BB&T 2010 Annual Report Download - page 43

Fair Value of Financial Instruments
A significant portion of BB&T’s assets and certain liabilities are financial instruments carried at fair value.
This includes securities available for sale, trading securities, derivatives, certain loans held for sale, residential
mortgage servicing rights, certain short-term borrowings and venture capital investments. At December 31,
2010, the percentage of total assets and total liabilities measured at fair value was 18.5% and less than 1%,
respectively. The vast majority of assets and liabilities carried at fair value are based on either quoted market
prices or market prices for similar instruments. At December 31, 2010, 7.6% of assets measured at fair value were
based on significant unobservable inputs. This is approximately 1% of BB&T’s total assets. See Note 19 “Fair
Value Disclosures” in the “Notes to Consolidated Financial Statements” herein for additional disclosures
regarding the fair value of financial instruments.
Securities
The fair values for available-for-sale and trading securities are generally based upon quoted market prices or
observable market prices for similar instruments. BB&T generally utilizes a third-party pricing service in
determining the fair value of its securities portfolio. The pricing service uses observable inputs when available
including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids
and offers. These values take into account recent market activity as well as other market observable data such as
interest rate, spread and prepayment information. When market observable data is not available, which generally
occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve
substantial judgment by management. As of December 31, 2010, BB&T had approximately $1.1 billion of
available-for-sale securities, which is less than 1% of total assets, valued using unobservable inputs. This total
includes $954 million of non-agency mortgage-backed securities that are covered by a loss sharing agreement
with the FDIC and $126 million of auction-rate securities. BB&T periodically reviews available-for-sale securities
with an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than
its amortized cost basis. The purpose of the review is to consider the length of time and the extent to which the
market value of a security has been below its amortized cost. The primary factors BB&T considers in determining
whether an impairment is other-than-temporary are long term expectations and recent experience regarding
principal and interest payments, and BB&T’s intent to sell and whether it is more likely than not that the
Company would be required to sell those securities before the anticipated recovery of the amortized cost basis.
Mortgage Servicing Rights
BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights (“MSRs”).
BB&T has two primary classes of MSRs for which it separately manages the economic risk: residential and
commercial. Residential MSRs are primarily carried at fair value with changes in fair value recorded as a
component of mortgage banking income each period. BB&T uses various derivative instruments to mitigate the
income statement effect of changes in fair value, due to changes in valuation inputs and assumptions, of its
residential MSRs. MSRs do not trade in an active, open market with readily observable prices. While sales of
MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, BB&T estimates
the fair value of residential MSRs using an option adjusted spread (“OAS”) valuation model to project MSR cash
flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The OAS model
considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency
rates, late charges, other ancillary revenue, costs to service and other economic factors. BB&T reassesses and
periodically adjusts the underlying inputs and assumptions in the OAS model to reflect market conditions and
assumptions that a market participant would consider in valuing the MSR asset. When available, fair value
estimates and assumptions are compared to observable market data and to recent market activity and actual
portfolio experience. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the
valuation hierarchy. The value of MSRs is significantly affected by mortgage interest rates available in the
marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest
rates, the 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
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