Fair Value Disclosures
|6 Months Ended|
Jun. 30, 2009
|Fair Value Disclosures
|Note 11. Fair Value Disclosures
NOTE 11. 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 held for sale at fair value in accordance with SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities-including an amendment of FASB Statement No. 115,” (the “Fair Value Option”). SFAS No. 157 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. SFAS No. 157 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 1 assets and liabilities include certain equity securities and derivative contracts that are traded in an active market.
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 2 assets and liabilities include fixed
income securities and mortgage-backed securities that are
held in the Corporation’s trading and available-for-sale
portfolios, loans held for sale, certain derivative
contracts and short-term borrowings.
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. Level 3 assets and liabilities include certain trading securities, non-agency mortgage-backed securities, mortgage servicing rights, venture capital investments and certain derivative contracts.
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:
(1) Loans held for sale are residential and
commercial mortgage loans that were originated subsequent
to December 31, 2007 for which the Company elected the fair
value option under SFAS No. 159. Loans originated prior to
January 1, 2008 and certain other loans held for sale are
still accounted for at the lower of cost or market. There
were $8 million and $28 million in loans held for sale that
are not accounted for at fair value at June 30, 2009 and
December 31, 2008, respectively.
The tables below present a reconciliation for the three and six month periods ended June 30, 2009 and 2008, respectively, for Level 3 assets and liabilities that are measured at fair value on a recurring basis. As of June 30, 2009, BB&T also had $1 million of Level 3 other securities outstanding. There was no activity during the three or six month periods ended June 30, 2009 related to these securities.
The tables below summarize unrealized and realized gains and losses recorded in earnings for Level 3 assets and liabilities for the three month periods ended June 30, 2009 and 2008, respectively.
The realized and unrealized gains reported for mortgage servicing rights assets are composed of a positive valuation adjustment of $137 million and $152 million less the realization of expected residential mortgage servicing rights cash flows of $32 million and $21 million for the quarters ended June 30, 2009 and 2008, respectively. BB&T uses various derivative financial instruments to mitigate the income statement effect of changes in fair value due to its quarterly valuation. During the three months ended June 30, 2009 and 2008, respectively, the derivative instruments produced losses of $114 million and $158 million, which offset the positive valuation adjustment recorded.
The tables below summarize unrealized and realized gains and losses recorded in earnings for Level 3 assets and liabilities for the six month periods ended June 30, 2009 and 2008, respectively.
realized and unrealized gains reported for mortgage
servicing rights assets are composed of a positive
valuation adjustment of $91 million and $68 million less
the realization of expected residential mortgage servicing
rights cash flows of $64 million and $44 million for the
six months ended June 30, 2009 and 2008, respectively.
BB&T uses various derivative financial instruments to
mitigate the income statement effect of changes in fair
value due to its quarterly valuation. During the first six
months of 2009 and 2008, respectively, the derivative
instruments produced losses of $40 million and $76 million,
which offset the positive valuation adjustment
The following table details the fair value and unpaid principal balance of loans held for sale at June 30, 2009 and December 31, 2008, that were elected to be carried at fair value.
(1) The change in fair value is reflected in mortgage banking income.
Also, BB&T may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. Assets measured at fair value on a nonrecurring basis for the quarter ended June 30, 2009 that were still held on the balance sheet at June 30, 2009 totaled $1.8 billion. This amount consists of $582 million for impaired loans and $1.2 billion for foreclosed real estate that were classified as Level 3 assets. During the second quarter and the first six months of 2009, BB&T recorded $111 million and $189 million, respectively, in losses related to write-downs of the loans and $32 million and $49 million in losses related to write-downs of foreclosed real estate based on the appraised value of the underlying collateral.
About Fair Value of Financial
the disclosure of the estimated fair value of financial
instruments. A financial instrument is defined as cash,
evidence of an ownership interest in an entity or a
contract that creates a contractual obligation or right to
deliver or receive cash or another financial instrument
from a second entity. BB&T has recorded certain assets
and liabilities at fair value based on the Fair Value
Option or as required by SFAS No. 157. The following is a
summary of the carrying amounts and fair values of those
financial assets and liabilities that BB&T has not
recorded at fair value:
The following is a summary of the notional or contractual amounts and fair values of BB&T's off-balance sheet financial instruments as of the periods indicated:
Estimates of the fair value of these financial instruments are made at a point in time, based on relevant market data and information about the financial instrument. Fair values are calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. No readily available market exists for a significant portion of BB&T’s financial instruments. Fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by BB&T in estimating the fair value of these financial instruments.
Cash and cash equivalents and segregated cash due from banks: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.
Loans receivable and loans held for sale: The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. The carrying amounts of accrued interest approximate fair values. The fair values of loans held for sale for which BB&T did not elect the Fair Value Option are based on quoted market prices and the projected value of the net servicing fees.
Deposit liabilities: The fair values for demand deposits, interest-checking accounts, savings accounts and certain money market accounts are, by definition, equal to the amount payable on demand at the reporting date, i.e., their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities.
Federal funds purchased, securities sold under repurchase agreements and short-term borrowed funds: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements and short-term borrowed funds approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on BB&T’s current incremental borrowing rates for similar types of instruments.
Contractual commitments: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair values also consider the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are estimated based on the counterparties’ creditworthiness and average default rates for loan products with similar risks. The fair values of commitments to fund affordable housing investments are estimated using the net present value of future commitments.