BB&T 2009 Annual Report Download - page 39

value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity.
Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced
refinance activity. Commercial MSRs are carried at lower of cost or market and amortized over the estimated
period that servicing income is expected to be received based on projections of the amount and timing of
estimated future cash flows. The amount and timing of servicing asset amortization is updated based on actual
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 upon the election of 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, 2009, BB&T had $281 million of venture capital investments, which is less than 1% of total assets.
Intangible Assets
BB&T’s mergers and acquisitions are accounted for using the acquisition method of accounting. Under the
acquisition 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, all of
which are inherently subjective. The amortization of identified intangible assets is based upon the estimated
economic benefits to be received, which is also subjective. Acquisitions typically result in goodwill, which is
subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to their
carrying value. 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 evaluated the sensitivity of the significant
assumptions in its impairment analysis including consideration of a 10% change in estimated future cash flows or
the discount rate for each reporting unit. After giving appropriate consideration to all available information,
management determined that no impairment of goodwill would have been incurred. However, as a result of the
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