   
          Capital Adequacy and Resources 62 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 64 
   
  Item 4. Controls and Procedures 65 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 65 
   
  Item 1A. Risk Factors 65 
   
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65 
   
  Item 4. Submission of Matters to a Vote of Security Holders 66 
   
  Item 6. Exhibits 67 
   
SIGNATURES 67 
   
EXHIBIT INDEX 68 
   
CERTIFICATIONS 69 



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




Item 1. Financial Statements

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

  June 30, December 31,
  2006 2005
     
Assets    
     Cash and due from banks     $ 2,159,857   $ 2,185,571  
     Interest-bearing deposits with banks       561,667     410,380  
     Federal funds sold and securities purchased under resale agreements    
         or similar arrangements       365,270     286,233  
     Trading securities at fair value       918,621     706,518  
     Securities available for sale at fair value       20,090,945     19,782,966  
     Loans held for sale       664,513     628,834  
     Loans and leases, net of unearned income       79,619,120     74,394,654  
     Allowance for loan and lease losses       (869,880 )   (825,300 )
         Loans and leases, net       78,749,240     73,569,354  
 
     Premises and equipment, net of accumulated depreciation       1,342,229     1,286,909  
     Goodwill       4,730,294     4,255,998  
     Core deposit and other intangible assets       493,463     487,525  
     Residential mortgage servicing rights (fair value at June 30, 2006,    
         and lower of cost or market at December 31, 2005)       499,706     431,213  
     Other assets       5,707,925     5,138,258  
 
                Total assets     $ 116,283,730   $ 109,169,759  
 
Liabilities and Shareholders' Equity    
     Deposits:    
         Noninterest-bearing deposits     $ 13,625,502   $ 13,476,939  
         Interest checking       1,539,064     1,426,715  
         Other client deposits       32,344,438     30,959,888  
         Client certificates of deposit       23,704,122     19,309,667  
         Other interest-bearing deposits       7,299,675     9,108,590  
                Total deposits       78,512,801     74,281,799  
 
     Federal funds purchased, securities sold under repurchase agreements    
            and short-term borrowed funds       6,797,108     6,561,719  
     Long-term debt       15,195,145     13,118,559  
     Accounts payable and other liabilities       4,614,563     4,078,568  
 
                Total liabilities       105,119,617     98,040,645  
 
     Commitments and contingencies (Note 6)    
     Shareholders' equity:    
 
         Preferred stock, $5 par, 5,000,000 shares authorized, none issued or    
            outstanding at June 30, 2006, or at December 31, 2005            
         Common stock, $5 par, 1,000,000,000 shares authorized;    
            536,895,965 issued and outstanding at June 30, 2006, and    
            543,102,080 issued and outstanding at December 31, 2005       2,684,480     2,715,510  
         Additional paid-in capital       2,648,721     2,818,703  
         Retained earnings       6,382,706     5,951,135  
         Accumulated other comprehensive loss, net of deferred income    
            taxes of $(319,408) at June 30, 2006, and $(207,319) at December 31, 2005       (551,794 )   (356,234 )
 
                Total shareholders' equity       11,164,113     11,129,114  
 
                Total liabilities and shareholders' equity     $ 116,283,730   $ 109,169,759  
 

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

BB&T Corporation           Page 2          Second 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 For the Six Months Ended
  June 30, June 30,
  2006 2005 2006 2005
Interest Income        
        Interest and fees on loans and leases     $ 1,443,972   $ 1,128,331   $ 2,777,517   $ 2,181,152  
        Interest and dividends on securities       214,421     199,167     430,326     385,955  
        Interest on short-term investments       10,222     5,186     17,442     9,069  
           Total interest income       1,668,615     1,332,684     3,225,285     2,576,176  
 
Interest Expense    
        Interest on deposits       497,238     279,283     935,658     520,582  
        Interest on federal funds purchased, securities sold under    
           repurchase agreements and short-term borrowed funds       80,560     58,546     145,641     101,012  
        Interest on long-term debt       174,048     117,890     329,165     228,434  
           Total interest expense       751,846     455,719     1,410,464     850,028  
 
Net Interest Income       916,769     876,965     1,814,821     1,726,148  
        Provision for credit losses       57,732     49,424     105,303     90,469  
 
Net Interest Income After Provision for Credit Losses       859,037     827,541     1,709,518     1,635,679  
 
Noninterest Income    
        Insurance commissions       214,087     181,612     390,599     333,902  
        Service charges on deposits       138,112     139,166     269,353     259,938  
        Other nondeposit fees and commissions       80,263     63,820     153,216     118,766  
        Investment banking and brokerage fees and commissions       78,220     81,046     159,531     149,929  
        Trust income       37,739     36,722     74,759     67,129  
        Mortgage banking income       29,128     12,367     61,423     42,560  
        Bankcard fees and merchant discounts       31,226     27,738     59,908     53,174  
        Securities gains (losses), net       153     (6 )   155     1  
        Other income       41,749     42,454     89,928     76,141  
           Total noninterest income       650,677     584,919     1,258,872     1,101,540  
 
Noninterest Expense    
        Personnel expense       505,558     450,730     1,019,557     865,846  
        Occupancy and equipment expense       109,707     148,080     217,492     253,824  
        Amortization of intangibles       25,225     28,611     50,333     56,713  
        Professional services       28,432     22,594     54,614     38,883  
        Loss on early extinguishment of debt           2,943         2,943  
        Merger-related and restructuring charges (gains), net       1,631     (404 )   (1,345 )   (2,961 )
        Other expenses       189,056     178,734     338,139     346,746  
           Total noninterest expense       859,609     831,288     1,678,790     1,561,994  
 
Earnings    
        Income before income taxes       650,105     581,172     1,289,600     1,175,225  
        Provision for income taxes       221,005     194,367     428,987     393,036  
        Net income     $ 429,100   $ 386,805   $ 860,613   $ 782,189  
 
Per Common Share    
        Net income:    
           Basic     $ .80   $ .71   $ 1.60   $ 1.43  
           Diluted     $ .79   $ .70   $ 1.59   $ 1.42  
        Cash dividends paid     $ .38   $ .35   $ .76   $ .70  
Weighted Average Shares Outstanding    
           Basic       536,882,392     547,089,165     538,409,049     548,179,529  
           Diluted       541,607,530     551,245,112     542,297,340     552,443,239  

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

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




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 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                   782,189         782,189  
            Unrealized holding gains (losses) arising during the period    
                on securities available for sale, net of tax of $(13,290)                       (21,924 )   (21,924 )
            Reclassification adjustment for losses (gains)    
                on securities available for sale included in net    
                income, net of tax of $40                       (41 )   (41 )
         Change in unrealized gains (losses) on securities, net of tax                       (21,965 )   (21,965 )
         Change in unrecognized gains (losses) on cash flow hedges,    
            net of tax of $4,208                       6,693     6,693  
         Change in minimum pension liability, net of tax of $(1,572)                       (2,138 )   (2,138 )
     Total comprehensive income (loss)                   782,189     (17,410 )   764,779  
 
     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       1,244,094     6,220     23,887             30,107  
     Redemption of common stock       (5,500,000 )   (27,500 )   (185,855 )           (213,355 )
     Cash dividends declared on common stock, $.73 per share                   (399,696 )       (399,696 )
     Excess tax benefit from equity-based awards               8,568             8,568  
     Other, net               190             190  
Balance, June 30, 2005       546,796,870   $ 2,733,984   $ 2,990,467   $ 5,494,527   $ (128,611 ) $ 11,090,367  
 
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                   860,613         860,613  
            Unrealized holding gains (losses) arising during the    
                period on securities available for sale, net of tax of    
                $ (113,289)                       (197,406 )   (197,406 )
            Reclassification adjustment for losses (gains)    
                on securities available for sale included in net    
                income, net of tax of $(61)                       (94 )   (94 )
 
         Change in unrealized gains (losses) on securities, net of tax                       (197,500 )   (197,500 )
         Change in unrecognized gains (losses) on cash flow hedges,    
            net of tax of $805                       1,144     1,144  
         Change in minimum pension liability, net of tax of $456                       796     796  
     Total comprehensive income (loss)                   860,613     (195,560 )   665,053  
 
     Common stock issued:    
         In purchase acquisitions       14,444,497     72,223     556,765             628,988  
         In connection with stock option exercises    
            and other employee benefits, net of cancellations       1,656,791     8,284     38,119             46,403  
     Redemption of common stock       (22,307,403 )   (111,537 )   (805,857 )           (917,394 )
     Cash dividends declared on common stock, $.80 per share                   (429,042 )       (429,042 )
     Excess tax benefit from equity-based awards               4,355             4,355  
     Equity-based compensation expense               36,636             36,636  
Balance, June 30, 2006       536,895,965   $ 2,684,480   $ 2,648,721   $ 6,382,706   $ (551,794 ) $ 11,164,113  

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

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




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

  For the Six Months Ended
  June 30,
  2006 2005
Cash Flows From Operating Activities:    
     Net income     $ 860,613   $ 782,189  
     Adjustments to reconcile net income to net cash provided by operating activities:    
           Provision for credit losses       105,303     90,469  
           Depreciation       87,428     104,670  
           Amortization of intangibles       50,333     56,713  
           Amortization of purchase accounting mark-to-market adjustments, net       9,043     14,484  
           Equity-based compensation       36,636     91  
           Discount accretion and premium amortization on long-term debt, net       60,711     55,026  
           Discount accretion and premium amortization on securities, net       17,242     23,094  
           Net increase in trading account securities       (205,638 )   (340,890 )
           Gain on sales of securities, net       (155 )   (1 )
           Gain on sales of loans and mortgage loan servicing rights, net       (31,497 )   (37,074 )
           Gain on disposals of premises and equipment, net       (31,637 )   (207 )
           Proceeds from sales of loans held for sale       2,383,010     2,342,194  
           Purchases of loans held for sale       (670,768 )   (358,064 )
           Origination of loans held for sale, net of principal collected       (1,766,879 )   (2,076,721 )
           Excess tax benefit from equity-based awards           8,567  
           Increase in other assets, net       (366,083 )   (155,431 )
           Increase (decrease) in accounts payable and other liabilities, net       413,647     (27,255 )
           Other, net       (8,394 )   6,995  
                   Net cash provided by operating activities       942,915     488,849  
 
Cash Flows From Investing Activities:    
     Proceeds from sales of securities available for sale       20,394     680,924  
     Proceeds from maturities, calls and paydowns of securities available for sale       806,246     1,429,674  
     Purchases of securities available for sale       (1,430,377 )   (3,454,119 )
     Proceeds from maturities, calls and paydowns of securities held to maturity           125  
     Leases made to customers       (132,275 )   (129,629 )
     Principal collected on leases       95,090     87,608  
     Loan originations, net of principal collected       (3,145,009 )   (3,127,155 )
     Purchases of loans       (268,584 )   (461,426 )
     Net cash acquired (paid) in business combinations       17,080     (127,051 )
     Proceeds from disposals of premises and equipment       81,960     11,652  
     Purchases of premises and equipment       (117,857 )   (83,650 )
     Proceeds from sales of foreclosed property or other real estate held for sale       53,854     37,618  
     Other, net           (11,612 )
           Net cash used in investing activities       (4,019,478 )   (5,147,041 )
 
Cash Flows From Financing Activities:    
     Net increase in deposits       2,568,196     4,134,290  
     Net increase in federal funds purchased, securities sold under repurchase agreements    
         and short-term borrowed funds       55,512     449,890  
     Proceeds from issuance of long-term debt       2,101,749     828,359  
     Repayment of long-term debt       (167,604 )   (416,320 )
     Net proceeds from common stock issued       46,403     30,107  
     Redemption of common stock       (917,394 )   (213,355 )
     Cash dividends paid on common stock       (410,044 )   (384,745 )
     Excess tax benefit from equity-based awards       4,355      
           Net cash provided by financing activities       3,281,173     4,428,226  
 
Net Increase (Decrease) in Cash and Cash Equivalents       204,610     (229,966 )
Cash and Cash Equivalents at Beginning of Period       2,882,184     3,025,835  
Cash and Cash Equivalents at End of Period     $ 3,086,794   $ 2,795,869  
 
 
Supplemental Disclosure of Cash Flow Information:    
 
     Cash paid during the period for:    
        Interest     $ 1,367,213   $ 810,572  
        Income taxes       373,348     414,979  
     Noncash investing and financing activities:    
        Transfers of loans to foreclosed property       39,753     23,760  
        Transfers of fixed assets to other real estate owned       3,205     4,085  
        Common stock issued in business combinations       628,988     25,300  


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

Back to Index

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




BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2006 and December 31, 2005; BB&T’s results of operations for the three months and six months ended June 30, 2006 and 2005; and BB&T’s cash flows for the six months ended June 30, 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 six 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          Second 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 periods’ 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          Second 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) had the following effect on BB&T’s income before income taxes, net income, basic earnings per share and diluted earnings per share for the three and six month periods ended June 30, 2006.

  For the Three For the Six
  Months Ended Months Ended
  June 30, 2006 June 30, 2006
  (Dollars in thousands, except per share data)
     
Effect of SFAS 123(R) on:    
    Income before income taxes     $ (9,612 ) $ (35,652 )
    Net income       (5,938 )   (22,001 )
    Basic earnings per share       (0.01 )   (0.04 )
    Diluted earnings per share       (0.02 )   (0.04 )

          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 six months ended June 30, 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.

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




          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 during 2006.

  For the Three For the Six
  Months Ended Months Ended
  June 30, 2005 June 30, 2005
  (Dollars in thousands, except per share data)
     
Net income:    
      Net income as reported     $ 386,805   $ 782,189  
          Add: Equity-based compensation expense    
               included in reported net income, net of tax       29     56  
          Deduct: Total equity-based employee    
               compensation expense determined under    
               fair value based method for all awards,    
               net of tax       (6,225 )   (10,640 )
      Pro forma net income     $ 380,609   $ 771,605  
 
Basic EPS:    
      As reported     $ .71   $ 1.43  
      Pro forma       .70     1.41  
 
Diluted EPS:    
      As reported       .70     1.42  
      Pro forma       .69     1.40  

      Changes in Accounting Principles and Effects of New Accounting Pronouncements

          In February 2006, the Financial Accounting Standards Board (“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.

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




          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.

          In July 2006, the FASB issued FASB Staff Position (“FSP”) FAS 13-2 “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction”, (“FSP FAS 13-2”), which amends SFAS No. 13, “Accounting for Leases.” FSP FAS 13-2 requires an entity to recalculate the allocation of income for a leveraged lease transaction from the inception of the lease if, during the lease term, the projected timing of the income tax cash flows generated by the transaction is revised, even if the total amount of income tax cash flows is not affected. The provisions of FSP FAS 13-2 are effective for fiscal years beginning after December 15, 2006. BB&T has entered into leveraged lease transactions in prior years that may require recalculations because the Internal Revenue Service (“IRS”) has issued a Notice of Proposed Adjustments relating to BB&T’s treatment of certain leveraged lease transactions. Management continues to believe that BB&T’s income tax treatment of these leveraged leases was appropriate and in compliance with the tax laws and regulations in effect at the time that the deductions were taken. BB&T is currently involved in litigation with the IRS concerning the income tax treatment of certain leveraged lease transactions. While management cannot currently predict with certainty whether there will be any changes to the projected income tax cash flows relating to BB&T’s leveraged lease transactions, BB&T may have to record a one-time non-cash after-tax charge to retained earnings which is not expected to exceed approximately $300 million as a cumulative effect of a change in accounting principle on January 1, 2007. The amount of the charge, if any, would then be recognized as net income over the remaining lives of the respective leases.

          In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109 “Accounting for Income Taxes.” FIN 48 provides guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. FIN 48 also requires additional disclosures related to an entity’s accounting for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. BB&T has taken certain tax positions which are uncertain in nature, primarily related to leveraged lease transactions, and may be required to record a one-time non-cash charge to retained earnings which is not expected to exceed approximately $150 million as a cumulative effect of a change in accounting principle on January 1, 2007. This charge primarily relates to the accrual of penalties and interest and is subject to the outcome of current litigation with the IRS.

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




NOTE 2. Business Combinations

   Financial Institution Acquisition

          On June 1, 2006, BB&T completed the acquisition of Main Street Banks Inc. (“Main Street”), a $2.3 billion bank holding company headquartered in Atlanta, Georgia. The merger enabled the Company to enhance its ongoing commitment to organic growth by adding strategically located financial centers in some of the nation’s fastest growing communities. In conjunction with this transaction, BB&T issued approximately 14.3 million shares and 636 thousand stock options valued at $621.2 million and recorded $423.9 million in goodwill and $45.2 million in amortizing intangibles, which are primarily comprised of core deposit intangibles, pending final valuations.

   Insurance and Other Nonbank Acquisitions

          During the first six 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. Including subsequent adjustments, approximately $22.7 million in goodwill and $11.1 million of identifiable intangibles were recorded in connection with these transactions. 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. Approximately $104.4 million in goodwill and $85.2 million of identifiable intangible assets were recorded in connection with these transactions. BB&T also acquired client relationships, primarily from insurance companies. Such acquisitions have not been material to BB&T’s financial condition or results of operations.

   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.



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




Summary of Merger-Related and Restructuring Charges (Gains)

  For the Three Months For the Six Months
  Ended June 30, Ended June 30,
  2006 2005 2006 2005
  (Dollars in thousands)
Severance and personnel-related items     $ 203   $ (111 ) $ 212   $ (1,398 )
Occupancy and equipment       (326 )   (541 )   (3,334 )   (1,754 )
Systems conversions and related items       766     —         766     3  
Marketing and public relations       628     —         628     —      
Other merger-related items       360     248     383     188  
       Total     $ 1,631   $ (404 ) $ (1,345 ) $ (2,961 )

          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, Accrued at restructuring     June 30,
  2006 acquisition charges (gains) Utilized Other, net 2006
             
Severance and personnel-related items     $ 6,011   $ 15,965   $ 212   $ (9,220 ) $ (76 ) $ 12,892  
Occupancy and equipment       7,606     325     (3,334 )   (534 )   —         4,063  
Systems conversions and related items       —         944     766     (766 )   —         944  
Other merger-related items       2,924     3     1,011     (1,394 )   123     2,667  
     Total     $ 16,541   $ 17,237   $ (1,345 ) $ (11,914 ) $ 47   $ 20,566  

BB&T Corporation           Page 12          Second 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, Accrued at restructuring     June 30,
Acquired Institution 2006 acquisition 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 )   (26 )       168  
FirstSpartan Financial Corp.       58         (19 )   (39 )        
Century South Banks, Inc.       737             (62 )       675  
Virginia Capital Bancshares, Inc.       505         (139 )   (202 )       164  
F&M National Corporation       1,528         (446 )   (173 )       909  
Community First Banking Company       150         (100 )           50  
Area Bancshares Corporation       417                     417  
Equitable Bank       1,942         (1,942 )            
First Virginia Banks, Inc.       7,221         (482 )   (1,260 )       5,479  
Main Street Banks, Inc.           17,237     1,852     (9,250 )       9,839  
Nonbank subsidiaries       3,357             (539 )   47     2,865  
Other adjustments               194     (194 )        
Total     $ 16,541   $ 17,237   $ (1,345 ) $ (11,914 ) $ 47   $ 20,566  

   NOTE 3. Securities

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

  June 30, 2006
        Estimated
  Amortized Gross Unrealized Fair
  Cost Gains Losses Value
  (Dollars in thousands)
Securities available for sale:        
      U.S. Treasury securities     $ 125,334   $   $ 2,008   $ 123,326  
      U.S. government-sponsored entity securities       11,619,831     20     570,859     11,048,992  
      Mortgage-backed securities       7,187,102     2,098     265,813     6,923,387  
      States and political subdivisions       605,827     6,968     1,083     611,712  
      Equity and other securities       1,396,915     15,871     29,258     1,383,528  
 
      Total securities available for sale     $ 20,935,009   $ 24,957   $ 869,021   $ 20,090,945  


  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  

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




           On June 30, 2006, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of June 30, 2006, the unrealized loss on these securities totaled $779.4 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. At June 30, 2006, BB&T had 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.

  June 30, 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     $ 16,821   $ 415   $ 106,505   $ 1,593   $ 123,326   $ 2,008  
      U.S. government-sponsored entity securities       1,201,589     26,442     9,846,885     544,417     11,048,474     570,859  
      Mortgage-backed securities       2,113,030     50,481     4,409,998     215,332     6,523,028     265,813  
      States and political subdivisions       6,471     55     56,758     1,028     63,229     1,083  
      Equity and other securities       343,551     12,256     338,922     17,002     682,473     29,258  
 
            Total temporarily impaired securities     $ 3,681,462   $ 89,649   $ 14,759,068   $ 779,372   $ 18,440,530   $ 869,021  


  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  


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




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 six months ended June 30, 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       397,937             25,917     4,095     13,286         441,235  
        Adjustments to goodwill       (2,035 )       2,323     20,456     6,093     6,224         33,061  
Balance, June 30, 2006     $ 3,786,750   $ 7,459   $ 87,036   $ 686,447   $ 85,334   $ 51,556   $ 25,712   $ 4,730,294  

           The adjustments to goodwill recorded during the first six months of 2006 include $27.5 million of contingent consideration paid subsequent to the dates of acquisition based on the terms of the purchase agreements and $5.3 million related to the receipt of final valuation reports. 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:

  Identifiable Intangible Assets
             
  As of June 30, 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     $ 401,662   $ (208,957 ) $ 192,705   $ 364,937   $ (185,799 ) $ 179,138  
   Other (1)       468,339     (167,581 )   300,758     448,793     (140,406 )   308,387  
      Totals     $ 870,001   $ (376,538 ) $ 493,463   $ 813,730   $ (326,205 ) $ 487,525  

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

           Estimated amortization expense of identifiable intangible assets for the full year 2006 and each of the next four years total $104.3 million, $94.2 million, $79.2 million, $63.8 million and $52.1 million.

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




NOTE 5. Long-Term Debt

          Long-term debt is summarized as follows:

  June 30, December 31,
  2006 2005
  (Dollars in thousands)
Parent Company    
      7.25% Subordinated Notes Due 2007     $ 249,646   $ 249,465  
      6.50% Subordinated Notes Due 2011 (1,3)       646,636     646,362  
      4.75% Subordinated Notes Due 2012 (1,3)       495,581     495,283  
      5.20% Subordinated Notes Due 2015 (1,3)       996,665     996,531  
      4.90% Subordinated Notes Due 2017 (1,3)       360,918     359,691  
      5.25% Subordinated Notes Due 2019 (1,3)       599,767     599,761  
 
Branch Bank    
 
      Floating Rate Secured Borrowings Due 2007 (5)       1,500,000     1,500,000  
      Floating Rate Senior Notes Due 2007       499,922     499,884  
      Floating Rate Senior Notes Due 2007       499,854     499,801  
      Floating Rate Senior Notes Due 2007       249,989     249,970  
      Floating Rate Senior Notes Due 2008       499,869     499,839  
      Floating Rate Senior Notes Due 2009       499,923      
      4.875% Subordinated Notes Due 2013 (1,3)       249,267     249,211  
 
Federal Home Loan Bank Advances to the Subsidiary Banks (4)    
      Varying maturities to 2025       6,790,118     5,678,694  
 
Capitalized Leases    
      Varying maturities to 2028 with interest rates from 4.06% to 15.78%       2,844     1,831  
 
 
Junior Subordinated Debt to Unconsolidated Trusts (2)    
      5.85% BB&T Capital Trust I Securities Due 2035 (3)       514,075     514,065  
      6.75% BB&T Capital Trust II Securities Due 2036       597,642      
      Other Securities (6)       150,591     101,805  
 
Other Long-Term Debt       2,298     2,483  
 
Hedging (Losses) Gains       (210,460 )   (26,117 )
 
 
           Total Long-Term Debt     $ 15,195,145   $ 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.

(3)  

These fixed rate notes were swapped to floating rates based on LIBOR. At June 30, 2006, the effective rates paid on these borrowings ranged from 5.34% to 6.05%.

(4)  

At June 30, 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.

(6)  

These securities were issued by companies acquired by BB&T. At June 30, 2006, the effective rate paid on these borrowings ranged from 8.75% to 10.07%. These securities have varying maturities through 2033.


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




          In June 2006, BB&T Capital Trust II (“BBTCT”) issued $600 million of 6.75% Capital Securities. BBTCT, a statutory business trust created under the laws of the State of Delaware, was formed by BB&T for the sole purpose of issuing the Capital Securities and investing the proceeds thereof in 6.75% Junior Subordinated Debentures issued by BB&T. BB&T is the sole owner of the common securities of BBTCT and has made guarantees which, taken collectively, fully, irrevocably, and unconditionally guarantee, on a subordinated basis, all of BBTCT’s obligations under the Trust and Capital Securities. BBTCT’s sole asset is the Junior Subordinated Debentures issued by BB&T which mature June 7, 2036, but are subject to early redemption (i) in whole or in part at any time at the option of BB&T pursuant to the optional redemption provisions of such security, or (ii) in whole, but not in part, under certain prescribed limited circumstances. The Capital Securities of BBTCT are subject to mandatory redemption in whole or in part, upon repayment of the Junior Subordinated Debentures at maturity or their earlier redemption.

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 June 30, 2006, BB&T had issued a total of $3.1 billion in standby letters of credit. The carrying amount of the liability for such guarantees was $5.9 million at June 30, 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 $24.3 billion and $23.7 billion at June 30, 2006 and December 31, 2005, respectively. The fair value of these instruments was $(215.5 million) and $(10.6 million), at June 30, 2006 and December 31, 2005, respectively.

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




          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 $134.3 million and $172.4 million at June 30, 2006 and December 31, 2005, respectively. At June 30, 2006, BB&T’s maximum exposure to loss associated with these investments totaled $265.3 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 representations and 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.

          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.








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




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 tables summarize the components of net periodic benefit cost (income) recognized for the three month and six month periods ended June 30, 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
  June 30, June 30, June 30,
  2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
             
Service cost     $ 15,304   $ 15,931   $ 998   $ 971   $   $  
Interest cost       14,313     13,363     1,571     1,528     355     348  
Estimated return on plan assets       (21,741 )   (20,097 )                
Amortization of prior service cost       (1,147 )   (1,147 )   (11 )   (7 )   (1,300 )   (1,300 )
Amortization of net loss       3,121     2,633     470     570     309     182  
  Net periodic benefit cost (income)     $ 9,850   $ 10,683   $ 3,028   $ 3,062   $ (636 ) $ (770 )


  Pension Plans Other Postretirement
  Qualified Nonqualified Benefit Plans
  For the For the For the
  Six months ended Six months ended Six months ended
  June 30, June 30, June 30,
  2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
             
Service cost     $ 30,608   $ 31,862   $ 1,996   $ 1,943   $   $  
Interest cost       28,627     26,727     3,143     3,056     710     696  
Estimated return on plan assets       (43,482 )   (40,194 )                
Amortization of prior service cost       (2,294 )   (2,295 )   (22 )   (14 )   (2,600 )   (2,600 )
Amortization of net loss       6,241     5,266     940     1,140     618     364  
  Net periodic benefit cost (income)     $ 19,700   $ 21,366   $ 6,057   $ 6,125   $ (1,272 ) $ (1,540 )

           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 19          Second Quarter 2006 10-Q




NOTE 8. Computation of Earnings per Share

           BB&T’s basic and diluted earnings per share amounts for the three and six month periods ended June 30, 2006 and 2005, respectively, were calculated as follows:

  For the Three Months For the Six Months
  Ended June 30, Ended June 30,
  2006 2005 2006 2005
  (Dollars in thousands, except per share data)
Basic Earnings Per Share:        
     Weighted average number of common shares       536,882,392     547,089,165     538,409,049     548,179,529  
           Net income     $ 429,100   $ 386,805   $ 860,613   $ 782,189  
     Basic earnings per share     $ .80   $ .71   $ 1.60   $ 1.43  
Diluted Earnings Per Share:    
     Weighted average number of common shares       536,882,392     547,089,165     538,409,049     548,179,529  
 
     Add:    
           Effect of dilutive equity awards       4,725,138     4,155,947     3,888,291     4,263,710  
     Weighted average number of diluted common shares       541,607,530     551,245,112     542,297,340     552,443,239  
 
           Net income     $ 429,100   $ 386,805   $ 860,613   $ 782,189  
 
     Diluted earnings per share     $ .79   $ .70   $ 1.59   $ 1.42  

           For the three months ended June 30, 2006 and 2005, respectively, antidilutive options to purchase 141 thousand shares and 117 thousand shares of common stock were outstanding. For the first six months of 2006 and 2005, respectively, antidilutive options to purchase 126 thousand shares and 116 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
June 30, 2006

  Before-Tax Tax After-Tax
  Amount Benefit Amount
  (Dollars in thousands)
       
Unrealized losses on securities available for sale     $ (844,063 ) $ (308,985 ) $ (535,078 )
Unrealized losses on cash flow hedges       (20,037 )   (7,682 )   (12,355 )
Minimum pension liability       (7,102 )   (2,741 )   (4,361 )
   Total     $ (871,202 ) $ (319,408 ) $ (551,794 )


BB&T Corporation           Page 20          Second 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 )

          The following table summarizes total comprehensive income for the three month and six month periods ended June 30, 2006 and 2005, respectively:

  For the Three Months Ended For the Six Months Ended
  June 30, June 30,
  2006 2005 2006 2005
  (Dollars in thousands)
Comprehensive income:        
  Net income     $ 429,100   $ 386,805   $ 860,613   $ 782,189  
  Other comprehensive income:    
     Net unrealized holding (losses) gains on securities       (85,308 )   161,269     (197,500 )   (21,965 )
     Net unrealized (losses) gains on cash flow hedges       (1,755 )   731     1,144     6,693  
     Net change in minimum pension liability               796     (2,138 )
         Total comprehensive income     $ 342,037   $ 548,805   $ 665,053   $ 764,779  








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




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 22          Second Quarter 2006 10-Q




BB&T Corporation
Reportable Segments
For the Three Months Ended June 30, 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)     $ 673,616   $ 616,301   $ 221,899   $ 178,559   $ (1,427 ) $ (725 ) $ 4,386   $ 2,276   $ 90,972   $ 73,620  
  Net intersegment interest income (expense)       295,027     263,028     (153,022 )   (112,632 )   2,358     1,931                  
 
Total net interest income       968,643     879,329     68,877     65,927     931     1,206     4,386     2,276     90,972     73,620  
 
Economic provision for loan and lease losses       55,695     59,032     2,713     2,303                     30,151     24,260  
Noninterest income       244,721     225,841     29,299     14,911     42,451     41,105     207,346     174,877     17,182     14,257  
  Intersegment noninterest income       108,107     105,581                                  
Noninterest expense       358,926     331,133     13,052     12,934     35,211     35,573     160,969     138,082     38,452     33,182  
  Allocated corporate expenses       185,786     158,940     2,722     8,888     5,506     4,165     6,312     7,103     3,950     4,052  
 
Income before income taxes       721,064     661,646     79,689     56,713     2,665     2,573     44,451     31,968     35,601     26,383  
 
  Provision for income taxes       240,703     223,342     27,198     19,182     1,021     940     17,508     12,500     15,790     8,675  
 
Segment net income (loss)     $ 480,361   $ 438,304   $ 52,491   $ 37,531   $ 1,644   $ 1,633   $ 26,943   $ 19,468   $ 19,811   $ 17,708  
 
Identifiable segment assets (period end)     $ 60,265,726   $ 54,015,364   $ 15,925,077   $ 13,628,857   $ 217,337   $ 208,432   $ 2,306,790   $ 1,996,451   $ 3,446,728   $ 2,700,243  
 
 
  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)     $ 1,992   $ 2,337   $ (54,780 ) $ (433 ) $ 44,136   $ 60,793   $   $   $ 980,794   $ 932,728  
  Net intersegment interest income (expense)               18,610     17,970     (16,236 )   (11,047 )   (146,737 )   (159,250 )        
 
Total net interest income       1,992     2,337     (36,170 )   17,537     27,900     49,746     (146,737 )   (159,250 )   980,794     932,728  
 
Economic provision for loan and lease losses                       1,406     12,236             89,965     97,831  
Noninterest income       88,867     86,022     17,932     18,388     14,711     34,611             662,509     610,012  
  Intersegment noninterest income                               (108,107 )   (105,581 )        
Noninterest expense       79,216     75,243     2,072     1,574     18,644     23,247             706,542     650,968  
  Allocated corporate expenses       2,673     3,600     1,554     69     1,865     5,367             210,368     192,184  
 
Income before income taxes       8,970     9,516     (21,864 )   34,282     20,696     43,507     (254,844 )   (264,831 )   636,428     601,757  
 
  Provision for income taxes       3,465     3,739     (5,249 )   6,109     5,346     11,372     (87,359 )   (87,156 )   218,423     198,703  
 
Segment net income (loss)     $ 5,505   $ 5,777   $ (16,615 ) $ 28,173   $ 15,350   $ 32,135   $ (167,485 ) $ (177,675 ) $ 418,005   $ 403,054  
 
Identifiable segment assets (period end)     $ 1,703,704   $ 1,335,921   $ 21,660,180   $ 20,298,337   $ 6,188,914   $ 5,935,629   $   $   $ 111,714,456   $ 100,119,234  


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

.

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




BB&T Corporation
Reportable Segments
For the Six Months Ended June 30, 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)     $ 1,332,317   $ 1,188,695   $ 428,311   $ 349,472   $ (2,836 ) $ (1,547 ) $ 7,939   $ 3,928   $ 173,196   $ 143,749  
  Net intersegment interest income (expense)       565,909     530,930     (294,349 )   (218,502 )   4,565     3,855                  
 
Total net interest income       1,898,226     1,719,625     133,962     130,970     1,729     2,308     7,939     3,928     173,196     143,749  
 
Economic provision for loan and lease losses       112,603     117,747     5,274     4,483                     61,438     47,212  
Noninterest income       473,108     420,630     61,905     50,524     84,125     74,995     377,352     323,718     33,555     24,446  
  Intersegment noninterest income       202,785     189,127                                  
Noninterest expense       700,530     638,310     25,577     24,530     71,409     61,323     323,306     266,599     74,759     64,243  
  Allocated corporate expenses       368,909     306,337     5,448     17,784     10,997     7,819     12,536     14,187     7,913     8,573  
 
Income before income taxes       1,392,077     1,266,988     159,568     134,697     3,448     8,161     49,449     46,860     62,641     48,167  
 
  Provision for income taxes       455,351     425,708     53,286     45,301     1,389     3,068     19,694     18,412     23,404     15,336  
 
Segment net income     $ 936,726   $ 841,280   $ 106,282   $ 89,396   $ 2,059   $ 5,093   $ 29,755   $ 28,448   $ 39,237   $ 32,831  
 
Identifiable segment assets (period end)     $ 60,265,726   $ 54,015,364   $ 15,925,077   $ 13,628,857   $ 217,337   $ 208,432   $ 2,306,790   $ 1,996,451   $ 3,446,728   $ 2,700,243  
 
 
  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)     $ 3,325   $ 4,511   $ (97,118 ) $ 19,802   $ 87,282   $ 124,015   $   $   $ 1,932,416   $ 1,832,625  
  Net intersegment interest income (expense)               37,705     32,061     (30,535 )   (21,272 )   (283,295 )   (327,072 )        
 
Total net interest income       3,325     4,511     (59,413 )   51,863     56,747     102,743     (283,295 )   (327,072 )   1,932,416     1,832,625  
 
Economic provision for loan and lease losses                       2,674     17,666             181,989     187,108  
Noninterest income       179,247     157,251     29,867     30,685     38,936     70,793             1,278,095     1,153,042  
  Intersegment noninterest income                               (202,785 )   (189,127 )        
Noninterest expense       156,945     138,881     4,532     2,929     36,370     48,126             1,393,428     1,244,941  
  Allocated corporate expenses       5,349     7,198     2,940     95     3,833     10,824             417,925     372,817  
Income before income taxes       20,278     15,683     (37,018 )   79,524     52,806     96,920     (486,080 )   (516,199 )   1,217,169     1,180,801  
 
  Provision for income taxes       7,947     6,129     (8,019 )   15,831     11,284     32,685     (160,892 )   (170,862 )   403,444     391,608  
 
Segment net income     $ 12,331   $ 9,554   $ (28,999 ) $ 63,693   $ 41,522   $ 64,235   $ (325,188 ) $ (345,337 ) $ 813,725   $ 789,193  
 
Identifiable segment assets (period end)     $ 1,703,704   $ 1,335,921   $ 21,660,180   $ 20,298,337   $ 6,188,914   $ 5,935,629   $   $   $ 111,714,456   $ 100,119,234  


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

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




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

  For the Three Months Ended For the Six Months Ended
  June 30, June 30,
  2006 2005 2006 2005
  (Dollars in thousands) (Dollars in thousands)
Net Interest Income        
    Net interest income from segments     $ 980,794   $ 932,728   $ 1,932,416   $ 1,832,625  
    Other net interest income (1)       163,014     77,068     312,134     149,901  
    Elimination of management accounting practices (2)       (130,366 )   (118,623 )   (253,171 )   (230,794 )
    Other, net (3)       (96,673 )   (14,208 )   (176,558 )   (25,584 )
       Consolidated net interest income     $ 916,769   $ 876,965   $ 1,814,821   $ 1,726,148  
 
Net income    
    Net income from segments     $ 418,005   $ 403,054   $ 813,725   $ 789,193  
    Other net income (1)       94,958     61,658     182,364     134,519  
    Elimination of management accounting practices (2)       10,856     (17,084 )   19,072     (36,948 )
    Other, net (3)       (94,719 )   (60,823 )   (154,548 )   (104,575 )
       Consolidated net income     $ 429,100   $ 386,805   $ 860,613   $ 782,189  
 
 
      June 30, June 30,
      2006 2005
    (Dollars in thousands)
Total Assets    
    Total assets from segments     $ 111,714,456   $ 100,119,234  
    Other, net (1,3)       4,569,274     5,716,090  
       Consolidated total assets     $ 116,283,730   $ 105,835,324  

(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 June 30, 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 awards 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 equity-based compensation plans with the exception of plans assumed from acquired companies. As of June 30, 2006, the 2004 Plan is the only plan that has shares available for future grants.

BB&T Corporation           Page 25          Second 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 June 30, 2006 there were 6.8 million non-qualified and qualified stock options at prices ranging from $10.90 to $42.94 and 2.5 million restricted shares and 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 June 30, 2006, there were 15.5 million shares available for future grants 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 align the employees’ interests with those of BB&T and its shareholders. At June 30, 2006, 7.6 million qualified stock options at prices ranging from $10.73 to $48.01 and 22.3 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 June 30, 2006, options to purchase 537 thousand shares of common stock at prices ranging from $15.94 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 June 30, 2006, there were 369 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 six months of 2006 and 2005, respectively:

  For the Six Months
  Ended June 30,
  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 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; and the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

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




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

          BB&T recorded $10.1 million and $46 thousand in equity-based compensation during the three months ended June 30, 2006 and 2005, respectively, and $36.6 million and $91 thousand during the six months ended June 30, 2006 and 2005, respectively. In connection with this compensation expense, BB&T also recorded $3.9 million and $17 thousand as an income tax benefit during the three months ended June 30, 2006 and 2005, respectively, and $14.0 million and $35 thousand during the six months ended June 30, 2006 and 2005, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $23.7 million and $21.8 million, respectively. The total fair value of options vested during the six months ended June 30, 2006 was $27.9 million. As of June 30, 2006, there was $120.8 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 3.8 years.

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

  For the Six Months Ended
  June 30, 2006
    Wtd. Avg.
    Exercise
  Shares Price
     
Outstanding at beginning of period       34,825,984   $ 34.32  
Issued in purchase transactions       636,429     28.64  
Granted       4,302,610     39.74  
Exercised       (1,683,449 )   27.64  
Forfeited or expired       (467,232 )   36.28  
Outstanding at end of period       37,614,342   $ 35.11
 
Exercisable at end of period       21,178,490   $ 33.04
 
 
 

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




           The following tables summarize information about BB&T’s stock option awards as of June 30, 2006:

    Options
  Options Outstanding Exercisable
    Weighted-     Weighted-  
    Average Weighted-   Average Weighted-
  Number Remaining Average Number Remaining Average
Range of Outstanding Contractual Exercise Exercisable Contractual Exercise
Exercise Prices 6/30/06 Life Price 6/30/06 Life Price
             
    $ 0.01 to $ 10.00       16,840     0.5  yrs $ 9.52     16,840     0.5  yrs $ 9.52  
     10.01 to    15.00       232,347     2.7     12.71     232,347     2.7     12.71  
     15.01 to    25.00       3,363,329     3.1     22.50     3,363,329     3.1     22.50  
     25.01 to    35.00       7,513,939     5.5     31.77     5,530,001     5.1     31.44  
     35.01 to    45.00       26,394,336     7.5     37.83     11,942,422     6.0     37.05  
     45.01 to    53.10       93,551     3.7     49.42     93,551     3.7     49.42  
        37,614,342     6.6  yrs $ 35.11     21,178,490     5.3  yrs $ 33.04  
 
Aggregate intrinsic value     $ 244,626,492   $ 182,013,249  
 
 
 
 
     
  Options Expected to Vest  
    Weighted-        
    Average Weighted-      
  Number Remaining Average      
Range of Outstanding Contractual Exercise      
Exercise Prices 6/30/06 Life Price      
             
    $ 0.01 to $ 10.00       16,840     0.5  yrs $ 9.52  
     10.01 to    15.00       232,347     2.7     12.71  
     15.01 to    25.00       3,363,329     3.1     22.50  
     25.01 to    35.00       7,195,097     5.4     31.73  
     35.01 to    45.00       23,711,175     7.3     37.76  
     45.01 to    53.10       93,551     3.7     49.42  
        34,612,339     6.5  yrs $ 34.87  
 
Aggregate intrinsic value     $ 233,516,183  




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




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

  For the Six Months Ended
  June 30, 2006
    Wtd. Avg.
    Grant Date
  Shares Fair Value
Nonvested at beginning of period       263,001   $ 40.27  
Granted       2,261,718     31.19  
Vested       (8,373 )   30.05  
Forfeited       (51,107 )   32.22  
Nonvested at end of period       2,465,239   $ 32.14  

           At June 30, 2006, BB&T’s restricted shares and restricted share units had a weighted-average life of 4.6 years. At June 30, 2006, management estimates that 2,047,012 restricted shares and restricted share units will vest over a weighted-average life of 4.6 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 $24.2 million and $20.1 million at June 30, 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
  June 30, 2006
  (Dollars in thousands)
   
Carrying value, January 1,     $ 431,213  
  Additions       44,574  
  Increase (decrease) in fair value:    
    Due to change in valuation inputs or assumptions       61,272  
    Other changes (1)       (37,353 )
 
Carrying value, June 30,     $ 499,706  

(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 29          Second Quarter 2006 10-Q




          The unpaid principal balances of BB&T’s total residential mortgage servicing portfolio were $42.7 billion and $41.1 billion at June 30, 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 $26.3 billion and $25.8 billion at June 30, 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 $49.9 million and $47.0 million during the first six months of 2006 and 2005, respectively, as a component of mortgage banking income.

          During the first six months of 2006 and 2005, BB&T sold residential mortgage loans with unpaid principal balances of $2.4 billion and $2.3 billion, respectively. The pretax gains recognized during the first six months of 2006 and 2005 were $13.1 million and $18.3 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 June 30, 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 5.86% and 5.83% at June 30, 2006 and December 31, 2005, respectively.

          At June 30, 2006, BB&T had $244.5 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 $74.8 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 are comparable to assumptions used by other market participants to value servicing rights available for sale in the market. At June 30, 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.




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




  Residential
  Mortgage Servicing Rights
  June 30, 2006
  (Dollars in thousands)
   
Fair Value of Residential Mortgage Servicing Rights     $ 499,706  
 
Composition of Residential Loans Serviced for Others:    
                             Fixed-rate mortgage loans       97.8  %
                             Adjustable-rate mortgage loans       2.2  
                               Total       100.0  
 
Weighted Average Life       8.5  yrs
 
Prepayment Speed       9.6  %
                             Effect on fair value of a 10% increase     $ (19,185 )
                             Effect on fair value of a 20% increase       (37,022 )
 
Expected Credit Losses       .02  %
                             Effect on fair value of a 10% increase     $ (367 )
                             Effect on fair value of a 20% increase       (734 )
 
Weighted Average Discount Rate       9.79  %
                             Effect on fair value of a 10% increase     $ (16,649 )
                             Effect on fair value of a 20% increase       (32,348 )

           The sensitivity calculations above are hypothetical and should not be viewed as 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.


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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;


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




·  

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;