BB&T 2008 Annual Report Download - page 135

BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
hedges of $11 million and unrecognized after-tax losses of $3 million at December 31, 2008 and 2007, respectively.
Also included in accumulated other comprehensive income at December 31, 2008 are unrecognized after-tax gains
of $3 million on terminated interest rate swaps hedging variable interest payments on long term debt.
The estimated net amount in accumulated other comprehensive income at December 31, 2008 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 2008 and 2007 was a net after-tax gain
of $61 million and $5 million, respectively. During 2006, the amount reclassified into earnings from other
comprehensive income was not material.
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 is 7.4 years.
BB&T also held $60.1 billion and $31.6 billion in notional value of derivatives not designated as hedges at
December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, these instruments were in a net gain
position with a net estimated fair value of $190 million and $74 million, respectively. 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 $25.1 billion and $9.4 billion have been entered into as risk management instruments for mortgage
servicing rights and mortgage banking operations at December 31, 2008 and 2007, 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, 2008 and 2007, respectively, BB&T held
derivatives not designated as hedges with notional amounts totaling $9.3 billion and $6.4 billion that have been
entered into to facilitate transactions on behalf of BB&T’s clients. BB&T also held derivatives not designated as
hedges with notional amounts totaling $25.7 billion and $15.8 billion at December 31, 2008 and 2007, respectively,
as risk management instruments primarily related to client derivatives, balance sheet management and capital
markets activities.
Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable.
Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or
payable, the risk of loss with any counterparty is limited to a small fraction of the notional amount. BB&T
controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in
making loans and other extensions of credit. In addition, certain counterparties are required to provide cash
collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. As of December 31, 2008
and 2007, BB&T had received cash collateral of approximately $165 million and $75 million, respectively. In
addition, BB&T had posted collateral of $180 million and $8 million at December 31, 2008 and 2007, respectively.
As of December 31, 2008, BB&T had approximately $59 million of unsecured positions with derivative dealers. All
of the derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. In the case of
contracts with derivative dealers, BB&T only transacts with dealers that are national market makers whose
credit ratings are strong. Further, BB&T has netting agreements with the dealers with which it does business.
Because of these factors, BB&T’s credit risk exposure related to derivatives contracts at December 31, 2008 and
2007 was not material.
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