BB&T 2009 Annual Report Download - page 69

interest rates. BB&T’s Market Risk and Liquidity Committee monitors loan, investment and liability portfolios to
ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper fixed-rate and
variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable net interest margins and
assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and
borrowed funds. It is the responsibility of the Market Risk and Liquidity Committee to determine and achieve
the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as to ensure an
adequate level of liquidity and capital, within the context of corporate performance goals. The Market Risk and
Liquidity Committee also sets policy guidelines and establishes long-term strategies with respect to interest rate
risk exposure and liquidity. The Market Risk and Liquidity Committee meets regularly to review BB&T’s
interest rate risk and liquidity positions in relation to present and prospective market and business conditions,
and adopts funding and balance sheet management strategies that are intended to ensure that the potential
impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards.
BB&T uses a variety of financial instruments to manage various financial risks. These instruments,
commonly referred to as derivatives, primarily consist of interest-rate swaps, swaptions, caps, floors, collars,
financial forward and futures contracts, when-issued securities and options written and purchased. A derivative
is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying
instrument, index or referenced interest rate. BB&T uses derivatives primarily to manage risk related to
securities, business loans, Federal funds purchased, other overnight funding, long-term debt, mortgage servicing
rights, mortgage banking operations and certificates of deposit. BB&T also uses derivatives to facilitate
transactions on behalf of its clients. BB&T’s derivatives produced a benefit to net interest income of $209 million
during 2009, a benefit to net interest income of $101 million in 2008 and a decrease in net interest income of $19
million in 2007. The increase in benefits to net interest income from derivatives activities during 2009 compared
to 2008 was primarily the result of benefits received on interest rate swaps on commercial loans. The increase in
benefits to net interest income from 2007 to 2008 can primarily be attributed to decreases in rates that affected
the benefits received on BB&T’s interest rate swaps on its medium and long-term debt.
Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide
the basis for calculating payments between counterparties and do not represent amounts to be exchanged
between parties, and are not a measure of financial risk. On December 31, 2009, BB&T had derivative financial
instruments outstanding with notional amounts totaling $66.2 billion. The estimated net fair value of open
contracts was $283 million at December 31, 2009.
See Note 19 “Derivative Financial Instruments” in the “Notes to Consolidated Financial Statements” herein
for additional disclosures.
Impact of Inflation and Changing Interest Rates
The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most
commercial and industrial companies that have significant investments in fixed assets or inventories.
Fluctuations in interest rates and actions of the Federal Reserve Board to regulate the availability and cost of
credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods
and services. Through its balance sheet management function, which is monitored by the Market Risk and
Liquidity Committee, management believes that BB&T is positioned to respond to changing needs for liquidity,
changes in interest rates and inflationary trends.
69