Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2010

Commission file number: 1-10853

 

 

BB&T CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina   56-0939887
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

 

200 West Second Street   27101

Winston-Salem, North Carolina

(Address of Principal Executive Offices)

  (Zip Code)

(336) 733-2000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨    NO  x

At October 31, 2010, 693,732,484 shares of the Registrant’s common stock, $5 par value, were outstanding.

 

 

 


Table of Contents

 

BB&T CORPORATION

FORM 10-Q

September 30, 2010

INDEX

 

         Page No.  

Part I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

     2   
 

Notes to Consolidated Financial Statements (Unaudited)

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   
 

Executive Summary

     51   
 

Analysis of Financial Condition

     52   
 

Analysis of Results of Operations

     71   
 

Market Risk Management

     80   
 

Capital Adequacy and Resources

     82   
 

Liquidity

     85   
 

Segment Results

     86   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     87   

Item 4.

 

Controls and Procedures

     87   

Part II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     87   

Item 1A.

 

Risk Factors

     87   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     88   

Item 6.

 

Exhibits

     88   

SIGNATURES

     89   

EXHIBIT INDEX

  

 

1


Table of Contents

 

Item 1. Financial Statements

BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions, except per share data, shares in thousands)

 

     September 30,
2010
    December 31,
2009
 

Assets

    

Cash and due from banks

   $ 1,225      $ 1,584   

Interest-bearing deposits with banks

     944        667   

Federal funds sold and securities purchased under resale agreements or similar arrangements

     285        398   

Segregated cash due from banks

     269        270   

Trading securities at fair value

     568        636   

Securities available for sale at fair value ($1,500 and $1,201 covered by FDIC loss share at September 30, 2010 and December 31, 2009, respectively)

     24,497        33,253   

Loans held for sale ($2,920 and $2,551 at fair value at September 30, 2010 and December 31, 2009, respectively)

     3,833        2,551   

Loans and leases ($6,753 and $8,019 covered by FDIC loss share at September 30, 2010 and December 31, 2009, respectively)

     102,181        103,656   

Allowance for loan and lease losses

     (2,611     (2,600
                

Loans and leases, net of allowance for loan and lease losses

     99,570        101,056   
                

FDIC loss share receivable

     1,924        3,062   

Premises and equipment

     1,831        1,583   

Goodwill

     6,013        6,053   

Core deposit and other intangible assets

     535        640   

Residential mortgage servicing rights at fair value

     585        832   

Other assets ($314 and $215 of foreclosed property and other assets covered by FDIC loss share at September 30, 2010 and December 31, 2009, respectively)

     15,151        13,179   
                

Total assets

   $ 157,230      $ 165,764   
                

Liabilities and Shareholders’ Equity

    

Deposits:

    

Noninterest-bearing deposits

   $ 20,607      $ 18,945   

Interest checking

     2,225        3,420   

Other client deposits

     52,795        52,097   

Client certificates of deposit

     23,772        32,298   

Other interest-bearing deposits

     7,020        8,205   
                

Total deposits

     106,419        114,965   
                

Federal funds purchased, securities sold under repurchase agreements and short-term borrowed funds

     5,820        8,106   

Long-term debt

     22,111        21,376   

Accounts payable and other liabilities

     6,093        5,076   
                

Total liabilities

     140,443        149,523   
                

Commitments and contingencies (Note 13)

    

Shareholders’ equity:

    

Common stock, $5 par

     3,468        3,449   

Additional paid-in capital

     5,753        5,620   

Retained earnings

     7,833        7,539   

Accumulated other comprehensive loss, net of deferred income taxes of $(209) at September 30, 2010 and $(257) at December 31, 2009

     (335     (417

Noncontrolling interests

     68        50   
                

Total shareholders’ equity

     16,787        16,241   
                

Total liabilities and shareholders’ equity

   $ 157,230      $ 165,764   
                

Common shares outstanding

     693,560        689,750   

Common shares authorized

     2,000,000        1,000,000   

Preferred shares authorized

     5,000        5,000   

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

 

BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in millions, except per share data, shares in thousands)

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
             2010                     2009                     2010                     2009          

Interest Income

        

Interest and fees on loans and leases

   $ 1,549      $ 1,414      $ 4,514      $ 4,072   

Interest and dividends on securities

     207        327        834        978   

Interest on other earning assets

     6        4        12        14   
                                

Total interest income

     1,762        1,745        5,360        5,064   
                                

Interest Expense

        

Interest on deposits

     225        311        725        977   

Interest on federal funds purchased, securities sold under repurchase agreements and short-term borrowed funds

     5        11        16        51   

Interest on long-term debt

     218        186        631        515   
                                

Total interest expense

     448        508        1,372        1,543   
                                

Net Interest Income

     1,314        1,237        3,988        3,521   

Provision for credit losses

     770        709        1,995        2,086   
                                

Net Interest Income After Provision for Credit Losses

     544        528        1,993        1,435   
                                

Noninterest Income

        

Insurance income

     252        254        792        787   

Service charges on deposits

     147        180        475        504   

Mortgage banking income

     184        144        383        516   

Investment banking and brokerage fees and commissions

     85        89        255        263   

Other nondeposit fees and commissions

     74        59        202        165   

Checkcard fees

     70        59        201        165   

Bankcard fees and merchant discounts

     45        41        130        115   

Trust and investment advisory revenues

     40        36        117        101   

Income from bank-owned life insurance

     30        24        92        72   

FDIC loss share income, net

     (43     3        (116     3   

Other income, net

     (13     20        7        73   

Securities gains, net

        

Realized gains, net

     241        34        468        240   

Other-than-temporary impairments

     —          (3     (49     (117

Less non-credit portion recognized in other comprehensive income

     (2     —          36        77   
                                

Total securities gains, net

     239        31        455        200   
                                

Total noninterest income

     1,110        940        2,993        2,964   
                                

Noninterest Expense

        

Personnel expense

     642        644        1,937        1,867   

Foreclosed property expense

     167        118        585        214   

Occupancy and equipment expense

     157        149        453        406   

Professional services

     84        68        242        185   

Regulatory charges

     61        44        152        183   

Loan processing expenses

     53        38        135        101   

Amortization of intangibles

     30        29        94        78   

Merger-related and restructuring charges, net

     10        18        65        29   

Other expenses

     204        212        586        507   
                                

Total noninterest expense

     1,408        1,320        4,249        3,570   
                                

Earnings

        

Income before income taxes

     246        148        737        829   

Provision (benefit) for income taxes

     27        (9     100        146   
                                

Net income

     219        157        637        683   
                                

Noncontrolling interests

     9        5        29        15   

Dividends and accretion on preferred stock

     —          —          —          124   
                                

Net income available to common shareholders

   $ 210      $ 152      $ 608      $ 544   
                                

Earnings Per Common Share

        

Basic

   $ .30      $ .23      $ .88      $ .89   
                                

Diluted

   $ .30      $ .23      $ .87      $ .88   
                                

Cash dividends declared

   $ .15      $ .15      $ .45      $ .77   
                                

Weighted Average Shares Outstanding

        

Basic

     693,017        665,408        691,982        609,698   
                                

Diluted

     701,535        672,457        700,551        615,307   
                                

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

 

BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

For the Nine Months Ended September 30, 2010 and 2009

(Dollars in millions, except per share data, shares in thousands)

 

    Shares
of
Common
Stock
    Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
    Total
Shareholders’
Equity
 

Balance, January 1, 2009

    559,248      $ 3,082      $ 2,796      $ 3,510      $ 7,381      $ (732   $ 44      $ 16,081   

Add (Deduct):

               

Comprehensive income (loss):

               

Net income

    —          —          —          —          668        —          15        683   

Net change in other comprehensive income (loss)

    —          —          —          —          —          368        —          368   
                                                               

Total comprehensive income (loss) (Note 10)

    —          —          —          —          668        368        15        1,051   
                                                               

Stock issued:

               

In purchase acquisitions

    96        —          1        1        —          —          —          2   

In connection with stock option exercises and other employee benefits, net of cancellations

    329        —          2        2        —          —          —          4   

In connection with dividend reinvestment plan

    2,396        —          12        39        —          —          —          51   

In connection with 401(k) plan

    665        —          3        13        —          —          —          16   

In common stock offerings

    124,712        —          623        2,014        —          —          —          2,637   

Redemption of preferred stock

    —          (3,134     —          (67     —          —          —          (3,201

Cash dividends declared on common stock, $.77 per share

    —          —          —          —          (467     —          —          (467

Cash dividends accrued on preferred stock

    —          —          —          —          (73     —          —          (73

Equity-based compensation expense

    —          —          —          50        —          —          —          50   

Other, net

    —          52        —          1        (51     —          (11     (9
                                                               

Balance, September 30, 2009

    687,446      $ —        $ 3,437      $ 5,563      $ 7,458      $ (364   $ 48      $ 16,142   
                                                               

Balance, January 1, 2010

    689,750      $ —        $ 3,449      $ 5,620      $ 7,539      $ (417   $ 50      $ 16,241   

Add (Deduct):

               

Comprehensive income (loss):

               

Net income

    —          —          —          —          608        —          29        637   

Net change in other comprehensive income (loss)

    —          —          —          —          —          82        —          82   
                                                               

Total comprehensive income (loss) (Note 10)

    —          —          —          —          608        82        29        719   
                                                               

Stock issued:

               

In purchase acquisitions

    57        —          —          2        —          —          —          2   

In connection with stock option exercises and other employee benefits, net of cancellations

    1,610        —          8        23        —          —          —          31   

In connection with dividend reinvestment plan

    803        —          4        19        —          —          —          23   

In connection with 401(k) plan

    1,340        —          7        31        —          —          —          38   

Cash dividends declared on common stock, $.45 per share

    —          —          —          —          (312     —          —          (312

Equity-based compensation expense

    —          —          —          58        —          —          —          58   

Other, net

    —          —          —          —          (2     —          (11     (13
                                                               

Balance, September 30, 2010

    693,560      $ —        $ 3,468      $ 5,753      $ 7,833      $ (335   $ 68      $ 16,787   
                                                               

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

 

BB&T CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)

 

     For the Nine Months Ended
September 30,
 
             2010                     2009          

Cash Flows From Operating Activities:

    

Net income

   $ 637      $ 683   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for credit losses

     1,995        2,086   

Depreciation

     194        166   

Amortization of intangibles

     94        78   

Equity-based compensation

     58        50   

Discount accretion and premium amortization on long-term debt, net

     25        46   

Gain on sales of securities, net

     (455     (200

Net decrease (increase) in trading securities

     68        (310

Net increase in loans held for sale

     (407     (539

Net decrease in FDIC loss share receivable

     892        —     

Net (increase) decrease in other assets

     (1,840     255   

Net increase (decrease) in accounts payable and other liabilities

     741        (3,429

Decrease in segregated cash due from banks

     1        93   

Other, net

     341        154   
                

Net cash provided by (used in) operating activities

     2,344        (867
                

Cash Flows From Investing Activities:

    

Proceeds from sales of securities available for sale

     24,737        17,060   

Proceeds from maturities, calls and paydowns of securities available for sale

     4,279        6,087   

Purchases of securities available for sale

     (19,001     (19,939

Originations and purchases of loans and leases, net of principal collected

     (2,542     44   

Net cash paid for divestitures

     (832     —     

Net cash (paid) acquired in business combinations

     (6     4,478   

Purchases of premises and equipment

     (370     (128

Proceeds from sales of foreclosed property or other real estate held for sale

     716        253   

Other, net

     69        (173
                

Net cash provided by investing activities

     7,050        7,682   
                

Cash Flows From Financing Activities:

    

Net decrease in deposits

     (7,641     (3,399

Net decrease in federal funds purchased, securities sold under repurchase agreements and short-term borrowed funds

     (2,287     (2,506

Proceeds from issuance of long-term debt

     500        3,383   

Repayment of long-term debt

     (83     (3,563

Net proceeds from common stock issued

     92        2,708   

Retirement of preferred stock

     —          (3,201

Cash dividends paid on common stock

     (311     (624

Cash dividends paid on preferred stock

     —          (93

Other, net

     141        131   
                

Net cash used in financing activities

     (9,589     (7,164
                

Net Decrease in Cash and Cash Equivalents

     (195     (349

Cash and Cash Equivalents at Beginning of Period

     2,649        2,740   
                

Cash and Cash Equivalents at End of Period

   $ 2,454      $ 2,391   
                

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 1,408      $ 1,555   

Income taxes

     873        416   

Noncash investing and financing activities:

    

Transfer of loans held for investment to loans held for sale

     1,284        525   

Transfers of loans to foreclosed property

     1,132        1,160   

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

 

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

NOTE 1. Basis of Presentation

General

In the opinion of management, the accompanying unaudited Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Shareholders’ Equity, and Consolidated Statements of Cash Flows of BB&T Corporation and subsidiaries (referred to herein as “BB&T”, the “Corporation” or the “Company”), are fair statements of BB&T’s financial position at September 30, 2010 and December 31, 2009, BB&T’s results of operations for the three and nine month periods ended September 30, 2010 and 2009, and BB&T’s changes in shareholders’ equity and cash flows for the nine month periods ended September 30, 2010 and 2009. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the interim period results have been made.

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the financial statements and footnotes included in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2009 should be referred to in connection with these unaudited interim consolidated financial statements.

The accounting and reporting policies of BB&T and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities.

Nature of Operations

BB&T Corporation (“BB&T”, the “Company” or “Parent Company”) is a financial holding company organized under the laws of North Carolina. BB&T conducts operations through its principal bank subsidiary, Branch Banking and Trust Company (“Branch Bank”), BB&T Financial, FSB (“BB&T FSB”), a federally chartered thrift institution, and the Company’s nonbank subsidiaries. Branch Bank has offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Florida, Alabama, Indiana, Texas and Washington, D.C. Branch Bank provides a wide range of banking services to individuals and businesses, and offers a variety of loans to businesses and consumers. Such loans are made primarily to individuals residing in the market areas described above or to businesses located within BB&T’s geographic footprint. Branch Bank also markets a wide range of deposit services to individuals and businesses. Branch Bank offers, either directly, or through its subsidiaries, lease financing to businesses and municipal governments; factoring; discount brokerage services, annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis and through a wholesale insurance brokerage operation; insurance premium financing; permanent financing arrangements for commercial real estate; loan servicing for third-party investors; direct consumer finance loans to individuals; trust and comprehensive wealth advisory services and association services. BB&T FSB and the direct nonbank subsidiaries of BB&T provide a variety of financial services including credit card lending, automobile lending, equipment financing, full-service securities brokerage, asset management and capital markets services.

Principles of Consolidation

The consolidated financial statements of BB&T include the accounts of BB&T Corporation and those subsidiaries that are majority owned by BB&T and over which BB&T exercises control. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise.

BB&T holds investments in certain legal entities that are considered variable interest entities (“VIE’s”). VIE’s are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is considered appropriate if a reporting entity holds a controlling financial interest in the VIE.

 

6


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

BB&T evaluates its investments in VIE’s to determine if a controlling financial interest is held. This evaluation gives appropriate consideration to the design of the entity and the variability that the entity was designed to pass along, the relative power of each of the parties to the VIE, and to BB&T’s relative obligation to absorb losses or receive residual returns of the entity, in relation to such obligations and rights held by other parties to the VIE. BB&T has variable interests in certain entities that were not required to be consolidated, including affordable housing partnership interests, historic tax credit partnerships, other partnership interests and trusts that have issued capital securities. Please refer to Note 13 for additional disclosures regarding BB&T’s significant variable interest entities.

BB&T accounts for unconsolidated partnership investments using the equity method of accounting. In addition to affordable housing partnerships, which represent the majority of unconsolidated investments in variable interest entities, BB&T also has investments and future funding commitments to venture capital and other entities. The maximum potential exposure to losses relative to investments in variable interest entities is generally limited to the sum of the outstanding balance, future funding commitments and any related loans to the entity. Loans to these entities are underwritten in substantially the same manner as are other loans and are generally secured.

BB&T has investments in certain entities for which BB&T does not have the controlling interest. For these investments, the Company records its interest using the equity method with its portion of income or loss being recorded in other noninterest income in the Consolidated Statements of Income. BB&T periodically evaluates these investments for impairment.

Reclassifications

Investments in Federal Home Loan Bank (“FHLB”) stock have been reclassified from securities available for sale to other assets in all periods presented. In certain other instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders’ equity or net income.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan and lease losses and the reserve for unfunded lending commitments, determination of fair value for financial instruments, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.

Changes in Accounting Principles and Effects of New Accounting Pronouncements

In June 2009, the FASB issued new guidance impacting Transfers and Servicing. The objective of this guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This guidance is effective for financial asset transfers occurring after December 31, 2009. The adoption of this guidance was not material to BB&T’s consolidated financial statements.

In June 2009, the FASB issued new guidance impacting Consolidation of variable interest entities. The objective of this guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance was effective as of January 1, 2010. The adoption of this guidance was not material to BB&T’s consolidated financial statements.

In February 2010, the FASB issued new guidance impacting Fair Value Measurements and Disclosures. The new guidance requires a gross presentation of purchases and sales of Level 3 activities and adds a new requirement to disclose

 

7


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

transfers in and out of Level 1 and Level 2 measurements. The guidance related to the transfers between Level 1 and Level 2 measurements was effective for BB&T on January 1, 2010. The guidance that requires increased disaggregation of the level 3 activities is effective for BB&T on January 1, 2011. The new disclosures required by this guidance are included in Note 14 to these consolidated financial statements.

In March 2010, the FASB issued new guidance impacting Receivables. The new guidance clarifies that a modification to a loan that is part of a pool of loans that were acquired with deteriorated credit quality should not result in the removal of the loan from the pool. This guidance is effective for any modifications of loans accounted for within a pool in the first interim or annual reporting period ending after July 15, 2010. The adoption of this guidance was not material to BB&T’s consolidated financial statements.

In July 2010, the FASB issued new guidance impacting Receivables. The new guidance requires additional disclosures that will allow users to understand the nature of credit risk inherent in a company’s loan portfolios, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and changes and reasons for those changes in the allowance for credit losses. The new disclosures that relate to information as of the end of the reporting period is effective as of December 31, 2010, whereas the disclosures related to activity that occurred during the reporting periods is effective January 1, 2011.

NOTE 2. Business Combinations

Financial Institution Acquisitions

On August 14, 2009, Branch Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and assume substantially all of the deposits and certain liabilities of Colonial Bank, an Alabama state-chartered bank headquartered in Montgomery, Alabama (“Colonial”). As further discussed in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2009, BB&T entered into loss sharing agreements with the FDIC related to certain loans, securities and other assets.

Branch Bank did not immediately acquire the real estate, banking facilities, furniture or equipment of Colonial as part of the purchase and assumption agreement. However, under the terms of the agreement, Branch Bank had the option through February 1, 2010 to acquire these assets from the FDIC at their fair market value as of the acquisition date. Prior to the exercise of this option, these banking facilities and equipment were leased from the FDIC on a month-to-month basis. During the first quarter, Branch Bank purchased real estate, banking facilities, furniture and equipment from the FDIC at a cost of approximately $210 million.

Branch Bank also had an option through February 1, 2010 to assume or repudiate certain lease agreements of Colonial. The repudiation or assumption of these lease agreements was finalized prior to the expiration of this option. The process to determine the fair value of the assumed lease obligations continued into the second quarter of 2010 during which BB&T recorded approximately $28 million of capital leases.

On January 15, 2010, BB&T sold certain Nevada branch locations and approximately $850 million in deposits that were acquired from Colonial.

 

8


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

NOTE 3. Securities

The amortized cost and approximate fair values of securities available for sale were as follows:

 

     September 30, 2010  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 
        Gains      Losses     
     (Dollars in millions)  

Securities available for sale:

           

U.S. government-sponsored entities (GSE)

   $ 52       $ 2       $ —         $ 54   

Mortgage-backed securities issued by GSE

     19,093         282         34         19,341   

States and political subdivisions

     2,126         80         114         2,092   

Non-agency mortgage-backed securities

     1,123         2         184         941   

Equity and other securities

     547         24         2         569   

Covered securities

     1,204         296         —           1,500   
                                   

Total securities available for sale

   $ 24,145       $ 686       $ 334       $ 24,497   
                                   
     December 31, 2009  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 
        Gains      Losses     
     (Dollars in millions)  

Securities available for sale:

           

U.S. government-sponsored entities (GSE)

   $ 2,090       $ 5       $ 60       $ 2,035   

Mortgage-backed securities issued by GSE

     26,649         231         210         26,670   

States and political subdivisions

     2,176         56         125         2,107   

Non-agency mortgage-backed securities

     1,339         —           317         1,022   

Equity and other securities

     196         22         —           218   

Covered securities

     1,166         47         12         1,201   
                                   

Total securities available for sale

   $ 33,616       $ 361       $ 724       $ 33,253   
                                   

As of September 30, 2010, the fair value of covered securities included $1.2 billion of non-agency mortgage-backed securities and $319 million of municipal securities. As of December 31, 2009, the fair value of covered securities included $896 million of non-agency mortgage-backed securities and $305 million of municipal securities. All covered securities were acquired from Colonial and are covered by one of the FDIC loss sharing agreements. BB&T is restricted from selling these securities without prior approval from the FDIC. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2009 for additional information.

At September 30, 2010 and December 31, 2009, securities with carrying value of approximately $16.6 billion and $20.7 billion were pledged to secure municipal deposits, securities sold under agreements to repurchase, other borrowings, and for other purposes as required or permitted by law.

BB&T had certain investments in marketable debt securities and mortgage-backed securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) that exceeded ten percent of shareholders’ equity at September 30, 2010. The Fannie Mae investments had total amortized cost and fair values of $12.5 billion and $12.6 billion, respectively, at September 30, 2010, while Freddie Mac investments had total amortized cost and fair values of $5.1 billion and $5.2 billion, respectively.

At September 30, 2010 and December 31, 2009, non-agency mortgage-backed securities primarily consisted of residential mortgage-backed securities.

 

9


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

The gross realized gains and losses and other than temporary impairments recognized in income during the three and nine months ended September 30, 2010 and 2009 are reflected in the following table:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
         2010             2009             2010             2009      
     (Dollars in millions)  

Gross gains

   $ 241      $ 35      $ 472      $ 241   

Gross losses

     —          (1     (4     (1
                                

Net realized gains

     241        34        468        240   
                                

Other than temporary impairment (OTTI) recognized in net income

     (2     (3     (13     (40
                                

Net securities gains

   $ 239      $ 31      $ 455      $ 200   
                                

The amortized cost and estimated fair value of the securities portfolio at September 30, 2010, by contractual maturity, are shown in the accompanying table. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay the underlying mortgage loans with or without prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity.

 

     September 30, 2010  
     Available for Sale  
     Amortized
Cost
     Fair
Value
 
     (Dollars in millions)  

Debt Securities:

     

Due in one year or less

   $ 57       $ 55   

Due after one year through five years

     65         68   

Due after five years through ten years

     694         721   

Due after ten years

     23,155         23,457   
                 

Total debt securities

     23,971         24,301   

Total securities with no stated maturity

     174         196   
                 

Total securities

   $ 24,145       $ 24,497   
                 

The following tables reflect the gross unrealized losses and fair values of BB&T’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented.

 

     September 30, 2010  
     Less than 12 months      12 months or more      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in millions)  

Securities:

                 

Mortgage-backed securities issued by GSE

   $ 4,780       $ 34       $ —         $ —         $ 4,780       $ 34   

States and political subdivisions

     75         6         807         108         882         114   

Non-agency mortgage-backed securities

     —           —           833         184         833         184   

Equity and other securities

     391         1         2         1         393         2   
                                                     

Total temporarily impaired securities

   $ 5,246       $ 41       $ 1,642       $ 293       $ 6,888       $ 334   
                                                     

 

10


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

     December 31, 2009  
     Less than 12 months      12 months or more      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in millions)  

Securities:

                 

U.S. government-sponsored entities (GSE)

   $ 1,843       $ 60       $ —         $ —         $ 1,843       $ 60   

Mortgage-backed securities issued by GSE

     16,338         210         114         —           16,452         210   

States and political subdivisions

     409         65         274         60         683         125   

Non-agency mortgage-backed securities

     181         66         825         251         1,006         317   

Equity and other securities

     13         —           1         —           14         —     

Covered securities

     94         12         —           —           94         12   
                                                     

Total temporarily impaired securities

   $ 18,878       $ 413       $ 1,214       $ 311       $ 20,092       $ 724   
                                                     

BB&T periodically evaluates available-for-sale securities for other-than-temporary impairment. Based on its evaluations during the third quarter of 2010, BB&T recognized a $2 million adjustment to the non-credit portion previously recorded in other comprehensive income. Based on its evaluations during the third quarter of 2009, BB&T recorded $3 million of other-than-temporary impairments in net income related to certain debt and equity securities.

On September 30, 2010, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of September 30, 2010, the unrealized losses on these securities totaled $293 million. Substantially all of these losses were in non-agency mortgage-backed and municipal securities. At September 30, 2010, all of the available-for-sale debt securities in an unrealized loss position, excluding those covered by FDIC loss sharing agreements, were investment grade with the exception of (a) bonds with an amortized cost of $3 million from one issuer of auction rate securities; (b) two municipal bonds with an amortized cost of $8 million; (c) sixteen non-agency mortgage-backed securities with an amortized cost of $884 million and (d) one non-agency commercial mortgage-backed security with an amortized cost of $25 million. At September 30, 2010, the total unrealized loss on these non-investment grade securities was $178 million. All of the non-investment grade securities referenced above were initially investment grade and have been downgraded since purchase. BB&T evaluated all of its debt securities for credit impairment. Based on its evaluation at September 30, 2010, BB&T determined that certain of the non-investment grade non-agency mortgage-backed securities had credit losses evident and recognized other-than-temporary impairments related to these securities. The decline in fair value related to credit losses was recognized in net income. BB&T’s evaluation of the other debt securities with continuous unrealized losses indicated that there were no credit losses evident. Furthermore, as of the date of the evaluation, BB&T did not intend to sell, and it was more likely than not that the Company would not be required to sell, these debt securities before the anticipated recovery of the amortized cost basis. See the “Summary Analysis Supporting Conclusions” section below for further details regarding BB&T’s below investment grade securities with significant unrealized losses.

BB&T conducts periodic reviews to identify and evaluate each investment that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.

Factors considered in determining whether a loss is temporary include:

 

   

The financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer;

 

   

BB&T’s intent to sell and whether it is more likely than not that the Company will be required to sell these debt securities before the anticipated recovery of the amortized cost basis;

 

   

The length of the time and the extent to which the market value has been less than cost;

 

   

Whether the decline in fair value is attributable to specific conditions, such as conditions in an industry or in a geographic area;

 

11


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

   

Whether a debt security has been downgraded by a rating agency;

 

   

Whether the financial condition of the issuer has deteriorated;

 

   

The seniority of the security;

 

   

Whether dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made; and

 

   

Any other relevant available information.

For certain U.S. mortgage-backed securities (and in particular for non-agency Alt-A, Prime and other mortgage-backed securities that have significant unrealized losses as a percentage of amortized cost), credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgage pools, using security-specific structure information. The model estimates cash flows from the underlying mortgage loan pools and distributes those cash flows to the various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in each structure. The cash flow model projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates and recovery rates (on foreclosed properties).

Management reviews the result of the cash flow model, internal credit analysis and other market observable information in its estimation of possible future credit losses. If management does not expect to recover the entire amortized cost basis of a mortgage-backed security, the Company records other-than-temporary impairment equal to the amount of expected credit losses in the mortgage-backed security. The remaining amount of unrealized loss is recognized as a component of other comprehensive income.

Where a mortgage-backed security is not deemed to be credit impaired, management performs additional analysis to assess whether it intends to sell and it is more likely than not that the Company will be required to sell these debt securities before anticipated recovery of the amortized cost basis. In making this determination, BB&T considers its expected liquidity and capital needs, including its asset/liability management needs, forecasts, strategies and other relevant information.

Summary Analysis Supporting Conclusions

The following table presents a detailed analysis of non-investment grade securities with significant unrealized losses that are not covered by a loss sharing arrangement, as the majority of potential losses related to covered securities would be reimbursed by the FDIC. The expected underlying collateral losses represent losses on the underlying mortgage pools supporting BB&T’s tranche. The benefits from subordination represent the amount of the expected losses the subordinate security holders are obligated to absorb prior to BB&T incurring a loss.

Non-investment grade securities with significant unrealized losses

As of September 30, 2010

(Dollars in millions)

 

Security

   Amortized
Cost
     Fair Value      Unrealized
Loss
    Moody’s      Credit
Rating
S&P
     Fitch      Expected
Underlying
Collateral
Losses
     Benefit of
Subordination
 

Securities with other-than-temporary impairment losses:

  

                

RMBS 1

   $ 147       $ 125       $ (22     Caa3         CC          $ 7       $   1   

RMBS 2

     51         33         (18     Ca            C         3         1   

RMBS 3

     56         34         (22     Caa1         CC         C         2         1   

Securities without other-than-temporary impairment losses (1):

  

             

RMBS 4

     104         72         (32     Caa2         CC            6         6   

RMBS 5

     111         73         (38        CCC         C         5         5   

 

(1) Additional benefits of subordination are available in excess of the expected underlying collateral losses.

 

12


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

NOTE 4. Loans and Leases

The following table provides a breakdown of BB&T’s loan portfolio as of September 30, 2010 and December 31, 2009:

 

     September 30,
2010
     December 31,
2009
 
     (Dollars in millions)  

Loans and leases, net of unearned income:

     

Commercial loans and leases

   $ 48,131       $ 49,820   

Sales finance loans

     6,972         6,290   

Revolving credit loans

     2,065         2,016   

Direct retail loans

     13,828         14,283   

Residential mortgage loans

     16,316         15,435   

Specialized lending loans

     8,047         7,670   

Other acquired loans

     69         123   
                 

Total loans and leases held for investment (excluding covered loans)

     95,428         95,637   

Covered loans

     6,753         8,019   
                 

Total loans and leases held for investment

     102,181         103,656   

Loans held for sale

     3,833         2,551   
                 

Total loans and leases

   $ 106,014       $ 106,207   
                 

Covered loans represent loans acquired from the FDIC subject to loss sharing agreements. Other acquired loans represent loans acquired from the FDIC that are not subject to loss sharing agreements.

The following table reflects the carrying value of all purchased impaired and nonimpaired loans as of September 30, 2010 and December 31, 2009:

 

     September 30, 2010     December 31, 2009  
     Purchased
Impaired
Loans
    Purchased
Nonimpaired
Loans
     Total     Purchased
Impaired
Loans
     Purchased
Nonimpaired
Loans
     Total  
     (Dollars in millions)  

Residential mortgage loans

   $ 748      $ 740       $ 1,488      $ 826       $ 806       $ 1,632   

Commercial real estate loans

     2,289        2,115         4,404        2,732         2,574         5,306   

Commercial loans

     83        778         861        94         987         1,081   
                                                   

Total covered loans

     3,120        3,633         6,753        3,652         4,367         8,019   

Other acquired loans

     7        62         69        14         109         123   
                                                   

Total

     3,127        3,695         6,822        3,666         4,476         8,142   
                                                   

Allowance for loan losses

     (44     —           (44     —           —           —     
                                                   

Net

   $ 3,083      $ 3,695       $ 6,778      $ 3,666       $ 4,476       $ 8,142   
                                                   

Changes in the carrying amount and accretable yield for purchased impaired and nonimpaired loans, excluding loans held for sale, were as follows for the nine month period ended September 30, 2010:

 

     Purchased Impaired     Purchased Nonimpaired  
     Accretable
Yield
    Carrying
Amount
of Loans
    Accretable
Yield
    Carrying
Amount
of Loans
 
     (Dollars in millions)  

Balance at beginning of period

   $ 889      $ 3,666      $ 1,301      $ 4,476   

Additions

     —          —          —          —     

Accretion

     (357     357        (311     311   

Reclassifications from nonaccretable balance, net

     898        —          584        —     

Payments received, net

     —          (896     —          (1,092
                                

Balance at end of period

   $ 1,430      $ 3,127      $ 1,574      $ 3,695   
                                

 

13


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

The outstanding unpaid principal balance for all purchased impaired loans as of September 30, 2010 and December 31, 2009 was $4.2 billion and $5.7 billion, respectively. The outstanding unpaid principal balance for all purchased nonimpaired loans as of September 30, 2010 and December 31, 2009 was $5.5 billion and $6.6 billion, respectively.

At September 30, 2010 and December 31, 2009, none of the purchased loans were classified as nonperforming assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased loans. The allowance for credit losses related to the purchased loans results from decreased expectations of future cash flows for certain acquired loan pools.

The following table sets forth certain information regarding BB&T’s impaired loans, excluding acquired impaired loans and loans held for sale, that were evaluated for specific reserves:

 

     September 30,
2010
    December 31,
2009 (1)
 
     (Dollars in millions)  

Total recorded investment—impaired loans

   $ 3,185      $ 2,305   
                

Total recorded investment with no related valuation allowance

     206        611   

Total recorded investment with related valuation allowance

     2,979        1,694   

Allowance for loan and lease losses assigned to impaired loans

     (587     (278
                

Net carrying value—impaired loans

   $ 2,598      $ 2,027   
                

 

(1) Prior period amounts were revised in the first quarter of 2010 to reflect the retrospective application of more definitive regulatory guidance on troubled debt restructurings.

The following table provides a summary of BB&T’s nonperforming and past due loans at September 30, 2010 and December 31, 2009:

 

     September 30,
2010
     December 31,
2009
 
     (Dollars in millions)  

Nonaccrual loans and leases (1) (2):

     

Held for investment

   $ 1,973       $ 2,713   

Held for sale

     826         5   
                 

Total nonaccrual loans and leases

     2,799         2,718   
                 

Foreclosed real estate

     1,309         1,451   

Other foreclosed property

     39         58   
                 

Total foreclosed property (3)

     1,348         1,509   
                 

Total nonperforming assets (excluding covered assets)

   $ 4,147       $ 4,227   
                 

Loans 90 days or more past due and still accruing (excluding covered loans) (4) (5)

   $ 405       $ 319   

 

(1) Covered and other acquired loans are considered to be performing due to the application of the accretion method. Covered loans that are contractually past due are noted in footnote (5) below.
(2) Includes nonperforming restructurings totaling $489 million and $248 million at September 30, 2010 and December 31, 2009, respectively.
(3) Excludes foreclosed real estate totaling $276 million and $160 million as of September 30, 2010 and December 31, 2009, respectively, that are covered by FDIC loss sharing agreements.
(4) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.
(5) Excludes loans totaling $1.3 billion and $1.4 billion past due 90 days or more as of September 30, 2010 and December 31, 2009, respectively, that are covered by FDIC loss sharing agreements.

During the third quarter of 2010, BB&T transferred $1.3 billion book value of nonperforming loans to loans held for sale, and recorded $431 million in net charge-offs.

 

14


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

The following table summarizes loans that continue to accrue interest under the terms of restructurings (“performing restructurings”):

 

     September 30,
2010
     December 31,
2009
 
     (Dollars in millions)  

Performing restructurings: (1)

     

Commercial loans and leases

   $ 876       $ 413   

Direct retail loans

     131         132   

Revolving credit loans

     62         54   

Residential mortgage loans

     689         471   

Specialized lending loans

     4         —     

Loans held for sale

     30         —     
                 

Total performing restructurings

     1,792         1,070   

Nonperforming restructurings (2)(3)

     489         248   
                 

Total restructurings (4)(5)

   $ 2,281       $ 1,318   
                 

 

(1) Prior period amounts were revised in the first quarter of 2010 to reflect the retrospective application of more definitive regulatory guidance.
(2) Nonperforming restructurings are included in nonaccrual loan disclosures.
(3) Includes approximately $152 million of nonperforming restructurings included in loans held for sale at September 30, 2010.
(4) All restructurings are considered impaired. The allowance for loan and lease losses attributable to these restructured loans totaled $416 million and $164 million at September 30, 2010 and December 31, 2009, respectively.
(5) Excludes restructured covered and other acquired loans accounted for under the accretion method.

Troubled debt restructurings (“restructurings”) can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. In circumstances where the restructuring involves charging off a portion of the loan balance, BB&T typically classifies these restructurings as nonaccrual. Restructurings have most often occurred within BB&T’s commercial, mortgage and consumer loan portfolios.

In connection with commercial restructurings, the decision to maintain a loan that has been restructured on accrual status is based on a current, well documented credit evaluation of the borrower’s financial condition and prospects for repayment under the modified terms. This evaluation includes consideration of the borrower’s current capacity to pay, which among other things may include a review of the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations, and an evaluation of secondary sources of payment from the client and any guarantors. This evaluation also includes an evaluation of the borrower’s current willingness to pay, which may include a review of past payment history, an evaluation of the borrower’s willingness to provide information on a timely basis, and consideration of offers from the borrower to provide additional collateral or guarantor support. The credit evaluation also reflects consideration of the borrower’s future capacity and willingness to pay, which may include evaluation of cash flow projections, consideration of the adequacy of collateral to cover all principal and interest and trends indicating improving profitability, collectability of receivables, etc.

The evaluation of mortgage and consumer loans includes an evaluation of the client’s debt to income ratio, credit report, property value, loan vintage, and certain other client-specific factors that have impacted their ability to make timely principal and interest payments on the loan.

BB&T had commitments totaling $102 million and $18 million at September 30, 2010 and December 31, 2009, respectively, to lend additional funds to clients with loans whose terms have been modified in restructurings.

 

15


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

NOTE 5. Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments

An analysis of the allowance for credit losses for the nine months ended September 30, 2010 and 2009 is presented in the following table:

 

     For the Nine  Months
Ended September 30,
 
     2010      2009  
     (Dollars in millions)  

Beginning Balance

   $ 2,672       $ 1,607   

Provision for credit losses

     1,995         2,086   

Loans and leases charged-off

     (2,092      (1,345

Recoveries of previous charge-offs

     102         60   
                 

Net loans and leases charged-off

     (1,990      (1,285
                 

Other changes, net

     (27      70   
                 

Ending Balance

   $ 2,650       $ 2,478   
                 

Allowance for loan and lease losses

   $ 2,611       $ 2,379   

Reserve for unfunded lending commitments

     39         99   
                 

Allowance for credit losses

   $ 2,650       $ 2,478   
                 

NOTE 6. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill attributable to each of BB&T’s operating segments for the nine months ended September 30, 2010 are reflected in the table below. To date, there have been no goodwill impairments recorded by BB&T.

 

     Goodwill Activity by Operating Segment  
     Community
Banking
    Residential
Mortgage
Banking
     Sales
Finance
     Specialized
Lending
    Insurance
Services
     Financial
Services
     All
Other
     Total  
     (Dollars in millions)  

Balance, January 1, 2010

   $ 4,569      $ 7       $ 93       $ 110      $ 1,056       $ 192       $ 26       $ 6,053   

Contingent consideration

     —          —           —           —          9         —           —           9   

Other adjustments

     (45     —           —           (7     3         —           —           (49
                                                                     

Balance, September 30, 2010

   $ 4,524      $ 7       $ 93       $ 103      $ 1,068       $ 192       $ 26       $ 6,013   
                                                                     

As of September 30, 2010, Branch Bank and the FDIC continue to finalize details of the acquisition of certain assets and substantially all of the deposits and certain liabilities of Colonial. As these details are finalized, adjustments to Branch Bank’s purchase accounting, including goodwill, may be recorded. The adjustments to goodwill during 2010 within the Community Banking segment (formerly “Banking Network”), reflect the finalization of valuations for certain assets and liabilities acquired in the Colonial acquisition. The ultimate resolution of these adjustments is not expected to be material to BB&T’s consolidated financial statements.

The following table presents the gross carrying amounts and accumulated amortization for BB&T’s identifiable intangible assets subject to amortization at the dates presented:

 

     Identifiable Intangible Assets  
     As of September 30, 2010      As of December 31, 2009  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 
     (Dollars in millions)  

Identifiable intangible assets

               

Core deposit intangibles

   $ 626       $ (425   $ 201       $ 633       $ (375   $ 258   

Other (1)

     751         (417     334         755         (373     382   
                                                   

Totals

   $ 1,377       $ (842   $ 535       $ 1,388       $ (748   $ 640   
                                                   

 

(1) Other identifiable intangibles are primarily customer relationship intangibles.

 

16


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

NOTE 7. Loan Servicing

Residential Mortgage Banking Activities

The following table includes a summary of residential mortgage loans managed or securitized and related delinquencies and net charge-offs:

 

         September 30,
2010
     December 31,
2009
 
         (Dollars in millions)  

Mortgage loans managed or securitized (1)

   $ 22,391       $ 21,637   

Less:  

 

Loans securitized and transferred to securities available for sale

     18         60   
 

Loans held for sale

     2,846         2,524   
 

Covered mortgage loans

     1,488         1,632   
 

Mortgage loans sold with recourse

     1,723         1,986   
                   

Mortgage loans held for investment

   $ 16,316       $ 15,435   
                   

Mortgage loans on nonaccrual status (2)

   $ 418       $ 767   

Mortgage loans 90 days past due and still accruing interest (2)

     256         158   

Mortgage loan net charge-offs (3)

     333         275   

 

(1) Balances exclude loans serviced for others, with no other continuing involvement.
(2) Includes amounts related to residential mortgage loans held for sale
(3) Net charge-offs for September 30, 2010 reflect nine months.

BB&T sold problem residential mortgages with a carrying value of $385 million from the mortgage loans held for investment portfolio and recorded write-downs on certain loans identified for sale during the nine months ended September 30, 2010. In connection with these actions, BB&T recorded $141 million of net charge-offs.

The unpaid principal balances of BB&T’s total residential mortgage servicing portfolio were $80.5 billion and $73.6 billion at September 30, 2010 and December 31, 2009, respectively. The unpaid principal balances of residential mortgage loans serviced for others consist primarily of agency conforming fixed-rate mortgage loans and totaled $60.2 billion and $54.5 billion at September 30, 2010 and December 31, 2009, respectively. Mortgage loans serviced for others are not included in loans on the accompanying Consolidated Balance Sheets.

During the nine months ended September 30, 2010 and 2009, BB&T sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $13.1 billion and $21.1 billion, respectively, and recognized pretax gains of $181 million and $291 million, respectively, which were recorded in noninterest income as a component of mortgage banking income. BB&T retained the related mortgage servicing rights and receives servicing fees.

At September 30, 2010 and 2009, the approximate weighted average servicing fee was .35% and .37%, respectively, of the outstanding balance of the residential mortgage loans. The weighted average coupon interest rate on the portfolio of mortgage loans serviced for others was 5.37% and 5.62% at September 30, 2010 and 2009, respectively. BB&T recognized servicing fees of $168 million and $135 million during the first nine months of 2010 and 2009, respectively, as a component of mortgage banking income.

At September 30, 2010 and December 31, 2009, BB&T had $1.7 billion and $2.0 billion, respectively, of residential mortgage loans sold with recourse liability. In the event of nonperformance by the borrower, BB&T has maximum recourse exposure of approximately $612 million and $667 million as of September 30, 2010 and December 31, 2009, respectively. At September 30, 2010 and December 31, 2009, BB&T has recorded $6 million of reserves related to these recourse exposures. Payments made to date have been immaterial.

In prior years, the Company securitized residential mortgage loans and retained the resulting securities available for sale. As of September 30, 2010, the fair value of the securities available for sale still owned by BB&T was $19 million and the remaining unpaid principal balance of the underlying loans totaled $18 million. Based on the performance of the underlying loans and general liquidity of the securities, the Company’s recovery of the cost basis in the securities has not been significantly impacted by changes in interest rates, prepayment speeds or credit losses.

 

17


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

Residential mortgage servicing rights are recorded on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage banking income in the Consolidated Statements of Income for each period. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value of its residential mortgage servicing rights due to changes in valuation inputs and assumptions. The following is an analysis of the activity in BB&T’s residential mortgage servicing rights for the nine month periods ended September 30, 2010 and 2009:

 

     Residential Mortgage Servicing Rights
For the Nine Months Ended
September 30,
 
           2010                 2009        
     (Dollars in millions)  

Carrying value, January 1,

   $ 832      $ 370   

Additions

     177        331   

Increase (decrease) in fair value:

    

Due to changes in valuation inputs or assumptions

     (327     32   

Other changes (1)

     (97     (94
                

Carrying value, September 30,

   $ 585      $ 639   
                

 

(1) Represents the realization of expected net servicing cash flows, expected borrower payments and the passage of time.

BB&T uses assumptions and estimates in determining the fair value of mortgage servicing rights. These assumptions include prepayment speeds, servicing costs and Option Adjusted Spread commensurate with the risks involved and comparable to assumptions used by market participants to value and bid servicing rights available for sale in the market. At September 30, 2010, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% adverse changes in key economic assumptions are included in the accompanying table.

 

     Residential Mortgage Servicing
Rights September 30, 2010
 
     (Dollars in millions)  

Fair value of residential mortgage servicing rights

   $ 585   

Composition of residential loans serviced for others:

  

Fixed-rate mortgage loans

     99

Adjustable-rate mortgage loans

     1   

Total

     100   

Weighted average life

     3.8 yrs   

Prepayment Speed

     20.2

Effect on fair value of a 10% increase

   $ (39

Effect on fair value of a 20% increase

     (74

Weighted average discount rate

     10.8

Effect on fair value of a 10% increase

   $ (25

Effect on fair value of a 20% increase

     (47

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption; however, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

 

18


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

Commercial Mortgage Banking Activities

BB&T also arranges and services commercial real estate mortgages through Grandbridge Real Estate Capital, LLC (“Grandbridge”) the commercial mortgage banking subsidiary of Branch Bank. During both the nine months ended September 30, 2010 and 2009, Grandbridge originated $1.8 billion of commercial real estate mortgages, primarily for third party investors. As of September 30, 2010 and December 31, 2009, Grandbridge’s portfolio of commercial real estate mortgages serviced for others totaled $23.8 billion and $24.3 billion, respectively. Commercial real estate mortgage loans serviced for others are not included in loans on the accompanying Consolidated Balance Sheets. Grandbridge had $4.2 billion and $4.0 billion in loans serviced for others that were covered by recourse provisions at September 30, 2010 and December 31, 2009, respectively. At both September 30, 2010 and December 31, 2009, Grandbridge’s maximum exposure to loss for these loans was approximately $1.1 billion. BB&T has recorded $17 million and $12 million of reserves related to these recourse exposures at September 30, 2010 and December 31, 2009, respectively.

Commercial mortgage servicing rights are recorded as other assets on the Consolidated Balance Sheets at lower of cost or market and amortized in proportion to and over the estimated period that net servicing income is expected to be received based on projections of the amount and timing of estimated future net cash flows. The following is an analysis of the activity in BB&T’s commercial mortgage servicing rights for the nine months ended September 30, 2010 and 2009:

 

     Commercial Mortgage Servicing Rights
For the Nine Months Ended
September 30,
 
             2010                     2009          
     (Dollars in millions)  

Carrying value, January 1,

   $ 101      $ 98   

Additions

     12        18   

Amortization expense

     (13     (13
                

Carrying value, September 30,

   $ 100      $ 103   
                

At September 30, 2010, the sensitivity of the current fair value of the commercial mortgage servicing rights to adverse changes in key economic assumptions are included in the accompanying table.

 

     Commercial Mortgage
Servicing Rights
September 30, 2010
 
     (Dollars in millions)  

Fair value of commercial mortgage servicing rights

   $ 116   

Weighted average life

     7.3 yrs   

Prepayment speed

     0.4

Effect on fair value of a 10% increase

   $ (1

Effect on fair value of a 15% increase

     (1

Weighted average discount rate

     12.5

Effect on fair value of a 25% increase

   $ (9

Effect on fair value of a 50% increase

     (17

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption; however, changes in one factor may result in changes in another (for example, increases in market interest rates may result in increased value of escrow deposits), which may magnify or counteract the effect of the change.

 

19


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

NOTE 8. Long-Term Debt

 

     September 30,
2010
     December 31,
2009
 
     (Dollars in millions)  

Parent Company

     

3.10% Senior Notes Due 2011

   $ 250       $ 250   

3.85% Senior Notes Due 2012

     1,000         1,000   

3.38% Senior Notes Due 2013

     500         500   

5.70% Senior Notes Due 2014

     510         509   

3.95% Senior Notes Due 2016

     499         —     

6.85% Senior Notes Due 2019

     538         538   

6.50% Subordinated Notes Due 2011 (1)

     610         610   

4.75% Subordinated Notes Due 2012 (1)

     490         489   

5.20% Subordinated Notes Due 2015 (1)

     932         932   

4.90% Subordinated Notes Due 2017 (1,3)

     339         336   

5.25% Subordinated Notes Due 2019 (1,3)

     586         586   

Branch Bank

     

Floating Rate Subordinated Notes Due 2016 (1,8)

     350         350   

Floating Rate Subordinated Notes Due 2017 (1,8)

     261         261   

4.875% Subordinated Notes Due 2013 (1)

     222         222   

5.625% Subordinated Notes Due 2016 (1)

     386         386   

Federal Home Loan Bank Advances to Branch Bank (4)

     

Varying maturities to 2034

     10,489         10,541   

Junior Subordinated Debt to Unconsolidated Trusts (2)

     

5.85% BB&T Capital Trust I Securities Due 2035

     514         514   

6.75% BB&T Capital Trust II Securities Due 2036

     598         598   

6.82% BB&T Capital Trust IV Securities Due 2077 (5)

     600         600   

8.95% BB&T Capital Trust V Securities Due 2068 (6)

     450         450   

9.60% BB&T Capital Trust VI Securities Due 2069

     575         575   

8.10% BB&T Capital Trust VII Securities Due 2069

     350         350   

Other (7)

     182         182   

Other Long-Term Debt

     124         98   

Fair value hedge-related basis adjustments

     756         499   
                 

Total Long-Term Debt

   $ 22,111       $ 21,376   
                 

 

(1) Subordinated notes that qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.
(2) Securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.
(3) These fixed rate notes were swapped to floating rates based on LIBOR. At September 30, 2010, the effective rates paid on these borrowings ranged from .84% to .96%.
(4) $800 million of these advances were swapped to a floating rate based on LIBOR. At September 30, 2010, the weighted average cost of these advances was 3.24% including the effect of the swapped portion, and the weighted average maturity was 6.7 years.
(5) These securities have a fixed rate through June 12, 2037 and then switch to a floating rate based on LIBOR.
(6) $360 million of this issuance was swapped to a floating rate based on LIBOR. At September 30, 2010 the effective rate on the swapped portion was 3.66%.
(7) These securities were issued by companies acquired by BB&T. At September 30, 2010, the effective rate paid on these borrowings ranged from 1.99% to 10.07%. These securities have varying maturities through 2035.
(8) These floating-rate securities are based on LIBOR and had an effective rate of .62% as of September 30, 2010.

 

20


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

NOTE 9. Shareholders’ Equity

Common Stock

As of September 30, 2010, the authorized common stock of BB&T consists of two billion shares with a $5 par value. There were 694 million and 690 million common shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively.

Preferred Stock

The authorized preferred stock of BB&T consists of five million shares. There were no preferred shares outstanding at September 30, 2010 or December 31, 2009.

Equity-Based Plans

BB&T has options, restricted shares of common stock and restricted share units outstanding from the following equity-based compensation plans: the 2004 Stock Incentive Plan (“2004 Plan”), the 1995 Omnibus Stock Incentive Plan, the Non-Employee Directors’ Stock Option Plan, and plans assumed from acquired entities. All plans generally allow for accelerated vesting of awards for holders who retire and have met all retirement eligibility requirements and in connection with certain other events. BB&T’s shareholders have approved all equity-based compensation plans with the exception of plans assumed from acquired companies. As of September 30, 2010, the 2004 Plan is the only plan that has awards available for future grants. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2009 for further disclosures related to equity-based awards issued by BB&T.

BB&T measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants awarded during the first nine months of 2010 and 2009. Substantially all of BB&T’s option awards are granted in February of each year.

 

     September 30,  
     2010     2009  

Assumptions:

    

Risk-free interest rate

     2.0     3.1

Dividend yield

     5.4        6.0   

Volatility factor

     36.0        29.1   

Expected life

     7.2 yrs        7.1 yrs   

Fair value of options per share

   $ 5.60      $ 2.59   

BB&T measures the fair value of restricted shares based on the price of BB&T’s common stock on the grant date and the fair value of restricted share units based on the price of BB&T’s common stock on the grant date less the present value of expected dividends that are foregone during the vesting period.

The following table details the activity during the first nine months of 2010 related to stock options awarded by BB&T:

 

     For the Nine Months Ended
September 30, 2010
 
     Options     Wtd. Avg.
Exercise
Price
 

Outstanding at beginning of period

     42,535,819      $ 35.40   

Granted

     4,652,250        27.75   

Exercised

     (1,529,530     23.19   

Forfeited or expired

     (734,320     33.74   
          

Outstanding at end of period

     44,924,219        35.04   
          

Exercisable at end of period

     32,706,693      $ 36.84   
          

 

21


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

The following table details the activity during the first nine months of 2010 related to restricted shares and restricted share units awarded by BB&T:

 

     For the Nine Months Ended
September 30, 2010
 
     Shares/Units     Wtd. Avg.
Grant Date
Fair Value
 

Nonvested at beginning of period

     10,861,433      $ 19.36   

Granted

     3,410,700        23.74   

Vested

     (471,183     30.37   

Forfeited

     (418,405     19.87   
          

Nonvested at end of period

     13,382,545      $ 20.07   
          

NOTE 10. Accumulated Other Comprehensive Income (Loss)

The balances in accumulated other comprehensive loss at September 30, 2010 and December 31, 2009 are shown in the following table.

 

    As of September 30, 2010     As of December 31, 2009  
    Pre-Tax
Amount
    Deferred
Tax Expense
(Benefit)
    After-
Tax
Amount
    Pre-Tax
Amount
    Deferred
Tax Expense
(Benefit)
    After-
Tax
Amount
 
    (Dollars in millions)  

Unrecognized net pension and postretirement costs

  $ (448   $ (170   $ (278   $ (447   $ (169   $ (278

Unrealized net (losses) gains on cash flow hedges

    (167     (63     (104     173        66        107   

Unrealized net gains (losses) on securities available for sale

    352        133        219        (363     (138     (225

FDIC’s share of unrealized net gains on securities available for sale under the loss share agreements (1)

    (273     (103     (170     (30     (11     (19

Foreign currency translation adjustment

    (8     (6     (2     (7     (5     (2
                                               

Total

  $ (544   $ (209   $ (335   $ (674   $ (257   $ (417
                                               

 

(1) Certain securities available for sale are covered by loss sharing agreements with the FDIC. The securities covered by the loss share agreements reflected a net unrealized pretax gain of $296 million and $35 million as of September 30, 2010 and December 31, 2009, respectively. The FDIC’s share of this net unrealized pretax gain, upon sale, would have been $273 million and $30 million as of September 30, 2010 and December 31, 2009, respectively, and was recorded as a reduction in other comprehensive income.

As of September 30, 2010 and December 31, 2009, unrealized net losses on securities available for sale included $100 million and $114 million, respectively, of pre-tax losses related to other-than-temporarily impaired non-agency mortgage-backed securities where a portion of the loss was recognized in net income.

 

22


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

The following tables reflect the components of total comprehensive income for the three and nine month periods ended September 30, 2010 and 2009.

 

     Three Months Ended September 30, 2010  
     Pre-Tax     Tax Effect     After-Tax  
     (Dollars in millions)  

Comprehensive income:

      

Net income

   $ 246      $ 27      $ 219   

Other comprehensive income:

      

Unrealized net holding gains (losses) arising during the period on securities available for sale

     315        119        196   

Reclassification adjustment for losses (gains) on securities available for sale included in net income

     (239     (91     (148

Net change in amounts attributable to the FDIC under the loss share agreements

     (117     (44     (73

Net change in unrecognized gains (losses) on cash flow hedges

     (125     (47     (78

Net change in foreign currency translation adjustment

     —          (1     1   

Net change in pension and postretirement liability

     6        2        4   
                        

Total comprehensive income

   $ 86      $ (35   $ 121   
                        
     Three Months Ended September 30, 2009  
     Pre-Tax     Tax Effect     After-Tax  
     (Dollars in millions)  

Comprehensive income:

      

Net income

   $ 148      $ (9   $ 157   

Other comprehensive income:

      

Unrealized net holding gains (losses) arising during the period on securities available for sale

     626        237        389   

Reclassification adjustment for losses (gains) on securities available for sale included in net income

     (31     (12     (19

Net change in amounts attributable to the FDIC under the loss share agreements

     (19     (7     (12

Net change in unrecognized gains (losses) on cash flow hedges

     4        2        2   

Net change in foreign currency translation adjustment

     1        (3     4   

Net change in pension and postretirement liability

     3        1        2   
                        

Total comprehensive income

   $ 732      $ 209      $ 523   
                        
     Nine Months Ended September 30, 2010  
     Pre-Tax     Tax Effect     After-Tax  
     (Dollars in millions)  

Comprehensive income:

      

Net income

   $ 737      $ 100      $ 637   

Other comprehensive income:

      

Unrealized net holding gains (losses) arising during the period on securities available for sale

     1,170        444        726   

Reclassification adjustment for losses (gains) on securities available for sale included in net income

     (455     (173     (282

Net change in amounts attributable to the FDIC under the loss share agreements

     (243     (92     (151

Net change in unrecognized gains (losses) on cash flow hedges

     (340     (129     (211

Net change in foreign currency translation adjustment

     (1     (1     —     

Net change in pension and postretirement liability

     (1     (1     —     
                        

Total comprehensive income

   $ 867      $ 148      $ 719   
                        

 

23


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

     Nine Months Ended September 30, 2009  
     Pre-Tax     Tax Effect     After-Tax  
     (Dollars in millions)  

Comprehensive income:

      

Net income

   $ 829      $ 146      $ 683   

Other comprehensive income:

      

Unrealized net holding gains (losses) arising during the period on securities available for sale

     695        261        434   

Reclassification adjustment for losses (gains) on securities available for sale included in net income

     (200     (76     (124

Net change in amounts attributable to the FDIC under the loss share agreements

     (19     (7     (12

Net change in unrecognized gains (losses) on cash flow hedges

     76        30        46   

Net change in foreign currency translation adjustment

     —          (5     5   

Net change in pension and postretirement liability

     31        12        19   
                        

Total comprehensive income

   $ 1,412      $ 361      $ 1,051   
                        

NOTE 11. Income Taxes

BB&T’s provision for income taxes was $27 million for the three months ended September 30, 2010 and a $9 million benefit for the three months ended September 30, 2009. BB&T recognized a tax benefit of $12 million in the third quarter of 2009 related to certain leveraged lease transactions. The provision for income taxes was $100 million and $146 million for the nine months ended September 30, 2010 and 2009, respectively. The effective tax rates for the three months ended September 30, 2010 and 2009 were 11.0% and (6.1%), respectively. The effective tax rates for the nine months ended September 30, 2010 and 2009 were 13.6% and 17.6%, respectively. The higher effective tax rate for the three months ended September 30, 2010 compared to 2009 is primarily the result of the tax benefit related to certain leveraged lease transactions. The lower effective tax rate for the nine months ended September 30, 2010 compared to 2009 is primarily the result of an increase in tax credits.

The IRS has completed its federal income tax examinations of BB&T through 2006. In connection with the settlement agreement with the IRS regarding its leveraged lease transactions, BB&T is entitled to federal income tax refunds for tax years 1998-2006. During the first nine months of 2010, BB&T received federal tax refunds including interest of approximately $379 million for tax years 1998-2006. In February 2010, BB&T received an IRS statutory notice of deficiency 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, 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.

In the third quarter of 2010, BB&T updated the tax basis valuation for the Colonial assets acquired from the FDIC. Based on this analysis, BB&T recorded a reserve of approximately $117 million related to the valuation of uncertain tax positions. Total unrecognized tax benefits at September 30, 2010 are $296 million.

NOTE 12. Benefit Plans

BB&T provides various benefit plans to substantially all employees, including employees of acquired entities. Employees of acquired entities generally participate in existing BB&T plans after consummation of the business combination. The plans of acquired institutions are typically merged into the BB&T plans after consummation of the

 

24


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

mergers, and, under these circumstances, credit is usually given to these employees for years of service at the acquired institution for vesting and eligibility purposes. The Colonial acquisition, as an asset purchase, was handled differently from typical mergers. The retirement plans of Colonial were not assumed by BB&T, and as such, were not merged into the BB&T plans. Credit for years of service with Colonial, where given, was determined on a plan-by-plan basis with regard to the participation of former Colonial employees in BB&T’s plans. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2009 for descriptions and disclosures about the various benefit plans offered by BB&T.

The following table summarizes the components of net periodic benefit cost recognized for BB&T’s pension plans for the three and nine month periods ended September 30, 2010 and 2009, respectively:

 

     Pension Plans  
     Qualified     Nonqualified  
     For the Three Months
Ended September 30,
    For the Three Months
Ended September 30,
 
         2010             2009             2010              2009      
     (Dollars in millions)  

Service cost

   $ 19      $ 17      $ 1       $ 1   

Interest cost

     21        20        3         3   

Estimated return on plan assets

     (44     (36     —           —     

Amortization and other

     6        13        —           —     
                                 

Net periodic benefit cost

   $ 2      $ 14      $ 4       $ 4   
                                 
     Pension Plans  
     Qualified     Nonqualified  
     For the Nine Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2010     2009     2010      2009  
     (Dollars in millions)  

Service cost

   $ 59      $ 55      $ 3       $ 3   

Interest cost

     63        58        7         7   

Estimated return on plan assets

     (133     (107     —           —     

Amortization and other

     17        41        1         1   
                                 

Net periodic benefit cost

   $ 6      $ 47      $ 11       $ 11   
                                 

BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding standard accounts and the maximum amount deductible for federal income tax purposes. Discretionary contributions of $7 million and $61 million were made to the qualified pension plan in the third and first quarters of 2010, respectively. Discretionary contributions of $50 million and $422 million were made to the qualified pension plan in the third and first quarters of 2009, respectively. Management currently has no plans to make any additional contributions to the qualified pension plan in 2010; however, management may elect to make additional contributions during 2010 if deemed appropriate.

NOTE 13. Commitments and Contingencies

BB&T utilizes a variety of financial instruments to meet the financing needs of clients and to reduce exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit and financial guarantees and derivatives. BB&T also has commitments to fund certain affordable housing investments and contingent liabilities of certain sold loans.

Commitments to extend, originate or purchase credit are primarily lines of credit to businesses and consumers and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow BB&T to cancel the commitment due to deterioration in the borrowers’ creditworthiness.

 

25


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

Letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions, the majority of which are to tax exempt entities. The credit risk involved in the issuance of these guarantees is essentially the same as that involved in extending loans to clients and as such, the instruments are collateralized when necessary. As of September 30, 2010 and December 31, 2009, BB&T had issued letters of credit totaling $7.5 billion and $8.0 billion, respectively. The carrying amount of the liability for such guarantees was $41 million and $40 million at September 30, 2010 and December 31, 2009, respectively.

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. These instruments include interest-rate swaps, swaptions, caps, floors, collars, financial forward and futures contracts, when-issued securities, foreign exchange contracts and options written and purchased. BB&T uses derivatives primarily to manage risk related to securities, business loans, Federal Funds purchased, other overnight funding, long-term debt, mortgage servicing rights, mortgage banking operations and certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients. BB&T held a variety of derivative financial instruments with notional values of $67.2 billion and $66.2 billion at September 30, 2010 and December 31, 2009, respectively. These instruments were in a net gain position of $277 million and $283 million at September 30, 2010 and December 31, 2009, respectively.

In the ordinary course of business, BB&T indemnifies its officers and directors to the fullest extent permitted by law against liabilities arising from pending litigation. BB&T also issues standard representation and warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnification arrangements provide similar indemnifications to BB&T. Although these agreements often do not specify limitations, BB&T does not believe that any payments related to these guarantees would materially change the financial condition or results of operations of BB&T.

Merger and acquisition agreements of businesses other than financial institutions occasionally include additional incentives to the acquired entities to offset the loss of future cash flows previously received through ownership positions. Typically, these incentives are based on the acquired entity’s contribution to BB&T’s earnings compared to agreed-upon amounts. When offered, these incentives are typically issued for terms of three to five years. As certain provisions of these agreements do not specify dollar limitations, it is not possible to quantify the maximum exposure resulting from these agreements.

As previously discussed, BB&T entered into loss sharing agreements with the FDIC in connection with the Colonial acquisition. The provisions of the agreements may require a payment by BB&T to the FDIC on October 15, 2019. On that date, BB&T is required to pay the FDIC 55% of the excess, if any, of (i) $1 billion over (ii) the sum of (A) 25% of the total net amounts paid to BB&T under both of the loss sharing agreements (i.e., BB&T’s payments received from the FDIC for losses, offset by BB&T’s payments made to the FDIC for recoveries) plus (B) 20% of the deemed total cost to BB&T of administering the assets covered under the loss sharing agreements other than shared loss securities. The deemed total cost to BB&T of administering the covered assets is the sum of 2% of the average of the principal amount of shared loss loans and shared loss assets (other than the shared loss securities) based on the beginning and end of year balances for each of the 10 years during which the shared loss agreements are in effect. In addition, any payments made by either party with respect to the securities with a 95% loss share will be excluded from this calculation.

BB&T invests in certain affordable housing and historic building rehabilitation projects throughout its market area as a means of supporting local communities, and receives tax credits related to these investments. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. Branch Bank typically provides financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project. As of September 30, 2010 and December 31, 2009, BB&T had investments of $1.1 billion related to these projects, which are included as other assets on the Consolidated Balance Sheets. BB&T’s outstanding commitments to fund affordable housing investments totaled $250 million and $371 million at September 30, 2010 and December 31, 2009, respectively, which are included as other liabilities on the Consolidated Balance Sheets. As of September 30, 2010 and December 31, 2009, BB&T had outstanding loan

 

26


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

commitments to these funds of $135 million and $165 million, respectively. Of these amounts, $31 million and $73 million had been funded at September 30, 2010 and December 31, 2009, respectively, and were included in loans and leases on the Consolidated Balance Sheets. BB&T’s maximum risk exposure related to these investments totaled $1.2 billion at September 30, 2010 and December 31, 2009.

BB&T has sold certain mortgage-related loans that contain recourse provisions. These provisions generally require BB&T to reimburse the investor for a share of any loss that is incurred after the disposal of the property. At September 30, 2010 and December 31, 2009, BB&T had $1.7 billion and $2.0 billion, respectively, of residential mortgage loans sold with recourse. In the event of nonperformance by the borrower, BB&T has maximum recourse exposure of approximately $612 million and $667 million as of September 30, 2010 and December 31, 2009, respectively. In addition, BB&T has $4.2 billion and $4.0 billion in commercial loans serviced for others that were covered by recourse provisions at September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, BB&T’s maximum exposure to loss for these loans is approximately $1.1 billion. BB&T has recorded $23 million and $18 million of reserves related to these recourse exposures at September 30, 2010 and December 31, 2009, respectively.

BB&T also issues standard representations and warranties related to mortgage loan sales to government-sponsored entities. Although these agreements often do not specify limitations, BB&T does not believe that any payments related to these warranties would materially change the financial condition or results of operations of BB&T. As of September 30, 2010, BB&T has recorded $14 million of reserves related to potential losses resulting from repurchases of loans sold.

BB&T has investments and future funding commitments to certain venture capital funds. As of September 30, 2010 and December 31, 2009, BB&T had investments of $287 million and $281 million related to these ventures, respectively. As of September 30, 2010 and December 31, 2009, BB&T had future funding commitments of $206 million and $183 million, respectively. BB&T’s risk exposure relating to such commitments is generally limited to the amount of investments and future funding commitments made.

NOTE 14. Fair Value Disclosures

BB&T carries various assets and liabilities at fair value based on applicable accounting standards. In addition, BB&T has elected to account for prime residential mortgage and commercial mortgage loans originated as loans held for sale at fair value in accordance with applicable accounting standards (the “Fair Value Option”). BB&T also has certain loans held for sale that were originated as loans held for investment. These loans are carried at the lower of cost or market. Accounting standards have established a framework for measuring fair value and defines fair value as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants. These standards also established a three level fair value hierarchy that describes the inputs that are used to measure assets and liabilities. Level 1 asset and liability fair values are based on quoted prices in active markets for identical assets and liabilities. Level 2 asset and liability fair values are based on observable inputs that include: quoted market prices for similar assets or liabilities; quoted market prices that are not in an active market; or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 assets and liabilities are financial instruments whose value is calculated by the use of pricing models and/or discounted cash flow methodologies, as well as financial instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data.

 

27


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

Assets and liabilities measured at fair value on a recurring basis, including financial instruments for which BB&T has elected the Fair Value Option are summarized below:

 

     9/30/2010      Fair Value Measurements for Assets and
Liabilities Measured on  a Recurring Basis
 
          Level 1              Level 2              Level 3      
            (Dollars in Millions)  

Assets:

           

Trading securities

   $ 568       $ 239       $ 319       $ 10   

Securities available for sale:

           

U.S. government-sponsored entities (GSE)

     54         —           54         —     

Mortgage-backed securities issued by GSE

     19,341         —           19,341         —     

States and political subdivisions

     2,092         —           1,952         140   

Non-agency mortgage-backed securities

     941         —           941         —     

Equity and other securities

     569         136         426         7   

Covered securities

     1,500         —           578         922   

Loans held for sale (4)

     2,920         —           2,920         —     

Residential mortgage servicing rights

     585         —           —           585   

Derivative assets: (2)

           

Interest rate contracts

     1,548         2         1,479         67   

Foreign exchange contracts

     6         —           6         —     

Venture capital and similar investments (1)(2)

     287         —           —           287   
                                   

Total assets

   $ 30,411       $ 377       $ 28,016       $ 2,018   
                                   

Liabilities:

           

Derivative liabilities: (2)

           

Interest rate contracts

   $ 1,272       $ 7       $ 1,264       $ 1   

Foreign exchange contracts

     5         —           5         —     

Short-term borrowed funds (3)

     180         —           180         —     
                                   

Total liabilities

   $ 1,457       $ 7       $ 1,449       $ 1   
                                   
            Fair Value Measurements for Assets and
Liabilities Measured on  a Recurring Basis
 
     12/31/2009      Level 1      Level 2      Level 3  
            (Dollars in Millions)  

Assets:

           

Trading securities

   $ 636       $ 255       $ 288       $ 93   

Securities available for sale:

           

U.S. government-sponsored entities (GSE)

     2,035         —           2,035         —     

Mortgage-backed securities issued by GSE

     26,670         —           26,670         —     

States and political subdivisions

     2,107         —           1,897         210   

Non-agency mortgage-backed securities

     1,022         —           1,022         —     

Equity and other securities

     218         166         43         9   

Covered securities

     1,201         —           533         668   

Loans held for sale

     2,551         —           2,551         —     

Residential mortgage servicing rights

     832         —           —           832   

Derivative assets (2)

     983         1         975         7   

Venture capital and similar investments (1)(2)

     281         —           —           281   
                                   

Total assets

   $ 38,536       $ 422       $ 36,014       $ 2,100   
                                   

Liabilities:

           

Derivative liabilities (2)

   $ 700       $ 5       $ 668       $ 27   

Short-term borrowed funds (3)

     295         —           295         —     
                                   

Total liabilities

   $ 995       $ 5       $ 963       $ 27   
                                   

 

28


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

(1) Based on an analysis of the nature and risks of these investments, BB&T has determined that presenting these investments as a single class is appropriate.
(2) These amounts are reflected in other assets and other liabilities on the Consolidated Balance Sheets.
(3) Short-term borrowed funds reflect securities sold short positions.
(4) Excludes loans held for sale carried at the lower of cost or market.

The following discussion focuses on the valuation techniques and significant inputs used by BB&T in determining the Level 2 and Level 3 fair values of each significant class of assets and liabilities.

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. For certain security types, additional inputs may be used, or some inputs may not be applicable. BB&T performs a review of pricing on actual trades executed in order to validate the fair values provided by this pricing service. BB&T also analyzes available third-party market data for a sample of securities to further validate these fair values. 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.

Specific valuation techniques and inputs used in determining the fair value of each significant class of assets and liabilities follows:

Trading securities: Trading securities are composed of all types of debt and equity securities, but the majority consists of debt securities issued by the U.S. Treasury, U.S. government-sponsored entities, or states and political subdivisions. The valuation techniques used for these investments are more fully discussed below.

U.S. government-sponsored entities (GSE) and Mortgage-backed securities issued by GSE: These are debt securities issued by government sponsored entities. BB&T’s valuations are based on a market approach using observable inputs such as benchmark yields and securities, TBA prices, reported trades, issuer spreads, monthly payment information and collateral performance.

States and political subdivisions: These are debt securities issued by states and political subdivisions. BB&T’s valuations are primarily based on a market approach using observable inputs such as benchmark yields, MSRB reported trades, material event notices and new issue data.

Non-agency mortgage-backed securities: BB&T’s valuation for these debt securities is based on a market approach using observable inputs such as benchmark yields and securities, TBA prices, reported trades, monthly payment information and collateral performance.

Equity and other securities: These securities consist primarily of equities, mutual funds and corporate bonds. These securities are valued based on a review of quoted market prices for identical and similar assets as well as through the various other inputs discussed previously.

Covered securities: Covered securities are covered by FDIC loss sharing agreements and consist of re-remic non-agency mortgage-backed securities and municipal securities. These securities were priced primarily through broker-dealer quotes.

Loans held for sale: BB&T originates certain mortgage loans to be sold to investors. These loans are carried at fair value based on BB&T’s election of the Fair Value Option. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale.

Residential mortgage servicing rights: BB&T estimates the fair value of residential mortgage servicing rights (“MSRs”) using an option adjusted spread (“OAS”) valuation model to project MSR cash flows over multiple interest rate scenarios,

 

29


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

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. When available, fair value estimates and assumptions are compared to observable market data and to recent market activity and actual portfolio experience.

Derivative assets and liabilities: BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. The fair value of interest rate lock commitments, which are related to mortgage loan commitments, is based on quoted market prices adjusted for commitments that BB&T does not expect to fund and includes the value attributable to the net servicing fee.

Venture capital and similar investments: BB&T has venture capital and similar investments that are carried at fair value. In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment and actual values in a sale could differ materially from those estimated.

Short-term borrowed funds: Short-term borrowed funds represent debt securities sold short. These are entered into through BB&T’s brokerage subsidiary Scott & Stringfellow, LLC. These trades are executed as a hedging strategy for the purposes of supporting institutional and retail client trading activities.

The tables below present reconciliations for the three and nine months ended September 30, 2010 and 2009, respectively, for Level 3 assets and liabilities that are measured at fair value on a recurring basis.

 

     Fair Value Measurements Using Significant Unobservable Inputs  

For the Three Months Ended September 30, 2010

   Trading     States &
Political
Subdivisions
    Equity &
Other
Securities
    Covered
Securities
     Mortgage
Servicing
Rights
    Net
Derivatives
    Venture
Capital and
Similar
Investments
 
     (Dollars in Millions)  

Balance at June 30, 2010

   $ 11      $ 136      $ 8      $ 818       $ 665      $ 48      $ 272   

Total realized and unrealized gains or losses:

               

Included in earnings:

               

Interest income

     —          —          —          5         —          —          —     

Mortgage banking income

     —          —          —          —           (135     123        —     

Other noninterest income

     (1     —          —          —           —          —          18   

Included in other comprehensive income (loss)

     —          18        (1     99         —          —          —     

Purchases, issuances and settlements

     —          (14     —          —           55        (105     (3

Transfers into Level 3

     —          —          —          —           —          —          —     

Transfers out of Level 3

     —          —          —          —           —          —          —     
                                                         

Balance at September 30, 2010

   $ 10      $ 140      $ 7      $ 922       $ 585      $ 66      $ 287   
                                                         

Net unrealized gains (losses) included in net income relating to assets and liabilities still held at September 30, 2010

   $ —        $ —        $ —        $ 5       $ (100   $ 66      $ 17   
                                                         

 

30


Table of Contents

BB&T Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  Third Quarter 2010

 

 

    Fair Value Measurements Using Significant Unobservable Inputs  

For the Three Months Ended September 30, 2009

  Trading     States &
Political
Subdivisions
    Non-agency
mortgage-

backed
securities
    Equity &
Other
Securities
    Covered
Securities
    Mortgage
Servicing
Rights
    Net
Derivatives
    Venture
Capital and
Similar
Investments
 
    (Dollars in Millions)              

Balance at June 30, 2009

  $ 14      $ —        $ 1,048      $ 1      $ —        $ 615      $ —        $ 200   

Total realized and unrealized gains or losses:

               

Included in earnings:

               

Interest Income

    —          —          —          —          4        —          —          —     

Mortgage banking income

    —          —          —          —          —          (89     33        —     

Other noninterest income

    (2     —          —          —          —          —          —          (4

Included in other comprehensive income (loss)

    —          —          70        —          —          —          —          —     

Purchases, issuances and settlements

    —          —          (57     (1     —          113        (7     3   

Transfers in and/or out of Level 3

    1        226        (1,061     9        632        —          (20     30   
                                                               

Balance at September 30, 2009

  $ 13      $ 226      $ —        $ 9      $ 636      $ 639      $ 6      $ 229   
                                                               

Net unrealized gains (losses) included in net income relating to assets and liabilities still held at September 30, 2009

  $ (2   $ —        $ —        $ —        $ 4      $ (59   $ 6      $ 2   
                                                               

 

    Fair Value Measurements Using Significant Unobservable Inputs  

For the Nine Months Ended September 30, 2010