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, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 1,188,032,000 shares of common stock, par value $.01, outstanding as of October 29, 2009.

 

 

 


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, 2009, December 31, 2008 and September 30, 2008

   5
    

Consolidated Statements of Operations—Three and nine months ended September 30, 2009 and 2008

   6
    

Consolidated Statements of Changes in Stockholders’ Equity—Nine months ended September 30, 2009 and 2008

   8
    

Consolidated Statements of Cash Flows—Nine months ended September 30, 2009 and 2008

   9
    

Notes to Consolidated Financial Statements

   10
 

Item 2.

  

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

   46
 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   82
 

Item 4.

  

Controls and Procedures

   82

Part II. Other Information

  
 

Item 1.

  

Legal Proceedings

   83
 

Item 1A.

  

Risk Factors

   84
 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   85
 

Item 6.

  

Exhibits

   87

Signatures

   88

 

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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, 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:

 

   

In October 2008 Congress enacted and the President signed into law the Emergency Economic Stabilization Act of 2008, and on February 17, 2009 the American Recovery and Reinvestment Act of 2009 was signed into law. Additionally, the U.S. Treasury Department and federal banking regulators are implementing a number of programs to address capital and liquidity issues in the banking system, and may announce additional programs in the future, 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.

 

   

The impact of compensation and other restrictions imposed under the Troubled Asset Relief Program (“TARP”) until Regions is able to repay the outstanding preferred stock issued under the TARP.

 

   

Possible additional loan losses, impairment of goodwill and other intangibles and valuation allowances on deferred tax assets and the impact on earnings and capital.

 

   

Possible changes in interest rates may affect 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 the collectability of loans.

 

   

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

 

   

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

 

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Regions’ ability to effectively manage credit risk, interest rate risk, market 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.

 

   

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

 

   

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.

See also Item 1A. “Risk Factors” of Regions’ Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly Reports on Form 10-Q for the periods ended March 31, 2009 and June 30, 2009.

 

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(In millions, except share data)    September 30
2009
    December 31
2008
    September 30
2008
 
Assets       

Cash and due from banks

   $ 2,101      $ 2,643      $ 2,986   

Interest-bearing deposits in other banks

     5,902        7,540        30   

Federal funds sold and securities purchased under agreements to resell

     366        790        542   

Trading account assets

     1,388        1,050        1,268   

Securities available for sale

     21,030        18,850        17,633   

Securities held to maturity

     39        47        50   

Loans held for sale (includes $726, $506 and $495 measured at fair value at September 30, 2009, December 31, 2008 and September 30, 2008, respectively)

     1,470        1,282        1,054   

Loans, net of unearned income

     92,754        97,419        98,712   

Allowance for loan losses

     (2,627     (1,826     (1,472
                        

Net loans

     90,127        95,593        97,240   

Other interest-earning assets

     839        897        587   

Premises and equipment, net

     2,694        2,786        2,730   

Interest receivable

     499        458        512   

Goodwill

     5,557        5,548        11,529   

Mortgage servicing rights

     216        161        263   

Other identifiable intangible assets

     535        638        675   

Other assets

     7,223        7,965        7,193   
                        

Total assets

   $ 139,986      $ 146,248      $ 144,292   
                        
Liabilities and Stockholders’ Equity       

Deposits:

      

Non-interest-bearing

   $ 21,226      $ 18,457      $ 18,045   

Interest-bearing

     73,654        72,447        71,176   
                        

Total deposits

     94,880        90,904        89,221   

Borrowed funds:

      

Short-term borrowings:

      

Federal funds purchased and securities sold under agreements to repurchase

     2,633        3,143        10,427   

Other short-term borrowings

     2,653        12,679        7,115   
                        

Total short-term borrowings

     5,286        15,822        17,542   

Long-term borrowings

     18,093        19,231        14,168   
                        

Total borrowed funds

     23,379        35,053        31,710   

Other liabilities

     3,235        3,478        3,656   
                        

Total liabilities

     121,494        129,435        124,587   

Stockholders’ equity:

      

Preferred stock, authorized 10 million shares

      

Series A, cumulative perpetual participating, par value $1.00 (liquidation preference $1,000.00) per share, net of discount;
Issued—3,500,000 shares

     3,334        3,307        —     

Series B, mandatorily convertible, cumulative perpetual participating, par value $1,000.00 (liquidation preference $1,000.00) per share;
Issued—287,500 shares

     278        —          —     

Common stock, par value $.01 per share:

      

Authorized 1.5 billion shares

      

Issued including treasury stock—1,231,352,421; 735,667,650 and 735,769,666 shares, respectively

     12        7        7   

Additional paid-in capital

     18,754        16,815        16,607   

Retained earnings (deficit)

     (2,618     (1,869     4,445   

Treasury stock, at cost—43,316,136; 44,301,693 and 43,813,524 shares, respectively

     (1,411     (1,425     (1,424

Accumulated other comprehensive income (loss), net

     143        (22     70   
                        

Total stockholders’ equity

     18,492        16,813        19,705   
                        

Total liabilities and stockholders’ equity

   $ 139,986      $ 146,248      $ 144,292   
                        

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(In millions, except per share data)        2009             2008             2009             2008      

Interest income on:

        

Loans, including fees

   $ 1,047      $ 1,318      $ 3,218      $ 4,222   

Securities:

        

Taxable

     232        208        710        616   

Tax-exempt

     6        11        18        31   
                                

Total securities

     238        219        728        647   

Loans held for sale

     12        9        43        27   

Federal funds sold and securities purchased under agreements to resell

     —          5        2        16   

Trading account assets

     10        13        32        52   

Other interest-earning assets

     7        5        21        18   
                                

Total interest income

     1,314        1,569        4,044        4,982   

Interest expense on:

        

Deposits

     301        391        997        1,316   

Short-term borrowings

     9        102        45        300   

Long-term borrowings

     159        154        517        447   
                                

Total interest expense

     469        647        1,559        2,063   
                                

Net interest income

     845        922        2,485        2,919   

Provision for loan losses

     1,025        417        2,362        907   
                                

Net interest income (loss) after provision for loan losses

     (180     505        123        2,012   

Non-interest income:

        

Service charges on deposit accounts

     300        294        857        860   

Brokerage, investment banking and capital markets

     252        241        732        786   

Mortgage income

     76        33        213        104   

Trust department income

     49        66        143        182   

Securities gains, net

     4        —          165        92   

Other

     91        85        927        347   
                                

Total non-interest income

     772        719        3,037        2,371   

Non-interest expense:

        

Salaries and employee benefits

     578        552        1,703        1,794   

Net occupancy expense

     121        110        340        328   

Furniture and equipment expense

     83        88        237        255   

Impairment (recapture) of mortgage servicing rights

     —          11        —          (14

Other-than-temporary impairments(1)

     3        9        75        10   

Other

     458        358        1,177        1,146   
                                

Total non-interest expense

     1,243        1,128        3,532        3,519   
                                

Income (loss) from continuing operations before income taxes

     (651     96        (372     864   

Income taxes

     (274     6        116        231   
                                

Income (loss) from continuing operations

     (377     90        (488     633   

Discontinued operations (Note 13):

        

Loss from discontinued operations before income taxes

     —          (18     —          (18

Income tax benefit

     —          (7     —          (7
                                

Loss from discontinued operations, net of tax

     —          (11     —          (11

Net income (loss)

   $ (377   $ 79      $ (488   $ 622   
                                

Net income (loss) available to common shareholders

   $ (437   $ 79      $ (655   $ 622   
                                

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(In millions, except per share data)        2009             2008             2009             2008      

Weighted-average number of shares outstanding:

        

Basic

   1,189      696      921      696   

Diluted

   1,189      696      921      696   

Earnings (loss) per common share from continuing operations:

        

Basic

   (0.37   0.13      (0.71   0.91   

Diluted

   (0.37   0.13      (0.71   0.91   

Earnings (loss) per common share from discontinued operations:

        

Basic

   —        (0.02   —        (0.02

Diluted

   —        (0.02   —        (0.02

Earnings (loss) per common share:

        

Basic

   (0.37   0.11      (0.71   0.89   

Diluted

   (0.37   0.11      (0.71   0.89   

Cash dividends declared per common share

   0.01      0.10      0.12      0.86   

 

(1)

Includes $3 million for the three months ended and $266 million for the nine months ended September 30, 2009, respectively, of gross charges, net of $0 for the three months ended and $191 million for the nine months ended September 30, 2009, respectively, of non-credit portion reported in other comprehensive income (loss).

 

 

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

(In millions, except share and per share data)

  Preferred Stock   Common Stock   Additional
Paid-In
Capital
    Retained
Earnings
(Deficit)
    Treasury
Stock,
At Cost
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  
  Shares   Amount   Shares     Amount          

BALANCE AT JANUARY 1, 2008

  —     $ —     694      $ 7   $ 16,545      $ 4,439      $ (1,371   $ 203      $ 19,823   

Cumulative effect of changes in accounting principles due to adoption of new accounting literature

  —       —     —          —       —          (17     —          —          (17

Comprehensive income:

                 

Net income

  —       —     —          —       —          622        —          —          622   

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

  —       —     —          —       —          —          —          (116     (116

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

  —       —     —          —       —          —          —          (18     (18

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

  —       —     —          —       —          —          —          1        1   
                       

Comprehensive income

                    489   

Cash dividends declared—$0.86 per share

  —       —     —          —       —          (599     —          —          (599

Common stock transactions:

                 

Stock transactions with employees under compensation plans, net

  —       —     (2     —       (2     —          (53     —          (55

Stock options exercised and related activity, net

  —       —     —          —       24        —          —          —          24   

Amortization of unearned restricted stock

  —       —     —          —       40        —          —          —          40   
                                                             

BALANCE AT SEPTEMBER 30, 2008

  —     $ —     692      $ 7   $ 16,607      $ 4,445      $ (1,424   $ 70      $ 19,705   
                                                             

BALANCE AT JANUARY 1, 2009

  4   $ 3,307   691      $ 7   $ 16,815      $ (1,869   $ (1,425   $ (22   $ 16,813   

Comprehensive income:

                 

Net income (loss)

  —       —     —          —       —          (488     —          —          (488

Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment, excluding non-credit portion of other-than-temporary impairments*

  —       —     —          —       —          —          —          389        389   

Non-credit portion of other-than-temporary impairments recognized in other comprehensive income, net of tax*

  —       —     —          —       —          —          —          (124     (124

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

  —       —     —          —       —          —          —          (120     (120

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

  —       —     —          —       —          —          —          20        20   
                       

Comprehensive income (loss)

                    (323

Cash dividends declared—$0.12 per share

  —       —     —          —       —          (94     —          —          (94

Preferred dividends

  —       —     —          —       —          (140     —          —          (140

Preferred stock transactions:

                 

Net proceeds from issuance of 287,500 shares of mandatorily convertible preferred stock

  —       278   —          —       —          —          —          —          278   

Discount accretion

  —       27   —          —       —          (27     —          —          —     

Common stock transactions:

                 

Net proceeds from issuance of 460 million shares of common stock

  —       —     460        5     1,764        —          —          —          1,769   

Issuance of 33 million shares of common stock issued in connection with early extinguishment of debt

      33        —       135              135   

Stock transactions with employees under compensation plans, net

  —       —     4        —       —          —          14        —          14   

Stock options exercised and related activity, net

  —       —     —          —       13        —          —          —          13   

Amortization of unearned restricted stock

  —       —     —          —       27        —          —          —          27   
                                                             

BALANCE AT SEPTEMBER 30, 2009

  4   $ 3,612   1,188      $ 12   $ 18,754      $ (2,618   $ (1,411   $ 143      $ 18,492   
                                                             

 

*

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 millions)    2009     2008  

Operating activities:

    

Net income (loss)

   $ (488   $ 622   

Adjustments to reconcile net cash provided by operating activities:

    

Provision for loan losses

     2,362        907   

Depreciation and amortization of premises and equipment

     212        213   

Recapture of mortgage servicing rights

     —          (14

Provision for losses on other real estate, net

     90        62   

Net accretion of securities

     (9     (12

Net amortization of loans and other assets

     192        104   

Net accretion of deposits and borrowings

     (13     (12

Net securities gains

     (165     (92

Net loss on sale of premises and equipment

     —          1   

(Gain) loss on early extinguishment of debt

     (61     66   

Other-than-temporary impairments, net

     75        10   

Deferred income tax benefit

     (471     (121

Originations and purchases of loans held for sale

     (8,139     (4,435

Proceeds from sales of loans held for sale

     8,318        4,704   

Gain on sale of loans, net

     (79     (42

Loss from sale of mortgage servicing rights

     —          15   

Increase in trading account assets

     (338     (177

Decrease (increase) in other interest-earning assets

     58        (83

(Increase) decrease in interest receivable

     (41     104   

Decrease (increase) in other assets

     814        (553

Decrease in other liabilities

     (223     (357

Other

     (11     41   
                

Net cash from operating activities

     2,083        951   

Investing activities:

    

Proceeds from sales of securities available for sale

     3,657        2,022   

Proceeds from maturities of:

    

Securities available for sale

     4,002        2,331   

Securities held to maturity

     7        6   

Purchases of:

    

Securities available for sale

     (9,312     (4,692

Securities held to maturity

     —          (5

Proceeds from sales of loans

     212        510   

Proceeds from sales of mortgage servicing rights

     —          44   

Net decrease (increase) in loans

     2,478        (5,086

Net purchases of premises and equipment

     (120     (334

Net cash received from deposits assumed

     279        894   
                

Net cash from investing activities

     1,203        (4,310

Financing activities:

    

Net increase (decrease) in deposits

     3,700        (6,442

Net (decrease) increase in short-term borrowings

     (10,536     6,421   

Proceeds from long-term borrowings

     1,602        5,806   

Payments on long-term borrowings

     (2,482     (3,038

Net proceeds from issuance of mandatory convertible preferred stock

     278        —     

Net proceeds from issuance of common stock

     1,769        —     

Cash dividends on common stock

     (94     (599

Cash dividends on preferred stock

     (140     —     

Proceeds from exercise of stock options and related activity

     13        24   
                

Net cash from financing activities

     (5,890     2,172   
                

Decrease in cash and cash equivalents

     (2,604     (1,187

Cash and cash equivalents at beginning of year

     10,973        4,745   
                

Cash and cash equivalents at end of period

   $ 8,369      $ 3,558   
                

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, 2009 and 2008

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, 2008.

Regions has evaluated all subsequent events for potential recognition and disclosure through November 3, 2009, the date of the filing of this Form 10-Q.

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 (Loss) per Common Share

The following table sets forth the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(In millions, except per share amounts)        2009             2008             2009             2008      

Numerator:

        

Net income (loss) from continuing operations

   $ (377   $ 90      $ (488   $ 633   

Preferred stock dividends

     (60     —          (167     —     
                                

Net income (loss) from continuing operations available to common shareholders

     (437     90        (655     633   

Loss from discontinued operations, net of tax

     —          (11     —          (11
                                

Net income (loss) available to common shareholders

   $ (437   $ 79      $ (655   $ 622   
                                

Denominator:

        

Weighted-average common shares outstanding—basic

     1,189        696        921        696   

Common stock equivalents

     —          —          —          —     
                                

Weighted-average common shares outstanding—diluted

     1,189        696        921        696   
                                

Earnings (loss) per share from continuing operations:

        

Basic

   $ (0.37   $ 0.13      $ (0.71   $ 0.91   

Diluted

     (0.37     0.13        (0.71     0.91   

Earnings (loss) per share from discontinued operations:

        

Basic

     —          (0.02     —          (0.02

Diluted

     —          (0.02     —          (0.02

Earnings (loss) per share:

        

Basic

     (0.37     0.11        (0.71     0.89   

Diluted

     (0.37     0.11        (0.71     0.89   

The effect from the assumed issuance of 65 million common shares upon conversion of mandatorily convertible preferred stock issued in May 2009 for both the three and nine months ended September 30, 2009 was not included in the above computations of diluted earnings (loss) per common share because such amounts would have had an antidilutive effect on earnings (loss) per common share (see Note 3 for further discussion). The effect from the assumed exercise of 55 million stock options for both the three and nine months ended September 30, 2009 and 53 million stock options for both the three and nine months ended September 30, 2008, was not included in the above computations of diluted earnings (loss) per common share because such amounts would have had an antidilutive effect on earnings (loss) per common share.

NOTE 3—Stockholders’ Equity and Comprehensive Income

On November 14, 2008, Regions completed the sale of 3.5 million shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 and liquidation preference $1,000.00 per share (and $3.5 billion liquidation preference in the aggregate) to the U.S. Treasury as part of the Capital Purchase Program (“CPP”). Regions will pay the U.S. Treasury on a quarterly basis 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. Regions performed a discounted cash flow analysis to value the preferred stock at the date of issuance. For purposes of this analysis, Regions assumed that the preferred stock would most likely be redeemed five years from the valuation date based on optimal financial budgeting considerations. Regions used the Bloomberg USD US Bank BBB index to derive the market yield curve as of the valuation date to discount future expected cash flows to the valuation date. The discount rate used to value the preferred stock was 7.46%, based on this yield curve at a 5-year maturity. Dividends were assumed to be accrued until redemption. While the discounting was required

 

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based on a 5-year redemption, Regions did not have a 5-year security or similarly termed security available. As a result, it was necessary to use a benchmark yield curve to calculate the 5-year value. To determine the appropriate yield curve that was applicable to Regions, the yield to maturity on the outstanding debt instrument with the longest dated maturity (8.875% junior subordinated notes due June 2048) was compared to the longest point on the USD US Bank BBB index as of November 14, 2008. Regions concluded that the yield to maturity as of the valuation date of the debt, which was 11.03%, was consistent with the indicative yield of the curve noted above. The longest available point on this curve was 10.55% at 30 years.

As part of its purchase of the preferred securities, the U.S. Treasury also received a warrant to purchase 48.3 million shares of Regions’ common stock at an exercise price of $10.88 per share, subject to anti-dilution and other adjustments. The warrant expires ten years from the issuance date. Regions used the Cox-Ross-Rubinstein Binomial Option Pricing Model (“CRR Model”) to value the warrant at the date of issuance. The CRR Model is a standard option pricing model which incorporates optimal early exercise in order to receive the benefit of future dividend payments. Based on the transferability of the warrant, the CRR Model approach that was applied assumes that the warrant holder will not sub-optimally exercise its warrant. The following assumptions were used in the CRR Model:

 

Stock price(a)

   $ 9.67   

Exercise price(b)

   $ 10.88   

Expected volatility(c)

     45.22

Risk-free rate(d)

     4.25

Dividend yield(e)

     3.88

Warrant term (in years)(b)

     10   

 

(a)

Closing stock price of Regions as of the valuation date (November 14, 2008).

(b)

As outlined in the Warrant to Purchase Agreement, dated November 14, 2008.

(c)

Expected volatility based on Regions’ historical volatility, as of November 14, 2008, over a look-back period of 10 years, commensurate with the terms of the warrant.

(d)

The risk-free rate represents the yield on 10-year U.S. Treasury Strips as of November 14, 2008.

(e)

The dividend yield assumption was calculated based on a weighting of 30% on management’s dividend yield expectations for the next 3 years and a weighting of 70% on Regions’ average dividend yield over the 10 years prior to the valuation date.

The fair value allocation of the $3.5 billion between the preferred shares and the warrant resulted in $3.304 billion allocated to the preferred shares and $196 million allocated to the warrant. Accrued dividends on the preferred shares reduced retained earnings by $23 million during 2008 and $131 million during the first nine months of 2009. The unamortized discount on the preferred shares at December 31, 2008 was $193 million and $166 million at September 30, 2009. Discount accretion on the preferred shares reduced retained earnings by $27 million during the first nine months of 2009. Both the preferred securities and the warrant will be accounted for as components of Regions’ regulatory Tier 1 Capital.

On May 20, 2009 the Company issued 287,500 shares of mandatory convertible preferred stock, Series B (“Series B shares”), generating net proceeds of approximately $278 million. Regions will pay annual dividends at a rate of 10% per share on the initial liquidation preference of $1,000.00 per share. Series B shares may be converted into common shares: 1) at December 15, 2010 (the “mandatory conversion date”); 2) prior to December 15, 2010 at the option of the holder; 3) upon occurrence of certain changes in ownership as defined in the offering documents; or 4) prior to December 15, 2010 at the option of the Company. At the mandatory conversion date, the Series B shares are subject to conversion into shares of Regions’ common stock with a per share conversion rate of not more than approximately 250 shares of common stock and not less than approximately 227 shares of common stock dependent upon the applicable market price, subject to anti-dilution adjustments. The Series B shares are not redeemable and rank senior to common stock and to each other class of capital stock established in the future, and on parity with the Series A preferred stock previously issued to the U.S. Treasury. If converted at September 30, 2009, approximately 65 million shares of Regions’ common stock would have been issued.

 

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On May 20, 2009, the Company issued 460 million shares of common stock at $4 per share, generating proceeds of $1.8 billion, net of issuance costs.

In addition to the offerings mentioned above, the Company also exchanged approximately 33 million common shares for $202 million of outstanding 6.625% trust preferred securities issued by Regions Financing Trust II (“the Trust”) in the second quarter of 2009. The trust preferred securities were exchanged for junior subordinated notes issued by the Company to the Trust. The Company recognized a pre-tax gain of approximately $61 million on the extinguishment of the junior subordinated notes. The increase in shareholders’ equity related to the debt for common share exchange was approximately $135 million, net of issuance costs.

At September 30, 2009, 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 2009. The Company’s ability to repurchase its common stock is limited by the terms of the CPP mentioned above.

The Board of Directors declared a $0.01 cash dividend for the third quarter of 2009, compared to $0.10 for the third quarter of 2008. Given the current operating environment, the quarterly cash dividend was reduced to further strengthen Regions’ capital position. Regions does not expect to increase its quarterly dividend above $0.01 for the foreseeable future.

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.

The following disclosure reflects the components of comprehensive income and any associated reclassification amounts:

 

     Three Months Ended
September 30, 2009
 
(In millions)    Before Tax     Tax Effect     Net of Tax  

Net income (loss)

   $ (651   $ 274      $ (377

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

     352        (131     221   

Less: non-credit portion of other-than-temporary impairments recognized in other comprehensive income

     —          —          —     

Less: reclassification adjustments for net securities gains realized in net income (loss)

     4        (2     2   
                        

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

     348        (129     219   

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

     37        (14     23   

Less: reclassification adjustments for net gains realized in net income (loss)

     105        (40     65   
                        

Net change in unrealized gains and losses on derivative instruments

     (68     26        (42

Net actuarial gains and losses arising during the period

     18        (9     9   

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

     11        (4     7   
                        

Net change from defined benefit plans

     7        (5     2   
                        

Comprehensive income (loss)

   $ (364   $ 166      $ (198
                        

 

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

Net income

   $ 78      $ 1      $ 79   

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

     21        (7     14   

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

     —          —          —     
                        

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

     21        (7     14   

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

     53        (20     33   

Less: reclassification adjustments for net gains realized in net income

     39        (15     24   
                        

Net change in unrealized gains and losses on derivative instruments

     14        (5     9   

Net actuarial gains and losses arising during the period

     1        —          1   

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

     1        —          1   
                        

Net change from defined benefit plans

     —          —          —     
                        

Comprehensive income (loss)

   $ 113      $ (11   $ 102   
                        
     Nine Months Ended
September 30, 2009
 
(In millions)    Before Tax     Tax Effect     Net of Tax  

Net income (loss)

   $ (372   $ (116   $ (488

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

     783        (287     496   

Less: non-credit portion of other-than-temporary impairments recognized in other comprehensive income

     191        (67     124   

Less: reclassification adjustments for net securities gains realized in net income (loss)

     165        (58     107   
                        

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

     427        (162     265   

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

     110        (42     68   

Less: reclassification adjustments for net gains realized in net income (loss)

     303        (115     188   
                        

Net change in unrealized gains and losses on derivative instruments

     (193     73        (120

Net actuarial gains and losses arising during the period

     66        (25     41   

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

     33        (12     21   
                        

Net change from defined benefit plans

     33        (13     20   
                        

Comprehensive income (loss)

   $ (105   $ (218   $ (323
                        

 

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Table of Contents
     Nine Months Ended
September 30, 2008
 
(In millions)    Before Tax     Tax Effect     Net of Tax  

Net income

   $ 846      $ (224   $ 622   

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

     (97     41        (56

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

     92        (32     60   
                        

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

     (189     73        (116

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

     71        (27     44   

Less: reclassification adjustments for net gains realized in net income

     100        (38     62   
                        

Net change in unrealized gains and losses on derivative instruments

     (29     11        (18

Net actuarial gains and losses arising during the period

     4        (2     2   

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

     2        (1     1   
                        

Net change from defined benefit plans

     2        (1     1   
                        

Comprehensive income

   $ 630      $ (141   $ 489   
                        

NOTE 4—Pension and Other Postretirement Benefits

Net periodic pension and other postretirement benefits cost included the following components as follows:

 

     For The Three Months Ended
September 30
     Pension     Other Postretirement
Benefits
(In millions)      2009         2008         2009         2008  

Service cost

   $ —        $ 10      $ —        $ —  

Interest cost

     22        22        —          1

Expected return on plan assets

     (22     (30     —          —  

Amortization of prior service cost (credit)

     —          1        —          —  

Amortization of actuarial loss

     11        —          —          —  

Settlement charge

     1        —          —          —  
                              
   $ 12      $ 3      $ —        $ 1
                              
     For The Nine Months Ended
September 30
     Pension     Other Postretirement
Benefits
(In millions)      2009         2008         2009         2008  

Service cost

   $ 2      $ 30      $ —        $ —  

Interest cost

     65        66        1        2

Expected return on plan assets

     (66     (89     —          —  

Amortization of prior service cost (credit)

     1        3        (1     —  

Amortization of actuarial loss

     33        —          —          —  

Settlement charge

     1        —          —          —  

Curtailment gains

     —          (4     —          —  
                              
   $ 36      $ 6      $ —        $ 2
                              

The curtailment gains recognized during the first nine months of 2008 resulted from merger-related employment terminations.

 

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Table of Contents

Beginning in March 2009, participant accruals of service in the Regions Financial Corporation Retirement Plan were temporarily suspended resulting in a reduction in service cost. Matching contributions in the 401(k) plan were temporarily suspended beginning in the second quarter of 2009.

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. The number of remaining share equivalents authorized for future issuance under long-term compensation plans was approximately 6.9 million at September 30, 2009.

In 2009, Regions made a stock option grant that vests based upon a service condition and a market condition in addition to awards that were similar to prior grants. The fair value of these stock options was estimated on the date of the grant using a Monte-Carlo simulation method. The simulation generates a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices and minimize standard error. For all other grants that vest solely upon a service condition, the fair value of stock options is estimated at the date of the grant using a Black-Scholes option pricing model and related assumptions.

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  
       2009     2008  

Expected dividend yield

       1.85     6.87

Expected volatility

       67.15     26.40

Risk-free interest rate

       2.80     2.91

Expected option life

       6.8  yrs.      5.8  yrs. 

Fair value

     $ 1.78      $ 2.47   

During 2009, the expected dividend yield decreased based upon the market’s expectation of reduced dividends in the near term. The 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 stock. The expected option life increased due to changes in the employee grant base and employee exercise behavior.

The following table details the activity during the first nine months of 2009 and 2008 related to stock options:

 

     For the Nine Months Ended September 30
     2009    2008
     Number of
Options
    Wtd. Avg.
Exercise
Price
   Number of
Options
    Wtd. Avg.
Exercise
Price

Outstanding at beginning of period

   52,955,298      $ 28.22    48,044,207      $ 29.71

Granted

   4,063,209        3.29    9,872,751        21.66

Exercised

   —          —      (90,801     17.94

Forfeited or cancelled

   (2,335,717     30.38    (4,517,950     29.28
                 

Outstanding at end of period

   54,682,790      $ 26.29    53,308,207      $ 28.27
                 

Exercisable at end of period

   43,875,821      $ 28.76    41,375,142      $ 29.33
                 

 

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In 2009, Regions granted 2.9 million restricted shares that vest based upon a service condition and a market condition in addition to awards that were similar to prior grants. The fair value of these restricted shares was estimated on the date of the grant using a Monte-Carlo simulation method. The assumptions related to this grant included expected volatility of 84.81%, expected dividend yield of 1.00%, and an expected term of 4.0 years based on the vesting term of the market condition. The risk-free rate is consistent with the assumption used to value stock options. For all other grants that vest solely upon a service condition, the fair value of the awards is estimated based upon the fair value of the underlying shares on the date of the grant.

The following table details the activity during the first nine months of 2009 and 2008 related to restricted share awards and units:

 

     For the Nine Months Ended September 30
     2009    2008
     Shares     Wtd. Avg.
Grant Date
Fair Value
   Shares     Wtd. Avg.
Grant Date
Fair Value

Non-vested at beginning of period

   4,123,911      $ 27.67    3,651,054      $ 32.60

Granted

   3,100,415        2.87    1,657,573        21.28

Vested

   (787,349     16.02    (514,516     33.41

Forfeited

   (281,524     21.69    (383,815     31.22
                 

Non-vested at end of period

   6,155,453      $ 16.94    4,410,296      $ 28.37
                 

NOTE 6—Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities available for sale and securities held to maturity are as follows:

 

September 30, 2009

   Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair
Value
     (In millions)

Securities available for sale:

          

U.S. Treasury securities

   $ 45    $ 5    $ —        $ 50

Federal agency securities

     44      2      —          46

Obligations of states and political subdivisions

     293      21      —          314

Residential mortgage-backed securities

          

Agency

     17,850      545      (7     18,388

Non-Agency

     1,226      6      (162     1,070

Other debt securities

     22      —        (3     19

Equity securities

     1,135      8      —          1,143
                            
   $ 20,615    $ 587    $ (172   $ 21,030
                            

Securities held to maturity:

          

U.S. Treasury securities

   $ 12    $ 1    $ —        $ 13

Federal agency securities

     8      —        —          8

Residential mortgage-backed securities

          

Agency

     17      —        (1     16

Other debt securities

     2      —        —          2
                            
   $ 39    $ 1    $ (1   $ 39
                            

 

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December 31, 2008

   Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair
Value
          (In millions)      

Securities available for sale:

          

U.S. Treasury securities

   $ 802    $ 84    $ —        $ 886

Federal agency securities

     1,521      175      —          1,696

Obligations of states and political subdivisions

     755      9      (8     756

Residential mortgage-backed securities

          

Agency

     12,060      276      (3     12,333

Non-Agency

     1,627      6      (394     1,239

Commercial mortgage-backed securities

     898      1      (142     757

Other debt securities

     21      —        (2     19

Equity securities

     1,178      1      (15     1,164
                            
   $ 18,862    $ 552    $ (564   $ 18,850
                            

Securities held to maturity:

          

U.S. Treasury securities

   $ 14    $ 1    $ —        $ 15

Federal agency securities

     10      —        (1     9

Obligations of states and political subdivisions

     1      —        —          1

Residential mortgage-backed securities

          

Agency

     20      —        —          20

Other debt securities

     2      —        —          2
                            
   $ 47    $ 1    $ (1   $ 47
                            

Regions evaluates securities in a loss position for other-than-temporary impairment, considering such factors as the length of time and the extent to which the market value has been below cost, the credit standing of the issuer, Regions’ intent to hold the security and the likelihood that the Company will hold the security until its market value recovers. Activity related to the credit loss component of other-than-temporary impairment is recognized in earnings. For debt securities, the portion of other-than-temporary impairment related to all other factors is recognized in other comprehensive income. For the three months ended September 30, 2009, activity related to credit losses for only debt securities where a portion of the other-than-temporary impairment was recognized in other comprehensive income is as follows:

 

(In millions)    Total

Balance, July 1, 2009

   $ 45

Additions for the credit loss component of other-than-temporary impairments of debt securities recognized in earnings where a portion of the impairment was charged to other comprehensive income

     2
      

Balance, September 30, 2009

   $ 47
      

 

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The following table provides details of other-than-temporary impairment charges for the three months and nine months ended September 30, 2009:

 

     September 30, 2009  
     Three months ended    Nine months ended  
     (In millions)  

Non-agency residential mortgage-backed securities

     

Gross charges(1)

   $ 2    $ 238   

Non-credit charges to other comprehensive income

     —        (191
               

Other-than-temporary impairment, net(2)

     2      47   

Municipal securities, gross charges(3)

     1      16   

Equity securities, gross charges(3)

     —        12   

Total gross charges(1)

   $ 3    $ 266   
               

Total other-than-temporary impairment, net(2)

   $ 3    $ 75   
               

 

(1)

Includes credit portion reported in earnings and non-credit portion reported in other comprehensive income.

(2)

Net other-than-temporary impairment reported in earnings.

(3)

All impairment for these securities is credit-related; therefore, gross charges equals the net amount reported in earnings.

As of September 30, 2009, non-agency residential mortgage backed securities with other-than-temporary impairment consisted of 30 securities in which credit-related losses totaled approximately $47 million. This includes credit-related losses of approximately $2 million on 11 securities for which credit losses were recorded during the second quarter and were further impaired in the third quarter, and one security on which no previous credit-related losses had been recorded. Gross other-than-temporary impairments related to these securities totaled $2 million and $238 million for the third quarter and nine months ended September 30, 2009, respectively. The remaining non-credit portion of $191 million is recognized in other comprehensive income, unchanged from the prior quarter. The Company estimates the amount of losses attributable to credit using a third-party discounted cash flow model that compiles relevant details on borrower and collateral performance on a security-by-security basis. Assumptions including delinquencies, default rates, credit subordination support, prepayment rates, and loss severity based on the underlying collateral characteristics and year of origination are considered to estimate the future cash flows. Assumptions used can vary widely from loan to loan, and are influenced by such factors as interest rates, geography, borrower specific data and underlying collateral. Expected future cash flows are then calculated using a discount rate that management believes a market participant would consider in determining the fair value. Based on the results of the estimated future cash flows, the Company determines the amount of estimated losses related to credit and the remaining unrealized loss for which recovery is expected. Significant weighted-average assumptions specific to non-agency residential mortgage-backed securities with identified expected future credit losses as of September 30, 2009 include a 22.9% collateral default rate projection, 9.2% credit subordination support and 14.2% delinquency rate.

During the third quarter and first nine months of 2009, Regions recognized net other-than-temporary impairments of $3 million and $75 million, respectively, related primarily to non-agency residential mortgage-backed securities, equity securities and a single municipal issuer. For all other securities included in the tables below, management does not believe any individual unrealized loss, which was comprised of 188 securities and 1,065 securities at September 30, 2009 and December 31, 2008, respectively, represented an other-than-temporary impairment as of those dates. The unrealized losses related primarily to the impact of lower interest rates and widening of credit and liquidity spreads related to U.S. Treasury securities and mortgage-backed securities.

 

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The following tables present unrealized loss and estimated fair value of securities available for sale at September 30, 2009 and December 31, 2008. The tables include debt securities where a portion of other-than-temporary impairments have been recognized in other comprehensive income (loss). These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more.

 

     Less Than
Twelve Months
    Twelve Months or More     Total  

September 30, 2009

   Estimated Fair
Value
   Gross
Unrealized
Losses
    Estimated Fair
Value
   Gross
Unrealized
Losses
    Estimated Fair
Value
   Gross
Unrealized
Losses
 
     (In millions)  

Federal agency securities

   $ —      $ —        $ 1    $ —        $ 1    $ —     

Residential mortgage-backed securities

               

Agency

     785      (7     4      —          789      (7

Non-Agency

     68      (2     830      (160     898      (162

All other securities

     —        —          8      (3     8      (3
                                             
   $ 853    $ (9   $ 843    $ (163   $ 1,696    $ (172
                                             

 

     Less Than
Twelve Months
    Twelve Months or More     Total  

December 31, 2008

   Estimated Fair
Value
   Gross
Unrealized
Losses
    Estimated Fair
Value
   Gross
Unrealized
Losses
    Estimated Fair
Value
   Gross
Unrealized
Losses
 
     (In millions)  

Federal agency securities

   $ 3    $ —        $ 1    $ —        $ 4    $ —     

Residential mortgage-backed securities

               

Agency

     370      (2     212      (1     582      (3

Non-Agency

     1,040      (345     132      (49     1,172      (394

Commercial mortgage-backed securities

     420      (75     316      (67     736      (142

All other securities

     204      (21     138      (4     342      (25
                                             
   $ 2,037    $ (443   $ 799    $ (121   $ 2,836    $ (564
                                             

The gross unrealized loss on debt securities held to maturity was $1 million at September 30, 2009 and December 31, 2008, with all loss positions in a continuous loss position of less than twelve months.

 

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The cost and estimated fair value of securities available for sale and securities held to maturity at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(In millions)    Cost    Estimated
Fair Value

Securities available for sale:

     

Due in one year or less

   $ 24    $ 23

Due after one year through five years

     199      207

Due after five years through ten years

     101      105

Due after ten years

     80      94

Residential mortgage-backed securities

     

Agency

     17,850      18,388

Non-Agency

     1,226      1,070

Equity securities

     1,135      1,143
             
   $ 20,615    $ 21,030
             

Securities held to maturity:

     

Due in one year or less

   $ 7    $ 7

Due after one year through five years

     11      12

Due after five years through ten years

     4      4

Due after ten years

     —        —  

Residential mortgage-backed securities

     

Agency

     17      16
             
   $ 39    $ 39
             

Proceeds from sales of securities available for sale in the first nine months of 2009 were $3.7 billion, with gross realized gains and losses of $169 million and $4 million, respectively. The cost of securities sold is based on the specific identification method.

Equity securities included $426 million and $475 million of amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock as of September 30, 2009, respectively, whose estimated fair value approximates its carrying amount.

Securities with carrying values of $13.0 billion at September 30, 2009, were pledged to secure public funds, trust deposits and certain borrowing arrangements.

Trading account net gains totaled $27 million and $50 million for the three and nine months ended September 30, 2009, respectively (including $12 million of net unrealized gains as of September 30, 2009). Trading account net gains totaled $12 million for the three months ended September 30, 2008, and net gains totaled $10 million for the nine months ended September 30, 2008 (including $3 million of net unrealized losses as of September 30, 2008).

NOTE 7—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. Prior to year-end 2008, Regions had reported an Other segment that

 

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included merger charges and the parent company. Regions realigned to include the parent company with General Banking/Treasury as parent company transactions essentially support the Treasury function. The 2008 amounts presented below have been adjusted to conform to the 2009 presentation.

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 Merger Charges and Discontinued Operations includes merger charges related to the AmSouth acquisition and the results of EquiFirst (see Note 13) for the periods presented. These amounts are excluded from other reportable segments because management reviews the results of the other reportable segments excluding these items.

The following tables present financial information for each reportable segment for the period indicated.

 

(In millions)    General
Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
   Insurance    Merger
Charges and
Discontinued
Operations
    Total
Company
 

Three months ended September 30, 2009

  

Net interest income

   $ 830      $ 14    $ 1    $ —        $ 845   

Provision for loan losses

     1,025        —        —        —          1,025   

Non-interest income

     431        316      25      —          772   

Non-interest expense

     936        284      23      —          1,243   

Income tax expense

     (292     17      1      —          (274
                                      

Net income (loss)

   $ (408   $ 29    $ 2    $ —        $ (377
                                      

Average assets

   $ 134,828      $ 4,981    $ 496    $ —        $ 140,305   
(In millions)    General
Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
   Insurance    Merger
Charges and
Discontinued
Operations
    Total
Company
 

Three months ended September 30, 2008

  

Net interest income

   $ 904      $ 17    $ 1    $ —        $ 922   

Provision for loan losses

     417        —        —        —          417   

Non-interest income

     428        266      25      —          719   

Non-interest expense

     848        234      22      42        1,146   

Income tax expense (benefit)

     (5     18      2      (16     (1
                                      

Net income (loss)

   $ 72      $ 31    $ 2    $ (26   $ 79   
                                      

Average assets

   $ 139,184      $ 3,735    $ 322    $ —        $ 143,241   

 

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Table of Contents
(In millions)    General
Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
   Insurance    Merger
Charges and
Discontinued
Operations
    Total
Company
 

Nine months ended September 30, 2009

  

Net interest income

   $ 2,438      $ 44    $ 3    $ —        $ 2,485   

Provision for loan losses

     2,362        —        —        —          2,362   

Non-interest income

     2,069        887      81      —          3,037   

Non-interest expense

     2,650        817      65      —          3,532   

Income tax expense

     67        42      7      —          116   
                                      

Net income (loss)

   $ (572   $ 72    $ 12    $ —        $ (488
                                      

Average assets

   $ 138,365      $ 4,454    $ 488    $ —        $ 143,307   
(In millions)    General
Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
   Insurance    Merger
Charges and
Discontinued
Operations
    Total
Company
 

Nine months ended September 30, 2008

  

Net interest income

   $ 2,857      $ 59    $ 3    $ —        $ 2,919   

Provision for loan losses

     907        —        —        —          907   

Non-interest income

     1,409        877      85      —          2,371   

Non-interest expense

     2,475        777      67      218        3,537   

Income tax expense (benefit)

     241        59      7      (83     224   
                                      

Net income (loss)

   $ 643      $ 100    $ 14    $ (135   $ 622   
                                      

Average assets

   $ 138,557      $ 3,684    $ 320    $ —        $ 142,561   

NOTE 8—Goodwill

Goodwill allocated to each reportable segment as of September 30, 2009, December, 31, 2008, and September 30, 2008 is presented as follows:

 

(In millions)    September 30
2009
   December 31
2008
   September 30
2008

General Banking/Treasury

   $ 4,691    $ 4,691    $ 10,682

Investment Banking/Brokerage/Trust

     745      740      733

Insurance

     121      117      114
                    

Balance at end of period

   $ 5,557    $ 5,548    $ 11,529
                    

The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. In order to determine the implied estimated fair value, a full purchase price allocation is required to be performed in the same manner as if a business combination had occurred. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.

 

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During the third quarter of 2009, Regions assessed the indicators of goodwill impairment as of August 31, 2009, and through the date of the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. The indicators assessed included:

 

   

Recent operating performance,

 

   

Changes in market capitalization,

 

   

Regulatory actions and assessments,

 

   

Changes in the business climate (including legal factors and competition),

 

   

Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and

 

   

Trends in the banking industry.

Based on the assessment of the indicators above, quantitative testing of goodwill was required for the General Banking/Treasury and Investment Banking/ Brokerage/Trust reporting units for the September 30, 2009 interim period. The Insurance reporting unit did not require quantitative testing of goodwill as there were no significant changes or indicators that would more likely than not reduce the fair value of the reporting unit below its carrying value since the date of the last quantitative test as of June 30, 2009.

For purposes of performing Step One of the goodwill impairment test, Regions uses both the income and market approaches to value its reporting units. The income approach, which is the primary valuation approach, consists of discounting projected long-term 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 or a build-up approach (such as the capital asset pricing model) applicable to each reporting unit. The significant inputs to the income approach include expected future cash flows, which are primarily driven by the long-term target tangible equity to tangible assets ratio, and the discount rate, which is determined in the build-up approach using the risk-free rate of return, adjusted equity beta, equity risk premium, and a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management.

Regions uses the public company method and the transaction method as the two market approaches. The public company method applies a value multiplier derived from each reporting unit’s peer group to a financial metric of the reporting unit (e.g. last twelve months of earnings before interest, taxes and depreciation, tangible book value, etc.) and an implied control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions. The transaction method applies a value multiplier to a financial metric of the reporting unit based on comparable observed purchase transactions in the financial services industry for the reporting unit (where available).

Regions uses the output from these approaches to determine the estimated fair value of each reporting unit. Below is a table of assumptions used in estimating the fair value of each reporting unit at September 30, 2009. The table includes the discount rate used in the income approach, the market multiplier used in the market approaches, and the public company method control premium applied to all reporting units.

 

As of September 30, 2009

   General
Banking/
Treasury
  Investment
Banking/
Brokerage/

Trust

Discount rate used in income approach

   18%   14%

Public company method market multiplier(a)

   0.8x   1.8x

Public company method control premium

   30%   30%

Transaction method market multiplier(a)

   0.9x   2.2x

 

(a)

For the General Bank/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value.

 

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The Step One analysis performed for the Investment Banking/Brokerage/Trust reporting unit during the third quarter of 2009 indicated that the estimated fair value exceeded its carrying value (including goodwill). Therefore, a Step Two analysis was not required for this reporting unit.

The Step One analysis performed for the General Banking/Treasury reporting unit during the third quarter of 2009 indicated that the carrying value (including goodwill) of the reporting unit exceeded its estimated fair value. Therefore, Step Two was performed for the General Banking/Treasury reporting unit as discussed below.

For purposes of performing Step Two of the goodwill impairment test, Regions compared the implied estimated fair value of the General Banking/Treasury reporting unit goodwill with the carrying amount of that goodwill. In order to determine the implied estimated fair value, a full purchase price allocation was performed in the same manner as if a business combination had occurred. As part of the Step Two analysis, Regions estimated the fair value of all of the assets and liabilities of the reporting unit, including unrecognized assets and liabilities. The fair values of certain material financial assets and liabilities and the valuation methodologies are discussed in Note 11, Fair Value Measurements. Based on the results of the Step Two analysis performed, Regions concluded the General Banking/Treasury reporting unit’s goodwill was not impaired as of September 30, 2009.

NOTE 9—Loan Servicing

Effective January 1, 2009, the Company made an election to prospectively change the policy for accounting for residential mortgage servicing rights from the amortization method to the fair value measurement method. Under the fair value measurement method, servicing assets are measured at fair value each period with changes in fair value recorded as a component of mortgage banking income.

The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. 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. Regions uses various derivative instruments to mitigate the effect of changes in the fair value of its mortgage servicing rights in the statement of operations. During the three months ended September 30, 2009 and the first nine months of 2009, Regions recognized a net $19.1 million gain and a net $16.3 million gain, respectively, associated with changes in mortgage servicing rights and the aforementioned derivatives, which is included in mortgage income. Additionally, during the third quarter of 2009, Regions adopted an option-adjusted spread (OAS) valuation approach. The OAS represents the additional spread over the swap rate that is required in order for the asset’s discounted cash flows to equal its market price. This change to OAS valuation did not materially impact the fair value of the mortgage servicing rights. An analysis of the OAS and its sensitivity to rate fluctuations is presented below.

The tables below present analyses of mortgage servicing rights:

 

(In millions)    Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Carrying value, beginning of period

   $ 202      $ 161   

Additions

     31        83   

Increase (decrease) in fair value:

    

Due to change in valuation inputs or assumptions

     (11     (2

Other changes(1)

     (6     (26
                

Carrying value, end of period

   $ 216      $ 216   
                

 

(1)

Represents economic amortization associated with borrower repayments.

 

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Table of Contents

Data and assumptions used in the fair value calculation related to residential mortgage servicing rights (excluding related derivative instruments) as of September 30, 2009 are as follows (dollars in millions):

 

Unpaid principal balance

   $ 23,951   

Weighted-average prepayment speed (CPR)

     20.36   

Estimated impact on fair value of a 10% increase

   $ (13

Estimated impact on fair value of a 20% increase

   $ (25

Option-adjusted spread (basis points)

     633   

Estimated impact on fair value of a 10% increase

   $ (4

Estimated impact on fair value of a 20% increase

   $ (8

Weighted-average coupon interest rate

     5.81

Weighted-average remaining maturity (months)

     285   

Weighted-average servicing fee (basis points)

     28.8   

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above.

NOTE 10—Derivative Financial Instruments and Hedging Activities

Regions enters into derivative financial instruments to manage interest rate risk, facilitate asset/liability management strategies and manage other exposures. These derivative instruments primarily include interest rate swaps, options on interest rate swaps, interest rate caps and floors, Eurodollar futures, forward rate contracts and forward sale commitments. All derivative financial instruments are recognized on the consolidated balance sheets as other assets or other liabilities at fair value. Regions enters into master netting agreements with counterparties and/or requires collateral based on counterparty credit ratings to cover exposures.

Interest rate swaps are agreements to exchange interest payments based upon notional amounts. Interest rate swaps subject Regions to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Option contracts involve rights to buy or sell financial instruments on a specified date or over a period at a specified price. These rights do not have to be exercised. Some option contracts such as interest rate floors, involve the exchange of cash based on changes in specified indices. Interest rate floors are contracts to hedge interest rate declines based on a notional amount. Interest rate floors subject Regions to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. Regions primarily enters into forward rate contracts on market instruments, which expose Regions to market risk associated with changes in the value of the underlying financial instrument, as well as the credit risk that the counterparty will fail to perform. Eurodollar futures are futures contracts on Eurodollar deposits. Eurodollar futures subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures.

 

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The following table presents the fair value of derivative instruments on a gross basis as of September 30, 2009:

 

     Asset Derivatives    Liability Derivatives
(In millions)    Balance Sheet
Location
   Fair
Value
   Balance Sheet
Location
   Fair
Value

Derivatives designated as hedging instruments

  

Interest rate swaps

   Other assets    $ 441    Other liabilities    $ —  

Interest rate options

   Other assets      62    Other liabilities      —  

Eurodollar futures(1)

   Other assets      —      Other liabilities      —  
                   

Total derivatives designated as hedging instruments

      $ 503       $ —  
                   

Derivatives not designated as hedging instruments

           

Interest rate swaps

   Other assets    $ 1,722    Other liabilities    $ 1,678

Interest rate options

   Other assets      33    Other liabilities      34

Interest rate futures and forward commitments

   Other assets      12    Other liabilities      16

Other contracts

   Other assets      31    Other liabilities      31
                   

Total derivatives not designated as hedging instruments

      $ 1,798       $ 1,759
                   

Total derivatives

      $ 2,301       $ 1,759
                   

 

(1)

Changes in fair value are cash-settled daily.

HEDGING DERIVATIVES

Derivatives entered into to manage interest rate risk and facilitate asset/liability management strategies are designated as hedging derivatives. Derivative financial instruments that qualify in a hedging relationship are classified, based on the exposure being hedged, as either fair value or cash flow hedges. The Company formally documents all hedging relationships between hedging instruments and the hedged items, as well as its risk management objective and strategy for entering into various hedge transactions. The Company performs periodic assessments to determine whether the hedging relationship has been highly effective in offsetting changes in fair values or cash flows of hedged items and whether the relationship is expected to continue to be highly effective in the future.

When a hedge is terminated or hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be recorded in the consolidated balance sheets at its fair value, with changes in fair value recognized currently in other non-interest income. Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the consolidated balance sheets and recognized currently in other non-interest expense. Gains and losses that were accumulated in other comprehensive income pursuant to the hedge of a forecasted transaction are recognized immediately in other non-interest expense.

 

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The following table presents the effect of derivative instruments on the statement of operations for the three months ended September 30, 2009:

 

Derivatives in

Fair Value
Hedging
Relationships

  Location of Gain
(Loss) Recognized

in Income on
Derivatives
    Amount of Gain (Loss)
Recognized in Income
on Derivatives
  Hedged Items in
Fair Value Hedge
Relationships
  Location of Gain (Loss)
Recognized in Income on
Related Hedged Item
  Amount of Gain (Loss)
Recognized in Income
on Related Hedged
Item
 
(In millions)  

Interest rate swaps

   
 
Other non-interest
expense
  
  
  $ 16    
 
Debt/
CDs
  Other non-interest
expense
  $ (15

Interest rate swaps

    Interest expense        43     Debt   Interest expense     1   
                   

Total

    $ 59       $ (14
                   

Derivatives in
Cash Flow
Hedging
Relationships

  Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)(1)
    Location of
Gain (Loss)
Reclassified from

Accumulated OCI into
Income (Effective
Portion)
  Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)(2)
  Location of Gain (Loss)
Recognized in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
  Amount of Gain (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)(2)
 
(In millions)  

Interest rate swaps

  $ (20    
 
Interest income
on loans
  $ 60   Other non-interest
expense
  $ 7   

Forward starting swaps

    (9    
 
Interest expense
on debt
    —     Other non-interest
expense
    —     

Interest rate options

    (2    
 
Interest income
on loans
    18   Interest income
on loans
    —     

Eurodollar futures

    (11    
 
Interest income
on loans
    19   Other non-interest
expense
    3   
                         

Total

  $ (42     $ 97     $ 10   
                         

 

(1)

After-tax

(2)

Pre-tax

The following table presents the effect of derivative instruments on the statement of operations for the nine months ended September 30, 2009:

 

Derivatives in

Fair Value

Hedging

Relationships

  Location of Gain
(Loss) Recognized

in Income on
Derivatives
  Amount of Gain (Loss)
Recognized in Income
on Derivatives
    Hedged Items in
Fair Value
Hedge
Relationships
  Location of Gain (Loss)
Recognized in Income on
Related Hedged Item
  Amount of Gain (Loss)
Recognized in Income
on Related Hedged
Item
(In millions)

Interest rate swaps

  Other non-interest
expense
  $ (48   Debt/CDs   Other non-interest
expense
  $ 49

Interest rate swaps

  Interest expense     116      Debt   Interest expense     3
                   

Total

    $ 68          $ 52
                   

 

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Derivatives in

Cash Flow

Hedging

Relationships

  Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)(1)
    Location of
Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
  Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)(2)
  Location of Gain (Loss)
Recognized in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
  Amount of Gain (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)(2)
(In millions)

Interest rate swaps

  $ (87   Interest income
on loans
  $ 189   Other non-interest
expense
  $ 8

Forward starting swaps

    8      Interest expense
on debt
    —     Other non-interest
expense
    —  

Interest rate options

    (25   Interest income
on loans
    76   Interest income
on loans
    —  

Eurodollar futures

    (16   Interest income
on loans
    30   Other non-interest
expense
    3
                       

Total

  $ (120     $ 295     $ 11
                       

 

(1)

After-tax

(2)

Pre-tax

FAIR VALUE HEDGES

Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item, are recognized in earnings in the period in which the change in fair value occurs. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. Hedge ineffectiveness exists to the extent the changes in fair value of the derivative do not offset the changes in fair value of the hedged item as other non-interest expense.

Regions enters into interest rate swap agreements to manage interest rate exposure on the Company’s fixed-rate borrowings, which includes long-term debt and certificates of deposit. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreements. As of September 30, 2009, the total notional amount of the Company’s interest rate swaps designated in fair value hedges was $6.1 billion.

CASH FLOW HEDGES

Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. For cash flow hedge relationships, the effective portion of the gain or loss related to the derivative instrument is recognized as a component of other comprehensive income. Ineffectiveness is measured by comparing the change in fair value of the respective derivative instrument and the change in fair value of a “perfectly effective” hypothetical derivative instrument. Ineffectiveness will be recognized in earnings only if it results from an overhedge. The ineffective portion of the gain or loss related to the derivative instrument, if any, is recognized in earnings as other non-interest expense during the period of change. Amounts recorded in other comprehensive income are recognized in earnings in the period or periods during which the hedged item impacts earnings.

Regions enters into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on LIBOR-based loans. The agreements effectively modify the Company’s exposure to interest rate risk by utilizing receive fixed/pay LIBOR interest rate swaps. As of September 30, 2009, the total notional amount of the Company’s interest rate swaps hedging cash flows on LIBOR loans was $4.3 billion.

 

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Regions issues long-term fixed-rate debt for various funding needs. Regions enters into receive LIBOR/pay-fixed forward starting swaps to hedge risks of changes in the projected quarterly interest payments attributable to changes in the benchmark interest rate (LIBOR) during the time leading up to the probable issuance date of the new long term fixed-rate debt. As of September 30, 2009, the total notional amount of the Company’s forward-starting swaps was $1.0 billion.

Regions enters into interest rate option contracts to protect cash flows through the maturity date of the hedging instrument on the designated one-month LIBOR floating-rate loans from adverse extreme market interest rate changes. As of September 30, 2009, the total notional amount of the Company’s interest rate options was $2.0 billion.

Regions purchases Eurodollar futures to hedge the variability in future cash flows based on forecasted resets of one-month LIBOR-based floating rate loans due to changes in the benchmark interest rate. As of September 30, 2009, the total notional amount of the Company’s Eurodollar futures was $40.2 billion.

Regions entered into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on prime-based loans. The agreements effectively modified the Company’s exposure to interest rate risk by utilizing receive fixed/pay prime interest rate swaps. During the quarter ended September 30, 2009, Regions terminated its hedges on prime-based loans.

Regions realized an after-tax benefit of $18.8 million in accumulated other comprehensive income at September 30, 2009, related to terminated cash flow hedges of loan and debt instruments which will be amortized into earnings in conjunction with the recognition of interest payments through 2012. Regions recognized pre-tax income of $30.9 million during the first nine months of 2009 related to this amortization.

Regions expects to reclassify out of other comprehensive income and into earnings approximately $182.7 million in pre-tax income due to the receipt of interest payments on all cash flow hedges within the next twelve months. Of this amount, $26.9 million relates to the amortization of discontinued cash flow hedges. The maximum length of time over which Regions is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately two years as of September 30, 2009.

TRADING DERIVATIVES

Derivative contracts that do not qualify for hedge accounting are classified as trading with gains and losses related to the change in fair value recognized in earnings during the period.

The Company maintains a derivatives trading portfolio of interest rate swaps, option contracts, and futures and forward commitments used to meet the needs of its customers. The portfolio is used to generate trading profit and to help clients manage market risk. The Company is subject to the credit risk that a counterparty will fail to perform. The Company is also subject to market risk, which is monitored by the asset/liability management function and evaluated by the Company. Separate derivative contracts are entered into to reduce overall market exposure to pre-defined limits. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through earnings and included in other assets and other liabilities. As of September 30, 2009, the total absolute notional amount of the Company’s derivatives trading portfolio was $65.8 billion.

In the normal course of business, Morgan Keegan enters into underwriting and forward and future commitments on U.S. Government and municipal securities. As of September 30, 2009, the contractual amounts of forward and future commitments was approximately $12.5 million. The brokerage subsidiary typically settles its position by entering into equal but opposite contracts and, as such, the contract amounts do not necessarily represent future cash requirements. Settlement of the transactions relating to such commitments is not expected to have a material effect on the subsidiary’s financial position. Transactions involving future settlement give rise to market risk, which represents the potential loss that can be caused by a change in the market value of a

 

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particular financial instrument. The exposure to market risk is determined by a number of factors, including size, composition and diversification of positions held, the absolute and relative levels of interest rates, and market volatility.

Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Fair value is based on fees currently charged to enter into similar agreements and, for fixed-rate commitments, considers the difference between current levels of interest rates and the committed rates. At September 30, 2009, Regions had $668.9 million in notional amounts of rate lock commitments. Regions manages market risk on interest rate lock commitments and mortgage loans held for sale with corresponding forward sale commitments, which are recorded at fair value with changes in fair value recorded in mortgage income. At September 30, 2009, Regions had $1.3 billion in absolute notional amounts related to these forward rate commitments.

On January 1, 2009, Regions made an election to account for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments and futures contracts, to mitigate the income statement effect of changes in the fair value of its mortgage servicing rights. As of September 30, 2009, the total notional amount related to these forward rate commitments and futures contracts was $1.8 billion.

The following table presents information for derivatives not designated as hedging instruments in the statement of operations for the three months ended September 30, 2009:

 

Derivatives Not Designated as Hedging

Instruments

   Location of Gain (Loss)
Recognized in Income
on Derivatives
   Amount of Gain (Loss)
Recognized in Income
on Derivatives
 
          (In millions)  

Interest rate swaps

   Brokerage income    $ (11

Interest rate options

   Brokerage income      —     

Interest rate options

   Mortgage income      5   

Interest rate futures and forward commitments

   Brokerage income      —     

Interest rate futures and forward commitments

   Mortgage income      13   

Other contracts

   Brokerage income      —     
           
      $ 7   
           

The following table presents information for derivatives not designated as hedging instruments in the statement of operations for the nine months ended September 30, 2009:

 

Derivatives Not Designated as Hedging

Instruments

   Location of Gain (Loss)
Recognized in Income
on Derivatives
   Amount of Gain (Loss)
Recognized in Income
on Derivatives
 
          (In millions)  

Interest rate swaps

   Brokerage income    $ 20   

Interest rate options

   Brokerage income      (42

Interest rate options

   Mortgage income      1   

Interest rate futures and forward commitments

   Brokerage income      7   

Interest rate futures and forward commitments

   Mortgage income      41   

Other contracts

   Brokerage income      1   
           
      $ 28   
           

Credit risk, defined as all positive exposures not collateralized with cash or other assets, at September 30, 2009, totaled approximately $1.2 billion. This amount represents the net credit risk on all trading and other derivative positions held by Regions.

 

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Table of Contents

CREDIT DERIVATIVES

Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty when the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2012 and 2026. Credit derivatives whereby Regions has sold credit protection have maturities between 2009 and 2015. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.

Regions’ maximum potential amount of future payments under these contracts is approximately $55.1 million. This scenario would only occur if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at September 30, 2009, was immaterial. In transactions where Regions has sold credit protection, recourse to collateral associated with the original swap transaction is available to offset some or all of Regions’ obligation.

CONTINGENT FEATURES

Certain Regions’ derivative instruments contain provisions that require Regions’ debt to maintain an investment grade credit rating from each of the major credit rating agencies. If Regions’ debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2009, was $436.0 million, for which Regions had posted collateral of $403.4 million in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2009, Regions would be required to post an additional $32.6 million of collateral to its counterparties.

NOTE 11—Fair Value Measurements

Fair value guidance 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). 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. Required disclosures include stratification of 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),

 

   

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

 

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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 (net of certain short-term borrowings), securities available for sale, mortgage loans held for sale, and derivatives were recorded at fair value on a recurring basis during 2009 and 2008. Mortgage servicing rights were recorded at fair value on a recurring basis only during 2009 (see Note 9).

The following tables present financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and 2008, respectively:

 

September 30, 2009

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

Trading account assets, net

   $ 321    $ 471    $ 189    $ 981

Securities available for sale

     256      20,687      87      21,030

Mortgage loans held for sale

     —        726      —        726

Mortgage servicing rights

     —        —        216      216

Derivatives, net(1)

     —        649      12      661

 

(1)

Derivatives include approximately $1.1 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 $101 million and cash collateral posted of $403 million with counterparties.

 

September 30, 2008

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

Trading account assets, net

   $ (115   $ 336    $ 246    $ 467

Securities available for sale

     2,686        14,854      93      17,633

Mortgage loans held for sale

     —          495      —        495

Derivatives, net(1)

     —          383      17      400

 

(1)

Derivatives 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’ consolidated balance sheets. Further, net trading account assets and net derivatives 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.

 

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Table of Contents

The following tables illustrate a rollforward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009 and 2008, respectively. The tables do 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.

 

     Fair Value Measurements Using
Significant Unobservable Inputs
Three Months Ended September 30, 2009
(Level 3 measurements only)
 
(In millions)    Trading
Account
Assets, net(1)
    Securities
Available
for Sale
    Mortgage
Servicing
Rights
    Net
Derivatives
 

Beginning balance, July 1, 2009

   $ 133      $ 73      $ 202      $ 7   

Total gains (losses) realized and unrealized:

        

Included in earnings(1)

     73        —          (17     31   

Included in other comprehensive income

     —          16        —          —     

Purchases and issuances

     (27,623     —          31        —     

Settlements

     27,350        (2     —          (26

Transfers in and/or out of Level 3, net

     256        —          —          —     
                                

Ending balance, September 30, 2009

   $ 189      $ 87      $ 216      $ 12   
                                

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

     Fair Value Measurements Using
Significant Unobservable Inputs

Three Months Ended September 30, 2008
(Level 3 measurements only)
 
(In millions)    Trading
Account
Assets, net(1)
    Securities
Available
for Sale
    Net
Derivatives
 

Beginning balance, July 1, 2008

   $ 370      $ 105      $ 12   

Total gains (losses) realized and unrealized:

      

Included in earnings(1)

     (6     —          15   

Included in other comprehensive income

     —          (4     —     

Purchases and issuances

     4,740        —          —     

Settlements

     (4,856     (8     (10

Transfers in and/or out of Level 3, net

     (2     —          —     
                        

Ending balance, September 30, 2008

   $ 246      $ 93      $ 17   
                        

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

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Table of Contents
     Fair Value Measurements Using
Significant Unobservable Inputs
Nine Months Ended September 30, 2009
(Level 3 measurements only)
 
(In millions)    Trading
Account
Assets, net(1)
    Securities
Available
for Sale
    Mortgage
Servicing
Rights
    Net
Derivatives
 

Beginning balance, January 1, 2009

   $ 275      $ 95      $ 161      $ 55   

Total gains (losses) realized and unrealized:

        

Included in earnings(1)

     209        (15     (28     34   

Included in other comprehensive income

     —          20        —          —     

Purchases and issuances

     (87,387     —          83        —     

Settlements

     86,656        (13     —          (77

Transfers in and/or out of Level 3, net

     436        —          —          —     
                                

Ending balance, September 30, 2009

   $ 189      $ 87      $ 216      $ 12   
                                

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

     Fair Value Measurements Using
Significant Unobservable Inputs
Nine Months Ended September 30, 2008
(Level 3 measurements only)
 
(In millions)    Trading
Account
Assets, net(1)
    Securities
Available
for Sale
    Net
Derivatives
 

Beginning balance, January 1, 2008

   $ 109      $ 73      $ 8   

Total gains (losses) realized and unrealized:

      

Included in earnings(1)

     (9     —          32   

Included in other comprehensive income

     —          (13     —     

Purchases and issuances

     8,949        49        1   

Settlements

     (8,804     (16     (24

Transfers in and/or out of Level 3, net

     1        —          —     
                        

Ending balance, September 30, 2008

   $ 246      $ 93      $ 17   
                        

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

The following tables detail the presentation of both realized and unrealized gains and losses recorded in earnings for Level 3 assets for the three and nine months ended September 30, 2009 and 2008, respectively:

 

     Total Gains and Losses
(Level 3 measurements only)
Three Months Ended September 30, 2009
(In millions)    Trading
Account
Assets, net(1)
   Securities
Available
for Sale
   Mortgage
Servicing
Rights
    Net
Derivatives

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

          

Brokerage, investment banking and capital markets

   $ 73    $ —      $ —        $ —  

Mortgage income

     —        —        (17     31

Other income

     —        —        —          —  

Other comprehensive income

     —        16      —          —  
                            

Total realized and unrealized gains and (losses)

   $ 73    $ 16    $ (17   $ 31
                            

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

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Table of Contents
     Total Gains and Losses
(Level 3 measurements only)
Three Months Ended September 30, 2008
(In millions)    Trading
Account
Assets, net(1)
    Securities
Available
for Sale
    Net
Derivatives

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

      

Interest income

   $ —        $ —        $ —  

Brokerage and investment banking

     (6     —          —  

Mortgage income

     —          —          10

Other income

     —          —          5

Other comprehensive income

     —          (4     —  
                      

Total realized and unrealized gains and (losses)

   $ (6   $ (4   $ 15
                      

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

     Total Gains and Losses
(Level 3 measurements only)
Nine Months Ended September 30, 2009
 
(In millions)    Trading
Account
Assets, net(1)
   Securities
Available

for Sale
    Mortgage
Servicing
Rights
    Net
Derivatives
 

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

         

Brokerage, investment banking and capital markets

   $ 209    $ —        $ —        $ (35

Mortgage income

     —        —          (28     69   

Other income

     —        (15     —          —     

Other comprehensive income

     —        20        —          —     
                               

Total realized and unrealized gains and (losses)

   $ 209    $ 5      $ (28   $ 34   
                               

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

     Total Gains and Losses
(Level 3 measurements only)
Nine Months Ended September 30,
2008
(In millions)    Trading
Account
Assets, net(1)
    Securities
Available
for Sale
    Net
Derivatives

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

      

Interest income

   $ 1      $ —        $ —  

Brokerage and investment banking

     (10     —          —  

Mortgage income

     —          —          27

Other income

     —          —          5

Other comprehensive income

     —          (13     —  
                      

Total realized and unrealized gains and (losses)

   $ (9   $ (13   $ 32
                      

 

(1)

Brokerage income from trading account assets, net, primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.

 

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The following tables detail the presentation of only unrealized gains and losses recorded in earnings for Level 3 assets for the three and nine months ended September 30, 2009 and 2008, respectively:

 

     Three Months Ended September 30, 2009
(In millions)    Trading
Account
Assets, net
    Securities
Available
for Sale
   Mortgage
Servicing
Rights
    Net
Derivatives

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, 2009:

         

Brokerage, investment banking and capital markets

   $ (1   $ —      $ —        $ 31

Mortgage income

     —          —        (11     —  

Other income

     —          —        —          —  

Other comprehensive income

     —          16      —          —  
                             

Total unrealized gains and (losses)

   $ (1   $ 16    $ (11   $ 31
                             

 

     Three Months Ended September 30, 2008
(In millions)    Trading
Account
Assets, net
    Securities
Available
for Sale
    Net
Derivatives

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:

      

Brokerage and investment banking

   $ (2   $ —        $ —  

Mortgage income

     —          —          10

Other income

     —          —          5

Other comprehensive income

     —          (4     —  
                      

Total unrealized gains and (losses)

   $ (2   $ (4   $ 15
                      

 

     Nine Months Ended September 30, 2009
(In millions)    Trading
Account
Assets, net
    Securities
Available
for Sale
    Mortgage
Servicing
Rights
    Net
Derivatives

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, 2009:

        

Brokerage, investment banking and capital markets

   $ (1   $ —        $ —        $ 6

Mortgage income

     —          —          (2     69

Other income

     —          (15     —          —  

Other comprehensive income

     —          20        —          —  
                              

Total unrealized gains and (losses)

   $ (1   $ 5      $ (2   $ 75
                              

 

37


Table of Contents
     Nine Months Ended September 30, 2008
(In millions)    Trading
Account
Assets, net
    Securities
Available
for Sale
    Net
Derivatives

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:

      

Brokerage and investment banking

   $ (2   $ —        $ —  

Mortgage income

     —          —          27

Other income

     —          —          5

Other comprehensive income

     —          (13     —  
                      

Total unrealized gains and (losses)

   $ (2   $ (13   $ 32
                      

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 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 carrying values in this table represent only those assets marked to fair value during the quarter ended September 30, 2009.

 

     Carrying Value as of September 30, 2009    Fair value
adjustments for the
three months ended
September 30, 2009
 
(In millions)     Level 1      Level 2      Level 3      Total    
             

Loans held for sale

   $ —      $ 132    $ 16    $ 148    $ (79

Foreclosed property and other real estate

     —        340      —        340      (78

FAIR VALUE OPTION

Regions adopted the fair value option for certain financial assets and financial liabilities, as of January 1, 2008. The fair value option 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. Additionally, the fair value option 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