Regions Bank 2011 Annual Report Download - page 162

Derivative contracts related to continuing operations that do not qualify for hedge accounting are classified
as trading assets or liabilities with gains and losses related to the change in fair value recognized in capital
markets and investment income or mortgage income, as applicable, in the statements of operations during the
period. Derivative contracts related to Morgan Keegan activities are included in discontinued operations. These
positions are used to mitigate economic and accounting volatility related to customer derivative transactions, as
well as non-derivative instruments.
Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans
whereby the interest rate on the loan is determined prior to funding and the customers have locked into that
interest rate. Accordingly, such commitments are recorded at estimated fair value with changes in fair value
recorded in mortgage income. Regions also has corresponding forward sale commitments related to these interest
rate lock commitments, which are recorded at fair value with changes in fair value recorded in mortgage income.
See the “Fair Value Measurements” section below for additional information related to the valuation of interest
rate lock commitments.
Regions enters into various derivative agreements with customers desiring protection from possible future
market fluctuations. Regions manages the market risk associated with these derivative agreements in a trading
portfolio. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through
earnings and included in other assets and other liabilities.
Concurrent with the election to use fair value measurement for mortgage servicing rights referred to above,
Regions began using various derivative instruments to mitigate the impact of changes in the fair value of
mortgage servicing rights in the statements of operations. The instruments are primarily forward rate
commitments, but can include futures, swaps and swaptions. These derivatives are carried at fair value, with
changes in fair value reported in mortgage income.
Refer to Note 20 for further discussion and details of derivative financial instruments and hedging activities.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method, which requires the recognition
of deferred tax assets and liabilities for expected future tax consequences. Under this method, deferred tax assets
and liabilities are determined by applying the federal and state tax rates to the differences between financial
statement carrying amounts and the corresponding tax bases of assets and liabilities. Deferred tax assets are also
recorded for any tax attributes, such as tax credit and net operating loss carryforwards. The net balance of
deferred tax assets and liabilities is reported in other assets in the consolidated balance sheets. Any effect of a
change in federal and state tax rates on deferred tax assets and liabilities is recognized in income tax expense in
the period that includes the enactment date. The Company reflects the expected amount of income tax to be paid
or refunded during the year as current income tax expense or benefit, as applicable.
The Company evaluates the realization of deferred tax assets based on all positive and negative evidence
available at the balance sheet date. Realization of deferred tax assets is based on the Company’s judgments,
including taxable income within any applicable carryback periods, future projected taxable income, reversal of
taxable temporary differences and other tax-planning strategies to maximize realization of the deferred tax assets.
A valuation allowance is recorded for any deferred tax assets that are not more-likely-than-not to be realized. See
Note 19 for additional discussion regarding income taxes.
Income tax benefits generated from uncertain tax positions are accounted for using the recognition and
cumulative-probability measurement thresholds. Based on the technical merits, if a tax benefit is not more-likely-
than-not of being sustained upon examination, the Company records a liability for the recognized income tax
benefit. If a tax benefit is more-likely-than-not of being sustained based on the technical merits, the Company
utilizes the cumulative probability measurement and records an income tax benefit equivalent to the largest
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