BB&T 2008 Annual Report Download - page 137

BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
for employee incentives, certain revenues of Residential Mortgage Banking, Sales Finance, Specialized Lending,
Insurance Services, Financial Services and other segments are reflected in the individual segment results and
also allocated to the Banking Network. This double counting of revenue is reflected in intersegment net referral
fees and eliminated to arrive at consolidated results. Allocation methodologies are subject to periodic adjustment
as the internal management accounting system is revised and business or product lines within the segments
change. Also, because the development and application of these methodologies is a dynamic process, the financial
results presented may be periodically revised.
BB&T’s overall objective is to maximize shareholder value by optimizing return on equity and managing
risk. Allocations of capital and the economic provision for loan and lease losses are designed to address this
objective. Capital is assigned to each segment on an economic basis, using management’s assessment of the
inherent risks associated with the segment. Capital allocations are made to cover the following risk categories:
credit risk, liquidity risk, interest rate risk, option risk, basis risk, market risk and operational risk. Each
segment is evaluated based on a risk-adjusted return on capital. Capital assignments are not equivalent to
regulatory capital guidelines, and the total amount assigned to all segments typically varies from total
consolidated shareholders’ equity.
The economic provision for loan and lease losses is also allocated to the relevant segments based on
management’s assessment of the segments’ risks as described above. Unlike the provision for loan and lease
losses recorded pursuant to generally accepted accounting principles, the economic provision adjusts for the
impact of expected credit losses over the effective lives of the related loans and leases. Any over or under
allocated provision for loan and lease losses is reflected in Parent/Reconciling Items to arrive at consolidated
results.
BB&T allocates expenses to the reportable segments based on various methodologies, including volume and
amount of loans and deposits and the number of full-time equivalent employees. A portion of corporate overhead
expense is not allocated, but is retained in corporate accounts and reflected as Parent/Reconciling Items in the
accompanying tables. Income taxes are allocated to the various segments based on taxable income and statutory
rates applicable to the segment.
BB&T utilizes a funds transfer pricing (“FTP”) system to eliminate the effect of interest rate risk from the
segments’ net interest income because such risk is centrally managed within the Treasury segment. The FTP
system credits or charges the segments with the economic value or cost of the funds the segments create or use.
The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each
segment. The net FTP credit or charge, which includes intercompany interest income and expense, is reflected as
net funds transfer pricing in the accompanying tables.
Early in 2009, management evaluated its allocation methodologies for the economic provision for loan and
lease losses and FTP given the deterioration in the loan portfolio and the dislocation in the LIBOR rate during
2008. Based on this evaluation, management updated its allocations of the economic provision for loan and lease
losses and FTP to reflect these events that occurred in 2008. The 2008 results presented in the three-year
comparative table reflect the updated methodologies for the economic provision for loan and lease losses and
FTP. In addition, a separate presentation of the 2008 results based on the prior methodologies has been provided.
Banking Network
BB&T’s Banking Network serves individual and business clients by offering a variety of loan and deposit
products and other financial services. The Banking Network is primarily responsible for serving client
relationships, and, therefore, is credited with revenue from the Residential Mortgage Banking, Financial
Services, Insurance Services, Specialized Lending, Sales Finance and other segments, which is reflected in net
referral fees. Amortization and depreciation expense that has been allocated to the segment totaled $82 million,
$86 million and $88 million for 2008, 2007 and 2006, respectively.
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