NOTE 15. Derivative Financial Instruments

The following tables set forth certain information concerning BB&T's derivative financial instruments and related hedged items as of the periods indicated:

Derivative Classifications and Hedging Relationships


		June 30, 2011							December 31, 2010
	Hedged Item or Transaction	Notional Amount		Fair Value					Notional Amount		Fair Value
	Hedged Item or Transaction	Notional Amount		Gain (1)		Loss (1)			Notional Amount		Gain (1)		Loss (1)
		(Dollars in millions)
Cash Flow Hedges (2):
Interest rate contracts:
Pay fixed swaps	3 month LIBOR funding	$	5,950	$	3	$	(222	)	$	5,950	$	6	$	(181	)
Caps	3 month LIBOR funding		—		—		—			200		—		—

Total			5,950		3		(222	)		6,150		6		(181	)

Net Investment Hedges:
Foreign exchange contracts			73		1		—			73		—		(2	)

Total			73		1		—			73		—		(2	)

Fair Value Hedges:
Interest rate contracts:
Receive fixed swaps and option trades	Long-term debt		4,571		119		—			1,160		25		—
Pay fixed swaps	Commercial loans		89		—		(1	)		54		—		—
Pay fixed swaps	Municipal securities		355		—		(78	)		355		—		(75	)

Total			5,015		119		(79	)		1,569		25		(75	)

Not Designated as Hedges:
Client-related and other risk management
Interest rate contracts:
Receive fixed swaps			9,346		501		(5	)		9,696		496		(10	)
Pay fixed swaps			9,265		8		(536	)		9,514		12		(530	)
Other swaps			2,944		2		(1	)		3,328		2		(3	)
Option trades			889		29		(31	)		897		29		(30	)
Futures contracts			690		—		—			1,747		1		—
Risk Participations			202		—		—			180		—		—
Foreign exchange contracts			376		3		(3	)		436		7		(4	)

Total			23,712		543		(576	)		25,798		547		(577	)

Mortgage Banking
Interest rate contracts:
Receive fixed swaps			89		3		—			11		—		—
Pay fixed swaps			16		—		(1	)		35		—		—
Interest rate lock commitments			2,762		13		(10	)		3,922		12		(37	)
When issued securities, forward rate agreements and forward commitments			3,723		11		(18	)		7,717		106		(27	)
Option trades			500		3		—			400		11		—
Futures contracts			24		—		—			13		1		—

Total			7,114		30		(29	)		12,098		130		(64	)

Mortgage Servicing Rights
Interest rate contracts:
Receive fixed swaps			3,088		34		(17	)		3,225		13		(61	)
Pay fixed swaps			2,889		9		(37	)		2,536		15		(7	)
Option trades			6,515		192		(8	)		6,095		192		(11	)
Futures contracts			1,342		—		(1	)		4,260		—		(10	)
When issued securities, forward rate agreements and forward commitments			2,362		9		—			3,582		5		(14	)

Total			16,196		244		(63	)		19,698		225		(103	)

Total nonhedging derivatives			47,022		817		(668	)		57,594		902		(744	)

Total Derivatives		$	58,060	$	940	$	(969	)	$	65,386	$	933	$	(1,002	)

(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 Sheet.

(2)	Cash flow hedges are hedging the first unhedged forecasted settlements associated with the listed hedged item descriptions.

The Effect of Derivative Instruments on the Consolidated Statements of Income

Three Months Ended June 30, 2011 and 2010


	Effective Portion													Ineffective Portion
	Gain or (Loss) Recognized in OCI						Location of Amounts Reclassified from AOCI into Income	(Gain) or Loss Reclassified from AOCI into Income						Location of Amounts Recognized in Income	Gain or (Loss) Recognized in Income (1)
	2011			2010			Location of Amounts Reclassified from AOCI into Income	2011			2010			Location of Amounts Recognized in Income	2011		2010
	(Dollars in millions)
Cash Flow Hedges
Interest rate contracts	$	(90	)	$	(137	)	Total interest income	$	(6	)	$	(12	)	Other noninterest income	$	—	$	—
							Total interest expense		14			4

								$	8		$	(8	)

Net Investment Hedges
Foreign exchange contracts	$	(1	)	$	4			$	—		$	—			$	—	$	—


	Effective Portion							Ineffective Portion
	Location of Amounts Recognized in Income	Gain or (Loss) Recognized in Income						Location of Amounts Recognized in Income	Gain or (Loss) Recognized in Income (1)
	Location of Amounts Recognized in Income	2011			2010			Location of Amounts Recognized in Income	2011		2010
	(Dollars in millions)
Fair Value Hedges
Interest rate contracts	Total interest expense	$	92		$	45		Other noninterest income	$	—	$	(2	)
Interest rate contracts	Total interest income		(5	)		(5	)

Total		$	87		$	40

Not Designated as Hedges
Client-related and other risk management
Interest rate contracts	Other noninterest income	$	1		$	(3	)
Foreign exchange contracts	Other nondeposit fees and commissions		2			2
Mortgage Banking Interest rate contracts	Mortgage banking income		(2	)		(27	)
Mortgage Servicing Rights Interest rate contracts	Mortgage banking income		59			241

Total		$	60		$	213

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

(1)	All gains and losses recognized in income relate to the ineffective portion of the change in the fair value of the derivative. No portion of the change in fair value of the derivative has been excluded from effectiveness testing.

The Effect of Derivative Instruments on the Consolidated Statements of Income

Six Months Ended June 30, 2011 and 2010


	Effective Portion													Ineffective Portion
	Gain or (Loss) Recognized in OCI						Location of Amounts Reclassified from AOCI into Income	(Gain) or Loss Reclassified from AOCI into Income						Location of Amounts Recognized in Income	Gain or (Loss) Recognized in Income (1)



	2011			2010				2011			2010				2011		2010
								(Dollars in millions)
Cash Flow Hedges
Interest rate contracts	$	(81	)	$	(196	)	Total interest income	$	(13	)	$	(28	)	Other noninterest income	$	—	$	—
							Total interest expense		27			9

								$	14		$	(19	)

Net Investment Hedges
Foreign exchange contracts	$	(3	)	$	1			$	—		$	—			$	—	$	—


	Effective Portion							Ineffective Portion
	Location of Amounts Recognized in Income	Gain or (Loss) Recognized in Income						Location of Amounts Recognized in Income	Gain or (Loss) Recognized in Income (1)



		2011			2010				2011		2010
		(Dollars in millions)
Fair Value Hedges
Interest rate contracts	Total interest expense	$	136		$	97		Other noninterest income	$	1	$	(1	)
Interest rate contracts	Total interest income		(10	)		(10	)

Total		$	126		$	87

Not Designated as Hedges

Client-related and other risk management
Interest rate contracts	Other noninterest income	$	(2	)	$	(4	)
Foreign exchange contracts	Other nondeposit fees and commissions		4			3
Mortgage Banking Interest rate contracts	Mortgage banking income		(62	)		(47	)
Mortgage Servicing Rights Interest rate contracts	Mortgage banking income		20			240

Total		$	(40	)	$	192

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

(1)	All gains and losses recognized in income relate to the ineffective portion of the change in the fair value of the derivative. No portion of the change in fair value of the derivative has been excluded from effectiveness testing.

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.

Cash Flow Hedges

BB&T's floating rate business loans, Federal funds purchased, other overnight funding, FHLB advances, medium-term bank notes and long-term debt expose it to variability in cash flows for interest payments. The risk management objective for these floating rate assets and liabilities is to hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions. These forecasted transactions include interest receipts on commercial loans and interest payments on 3 month LIBOR funding. All of BB&T's current cash flow hedges are hedging exposure to variability in future cash flows for forecasted transactions related to the payment of variable interest on then existing financial instruments.

For a qualifying cash flow hedge, the portion of changes in the fair value of the derivatives that has been highly effective is recognized in other comprehensive income (loss) until the related cash flows from the hedged item are recognized in earnings. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable of occurring during the forecast period or within a short period thereafter, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately. During the six months ended June 30, 2011 and 2010, BB&T amortized approximately $(14) million and $19 million of unrecognized pre-tax gains (losses) from accumulated other comprehensive income (loss) into net interest income.

At June 30, 2011, BB&T had $142 million of unrecognized pre-tax losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared to $75 million of unrecognized pre-tax losses at December 31, 2010. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the next 12 months is a loss totaling approximately $38 million. This includes active hedges and gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. The proceeds from these terminations were included in cash flows from financing activities.

All cash flow hedges were highly effective for the six months ended June 30, 2011, and the change in fair value attributed to hedge ineffectiveness was not material.

Fair Value Hedges

BB&T's fixed rate long-term debt, certificates of deposit, FHLB advances, loan and municipal security assets result in exposure to losses in value as interest rates change. The risk management objective for hedging fixed rate assets and liabilities is to convert the fixed rate paid or received to a floating rate. BB&T accomplishes its risk management objective by hedging exposure to changes in fair value of fixed rate financial instruments primarily through the use of swaps. 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.

During the six months ended June 30, 2011 and 2010, BB&T terminated certain fair value hedges primarily related to its long-term debt and received proceeds of $16 million and $152 million, respectively. When hedged debt/other financial instruments are retired or redeemed, the amounts associated with the hedge are included as a component of the gain or loss on termination. When a hedge is terminated but the hedged item remains outstanding, the proceeds from the termination of these hedges have been reflected as part of the carrying value of the underlying debt/other financial instrument and are being amortized to earnings over its estimated remaining life. The proceeds from these terminations were included in cash flows from financing activities. During the six months ended June 30, 2011 and 2010, BB&T recognized pre-tax benefits of $92 million and $24 million respectively through reductions of interest expense from previously unwound hedges.

Derivatives Not Designated As Hedges

Derivatives not designated as a hedge include those that are entered into as either balance sheet risk management instruments or to facilitate client needs. Balance sheet risk management hedges are those hedges that do not qualify to be treated as a cash flow hedge, a fair value hedge or a foreign currency hedge for accounting purposes, but are necessary to economically manage the risk associated with an asset or liability.

This category of hedges includes derivatives that hedge mortgage banking operations and mortgage servicing rights ("MSRs"). 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. For MSRs, BB&T uses various derivative instruments to mitigate the income statement effect of changes in the fair value of its MSRs. For the six months ended June 30, 2011, BB&T recorded a gain totaling $20 million related to these derivatives which was offset by a decrease in the carrying value of mortgage servicing assets totaling $20 million. For the six months ended June 30, 2010, BB&T recognized a $240 million gain on these derivatives, which was offset by a negative $227 million valuation adjustment related to the mortgage servicing asset.

BB&T also held, as risk management instruments, other derivatives not designated as hedges primarily to facilitate transactions on behalf of its clients, as well as activities related to balance sheet management.

Net Investment Hedges

In connection with a long-term investment in a foreign subsidiary, BB&T is exposed to changes in the carrying value of its investment as a result of changes in the related foreign exchange rate. At June 30, 2011 and December 31, 2010, BB&T used derivatives to hedge the variability in the value of its $73 million investment. For net investment hedges, changes in value of qualifying hedges are deferred in other comprehensive income (loss) when the terms of the derivative match the notional and currency risk being hedged. At June 30, 2011 and December 31, 2010, accumulated other comprehensive income (loss) reflected unrecognized after-tax losses totaling $13 million and $11 million, respectively, related to cumulative changes in the fair value of BB&T's net investment hedge.

Derivatives Credit Risk

Credit risk related to derivatives arises when amounts receivable from counterparty exceed those payable to the same counterparty. BB&T addresses the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans or other extensions of credit and by requiring collateral. Dealer counterparties operate under agreements to provide cash and/or liquid collateral when unsecured loss positions exceed certain negotiated limits.

As of June 30, 2011 BB&T had received cash collateral totaling $37 million related to derivatives in a gain position totaling $41 million and had posted collateral totaling $550 million including initial margin required by exchanges related to derivatives in a loss position totaling $524 million. As of December 31, 2010, BB&T had received cash collateral totaling $33 million, to cover derivatives in a gain position of similar value and had posted collateral totaling $605 million related to derivatives in a loss position totaling $612 million. In the event that BB&T's credit ratings had been downgraded below investment grade, the amount of collateral posted would have increased by $8 million and $10 million as of June 30, 2011 and December 31, 2010, respectively.

After collateral postings are considered, BB&T had $6 million of unsecured positions in a gain with derivative dealers at June 30, 2011 and had collateral sufficient to secure derivatives in a gain at December 31, 2010. 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 with strong credit ratings. 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 derivative dealers at June 30, 2011 and December 31, 2010 was not material.