BB&T 2010 Annual Report Download - page 77

Provision for Income Taxes
BB&T’s provision for income taxes totaled $115 million for 2010, a decrease of $44 million, or 27.7%,
compared to 2009. The decline in the provision for income taxes during 2010 was largely due to lower pre-tax
income, higher federal tax credits and higher tax-exempt income. The provision for income taxes totaled $159
million in 2009 and $550 million in 2008. The decline in the provision for income taxes during 2009 was also
primarily due to lower pre-tax income and higher federal tax credits and tax exempt income. The variances in the
provision for income taxes during 2010 and 2009 were also affected by the treatment of leveraged lease
transactions as discussed below. BB&T’s effective tax rates for the years ended 2010, 2009 and 2008 were 11.9%,
15.3% and 26.5%, respectively. A reconciliation of the effective tax rate to the statutory tax rate is included in
Note 14 “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 2010, 2009 and 2008.
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 $892 million related to the disallowance of 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. BB&T paid the disputed tax, penalties and interest in the
first quarter of 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims in March 2010.
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 14 “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 from the IRS 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 objectives of interest rate risk
management are to minimize any adverse effect that changes in interest rates may have on net interest income,
and to offset the risk of price changes for certain assets recorded at fair value. These are 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
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