BB&T 2008 Annual Report Download - page 41

results and updated projections. Please refer to Note 8 “Loan Servicing” in the “Notes to Consolidated Financial
Statements” for quantitative disclosures reflecting the effect that changes in management’s assumptions would
have on the fair value of MSRs.
Loans Held for Sale
BB&T originates certain mortgage loans to be sold to investors. The majority of these loans are carried at
fair value based on the Fair Value Option. For these loans, the fair value is primarily based on quoted market
prices for securities backed by similar types of loans. Changes in the fair value are recorded as a component of
mortgage banking income while mortgage loan origination costs for loans held for sale for which the Corporation
elected the Fair Value Option are recognized in noninterest expense when incurred. The changes in fair value of
these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair
value of servicing associated with the mortgage loan held for sale. BB&T uses various derivative instruments to
mitigate the income statement effect of changes in fair value of the underlying loans.
Derivatives
BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments
are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily
sensitive to market observable data. BB&T mitigates the credit risk 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 collateral to BB&T when their unsecured loss positions exceed certain
negotiated limits. The fair value of interest rate lock commitments, which are related to mortgage loan
commitments, is based on quoted market prices adjusted for commitments that BB&T does not expect to fund
and includes the value attributable to the net servicing fee.
Venture Capital Investments
BB&T has venture capital investments that are carried at fair value. Changes in the fair value of these
investments are recorded in other noninterest income each period. In many cases there are no observable market
values for these investments and therefore management must estimate the fair value based on a comparison of
the operating performance of the company to multiples in the marketplace for similar entities. This analysis
requires significant judgment and actual values in a sale could differ materially from those estimated. As of
December 31, 2008, BB&T had $183 million of venture capital investments, which is less than 1% of total assets.
Intangible Assets
BB&T’s growth in business, profitability and market share over the past several years has been enhanced
significantly by mergers and acquisitions. BB&T’s mergers and acquisitions are accounted for using the purchase
method of accounting. Under the purchase method, BB&T is required to record the assets acquired, including
identified intangible assets, and liabilities assumed at their fair value, which often involves estimates based on
third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other
valuation techniques, which are inherently subjective. The amortization of identified intangible assets is based
upon the estimated economic benefits to be received, which is also subjective. These estimates also include the
establishment of various accruals and allowances based on planned facility dispositions and employee severance
considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in
goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired
compared to the carrying value of goodwill. Please refer to Note 1 “Summary of Significant Accounting Policies”
in the “Notes to Consolidated Financial Statements” for a description of BB&T’s impairment testing process. The
major assumptions used in the impairment testing process include the estimated future cash flows of each
business unit and discount rates. Discount rates are unique to each business unit and are based upon the cost of
capital specific to the industry in which the business unit operates. Management has evaluated the effect of
lowering the estimated future cash flows or increasing the discount rate for each business unit by 10% and
determined that no impairment of goodwill would have been recognized under this evaluation. However, as a
result of the market disruption and the decline in market capitalization, the excess of the fair value over the
carrying value of several reporting units continues to narrow. A continuing period of market disruption, or
further market deterioration, may result in impairment of goodwill in the future.
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