BB&T 2011 Annual Report Download - page 99

asset, liability or forecasted transaction (“cash flow hedge”), (3) a hedge of a net investment in a subsidiary, or
(4) derivatives not designated as hedges. Changes in the fair value of derivatives not designated as hedges are recognized
in current period earnings. BB&T has master netting agreements with the derivatives dealers with which it does business,
but reflects gross gains and losses on the Consolidated Balance Sheets.
BB&T uses the long-haul method to assess hedge effectiveness. BB&T documents, both at inception and over the life of
the hedge, at least quarterly, its analysis of actual and expected hedge effectiveness. This analysis includes techniques
such as regression analysis and hypothetical derivatives to demonstrate that the hedge has been, and is expected to be,
highly effective in off-setting corresponding changes in the fair value or cash flows of the hedged item. For cash flow
hedges involving interest rate caps and collars, this analysis also includes consideration whether critical terms match, the
strike price of the hedging option matches the specified level beyond (or within) which the entity’s exposure is being
hedged, the hedging instrument’s inflows (outflows) at its maturity date completely offset the change in the hedged
transaction’s cash flows for the risk being hedged and the hedging instrument can be exercised only on its contractual
maturity date. 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. For a qualifying cash flow hedge, the portion of changes in the fair
value of the derivatives that have been highly effective are recognized in other comprehensive income until the related
cash flows from the hedged item are recognized in earnings. For qualifying cash flow hedges involving interest rate caps
and collars, the initial fair value of the premium paid is allocated and recognized in the same future period that the hedged
forecasted transaction impacts earnings.
For either fair value hedges or cash flow hedges, ineffectiveness may be recognized in noninterest income to the extent that
changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the hedge
ceases to be highly effective, BB&T discontinues hedge accounting and recognizes the changes in fair value in current period
earnings. If a derivative that qualifies as a fair value or cash flow hedge is terminated or the designation removed, the realized or
then unrealized gain or loss is recognized into income over the life of the hedged item (fair value hedge) or period in which the
hedged item affects earnings (cash flow hedge). Immediate recognition in earnings is required upon sale or extinguishment of
the hedged item (fair value hedge) or if it is probable that the hedged cash flows will not occur (cash flow hedge).
Derivatives used to manage economic risk not designated as hedges primarily represent economic risk management
instruments of mortgage servicing rights and mortgage banking operations, with gains or losses included in mortgage
banking income. In connection with its mortgage banking activities, BB&T enters into loan commitments to fund
residential mortgage loans at specified rates and for specified periods of time. To the extent that BB&T’s interest rate lock
commitments relate to loans that will be held for sale upon funding, they are also accounted for as derivatives, with gains
or losses included in mortgage banking income. Gains and losses on other derivatives used to manage economic risk are
primarily associated with client derivative activity and included in other income.
Per Share Data
Basic net income per common share is computed by dividing net income available to common shareholders by the
weighted average number of shares of common stock outstanding during the years presented. Diluted net income per
common share is computed by dividing net income available to common shareholders by the weighted average number of
shares of common stock, common stock equivalents and other potentially dilutive securities outstanding.
Goodwill and Other Intangible Assets
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in
transactions accounted for as acquisitions. BB&T allocates goodwill to the reporting unit(s) that receives significant
benefits from the acquisition. Goodwill is not amortized over an estimated useful life, but rather is tested at least annually
for impairment. BB&T performs its impairment testing in the fourth quarter of each year and more frequently if
circumstances exist that indicate a possible reduction in the fair value of the business below its carrying value. BB&T
measures impairment using the present value of estimated future cash flows. The analysis is based upon available
information regarding expected future cash flows and discount rates. Discount rates are based upon the cost of capital
specific to the industry in which the reporting unit operates. If the carrying value of the reporting unit exceeds its fair
value, a second analysis is performed to measure the fair value of all assets and liabilities. If, based on the second analysis,
it is determined that the fair value of the assets and liabilities of the reporting unit is less than the carrying value, BB&T
would recognize impairment for the excess of carrying value over fair value.
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