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
(Registrants 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 issuers classes of common stock was 694,800,000 shares of common stock, par value $.01, outstanding as of July 31, 2008.
REGIONS FINANCIAL CORPORATION
FORM 10-Q
Page | ||||||
Item 1. | ||||||
Consolidated Balance SheetsJune 30, 2008, December 31, 2007 and June 30, 2007 |
4 | |||||
Consolidated Statements of IncomeThree and six months ended June 30, 2008 and 2007 |
5 | |||||
Consolidated Statements of Changes in Stockholders EquitySix months ended June 30, 2008 and 2007 |
6 | |||||
Consolidated Statements of Cash FlowsSix months ended June 30, 2008 and 2007 |
7 | |||||
8 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
28 | ||||
Item 3. | 55 | |||||
Item 4. | 55 | |||||
Item 1. | 56 | |||||
Item 2. | 56 | |||||
Item 4. | 57 | |||||
Item 6. | 57 | |||||
58 |
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 managements 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.
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
(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 stock735,783,594; 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 cost41,054,113; 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.
4
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.
5
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.
6
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.
7
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and Six Months Ended June 30, 2008 and 2007
NOTE 1Basis 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.
8
NOTE 2Earnings 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 sharebasic 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 sharebasic 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 sharediluted |
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 3Comprehensive 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.
9
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 | |||||
10
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 | |||||
11
NOTE 4Pension 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 5Share-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 AmSouths 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 Companys
12
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 6Business 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 Companys primary segment is General Banking/Treasury, which represents the Companys 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 Companys Treasury function, including the Companys 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
13
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 |
14
(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 |
15
(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 7Goodwill
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 8Fair 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), |
16
| 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 Companys 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.
17
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 9Commitments 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 managements 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 creditTo 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 creditStandby 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 creditCommercial 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 10Visa 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, Guarantors 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.
23
A portion of Visas 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 USAs 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 Companys proportionate economic interest in the escrow account to settle the litigation liability.
NOTE 11Discontinued 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 12Recent 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 plans overfunded status or a liability for a plans underfunded status, (2) measure a plans assets and its obligations that determine its funded status as of the end of the employers 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 entitys 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 entitys 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 Staffs 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 entitys 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 13Subsequent 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. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporations (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 1Loan 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 estatemortgage |
40,251,729 | 39,343,128 | 33,646,480 | ||||||
Real estateconstruction |
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 managements 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 estateconstruction loan category, while a smaller portion is reported as real estatemortgage 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 Companys 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 2Residential 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 | |||
Residentialspec |
1,752,055 | 1,874,700 | 1,893,567 | ||||||
Residentialpresold |
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 managements 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. Managements 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 Floridaand 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 years 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 Companys 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) managements 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, managements 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 3Allowance 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 estatemortgage |
68,670 | 26,655 | ||||||
Real estateconstruction |
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 estatemortgage |
4,822 | 4,115 | ||||||
Real estateconstruction |
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 estatemortgage |
63,848 | 22,540 | ||||||
Real estateconstruction |
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 4Non-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 estatemortgage |
539,383 | 334,888 | 128,696 | |||||||||
Real estateconstruction |
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 estatemortgage |
226,291 | 167,314 | 87,252 | |||||||||
Real estateconstruction |
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 5Securities
(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 6Mortgage 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 7Deposits
(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 8Short-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 Reserves Term Auction Facility and the issuance of senior bank notes.
37
LONG-TERM BORROWINGS
Long-term borrowings are summarized as follows:
Table 9Long-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.
38
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.
39
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 10Regulatory 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.
40
RATINGS
The table below reflects the most recent debt ratings of Regions Financial Corporation and Regions Bank by Standard & Poors Corporation, Moodys Investors Service, Fitch IBCA and Dominion Bond Rating Service:
Table 11Credit Ratings
Standard & Poors |
Moodys | 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.
41
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 Companys 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 12GAAP 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 sharediluted (GAAP) |
A/C | $ | 0.30 | $ | 0.63 | $ | 0.78 | $ | 1.08 | |||||||||
Earnings per share, excluding discontinued operations and merger chargesdiluted (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. |
42
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 13Consolidated 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
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 14Consolidated 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 |