Regions Bank 2009 Annual Report Download - page 139

Qualifying derivative financial instruments are designated, based on the exposure being hedged, as either
fair value or cash flow hedges. For derivative financial instruments not designated as fair value or cash flow
hedges, gains and losses related to the change in fair value are recognized in earnings during the period of change
in fair value as brokerage, investment banking and capital markets income.
Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm
commitment. Under the fair value hedging model, gains or losses attributable to the change in fair value of the
derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item,
are recognized in earnings in the period in which the change in fair value occurs. Hedge ineffectiveness is
recognized to the extent the changes in fair value of the derivative do not offset the changes in fair value of the
hedged item as other non-interest expense. The corresponding adjustment to the hedged asset or liability is
included in the basis of the hedged item, while the corresponding change in the fair value of the derivative
instrument is recorded as an adjustment to other assets or other liabilities, as applicable.
Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted
transactions. For cash flow hedge relationships, the effective portion of the gain or loss related to the derivative
instrument is recognized as a component of other comprehensive income. The ineffective portion of the gain or
loss related to the derivative instrument, if any, is recognized in earnings as other non-interest expense during the
period of change. Amounts recorded in other comprehensive income are recognized in earnings in the period or
periods during which the hedged item impacts earnings.
The Company formally documents all hedging relationships between hedging instruments and the hedged
items, as well as its risk management objective and strategy for entering into various hedge transactions. The
Company performs periodic assessments to determine whether the hedging relationship has been highly effective
in offsetting changes in fair values or cash flows of hedged items and whether the relationship is expected to
continue to be highly effective in the future.
When a hedge is terminated or hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the
end of the specified time period, the derivative will continue to be recorded in the consolidated balance sheets at
its estimated fair value, with changes in fair value recognized currently in brokerage, investment banking and
capital markets income. Any asset or liability that was recorded pursuant to recognition of the firm commitment
is removed from the consolidated balance sheets and recognized currently in other non-interest expense. Gains
and losses that were accumulated in other comprehensive income pursuant to the hedge of a forecasted
transaction are recognized immediately in other non-interest expense.
Regions also 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 Note 22 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. Customer derivatives are paired with offsetting
derivative contracts that, when completed, are designed to eliminate market risk.
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 statement of operations. The instruments are primarily forward rate
commitments but can include futures and swaptions. These derivatives are carried at fair value, with changes
reported in mortgage income.
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