BB&T 2007 Annual Report Download - page 121

BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At December 31, 2007 and 2006, BB&T had designated notional values of $8.7 billion and $3.9 billion,
respectively, of derivatives as fair value hedges. At December 31, 2007, fair value hedges reflected a net
unrealized gain of $109 million, with instruments in a gain position reflecting a fair value of $148 million recorded
in other assets and instruments in a loss position with a fair value of $39 million recorded in other liabilities. At
December 31, 2006, derivatives designated as fair value hedges reflected a net unrealized loss of $47 million,
composed of instruments in a gain position with a fair value of $50 million and instruments in a loss position with a
fair value of $97 million. The impact on earnings resulting from fair value hedge ineffectiveness was a loss of $2
million during 2007, 2006 and 2005.
At December 31, 2007 and 2006, BB&T had designated derivatives with notional values of $6.8 billion and
$4.8 billion, respectively, as cash flow hedges. These instruments were in a net loss position of $2 million at
December 31, 2007 and a net gain position of $6 million at December 31, 2006. The effect on earnings resulting
from the ineffectiveness of cash flow hedges was not material for 2007, 2006 or 2005.
Accumulated other comprehensive income included $14 million in unrecognized after-tax gains and $15
million in unrecognized after-tax losses on interest rate swaps, floors and collars hedging variable interest
payments on business loans at December 31, 2007 and 2006, respectively. These amounts included unrecognized
after-tax gains on previously terminated swaps of $7 million and $1 million at December 31, 2007 and
December 31, 2006, respectively. In addition, accumulated other comprehensive income included $14 million in net
unrecognized after-tax losses and $15 million in net unrecognized after-tax gains on interest rate swaps and caps
hedging variable interest payments on Federal funds purchased, institutional certificates of deposit, other time
deposits, medium term bank notes, FHLB advances and long term debt at December 31, 2007 and 2006,
respectively. These amounts included unrecognized after-tax losses of $3 million and $1 million on interest rate
caps at December 31, 2007 and 2006, respectively. BB&T’s floating rate business loans, Federal funds purchased,
institutional certificates of deposit, other time deposits, medium term bank notes and long term debt expose it to
variability in cash flows for interest payments. The risk management objective for these assets and liabilities is to
hedge the variability in the interest payments. This objective is met by entering into interest rate swaps, and
interest rate collars and caps. Interest rate collars and caps fix the interest payments when interest rates on the
hedged item exceed predetermined rates.
The estimated net amount in accumulated other comprehensive income at December 31, 2007 that is
expected to be reclassified into earnings within the next 12 months is a net after-tax loss of $9 million. The
amount reclassified into earnings from other comprehensive income during 2007 was a net after-tax gain of $5
million and was not material during 2006. During 2005, BB&T reclassified into earnings from other
comprehensive income after-tax net gains of $3 million.
All of BB&T’s cash flow hedges are hedging exposure to variability in future cash flows for forecasted
transactions related to the payment of variable interest on then existing financial instruments. The maximum
length of time over which BB&T is hedging its exposure to the variability in future cash flows for forecasted
transactions related to variable interest payments on existing financial instruments is 2.8 years.
BB&T also held $31.6 billion and $14.4 billion in notional value of derivatives not designated as hedges at
December 31, 2007 and 2006, respectively. At December 31, 2007, these instruments were in a net gain position
with a net estimated fair value of $74 million. At December 31, 2006, these instruments were in a net loss position
with a net estimated fair value of $4 million. Changes in the fair value of these derivatives are reflected in current
period earnings. Derivatives not designated as a hedge in the notional amounts of $9.4 billion and $6.1 billion have
been entered into as risk management instruments for mortgage servicing rights and mortgage banking
operations at December 31, 2007 and 2006, respectively. For mortgage loans originated for sale, BB&T is exposed
to changes in market rates and conditions subsequent to the interest rate lock and funding date. BB&T’s
economic hedge strategy related to its interest rate lock commitment derivatives and loans held for sale includes
utilizing mortgage-based derivatives such as forward commitments and options in order to mitigate market risk.
At December 31, 2007 and 2006, respectively, BB&T held derivatives not designated as hedges with notional
121