10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number: 000-50831

 

 

Regions Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   63-0589368

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

1900 Fifth Avenue North

Birmingham, Alabama

  35203
(Address of principal executive offices)   (Zip code)

(205) 944-1300

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨  (Do not check if a smaller reporting company)    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of shares outstanding of each of the issuer’s classes of common stock was 694,800,000 shares of common stock, par value $.01, outstanding as of July 31, 2008.

 

 

 


Table of Contents

REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

              Page

Part I. Financial Information

  
   Item 1.  

Financial Statements (Unaudited)

  
    

Consolidated Balance Sheets—June 30, 2008, December 31, 2007 and June 30, 2007

   4
    

Consolidated Statements of Income—Three and six months ended June 30, 2008 and 2007

   5
    

Consolidated Statements of Changes in Stockholders’ Equity—Six months ended June 30, 2008 and 2007

   6
    

Consolidated Statements of Cash Flows—Six months ended June 30, 2008 and 2007

   7
    

Notes to Consolidated Financial Statements

   8
   Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   28
   Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

   55
   Item 4.  

Controls and Procedures

   55

Part II. Other Information

  
   Item 1.  

Legal Proceedings

   56
   Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   56
   Item 4.  

Submission of Matters to a Vote of Security Holders

   57
   Item 6.  

Exhibits

   57

Signatures

   58


Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation (“Regions”) under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of Regions may include forward-looking statements. The Private Securities Litigation Reform Act of 1995 (“the Act”) provides a “safe harbor” for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, we, together with our subsidiaries, unless the context implies otherwise, claim the protection afforded by the safe harbor in the Act. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, those described below:

 

   

Regions’ ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support Regions’ business.

 

   

Regions’ ability to achieve the earnings expectations related to businesses that have been acquired, including its merger with AmSouth Bancorporation (“AmSouth”), or that may be acquired in the future.

 

   

Regions’ ability to expand into new markets and to maintain profit margins in the face of competitive pressures.

 

   

Regions’ ability to keep pace with technological changes.

 

   

Regions’ ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Regions’ customers and potential customers.

 

   

Regions’ ability to effectively manage interest rate risk, market risk, credit risk, operational risk, legal risk, liquidity risk, and regulatory and compliance risk.

 

   

The current stresses in the financial and residential real estate markets, including possible continued deterioration in residential property values.

 

   

The cost and other effects of material contingencies, including litigation contingencies.

 

   

The effects of increased competition from both banks and non-banks.

 

   

Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins.

 

   

Possible changes in general economic and business conditions in the United States in general and in the communities Regions serves in particular.

 

   

Possible changes in the creditworthiness of customers and the possible impairment of collectibility of loans.

 

   

The effects of geopolitical instability and risks such as terrorist attacks.

 

   

Possible changes in trade, monetary and fiscal policies, laws and regulations, and other activities of governments, agencies, and similar organizations, including changes in accounting standards, may have an adverse effect on business.

 

   

Possible changes in consumer and business spending and saving habits could affect Regions’ ability to increase assets and to attract deposits.

 

   

The effects of weather and natural disasters such as droughts and hurricanes.

The words “believe,” “expect,” “anticipate,” “project,” and similar expressions often signify forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no obligation to update or revise any forward-looking statements that are made from time to time.


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)    June 30
2008
    December 31
2007
    June 30
2007
 
Assets       

Cash and due from banks

   $ 3,160,519     $ 3,720,365     $ 2,796,196  

Interest-bearing deposits in other banks

     46,257       31,706       73,963  

Federal funds sold and securities purchased under agreements to resell

     977,579       1,177,170       1,158,771  

Trading account assets

     1,454,502       907,300       1,606,130  

Securities available for sale

     17,724,907       17,318,074       17,414,407  

Securities held to maturity

     48,244       50,935       44,452  

Loans held for sale (includes $621,784 measured at fair value at June 30, 2008)

     677,098       720,924       1,596,425  

Margin receivables

     533,635       504,614       590,811  

Loans, net of unearned income

     98,266,579       95,378,847       94,014,488  

Allowance for loan losses

     (1,471,524 )     (1,321,244 )     (1,061,873 )
                        

Net loans

     96,795,055       94,057,603       92,952,615  

Premises and equipment, net

     2,726,249       2,610,851       2,422,256  

Interest receivable

     510,895       615,711       626,514  

Goodwill

     11,515,095       11,491,673       11,243,287  

Mortgage servicing rights

     271,392       321,308       400,056  

Other identifiable intangible assets

     693,423       759,832       809,827  

Other assets

     7,301,445       6,753,651       3,886,762  
                        

Total assets

   $ 144,436,295     $ 141,041,717     $ 137,622,472  
                        
Liabilities and Stockholders’ Equity       

Deposits:

      

Non-interest-bearing

   $ 18,334,239     $ 18,417,266     $ 19,136,419  

Interest-bearing

     71,569,410       76,357,702       75,919,972  
                        

Total deposits

     89,903,649       94,774,968       95,056,391  

Borrowed funds:

      

Short-term borrowings:

      

Federal funds purchased and securities sold under agreements to repurchase

     8,663,628       8,820,235       8,207,250  

Other short-term borrowings

     8,926,603       2,299,887       1,882,114  
                        

Total short-term borrowings

     17,590,231       11,120,122       10,089,364  

Long-term borrowings

     13,318,656       11,324,790       9,287,926  
                        

Total borrowed funds

     30,908,887       22,444,912       19,377,290  

Other liabilities

     3,915,265       3,998,808       3,492,404  
                        

Total liabilities

     124,727,801       121,218,688       117,926,085  

Stockholders’ equity:

      

Common stock, par value $.01 per share:

      

Authorized 1,500,000,000 shares

      

Issued including treasury stock—735,783,594; 734,689,800 and 734,358,539 shares, respectively

     7,358       7,347       7,344  

Additional paid-in capital

     16,588,382       16,544,651       16,500,425  

Retained earnings

     4,436,660       4,439,505       4,489,078  

Treasury stock, at cost—41,054,113; 41,054,113 and 29,960,879 shares, respectively

     (1,370,761 )     (1,370,761 )     (1,063,779 )

Accumulated other comprehensive income (loss), net

     46,855       202,287       (236,681 )
                        

Total stockholders’ equity

     19,708,494       19,823,029       19,696,387  
                        

Total liabilities and stockholders’ equity

   $ 144,436,295     $ 141,041,717     $ 137,622,472  
                        

See notes to consolidated financial statements.

 

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Table of Contents

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

    Three Months Ended
June 30
    Six Months Ended
June 30
 
(In thousands, except per share data)   2008     2007     2008     2007  

Interest income on:

       

Loans, including fees

  $ 1,374,705     $ 1,734,278     $ 2,903,588     $ 3,507,682  

Securities:

       

Taxable

    208,134       218,123       408,251       442,442  

Tax-exempt

    9,952       10,831       19,673       21,879  
                               

Total securities

    218,086       228,954       427,924       464,321  

Loans held for sale

    9,598       21,363       18,596       69,705  

Federal funds sold and securities purchased under agreements to resell

    10,202       17,162       23,735       33,535  

Trading account assets

    12,362       15,785       26,515       31,405  

Margin receivables

    5,541       9,289       12,324       18,899  

Time deposits in other banks

    168       649       784       1,828  
                               

Total interest income

    1,630,662       2,027,480       3,413,466       4,127,375  

Interest expense on:

       

Deposits

    422,151       677,239       925,341       1,364,698  

Short-term borrowings

    85,294       116,637       198,302       237,298  

Long-term borrowings

    143,509       128,269       292,635       251,006  
                               

Total interest expense

    650,954       922,145       1,416,278       1,853,002  
                               

Net interest income

    979,708       1,105,335       1,997,188       2,274,373  

Provision for loan losses

    309,000       60,000       490,000       107,000  
                               

Net interest income after provision for loan losses

    670,708       1,045,335       1,507,188       2,167,373  

Non-interest income:

       

Service charges on deposit accounts

    294,182       297,638       565,795       581,735  

Brokerage and investment banking

    256,863       207,372       486,066       393,567  

Trust department income

    58,537       64,590       115,475       128,072  

Mortgage income

    24,926       40,830       70,546       77,851  

Securities (losses) gains, net

    (28 )     (32,806 )     91,615       (32,502 )

Other

    108,740       119,177       322,026       244,990  
                               

Total non-interest income

    743,220       696,801       1,651,523       1,393,713  

Non-interest expense:

       

Salaries and employee benefits

    598,844       602,646       1,242,331       1,211,585  

Net occupancy expense

    111,457       93,175       218,122       186,706  

Furniture and equipment expense

    85,122       74,048       164,358       146,857  

Recapture of mortgage servicing rights

    (67,000 )     (38,000 )     (25,000 )     (37,000 )

Other

    411,951       325,866       790,822       658,553  
                               

Total non-interest expense

    1,140,374       1,057,735       2,390,633       2,166,701  
                               

Income from continuing operations before income taxes

    273,554       684,401       768,078       1,394,385  

Income taxes

    66,908       230,669       224,722       466,577  
                               

Income from continuing operations

    206,646       453,732       543,356       927,808  
                               

Discontinued operations (Note 11):

       

Loss from discontinued operations before income taxes

    (406 )     (682 )     (473 )     (216,500 )

Income tax benefit

    (153 )     (259 )     (178 )     (74,982 )
                               

Loss from discontinued operations, net of tax

    (253 )     (423 )     (295 )     (141,518 )
                               

Net income

  $ 206,393     $ 453,309     $ 543,061     $ 786,290  
                               

Weighted-average number of shares outstanding:

       

Basic

    695,978       709,332       695,538       718,073  

Diluted

    696,346       715,564       695,947       724,997  

Earnings per share from continuing operations(1):

       

Basic

  $ 0.30     $ 0.64     $ 0.78     $ 1.29  

Diluted

    0.30       0.63       0.78       1.28  

Earnings per share from discontinued operations(1):

       

Basic

    —         —         —         (0.20 )

Diluted

    —         —         —         (0.20 )

Earnings per share(1):

       

Basic

    0.30       0.64       0.78       1.10  

Diluted

    0.30       0.63       0.78       1.08  

Cash dividends declared per share

    0.38       0.36       0.76       0.72  

 

(1)

Certain per share amounts may not appear to reconcile due to rounding.

See notes to consolidated financial statements.

 

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Table of Contents

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

    Common Stock   Additional
Paid-In
Capital
    Retained
Earnings
    Treasury
Stock, At Cost
    Accumulated Other
Comprehensive
Income (Loss)
    Total  
(In thousands, except share and per share data)   Shares     Amount          
       

BALANCE AT JANUARY 1, 2007

  730,076     $ 7,303   $ 16,339,726     $ 4,493,245     $ (7,548 )   $ (131,272 )   $ 20,701,454  

Cumulative effect of changes in accounting principles due to adoption of FIN 48 and FSP 13-2

  —         —       —         (269,403 )     —         —         (269,403 )

Comprehensive income:

             

Net income

  —         —       —         786,290       —         —         786,290  

Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment*

  —         —       —         —         —         (77,467 )     (77,467 )

Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment*

  —         —       —         —         —         (30,225 )     (30,225 )

Net change from defined benefit pension plans, net of tax*

  —         —       —         —         —         2,283       2,283  
                   

Comprehensive income

                680,881  

Cash dividends declared—$0.72 per share

  —         —       —         (521,054 )     —         —         (521,054 )

Purchase of treasury stock

  (29,761 )     —       —         —         (1,056,231 )     —         (1,056,231 )

Common stock transactions:

             

Stock issued to employees under incentive plans, net

  1,000       10     (10,017 )     —         —         —         (10,007 )

Stock options exercised, net

  3,083       31     131,607       —         —         —         131,638  

Amortization of unearned restricted stock

  —         —       39,109       —         —         —         39,109  
                                                   

BALANCE AT JUNE 30, 2007

  704,398     $ 7,344   $ 16,500,425     $ 4,489,078     $ (1,063,779 )   $ (236,681 )   $ 19,696,387  
                                                   

BALANCE AT JANUARY 1, 2008

  693,636     $ 7,347   $ 16,544,651     $ 4,439,505     $ (1,370,761 )   $ 202,287     $ 19,823,029  

Cumulative effect of changes in accounting principles due to adoption of EITF 06-4, EITF 06-10 and FAS 158 (see Note 12)

  —         —       —         (17,246 )     —         —         (17,246 )

Comprehensive income:

             

Net income

  —         —       —         543,061       —         —         543,061  

Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment*

  —         —       —         —         —         (129,708 )     (129,708 )

Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment*

  —         —       —         —         —         (26,532 )     (26,532 )

Net change from defined benefit pension plans, net of tax*

  —         —       —         —         —         808       808  
                   

Comprehensive income

                387,629  

Cash dividends declared—$0.76 per share

  —         —       —         (528,660 )     —         —         (528,660 )

Common stock transactions:

             

Stock issued to employees under incentive plans, net

  979       10     (2,439 )     —         —         —         (2,429 )

Stock options exercised, net

  114       1     19,343       —         —         —         19,344  

Amortization of unearned restricted stock

  —         —       26,827       —         —         —         26,827  
                                                   

BALANCE AT JUNE 30, 2008

  694,729     $ 7,358   $ 16,588,382     $ 4,436,660     $ (1,370,761 )   $ 46,855     $ 19,708,494  
                                                   

 

* See disclosure of reclassification adjustment amount and tax effect, as applicable, in Note 3 to the consolidated financial statements.

See notes to consolidated financial statements.

 

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Table of Contents

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended June 30  
(In thousands)    2008     2007  
        

Operating activities:

    

Net income

   $ 543,061     $ 786,290  

Adjustments to reconcile net cash provided by operating activities:

    

Provision for loan losses

     490,000       107,000  

Depreciation and amortization of premises and equipment

     135,834       130,125  

Recapture of impairment of mortgage servicing rights

     (25,000 )     (37,000 )

Provision for losses on other real estate, net

     21,727       1,850  

Net accretion of securities

     (7,793 )     (13,265 )

Net amortization of loans and other assets

     82,005       134,459  

Net accretion of deposits and borrowings

     (7,864 )     (22,516 )

Net securities (gains) losses

     (91,615 )     32,502  

Net loss on sale of premises and equipment

     1,622       599  

Loss on early extinguishment of debt

     65,405       —    

Deferred income tax benefit

     (23,070 )     (193,913 )

Excess tax benefits from share-based payments

     (618 )     (2,501 )

Originations and purchases of loans held for sale

     (3,151,134 )     (5,135,010 )

Proceeds from sales of loans held for sale

     3,222,021       7,476,290  

(Gain) loss on sale of loans, net

     (27,061 )     126,861  

Loss from sale of mortgage servicing rights

     14,857       —    

Increase in trading account assets

     (547,202 )     (163,136 )

Increase in margin receivables

     (29,021 )     (20,748 )

Decrease in interest receivable

     104,816       34,096  

(Increase) decrease in other assets

     (806,650 )     49,034  

(Decrease) increase in other liabilities

     (69,354 )     685,590  

Other

     24,398       26,274  
                

Net cash (used in) provided by operating activities

     (80,636 )     4,002,881  

Investing activities:

    

Proceeds from sale of securities available for sale

     2,010,474       1,008,231  

Proceeds from maturity of:

    

Securities available for sale

     1,693,501       1,130,824  

Securities held to maturity

     3,728       2,790  

Purchases of:

    

Securities available for sale

     (4,111,395 )     (1,178,415 )

Securities held to maturity

     (1,036 )     (257 )

Proceeds from sales of loans

     315,976       958,722  

Proceeds from sales of mortgage servicing rights

     43,763       —    

Net (increase) decrease in loans

     (3,458,229 )     70,973  

Net purchase of premises and equipment

     (252,854 )     (165,298 )

Net cash received from disposition of business

     —         5,700  
                

Net cash (used in) provided by investing activities

     (3,756,072 )     1,833,270  

Financing activities:

    

Net decrease in deposits

     (4,866,833 )     (6,149,063 )

Net increase in short-term borrowings

     6,470,109       422,293  

Proceeds from long-term borrowings

     4,205,130       1,967,821  

Payments on long-term borrowings

     (2,207,886 )     (1,322,544 )

Cash dividends

     (528,660 )     (521,054 )

Purchase of treasury stock

     —         (1,056,231 )

Proceeds from exercise of stock options

     19,344       131,638  

Excess tax benefits from share-based payments

     618       2,501  
                

Net cash provided by (used in) financing activities

     3,091,822       (6,524,639 )
                

Decrease in cash and cash equivalents

     (744,886 )     (688,488 )

Cash and cash equivalents at beginning of year

     4,929,241       4,717,418  
                

Cash and cash equivalents at end of period

   $ 4,184,355     $ 4,028,930  
                

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Six Months Ended June 30, 2008 and 2007

NOTE 1—Basis of Presentation

Regions Financial Corporation (“Regions” or the “Company”) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located primarily in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The Company is subject to competition from other financial institutions, is subject to the regulations of certain government agencies and undergoes periodic examinations by those regulatory authorities.

The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with accounting principles generally accepted in the United States (“GAAP”) and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of only normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions’ Form 10-K for the year ended December 31, 2007.

Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, total assets or stockholders’ equity.

 

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NOTE 2—Earnings per Share

The following table sets forth the computation of basic earnings per share and diluted earnings per share:

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
(In thousands, except per share amounts)    2008     2007     2008     2007  

Numerator:

        

For earnings per share—basic and diluted

        

Income from continuing operations

   $ 206,646     $ 453,732     $ 543,356     $ 927,808  

Loss from discontinued operations, net of tax

     (253 )     (423 )     (295 )     (141,518 )
                                

Net income

   $ 206,393     $ 453,309     $ 543,061     $ 786,290  
                                

Denominator:

        

For earnings per share—basic Weighted-average shares outstanding

     695,978       709,322       695,538       718,073  

Effect of dilutive securities:

        

Common stock equivalents

     368       6,242       409       6,924  
                                

For earnings per share—diluted

     696,346       715,564       695,947       724,997  
                                

Earnings per share from continuing operations(1):

        

Basic

   $ 0.30     $ 0.64     $ 0.78     $ 1.29  

Diluted

     0.30       0.63       0.78       1.28  

Earnings per share from discontinued operations(1):

        

Basic

     —         —         —         (0.20 )

Diluted

     —         —         —         (0.20 )

Earnings per share(1):

        

Basic

     0.30       0.64       0.78       1.10  

Diluted

     0.30       0.63       0.78       1.08  

 

(1)

Certain per share amounts may not appear to reconcile due to rounding.

The effect from the assumed exercise of 54,191,000 and 6,617,000 stock options for the three months ended and 54,174,000 and 1,733,000 stock options for the six months ended June 30, 2008 and 2007, respectively, was not included in the above computations of diluted earnings per share because such amounts would have had an antidilutive effect on earnings per share.

NOTE 3—Comprehensive Income

Comprehensive income is the total of net income and all other non-owner changes in equity. Items that are to be recognized under accounting standards as components of comprehensive income are displayed in the consolidated statements of changes in stockholders’ equity.

In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double-counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.

 

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The disclosure of the reclassification amount is as follows:

 

     Three Months Ended June 30, 2008  
(In thousands)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 273,148     $ (66,755 )   $ 206,393  

Net unrealized holding gains and losses on securities available for sale arising during the period

     (245,145 )     91,316       (153,829 )

Less: reclassification adjustments for net securities losses realized in net income

     (28 )     10       (18 )
                        

Net change in unrealized gains and losses on securities available for sale

     (245,117 )     91,306       (153,811 )

Net unrealized holding gains and losses on derivatives arising during the period

     (186,004 )     71,490       (114,514 )

Less: reclassification adjustments for net gains realized in net income

     24,762       (8,667 )     16,095  
                        

Net change in unrealized gains and losses on derivative instruments

     (210,766 )     80,157       (130,609 )

Net actuarial gains and losses arising during the period

     2,888       (1,605 )     1,283  

Less: amortization of actuarial loss and prior service credit realized in net income

     702       (245 )     457  
                        

Net change from defined benefit plans

     2,186       (1,360 )     826  
                        

Comprehensive income

   $ (180,549 )   $ 103,348     $ (77,201 )
                        

 

     Three Months Ended June 30, 2007  
(In thousands)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 683,719     $ (230,410 )   $ 453,309  

Net unrealized holding gains and losses on securities available for sale arising during the period

     (220,715 )     80,057       (140,658 )

Less: reclassification adjustments for net securities losses realized in net income

     (32,806 )     11,482       (21,324 )
                        

Net change in unrealized gains and losses on securities available for sale

     (187,909 )     68,575       (119,334 )

Net unrealized holding gains and losses on derivatives arising during the period

     (79,024 )     28,827       (50,197 )

Less: reclassification adjustments for net gains realized in net income

     7,395       (2,588 )     4,807  
                        

Net change in unrealized gains and losses on derivative instruments

     (86,419 )     31,415       (55,004 )

Net actuarial gains and losses arising during the period

     1,200       (1,346 )     (146 )

Less: amortization of actuarial loss and prior service credit realized in net income

     1,796       (628 )     1,168  
                        

Net change from defined benefit plans

     (596 )     (718 )     (1,314 )
                        

Comprehensive income

   $ 408,795     $ (131,138 )   $ 277,657  
                        

 

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     Six Months Ended June 30, 2008  
(In thousands)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 767,605     $ (224,544 )   $ 543,061  

Net unrealized holding gains and losses on securities available for sale arising during the period

     (117,833 )     47,675       (70,158 )

Less: reclassification adjustments for net securities gains realized in net income

     91,615       (32,065 )     59,550  
                        

Net change in unrealized gains and losses on securities available for sale

     (209,448 )     79,740       (129,708 )

Net unrealized holding gains and losses on derivatives arising during the period

     (5,315 )     3,163       (2,152 )

Less: reclassification adjustments for net gains realized in net income

     37,509       (13,129 )     24,380  
                        

Net change in unrealized gains and losses on derivative instruments

     (42,824 )     16,292       (26,532 )

Net actuarial gains and losses arising during the period

     3,575       (1,845 )     1,730  

Less: amortization of actuarial loss and prior service credit realized in net income

     1,418       (496 )     922  
                        

Net change from defined benefit plans

     2,157       (1,349 )     808  
                        

Comprehensive income

   $ 517,490     $ (129,861 )   $ 387,629  
                        

 

     Six Months Ended June 30, 2007  
(In thousands)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 1,177,885     $ (391,595 )   $ 786,290  

Net unrealized holding gains and losses on securities available for sale arising during the period

     (154,279 )     55,686       (98,593 )

Less: reclassification adjustments for net securities losses realized in net income

     (32,502 )     11,376       (21,126 )
                        

Net change in unrealized gains and losses on securities available for sale

     (121,777 )     44,310       (77,467 )

Net unrealized holding gains and losses on derivatives arising during the period

     (43,852 )     18,630       (25,222 )

Less: reclassification adjustments for net gains realized in net income

     7,696       (2,693 )     5,003  
                        

Net change in unrealized gains and losses on derivative instruments

     (51,548 )     21,323       (30,225 )

Net actuarial gains and losses arising during the period

     7,001       (2,383 )     4,618  

Less: amortization of actuarial loss and prior service credit realized in net income

     3,592       (1,257 )     2,335  
                        

Net change from defined benefit plans

     3,409       (1,126 )     2,283  
                        

Comprehensive income

   $ 1,007,969     $ (327,088 )   $ 680,881  
                        

 

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NOTE 4—Pension and Other Postretirement Benefits

Net periodic pension and other postretirement benefits cost (benefit) included the following components for the three months ended June 30:

 

     Pension     Other Postretirement Benefits  
(In thousands)    2008     2007     2008     2007  

Service cost

   $ 10,156     $ 9,942     $ 103     $ 235  

Interest cost

     22,151       20,444       684       766  

Expected return on plan assets

     (29,613 )     (27,749 )     (48 )     (68 )

Amortization of prior service cost (credit)

     1,040       (66 )     (183 )     (104 )

Amortization of actuarial loss

     29       1,862       —         12  

Curtailment gains

     (4,383 )     —         —         —    
                                
   $ (620 )   $ 4,433     $ 556     $ 841  
                                

Net periodic pension and other postretirement benefits cost included the following components for the six months ended June 30:

 

     Pension     Other Postretirement Benefits  
(In thousands)    2008     2007     2008     2007  

Service cost

   $ 20,313     $ 20,584     $ 206     $ 469  

Interest cost

     44,048       40,704       1,369       1,531  

Expected return on plan assets

     (59,227 )     (54,474 )     (96 )     (135 )

Amortization of prior service cost (credit)

     1,728       (133 )     (367 )     (208 )

Amortization of actuarial loss

     57       3,725       —         24  

Settlement charge

     —         2,300       —         —    

Curtailment gains

     (4,383 )     (7,052 )     —         —    
                                
   $ 2,536     $ 5,654     $ 1,112     $ 1,681  
                                

The curtailment gains recognized during the second quarter of 2008 and the first six months of 2007 resulted from merger-related employment terminations. The settlement charge during the first six months of 2007 relates to the settlement of a liability under the Regions supplemental executive retirement plan for a certain executive officer.

NOTE 5—Share-Based Payments

Regions has long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock and stock appreciation rights. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors, but no options may be granted after the tenth anniversary of the plans’ adoption. Options and restricted stock usually vest based on employee service, generally within three years from the date of the grant. The contractual life of options granted under these plans ranges from seven to ten years from the date of grant. Upon adoption of a new long-term incentive plan in 2006, Regions amended all other open stock and long-term incentive plans, such that no new awards may be granted under those plans subsequent to the amendment date. The outstanding awards were unaffected by this plan amendment. Additionally, in connection with the AmSouth Bancorporation (“AmSouth”) merger, Regions assumed AmSouth’s long-term incentive plans. Refer to Regions’ Annual Report on Form 10-K for the year ended December 31, 2007 for further disclosures related to share-based payments issued by Regions.

The fair value of stock options is estimated at the date of the grant using a Black-Scholes option pricing model and related assumptions. During 2008, expected volatility increased based upon increases in the historical volatility of Regions’ stock price and the implied volatility measurements from traded options on the Company’s

 

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Table of Contents

stock. The expected option life increased based upon the increase in the contractual life on new grants. The following table summarizes the weighted-average assumptions used and the estimated fair values related to stock options granted:

 

     June 30  
     2008     2007  

Expected dividend yield

     6.94 %     4.10 %

Expected volatility

     26.40 %     19.50 %

Risk-free interest rate

     2.90 %     4.52 %

Expected option life

     5.8  yrs.     4.0  yrs

Fair value

   $ 2.47     $ 4.82  

The following table details the activity during the first six months of 2008 and 2007 related to stock options:

 

     For the Six Months Ended June 30
     2008    2007
     Number of
Options
    Wtd. Avg.
Exercise
Price
   Number of
Options
    Wtd. Avg.
Exercise
Price

Outstanding at beginning of period

   48,044,207     $ 29.71    48,805,147     $ 28.97

Granted

   9,672,751       21.87    4,870,093       35.10

Exercised

   (90,801 )     17.94    (3,326,419 )     27.22

Forfeited or cancelled

   (3,025,808 )     29.77    (793,077 )     28.96
                 

Outstanding at end of period

   54,600,349     $ 28.34    49,555,744     $ 29.69
                 

Exercisable at end of period

   42,363,726     $ 29.34    44,193,431     $ 29.04
                 

The following table details the activity during the first six months of 2008 and 2007 related to restricted shares awarded by Regions:

 

     For the Six Months Ended June 30
     2008    2007
     Shares     Wtd. Avg.
Grant Date
Fair Value
   Shares     Wtd. Avg.
Grant Date
Fair Value

Non-vested at beginning of period

   3,651,054     $ 32.60    3,290,589     $ 33.34

Granted

   1,543,144       22.00    1,511,596       35.57

Vested

   (397,971 )     33.17    (905,743 )     31.71

Forfeited

   (242,468 )     32.16    (232,362 )     34.84
                 

Non-vested at end of period

   4,553,759     $ 28.98    3,664,080     $ 34.57
                 

NOTE 6—Business Segment Information

Regions’ segment information is presented based on Regions’ key segments of business. Each segment is a strategic business unit that serves specific needs of Regions’ customers. The Company’s primary segment is General Banking/Treasury, which represents the Company’s branch network, including consumer and commercial banking functions, and has separate management that is responsible for the operation of that business unit. This segment also includes the Company’s Treasury function, including the Company’s securities portfolio and other wholesale funding activities. EquiFirst is presented separately as a discontinued operation in the consolidated statements of income. See Note 11 to the consolidated financial statements for further discussion.

In addition to General Banking/Treasury, Regions has designated as distinct reportable segments the activity of its Investment Banking/Brokerage/Trust and Insurance divisions. Investment Banking/Brokerage/Trust

 

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Table of Contents

includes trust activities and all brokerage and investment activities associated with Morgan Keegan. Insurance includes all business associated with commercial insurance and credit life products sold to consumer customers. The reportable segment designated “Other” primarily includes merger charges and the parent company.

The accounting policies used by each reportable segment are the same as those discussed in Note 1 to the consolidated financial statements included in the 2007 Annual Report on Form 10-K. Additionally, certain information that was previously reported in the Other segment has been moved to the General Banking/Treasury segment to better reflect the functions and the management of the General Banking/Treasury segment. Prior period information has been restated to reflect the current period classifications. The following tables present financial information for each reportable segment for the period indicated.

 

(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/

Trust
    Insurance    Other  

Three months ended June 30, 2008

          

Net interest income

   $ 1,011,109    $ 15,499     $ 1,079    $ (47,979 )

Provision for loan losses

     309,000      —         —        —    

Non-interest income

     400,431      312,142       27,675      2,972  

Non-interest expense

     712,114      266,937       22,652      138,671  

Income taxes (benefit)

     112,150      22,463       2,093      (69,798 )
                              

Net income (loss)

   $ 278,276    $ 38,241     $ 4,009    $ (113,880 )
                              

Average assets

   $ 112,803,335    $ 3,740,037     $ 311,671    $ 25,705,586  
(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
      

Net interest income

   $ 979,708    $ —       $ 979,708   

Provision for loan losses

     309,000      —         309,000   

Non-interest income

     743,220      —         743,220   

Non-interest expense

     1,140,374      406       1,140,780   

Income taxes (benefit)

     66,908      (153 )     66,755   
                        

Net income (loss)

   $ 206,646    $ (253 )   $ 206,393   
                        

Average assets

   $ 142,560,629    $ —       $ 142,560,629   

 

(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/

Trust
   Insurance    Other  

Three months ended June 30, 2007

           

Net interest income

   $ 1,138,667    $ 14,774    $ 1,557    $ (49,663 )

Provision for loan losses

     60,000      —        —        —    

Non-interest income

     371,504      289,014      25,908      10,375  

Non-interest expense

     722,609      225,074      20,467      89,585  

Income taxes (benefit)

     248,680      28,603      2,357      (48,971 )
                             

Net income (loss)

   $ 478,882    $ 50,111    $ 4,641    $ (79,902 )
                             

Average assets

   $ 109,091,365    $ 3,815,357    $ 269,189    $ 24,362,681  

 

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Table of Contents
(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
      

Net interest income

   $ 1,105,335    $ —       $ 1,105,335   

Provision for loan losses

     60,000      —         60,000   

Non-interest income

     696,801      —         696,801   

Non-interest expense

     1,057,735      682       1,058,417   

Income taxes (benefit)

     230,669      (259 )     230,410   
                        

Net income (loss)

   $ 453,732    $ (423 )   $ 453,309   
                        

Average assets

   $ 137,538,592    $ —       $ 137,538,592   
(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/

Trust
    Insurance    Other  

Six months ended June 30, 2008

          

Net interest income

   $ 2,065,111    $ 29,483     $ 2,017    $ (99,423 )

Provision for loan losses

     490,000      —         —        —    

Non-interest income

     977,197      621,937       59,445      (7,056 )

Non-interest expense

     1,584,537      541,674       45,559      218,863  

Income taxes (benefit)

     303,173      40,532       4,647      (123,630 )
                              

Net income (loss)

   $ 664,598    $ 69,214     $ 11,256    $ (201,712 )
                              

Average assets

   $ 112,624,341    $ 3,739,520     $ 319,779    $ 25,534,264  
(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
      

Net interest income

   $ 1,997,188    $ —       $ 1,997,188   

Provision for loan losses

     490,000      —         490,000   

Non-interest income

     1,651,523      —         1,651,523   

Non-interest expense

     2,390,633      473       2,391,106   

Income taxes (benefit)

     224,722      (178 )     224,544   
                        

Net income (loss)

   $ 543,356    $ (295 )   $ 543,061   
                        

Average assets

   $ 142,217,904    $ —       $ 142,217,904   
(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/

Trust
    Insurance    Other  

Six months ended June 30, 2007

          

Net interest income

   $ 2,335,624    $ 30,822     $ 2,851    $ (94,924 )

Provision for loan losses

     107,000      —         —        —    

Non-interest income

     775,717      550,982       53,979      13,035  

Non-interest expense

     1,525,853      431,182       40,500      169,166  

Income taxes (benefit)

     501,197      54,970       5,811      (95,401 )
                              

Net income (loss)

   $ 977,291    $ 95,652     $ 10,519    $ (155,654 )
                              

Average assets

   $ 110,230,076    $ 3,766,271     $ 263,449    $ 24,510,986  

 

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Table of Contents
(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
    

Net interest income

   $ 2,274,373    $ 11,967     $ 2,286,340   

Provision for loan losses

     107,000      182       107,182   

Non-interest income

     1,393,713      (176,681 )     1,217,032   

Non-interest expense

     2,166,701      51,604       2,218,305   

Income taxes (benefit)

     466,577      (74,982 )     391,595   
                        

Net income (loss)

   $ 927,808    $ (141,518 )   $ 786,290   
                        

Average assets

   $ 138,770,782    $ 968,135     $ 139,738,917   

NOTE 7—Goodwill

Goodwill allocated to each reportable segment as of June 30, 2008, December, 31, 2007, and June 30, 2007 is presented as follows:

 

(In millions)    June 30
2008
   December 31
2007
   June 30
2007

General Banking/Treasury

   $ 10,669    $ 10,669    $ 10,408

Investment Banking/Brokerage/Trust

     732      728      740

Insurance

     114      95      95
                    

Total

   $ 11,515    $ 11,492    $ 11,243
                    

For purposes of testing goodwill for impairment, Regions uses both the income and market approach to value its reporting units. The income approach consists of discounting projected future cash flows, which are derived from internal forecasts and economic expectations for the respective reporting units. The projected future cash flows are discounted using cost of capital metrics for Regions’ peer group. The market approach applies a market multiple, based on observed purchase transactions and/or price/earnings of Regions’ peer group for each reporting unit, to the last twelve-months of net income or earnings before income taxes, depreciation and amortization.

During the second quarter of 2008, Regions performed an interim impairment test due to the downturn in the economic environment. The interim impairment test indicated that the fair value of the respective reporting units is greater than the carrying value (including goodwill); therefore, goodwill was not impaired as of June 30, 2008. Regions will continue to assess the economic environment and determine whether or not further testing of goodwill is appropriate.

NOTE 8—Fair Value Measurements

Regions adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), as of January 1, 2008. FAS 157 establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). Under FAS 157, a fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. FAS 157 requires disclosures that stratify balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These strata include:

 

   

Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),

 

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Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and

 

   

Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

ITEMS MEASURED AT FAIR VALUE ON A RECURRING BASIS

Trading account assets, securities available for sale, mortgage loans held for sale, derivatives and certain short-term borrowings are recorded at fair value on a recurring basis. Below is a description of valuation methodologies for these assets and liabilities.

Trading account assets and securities available for sale primarily consist of U.S. Treasuries, mortgage-backed and asset-backed securities (including agency securities), municipal bonds and equity securities (primarily common stock and mutual funds). Regions uses quoted market prices of identical assets on active exchanges, or Level 1 measurements. Where such quoted market prices are not available, Regions typically employs quoted market prices of similar instruments (including matrix pricing) and/or discounted cash flows to estimate a value of these securities, or Level 2 measurements. Discounted cash flow analyses are typically based on market interest rates, prepayment speeds and/or option adjusted spreads. Level 3 measurements include discounted cash flow analyses based on assumptions that are not readily observable in the market place. Such assumptions include projections of future cash flows, including loss assumptions, and discount rates.

Mortgage loans held for sale consist of residential mortgage loans held for sale. Mortgage loans held for sale primarily consist of loans that are valued 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 value and market conditions, a Level 2 measurement. Regions has elected to measure mortgage loans held for sale at fair value by applying the fair value option (see additional discussion under “Fair Value Option” below).

Derivatives primarily consist of interest rate contracts that include futures, options and swaps and are included in other assets and other liabilities on the balance sheet. For exchange-traded options and futures contracts, values are based on quoted market prices, or Level 1 measurements. For all other options and futures contracts traded in over-the-counter markets, values are determined using discounted cash flow analyses and option pricing models based on market rates and volatilities, or Level 2 measurements. Interest rate lock commitments on loans intended for sale, treasury locks and credit derivatives are valued using option pricing models that incorporate significant unobservable inputs, and therefore are Level 3 measurements.

Interest rate swaps are predominantly traded in over-the-counter markets and, as such, values are determined using widely accepted discounted cash flow models, or Level 2 measurements. These discounted cash flow models use projections of future cash payments/receipts that are discounted at mid-market rates. These valuations are adjusted for the unsecured credit risk at the reporting date, which considers collateral posted and the impact of master netting agreements.

Short-term borrowings recognized at fair value represent short-sale liabilities to counterparties. Short-sale liabilities are valued based on the fair value of the underlying securities, which are determined in the same manner as trading account assets and available for sale securities.

 

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The following table presents financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2008:

 

(In thousands)    Level 1    Level 2    Level 3    Fair
Value

ASSETS:

           

Trading account assets

   $ 118,528    $ 731,967    $ 604,007    $ 1,454,502

Securities available for sale

     3,088,413      14,531,163      105,331      17,724,907

Mortgage loans held for sale

     —        621,784      —        621,784

Derivative assets(a)

     —        654,142      12,293      666,435

LIABILITIES:

           

Short-term borrowings

   $ 234,543    $ 236,952    $ 234,212    $ 705,707

Derivative liabilities(a)

     —        230,753      —        230,753

 

(a)

Derivative assets and liabilities include approximately $1.0 billion related to legally enforceable master netting agreements that allow the Company to settle positive and negative positions. Derivative assets and liabilities are also presented excluding cash collateral received of $136 million and cash collateral posted of $61 million with counterparties.

Assets and liabilities in all levels could result in volatile and material price fluctuations. Realized and unrealized gains and losses on Level 3 assets represent only a portion of the risk to market fluctuations in Regions’ balance sheets. Further, trading account assets, net derivatives and short-term borrowings included in Levels 1, 2 and 3 are used by the Asset and Liability Management Committee of the Company in a holistic approach to managing price fluctuation risks.

The following tables illustrate a rollforward for all assets and (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2008:

 

     Fair Value Measurements Using
Significant Unobservable Inputs
Three Months Ended June 30
(Level 3 measurements only)
 
(In thousands)    Trading
Account
Assets
    Securities
Available for
Sale
    Net
Derivatives
    Short-
Term
Borrowings
 

Beginning balance, April 1, 2008

   $ 310,718     $ 111,039     $ 17,623     $ (152,572 )

Total gains (losses) realized and unrealized:

        

Included in earnings

     1,138       —         506       (20 )

Included in other comprehensive income

     —         (683 )     —         —    

Purchases and issuances

     879,148       200       —         1,922,100  

Settlements

     (586,195 )     (5,225 )     (5,836 )     (2,007,274 )

Transfers in and/or out of Level 3

     (802 )     —         —         3,554  
                                

Ending balance, June 30, 2008

   $ 604,007     $ 105,331     $ 12,293     $ (234,212 )
                                

 

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     Fair Value Measurements Using
Significant Unobservable Inputs
Six Months Ended June 30
(Level 3 measurements only)
 
(In thousands)    Trading
Account
Assets
    Securities
Available for
Sale
    Net
Derivatives
    Short-
Term
Borrowings
 

Beginning balance, January 1, 2008

   $ 166,003     $ 73,003     $ 8,122     $ (57,456 )

Total gains (losses) realized and unrealized:

        

Included in earnings

     (903 )     —         17,265       (1,706 )

Included in other comprehensive income

     —         (8,480 )     —         —    

Purchases and issuances

     1,673,959       49,100       530       2,535,395  

Settlements

     (1,234,250 )     (8,292 )     (13,624 )     (2,713,999 )

Transfers in and/or out of Level 3

     (802 )     —         —         3,554  
                                

Ending balance, June 30, 2008

   $ 604,007     $ 105,331     $ 12,293     $ (234,212 )
                                

The following tables detail the income statement presentation of both realized and unrealized gains and losses recorded in earnings for Level 3 assets and liabilities for the three and six months ended June 30, 2008:

 

     Three Months Ended June 30  
(In thousands)    Trading
Account
Assets
   Securities
Available for
Sale
    Net
Derivatives
    Short-
Term
Borrowings
 

Classifications of gains (losses) both realized and unrealized included in earnings for the period:

         

Interest income

   $ —      $ —       $ —       $ —    

Brokerage and investment banking

     1,138      —         —         (20 )

Mortgage income

     —        —         8,670       —    

Other income

     —        —         (8,164 )     —    

Other comprehensive income

     —        (683 )     —         —    
                               

Total realized and unrealized gains and (losses)

   $ 1,138    $ (683 )   $ 506     $ (20 )
                               

 

     Six Months Ended June 30  
(In thousands)    Trading
Account
Assets
    Securities
Available for
Sale
    Net
Derivatives
    Short-
Term
Borrowings
 

Classifications of gains (losses) both realized and unrealized included in earnings for the period:

        

Interest income

   $ 958     $ —       $ —       $ —    

Brokerage and investment banking

     (1,861 )     —         —         (1,706 )

Mortgage income

     —         —         17,598       —    

Other income

     —         —         (333 )     —    

Other comprehensive income

     —         (8,480 )     —         —    
                                

Total realized and unrealized gains and (losses)

   $ (903 )   $ (8,480 )   $ 17,265     $ (1,706 )
                                

 

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The following tables detail the income statement presentation of only unrealized gains and losses recorded in earnings for Level 3 assets and liabilities for the three and six months ended June 30, 2008:

 

     Three Months Ended June 30
(In thousands)    Trading
Account
Assets
    Securities
Available for
Sale
    Net
Derivatives
    Short-
Term
Borrowings

The amount of total gains and losses for the period included in earnings, attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30, 2008:

        

Interest income

   $ —       $ —       $ —       $ —  

Brokerage and investment banking

     172       —         —         686

Mortgage income

     —         —         8,670       —  

Other income

     —         —         (8,164 )     —  

Other comprehensive income

     —         (683 )     —         —  
                              

Total unrealized gains and (losses)

   $ 172     $ (683 )   $ 506     $ 686
                              
     Six Months Ended June 30
(In thousands)    Trading
Account
Assets
    Securities
Available for
Sale
    Net
Derivatives
    Short-
Term
Borrowings

The amount of total gains and losses for the period included in earnings, attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30, 2008:

        

Interest income

   $ 222     $ —       $ —       $ —  

Brokerage and investment banking

     (89 )     —         —         801

Mortgage income

     —         —         17,598       —  

Other income

     —         —         (333 )     —  

Other comprehensive income

     —         (8,480 )     —         —  
                              

Total unrealized gains and (losses)

   $ 133     $ (8,480 )   $ 17,265     $ 801
                              

ITEMS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS

From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. The following is a description of the valuation methodologies used for certain assets that are recorded at fair value.

Loans that are transferred from held for sale to the loan portfolio are transferred at the lower of cost or fair value and are reported at fair value on a non-recurring basis. The determination of fair value for loans transferred from held for sale is based on discounted cash flow analyses using assumptions both observable and unobservable in the market, and therefore such valuations are classified as a Level 3 measurement.

Loans held for sale for which the fair value has not been elected are recorded at the lower of cost or fair value and are reported at fair value on a non-recurring basis. The fair values for loans held for sale are generally based on observable market prices or formally committed loan sale prices and therefore such valuations are classified as a Level 2 measurement.

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,

 

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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 June 30, 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, and gains and losses recognized during the period. 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 June 30, 2008    Fair value
gains (losses)
for the three
months ended
June 30, 2008
    Fair value
gains (losses)
for the six
months ended
June 30, 2008
 
(Dollars in thousands)    Total    Level 1    Level 2    Level 3     

Loans(1)

   28,964    —      —      28,964    (197 )   (197 )

Loans Held for Sale(2)

   31,023    —      31,023    —      (8,583 )   (8,583 )

Mortgage Servicing Rights

   271,392    —      —      271,392    67,000     25,000  

 

(1)

Regions transferred these commercial real estate loans from held for sale to the loan portfolio during the second quarter of 2008.

(2)

These commercial real estate loans held for sale were not included in the election of the fair value option and are measured at fair value on a non-recurring basis in accordance with Statement of Financial Accounting Standards No. 65, “Accounting for Certain Mortgage Banking Activities” (“FAS 65”).

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 12 “Recent Accounting Pronouncements” for further discussion.

FAIR VALUE OPTION

Regions also adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“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 Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“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

 

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June 30, 2008, loans held for sale for which the fair value option was elected had an aggregate fair value of $621.8 million and an aggregate outstanding principal balance of $622.2 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 income statement. Net gains (losses) resulting from changes in fair value of these loans of $(0.4) million and $9.1 million were recorded in mortgage income during the second quarter and first six months of 2008, respectively. These changes in fair value are mostly offset by economic hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

The election of the fair value option under FAS 159 impacts the timing and recognition of servicing value, as well as origination fees and costs. The servicing value of a loan was precluded from being recognized until the sale of the loan prior to the election of the fair value option. After adoption of the fair value option, this value is recognized in earnings at the time of origination. Origination fees and costs for mortgage loans held for sale, which had been previously deferred under Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”, are now recognized in earnings at the time of origination. Prior to the election of the fair value option, net loan origination costs for mortgage loans held for sale were capitalized as part of the carrying amount of the loans and recognized as a reduction of mortgage income upon the sale of such loans. Approximately $10 million of loan servicing value was recognized in non-interest income for the first six months of 2008, related to the adoption of FAS 159. The net impact of ceasing deferrals of origination fees and costs during the first six months of 2008 related to the adoption of FAS 159 was not material.

NOTE 9—Commitments and Contingencies

COMMERCIAL COMMITMENTS

Regions issues off-balance sheet financial instruments in connection with lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to Regions’ normal credit approval policies and procedures. Collateral is obtained based on management’s assessment of the customer.

Credit risk associated with these instruments as of June 30 is represented by the contractual amounts indicated in the following table:

 

(In millions)    2008    2007

Unused commitments to extend credit

   $ 43,195    $ 41,289

Standby letters of credit

     8,447      6,893

Commercial letters of credit

     31      74

Unused commitments to extend credit—To accommodate the financial needs of its customers, Regions makes commitments under various terms to lend funds to consumers, businesses and other entities. These commitments include (among others) revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.

Standby letters of credit—Standby letters of credit are also issued to customers, which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit also expire without being funded.

Commercial letters of credit—Commercial letters of credit are issued to facilitate foreign or domestic trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.

 

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LEGAL

Regions and its affiliates are subject to litigation, including the litigation discussed below, and claims arising in the ordinary course of business. Punitive damages are routinely claimed in these cases. Regions continues to be concerned about the general trend in litigation involving large damage awards against financial service company defendants. Regions evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Although it is not possible to predict the ultimate resolution or financial liability with respect to these litigation contingencies, management is currently of the opinion that the outcome of pending and threatened litigation would not have a material effect on Regions’ consolidated financial position or results of operations, except to the extent indicated in the discussion below.

In late 2007 and during 2008, Regions and certain of its affiliates were named in class-action lawsuits filed in federal and state courts on behalf of investors who purchased shares of certain Regions Morgan Keegan Select Funds (the “Funds”) and shareholders of Regions. The complaints contain various allegations, including claims that the Funds and the defendants misrepresented or failed to disclose material facts relating to the activities of the Funds. No class has been certified, and at this stage of the lawsuits Regions cannot determine the probability of a material adverse result or reasonably estimate a range of potential exposures, if any. However, it is possible that an adverse resolution of these matters may be material to Regions’ consolidated financial position or results of operations. In addition, the Company has received requests for information from the SEC Staff regarding the matters subject to the litigation described above.

Certain of the shareholders in these Funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating in the class actions. As with the class actions, these proceedings are in the preliminary stages. Although it is not possible to predict the ultimate resolution or financial liability with respect to these contingencies, management is currently of the opinion that the outcome of these proceedings would not have a material effect on Regions’ consolidated financial position or results of operations.

NOTE 10—Visa Indemnification and Initial Public Offering

As a member of the Visa USA network, Regions, along with other members, indemnified Visa USA against certain litigation. On October 3, 2007, Visa USA was restructured and acquired several Visa affiliates, and the restructured entity resulted in the formation of Visa, Inc. (“Visa”). In conjunction with this restructuring, Regions’ indemnification of Visa was modified to cover five specific cases (“covered litigation”). Certain of the covered litigation has been settled or accrued for by Visa and, accordingly, Regions has recorded its pro-rata share. Additionally, this modification caused Regions’ indemnification to be included within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, requiring a liability to be recognized at fair value for Regions’ share of the indemnification for the covered litigation that has not been settled or accrued by Visa. As of June 30, 2008 and December 31, 2007, Regions’ liability recognized under this indemnification was approximately $51.5 million.

On March 25, 2008, Visa executed an initial public offering (“IPO”) of common stock and, in connection with the IPO, Regions’ ownership interest in Visa was converted into Class B common stock of approximately 3.8 million shares. On March 28, 2008, Visa redeemed approximately 1.5 million shares of the Class B common stock from Regions for proceeds of approximately $62.8 million, all of which was recorded as “Other Income” in the consolidated statements of income. As of June 30, 2008, Regions’ remaining investment totaled approximately 2.3 million shares with a cost basis of zero. The Class B common stock is subject to a restriction period of the lesser of three years from the date of the IPO or settlement of all covered litigation. The number of shares of Class B common stock may also be adjusted by Visa, depending on the outcome of the covered litigation.

 

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A portion of Visa’s proceeds from the IPO, totaling $3.0 billion, was escrowed to fund the covered litigation. To the extent that the amount available under the escrow arrangement is insufficient to fully resolve the covered litigation, Visa will enforce the indemnification obligations of Visa USA’s members for any excess amount. As of June 30, 2008, Regions recognized an asset of and reduced first quarter 2008 expense by approximately $28.4 million, which represents the Company’s proportionate economic interest in the escrow account to settle the litigation liability.

NOTE 11—Discontinued Operations

On March 30, 2007, Regions sold EquiFirst Corporation (“EquiFirst”), a wholly-owned non-conforming mortgage origination subsidiary, for approximately $76 million and recorded an after-tax gain of approximately $1 million. Consequently, the business related to EquiFirst has been accounted for as discontinued operations and the results are presented separately on the consolidated statements of income following the results from continuing operations. The sales price is subject to final resolution of closing date values of net assets sold, which is not yet completed. Regions anticipates resolution of the final sales price in 2008. Regions believes any adjustments to the sales price will not have a material impact to the consolidated financial statements.

Prior to the sale of EquiFirst and excluding the gain on the sale, Regions recorded, during the first quarter of 2007, approximately $142 million in after-tax losses related to the operations of EquiFirst. The primary factor in the recognition of these losses was the significant and rapid deterioration of the sub-prime market during the first three months of 2007.

The results from discontinued operations for the three-month periods ending June 30, 2008 and 2007 are as follows:

 

     Three Months Ended
June 30
 
(In thousands)      2008         2007    
        

Total non-interest expense

   $ 406       682  
                

Loss from discontinued operations before income taxes

     (406 )     (682 )

Income tax benefit

     (153 )     (259 )
                

Loss from discontinued operations, net of tax

   $ (253 )   $ (423 )
                

The results from discontinued operations for the six-month periods ending June 30, 2008 and 2007 are as follows:

 

     Six Months Ended
June 30
 
(In thousands)    2008     2007  

Net interest income

   $ —       $ 11,967  

Provision for loan losses

     —         182  
                

Net interest income after provision for loan losses

     —         11,785  
                

Total non-interest income, excluding gain on sale of discontinued operations

     —         (188,658 )

Total non-interest expense

     473       51,604  
                

Loss from discontinued operations, excluding gain on sale, before income taxes

     (473 )     (228,477 )

Gain on sale of discontinued operations before income taxes

     —         11,977  
                

Loss from discontinued operations before income taxes

     (473 )     (216,500 )

Income tax benefit

     (178 )     (74,982 )
                

Loss from discontinued operations, net of tax

   $ (295 )   $ (141,518 )
                

 

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NOTE 12—Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“FAS 158”). FAS 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires a company to (1) recognize on its balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and (3) recognize changes in the funded status of a plan through comprehensive income in the year in which the changes occur. Companies with publicly-traded equity securities were required to prospectively adopt the recognition and disclosure provisions of FAS 158 effective for fiscal years ending after December 15, 2006. Regions adopted FAS 158 on December 31, 2006 and recorded an after-tax reduction to the ending balance of accumulated other comprehensive income of $64.1 million to recognize the funded status of Regions’ pension and other postretirement benefit plans. On January 1, 2008, Regions made a cumulative effect adjustment to beginning retained earnings to reflect the transition to a fiscal year-end measurement date, which resulted in an after-tax reduction to beginning retained earnings of approximately $1.7 million. The first year-end measurement date will be on December 31, 2008.

In September 2006, the FASB ratified the consensus the Emerging Issues Task Force (“EITF”) reached regarding EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”), which provides accounting guidance for postretirement benefits related to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policies. The consensus concludes that an employer should recognize a liability for the postretirement benefit in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“FAS 106”) or Accounting Principles Board Opinion No. 12, “Omnibus Opinion-1967” (“APB 12”). In addition, the consensus states that an employer should also recognize an asset based on the substance of the arrangement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007 with early application permitted.

In March 2007, the FASB ratified the consensus the EITF reached regarding EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”), which provides accounting guidance for postretirement benefits related to collateral assignment split-dollar life insurance arrangements, whereby the employee owns and controls the insurance policies. The consensus concludes that an employer should recognize a liability for the postretirement benefit in accordance with FAS 106 or APB 12, as well as recognize an asset based on the substance of the arrangement with the employee. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, with early application permitted. Regions adopted EITF 06-4 and 06-10 on January 1, 2008, and the effect of adoption on the consolidated financial statements was a reduction in retained earnings of approximately $15.5 million.

In September 2006, the FASB issued FAS 157, which provides guidance for using fair value to measure assets and liabilities, but does not expand the use of fair value in any circumstance. FAS 157 also requires expanded disclosures about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on an entity’s financial statements. The statement applies when other standards require or permit assets and liabilities to be measured at fair value. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. Additionally, in February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delays the effective date of FAS 157 for non-recurring, non-financial instruments to fiscal years beginning after November 15, 2008. Regions adopted FAS 157 on January 1, 2008, and the effect of adoption on the consolidated financial statements was not material. Prospectively, Regions anticipates the adoption of FAS 157 will impact the valuation of derivatives, specifically the credit component of the valuation. See Note 8, “Fair Value Measurements” for additional information about the impact of the adoption of FAS 157.

 

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In February 2007, the FASB issued FAS 159, which allows entities to voluntarily choose, at specified election dates, to measure financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, FAS 159 specifies that all subsequent changes in fair value for that instrument be reported in earnings. FAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, and earlier adoption is permitted. Regions adopted FAS 159 on January 1, 2008, for mortgage loans held for sale originated on or after January 1, 2008, and there was no material effect of adoption on the consolidated financial statements. Prospectively, Regions anticipates the adoption of FAS 159 will accelerate the timing of gain recognition on mortgage loans held for sale. See Note 8, “Fair Value Measurements” for additional information about the impact of the adoption of FAS 159.

In April 2007, the FASB issued FSP FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”), which permits a reporting entity that is party to a master netting agreement to offset fair value amounts recognized for rights and obligations relating to cash collateral against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangements. FSP FIN 39-1 requires entities to make an accounting policy election to carry collateral posted/received at fair value, netted against the corresponding derivative positions, or carry collateral posted/received presented separately at cost. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, requiring retrospective application for all financial statements presented. Regions has elected not to present collateral posted/received under master netting arrangements at fair value and thus, has not netted such amounts against derivative amounts included in the consolidated balance sheets. Collateral posted/received is included in Fed Funds Sold/Purchased on the consolidated balance sheets. At June 30, 2008, December 31, 2007 and June 30, 2007, Regions posted collateral of $61.1 million, $18.4 million and $9.8 million, respectively, and received collateral of $135.7 million, $114.4 million and $19.4 million, respectively.

In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 109, “Application of Accounting Principles to Loan Commitments” (“SAB 109”), to inform registrants of the Staff’s view that the fair value of written loan commitments that are accounted for at fair value should include expected net future cash flows related to the associated servicing of the loan. Additionally, the Staff reaffirmed its previous views that internally-developed intangible assets (such as customer relationship intangible assets) should not be recorded as part of the fair value of such commitments. The Staff expects registrants to apply the views stated in SAB 109 on a prospective basis to written loan commitments recorded at fair value which were issued or modified in fiscal quarters beginning after December 15, 2007. Regions adopted SAB 109 on January 1, 2008. The adoption of SAB 109 did not have a material impact on Regions’ consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS 141(R)”). FAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. FAS 141(R) is effective for fiscal years beginning after December 15, 2008. Regions is in the process of reviewing the potential impact of FAS 141(R). The adoption of FAS 141(R) could have a material impact to the consolidated financial statements for business combinations entered into after the effective date of FAS 141(R). Also, any tax contingencies related to acquisitions prior to the effective date of FAS 141(R) that are resolved after the adoption of FAS 141(R) would be recorded through current earnings, and also could have a material impact to the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), which requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements.

 

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Additionally, FAS 160 requires that transactions between an entity and noncontrolling interests be treated as equity transactions. FAS 160 is effective for fiscal years beginning after December 15, 2008. Regions is in the process of reviewing the potential impact of FAS 160; however, the adoption of FAS 160 is not expected to have a material impact to the consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and early adoption is permitted. Regions is in the process of reviewing the potential impact of FAS 161; however, the adoption of FAS 161 is not expected to have a material impact to the consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payments Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that instruments granted in share-based payment transactions, that are considered to be participating securities, should be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in FASB Statement No. 128, “Earnings per Share”. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 with all prior period EPS data being adjusted retrospectively. Early adoption is not permitted. Regions is in the process of reviewing the potential impact of FSP EITF 03-6-1; however, the adoption of FSP EITF 03-6-1 is not expected to have a material impact to the consolidated financial statements.

NOTE 13—Subsequent Events

On July 17, 2008, the Board of Directors declared a $0.10 per common share cash dividend, payable October 1, 2008 for the third quarter of 2008, a reduction compared to the second quarter 2008 cash dividend of $0.38. Given the current operating environment and its potential pressure on earnings, the quarterly cash dividend was reduced to strengthen Regions’ capital position.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis is part of Regions Financial Corporation’s (“Regions” or the “Company”) Quarterly Report on Form 10-Q to the Securities and Exchange Commission (“SEC”) and updates Regions’ Form 10-K for the year ended December 31, 2007, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions’ financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 for the statement of income. For the balance sheet, the emphasis of this discussion will be the balances as of June 30, 2008 as compared to December 31, 2007.

This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See page 3 for additional information regarding forward-looking statements.

CORPORATE PROFILE

Regions is a financial holding company headquartered in Birmingham, Alabama, which operates in the South, Midwest and Texas. Regions’ provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing.

Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At June 30, 2008, Regions operated approximately 1,900 full-service banking offices in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions provides brokerage services and investment banking from approximately 400 offices of Morgan Keegan & Company, Inc. (“Morgan Keegan”), a full-service regional brokerage and investment banking firm. Regions provides full-line insurance brokerage services primarily through Regions Insurance, Inc., one of the 30 largest insurance brokers in the country.

Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and non-interest income sources. Net interest income is the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions’ net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, securities brokerage, investment banking and trust activities, mortgage servicing and secondary marketing, insurance activities and other customer services which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses, such as salaries and employee benefits, occupancy and other operating expenses, as well as income taxes.

Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions’ market areas.

Regions’ business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in

 

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convenient locations. Regions delivers this business strategy with the personal attention and feel of a community bank and with the service and product offerings of a large regional bank.

SECOND QUARTER HIGHLIGHTS

Regions reported income from continuing operations of $206.6 million, or $0.30 per diluted share in the second quarter of 2008, which included $62.0 million in after-tax merger-related expenses (or 9 cents per diluted share). Excluding the impact of merger-related expenses, earnings per diluted share from continuing operations were $0.39, compared to second quarter 2007 per diluted share earnings of $0.69. See Table 12 for a reconciliation of GAAP to non-GAAP financial measures. Earnings for the second quarter of 2008 reflect a continuation of the difficult credit cycle, which is exhibited in both the decline in net interest income and a higher provision for loan losses. Additionally, several significant expense items, which are discussed later in this section, affected net income for the second quarter of 2008. Second quarter 2008 results also include steady fee-based revenue, controlled core operating expenses and better-than-projected merger cost saves.

Net interest income from continuing operations, on a fully taxable-equivalent basis, for the second quarter of 2008 was $1.0 billion, compared to $1.1 billion in the second quarter of 2007. The taxable-equivalent net interest margin (annualized and including discontinued operations) for the second quarter of 2008 was 3.36%, compared to 3.82% in the second quarter of 2007. Despite an increase in average loans during the period, the decrease in the net interest margin reflects the continued pressure of a negative shift in deposit mix, the impact of recent yield curve movements (including recent Federal Reserve interest rate reductions) and higher non-performing asset levels. Also, the issuances of $750 million of subordinated debt and $345 million of junior subordinated debt during the second quarter of 2008 further pressured the net interest margin during the quarter.

Net charge-offs totaled $209.0 million, or an annualized 0.86% of average loans, in the second quarter of 2008, compared to 0.23% for the second quarter of 2007. The provision for loan losses from continuing operations totaled $309.0 million in the second quarter of 2008 compared to $60.0 million during the same period of 2007. The allowance for credit losses at June 30, 2008, was 1.56% of total loans, net of unearned income, compared to 1.45% at December 31, 2007 and 1.19% at June 30, 2007. These increases were primarily driven by deterioration in the residential homebuilder portfolio and losses within the home equity portfolio, both of which are closely tied to the housing market slowdown. Total non-performing assets at June 30, 2008, were $1,620.8 million, compared to $864.1 million at December 31, 2007. Residential homebuilder and condominium loans were the primary driver of the increase since December 31, 2007.

Non-interest income in the second quarter of 2008 from continuing operations increased 7% compared to the second quarter of 2007. This increase was attributable to strong contributions from brokerage and investment banking income, commercial credit fee income and insurance income. During the second quarter of 2008, a $14.9 million loss was recognized as a reduction to mortgage income on the sale of a $3.4 billion Government National Mortgage Association (“GNMA”) mortgage servicing rights portfolio.

Total non-interest expense from continuing operations was $1.140 billion and $1.057 billion in the second quarter of 2008 and 2007, respectively. Pre-tax merger charges of $100.1 million were incurred in the second quarter of 2008 compared to $59.9 million in the second quarter of 2007 (see Table 12 “GAAP to Non-GAAP Reconciliation”). The increase in non-interest expense was primarily attributable to higher occupancy expense related to additional branches and higher professional fees. These increases were offset slightly by personnel-related efficiencies gained during 2008. Also, several significant non-interest expense items were recorded during the second quarter of 2008, including $20.1 million of other real estate owned expense and a $13.3 million write-down on the investment in two Morgan Keegan mutual funds. These items were more than offset by a $67.0 million mortgage servicing rights impairment recapture. Non-interest expenses also benefited from the realization of merger cost saves of approximately $165 million during the second quarter of 2008, compared to $84 million in the second quarter of 2007.

 

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TOTAL ASSETS

Regions’ total assets at June 30, 2008, were $144.4 billion, compared to $141.0 billion at December 31, 2007. The increase in total assets from year-end 2007 resulted primarily from an increase in loans.

LOANS

At June 30, 2008, loans represented 82% of Regions’ interest-earning assets. The following table presents the distribution by loan type of Regions’ loan portfolio, net of unearned income:

Table 1—Loan Portfolio

 

(In thousands, net of unearned income)    June 30
2008
   December 31
2007
   June 30
2007

Commercial

   $ 23,241,719    $ 20,906,617    $ 25,123,355

Real estate—mortgage

     40,251,729      39,343,128      33,646,480

Real estate—construction

     13,133,258      14,025,491      14,311,192

Home equity

     15,446,740      14,962,007      14,819,443

Indirect

     4,145,457      3,938,113      4,052,637

Other consumer

     2,047,676      2,203,491      2,061,381
                    
   $ 98,266,579    $ 95,378,847    $ 94,014,488
                    

Loans, net of unearned income, totaled $98.3 billion at June 30, 2008, an increase of $2.9 billion from year-end 2007 levels. Loan growth occurred primarily in commercial, real estate mortgage and home equity partially offset by a decrease in real estate construction. Commercial loan growth was driven by healthcare and asset-based lending.

Regions has approximately $87 million in book value of “sub-prime” loans retained from the disposition of EquiFirst, down slightly from the year-end 2007 balance. The credit loss exposure related to these loans is addressed in management’s periodic determination of the allowance for credit losses.

RESIDENTIAL HOMEBUILDER PORTFOLIO

During late 2007, the residential homebuilder portfolio came under significant stress. In Table 1 “Loan Portfolio”, the majority of these loans are reported in the real estate—construction loan category, while a smaller portion is reported as real estate—mortgage loans. The residential homebuilder portfolio is geographically concentrated in Florida and Regions’ Central Region, mainly Atlanta, Georgia; the balances in these regions total approximately $3.4 billion. Regions has realigned its organizational structure to enable some of the Company’s most experienced bankers to concentrate their efforts on management of this portfolio. From March 31, 2008 to June 30, 2008, this portfolio decreased by approximately $473 million primarily due to repayments.

The following table details the portfolio breakout of the residential homebuilder portfolio:

Table 2—Residential Homebuilder Portfolio

 

(In thousands, net of unearned income)    June 30
2008
   March 31
2008
   December 31
2007

Land

   $ 2,065,967    $ 2,093,181    $ 2,925,685

Residential—spec

     1,752,055      1,874,700      1,893,567

Residential—presold

     545,806      588,163      617,628

Lots

     1,178,815      1,416,909      1,607,794

National homebuilders and other

     215,610      258,211      160,505
                    
   $ 5,758,253    $ 6,231,164    $ 7,205,179
                    

 

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ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses (“allowance”) represents management’s estimate of credit losses inherent in the portfolio as of June 30, 2008. The allowance consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Management’s assessment of the adequacy of the allowance is based on the combination of both of these components. Regions determines its allowance in accordance with regulatory guidance, Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (“FAS 114”) and Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“FAS 5”). Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments.

At June 30, 2008 and December 31, 2007, the allowance totaled approximately $1.5 billion and $1.4 billion, respectively. The allowance as a percentage of net loans was 1.56% at June 30, 2008 compared to 1.45% at year-end 2007. Net charge-offs as a percentage of average loans (annualized) were 0.70% and 0.21% in the first six months of 2008 and 2007, respectively. The increase in the allowance was primarily driven by deterioration in the residential homebuilder and condominium portfolios and losses within the home equity portfolio, all of which are tied directly to the housing market slowdown. Given continuing deterioration in residential property values –especially in Florida—and a generally uncertain economic backdrop, the Company expects credit costs to remain elevated. The reserve for unfunded credit commitments was $64.8 million at June 30, 2008 compared to $58.3 million at December 31, 2007. Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 3 “Allowance for Credit Losses”.

Home equity credits accounted for over half of the increase in net charge-offs, rising to an annualized 1.94% of outstanding loans and lines during the second quarter of 2008. The increase was mostly due to Florida-based credits, where property valuations in certain markets have experienced significant and rapid deterioration. These loans and lines represent approximately $5.4 billion of Regions’ total home equity portfolio. Of that balance, approximately $1.9 billion represent first liens; second liens, which total $3.5 billion, are the main source of losses. Florida second lien losses were 4.74% during the second quarter of 2008. Second quarter home equity losses amounted to an annualized 3.55% of loans and lines in Florida versus 1.08% across the remainder of Regions’ footprint.

The remainder of the increase in net charge-offs during the second quarter of 2008 relates primarily to the residential homebuilder portfolio, which is discussed earlier in this report. Specifically, charge-offs in the residential homebuilder portfolio totaled $34.2 million in the second quarter of 2008.

Factors considered by management in determining the adequacy of the allowance include, but are not limited to: (1) detailed reviews of individual loans; (2) historical and current trends in gross and net loan charge-offs for the various portfolio segments evaluated; (3) the Company’s policies relating to delinquent loans and charge-offs; (4) the level of the allowance in relation to total loans and to historical loss levels; (5) levels and trends in non-performing and past due loans; (6) collateral values of properties securing loans; (7) the composition of the loan portfolio, including unfunded credit commitments; and (8) management’s analysis of current economic conditions.

Various departments, including Credit Review, Commercial and Consumer Credit Risk Management and Special Assets are involved in the credit risk management process to assess the accuracy of risk ratings, the quality of the portfolio and the estimation of inherent credit losses in the loan portfolio. This comprehensive process also assists in the prompt identification of problem credits. The Company has taken a number of measures to aggressively manage the portfolios and mitigate future losses, particularly in the more problematic portfolios. Specific to the residential homebuilder portfolio, $1.8 billion of relationships have been identified as problem loans and are being aggressively managed to mitigate risk. Significant action in the management of the home equity portfolio has also been taken. A portfolio evaluation was completed during the quarter, which will provide detailed property level information to assist in workout strategies. Also, a strong Customer Assistance

 

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Program is in place which educates customers about options and initiates early contact with customers to discuss solutions when a loan first becomes delinquent.

For the majority of the loan portfolio, management uses information from its ongoing review processes to stratify the loan portfolio into pools sharing common risk characteristics. Loans that share common risk characteristics are assigned a portion of the allowance based on the assessment process described above. Credit exposures are categorized by type and assigned estimated amounts of inherent loss based on the processes described above.

Impaired loans are defined as commercial and commercial real estate loans (excluding leases) on non-accrual status. Impaired loans totaled approximately $1,246.3 million at June 30, 2008, compared to $660.4 million at December 31, 2007. The increase in impaired loans is consistent with the increase in non-performing loans, which is discussed in the “Non-Performing Assets” section of this report. All loans that management has identified as impaired, and that are greater than $2.5 million, are evaluated individually for purposes of determining appropriate allowances for loan losses. For these loans, Regions measures the level of impairment based on the present value of the estimated cash flows, the estimated value of the collateral or, if available, observable market prices. Specifically reviewed impaired loans totaled $821.5 million, and the allowance allocated to these loans totaled $125.2 million at June 30, 2008. This compared to $337.2 million of specifically reviewed impaired loans with allowance allocated to these loans of $58.7 million at December 31, 2007. While impaired loans increased, they are generally secured by real estate collateral.

Except for specific allowances on certain impaired loans, no portion of the resulting allowance is restricted to any individual credits or group of credits. The remaining allowance is available to absorb losses from any and all loans.

Management expects the allowance to vary over time due to changes in economic conditions, loan mix, management’s estimates or variations in other factors that may affect inherent losses.

 

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Activity in the allowance for credit losses is summarized as follows:

Table 3—Allowance for Credit Losses

 

(In thousands)   Six months ended June 30  
  2008     2007  

Allowance for loan losses at January 1

  $ 1,321,244     $ 1,055,953  

Loans charged-off:

   

Commercial

    87,469       36,878  

Real estate—mortgage

    68,670       26,655  

Real estate—construction

    60,434       10,470  

Equity

    102,408       24,643  

Indirect

    24,426       16,870  

Other consumer

    36,965       37,963  
               
    380,372       153,479  

Recoveries of loans previously charged-off:

   

Commercial

    11,548       17,428  

Real estate—mortgage

    4,822       4,115  

Real estate—construction

    1,259       1,189  

Equity

    7,930       7,183  

Indirect

    8,008       8,479  

Other consumer

    12,096       15,156  
               
    45,663       53,550  

Net charge-offs:

   

Commercial

    75,921       19,450  

Real estate—mortgage

    63,848       22,540  

Real estate—construction

    59,174       9,281  

Equity

    94,478       17,460  

Indirect

    16,419       8,391  

Other consumer

    24,869       22,807  
               
    334,709       99,929  

Allowance allocated to sold loans and loans transferred to loans held for sale

    (5,011 )     (1,333 )

Provision for loan losses from continuing operations

    490,000       107,000  

Provision for loan losses from discontinued operations

    —         182  
               

Allowance for loan losses at June 30

  $ 1,471,524     $ 1,061,873  
               

Reserve for unfunded credit commitments at January 1

  $ 58,254     $ 51,835  

Provision for unfunded credit commitments

    6,568       4,521  
               

Reserve for unfunded credit commitments at June 30

  $ 64,822     $ 56,356  
               

Allowance for credit losses

  $ 1,536,346     $ 1,118,229  
               

Loans, net of unearned income, outstanding at end of period

  $ 98,266,579     $ 94,014,488  

Average loans, net of unearned income, outstanding for the period

  $ 96,456,468     $ 94,194,342  

Ratios:

   

Allowance for loan losses at end of period to loans, net of unearned income

    1.50 %     1.13 %

Allowance for credit losses at end of period to loans, net of unearned income

    1.56       1.19  

Net charge-offs as percentage of:

   

Average loans, net of unearned income

    0.70       0.21  

Provision for loan losses

    68.31       93.23  

Allowance for credit losses

    21.79       8.94  

 

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NON-PERFORMING ASSETS

Non-performing assets are summarized as follows:

Table 4—Non-Performing Assets

 

(Dollars in thousands)    June 30
2008
    December 31
2007
    June 30
2007
 

Non-performing loans:

      

Commercial

   $ 181,388     $ 92,029     $ 99,184  

Real estate—mortgage

     539,383       334,888       128,696  

Real estate—construction

     676,082       310,052       267,566  

Home equity

     13,335       6,611       5,452  

Indirect

     1       9       2  

Other consumer

     315       —         275  
                        

Total non-performing loans

     1,410,504       743,589       501,175  

Foreclosed properties

     210,330       120,465       83,834  
                        

Total non-performing assets*

   $ 1,620,834     $ 864,054     $ 585,009  
                        

Non-performing loans to loans, net of unearned income

     1.44 %     0.78 %     0.53 %

Non-performing assets* to loans, net of unearned income, and foreclosed properties

     1.65 %     0.90 %     0.62 %

Accruing loans 90 days past due:

      

Commercial

   $ 10,528     $ 12,055     $ 25,051  

Real estate—mortgage

     226,291       167,314       87,252  

Real estate—construction

     17,842       18,930       10,289  

Home equity

     166,816       146,809       74,105  

Indirect

     4,581       6,002       2,948  

Other consumer

     5,900       5,575       5,184  
                        
   $ 431,958     $ 356,685     $ 204,829  
                        

Restructured loans not included in the categories above

   $ 101,559     $ —       $ —    

 

*

Exclusive of accruing loans 90 days past due

Non-accrual loans at June 30, 2008 increased $666.9 million from year-end 2007 levels. The increase was primarily driven by commercial and commercial real estate loans, including the residential homebuilder portfolio, due to the widespread decline in residential property values. Of the $5.8 billion residential homebuilder portfolio, non-accruing loans represent approximately $543.7 million, while $7.4 million are 90 days past due. Non-performing assets are expected to increase throughout the year as the strained economic climate continues. During the second quarter of 2008, Regions disposed of approximately $147 million of loans and foreclosed properties, of which approximately $132 million were non-performing assets.

Loans past due 90 days or more and still accruing increased $75.3 million from year-end 2007 levels, reflecting weaker economic conditions and general market deterioration. The increase was due primarily to increases in home equity and residential first mortgages, as well as commercial real estate loans being managed by the Special Assets Department and in the process of collection.

Restructured loans at June 30, 2008 were primarily comprised of $85 million of 1-4 family mortgage loans and $16 million of home equity lines and loans.

At June 30, 2008 and December 31, 2007, Regions had approximately $335.0 million and $221.5 million, respectively, of potential problem commercial and commercial real estate loans that were not included in

 

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non-accrual loans or in the accruing loans 90 days past due categories, but for which management had concerns as to the ability of such borrowers to comply with their present loan repayment terms.

SECURITIES

The following table details the carrying values of securities:

Table 5—Securities

 

(In thousands)    June 30
2008
   December 31
2007
   June 30
2007

U.S. Treasury securities

   $ 804,634    $ 964,647    $ 302,698

Federal agency securities

     1,769,925      3,329,656      3,548,168

Obligations of states and political subdivisions

     728,719      732,367      744,695

Mortgage-backed securities

     13,013,173      11,092,758      11,759,778

Other debt securities

     30,364      45,108      258,901

Equity securities

     1,426,336      1,204,473      844,619
                    
   $ 17,773,151    $ 17,369,009    $ 17,458,859
                    

Securities totaled $17.8 billion at June 30, 2008, an increase of approximately $404.1 million from year-end 2007 levels. Securities available for sale, which comprise nearly all of the securities portfolio, are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company (see INTEREST RATE SENSITIVITY, Exposure to Interest Rate Movements and LIQUIDITY).

During late 2007, Regions invested approximately $130 million in two open-end mutual funds managed by Morgan Keegan. Regions accounts for these investments using the equity method. At June 30, 2008, total assets of these funds were approximately $89.0 million. Regions’ investment in the funds was approximately $22.3 million at June 30, 2008 and is included in other assets. During the six months ended June 30, 2008, Regions recognized losses associated with these investments of approximately $37.8 million, which is included in other non-interest expense.

OTHER INTEREST-EARNING ASSETS

All other interest-earning assets increased approximately $347.4 million from year-end 2007 to June 30, 2008, primarily resulting from the increase in trading account assets and margin receivables.

GOODWILL

Goodwill totaled $11.5 billion at June 30, 2008. See Note 7 for a detail of goodwill allocated to each reportable segment and discussion of goodwill impairment testing.

MORTGAGE SERVICING RIGHTS

A summary of mortgage servicing rights is presented in Table 6. The balances shown represent the right to service mortgage loans that are owned by other investors and include the original amounts capitalized, less accumulated amortization and the valuation allowance. The carrying values of mortgage servicing rights are affected by various factors, including estimated prepayments of the underlying mortgages. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights. During the second quarter of 2008, a $14.9 million loss (including transaction costs) was recognized on the sale of a $3.4 billion GNMA mortgage servicing rights portfolio. During the first six months of 2008 and 2007, non-interest expense benefited $25.0 million and $37.0 million, respectively, as a result of mortgage servicing rights impairment recapture.

 

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Table 6—Mortgage Servicing Rights

 

     Six months ended
June 30
 
(In thousands)    2008     2007  

Balance at beginning of year

   $ 368,654     $ 416,217  

Amounts capitalized

     17,501       28,611  

Sale of servicing assets

     (58,620 )     —    

Amortization

     (46,349 )     (40,426 )
                
     281,186       404,402  

Valuation allowance

     (9,794 )     (4,346 )
                

Balance at end of period

   $ 271,392     $ 400,056  
                

DEPOSITS

Regions competes with other banking and financial services companies for a share of the deposit market. Regions’ ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers’ needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing well-designed products, a high level of customer service, competitive pricing and expanding the traditional branch network to provide convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality telephone banking services and alternative product delivery channels such as internet banking.

The following table summarizes deposits by category:

Table 7—Deposits

 

(In thousands)    June 30
2008
   December 31
2007
   June 30
2007

Non-interest-bearing demand deposits

   $ 18,334,239    $ 18,417,266    $ 19,136,419
                    

Savings accounts

     3,819,138      3,646,632      3,795,701

Interest-bearing transaction accounts

     15,380,301      15,846,139      15,685,340

Money market accounts

     17,993,169      18,934,309      20,025,759

Time deposits

     30,462,142      29,298,845      29,572,747

Foreign deposits

     3,914,660      8,631,777      6,840,425
                    

Total interest-bearing deposits

     71,569,410      76,357,702      75,919,972
                    
   $ 89,903,649    $ 94,774,968    $ 95,056,391
                    

Total deposits at June 30, 2008, decreased approximately $4.9 billion compared to year-end 2007 levels. The primary driver for the decrease was a shift out of foreign deposits (which Regions uses as a source of short-term wholesale funding) and into short-term borrowings to access the most cost-effective funding. There were increases in savings and time deposits, which were offset by the decreases in non-interest bearing demand, interest-bearing transaction and money market accounts. The decrease in money market accounts reflects a mix shift in consumer customers’ preferences toward certificates of deposits. In the current economic environment, deposit growth is likely to remain a challenge throughout the remainder of the year.

 

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SHORT-TERM BORROWINGS

The following is a summary of short-term borrowings:

Table 8—Short-Term Borrowings

 

(In thousands)    June 30
2008
   December 31
2007
   June 30
2007

Federal funds purchased

   $ 4,049,488    $ 5,182,649    $ 4,496,567

Securities sold under agreements to repurchase

     4,614,140      3,637,586      3,710,683

Term Auction Facility

     5,500,000      —        —  

Senior bank notes

     550,000      —        —  

Treasury, tax and loan notes

     899,505      1,150,000      —  

Federal Home Loan Bank advances

     500,000      100,000      600,000

Brokerage customers liabilities

     448,199      505,487      499,309

Short-sale liability

     477,256      217,355      666,169

Other short-term borrowings

     551,643      327,045      116,636
                    
   $ 17,590,231    $ 11,120,122    $ 10,089,364
                    

Federal funds purchased and securities sold under agreements to repurchase totaled $8.7 billion at June 30, 2008, compared to $8.8 billion at year-end 2007. The level of Federal funds purchased and securities sold under agreements to repurchase can fluctuate significantly on a day-to-day basis, depending on funding needs and which sources of funds are used to satisfy those needs. Short-term borrowings increased due to the shift away from using foreign deposits for funding purposes. Instead, the Company utilized short-term borrowings through participation in the Federal Reserve’s Term Auction Facility and the issuance of senior bank notes.

 

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LONG-TERM BORROWINGS

Long-term borrowings are summarized as follows:

Table 9—Long-Term Borrowings

 

(In thousands)    June 30
2008
   December 31
2007
   June 30
2007
 

Federal Home Loan Bank structured advances

   $ 1,738,201    $ 1,662,898    $ 1,767,535  

Other Federal Home Loan Bank advances

     3,619,049      2,119,318      270,067  

6.375% subordinated notes due 2012

     597,637      597,343      597,050  

7.75% subordinated notes due 2011

     528,555      533,912      540,538  

7.00% subordinated notes due 2011

     499,338      499,227      497,887  

7.375% subordinated notes due 2037

     300,000      300,000      —    

7.50% subordinated notes due 2018 (Regions Bank)

     749,383      —        —    

6.45% subordinated notes due 2037 (Regions Bank)

     497,208      497,191      500,000  

4.85% subordinated notes due 2013 (Regions Bank)

     488,726      487,696      486,694  

5.20% subordinated notes due 2015 (Regions Bank)

     344,905      344,523      341,325  

6.45% subordinated notes due 2018 (Regions Bank)

     —        321,657      322,453  

6.50% subordinated notes due 2018 (Regions Bank)

     —        311,439      312,032  

6.125% subordinated notes due 2009

     175,997      176,722      177,380  

6.75% subordinated debentures due 2025

     163,616      163,840      164,058  

7.75% subordinated notes due 2024

     100,000      100,000      100,000  

Senior bank notes

     —        —        100,000  

4.375% senior notes due 2010

     493,464      492,104      490,741  

LIBOR floating rate senior notes due 2012

     350,000      350,000      350,000  

LIBOR floating rate senior notes due 2009

     249,975      249,963      250,000  

LIBOR floating rate senior debt notes due 2008

     399,954      399,762      399,573  

4.50% senior debt notes due 2008

     349,941      349,694      349,451  

6.625% junior subordinated notes due 2047

     699,814      699,814      699,814  

8.875% junior subordinated notes due 2048

     345,010      —        —    

Other long-term debt

     512,115      545,298      607,611  

Valuation adjustments on hedged long-term debt

     115,768      122,389      (36,283 )
                      
   $ 13,318,656    $ 11,324,790    $ 9,287,926  
                      

Long-term borrowings increased $2.0 billion since year-end 2007 due primarily to increases in Federal Home Loan Bank (“FHLB”) advances of $1.6 billion and $1.1 billion of new subordinated notes, including junior subordinated notes. This increase was offset by the redemption of approximately $630 million in subordinated notes during the first quarter of 2008, resulting in a $65.4 million loss on early extinguishment of debt (see Table 19 “Non-Interest Expense (Including Non-GAAP Reconciliation)”).

On April 25, 2008, Regions Financial Corporation issued $345 million of junior subordinated notes (“JSNs”) bearing an initial fixed interest rate of 8.875%. The JSNs have a scheduled maturity of June 15, 2048 and a final maturity of June 15, 2078, and are redeemable at Regions’ option on or after June 15, 2013. The JSNs were issued to Regions Financing Trust III (“the Trust”) and are the underlying collateral of trust preferred securities (“TPS”) issued by the Trust. The terms of the TPS are identical to those of the JSNs, and the TPS are fully guaranteed by Regions. While Regions is not required to consolidate the Trust, the TPS qualify as Tier 1 capital for purposes of calculating regulatory capital for Regions Financial Corporation. Regions has the option to defer interest payments on the JSNs, but in doing so, may not pay dividends to equity interest holders while deferred interest is outstanding. The redemption of the JSNs and payment of deferred interest is subject to a replacement capital covenant, whereby Regions must issue interests ranking equal or junior to the JSNs in subordination in order to repay such amounts.

 

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On May 16, 2008, Regions Bank issued $750 million of 7.50% subordinated notes due 2018, which qualify as Tier 2 capital for calculating regulatory capital for Regions Bank.

STOCKHOLDERS’ EQUITY

Stockholders’ equity was $19.7 billion at June 30, 2008, compared to $19.8 billion at December 31, 2007. During the first six months of 2008, net income added $543.1 million to stockholders’ equity, cash dividends declared reduced equity by $528.7 million, and changes in accumulated other comprehensive income decreased equity by $155.4 million.

Regions’ ratio of stockholders’ equity to total assets was 13.65% at June 30, 2008, compared to 14.05% at December 31, 2007. Regions’ ratio of tangible stockholders’ equity to tangible assets was 5.67% at June 30, 2008, compared to 5.88% at December 31, 2007.

At June 30, 2008, Regions had 23.1 million common shares available for repurchase through open market transactions under an existing share repurchase authorization. There were no treasury stock purchases during the first six months of 2008. The Company, like many other financial institutions, is in a capital conservation mode and does not expect to repurchase shares in the near term.

The Board of Directors declared a $0.38 cash dividend for the second quarter of 2008, compared to a $0.36 cash dividend declared for the first quarter of 2007. On July 17, 2008, the Board of Directors declared a $0.10 per common share cash dividend payable October 1, 2008 for the third quarter of 2008. Given the current operating environment and its potential pressure on earnings, the quarterly cash dividend was reduced to strengthen Regions’ capital position.

REGULATORY CAPITAL REQUIREMENTS

Regions and Regions Bank are required to comply with capital adequacy standards established by banking regulatory agencies. Currently, there are two basic measures of capital adequacy: a risk-based measure and a leverage measure.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and interest rate risk, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with specified risk-weighting factors. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Banking organizations that are considered to have excessive interest rate risk exposure are required to maintain higher levels of capital.

The minimum standard for the ratio of total capital to risk-weighted assets is 8%. At least 50% of that capital level must consist of common equity, undivided profits and non-cumulative perpetual preferred stock, less goodwill and certain other intangibles (“Tier 1 Capital”). The remainder (“Tier 2 Capital”) may consist of a limited amount of other preferred stock, mandatory convertible securities, subordinated debt, and a limited amount of the allowance for loan losses. The sum of Tier 1 Capital and Tier 2 Capital is “total risk-based capital.”

The banking regulatory agencies also have adopted regulations that supplement the risk-based guidelines to include a minimum ratio of 3% of Tier 1 Capital to average assets less goodwill (the “Leverage ratio”). Depending upon the risk profile of the institution and other factors, the regulatory agencies may require a Leverage ratio of 1% to 2% above the minimum 3% level.

 

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The following chart summarizes the applicable bank regulatory capital requirements. Regions’ capital ratios at June 30, 2008, December 31, 2007 and June 30, 2007 substantially exceeded all regulatory requirements.

Table 10—Regulatory Capital Requirements

 

     June 30,
2008 Ratio
    December 31,
2007 Ratio
    June 30,
2007 Ratio
    To Be Well
Capitalized
 

Tier 1 Capital:

        

Regions Financial Corporation

   7.48 %   7.29 %   7.99 %   6.00 %

Regions Bank

   8.59     8.65     9.82     6.00  

Total Capital:

        

Regions Financial Corporation

   11.77 %   11.25 %   11.56 %   10.00 %

Regions Bank

   11.70     11.20     12.20     10.00  

Leverage:

        

Regions Financial Corporation

   6.78 %   6.66 %   7.14 %   5.00 %

Regions Bank

   7.85     7.94     8.83     5.00  

LIQUIDITY

GENERAL

Liquidity is an important factor in the financial condition of Regions and affects Regions’ ability to meet the borrowing needs and deposit withdrawal requirements of its customers. Assets, consisting principally of loans and securities, are funded by customer deposits, purchased funds, borrowed funds and stockholders’ equity.

The securities portfolio is one of Regions’ primary sources of liquidity. Maturities of securities provide a constant flow of funds available for cash needs. Maturities in the loan portfolio also provide a steady flow of funds. Additional funds are provided from payments on consumer loans and one-to-four family residential mortgage loans. Historically, Regions’ high levels of earnings have also contributed to cash flow. In addition, liquidity needs can be met by the borrowing of funds in state and national money markets. Regions’ liquidity also continues to be enhanced by a relatively stable deposit base.

Regions’ financing arrangement with the FHLB adds additional flexibility in managing its liquidity position. The FHLB has been and is expected to continue to be a reliable and economical source of funding.

In May 2007, Regions filed a shelf registration statement. The shelf allows for the issuance of an indeterminate amount of various debt and/or equity securities, and does not have a limit on the amount of securities that can be issued. In particular, Regions has the capacity to issue approximately $1.2 billion of hybrid capital to meet its liquidity needs.

In addition, Regions Bank has the requisite agreements in place with remaining capacity to issue and sell up to $3.2 billion of bank notes to institutional investors through placement agents as of June 30, 2008. The issuance of additional bank notes could provide a significant source of liquidity and funding to meet future needs.

Morgan Keegan maintains certain lines of credit with unaffiliated banks to manage liquidity in the ordinary course of business.

 

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RATINGS

The table below reflects the most recent debt ratings of Regions Financial Corporation and Regions Bank by Standard & Poor’s Corporation, Moody’s Investors Service, Fitch IBCA and Dominion Bond Rating Service:

Table 11—Credit Ratings

 

     Standard
& Poor’s
   Moody’s    Fitch    Dominion

Regions Financial Corporation

           

Senior notes

   A    A2    A+    AH

Subordinated notes

   A-    A3    A    A

Junior subordinated notes

   BBB+    A3    A    A

Regions Bank

           

Short-term certificates of deposit

   A-1    P-1    F1    R-1M

Short-term debt

   A-1    P-1    F1    R-1M

Long-term certificates of deposit

   A+    A1    AA-    AAL

Long-term debt

   A+    A1    A+    AAL

Subordinated debt

   A    A2    A    AH

Table reflects ratings as of June 30, 2008.

A security rating is not a recommendation to buy, sell or hold securities, and the ratings above are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

OPERATING RESULTS

The table below presents computations of earnings and certain other financial measures excluding discontinued operations and merger charges (“non-GAAP”). Merger charges are included in financial results presented in accordance with generally accepted accounting principles (“GAAP”). Regions believes the exclusion of merger charges in expressing earnings and certain other financial measures, including “earnings per share from continuing operations, excluding merger charges” and “return on average tangible equity, excluding discontinued operations and merger charges” provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions’ business, because management does not consider merger charges to be relevant to ongoing operating results. Management and the Board of Directors utilize these non-GAAP financial measures as follows:

 

   

Preparation of Regions’ operating budgets

 

   

Calculation of performance-based annual incentive bonuses for executives

 

   

Calculation of performance-based multi-year incentive bonuses for executives

 

   

Monthly financial performance reporting, including segment reporting

 

   

Monthly close-out “flash” reporting of consolidated results (management only)

 

   

Presentations to investors of Company performance

Regions believes that presenting these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management and the Board of Directors.

 

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Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, Regions has policies in place to address expenses that qualify as merger charges and procedures in place to approve and segregate merger charges from other normal operating expenses to ensure that the Company’s operating results are properly reflected for period-to-period comparisons. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes merger charges does not represent the amount that effectively accrues to stockholders’ equity (i.e., merger charges are a reduction to earnings and stockholders’ equity).

See table below for computations of earnings and certain other GAAP financial measures and the corresponding reconciliation to non-GAAP financial measures, which exclude discontinued operations and merger charges for the periods presented.

Table 12—GAAP to Non-GAAP Reconciliation

 

(Dollars in thousands, except per share data)        Three Months Ended June 30     Six Months Ended June 30  
       2008     2007     2008     2007  

INCOME

          

Income from continuing operations (GAAP)

     $ 206,646     $ 453,732     $ 543,356     $ 927,808  

Loss from discontinued operations, net of tax (GAAP)

       (253 )     (423 )     (295 )     (141,518 )
                                  

Net income (GAAP)

   A   $ 206,393     $ 453,309     $ 543,061     $ 786,290  
                                  

Income from continuing operations (GAAP)

     $ 206,646     $ 453,732     $ 543,356     $ 927,808  

Merger-related charges, pre-tax

          

Salaries and employee benefits

       46,797       23,047       108,886       46,578  

Net occupancy expense

       1,932       4,685       3,331       8,515  

Furniture and equipment expense

       5,129       992       4,985       1,237  

Other

       46,200       31,203       58,454       52,590  
                                  

Total merger-related charges, pre-tax

       100,058       59,927       175,656       108,920  

Merger-related charges, net of tax

       62,035       37,155       108,906       67,531  
                                  

Income excluding discontinued operations and merger charges (non-GAAP)

   B   $ 268,681     $ 490,887     $ 652,262     $ 995,339  
                                  

Weighted-average diluted shares

   C     696,346       715,564       695,947       724,997  

Earnings per share—diluted (GAAP)

   A/C   $ 0.30     $ 0.63     $ 0.78     $ 1.08  
                                  

Earnings per share, excluding discontinued operations and merger charges—diluted (non-GAAP)

   B/C   $ 0.39     $ 0.69     $ 0.94     $ 1.37  
                                  

RETURN ON AVERAGE TANGIBLE EQUITY

          

Average equity (GAAP)

   D   $ 19,782,168     $ 20,040,276     $ 19,813,041     $ 20,245,364  

Average intangible assets (GAAP)

     $ 12,221,261     $ 12,097,753     $ 12,238,061     $ 12,131,221  
                                  

Average tangible equity

   E   $ 7,560,907     $ 7,942,523     $ 7,574,980     $ 8,114,143  
                                  

Average equity, excluding discontinued operations

   F   $ 19,782,168     $ 20,040,276     $ 19,813,041     $ 20,199,079  

Average intangible assets, excluding discontinued operations

       12,221,261       12,097,753       12,238,061       12,131,221  
                                  

Average tangible equity, excluding discontinued operations

   G   $ 7,560,907     $ 7,942,523     $ 7,574,980     $ 8,067,858  
                                  

Return on average tangible equity*

   A/E     10.98 %     22.89 %     14.42 %     19.54 %
                                  

Return on average tangible equity, excluding discontinued operations and merger charges (non-GAAP)*

   B/G     14.29 %     24.79 %     17.32 %     24.88 %
                                  

 

*

Income statement amounts have been annualized in calculation.

 

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Annualized return on average stockholders’ equity for the second quarter of 2008 was 4.20% compared to 9.07% for the same period in 2007. Annualized return on average stockholders’ equity for the first six months of 2008 was 5.51% compared to 7.83% for the same period in 2007. Annualized return on average assets for the three months ended June 30, 2008 and 2007 was 0.58% and 1.32%, respectively. Annualized return on average assets for the first six months of 2008 and 2007 was 0.77% and 1.13%, respectively.

NET INTEREST INCOME

The following table presents an analysis of net interest income/margin for the three months ended June 30 and includes discontinued operations:

Table 13—Consolidated Average Daily Balances and Yield/Rate Analysis Including Discontinued Operations

 

    Three Months Ended June 30  
    2008     2007  
(Dollars in thousands; yields on taxable-equivalent basis)   Average
Balance
    Income/
Expense
  Yield/
Rate
    Average
Balance
    Income/
Expense
  Yield/
Rate
 

Assets

           

Interest-earning assets:

           

Interest-bearing deposits in other banks

  $ 50,509     $ 168   1.34 %   $ 39,767     $ 649   6.55 %

Federal funds sold and securities purchased under agreements to resell

    949,682       10,202   4.32       1,124,636       17,162   6.12  

Trading account assets

    1,333,590       13,551   4.09       1,555,939       15,963   4.12  

Securities:

           

Taxable

    16,977,622       208,134   4.93       17,245,705       218,123   5.07  

Tax-exempt

    719,535       15,223   8.51       737,522       16,430   8.94  

Loans held for sale

    650,096       9,598   5.94       1,323,479       21,363   6.47  

Margin receivables

    585,736       5,541   3.81       532,037       9,289   7.00  

Loans, net of unearned income(1)(2)

    97,194,350       1,378,059   5.70       94,051,511       1,735,135   7.40  
                                       

Total interest-earning assets

    118,461,120       1,640,476   5.57       116,610,596       2,034,114   7.00  

Allowance for loan losses

    (1,370,777 )         (1,056,832 )    

Cash and due from banks

    2,424,758           2,803,967      

Other non-earning assets

    23,045,528           19,180,861      
                       
  $ 142,560,629         $ 137,538,592      
                       

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Savings accounts

  $ 3,810,211       1,000   0.11     $ 3,861,380       2,884   0.30  

Interest-bearing transaction accounts

    15,396,516       32,057   0.84       15,816,958       84,334   2.14  

Money market accounts

    18,314,710       70,968   1.56       19,739,594       165,360   3.36  

Time deposits

    29,932,613       292,402   3.93       30,499,907       349,053   4.59  

Foreign deposits

    5,635,370       25,724   1.84       6,432,408       75,608   4.71  
                                       

Total interest-bearing deposits

    73,089,420       422,151   2.32       76,350,247       677,239   3.56  

Federal funds purchased and securities sold under agreements to repurchase

    7,683,304       39,353   2.06       7,461,579       90,460   4.86  

Other short-term borrowings

    7,097,347       45,941   2.60       2,251,296       26,177   4.66  

Long-term borrowings

    12,925,634       143,509   4.47       9,014,112       128,269   5.71  
                                       

Total interest-bearing liabilities

    100,795,705       650,954   2.60       95,077,234       922,145   3.89  
                   

Net interest spread

      2.97         3.11  
                   

Non-interest-bearing deposits

    17,814,075           19,233,146      

Other liabilities

    4,168,681           3,187,936      

Stockholders’ equity

    19,782,168           20,040,276      
                       
  $ 142,560,629         $ 137,538,592      
                       

Net interest income/margin on a taxable-equivalent basis(3)

    $ 989,522   3.36 %     $ 1,111,969   3.82 %
                           

 

43


Table of Contents

 

Notes:

 

(1)

Loans, net of unearned income include non-accrual loans for all periods presented.

(2)

Interest income includes net loan fees of $8,831,000 and $19,980,000 for the quarters ended June 30, 2008 and 2007, respectively.

(3)

The computation of taxable-equivalent net interest income is based on the stautory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.

The following table presents an analysis of net interest income/margin for the six months ended June 30 and includes discontinued operations:

Table 14—Consolidated Average Daily Balances and Yield/Rate Analysis Including Discontinued Operations

 

    Six Months Ended June 30  
    2008     2007  
(Dollars in thousands; yields on taxable-equivalent basis)   Average
Balance
    Income/
Expense
  Yield/
Rate
    Average
Balance
    Income/
Expense
  Yield/
Rate
 

Assets