BB&T 2009 Annual Report Download - page 68

Provision for Income Taxes
BB&T’s provision for income taxes totaled $159 million for 2009, a decrease of $391 million, or 71.1%,
compared to 2008. The decline in the provision for income taxes during 2009 was largely due to lower pretax
income, stable tax-exempt income and non-taxable gains of $19 million primarily related to leveraged lease
terminations. The provisions for income taxes totaled $550 million in 2008 and $836 million in 2007. BB&T’s
effective tax rates for the years ended 2009, 2008 and 2007 were 15.3%, 26.5% and 32.4%, respectively. The decline
in the provision for income taxes during 2008 was largely due to lower pretax income, as well as a credit of $60
million related to leveraged leases as discussed below. A reconciliation of the effective tax rate to the statutory
tax rate is included in Note 13 “Income Taxes” in the “Notes to Consolidated Financial Statements” herein.
BB&T has extended credit to, and invested in, the obligations of states and municipalities and their agencies,
and has made other investments and loans that produce tax-exempt income. The income generated from these
investments together with certain other transactions that have favorable tax treatment have reduced BB&T’s
overall effective tax rate from the statutory rate in 2009, 2008 and 2007.
BB&T continually monitors and evaluates the potential impact of current events and circumstances on the
estimates and assumptions used in the analysis of its income tax positions and, accordingly, BB&T’s effective tax
rate may fluctuate in the future. On a periodic basis, BB&T evaluates its income tax positions based on tax laws
and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation
takes into consideration the status of current taxing authorities’ examinations of BB&T’s tax returns, recent
positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in
relation to tax-advantaged transactions. Accordingly, the results of these examinations may alter the timing or
amount of taxable income or deductions or the allocation of income among tax jurisdictions. In February 2010,
BB&T received a statutory notice of deficiency from the IRS for tax years 2002-2007 asserting a liability for
taxes, penalties and interest of approximately $890 million related to foreign tax credits and other deductions
claimed by a deconsolidated subsidiary in connection with a financing transaction. Management has consulted
with outside counsel and continues to believe that BB&T’s treatment of this transaction was in compliance with
applicable tax laws and regulations. Consequently, BB&T will pay the disputed tax, penalties and interest in the
first quarter of 2010 and then file a lawsuit seeking a refund in federal court. Management believes the
Company’s current reserves for this matter are adequate, although the final outcome is uncertain. Final
resolution of this matter is not expected to occur within the next twelve months. Various years remain subject to
examination by state taxing authorities. Please refer to Note 13 “Income Taxes” in the “Notes to Consolidated
Financial Statements” herein for additional disclosures related to BB&T’s unresolved tax issues related to tax
examinations by the IRS and other taxing authorities.
During the fourth quarter of 2008, BB&T agreed to treat its leveraged leases in accordance with the IRS’s
proposal that, among other things, allows 20% of deductions, imputes interest income and deems the remaining
transactions to be terminated as of December 31, 2008. As a result of this settlement, BB&T recognized pre-tax
interest income of $93 million, or $60 million after-tax, which is reflected as a reduction in tax expense. As a result
of changes in the timing of tax payments, a recalculation of each transaction was required that resulted in a $67
million charge to interest income and a corresponding $24 million tax benefit. As part of the IRS proposal, all
gains on leases terminated prior to December 31, 2010 are treated as nontaxable. During 2009, BB&T terminated
a number of leveraged lease transactions, which resulted in tax benefits of $18 million.
Market Risk Management
The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a
financial institution, BB&T’s most significant market risk exposure is interest rate risk; however, market risk
also includes product liquidity risk, price risk and volatility risk. The primary objective of interest rate risk
management is to minimize any adverse effect that changes in interest rates may have on net interest income.
This is accomplished through active management of asset and liability portfolios with a focus on the strategic
pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The
goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T’s
portfolios of assets and liabilities that will produce consistent net interest income during periods of changing
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