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 June 30, 2010

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 No.)

1900 Fifth Avenue North

Birmingham, Alabama

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

(205) 326-5807

(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 1,255,941,000 shares of common stock, par value $.01, outstanding as of July 31, 2010.

 

 

 


Table of Contents

REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

              Page

Part I. Financial Information

  
  Item 1.   

Financial Statements (Unaudited)

  
    

Consolidated Balance Sheets—June 30, 2010, December 31, 2009 and June 30, 2009

   5
    

Consolidated Statements of Operations—Three and six months ended June 30, 2010 and 2009

   6
    

Consolidated Statements of Changes in Stockholders’ Equity—Six months ended June 30, 2010 and 2009

   7
    

Consolidated Statements of Cash Flows—Six months ended June 30, 2010 and 2009

   8
    

Notes to Consolidated Financial Statements

   9
  Item 2.   

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

   46
  Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   84
  Item 4.   

Controls and Procedures

   84

Part II. Other Information

  
  Item 1.   

Legal Proceedings

   85
  Item 1A.   

Risk Factors

   86
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   89
  Item 6.   

Exhibits

   90

Signatures

   91

 

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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:

 

   

The Dodd-Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, and a number of legislative, regulatory and tax proposals remain pending. Additionally, the U.S. Treasury and federal banking regulators continue to implement, but are also beginning to wind down, a number of programs to address capital and liquidity in the banking system. All of the foregoing 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 repays the outstanding preferred stock and warrant issued under the TARP, including restrictions on Regions’ ability to attract and retain talented executives and associates.

 

   

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

 

   

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

 

   

Possible changes in general economic and business conditions in the United States in general and in the communities Regions serves in particular, including any prolonging or worsening of the current unfavorable economic conditions, including unemployment levels.

 

   

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.

 

   

Regions’ ability to ensure adequate capitalization which is impacted by inherent uncertainties in forecasting credit losses.

 

   

The cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative, or arbitral rulings or proceedings.

 

   

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 floods, droughts and hurricanes, and the effects of the Gulf of Mexico oil spill.

 

   

Regions’ ability to maintain favorable ratings from rating agencies.

 

   

Potential dilution of holders of shares of Regions’ common stock resulting from the U.S. Treasury’s investment in TARP.

 

   

Possible changes in the speed of loan prepayments by Regions’ customers and loan origination or sales volumes.

 

   

The effects of problems encountered by larger or similar financial institutions that adversely affect Regions or the banking industry generally.

 

   

Regions’ ability to receive dividends from its subsidiaries.

 

   

The effects of the failure of any component of Regions’ business infrastructure which is provided by a third party.

 

   

The effects of any damage to Regions’ reputation resulting from developments related to any of the items identified above.

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 this Form 10-Q and of Regions’ Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

 

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30
2010
    December 31
2009
    June 30
2009
 
     (In millions, except share data)  
Assets       

Cash and due from banks

   $ 2,097      $ 2,052      $ 2,363   

Interest-bearing deposits in other banks

     4,562        5,580        2,846   

Federal funds sold and securities purchased under agreements to resell

     752        379        3,221   

Trading account assets

     1,261        3,039        1,109   

Securities available for sale

     24,166        24,069        19,681   

Securities held to maturity

     28        31        43   

Loans held for sale (includes $819, $780 and $1,373 measured at fair value, respectively)

     1,162        1,511        1,932   

Loans, net of unearned income

     85,945        90,674        96,149   

Allowance for loan losses

     (3,185     (3,114     (2,282
                        

Net loans

     82,760        87,560        93,867   

Other interest-earning assets

     1,082        734        829   

Premises and equipment, net

     2,588        2,668        2,789   

Interest receivable

     466        468        501   

Goodwill

     5,561        5,557        5,556   

Mortgage servicing rights

     220        247        202   

Other identifiable intangible assets

     443        503        568   

Other assets

     8,192        7,920        7,304   
                        

Total assets

   $ 135,340      $ 142,318      $ 142,811   
                        
Liabilities and Stockholders’ Equity       

Deposits:

      

Non-interest-bearing

   $ 22,993      $ 23,204      $ 20,995   

Interest-bearing

     73,257        75,476        73,731   
                        

Total deposits

     96,250        98,680        94,726   

Borrowed funds:

      

Short-term borrowings:

      

Federal funds purchased and securities sold under agreements to repurchase

     1,929        1,893        2,265   

Other short-term borrowings

     1,035        1,775        4,927   
                        

Total short-term borrowings

     2,964        3,668        7,192   

Long-term borrowings

     15,415        18,464        18,238   
                        

Total borrowed funds

     18,379        22,132        25,430   

Other liabilities

     3,248        3,625        3,918   
                        

Total liabilities

     117,877        124,437        124,074   

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

     3,360        3,343        3,325   

Series B, mandatorily convertible, cumulative perpetual participating, par value $1,000.00 (liquidation preference $1,000.00) per share;
Issued—0; 267,665 and 287,500 shares, respectively

     —          259        278   

Common stock, par value $.01 per share:

      

Authorized 1.5 billion shares

      

Issued including treasury stock—1,298,911,598; 1,235,850,589 and 1,231,643,211 shares, respectively

     13        12        12   

Additional paid-in capital

     19,038        18,781        18,740   

Retained earnings (deficit)

     (3,849     (3,235     (2,169

Treasury stock, at cost—42,969,345; 43,241,020 and 43,439,788 shares, respectively

     (1,405     (1,409     (1,413

Accumulated other comprehensive income (loss), net

     306        130        (36
                        

Total stockholders’ equity

     17,463        17,881        18,737   
                        

Total liabilities and stockholders’ equity

   $ 135,340      $ 142,318      $ 142,811   
                        

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
       2010         2009         2010         2009    
     (In millions, except per share data)  

Interest income on:

        

Loans, including fees

   $ 930      $ 1,073      $ 1,875      $ 2,171   

Securities:

        

Taxable

     224        239        466        478   

Tax-exempt

     —          5        1        12   
                                

Total securities

     224        244        467        490   

Loans held for sale

     9        15        17        31   

Federal funds sold and securities purchased under agreements to resell

     1        1        1        2   

Trading account assets

     9        10        21        22   

Other interest-earning assets

     7        8        14        14   
                                

Total interest income

     1,180        1,351        2,395        2,730   

Interest expense on:

        

Deposits

     194        330        436        696   

Short-term borrowings

     2        16        5        36   

Long-term borrowings

     128        174        267        358   
                                

Total interest expense

     324        520        708        1,090   
                                

Net interest income

     856        831        1,687        1,640   

Provision for loan losses

     651        912        1,421        1,337   
                                

Net interest income (loss) after provision for loan losses

     205        (81     266        303   

Non-interest income:

        

Service charges on deposit accounts

     302        288        590        557   

Brokerage, investment banking and capital markets

     254        263        490        480   

Mortgage income

     63        64        130        137   

Trust department income

     49        48        97        94   

Securities gains, net

     —          108        59        161   

Leveraged lease termination gains

     —          189        19        512   

Other

     88        239        183        324   
                                

Total non-interest income

     756        1,199        1,568        2,265   

Non-interest expense:

        

Salaries and employee benefits

     560        586        1,135        1,125   

Net occupancy expense

     110        112        230        219   

Furniture and equipment expense

     79        78        153        154   

Other-than-temporary impairments (1)

     —          69        1        72   

Regulatory charge

     200        —          200        —     

Other

     377        386        837        719   
                                

Total non-interest expense

     1,326        1,231        2,556        2,289   
                                

Income (loss) before income taxes

     (365     (113     (722     279   

Income taxes

     (88     75        (249     390   
                                

Net income (loss)

   $ (277   $ (188   $ (473   $ (111
                                

Net income (loss) available to common shareholders

   $ (335   $ (244   $ (590   $ (218
                                

Weighted-average number of shares outstanding:

        

Basic

     1,200        876        1,197        785   

Diluted

     1,200        876        1,197        785   

Earnings (loss) per common share:

        

Basic

   $ (0.28   $ (0.28   $ (0.49   $ (0.28

Diluted

     (0.28     (0.28     (0.49     (0.28

Cash dividends declared per common share

     0.01        0.01        0.02        0.11   

 

(1)

Includes $260 million for the three months ended and $263 million for the six months ended June 30, 2009, respectively, of gross charges, net of $191 million non-credit portion reported in other comprehensive income (loss). The corresponding 2010 amounts are immaterial.

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

    Preferred Stock     Common Stock   Additional
Paid-In

Capital
    Retained
Earnings

(Deficit)
    Treasury
Stock,

At Cost
    Accumulated
Other
Comprehensive

Income (Loss)
       
    Shares   Amount     Shares   Amount           Total  
    (In millions, except per share data)  

BALANCE AT JANUARY 1, 2009

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

Comprehensive income:

                 

Net income (loss)

  —       —        —       —       —          (111     —          —          (111

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*

  —       —        —       —       —          —          —          170        170   

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*

  —       —        —       —       —          —          —          (78     (78

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

  —       —        —       —       —          —          —          18        18   
                       

Comprehensive income (loss)

                    (125

Cash dividends declared—$0.11 per share

  —       —        —       —       —          (82     —          —          (82

Preferred dividends

  —       —        —       —       —          (89     —          —          (89

Preferred stock transactions:

                 

Net proceeds from issuance of 287.5 thousand shares of mandatorily convertible preferred stock

  —       278      —       —       —          —          —          —          278   

Discount accretion

  —       18      —       —       —          (18     —          —          —     

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 in connection with early extinguishment of debt

  —       —        33     —       135        —          —          —          135   

Stock transactions under compensation plans, net

  —       —        4     —       9        —          12        —          21   

Amortization of unearned restricted stock and related adjustments

  —       —        —       —       17        —          —          —          17   
                                                             

BALANCE AT JUNE 30, 2009

  4   $ 3,603      1,188   $ 12   $ 18,740      $ (2,169   $ (1,413   $ (36   $ 18,737   
                                                             

BALANCE AT JANUARY 1, 2010

  4   $ 3,602      1,193   $ 12   $ 18,781      $ (3,235   $ (1,409   $ 130      $ 17,881   

Comprehensive income:

                 

Net income (loss)

  —       —        —       —       —          (473     —          —          (473

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

  —       —        —       —       —          —          —          234        234   

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

  —       —        —       —       —          —          —          (67     (67

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

  —       —        —       —       —          —          —          9        9   
                       

Comprehensive income (loss)

                    (297

Cash dividends declared—$0.02 per share

  —       —        —       —       —          (24     —          —          (24

Preferred dividends

  —       —        —       —       3        (100     —          —          (97

Preferred stock transactions:

                 

Conversion of mandatorily convertible preferred stock into 63 million shares of common stock

  —       (259   63     1     258        —          —          —          —     

Discount accretion

  —       17      —       —       —          (17     —          —          —     

Common stock transactions:

                 

Stock transactions under compensation plans, net

  —       —        —       —       (5     —          4        —          (1

Amortization of unearned restricted stock and related adjustments

  —       —        —       —       1        —          —          —          1   
                                                             

BALANCE AT JUNE 30, 2010

  4   $ 3,360      1,256   $ 13   $ 19,038      $ (3,849   $ (1,405   $ 306      $ 17,463   
                                                             

See notes to consolidated financial statements.

 

*

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

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended June 30  
         2010             2009      
     (In millions)  

Operating activities:

    

Net income (loss)

   $ (473   $ (111

Adjustments to reconcile net cash provided by operating activities:

    

Provision for loan losses

     1,421        1,337   

Depreciation and amortization of premises and equipment

     145        140   

Provision for losses on other real estate, net

     64        36   

Net amortization (accretion) of securities

     92        (9

Net amortization of loans and other assets

     109        131   

Net accretion of deposits and borrowings

     (3     (9

Net securities gains

     (59     (161

Loss (gain) on early extinguishment of debt

     53        (61

Other-than-temporary impairments, net

     1        72   

Deferred income tax benefit

     (146     (302

Originations and purchases of loans held for sale

     (2,294     (4,683

Proceeds from sales of loans held for sale

     2,853        4,261   

Gain on sale of loans, net

     (33     (67

Decrease (increase) in trading account assets

     1,778        (59

(Increase) decrease in other interest-earning assets

     (348     68   

Decrease (increase) in interest receivable

     2        (43

(Increase) decrease in other assets

     (58     1,130   

(Decrease) increase in other liabilities

     (365     458   

Other

     61        (38
                

Net cash from operating activities

     2,800        2,090   

Investing activities:

    

Proceeds from sales of securities available for sale

     1,460        2,413   

Proceeds from maturities of:

    

Securities available for sale

     3,686        2,674   

Securities held to maturity

     3        4   

Purchases of:

    

Securities available for sale

     (4,899     (5,741

Proceeds from sales of loans

     630        168   

Net decrease (increase) in loans

     2,209        (364

Net purchases of premises and equipment

     (71     (143

Net cash received from deposits assumed

     —          279   
                

Net cash from investing activities

     3,018        (710

Financing activities:

    

Net (decrease) increase in deposits

     (2,430     3,545   

Net decrease in short-term borrowings

     (704     (8,630

Proceeds from long-term borrowings

     743        1,200   

Payments on long-term borrowings

     (3,901     (1,923

Net proceeds from issuance of mandatorily convertible preferred stock

     —          278   

Net proceeds from issuance of common stock

     —          1,769   

Cash dividends on common stock

     (24     (82

Cash dividends on preferred stock

     (97     (89

Proceeds from stock transactions under compensation plans

     (5     9   
                

Net cash from financing activities

     (6,418     (3,923
                

Decrease in cash and cash equivalents

     (600     (2,543

Cash and cash equivalents at beginning of year

     8,011        10,973   
                

Cash and cash equivalents at end of period

   $ 7,411      $ 8,430   
                

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Six Months Ended June 30, 2010 and 2009

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, 2009.

Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date 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.

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
June 30
    Six Months Ended
June 30
 
         2010             2009             2010             2009      
     (In millions, except per share amounts)  

Numerator:

        

Net income (loss)

   $ (277   $ (188   $ (473   $ (111

Preferred stock dividends and accretion

     (58     (56     (117     (107
                                

Net income (loss) available to common shareholders

   $ (335   $ (244   $ (590   $ (218
                                

Denominator:

        

Weighted-average common shares outstanding—basic

     1,200        876        1,197        785   

Common stock equivalents

     —          —          —          —     
                                

Weighted-average common shares outstanding—diluted

     1,200        876        1,197        785   
                                

Earnings (loss) per common share:

        

Basic

   $ (0.28   $ (0.28   $ (0.49   $ (0.28

Diluted

     (0.28     (0.28     (0.49     (0.28

 

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The effect from the assumed exercise of 57 million stock options for both the quarter and six months ended June 30, 2010 and 55 million stock options for both the quarter and six months ended June 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.

As discussed in Note 3 to the consolidated financial statements, approximately 63 million common shares were issued in June of 2010 in connection with the conversion of the remaining Series B mandatorily convertible preferred shares, which were originally issued in May 2009. Under applicable accounting literature, such shares should be included in the denominator in arriving at diluted earnings per share as if they were issued at the beginning of the reporting period or as of the date issued, if later. However, the assumed conversion was not included in the computation above because such amounts would have had an antidilutive effect on earnings (loss) per common share.

NOTE 3—Stockholders’ Equity and Comprehensive Income (Loss)

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 percent dividend, or $175 million annually, for each of the first five years of the investment, and 9 percent 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 percent, based on this yield curve at a 5-year maturity. Dividends were assumed to be accrued until redemption. While the discounting was required 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 percent, was consistent with the indicative yield of the curve noted above. The longest available point on this curve was 10.55 percent 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.

 

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(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 $88 million during the first six months of both 2010 and 2009. The unamortized discount on the preferred shares was $140 million at June 30, 2010, $157 million at December 31, 2009 and $175 million at June 30, 2009. Discount accretion on the preferred shares reduced retained earnings by $17 million and $18 million during the first six months of 2010 and 2009, respectively. Both the preferred securities and the warrant are accounted for as components of Regions’ regulatory Tier 1 Capital.

On May 20, 2009 the Company issued 287,500 shares of mandatorily convertible preferred stock, Series B (“Series B shares”), generating net proceeds of approximately $278 million. Accrued dividends on the Series B shares reduced retained earnings by $12 million and $1 million for the first six months of 2010 and 2009, respectively. In November 2009, a single investor converted approximately 20,000 Series B shares to common shares as allowed under the original transaction documents. On June 18, 2010, as allowed by the terms of the Series B shares, Regions initiated an early conversion of all of the remaining outstanding Series B shares. Dividends accrued and unpaid at the conversion date were settled through issuance of common shares in accordance with the original document. No Series B shares were outstanding at June 30, 2010. Approximately 63 million common shares were issued in the conversion and dividend settlement.

On May 20, 2009, the Company announced a public equity offering and 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, in the second quarter of 2009, 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”). 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 June 30, 2010, 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 six months of 2010. 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 second quarters of both 2010 and 2009. Regions does not expect to increase its quarterly dividend above $0.01 for the foreseeable future. Cash dividends declared for the first six months of 2010 and 2009 were $0.02 and $0.11, respectively.

Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity. Items are recognized as components of comprehensive income (loss) and are displayed in the consolidated statements of changes in stockholders’ equity. In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double-counting items that are displayed as part of net income (loss) for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.

 

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

 

     Three Months Ended June 30, 2010  
     Before Tax     Tax Effect     Net of Tax  
     (In millions)  

Net income (loss)

   $ (365   $ 88      $ (277

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

     331        (126     205   

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

     —          —          —     
                        

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

     331        (126     205   

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

     (16     6        (10

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

     63        (24     39   
                        

Net change in unrealized gains and losses on derivative instruments

     (79     30        (49

Net actuarial gains and losses arising during the period

     22        (9     13   

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

     11        (4     7   
                        

Net change from defined benefit plans

     11        (5     6   
                        

Comprehensive income (loss)

   $ (102   $ (13   $ (115
                        
     Three Months Ended June 30, 2009  
     Before Tax     Tax Effect     Net of Tax  
     (In millions)  

Net income (loss)

   $ (113   $ (75   $ (188

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

     297        (108     189   

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

     191        (67     124   

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

     108        (37     71   
                        

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

     (2     (4     (6

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

     34        (13     21   

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

     103        (39     64   
                        

Net change in unrealized gains and losses on derivative instruments

     (69     26        (43

Net actuarial gains and losses arising during the period

     39        (13     26   

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

     11        (4     7   
                        

Net change from defined benefit plans

     28        (9     19   
                        

Comprehensive income (loss)

   $ (156   $ (62   $ (218
                        

 

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     Six Months Ended June 30, 2010  
     Before Tax     Tax Effect     Net of Tax  
     (In millions)  

Net income (loss)

   $ (722   $ 249      $ (473

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

     437        (165     272   

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

     59        (21     38   
                        

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

     378        (144     234   

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

     18        (7     11   

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

     126        (48     78   
                        

Net change in unrealized gains and losses on derivative instruments

     (108     41        (67

Net actuarial gains and losses arising during the period

     39        (16     23   

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

     22        (8     14   
                        

Net change from defined benefit plans

     17        (8     9   
                        

Comprehensive income (loss)

   $ (435   $ 138      $ (297
                        
     Six Months Ended June 30, 2009  
     Before Tax     Tax Effect     Net of Tax  
     (In millions)  

Net income (loss)

   $ 279      $ (390   $ (111

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

     431        (156     275   

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

     191        (67     124   

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

     161        (56     105   
                        

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

     79        (33     46   

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

     73        (28     45   

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

     198        (75     123   
                        

Net change in unrealized gains and losses on derivative instruments

     (125     47        (78

Net actuarial gains and losses arising during the period

     48        (16     32   

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

     22        (8     14   
                        

Net change from defined benefit plans

     26        (8     18   
                        

Comprehensive income (loss)

   $ 259      $ (384   $ (125
                        

 

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NOTE 4—Pension and Other Postretirement Benefits

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

 

     For The Three Months Ended June 30  
     Pension     Other Postretirement
Benefits
 
     2010     2009         2010             2009      
     (In millions)  

Service cost

   $ 10      $ 1      $ —        $ —     

Interest cost

     23        21        1        1   

Expected return on plan assets

     (25     (22     —          —     

Amortization of prior service cost (credit)

     1        1        (1     (1

Amortization of actuarial loss

     10        11        —          —     
                                
   $ 19      $ 12      $ —        $ —     
                                
     For The Six Months Ended June 30  
     Pension     Other Postretirement
Benefits
 
         2010             2009         2010     2009  
     (In millions)  

Service cost

   $ 19      $ 2      $ —        $ —     

Interest cost

     46        43        2        1   

Expected return on plan assets

     (50     (44     —          —     

Amortization of prior service cost (credit)

     1        1        (1     (1

Amortization of actuarial loss

     21        22        —          —     
                                
   $ 37      $ 24      $ 1      $ —     
                                

During 2009, participant accruals of service in the Regions Financial Corporation Retirement Plan and the Company’s current active non-qualified supplemental retirement plan (the “SERP”) were temporarily suspended resulting in a reduction in service cost. Effective January 1, 2010, the benefit accruals were reinstated for pension plan and SERP participants.

Matching contributions in the 401(k) plan were temporarily suspended beginning in the second quarter of 2009. Effective January 1, 2010, Regions restored matching contributions to the 401(k) plan to pre-existing levels.

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/or stock appreciation rights. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors; however, no awards 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 lives of options granted under these plans range from seven to ten years from the date of grant.

On May 13, 2010, the shareholders of the Company approved the Regions Financial Corporation 2010 Long-Term Incentive Plan (“2010 LTIP”), which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2010 LTIP authorizes 100 million common share equivalents available for grant, where grants of options count as one share equivalent and grants of full value awards (e.g., shares of restricted stock and restricted stock units) count as 2.25 share equivalents. Unless otherwise determined

 

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by the Compensation Committee of the Board of Directors, grants of restricted stock and restricted stock units accrue dividends as they are declared by the Board of Directors, and the dividends are paid upon vesting of the award. The 2010 LTIP closed all prior long-term incentive plans to new grants, and accordingly, prospective grants must be made under the 2010 LTIP or a successor plan. All existing grants under prior long-term incentive plans were unaffected by this amendment. The number of remaining share equivalents available for future issuance under the active long-term compensation plan was approximately 91 million at June 30, 2010.

In the second quarter of 2010, Regions made stock option grants that vest based upon a service condition. The fair value of these stock options was estimated on the date of the grant using a Black-Scholes option pricing model and related assumptions. The stock options vest ratably over a 3-year term. During the first quarter of 2009, Regions made stock option grants from prior long-term incentive plans 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 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.

The following table summarizes the weighted-average assumptions used and the estimated fair values related to stock options granted during the six months ended June 30:

 

     June 30
         2010        2009

Expected option life

     5.8 yrs.      6.8 yrs.

Expected volatility

     74.04%        67.15%  

Expected dividend yield

     2.22%        1.85%  

Risk-free interest rate

     2.24%        2.80%  

Fair value

   $ 3.86         $ 1.78     

The second quarter 2010 awards of stock options were granted to a broader pool of employees than the 2009 awards. The expected exercise behavior of the broader base of employees receiving awards resulted in a lower expected option life when comparing 2010 to 2009. The expected volatility increased based upon increases in the historical volatility of Regions’ stock price, offset slightly by reductions in the implied volatility measurements from traded options on the Company’s stock. The expected dividend yield increased based upon the company’s expectation of increased dividends over the long term.

The following table details the activity during the first six months of 2010 and 2009 related to stock options:

 

     For the Six Months Ended June 30
     2010    2009
     Number of
Options
    Wtd. Avg.
Exercise
Price
   Number of
Options
    Wtd. Avg.
Exercise
Price

Outstanding at beginning of period

   52,968,560      $ 26.34    52,955,298      $ 28.22

Granted

   7,173,667        7.00    4,063,209        3.29

Exercised

   (24,589     3.29    —          —  

Forfeited or cancelled

   (3,281,332     19.85    (1,594,451     30.37
                 

Outstanding at end of period

   56,836,306      $ 24.29    55,424,056      $ 26.31
                 

Exercisable at end of period

   45,905,668      $ 27.77    44,376,343      $ 28.79
                 

In the second quarter of 2010, Regions granted 800 thousand restricted shares that vest based upon a service condition. The fair value of these restricted shares was estimated based upon the fair value of the underlying shares on the date of the grant. The valuation was not adjusted for the deferral of dividends.

 

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In the first quarter of 2009, Regions granted 2.9 million restricted shares from prior long-term incentive plans 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 percent, expected dividend yield of 1.00 percent, 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 six months of 2010 and 2009 related to restricted share awards and units:

 

     For the Six Months Ended June 30
     2010    2009
     Number of
Shares
    Wtd. Avg.
Grant Date
Fair Value
   Number of
Shares
    Wtd. Avg.
Grant Date
Fair Value

Non-vested at beginning of period

   5,964,594      $ 17.15    4,123,911      $ 27.67

Granted

   1,151,968        6.96    3,100,415        2.87

Vested

   (844,787     34.44    (288,406     33.44

Forfeited

   (1,024,271     16.65    (155,303     26.64
                 

Non-vested at end of period

   5,247,504      $ 12.23    6,780,617      $ 16.11
                 

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:

 

June 30, 2010

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

Securities available for sale:

          

U.S. Treasury securities

   $ 59    $ 5    $ —        $ 64

Federal agency securities

     43      2      —          45

Obligations of states and political subdivisions

     33      5      —          38

Mortgage-backed securities:

          

Residential agency

     22,040      784      —          22,824

Residential non-agency

     22      3      —          25

Commercial agency

     19      2      —          21

Other debt securities

     29      —        (3     26

Equity securities

     1,110      13      —          1,123
                            
   $ 23,355    $ 814    $ (3   $ 24,166
                            

Securities held to maturity:

          

U.S. Treasury securities

   $ 7    $ —      $ —        $ 7

Federal agency securities

     5      1      —          6

Mortgage-backed securities:

          

Residential agency

     14      —        —          14

Other debt securities

     2      —        —          2
                            
   $ 28    $ 1    $ —        $ 29
                            

 

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December 31, 2009

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

Securities available for sale:

          

U.S. Treasury securities

   $ 46    $ 4    $ —        $ 50

Federal agency securities

     44      1      —          45

Obligations of states and political subdivisions

     70      —        —          70

Mortgage-backed securities:

          

Residential agency

     22,271      474      (61     22,684

Residential non-agency

     33      3      —          36

Commercial agency

     20      1      —          21

Other debt securities

     22      —        (3     19

Equity securities

     1,132      12      —          1,144
                            
   $ 23,638    $ 495    $ (64   $ 24,069
                            

Securities held to maturity:

          

U.S. Treasury securities

   $ 7    $ —      $ —        $ 7

Federal agency securities

     6      —        —          6

Mortgage-backed securities:

          

Residential agency

     16      —        —          16

Other debt securities

     2      —        —          2
                            
   $ 31    $ —      $ —        $ 31
                            

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 and six months ended June 30, 2010, Regions recorded a credit related impairment charge of approximately $0 and $1 million, respectively. For the three and six months ended June 30, 2009, Regions recorded a credit related impairment charge of approximately $69 million and $72 million, respectively. There were no non-credit related impairment charges recorded during the three and six months ended June 30, 2010. For both the three and six months ended June 30, 2009, $191 million non-credit portion of other-than-temporary impairment charges were recorded in other comprehensive income (loss).

The following tables present unrealized loss and estimated fair value of securities available for sale at June 30, 2010 and December 31, 2009. 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  

June 30, 2010

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

Other debt securities

   $ —      $ —      $ 7    $ (3   $ 7    $ (3
                                            

 

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Table of Contents
     Less Than
Twelve Months
    Twelve Months or More     Total  

December 31, 2009

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

Mortgage-backed securities:

               

Residential agency

   $ 6,686    $ (61   $ —      $ —        $ 6,686    $ (61

Other debt securities

     —        —          8      (3     8      (3
                                             
   $ 6,686    $ (61   $ 8    $ (3   $ 6,694    $ (64
                                             

For securities included in the tables above, management does not believe that any of the 57 securities and 151 securities at June 30, 2010 and December 31, 2009, respectively, in an individual loss position represented an other-than-temporary impairment as of those dates.

The gross unrealized loss on debt securities held to maturity was less than $1 million at June 30, 2010 and December 31, 2009.

The cost and estimated fair value of securities available for sale and securities held to maturity at June 30, 2010, 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.

 

     Amortized
Cost
   Estimated
Fair Value
     (In millions)

Securities available for sale:

     

Due in one year or less

   $ 32    $ 33

Due after one year through five years

     77      82

Due after five years through ten years

     11      11

Due after ten years

     44      47

Mortgage-backed securities:

     

Residential agency

     22,040      22,824

Residential non-agency

     22      25

Commercial agency

     19      21

Equity securities

     1,110      1,123
             
   $ 23,355    $ 24,166
             

Securities held to maturity:

     

Due in one year or less

   $ 4    $ 4

Due after one year through five years

     7      8

Due after five years through ten years

     3      3

Due after ten years

     —        —  

Mortgage-backed securities:

     

Residential agency

     14      14
             
   $ 28    $ 29
             

Proceeds from sales of securities available for sale in the three and six months of 2010 were $17 million and $1.5 billion, respectively. Gross realized gains and losses were each less than $1 million for the three months ended June 30, 2010 and $82 million and $23 million, respectively, for the six months ended June 30, 2010. Proceeds from sales of securities available for sale in the three and six months of 2009 were $1.6 billion and $2.4 billion, respectively. Gross realized gains and losses were $108 million and $0 million, respectively, for the three months ended June 30, 2009 and $161 million and $0 million, respectively, for the six months ended June 30, 2009.

 

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Equity securities included $477 million and $472 million, respectively, of amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock as of June 30, 2010 and $492 million and $533 million, respectively, of amortized cost related to Federal Reserve Bank stock and FHLB stock as of December 31, 2009. The estimated fair value of both Federal Reserve Bank and FHLB stock approximates their carrying amounts.

Securities with carrying values of $13.7 billion and $12.4 billion at June 30, 2010 and December 31, 2009, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements.

Trading account net gains (losses) totaled $(5) million and $9 million for the three and six months ended June 30, 2010, respectively, (including $(12) million and $4 million of net unrealized gains (losses) for the three months and six months ended June 30, 2010, respectively). Trading account net gains totaled $29 million and $23 million for the three and six months ended June 30, 2009, respectively, (including $6 million and $(12) million of net unrealized gains (losses) for the three months and six months ended June 30, 2009, respectively).

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 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.

In addition to 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 following tables present financial information for each reportable segment for the period indicated.

 

     Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
    Insurance    Total
Company
 
Three months ended June 30, 2010    (In millions)  

Net interest income

   $ 840      $ 15      $ 1    $ 856   

Provision for loan losses

     651        —          —        651   

Non-interest income

     437        292        27      756   

Non-interest expense

     829        275        22      1,126   

Regulatory charge

     —          200        —        200   

Income taxes

     (101     12        1      (88
                               

Net income (loss)

   $ (102   $ (180   $ 5    $ (277
                               

Average assets

   $ 131,420      $ 5,359      $ 506    $  137,285   

 

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     Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
   Insurance    Total
Company
 
Three months ended June 30, 2009    (In millions)  

Net interest income

   $ 816      $ 14    $ 1    $ 831   

Provision for loan losses

     912        —        —        912   

Non-interest income

     854        318      27      1,199   

Non-interest expense

     926        285      20      1,231   

Income taxes

     55        17      3      75   
                              

Net income (loss)

   $ (223   $ 30    $ 5    $ (188
                              

Average assets

   $ 140,783      $ 4,817    $ 487    $ 146,087   

 

     Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
    Insurance    Total
Company
 
Six months ended June 30, 2010          (In millions)       

Net interest income

   $ 1,656      $ 29      $ 2    $ 1,687   

Provision for loan losses

     1,421        —          —        1,421   

Non-interest income

     925        589        54      1,568   

Non-interest expense

     1,765        547        44      2,356   

Regulatory charge

     —          200        —        200   

Income taxes

     (278     26        3      (249
                               

Net income (loss)

   $ (327   $ (155   $ 9    $ (473
                               

Average assets

   $ 132,705      $ 5,208      $ 506    $ 138,419   

 

     Banking/
Treasury
    Investment
Banking/
Brokerage/
Trust
   Insurance    Total
Company
 
Six months ended June 30, 2009    (In millions)  

Net interest income

   $ 1,608      $ 30    $ 2    $ 1,640   

Provision for loan losses

     1,337        —        —        1,337   

Non-interest income

     1,639        571      55      2,265   

Non-interest expense

     1,714        533      42      2,289   

Income taxes

     360        25      5      390   
                              

Net income (loss)

   $ (164   $ 43    $ 10    $ (111
                              

Average assets

   $ 140,162      $ 4,186    $ 484    $  144,832   

NOTE 8—Goodwill

Goodwill allocated to each reportable segment as of June 30, 2010, December, 31, 2009, and June 30, 2009 is presented as follows:

 

     June 30
2010
   December 31
2009
   June 30
2009
     (In millions)

Banking/Treasury

   $ 4,691    $ 4,691    $ 4,691

Investment Banking/Brokerage/Trust

     745      745      745

Insurance

     125      121      120
                    

Total goodwill

   $ 5,561    $ 5,557    $ 5,556
                    

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

 

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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. 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.

During the second quarter of 2010, Regions assessed the indicators of goodwill impairment as of May 31, 2010, and through the date of the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. 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 Banking/Treasury, Investment Banking/ Brokerage/Trust, and Insurance reporting units for the June 30, 2010, interim period.

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 significant inputs to the income approach include expected future cash flows, the long-term target tangible equity to tangible assets ratio, and the discount rate.

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. tangible common equity or last twelve months net income) 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).

 

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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 for the June 30, 2010 interim period. 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.

 

      Banking/
Treasury
    Investment
Banking/
Brokerage/

Trust
    Insurance  

Discount rate used in income approach

   16   13   12

Public company method market multiplier (a)

   0.9   1.6   19.8

Public company method control premium

   30   30   30

Transaction method market multiplier (b)

   1.0   2.1   n/a   

 

(a)

For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible common book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income.

(b)

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

Regions utilizes the capital asset pricing model (CAPM) in order to drive the base discount rate. The inputs to the CAPM include the 20-year risk-free rate, 5-year beta for a select peer set, and the market risk premium based on published data. Once the output of the CAPM is determined, a size premium is added (also based on a published source) as well as a company-specific risk premium, which is an estimate determined by the Company and meant to compensate for the risk inherent in the future cash flow projections and inherent differences (such as business model and market perception of risk) between Regions and the peer set. The table below summarizes the discount rate used in the goodwill impairment tests of the Banking/Treasury reporting unit for the reporting periods indicated:

 

     2nd Quarter
2010
    1st Quarter
2010
    Annual Test
2009
    3rd Quarter
2009
    2nd Quarter
2009
 

Discount Rate

   16   16   18   18   20

The decrease in discount rates during the periods was driven primarily by reductions in the company-specific risk premium, which was lowered as a result of updated forecasts that reduced uncertainty from the projected cash flows.

In estimating future cash flows, a balance sheet as of the test date and an income statement for the last twelve months of activity for the reporting unit are compiled. From that point, future balance sheets and income statements are projected based on the inputs discussed below. Cash flows are based on expected future capitalization requirements due to balance sheet growth and anticipated changes in regulatory capital requirements. The baseline cash flows utilized in all models correspond to the most recent internal forecasts and/or budgets that range from 1 to 5 years. These internal forecasts are typically projections submitted to regulators and are based on inputs developed by the Company’s internal economic forecasting committee.

Specific factors as of the date of filing our financial statements that could negatively impact the assumptions used in assessing goodwill for impairment include: disparities in the level of fair value changes in net assets compared to equity; adverse business trends resulting from litigation and/or regulatory actions; increasing FDIC premiums; higher loan losses resulting from a double-dip recession or deflation; lengthened forecasts of unemployment in excess of 10 percent beyond 2011; future increased minimum regulatory capital requirements above current thresholds (refer to Note 14, “Regulatory Capital Requirements and Restrictions” of the consolidated financial statements included in the 2009 Form 10-K for a discussion of current minimum regulatory requirements); future federal rules and regulations resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act; and/or a protraction in the current low level of interest rates beyond 2011.

 

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The Step One analyses performed for the Investment Banking/Brokerage/Trust and Insurance reporting units during the second quarter of 2010 indicated that the estimated fair value exceeded its carrying value (including goodwill). Therefore, a Step Two analysis was not required for these reporting units.

The Step One analysis performed for the Banking/Treasury reporting unit during the second quarter of 2010 indicated that the carrying value (including goodwill) of the reporting unit exceeded its estimated fair value. Therefore, Step Two was performed for the 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 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 Banking/Treasury reporting unit’s goodwill was not impaired for the June 30, 2010 interim period.

NOTE 9—Loan Servicing

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 and/or trading securities to mitigate the effect of changes in the fair value of its mortgage servicing rights in the statement of operations. The table below presents the impact on the statements of operations associated with changes in mortgage servicing rights and related derivative and/or trading securities for the three and six months ended June 30, 2010 and 2009.

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
       2010        2009         2010        2009    
     (In millions)  

Net interest income

   $ —      $ —        $ 3    $ —     

Brokerage, investment banking and capital markets income

     —        —          4      —     

Mortgage income

     12      (2     28      (3
                              

Total

   $ 12    $ (2   $ 35    $ (3
                              

Beginning in the third quarter of 2009, Regions began using 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.

The table below presents an analysis of mortgage servicing rights for the three and six months ended June 30, 2010 and 2009, under the fair value measurement method:

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
       2010         2009         2010         2009    
     (In millions)  

Carrying value, beginning of period

   $ 270      $ 161      $ 247      $ 161   

Additions

     13        33        30        52   

Increase (decrease) in fair value:

        

Due to change in valuation inputs or assumptions

     (57     18        (46     9   

Other changes (1)

     (6     (10     (11     (20
                                

Carrying value, end of period

   $ 220      $ 202      $ 220      $ 202   
                                

 

(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 mortgage servicing rights (excluding related derivative instruments) as of June 30, 2010 and 2009 are as follows:

 

     June 30  
     2010     2009  
     (Dollars in millions)  

Unpaid principal balance

   $ 23,502      $ 22,984   

Weighted-average prepayment speed (CPR; percentage)

     17.8     27.3

Estimated impact on fair value of a 10% increase

   $ (15   $ (9

Estimated impact on fair value of a 20% increase

   $ (28   $ (18

Option-adjusted spread (basis points)

     580.2        (NA

Estimated impact on fair value of a 10% increase

   $ (4     (NA

Estimated impact on fair value of a 20% increase

   $ (9     (NA

Weighted-average coupon interest rate

     5.69     5.91

Weighted-average remaining maturity (months)

     289        282   

Weighted-average servicing fee (basis points)

     29.1        28.8   

 

(NA)

Regions adopted the option-adjusted spread valuation approach during the third quarter of 2009.

The decrease in the weighted-average prepayment speed assumption from June 30, 2009 to June 30, 2010 was driven by the impact of historically low interest rates on prepayments. During the first six months of 2009, low market interest rates led to a higher level of refinancing activity and higher prepayment speeds. Refinancing activity for the corresponding 2010 period was lower, consequently decreasing the prepayment speed assumption.

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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Table of Contents

The following tables present the fair value of derivative instruments on a gross basis as of June 30, 2010 and December 31, 2009, respectively:

 

June 30, 2010     
    Asset Derivatives   Liability Derivatives
    Balance Sheet Location   Fair
Value
  Balance Sheet Location   Fair
Value
    (In millions)

Derivatives designated as hedging instruments

       

Interest rate swaps

  Other assets   $ 411   Other liabilities   $ 29

Interest rate options

  Other assets     30   Other liabilities     —  

Eurodollar futures (1)

  Other assets     —     Other liabilities     —  
               

Total derivatives designated as hedging instruments

    $ 441     $ 29
               

Derivatives not designated as hedging instruments

       

Interest rate swaps

  Other assets   $ 1,817   Other liabilities   $ 1,831

Interest rate options

  Other assets     273   Other liabilities     234

Interest rate futures and forward commitments

  Other assets     6   Other liabilities     25

Other contracts

  Other assets     9   Other liabilities     5
               

Total derivatives not designated as hedging instruments

    $ 2,105     $ 2,095
               

Total derivatives

    $ 2,546     $ 2,124
               

 

(1)

Changes in fair value are cash-settled daily; therefore there is no ending balance at any given reporting period.

 

December 31, 2009                    
    Asset Derivatives   Liability Derivatives
    Balance Sheet Location   Fair
Value
  Balance Sheet Location   Fair
Value
    (In millions)

Derivatives designated as hedging instruments

       

Interest rate swaps

  Other assets   $ 390   Other liabilities   $ 22

Interest rate options

  Other assets     52   Other liabilities     —  

Eurodollar futures (1)

  Other assets     —     Other liabilities     —  
               

Total derivatives designated as hedging instruments

    $ 442     $ 22
               

Derivatives not designated as hedging instruments

       

Interest rate swaps

  Other assets   $ 1,518   Other liabilities   $ 1,505

Interest rate options

  Other assets     26   Other liabilities     33

Interest rate futures and forward commitments

  Other assets     13   Other liabilities     —  

Other contracts

  Other assets     20   Other liabilities     19
               

Total derivatives not designated as hedging instruments

    $ 1,577     $ 1,557
               

Total derivatives

    $ 2,019     $ 1,579
               

 

(1)

Changes in fair value are cash-settled daily; therefore there is no ending balance at any given reporting period.

 

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Table of Contents

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.

The following tables present the effect of derivative instruments on the statements of operations for the periods indicated:

 

Three Months Ended June 30, 2010

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
  $                        50   Debt/CDs
  Other non-interest
expense
  $          (47)

Interest rate swaps

  Interest expense   61   Debt   Interest expense   1
             

Total

    $                      111       $          (46)
             

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

  $                      (7)   Interest income on
loans
  $          43   Other non-interest
expense
  $               1

Interest rate swaps

  (18)   Interest expense
on debt
  —     Other non-interest
expense
  —  

Interest rate options

  (7)   Interest income on
loans
              11   Interest income
on loans
              —  

Eurodollar futures

  (14)   Interest income on
loans
  8   Other non-interest
expense
  (3)
               

Total

  $                    (46)     $          62     $            (2)
               

 

(1)

After-tax

(2)

Pre-tax

 

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Table of Contents

Three Months Ended June 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
  
  
  $                       (59    
Debt
  Other non-interest
expense
  $ 59   

Interest rate swaps

    Interest expense                     39        Debt   Interest expense     1   
                     

Total

    $                       (20)          $ 60   
                     

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

  $                       (25    
 
Interest income on
loans
  
  
  $           65   Interest income on
loans
  $ 1   

Interest rate options

    (14    
 
Interest income on
loans
  
  
    34   Interest income on
loans
    (5

Eurodollar futures

    (2    
 
Interest income on
loans
  
  
    9               —     
                         

Total

  $                       (41     $ 108     $ (4
                         

 

(1) After-tax
(2) Pre-tax

 

Six Months Ended June 30, 2010

 

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
  
  
  $                      102   Debt/CDs   Other non-interest
expense
  $                      (114

Interest rate swaps

  Interest expense      121   Debt   Interest expense   2   
               

Total

    $                      223       $                      (112
               

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

  $                      (21   Interest income on
loans
  $              91   Other non-interest
expense
  $                             2   

Interest rate swaps

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

Interest rate options

  (10   Interest income on
loans
  22   Interest income
on loans
                  —     

Eurodollar futures

  1      Interest income on
loans
                  11   Other non-interest
expense
  (7
                   

Total

  $                      (58     $            124     $                           (5
                   

 

(1) After-tax
(2) Pre-tax

 

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Table of Contents

Six Months Ended June 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
  
  
  $                       (64     Debt   Other non-interest expense   $ 64   

Interest rate swaps

      Interest expense        73        Debt   Interest expense     2   
                       

Total

      $ 9          $ 66   
                       

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

    $                      (42    
 
Interest income on
loans
  
  
  $         129   Interest income on
loans
  $         1   

Interest rate options

      (23    
 
Interest income on
loans
  
  
    67   Interest income on
loans
    (9

Eurodollar futures

      (5    
 
Interest income on
loans
  
  
    11       —     
                           

Total

    $ (70     $ 207     $ (8
                           

 

(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 and is recorded 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.

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.

 

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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.

Regions enters into interest rate option contracts to protect cash flows through the maturity date of the hedging instrument on designated one-month LIBOR floating-rate loans from adverse extreme market interest rate changes. 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. Regions realized an after-tax benefit of $17 million in accumulated other comprehensive income at both June 30, 2010 and 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 the beginning of 2012. Regions recognized pre-tax income of $13 million and $20 million during the first six months of 2010 and 2009, respectively, related to the amortization of terminated cash flow hedges of loan and debt instruments.

At June 30, 2010, Regions expects to reclassify out of other comprehensive income and into earnings approximately $151 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 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 one year as of June 30, 2010. Subsequent to June 30, 2010, Regions extended hedging its exposure to the variability in future cash flows for forecasted transactions through the end of 2011.

The following table presents the notional value of fair value and cash flow hedges as of June 30, 2010 and December 31, 2009:

 

Derivatives in Fair Value Hedging Relationships

   June 30
2010
   December 31
2009
     (In millions)

Interest rate swaps

   $ 10,980    $ 10,258
             

Derivatives in Cash Flow Hedging Relationships

         

Interest rate swaps

   $ 53,125    $ 5,300

Interest rate options

     2,000      2,000

Eurodollar futures

     —        30,225
             

Total

   $ 55,125    $ 37,525
             

Total notional value

   $ 66,105    $ 47,783
             

DERIVATIVES NOT DESIGNATED AS HEDGES

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. These positions are used to mitigate economic and accounting volatility related to customer derivative transactions, as well as non-derivative instruments.

The Company maintains a derivatives trading portfolio of interest rate swaps, option contracts, and futures and forward commitments used to help customers mitigate 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

 

29


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accounting and are marked-to-market through earnings and included in other assets and other liabilities. As of June 30, 2010 and 2009, the total absolute notional amount of the Company’s derivatives trading portfolio was $63.1 billion and $65.4 billion, respectively.

In the normal course of business, Morgan Keegan enters into underwriting and forward commitments on U.S. Government and municipal securities. As of June 30, 2010 and 2009, the contractual amounts of forward commitments was approximately $477 million and $628 million, respectively. 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 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. As of June 30, 2010 and 2009, Regions had $720 million and $653 million in notional amounts of interest 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. As of June 30, 2010 and 2009, Regions had $1.3 billion and $2.0 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 to mitigate the income statement effect of changes in the fair value of its mortgage servicing rights. Regions continues to use derivatives such as forward rate commitments, swaptions, and futures contracts to mitigate these fair value changes. Regions has and may prospectively use trading securities to mitigate these changes. As of June 30, 2010 and 2009, the total notional amount related to these swaptions, forward rate commitments and futures contracts was $1.8 billion and $1.7 billion, respectively.

The following tables present information for derivatives not designated as hedging instruments in the statements of operations for the periods presented:

 

Three Months Ended June 30, 2010

 

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    $ 2   

Interest rate options

  Brokerage income      1   

Interest rate options

  Mortgage income      (2

Interest rate futures and forward commitments

  Brokerage income      (1

Interest rate futures and forward commitments

  Mortgage income      59   

Other contracts

  Brokerage income      5   
          
     $ 64   
          

 

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Table of Contents

Three Months Ended June 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    $ (10

Interest rate options

  Brokerage income      (5

Interest rate options

  Mortgage income      (16

Interest rate futures and forward commitments

  Brokerage income      8   

Interest rate futures and forward commitments

  Mortgage income      23   

Other contracts

  Brokerage income      1   
          
     $ 1   
          

 

Six Months Ended June 30, 2010

 

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    $ (5

Interest rate options

  Brokerage income      2   

Interest rate options

  Mortgage income      (20

Interest rate futures and forward commitments

  Brokerage income      (3

Interest rate futures and forward commitments

  Mortgage income      83   

Other contracts

  Brokerage income      5   
          
     $ 62   
          

 

Six Months Ended June 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    $ 32   

Interest rate options

  Brokerage income      (42

Interest rate options

  Mortgage income      (4

Interest rate futures and forward commitments

  Brokerage income      7   

Interest rate futures and forward commitments

  Mortgage income      28   

Other contracts

  Brokerage income      1   
          
     $ 22   
          

Credit risk, defined as all positive exposures not collateralized with cash or other liquid assets, at June 30, 2010 and 2009, totaled approximately $1.2 billion and $1.1 billion, respectively. This amount represents the net credit risk on all trading and other derivative positions held by Regions.

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 2010 and 2015. For contracts where Regions sold credit protection, Regions would be required to make

 

31


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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 $37 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 June 30, 2010 and 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 June 30, 2010 and December 31, 2009 was $567 million and $347 million, respectively, for which Regions had posted collateral of $555 million and $336 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2010 and December 31, 2009 Regions would be required to post an additional $12 million and $11 million, respectively, 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 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.

 

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Table of Contents

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, mortgage servicing rights and derivatives were recorded at fair value on a recurring basis during 2010 and 2009. Below is a description of valuation methodologies for these assets and liabilities:

Trading account assets, net and securities available for sale primarily consist of U.S. Treasuries, obligations of states and political subdivisions, mortgage-backed securities (including agency securities), and equity securities. Trading account assets are presented net of short-sale liabilities which are valued based on the fair value of the underlying securities.

 

   

U.S. Treasuries and mortgage-backed securities are valued primarily using data from third-party pricing services for similar securities as applicable. Pricing from these third party services is generally based on quoted market prices of similar instruments (including matrix pricing); these valuations are Level 2 measurements.

 

   

Obligations of states and political subdivisions are generally based on data from third party pricing services for similar securities (Level 2 measurements as described above). Where such comparable data is not available, the Company develops valuations based on assumptions that are not readily observable in the market place; these valuations are Level 3 measurements. For example, auction-rate securities fall into this category; for these instruments, internal pricing models assume converting the securities into fixed-rate debt securities with similar credit ratings and maturity dates based on management’s estimates of the term of the securities. Assumed terms generally fall within a range of one to four years.

 

   

Equity securities are valued based on quoted market prices of identical assets on active exchanges; these valuations are Level 1 measurements.

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

Mortgage servicing rights consist of residential mortgage servicing rights and were valued using an option-adjusted spread valuation approach, a Level 3 measurement. See Note 9, “Loan Servicing” for additional details regarding assumptions relevant to this valuation.

Derivatives, net which primarily consist of interest rate contracts that include futures, options and swaps, are included in other assets and other liabilities (as applicable) on the consolidated balance sheets, and are presented in the tables below as a net amount. Interest rate swaps are predominantly traded in over-the-counter markets and, as such, values are determined using widely accepted discounted cash flow models, or Level 2 measurements. These discounted cash flow models use projections of future cash payments/receipts that are discounted at mid-market rates. The assumed cash flows are sourced from an assumed yield curve, which is consistent with industry standards and conventions. These valuations are adjusted for the unsecured credit risk at the reporting date, which considers collateral posted and the impact of master netting agreements. For exchange-traded options and futures contracts, values are based on quoted market prices, or Level 1 measurements. For all other options and futures contracts traded in over-the-counter markets, values are determined using discounted cash flow analyses and option pricing models based on market rates and volatilities, or Level 2 measurements. Interest rate lock commitments on loans intended for sale, treasury locks and credit derivatives are valued using option pricing models that incorporate significant unobservable inputs, and therefore are Level 3 measurements.

Regions rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. There were no such transfers during the three or six months ended June 30, 2010 or 2009. Trading

 

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Table of Contents

account assets are periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method for pricing for an individual security. Such transfers are accounted for as if they occur at the beginning of a reporting period.

New accounting literature effective for 2010 financial reporting requires more granular levels of disclosure for fair value measurements. The new guidance does not require any changes to presentation of prior periods. The following tables present assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and 2009:

 

     June 30, 2010  
     Level 1    Level 2     Level 3     Fair
Value
 
     (In millions)  

Trading account assets, net (1)

         

U.S. Treasury securities

   $ —      $ (134   $  —        $ (134

Obligations of states and political subdivisions

     —        159        185        344   

Mortgage-backed securities:

         

Residential agency

     —        251        —          251   

Residential non-agency

     —        2        —          2   

Commercial agency

     —        —          28        28   

Other securities

     258      38        (4     292   

Equity securities

     177      —          —          177   
                               

Total trading account assets, net (1)

   $ 435    $ 316      $ 209      $ 960   
                               

Securities available for sale

         

U.S. Treasury securities

   $ 64    $ —        $ —        $ 64   

Federal agency securities

     26      19        —          45   

Obligations of states and political subdivisions

     —        21        17        38   

Mortgage-backed securities:

         

Residential agency

     —        22,824        —          22,824   

Residential non-agency

     —        —          25        25   

Commercial agency

     —        21        —          21   

Other debt securities

     —        26        —          26   

Equity securities

     1,123      —          —          1,123   
                               

Total securities available for sale

   $ 1,213    $ 22,911      $ 42      $ 24,166   
                               

Mortgage loans held for sale

   $ —      $ 819      $ —        $ 819   
                               

Mortgage servicing rights

   $ —      $ —        $ 220      $ 220   
                               

Derivatives, net (2)

         

Interest rate swaps

   $ —      $ 365      $ —        $ 365   

Interest rate options

     —        57        —          57   

Interest rate futures and forward commitments

     —        (18     16        (2

Other contracts

     —        2        —          2   
                               

Total derivatives, net (2)

   $ —      $ 406      $ 16      $ 422   
                               

 

(1)

Trading account assets are presented in the table above net of short-sale liabilities; accordingly, the total of the balances above are not in agreement with trading account assets as shown on the balance sheet.

(2)

Derivatives include approximately $1.3 billion related to legally enforceable master netting agreements that allow the Company to settle positive and negative positions. Derivatives, net are also presented excluding cash collateral received of $66 million and cash collateral posted of $555 million with counterparties.

 

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Table of Contents
     June 30, 2009
     Level 1    Level 2    Level 3    Fair
Value
     (In millions)

Trading account assets, net

   $ 229    $ 381    $ 181    $ 791

Securities available for sale

     376      19,232      73      19,681

Mortgage loans held for sale

     —        1,373      —        1,373

Mortgage servicing rights

     —        —        202      202

Derivatives, net (1)

     —        783      7      790

 

(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 $116 million and cash collateral posted of $309 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.

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 six months ended June 30, 2010 and 2009, 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 June 30, 2010
(Level 3 measurements only)
 
    Trading account assets, net (1)     Securities available for sale           Derivatives, net  
    Obligations of
states and
political
subdivisions
    Commercial
agency MBS
    Other securities     Obligations of
states and
political
subdivisions
    Residential
non-agency MBS
    Mortgage
servicing
rights
    Interest rate
futures and
forward
commitments
 
    (In millions)  

Beginning balance, April 1, 2010

  $ 170      $ 66      $ 2      $ 17      $ 26      $ 270      $ 8   

Total gains (losses) realized and unrealized:

             

Included in
earnings (1)

    (3     1        6        —          —          (63     39   

Included in other comprehensive income

    —          —          —          5        —          —          —     

Purchases and issuances

    115        127        3,442        —          —          13        —     

Settlements

    (97     (166     (3,454     (5     (1     —          (31

Transfers into Level 3

    —          —          —          —          —          —          —     
                                                       

Ending balance, June 30, 2010

  $ 185      $ 28      $ (4   $ 17      $ 25      $ 220      $ 16   
                                                       

 

(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
Three Months Ended June 30, 2009
(Level 3 measurements only)
 
     Trading
account
assets, net (1)
    Securities
available  for

sale
    Mortgage
servicing
rights
   Derivatives,
net
 
     (In millions)  

Beginning balance, April 1, 2009

   $ 191      $ 89      $ 161    $ 30   

Total gains (losses) realized and unrealized:

         

Included in earnings (1)

     (3     (15     8      —     

Included in other comprehensive income

     —          4        —        —     

Purchases and issuances

     20        —          33      —     

Settlements

     (55     (5     —        (23

Transfers in and/or out of Level 3, net

     28        —          —        —     
                               

Ending balance, June 30, 2009

   $ 181      $ 73      $ 202    $ 7   
                               

 

(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
Six Months Ended June 30, 2010
(Level 3 measurements only)
 
    Trading account assets, net (1)     Securities available for sale           Derivatives,
net
 
    Obligations of
states and
political
subdivisions
    Commercial
agency MBS
    Other
securities
    Obligations of
states and
political
subdivisions
    Residential
non-agency
MBS
    Mortgage
servicing
rights
    Interest rate
futures and
forward
commitments
 
    (In millions)  

Beginning balance, January 1, 2010

  $ 171      $ 39      $ 4      $ 17      $ 36      $ 247      $ 3   

Total gains (losses) realized and unrealized:

             

Included in earnings (1)

    (3     1        12        —          —          (57     60   

Included in other comprehensive income

    —          —          —          5        —          —          —     

Purchases and issuances

    130        506        7,015        —          —          30        —     

Settlements

    (113     (528     (7,041     (5     (11     —          (47

Transfers into Level 3

    —          10        6        —          —          —          —