Regions Bank 2010 Annual Report Download - page 71

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future
performance. Changes in implied fair value based on adverse changes in assumptions generally cannot be
extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.
Also, the effect of an adverse variation in a particular assumption on the implied fair value of goodwill is
calculated without changing any other assumption, while in reality changes in one factor may result in changes in
another which may either magnify or counteract the effect of the change.
Other identifiable intangible assets, primarily core deposit intangibles, are reviewed at least annually for
events or circumstances which could impact the recoverability of the intangible asset, such as loss of core
deposits, increased competition or adverse changes in the economy. To the extent another identifiable intangible
asset is deemed unrecoverable; an impairment loss would be recorded to reduce the carrying amount. These
events or circumstances, if they occur, could be material to Regions’ operating results for any particular reporting
period but the potential impact cannot be reasonably estimated.
Mortgage Servicing Rights
Regions estimates the fair value of its mortgage servicing rights in order to record them at fair value on the
balance sheet. Although sales of mortgage servicing rights do occur, mortgage servicing rights do not trade in an
active market with readily observable market prices and the exact terms and conditions of sales may not be
readily available, and are therefore Level 3 valuations in the fair value hierarchy previously discussed. Specific
characteristics of the underlying loans greatly impact the estimated value of the related mortgage servicing rights.
As a result, Regions stratifies its mortgage servicing portfolio on the basis of certain risk characteristics,
including loan type and contractual note rate, and values its mortgage servicing rights using discounted cash flow
modeling techniques. These techniques require management to make estimates regarding future net servicing
cash flows, taking into consideration historical and forecasted mortgage loan prepayment rates and discount
rates. Changes in interest rates, prepayment speeds or other factors impact the fair value of mortgage servicing
rights which impacts earnings. Based on a hypothetical sensitivity analysis, Regions estimates that a reduction in
primary mortgage market rates of 25 basis points and 50 basis points would reduce the December 31, 2010 fair
value of mortgage servicing rights by approximately 6.1 percent ($16 million) and 12.7 percent ($34 million),
respectively. Conversely, 25 basis point and 50 basis point increases in these rates would increase the
December 31, 2010 fair value of mortgage servicing rights by approximately 5.6 percent ($15 million) and 10.7
percent ($28 million), respectively.
The pro forma fair value analysis presented above demonstrates the sensitivity of fair values to hypothetical
changes in primary mortgage rates. This sensitivity analysis does not reflect an expected outcome. Refer to the
“Mortgage Servicing Rights” discussion in the “Balance Sheet” analysis section found later in this report.
Income Taxes
Accrued income taxes are reported as a component of other assets in the consolidated balance sheets and
reflect management’s estimate of income taxes to be paid or received.
Deferred income taxes represent the amount of future income taxes to be paid or received and are accounted
for using the asset and liability method. The net balance is reported in other assets in the consolidated balance
sheets. The Company determines the realization of the net deferred tax asset based upon an evaluation of the four
possible sources of taxable income: 1) the future reversals of taxable temporary differences; 2) future taxable
income exclusive of reversing temporary differences and carryforwards; 3) taxable income in prior carryback
years; and 4) tax-planning strategies. In projecting future taxable income, the Company utilizes forecasted
pre-tax earnings, adjusts for the estimated book-tax differences and incorporates assumptions, including the
amounts of income allocable to taxing jurisdictions. These assumptions require significant judgment and are
consistent with the plans and estimates the Company uses to manage the underlying businesses. The realization
of the deferred tax assets could be reduced in the future if these estimates are significantly different than
forecasted. For a detailed discussion of realization of deferred tax assets, refer to the “Income Taxes” section
found later in this report.
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