BB&T 2010 Annual Report Download - page 163

interest receipts on commercial loans and interest payments on 3 month LIBOR funding. All of BB&T’s current
cash flow hedges are hedging exposure to variability in future cash flows for forecasted transactions related to
the payment of variable interest on then existing financial instruments. At December 31, 2010 and 2009, the
maximum length of time over which BB&T is hedging its exposure on such transactions is 6.6 years.
For a qualifying cash flow hedge, the portion of changes in the fair value of the derivatives that has been
highly effective is recognized in other comprehensive income (loss) until the related cash flows from the hedged
item are recognized in earnings. If a derivative designated as a cash flow hedge is terminated or ceases to be
highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the
forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable of
occurring during the forecast period or within a short period thereafter, hedge accounting is ceased and any gain
or loss included in other comprehensive income (loss) is reported in earnings immediately. During the year ended
December 31, 2010 and 2009, BB&T amortized approximately $24 million and $49 million of unrecognized pre-tax
gains from accumulated other comprehensive income (loss) into net interest income.
At December 31, 2010, BB&T had $47 million of unrecognized losses on derivatives classified as cash flow
hedges recorded in other comprehensive income (loss), compared to $107 million of unrecognized gains at
December 31, 2009. The estimated amount to be reclassified from other comprehensive income (loss) into
earnings during the next 12 months is a loss totaling approximately $30 million. This includes gains and losses
related to hedges that were terminated early for which the forecasted transactions are still probable. The
proceeds from these terminations were included in cash flows from financing activities.
All cash flow hedges were highly effective for the year ended December 31, 2010, and the change in fair value
attributed to hedge ineffectiveness was not material.
Fair Value Hedges
BB&T’s fixed rate long term debt, certificates of deposit, FHLB advances, loan and municipal security assets
result in exposure to losses in value as interest rates change. The risk management objective for hedging fixed
rate assets and liabilities is to convert the fixed rate paid or received to a floating rate. BB&T accomplishes its
risk management objective by hedging exposure to changes in fair value of fixed rate financial instruments
primarily through the use of swaps. For a qualifying fair value hedge, changes in the value of the derivatives that
have been highly effective as hedges are recognized in current period earnings along with the corresponding
changes in the fair value of the designated hedged item attributable to the risk being hedged.
During the years ended December 31, 2010 and 2009, BB&T terminated certain fair value hedges primarily
related to its long-term debt and received proceeds of $314 million and $131 million, respectively. When hedged
debt/other financial instruments are retired or redeemed, the amounts associated with the hedge are included as
a component of the gain or loss on termination. When a hedge is terminated but the hedged item remains
outstanding, the proceeds from the termination of these hedges have been reflected as part of the carrying value
of the underlying debt/other financial instrument and are being amortized to earnings over its remaining life. The
proceeds from these terminations were included in cash flows from financing activities. During 2009, BB&T
recognized $24 million in gains on debt retirement associated with previous hedges. There were no hedge
unwinds associated with debt retirement during 2010. During the years ended December 31, 2010 and 2009,
BB&T recognized pre-tax benefits of $64 million and $21 million respectively through reductions of interest
expense from previous hedge unwinds.
Derivatives Not Designated As Hedges
Derivatives not designated as a hedge include those that are entered into as either balance sheet risk
management instruments or to facilitate client needs. Balance sheet risk management hedges are those hedges
that do not qualify to be treated as either a cash flow hedge, a fair value hedge or a foreign currency hedge for
accounting purposes, but are necessary to economically manage the risk associated with an asset or liability.
This category of hedges includes derivatives that hedge mortgage banking operations and mortgage
servicing rights (“MSRs”). For mortgage loans originated for sale, BB&T is exposed to changes in market rates
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