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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, 2008

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  
Winston-Salem, North Carolina 27101
(Address of Principal Executive Offices) (Zip Code)

(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 þ NO ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer  ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company  ¨

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

At October 31, 2008, 552,487,459 shares of the registrant's common stock, $5 par value, were outstanding.


  BB&T CORPORATION  
  FORM 10-Q  
  September 30, 2008  
  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 30
  Executive Summary 35
  Analysis of Financial Condition 36
  Analysis of Results of Operations 48
  Market Risk Management 58
  Capital Adequacy and Resources 63
  Segment Results 65
           Item 3. Quantitative and Qualitative Disclosures About  
  Market Risk 67
           Item 4. Controls and Procedures 67
Part II. OTHER INFORMATION  
           Item 1. Legal Proceedings 67
           Item 1A.  Risk Factors 68
           Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
           Item 6. Exhibits 70
SIGNATURES 70
EXHIBIT INDEX 71
CERTIFICATIONS 72

 

BB&T Corporation                     Page 1                Third Quarter 2008 10-Q


Item 1. Financial Statements

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

    September 30,     December 31,  
    2008     2007  
 
Assets            
     Cash and due from banks $ 1,675   $ 2,050  
     Interest-bearing deposits with banks   420     388  
     Federal funds sold and securities purchased under resale agreements            
           or similar arrangements   297     679  
     Segregated cash due from banks   307     208  
     Trading securities at fair value   548     1,009  
     Securities available for sale at fair value   20,534     22,419  
     Loans held for sale ($1,379 at fair value at September 30, 2008)   1,419     779  
     Loans and leases, net of unearned income   95,263     90,907  
     Allowance for loan and lease losses   (1,377 )   (1,004 )
           Loans and leases, net   93,886     89,903  
 
     Premises and equipment, net of accumulated depreciation   1,557     1,529  
     Goodwill   5,340     5,194  
     Core deposit and other intangible assets   507     489  
     Residential mortgage servicing rights at fair value   601     472  
     Other assets   9,950     7,499  
                           Total assets $ 137,041   $ 132,618  
 
Liabilities and Shareholders' Equity            
     Deposits:            
           Noninterest-bearing deposits $ 13,534   $ 13,059  
           Interest checking   2,189     1,201  
           Other client deposits   37,786     35,504  
           Client certificates of deposit   26,519     26,972  
           Other interest-bearing deposits   8,359     10,030  
                           Total deposits   88,387     86,766  
     Federal funds purchased, securities sold under repurchase agreements            
                   and short-term borrowed funds   10,075     10,634  
     Long-term debt   21,337     18,693  
     Accounts payable and other liabilities   4,307     3,893  
                           Total liabilities   124,106     119,986  
     Commitments and contingencies (Note 6)            
     Shareholders' equity:            
           Preferred stock, $5 par, 5,000 shares authorized, none issued or            
                   outstanding at September 30, 2008 or at December 31, 2007 -   -  
           Common stock, $5 par, 1,000,000 shares authorized;            
                   552,259 issued and outstanding at September 30, 2008, and            
                   545,955 issued and outstanding at December 31, 2007   2,761     2,730  
           Additional paid-in capital   3,278     3,087  
           Retained earnings   7,357     6,919  
           Accumulated other comprehensive loss, net of deferred income            
                   taxes of $(277) at September 30, 2008 and $(65) at December 31, 2007   (461 )   (104 )
                           Total shareholders' equity   12,935     12,632  
                           Total liabilities and shareholders' equity $ 137,041   $ 132,618  

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

 

BB&T Corporation                     Page 2                Third Quarter 2008 10-Q


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
 
 
 
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2008   2007     2008   2007  
Interest Income                    
         Interest and fees on loans and leases $ 1,499 $ 1,719   $ 4,595 $ 5,007  
         Interest and dividends on securities   287   297     859   838  
         Interest on short-term investments   7   14     24   37  
                 Total interest income   1,793   2,030     5,478   5,882  
 
Interest Expense                    
         Interest on deposits   449   679     1,468   1,965  
         Interest on federal funds purchased, securities sold under                    
                 repurchase agreements and short-term borrowed funds   48   110     195   299  
         Interest on long-term debt   208   263     642   729  
                 Total interest expense   705   1,052     2,305   2,993  
 
Net Interest Income   1,088   978     3,173   2,889  
         Provision for credit losses   364   105     917   264  
 
Net Interest Income After Provision for Credit Losses   724   873     2,256   2,625  
Noninterest Income                    
         Insurance income   232   206     681   632  
         Service charges on deposits   176   157     502   446  
         Investment banking and brokerage fees and commissions   84   87     258   258  
         Mortgage banking income   83   27     199   88  
         Checkcard fees   52   47     151   132  
         Other nondeposit fees and commissions   47   46     140   137  
         Trust and investment advisory revenues   37   40     115   120  
         Bankcard fees and merchant discounts   38   36     113   101  
         Income from bank-owned life insurance   24   24     62   77  
         Securities gains (losses), net   13   6     66   (4 )
         Other income (loss)   6   (1 )   103   69  
                 Total noninterest income   792   675     2,390   2,056  
Noninterest Expense                    
         Personnel expense   552   514     1,664   1,578  
         Occupancy and equipment expense   127   118     374   351  
         Professional services   51   36     136   99  
         Loan processing expenses   32   29     96   84  
         Amortization of intangibles   25   26     77   77  
         Merger-related and restructuring charges, net   5   7     11   18  
         Other expenses   217   158     549   487  
                 Total noninterest expense   1,009   888     2,907   2,694  
Earnings                    
         Income before income taxes   507   660     1,739   1,987  
         Provision for income taxes   149   216     525   664  
         Net income $ 358 $ 444   $ 1,214 $ 1,323  
 
Per Common Share                    
         Net income:                    
                 Basic $ .65 $ .81   $ 2.22 $ 2.42  
                 Diluted $ .65 $ .80   $ 2.20 $ 2.40  
         Cash dividends paid $ .47 $ .46   $ 1.39 $ 1.30  
 
Weighted Average Shares Outstanding                    
                 Basic   549,761   550,603     547,543   546,978  
                 Diluted   553,544   555,336     551,144   552,153  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 

BB&T Corporation                     Page 3                Third Quarter 2008 10-Q


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)

                             Accumulated       
    Shares of           Additional       Other Total
    Common     Common     Paid-In   Retained   Comprehensive Shareholders'
    Stock     Stock     Capital   Earnings     Income (Loss) Equity
Balance, January 1, 2007   541,475   $ 2,707   $   2,801   $ 6,596   $ (359 ) $ 11,745  
Add (Deduct):                                      
   Comprehensive income (loss):                                      
       Net income -     -     -     1,323     -     1,323  
             Unrealized holding gains (losses) arising during the period                                      
                 on securities available for sale, net of tax of $52 -     -     -     -     96     96  
             Reclassification adjustment for losses (gains)                                      
                 on securities available for sale included in net                                      
                 income, net of tax of $1 -     -        -     -     3     3  
       Change in unrealized gains (losses) on securities, net of tax -     -     -     -     99     99  
       Change in unrecognized gains (losses) on cash flow hedges,                                      
             net of tax -     -     -     -     (1 )   (1 )
       Change in pension and postretirement liability, net of tax of $(2) -     -     -     -     (10 )   (10 )
       Foreign currency translation adjustment -     -         -     -     3     3  
   Total comprehensive income (loss) -     -         -     1,323     91     1,414  
 
   Common stock issued:                                      
       In purchase acquisitions (1)   8,807     44       356     -     -     400  
       In connection with stock option exercises                                      
             and other employee benefits, net of cancellations   2,155     11       47     -     -     58  
   Redemption of common stock   (3,100 )   (16 )     (107 )   -     -     (123 )
   Cash dividends declared on common stock, $1.34 per share -     -     -     (735 )   -     (735 )
   Cumulative effect of adoption of FIN 48 -     -     -     (119 )   -     (119 )
   Cumulative effect of adoption of FSP FAS 13-2 -     -     -     (306 )   -     (306 )
   Other, net     -     -       68     -     -     68  
Balance, September 30, 2007   549,337   $ 2,746   $   3,165   $ 6,759   $ (268 ) $ 12,402  
 
 
Balance, January 1, 2008   545,955   $ 2,730   $   3,087   $ 6,919   $ (104 ) $ 12,632  
Add (Deduct):                                      
   Comprehensive income (loss):                                      
       Net income -     -     -     1,214     -     1,214  
             Unrealized holding gains (losses) arising during the period                                      
                 on securities available for sale, net of tax of $(196) -     -     -     -     (329 )   (329 )
             Reclassification adjustment for losses (gains)                                      
                 on securities available for sale included in net                                      
                 income, net of tax of $(25) -     -         -     -     (41 )   (41 )
       Change in unrealized gains (losses) on securities, net of tax -     -     -     -     (370 )   (370 )
       Change in unrecognized gains (losses) on cash flow hedges,                                      
             net of tax of $8 -     -     -     -     13     13  
       Change in pension and postretirement liability, net of tax of $1 -     -     -     -     1     1  
       Foreign currency translation adjustment -     -         -     -     (1 )   (1 )
   Total comprehensive income (loss) -     -        -     1,214     (357 )   857  
 
   Common stock issued:                                      
       In purchase acquisitions   1,181     6       27     -     -     33  
       In connection with stock option exercises                                      
             and other employee benefits, net of cancellations   1,857     9       43     -     -     52  
       In connection with dividend reinvestment plan   813     4       19     -     -     23  
       In connection with private placement to BB&T pension plan   2,458     12       41     -     -     53  
   Cash dividends declared on common stock, $1.40 per share -     -     -     (768 )   -     (768 )
   Cumulative effect of adoption of EITF 06-4 and EITF 06-10 -     -     -     (8 )   -     (8 )
   Other, net   (5 )   -         61     -     -     61  
Balance, September 30, 2008   552,259   $ 2,761   $    3,278   $ 7,357   $ (461 ) $ 12,935  
 
                            (1) Additional paid-in capital includes the value of replacement stock options issued.
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 

BB&T Corporation                     Page 4                Third Quarter 2008 10-Q


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
  For the Nine Months Ended
  September 30,
  2008     2007  
Cash Flows From Operating Activities:            
     Net income $ 1,214   $ 1,323  
     Adjustments to reconcile net income to net cash provided by (used in)            
          operating activities:            
       Provision for credit losses   917     264  
       Depreciation   146     133  
       Amortization of intangibles   77     77  
       Equity-based compensation   61     56  
       Discount accretion and premium amortization on long-term debt, net   74     92  
       (Gain) loss on sales of securities, net   (66 )   4  
       Loss (gain) on disposals of premises and equipment, net   2     (4 )
       Net decrease in trading account securities   461     560  
       Net increase in loans held for sale   (600 )   (720 )
       Increase in other assets, net   (2,289 )   (828 )
       Increase (decrease) in accounts payable and other liabilities, net   513     (1,225 )
       Increase in segregated cash due from banks   (99 )   (73 )
       Other, net   15     (1 )
                Net cash provided by (used in) operating activities   426     (342 )
 
Cash Flows From Investing Activities:            
     Proceeds from sales of securities available for sale   12,374     1,813  
     Proceeds from maturities, calls and paydowns of securities available for sale   3,774     4,905  
     Purchases of securities available for sale   (14,827 )   (8,465 )
     Originations and purchases of loans and leases, net of principal collected   (5,360 )   (4,242 )
     Net cash (paid) acquired in business combinations   (159 )   23  
     Proceeds from disposals of premises and equipment   4     15  
     Purchases of premises and equipment   (152 )   (184 )
     Proceeds from sales of foreclosed property or other real estate held for sale   106     64  
     Other, net   95     -  
                 Net cash used in investing activities   (4,145 )   (6,071 )
 
Cash Flows From Financing Activities:            
     Net increase in deposits   1,626     3,244  
     Net (decrease) increase in federal funds purchased, securities sold under repurchase agreements            
             and short-term borrowed funds   (559 )   989  
     Proceeds from issuance of long-term debt   4,901     5,405  
     Repayment of long-term debt   (2,342 )   (2,707 )
     Net proceeds from common stock issued   128     58  
     Redemption of common stock   -     (123 )
     Cash dividends paid on common stock   (760 )   (709 )
     Excess tax benefit from equity-based awards   -     12  
                 Net cash provided by financing activities   2,994     6,169  
 
Net Decrease in Cash and Cash Equivalents   (725 )   (244 )
Cash and Cash Equivalents at Beginning of Period   3,117     2,712  
Cash and Cash Equivalents at End of Period $ 2,392   $ 2,468  
 
 
Supplemental Disclosure of Cash Flow Information:            
 
     Cash paid during the period for:            
           Interest $ 2,335   $ 2,918  
           Income taxes   562     2,073  
     Noncash investing and financing activities:            
           Transfers of loans to foreclosed property   374     91  
           Common stock issued in business combinations   33     400  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

Back to Index

BB&T Corporation                     Page 5                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

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”), are a fair statement of BB&T’s financial position at September 30, 2008 and December 31, 2007, BB&T’s results of operations for the three and nine month periods ended September 30, 2008 and 2007, and BB&T’s changes in shareholders’ equity and cash flows for the nine month periods ended September 30, 2008 and 2007. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made.

          These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the financial statements and footnotes included in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2007 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, Branch Banking and Trust Company (“Branch Bank”), which has branches in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Florida, Alabama, Indiana and Washington, D.C. Branch Bank provides a wide range of banking services to individuals and businesses, and offers 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. Branch Bank also markets a wide range of deposit services to individuals and businesses. Branch Bank offers, either directly, or through its 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.

     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

 

BB&T Corporation                     Page 6                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

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 in 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

 

BB&T Corporation                     Page 7                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

commitments, determination of fair value for financial instruments, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expenses.

     Changes in Accounting Principles and Effects of New Accounting Pronouncements

          In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 clarifies that fair value is the price that would be received to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date. SFAS No. 157 is required to be applied whenever another financial accounting standard requires or permits an asset or liability to be measured at fair value. SFAS No. 157 does not expand the use of fair value to any new circumstances. BB&T adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 was not material to the consolidated financial statements. Additional disclosures required by SFAS No. 157 are included in Note 12 to these consolidated financial statements.

          In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair value of a financial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have a material impact on BB&T’s consolidated financial statements.

          In September 2006, the FASB reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death benefit. BB&T adopted the provisions of these standards effective January 1, 2008. The adoption of these standards was not material to the consolidated financial statements.

          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” (“SFAS No. 159” or “the Fair Value Option”), which permits companies to choose to measure many financial instruments and certain other items at fair value, on an instrument-by-instrument basis. Once a company has elected to record eligible items at fair value, the decision is generally irrevocable. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. BB&T adopted SFAS No. 159 effective January 1, 2008, and elected the Fair Value Option for certain loans held for sale originated after December 31, 2007. The adoption of SFAS

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

No. 159 was not material to the consolidated financial statements. Additional disclosures required by SFAS No. 159 are included in Note 12 to these consolidated financial statements.

          In November 2007, the Securities and Exchange Commission (“SEC”) Staff issued Staff Accounting Bulletin No. 109 “Written Loan Commitments Recorded at Fair Value through Earnings,” (“SAB No. 109”), which supersedes the guidance previously issued in SAB No. 105 “Application of Accounting Principles to Loan Commitments” (“SAB No. 105”). SAB No. 109 expresses the current view of the Staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB No. 109 affect only the timing of mortgage banking income recognition and are effective for loan commitments as of January 1, 2008. The adoption of the provisions of SAB No. 109 was not material to BB&T’s consolidated results of operations.

          In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS No. 141(R)”). SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for BB&T for business combinations consummated after December 31, 2008.

          In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest in a subsidiary be accounted for as equity in the consolidated statement of financial position and that net income include the amounts for both the parent and the noncontrolling interest, with a separate amount presented in the income statement for the noncontrolling interest share of net income. SFAS No. 160 also expands the disclosure requirements and provides guidance on how to account for changes in the ownership interest of a subsidiary. SFAS No. 160 is effective prospectively for BB&T on January 1, 2009, except for the presentation and disclosure provisions that will be applied retrospectively for all periods presented. Management does not expect the adoption of SFAS No. 160 to be material to the consolidated financial statements.

          In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for BB&T on January 1, 2009.

          In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP No. 142-3 is to improve the consistency

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R). FSP No. 142-3 is effective for BB&T on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP No. 142-3 is not expected to have a material impact on BB&T’s consolidated financial statements.

          In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provisions of SFAS No. 162 to have any impact on the consolidated financial statements.

          In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for BB&T on December 31, 2008.

 

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BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

NOTE 2. Business Combinations and Intangible Assets

     Acquisitions

          During the first nine months of 2008, BB&T acquired nine insurance agencies. Approximately $123 million in goodwill and $92 million of identifiable intangibles were recorded in connection with these transactions.

     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, 2008 are as follows:

  Goodwill Activity by Operating Segment
      Residential                            
    Banking Mortgage Sales Specialized   Insurance Financial   All      
    Network Banking Finance Lending   Services Services   Other   Total  
  (Dollars in millions)
 
Balance, January 1, 2008 $ 4,035 $ 7 $ 93 $ 100   $ 741 $ 192 $ 26 $ 5,194  
     Acquisitions   -     -     -   -     123   -   -   123  
     Contingent consideration   -     -     -   -     24   -   -   24  
     Other adjustments   2    -     -   (4 )   1   -   -   (1 )
Balance, September 30, 2008 $ 4,037 $ 7 $ 93 $ 96   $ 889 $ 192 $ 26 $ 5,340  

           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, 2008   As of December 31, 2007
  Gross         Net   Gross         Net  
   Carrying   Accumulated   Carrying   Carrying   Accumulated     Carrying  
    Amount     Amortization       Amount     Amount   Amortization     Amount  
   (Dollars in millions)
Identifiable intangible assets                            
   Core deposit intangibles $ 457 $ (315 ) $ 142 $ 457 $ (284 ) $ 173  
   Other (1)   661   (296 )    365      566   (250 )   316   
         Totals $ 1,118 $ (611 ) $ 507    $ 1,023 $ (534 ) $ 489   
        
          (1) Other identifiable intangibles are primarily customer relationship intangibles.

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

NOTE 3. Securities

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

        September 30, 2008    
    Amortized   Gross Unrealized   Fair
    Cost   Gains   Losses   Value
        (Dollars in millions)    
Securities available for sale:                
     U.S. government-sponsored entities (GSE) $ 1,531 $ 2 $ 9 $ 1,524
     Mortgage-backed securities issued by GSE   14,879   21   161   14,739
     States and political subdivisions   2,170   3   236   1,937
     Non-agency mortgage-backed securities   1,604   -   225   1,379
     Equity and other securities   986   4   35   955
          Total securities available for sale $ 21,170 $ 30 $ 666 $ 20,534
 
 
        December 31, 2007    
    Amortized   Gross Unrealized   Fair
    Cost   Gains   Losses   Value
        (Dollars in millions)    
Securities available for sale:                
     U.S. government-sponsored entities (GSE) $ 9,792 $ 50 $ 35 $ 9,807
     Mortgage-backed securities issued by GSE   8,218   58   55   8,221
     States and political subdivisions   1,423   20   51   1,392
     Non-agency mortgage-backed securities   1,740   8   28   1,720
     Equity and other securities   1,291   7   19   1,279
          Total securities available for sale $ 22,464 $ 143 $ 188 $ 22,419

          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, 2008
  Less than 12 months 12 months or more   Total
 
    Fair Unrealized    Fair Unrealized   Fair   Unrealized
    Value   Losses      Value Losses   Value   Losses
                 (Dollars in millions)          
Securities:                        
   U.S. government-sponsored entities (GSE) $ 1,148 $ 9 $ - $ - $ 1,148 $ 9
   Mortgage-backed securities issued by GSE   11,914   143   750   18   12,664   161
   States and political subdivisions   1,375   182   200   54   1,575   236
   Non-agency mortgage-backed securities   869   121   510   104   1,379   225
   Equity and other securities   224   32   38   3   262   35
          Total temporarily impaired securities $ 15,530 $ 487 $ 1,498 $ 179 $ 17,028 $ 666

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

  December 31, 2007
  Less than 12 months 12 months or more   Total
 
    Fair Unrealized   Fair Unrealized   Fair   Unrealized
    Value Losses   Value Losses   Value   Losses
                 (Dollars in millions)          
Securities:                        
   U.S. government-sponsored entities (GSE) $ 1,537 $ 16 $ 3,701 $ 19 $ 5,238 $ 35
   Mortgage-backed securities issued by GSE   3,236   39   797   16   4,033   55
   States and political subdivisions   354   51   1   -   355   51
   Non-agency mortgage-backed securities   1,111   28   24   -   1,135   28
   Equity and other securities   412   18   61   1   473   19
      Total temporarily impaired securities $ 6,650 $ 152 $ 4,584 $ 36 $ 11,234 $ 188

          BB&T periodically evaluates available-for-sale securities for other-than-temporary impairment. Based on its evaluation on September 30, 2008, BB&T recorded $41 million of other-than-temporary impairment related to certain debt and equity securities.

          On September 30, 2008, BB&T also held certain investment securities having continuous unrealized loss positions for more than 12 months. As of September 30, 2008, the unrealized losses on these securities totaled $179 million. Substantially all of these losses were in mortgage-backed, municipal and corporate securities, all of which were investment grade. The unrealized losses are the result of changes in market interest rates rather than the credit quality of the issuers. At September 30, 2008, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.

NOTE 4. Loans and Leases

          The following table provides a breakdown of BB&T’s loan portfolio as of September 30, 2008 and December 31, 2007.

    September 30, December 31,
    2008   2007
    (Dollars in millions)
Loans and leases, net of unearned income:        
     Commercial loans and leases $ 48,694 $ 44,870
     Sales finance   6,314   6,021
     Revolving credit   1,718   1,618
     Direct retail   15,569   15,691
     Residential mortgage loans   17,259   17,467
     Specialized lending   5,709   5,240
     Loans held for sale   1,419   779
          Total loans and leases $ 96,682 $ 91,686

 

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BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

     An analysis of the allowance for credit losses for the nine month periods ended September 30, 2008 and 2007 is presented in the following table:

    For the Nine Months Ended  
    September 30,  
    2008     2007  
    (Dollars in millions)  
 
Beginning Balance $ 1,015   $ 888  
     Allowance for acquired (sold) loans, net   (2 )   16  
     Provision for credit losses   917     264  
 
     Loans and leases charged-off   (583 )   (280 )
     Recoveries of previous charge-offs   46     53  
           Net loans and leases charged-off   (537 )   (227 )
Ending Balance $ 1,393   $ 941  
 
Allowance for loan and lease losses $ 1,377   $ 934  
Reserve for unfunded lending commitments   16     7  
Allowance for credit losses $ 1,393   $ 941  

          The following table provides a summary of BB&T’s nonperforming and past due loans as of September 30, 2008 and December 31, 2007.

    September 30,  December 31,
    2008   2007    
  (Dollars in millions)
 
Nonaccrual loans and leases $ 1,196 $ 502
 
Foreclosed real estate   382   143
Other foreclosed property   60

   

51   
     Total foreclosed property   442   194   
Total nonperforming assets $ 1,638 $ 696   
 
Loans 90 days or more past due and still accruing (1) $ 297 $ 223

          (1) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

NOTE 5. Long-Term Debt

Long-term debt is summarized as follows:

    September 30,   December 31,
    2008   2007
    (Dollars in millions)
Parent Company        
       6.50% Subordinated Notes Due 2011 (1,3) $ 648 $ 648
       4.75% Subordinated Notes Due 2012 (1,3)   497   496
       5.20% Subordinated Notes Due 2015 (1,3)   997   997
       4.90% Subordinated Notes Due 2017 (1,3)   367   365
       5.25% Subordinated Notes Due 2019 (1,3)   600   600
 
Branch Bank        
       Fixed Rate Secured Borrowings Due 2010 (5)   4,000   4,000
       Floating Rate Senior Notes Due 2008   -   500
       Floating Rate Senior Notes Due 2009 (9)   540   500
       Floating Rate Subordinated Notes Due 2016 (1,9)   350   350
       Floating Rate Subordinated Notes Due 2017 (1,9)   300   300
       4.875% Subordinated Notes Due 2013 (1,3)   250   249
       5.625% Subordinated Notes Due 2016 (1,3)   399   399
 
Federal Home Loan Bank Advances to Branch Bank (4)        
       Varying maturities to 2028   9,789   7,210
 
Junior Subordinated Debt to Unconsolidated Trusts (2)        
       5.85% BB&T Capital Trust I Securities Due 2035 (3)   514   514
       6.75% BB&T Capital Trust II Securities Due 2036   598   598
       6.82% BB&T Capital Trust IV Securities Due 2077 (6)   600   600
       8.95% BB&T Capital Trust V Securities Due 2068 (7)   450   -
       Other Securities (8)   182   183
 
Other Long-Term Debt   62   37
 
Fair value hedge-related basis adjustments   194   147
 
               Total Long-Term Debt $ 21,337 $ 18,693

  (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, 2008, the effective rates paid on these borrowings ranged from 2.94% to 4.32%.
  (4) At September 30, 2008, the weighted average cost of these advances was 4.39% and the weighted average maturity was 7.5 years.
  (5) This borrowing is currently secured by automobile loans. The fixed rate was swapped to a floating rate based on LIBOR. This borrowing was called effective October 14, 2008.
  (6) These securities are fixed rate through June 12, 2037 and then switch to a floating rate based on LIBOR.
  (7) $360 million of this issuance was swapped to a floating rate based on LIBOR. At September 30, 2008 the effective rate on the swapped portion was 6.58%.
  (8) These securities were issued by companies acquired by BB&T. At September 30, 2008, the effective rate paid on these borrowings ranged from 4.48% to 10.07%. These securities have varying maturities through 2035.
  (9) These floating-rate securities are based on LIBOR and had an effective rate of 3.01% as of September 30, 2008.

 

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BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

Junior Subordinated Debt to Unconsolidated Trusts

          In September 2008, BB&T Capital Trust V (“BBTCT V”) issued $450 million of Capital Securities, with a fixed interest rate of 8.95% through September 15, 2063 and a floating rate, if extended, through September 15, 2068. BBTCT V, 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 Junior Subordinated Debentures issued by BB&T. BB&T has made guarantees which, taken collectively, fully, irrevocably, and unconditionally guarantee, on a subordinated basis, all of BBTCT V’s obligations under the Trust and Capital Securities. BBTCT V’s sole asset is the Junior Subordinated Debentures issued by BB&T which have an initial maturity on September 15, 2063 and a final maturity date on September 15, 2068. The Junior Subordinated Debentures are subject to early redemption (i) in whole, but not in part, at any time under certain prescribed limited circumstances or (ii) in whole, or in part, pursuant to the call provisions after September 15, 2013. The Capital Securities of BBTCT V are subject to mandatory redemption in whole, or in part, upon repayment of the Junior Subordinated Debentures at maturity or their earlier redemption.

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

          BB&T uses a variety of financial instruments to meet the financing needs of clients and 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, 2008 and December 31, 2007, BB&T had issued standby letters of credit totaling $5.4 billion and $3.4 billion, respectively. The carrying amount of the liability for such guarantees was $15 million and $5 million at September 30, 2008 and December 31, 2007, respectively.

          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, swaptions, caps, floors, collars, financial forward and futures contracts, when-issued securities, foreign exchange contracts and options written and purchased. BB&T uses derivatives primarily to manage risk related to securities, business loans, overnight funds, long-term debt, mortgage servicing rights, mortgage banking operations and certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients. BB&T held a variety of derivative financial instruments with notional values of $67.3 billion and $47.2 billion at September 30, 2008 and December 31, 2007, respectively. These instruments were in

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

a net gain position of $219 million and $181 million at September 30, 2008 and December 31, 2007, respectively.

          BB&T invests in certain affordable housing and historic building rehabilitation projects throughout its market area as a means of supporting local communities and receives tax credits related to these investments. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. Branch Bank typically provides 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 $426 million and $444 million at September 30, 2008 and December 31, 2007, respectively. At September 30, 2008, BB&T’s maximum exposure to loss associated with these investments totaled $815 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 does not believe that any payments related to these guarantees would materially change the financial condition or results of operations of BB&T.

          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 five years. Since certain provisions of these agreements do not specify dollar limitations, it is not possible to quantify the maximum exposure resulting from these agreements.

          BB&T has sold certain mortgage-related loans that contain recourse provisions. These provisions generally require BB&T to reimburse the investor for a share of any loss that is incurred after the disposal of the property. At September 30, 2008, BB&T had $844 million of residential mortgage loans sold with recourse. In the event of nonperformance by the borrower, BB&T has maximum recourse exposure of approximately $760 million. In addition, BB&T has $3.2 billion in loans serviced for others that were covered by loss sharing agreements. BB&T’s maximum exposure to loss for these loans is approximately $786 million. The majority of these recourse obligations were acquired by BB&T during 2007 in connection with the acquisition of Collateral Real Estate Capital, LLC.

          BB&T has investments and future funding commitments to certain venture capital funds. As of September 30, 2008, BB&T had investments of $158 million, net of minority interest, related to these ventures and future funding commitments of $228 million. BB&T’s risk exposure relating to such commitments is generally limited to the amount of investments and future funding commitments made.

 

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Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

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, 2007 for descriptions and disclosures about the various benefit plans offered by BB&T.

          The following tables summarize the components of net periodic benefit cost recognized for BB&T’s pension plans for the three and nine month periods ended September 30, 2008 and 2007, respectively:

    Pension Plans
  Qualified Nonqualified
  For the For the
  Three Months Ended Three Months Ended
  September 30, September 30,
    2008     2007     2008   2007
  (Dollars in millions)
Service cost $ 16   $ 16   $ 1 $ 2
Interest cost   18     16     3   2
Estimated return on plan assets   (36 )   (32 )   -   -
Amortization and other   (1 )   -     -   1
 Net periodic benefit cost $ (3 ) $ -   $ 4 $ 5
 
 
          Pension Plans    
  Qualified     Nonqualified
    For the     For the
    Nine Months Ended     Nine Months Ended
    September 30,     September 30,
    2008     2007     2008   2007
          (Dollars in millions)    
 
Service cost $ 51   $ 53   $ 3 $ 4
Interest cost   54     50     7   6
Estimated return on plan assets   (104 )   (89 )   -   -
Amortization and other   (3 )   1     1   2
 Net periodic benefit cost $ (2 ) $ 15   $ 11 $ 12

          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. Management elected to make discretionary contributions of $249 million and $83 million to the qualified pension plan during the third quarters of 2007 and 2008, respectively. Management currently has no plans to make any additional contributions to the qualified pension plan in 2008.

 

BB&T Corporation                     Page 18                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

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, 2008 and 2007, respectively, were calculated as follows:

    For the Three Months Ended   For the Nine Months Ended
    September 30,   September 30,
    2008   2007   2008   2007
    (Dollars in millions, except per share data, shares in thousands)
 
Basic Earnings Per Share:                
         Net income $ 358 $ 444 $ 1,214 $ 1,323
   Weighted average number of common shares   549,761   550,603   547,543   546,978
   Basic earnings per share $ .65 $ .81 $ 2.22 $ 2.42
Diluted Earnings Per Share:                
         Net income $ 358 $ 444 $ 1,214 $ 1,323
   Weighted average number of common shares   549,761   550,603   547,543   546,978
   Add:                
         Effect of dilutive outstanding equity-based awards   3,783   4,733   3,601   5,175
   Weighted average number of diluted common shares   553,544   555,336   551,144   552,153
   Diluted earnings per share $ .65 $ .80 $ 2.20 $ 2.40

          For the three months ended September 30, 2008 and 2007, the number of anti-dilutive awards was 35.1 million and 5.5 million shares, respectively. For the nine months ended September 30, 2008 and 2007, the number of anti-dilutive awards was 32.7 million and 5.4 million shares, respectively.

NOTE 9. Comprehensive Income (Loss)

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

      As of September 30, 2008  
    Pre-Tax   Tax   After-Tax  
      Amount   Benefit     Amount  
      (Dollars in millions)  
 
Unrealized net losses on securities available for sale $   (636 ) $ (238 ) $ (398 )
Unrecognized net pension and postretirement costs     (125 ) (47 )   (78 )
Unrealized net gains on cash flow hedges     21   8     13  
Foreign currency translation adjustment     2   -     2  
       Total $   (738 ) $ (277 ) $ (461 )

 

BB&T Corporation                     Page 19                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

    As of December 31, 2007  
    Pre-Tax     Tax   After-Tax  
    Amount     Benefit   Amount  
    (Dollars in millions)  
 
Unrealized net losses on securities available for sale $ (45 ) $ (17 ) $ (28 )
Unrecognized net pension and postretirement costs   (127 )   (48 )   (79 )
Foreign currency translation adjustment   3      -     3  
       Total $ (169 )  $ (65 ) $ (104 )

          The following table reflects the components of total comprehensive income for the three and nine month periods ended September 30, 2008 and 2007, respectively.

    For the Three Months Ended    For the Nine Months Ended  
    September 30,   September 30,  
    2008     2007   2008   2007  
    (Dollars in millions)  
Comprehensive income:                        
   Net income $ 358   $ 444   $ 1,214   $ 1,323  
   Other comprehensive income:                        
           Unrealized net (losses) gains on securities available for sale   (124 )   189     (370 )   99  
           Unrealized net gains (losses) on cash flow hedges   -     3     13     (1 )
           Net change in pension and postretirement liability   3     (9 )   1     (10 )
           Net foreign currency translation adjustment   (1 )   1     (1 )   3  
                 Total comprehensive income $ 236   $ 628   $ 857   $ 1,414  

 

BB&T Corporation                     Page 20                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

NOTE 10. Operating Segments

           BB&T’s operations are divided into seven reportable business segments: the Banking Network, Residential Mortgage Banking, Sales Finance, Specialized Lending, Insurance Services, Financial Services 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 were designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The performance of the segments is not comparable with BB&T’s consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

          Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2007 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 21                Third Quarter 2008 10-Q


  BB&T Corporation
  Reportable Segments
  For the Three Months Ended September 30, 2008 and 2007
Residential
    Banking Network Mortgage Banking   Sales Finance   Specialized Lending Insurance Services
      2008   2007     2008     2007     2008     2007           2008       2007     2008     2007  
     (Dollars in millions)
 
  Net interest income (expense) $ 534 $ 583 $ 284   $ 270   $ 102   $ 98   $ 179   $ 172   $ 3   $

6

 
     Net funds transfer pricing (FTP)   306   292   (207 )   (203 )   (68 )   (68 )     (52 )   (58 )   (1 )   (2 )
  Net interest income (expense) and FTP   840   875   77     67     34     30       127     114     2     4  
  Economic provision for loan and lease losses   49   40   3     3     6     5       64     48     -     -  
  Noninterest income   317   282   67     30     -            -       32     21     228     198  
     Intersegment net referral fees (expense)   56   60   (23 )   (23 )   (3 )   (3 )     -            -     -     -  
  Noninterest expense   389   370   20     15     6     5       64     52     180     154  
     Allocated corporate expenses   176   147   3     3     3     3       9     6     10     7  
  Income (loss) before income taxes   599   660   95     53     16     14       22     29     40     41  
     Provision (benefit) for income taxes   214   238   34     19     6     5       8     11     15     16  
  Segment net income (loss) $ 385 $ 422 $ 61   $ 34   $ 10   $ 9    $ 14   $ 18   $ 25   $ 25  
  Identifiable segment assets (period end) $ 63,518 $ 59,143 $ 19,046   $ 18,406   $ 6,127   $ 5,868   $ 6,262   $ 5,474   $ 1,117   $ 1,035  
 
 
      Financial Services   Treasury   All Other Segments (1) Parent/Reconciling Items Total BB&T Corporation  
      2008   2007     2008     2007     2008     2007          2008       2007     2008     2007  
     (Dollars in millions)
 
  Net interest income (expense) $ 9 $ 1  $  91   $ (30 ) $ 37   $ 44   $ (151 ) $ (166 ) $ 1,088   $ 978  
     Net funds transfer pricing (FTP)   15   11   (38 )   (47 )   (38 )   (43 )     83     118     -     -  
  Net interest income (expense) and FTP   24   12   53     (77 )   (1 )   1       (68 )   (48 )   1,088     978  
  Economic provision for loan and lease losses   1          -   -            -     -     1       241     8     364     105  
  Noninterest income   149   129   26     39     13     13       (40 )   (37 )   792     675  
     Intersegment net referral fees (expense)   5   3   -            -     -            -       (35 )   (37 )   -     -  
  Noninterest expense   125   116   2     2     19     17       204     157     1,009     888  
     Allocated corporate expenses   6   7   2            -     -     2     (209 )   (175 )   -     -  
  Income (loss) before income taxes   46   21   75     (40 )   (7 )   (6 )   (379 )   (112 )   507     660  
     Provision (benefit) for income taxes   17   7   14     (22 )   (9 )   (4 )   (150 )   (54 )   149     216  
  Segment net income (loss) $ 29 $ 14 $   61   $ (18 ) $ 2   $ (2 ) $ (229 ) $ (58 ) $ 358   $ 444  
  Identifiable segment assets (period end) $ 2,769 $ 3,863 $ 24,786   $ 25,277   $ 4,752   $ 3,753   $ 8,664   $ 7,962   $ 137,041   $ 130,781  
     
 (1)    Includes financial data from subsidiaries below the quantitative and qualitative thresholds requiring disclosure.

 

BB&T Corporation                     Page 22                Third Quarter 2008 10-Q


BB&T Corporation
Reportable Segments
For the Nine Months Ended September 30, 2008 and 2007
              Residential                                      
             Banking Network   Mortgage Banking     Sales Finance   Specialized Lending   Insurance Services  
          2008    2007   2008     2007     2008     2007     2008     2007     2008     2007   
  (Dollars in millions)  
   
Net interest income (expense) $ 1,594 $ 1,734 $ 857   $ 765   $ 298   $ 276   $ 528   $ 503   $ 10   $ 14  
   Net funds transfer pricing (FTP)     954   834   (626 )   (578 )   (200 )   (188 )   (156 )   (166 )   (4 )   (2 )
Net interest income (expense) and FTP   2,548   2,568   231     187     98     88     372     337     6     12   
Economic provision for loan and lease losses     139   113   8     7     17     15     218     135     -     -
Noninterest income     916   793   158     93     1     1     91     62     663     625
   Intersegment net referral fees (expense)     198   180   (75 )   (70 )   (10 )   (10 )   -            -     -     -
Noninterest expense   1,148   1,095   58     46     20     17     183     152     519     466
   Allocated corporate expenses     525   440   8     8     8     8     26     17     30     21   
Income (loss) before income taxes   1,850   1,893   240     149     44     39     36     95     120     150
   Provision (benefit) for income taxes     664   684   86     54     16     14     14     36     46     57  
Segment net income (loss) $ 1,186 $ 1,209 $ 154   $ 95   $ 28   $ 25   $ 22   $ 59   $ 74   $ 93  
Identifiable segment assets (period end) $ 63,518 $ 59,143 $ 19,046   $ 18,406   $ 6,127   $ 5,868   $ 6,262   $ 5,474   $ 1,117   $ 1,035  
 
 
             Financial Services   Treasury   All Other Segments (1) Parent/Reconciling Items Total BB&T Corporation  
         2008     2007   2008     2007     2008     2007     2008     2007     2008     2007  
  (Dollars in millions)
 
Net interest income (expense) $ 34 $ 10 $ 185   $ (107 ) $ 121   $ 121   $ (454 ) $ (427 ) $ 3,173   $ 2,889
   Net funds transfer pricing (FTP)     33   26   (135 )   (109 )   (124 )   (125 )   258     308     -     -  
Net interest income (expense) and FTP     67   36   50     (216 )   (3 )   (4 )   (196 )   (119 )   3,173     2,889  
Economic provision for loan and lease losses     1          -                  -            -     1     1     533     (7 )   917     264
Noninterest income     466   411   121     80     30     43     (56 )   (52 )   2,390     2,056
   Intersegment net referral fees (expense)     15   11                  -            -              -            -     (128 )   (111 )   -     -
Noninterest expense     389   361   9     6     65     61     516     490     2,907     2,694
   Allocated corporate expenses     25   22   3     3     1     5     (626 )   (524 )   -     -  
Income (loss) before income taxes     133   75   159     (145 )   (40 )   (28 )   (803 )   (241 )   1,739     1,987
   Provision (benefit) for income taxes     49   26   24     (81 )   (33 )   (19 )   (341 )   (107 )   525     664  
Segment net income (loss) $ 84 $ 49 $ 135   $ (64 ) $ (7 ) $ (9 ) $ (462 ) $ (134 ) $ 1,214   $ 1,323  
Identifiable segment assets (period end) $ 2,769 $ 3,863 $ 24,786   $ 25,277   $ 4,752   $ 3,753   $ 8,664   $ 7,962   $ 137,041   $ 130,781  

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

 

BB&T Corporation                     Page 23                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

NOTE 11. Equity-Based Compensation Plans

          BB&T has options, restricted shares of common stock 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, the Non-Employee Directors’ Stock Option Plan, and plans assumed from acquired entities. 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, 2008, the 2004 Plan is the only plan that has awards available for future grants. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2007 for further disclosures related to equity-based awards issued by BB&T.

          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 weighted average assumptions used for grants awarded during the first nine months of 2008.

Assumptions:      
               Risk-free interest rate   3.7  %
               Dividend yield   4.5  
               Volatility factor   15.5  
               Expected life   6.9  yrs
Fair value of options per share $ 3.43  

          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.

          The following table details the activity during the first nine months of 2008 related to stock options awarded by BB&T:

  For the Nine Months Ended
  September 30, 2008
      Wtd. Avg.
      Exercise
  Options   Price
 
Outstanding at beginning of period 38,042,742   $ 36.61
Granted 6,718,748     34.04
Exercised (1,901,331 )   30.02
Forfeited or expired (578,421 )   37.54
Outstanding at end of period 42,281,738   $ 36.48
 
Exercisable at end of period 26,195,989   $ 35.54

 

BB&T Corporation                     Page 24                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

          The following table details the activity during the first nine months of 2008 related to restricted shares and restricted share units awarded by BB&T:

  For the Nine Months Ended
  September 30, 2008
      Wtd. Avg.
      Grant Date
  Shares/Units   Fair Value
Nonvested at beginning of period 3,994,441   $ 33.20
Granted 2,609,672     23.08
Vested (68,779 )   30.97
Forfeited (204,125 )   29.99
Nonvested at end of period 6,331,209   $ 29.16
 

NOTE 12. Fair Value Measurements

          BB&T adopted SFAS No. 157 effective January 1, 2008. SFAS No. 157, which provides a framework for measuring fair value, requires that an entity determine fair value based on the principal market for the asset or liability being measured. Upon adoption, BB&T changed its principal market for measuring the fair value of certain client derivative contracts. The impact of this change on the measurement of fair value for these contracts was $7 million, pre-tax, and was recorded as a decrease in other noninterest income effective January 1, 2008.

          BB&T also adopted SFAS No. 159 effective January 1, 2008. SFAS No. 159 allows an entity the option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities on a contract-by-contract basis. This option is generally irrevocable. BB&T elected to adopt fair value for all commercial mortgage loans held for sale and prime residential mortgage loans held for sale originated after December 31, 2007. There was no impact to retained earnings as a result of the adoption of SFAS No. 159.

          BB&T elected the Fair Value Option for the majority of new loans held for sale because they are hedged using derivatives and the historical accounting practice resulted in volatility in earnings. Under historical accounting practices, BB&T was required to account for the derivatives at fair value and the loans held for sale at lower of cost or market. This practice resulted in volatility in reported earnings during a declining interest-rate environment because the decline in the value of derivatives held were required to be marked down, but the increasing value of the loans held for sale could not be marked up. Under the Fair Value Option, BB&T will be permitted to record both the loans held for sale and the corresponding derivatives at the full fair value, which will eliminate the mismatch in reported earnings that was caused by the prior accounting practices. BB&T has not elected the Fair Value Option for a small portfolio of its loans held for sale because these loans are not exchanged in an active market and BB&T does not hedge these assets. Fair value for loans held for sale is primarily based on quoted market prices for securities backed by similar types of loans. Following the adoption of SFAS No. 159,

 

BB&T Corporation                     Page 25                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

direct loan origination fees and costs related to loans held for sale for which the Fair Value Option has been elected are no longer capitalized and recognized in earnings upon the sale of such loans, but rather are recorded as mortgage banking income in the case of the direct loan origination fees and primarily personnel expense in the case of the direct loan origination costs.

          The following table details the fair value and unpaid principal balance of loans held for sale at September 30, 2008 that were elected to be carried at fair value.

          Fair Value
          less
        Aggregate Aggregate
        Unpaid Unpaid
        Principal Principal
  Fair Value   Balance Balance
    (Dollars in millions)  
Loans held for sale reported at fair value              
  Total (1) $ 1,379 $ 1,371 $ 8  
  Nonaccrual loans   1   1   -  
  Loans 90 days or more past due and still accruing interest   2   3   (1 )
 
 
(1) The change in fair value is reflected in mortgage banking income.          

     Fair Value Measurements

          SFAS No. 157 defines fair value as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants. SFAS No. 157 also establishes a three level fair value hierarchy that describes the inputs that are used to measure assets and liabilities.

Level 1

Level 1 asset and liability fair values are based on quoted prices in active markets for identical assets and liabilities. Level 1 assets and liabilities include certain equity securities and derivative contracts that are traded in an active market.

Level 2

Level 2 asset and liability fair values are based on observable inputs that include: quoted market prices for similar assets or liabilities; quoted market prices that are not in an active market; or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Corporation’s trading and available-for-sale portfolios, loans held for sale, certain derivative contracts and short-term borrowings.

 

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BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

Level 3

Level 3 assets and liabilities are financial instruments whose value is calculated by the use of pricing models and/or discounted cash flow methodologies, as well as financial instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data. Level 3 assets and liabilities include certain trading securities, certain structured notes, mortgage servicing rights, venture capital investments and certain derivative contracts.

         Assets and liabilities measured at fair value on a recurring basis, including financial instruments for which BB&T has elected the Fair Value Option are summarized below:

        Fair Value Measurements for Assets and Liabilities
        Measured on a Recurring Basis
 
          Quoted Prices in Active   Significant Other Significant
        Markets for Identical Assets Observable Inputs Unobservable Inputs
    9/30/2008   (Level 1)   (Level 2) (Level 3)
     (Dollars in Millions)
Assets:                  
 Trading securities $ 548 $ 223 $ 320 $ 5
 Securities available for sale   20,534   170   20,316   48
 Loans held for sale (1)   1,379   -   1,379   -
 Residential mortgage servicing rights     601   -   -   601
 Derivative assets (2)     561   2   553   6
 Venture capital investments (2)     175   -   1   174
   Total assets $ 23,798 $ 395 $ 22,569 $ 834
 
Liabilities:                  
 Derivative liabilities (2) $ 342 $ 2 $ 332 $ 8
 Short-term borrowed funds (3)     208   -   208   -
    Total liabilities $ 550 $ 2 $ 540 $ 8

 (1) Loans held for sale are residential and commercial mortgage loans that were originated subsequent to December 31, 2007 for which the Company elected the fair value option under SFAS No. 159. Loans originated prior to January 1, 2008 and certain other loans held for sale are still accounted for at the lower of cost or market. There were $40 million in loans held for sale that are not accounted for at fair value at September 30, 2008.
 (2) These amounts are reflected in other assets and other liabilities on the Consolidated Balance Sheet.
 (3) Short term borrowed funds reflect securities sold short positions.

          The tables below present a reconciliation for the three and nine month periods ended September 30, 2008 for all Level 3 assets and liabilities that are measured at fair value on a recurring basis.

 

BB&T Corporation                     Page 27                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

  Fair Value Measurements Using Significant Unobservable Inputs
                Mortgage              
For the Three Month Period               Servicing         Venture Capital  
Ended September 30, 2008   AFS Securities     Trading     Rights   Net Derivatives   Investments  
   (Dollars in Millions)
Balance at June 30, 2008 $ 14   $ 5   $ 611   $ 6   $ 152  
 Total realized and unrealized gains or losses:                              
   Included in earnings   -     -     (63 )   (8 )   1  
   Included in other comprehensive income   (1 )   -     -     -     -  
 Purchases, issuances and settlements   -     -     53     -     21  
 Transfers in and/or out of Level 3   35     -     -     -     -  
Balance at September 30, 2008 $ 48   $ 5   $ 601   $ (2 )  $ 174  
 
 
 
  Fair Value Measurements Using Significant Unobservable Inputs
                Mortgage              
 For the Nine Month Period               Servicing         Venture Capital  
 Ended September 30, 2008   AFS Securities     Trading     Rights   Net Derivatives    Investments  
  (Dollars in Millions)
 Balance at January 1, 2008 $ 9   $ 27   $ 472   $ 2   $ 128  
   Total realized and unrealized gains or losses:                              
       Included in earnings   -     (2 )   (39 )   (4 )   (8 )
       Included in other comprehensive income   (1 )   -     -     -     -  
   Purchases, issuances and settlements   5     (23 )   168     -     54  
   Transfers in and/or out of Level 3   35     3     -     -     -  
 Balance at September 30, 2008 $ 48   $ 5   $ 601   $ (2 ) $ 174  

          The table below summarizes unrealized and realized gains and losses recorded in earnings for Level 3 assets and liabilities for the three month period ended September 30, 2008.

  Total Gains and Losses
        Mortgage       Venture Capital
     AFS Securities   Trading Servicing Rights Net Derivatives   Investments
  (Dollars in Millions)
Classification of gains and losses                      
(realized/unrealized) included in                      
earnings for the period:                      
    Mortgage banking income  $ - $ - $ (63 ) $ (8 ) $ -
    Other noninterest income      -      -    -      -      1
         Total  $ - $   - $ (63 ) $ (8 ) $ 1
 
Net unrealized gains (losses) included                      
 in net income relating to assets and liabilities                        
 still held at September 30, 2008  $ - $   - $ (41 ) $ (2 ) $ 1

          The realized and unrealized losses reported for mortgage servicing rights assets are composed of a negative valuation adjustment of $41 million plus the realization of expected residential mortgage servicing rights cash flows of $22 million for the quarter ended September 30, 2008. BB&T uses various derivative financial instruments to mitigate the income statement effect of changes in fair value due to its quarterly valuation. During the three months ended September 30, 2008, the derivative instruments produced gains of $65 million, which offset the negative valuation adjustment recorded.

 

BB&T Corporation                     Page 28                Third Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Third Quarter 2008

          The table below summarizes unrealized and realized gains and losses recorded in earnings for Level 3 assets and liabilities for the nine month period ended September 30, 2008.

  Total Gains and Losses
 
            Mortgage           Venture Capital  
    AFS Securities       Trading   Servicing Rights   Net Derivatives     Investments  
  (Dollars in Millions)
Classification of gains and losses                          
(realized/unrealized) included in                          
earnings for the period:                          
    Mortgage banking income $ - $ -   $ (39 ) $ (4 ) $ -  
    Other noninterest income    -     (2 )   -     -     (8 )
         Total $  - $ (2 ) $ (39 ) $ (4 ) $ (8 )
 
Net unrealized gains (losses) included                            
 in net income relating to assets and liabilities                            
 still held at September 30, 2008 $  - $ -   $ 27   $ (2 ) $ (12 )

          The realized and unrealized losses reported for mortgage servicing rights assets are composed of a positive valuation adjustment of $27 million less the realization of expected residential mortgage servicing rights cash flows of $66 million for the nine months ended September 30, 2008. BB&T uses various derivative financial instruments to mitigate the income statement effect of changes in fair value due to its quarterly valuation. During the first nine months of 2008, the derivative instruments produced losses of $11 million, which offset the positive valuation adjustment recorded.

          Also, BB&T may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. Assets measured at fair value on a nonrecurring basis in the first nine months of 2008 that were still held on the balance sheet at September 30, 2008 totaled $549 million. This amount consists of impaired loans that were classified as Level 3 assets. During the first nine months of 2008, BB&T recorded $66 million in losses related to write-downs of impaired loans based on the appraised value of the underlying collateral.

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

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

Forward-Looking Statements

          This Quarterly Report on Form 10-Q contains forward-looking statements with respect to the financial condition, results of operations and businesses of BB&T. These forward-looking statements involve certain risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following:

Regulatory Considerations

          BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, the Financial Industry Regulatory Authority, and various state insurance and securities regulators. BB&T and its subsidiaries have from time to time received requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2007 for additional disclosures with respect to laws and regulations affecting the Company’s businesses.

 

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Management’s Discussion and Analysis Third Quarter 2008

          On April 1, 2008, BB&T Bankcard Corporation was converted into a federally chartered thrift institution and renamed BB&T Financial, FSB (“BB&T FSB”). As a federally chartered thrift, BB&T FSB is subject to regulation, supervision and examination by the Office of Thrift Supervision. In connection with the charter conversion of BB&T FSB, Sheffield Financial, LLC and MidAmerica Gift Certificate Company, which were previously direct operating subsidiaries of the Corporation, became divisions or subsidiaries of BB&T FSB. In addition, Liberty Mortgage Corporation, formerly a subsidiary of Branch Bank, was reorganized as a subsidiary of BB&T FSB. These organizational structure changes were made to optimize the operating efficiency of these divisions or subsidiaries and have no impact on BB&T’s reportable segments.

          On October 14, 2008, under authority granted by the Emergency Economic Stabilization Act of 2008 (the “EESA”), the United States Department of the Treasury adopted the Troubled Asset Relief Program (“TARP”) and the Capital Purchase Program (the “Capital Purchase Program”) pursuant to which the Treasury will purchase up to $250 billion of preferred stock and warrants to be issued by United States banks, savings associations and their holding companies. BB&T received preliminary approval to participate in the Capital Purchase Program on October 27, 2008. Under the Capital Purchase Program, BB&T will issue and sell to the Treasury preferred stock and warrants to purchase shares of BB&T common stock for an aggregate purchase price of approximately $3.1 billion. The Treasury will receive 10-year warrants to purchase shares of BB&T common stock with an aggregate market price of approximately $465 million as of the closing date. Upon the consummation of the transaction, BB&T will be subject to the terms and conditions of the Capital Purchase Program, which are generally described in the Treasury’s term sheet available on the Treasury’s website at http://www.ustreas.gov.

          BB&T also is considering whether it will participate in other programs currently being offered under, or in conjunction with, the EESA including the FDIC’s program to insure noninterest-bearing deposits, the FDIC’s program to guarantee senior debt of FDIC-insured institutions, and the Federal Reserve Board of Governors’ commercial paper funding facility, which will serve as a funding backstop to facilitate the issuance of unsecured and asset-backed term commercial paper by eligible issuers.

Critical Accounting Policies

          The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. BB&T’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in BB&T’s consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include BB&T’s accounting for the allowance for loan and lease losses and reserve for unfunded lending commitments, determining fair value of financial instruments, intangible assets and other purchase accounting related adjustments associated with mergers and acquisitions, costs and benefit obligations associated with BB&T’s pension and postretirement benefit plans, and income taxes. Understanding BB&T’s accounting policies is fundamental to understanding BB&T’s consolidated financial position and consolidated results

 

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Management’s Discussion and Analysis Third Quarter 2008

of operations. Accordingly, BB&T’s significant accounting policies and changes in accounting principles are discussed in detail in Note 1 of the “Notes to Consolidated Financial Statements” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2007.

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

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

          It is the policy of BB&T to maintain an allowance for loan and lease losses and a reserve for unfunded lending commitments that equals management’s best estimate of probable credit losses that are inherent in the portfolio at the balance sheet date. Estimates for loan and lease losses are determined by analyzing historical loan and lease losses, historical loan and lease migration to charge-off experience, current trends in delinquencies and charge-offs, changes in commercial loan risk grades, plans for problem loan and lease administration, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease portfolio. Also included in management’s estimates for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business. The methodology used to determine an estimate for the reserve for unfunded lending commitments is inherently similar to the methodology used in calculating the allowance for loans and leases adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding.

     Fair Value of Financial Instruments

          A significant portion of BB&T’s assets and liabilities are financial instruments that are carried at fair value. This includes securities available for sale, trading securities, derivatives, certain loans held for sale, residential mortgage servicing rights, certain short-term borrowings and venture capital investments. At September 30, 2008, the percentage of total assets and total liabilities measured at fair value was 17.4% and less than 1%, respectively. The vast majority of assets and liabilities carried at fair value are based on either quoted market prices or market prices for similar instruments. At September 30, 2008, 3.5% of assets measured at fair value were based on significant unobservable inputs. This is less than 1% of BB&T’s total assets.

     Securities

          The fair values for available-for-sale and trading securities are generally based upon market prices or market prices for similar instruments. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain trading securities, the valuation of the security is subjective and may involve substantial judgment. As of September 30, 2008, BB&T had approximately

 

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Management’s Discussion and Analysis Third Quarter 2008

$53 million of available-for-sale and trading securities, which is less than 1% of total assets, valued using unobservable inputs.

     Mortgage Servicing Rights

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

     Loans Held for Sale

          BB&T originates certain mortgage loans to be sold to investors. The majority of these loans are carried at fair value based on the Fair Value Option. For these loans, the fair value is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value are recorded as a component of mortgage banking income while mortgage loan origination costs for loans held for sale for which the Corporation elected the Fair Value Option are recognized in noninterest expense when incurred. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value of the underlying loans.

     Derivatives

          BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. BB&T mitigates the credit risk by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. The fair value of interest rate lock commitments, which are related to mortgage loan commitments, is

 

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Management’s Discussion and Analysis Third Quarter 2008

based on quoted market prices adjusted for commitments that BB&T does not expect to fund and includes the value attributable to the net servicing fee.

     Venture Capital Investments

          BB&T has venture capital investments that are carried at fair value. Changes in the fair value of these investments are recorded in other noninterest income each period. In many cases there is no observable market value for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment and actual values in a sale could differ materially from those estimated. As of September 30, 2008, BB&T had $175 million of venture capital investments, which is less than 1% of total assets.

     Intangible Assets

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

     Pension and Postretirement Benefit Obligations

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

     Income Taxes

          The calculation of BB&T’s income tax provision is complex and requires the use of estimates and judgments. As part of the Company’s analysis and implementation of business strategies, consideration is given to the tax laws and regulations that apply to the specific facts and circumstances for any tax position under evaluation. For tax positions that are uncertain in nature, management determines whether the tax position is more likely than not to be sustained upon examination. For tax positions that meet this threshold, management then estimates the amount of the tax benefit to recognize in the financial statements. Management closely monitors

 

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Management’s Discussion and Analysis Third Quarter 2008

tax developments in order to evaluate the effect they may have on the Company’s overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.

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EXECUTIVE SUMMARY

           BB&T’s total assets at September 30, 2008 were $137.0 billion, an increase of $4.4 billion, or 3.3%, from December 31, 2007. The asset category that experienced the largest increase was loans and leases, including loans held for sale, which grew $5.0 billion, or 5.4%, during the first nine months of 2008.

          Total deposits at September 30, 2008 were $88.4 billion, an increase of $1.6 billion, or 1.9%, from December 31, 2007. Long-term debt increased $2.6 billion, or 14.1%, and total shareholders’ equity increased $303 million compared to December 31, 2007.

          Consolidated net income for the third quarter of 2008 totaled $358 million, a decrease of 19.4% compared to $444 million earned during the third quarter of 2007. On a diluted per share basis, earnings for the three months ended September 30, 2008 were $.65, compared to $.80 for the same period in 2007, a decrease of 18.8% . BB&T’s results of operations for the third quarter of 2008 produced an annualized return on average assets of 1.04% and an annualized return on average shareholders’ equity of 10.86% compared to prior year ratios of 1.37% and 14.24%, respectively.

          Consolidated net income for the first nine months of 2008 totaled $1.2 billion, a decrease of 8.2% compared to $1.3 billion earned during the first nine months of 2007. On a diluted per share basis, earnings for the nine months ended September 30, 2008 were $2.20, compared to $2.40 for the same period in 2007, a decrease of 8.3% . BB&T’s results of operations for the first nine months of 2008 produced an annualized return on average assets of 1.20% and an annualized return on average shareholders’ equity of 12.46% compared to prior year ratios of 1.42% and 14.74%, respectively.

          Included in the results of operations for the third quarter and first nine months of 2008 were a number of notable items. During the third quarter of 2008, earnings benefited from $54 million in net gains from the sales of securities which was partially offset by $41 million in charges for other-than-temporary impairment. The first nine months of 2008 also included an additional increase in earnings from $36 million in gains on the early extinguishment of certain FHLB advances, a $94 million gain associated with the initial public offering and sale of Visa, Inc. shares, which included a $14 million reversal of a previously recorded liability.

          The third quarter and first nine months of 2008 included $364 million and $917 million, respectively, in provision for credit losses. The provision for credit losses exceeded net charge-offs by $122 million for the third quarter and $380 million for the first nine months of 2008, which resulted in an increase in the allowance for loan and lease losses as a percentage of loans and leases held for investment to 1.45% compared to 1.33% at June 30, 2008 and 1.10% at December 31, 2007.

 

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Management’s Discussion and Analysis Third Quarter 2008

          During the third quarter of 2008, BB&T continued to experience challenges resulting from the current credit cycle. These challenges resulted in additional credit deterioration during the quarter, which primarily related to residential real estate in Georgia, Florida and metro Washington, D.C. Management is working aggressively to deal with problem assets and continues to believe that BB&T’s credit issues are manageable.

          BB&T’s core operations produced 7.7% growth in average loans and leases and 6.9% growth in average deposits compared to the third quarter of 2007. BB&T’s net interest margin improved 1 basis point during the third quarter of 2008 compared to the second quarter of 2008, marking the fourth consecutive quarter of expansion.

          As of September 30, 2008, BB&T’s Tier 1 leverage and tangible capital ratios were 7.6% and 5.8%, respectively. In addition, BB&T’s Tier 1 risk-based capital and total risk-based capital ratios were 9.4% and 14.4%, respectively, which are significantly higher than the average levels recently reported by BB&T’s peers. BB&T’s capital levels improved compared to the prior quarter and are well above the regulatory standards for well-capitalized banks.

          In the third quarter the volatility and disruption in the financial markets reached unprecedented levels. In response to financial conditions affecting the banking industry and the financial markets, the U.S. government has taken a number of actions. Early in the fourth quarter, the U.S. Department of the Treasury announced plans to inject up to $250 billion of capital into the banking industry, by purchasing preferred stock and warrants from qualified banking organizations. BB&T has received preliminary approval from the Treasury to sell approximately $3.1 billion of securities to the Treasury under this program.

          Please refer to the section titled “Executive Overview” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2007 for additional information with respect to BB&T’s recent accomplishments and significant challenges. The factors causing the fluctuations in the major balance sheet and income statement categories for the third quarter of 2008 are further discussed in the following sections.

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ANALYSIS OF FINANCIAL CONDITION

Securities

          Securities available for sale totaled $20.5 billion at September 30, 2008, a decrease of $1.9 billion, or 8.4%, compared with December 31, 2007. The decline in the securities available for sale portfolio was primarily the result of sales of securities in September that were not reinvested until early in the fourth quarter of 2008. Trading securities totaled $548 million, down $461 million, or 45.7%, compared to the balance at December 31, 2007. The decline in the trading portfolio was largely the result of a reduction in Scott & Stringfellow’s trading portfolio primarily due to management’s decision to reduce risk associated with trading activities. BB&T’s trading portfolio may fluctuate significantly from period to period based on market conditions, which affect the timing of purchases and sales of securities classified as trading.

 

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

          Average total securities for the third quarter of 2008 totaled $24.1 billion, a slight decrease compared to the average balance during the third quarter of 2007. Average total securities for the first nine months of 2008 totaled $23.8 billion, an increase of $710 million, or 3.1%, compared to the average balance during the first nine months of 2007. BB&T sold a total of $12.4 billion in available-for-sale securities during the nine month period ended September 30, 2008, which produced net securities gains of $107 million. In addition, BB&T recorded $41 million in charges for other-than-temporary impairment related to certain debt and equity securities.

          The annualized fully taxable equivalent (“FTE”) yield on the average securities portfolio for the third quarter of 2008 was 5.03%, which represents a decrease of 2 basis points compared to the annualized yield earned during the third quarter of 2007. For the first nine months, the annualized FTE yield was 5.07%, which represents a 5 basis point increase compared to the annualized interest earned during the same period of 2007. The fluctuations in the annualized FTE yield on the average securities portfolio were primarily the result of changes in the overall composition of the securities portfolio including purchases of higher-yielding mortgage-backed securities issued by government-sponsored entities and purchases of municipal securities.

          Securities available for sale had net unrealized losses of $636 million and $45 million at September 30, 2008 and December 31, 2007, respectively. On September 30, 2008, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of September 30, 2008, the unrealized losses on these securities totaled $179 million. Substantially all of these losses were in mortgage-backed, municipal and corporate securities, all of which were investment grade. The unrealized losses are the result of changes in market interest rates rather than the credit quality of the issuers. At September 30, 2008, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.

Loans and Leases

          BB&T emphasizes commercial lending to small and medium-sized businesses, consumer lending, mortgage lending and specialized lending with an overall goal of maximizing the profitability of the loan portfolio, maintaining strong asset quality and achieving an equal mix of consumer and commercial loans. For the third quarter of 2008, average total loans were $95.9 billion, an increase of $6.9 billion, or 7.7%, compared to the same period in 2007. For the first nine months of 2008, average total loans were $94.5 billion, an increase of $7.5 billion, or 8.6%, compared to the same period in 2007.

         The following table presents the composition of average loans and leases for the third quarter and nine months ended September 30, 2008 and 2007, respectively:

 

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Management’s Discussion and Analysis Third Quarter 2008

Table 1
Composition of Average Loans and Leases
 
      For the Three Months Ended    
    September 30, 2008     September 30, 2007  
    Balance % of total     Balance % of total  
      (Dollars in millions)    
 
Commercial loans and leases $ 48,132 50.0  % $ 42,838 48.1  %
Direct retail loans   15,595 16.3     15,534 17.4  
Sales finance loans   6,292 6.6     6,006 6.7  
Revolving credit loans   1,688 1.8     1,485 1.7  
Mortgage loans   18,485 19.3     17,922 20.1  
Specialized lending loans   5,751 6.0     5,305 6.0  
   Total average loans and leases $ 95,943 100.0  % $ 89,090 100.0  %
 
      For the Nine Months Ended    
    September 30, 2008     September 30, 2007  
    Balance % of total     Balance % of total  
      (Dollars in millions)    
 
Commercial loans and leases $ 46,931 49.8  % $ 41,971 48.3  %
Direct retail loans   15,606 16.5     15,415 17.7  
Sales finance loans   6,171 6.5     5,856 6.7  
Revolving credit loans   1,639 1.7     1,430 1.6  
Mortgage loans   18,653 19.7     17,217 19.8  
Specialized lending loans   5,514 5.8     5,101 5.9  
   Total average loans and leases $ 94,514 100.0  % $ 86,990 100.0  %

          The fluctuation in the mix of the loan portfolio during the third quarter and the first nine months of 2008 compared to the same periods of 2007 was primarily due to increased growth in the commercial loan and lease portfolio, which grew at a faster pace than the direct retail portfolio. The slower growth in the direct retail portfolio was the result of decreased demand for home equity loans as a result of a slowdown in the residential real estate market. Growth in the commercial portfolio has shifted somewhat, primarily due to a slowdown in commercial real estate lending, which has been offset by stronger growth in commercial and industrial loans.

          The annualized FTE yield for the total loan portfolio for the third quarter of 2008 was 6.28% compared to 7.72% in the third quarter of 2007. The annualized yield on commercial loans for the third quarter of 2008 was 5.42%, a decline of 243 basis points compared to the same period in 2007, while the annualized yield on direct retail loans for the third quarter of 2008 was 6.35% compared to 7.40% in the same period in 2007. The annualized FTE yield on the total loan portfolio for the first nine months of 2008 was 6.54%, which reflects a decrease of 119 basis points compared to the same period in 2007. The annualized yield on commercial loans for the first nine months of 2008 was 5.82%, a decline of 207 basis points compared to the

 

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Management’s Discussion and Analysis Third Quarter 2008

same period in 2007, while the annualized yield on direct retail loans for the first nine months of 2008 was 6.59% compared to 7.38% in the same period in 2007. The decreases in the FTE yield on the loan portfolio were primarily the result of the repricing of loans in response to the decrease in the prime lending rate and other indices.

Other Interest-Earning Assets

          Federal Funds sold and securities purchased under resale agreements or similar arrangements totaled $297 million at September 30, 2008, a decrease of $382 million compared to December 31, 2007. Interest-bearing deposits with banks, including segregated cash, increased $131 million, or 22.0%, compared to year-end 2007. These categories of earning assets are subject to large daily fluctuations. The average yield on other interest-earning assets was 2.61% for the third quarter of 2008 compared to 4.96% for the third quarter of 2007. For the first nine months of 2008, the average yield on other interest-earning assets was 2.88% compared to 5.06% for the same period in 2007. The decreases in the yield on other interest-earning assets reflect the decline in the Federal Funds target rate during 2008 that began in the second half of 2007.

Noninterest-Earning Assets

          BB&T’s other noninterest-earning assets, including premises and equipment, goodwill, core deposit and other intangible assets, residential mortgage servicing rights and noninterest-bearing cash and due from banks, increased $2.4 billion from December 31, 2007 to September 30, 2008. The growth in this category included an increase of $1.4 billion for certain short-term receivables, $146 million in goodwill, which resulted primarily from the acquisitions of insurance agencies and certain contingent payments related to prior acquisitions, an increase of $129 million in the fair value of residential mortgage servicing rights due to growth in mortgage loans serviced for others and a decline in prepayment speeds, which increases the value of existing servicing relationships. In addition, investments in partnerships increased by $123 million, primarily due to additional investments in affordable housing projects that produce tax benefits, and foreclosed real estate increased by $239 million compared to December 31, 2007.

Deposits

          Client deposits generated through the BB&T banking network are the largest source of funds used to support asset growth. Deposits totaled $88.4 billion at September 30, 2008, an increase of $1.6 billion, or 1.9%, from December 31, 2007.

          Average deposits for the third quarter of 2008 increased $5.8 billion, or 6.9%, to $90.0 billion compared to the same period in 2007. The categories of deposits with the highest growth for the third quarter of 2008 compared to the third quarter of 2007 were other client deposits, which includes money rate savings accounts, investor deposit accounts, savings accounts, individual retirement accounts and other time deposits, which increased $3.5 billion, or 10.1%, and other interest-bearing deposits, which consist of negotiable certificates of deposit and Eurodollar deposits, which increased $2.3 billion, or 30.8% .

 

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Management’s Discussion and Analysis Third Quarter 2008

          Average deposits for the first nine months of 2008 increased $4.9 billion, or 5.9%, to $87.8 billion compared to the first nine months of 2007. The categories of deposits with the highest average rates of growth for the first nine months of 2008 compared to the same period of 2007 were other client deposits, which increased $1.9 billion, or 5.7%, and other interest-bearing deposits, which increased $2.1 billion, or 28.3%, for the first nine months of 2008 compared to the same period in 2007.

          The following table presents the composition of average deposits for the third quarter and nine months ended September 30, 2008 and 2007:

Table 2
Composition of Average Deposits
 
  For the Three Months Ended
    September 30, 2008     September 30, 2007  
    Balance % of total     Balance % of total  
      (Dollars in millions)    
 
Noninterest-bearing deposits  $ 13,181 14.6  % $ 13,248 15.7  %
Interest checking   2,369 2.6     2,202 2.6  
Other client deposits   38,369 42.7     34,836 41.4  
Client certificates of deposit   26,317 29.2     26,456 31.4  
   Total client deposits   80,236 89.1     76,742 91.1  
Other interest-bearing deposits   9,785 10.9     7,481 8.9  
   Total average deposits  $ 90,021 100.0  % $ 84,223 100.0  %
 
      For the Nine Months Ended    
    September 30, 2008     September 30, 2007  
    Balance % of total     Balance % of total  
      (Dollars in millions)    
 
Noninterest-bearing deposits  $ 12,981 14.8  % $ 13,188 15.9  %
Interest checking   2,412 2.7     2,299 2.8  
Other client deposits   35,965 41.0     34,035 41.1  
Client certificates of deposit   26,707 30.4     25,822 31.1  
   Total client deposits   78,065 88.9     75,344 90.9  
Other interest-bearing deposits   9,707 11.1     7,564 9.1  
   Total average deposits  $ 87,772 100.0  % $ 82,908 100.0  %

          The change in deposit mix primarily reflects a decline in noninterest-bearing accounts due to the slowing economy. In addition, beginning late in the third quarter of 2008, BB&T began to experience strong deposit inflows in the other client deposits category, as BB&T gained many new client relationships from competitors. The average balance of client certificates of

 

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

deposit declined compared to third quarter of 2007, as management decided to lower the rates paid for certificates of deposit.

          For the third quarter of 2008, the annualized average rate paid on total interest-bearing deposits was 2.32% compared to 3.80% in the same period last year. For the first nine months of 2008, the annualized average rate paid on total interest-bearing deposits was 2.62%, a decrease of 115 basis points compared to the first nine months of 2007. The decrease in the average rate paid on interest-bearing deposits resulted primarily from the declining interest rate environment that existed during 2008 compared to 2007.

Borrowings

          While client deposits remain the primary source for funding loan originations and other balance sheet growth, management uses short-term borrowings as a supplementary funding source for balance sheet growth. Short-term borrowings used by BB&T include Federal Funds purchased, securities sold under repurchase agreements, master notes, U.S. Treasury tax and loan deposit notes, short-term FHLB advances and short-term bank notes. At September 30, 2008, short-term borrowings totaled $10.1 billion, a decrease of $559 million, or 5.3%, compared to December 31, 2007.

          Average short-term borrowed funds for the third quarter of 2008 were $8.9 billion compared to $9.9 billion for the same period of 2007. For the first nine months of 2008 the average balance of short-term borrowed funds was $10.0 billion, an increase of $1.2 billion compared to the first nine months of 2007. For the third quarter of 2008, the average annualized FTE rate paid on short-term borrowings was 2.44% compared to 4.71% during the third quarter of 2007. The average annualized FTE rate paid on short-term borrowed funds for the first nine months of 2008 was 2.84%, a decrease of 179 basis points from the average rate of 4.63% paid during the comparable period of 2007. The lower rate paid on short-term borrowed funds during 2008 compared to 2007 was primarily the result of decreases in the Federal Funds target rate.

          BB&T also uses long-term debt for a variety of funding needs, including the repurchase of common stock and to supplement levels of regulatory capital. Long-term debt consists of FHLB advances to Branch Bank, corporate subordinated notes, senior and subordinated notes issued by Branch Bank, junior subordinated debentures issued by BB&T and certain private borrowings by Branch Bank. Long-term debt totaled $21.3 billion at September 30, 2008, an increase of $2.6 billion, or 14.1%, from the balance at December 31, 2007. The increase primarily resulted from a $2.6 billion increase in FHLB advances due to the more competitive rates obtained compared to other financing options.

          Early in the fourth quarter of 2008, BB&T received notice that its $4 billion privately financed debt scheduled to mature in 2010 would be called effective October 14, 2008. The financing was called by BB&T’s counterparty because it was no longer profitable to the counterparty due to changes in LIBOR. Under the terms of the financing, BB&T has exercised its option to continue funding the debt with the counterparty for an additional fifty-five days. BB&T has adequate sources of funding available and will determine the appropriate mix of replacement funding based on its interest-sensitivity position and funding costs.

         

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

          The average annualized rate paid on long-term debt for the third quarter of 2008 was 4.00% compared to 5.59% for the same period in 2007. For the first nine months of 2008, the average annualized rate was 4.17%, a decrease of 131 basis points compared to the first nine months of 2007. The decreases in the cost of long-term funds resulted from decreases in short-term rates and new FHLB advances issued at lower rates. The decline in short-term rates resulted in decreases in the effective rates paid on the portion of BB&T’s long-term debt that was either issued as a floating-rate instrument or swapped to a floating rate.

Asset Quality

          BB&T experienced additional credit deterioration during the third quarter, reflecting the ongoing challenges in the residential real estate markets with the largest concentration of credit issues occurring in Georgia, Florida and metro Washington, D.C.

          Nonperforming assets, which are composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $1.6 billion at September 30, 2008, compared to $696 million at December 31, 2007. As a percentage of loans and leases plus foreclosed property, nonperforming assets were 1.69% at September 30, 2008 and .76% at December 31, 2007. Loans 90 days or more past due and still accruing interest totaled $297 million at September 30, 2008, compared to $223 million at year-end 2007.

          BB&T’s net charge-offs totaled $242 million for the third quarter of 2008 and amounted to 1.00% of average loans and leases, on an annualized basis, compared to $90 million, or .40%, of average loans and leases, on an annualized basis, in the corresponding period in 2007. For the nine months ended September 30, 2008 and 2007, net charge-offs totaled $537 million and $227 million, respectively, and represented .76% and .35%, respectively, of average loans and leases on an annualized basis. The increase in net charge-offs in 2008 compared to 2007 was largely driven by challenges in the residential real estate market, which has resulted in increases in losses in the commercial, direct retail and mortgage portfolios.

          The allowance for credit losses, which totaled $1.4 billion and $1.0 billion at September 30, 2008 and December 31, 2007, respectively, consists of the allowance for loan and lease losses, which is presented on the Consolidated Balance Sheets, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheets. The allowance for loan and lease losses amounted to 1.45% of loans and leases held for investment at September 30, 2008, compared to 1.10% at December 31, 2007.

 

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

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

Table 3 - 1
Asset Quality Analysis

  For the Three Months Ended
    9/30/2008     6/30/2008   3/31/2008   12/31/2007   9/30/2007  
  (Dollars in millions)
Allowance For Credit Losses                              
   Beginning balance $ 1,273   $ 1,113   $ 1,015   $ 941   $ 926  
   Allowance for acquired (sold) loans, net   (2 )   -     -     1     -  
   Provision for credit losses   364     330     223     184     105  
       Charge-offs                              
           Commercial loans and leases   (87 )   (48 )   (18 )   (26 )   (18 )
           Direct retail loans   (41 )   (38 )   (28 )   (18 )   (20 )
           Sales finance loans   (15 )   (13 )   (13 )   (10 )   (9 )
           Revolving credit loans   (20 )   (18 )   (18 )   (11 )   (12 )
           Mortgage loans   (33 )   (13 )   (5 )   (6 )   (1 )
           Specialized lending   (61 )   (55 )   (59 )   (54 )   (45 )
       Total charge-offs   (257 )   (185 )   (141 )   (125 )   (105 )
       Recoveries                              
           Commercial loans and leases   3     2     4     2     3  
           Direct retail loans   3     3     3     3     3  
           Sales finance loans   2     2     2     2     2  
           Revolving credit loans   2     3     3     3     3  
           Specialized lending   5     5     4     4     4  
       Total recoveries   15     15     16     14     15  
   Net charge-offs   (242 )   (170 )   (125 )   (111 )   (90 )
       Ending balance $ 1,393   $ 1,273    $ 1,113   $ 1,015   $ 941  
Nonperforming Assets                              
   Nonaccrual loans and leases                              
           Commercial loans and leases $ 722   $ 621    $ 443   $ 273   $ 237  
           Direct retail loans   76     65     60     43     56  
           Sales finance loans   6     4     5     5     4  
           Mortgage loans   298     250     185     119     74  
           Specialized lending   94     76     67     62     48  
   Total nonaccrual loans and leases   1,196     1,016     760     502     419  
   Foreclosed real estate   382     232     178     143     82  
   Other foreclosed property   60     53     51     51     46  
       Total nonperforming assets $ 1,638   $ 1,301    $ 989   $ 696   $ 547  
   Loans 90 days or more past due                              
       and still accruing (1):                              
           Commercial loans and leases $ 39   $ 42    $ 52   $ 40   $ 21  
           Direct retail loans   88     72     59     58     18  
           Sales finance loans   19     17     15     17     14  
           Revolving credit loans   17     15     16     15     7  
           Mortgage loans   123     126     106     85     76  
           Specialized lending   11     10     10     8     13  
       Total loans 90 days or more past due                              
           and still accruing $ 297   $ 282    $ 258   $ 223   $ 149  
     Loans 30 - 89 days past due (1)                              
           Commercial loans and leases $ 355   $ 492   $ 364   $ 284   $ 216  
           Direct retail loans   200     175     185     192     148  
           Sales finance loans   119     93     86     105     89  
           Revolving credit loans   29     25     24     24     20  
           Mortgage loans   582     519     510     506     479  
           Specialized lending   294     258     216     243     187  
       Total loans 30 - 89 days past due $ 1,579   $ 1,562   $ 1,385   $ 1,354   $ 1,139  

(1) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.

 

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

Table 3 - 2
Asset Quality Ratios
 
      For the Three Months Ended      
  9/30/2008   6/30/2008   3/31/2008   12/31/2007   9/30/2007  
Loans 30 - 89 days past due and still accruing                    
   as a percentage of total loans and leases (1): 1.63  % 1.63  % 1.47  % 1.48  % 1.26  %
Loans 90 days or more past due and still                    
   accruing as a percentage of total loans                    
   and leases (1): .31   .29   .27   .24   .17  
Nonaccrual and restructured loans and leases                    
   as a percentage of total loans and leases 1.24   1.06   .81   .55   .47  
Total nonperforming assets as a percentage of:                    
   Total assets 1.20   .95   .73   .52   .42  
   Loans and leases plus foreclosed property 1.69   1.36   1.05   .76   .61  
Net charge-offs as a percentage of                    
   average loans and leases 1.00   .72   .54   .48   .40  
Allowance for loan and lease losses as a                    
   percentage of loans and leases 1.42   1.31   1.17   1.10   1.04  
Allowance for loan and lease losses as a                    
   percentage of loans and leases                    
   held for investment 1.45   1.33   1.19   1.10   1.05  
Ratio of allowance for loan and lease losses to:                    
   Net charge-offs 1.43  x   1.84  x 2.18  x 2.29  x 2.61  x
   Nonaccrual and restructured loans and leases 1.15   1.24   1.44   2.00   2.23  
 
Note: All items referring to loans and leases include loans held for sale and are net of unearned income.     Applicable ratios are annualized.
           (1) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.      

          The following tables provide further details regarding BB&T’s commercial real estate lending, residential mortgage and consumer home equity portfolios as of September 30, 2008.

Table 4-1
Real Estate Lending Portfolio Credit Quality and Geographic Distribution

Commercial Real Estate Loan Portfolio (1)

    As of / For the Period Ended September 30, 2008  
 
Residential Acquisition, Development, and Construction   Builders /   Land /Land Condos /      
Loans (ADC)   Construction   Development Townhomes   Total ADC  
    (Dollars in millions, except average loan and average client size)  
 Total loans outstanding $ 3,093   $ 4,581 $ 654   $ 8,328  
 Average loan size (in thousands)   294     600   1,438     447  
 Average client size (in thousands)   863     1,366   3,466     1,163  
 
 Percentage of total loans   3.2  %   4.7  % .7  %   8.6  %
 Nonaccrual loans and leases as a percentage of category   5.33     4.70   5.79     5.02  
 Gross charge-offs as a percentage of category   1.04     1.57   2.41     1.44  

 

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

  As of / For the Period Ended September 30, 2008
                        Gross Charge-
                  Nonaccrual as a   Offs as a
 Residential Acquisition, Development, and Construction Total Percentage of Nonaccrual     Percentage of   Percentage of
 Loans (ADC) by State of Origination Outstandings Total Loans and Leases     Outstandings   Outstandings
          (Dollars in millions)              
 
     North Carolina $ 2,951 35.4  % $ 68     2.31  %   .10  %
     Georgia   1,494 17.9     126     8.42     3.98  
     Virginia   1,311 15.7     68     5.17     1.48  
     Florida   872 10.5     109     12.48     2.24  
     South Carolina   656 7.9     10     1.54     .28  
     Washington, D.C.   267 3.2     2     .76     1.99  
     Tennessee   267 3.2     9     3.43     1.27  
     Kentucky   212 2.6     13     6.33     .10  
     Maryland   150 1.8     7     4.68     3.65  
     West Virginia   148 1.8     6     3.87     1.28  
          Total $ 8,328 100.0  %  $ 418     5.02  %   1.44  %
 
 
      As of / For the Period Ended September 30, 2008  
                  Permanent        
            Commercial     Income     Total Other
      Commercial /   Land/     Producing     Commercial Real
 Other Commercial Real Estate Loans (2)     Construction   Development     Properties     Estate
      (Dollars in millions, except average loan and average client size)  
 
     Total loans outstanding   $ 2,396    $ 2,714   $ 5,737   $ 10,847  
 
     Average loan size (in thousands)     1,211     787     337     485  
     Average client size (in thousands)     1,586     951     499     684  
 
 
     Percentage of total loans     2.5  %   2.8  %   5.9  %   11.2  %
 
     Nonaccrual loans and leases as a percentage of category     .53     2.02     .53     .90  
     Gross charge-offs as a percentage of category     .09     .13     .11     .11  
 
 
 
 
      As of / For the Period Ended September 30, 2008        
                        Gross Charge-
                  Nonaccrual as a   Offs as a
 Other Commercial Real Estate Loans by State of Total Percentage of   Nonaccrual     Percentage of   Percentage of
 Origination Outstandings Total   Loans and Leases     Outstandings   Outstandings
          (Dollars in millions)              
 
     North Carolina $ 3,215 29.6  %  $ 11     .35  %   .10  %  
     Georgia   1,925 17.7     25     1.28     .19  
     Virginia   1,688 15.6     3     .20     .03  
     South Carolina   878 8.1     5     .59     .15  
     Florida   821 7.6     39     4.69     .14  
     Washington, D.C.   565 5.2     -     .05     .06  
     Maryland   452 4.2     -     .08                    -  
     Kentucky   437 4.0     5     1.04     .05  
     West Virginia   437 4.0     2     .44     .02  
     Tennessee   322 3.0     8     2.40     .51  
     Other   107 1.0     -      -                    -  
          Total   $ 10,847 100.0  %  $ 98      .90  %   .11  %
 

NOTES: (1) Commercial real estate loans (CRE) are defined as loans to finance non-owner occupied real property where the primary repayment source is the sale or rental/lease 
                        
of the real property. Definition is based on internal classification.
                (2) Other CRE loans consist primarily of non-residential income producing CRE loans. C&I loans secured by real property are excluded.

 

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BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Third Quarter 2008

Table 4-2
Real Estate Lending Portfolio Credit Quality and Geographic Distribution
Residential Mortgage Portfolio
 
 
  As of / For the Period Ended September 30, 2008
 
 
                Construction/      
Mortgage Loans   Prime     ALT-A     Permanent   Subprime (1)
   (Dollars in millions, except average loan size)
 
 Total loans outstanding $ 12,043   $ 3,255   $ 1,659   $ 630  
 
 Average loan size (in thousands)   193     329     316     69  
 Average credit score   721     734     735     607  
 
 Percentage of total loans   12.5  %   3.4  %   1.7  %   .7  %
 Percentage that are first mortgages   99.6     99.7     98.9     82.2  
 Average loan to value   74.4     67.3     77.4     81.1  
 
 Nonaccrual loans and leases as a percentage of category   1.36     2.04     3.14     4.08  
 Gross charge-offs as a percentage of category   .27     .47     .88     1.80  
 
 
    As of / For the Period Ended September 30, 2008