Regions Bank 2008 Annual Report Download - page 152

NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS
Regions adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS
157”), as of January 1, 2008. FAS 157 establishes a framework for using fair value to measure assets and
liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability
(an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability
(an entry price). Under FAS 157, a fair value measure should reflect the assumptions that market participants
would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular
valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. FAS
157 requires disclosures that stratify balance sheet amounts measured at fair value based on inputs the Company
uses to derive fair value measurements. These strata include:
• Level 1 valuations, where the valuation is based on quoted market prices for identical assets or
liabilities traded in active markets (which include exchanges and over-the-counter markets with
sufficient volume),
• Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded
in active markets, quoted prices for identical or similar instruments in markets that are not active and
model-based valuation techniques for which all significant assumptions are observable in the market,
and
• Level 3 valuations, where the valuation is generated from model-based techniques that use significant
assumptions not observable in the market, but observable based on Company-specific data. These
unobservable assumptions reflect the Company’s own estimates for assumptions that market
participants would use in pricing the asset or liability. Valuation techniques typically include option
pricing models, discounted cash flow models and similar techniques, but may also include the use of
market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
ITEMS MEASURED AT FAIR VALUE ON A RECURRING BASIS
Trading account assets, securities available for sale, mortgage loans held for sale, derivatives and certain
short-term borrowings are recorded at fair value on a recurring basis. Below is a description of valuation
methodologies for these assets and liabilities.
Trading account assets and securities available for sale primarily consist of U.S. Treasuries, mortgage-
backed and asset-backed securities (including agency securities), municipal bonds and equity securities
(primarily common stock and mutual funds). Regions uses quoted market prices of identical assets on active
exchanges, or Level 1 measurements. Where such quoted market prices are not available, Regions typically
employs quoted market prices of similar instruments (including matrix pricing) and/or discounted cash flows to
estimate a value of these securities, or Level 2 measurements. Level 2 discounted cash flow analyses are
typically based on market interest rates, prepayment speeds and/or option adjusted spreads. Level 3
measurements include discounted cash flow analyses based on assumptions that are not readily observable in the
market place. Such assumptions include projections of future cash flows, including loss assumptions, and
discount rates.
Mortgage loans held for sale consist of residential first mortgage loans held for sale. Mortgage loans held
for sale primarily consist of loans that are valued based on traded market prices of similar assets where available
and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing
value and market conditions, a Level 2 measurement. Regions has elected to measure mortgage loans held for
sale at fair value by applying the fair value option (see additional discussion under “Fair Value Option” below).
Derivatives primarily consist of interest rate contracts that include futures, options and swaps and are
included in other assets and other liabilities on the consolidated balance sheet. For exchange-traded options and
futures contracts, values are based on quoted market prices, or Level 1 measurements. For all other options and
futures contracts traded in over-the-counter markets, values are determined using discounted cash flow analyses
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