Edgar Filing: REGIONS FINANCIAL CORP

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2010

¨	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 1,256,084,000 shares of common stock, par value $.01, outstanding as of October 29, 2010.

REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX


			Page
Part I. Financial Information
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets—September 30, 2010, December 31, 2009 and September 30, 2009		5
		Consolidated Statements of Operations—Three and nine months ended September 30, 2010 and 2009		6
		Consolidated Statements of Changes in Stockholders’ Equity—Nine months ended September 30, 2010 and 2009		7
		Consolidated Statements of Cash Flows—Nine months ended September 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		47
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		85
	Item 4.	Controls and Procedures		85

Part II. Other Information
	Item 1.	Legal Proceedings		86
	Item 1A.	Risk Factors		86
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		88
	Item 6.	Exhibits		89

Signatures				90

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

•

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

•

Regions’ ability to keep pace with technological changes.

•

Regions’ ability to effectively manage 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.

•

Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.

•

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.

•

Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies.

•

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 Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30 2010			December 31 2009			September 30 2009
	September 30 2010			December 31 2009			September 30 2009
	(In millions, except share data)
Assets
Cash and due from banks	$	1,898		$	2,052		$	2,101
Interest-bearing deposits in other banks		3,852			5,580			5,902
Federal funds sold and securities purchased under agreements to resell		1,137			379			366
Trading account assets		1,580			3,039			1,388
Securities available for sale		23,555			24,069			21,030
Securities held to maturity		26			31			39
Loans held for sale (includes $1,183, $780 and $726 measured at fair value, respectively)		1,587			1,511			1,470
Loans, net of unearned income		84,420			90,674			92,754
Allowance for loan losses		(3,185	)		(3,114	)		(2,627	)

Net loans		81,235			87,560			90,127
Other interest-earning assets		1,043			734			839
Premises and equipment, net		2,564			2,668			2,694
Interest receivable		512			468			499
Goodwill		5,561			5,557			5,557
Mortgage servicing rights		204			247			216
Other identifiable intangible assets		414			503			535
Other assets		8,330			7,920			7,223

Total assets	$	133,498		$	142,318		$	139,986

Liabilities and Stockholders’ Equity
Deposits:
Non-interest-bearing	$	25,300		$	23,204		$	21,226
Interest-bearing		69,678			75,476			73,654

Total deposits		94,978			98,680			94,880
Borrowed funds:
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase		2,451			1,893			2,633
Other short-term borrowings		1,210			1,775			2,653

Total short-term borrowings		3,661			3,668			5,286
Long-term borrowings		14,335			18,464			18,093

Total borrowed funds		17,996			22,132			23,379
Other liabilities		3,361			3,625			3,235

Total liabilities		116,335			124,437			121,494
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		3,370			3,343			3,334
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 3 billion shares at September 30, 2010, and 1.5 billion shares at December 31, 2009 and September 30, 2009
Issued including treasury stock—1,298,993,365; 1,235,850,589 and 1,231,352,421 shares, respectively		13			12			12
Additional paid-in capital		19,047			18,781			18,754
Retained earnings (deficit)		(4,070	)		(3,235	)		(2,618	)
Treasury stock, at cost—42,909,422; 43,241,020 and 43,316,136 shares, respectively		(1,405	)		(1,409	)		(1,411	)
Accumulated other comprehensive income, net		208			130			143

Total stockholders’ equity		17,163			17,881			18,492

Total liabilities and stockholders’ equity	$	133,498		$	142,318		$	139,986

See notes to consolidated financial statements.

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
	(In millions, except per share data)
Interest income on:
Loans, including fees	$	919		$	1,047		$	2,794		$	3,218
Securities:
Taxable		214			232			680			710
Tax-exempt		—			6			1			18

Total securities		214			238			681			728
Loans held for sale		10			12			27			43
Federal funds sold and securities purchased under agreements to resell		1			—			2			2
Trading account assets		8			10			29			32
Other interest-earning assets		6			7			20			21

Total interest income		1,158			1,314			3,553			4,044
Interest expense on:
Deposits		167			301			603			997
Short-term borrowings		3			9			8			45
Long-term borrowings		120			159			387			517

Total interest expense		290			469			998			1,559

Net interest income		868			845			2,555			2,485
Provision for loan losses		760			1,025			2,181			2,362

Net interest income (loss) after provision for loan losses		108			(180	)		374			123
Non-interest income:
Service charges on deposit accounts		294			300			884			857
Brokerage, investment banking and capital markets		257			252			747			732
Mortgage income		66			76			196			213
Trust department income		49			49			146			143
Securities gains, net		2			4			61			165
Leveraged lease termination gains		—			4			19			517
Other		82			87			265			410

Total non-interest income		750			772			2,318			3,037
Non-interest expense:
Salaries and employee benefits		582			578			1,717			1,703
Net occupancy expense		110			121			340			340
Furniture and equipment expense		75			83			228			237
Other-than-temporary impairments (1)		1			3			2			75
Regulatory charge		—			—			200			—
Other		395			458			1,232			1,177

Total non-interest expense		1,163			1,243			3,719			3,532

Income (loss) before income taxes		(305	)		(651	)		(1,027	)		(372	)
Income tax expense (benefit)		(150	)		(274	)		(399	)		116

Net income (loss)	$	(155	)	$	(377	)	$	(628	)	$	(488	)

Net income (loss) available to common shareholders	$	(209	)	$	(437	)	$	(799	)	$	(655	)

Weighted-average number of shares outstanding:
Basic		1,257			1,189			1,217			921
Diluted		1,257			1,189			1,217			921
Earnings (loss) per common share:
Basic	$	(0.17	)	$	(0.37	)	$	(0.66	)	$	(0.71	)
Diluted		(0.17	)		(0.37	)		(0.66	)		(0.71	)
Cash dividends declared per common share		0.01			0.01			0.03			0.12

(1)

Includes $3 million for the three months ended and $266 million for the nine months ended September 30, 2009, respectively, of gross charges, net of $0 for the three months ended and $191 million for the nine months ended September 30, 2009, respectively, of non-credit portion reported in other comprehensive income (loss). The corresponding 2010 amounts are immaterial.

See notes to consolidated financial statements.

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)			Total
	Shares		Amount			Shares		Amount		Additional Paid-In Capital		Retained Earnings (Deficit)			Treasury Stock, At Cost						Total
	(In millions, except share and 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)		—		—			—		—		—		(488	)		—			—			(488	)
Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment, excluding non-credit portion of other-than temporary impairments*		—		—			—		—		—		—			—			389			389
Non-credit portion of other-than-temporary impairments recognized in other comprehensive income, net of tax*		—		—			—		—		—		—			—			(124	)		(124	)
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment*		—		—			—		—		—		—			—			(120	)		(120	)
Net change from defined benefit pension plans, net of tax*		—		—			—		—		—		—			—			20			20

Comprehensive income (loss)																						(323	)
Cash dividends declared - $0.12 per share		—		—			—		—		—		(94	)		—			—			(94	)
Preferred dividends		—		—			—		—		—		(140	)		—			—			(140	)
Preferred stock transactions:
Net proceeds from issuance of 287,500 shares of mandatorily convertible preferred stock		—		278			—		—		—		—			—			—			278
Discount accretion		—		27			—		—		—		(27	)		—			—			—
Common stock transactions:
Net proceeds from issuance of 460 million shares of common stock		—		—			460		5		1,764		—			—			—			1,769
Issuance of 33 million shares of common stock in connection with early extinguishment of debt		—		—			33		—		135		—			—			—			135
Impact of stock transactions under compensation plans, net		—		—			4		—		40		—			14			—			54

BALANCE AT SEPTEMBER 30, 2009		4	$	3,612			1,188	$	12	$	18,754	$	(2,618	)	$	(1,411	)	$	143		$	18,492

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)		—		—			—		—		—		(628	)		—			—			(628	)
Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment*		—		—			—		—		—		—			—			144			144
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment*		—		—			—		—		—		—			—			(83	)		(83	)
Net change from defined benefit pension plans, net of tax*		—		—			—		—		—		—			—			17			17

Comprehensive income (loss)																						(550	)
Cash dividends declared - $0.03 per share		—		—			—		—		—		(36	)		—			—			(36	)
Preferred dividends		—		—			—		—		3		(144	)		—			—			(141	)
Preferred stock transactions:
Conversion of mandatorily convertible preferred stock into 63 million shares of common stock		—		(259	)		63		1		258		—			—			—			—
Discount accretion		—		27			—		—		—		(27	)		—			—			—
Common stock transactions:
Impact of stock transactions under compensation plans, net		—		—			—		—		5		—			4			—			9

BALANCE AT SEPTEMBER 30, 2010		4	$	3,370			1,256	$	13	$	19,047	$	(4,070	)	$	(1,405	)	$	208		$	17,163

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.

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30
	2010			2009
	(In millions)
Operating activities:
Net income (loss)	$	(628	)	$	(488	)
Adjustments to reconcile net cash provided by operating activities:
Provision for loan losses		2,181			2,362
Depreciation and amortization of premises and equipment		216			212
Provision for losses on other real estate, net		121			90
Net amortization (accretion) of securities		151			(9	)
Net amortization of loans and other assets		167			192
Net accretion of deposits and borrowings		(4	)		(13	)
Net securities gains		(61	)		(165	)
Loss (gain) on early extinguishment of debt		53			(61	)
Other-than-temporary impairments, net		2			75
Deferred income tax benefit		(216	)		(471	)
Originations and purchases of loans held for sale		(3,744	)		(6,179	)
Proceeds from sales of loans held for sale		4,167			6,358
Gain on sale of loans, net		(59	)		(79	)
Decrease (increase) in trading account assets		1,459			(338	)
(Increase) decrease in other interest-earning assets		(309	)		58
Increase in interest receivable		(44	)		(41	)
Decrease in other assets		51			1,368
Decrease in other liabilities		(244	)		(223	)
Other		75			(11	)

Net cash from operating activities		3,334			2,637
Investing activities:
Proceeds from sales of securities available for sale		1,610			3,657
Proceeds from maturities of:
Securities available for sale		5,617			4,002
Securities held to maturity		4			7
Purchases of:
Securities available for sale		(6,572	)		(9,312	)
Proceeds from sales of loans		966			350
Net decrease in loans		2,168			1,786
Net purchases of premises and equipment		(118	)		(120	)
Net cash received from deposits assumed		—			279

Net cash from investing activities		3,675			649
Financing activities:
Net (decrease) increase in deposits		(3,702	)		3,700
Net decrease in short-term borrowings		(7	)		(10,536	)
Proceeds from long-term borrowings		743			1,602
Payments on long-term borrowings		(4,990	)		(2,482	)
Net proceeds from issuance of mandatorily convertible preferred stock		—			278
Net proceeds from issuance of common stock		—			1,769
Cash dividends on common stock		(36	)		(94	)
Cash dividends on preferred stock		(141	)		(140	)
Proceeds from stock transactions under compensation plans		—			13

Net cash from financing activities		(8,133	)		(5,890	)

Decrease in cash and cash equivalents		(1,124	)		(2,604	)
Cash and cash equivalents at beginning of year		8,011			10,973

Cash and cash equivalents at end of period	$	6,887		$	8,369

See notes to consolidated financial statements.

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Nine Months Ended September 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 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 September 30						Nine Months Ended September 30
	2010			2009			2010			2009
	(In millions, except per share amounts)
Numerator:
Net income (loss)	$	(155	)	$	(377	)	$	(628	)	$	(488	)
Preferred stock dividends and accretion		(54	)		(60	)		(171	)		(167	)

Net income (loss) available to common shareholders	$	(209	)	$	(437	)	$	(799	)	$	(655	)

Denominator:
Weighted-average common shares outstanding—basic and dilulted		1,257			1,189			1,217			921

Earnings (loss) per common share:
Basic	$	(0.17	)	$	(0.37	)	$	(0.66	)	$	(0.71	)
Diluted		(0.17	)		(0.37	)		(0.66	)		(0.71	)

Basic and diluted weighted-average common shares outstanding are the same due to the net losses for all periods presented.

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. Prior to conversion, these shares were not included in the computation above as 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.

(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 $131 million during the first nine months of both 2010 and 2009. The unamortized discount on the preferred shares was $130 million at September 30, 2010, $157 million at December 31, 2009 and $166 million at September 30, 2009. Discount accretion on the preferred shares reduced retained earnings by $27 million during the first nine months of both 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 $9 million for the first nine 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 September 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 September 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 nine 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 third 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 nine months of 2010 and 2009 were $0.03 and $0.12, 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.

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


	Three Months Ended September 30, 2010
	Before Tax			Tax Effect			Net of Tax
	(In millions)
Net income (loss)	$	(305	)	$	150		$	(155	)
Net unrealized holding gains and losses on securities available for sale arising during the period		(144	)		56			(88	)
Less: reclassification adjustments for net securities gains realized in net income (loss)		2			—			2

Net change in unrealized gains and losses on securities available for sale		(146	)		56			(90	)
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)		60			(23	)		37

Net change in unrealized gains and losses on derivative instruments		(26	)		10			(16	)
Net actuarial gains and losses arising during the period		23			(8	)		15
Less: amortization of actuarial loss and prior service credit realized in net income (loss)		11			(4	)		7

Net change from defined benefit plans		12			(4	)		8

Comprehensive income (loss)	$	(465	)	$	212		$	(253	)


	Three Months Ended September 30, 2009
	Before Tax			Tax Effect			Net of Tax
	(In millions)
Net income (loss)	$	(651	)	$	274		$	(377	)
Net unrealized holding gains and losses on securities available for sale arising during the period		352			(131	)		221
Less: non-credit portion of other-than-temporary impairments recognized in other comprehensive income (loss)		—			—			—
Less: reclassification adjustments for net securities gains realized in net income (loss)		4			(2	)		2

Net change in unrealized gains and losses on securities available for sale		348			(129	)		219
Net unrealized holding gains and losses on derivatives arising during the period		37			(14	)		23
Less: reclassification adjustments for net gains realized in net income (loss)		105			(40	)		65

Net change in unrealized gains and losses on derivative instruments		(68	)		26			(42	)
Net actuarial gains and losses arising during the period		18			(9	)		9
Less: amortization of actuarial loss and prior service credit realized in net income (loss)		11			(4	)		7

Net change from defined benefit plans		7			(5	)		2

Comprehensive income (loss)	$	(364	)	$	166		$	(198	)


	Nine Months Ended September 30, 2010
	Before Tax			Tax Effect			Net of Tax
	(In millions)
Net income (loss)	$	(1,027	)	$	399		$	(628	)
Net unrealized holding gains and losses on securities available for sale arising during the period		293			(109	)		184
Less: reclassification adjustments for net securities gains realized in net income (loss)		61			(21	)		40

Net change in unrealized gains and losses on securities available for sale		232			(88	)		144
Net unrealized holding gains and losses on derivatives arising during the period		52			(20	)		32
Less: reclassification adjustments for net gains realized in net income (loss)		186			(71	)		115

Net change in unrealized gains and losses on derivative instruments		(134	)		51			(83	)
Net actuarial gains and losses arising during the period		62			(24	)		38
Less: amortization of actuarial loss and prior service credit realized in net income (loss)		33			(12	)		21

Net change from defined benefit plans		29			(12	)		17

Comprehensive income (loss)	$	(900	)	$	350		$	(550	)


	Nine Months Ended September 30, 2009
	Before Tax			Tax Effect			Net of Tax
	(In millions)
Net income (loss)	$	(372	)	$	(116	)	$	(488	)
Net unrealized holding gains and losses on securities available for sale arising during the period		783			(287	)		496
Less: non-credit portion of other-than-temporary impairments recognized in other comprehensive income (loss)		191			(67	)		124
Less: reclassification adjustments for net securities gains realized in net income (loss)		165			(58	)		107

Net change in unrealized gains and losses on securities available for sale		427			(162	)		265
Net unrealized holding gains and losses on derivatives arising during the period		110			(42	)		68
Less: reclassification adjustments for net gains realized in net income (loss)		303			(115	)		188

Net change in unrealized gains and losses on derivative instruments		(193	)		73			(120	)
Net actuarial gains and losses arising during the period		66			(25	)		41
Less: amortization of actuarial loss and prior service credit realized in net income (loss)		33			(12	)		21

Net change from defined benefit plans		33			(13	)		20

Comprehensive income (loss)	$	(105	)	$	(218	)	$	(323	)

NOTE 4—Pension and Other Postretirement Benefits

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


	For The Three Months Ended September 30
	Pension						Other Postretirement Benefits
	2010			2009			2010			2009
	(In millions)
Service cost	$	8		$	—		$	—		$	—
Interest cost		23			22			—			—
Expected return on plan assets		(28	)		(22	)		—			—
Amortization of actuarial loss		12			11			—			—
Settlement charge		—			1			—			—

	$	15		$	12		$	—		$	—


	For The Nine Months Ended September 30
	Pension						Other Postretirement Benefits
	2010			2009			2010			2009
	(In millions)
Service cost	$	27		$	2		$	—		$	—
Interest cost		69			65			2			1
Expected return on plan assets		(78	)		(66	)		—			—
Amortization of prior service cost (credit)		1			1			(1	)		(1	)
Amortization of actuarial loss		33			33			—			—
Settlement charge		—			1			—			—

	$	52		$	36		$	1		$	—

During 2009, participant accruals of service in the Regions Financial Corporation Retirement Plan (the “pension 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 from the date the plans were initially approved by shareholders. 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

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 September 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 nine months ended September 30:


	September 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 nine months of 2010 and 2009 related to stock options:


	For the Nine Months Ended September 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		(137,736	)		3.29		—			—
Forfeited or cancelled		(3,610,699	)		20.07		(2,335,717	)		30.38

Outstanding at end of period		56,393,792		$	24.34		54,682,790		$	26.29

Exercisable at end of period		45,537,603		$	27.85		43,875,821		$	28.76

In the second quarter of 2010, Regions granted 800 thousand restricted shares that vest based upon a service condition. Dividend payments during the vesting period are deferred to the end of the vesting term. 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.

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 nine months of 2010 and 2009 related to restricted share awards and units:


	For the Nine Months Ended September 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		(873,383	)		34.35		(787,349	)		16.02
Forfeited		(1,049,924	)		16.57		(281,524	)		21.69

Non-vested at end of period		5,193,255		$	12.39		6,155,453		$	16.94

NOTE 6—Securities

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


September 30, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Securities available for sale:
U.S. Treasury securities	$	85	$	7	$	—		$	92
Federal agency securities		40		1		—			41
Obligations of states and political subdivisions		32		6		—			38
Mortgage-backed securities:
Residential agency		21,586		642		(4	)		22,224
Residential non-agency		20		3		—			23
Commercial agency		56		3		—			59
Other debt securities		29		—		(3	)		26
Equity securities		1,044		8		—			1,052

	$	22,892	$	670	$	(7	)	$	23,555

Securities held to maturity:
U.S. Treasury securities	$	6	$	1	$	—		$	7
Federal agency securities		5		—		—			5
Mortgage-backed securities:
Residential agency		13		1		—			14
Other debt securities		2		—		—			2

	$	26	$	2	$	—		$	28


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

The Company reviews its securities portfolio on a regular basis to determine if there are any conditions indicating that a security has other-than-temporary impairment. Factors considered in this determination include 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 sell and whether it is more likely than not that the Company will have to sell the security before its market value recovers. For debt securities, activity related to the credit loss component of other-than-temporary impairment is recognized in earnings, and the portion of other-than-temporary impairment related to all other factors is recognized in other comprehensive income (loss). For the three and nine months ended September 30, 2010, Regions recorded a credit related impairment charge related to debt securities of approximately $0 and $1 million, respectively. For the three and nine months ended September 30, 2009, Regions recorded a credit related impairment charge related to debt securities of approximately $3 million and $63 million, respectively. There were no non-credit related impairment charges related to debt securities recorded during the three and nine months ended September 30, 2010. For the three and nine months ended September 30, 2009, $0 and $191 million non-credit portion of other-than-temporary impairment charges related to debt securities were recorded in other comprehensive income (loss).

In addition to the other-than-temporary impairment charge recognized during the nine months ended September 30, 2010 related to debt securities, the Company recognized a write-down of approximately $1 million during both the three and nine months ended September 30, 2010 and $0 and $12 million for the three and nine months ended September 30, 2009, representing other-than-temporary-impairments of equity securities classified as available for sale. The Company recognizes impairment of available for sale equity securities when the current market value is below the highest traded price within the past six months. The cost basis of the securities is adjusted to current fair value with the entire offset recorded in the statement of operations.

The following tables present unrealized loss and estimated fair value of securities available for sale at September 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
September 30, 2010	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	$	1,272	$	(4	)	$	—	$	—		$	1,272	$	(4	)
Other debt securities		—		—			6		(3	)		6		(3	)

	$	1,272	$	(4	)	$	6	$	(3	)	$	1,278	$	(7	)


	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 83 securities and 151 securities at September 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 September 30, 2010 and December 31, 2009.

The cost and estimated fair value of securities available for sale and securities held to maturity at September 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	$	41	$	41
Due after one year through five years		89		96
Due after five years through ten years		14		14
Due after ten years		42		46
Mortgage-backed securities:
Residential agency		21,586		22,224
Residential non-agency		20		23
Commercial agency		56		59
Equity securities		1,044		1,052

	$	22,892	$	23,555

Securities held to maturity:
Due in one year or less	$	4	$	4
Due after one year through five years		6		7
Due after five years through ten years		3		3
Due after ten years		—		—
Mortgage-backed securities:
Residential agency		13		14

	$	26	$	28

Proceeds from sales of securities available for sale in the three and nine months of 2010 were $150 million and $1.6 billion, respectively. Gross realized gains and losses were $2 million and $0 million for the three months ended September 30, 2010, and $84 million and $23 million, respectively, for the nine months ended September 30, 2010. Proceeds from sales of securities available for sale in the three and nine months of 2009 were $1.3 billion and $3.7 billion, respectively. Gross realized gains and losses were $8 million and $4 million, respectively, for the three months ended September 30, 2009, and $169 million and $4 million, respectively, for the nine months ended September 30, 2009.

Equity securities included $477 million and $437 million, respectively, of amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock as of September 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 $14.4 billion and $12.4 billion at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements.

Trading account net gains totaled $18 million and $27 million for the three and nine months ended September 30, 2010, respectively, (including $6 million and $10 million of net unrealized gains for the three months and nine months ended September 30, 2010, respectively). Trading account net gains totaled $27 million and $50 million for the three and nine months ended September 30, 2009, respectively, (including $24 million and $12 million of net unrealized gains for the three months and nine months ended September 30, 2009, respectively). The unrealized gains primarily represent market valuation changes in securities related to deferred compensation plans, and are offset by increases in salaries and employee benefits expense.

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.

During the third quarter of 2010, minor reclassifications were made from the Banking/Treasury segment to the Insurance segment to more appropriately present management’s current view of the segments. The 2009 amounts presented below have been adjusted to conform to the 2010 presentation.

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 September 30, 2010	(In millions)
Net interest income	$	852		$	15	$	1	$	868
Provision for loan losses		760			—		—		760
Non-interest income		415			309		26		750
Non-interest expense		851			289		23		1,163
Income tax expense (benefit)		(165	)		13		2		(150	)

Net income (loss)	$	(179	)	$	22	$	2	$	(155	)

Average assets	$	127,090		$	6,121	$	518	$	133,729


	Banking/ Treasury			Investment Banking/ Brokerage/ Trust		Insurance		Total Company
Three months ended September 30, 2009	(In millions)
Net interest income	$	830		$	14	$	1	$	845
Provision for loan losses		1,025			—		—		1,025
Non-interest income		430			316		26		772
Non-interest expense		935			284		24		1,243
Income tax expense (benefit)		(292	)		17		1		(274	)

Net income (loss)	$	(408	)	$	29	$	2	$	(377	)

Average assets	$	134,824		$	4,981	$	500	$	140,305


	Banking/ Treasury			Investment Banking/ Brokerage/ Trust			Insurance		Total Company
Nine months ended September 30, 2010	(In millions)
Net interest income	$	2,508		$	45		$	2	$	2,555
Provision for loan losses		2,181			—			—		2,181
Non-interest income		1,340			899			79		2,318
Non-interest expense		2,613			838			68		3,519
Regulatory charge		—			200			—		200
Income tax expense (benefit)		(443	)		39			5		(399	)

Net income (loss)	$	(503	)	$	(133	)	$	8	$	(628	)

Average assets	$	130,811		$	5,515		$	512	$	136,838


	Banking/ Treasury			Investment Banking/ Brokerage/ Trust		Insurance		Total Company
Nine months ended September 30, 2009	(In millions)
Net interest income	$	2,438		$	44	$	3	$	2,485
Provision for loan losses		2,362			—		—		2,362
Non-interest income		2,068			887		82		3,037
Non-interest expense		2,646			817		69		3,532
Income tax expense (benefit)		67			42		7		116

Net income (loss)	$	(569	)	$	72	$	9	$	(488	)

Average assets	$	138,360		$	4,454	$	493	$	143,307

NOTE 8—Goodwill

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


	September 30 2010		December 31 2009		September 30 2009
	(In millions)
Banking/Treasury	$	4,691	$	4,691	$	4,691
Investment Banking/Brokerage/Trust		745		745		745
Insurance		125		121		121

Total goodwill	$	5,561	$	5,557	$	5,557

The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. 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 third quarter of 2010, Regions assessed the indicators of goodwill impairment as of August 31, 2010, and through the date of the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. The indicators assessed included:

•

Recent operating performance,

•

Changes in market capitalization,

•

Regulatory actions and assessments,

•

Changes in the business climate (including legislation, 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 all of Regions’ reporting units for the September 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).

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 September 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	%		11	%
Public company method market multiplier (a)		0.8	x		1.5	x		20.5	x
Public company method control premium		30	%		30	%		30	%
Transaction method market multiplier (b)		1.0	x		2.1	x		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 derive 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:


	3rd Quarter 2010			2nd Quarter 2010			1st Quarter 2010			Annual Test 2009			3rd Quarter 2009
Discount Rate		16	%		16	%		16	%		18	%		18	%

The decrease in discount rate from the Annual 2009 test to the first quarter 2010 test was driven primarily by a reduction 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 2012; 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 2012.

The Step One analyses performed for the Investment Banking/Brokerage/Trust and Insurance reporting units during the third 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 third 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 September 30, 2010 interim period.

Regions has not completed the annual goodwill impairment test performed in the fourth quarter.

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 nine months ended September 30, 2010 and 2009.


	Three Months Ended September 30				Nine Months Ended September 30
	2010		2009		2010		2009
	(In millions)
Net interest income	$	—	$	—	$	3	$	—
Brokerage, investment banking and capital markets income		—		—		4		—
Mortgage income		2		19		30		16

Total	$	2	$	19	$	37	$	16

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 nine months ended September 30, 2010 and 2009, under the fair value measurement method:


	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
	(In millions)
Carrying value, beginning of period	$	220		$	202		$	247		$	161
Additions		23			31			53			83
Increase (decrease) in fair value:
Due to change in valuation inputs or assumptions		(31	)		(11	)		(77	)		(2	)
Other changes (1)		(8	)		(6	)		(19	)		(26	)

Carrying value, end of period	$	204		$	216		$	204		$	216

(1)	Represents economic amortization associated with borrower repayments.

Data and assumptions used in the fair value calculation related to mortgage servicing rights (excluding related derivative instruments) as of September 30, 2010 and 2009 are as follows:


	September 30
	2010			2009
	(Dollars in millions)
Unpaid principal balance	$	24,378		$	23,951
Weighted-average prepayment speed (CPR; percentage)		21.6	%		20.4	%
Estimated impact on fair value of a 10% increase	$	(16	)	$	(13	)
Estimated impact on fair value of a 20% increase	$	(31	)	$	(25	)
Option-adjusted spread (basis points)		529			633
Estimated impact on fair value of a 10% increase	$	(4	)	$	(4	)
Estimated impact on fair value of a 20% increase	$	(7	)	$	(8	)
Weighted-average coupon interest rate		5.63	%		5.81	%
Weighted-average remaining maturity (months)		290			285
Weighted-average servicing fee (basis points)		29.0			28.8

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

NOTE 10—Derivative Financial Instruments and Hedging Activities

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

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

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


September 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	$	402		Other liabilities	$	51
Interest rate options		Other assets		19		Other liabilities		—
Eurodollar futures (1)		Other assets		—		Other liabilities		—

Total derivatives designated as hedging instruments			$	421			$	51

Derivatives not designated as hedging instruments
Interest rate swaps		Other assets	$	2,393		Other liabilities	$	2,394
Interest rate options		Other assets		46		Other liabilities		29
Interest rate futures and forward commitments		Other assets		8		Other liabilities		15
Other contracts		Other assets		21		Other liabilities		19

Total derivatives not designated as hedging instruments			$	2,468			$	2,457

Total derivatives			$	2,889			$	2,508

(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.

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 September 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		$	38		Debt/CDs		Other non-interest expense	$	(31	)
Interest rate swaps		Interest expense			63		Debt		Interest expense		4

Total				$	101					$	(27	)


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	$	8			Interest income on loans	$	40		Other non-interest expense	$	1
Interest rate swaps		(14	)		Interest expense on debt		—		Other non-interest expense		—
Interest rate options		(5	)		Interest income on loans		11		Interest income on loans		—
Eurodollar futures		(5	)		Interest income on loans		9		Other non-interest expense		—

Total	$	(16	)			$	60			$	1

(1)

After-tax

(2)

Pre-tax


Three Months Ended September 30, 2009
Derivatives in Fair Value Hedging Relationships	Location of Gain(Loss) Recognized in Income on Derivatives		Amount of Gain(Loss) Recognized in Income on Derivatives		Hedged Items in Fair Value Hedge Relationships		Location of Gain(Loss) Recognized in Income on Related Hedged Item		Amount of Gain(Loss) Recognized in Income on Related Hedged Item
(In millions)
Interest rate swaps		Other non-interest expense	$	16		Debt/CDs		Other non-interest expense	$	(15)
Interest rate swaps		Interest expense		43		Debt		Interest expense		1

Total			$	59					$	(14)


Derivatives in Cash Flow Hedging Relationships	Amount of Gain(Loss) Recognized in OCI on Derivatives (Effective Portion) (1)		Location of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (2)		Location of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)		Amount of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (2)
(In millions)
Interest rate swaps	$	(20)		Interest income on loans	$	60		Other non-interest expense	$	7
Forward starting swaps		(9)		Interest expense on debt		—		Other non-interest expense		—
Interest rate options		(2)		Interest income on loans		18		Interest income on loans		—
Eurodollar futures		(11)		Interest income on loans		19		Other non-interest expense		3

Total	$	(42)			$	97			$	10

(1)

After-tax

(2)

Pre-tax


Nine Months Ended September 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	$	140	Debt/CDs	Other non-interest expense	$	(145)
Interest rate swaps	Interest expense		184	Debt	Interest expense		6

Total		$	324			$	(139)


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	$ (22)		Interest income on loans	$ 131	Other non-interest expense	$	3
Interest rate swaps	(42)		Interest expense on debt	—	Other non-interest expense		—
Interest rate options	(15)		Interest income on loans	33	Interest income on loans		—
Eurodollar futures	(4)		Interest income on loans	20	Other non-interest expense		(7)

Total	$ (83)			$ 184		$	(4)

(1)

After-tax

(2)

Pre-tax


Nine Months Ended September 30, 2009
Derivatives in Fair Value Hedging Relationships	Location of Gain(Loss) Recognized in Income on Derivatives	Amount of Gain(Loss) Recognized in Income on Derivatives		Hedged Items in Fair Value Hedge Relationships	Location of Gain(Loss) Recognized in Income on Related Hedged Item	Amount of Gain(Loss) Recognized in Income on Related Hedged Item
(In millions)
Interest rate swaps	Other non-interest expense	$	(48)	Debt/CDs	Other non-interest expense	$	49
Interest rate swaps	Interest expense		116	Debt	Interest expense		3

Total		$	68			$	52


Derivatives in Cash Flow Hedging Relationships	Amount of Gain(Loss) Recognized in OCI on Derivatives (Effective Portion) (1)	Location of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (2)	Location of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (2)
(In millions)
Interest rate swaps	$ (87)		Interest income on loans	$ 189	Other non-interest expense	$	8
Forward starting swaps	8		Interest expense on debt	—	Other non-interest expense		—
Interest rate options	(25)		Interest income on loans	76	Interest income on loans		—
Eurodollar futures	(16)		Interest income on loans	30	Other non-interest expense		3

Total	$ (120)			$ 295		$	11

(1)

After-tax

(2)

Pre-tax

FAIR VALUE HEDGES

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

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 $47 million and $19 million in accumulated other comprehensive income at September 30, 2010 and 2009, respectively, 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 $25 million and $31 million during the first nine months of 2010 and 2009, respectively, related to the amortization of terminated cash flow hedges of loan and debt instruments.

At September 30, 2010, Regions expects to reclassify out of other comprehensive income and into earnings approximately $154 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, $64 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 2 years as of September 30, 2010.

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


Derivatives in Fair Value Hedging Relationships	September 30 2010		December 31 2009
	(In millions)
Interest rate swaps	$	10,730	$	10,258


Derivatives in Cash Flow Hedging Relationships
Interest rate swaps	$	23,420	$	5,300
Interest rate options		2,000		2,000
Eurodollar futures		—		30,225

Total	$	25,420	$	37,525

Total notional value	$	36,150	$	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 accounting and are marked-to-market through earnings and included in other assets and other liabilities. As of September 30, 2010 and 2009, the total absolute notional amount of the Company’s derivatives trading portfolio was $92.9 billion and $65.8 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 September 30, 2010 and 2009, the contractual amounts of forward commitments was approximately $535 million and $256 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 September 30, 2010 and 2009, Regions had $1.2 billion and $669 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 September 30, 2010 and 2009, Regions had $2.1 billion and $1.3 billion in absolute notional amounts related to these forward rate commitments.

On January 1, 2009, Regions made an election to account for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments 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, interest rate swaps, and futures contracts to mitigate these fair value changes. Additionally, Regions has and may prospectively use marketable securities classified as trading assets to mitigate these changes. As of September 30, 2010 and 2009, the total notional amount related to these swaptions, interest rate swaps, forward rate commitments, and futures contracts was $1.4 billion and $1.8 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 September 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	$	(7	)
Interest rate swaps	Mortgage income		31
Interest rate options	Brokerage income		1
Interest rate options	Mortgage income		9
Interest rate futures and forward commitments	Brokerage income		(1	)
Interest rate futures and forward commitments	Mortgage income		17
Other contracts	Brokerage income		2

		$	52


Three Months Ended September 30, 2009
Derivatives Not Designated as Hedging Instruments	Location of Gain(Loss) Recognized in Income on Derivatives	Amount of Gain(Loss) Recognized in Income on Derivatives
		(In millions)
Interest rate swaps	Brokerage income	$	(11	)
Interest rate options	Brokerage income		—
Interest rate options	Mortgage income		5
Interest rate futures and forward commitments	Brokerage income		—
Interest rate futures and forward commitments	Mortgage income		13
Other contracts	Brokerage income		—

		$	7


Nine Months Ended September 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	$	(12	)
Interest rate swaps	Mortgage income		31
Interest rate options	Brokerage income		3
Interest rate options	Mortgage income		(11	)
Interest rate futures and forward commitments	Brokerage income		(4	)
Interest rate futures and forward commitments	Mortgage income		100
Other contracts	Brokerage income		7

		$	114


Nine Months Ended September 30, 2009
Derivatives Not Designated as Hedging Instruments	Location of Gain(Loss) Recognized in Income on Derivatives	Amount of Gain(Loss) Recognized in Income on Derivatives
		(In millions)
Interest rate swaps	Brokerage income	$	20
Interest rate options	Brokerage income		(42	)
Interest rate options	Mortgage income		1
Interest rate futures and forward commitments	Brokerage income		7
Interest rate futures and forward commitments	Mortgage income		41
Other contracts	Brokerage income		1

		$	28

Credit risk, defined as all positive exposures not collateralized with cash or other liquid assets, at September 30, 2010 and 2009, totaled approximately $1.3 billion and $1.2 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 2016. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.

Regions’ maximum potential amount of future payments under these contracts is approximately $38 million. This scenario would only occur if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at September 30, 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 September 30, 2010 and December 31, 2009 was $647 million and $347 million, respectively, for which Regions had posted collateral of $637 million and $336 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2010 and December 31, 2009 Regions would be required to post an additional $10 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.

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 nine months ended September 30, 2010 or 2009. Trading 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 September 30, 2010 and 2009:


	September 30, 2010
	Level 1		Level 2			Level 3		Fair Value
	(In millions)
Trading account assets, net (1)
U.S. Treasury securities	$	—	$	(221	)	$	—	$	(221	)
Obligations of states and political subdivisions		—		293			222		515
Mortgage-backed securities:									—
Residential agency		—		423			—		423
Residential non-agency		—		(8	)		—		(8	)
Commercial agency		—		—			43		43
Other securities		207		72			3		282
Equity securities		169		—			—		169

Total trading account assets, net (1)	$	376	$	559		$	268	$	1,203

Securities available for sale
U.S. Treasury securities	$	92	$	—		$	—	$	92
Federal agency securities		25		16			—		41
Obligations of states and political subdivisions		—		21			17		38
Mortgage-backed securities:
Residential agency		—		22,224			—		22,224
Residential non-agency		—		—			23		23
Commercial agency		—		59			—		59
Other debt securities		—		26			—		26
Equity securities		1,052		—			—		1,052

Total securities available for sale	$	1,169	$	22,346		$	40	$	23,555

Mortgage loans held for sale	$	—	$	1,183		$	—	$	1,183

Mortgage servicing rights	$	—	$	—		$	204	$	204

Derivatives, net (2)
Interest rate swaps	$	—	$	350		$	—	$	350
Interest rate options		—		19			17		36
Interest rate futures and forward commitments		—		(12	)

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