Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended September 30, 2008

or

 

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

For the transition period from              to             

Commission File Number: 000-50831

 

 

Regions Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   63-0589368

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

1900 Fifth Avenue North

Birmingham, Alabama

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

(205) 944-1300

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

 

 

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

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

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

The number of shares outstanding of each of the issuer’s classes of common stock was 691,956,000 shares of common stock, par value $.01, outstanding as of September 30, 2008.

 

 

 


Table of Contents

REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

             Page

Part I. Financial Information

  
 

Item 1.

 

Financial Statements (Unaudited)

  
   

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

   5
   

Consolidated Statements of Income—Three and nine months ended September 30, 2008 and 2007

   6
   

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

   7
   

Consolidated Statements of Cash Flows—Nine months ended September 30, 2008 and 2007

   8
   

Notes to Consolidated Financial Statements

   9
 

Item 2.

 

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

   29
 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   58
 

Item 4.

 

Controls and Procedures

   58

Part II. Other Information

  
 

Item 1.

 

Legal Proceedings

   59
 

Item 1A.

 

Risk Factors

   59
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   60
 

Item 6.

 

Exhibits

   61

Signatures

   62


Table of Contents

Forward-Looking Statements

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

 

   

Congress recently enacted the Emergency Economic Stabilization Act of 2008, and the U.S. Treasury and banking regulators are implementing a number of programs to address capital and liquidity issues in the banking system, all of which may have significant effects on Regions and the financial services industry, the exact nature and extent of which cannot be determined at this time.

 

   

Possible other 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.

 

   

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

 

   

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 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 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 keep pace with technological changes.

 

   

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

 

   

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.


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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.


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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

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

Cash and due from banks

   $ 2,985,950     $ 3,720,365     $ 2,902,340  

Interest-bearing deposits in other banks

     29,638       31,706       29,895  

Federal funds sold and securities purchased under agreements to resell

     698,142       1,177,170       706,378  

Trading account assets

     1,111,818       907,300       1,355,007  

Securities available for sale

     17,632,912       17,318,074       16,957,077  

Securities held to maturity

     50,494       50,935       49,559  

Loans held for sale (includes $495,206 measured at fair value at September 30, 2008)

     1,053,977       720,924       792,142  

Margin receivables

     587,178       504,614       525,953  

Loans, net of unearned income

     98,711,810       95,378,847       94,373,632  

Allowance for loan losses

     (1,472,141 )     (1,321,244 )     (1,070,716 )
                        

Net loans

     97,239,669       94,057,603       93,302,916  

Premises and equipment, net

     2,730,301       2,610,851       2,473,339  

Interest receivable

     512,196       615,711       664,974  

Goodwill

     11,529,091       11,491,673       11,453,078  

Mortgage servicing rights

     263,138       321,308       377,201  

Other identifiable intangible assets

     660,998       759,832       804,328  

Other assets

     7,206,993       6,753,651       5,841,002  
                        

Total assets

   $ 144,292,495     $ 141,041,717     $ 138,235,189  
                        
Liabilities and Stockholders’ Equity       

Deposits:

      

Non-interest-bearing

   $ 18,044,840     $ 18,417,266     $ 18,834,856  

Interest-bearing

     71,175,708       76,357,702       74,605,074  
                        

Total deposits

     89,220,548       94,774,968       93,439,930  

Borrowed funds:

      

Short-term borrowings:

      

Federal funds purchased and securities sold under agreements to repurchase

     10,427,005       8,820,235       8,063,739  

Other short-term borrowings

     7,114,553       2,299,887       1,727,346  
                        

Total short-term borrowings

     17,541,558       11,120,122       9,791,085  

Long-term borrowings

     14,168,524       11,324,790       10,817,491  
                        

Total borrowed funds

     31,710,082       22,444,912       20,608,576  

Other liabilities

     3,656,586       3,998,808       4,340,334  
                        

Total liabilities

     124,587,216       121,218,688       118,388,840  

Stockholders’ equity:

      

Common stock, par value $.01 per share:

      

Authorized 1,500,000,000 shares

      

Issued including treasury stock—735,769,666; 734,689,800 and 734,615,634 shares, respectively

     7,358       7,347       7,346  

Additional paid-in capital

     16,606,677       16,544,651       16,527,540  

Retained earnings

     4,445,375       4,439,505       4,632,033  

Treasury stock, at cost—43,813,524; 41,054,113 and 37,283,713 shares, respectively

     (1,423,620 )     (1,370,761 )     (1,270,922 )

Accumulated other comprehensive income (loss), net

     69,489       202,287       (49,648 )
                        

Total stockholders’ equity

     19,705,279       19,823,029       19,846,349  
                        

Total liabilities and stockholders’ equity

   $ 144,292,495     $ 141,041,717     $ 138,235,189  
                        

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(In thousands, except per share data)    2008     2007     2008     2007  

Interest income on:

        

Loans, including fees

   $ 1,318,463     $ 1,742,172     $ 4,222,051     $ 5,249,854  

Securities:

        

Taxable

     207,903       210,932       616,154       653,374  

Tax-exempt

     10,974       10,020       30,647       31,899  
                                

Total securities

     218,877       220,952       646,801       685,273  

Loans held for sale

     8,514       12,302       27,110       82,007  

Federal funds sold and securities purchased under agreements to resell

     7,746       18,154       31,481       51,689  

Trading account assets

     9,868       10,271       36,383       41,676  

Margin receivables

     4,776       8,754       17,100       27,653  

Time deposits in other banks

     151       515       935       2,343  
                                

Total interest income

     1,568,395       2,013,120       4,981,861       6,140,495  

Interest expense on:

        

Deposits

     391,271       673,585       1,316,612       2,038,283  

Short-term borrowings

     101,635       115,092       299,937       352,390  

Long-term borrowings

     153,894       144,662       446,529       395,668  
                                

Total interest expense

     646,800       933,339       2,063,078       2,786,341  
                                

Net interest income

     921,595       1,079,781       2,918,783       3,354,154  

Provision for loan losses

     417,000       90,000       907,000       197,000  
                                

Net interest income after provision for loan losses

     504,595       989,781       2,011,783       3,157,154  

Non-interest income:

        

Service charges on deposit accounts

     294,038       288,296       859,833       870,031  

Brokerage, investment banking and capital markets

     240,839       227,613       785,072       640,799  

Trust department income

     66,473       62,449       181,948       190,521  

Mortgage income

     33,030       29,806       103,576       107,657  

Securities gains (losses), net

     43       23,994       91,658       (8,508 )

Other

     84,841       96,986       348,700       322,357  
                                

Total non-interest income

     719,264       729,144       2,370,787       2,122,857  

Non-interest expense:

        

Salaries and employee benefits

     551,871       581,425       1,794,202       1,793,010  

Net occupancy expense

     110,595       120,753       328,717       307,459  

Furniture and equipment expense

     85,375       74,127       249,733       220,984  

Impairment (recapture) of mortgage servicing rights

     11,000       20,000       (14,000 )     (17,000 )

Other

     368,790       349,089       1,159,612       1,007,642  
                                

Total non-interest expense

     1,127,631       1,145,394       3,518,264       3,312,095  
                                

Income from continuing operations before income taxes

     96,228       573,531       864,306       1,967,916  

Income taxes

     5,870       179,291       230,592       645,868  
                                

Income from continuing operations

     90,358       394,240       633,714       1,322,048  
                                

Discontinued operations (Note 11):

        

Loss from discontinued operations before income taxes

     (17,501 )     (122 )     (17,974 )     (216,622 )

Income tax benefit

     (6,604 )     (46 )     (6,782 )     (75,028 )
                                

Loss from discontinued operations, net of tax

     (10,897 )     (76 )     (11,192 )     (141,594 )
                                

Net income

   $ 79,461     $ 394,164     $ 622,522     $ 1,180,454  
                                

Weighted-average number of shares outstanding:

        

Basic

     695,950       700,589       695,676       712,181  

Diluted

     696,205       704,485       696,034       718,084  

Earnings per share from continuing operations(1):

        

Basic

   $ 0.13     $ 0.56     $ 0.91     $ 1.86  

Diluted

     0.13       0.56       0.91       1.84  

Earnings per share from discontinued operations(1):

        

Basic

     (0.02 )     —         (0.02 )     (0.20 )

Diluted

     (0.02 )     —         (0.02 )     (0.20 )

Earnings per share(1):

        

Basic

     0.11       0.56       0.89       1.66  

Diluted

     0.11       0.56       0.89       1.64  

Cash dividends declared per share

     0.10       0.36       0.86       1.08  

 

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

See notes to consolidated financial statements.

 

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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

  —         —       —         1,180,454       —         —         1,180,454  

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

  —         —       —         —         —         41,375       41,375  

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

  —         —       —         —         —         36,980       36,980  

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

  —         —       —         —         —         3,269       3,269  
                   

Comprehensive income

                1,262,078  

Cash dividends declared—$1.08 per share

  —         —       —         (772,263 )     —         —         (772,263 )

Purchase of treasury stock

  (37,084 )     —       —         —         (1,263,374 )     —         (1,263,374 )

Common stock transactions:

             

Stock transactions with employees under compensation plans, net

  795       8     (12,298 )     —         —         —         (12,290 )

Stock options exercised, net

  3,545       35     146,382       —         —         —         146,417  

Amortization of unearned restricted stock

  —         —       53,730       —         —         —         53,730  
                                                   

BALANCE AT SEPTEMBER 30, 2007

  697,332     $ 7,346   $ 16,527,540     $ 4,632,033     $ (1,270,922 )   $ (49,648 )   $ 19,846,349  
                                                   

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

  —         —       —         622,522       —         —         622,522  

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

  —         —       —         —         —         (115,972 )     (115,972 )

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

  —         —       —         —         —         (18,003 )     (18,003 )

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

  —         —       —         —         —         1,177       1,177  
                   

Comprehensive income

                489,724  

Cash dividends declared—$0.86 per share

  —         —       —         (599,406 )     —         —         (599,406 )

Common stock transactions:

             

Stock transactions with employees under compensation plans, net

  (1,806 )     10     (2,159 )     —         (52,859 )     —         (55,008 )

Stock options exercised, net

  126       1     24,580       —         —         —         24,581  

Amortization of unearned restricted stock

  —         —       39,605       —         —         —         39,605  
                                                   

BALANCE AT SEPTEMBER 30, 2008

  691,956     $ 7,358   $ 16,606,677     $ 4,445,375     $ (1,423,620 )   $ 69,489     $ 19,705,279  
                                                   

 

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

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended
September 30
 
(In thousands)    2008     2007  

Operating activities:

    

Net income

   $ 622,522     $ 1,180,454  

Adjustments to reconcile net cash provided by operating activities:

    

Provision for loan losses

     907,000       197,000  

Depreciation and amortization of premises and equipment

     213,417       193,705  

Recapture of impairment of mortgage servicing rights

     (14,000 )     (17,000 )

Provision for losses on other real estate, net

     62,341       2,549  

Net accretion of securities

     (11,778 )     (19,792 )

Net amortization of loans and other assets

     103,920       187,619  

Net accretion of deposits and borrowings

     (11,666 )     (44,136 )

Net securities (gains) losses

     (91,658 )     8,508  

Net loss (gain) on sale of premises and equipment

     1,505       (1,284 )

Loss on early extinguishment of debt

     65,405       —    

Deferred income tax benefit

     (121,497 )     (187,207 )

Excess tax benefits from share-based payments

     (37 )     (4,043 )

Originations and purchases of loans held for sale

     (4,434,875 )     (6,368,110 )

Proceeds from sales of loans held for sale

     4,703,790       9,506,771  

(Gain) loss on sale of loans, net

     (41,737 )     119,626  

Loss from sale of mortgage servicing rights

     14,857       —    

(Increase) decrease in trading account assets

     (157,157 )     87,987  

(Increase) decrease in margin receivables

     (82,564 )     44,109  

Decrease (increase) in interest receivable

     103,515       (4,363 )

Increase in other assets

     (552,758 )     (1,618,556 )

(Decrease) increase in other liabilities

     (357,341 )     858,656  

Other

     906       41,438  
                

Net cash provided by operating activities

     922,110       4,163,931  

Investing activities:

    

Proceeds from sale of securities available for sale

     2,022,102       1,372,270  

Proceeds from maturity of:

    

Securities available for sale

     2,331,269       1,850,327  

Securities held to maturity

     5,809       5,695  

Purchases of:

    

Securities available for sale

     (4,691,552 )     (1,471,717 )

Securities held to maturity

     (5,367 )     (6,044 )

Proceeds from sales of loans

     510,566       958,722  

Proceeds from sales of mortgage servicing rights

     43,763       —    

Net increase in loans

     (5,085,753 )     (349,387 )

Net purchase of premises and equipment

     (334,372 )     (278,079 )

Net cash received from disposition of business

     —         5,700  

Net cash received from deposits assumed

     893,934       —    
                

Net cash (used in) provided by investing activities

     (4,309,601 )     2,087,487  

Financing activities:

    

Net decrease in deposits

     (6,442,099 )     (7,760,054 )

Net increase in short-term borrowings

     6,421,436       124,014  

Proceeds from long-term borrowings

     5,805,473       5,168,241  

Payments on long-term borrowings

     (3,038,042 )     (2,977,247 )

Cash dividends

     (599,406 )     (772,263 )

Purchase of treasury stock

     —         (1,263,374 )

Proceeds from exercise of stock options

     24,581       146,417  

Excess tax benefits from share-based payments

     37       4,043  
                

Net cash provided by (used in) financing activities

     2,171,980       (7,330,223 )
                

Decrease in cash and cash equivalents

     (1,215,511 )     (1,078,805 )

Cash and cash equivalents at beginning of year

     4,929,241       4,717,418  
                

Cash and cash equivalents at end of period

   $ 3,713,730     $ 3,638,613  
                

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Nine Months Ended September 30, 2008 and 2007

NOTE 1—Basis of Presentation

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

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

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

 

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NOTE 2—Earnings per Share

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

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(In thousands, except per share amounts)    2008     2007     2008     2007  

Numerator:

        

For earnings per share—basic and diluted

        

Income from continuing operations

   $ 90,358     $ 394,240     $ 633,714     $ 1,322,048  

Loss from discontinued operations, net of tax

     (10,897 )     (76 )     (11,192 )     (141,594 )
                                

Net income

   $ 79,461     $ 394,164     $ 622,522     $ 1,180,454  
                                

Denominator:

        

For earnings per share—basic Weighted-average shares outstanding

     695,950       700,589       695,676       712,181  

Effect of dilutive securities:

        

Common stock equivalents

     255       3,896       358       5,903  
                                

For earnings per share—diluted

     696,205       704,485       696,034       718,084  
                                

Earnings per share from continuing operations(1):

        

Basic

   $ 0.13     $ 0.56     $ 0.91     $ 1.86  

Diluted

     0.13       0.56       0.91       1.84  

Earnings per share from discontinued operations(1):

        

Basic

     (0.02 )     —         (0.02 )     (0.20 )

Diluted

     (0.02 )     —         (0.02 )     (0.20 )

Earnings per share(1):

        

Basic

     0.11       0.56       0.89       1.66  

Diluted

     0.11       0.56       0.89       1.64  

 

(1)

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

The effect from the assumed exercise of 53,308,000 and 21,852,000 stock options for the three months ended and 52,712,000 and 10,962,000 stock options for the nine months ended September 30, 2008 and 2007, respectively, was not included in the above computations of diluted earnings per share because such amounts would have had an antidilutive effect on earnings per share.

NOTE 3—Comprehensive Income

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

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

 

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The disclosure of the reclassification amount is as follows:

 

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

Net income

   $ 78,727     $ 734     $ 79,461

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

     20,620       (6,856 )     13,764

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

     43       (15 )     28
                      

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

     20,577       (6,841 )     13,736

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

     53,038       (20,170 )     32,868

Less: reclassification adjustments for net gains realized in net income

     39,281       (14,942 )     24,339
                      

Net change in unrealized gains and losses on derivative instruments

     13,757       (5,228 )     8,529

Net actuarial gains and losses arising during the period

     679       151       830

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

     709       (248 )     461
                      

Net change from defined benefit plans

     (30 )     399       369
                      

Comprehensive income

   $ 113,031     $ (10,936 )   $ 102,095
                      

 

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

Net income

   $ 573,409     $ (179,245 )   $ 394,164  

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

     214,774       (80,336 )     134,438  

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

     23,994       (8,398 )     15,596  
                        

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

     190,780       (71,938 )     118,842  

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

     104,612       (38,373 )     66,239  

Less: reclassification adjustments for net losses realized in net income

     (1,485 )     519       (966 )
                        

Net change in unrealized gains and losses on derivative instruments

     106,097       (38,892 )     67,205  

Net actuarial gains and losses arising during the period

     3,499       (1,346 )     2,153  

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

     1,796       (629 )     1,167  
                        

Net change from defined benefit plans

     1,703       (717 )     986  
                        

Comprehensive income

   $ 871,989     $ (290,792 )   $ 581,197  
                        

 

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     Nine Months Ended September 30, 2008  
(In thousands)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 846,332     $ (223,810 )   $ 622,522  

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

     (97,213 )     40,819       (56,394 )

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

     91,658       (32,080 )     59,578  
                        

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

     (188,871 )     72,899       (115,972 )

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

     70,814       (26,930 )     43,884  

Less: reclassification adjustments for net gains realized in net income

     99,881       (37,994 )     61,887  
                        

Net change in unrealized gains and losses on derivative instruments

     (29,067 )     11,064       (18,003 )

Net actuarial gains and losses arising during the period

     4,254       (1,694 )     2,560  

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

     2,127       (744 )     1,383  
                        

Net change from defined benefit plans

     2,127       (950 )     1,177  
                        

Comprehensive income

   $ 630,521     $ (140,797 )   $ 489,724  
                        

 

     Nine Months Ended September 30, 2007  
(In thousands)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 1,751,294     $ (570,840 )   $ 1,180,454  

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

     60,495       (24,650 )     35,845  

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

     (8,508 )     2,978       (5,530 )
                        

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

     69,003       (27,628 )     41,375  

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

     60,760       (19,743 )     41,017  

Less: reclassification adjustments for net gains realized in net income

     6,211       (2,174 )     4,037  
                        

Net change in unrealized gains and losses on derivative instruments

     54,549       (17,569 )     36,980  

Net actuarial gains and losses arising during the period

     10,500       (3,729 )     6,771  

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

     5,388       (1,886 )     3,502  
                        

Net change from defined benefit plans

     5,112       (1,843 )     3,269  
                        

Comprehensive income

   $ 1,879,958     $ (617,880 )   $ 1,262,078  
                        

 

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NOTE 4—Pension and Other Postretirement Benefits

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

 

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

Service cost

   $ 10,157     $ 12,207     $ 104     $ 234  

Interest cost

     22,024       24,052       685       766  

Expected return on plan assets

     (29,614 )     (32,851 )     (49 )     (67 )

Amortization of prior service cost (credit)

     864       (67 )     (184 )     (105 )

Amortization of actuarial loss

     28       1,863       —         12  

Curtailment gains

     —         (1,740 )     —         —    
                                
   $ 3,459     $ 3,464     $ 556     $ 840  
                                

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

 

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

Service cost

   $ 30,470     $ 32,791     $ 310     $ 703  

Interest cost

     66,072       64,756       2,054       2,297  

Expected return on plan assets

     (88,841 )     (87,325 )     (145 )     (202 )

Amortization of prior service cost (credit)

     2,592       (200 )     (551 )     (313 )

Amortization of actuarial loss

     85       5,588       —         36  

Settlement charge

     —         2,300       —         —    

Curtailment gains

     (4,383 )     (8,792 )     —         —    
                                
   $ 5,995     $ 9,118     $ 1,668     $ 2,521  
                                

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

NOTE 5—Share-Based Payments

Regions has long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock awards and units, and stock appreciation rights. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors, but no options may be granted after the tenth anniversary of the plans’ adoption. Options and restricted stock usually vest based on employee service, generally within three years from the date of the grant. The contractual life of options granted under these plans ranges from seven to ten years from the date of grant. Upon adoption of a new long-term incentive plan in 2006, Regions amended all other open stock and long-term incentive plans, such that no new awards may be granted under those plans subsequent to the amendment date. The outstanding awards were unaffected by this plan amendment. Additionally, in connection with the AmSouth Bancorporation (“AmSouth”) merger, Regions assumed AmSouth’s long-term incentive plans. The number of remaining share equivalents authorized for future issuance under long-term compensation plans was approximately 16,618,000 share equivalents at September 30, 2008. Refer to Regions’ Annual Report on Form 10-K for the year ended December 31, 2007 for further disclosures related to share-based payments issued by Regions.

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

 

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Table of Contents

stock. The expected option life increased based upon the increase in the contractual life on new grants. The following table summarizes the weighted-average assumptions used and the estimated fair values related to stock options granted during the nine months ended September 30:

 

     September 30  
     2008     2007  

Expected dividend yield

     6.87 %     4.11 %

Expected volatility

     26.40 %     19.70 %

Risk-free interest rate

     2.91 %     4.52 %

Expected option life

     5.8  yrs.     5.0  yrs.

Fair value

   $ 2.47     $ 5.23  

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

 

     For the Nine Months Ended September 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

   9,872,751       21.66    4,916,960       35.08

Exercised

   (90,801 )     17.94    (3,801,825 )     26.91

Forfeited or cancelled

   (4,517,950 )     29.28    (1,190,021 )     30.35
                 

Outstanding at end of period

   53,308,207     $ 28.27    48,730,261     $ 29.72
                 

Exercisable at end of period

   41,375,142     $ 29.33    43,578,027     $ 29.09
                 

The following table details the activity during the first nine months of 2008 and 2007 related to restricted share awards and units:

 

     For the Nine Months Ended September 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

   1,657,573       21.28    1,511,596       35.57

Vested

   (514,516 )     33.41    (1,147,091 )     32.14

Forfeited

   (383,815 )     31.22    (365,804 )     35.03
                 

Non-vested at end of period

   4,410,296     $ 28.37    3,289,290     $ 34.60
                 

NOTE 6—Business Segment Information

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

 

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Table of Contents

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 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 September 30, 2008

         

Net interest income

   $ 957,655    $ 10,510     $ 1,049     $ (47,619 )

Provision for loan losses

     417,000      —         —         —    

Non-interest income

     422,202      271,364       25,417       281  

Non-interest expense

     820,903      232,630       21,580       52,518  

Income taxes (benefit)

     23,404      18,262       2,149       (37,945 )
                               

Net income (loss)

   $ 118,550    $ 30,982     $ 2,737     $ (61,911 )
                               

Average assets

   $ 114,088,628    $ 3,832,030     $ 321,524     $ 24,998,780  
(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
       

Net interest income

   $ 921,595    $ —       $ 921,595    

Provision for loan losses

     417,000      —         417,000    

Non-interest income

     719,264      —         719,264    

Non-interest expense

     1,127,631      17,501       1,145,132    

Income taxes (benefit)

     5,870      (6,604 )     (734 )  
                         

Net income (loss)

   $ 90,358    $ (10,897 )   $ 79,461    
                         

Average assets

   $ 143,240,962    $ —       $ 143,240,962    
(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/
Trust
    Insurance     Other  

Three months ended September 30, 2007

         

Net interest income

   $ 1,118,359    $ 13,598     $ 1,587     $ (53,763 )

Provision for loan losses

     90,000      —         —         —    

Non-interest income

     420,476      283,028       24,214       1,426  

Non-interest expense

     772,407      225,469       20,367       127,151  

Income taxes (benefit)

     219,738      26,000       1,760       (68,207 )
                               

Net income (loss)

   $ 456,690    $ 45,157     $ 3,674     $ (111,281 )
                               

Average assets

   $ 108,192,658    $ 3,625,844     $ 283,842     $ 24,774,085  

 

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(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
    

Net interest income

   $ 1,079,781    $           —       $ 1,079,781   

Provision for loan losses

     90,000      —         90,000   

Non-interest income

     729,144      —         729,144   

Non-interest expense

     1,145,394      122       1,145,516   

Income taxes (benefit)

     179,291      (46 )     179,245   
                        

Net income (loss)

   $ 394,240    $ (76 )   $ 394,164   
                        

Average assets

   $ 136,876,429    $ —       $ 136,876,429   

 

(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/
Trust
    Insurance    Other  

Nine months ended September 30, 2008

          

Net interest income

   $ 3,022,766    $ 39,993     $ 3,066    $ (147,042 )

Provision for loan losses

     907,000      —         —        —    

Non-interest income

     1,399,399      893,301       84,862      (6,775 )

Non-interest expense

     2,405,440      774,304       67,139      271,381  

Income taxes (benefit)

     326,577      58,794       6,796      (161,575 )
                              

Net income (loss)

   $ 783,148    $ 100,196     $ 13,993    $ (263,623 )
                              

Average assets

   $ 113,115,999    $ 3,770,582     $ 320,365    $ 25,354,466  
(In thousands)    Total
Continuing
Operations
   Discontinued
Operations
(EquiFirst)
    Total
Company
      

Net interest income

   $ 2,918,783    $ —       $ 2,918,783   

Provision for loan losses

     907,000      —         907,000   

Non-interest income

     2,370,787      —         2,370,787   

Non-interest expense

     3,518,264      17,974       3,536,238   

Income taxes (benefit)

     230,592      (6,782 )     223,810   
                        

Net income (loss)

   $ 633,714    $ (11,192 )   $ 622,522   
                        

Average assets

   $ 142,561,412    $ —       $ 142,561,412   
(In thousands)    General
Banking/
Treasury
   Investment
Banking/
Brokerage/
Trust
    Insurance    Other  

Nine months ended September 30, 2007

          

Net interest income

   $ 3,453,983    $ 44,420     $ 4,438    $ (148,687 )

Provision for loan losses

     197,000      —         —        —    

Non-interest income

     1,196,193      834,010       78,193      14,461  

Non-interest expense

     2,298,259      656,651       60,867      296,318  

Income taxes (benefit)

     720,934      80,970       7,571      (163,607 )
                              

Net income (loss)

   $ 1,433,983    $ 140,809     $ 14,193    $ (266,937 )
                              

Average assets

   $ 109,543,474    $ 3,718,948     $ 270,321    $ 24,599,649  

 

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

Net interest income

   $ 3,354,154    $ 11,967     $ 3,366,121   

Provision for loan losses

     197,000      182       197,182   

Non-interest income

     2,122,857      (176,681 )     1,946,176   

Non-interest expense

     3,312,095      51,726       3,363,821   

Income taxes (benefit)

     645,868      (75,028 )     570,840   
                        

Net income (loss)

   $ 1,322,048    $ (141,594 )   $ 1,180,454   
                        

Average assets

   $ 138,132,392    $ 641,877     $ 138,774,269   

NOTE 7—Goodwill

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

 

(In millions)    September 30,
2008
   December 31,
2007
   September 30,
2007

General Banking/Treasury

   $ 10,682    $ 10,669    $ 10,632

Investment Banking/Brokerage/Trust

     733      728      726

Insurance

     114      95      95
                    

Total

   $ 11,529    $ 11,492    $ 11,453
                    

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 third 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 (as defined by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”) of the respective reporting units is greater than the carrying value (including goodwill); therefore, goodwill was not impaired as of September 30, 2008. Regions will continue to test goodwill as appropriate.

NOTE 8—Fair Value Measurements

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

 

   

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

 

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

 

   

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

ITEMS MEASURED AT FAIR VALUE ON A RECURRING BASIS

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

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

Mortgage loans held for sale consist of residential mortgage loans held for sale. Mortgage loans held for sale primarily consist of loans that are valued based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing value and market conditions, a Level 2 measurement. Regions has elected to measure mortgage loans held for sale at fair value by applying the fair value option (see additional discussion under “Fair Value Option” below).

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

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

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

 

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

 

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

ASSETS:

           

Trading account assets

   $ 201,063    $ 423,703    $ 487,052    $ 1,111,818

Securities available for sale

     2,685,598      14,853,856      93,458      17,632,912

Mortgage loans held for sale

     —        495,206      —        495,206

Derivative assets(a)

     —        689,337      16,872      706,209

LIABILITIES:

           

Short-term borrowings

   $ 315,853    $ 87,792    $ 240,733    $ 644,378

Derivative liabilities(a)

     —        305,766      —        305,766

 

(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 $85 million and cash collateral posted of $111 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 nine months ended September 30, 2008:

 

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

Beginning balance, July 1, 2008

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

Total gains (losses) realized and unrealized:

        

Included in earnings

     (9,059 )     —         14,151       3,113  

Included in other comprehensive income

     —         (4,218 )     —         —    

Purchases and issuances

     868,207       80       78       3,871,456  

Settlements

     (974,577 )     (7,735 )     (9,650 )     (3,881,090 )

Transfers in and/or out of Level 3, net

     (1,526 )     —         —         —    
                                

Ending balance, September 30, 2008

   $ 487,052     $ 93,458     $ 16,872     $ (240,733 )
                                

 

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(In thousands)   Fair Value Measurements Using
Significant Unobservable Inputs
Nine Months Ended September 30
(Level 3 measurements only)
 
  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

    (9,962 )     —         32,265       1,407  

Included in other comprehensive income

    —         (12,698 )     —         —    

Purchases and issuances

    2,542,166       49,180       204       6,406,851  

Settlements

    (2,208,827 )     (16,027 )     (23,719 )     (6,595,089 )

Transfers in and/or out of Level 3, net

    (2,328 )     —         —         3,554  
                               

Ending balance, September 30, 2008

  $ 487,052     $ 93,458     $ 16,872     $ (240,733 )
                               

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

 

(In thousands)      Total Gains and Losses
(Level 3 measurements only)
Three Months Ended September 30
     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

       (9,059 )     —         —        3,133

Mortgage income

       —         —         9,216      —  

Other income

       —         —         4,935      —  

Other comprehensive income

       —         (4,218 )     —        —  
                               

Total realized and unrealized gains and (losses)

     $ (9,059 )   $ (4,218 )   $ 14,151    $ 3,133
                               

 

(In thousands)

   Total Gains and Losses
(Level 3 measurements only)
Nine Months Ended September 30
   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

     (10,920 )     —         —        1,407

Mortgage income

     —         —         26,814      —  

Other income

     —         —         5,451      —  

Other comprehensive income

     —         (12,698 )     —        —  
                             

Total realized and unrealized gains and (losses)

   $ (9,962 )   $ (12,698 )   $ 32,265    $ 1,407
                             

 

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

 

     Three Months Ended September 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 September 30, 2008:

          

Interest income

   $   —      $ —       $ —      $ —    

Brokerage and investment banking

     33      —         —        (1,887 )

Mortgage income

     —        —         9,216      —    

Other income

     —        —         4,935      —    

Other comprehensive income

     —        (4,218 )     —        —    
                              

Total unrealized gains and (losses)

   $ 33    $ (4,218 )   $ 14,151    $ (1,887 )
                              

 

     Nine Months Ended September 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 September 30, 2008:

         

Interest income

   $ 222     $ —       $ —      $ —    

Brokerage and investment banking

     (56 )     —         —        (1,086 )

Mortgage income

     —         —         26,814      —    

Other income

     —         —         5,382      —    

Other comprehensive income

     —         (12,698 )     —        —    
                               

Total unrealized gains and (losses)

   $ 166     $ (12,698 )   $ 32,196    $ (1,086 )
                               

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 held for sale for which the fair value option 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 based on observable transactions of similar instruments 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, where available, are obtained from brokers and adjusted for Company-specific observations. These assumptions primarily include discount rates and expected prepayments.

 

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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 September 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 September 30, 2008    Fair value
gains (losses)
for the three
months ended

September 30, 2008
    Fair value
gains (losses)
for the nine
months ended
September 30, 2008
 
(Dollars in thousands)    Total    Level 1    Level 2    Level 3     

Loans Held for Sale(1)

   128,771    —      128,771    —      (135,401 )   (136,159 )

Mortgage Servicing Rights

   263,138    —      —      263,138    (11,000 )   14,000  

 

(1)

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”) and Statement of Position 01-6 “Accounting by Certain Entities (Including with Trade Receivables) that Lend to or Finance the Activity of Others” (“SOP 01-6”).

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 13 “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 September 30, 2008, loans held for sale for which the fair value option was elected had an aggregate fair value of $495.2 million and an aggregate outstanding principal balance of $487.9 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 $7.7 million and $7.3 million were recorded

 

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in mortgage income during the third quarter and first nine 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 nine months of 2008 related to the adoption of FAS 159. The net impact of ceasing deferrals of origination fees and costs during the first nine months of 2008 related to the adoption of FAS 159 was not material.

NOTE 9—Commitments and Contingencies

COMMERCIAL COMMITMENTS

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

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

 

(In millions)    2008    2007

Unused commitments to extend credit

   $ 39,203    $ 41,401

Standby letters of credit

     8,048      6,890

Commercial letters of credit

     27      60

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

Standby letters of credit—Standby letters of credit are also issued to customers, which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expired without being funded. The current lack of liquidity in the broader market and the current credit environment has resulted in increased fundings of standby letters of credit.

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

 

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LEGAL

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

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

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

NOTE 10—Visa Indemnification and Initial Public Offering

As a member of the Visa USA network, Regions, along with other members, indemnified Visa USA against certain litigation. On October 3, 2007, Visa USA was restructured and acquired several Visa affiliates, and the restructured entity resulted in the formation of Visa, Inc. (“Visa”). In conjunction with this restructuring, Regions’ indemnification of Visa was modified to cover five specific cases (“covered litigation”). Certain of the covered litigation has been settled or accrued for by Visa and, accordingly, Regions has recorded its pro-rata share. Additionally, this modification caused Regions’ indemnification to be included within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, requiring a liability to be recognized at fair value for Regions’ share of the indemnification for the covered litigation that has not been settled or accrued by Visa. As of September 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 September 30, 2008, Regions’ remaining investment totaled approximately 2.3 million shares with a cost basis of zero. The Class B common stock is subject to a restriction period of the lesser of three years from the date of the IPO or settlement of all covered litigation. The number of shares of Class B common stock may also be adjusted by Visa, depending on the outcome of the covered litigation.

 

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

NOTE 11—Discontinued Operations

On March 30, 2007, Regions sold EquiFirst Corporation (“EquiFirst”), a wholly-owned non-conforming mortgage origination subsidiary, for approximately $76 million and recorded an after-tax gain of approximately $1 million. Consequently, the business related to EquiFirst has been accounted for as discontinued operations and the results are presented separately on the consolidated statements of income following the results from continuing operations. In the third quarter of 2008, an adjustment was recorded based on the anticipated final sales price. Resolution of the sales price was completed in October 2008, and was not materially different from the estimated final sales price.

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 September 30, 2008 and 2007 are as follows:

 

     Three Months Ended
September 30
 
(In thousands)    2008     2007  

Total non-interest expense

   $ 17,501       122  
                

Loss from discontinued operations before income taxes

     (17,501 )     (122 )

Income tax benefit

     (6,604 )     (46 )
                

Loss from discontinued operations, net of tax

   $ (10,897 )   $ (76 )
                

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

 

     Nine Months Ended
September 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

     17,974       51,726  
                

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

     (17,974 )     (228,599 )

Gain on sale of discontinued operations before income taxes

     —         11,977  
                

Loss from discontinued operations before income taxes

     (17,974 )     (216,622 )

Income tax benefit

     (6,782 )     (75,028 )
                

Loss from discontinued operations, net of tax

   $ (11,192 )   $ (141,594 )
                

 

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NOTE 12—Recent Accounting Pronouncements

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

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

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

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

 

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

In April 2007, the FASB issued FASB Staff Position 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 September 30, 2008, December 31, 2007 and September 30, 2007, Regions posted collateral of $110.9 million, $18.4 million and $51 thousand, respectively, and received collateral of $84.8 million, $114.4 million and $40.7 million, respectively.

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

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

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

 

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

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

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

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application FAS 157 in a market that is not active. The FSP is intended to address the following application issues: (a) how the reporting entity’s own assumptions (that is, expected cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair value when relevant observable inputs do not exist; (b) how available observable inputs in a market that is not active should be considered when measuring fair value; and (c) how the use of market quotes (for example, broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable inputs available to measure fair value. FSP 157-3 is effective on issuance, including prior periods for which financial statements have not been issued. Regions adopted FSP 157-3 for the quarter ended September 30, 2008 and the effect of adoption on the consolidated financial statements was not material.

NOTE 13—Subsequent Events

During October 2008, Regions received preliminary approval from the U.S. Treasury Department, subject to standard closing conditions, for the investment of $3.5 billion in Regions preferred stock. The investment is part of the U. S. Treasury’s Capital Purchase Program, designed to restore confidence in our nation’s financial system, increase the flow of credit to consumers and businesses, and provide additional assistance to distressed homeowners facing foreclosure. Regions will pay the government a 5% dividend, or $175 million annually, for each of the first five years of the investment, and 9% thereafter unless Regions redeems the shares. The government also will receive 10-year warrants for common stock.

 

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Item 2.

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

INTRODUCTION

The following discussion and analysis is part of Regions Financial Corporation’s (“Regions” or the “Company”) Quarterly Report on Form 10-Q to the Securities and Exchange Commission (“SEC”) and updates Regions’ Form 10-K for the year ended December 31, 2007, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions’ financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three and nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2007 for the statement of income. For the balance sheet, the emphasis of this discussion will be the balances as of September 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 pages 3 and 4 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 September 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 360 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 25 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.

THIRD QUARTER HIGHLIGHTS

Regions reported income from continuing operations of $90.4 million, or $0.13 per diluted share in the third quarter of 2008, which included $15.2 million in after-tax merger-related expenses (or 2 cents per diluted share). Excluding the impact of merger-related expenses, earnings per diluted share from continuing operations were $0.15, compared to third quarter 2007 per diluted share earnings of $0.64 on the same basis. See Table 12 for a reconciliation of GAAP to non-GAAP financial measures. High credit costs, primarily the result of ongoing deterioration in real estate values, continued to negatively impact pre-tax earnings. During the third quarter, Regions recorded a $417.0 million provision for loan losses, $108.0 million higher than second quarter’s level and $327.0 million higher than the same period in 2007. Additionally, several other significant items, which are discussed later in this section, affected net income for the third quarter of 2008.

Net interest income from continuing operations, on a fully taxable-equivalent basis, for the third quarter of 2008 was $0.931 billion, compared to $1.087 billion in the third quarter of 2007. The taxable-equivalent net interest margin (annualized) for the third quarter of 2008 was 3.10%, compared to 3.74% in the third quarter of 2007. A $43 million charge related to a leveraged lease tax settlement during the third quarter of 2008 accounted for 14 basis points of the reduction. A related $19 million tax benefit is reflected in income tax expense. The remaining change in the net interest margin is attributable to several conditions, including the continued pressure of a negative shift in the deposit mix. In particular, Regions’ net interest margin has been recently affected by deposit disintermediation and pricing pressure, as an industry-wide flight to quality to assets such as Treasury securities weighed on bank deposits. Additionally, the impact of recent yield curve movements (including Federal Reserve interest rate reductions during 2008) and higher non-performing asset levels negatively impacted the net interest margin. 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.

Net charge-offs totaled $416.4 million, or an annualized 1.68% of average loans, in the third quarter of 2008, compared to 0.27% for the third quarter of 2007. The increase was 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. Losses were also impacted by the disposition of non-performing loans. During the third quarter of 2008, approximately $327 million in non-accrual loans were either sold or designated as held for sale, with associated charge-offs of approximately $163 million. The provision for loan losses from continuing operations totaled $417.0 million in the third quarter of 2008 compared to $309.0 million in the second quarter of 2008 and $90.0 million during the third quarter of 2007. The allowance for credit losses at September 30, 2008, was 1.57% of total loans, net of unearned income, compared to 1.56% at June 30, 2008 and 1.45% at December 31, 2007. Total non-performing assets at September 30, 2008, were $1,770.7 million, compared to $864.1 million at December 31, 2007. Residential homebuilder and condominium loans were the primary drivers of the increase since December 31, 2007. Included in non-performing assets was $128.8 million of loans held for sale at September 30, 2008.

Non-interest income for the third quarter of 2008 from continuing operations, excluding the impact of securities gains, increased slightly compared to the third quarter of 2007. This increase was attributable to contributions from brokerage, investment banking and capital markets income, trust income, mortgage income and insurance income, offset by decreases in other income.

Total non-interest expense from continuing operations was $1.128 billion and $1.145 billion in the third quarter of 2008 and 2007, respectively. The decrease in non-interest expense was primarily attributable to lower merger charges. Pre-tax merger charges of $24.5 million were incurred in the third quarter of 2008 compared to $91.8 million in the third quarter of 2007 (see Table 12 “GAAP to Non-GAAP Reconciliation”). Additional non-interest expense declines were due to personnel-related efficiencies and reduced incentive expense during

 

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2008. Offsetting the decrease was higher occupancy and furniture and equipment expense related to additional branches and higher professional fees and other real estate owned (“OREO”) expenses.

TOTAL ASSETS

Regions’ total assets at September 30, 2008, were $144.3 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 September 30, 2008, loans represented 82% of Regions’ interest-earning assets. The following table presents the distribution by loan type of Regions’ loan portfolio, net of unearned income:

Table 1—Loan Portfolio

 

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

Commercial

   $ 23,511,223    $ 20,906,617    $ 23,565,882

Real estate—mortgage

     40,477,318      39,343,128      35,337,366

Real estate—construction

     13,053,627      14,025,491      14,237,083

Home equity

     15,848,994      14,962,007      14,835,319

Indirect

     4,211,078      3,938,113      4,015,142

Other consumer

     1,609,570      2,203,491      2,382,840
                    
   $ 98,711,810    $ 95,378,847    $ 94,373,632
                    

Loans, net of unearned income, totaled $98.7 billion at September 30, 2008, an increase of $3.3 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 and other consumer. Commercial loan growth was driven by healthcare and asset-based lending, while the growth in home equity was generally a result of slower paydowns coupled with increased line usage.

Regions has approximately $82 million in book value of “sub-prime” loans retained from the disposition of EquiFirst, down slightly from the year-end 2007 balance of $100 million. The credit loss exposure related to these loans is addressed in management’s periodic determination of the allowance for credit losses.

As of September 30, 2008, Regions had funded $602 million in letters of credit backing Variable-Rate Demand Notes (“VRDN”). These loans are included in the commercial category in the table above. As of October 29, 2008, Regions has funded an additional $919 million, net, in letters of credit backing VRDNs. These fundings are largely related to significant redemption requests in money market mutual funds that invested in VRDNs, as a result of the increased volatility in the financial markets. An additional $126 million has been tendered but not yet funded. The remaining unfunded VRDN letters of credit portfolio is approximately $3.9 billion (net of participations).

As of the end of business on October 9, 2008, Regions ceased originating loans through the retail indirect lending channel. Therefore, loans in the indirect category will begin to decline in the fourth quarter of 2008.

RESIDENTIAL HOMEBUILDER PORTFOLIO

During late 2007, the residential homebuilder portfolio came under significant stress. In Table 1 “Loan Portfolio”, the majority of these loans are reported in the real estate—construction loan category, while a smaller portion is reported as real estate—mortgage loans. The residential homebuilder portfolio is geographically

 

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concentrated in Florida and North Georgia; the balances in these areas total approximately $2.1 billion of the $5.2 billion total at September 30, 2008. Regions has realigned its organizational structure to enable some of the Company’s most experienced bankers to concentrate their efforts on management of this portfolio. From June 30, 2008 to September 30, 2008, this portfolio decreased by approximately $556 million primarily due to repayments.

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

Table 2—Residential Homebuilder Portfolio

 

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

Land

   $ 1,838,899    $ 2,065,967    $ 2,093,181    $ 2,925,685

Residential—spec

     1,505,731      1,752,055      1,874,700      1,893,567

Residential—presold

     457,097      545,806      588,163      617,628

Lots

     1,109,921      1,178,815      1,416,909      1,607,794

National homebuilders and other

     290,279      215,610      258,211      160,505
                           
   $ 5,201,927    $ 5,758,253    $ 6,231,164    $ 7,205,179
                           

ALLOWANCE FOR CREDIT LOSSES

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

At September 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 1.57% at September 30, 2008 compared to 1.56% at June 30, 2008 and 1.45% at year-end 2007. Net charge-offs as a percentage of average loans (annualized) were 1.03% and 0.23% in the first nine months of 2008 and 2007, respectively. The increase in the allowance was primarily driven by deterioration in the residential homebuilder, condominium and home equity portfolios, all of which are tied directly to the housing market slowdown. Given continuing pressure on residential property values—especially in Florida and North Georgia—and a generally uncertain economic backdrop, the Company expects credit costs to remain elevated. The reserve for unfunded credit commitments was $74.2 million at September 30, 2008 compared to $58.3 million at December 31, 2007. This increase is due to migration of commitments’ risk ratings from pass to classified status. Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 3 “Allowance for Credit Losses”.

For the third quarter of 2008, net charge-offs on home equity credits were an annualized 1.59% of home equity loans compared to an annualized 0.31% for the third quarter of 2007. However, net charge-offs on home equity credits decreased on a linked-quarter basis from an annualized 1.94% of outstanding loans and lines during the second quarter of 2008. Losses in Florida-based credits remained at elevated levels, as property valuations in certain markets have continued to experience ongoing deterioration. These loans and lines represent approximately $5.6 billion of Regions’ total home equity portfolio at September 30, 2008. Of that balance, approximately $2.0 billion represent first liens; second liens, which total $3.6 billion, are the main source of losses. Florida second lien losses were 4.28% annualized during the third quarter of 2008 as compared to 4.74%

 

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during the second quarter of 2008. Third quarter home equity losses in Florida amounted to an annualized 3.28% of loans and lines versus 0.69% across the remainder of Regions’ footprint. This compares to second quarter 2008 losses of 3.55% and 1.08%, respectively.

The remainder of the increase in net charge-offs during the third quarter of 2008 relates primarily to the residential homebuilder portfolio, which is discussed earlier in this report, and the disposition of non-accrual loans. During the third quarter of 2008, a total of $327 million in non-accrual loans were sold or designated as held for sale with associated charge-offs of approximately $163 million.

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

Various departments, including Credit Review, Commercial and Consumer Credit Risk Management and Special Assets are involved in the credit risk management process to assess the accuracy of risk ratings, the quality of the portfolio and the estimation of inherent credit losses in the loan portfolio. This comprehensive process also assists in the prompt identification of problem credits. The Company has taken a number of measures to aggressively manage the portfolios and mitigate losses, particularly in the more problematic portfolios. Specific to the residential homebuilder portfolio, $2.2 billion of relationships 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 provided detailed property level information to assist in workout strategies. Also, a strong Customer Assistance 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 $1,268.7 million at September 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 $768.8 million, and the allowance allocated to these loans totaled $132.6 million at September 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.

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.

 

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

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

Table 3—Allowance for Credit Losses

 

    Nine months ended
September 30
 
(In thousands)   2008     2007  

Allowance for loan losses at January 1

  $ 1,321,244     $ 1,055,953  

Loans charged-off:

   

Commercial

    144,146       61,875  

Real estate—mortgage

    149,709       36,156  

Real estate—construction

    259,976       15,962  

Equity

    169,917       39,006  

Indirect

    38,170       25,260  

Other consumer

    56,961       59,538  
               
    818,879       237,797  

Recoveries of loans previously charged-off:

   

Commercial

    16,951       23,264  

Real estate—mortgage

    8,216       7,224  

Real estate—construction

    2,126       1,451  

Equity

    12,899       9,845  

Indirect

    11,578       12,474  

Other consumer

    16,016       20,489  
               
    67,786       74,747  

Net charge-offs:

   

Commercial

    127,195       38,611  

Real estate—mortgage

    141,493       28,932  

Real estate—construction

    257,850       14,511  

Equity

    157,018       29,161  

Indirect

    26,592       12,786  

Other consumer

    40,945       39,049  
               
    751,093       163,050  

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

    (5,010 )     (19,369 )

Provision for loan losses from continuing operations

    907,000       197,000  

Provision for loan losses from discontinued operations

    —         182  
               

Allowance for loan losses at September 30

  $ 1,472,141     $ 1,070,716  
               

Reserve for unfunded credit commitments at January 1

  $ 58,254     $ 51,835  

Provision for unfunded credit commitments

    15,968       4,003  
               

Reserve for unfunded credit commitments at September 30

  $ 74,222     $ 55,838  
               

Allowance for credit losses

  $ 1,546,363     $ 1,126,554  
               

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

  $ 98,711,810     $ 94,373,632  

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

  $ 97,086,631     $ 94,233,255  

Ratios:

   

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

    1.49 %     1.13 %

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

    1.57       1.19  

Net charge-offs as percentage of:

   

Average loans, net of unearned income

    1.03       0.23  

Provision for loan losses

    82.81       82.69  

Allowance for credit losses

    48.57       14.47  

 

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NON-PERFORMING ASSETS

Non-performing assets are summarized as follows:

Table 4—Non-Performing Assets

 

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

Non-performing loans:

      

Commercial

   $ 214,809     $ 92,029     $ 98,765  

Real estate—mortgage

     668,677       334,888       142,686  

Real estate—construction

     554,777       310,052       247,679  

Home equity

     2,226       6,611       5,410  

Indirect

     15       9       1  

Other consumer

     119       —         152  
                        

Total non-performing loans

     1,440,623       743,589       494,693  

Foreclosed properties

     201,345       120,465       93,649  
                        

Total non-performing assets* excluding loans held for sale

     1,641,968       864,054       588,342  

Non-performing loans held for sale

     128,771       —         24,066  
                        

Total non-performing assets* including loans held for sale

   $ 1,770,739     $ 864,054     $ 612,408  
                        

Non-performing loans, excluding loans held for sale, to loans, net of unearned income

     1.46 %     0.78 %     0.52 %

Non-performing assets* excluding loans held for sale to loans, net of unearned income, and foreclosed properties

     1.66 %     0.90 %     0.62 %

Non-performing assets* including loans held for sale to loans, net of unearned income, and foreclosed properties

     1.79 %     0.90 %     0.65 %

Accruing loans 90 days past due:

      

Commercial

   $ 10,330     $ 12,055     $ 15,879  

Real estate—mortgage

     255,667       167,314       184,481  

Real estate—construction

     8,445       18,930       21,744  

Home equity

     172,894       146,809       99,085  

Indirect

     4,227       6,002       3,941  

Other consumer

     5,527       5,575       6,986  
                        
   $ 457,090     $ 356,685     $ 332,116  
                        

Restructured loans not included in the categories above

   $ 138,688     $ —       $ —    

 

*

Exclusive of accruing loans 90 days past due

Total non-performing assets were $1,770.7 million at September 30, 2008 compared to $1,629.4 million at June 30, 2008 and $864.1 million at December 31, 2007. Excluding loans held for sale, non-performing assets at September 30, 2008 were $1,642.0 million and were essentially flat on a linked-quarter basis. The increase since year-end 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 $5.2 billion residential homebuilder portfolio, approximately $556.9 million is non-accruing and $7.2 million is 90 days past due as of September 30, 2008. During the third and second quarters of 2008, Regions disposed of or designated as held for sale approximately $430 million and $147 million, respectively, of loans and foreclosed properties.

Loans past due 90 days or more and still accruing increased $100.4 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—particularly in Florida, as well as commercial real estate loans being managed by the Special Assets Department and in the process of collection.

 

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Restructured loans at September 30, 2008 were primarily comprised of $111 million of 1-4 family mortgage loans and $26 million of home equity lines and loans.

At September 30, 2008 and December 31, 2007, Regions had approximately $479.0 million and $221.5 million, respectively, of potential problem commercial and commercial real estate loans that were not included in non-accrual loans or in the accruing loans 90 days past due categories, but for which management had concerns as to the ability of such borrowers to comply with their present loan repayment terms.

SECURITIES

The following table details the carrying values of securities:

Table 5—Securities

 

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

U.S. Treasury securities

   $ 827,724    $ 964,647    $ 277,345

Federal agency securities

     1,791,292      3,329,656      3,283,116

Obligations of states and political subdivisions

     862,812      732,367      729,401

Mortgage-backed securities

     13,005,029      11,092,758      11,374,198

Other debt securities

     20,540      45,108      431,606

Equity securities

     1,176,009      1,204,473      910,970
                    
   $ 17,683,406    $ 17,369,009    $ 17,006,636
                    

Securities totaled $17.7 billion at September 30, 2008, an increase of approximately $314.4 million from year-end 2007 levels. During 2008, maturities of federal agency securities have been reinvested in mortgage-backed securities. 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 September 30, 2008, total assets of these funds were approximately $41.7 million. Regions’ investment in the funds was approximately $11.5 million at September 30, 2008 and is included in other assets. During the nine months ended September 30, 2008, Regions recognized losses associated with these investments of approximately $46.6 million, which is included in other non-interest expense.

OTHER INTEREST-EARNING ASSETS

All other interest-earning assets increased approximately $139.0 million from year-end 2007 to September 30, 2008. Increases in loans held for sale and trading account assets more than offset decreases in federal funds sold and securities purchased under agreements to resell.

GOODWILL

Goodwill totaled $11.5 billion at September 30, 2008 and December 31, 2007. 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

 

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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 nine months of 2008 and 2007, non-interest expense benefited $14.0 million and $17.0 million, respectively, as a result of mortgage servicing rights impairment recapture.

Table 6—Mortgage Servicing Rights

 

     Nine months ended
September 30
 
(In thousands)    2008     2007  

Balance at beginning of year

   $ 368,654     $ 416,217  

Amounts capitalized

     33,128       43,065  

Sale of servicing assets

     (58,620 )     —    

Amortization

     (59,230 )     (57,735 )
                
     283,932       401,547  

Valuation allowance

     (20,794 )     (24,346 )
                

Balance at end of period

   $ 263,138     $ 377,201  
                

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 a high level of customer service, competitive pricing and expanding the traditional branch network to provide convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality telephone banking services and alternative product delivery channels such as internet banking.

The following table summarizes deposits by category:

Table 7—Deposits

 

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

Non-interest-bearing demand deposits

   $ 18,044,840    $ 18,417,266    $ 18,834,856
                    

Savings accounts

     3,708,541      3,646,632      3,692,087

Interest-bearing transaction accounts

     14,616,324      15,846,139      15,208,224

Money market accounts

     17,098,015      18,934,309      19,694,280

Time deposits

     30,410,918      29,298,845      27,744,789

Foreign deposits

     5,341,910      8,631,777      8,265,694
                    

Total interest-bearing deposits

     71,175,708      76,357,702      74,605,074
                    
   $ 89,220,548    $ 94,774,968    $ 93,439,930
                    

Total deposits at September 30, 2008, decreased approximately $5.6 billion compared to year-end 2007 levels. One 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. Increases in

 

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savings and time deposits were offset by decreases in non-interest bearing demand, interest-bearing transaction and money market accounts. Deposit disintermediation through a flight to quality, such as Treasury securities, is putting pressure on bank deposits industry-wide. In the third quarter of 2008, Regions also experienced substantial pricing pressure from both community banks and some larger competitors.

During the third quarter of 2008, Regions, in an FDIC-assisted transaction, assumed approximately $900 million of deposits from Integrity Bank in Alpharetta, Georgia.

SHORT-TERM BORROWINGS

The following is a summary of short-term borrowings:

Table 8—Short-Term Borrowings

 

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

Federal funds purchased

   $ 5,775,767    $ 5,182,649    $ 5,106,078

Securities sold under agreements to repurchase

     4,651,238      3,637,586      2,957,661

Term Auction Facility

     3,000,000      —        —  

Treasury, tax and loan notes

     1,204,769      1,150,000      50,000

Federal Home Loan Bank advances

     1,500,000      100,000      350,000

Brokerage customers liabilities

     465,282      505,487      552,900

Short-sale liability

     331,637      217,355      539,395

Other short-term borrowings

     612,865      327,045      235,051
                    
   $ 17,541,558    $ 11,120,122    $ 9,791,085
                    

Federal funds purchased and securities sold under agreements to repurchase totaled $10.4 billion at September 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 increased loan demand and a general decrease in deposits. The Company utilized short-term borrowings through participation in the Federal Reserve’s Term Auction Facility (“TAF”) and the issuance of Federal Home Loan Bank (“FHLB”) advances and senior bank notes. In addition, subsequent to September 30, 2008, Regions secured the following funding through the TAF: $7 billion at a rate of 1.39% that matures in January 2009, and $3 billion at a rate of 1.11% that matures in November 2008. These fundings were utilized primarily to repay other short-term borrowings.

The TAF was designed to address pressures in short-term funding markets. Under the TAF, the Federal Reserve auctions term funds to depository institutions with maturities of 28 or 84 days. All depository institutions that are eligible to borrow under the primary credit program are eligible to participate in TAF auctions. All advances are fully collateralized using collateral values and margins applicable for other Federal Reserve lending programs.

 

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LONG-TERM BORROWINGS

Long-term borrowings are summarized as follows:

Table 9—Long-Term Borrowings

 

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

Federal Home Loan Bank structured advances

   $ 1,730,791    $ 1,662,898    $ 1,765,230

Other Federal Home Loan Bank advances

     5,219,005      2,119,318      1,769,047

6.375% subordinated notes due 2012

     597,786      597,343      597,196

7.75% subordinated notes due 2011

     525,876      533,912      537,774

7.00% subordinated notes due 2011

     499,395      499,227      498,023

7.375% subordinated notes due 2037

     300,000      300,000      —  

7.50% subordinated notes due 2018 (Regions Bank)

     749,394      —        —  

6.45% subordinated notes due 2037 (Regions Bank)

     497,216      497,191      497,183

4.85% subordinated notes due 2013 (Regions Bank)

     489,251      487,696      487,192

5.20% subordinated notes due 2015 (Regions Bank)

     345,087      344,523      344,336

6.45% subordinated notes due 2018 (Regions Bank)

     —        321,657      322,058

6.50% subordinated notes due 2018 (Regions Bank)

     —        311,439      311,740

6.125% subordinated notes due 2009

     175,627      176,722      177,078

6.75% subordinated debentures due 2025

     163,501      163,840      163,950

7.75% subordinated notes due 2024

     100,000      100,000      100,000

Senior bank notes

     —        —        100,000

4.375% senior notes due 2010

     494,140      492,104      491,419

LIBOR floating rate senior notes due 2012

     350,000      350,000      350,000

LIBOR floating rate senior notes due 2009

     249,981      249,963      249,952

LIBOR floating rate senior debt notes due 2008

     —        399,762      399,667

4.50% senior debt notes due 2008

     —        349,694      349,572

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

     497,952      545,298      565,367

Valuation adjustments on hedged long-term debt

     138,698      122,389      40,893
                    
   $ 14,168,524      11,324,790    $ 10,817,491
                    

Long-term borrowings increased $2.8 billion since year-end 2007 due primarily to increases in FHLB advances of $3.2 billion and $1.1 billion of new subordinated notes, including junior subordinated notes. This total 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)”), and the maturity of approximately $750 million of senior debt notes during the third quarter of 2008.

STOCKHOLDERS’ EQUITY

Stockholders’ equity was $19.7 billion at September 30, 2008, compared to $19.8 billion at December 31, 2007. During the first nine months of 2008, net income added $622.5 million to stockholders’ equity, cash dividends declared reduced equity by $599.4 million, and changes in accumulated other comprehensive income decreased equity by $132.8 million. Additionally, an adjustment related to Regions stock maintained within trust or brokerage accounts tied to Company deferred compensation plans was recorded in the third quarter of 2008, which reduced stockholders’ equity by $52.9 million.

 

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Regions’ ratio of stockholders’ equity to total assets was 13.66% at September 30, 2008, compared to 14.05% at December 31, 2007. Regions’ ratio of tangible stockholders’ equity to tangible assets was 5.69% at September 30, 2008, compared to 5.88% at December 31, 2007.

At September 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 through open market transactions during the first nine 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 $0.10 cash dividend for the fourth quarter of 2008, compared to a $0.10 cash dividend declared for the third quarter of 2008 and a $0.36 cash dividend declared for the third quarter of 2007.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008. The legislation was the result of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008 in response to the financial crises affecting the banking system. The U.S. Treasury and banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system. Regions has received preliminary approval from the U.S. Treasury Department, subject to standard closing conditions, for the investment of $3.5 billion in Regions preferred stock. The investment is part of the U. S. Treasury’s Capital Purchase Program, designed to restore confidence in our nation’s financial system, increase the flow of credit to consumers and businesses, and provide additional assistance to distressed homeowners facing foreclosure. Regions will pay the government a 5% dividend, or $175 million annually, for each of the first five years of the investment, and 9% thereafter unless Regions redeems the shares. The government also will receive 10-year warrants for common stock.

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” or total capital.

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

 

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

Table 10—Regulatory Capital Requirements

 

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

Tier 1 Capital:

        

Regions Financial Corporation

   7.47 %   7.29 %   7.73 %   6.00 %

Regions Bank

   8.51     8.65     9.53     6.00  

Total Capital:

        

Regions Financial Corporation

   11.70 %   11.25 %   11.30 %   10.00 %

Regions Bank

   11.63     11.20     11.90     10.00  

Leverage:

        

Regions Financial Corporation

   6.67 %   6.66 %   7.02 %   5.00 %

Regions Bank

   7.67     7.94     8.70     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 challenges of the current market environment demonstrate the importance of having and using various sources of liquidity to satisfy the Company’s funding requirements. See Note 9 “Commitments and Contingencies” to the consolidated financial statements for additional discussion of the Company’s funding requirements.

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. Historically, Regions’ liquidity has been enhanced by its relatively stable deposit base. During 2008, deposit disintermediation through a flight to quality, such as Treasury securities, and increased pricing competition from community banks and some large competitors has led to a reduction in deposits.

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. As of the filing date of this report, Regions’ additional borrowing capacity from the FHLB was approximately $474 million.

In May 2007, Regions filed a shelf registration statement, which 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 qualifying trust preferred securities to meet its liquidity needs. However, investor demand for this type of capital has ceased in the current market environment.

In addition, Regions Bank has the requisite agreements in place with remaining capacity to issue and sell up to $3.75 billion of bank notes to institutional investors through placement agents as of September 30, 2008. The

 

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issuance of additional bank notes could provide a significant source of liquidity and funding to meet future needs. Investor demand for bank notes has ceased in the current market environment. However, the new Temporary Liquidity Guarantee Program (“TLGP”) recently enacted by the Federal Deposit Insurance Corporation (“FDIC”), which is discussed later in this section, could regenerate demand for bank notes.

As of September 30, 2008, based on assets available for collateral as of this date, Regions can borrow a maximum of $17.6 billion with terms of less than 29 days, or $13.2 billion with terms of greater than 29 days, from the Federal Reserve Bank through its discount window and/or the TAF program. Subsequent to September 30, 2008, Regions secured the following funding through the TAF: $7 billion at a rate of 1.39% that matures in January 2009 (84 days), and $3 billion at a rate of 1.11% that matures in November 2008 (28 days). Future fundings under commitments to extend credit would increase Regions’ borrowing capacity under these programs.

In October 2008, the FDIC announced a new program—the TLGP—to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. Under the current interim rules, certain newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. The guarantee is limited to 125% of senior unsecured debt as of September 30, 2008 that is scheduled to mature before June 30, 2009. This includes federal funds purchased, promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. Coverage would be limited to June 30, 2012, even if the maturity exceeds that date. Participants will have the option to issue non-guaranteed senior unsecured debt for a non-refundable fee of 37.5 basis points, provided that the debt has a term greater than three years. Participants will be charged a 75-basis point fee to protect their new debt issues (amounts paid as a non-refundable fee will be applied to offset this 75-basis point fee until the non-refundable fee is exhausted). Based on the current interim rules, Regions can issue between approximately $7.5 billion and $7.8 billion of qualifying senior debt securities covered by the TLGP.

See the “Stockholders’ Equity” section of this report for discussion of the Capital Purchase Program, which also provides a significant source of liquidity to Regions.

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

RATINGS

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

Table 11—Credit Ratings

 

     Standard
& Poor’s
   Moody’s    Fitch    Dominion

Regions Financial Corporation

           

Senior notes

   A    A2    A+    AH

Subordinated notes

   A-    A3    A    A

Junior subordinated notes

   BBB+    A3    A    A

Regions Bank

           

Short-term certificates of deposit

   A-1    P-1    F1    R-1M

Short-term debt

   A-1    P-1    F1    R-1M

Long-term certificates of deposit

   A+    A1    AA-    AAL

Long-term debt

   A+    A1    A+    AAL

Subordinated debt

   A    A2    A    AH

 

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Table reflects ratings as of September 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.

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

 

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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. The third quarter of 2008 is the final quarter for merger charges related to the AmSouth Bancorporation acquisition.

Table 12—GAAP to Non-GAAP Reconciliation

 

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

INCOME

           

Income from continuing operations (GAAP)

      $ 90,358     $ 394,240     $ 633,714     $ 1,322,048  

Loss from discontinued operations, net of tax (GAAP)

        (10,897 )     (76 )     (11,192 )     (141,594 )
                                   

Net income (GAAP)

   A    $ 79,461     $ 394,164     $ 622,522     $ 1,180,454  
                                   

Income from continuing operations (GAAP)

      $ 90,358     $ 394,240     $ 633,714     $ 1,322,048  

Merger-related charges, pre-tax

           

Salaries and employee benefits

        24,515       14,811       133,401       61,389  

Net occupancy expense

        —         21,428       3,331       29,943  

Furniture and equipment expense

        —         1,942       4,985       3,179  

Other

        —         53,604       58,454       106,194  
                                   

Total merger-related charges, pre-tax

        24,515       91,785       200,171       200,705  

Merger-related charges, net of tax

        15,200       56,501       124,106       124,032  
                                   

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

   B    $ 105,558     $ 450,741     $ 757,820     $ 1,446,080  
                                   

Weighted-average diluted shares

   C      696,205       704,485       696,034       718,084  

Earnings per share—diluted (GAAP)

   A/C    $ 0.11     $ 0.56     $ 0.89     $ 1.64  
                                   

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

   B/C    $ 0.15     $ 0.64     $ 1.09     $ 2.01  
                                   

RETURN ON AVERAGE TANGIBLE EQUITY

           

Average equity (GAAP)

   D    $ 19,713,468     $ 19,793,123     $ 19,779,608     $ 20,092,961  

Average intangible assets (GAAP)

      $ 12,194,962     $ 12,026,887     $ 12,223,590     $ 12,096,061  
                                   

Average tangible equity

   E    $ 7,518,506     $ 7,766,236     $ 7,556,018     $ 7,996,900  
                                   

Average equity, excluding discontinued operations

   F    $ 19,713,468     $ 19,793,123     $ 19,779,608     $ 20,062,027  

Average intangible assets, excluding discontinued operations

        12,194,962       12,026,887       12,223,590       12,096,061  
                                   

Average tangible equity, excluding discontinued operations

   G    $ 7,518,506     $ 7,766,236     $ 7,556,018     $ 7,965,966  
                                   

Return on average tangible equity*

   A/E      4.20 %     20.14 %     11.01 %     19.74 %
                                   

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

   B/G      5.59 %     23.03 %     13.40 %     24.27 %
                                   

 

*

Income statement amounts have been annualized in calculation.

Annualized return on average stockholders’ equity for the third quarter of 2008 was 1.60% compared to 7.90% for the same period in 2007. Annualized return on average stockholders’ equity for the first nine months of 2008 was 4.20% compared to 7.85% for the same period in 2007. Annualized return on average assets for the three months ended September 30, 2008 and 2007 was 0.22% and 1.14%, respectively. Annualized return on average assets for the first nine months of 2008 and 2007 was 0.58% and 1.14%, respectively.

 

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NET INTEREST INCOME

The following table presents an analysis of net interest income/margin for the three months ended September 30:

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

 

    Three Months Ended September 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

  $ 45,059     $ 151   1.33 %   $ 51,740     $ 515   3.95 %

Federal funds sold and securities purchased under agreements to resell

    1,062,198       7,746   2.90       1,141,666       18,154   6.31  

Trading account assets

    1,285,122       10,914   3.38       1,213,485       10,385   3.40  

Securities:

           

Taxable

    16,962,182       207,903   4.88       16,545,332       210,932   5.06  

Tax-exempt

    767,277       16,627   8.62       722,663       15,235   8.36  

Loans held for sale

    563,015       8,514   6.02       779,918       12,302   6.26  

Margin receivables

    536,681       4,776   3.54       521,497       8,754   6.66  

Loans, net of unearned income(1)(2)(3)

    98,333,257       1,320,771   5.34       94,309,811       1,743,636   7.34  
                                       

Total interest-earning assets

    119,554,791       1,577,402   5.25       115,286,112       2,019,913   6.95  

Allowance for loan losses

    (1,490,838 )         (1,062,432 )    

Cash and due from banks

    2,420,550           2,751,656      

Other non-earning assets

    22,756,459           19,901,093      
                       
  $ 143,240,962         $ 136,876,429      
                       

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Savings accounts

  $ 3,774,330       1,010   0.11     $ 3,756,311       2,795   0.30  

Interest-bearing transaction accounts

    14,830,665       28,529   0.77       15,268,807       79,618   2.07  

Money market accounts

    17,534,433       70,589   1.60       19,883,326       169,606   3.38  

Time deposits

    30,167,854       272,975   3.60       28,713,151       331,619   4.58  

Foreign deposits

    4,592,450       18,168   1.57       7,466,762       89,947   4.78  
                                       

Total interest-bearing deposits

    70,899,732       391,271   2.20       75,088,357       673,585   3.56  

Federal funds purchased and securities sold under agreements to repurchase

    9,906,410       51,597   2.07       8,121,636       98,522   4.81  

Other short-term borrowings

    8,015,486       50,038   2.48       1,598,989       16,570   4.11  

Long-term borrowings

    13,363,762       153,894   4.58       10,085,073       144,662   5.69  
                                       

Total interest-bearing liabilities

    102,185,390       646,800   2.52       94,894,055       933,339   3.90  
                   

Net interest spread

      2.73         3.05  
                   

Non-interest-bearing deposits

    17,690,915           18,850,607      

Other liabilities

    3,651,189        </