BB&T 2013 Annual Report Download - page 74

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Interest Rate Market Risk (Other than Trading)
BB&T actively manages market risk associated with 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 that will
produce reasonably consistent net interest income during periods of changing interest rates. These portfolios are analyzed for
proper fixed-rate and variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable NIM and assure liquidity by coordinating the
volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. Among other things, this
process gives consideration to prepayment trends related to securities, loans and leases and certain deposits that have no
stated maturity. Prepayment assumptions are developed using a combination of market data and internal historical
prepayment experience for residential mortgage-related loans and securities, and internal historical prepayment experience
for client deposits with no stated maturity and loans that are not residential mortgage related. These assumptions are subject
to monthly back-testing, and are adjusted as deemed necessary to reflect changes in interest rates relative to the reference rate
of the underlying assets or liabilities. On a monthly basis, BB&T evaluates the accuracy of its Simulation model, which
includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model
appropriately reflect changes in the interest rate environment and related trends in prepayment activity. It is the responsibility
of the MRLCC to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing
liabilities, as well as to ensure an adequate level of liquidity and capital, within the context of corporate performance goals.
The MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and
liquidity. The MRLCC meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and
prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to
ensure that the potential impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable
tolerance guidelines.
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and mortgage
banking operations, long-term debt and other funding sources. BB&T also uses derivatives to facilitate transactions on behalf
of its clients. As of December 31, 2013, BB&T had derivative financial instruments outstanding with notional amounts
totaling $59.3 billion, with a net fair value of a loss of $106 million. See Note 18 “Derivative Financial Instruments” in the
“Notes to Consolidated Financial Statements” herein for additional disclosures.
The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and actions
of the FRB to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do
the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the
MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates
and inflationary trends.
Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation
model projects net interest income and interest rate risk for a rolling two-year period of time. The Simulation takes into
account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans,
investments and commitments to enter into those transactions. Furthermore, the Simulation considers the impact of expected
customer behavior. Management monitors BB&T’s interest sensitivity by means of a model that incorporates the current
volumes, average rates earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with
multiple scenarios that include projected prepayments, repricing opportunities and anticipated volume growth. Using this
information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This
level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings
of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but management believes that
it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or
dynamic gap. In addition to the Simulation, BB&T uses EVE analysis to focus on projected changes in capital given potential
changes in interest rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window
contained in the Simulation model. The EVE model is a discounted cash flow of the portfolio of assets, liabilities, and
derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as the
economic value of equity.