ANNUAL REPORT

10-K 1 d10k.htm ANNUAL REPORT ANNUAL REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the fiscal year ended:

December 31, 2002

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)

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Name of each exchange

on which registered

Common Stock, $5 par value

New York Stock Exchange

Share Purchase Rights

New York Stock Exchange

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 x NO ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x NO ¨

The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 30, 2002, was approximately $18.2 billion. The number of shares of the Registrant's Common Stock outstanding on January 31, 2003, was 470,949,530. No shares of preferred stock were outstanding at January 31, 2003.

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 22, 2003, are incorporated by reference in Part III of this report.

The Exhibit Index begins on page 114.

CROSS REFERENCE INDEX

			Page
PART I	Item 1	Business	4

	Item 2	Properties	16, 74

	Item 3	Legal Proceedings	92

	Item 4	Submission of Matters to a Vote of Shareholders None.

PART II	Item 5	Market for the Registrant’s Common Stock and Related Shareholder Matters	48

	Item 6	Selected Financial Data	51

	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 7A	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 8	Financial Statements and Supplementary Data

		Consolidated Balance Sheets at December 31, 2002 and 2001	56

		Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002	57

		Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2002	58

		Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002	59

		Notes to Consolidated Financial Statements	60

		Reports of Independent Public Accountants	54, 55

		Quarterly Financial Summary for 2002 and 2001	50

	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None.

PART III	Item 10	Directors and Executive Officers of the Registrant	*, 16

	Item 11	Executive Compensation	*

	Item 12	Security Ownership of Certain Beneficial Owners and Management	*

	Item 13	Certain Relationships and Related Transactions	*

	Item 14	Controls and Procedures	108

PART IV	Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K	114

		Signatures	109

		Certification of Chief Executive Officer	112

		Certification of Chief Financial Officer	113

(a)

See Item 8

(b)

Current Reports on Form 8-K filed during the fourth quarter of 2002.

Type	Date Filed	Reporting Purpose
Item 9.	October 3, 2002	To announce the signing of a definitive agreement to acquire FloridaFirst Bancorp, Inc. of Lakeland, Florida

Item 9.	October 11, 2002	To announce BB&T’s third quarter earnings.

Item 5.	October 31, 2002	To announce that the merger agreement between BB&T and FloridaFirst Bancorp had been terminated.

(c)

Exhibits—See Item 15

(d)

Financial Statement Schedules—See Item 15

The information required by Item 10 is incorporated herein by reference to the information that appears under the headings “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation of Executive Officers”, “Retirement Plans” and “Compensation Committee Report on Executive Compensation” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

The information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Security Ownership” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Compensation Committee Interlocks and Insider Participation” and “Transactions with Executive Officers and Directors” in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders.

DESCRIPTION OF BUSINESS

General

BB&T Corporation (“BB&T” or “the Corporation”) is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its banking subsidiaries, which have offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and the metropolitan Washington, D.C. area.

Forward-Looking Statements

This report contains forward-looking statements with respect to the financial condition, results of operations and business of BB&T. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T, and on 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 possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) 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; (3) 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; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged; (5) costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected; (6) expected cost savings associated with pending or recently completed mergers may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following pending or recently completed mergers may be greater than expected; (8) competitors of BB&T may have greater financial resources and develop products that enable such competitors to compete more successfully than BB&T; and (9) adverse changes may occur in the securities markets.

Significant Subsidiaries

At December 31, 2002, the principal assets of BB&T included all of the outstanding shares of common stock of:

Branch Banking and Trust Company, Winston-Salem, North Carolina;

Branch Banking and Trust Company of South Carolina, Greenville, South Carolina;

Branch Banking and Trust Company of Virginia, Richmond, Virginia;

Regional Acceptance Corporation, Greenville, North Carolina;

Scott & Stringfellow, Inc., Richmond, Virginia;

MidAmerica Gift Certificate Company, Louisville, Kentucky;

Sheffield Financial LLC, Clemmons, North Carolina; and

BB&T Factors Corporation, High Point, North Carolina.

Branch Banking and Trust Company (“Branch Bank”), BB&T’s largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. The following table reflects BB&T’s deposit market share and branch locations by state at December 31, 2002.

Table 1

BB&T Deposit Market Share and Branch Locations by State

December 31, 2002

	% of BB&T’s Deposits		Deposit Market Share Rank	Number of Branches
North Carolina *	32	%	2nd	335
Virginia	19		4th	241
Georgia	11		6th	117
Kentucky	8		3rd	105
South Carolina	10		3rd	94
West Virginia	9		1st	88
Maryland	7		6th	76
Tennessee	2		12th	38
Florida	1		33rd	18
Washington, D.C.	1		6th	7

Excludes home office deposits

Source:

SNL Financial

In addition to the markets described in the table above, BB&T operated two branches in Alabama and one branch in Indiana. After the completion of pending acquisitions with Equitable Bank and First Virginia Banks, Inc., BB&T will operate 539 branches in Virginia, 136 branches in Maryland and 49 branches in Tennessee, and increase its deposits market share rank to 2^nd, 10^th, and 4^th in Virginia, Tennessee and the Washington D.C. area, respectively. BB&T’s presence and deposit market share in other states listed in the table above will not change as a result of these pending acquisitions.

Branch Bank’s principal subsidiaries include BB&T Leasing Corp., based in Charlotte, North Carolina, which provides lease financing to commercial businesses; BB&T Investment Services, Inc., located in Charlotte, North Carolina, which offers nondeposit investment alternatives, including fixed-rate and variable-rate annuities, mutual funds and discount brokerage services; BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which was the 10^th largest retail insurance broker in the country at December 31, 2002, and offers property and casualty, life, employee benefits, surety, title, and other insurance products through its 71 agencies in 8 states; and Stanley, Hunt, DuPree & Rhine Inc., with dual headquarters in Greensboro, North Carolina and Greenville, South Carolina, which offers group medical plans, insurance and investment consulting, and actuarial services.

Branch Bank has a number of additional subsidiaries including but not limited to the following: Prime Rate Premium Finance Corporation, Inc. (“Prime Rate”), located in Florence, South Carolina, which provides insurance premium financing primarily to clients in BB&T’s principal market area; Laureate Capital Corp. (“Laureate”), located in Charlotte, North Carolina, which principally specializes in arranging and servicing commercial mortgage loans; Lendmark Financial Services, Inc. (“Lendmark”), located in Conyers, Georgia, which offers alternative consumer and mortgage loans to clients unable to meet BB&T’s normal consumer and mortgage loan guidelines; and Cooney Rikard & Curtin Inc. (“CRC”), based in Birmingham, Alabama, which was the 4^th largest wholesale insurance broker in the country with 14 offices and representation in 47 states at December 31, 2002.

Branch Banking and Trust Company of South Carolina (“BB&T-SC”) operated 94 banking offices at December 31, 2002. BB&T-SC is the third largest bank in South Carolina in terms of deposit market share.

Branch Banking and Trust Company of Virginia (“BB&T-VA”) operated 241 banking offices in Virginia at December 31, 2002. BB&T-VA is the fourth largest bank in Virginia in terms of deposit market share.

Scott & Stringfellow, Inc. (“Scott & Stringfellow”) is an investment banking and full-service brokerage firm located in Richmond, Virginia. At December 31, 2002, Scott & Stringfellow operated 23 full-service retail brokerage offices in Virginia, 12 in North Carolina, and 7 in South Carolina. Scott & Stringfellow specializes in the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. Scott & Stringfellow also has a public finance department that provides investment banking, financial advisory services, and debt underwriting services to a variety of regional tax-exempt issuers.

The primary services offered by BB&T’s subsidiaries include:

small business lending

commercial middle market lending

real estate lending

retail lending

home equity lending

sales finance

mortgage lending

leasing

asset management

trust services

agency insurance

wholesale insurance brokerage

treasury services

investment brokerage services

capital markets services

factoring

asset-based lending

international banking services

cash management

electronic payment services

credit and debit card services

consumer finance

payroll processing

gift certificate services

The following table discloses selected financial information related to BB&T’s significant banking subsidiaries. Additionally, please see Note 20 in the “Notes to Consolidated Financial Statements” for further discussion relating to BB&T’s reportable business segments.

Table 2

Selected Financial Data of Significant Banking Subsidiaries

(Dollars in thousands)

	As of / For the Year Ended December 31, 2002
	Branch Bank		BB&T-SC		BB&T-VA
Total assets	$	65,629,555	$	6,279,959	$	11,797,675
Securities		13,679,859		127,567		3,287,671
Loans and leases, net of unearned income (1)		43,659,450		5,303,769		7,394,505
Deposits		39,486,381		4,372,746		9,053,880
Shareholder’s equity		6,462,209		542,184		1,017,837

Net interest income		2,151,764		191,355		329,163
Provision for loan and lease losses		173,322		34,925		9,463
Noninterest income		1,446,179		93,646		139,253
Noninterest expense		1,925,328		147,560		291,387
Net income		1,107,470		65,874		110,831

	As of / For the Year Ended December 31, 2001
	Branch Bank		BB&T-SC		BB&T-VA
Total assets	$	54,887,883	$	6,294,110	$	10,945,076
Securities		13,226,304		232,304		2,711,756
Loans and leases, net of unearned income (1)		36,384,003		4,723,568		6,165,161
Deposits		32,900,901		4,569,321		8,297,098
Shareholder’s equity		4,939,604		504,439		1,009,316

Net interest income		1,821,086		211,839		335,451
Provision for loan and lease losses		138,533		21,666		33,933
Noninterest income		1,164,030		81,792		147,343
Noninterest expense		1,691,672		151,143		370,451
Net income		811,182		80,759		48,889

	As of / For the Year Ended December 31, 2000
	Branch Bank		BB&T-SC		BB&T-VA
Total assets	$	50,094,076	$	5,249,100	$	9,785,950
Securities		13,132,843		389,331		1,696,508
Loans and leases, net of unearned income (1)		32,603,764		4,008,789		6,018,130
Deposits		30,966,539		3,952,819		7,827,976
Shareholder’s equity		4,033,970		378,740		913,019

Net interest income		1,515,718		230,877		369,419
Provision for loan and lease losses		85,852		12,554		16,414
Noninterest income		653,004		55,306		73,968
Noninterest expense		1,391,964		125,123		288,042
Net income		484,347		95,175		88,844

(1)

Includes loans held for sale.

Merger Strategy

BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. BB&T’s acquisition strategy is focused on three primary objectives:

to pursue acquisitions of banks and thrifts in the Carolinas, Virginia, Maryland, Washington D.C., Georgia, West Virginia, Tennessee, Kentucky, Ohio and Florida, generally with assets in the $250 million to $10 billion range,

to acquire companies in niche markets that provide products or services that can be offered through the existing distribution system to BB&T’s current customer base, and

to consider strategic acquisitions in new markets that are economically feasible and provide positive long-term benefits.

BB&T has consummated acquisitions of 56 community banks and thrifts, 60 insurance agencies and 21 non-bank financial services providers over the last fifteen years. BB&T expects, in the long-term, to continue to take advantage of the consolidation in the financial services industry and expand and enhance its franchise through mergers and acquisitions. The consideration paid for these acquisitions may be in the form of cash, debt or BB&T stock. The amount of consideration paid to complete these transactions may be in excess of the book value of the underlying net assets acquired, which could have a dilutive effect on BB&T’s earnings per share or book value. In addition, acquisitions often result in significant front-end charges against earnings; however, cost savings and revenue enhancements, especially incident to in-market bank and thrift acquisitions, are also typically anticipated.

Competition

The financial services industry is highly competitive and dramatic change continues to occur. BB&T’s subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies and insurance companies. Competition among providers of financial products and services continues to increase with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The industry continues to rapidly consolidate, which affects competition by eliminating some regional and local institutions, while strengthening the franchise of acquirers. For additional information concerning markets, BB&T’s competitive position and business strategies, see “Market Area” and “Lending Activities” below.

Market Area

BB&T’s primary market area consists of North and South Carolina, Virginia, Maryland, Georgia, eastern Tennessee, West Virginia, Kentucky, northern Florida and Washington, D.C. The area’s employment base is diverse and primarily consists of manufacturing, general services, agricultural, wholesale/retail trade, technology and financial services. BB&T believes its current market area is economically stable and will support consistent growth in assets and deposits in the future. Even so, management intends to continue expanding and diversifying the BB&T franchise. Management strongly believes that BB&T’s community bank approach to providing client service is a competitive advantage, which strengthens the Corporation’s ability to enter new markets and effectively provide financial products and services to businesses and individuals in these markets.

Lending Activities

The primary goal of the BB&T lending function is to help clients achieve their financial goals by providing quality loans that are fair to the clients and profitable to the Corporation. This purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well being of its clients. BB&T’s philosophy of lending is to attempt to meet the business and consumer credit needs within defined market segments where standards of profitability, client relationships and credit quality can be met. Based on internal analyses, this philosophy has resulted in BB&T’s loan portfolio consistently outperforming the average of a group of BB&T’s peer banks in terms of asset quality, portfolio yield and rate of growth.

BB&T focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and consumer loans. Typically, fixed-rate conforming residential mortgage loans are sold in the secondary mortgage market and adjustable-rate residential mortgages are generally retained in the portfolio. Servicing rights on mortgage loans sold are typically retained by BB&T. As of December 31, 2002, BB&T’s total residential mortgage servicing portfolio was approximately $34.8 billion. BB&T conducts the majority of its lending activities in the context of the Corporation’s community bank operating model, with lending decisions made as close to the client as practicable.

The following table summarizes BB&T’s loan portfolio based on the underlying collateral, rather than the primary purpose of the loan.

Table 3

Composition of Loan and Lease Portfolio

	December 31,
	2002			2001			2000			1999			1998
	(Dollars in thousands)
Commercial, financial and agricultural loans	$	7,061,493		$	6,551,073		$	6,555,578		$	6,025,337		$	5,675,978
Lease receivables		5,156,307			5,012,110			4,453,598			2,606,002			1,620,326
Real estate—construction and land development loans		5,291,719			5,334,108			4,264,275			4,227,146			3,288,411
Real estate—mortgage loans		30,023,470			25,542,288			25,239,698			22,712,509			20,574,669
Consumer loans		6,412,563			5,965,010			5,891,059			5,091,840			4,505,704

Total loans and leases held for investment		53,945,552			48,404,589			46,404,208			40,662,834			35,665,088
Loans held for sale		2,377,707			1,907,416			906,244			390,338			1,375,135

Total loans and leases		56,323,259			50,312,005			47,310,452			41,053,172			37,040,223
Less: unearned income		(2,805,246	)		(2,868,832	)		(2,483,377	)		(1,250,129	)		(746,031	)

Net loans and leases	$	53,518,013		$	47,443,173		$	44,827,075		$	39,803,043		$	36,294,192

Mortgage Banking

Branch Bank is a large originator of residential mortgage loans, with originations in 2002 of $14.1 billion. Branch Bank offers various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale of substantially all conforming fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and mortgage insurance. Branch Bank also purchases residential mortgage loans from more than 100 correspondent originators. The loans purchased from third-party originators are subject to the same underwriting and risk management criteria as loans originated internally.

Laureate Capital, a wholly owned subsidiary of Branch Bank, provides commercial mortgage banking services that include arranging and servicing permanent commercial mortgage loans for third party investors.

Commercial Lending

BB&T’s commercial lending program is generally targeted to serve small-to-middle market businesses with sales of $200 million or less. The bank also makes loans to larger corporate customers where requirements of quality, profitability and relationship are met. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Pricing on commercial loans is usually tied to market indexes, such as the prime rate and the London Interbank Offered Rate (“LIBOR”). For the fifth consecutive year, BB&T received recognition from the U.S. Small Business Administration as one of the top two “small business friendly” banks in the United States. Management believes that commercial lending to small and mid-sized businesses is among BB&T’s strongest markets.

Construction Lending

Real estate construction loans include construction / permanent loans, which are intended to convert to permanent one-to-four family residential mortgage loans upon completion of the construction and loans to builders and developers of residential properties. BB&T is also a commercial construction lender. Loans for commercial construction are usually granted to in-market developers, businesses, individuals or real estate investors for the construction of commercial structures in BB&T’s market area. They are made for purposes including, but not limited to, the construction of industrial facilities, apartments, shopping centers, office buildings, hotels and warehouses. The properties may be constructed for sale, lease or owner-occupancy.

Consumer Lending

BB&T offers a wide variety of consumer loan products. Various types of secured and unsecured loans are marketed to qualifying, existing clients and to other creditworthy candidates in BB&T’s market area. Home equity loans and lines are underwritten with note amounts and credit limits that ensure consistency with the Corporation’s policies. Numerous forms of unsecured loans, including revolving credits (e.g. credit cards, checking account overdraft protection and personal lines of credit) are provided and various installment loan products, such as vehicle loans, are offered.

Leasing

BB&T provides commercial leasing services through BB&T Leasing Corp. (“Leasing”), a subsidiary of Branch Bank. Leasing provides three primary products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases for vehicles, rolling stock and tangible personal property. Leasing also provides lease-related services for small to medium-sized commercial customers. In addition to the services offered by Leasing, other BB&T subsidiaries provide leases to municipalities and invest in various types of leveraged lease transactions.

The following table presents BB&T’s total loan portfolio based on the primary purpose of the loan, rather than the underlying collateral:

Table 4

Composition of Loan and Lease Portfolio Based on Loan Purpose

	December 31,
	2002		2001		2000		1999		1998
	(Dollars in thousands)
Loans and leases, net of unearned income
Business loans	$	26,441,309	$	23,640,081	$	21,885,646	$	18,884,501	$	16,308,568
Lease receivables		2,527,173		2,319,061		2,100,965		1,508,396		992,684

Total commercial loans and leases		28,968,482		25,959,142		23,986,611		20,392,897		17,301,252

Sales Finance		3,374,419		2,940,364		2,844,970		2,565,439		2,254,190
Revolving Credit		1,050,738		951,319		863,089		713,585		602,521
Direct Retail		9,522,451		8,273,829		8,336,368		7,526,163		6,466,926

Total consumer loans		13,947,608		12,165,512		12,044,427		10,805,187		9,323,637

Residential mortgage loans		10,601,923		9,318,519		8,796,037		8,604,959		9,669,303

Total loans and leases (1)	$	53,518,013	$	47,443,173	$	44,827,075	$	39,803,043	$	36,294,192

(1)

Includes loans held for sale.

The following table reflects the scheduled maturities of commercial, financial and agricultural loans, as well as construction loans:

Table 5

Selected Loan Maturities and Interest Sensitivity (1)

	December 31, 2002
	Commercial, Financial and Agricultural		Real Estate: Construction		Total
	(Dollars in thousands)
Fixed rate:
1 year or less (2)	$	406,565	$	145,528	$	552,093
1-5 years		692,026		249,139		941,165
After 5 years		137,169		76,296		213,465

Total		1,235,760		470,963		1,706,723

Variable rate:
1 year or less (2)		3,227,456		2,781,576		6,009,032
1-5 years		2,184,650		1,721,010		3,905,660
After 5 years		413,627		318,170		731,797

Total		5,825,733		4,820,756		10,646,489

Total loans and leases (3)	$	7,061,493	$	5,291,719	$	12,353,212

(1)

Balances include unearned income.

(2)

Includes loans due on demand.

	(Dollars in thousands)
(3) The above table excludes:
(i) consumer loans to individuals for household, family and other personal expenditures	$	6,412,563
(ii) real estate mortgage loans		30,023,470
(iii) loans held for sale		2,377,707
(iv) lease receivables		5,156,307

Total	$	43,970,047

Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T’s credit policy does not permit automatic renewals of loans. At the scheduled maturity date (including balloon payment date), the customer must request a new loan to replace the matured loan and execute a new note with rate, terms and conditions negotiated at that time.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is management’s estimate of probable inherent credit losses in the loan and lease portfolios at the balance sheet date. The Company determines the allowance based on an ongoing evaluation of the loan and lease portfolios. This evaluation is inherently subjective because it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Increases to the allowance are made by charges to the provision for loan and lease losses, which is reflected in the Consolidated Statements of Income. Loans or leases deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance.

The allowance is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent estimates performed pursuant to either SFAS No. 5, “Accounting for Contingencies,” or SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Management’s estimate of each SFAS No. 5 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry loan concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. Reserves for commercial loans are determined by applying loss percentages to the portfolio based

on management’s evaluation and “risk grading” of the commercial loan portfolio adjusted to give effect to current economic trends. Reserves are provided for noncommercial loan categories based on a four-year weighted average of actual loss experience adjusted to give effect to current economic trends, which is applied to the total outstanding loan balance of each loan category. Specific reserves are typically provided on all impaired commercial loans in excess of a defined threshold that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of BB&T’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. Loans for which specific reserves are provided under SFAS No. 114 are excluded from the reserves calculated in accordance with SFAS No. 5 to prevent duplicate reserves. BB&T’s objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to manage overall credit risk by minimizing the adverse impact of any single event or combination of related events.

A portion of the Corporation’s allowance for loan and lease losses is not allocated to any specific category of loans. This unallocated portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion of the allowance considered unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current economic conditions, industry or borrower concentrations and the status of merged institutions. While the unallocated allowance is available to absorb losses in excess of the amounts allocated to specific loan categories, allocated portions of the allowance are also available to absorb losses in any loan or lease category. Management evaluates the adequacy of the allowance for loan and lease losses based on the combined total of the allocated and unallocated components.

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance or to the reserving methodology may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

The following table presents an allocation of the allowance for loan and lease losses at the end of each of the past five years. The allowance has been allocated by applying the methodologies described above to the loan portfolios based on the underlying collateral of the loans. Amounts applicable to years prior to 2002 have been restated for acquisitions accounted for as poolings of interests. This allocation of the allowance for loan and lease losses is calculated on an approximate basis and is not necessarily indicative of future losses. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.

Table 6

Allocation of Allowance for Loan and Lease Losses by Category

	December 31,
	2002				2001				2000				1999				1998
	Amount		% Loans in each category		Amount		% Loans in each category		Amount		% Loans in each category		Amount		% Loans in each category		Amount		% Loans in each category
	(Dollars in thousands)
Balances at end of period applicable to:
Commercial, financial and agricultural	$	150,700	12.5	%	$	133,238	13.0	%	$	120,486	13.9	%	$	99,424	14.7	%	$	81,641	15.3	%
Real estate:
Construction and land development		85,525	9.4			79,443	10.6			55,874	9.0			42,041	10.3			30,484	8.9
Mortgage		332,490	57.5			234,872	54.6			199,864	55.3			173,862	56.3			170,578	59.3

Total real estate		418,015	66.9			314,315	65.2			255,738	64.3			215,903	66.6			201,062	68.2

Consumer		64,209	11.4			54,668	11.9			49,575	12.5			60,255	12.4			58,939	12.2
Lease receivables		45,173	9.2			38,098	9.9			30,702	9.3			18,193	6.3			6,726	4.3
Unallocated		45,588	—			104,099	—			121,606	—			135,461	—			142,251	—

Total	$	723,685	100.0	%	$	644,418	100.0	%	$	578,107	100.0	%	$	529,236	100.0	%	$	490,619	100.0	%

Information relevant to BB&T’s allowance for loan and lease losses for the last five years is presented in the following table.

Table 7

Analysis of Allowance for Loan and Lease Losses

	December 31,
	2002			2001			2000			1999			1998
	(Dollars in thousands)
Balance, beginning of period	$	644,418		$	578,107		$	529,236		$	490,619		$	435,693

Charge-offs:
Commercial, financial and agricultural		(84,967	)		(63,387	)		(33,214	)		(34,693	)		(23,605	)
Real estate		(61,608	)		(41,035	)		(20,759	)		(19,239	)		(16,165	)
Consumer		(144,609	)		(124,359	)		(93,040	)		(79,075	)		(85,505	)
Lease receivables		(5,965	)		(2,448	)		(3,502	)		(993	)		(1,167	)

Total charge-offs		(297,149	)		(231,229	)		(150,515	)		(134,000	)		(126,442	)

Recoveries:
Commercial, financial and agricultural		18,029			14,985			12,358			13,087			9,649
Real estate		6,345			4,824			3,788			4,823			4,787
Consumer		24,890			23,955			21,430			17,344			15,645
Lease receivables		1,353			375			312			107			425

Total recoveries		50,617			44,139			37,888			35,361			30,506

Net charge-offs		(246,532	)		(187,090	)		(112,627	)		(98,639	)		(95,936	)

Provision charged to expense		263,700			224,318			147,187			126,559			126,269

Allowance of loans acquired in purchase transactions, net		62,099			29,083			14,311			10,697			24,593

Balance, end of period	$	723,685		$	644,418		$	578,107		$	529,236		$	490,619

Average loans and leases (1)	$	50,851,417		$	46,587,780		$	41,933,641		$	37,819,870		$	34,216,258

Net charge-offs as a percentage of average loans and leases		.48	%		.40	%		.27	%		.26	%		.28	%

(1)

Loans and leases are net of unearned income and include loans held for sale.

Nonperforming Assets and Classified Assets

Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessed collateral. BB&T generally places loans and leases on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest become doubtful. Loans past due 90 days or more may remain on accrual status if management determines that concern over the collectibility of principal and interest is not significant. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as the ultimate collection of the principal remains in doubt. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful.

Investment Activities

Investment securities represent a sizeable portion of BB&T’s assets. BB&T’s subsidiary banks invest in securities as allowable under bank regulations. These securities include all obligations of the U.S. Treasury, agencies of the U.S. government, including mortgage-backed securities and certain derivatives, bank eligible

obligations of any state or political subdivision, bank eligible corporate obligations, including commercial paper, negotiable certificates of deposit, bankers acceptances, mutual funds and limited types of equity securities. BB&T’s bank subsidiaries may also deal in securities subject to the provisions of the GLB Act. Scott & Stringfellow, Inc., BB&T’s full-service brokerage and investment banking subsidiary, engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Corporation.

BB&T’s investment activities are governed internally by a written, board-approved policy. Investment policy is carried out by the Corporation’s Asset/Liability Committee (“ALCO”), which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities, which are discussed in “Market Risk Management”, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Investment strategies are established by the ALCO in consideration of the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).

The following table provides information regarding the composition of BB&T’s securities portfolio at the end of each of the past three years. The trading securities reflected in the accompanying table represent positions held primarily by Scott & Stringfellow, Inc.

Table 8

Composition of Securities Portfolio

	December 31,
	2002		2001		2000
	(Dollars in thousands)
Trading Securities (at estimated fair value):	$	148,488	$	97,675	$	96,719

Securities held to maturity (at amortized cost):
U.S. Treasury and U.S. government agency obligations		55,523		40,496		536,863
States and political subdivisions		—		—		80,479
Mortgage-backed securities		—		—		1,739
Other securities		—		—		3,021

Total securities held to maturity		55,523		40,496		622,102

Securities available for sale (at estimated fair value):
U.S. Treasury and U.S. government agency obligations		11,560,414		10,918,219		9,727,118
States and political subdivisions		912,598		1,008,973		1,038,555
Mortgage-backed securities		3,869,037		3,425,288		2,805,607
Other securities		1,257,428		1,269,204		1,659,843

Total securities available for sale		17,599,477		16,621,684		15,231,123

Total securities	$	17,803,488	$	16,759,855	$	15,949,944

Sources of Funds

Deposits are the primary source of funds for lending and investing activities. Scheduled payments, as well as prepayments, loan sales and maturities from portfolios of loans and investment securities also provide a stable source of funds. Federal Home Loan Bank (“FHLB”) advances, other secured borrowings, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources.

Deposits

Deposits are attracted principally from clients within BB&T’s market area through the offering of a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money rate savings, investor deposit accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) anticipated amount and timing of funding needs, (iii) availability of and cost of alternative sources of funding, and (iv) anticipated future economic conditions and interest rates. Client deposits are attractive sources of liquidity because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other BB&T services.

The following table provides information regarding the scheduled maturities of time deposits that are $100,000 and greater at December 31, 2002.

Table 9

Scheduled Maturities of Time Deposits $100,000 and Greater

December 31, 2002

(Dollars in thousands)

Maturity Schedule
Less than three months	$	2,138,248
Three through six months		1,156,286
Seven through twelve months		926,910
Over twelve months		2,092,191

Total	$	6,313,635

Borrowed Funds

BB&T’s ability to borrow funds from nondeposit sources provides additional flexibility in meeting the liquidity needs of customers. Short-term borrowed funds include master notes, securities sold under repurchase agreements, short-term FHLB advances, Federal funds purchased and U.S. Treasury tax and loan depository note accounts. See Note 9. in the “Notes to Consolidated Financial Statements” for additional disclosures related to short-term borrowed funds. The following table summarizes certain pertinent information for the past three years with respect to BB&T’s short-term borrowed funds:

Table 10

Short-Term Borrowed Funds

	As of / For the Year Ended December 31,
	2002			2001			2000
	(Dollars in thousands)
Securities Sold Under Agreements to Repurchase
Maximum outstanding at any month-end during the year	$	2,568,897		$	2,532,813		$	2,401,223
Balance outstanding at end of year		2,511,530			2,175,510			2,371,054
Average outstanding during the year		2,479,185			2,162,917			2,220,242
Average interest rate during the year		2.02	%		3.76	%		5.74	%
Average interest rate at end of year		1.64			2.07			5.76

Other Short-term Borrowed Funds
Maximum outstanding at any month-end during the year	$	4,542,536		$	4,866,565		$	6,421,042
Balance outstanding at end of year		2,885,429			4,473,590			4,938,924
Average outstanding during the year		2,914,294			4,101,183			4,690,607
Average interest rate during the year		1.58	%		3.82	%		6.05	%
Average interest rate at end of year		1.00			4.39			6.22

BB&T also utilizes longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost-effective options for funding asset growth and satisfying capital needs. BB&T’s long-term borrowings include capitalized leases, medium-term bank notes, long-term FHLB advances, and other secured borrowings, subordinated debt issued by BB&T Corporation or the subsidiary banks and trust preferred securities. See Note 10. in the “Notes to Consolidated Financial Statements” for additional disclosures related to long-term borrowings.

Employees

At December 31, 2002, BB&T had approximately 22,500 full-time equivalent employees compared to approximately 20,400 full-time equivalent employees at December 31, 2001.

Properties

BB&T and its significant subsidiaries occupy headquarters offices that are either owned or operated under long-term leases, and also own free-standing operations centers, with its primary operations and information technology center located in Wilson, North Carolina. BB&T also owns or leases significant office space used as the Corporation’s headquarters in Winston-Salem, North Carolina. At December 31, 2002, BB&T’s subsidiary banks operated 1,122 branch offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and Washington, D.C. BB&T also operates numerous insurance agencies and other facilities. Office locations are owned or leased. Management believes that the premises occupied by BB&T and its subsidiaries are well-located and suitably equipped to serve as financial services facilities. See Note 6. “Premises and Equipment” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to BB&T’s properties and other fixed assets.

Executive Officers of BB&T

BB&T’s Chairman and Chief Executive Officer is John A. Allison, IV. As of December 31, 2002, Mr. Allison is 54 and has 32 years of service with the Corporation. Henry G. Williamson, Jr., is BB&T’s Chief Operating Officer. Mr. Williamson is 55 and has 31 years of service with the Corporation. Kelly S. King is the President of BB&T Corporation and is the Senior Executive Vice President for the Branch Network. Mr. King is 54 and has 31 years of service with the Corporation. W. Kendall Chalk is a Senior Executive Vice President and the Corporation’s Chief Credit Officer. Mr. Chalk is 57 and has served the Corporation for 28 years. Scott E. Reed is a Senior Executive Vice President and the Corporation’s Chief Financial Officer. Mr. Reed is 54 and has 31 years of service with the Corporation. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 52 and has served the Corporation for 30 years. Sherry A. Kellett is a Senior Executive Vice President and the Corporation’s Controller. Ms. Kellett is 58 and has 18 years of service with the Corporation. C. Leon Wilson III is a Senior Executive Vice President and is the Corporation’s Operations Division Manager. Mr. Wilson is 47 and has served BB&T for 26 years.

Web Site Access to BB&T’s Filings with the Securities and Exchange Commission

All of BB&T’s electronic filings with the Securities and Exchange Commission (“SEC”), including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available at no cost on the Corporation’s web site, www.bbandt.com, through the Investor Relations link as soon as reasonably practicable after BB&T files such material with, or furnishes it to, the SEC. BB&T’s SEC filings are also available through the SEC’s web site at www.sec.gov.

REGULATORY CONSIDERATIONS

General

As a financial holding company under the Gramm-Leach-Bliley Act of 1999, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the “BHCA”) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As state-chartered commercial banks, Branch Bank, BB&T-SC and BB&T-VA (collectively, the “Banks”) are subject to regulation, supervision and examination by state bank regulatory authorities in their respective home states. These authorities include the North Carolina Commissioner of Banks, in the case of Branch Bank, the South Carolina Commissioner of Banking, in the case of BB&T-SC, and the Virginia State Corporation Commission’s Bureau of Financial Institutions, in the case of BB&T-VA. Each of the State-Chartered Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”). State and Federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks’ operations.

In addition to banking laws, regulations and regulatory agencies, BB&T and certain of its subsidiaries and affiliates are subject to various other laws and regulations, and supervision and examination by other state and federal regulatory agencies. These include the regulation, examination and supervision of BB&T’s subsidiaries and affiliates engaged in securities underwriting, dealing, brokerage, investment advisory activities and insurance activities.

The earnings of BB&T’s subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which BB&T and the Banks are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

The Gramm-Leach-Bliley Act of 1999

The Gramm-Leach-Bliley Act of 1999 (the “GLB Act” or the “Act”), signed into law on November 12, 1999, amended a number of Federal banking laws that affect BB&T and its subsidiary banks, and the provisions of the Act that are believed to be of most significance to BB&T are discussed below. In particular, the GLB Act permits a bank holding company to elect to become a financial holding company. In order to become and maintain its status as a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating. BB&T filed an election and on June 14, 2000, became a financial holding company.

Under the BHCA, a financial holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA, as amended by the GLB Act, now generally limits the activities of a bank holding company that is a financial holding company to that of banking, managing or controlling banks; performing certain servicing activities for subsidiaries; and engaging in any activity, or acquiring and retaining the shares of any company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity, as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury; or (2) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, as determined by the Federal Reserve Board. Activities that are “financial in nature” include those activities that the Federal Reserve Board had determined, by order or regulation in effect prior to enactment of the GLB Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The GLB Act covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. In particular, the GLB Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations between banks and securities

firms. The Act also provides that, while the states continue to have the authority to regulate insurance activities, in most instances they are prohibited from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. A financial holding company, therefore, may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and insurance underwriting, sales and brokerage activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain areas identified in the Act. The Act directs the Federal bank regulatory agencies to adopt insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures, and such regulations have been adopted and became effective April 1, 2001.

The GLB Act includes a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. The Act repealed the broad exemption of banks from the definitions of “broker” and “dealer” for purposes of the Securities Exchange Act of 1934, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a “broker”, and a set of activities in which a bank may engage without being deemed a “dealer”. The Act also makes conforming changes in the definitions of “broker” and “dealer” for purposes of the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

The GLB Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The Act also provides that the states may adopt customer privacy protections that are stricter than those contained in the Act. The Act also makes a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. The Act also contains requirements for the posting of notices by operators of automated teller machines regarding fees charged for the use of such machines.

Many of the GLB Act’s provisions, including the customer privacy protection provisions, require the Federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement those respective provisions, and the required implementing regulations have been adopted by the bank regulatory agencies. Neither the provisions of the GLB Act nor the Act’s implementing regulations, as proposed or adopted, have had a material impact on BB&T’s or the Banks’ regulatory capital ratios or well capitalized status (as discussed below) or ability to continue to operate in a safe and sound manner.

Payment of Dividends

BB&T is a legal entity separate and distinct from its subsidiaries. The majority of BB&T’s revenue is from dividends paid to BB&T by its banking subsidiaries. BB&T’s banking subsidiaries are subject to laws and regulations that limit the amount of dividends they can pay. In addition, both BB&T and its Subsidiary Banks are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. BB&T does not expect that any of these laws, regulations or policies will materially affect the ability of the Banks to pay dividends. During the year ended December 31, 2002, the Banks declared $974.5 million in dividends payable to

BB&T. Subject to restrictions imposed by state laws and federal regulations, the Boards of Directors of the Subsidiary Banks could have declared dividends from their retained earnings up to $2.8 billion at December 31, 2002.

Capital

The Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency (the “OCC”) have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Additionally, as noted above under the GLB Act, a bank holding company that elects to become a financial holding company must be well-managed, have at least a satisfactory Community Reinvestment Act rating, and be well-capitalized. Under the risk-based capital requirements, BB&T and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles (“Tier 1 capital”). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance (“Tier 2 capital” which, together with Tier 1 capital, composes “total capital”). To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total risk-weighted capital ratio of at least 10% and a Tier 1 risk-weighted ratio of 6% or greater. The ratios of Tier 1 capital and total capital to risk-adjusted assets for BB&T and the Subsidiary Banks as of December 31, 2002, are shown in the following table.

In addition, each of the Federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Pursuant to these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. The leverage ratios of BB&T and the Subsidiary Banks as of December 31, 2002, also are reflected in the following table.

Table 11

Capital Adequacy Ratios of BB&T Corporation and Principal Banking Subsidiaries

December 31, 2002

	Regulatory Minimums		Regulatory Minimums to be Well-Capitalized		BB&T		Branch Bank		BB&T- SC		BB&T- VA
Risk-based capital ratios:
Tier 1 capital (1)	4.0	%	6.0	%	9.2	%	10.2	%	10.3	%	10.8	%
Total risk-based capital (2)	8.0		10.0		13.4		11.9		11.6		12.1
Tier 1 leverage ratio (3)	3.0		5.0		6.9		7.4		7.8		7.0

(1)

Shareholders’ equity plus corporation-obligated mandatorily redeemable capital securities, less unrealized gains (losses) on debt securities available for sale, net of deferred income taxes, less nonqualifying intangible assets; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.

(2)

Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.

(3)

Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles.

The Federal Deposit Insurance Corporation Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. BB&T and each of the Banks are classified as “well-capitalized”. FDICIA also requires the bank regulatory agencies to implement systems for “prompt corrective action” for institutions that fail to meet minimum capital requirements within these five categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Failure to meet capital requirements can also cause an institution to be directed to raise additional capital. FDICIA also mandates that the agencies adopt safety and soundness

standards relating generally to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.

In addition, the Federal Reserve Board, the FDIC and the OCC each by regulation has adopted risk-based capital standards that explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by each agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy. The agencies also jointly adopted a regulation, effective January 1, 2002, amending their regulatory capital standards to change the treatment of certain recourse obligations, direct credit subsidies, residual interest and other positions in securitized transactions that expose banking organizations to credit risk. The regulation amends the agencies’ regulatory capital standards to align more closely the risk-based capital treatment of recourse obligations and direct credit subsidies, to vary the capital requirements for positions in securitized transactions (and certain other credit exposures) according to their relative risk, and to require capital commensurate with the risks associated with residual interests.

In addition to the “prompt corrective action” directives, failure to meet capital guidelines can subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC, and under certain conditions the appointment of a conservator or receiver.

Deposit Insurance Assessments

The deposits of the Banks are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC. However, a portion of the Banks’ deposits (relating to the acquisitions of various savings associations) are subject to assessments imposed by the Savings Association Insurance Fund (“SAIF”) of the FDIC.

The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1998. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. Legislation was enacted in 1997 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”). At December 31, 2002, the FDIC assessed BIF-insured and SAIF-insured deposits an additional 1.70 basis points per $100 of deposits to cover those obligations. At December 31, 2002, BB&T’s assessment is limited to this 1.70 basis points.

Other Safety and Soundness Regulations

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.

State banking regulators and the OCC also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of a North Carolina state bank) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner of Banks also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.

Interstate Banking and Branching

Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1998, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years; and certain deposit market-share limitations. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

On October 26, 2001, the USA Patriot Act of 2001 was signed into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. BB&T does not expect that compliance with the IMLAFA will have a material impact on BB&T’s or the Banks’ results of operations or financial condition.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Many of the provisions became effective immediately while other provisions become effective over a period of 30 to 270 days and are subject to rulemaking by the Securities and Exchange Commission. Although BB&T anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, BB&T does not expect that such compliance will have a material impact on BB&T’s or the Banks’ results of operations or financial condition.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion and analysis of the consolidated financial condition and consolidated results of operations of BB&T Corporation and subsidiaries (“BB&T” or the “Corporation”) for each of the three years in the period ended December 31, 2002, and related financial information, are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T’s 2002 performance.

Reclassifications

In certain circumstances, reclassifications have been made to prior period information to conform to the 2002 presentation.

Mergers and Acquisitions Completed during 2002

During 2002, BB&T completed the following mergers and acquisitions, all of which were accounted for as purchases as required by current accounting regulations.

On January 1, 2002, BB&T completed its acquisition of Cooney, Rickard & Curtin, Inc. (“CRC”), the largest independently owned wholesale insurance broker in the nation based in Birmingham, Alabama. In connection with the transaction, BB&T issued 2.5 million shares of common stock valued at $85.6 million. CRC’s assets totaled $108.6 million at time of acquisition. BB&T recorded $59.4 million in goodwill and $42.7 million in other intangible assets in connection with the acquisition.

On March 8, 2002, BB&T completed its acquisition of Louisville, Kentucky-based MidAmerica Bancorp (“MidAmerica”). To complete the acquisition, BB&T paid $94.9 million in cash and issued 8.2 million shares of common stock valued at $284.9 million in exchange for all of the outstanding common shares of MidAmerica. MidAmerica’s assets totaled $2.0 billion at the time of acquisition and BB&T recorded $230.4 million in goodwill and other intangible assets in connection with the acquisition.

On March 20, 2002, BB&T completed its acquisition of AREA Bancshares Corporation (“AREA”) of Owensboro, Kentucky. BB&T issued 13.2 million shares of common stock valued at $448.9 million in exchange for all of the outstanding common shares of AREA. AREA’s assets totaled $2.9 billion at the time of acquisition and BB&T recorded $279.2 million in goodwill and other intangible assets in connection with the acquisition.

On September 13, 2002, BB&T completed its acquisition of Regional Financial Corp. (“Regional”), the parent company for First South Bank based in Tallahassee, Florida. BB&T issued 7.3 million shares of common stock valued at $276.3 million in exchange for all of the outstanding common shares of Regional. Regional’s assets totaled $1.6 billion at the time of acquisition and BB&T recorded $235.7 million in goodwill and other intangible assets in connection with the acquisition.

BB&T also acquired the following nonbank financial services companies during 2002, all of which were immaterial in relation to BB&T: Ryan, Lee & Co. Inc., an investment banking and brokerage firm based in McLean, Virginia; The Pfefferkorn Company (“Pfefferkorn”), a mortgage banking company based in Winston-Salem, North Carolina; Virginia Investment Counselors, Inc. (“VIC”), an investment advisory firm based in Norfolk, Virginia; Hunt, DuPree, Rhine & Associates, Inc., an employee benefits and investment advisory firm based in Greenville, South Carolina; and American Marketing Center, Inc., a New York City-based wholesale insurance broker specializing in real estate products.

In addition to the mergers and acquisitions noted above, BB&T acquired a number of insurance agencies during 2002. See Note 2. in the “Notes to Consolidated Financial Statements” for further information regarding mergers and acquisitions.

Pending Mergers and Acquisitions

On September 27, 2002, BB&T announced plans to acquire Equitable Bank (“Equitable”), based in Wheaton, Maryland. At the time of the announcement, Equitable had $477 million in assets and operated five full-service banking offices in Montgomery and Prince George’s counties. Shareholders of Equitable will receive one share of BB&T common stock in exchange for each share of Equitable. The transaction is expected to be completed in the first quarter of 2003. BB&T expects to issue $1.4 million shares of common stock to consummate the transaction.

On December 4, 2002, BB&T announced plans to acquire Southeastern Fidelity Corporation (“SEFCO”), an insurance premium finance company based in Tallahassee, Florida. Pending regulatory approval, the transaction is planned to be completed in the first quarter of 2003.

On January 21, 2003, BB&T announced plans to acquire First Virginia Banks, Inc. (“First Virginia”), a bank holding company headquartered in Falls Church, Virginia. First Virginia was the parent company to eight community banks and operated 364 branches in Virginia, Maryland, and northeast Tennessee at the time of the announcement. At December 31, 2002, First Virginia had $11.2 billion in assets, including $6.4 billion in loans and $4.0 billion in investment securities, and $9.2 billion of deposits. Shareholders of First Virginia will receive 1.26 BB&T shares in exchange for each share of First Virginia. The merger, which is subject to regulatory and shareholder approval, is expected to be completed in the second quarter of 2003. BB&T expects to issue $89.3 million shares of common stock to consummate the transaction.

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 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, expenses and related disclosures. 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. The more critical accounting and reporting policies include BB&T’s accounting for the allowance for loan and lease losses, valuation of mortgage servicing rights, mergers and acquisitions, and income taxes. BB&T’s accounting policies are fundamental to understanding BB&T’s consolidated financial position and consolidated results of operations. Accordingly, BB&T’s significant accounting policies are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements”.

The following is a summary of BB&T’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.

The allowance for loan and lease losses is established and maintained at levels management deems adequate to cover probable losses inherent in the portfolio as of the balance sheet date and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates for loan losses are determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan administration, the opinions of our regulators, changes in the size, composition and risk assessment of the loan portfolio. Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which is uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business.

BB&T has a significant mortgage loan-servicing portfolio and has capitalized the associated servicing rights. Mortgage servicing rights represent the present value of the future servicing fees from the right to service loans in the portfolio. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires the development of a number of estimates, including anticipated loan principal amortization and prepayments of principal. The value of capitalized mortgage servicing rights is significantly affected by interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the

value of mortgage servicing assets declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing assets generally increases due to reduced refinance activity. BB&T amortizes mortgage servicing rights over the estimated period that servicing income is expected to be received based on projections of the amount and timing of future cash flows. The amount and timing of servicing asset amortization is adjusted periodically based on actual results and updated projections. Please refer to Note 8 in the “Notes to Consolidated Financial Statements” for quantitative disclosures reflecting the effect that changes in management’s assumptions would have on the fair value of capitalized mortgage servicing rights.

BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. Prior to 2002, BB&T’s acquisitions were accounted for using the pooling-of-interests and purchase business combination methods of accounting. Effective July 1, 2001, BB&T adopted SFAS No. 141, “Business Combinations,” which allows only the use of the purchase method of accounting. For purchase acquisitions, BB&T is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective as is the appropriate amortization period for such intangible assets. These estimates also include the establishment of various accruals and allowances based on planned facilities 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 calculation of BB&T’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of the Company’s overall business strategy, management must consider tax laws and regulations that apply to the specific facts and circumstances under consideration. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management closely monitors tax developments in order to evaluate the effect they may have on the Company’s overall tax position.

BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and the determination of future market values of plan assets are subject to management judgment and may differ significantly if different assumptions are used. Please refer to Note 13 in the “Notes to Consolidated Financial Statements” for disclosures related to BB&T’s benefit plans, including quantitative disclosures reflecting the impact that changes in certain assumptions would have on service and interest costs and benefit obligations.

Analysis of Financial Condition

For the year ended December 31, 2002, BB&T’s average assets totaled $75.8 billion, an increase of $7.0 billion, or 10.1%, compared to the 2001 average of $68.8 billion. The major balance sheet categories with increases in average balances were loans and leases, up $4.3 billion, or 9.2%, and securities, which increased $1.1 billion, or 6.6%. The primary components of growth in average loans and leases were commercial loans and leases, which increased $2.7 billion, or 10.7%; mortgage loans, which increased $325.1 million, or 3.5%; revolving credit loans, which increased $97.7 million, or 11.0%; and consumer loans, which increased $1.1 billion, or 10.1%. Total earning assets averaged $68.2 billion in 2002, an increase of $5.3 billion, or 8.5%, compared to 2001.

BB&T’s average deposits totaled $49.1 billion, reflecting growth of $4.9 billion, or 11.0%, compared to 2001. The categories of deposits with the highest growth rates were: money rate savings, which increased $2.3 billion, or 18.6%, noninterest-bearing deposits, which increased $995.4 million, or 16.0%, and certificates of deposit and other time deposits, which increased $1.6 billion, or 7.0%.

Short-term borrowed fund include Federal funds purchased, securities sold under repurchase agreements, master notes, short-term bank notes and Federal Home Loan Bank (“FHLB”) advances. Average short-term borrowed funds totaled $5.4 billion for the year ended December 31, 2002, a decrease of $870.6 million, or 13.9%, from the 2001 average. BB&T has also utilized long-term debt based on the flexibility and cost-effectiveness of

the alternatives available. Long-term debt includes FHLB advances, other secured borrowings by subsidiary banks and subordinated debt issued by the Corporation and Branch Bank. Average long-term debt totaled $12.1 billion for the year ended December 31, 2002, up $1.1 billion, or 10.0%, compared to 2001.

The compound annual rate of growth in average total assets for the five-year period ended December 31, 2002, was 10.6%. Over the same five-year period, average loans and leases increased at a compound annual rate of 10.7%, average securities increased at a compound annual rate of 7.5%, and average deposits grew at a compound annual rate of 7.9%. All balance sheet growth rates referred to include the effect of acquisitions accounted for as purchases, as well as internal growth.

Securities