BB&T Third 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:

September 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 October 31, 2006, 540,934,899 shares of the registrant's common stock, $5 par value, were outstanding.




BB&T CORPORATION

FORM 10-Q

September 30, 2006


INDEX


Page No.

   
Part I. FINANCIAL INFORMATION  
   
  Item 1. Financial Statements (Unaudited) 2 
   
          Notes to Consolidated Financial Statements (Unaudited) 6 
   
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 32 
   
          Executive Summary 35 
   
          Analysis of Financial Condition 36 
   
          Analysis of Results of Operations 44 
   
          Market Risk Management 58 
   
          Capital Adequacy and Resources 64 
   
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 66 
   
  Item 4. Controls and Procedures 66 
   
Part II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 67 
   
  Item 1A. Risk Factors 67 
   
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 67 
   
  Item 6. Exhibits 68 
   
SIGNATURES 68 
   
EXHIBIT INDEX 69 
   
CERTIFICATIONS 70 



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




Item 1. Financial Statements

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

  September 30, December 31,
  2006 2005
     
Assets    
     Cash and due from banks     $ 1,953,967   $ 2,185,571  
     Interest-bearing deposits with banks       567,323     410,380  
     Federal funds sold and securities purchased under resale agreements    
         or similar arrangements       339,613     286,233  
     Trading securities at fair value       887,605     706,518  
     Securities available for sale at fair value       20,733,173     19,782,966  
     Loans held for sale       546,537     628,834  
     Loans and leases, net of unearned income       81,403,542     74,394,654  
     Allowance for loan and lease losses       (883,497 )   (825,300 )
         Loans and leases, net       80,520,045     73,569,354  
 
     Premises and equipment, net of accumulated depreciation       1,387,080     1,286,909  
     Goodwill       4,822,813     4,255,998  
     Core deposit and other intangible assets       478,853     487,525  
     Residential mortgage servicing rights (fair value at September 30, 2006,    
         and lower of cost or market at December 31, 2005)       480,839     431,213  
     Other assets       5,806,049     5,138,258  
 
                Total assets     $ 118,523,897   $ 109,169,759  
 
Liabilities and Shareholders' Equity    
     Deposits:    
         Noninterest-bearing deposits     $ 13,533,341   $ 13,476,939  
         Interest checking       1,303,510     1,426,715  
         Other client deposits       32,795,530     30,959,888  
         Client certificates of deposit       24,337,678     19,309,667  
         Other interest-bearing deposits       8,096,144     9,108,590  
                Total deposits       80,066,203     74,281,799  
 
     Federal funds purchased, securities sold under repurchase agreements    
            and short-term borrowed funds       7,234,721     6,561,719  
     Long-term debt       16,159,379     13,118,559  
     Accounts payable and other liabilities       3,329,669     4,078,568  
 
                Total liabilities       106,789,972     98,040,645  
 
     Commitments and contingencies (Note 6)    
     Shareholders' equity:    
         Preferred stock, $5 par, 5,000,000 shares authorized, none issued or    
            outstanding at September 30, 2006, or at December 31, 2005            
         Common stock, $5 par, 1,000,000,000 shares authorized;    
            540,652,126 issued and outstanding at September 30, 2006, and    
            543,102,080 issued and outstanding at December 31, 2005       2,703,261     2,715,510  
         Additional paid-in capital       2,775,914     2,818,703  
         Retained earnings       6,572,716     5,951,135  
         Accumulated other comprehensive loss, net of deferred income    
            taxes of $(182,602) at September 30, 2006, and $(207,319) at December 31, 2005       (317,966 )   (356,234 )
                Total shareholders' equity       11,733,925     11,129,114  
                Total liabilities and shareholders' equity     $ 118,523,897   $ 109,169,759  


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

BB&T Corporation           Page 2          Third 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 Nine Months Ended
  September 30, September 30,
  2006 2005 2006 2005
Interest Income        
         Interest and fees on loans and leases     $ 1,563,071   $ 1,220,102   $ 4,340,588   $ 3,401,254  
         Interest and dividends on securities       229,087     204,016     659,413     589,971  
         Interest on short-term investments       10,233     6,331     27,675     15,400  
             Total interest income       1,802,391     1,430,449     5,027,676     4,006,625  
 
Interest Expense    
         Interest on deposits       585,115     343,489     1,520,773     864,071  
         Interest on federal funds purchased, securities sold under    
             repurchase agreements and short-term borrowed funds       74,974     58,169     220,615     159,181  
         Interest on long-term debt       204,514     129,799     533,679     358,233  
             Total interest expense       864,603     531,457     2,275,067     1,381,485  
 
Net Interest Income       937,788     898,992     2,752,609     2,625,140  
         Provision for credit losses       62,336     57,465     167,639     147,934  
 
Net Interest Income After Provision for Credit Losses       875,452     841,527     2,584,970     2,477,206  
 
Noninterest Income    
         Insurance commissions       207,799     182,915     598,398     516,817  
         Service charges on deposits       137,950     141,072     407,303     401,010  
         Other nondeposit fees and commissions       83,991     67,979     237,207     186,745  
         Investment banking and brokerage fees and commissions       82,698     70,036     242,229     219,965  
         Trust income       39,699     36,552     114,458     103,681  
         Mortgage banking income       22,616     35,840     84,039     78,400  
         Bankcard fees and merchant discounts       30,961     29,229     90,869     82,403  
         Securities gains, net       179     193     334     194  
         Other income       54,289     41,304     144,217     117,445  
             Total noninterest income       660,182     605,120     1,919,054     1,706,660  
 
Noninterest Expense    
         Personnel expense       524,140     451,260     1,543,697     1,317,106  
         Occupancy and equipment expense       113,808     105,656     331,300     359,480  
         Amortization of intangibles       26,776     26,540     77,109     83,253  
         Professional services       28,890     23,278     83,504     62,161  
         Loss on early extinguishment of debt                   2,943  
         Merger-related and restructuring charges (gains), net       10,098     (1,824 )   8,753     (4,785 )
         Other expenses       211,766     181,566     549,905     528,312  
             Total noninterest expense       915,478     786,476     2,594,268     2,348,470  
 
Earnings    
         Income before income taxes       620,156     660,171     1,909,756     1,835,396  
         Provision for income taxes       203,128     218,165     632,115     611,201  
 
         Net income     $ 417,028   $ 442,006   $ 1,277,641   $ 1,224,195  
 
 
Per Common Share    
         Net income:    
             Basic     $ .77   $ .81   $ 2.37   $ 2.23  
             Diluted     $ .77   $ .80   $ 2.35   $ 2.22  
         Cash dividends paid     $ .42   $ .38   $ 1.18   $ 1.08  
 
Weighted Average Shares Outstanding    
             Basic       538,911,074     547,467,864     538,578,229     547,939,700  
             Diluted       544,285,889     552,058,757     543,496,218     552,313,670  


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

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




BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 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                   1,224,195         1,224,195  
            Unrealized holding gains (losses) arising during the period    
                on securities available for sale, net of tax of $(103,867)                       (178,894 )   (178,894 )
            Reclassification adjustment for losses (gains)    
                on securities available for sale included in net    
                income, net of tax of $128                       (322 )   (322 )
         Change in unrealized gains (losses) on securities, net of tax                       (179,216 )   (179,216 )
         Change in unrecognized gains (losses) on cash flow hedges,    
            net of tax of $3,771                       5,999     5,999  
         Change in minimum pension liability, net of tax of $(1,572)                       (2,138 )   (2,138 )
     Total comprehensive income (loss)                   1,224,195     (175,355 )   1,048,840  
 
     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       2,498,575     12,493     40,944             53,437  
     Redemption of common stock       (5,500,000 )   (27,500 )   (185,855 )           (213,355 )
     Cash dividends declared on common stock, $1.11 per share                   (605,067 )       (605,067 )
     Excess tax benefit from equity-based awards               11,966             11,966  
     Other, net               323             323  
Balance, September 30, 2005       548,051,351   $ 2,740,257   $ 3,011,055   $ 5,731,162   $ (286,556 ) $ 11,195,918  
 
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                   1,277,641         1,277,641  
            Unrealized holding gains (losses) arising during the    
                period on securities available for sale, net of tax of    
                $16,371                       25,049     25,049  
            Reclassification adjustment for losses (gains)    
                on securities available for sale included in net    
                income, net of tax of $(128)                       (206 )   (206 )
         Change in unrealized gains (losses) on securities, net of tax                       24,843     24,843  
         Change in unrecognized gains (losses) on cash flow hedges,    
            net of tax of $8,018                       12,629     12,629  
         Change in minimum pension liability, net of tax of $456                       796     796  
     Total comprehensive income (loss)                   1,277,641     38,268     1,315,909  
 
     Common stock issued:    
         In purchase acquisitions       17,356,997     86,785     664,344             751,129  
         In connection with stock option exercises    
            and other employee benefits, net of cancellations       2,500,452     12,503     59,708             72,211  
     Redemption of common stock       (22,307,403 )   (111,537 )   (818,433 )           (929,970 )
     Cash dividends declared on common stock, $1.22 per share                   (656,060 )       (656,060 )
     Excess tax benefit from equity-based awards               4,355             4,355  
     Equity-based compensation expense               47,237             47,237  
Balance, September 30, 2006       540,652,126   $ 2,703,261   $ 2,775,914   $ 6,572,716   $ (317,966 ) $ 11,733,925  


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

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




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

  For the Nine Months Ended
  September 30,
  2006 2005
Cash Flows From Operating Activities:    
     Net income     $ 1,277,641   $ 1,224,195  
     Adjustments to reconcile net income to net cash provided by operating activities:    
           Provision for credit losses       167,639     147,934  
           Depreciation       137,388     147,086  
           Amortization of intangibles       77,109     83,253  
           Amortization of purchase accounting mark-to-market adjustments, net       10,592     22,035  
           Equity-based compensation       47,237     222  
           Discount accretion and premium amortization on long-term debt, net       91,098     84,827  
           Discount accretion and premium amortization on securities, net       22,902     32,776  
           Net increase in trading account securities       (174,622 )   (99,396 )
           Gain on sales of securities, net       (334 )   (194 )
           Gain on sales of loans and mortgage loan servicing rights, net       (46,351 )   (57,614 )
           Gain on disposals of premises and equipment, net       (30,576 )   (859 )
           Proceeds from sales of loans held for sale       3,859,414     3,776,518  
           Purchases of loans held for sale       (1,085,312 )   (570,007 )
           Origination of loans held for sale, net of principal collected       (2,723,288 )   (3,267,245 )
           Excess tax benefit from equity-based awards           11,966  
           Increase in other assets, net       (293,419 )   (289,915 )
           (Decrease) increase in accounts payable and other liabilities, net       (918,390 )   4,900  
           Other, net       (28,588 )   (10,907 )
                   Net cash provided by operating activities       390,140     1,239,575  
 
Cash Flows From Investing Activities:    
     Proceeds from sales of securities available for sale       159,956     1,332,590  
     Proceeds from maturities, calls and paydowns of securities available for sale       1,241,527     2,423,622  
     Purchases of securities available for sale       (2,162,212 )   (5,050,643 )
     Leases made to customers       (201,774 )   (188,199 )
     Principal collected on leases       141,717     134,309  
     Loan originations, net of principal collected       (4,516,613 )   (4,871,438 )
     Purchases of loans       (270,854 )   (735,516 )
     Net cash acquired (paid) in business combinations       68,029     (128,461 )
     Proceeds from disposals of premises and equipment       82,052     21,383  
     Purchases of premises and equipment       (185,572 )   (135,846 )
     Proceeds from sales of foreclosed property or other real estate held for sale       70,496     61,644  
     Other, net       (17,972 )   (11,487 )
           Net cash used in investing activities       (5,591,220 )   (7,148,042 )
 
Cash Flows From Financing Activities:    
     Net increase in deposits       3,568,749     5,485,403  
     Net increase (decrease) in federal funds purchased, securities sold under repurchase agreements    
         and short-term borrowed funds       433,177     (154,417 )
     Proceeds from issuance of long-term debt       2,852,346     1,842,533  
     Repayment of long-term debt       (185,519 )   (918,870 )
     Net proceeds from common stock issued       72,211     53,437  
     Redemption of common stock       (929,970 )   (213,355 )
     Cash dividends paid on common stock       (635,550 )   (592,654 )
     Excess tax benefit from equity-based awards       4,355      
           Net cash provided by financing activities       5,179,799     5,502,077  
 
Net Decrease in Cash and Cash Equivalents       (21,281 )   (406,390 )
Cash and Cash Equivalents at Beginning of Period       2,882,184     3,025,835  
Cash and Cash Equivalents at End of Period     $ 2,860,903   $ 2,619,445  
 
 
Supplemental Disclosure of Cash Flow Information:    
 
     Cash paid during the period for:    
        Interest     $ 2,168,423   $ 1,302,282  
        Income taxes       720,827     618,969  
     Noncash investing and financing activities:    
        Transfers of loans to foreclosed property       63,042     42,047  
        Transfers of fixed assets to other real estate owned       5,605     7,628  
        Common stock issued in business combinations       751,129     25,300  


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

Back to Index

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




BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2006 and December 31, 2005; BB&T’s results of operations for the three months and nine months ended September 30, 2006 and 2005; and BB&T’s cash flows for the nine months ended September 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 nine 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          Third 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          Third 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 nine month periods ended September 30, 2006.

  For the Three For the Nine
  Months Ended Months Ended
  September 30, 2006 September 30, 2006
  (Dollars in thousands, except per share data)
     
Effect of SFAS 123(R) on:    
       Income before income taxes     $ (10,109 ) $ (45,761 )
       Net income       (6,243 )   (28,244 )
       Basic earnings per share       (0.02 )   (0.05 )
       Diluted earnings per share       (0.01 )   (0.05 )

          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 nine months ended September 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          Third 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 Nine
  Months Ended Months Ended
  September 30, 2005 September 30, 2005
  (Dollars in thousands, except per share data)
     
Net income:    
     Net income as reported     $ 442,006   $ 1,224,195  
        Add: Equity-based compensation expense    
            included in reported net income, net of tax       79     135  
        Deduct: Total equity-based employee    
            compensation expense determined under    
            fair value based method for all awards,    
            net of tax       (3,581 )   (14,221 )
     Pro forma net income     $ 438,504   $ 1,210,109  
 
Basic EPS:    
     As reported     $ .81   $ 2.23  
     Pro forma       .80     2.21  
 
Diluted EPS:    
     As reported       .80     2.22  
     Pro forma       .80     2.19  


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




   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. SFAS No. 155 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”. SFAS No. 155 is effective for financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. BB&T adopted the provisions of SFAS No. 155 on January 1, 2006. The adoption did not have an impact on BB&T’s consolidated financial position, results of operations or cash flows.

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

          In July 2006, the FASB issued FASB Staff Position 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, management is currently evaluating the impact of adoption and estimates that the potential adjustment could be approximately $300 million and would be recorded as a cumulative effect to retained earnings due to a change in accounting principle on January 1, 2007. Any adjustment to retained earnings would then be recognized as a component of net income over the remaining lives of the respective leases.

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




          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. Management is currently evaluating the impact of adoption and estimates that the potential adjustment could be approximately $150 million and would be recorded as a cumulative effect to retained earnings due to a change in accounting principle on January 1, 2007. This adjustment primarily relates to the accrual of penalties and interest on such transactions.

          In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that SFAS No. 157 will have on BB&T’s consolidated financial statements.

          In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (“SFAS No. 158”), which requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize actuarial gains and losses as a component of comprehensive income in the year that the changes occur. SFAS No. 158 will be effective for BB&T as of December 31, 2006. Management is currently evaluating the effect that SFAS No. 158 will have on BB&T’s consolidated financial statements.

NOTE 2. Business Combinations

   Financial Institution Acquisitions

          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. Including subsequent adjustments, BB&T recorded $421.4 million in goodwill and $43.2 million in amortizing intangibles, which are primarily comprised of core deposit intangibles.

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




          On August 1, 2006, BB&T completed the acquisition of First Citizens Bancorp (“First Citizens”), a $699.6 million bank holding company headquartered in Cleveland, Tennessee. In conjunction with this transaction, BB&T issued approximately 2.9 million shares and 38 thousand stock options valued at $122.3 million and paid $19.6 million in cash. BB&T recorded $92.5 million in goodwill and $14.2 million in amortizing intangibles, which are primarily comprised of core deposit intangibles, pending final valuations.

   Insurance and Other Nonbank Acquisitions

          During the first nine 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 $22.8 million in goodwill and $11.0 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 agencies. 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.

Summary of Merger-Related and Restructuring Charges (Gains)

  For the Three Months For the Nine Months
  Ended September 30, Ended September 30,
  2006 2005 2006 2005
  (Dollars in thousands)
Severance and personnel-related items     $ 758   $ (21 ) $ 970   $ (1,419 )
Occupancy and equipment       916     (1,584 )   (2,418 )   (3,338 )
Systems conversions and related items       1,371         2,137     3  
Marketing and public relations       748         1,376      
Asset write-offs and other merger-related items       6,305     (219 )   6,688     (31 )
       Total     $ 10,098   $ (1,824 ) $ 8,753   $ (4,785 )

          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:

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




   
  Merger Accrual Activity
  (Dollars in thousands)
               
               
      Merger-related        
  Balance   and   Purchase   Balance
  January 1, Accrued at restructuring   price   September 30,
  2006 acquisition charges (gains) Utilized adjustments Other, net (1) 2006
               
Severance and personnel-related items     $ 6,011   $ 20,174   $ 970   $ (14,321 ) $ 1,167   $ (75 ) $ 13,926  
Occupancy and equipment       7,606     325     (2,418 )   (1,207 )           4,306  
Systems conversions and related items           944     2,137     (2,642 )   256         695  
Other merger-related items       2,924     3     8,064     (2,736 )   100     (5,637 )   2,718  
     Total     $ 16,541   $ 21,446   $ 8,753   $ (20,906 ) $ 1,523   $ (5,712 ) $ 21,645  

(1)

Primarily relates to the write-off of duplicate software related to the Main Street acquisition.


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

      Merger-related        
  Balance   and   Purchase   Balance
  January 1, Accrued at restructuring   price   September 30,
Acquired Institution 2006 acquisition charges (gains) Utilized adjustments Other, net 2006
  (Dollars in thousands)
               
Premier Bancshares, Inc.     $ 146   $   $   $ (146 ) $   $   $  
One Valley Bancorp, Inc.       184         (161 )   (23 )            
FCNB Corp.       296         (102 )   (41 )           153  
FirstSpartan Financial Corp.       58         (19 )   (39 )            
Century South Banks, Inc.       737             (93 )           644  
Virginia Capital Bancshares, Inc.       505         (139 )   (303 )           63  
F&M National Corporation       1,528         (446 )   (214 )           868  
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 )   (1,733 )           5,006  
Main Street Banks, Inc.           17,237     9,815     (14,873 )   1,523     (5,759 )   7,943  
First Citizens Bancorp           4,209     2,276     (2,702 )           3,783  
Nonbank subsidiaries       3,357         4     (690 )       47     2,718  
Other adjustments               49     (49 )            
Total     $ 16,541   $ 21,446   $ 8,753   $ (20,906 ) $ 1,523   $ (5,712 ) $ 21,645  

           During the first nine months of 2006, BB&T recorded $5.7 million of other adjustments to its merger-related accruals. These adjustments primarily related to the acquisition of Main Street and included $5.8 million of accelerated depreciation and write-off for duplicate software.

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




NOTE 3. Securities

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

  September 30, 2006
        Estimated
  Amortized Gross Unrealized Fair
  Cost Gains Losses Value
  (Dollars in thousands)
Securities available for sale:        
    U.S. Treasury securities     $ 103,048   $ 258   $ 999   $ 102,307  
    U.S. government-sponsored entity securities       11,566,391     2,338     382,285     11,186,444  
    Mortgage-backed securities       7,337,420     34,960     161,112     7,211,268  
    States and political subdivisions       591,035     9,970     644     600,361  
    Equity and other securities       1,627,406     20,968     15,581     1,632,793  
 
    Total securities available for sale     $ 21,225,300   $ 68,494   $ 560,621   $ 20,733,173  


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

          On September 30, 2006, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of September 30, 2006, the unrealized losses on these securities totaled $554.5 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 changes in the underlying credit quality of the issuers. At September 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 any other-than-temporary impairment in connection with these securities during 2006.

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




          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.

  September 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     $ 13,623   $ 136   $ 46,251   $ 863   $ 59,874   $ 999  
    U.S. government-sponsored entity securities       557,483     4,682     10,387,540     377,603     10,945,023     382,285  
    Mortgage-backed securities       50,525     110     5,459,910     161,002     5,510,435     161,112  
    States and political subdivisions               55,045     644     55,045     644  
    Equity and other securities       35,633     1,185     613,982     14,396     649,615     15,581  
 
          Total temporarily impaired securities     $ 657,264   $ 6,113   $ 16,562,728   $ 554,508   $ 17,219,992   $ 560,621  


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


NOTE 4. Goodwill and Other Intangible Assets

          The changes in the carrying amount of goodwill attributable to each of BB&T’s operating segments for the nine months ended September 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       490,397             25,917     4,095     13,286         533,695  
       Adjustments to goodwill       (2,229 )       4,277     18,635     6,112     6,325         33,120  
Balance, September 30, 2006     $ 3,879,016   $ 7,459   $ 88,990   $ 684,626   $ 85,353   $ 51,657   $ 25,712   $ 4,822,813  

          The adjustments to goodwill recorded during the first nine months of 2006 include $29.1 million of contingent consideration paid subsequent to the dates of acquisition based on the terms of the purchase agreements and $5.4 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.

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




          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 September 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     $ 413,284   $ (222,018 ) $ 191,266   $ 364,937   $ (185,799 ) $ 179,138  
Other (1)       468,883     (181,296 )   287,587     448,793     (140,406 )   308,387  
   Totals     $ 882,167   $ (403,314 ) $ 478,853   $ 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 $104.5 million, $95.4 million, $80.0 million, $65.2 million and $53.4 million.








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




NOTE 5. Long-Term Debt

Long-term debt is summarized as follows:

  September 30, December 31,
  2006 2005
  (Dollars in thousands)
Parent Company    
      7.25% Subordinated Notes Due 2007     $ 249,739   $ 249,465  
      6.50% Subordinated Notes Due 2011 (1,3)       646,776     646,362  
      4.75% Subordinated Notes Due 2012 (1,3)       495,733     495,283  
      5.20% Subordinated Notes Due 2015 (1,3)       996,733     996,531  
      4.90% Subordinated Notes Due 2017 (1,3)       361,546     359,691  
      5.25% Subordinated Notes Due 2019 (1,3)       599,770     599,761  
 
Branch Bank    
      Floating Rate Secured Borrowings Due 2007 (5)       1,500,000     1,500,000  
      Floating Rate Senior Notes Due 2007       1,249,814     1,249,655  
      Floating Rate Senior Notes Due 2008       499,883     499,839  
      Floating Rate Senior Notes Due 2009       499,931      
      Floating Rate Subordinated Notes Due 2016 (1)       349,523      
      4.875% Subordinated Notes Due 2013 (1,3)       249,295     249,211  
      5.625% Subordinated Notes Due 2016 (1)       399,454      
 
 
Federal Home Loan Bank Advances to the Subsidiary Banks (4)    
      Varying maturities to 2026       6,819,799     5,678,694  
 
Capitalized Leases    
      Varying maturities to 2028 with interest rates from 4.06% to 15.78%       2,888     1,831  
 
Junior Subordinated Debt to Unconsolidated Trusts (2)    
      5.85% BB&T Capital Trust I Securities Due 2035 (3)       514,078     514,065  
      6.75% BB&T Capital Trust II Securities Due 2036       597,646      
      Other Securities (6)       168,045     101,805  
 
Other Long-Term Debt       2,269     2,483  
 
Hedging Losses       (43,543 )   (26,117 )
 
           Total Long-Term Debt     $ 16,159,379   $ 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 September 30, 2006, the effective rates paid on these borrowings ranged from 5.58% to 6.22%.

(4)  

At September 30, 2006, the weighted average cost of these advances was 5.31% 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 September 30, 2006, the effective rate paid on these borrowings ranged from 7.09% to 10.07%. These securities have varying maturities through 2035.


BB&T Corporation           Page 17          Third 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-BalanceSheet
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 September 30, 2006, BB&T had issued a total of $3.3 billion in standby letters of credit. The carrying amount of the liability for such guarantees was $6.0 million at September 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 $25.1 billion and $23.7 billion at September 30, 2006 and December 31, 2005, respectively. The fair value of these instruments was $(25.8 million) and $(10.6 million), at September 30, 2006 and December 31, 2005, respectively.

BB&T Corporation           Page 18          Third 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 $137.8 million and $172.4 million at September 30, 2006 and December 31, 2005, respectively. At September 30, 2006, BB&T’s maximum exposure to loss associated with these investments totaled $280.7 million.

          In the ordinary course of business, BB&T indemnifies its officers and directors to the fullest extent permitted by law against liabilities arising from pending litigation. BB&T also issues standard 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.

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.




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




          The following tables summarize the components of net periodic benefit cost (income) recognized for the three month and nine month periods ended September 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
  September 30, September 30, September 30,
  2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
             
Service cost     $ 14,992   $ 11,141   $ 1,180   $ 845   $   $  
Interest cost       14,742     13,028     1,784     1,379     682     310  
Estimated return on plan assets       (24,051 )   (20,049 )                
Amortization of prior service cost       (1,148 )   (1,147 )   (10 )   (8 )   (1,218 )   (1,177 )
Amortization of net loss       3,753     2,155     730     327     586     100  
 
Net periodic benefit cost (income)     $ 8,288   $ 5,128   $ 3,684   $ 2,543   $ 50   $ (767 )


  Pension Plans Other Postretirement
  Qualified Nonqualified Benefit Plans
  For the For the For the
  Nine Months Ended Nine Months Ended Nine Months Ended
  September 30, September 30, September 30,
  2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
             
Service cost     $ 45,600   $ 43,003   $ 3,176   $ 2,788   $   $  
Interest cost       43,369     39,755     4,927     4,435     1,392     1,006  
Estimated return on plan assets       (67,533 )   (60,243 )                
Amortization of prior service cost       (3,442 )   (3,442 )   (32 )   (22 )   (3,818 )   (3,777 )
Amortization of net loss       9,994     7,421     1,670     1,467     1,204     464  
 
Net periodic benefit cost (income)     $ 27,988   $ 26,494   $ 9,741   $ 8,668   $ (1,222 ) $ (2,307 )

          BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding standard accounts and the maximum amount deductible for federal income tax purposes. During the third quarter of 2006, the Pension Protection Act of 2006 was approved by Congress and allows Corporations to increase their contribution in 2006 and 2007 due to the increased deduction limit from 100% to 150% of the plan’s unfunded current liability. Management elected to make a discretionary contribution of $234.0 million to the qualified pension plan in the third quarter of 2006 pursuant to this change in pension law, and has made $314.0 million in discretionary contributions during the first nine months of 2006. Management currently has no plans to make any additional contributions to the qualified pension plan in 2006.

BB&T Corporation           Page 20          Third 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 nine month periods ended September 30, 2006 and 2005, respectively, were calculated as follows:

  For the Three Months For the Nine Months
  Ended September 30, Ended September 30,
  2006 2005 2006 2005
  (Dollars in thousands,except per share data)
Basic Earnings Per Share:        
     Weighted average number of common shares       538,911,074     547,467,864     538,578,229     547,939,700  
         Net income     $ 417,028   $ 442,006   $ 1,277,641   $ 1,224,195  
     Basic earnings per share     $ .77   $ .81   $ 2.37   $ 2.23  
Diluted Earnings Per Share:    
     Weighted average number of common shares       538,911,074     547,467,864     538,578,229     547,939,700  
 
     Add:    
         Effect of dilutive equity awards       5,374,815     4,590,893     4,917,989     4,373,970  
     Weighted average number of diluted common shares       544,285,889     552,058,757     543,496,218     552,313,670  
         Net income     $ 417,028   $ 442,006   $ 1,277,641   $ 1,224,195  
     Diluted earnings per share     $ .77   $ .80   $ 2.35   $ 2.22  

          For the three months ended September 30, 2006 and 2005, respectively, antidilutive options to purchase 252 thousand shares and 93 thousand shares of common stock were outstanding. For the first nine months of 2006 and 2005, respectively, antidilutive options to purchase 217 thousand shares and 108 thousand shares of common stock were outstanding. Antidilutive options outstanding were not included in the computation of diluted earnings per share.

NOTE 9. Comprehensive Income (Loss)

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

Accumulated Other Comprehensive Loss
September 30, 2006

  Before-Tax Tax After-Tax
  Amount Benefit Amount
(Dollars in thousands)
       
Unrealized losses on securities available for sale     $ (492,127 ) $ (179,392 ) $ (312,735 )
Unrealized losses on cash flow hedges       (1,339 )   (469 )   (870 )
Minimum pension liability       (7,102 )   (2,741 )   (4,361 )
Total     $ (500,568 ) $ (182,602 ) $ (317,966 )

BB&T Corporation           Page 21          Third 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 nine month periods ended September 30, 2006 and 2005, respectively:

  For the Three Months Ended For the Nine Months Ended
  September 30, September 30,
  2006 2005 2006 2005
  (Dollars in thousands)
Comprehensive income:        
Net income     $ 417,028   $ 442,006   $ 1,277,641   $ 1,224,195  
Other comprehensive income:    
    Net unrealized holding gains (losses) on securities       222,343     (157,251 )   24,843     (179,216 )
    Net unrealized gains (losses) on cash flow hedges       11,485     (694 )   12,629     5,999  
    Net change in minimum pension liability               796     (2,138 )
       Total comprehensive income     $ 650,856   $ 284,061   $ 1,315,909   $ 1,048,840  

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.

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




          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 23          Third Quarter 2006 10-Q




BB&T Corporation
Reportable Segments
For the Three Months Ended September 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)     $ 656,812   $ 645,498   $ 230,426   $ 191,083   $ (1,448 ) $ (789 ) $ 5,168   $ 3,258   $ 97,409   $ 78,756  
  Net intersegment interest income (expense)       334,053     251,862     (165,223 )   (129,689 )   2,624     2,012                  
 
Total net interest income       990,865     897,360     65,203     61,394     1,176     1,223     5,168     3,258     97,409     78,756  
 
Economic provision for loan and lease losses       59,878     64,161     2,531     2,472     6                 35,795     26,107  
Noninterest income       248,506     233,338     24,768     41,070     44,652     40,449     200,369     176,683     18,108     13,447  
  Intersegment noninterest income       104,443     107,430                                  
Noninterest expense       358,239     311,193     12,589     13,554     49,355     32,165     165,993     140,042     42,119     34,275  
  Allocated corporate expenses       188,058     156,816     2,749     8,890     5,632     4,208     6,324     7,092     3,805     4,312  
 
Income (loss) before income taxes       737,639     705,958     72,102     77,548     (9,165 )   5,299     33,220     32,807     33,798     27,509  
 
  Provision for income taxes       238,449     233,256     23,746     25,694     (3,217 )   1,981     11,194     12,788     12,691     8,728  
 
Segment net income (loss)     $ 499,190   $ 472,702   $ 48,356   $ 51,854   $ (5,948 ) $ 3,318   $ 22,026   $ 20,019   $ 21,107   $ 18,781  
 
Identifiable segment assets (period end)     $ 61,096,289   $ 55,167,379   $ 16,166,257   $ 14,350,595   $ 212,086   $ 214,836   $ 2,077,972   $ 1,976,874   $ 3,682,878   $ 2,798,864  
 
 
  Investment Banking All Other Intersegment  
  and Brokerage Treasury Segments (1) Eliminations Total Segments
  2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
                     
Net interest income (expense)     $ 1,548   $ 2,270   $ (62,314 ) $ (2,354 ) $ 44,833   $ 63,862   $   $   $ 972,434   $ 981,584  
  Net intersegment interest income (expense)               34,601     22,548     (18,170 )   (12,206 )   (187,885 )   (134,527 )        
 
Total net interest income (expense)       1,548     2,270     (27,713 )   20,194     26,663     51,656     (187,885 )   (134,527 )   972,434     981,584  
 
Economic provision for loan and lease losses                       999     10,929             99,209     103,669  
Noninterest income       90,306     80,217     22,303     17,523     15,049     39,486             664,061     642,213  
  Intersegment noninterest income                               (104,443 )   (107,430 )        
Noninterest expense       80,350     68,090     2,530     1,675     24,669     24,868             735,844     625,862  
  Allocated corporate expenses       2,678     3,603     2,222     149     1,928     5,357             213,396     190,427  
 
Income (loss) before income taxes       8,826     10,794     (10,162 )   35,893     14,116     49,988     (292,328 )   (241,957 )   588,046     703,839  
 
  Provision for income taxes       3,365     3,891     1,172     6,536     1,628     16,397     (95,983 )   (79,329 )   193,045     229,942  
 
Segment net income (loss)     $ 5,461   $ 6,903   $ (11,334 ) $ 29,357   $ 12,488   $ 33,591   $ (196,345 ) $ (162,628 ) $ 395,001   $ 473,897  
 
Identifiable segment assets (period end)     $ 1,525,091   $ 1,032,240   $ 21,547,924   $ 21,786,283   $ 5,993,986   $ 6,675,208   $   $   $ 112,302,483   $ 104,002,279  

(1)

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


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




BB&T Corporation
Reportable Segments
For the Nine Months Ended September 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)     $ 1,989,129   $ 1,834,193   $ 658,737   $ 540,555   $ (4,284 ) $ (2,336 ) $ 13,107   $ 7,186   $ 270,605   $ 222,505  
  Net intersegment interest income (expense)       899,962     782,792     (459,572 )   (348,191 )   7,189     5,867                  
 
Total net interest income       2,889,091     2,616,985     199,165     192,364     2,905     3,531     13,107     7,186     270,605     222,505  
 
Economic provision for loan and lease losses       172,481     181,908     7,805     6,955     6                 97,233     73,319  
Noninterest income       721,614     653,968     86,673     91,594     128,777     115,444     577,721     500,401     51,663     37,893  
  Intersegment noninterest income       307,228     296,557                                  
Noninterest expense       1,058,769     949,503     38,166     38,084     120,764     93,488     489,299     406,641     116,878     98,518  
  Allocated corporate expenses       556,967     463,153     8,197     26,674     16,629     12,027     18,860     21,279     11,718     12,885  
 
Income (loss) before income taxes       2,129,716     1,972,946     231,670     212,245     (5,717 )   13,460     82,669     79,667     96,439     75,676  
 
  Provision for income taxes       693,800     658,964     77,032     70,995     (1,828 )   5,049     30,888     31,200     36,095     24,064  
 
Segment net income (loss)     $ 1,435,916   $ 1,313,982   $ 154,638   $ 141,250   $ (3,889 ) $ 8,411   $ 51,781   $ 48,467   $ 60,344   $ 51,612  
 
Identifiable segment assets (period end)     $ 61,096,289   $ 55,167,379   $ 16,166,257   $ 14,350,595   $ 212,086   $ 214,836   $ 2,077,972   $ 1,976,874   $ 3,682,878   $ 2,798,864  
 
 
 
 
  Investment Banking All Other Intersegment  
  and Brokerage Treasury Segments (1) Eliminations Total Segments
  2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
  (Dollars in thousands)
                     
Net interest income (expense)     $ 4,873   $ 6,781   $ (159,432 ) $ 17,448   $ 132,115   $ 187,877   $   $   $ 2,904,850   $ 2,814,209  
  Net intersegment interest income (expense)               72,306     54,609     (48,705 )   (33,478 )   (471,180 )   (461,599 )        
 
Total net interest income (expense)       4,873     6,781     (87,126 )   72,057     83,410     154,399     (471,180 )   (461,599 )   2,904,850     2,814,209  
 
Economic provision for loan and lease losses                       3,673     28,595             281,198     290,777  
Noninterest income       269,553     237,468     52,170     48,208     53,985     110,279             1,942,156     1,795,255  
  Intersegment noninterest income                               (307,228 )   (296,557 )        
Noninterest expense       237,295     206,971     7,062     4,604     61,039     72,994             2,129,272     1,870,803  
  Allocated corporate expenses       8,027     10,801     5,162     244     5,761     16,181             631,321     563,244  
 
Income (loss) before income taxes       29,104     26,477     (47,180 )   115,417     66,922     146,908     (778,408 )   (758,156 )   1,805,215     1,884,640  
 
  Provision for income taxes       11,312     10,020     (6,847 )   22,367     12,912     49,082     (256,875 )   (250,191 )   596,489     621,550  
 
Segment net income (loss)     $ 17,792   $ 16,457   $ (40,333 ) $ 93,050   $ 54,010   $ 97,826   $ (521,533 ) $ (507,965 ) $ 1,208,726   $ 1,263,090  
 
Identifiable segment assets (period end)     $ 1,525,091   $ 1,032,240   $ 21,547,924   $ 21,786,283   $ 5,993,986   $ 6,675,208   $   $   $ 112,302,483   $ 104,002,279  


(1)

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

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




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

  For the Three Months Ended For the Nine Months Ended
  September 30, September 30,
  2006 2005 2006 2005
(Dollars in thousands) (Dollars in thousands)
Net Interest Income        
     Net interest income from segments     $ 972,434   $ 981,584   $ 2,904,850   $ 2,814,209  
     Other net interest income (expense) (1)       160,783     (14,179 )   472,917     135,722  
     Elimination of management accounting practices (2)       (143,405 )   (134,644 )   (396,576 )   (365,438 )
     Other, net (3)       (52,024 )   66,231     (228,582 )   40,647  
        Consolidated net interest income     $ 937,788   $ 898,992   $ 2,752,609   $ 2,625,140  
 
Net income    
     Net income from segments     $ 395,001   $ 473,897   $ 1,208,726   $ 1,263,090  
     Other net income (1)       104,078     41,379     286,442     175,898  
     Elimination of management accounting practices (2)       3,736     (28,284 )   22,808     (65,232 )
     Other, net (3)       (85,787 )   (44,986 )   (240,335 )   (149,561 )
        Consolidated net income     $ 417,028   $ 442,006   $ 1,277,641   $ 1,224,195  
 
      September 30, September 30,
      2006 2005
  (Dollars in thousands)
Total Assets    
     Total assets from segments                 $ 112,302,483   $ 104,002,279  
     Other, net (1,3)                   6,221,414     3,077,874  
        Consolidated total assets                 $ 118,523,897   $ 107,080,153  

(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 September 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 September 30, 2006, the 2004 Plan is the only plan that has shares available for future grants.

          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 September 30, 2006 there were 6.7 million non-qualified and qualified stock options at prices ranging from $10.90 to $50.71 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 September 30, 2006, there were 15.5 million shares available for future grants under the 2004 Plan.

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




          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 September 30, 2006, 7.3 million qualified stock options at prices ranging from $10.73 to $48.01 and 21.8 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 September 30, 2006, options to purchase 535 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 September 30, 2006, there were 334 thousand stock options outstanding in connection with these plans, with option prices ranging from $22.62 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 nine months of 2006 and 2005, respectively:

  For the Nine Months
  Ended September 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 27          Third 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 $10.6 million and $131 thousand in equity-based compensation during the three months ended September 30, 2006 and 2005, respectively, and $47.2 million and $222 thousand during the nine months ended September 30, 2006 and 2005, respectively. In connection with this compensation expense, BB&T also recorded $4.1 million and $52 thousand as an income tax benefit during the three months ended September 30, 2006 and 2005, respectively, and $18.1 million and $87 thousand during the nine months ended September 30, 2006 and 2005, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $34.0 million and $36.5 million, respectively. The total fair value of options vested during the nine months ended September 30, 2006 was $30.1 million. As of September 30, 2006, there was $117.4 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 3.5 years.

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

  For the Nine Months Ended
  September 30, 2006
    Wtd. Avg.
    Exercise
  Shares Price
     
Outstanding at beginning of period       34,825,984   $ 34.32  
Issued in purchase transactions       674,129     27.95  
Granted       4,302,610     39.74  
Exercised       (2,527,154 )   28.80  
Forfeited or expired       (666,906 )   36.83  
Outstanding at end of period       36,608,663   $ 35.16  
 
Exercisable at end of period       20,551,362   $ 33.12  




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




          The following tables summarize information about BB&T’s stock option awards as of September 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 9/30/06 Life Price 9/30/06 Life Price
             
  $0.01   to   $10.00     16,840     0.3  yrs $ 9.52     16,840     0.3  yrs $ 9.52  
  10.01   to    15.00     205,388     2.5     12.63     205,388     2.5     12.63  
  15.01   to    25.00     3,217,185     2.9     22.53     3,217,185     2.9     22.53  
  25.01   to    35.00     7,222,892     5.3     31.77     5,279,190     4.8     31.42  
  35.01   to    45.00     25,860,059     7.2     37.83     11,746,460     5.8     37.05  
  45.01   to    53.10     86,299     3.1     49.32     86,299     3.1     49.32  
        36,608,663     6.4  yrs $ 35.16     20,551,362     5.0  yrs $ 33.12  
 
  Aggregate intrinsic value   $ 236,078,772               $ 174,945,953
 
 
 
   
  Options Expected to Vest
    Weighted-  
    Average Weighted-
  Number Remaining Average
Range of Outstanding Contractual Exercise
Exercise Prices 9/30/06 Life Price
       
  $0.01   to   $10.00     16,840     0.3  yrs $ 9.52  
  10.01   to    15.00     205,388     2.5     12.63  
  15.01   to    25.00     3,217,185     2.9     22.53  
  25.01   to    35.00     6,919,894     5.2     31.73  
  35.01   to    45.00     23,323,247     7.1     37.76  
  45.01   to    53.10     86,299     3.1     49.32  
        33,768,853     6.3  yrs $ 34.94  
 
  Aggregate intrinsic value   $ 225,567,466  

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

  For the Nine Months Ended
  September 30, 2006
    Wtd. Avg.
    Grant Date
  Shares Fair Value
     
Nonvested at beginning of period       263,001   $ 40.27  
Granted       2,322,162     31.22  
Vested       (21,354 )   30.74  
Forfeited       (78,617 )   32.26  
Nonvested at end of period       2,485,192   $ 32.14  

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




          At September 30, 2006, BB&T’s restricted shares and restricted share units had a weighted-average life of 4.4 years. At September 30, 2006, management estimates that 2.1 million restricted shares and restricted share units will vest over a weighted-average life of 4.3 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 $26.3 million and $20.1 million at September 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
  September 30, 2006
  (Dollars in thousands)
   
Carrying value, January 1,     $ 431,213  
  Additions       68,930  
  Purchases       17,972  
  Increase (decrease) in fair value:    
    Due to change in valuation inputs or assumptions       20,652  
    Other changes (1)       (57,928 )
 
Carrying value, September 30,     $ 480,839  

(1)

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


          The unpaid principal balances of BB&T’s total residential mortgage servicing portfolio were $44.4 billion and $41.1 billion at September 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 $27.9 billion and $25.8 billion at September 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 $75.3 million and $71.5 million during the first nine months of 2006 and 2005, respectively, as a component of mortgage banking income.

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




          During the first nine months of 2006 and 2005, BB&T sold residential mortgage loans with unpaid principal balances of $3.9 billion and $3.8 billion, respectively. The pretax gains recognized during the first nine months of 2006 and 2005 were $15.1 million and $29.3 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 September 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 5.90% and 5.83% at September 30, 2006 and December 31, 2005, respectively.

          At September 30, 2006, BB&T had $228.9 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 $70.8 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. The sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% adverse changes in key economic assumptions, as of the date indicated, are included in the accompanying table.

  Residential
  Mortgage Servicing Rights
  September 30, 2006
  (Dollars in thousands)
   
Fair Value of Residential Mortgage Servicing Rights     $ 480,839  
 
Composition of Residential Loans Serviced for Others:    
                     Fixed-rate mortgage loans       98.3  %
                     Adjustable-rate mortgage loans       1.7  
                       Total       100.0  
 
Weighted Average Life       7.2  yrs
 
Prepayment Speed       12.4  %
                     Effect on fair value of a 10% increase     $ (21,180 )
                     Effect on fair value of a 20% increase       (40,648 )
 
Expected Credit Losses       .01  %
                     Effect on fair value of a 10% increase     $ (214 )
                     Effect on fair value of a 20% increase       (427 )
 
Weighted Average Discount Rate       9.79  %
                     Effect on fair value of a 10% increase     $ (14,567 )
                     Effect on fair value of a 20% increase       (28,367 )

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




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

Forward-Looking Statements