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BB&T 10-Q 2008
q20810q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended:

June 30, 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 July 31, 2008, 549,489,664 shares of the registrant's common stock, $5 par value, were outstanding.


  BB&T CORPORATION  
  FORM 10-Q  
  June 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 29
  Executive Summary 33
  Analysis of Financial Condition 35
  Analysis of Results of Operations 46
  Market Risk Management 56
  Capital Adequacy and Resources 61
  Segment Results 63
           Item 3. Quantitative and Qualitative Disclosures About  
  Market Risk 65
           Item 4. Controls and Procedures 65
Part II. OTHER INFORMATION  
           Item 1. Legal Proceedings 65
           Item 1A. Risk Factors 66
           Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66
           Item 4. Submission of Matters to a Vote of Security Holders 66
           Item 6. Exhibits 67
SIGNATURES 68
EXHIBIT INDEX 69
CERTIFICATIONS 70

 

BB&T Corporation                     Page 1                Second 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)

    June 30,     December 31,  
    2008     2007  
 
Assets            
     Cash and due from banks $ 1,888   $ 2,050  
     Interest-bearing deposits with banks   577     388  
     Federal funds sold and securities purchased under resale agreements            
           or similar arrangements   178     679  
     Segregated cash due from banks   196     208  
     Trading securities at fair value   514     1,009  
     Securities available for sale at fair value   22,657     22,419  
     Loans held for sale ($1,490 at fair value at June 30, 2008)   1,515     779  
     Loans and leases, net of unearned income   94,200     90,907  
     Allowance for loan and lease losses   (1,257 )   (1,004 )
           Loans and leases, net   92,943     89,903  
 
     Premises and equipment, net of accumulated depreciation   1,557     1,529  
     Goodwill   5,306     5,194  
     Core deposit and other intangible assets   505     489  
     Residential mortgage servicing rights at fair value   611     472  
     Other assets   8,018     7,499  
                           Total assets $ 136,465   $ 132,618  
 
Liabilities and Shareholders' Equity            
     Deposits:            
           Noninterest-bearing deposits $ 13,567   $ 13,059  
           Interest checking   2,542     1,201  
           Other client deposits   36,871     35,504  
           Client certificates of deposit   26,801     26,972  
           Other interest-bearing deposits   8,433     10,030  
                           Total deposits   88,214     86,766  
     Federal funds purchased, securities sold under repurchase agreements            
                   and short-term borrowed funds   10,804     10,634  
     Long-term debt   20,556     18,693  
     Accounts payable and other liabilities   4,091     3,893  
                           Total liabilities   123,665     119,986  
     Commitments and contingencies (Note 6)            
     Shareholders' equity:            
           Preferred stock, $5 par, 5,000 shares authorized, none issued or            
                   outstanding at June 30, 2008 or at December 31, 2007   -   -  
           Common stock, $5 par, 1,000,000 shares authorized;            
                   546,928 issued and outstanding at June 30, 2008, and            
                   545,955 issued and outstanding at December 31, 2007   2,735     2,730  
           Additional paid-in capital   3,146     3,087  
           Retained earnings   7,258     6,919  
           Accumulated other comprehensive loss, net of deferred income            
                   taxes of $(199) at June 30, 2008 and $(65) at December 31, 2007   (339 )   (104 )
                           Total shareholders' equity   12,800     12,632  
                           Total liabilities and shareholders' equity $ 136,465   $ 132,618  

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

 

BB&T Corporation                     Page 2                Second 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 Six Months Ended  
    June 30,   June 30,  
    2008   2007   2008   2007  
Interest Income                  
         Interest and fees on loans and leases $ 1,501 $ 1,675 $ 3,096 $ 3,288  
         Interest and dividends on securities   283   273   572   541  
         Interest on short-term investments   6   13   17   23  
                 Total interest income   1,790   1,961   3,685   3,852  
 
Interest Expense                  
         Interest on deposits   455   639   1,019   1,286  
         Interest on federal funds purchased, securities sold under                  
                 repurchase agreements and short-term borrowed funds   59   102   147   189  
         Interest on long-term debt   208   254   434   466  
                 Total interest expense   722   995   1,600   1,941  
 
Net Interest Income   1,068   966   2,085   1,911  
         Provision for credit losses   330   88   553   159  
 
Net Interest Income After Provision for Credit Losses   738   878   1,532   1,752  
Noninterest Income                  
         Insurance income   237   229   449   426  
         Service charges on deposits   172   151   326   289  
         Investment banking and brokerage fees and commissions   88   89   174   171  
         Mortgage banking income   57   31   116   61  
         Checkcard fees   53   44   99   85  
         Other nondeposit fees and commissions   47   48   93   91  
         Trust and investment advisory revenues   38   40   78   80  
         Bankcard fees and merchant discounts   39   35   75   65  
         Income from bank-owned life insurance   25   25   38   53  
         Securities gains (losses), net   10   1   53   (10 )
         Other income   61   36   97   70  
                 Total noninterest income   827   729   1,598   1,381  
Noninterest Expense                  
         Personnel expense   565   540   1,112   1,064  
         Occupancy and equipment expense   124   117   247   233  
         Professional services   48   32   85   63  
         Loan processing expenses   33   29   64   55  
         Amortization of intangibles   25   26   52   51  
         Merger-related and restructuring charges, net   1   5   6   11  
         Other expenses   166   174   332   329  
                 Total noninterest expense   962   923   1,898   1,806  
Earnings                  
         Income before income taxes   603   684   1,232   1,327  
         Provision for income taxes   175   226   376   448  
         Net income $ 428 $ 458 $ 856 $ 879  
 
Per Common Share                  
         Net income:                  
                 Basic $ .78 $ .84 $ 1.57 $ 1.61  
                 Diluted $ .78 $ .83 $ 1.56 $ 1.60  
         Cash dividends paid $ .46 $ .42 $ .92 $ .84  
 
Weighted Average Shares Outstanding                  
                 Basic   546,628   548,385   546,421   545,136  
                 Diluted   549,758   553,935   549,344   550,556  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 

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


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 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 -     -     -     879     -     879  
               Unrealized holding gains (losses) arising during the period                                  
                   on securities available for sale, net of tax of $(71) -     -     -     -     (96 )   (96 )
               Reclassification adjustment for losses (gains)                                  
                   on securities available for sale included in net                                  
                   income, net of tax of $4 -     -     -     -     6     6  
         Change in unrealized gains (losses) on securities, net of tax -     -     -     -     (90 )   (90 )
         Change in unrecognized gains (losses) on cash flow hedges,                                  
               net of tax of $(2) -     -     -     -     (4 )   (4 )
         Change in pension and postretirement liability, net of tax -     -     -     -     (1 )   (1 )
         Foreign currency translation adjustment -     -     -     -     2     2  
   Total comprehensive income (loss) -     -     -     879     (93 )   786  
 
   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 1,666     9     37     -     -     46  
   Cash dividends declared on common stock, $.88 per share -     -     -     (482 )   -     (482 )
   Cumulative effect of adoption of FIN 48 -     -     -     (119 )   -     (119 )
   Cumulative effect of adoption of FSP FAS 13-2 -     -     -     (306 )   -     (306 )
   Other, net -     -     55     -     -     55  
Balance, June 30, 2007 551,948    $  2,760   $  3,249   $  6,568   $  (452 ) $ 12,125  
 
 
Balance, January 1, 2008 545,955 $  2,730 $   3,087 $   6,919   $  (104 ) $ 12,632  
Add (Deduct):                                  
   Comprehensive income (loss):                                  
         Net income -     -     -     856     -     856  
               Unrealized holding gains (losses) arising during the period                                  
                   on securities available for sale, net of tax of $(128) -     -     -     -     (213 )   (213 )
               Reclassification adjustment for losses (gains)                                  
                   on securities available for sale included in net                                  
                   income, net of tax of $(20) -     -     -     -     (33 )   (33 )
         Change in unrealized gains (losses) on securities, net of tax -     -     -     -     (246 )   (246 )
         Change in unrecognized gains (losses) on cash flow hedges,                                  
               net of tax of $14 -     -     -     -     13     13  
         Change in pension and postretirement liability, net of tax -     -     -     -     (2 )   (2 )
   Total comprehensive income (loss) -     -     -     856     (235 )   621  
 
   Common stock issued:                                  
         In connection with stock option exercises                                  
               and other employee benefits, net of cancellations 959     5     21     -     -     26  
   Cash dividends declared on common stock, $.93 per share -     -     -     (509 )   -     (509 )
   Cumulative effect of adoption of EITF 06-4 and EITF 06-10 -     -     -     (8 )   -     (8 )
   Other, net 14     -     38     -     -     38  
Balance, June 30, 2008 546,928   $  2,735   $  3,146   $  7,258   $  (339 ) $ 12,800  
 
                     (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                Second Quarter 2008 10-Q


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
(Dollars in millions) 
 
  For the Six Months Ended  
    June 30,  
  2008   2007
Cash Flows From Operating Activities:            
     Net income $ 856   $ 879  
     Adjustments to reconcile net income to net cash provided by            
           operating activities:            
     Provision for credit losses   553     159  
     Depreciation   93     88  
     Amortization of intangibles   52     51  
     Equity-based compensation   38     42  
     Discount accretion and premium amortization on long-term debt, net   51     61  
     (Gain) loss on sales of securities, net   (53 )   10  
     Loss (gain) on disposals of premises and equipment, net   2     (4 )
     Net decrease in trading account securities   495     1,080  
     Net increase in loans held for sale   (687 )   (554 )
     Increase in other assets, net   (568 )   (364 )
     Increase (decrease) in accounts payable and other liabilities, net   268     (1,062 )
     Decrease (increase) in segregated cash due from banks   12     (35 )
     Other, net   (61 )   (15 )
                Net cash provided by operating activities   1,051     336  
 
Cash Flows From Investing Activities:            
     Proceeds from sales of securities available for sale   5,236     1,318  
     Proceeds from maturities, calls and paydowns of securities available for sale   3,089     4,425  
     Purchases of securities available for sale   (8,910 )   (7,010 )
     Originations and purchases of loans and leases, net of principal collected   (3,832 )   (2,698 )
     Net cash (paid) acquired in business combinations   (146 )   45  
     Proceeds from disposals of premises and equipment   2     15  
     Purchases of premises and equipment   (107 )   (126 )
     Proceeds from sales of foreclosed property or other real estate held for sale   61     46  
     Other, net   95     -  
                   Net cash used in investing activities   (4,512 )   (3,985 )
 
Cash Flows From Financing Activities:            
     Net increase in deposits   1,448     2,137  
     Net increase (decrease) in federal funds purchased, securities sold under repurchase agreements            
             and short-term borrowed funds   170     (308 )
     Proceeds from issuance of long-term debt   3,385     4,902  
     Repayment of long-term debt   (1,539 )   (2,683 )
     Net proceeds from common stock issued   26     46  
     Cash dividends paid on common stock   (503 )   (455 )
     Excess tax benefit from equity-based awards   -     13  
                   Net cash provided by financing activities   2,987     3,652  
 
Net (Decrease) Increase in Cash and Cash Equivalents   (474 )   3  
Cash and Cash Equivalents at Beginning of Period   3,117    

2,712

 
Cash and Cash Equivalents at End of Period $ 2,643   $ 2,715  
 
 
Supplemental Disclosure of Cash Flow Information:            
 
     Cash paid during the period for:            
           Interest $ 1,650   $ 1,896  
           Income taxes   528     1,725  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
Back to Index

 

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


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Second 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”), present fairly, in all material respects, BB&T’s financial position at June 30, 2008 and December 31, 2007, BB&T’s results of operations for the three and six month periods ended June 30, 2008 and 2007, and BB&T’s changes in shareholders’ equity and cash flows for the six month periods ended June 30, 2008 and 2007. In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All adjustments during the first six months of 2008 and 2007 were of a normal recurring nature.

          These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the 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                Second Quarter 2008 10-Q


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Second 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 commitments, determination of fair value for financial instruments, valuation of goodwill,

 

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


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

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 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 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

 

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Notes to Consolidated Financial Statements (Unaudited) Second Quarter 2008

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 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.

 

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Notes to Consolidated Financial Statements (Unaudited) Second Quarter 2008

          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.

     NOTE 2. Business Combinations and Intangible Assets

     Acquisitions

          During the first six months of 2008, BB&T acquired six insurance agencies. Approximately $90 million in goodwill and $65 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 six months ended June 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   -   -       -   -     90   -   -   90
     Contingent consideration   -   -             -   -     22   -   -   22
     Other adjustments   2      -             -   (2 )   -   -   -          -
Balance, June 30, 2008 $ 4,037 $ 7 $ 93 $ 98   $ 853 $ 192 $ 26 $ 5,306

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

  Identifiable Intangible Assets
  As of June 30, 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 $ (305 ) $ 152 $ 457 $ (284 ) $ 173
   Other (1)   634   (281 )   353   566   (250 )                316
 
Totals $ 1,091  $ (586 ) $ 505 $ 1,023 $ (534 ) $              489
   (1) Other identifiable intangibles are primarily customer relationship intangibles.                    

 

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Notes to Consolidated Financial Statements (Unaudited) Second Quarter 2008

     NOTE 3. Securities

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

  June 30, 2008
     Amortized                Gross Unrealized   Fair
    Cost    Gains    Losses   Value
  (Dollars in millions)
Securities available for sale:                
     U.S. government-sponsored entities (GSE) $ 4,337 $  45 $ 7 $ 4,375
     Mortgage-backed securities issued by GSE   13,938   38   215   13,761
     States and political subdivisions   2,056   7   100   1,963
     Non-agency mortgage-backed securities   1,641   -   128   1,513
     Equity and other securities   1,124   3   82   1,045
            Total securities available for sale $ 23,096 $  93 $ 532 $ 22,657
 
 
  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.

  June 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) $ 1,151 $ 7 $ - $ - $ 1,151 $ 7
   Mortgage-backed securities issued by GSE   9,680   192   793   23   10,473   215
   States and political subdivisions   1,172   83   140   17   1,312   100
   Non-agency mortgage-backed securities   1,015   82   498   46   1,513   128
   Equity and other securities   255   60   70   22   325   82
Total temporarily impaired securities $ 13,273 $ 424 $ 1,501 $ 108 $ 14,774 $ 532

 

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Notes to Consolidated Financial Statements (Unaudited) Second 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

          On June 30, 2008, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of June 30, 2008, the unrealized losses on these securities totaled $108 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 June 30, 2008, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Accordingly, BB&T did not recognize any other-than-temporary impairment in connection with these securities during the second quarter of 2008.

     NOTE 4. Loans and Leases

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

    June 30, December 31,
    2008 2007
    (Dollars in millions)
Loans and leases, net of unearned income:        
     Commercial loans and leases $ 47,790 $ 44,870
     Sales finance   6,266   6,021
     Revolving credit   1,667   1,618
     Direct retail   15,623   15,691
     Residential mortgage loans   17,304   17,467
     Specialized lending   5,550   5,240
     Loans held for sale   1,515   779
          Total loans and leases $ 95,715 $ 91,686

 

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

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

    For the Six Months Ended  
    June 30,  
    2008   2007
    (Dollars in millions)  
 
Beginning Balance $ 1,015   $ 888  
     Allowance for acquired (sold) loans, net   -     16  
     Provision for credit losses   553     159  
 
     Loans and leases charged-off   (326 )   (175 )
     Recoveries of previous charge-offs   31     38  
          Net loans and leases charged-off   (295 )   (137 )
Ending Balance $ 1,273   $ 926  
 
Allowance for loan and lease losses $ 1,257   $ 920  
Reserve for unfunded lending commitments   16     6  
Allowance for credit losses $ 1,273   $ 926  

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

    June 30, December 31,
       2008 2007
  (Dollars in millions)
 
Nonaccrual loans and leases $ 1,016 $ 502
 
Foreclosed real estate   232   143
Other foreclosed property   53   51
   Total foreclosed property   285   194
Total nonperforming assets $ 1,301 $ 696
 
Loans 90 days or more past due and still accruing (1) $ 282 $ 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) Second Quarter 2008

NOTE 5. Long-Term Debt        
 
          Long-term debt is summarized as follows:        
 
 
    June 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)   366   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   500
         Floating Rate Senior Notes Due 2009   500   500
         Floating Rate Subordinated Notes Due 2016 (1)   350   350
         Floating Rate Subordinated Notes Due 2017 (1)   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 2027   9,059   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
        Other Securities (7)   182   183
 
 Other Long-Term Debt   49   37
 
 Fair value hedge-related basis adjustments   147   147
 
                   Total Long-Term Debt $ 20,556 $ 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 June 30, 2008, the effective rates paid on these borrowings ranged from 2.89% to 3.60%.
(4)      At June 30, 2008, the weighted average cost of these advances was 4.44% and the weighted average maturity was 7.6 years.
(5)      This borrowing is currently secured by automobile loans. The fixed rate was swapped to a floating rate based on LIBOR.
(6)      These securities are fixed rate through June 12, 2037 and then switch to a floating rate based on LIBOR.
(7)      These securities were issued by companies acquired by BB&T. At June 30, 2008, the effective rate paid on these borrowings ranged from 4.48% to 10.07%. These securities have varying maturities through 2035.
 

 

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

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

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

          Standby letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions. The credit risk involved in the issuance of these guarantees is essentially the same as that involved in extending loans to clients and as such, the instruments are collateralized when necessary. As of June 30, 2008 and December 31, 2007, BB&T had issued standby letters of credit totaling $4.4 billion and $3.4 billion, respectively. The carrying amount of the liability for such guarantees was $10 million and $5 million at June 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, Federal Funds purchased, long-term debt, mortgage servicing rights, mortgage banking operations and certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients. BB&T held a variety of derivative financial instruments with notional values of $59.8 billion and $47.2 billion at June 30, 2008 and December 31, 2007, respectively. These instruments were in a net gain position of $156 million and $181 million at June 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 $462 million and $444 million at June 30, 2008 and December 31, 2007, respectively. At June 30, 2008, BB&T’s maximum exposure to loss associated with these investments totaled $816 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

 

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Notes to Consolidated Financial Statements (Unaudited) Second Quarter 2008

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 June 30, 2008, BB&T had $879 million of residential mortgage loans sold with recourse. In the event of nonperformance by the borrower, BB&T has maximum recourse exposure of approximately $771 million. In addition, BB&T has $2.1 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 $696 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. Neither BB&T nor the predecessor has incurred any losses related to these recourse provisions.

          BB&T has investments and future funding commitments to certain venture capital funds. As of June 30, 2008, BB&T had investments of $95 million, net of minority interest, related to these ventures and future funding commitments of $231 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) Second 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 six month periods ended June 30, 2008 and 2007, respectively:

  Pension Plans
    Qualified     Nonqualified
    For the     For the
    Three Months Ended     Three Months Ended
    June 30,     June 30,
    2008     2007      2008   2007
  (Dollars in millions)
Service cost $ 18   $ 18   $                  1 $                1
Interest cost   18     17                      2                  2
Estimated return on plan assets   (34 )   (28 )                -            -
Amortization and other   (1 )   1                  -            -
   Net periodic benefit cost $ 1   $ 8   $                  3 $                3
 
 
 
  Pension Plans
    Qualified     Nonqualified
    For the     For the
    Six months ended        Six months ended
    June 30,     June 30,
    2008     2007      2008   2007
  (Dollars in millions)
 
Service cost $ 35   $ 37   $                    2 $                  2
Interest cost   36     34                        4                    4
Estimated return on plan assets   (68 )   (57 )                -              -
Amortization and other   (2 )   1                        1                    1
   Net periodic benefit cost $ 1   $ 15   $                    7 $                  7

 

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BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Second Quarter 2008
 
 
NOTE 8. Computation of Earnings per Share  

        BB&T’s basic and diluted earnings per share amounts for the three and six month periods ended June 30, 2008 and 2007, respectively, were calculated as follows:

    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2008   2007   2008   2007
    (Dollars in millions, except per share data, shares in thousands)
 
Basic Earnings Per Share:                
           Net income $ 428 $ 458 $ 856 $ 879
   Weighted average number of common shares   546,628   548,385   546,421   545,136
   Basic earnings per share $ .78 $ .84 $ 1.57 $ 1.61
Diluted Earnings Per Share:                
           Net income $ 428 $ 458 $ 856 $ 879
   Weighted average number of common shares   546,628   548,385   546,421   545,136
   Add:                
           Effect of dilutive outstanding equity-based awards   3,130   5,550   2,923   5,420
   Weighted average number of diluted common shares   549,758   553,935   549,344   550,556
   Diluted earnings per share $ .78 $ .83 $ 1.56 $ 1.60

          For the three months ended June 30, 2008 and 2007, the number of antidilutive awards was 33.2 million and 6.5 million shares, respectively. For the six months ended June 30, 2008 and 2007, the number of antidilutive awards was 32.4 million and 7.7 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 June 30, 2008
    Pre -Tax   Tax   After-Tax    
    Amount   Benefit     Amount  
    (Dollars in millions)  
 
Unrealized net losses on securities available for sale $ (439 ) $ (165 ) $ (274 )
Unrecognized net pension and postretirement costs   (129 ) (48 )   (81 )
Unrealized net gains on cash flow hedges   27   14     13  
Foreign currency translation adjustment   3   -     3  
       Total $ (538 ) $ (199 ) $ (339 )

 

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Notes to Consolidated Financial Statements (Unaudited) Second 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 six month periods ended June 30, 2008 and 2007, respectively.

    For the Three Months Ended      For the Six Months Ended  
    June 30,   June 30,   
    2008     2007   2008     2007  
   (Dollars in millions)
Comprehensive income:                        
     Net income $ 428   $ 458   $ 856   $ 879  
     Other comprehensive income:                        
           Unrealized net losses on securities available for sale   (256 )   (161 )   (246 )   (90 )
           Unrealized net gains (losses) on cash flow hedges   20     (5 )   13     (4 )
           Net change in pension and postretirement liability   (1 )            -     (2 )   (1 )
           Net foreign currency translation adjustment   1     2      -     2  
                   Total comprehensive income $ 192   $ 294   $ 621   $ 786  

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.

 

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


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

         During the second quarter of 2008, the methodology for providing credit for client funding sources was reviewed and additional funds transfer pricing credits were provided. The adjustments made in the second quarter were retroactively applied to the beginning of the year. The amount of the adjustment that related to the first quarter of 2008 resulted in an increase in after-tax net income attributable to the Banking Network and Financial Services segments of approximately $21 million and $3 million, respectively, with a corresponding decrease of $24 million in the Treasury segment.

          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 20                Second Quarter 2008 10-Q


BB&T Corporation
Reportable Segments
For the Three Months Ended June 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) $ 527 $ 578 $ 290   $ 253   $ 99   $ 91   $ 176   $ 168   $ 3   $ 4  
       Net funds transfer pricing (FTP)   356   282   (208 )   (191 )   (66 )   (61 )   (50 )   (55 )   (2 )   (1 )
    Net interest income (expense) and FTP   883   860   82     62     33     30     126     113     1     3  
    Economic provision for loan and lease losses   47   37   2     2     6     5     74     44     -     -  
    Noninterest income   312   270   43     31     1     -     28     23     232     219  
       Intersegment net referral fees (expense)   73   67   (27 )   (25 )   (4 )   (4 )   -            -     -     -  
    Noninterest expense   385   369   21     16     8     6     60     51     174     158  
       Allocated corporate expenses   175   147   2     3     2     3     8     6     10     7  
    Income (loss) before income taxes   661   644   73     47     14     12     12     35     49     57  
       Provision (benefit) for income taxes   239   233   26     17     5     4     5     13     19     21  
    Segment net income (loss) $ 422 $ 411 $ 47   $ 30   $ 9   $ 8   $ 7   $ 22   $ 30   $ 36  
    Identifiable segment assets (period end) $ 62,948 $ 58,506 $ 19,217   $ 17,580   $ 6,045   $ 5,711   $ 5,899   $ 5,442   $ 1,292   $ 1,241  
 
 
        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) $ 13 $ 5 $ 71   $ (22 ) $ 40   $ 44   $ (151 ) $ (155 ) $ 1,068   $ 966  
       Net funds transfer pricing (FTP)   10   8   (76 )   (50 )   (43 )   (42 )   79     110     -     -  
    Net interest income (expense) and FTP   23   13   (5 )   (72 )   (3 )   2     (72 )   (45 )   1,068     966  
    Economic provision for loan and lease losses          -          -        -            -     1     -     200            -     330     88  
    Noninterest income   163   150   35     29     6     17     7     (10 )   827     729  
       Intersegment net referral fees (expense)   6   5        -            -              -     -     (48 )   (43 )   -     -  
    Noninterest expense   132   126   4     2     25     21     153     174     962     923  
       Allocated corporate expenses   10   8        -     2     1     2      (208 )   (178 )   -     -  
    Income (loss) before income taxes   50   34   26     (47 )   (24 )   (4 )    (258 )   (94 )   603     684  
       Provision (benefit) for income taxes   19   12   (5 )   (26 )   (17 )   (4 )    (116 )   (44 )   175     226  
    Segment net income (loss) $ 31 $ 22 $ 31   $ (21 ) $ (7 ) $ -   $ (142 ) $ (50 ) $ 428   $ 458  
    Identifiable segment assets (period end) $ 2,488 $ 3,003 $ 25,400   $ 24,352   $ 4,446   $ 3,578   $ 8,730   $ 8,164   $ 136,465   $ 127,577  
 
 
(1 )    Includes financial data from subsidiaries below the quantitative and qualitative thresholds requiring disclosure.

 

BB&T Corporation                     Page 21                Second Quarter 2008 10-Q


BB&T Corporation
Reportable Segments
For the Six Months Ended June 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) $ 1,060 $ 1,151 $ 573   $ 495   $ 196   $ 178   $ 349   $ 331   $ 7   $ 8
       Net funds transfer pricing (FTP)   648   542   (419 )   (375 )   (132 )   (120 )   (104 )   (108 )   (3 )   -
    Net interest income (expense) and FTP   1,708   1,693   154     120     64     58     245     223     4     8
    Economic provision for loan and lease losses   90   73   5     4     11     10     154     87     -     -
    Noninterest income   599   511   91     63     1     1     59     41     435     427
       Intersegment net referral fees (expense)   142   120   (52 )   (47 )   (7 )   (7 )   -            -     -     -
    Noninterest expense   759   725   38     31     14     12     119     100     339     312
       Allocated corporate expenses   349   293   5     5     5     5     17     11     20     14
    Income (loss) before income taxes   1,251   1,233   145     96     28     25     14     66     80     109
       Provision (benefit) for income taxes   450   446   52     35     10     9     6     25     31     41
    Segment net income (loss) $ 801 $ 787 $ 93   $ 61   $ 18   $ 16   $ 8   $ 41   $ 49   $ 68
    Identifiable segment assets (period end) $ 62,948 $ 58,506 $ 19,217   $ 17,580   $ 6,045   $ 5,711   $ 5,899   $ 5,442   $ 1,292   $ 1,241
 
 
        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) $ 25 $ 9 $ 94   $ (77 ) $ 84   $ 77   $ (303 ) $ (261 ) $ 2,085   $ 1,911
       Net funds transfer pricing (FTP)   18   15   (97 )   (62 )   (86 )   (82 )   175     190     -     -
    Net interest income (expense) and FTP   43   24   (3 )   (139 )   (2 )   (5 )   (128 )   (71 )   2,085     1,911
    Economic provision for loan and lease losses          -          -          -            -     1            -     292     (15 )   553     159
    Noninterest income   317   282   95     41     17     30     (16 )   (15 )   1,598     1,381
       Intersegment net referral fees (expense)   10   8          -            -              -            -     (93 )   (74 )   -     -
    Noninterest expense   264   245   7     4     46     44     312     333     1,898     1,806
       Allocated corporate expenses   19   15   1     3     1     3     (417 )   (349 )   -     -
    Income (loss) before income taxes   87   54   84     (105 )   (33 )   (22 )   (424 )   (129 )   1,232     1,327
       Provision (benefit) for income taxes   32   19   10     (59 )   (24 )   (15 )   (191 )   (53 )   376     448
    Segment net income (loss) $ 55 $ 35 $ 74   $ (46 ) $ (9 ) $ (7 ) $ (233 ) $ (76 ) $ 856   $ 879
    Identifiable segment assets (period end) $ 2,488 $ 3,003 $ 25,400   $ 24,352   $ 4,446   $ 3,578   $ 8,730   $ 8,164   $ 136,465   $ 127,577
 
  
(1 )    Includes financial data from subsidiaries below the quantitative and qualitative thresholds requiring disclosure.

 

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


BB&T Corporation and Subsidiaries  
Notes to Consolidated Financial Statements (Unaudited) Second 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 June 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 six 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 six months of 2008 related to stock options awarded by BB&T:



 

For the Six Months Ended
June 30, 2008  
Wtd. Avg.
Exercise
Options Price
Outstanding at beginning of period 38,042,742   $ 36.61
Granted 6,718,748     34.04
Exercised (973,574 )   29.89
Forfeited or expired (319,350 )   37.37
Outstanding at end of period 43,468,566   $ 36.36
 
Exercisable at end of period 26,817,259   $ 35.34

 

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


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

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

  For the Six Months Ended
  June 30, 2008
      Wtd. Avg.
      Grant Date
  Shares/Units   Fair Value
Nonvested at beginning of period 3,994,441   $ 33.20
Granted 2,609,228     23.08
Vested (31,790 )   31.97
Forfeited (131,394 )   30.12
Nonvested at end of period 6,440,485   $ 29.17

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, 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

 

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


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

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 June 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) $ 1,490 $ 1,496 $ (6 )
 Nonaccrual loans   -   -   -  
 Loans 90 days or more past due and still accruing interest   1   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.

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

 

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


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

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, 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  
    6/30/2008  (Level 1)   (Level 2)     (Level 3)
  (Dollars in Millions)
Assets:                
 Trading securities $ 514 $ 225 $ 284 $ 5
 Securities available for sale   22,657   239   22,404   14
 Loans held for sale (1)   1,490   -   1,490   -
 Residential mortgage servicing rights   611   -   -   611
 Derivative assets (2)   453   4   439   10
 Venture capital investments (2)   152   -   -   152
   Total assets $ 25,877 $ 468 $ 24,617 $ 792
 
Liabilities:                
 Derivative liabilities (2) $ 297 $ 1 $ 292 $ 4
 Short-term borrowed funds (3)   211   -   211   -
   Total liabilities $ 508 $ 1 $ 503 $ 4
 
(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 $25 million in loans held for sale that are not accounted for at fair value.  
(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 six month periods ended June 30, 2008, for all Level 3 assets and liabilities that are measured at fair value on a recurring basis.

  Fair Value Measurements Using Significant Unobservable Inputs
              Mortgage            
For the Three Month Period             Servicing       Venture Capital  
Ended June 30, 2008   AFS Securities        Trading     Rights Net Derivatives     Investments  
  (Dollars in Millions)
Balance at March 31, 2008 $ 14 $ 14   $ 406 $ 19   $

141

 
 Total realized and unrealized gains or losses:                          
     Included in earnings   -   -     131   (13 )   (8 )
     Included in other comprehensive income   -   -     -   -     -  
 Purchases, issuances and settlements   -   (9 )   74   -     19  
 Transfers in and/or out of Level 3   -   -     -   -     -  
Balance at June 30, 2008 $ 14 $ 5   $ 611 $ 6   $ 152  

 

BB&T Corporation                     Page 26                Second Quarter 2008 10-Q


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

  Fair Value Measurements Using Significant Unobservable Inputs
              Mortgage          
For the Six Month Period             Servicing     Venture Capital  
Ended June 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 )   24   4   (9 )
     Included in other comprehensive income   -   -     -   -   -  
 Purchases, issuances and settlements   5   (23 )   115   -   33  
 Transfers in and/or out of Level 3   -   3     -   -   -  
Balance at June 30, 2008 $ 14 $ 5   $ 611 $ 6 $ 152  

          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 June 30, 2008.

  Total Gains and Losses
    Mortgage         Venture Capital  
           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 $ - $ 131 $ (13 ) $ -  
       Other noninterest income     -    -    -      (8 )
 
            Total $ - $ 131 $ (13 ) $ (8 )
 
Net unrealized gains (losses) included                  
in net income relating to assets and liabilities                  
still held at June 30, 2008 $ - $ 152 $ 6   $ (12 )

          The realized and unrealized losses reported for mortgage servicing rights assets are composed of a positive valuation adjustment of $152 million less the realization of expected residential mortgage servicing rights cash flows of $21 million for  the quarter ended June 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 June 30, 2008, the derivative instruments produced losses of $158 million, which offset the positive valuation adjustment recorded.

 

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


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

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

  Total Gains and Losses
 
        Mortgage         Venture Capital  
          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 $ -   $ 24 $ 4 $ -  
       Other noninterest income   (2 )   -   -   (9 )
            Total $ (2 ) $ 24 $ 4 $ (9 )
 
Net unrealized gains (losses) included                    
 in net income relating to assets and liabilities                    
 still held at June 30, 2008 $ -   $ 68 $ 6 $ (12 )

          The realized and unrealized losses reported for mortgage servicing rights assets are composed of a positive valuation adjustment of $68 million less the realization of expected residential mortgage servicing rights cash flows of $44 million for the six months ended June 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 six months of 2008, the derivative instruments produced losses of $76 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 half of 2008 that were still held on the balance sheet at June 30, 2008 totaled $486 million. This amount consists of impaired loans that were classified as Level 3 assets. During the first six months of 2008, BB&T recorded $23 million in losses related to write-downs of these loans based on the appraised value of the underlying collateral.

Back to Index

 

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


BB&T Corporation and Subsidiaries  
Management’s Discussion and Analysis Second 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:

  • general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit or other services;
  • changes in the interest rate environment may reduce net interest margins and/or the volumes and values of loans made or held as well as the value of other financial assets held;
  • competitive pressures among depository and other financial institutions may increase significantly;
  • legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged;
  • local, state or federal taxing authorities may take tax positions that are adverse to BB&T;
  • adverse changes may occur in the securities markets;
  • competitors of BB&T may have greater financial resources and develop products that enable them to compete more successfully than BB&T;
  • costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected;
  • expected cost savings associated with completed mergers may not be fully realized or realized within the expected time frames; and
  • deposit attrition, customer loss and/or revenue loss following completed mergers may be greater than expected.

Regulatory Considerations

          BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the 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 Second 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.

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 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, 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

 

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areas and industries in which BB&T conducts business. The methodology used to determine an estimate for the reserve for unfunded lending commitments is inherently similar to the methodology utilized in calculating the allowance for loans and leases adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding.

     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 June 30, 2008, the percentage of total assets and total liabilities measured at fair value was 19.0% 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 June 30, 2008, 3.1% 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 June 30, 2008, BB&T had approximately $19 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

 

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Management’s Discussion and Analysis Second Quarter 2008

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 utilizes 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 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 June 30, 2008, BB&T had $152 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

 

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Management’s Discussion and Analysis Second Quarter 2008

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

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EXECUTIVE SUMMARY

          BB&T’s total assets at June 30, 2008 were $136.5 billion, an increase of $3.8 billion, or 2.9%, from December 31, 2007. The asset category that experienced the largest increase was loans and leases,  including loans held for sale, which grew $4.0 billion, or 4.4%, during the first six months of 2008. In addition, securities available for sale increased $238 million, or 1.1%, compared to the balance at December 31, 2007.

          Total deposits at June 30, 2008 were $88.2 billion, an increase of $1.4 billion, or 1.7%, from December 31, 2007. Long-term debt increased $1.9 billion, or 10.0%, and short-term borrowings increased $170 million, or 1.6%, during the first six months of 2008. Total shareholders’ equity increased $168 million compared to December 31, 2007.

          Consolidated net income for the second quarter of 2008 totaled $428 million, a decrease of 6.6% compared to $458 million earned during the second quarter of 2007. On a diluted per share basis, earnings for the three months ended June 30, 2008 were $.78, compared to $.83 for

 

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the same period in 2007, a decrease of 6.0% . BB&T’s results of operations for the second quarter of 2008 produced an annualized return on average assets of 1.27% and an annualized return on average shareholders’ equity of 13.27% compared to prior year ratios of 1.47% and 15.18%, respectively.

          Consolidated net income for the first six months of 2008 totaled $856 million, a decrease of 2.6% compared to $879 million earned during the first six months of 2007. On a diluted per share basis, earnings for the six months ended June 30, 2008 were $1.56, compared to $1.60 for the same period in 2007, a decrease of 2.5% . BB&T’s results of operations for the first six months of 2008 produced an annualized return on average assets of 1.28% and an annualized return on average shareholders’ equity of 13.29% compared to prior year ratios of 1.44% and 15.00%, respectively.

          Included in the results of operations for the second quarter and first six months of 2008 were a number of notable items. During the second quarter of 2008, earnings benefited from $36 million in pretax gains on the early extinguishment of certain FHLB advances and a $47 million pretax gain from the sale of Visa, Inc. shares. The first six months of 2008 also included an additional increase in earnings of $47 million associated with the initial public offering of Visa, Inc., which was recorded in the first quarter of 2008, and included a $14 million reversal of a previously recorded liability. During the first six months of 2008, BB&T also recognized pretax securities gains of $53 million. The securities gains resulted from sales of available-for-sale securities, which allowed reinvestment at higher rates of return with no additional credit risk.

          The second quarter and first six months of 2008 included $330 million and $553 million, respectively, in provision for credit losses. The provision for credit losses exceeded net charge-offs by $160 million for the second quarter and $258 million for the first six 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 1.33% .

          During the second 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 9.1% growth in average loans and leases and improved revenue growth. BB&T’s net interest margin improved 11 basis points during the second quarter of 2008 compared to the first quarter of 2008. Management currently anticipates some continued expansion of the net interest margin for the remainder of 2008.

          As of June 30, 2008, BB&T’s Tier 1 leverage and tangible capital ratios were 7.2% and 5.7%, respectively. In addition, BB&T’s Tier 1 risk-based capital and total risk-based capital ratios were 8.9% and 14.0%, respectively, which are significantly higher than the average levels recently reported by BB&T’s peers. BB&T’s capital levels are well above the regulatory standards for well-capitalized banks. On June 24, 2008, BB&T’s Board of Directors approved a 2.2% increase in the quarterly cash dividend paid to shareholders. The increase, to $.47 per share, marks the 37th consecutive year that BB&T has raised the cash dividend to shareholders.

 

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Management’s Discussion and Analysis Second Quarter 2008

          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 second quarter of 2008 are further discussed in the following sections.

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ANALYSIS OF FINANCIAL CONDITION

Securities

          Securities available for sale totaled $22.7 billion at June 30, 2008, an increase of $238 million, or 1.1%, compared with December 31, 2007. Securities available for sale had net unrealized losses of $439 million and $45 million at June 30, 2008 and December 31, 2007, respectively. Trading securities totaled $514 million, down $495 million, or 49.1%, 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.

          Average total securities for the second quarter of 2008 totaled $23.9 billion, an increase of $774 million, or 3.3%, compared to the average balance during the second quarter of 2007. Average total securities for the first six months of 2008 totaled $23.7 billion, an increase of $1.2 billion, or 5.1%, compared to the average balance during the first six months of 2007. BB&T sold a total of $5.2 billion in available-for-sale securities during the six month period ended June 30, 2008, which produced securities gains of $53 million.  The securities sold were reinvested at higher rates of return with no additional credit risk and only a slight increase in duration.

          The annualized fully taxable equivalent (“FTE”) yield on the average securities portfolio for the second quarter of 2008 was 5.01%, which represents an increase of 7 basis points compared to the annualized yield earned during the second quarter of 2007. For the first six months, the annualized FTE yield was 5.09%, which represents a 9 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.

          On June 30, 2008, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of June 30, 2008, the unrealized losses on these securities totaled $108 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 June 30, 2008, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Accordingly, BB&T did not recognize any other-than-temporary impairment in connection with these securities during the second quarter of 2008.

 

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Management’s Discussion and Analysis Second Quarter 2008

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 second quarter of 2008, average total loans were $94.9 billion, an increase of $7.9 billion, or 9.1%, compared to the same period in 2007. For the first six months of 2008, average total loans were $93.8 billion, an increase of $7.9 billion, or 9.2%, compared to the same period in 2007.

          The following table presents the composition of average loans and leases for the second quarter and six months ended June 30, 2008 and 2007, respectively:

Table 1
Composition of Average Loans and Leases
 
      For the Three Months Ended    
    June 30, 2008     June 30, 2007  
    Balance % of total     Balance % of total  
      (Dollars in millions)    
 
Commercial loans and leases $ 47,098 49.7  % $ 41,935 48.2 %
Direct retail loans   15,584 16.4     15,438 17.8  
Sales finance loans   6,188 6.5     5,823 6.7  
Revolving credit loans   1,628 1.7     1,417 1.6  
Mortgage loans   18,902 19.9     17,231 19.8  
Specialized lending loans   5,466 5.8     5,095 5.9  
   Total average loans and leases $ 94,866 100.0  % $ 86,939 100.0  %
 
  For the Six Months Ended
    June 30, 2008     June 30, 2007  
    Balance % of total     Balance % of total  
  (Dollars in millions)
 
Commercial loans and leases $ 46,323 49.4  % $ 41,531 48.4  %
Direct retail loans   15,612 16.6     15,355 17.9