BB&T 2012 Annual Report Download - page 156

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The Effect of Derivative Instruments on the Consolidated Statements of Income
Years Ended December 31, 2012, 2011 and 2010
Effective Portion
Pre-tax Gain (Loss) Location of Pre-tax Gain (Loss) Reclassified
Recognized in OCI Amounts Reclassified from AOCI into Income
2012 2011 2010 from AOCI into Income 2012 2011 2010
(Dollars in millions)
Cash Flow Hedges:
Interest rate contracts $ (84) $ (225) $ (233) Total interest income $ 11 $ 26 $ 44
Total interest expense (72) (72) (29)
$ (61) $ (46) $ 15
Pre-tax Gain (Loss)
Location of Amounts Recognized in Income
Recognized in Income 2012 2011 2010
(Dollars in millions)
Fair Value Hedges:
Interest rate contracts Total interest income $ (21) $ (21) $ (19)
Total interest expense 288 314 179
$ 267 $ 293 $ 160
N
ot Designated as Hedges:
Client-related and other risk management:
Interest rate contracts Other income $ 35 $ 10 $ 5
Foreign exchange contracts Other income 9 6 6
Mortgage Banking:
Interest rate contracts Mortgage banking income 59 (70) 33
MSRs:
Interest rate contracts Mortgage banking income 128 394 196
$ 231 $ 340 $ 240
BB&T uses a variety of derivative instruments to manage interest rate and foreign exchange risks. These instruments consist
of interest-rate swaps, swaptions, caps, floors, collars, financial forward and futures contracts, when-issued securities, foreign
exchange contracts and options written and purchased. A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or referenced interest rate. There are four areas of risk
management addressed through the use of derivatives: balance sheet management, mortgage banking operations, MSRs and
client-related and other risk management activities. No portion of the change in fair value of the derivative has been
excluded from effectiveness testing. The ineffective portion was immaterial for all periods presented.
Cash Flow Hedges
BB&T’ s floating rate business loans, overnight funding, FHLB advances, medium-term bank notes and long-term debt
expose it to variability in cash flows for interest payments. The risk management objective for these floating rate assets and
liabilities is to hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions. 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.
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 OCI 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 OCI 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 OCI is reported in earnings immediately. At December 31, 2012, BB&T had $173 million of unrecognized after-
tax losses on derivatives classified as cash flow hedges recorded in OCI, compared to $159 million of unrecognized after-tax
losses at December 31, 2011.
The estimated amount to be reclassified from OCI into earnings during the next 12 months is a loss totaling approximately
$59 million. This includes active hedges and 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.