NOTE 12. Derivative Financial Instruments

          BB&T uses a variety of derivative instruments to manage interest rate and foreign exchange risks. These instruments consist of interest-rate swaps, swaptions, caps, floors, collars, financial forward and futures contracts, when-issued securities, foreign exchange contracts and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. There are five areas of risk management: balance sheet management, mortgage banking operations, mortgage servicing rights, net investment in a foreign subsidiary and client-related and other risk management activities.

          The following tables set forth certain information concerning BB&T’s derivative financial instruments and related hedged items at June 30, 2009:

Derivative Classifications and Hedging Relationships
		June 30, 2009
	Hedged Item or	Notional				Fair Value
	Transaction	Amount				Gain (1)				Loss (1)
			(Dollars in millions)
Derivatives Designated as Cash Flow Hedges
Interest rate contracts
Receive fixed swaps	First forecasted interest receipts on	$	5,000		$	32		$		(36	)
	commercial loans
Pay fixed swaps	First forecasted interest payments on		3,150			39				(6	)
	overnight funding
Pay fixed swaps	First forecasted interest payments on		2,900			48				(31	)
	3 month LIBOR funding
Caps	First forecasted interest payments on		442			1				-
	3 month LIBOR funding
Total		$	11,492		$	120		$		(73	)
Derivatives Designated as Net Investment Hedges
Foreign exchange contracts		$	73		$	-		$		(2	)
Derivatives Designated as Fair Value Hedges
Interest rate contracts
Receive fixed swaps	Individual fixed rate long-term debt	$	3,342		$	262		$		(8	)
Receive fixed swaps	Long-term CDs		328			3				-
Pay fixed swaps	Individual fixed rate securities		354			-				(69	)
	available for sale
Total		$	4,024		$	265		$		(77	)
Derivatives Not Designated as Hedges
Client-related and other risk management
Interest rate contracts
Receive fixed swaps		$	10,969		$	444		$		(30	)
Pay fixed swaps			10,736			29				(391	)
Other swaps			7,713			4				(7	)
Option trades			898			-				-
Swaptions			543			27				(26	)
Futures contracts			3,329			1				-
Collars			151			5				(5	)
Foreign exchange contracts			466			9				(6	)
Mortgage Banking
Interest rate contracts
Receive fixed swaps			76			-				(1	)
Forward commitments			8,253			69				(35	)
Interest rate lock commitments			4,630			14				(15	)
Swaptions			75			2				-
TBA/When issued securities			340			3				-
Mortgage Servicing Rights

---

Interest rate contracts
Receive fixed swaps		1,972		17		(61	)
Pay fixed swaps		641		8		-
Swaptions		1,930		85		(2	)
Futures contracts		10,400		1		(4	)
When issued securities and Forward rate agreements		5,938		10		(23	)
Total	$	69,060	$	728	$	(606	)
Total Derivatives	$	84,649	$	1,113	$	(758	)

(1)	Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities  on the Consolidated Balance Sheets.

The Effect of Derivative Instruments on the Consolidated Statements of Income
for the Six Month Period Ended June 30, 2009
(Dollars in millions)

Effective Portion

Ineffective Portion

Location of Amounts

(Gain) or Loss

Gain or (Loss)

Gain or (Loss)

Reclassified from

Reclassified from

Location of Amounts

Recognized

Recognized in OCI

AOCI into Income

AOCI into Income

Recognized in Income

in Income

Derivatives Designated as Cash Flow Hedges

Interest rate contracts

$

90

Total interest income

$

(15

)

Other noninterest income

$

1

Total interest expense

(3

)

$

(18

)

Derivatives Designated as Net Investment Hedges

Foreign exchange contracts

(1

)

Effective Portion

Ineffective Portion

Location of Amounts

Gain or (Loss)

Location of Amounts

Gain or (Loss)

Recognized in Income

Recognized in Income

Recognized in Income

Recognized in Income

Derivatives Designated as Fair Value Hedges

Interest rate contracts

Total interest expense

$

80

Other noninterest income

$

7

Interest rate contracts

Total interest income

(8

)

Total

$

72

Derivatives Not Designated as Hedges

Client-related and other risk management

Interest rate contracts

Other noninterest income

$

17

Credit derivatives

Other noninterest income

(20

)

Foreign exchange contracts

Other nondeposit fees

(3

)

and commissions

Mortgage Banking

Interest rate contracts

Mortgage banking income

42

Mortgage Servicing Rights

Interest rate contracts

Mortgage banking income

(40

)

Total

$

(4

)

Note: All amounts for Other Comprehensive Income (OCI) and Accumulated Other Comprehensive Income (AOCI) are stated on a pre-tax basis.

The Effect of Derivative Instruments on the Consolidated Statements of Income

for the Three Month Period Ended June 30, 2009

(Dollars in millions)

Effective Portion

Ineffective Portion

Location of Amounts

(Gain) or Loss

Gain or (Loss)

Gain or (Loss)

Reclassified from

Reclassified from

Location of Amounts

Recognized

Recognized in OCI

AOCI into Income

AOCI into Income

Recognized in Income

in Income

Derivatives Designated as Cash Flow Hedges

Interest rate contracts

$

69

Total interest income

$

(9

)

Other noninterest income

$

1

Total interest expense

(2

)

$

(11

)

Derivatives Designated as Net Investment Hedges

Foreign exchange contracts

1

Effective Portion

Ineffective Portion

Location of Amounts

Gain or (Loss)

Location of Amounts

Gain or (Loss)

Recognized in Income

Recognized in Income

Recognized in Income

Recognized in Income

Derivatives Designated as Fair Value Hedges

Interest rate contracts

Total interest expense

$

42

Other noninterest income

$

2

Interest rate contracts

Total interest income

(5

)

Total

$

37

Derivatives Not Designated as Hedges

Client-related and other risk management

Interest rate contracts

Other noninterest income

$

6

Credit derivatives

Other noninterest income

(17

)

Foreign exchange contracts

Other nondeposit fees

(4

)

and commissions

Mortgage Banking

Interest rate contracts

Mortgage banking income

36

Mortgage Servicing Rights

Interest rate contracts

Mortgage banking income

(114

)

Total

$

(93

)

Note: All amounts for Other Comprehensive Income (OCI) and Accumulated Other Comprehensive Income (AOCI) are stated on a pre-tax basis.

          The majority of the balance sheet management derivatives are designated as cash flow or fair value hedges. BB&T’s floating rate business loans, Federal funds purchased, other overnight funding, institutional and brokered certificates of deposit, other time deposits, medium-term bank notes and long-term debt expose it to variability in cash flows for interest payments. The risk management objective for these assets and liabilities is to hedge the variability in the interest payments. This objective is met by entering into interest rate swaps and interest rate collars and caps. Interest rate collars and caps fix the interest payments when interest rates on the hedged item exceed predetermined rates.

     Cash Flow Hedges

          At June 30, 2009, BB&T had designated notional values of $11.5 billion of derivatives as cash flow hedges. These cash flow hedges reflected a net unrealized gain of $47 million, with instruments in a gain position reflecting a fair value of $120 million recorded in other assets and instruments in a loss position reflecting a fair value of $73 million recorded in other liabilities. For a qualifying cash flow hedge, the portion of changes in the fair value of the derivatives that have been highly effective are recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. The impact on earnings resulting from the ineffectiveness of cash flow hedges was $1 million during the first six months of 2009.

          Accumulated other comprehensive income included $33 million in unrecognized after-tax gains on interest rate swaps, caps and floors hedging variable interest payments on business loans at June 30, 2009. These amounts included unrecognized after-tax gains on terminated swaps, caps and collars of $35 million at June 30, 2009. In addition, accumulated other comprehensive income included $56 million in net unrecognized after-tax gains on interest rate swaps, caps and floors hedging variable interest payments on funding at June 30, 2009. These amounts included unrecognized after-tax gains on terminated hedges of $26 million at June 30, 2009. Also included in accumulated other comprehensive income at June 30, 2009 are unrecognized after-tax gains of $3 million on terminated interest rate swaps hedging variable interest payments on long-term debt.

          The estimated net amount in accumulated other comprehensive income at June 30, 2009 that is expected to be reclassified into earnings within the next 12 months is a net after-tax gain of $45 million. The amount reclassified into earnings from other comprehensive income during the first six months of 2009 was a net after-tax gain of $18 million.

          All of BB&T’s cash flow hedges are hedging exposure to variability in future cash flows for forecasted transactions related to the payment of variable interest on then existing financial instruments. The maximum length of time over which BB&T is hedging its exposure to the variability in future cash flows for forecasted transactions related to variable interest payments on existing financial instruments is 6.9 years.

     Fair Value Hedges

          At June 30, 2009, BB&T had designated notional values of $4.0 billion of derivatives as fair value hedges which reflected a net unrealized gain of $188 million, with instruments in a gain position reflecting a fair value of $265 million recorded in other assets and instruments in a loss position reflecting a fair value of $77 million recorded in other liabilities. For a qualifying fair value hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged. BB&T terminated certain fair value hedges relating to its long-term debt during the second quarter of 2009 and received proceeds of $74 million. The proceeds from these terminations were included in cash flows from financing activities. The impact on earnings resulting from fair value hedge ineffectiveness was a $7 million gain during the first six months of 2009.

          BB&T also held $69.1 billion in notional value of derivatives not designated as hedges at June 30, 2009. These instruments were in a net gain position with a net estimated fair value of $122 million. Changes in the fair value of these derivatives are reflected in current period earnings.

          Derivatives not designated as a hedge include the notional amount of $13.4 billion that have been entered into as a risk management instrument for mortgage banking operations at June 30, 2009. For mortgage loans originated for sale, BB&T is exposed to changes in market rates and conditions subsequent to the interest rate lock and funding date. BB&T’s risk management strategy related to its interest rate lock commitment derivatives and loans held for sale includes using mortgage-based derivatives such as forward commitments and options in order to mitigate market risk.

           Derivatives not designated as a hedge include the notional amount of $20.9 billion that have been entered into as a risk management instrument for mortgage servicing rights at June 30, 2009. The $40 million loss related to these derivatives is offset by a positive $91 million valuation adjustment for residential mortgage servicing rights for the six month period ended June 30, 2009. For the quarter ended June 30, 2009, the $114 million loss on these derivatives is offset by a positive $137 million valuation adjustment.

           BB&T also held derivatives not designated as hedges with notional amounts totaling $34.8 billion at June 30, 2009 as risk management instruments primarily to facilitate transactions on behalf of its clients, as well as activities related to balance sheet management.

          At June 30, 2009, BB&T had designated notional values of $73 million of derivatives as net investment hedges used to hedge the variability in a foreign currency exchange rate.

          Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. BB&T controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide cash collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. These bilateral limits are typically based on current credit ratings and vary with ratings changes. As of June 30, 2009 and December 31, 2008, respectively, BB&T had received cash collateral of approximately $38 million and $165 million. In addition, BB&T had posted collateral of $88 million and $180 million at June 30, 2009 and December 31, 2008, respectively. In the event that BB&T's credit ratings had been downgraded below investment grade, the amount of collateral posted would have increased by $83 million and $225 million as of June 30, 2009 and December 31, 2008, respectively. As of June 30, 2009, BB&T had approximately $26 million of unsecured positions with derivative dealers. All of the derivative contracts to which BB&T is a party settle monthly, quarterly or semiannually. In the case of contracts with derivative dealers, BB&T only transacts with dealers that are national market makers whose credit ratings are strong. Further, BB&T has netting agreements with the dealers with which it does business. Because of these factors, BB&T’s credit risk exposure related to derivatives contracts at June 30, 2009 and December 31, 2008 was not material.