BB&T 2007 Annual Report Download - page 15

commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the
Corporation’s risk philosophy. In addition to its normal underwriting due diligence, BB&T uses automated
“scoring systems” to help underwrite the credit risk in its consumer portfolio.
The consumer loan portfolio consists of three primary sub-portfolios—direct retail, revolving credit and sales
finance. The direct retail category consists mainly of home equity loans and lines of credit, which are secured by
residential real estate. It also includes installment loans and some unsecured lines of credit other than credit
cards. The revolving credit category is comprised of the outstanding balances on credit cards and BB&T’s
checking account overdraft protection product, Constant Credit. Such balances are generally unsecured and
actively managed by BB&T Bankcard Corporation. Finally, the sales finance category primarily includes secured
indirect installment loans to consumers for the purchase of automobiles. Such loans are originated through
approved franchised and independent automobile dealers throughout the BB&T market area and, to a lesser
degree, states outside BB&T’s market area. The sales finance category also includes loans for the purchase of
boats and recreational vehicles originated through dealers in BB&T’s market area. Substantially all consumer
loans, excluding the revolving credit portfolio, are secured.
Mortgage Loan Portfolio
BB&T is a large originator of residential mortgage loans, with originations in 2007 totaling $11.9 billion.
Branch Bank offers various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing
or refinancing residential properties. BB&T primarily originates conforming mortgage loans and higher quality
jumbo and construction-to-permanent loans for owner-occupied properties. Conforming loans are loans that are
underwritten in accordance with the underwriting standards set forth by the Federal National Mortgage
Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). They are
generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or
less, and are made to borrowers in good credit standing.
Risks associated with the mortgage lending function include interest rate risk, which is mitigated through
the sale of substantially all conforming fixed-rate loans in the secondary mortgage market and an effective
mortgage servicing rights hedge process. Borrower risk is lessened through rigorous underwriting procedures
and mortgage insurance. The right to service the loans and receive servicing income is generally retained when
conforming loans are sold. Management believes that the retention of mortgage servicing is a primary
relationship driver in retail banking and a vital part of management’s strategy to establish profitable long-term
customer relationships and offer high quality client service. BB&T also purchases residential mortgage loans
from correspondent originators. The loans purchased from third-party originators are subject to the same
underwriting and risk-management criteria as loans originated internally.
Specialized Lending Portfolio
BB&T’s specialized lending portfolio consists of loans originated through six wholly owned subsidiaries that
provide specialty finance alternatives to consumers and businesses including: dealer-based financing of equipment
for small businesses and consumers, commercial equipment leasing and finance, direct and indirect consumer
finance, insurance premium finance, indirect subprime automobile finance, and full-service commercial mortgage
banking. BB&T offers these services to bank clients as well as nonbank clients within and outside BB&T’s
primary geographic market area.
The specialized lending portfolio carries a higher overall credit risk profile than BB&T’s other portfolios with
a corresponding higher yield on the loans. BB&T’s specialized lending subsidiaries adhere to the same overall
underwriting approach as the commercial and consumer lending portfolio and also utilize automated credit
scoring to assist with underwriting the credit risk. The majority of these loans are relatively homogenous and no
single loan is individually significant in terms of its size and potential risk of loss. The majority of the loans are
secured by real estate, automobiles, equipment or unearned insurance premiums. As of December 31, 2007,
included in the specialized lending portfolio are loans to subprime borrowers of approximately $2.4 billion, or 2.6%
of the total BB&T loan and lease portfolio. Of these, approximately $350 million are residential real estate loans
and included in the disclosures in Table 6 herein.
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