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Table of Contents
Index to Financial Statements
as fair value adjustments of financial derivatives in the consolidated statements of operations. Accordingly, any net difference, or hedge
ineffectiveness, is recognized currently in the consolidated statements of operations in other income (expenses) as the fair value adjustments of
financial derivatives. Cash payments or receipts and related accruals during the reporting period on derivatives included in fair value hedge
relationships are recorded as an adjustment to interest income on the hedged asset. If a financial derivative in a fair value hedging relationship
is no longer effective, de-designated from its hedging relationship or terminated, the Company discontinues fair value hedge accounting for the
are recorded in gain on sales of loans held-for-sale and securities, net, in the consolidated statements of operations. The accumulated
adjustment of the carrying amount of the hedged interest-earning asset is recognized in earnings as an adjustment to interest income over the
expected remaining life of the asset using the effective interest method.
Cash flow hedges are accounted for by recording the fair value of the financial derivative instrument as either a freestanding asset or a
freestanding liability in the consolidated balance sheets, with the effective portion of the change in fair value of the financial derivative
recorded in AOCI within shareholders’ equity, net of tax. Amounts are then included in interest expense as a yield adjustment in the same
period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the financial derivative is
reported as fair value adjustments of financial derivatives in the consolidated statements of operations. If it becomes probable that a hedged
forecasted transaction will not occur, amounts included in AOCI related to the specific hedging instruments are reported as gain on sales of
loans held-for-sale and securities, net in the consolidated statements of operations.
Derivative gains and losses that are not considered highly effective in hedging the change in fair value or expected cash flows of the
hedged item are recognized in the consolidated statements of operations as gain on sales of loans held-for-sale and securities, net as these
derivatives do not qualify for hedge accounting under SFAS No. 133. If a financial derivative ceases to be highly effective as a hedge, hedge
accounting is discontinued prospectively and the financial derivative instrument continues to be recorded at fair value with changes in fair
value being reported as gain on sales of loans held-for-sale and securities, net in the consolidated statements of operations.
New Accounting Standards
Consolidation of Variable Interest Entities—FIN No. 46
In 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities—
an interpretation of ARB No. 51
and as amended by FIN No. 46R (collectively, “FIN No. 46”), which addresses the consolidation of variable interest entities (“VIEs”). A VIE
is a corporation, partnership, trust or other legal structure used for business purposes that either does not have equity investors with substantive
voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities without additional
subordinated financial support provided by any parties including equity holders. A VIE often holds financial assets and may either be passive
or engage in activities, such as research and development, on behalf of other companies. FIN No. 46 requires VIEs to be consolidated by a
company if that company absorbs a majority of the VIE’s expected loss or if it is entitled to receive a majority of the VIE’s residual returns or
both. The company that consolidates a VIE is referred to as the primary beneficiary of that entity.
In 2003, the Company adopted the disclosure and consolidation provisions of FIN No. 46 for its VIEs. Adoption of the provisions of FIN
No. 46 resulted in the deconsolidation of certain trusts that had issued $143.5 million of mandatorily redeemable preferred stock to the capital
markets. Concurrently, this standard required the Company to record the subordinated debentures that had been previously eliminated during
each trust’
s consolidation. These securities were classified in the consolidated balance sheets as other borrowings by Bank subsidiary (see Note
14). The related interest expense on these subordinated debentures of $5.7 million was classified in banking interest expense, rather than in
minority interest, net of tax, in the consolidated statements
58