BB&T 2010 Annual Report Download - page 108

reserve for unfunded lending commitments is inherently similar to that used to determine the collective
component of the allowance for loan and lease losses described above, adjusted for factors specific to binding
commitments, including the probability of funding and exposure at default. While management uses the best
information available to establish the allowance for loan and lease losses and the reserve for unfunded lending
commitments, future adjustments may be necessary if economic conditions differ substantially from the
assumptions used in computing the allowance or, if required by regulators, based upon information available to
them at the time of their examinations.
Accounting standards require the presentation of certain disclosure information at the portfolio segment
level, which represents the level at which an entity develops and documents a systematic methodology to
determine its allowance for credit losses. BB&T concluded that its loan and lease portfolio comprises three
portfolio segments; commercial, retail and covered and other acquired. The commercial portfolio segment includes
commercial real estate, commercial and industrial (“C&I”) and certain specialized lending loans, and was
identified based on the risk-based approach used to estimate the allowance for loan and lease losses for the vast
majority of these loans. The retail portfolio segment includes direct retail lending, revolving credit, mortgage,
sales finance and certain retail-oriented specialized lending loans, and was identified based on the delinquency-
based approach used to estimate the allowance for these loans. The covered and other acquired portfolio segment
was identified based on the expected cash flows approach used to estimate the allowance related to loans acquired
subsequent to December 31, 2008.
A portion of the Corporation’s allowance for loan and lease losses is not allocated to any specific category of
loans. This unallocated portion of the allowance reflects management’s best estimate of the elements of
imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity
involved in determining the overall allowance, including the unallocated portion, the portion considered
unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the
assumptions used in calculating the allowance, including historical loss experience, current economic conditions,
industry or borrower concentrations and the status of merged institutions. The unallocated portion of the
allowance is available to absorb losses on any loan category or lending-related commitment. Management
evaluates the adequacy of the allowance for loan and lease losses based on the combined total of the allocated and
unallocated components.
The following provides a description of BB&T’s accounting policies and methodologies related to each of its
portfolio segments:
Commercial
The vast majority of loans in the commercial lending portfolio are assigned risk grades based on an
assessment of conditions that affect the borrower’s ability to meet contractual obligations under the loan
agreement. This process includes reviewing borrowers’ financial information, historical payment experience,
credit documentation, public information, and other information specific to each borrower. Risk grades are
reviewed on an annual basis for all credit relationships with total credit exposure of $1 million or more, or at any
point management becomes aware of information affecting the borrower’s ability to fulfill their obligations. For
commercial clients where total credit exposure is less than $1 million, BB&T has developed an automated loan
review system to identify and proactively manage accounts with a higher risk of loss. The “score” produced by
this automated system is updated monthly.
On a quarterly basis, BB&T reviews all commercial lending relationships with outstanding debt of $2 million
or more that have been classified as substandard or doubtful. While this review is largely focused on the
borrower’s ability to repay the loan, BB&T also considers the capacity and willingness of a loan’s guarantors to
support the debt service on the loan as a secondary source of repayment. When a guarantor exhibits the
documented capacity and willingness to support the loan, BB&T may consider extending the loan maturity and/or
temporarily deferring principal payments if the ultimate collection of both principal and interest is not in
question. In these cases, BB&T may not deem the loan to be impaired due to the documented capacity and
willingness of the guarantor to repay the loan. Loans are considered impaired when the borrower (or guarantor in
certain circumstances) does not have the cash flow capacity or willingness to service the debt according to
contractual terms, or it does not appear reasonable to assume that the borrower will continue to pay according to
the contractual agreement. BB&T establishes a specific reserve for each loan that has been deemed impaired
based on the criteria outlined above. The amount of the reserve is based on the present value of expected cash
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