BB&T 2007 Annual Report Download - page 18

observable data related to industry and general economic trends; and any significant, relevant changes to BB&T’s
policies and procedures. Any adjustments to historical loss experience are based on one or more sets of
observable data as described above and are directionally consistent with changes in the data from period to
period, taking into account the interaction of components over time. The adjusted historical loss information is
applied to pools of loans grouped according to similar risk characteristics to calculate components of the
allowance. In the commercial lending portfolio, each loan is assigned a “risk grade” at origination by the account
officer and the assigned risk grade is subsequently reviewed and finalized through BB&T’s established loan
review committee process. Loans are assigned risk grades based on an assessment of conditions that affect the
borrower’s ability to meet contractual obligations under the loan agreement. This process includes reviewing
borrowers’ financial information, historical payment experience, credit documentation, public information, and
other information specific to each borrower. The established risk management regimen includes a review of all
credit relationships with total credit exposure of $1 million or more on an annual basis or at any point
management becomes aware of information affecting the borrower’s ability to fulfill their obligations. In addition,
for small business and commercial clients where total credit exposure is less than $1 million, BB&T has developed
an automated loan review system to identify and proactively manage accounts with a higher risk of loss. The
“score” produced by this automated system is updated monthly. All of the loan portfolios grouped in the retail
lending and specialized lending categories typically employ scoring models to segment credits into groups with
homogenous risk characteristics. Scoring models are validated on a periodic basis in order to ensure reliable
default rate information. This information is employed to evaluate the levels of risk associated with new
production as well as to assess any risk migration in the existing portfolio.
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 management’s best estimate of 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 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. The allocated and unallocated portions
of the allowance are 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.
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