Regions Bank 2008 Annual Report Download - page 155

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Mortgage servicing rights are initially recorded at estimated fair value and are then periodically measured
for impairment by projecting and discounting future cash flows associated with servicing at market rates. The
projection of cash flows is a Level 3 measurement, incorporating assumptions of changes in cash flows due to
estimated prepayments, estimated costs to service and estimates of other servicing income. Market assumptions,
where available, are obtained from brokers and adjusted for Company-specific observations. These assumptions
primarily include discount rates and expected prepayments.
In addition to the assets currently measured at fair value mentioned above, Regions often uses fair value
measurements in determining the period-end balance of certain financial instruments such as non-marketable
investments. Typically, these assets use fair value measurements to determine the recorded lower of cost or fair
value of the asset or to determine the losses incurred during the period. As of December 31, 2008, none of these
assets were recognized at fair value on the consolidated balance sheet.
The following table presents the carrying value of those assets measured at fair value on a non-recurring
basis as of December 31, 2008, and gains and losses recognized during the year. The table does not reflect the
change in fair value attributable to any related economic hedges the Company used to mitigate the interest rate
risk associated with these assets.
Carrying Value as of December 31, 2008
Fair value
adjustments for
the year ended
December 31, 2008Level 1 Level 2 Level 3 Total
(Dollars in thousands)
Loans Held for Sale ........................ $— $133,912 $221,300 $355,212 $(358,937)
Mortgage Servicing Rights ................... — — 160,890 160,890 (85,000)
Regions also uses fair value measurements on a non-recurring basis for certain non-financial instruments
such as other real estate and foreclosed assets. However, the effective date for the FAS 157 requirements for
these instruments was deferred until January 1, 2009. See Note 1 for further discussion.
FAIR VALUE OPTION
Regions also adopted FAS 159 as of January 1, 2008. FAS 159 allows an entity the irrevocable option to
elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. FAS 159 requires the difference between the carrying value before election of the fair
value option and the fair value of these financial instruments be recorded as an adjustment to beginning retained
earnings in the period of adoption. There was no material effect of adoption on the consolidated financial
statements.
Regions elected the fair value option for residential mortgage loans held for sale originated after January 1,
2008. This election allows for a more effective offset of the changes in fair values of the loans and the derivative
instruments used to economically hedge them without the burden of complying with the requirements for hedge
accounting under FAS 133. Regions has not elected the fair value option for other loans held for sale primarily
because they are not economically hedged using derivative instruments. Fair values of loans held for sale are
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 values and market conditions. At December 31,
2008, loans held for sale for which the fair value option was elected had an aggregate fair value of $506.3 million
and an aggregate outstanding principal balance of $492.3 million and were recorded in loans held for sale in the
consolidated balance sheet. Interest income on mortgage loans held for sale is recognized based on contractual
rates and reflected in interest income on loans held for sale in the consolidated statements of operations. Net
gains (losses) resulting from changes in fair value of these loans of $16.2 million was recorded in mortgage
income in the consolidated statement of operations for the year ended December 31, 2008. These changes in fair
value are mostly offset by economic hedging activities. An immaterial portion of this amount was attributable to
changes in instrument-specific credit risk.
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