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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 March 31, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER: 0-6159
REGIONS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 63-0589368
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
417 North 20th Street
Birmingham, Alabama 35203
(Address of Principal Executive Offices) (Zip Code)
(205) 944-1300
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
The number of shares outstanding of each of the issuer's classes of
common stock was 222,105,563 shares of common stock, par value $.625,
outstanding as of April 30, 2003.
REGIONS FINANCIAL COPORATION
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition -
March 31, 2003, December 31, 2002
and March 31, 2002 4
Consolidated Statements of Income -
Three months ended
March 31, 2003 and March 31, 2002 5
Consolidated Statements of Stockholders' Equity -
Three months ended March 31, 2003 6
Consolidated Statements of Cash Flows -
Three months ended
March 31, 2003 and March 31, 2002 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures about
Market Risk 38
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 39
CERTIFICATIONS 40
Forward Looking Statements
This Quarterly Report on Form 10-Q, other periodic reports filed by
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 which reflect Regions' current views
with respect to future events and financial performance. Such forward
looking 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.
Some factors are specific to Regions, including:
- The cost and other effects of material contingencies,
including litigation contingencies.
- Regions' ability to expand into new markets and to maintain
profit margins in the face of pricing pressures.
- Regions' ability to keep pace with technological changes.
- Regions' ability to develop competitive new products and
services in a timely manner and the acceptance of such
products and services by Regions' customers and potential
customers.
- Regions' ability to effectively manage interest rate risk
and other market risk, credit risk and operational risk.
- Regions' ability to manage fluctuations in the value of
assets and liabilities and off-balance sheet exposure so as
to maintain sufficient capital and liquidity to support
Regions' business.
- Regions' ability to achieve the earnings expectations related
to the businesses that were recently acquired or that may be
acquired in the future, which in turn depends on a variety of
factors, including:
- Regions' ability to achieve the anticipated cost savings
and revenue enhancements with respect to the acquired
operations;
- the assimilation of the acquired operations to Regions'
corporate culture, including the ability to instill
Regions' credit practices and efficient approach to the
acquired operations; and
- the continued growth of the markets that the acquired
entities serve, consistent with recent historical
experience.
Other factors which may affect Regions apply to the financial services
industry more generally, including:
- Further easing of restrictions on participants in the
financial services industry, such as banks, securities brokers
and dealers, investment companies and finance companies, may
increase competitive pressures.
- 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 and the South in general and in the
communities Regions serves in particular may lead to a
deterioration in credit quality, thereby increasing provisioning
costs, or a reduced demand for credit, thereby reducing earning
assets.
- The threat or occurrence of war or acts of terrorism and the
existence or exacerbation of general geopolitical instability
and uncertainty.
- Possible changes in trade, monetary and fiscal policies, laws,
and regulations, and other activities of governments, agencies,
and similar organizations, including changes in accounting
standards, may have an adverse effect on business.
- Possible changes in consumer and business spending and saving
habits could affect Regions' ability to increase assets and to
attract deposits.
The words "believe," "expect," "anticipate," "project," and similar
expressions signify forward looking statements. Readers are cautioned
not to place undue reliance on any forward looking statements made by
or on behalf of Regions. Any such statement speaks only as of the date
the statement was made. Regions undertakes no obligation to update or
revise any forward looking statements.
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
March 31, December 31, March 31,
2003 2002 2002
ASSETS
Cash and due from banks $ 1,216,597 $ 1,577,536 $ 961,035
Interest-bearing deposits in other
banks 185,554 303,562 251,668
Securities held to maturity 30,919 32,909 34,513
Securities available for sale 9,680,014 8,961,691 7,818,728
Trading account assets 889,628 785,992 691,183
Loans held for sale 971,312 1,497,849 466,073
Federal funds sold and securities
purchased under agreements to
resell 371,098 334,788 199,051
Margin receivables 448,541 432,337 565,863
Loans 31,799,866 31,230,268 31,002,399
Unearned income (238,864) (244,494) (250,754)
Loans, net of unearned income 31,561,002 30,985,774 30,751,645
Allowance for loan losses (449,704) (437,164) (429,577)
Net loans 31,111,298 30,548,610 30,322,068
Premises and equipment 628,473 638,031 644,264
Interest receivable 224,016 242,088 236,423
Due from customers on acceptances 71,391 60,320 70,039
Other assets 2,635,744 2,523,127 1,985,072
$48,464,585 $47,938,840 $44,245,980
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 5,287,382 $ 5,147,689 $ 4,875,805
Interest-bearing 27,081,993 27,778,512 25,201,581
Total deposits 32,369,375 32,926,201 30,077,386
Borrowed funds:
Short-term borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 3,397,335 2,203,261 2,277,608
Commercial paper 17,250 17,250 26,750
Other short-term borrowings 1,817,000 1,864,946 2,146,743
Total short-term borrowings 5,231,585 4,085,457 4,451,101
Long-term borrowings 5,392,132 5,386,109 4,711,218
Total borrowed funds 10,623,717 9,471,566 9,162,319
Bank acceptances outstanding 71,391 60,320 70,039
Other liabilities 1,129,132 1,302,331 849,160
Total liabilities 44,193,615 43,760,418 40,158,904
Stockholders' Equity:
Preferred stock, par value $1.00
a share:
Authorized 5,000,000 shares -0- -0- -0-
Common stock, par value $.625 a
share:
Authorized 500,000,000 shares,
issued, including treasury stock,
221,897,905; 221,336,905; and
230,834,790 shares, respectively 138,686 138,336 144,272
Surplus 950,699 936,958 1,268,327
Undivided profits 3,044,708 2,952,657 2,679,307
Treasury stock, at cost -0-; -0-;
and 1,151,000 shares, respectively -0- -0- (37,553)
Unearned restricted stock (20,236) (13,620) (19,470)
Accumulated other comprehensive
income 157,113 164,091 52,193
Total Stockholders' Equity 4,270,970 4,178,422 4,087,076
$48,464,585 $47,938,840 $44,245,980
See notes to consolidated financial statements.
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended
March 31,
2003 2002
Interest Income:
Interest and fees on loans $437,897 $512,435
Interest on securities:
Taxable interest income 95,370 95,382
Tax-exempt interest income 6,433 8,666
Total Interest on Securities 101,803 104,048
Interest on loans held for sale 23,348 12,816
Interest on margin receivables 3,874 4,970
Income on federal funds sold and securities
purchased under agreements to resell 2,029 1,616
Interest on time deposits in other banks 48 211
Interest on trading account assets 6,987 5,480
Total Interest Income 575,986 641,576
Interest Expense:
Interest on deposits 134,847 173,422
Interest on short-term borrowings 27,633 29,986
Interest on long-term borrowings 53,603 68,382
Total Interest Expense 216,083 271,790
Net Interest Income 359,903 369,786
Provision for loan losses 31,500 30,000
Net Interest Income After
Provision for Loan Losses 328,403 339,786
Non-Interest Income:
Brokerage and investment banking 125,027 112,855
Trust department income 17,106 15,747
Service charges on deposit accounts 69,725 66,034
Mortgage servicing and origination fees 28,228 24,679
Securities gains 9,898 1,856
Other 91,605 57,437
Total Non-Interest Income 341,589 278,608
Non-Interest Expense:
Salaries and employee benefits 272,619 237,362
Net occupancy expense 25,712 22,548
Furniture and equipment expense 20,312 22,100
Other 129,531 120,350
Total Non-Interest Expense 448,174 402,360
Income Before Income Taxes 221,818 216,034
Applicable income taxes 63,218 61,971
Net Income $158,600 $154,063
Average number of shares outstanding 221,604 229,958
Average number of shares outstanding-diluted 224,059 233,165
Per share:
Net income $0.72 $0.67
Net income-diluted $0.71 $0.66
Cash dividends declared $0.30 $0.29
See notes to consolidated financial statements.
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS) (UNAUDITED)
Accumulated
Unearned Other
Common Undivided Treasury Restricted Comprehensive
Stock Surplus Profits Stock Stock Income Total
BALANCE AT JANUARY 1, 2003 $138,336 $936,958 $2,952,657 $ -0- $(13,620) $164,091 $4,178,422
Comprehensive Income:
Net income 158,600 158,600
Unrealized loss on available
for sale securities, net of
reclassification adjustment (7,193) (7,193)
Other comprehensive gain
from derivatives 215 215
Comprehensive income* 158,600 (6,978) 151,622
Cash dividends declared
($0.30 per common share) (66,549) (66,549)
Common stock transactions:
Stock options exercised 197 5,895 6,092
Stock issued to employees
under incentive plan 153 7,846 (9,967) (1,968)
Amortization of unearned
restricted stock 3,351 3,351
BALANCE AT MARCH 31, 2003 $138,686 $950,699 $3,044,708 $ -0- $(20,236) $157,113 $4,270,970
Disclosure of reclassification amount:
Unrealized holding losses on
available for sale securities
arising during period, net of tax $ (116)
Less: Reclassification adjustment,
net of tax, for gains and losses
realized in net income 7,077
Unrealized holding gain on
derivatives, net of tax 458
Less: Reclassification adjustment,
net of tax, for losses
realized in net income 243
Comprehensive income $ (6,978)
*Comprehensive income as of March 31, 2002 was $147.8 million.
See notes to consolidated financial statements.
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
Three Months Ended
March 31,
2003 2002
Operating Activities:
Net income $ 158,600 $ 154,063
Adjustments to reconcile net cash (used in)
provided by operating activities
Gain on securitization of loans held for sale (6,830) -0-
Depreciation and amortization of premises and
equipment 16,941 17,549
Provision for loan losses 31,500 30,000
Net amortization of securities 5,769 5,442
Amortization of loans and other assets 19,148 13,648
Amortization of deposits and borrowings 238 234
Provision for losses on other real estate 384 105
Deferred income tax (benefit) expense (16,088) 6,342
Gain on sale of premises and equipment (85) (135)
Realized securities gains (9,898) (1,856)
(Increase) decrease in trading account assets (103,636) 50,713
Increase in margin receivables (16,204) (41,922)
Decrease in interest receivable 18,072 13,207
Increase in other assets (132,071) (45,291)
Decrease in other liabilities (152,200) (42,616)
Other 1,383 3,118
Net Cash (Used In) Provided By Operating
Activities (184,977) 162,601
Investing Activities:
Net (increase) decrease in loans (594,266) 113,934
(Increase) decrease in loans held for sale (43,150) 424,120
Proceeds from securitization of loans held for
sale 576,517 -0-
Proceeds from sale of securities available for
sale 231,703 66,373
Proceeds from maturity of securities held to
maturity -0- 193
Proceeds from maturity of securities available
for sale 1,161,887 775,727
Purchases of securities held to maturity (251) (821)
Purchases of securities available for sale (2,117,432) (861,829)
Net decrease in interest-bearing deposits in
other banks 118,008 415,518
Proceeds from sale of premises and equipment 1,462 4,176
Purchases of premises and equipment (8,760) (18,678)
Net decrease in customers' acceptance
liability (11,071) (6,185)
Net Cash (Used In) Provided By Investing
Activities (685,353) 912,528
Financing Activities:
Net decrease in deposits (557,064) (1,471,171)
Net increase in short-term borrowings 1,146,128 352,701
Proceeds from long-term borrowings 7,939 -0-
Payments on long-term borrowings (1,916) (36,456)
Net increase in bank acceptance liability 11,071 6,185
Cash dividends (66,549) (66,718)
Purchases of treasury stock -0- (37,553)
Proceeds from exercise of stock options 6,092 5,828
Net Cash Provided By (Used In) Financing
Activities 545,701 (1,247,184)
Decrease in Cash and Cash Equivalents (324,629) (172,055)
Cash and Cash Equivalents, Beginning of Period 1,912,324 1,332,141
Cash and Cash Equivalents, End of Period $ 1,587,695 $ 1,160,086
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE A -- Basis of Presentation
The accounting and reporting policies of Regions Financial
Corporation ("Regions" or the "Company"), conform with accounting
principles generally accepted in the United States and with
general financial services industry practices. Regions 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,
Louisiana, North Carolina, South Carolina, Tennessee and Texas.
The Company is subject to intense competition from other financial
institutions and is also subject to the regulations of certain
government agencies and undergoes periodic examinations by those
regulatory authorities.
The accompanying unaudited Consolidated Financial Statements
have been prepared in accordance with the instructions for Form
10-Q, and, therefore, do not include all information and footnotes
necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with accounting
principles generally accepted in the United States. For a summary
of significant accounting policies that have been consistently
followed, see NOTE A to the Consolidated Financial Statements
included under Item 8 of the Annual Report on Form 10-K. It is
management's opinion that all adjustments, consisting of only
normal and recurring items necessary for a fair presentation, have
been included. Please refer to "Critical Accounting Policies"
included in Management's Discussion and Analysis.
Certain amounts in prior periods have been reclassified to
conform to the current period presentation.
NOTE B - Stock-Based Compensation
Regions has stock option plans for certain key employees that
provide for the granting of options to purchase up to 5,720,000
shares of Regions' common stock (excluding options assumed in
connection with acquisitions). The terms of options granted are
determined by the personnel committee of the Board of Directors;
however, no options may be granted after ten years from the plans'
adoption, and no options may be exercised beyond ten years from
the date granted. The option price per share of incentive stock
options cannot be less than the fair market value of the common
stock on the date of the grant; however, the option price of non-
qualified options may be less than the fair market value of the
common stock on the date of the grant.
Regions' long-term incentive plans provide for the granting of
up to 35,000,000 shares of common stock in the form of stock
options, stock appreciation rights, performance awards or
restricted stock awards. The terms of stock options granted under
the long-term incentive plans are generally subject to the same
terms as options granted under Regions' stock option plans.
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting and Disclosure of Stock-
Based Compensation" (Statement 123). Statement 123 is effective
for fiscal years beginning after December 15, 1995, and allows for
the option of continuing to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees", and the related interpretations, or selecting the fair
value method of expense recognition as described in Statement 123.
The Company has elected to follow APB 25 in accounting for its
employee stock options. Pro forma net income and net income per
share data is presented below for the three months ended March 31,
2003 and 2002, as if the fair-value method had been applied in
measuring compensation costs:
Three months ended
March 31, March 31,
2003 2002
Net income $158,600 $154,063
Less: Total stock-based
compensation expense
based on fair value method
for all awards, net
of related tax effects
(1,796) (8,571)
Pro forma net income $156,804 $145,492
Per share:
Net income $0.72 $0.67
Net income-diluted 0.71 0.66
Pro forma net income 0.71 0.63
Pro forma net income-diluted 0.70 0.62
The weighted average fair value of options granted during the
three months ended March 31, 2003 and 2002, was $4.52 and $4.70,
respectively. The fair value of each grant is estimated on the
date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 2003: expected
dividend yield of 3.70%; expected option life of 5 years; expected
volatility of 21.8%; and a risk-free interest rate of 2.8%. The
2002 assumptions used in the model included: expected dividend
yield of 3.38%; expected option life of 5 years; expected
volatility of 22.0%; and a risk-free interest rate of 2.7%.
NOTE C -- Business Segment Information
Regions' segment information is presented based on Regions'
primary segments of business. Each segment is a strategic
business unit that serves specific needs of Regions' customers.
The Company's primary segment is community banking. Community
banking represents the Company's branch banking functions and has
separate management that is responsible for the operation of that
business unit. In addition, Regions has designated as distinct
reportable segments the activities of its treasury, mortgage
banking, investment banking/brokerage/trust, and insurance
divisions. The treasury division includes the Company's bond
portfolio, indirect mortgage lending division, and other wholesale
activities. Mortgage banking consists of origination and servicing
functions of Regions' mortgage subsidiaries. Investment banking
includes trust activities and all brokerage and investment
activities associated with Morgan Keegan. Insurance includes all
business associated with commercial insurance, in addition to
credit life products sold to consumer customers. The reportable
segment designated "Other" includes activity of Regions' indirect
consumer lending division and the parent company. Prior period
amounts have been restated to reflect changes in methodology.
The accounting policies used by each reportable segment are the
same as those discussed in Note A to the Consolidated Financial
Statements included under Item 8 of the Annual Report on Form 10-
K. The following table presents financial information for each
reportable segment.
Three months ended March 31, 2003
Total Banking
(in thousands)
Community Mortgage
Banking Treasury Combined Banking
Net interest income $278,539 $ 72,765 $351,304 $ 11,119
Provision for loan loss 28,295 2,391 30,686 434
Non-interest income 83,782 9,901 93,683 79,762
Non-interest expense 217,601 8,026 225,627 55,376
Income taxes 37,422 27,093 64,515 13,292
Net income $ 79,003 $ 45,156 $124,159 $ 21,779
Average assets $26,383,174 $14,243,627 $40,626,801 $1,400,994
Investment
Banking/ Total
Brokerage/ Insurance Other Company
Trust
Net interest income $ 6,374 $ 541 $ (9,435) $359,903
Provision for loan loss -0- -0- 380 31,500
Non-interest income 146,770 19,201 2,173 341,589
Non-interest expense 127,024 14,109 26,038 448,174
Income taxes 9,687 1,888 (26,164) 63,218
Net income $ 16,433 $3,745 $ (7,516) $158,600
Average assets $2,808,976 $119,129 $3,192,864 $48,148,764
Three months ended March 31, 2002
Total Banking
(in thousands)
Community Mortgage
Banking Treasury Combined Banking
Net interest income $293,095 $74,466 $367,561 $ 8,986
Provision for loan loss 25,804 2,399 28,203 222
Non-interest income 74,221 1,994 76,215 52,563
Non-interest expense 223,290 6,844 230,134 40,371
Income taxes 40,246 25,206 65,452 8,201
Net income $ 77,976 $42,011 $119,987 $12,755
Average assets $24,807,874 $13,218,669 $38,026,543 $1,061,999
Investment
Banking/ Total
Brokerage/ Insurance Other Company
Trust
Net interest income $ 6,668 $ 612 $(14,041) $369,786
Provision for loan loss -0- -0- 1,575 30,000
Non-interest income 132,075 11,531 6,224 278,608
Non-interest expense 118,859 8,971 4,025 402,360
Income taxes 7,289 1,167 (20,138) 61,971
Net income $ 12,595 $ 2,005 $ 6,721 $154,063
Average assets $2,490,494 $100,072 $3,031,448 $44,710,556
NOTE D -- Derivative Financial Instruments
Regions maintains positions in derivative financial instruments to
manage interest rate risk, to facilitate asset/liability management
strategies, and to manage other risk exposures. The most common
derivative instruments are forward rate agreements, interest rate
swaps, and put and call options. For those derivative contracts
that qualify for special hedge accounting treatment, according to
Statement of Financial Accounting Standards No. 133 (Statement 133),
Regions designates the hedging instrument as either a cash flow or
fair value hedge. The accounting policies associated with
derivative financial instruments are discussed further in Note A to
the Consolidated Financial Statements included under Item 8 of the
Annual Report on Form 10-K.
Regions utilizes certain derivative instruments to hedge the
variability of interest cash flows on debt instruments. To the
extent that the hedge of future cash flows is effective, changes in
the fair value of the derivative are recognized as a component of
other comprehensive income in stockholders' equity. At March 31,
2003, Regions had reported a $5.2 million loss in other
comprehensive income related to cash flow hedges. The Company will
amortize this loss into earnings in conjunction with the recognition
of interest payments through 2011. To the extent that the hedge of
future cash flows is ineffective, changes in the fair value of the
derivative are recognized in earnings as a component of other non-
interest expense. For the three months ended March 31, 2003, there
was no ineffectiveness recognized in other non-interest expense
attributable to cash flow hedges. No gains or losses were
recognized in the first three months of 2003 related to components
of derivative instruments that were excluded from the assessment of
hedge effectiveness.
Regions hedges the changes in the fair value of assets using
forward contracts, which represent commitments to sell money market
instruments at a future date at a specified price or yield. The
contracts are utilized by the Company to hedge interest rate risk
positions associated with the origination of mortgage loans held for
sale. The Company is subject to the market risk associated with
changes in the value of the underlying financial instrument, as well
as the risk that the other party will fail to perform. For the
three months ended March 31, 2003, Regions recognized a net hedging
loss of $704,000 associated with these hedging instruments.
Regions has also entered into interest rate swap agreements
converting a portion of its fixed rate long-term debt to floating
rate. The fair values of these derivative instruments are included
in other assets on the statements of financial condition. For the
three months ended March 31, 2003, there was a $249,000 loss
recorded in earnings due to hedge ineffectiveness. No gains or
losses were recognized in the first three months of 2003 related to
components of derivative instruments that were excluded from the
assessment of hedge effectiveness.
The Company also maintains a trading portfolio of interest rate
swaps, option contracts and futures and forward commitments used to
meet the needs of its customers. The portfolio is used to generate
trading profit and help clients manage interest rate risk. The
Company is subject to the risk that a counterparty will fail to
perform. The fair value of the trading portfolio at March 31, 2003,
was $27.3 million.
Foreign currency contracts involve the exchange of one currency
for another on a specified date and at a specified rate. These
contracts are executed on behalf of the Company's customers and are
used to manage fluctuations in foreign exchange rates. The notional
amount of forward foreign exchange contracts totaled $7 million at
March 31, 2003, and $16 million at March 31, 2002. The Company is
subject to the risk that a counterparty will fail to perform.
In the normal course of business, Regions' brokerage subsidiary
enters into underwriting and forward and future commitments. At
March 31, 2003, the contract amount of future contracts were $13
million to purchase and $105 million to sell U.S. Government and
municipal securities. 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 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' derivative financial instruments are summarized as
follows:
Other Than Trading Derivatives
As of March 31, 2003
Average
Notional Fair Maturity
Amount Value Receive Pay in Years
(dollars in millions)
Asset hedges:
Fair value hedges:
Forward sale
commitments $ 395 $ (2) 0.2
Total asset hedges $ 395 $ (2) 0.2
Liability hedges:
Fair value hedges:
Interest rate swaps $3,938 $ 238 5.11% 2.17% 6.1
Interest rate options 1,400 1 2.2
Total liability hedges $5,338 $ 239 5.1
As of March 31, 2002
Average
Notional Fair Maturity
Amount Value Receive Pay in Years
(dollars in millions)
Asset hedges:
Fair value hedges:
Forward sale
commitments $ 240 $ 1 0.2
Total asset hedges $ 240 $ 1 0.2
Liability hedges:
Fair value hedges:
Interest rate swaps $1,188 $ (35) 6.98% 3.66% 11.0
Interest rate options 400 3 3.2
Total liability hedges $1,588 $(32) 9.0
Derivative Financial Instruments
As of March 31,
2003 2002
Contract or Contract or
Notional Amount Notional Amount
Other Credit Other Credit
Than Risk Than Risk
Trading Trading Amount* Trading Trading Amount*
(in millions)
Interest rate
swaps $3,938 $3,909 $180 $1,188 $1,636 $13
Interest rate
options 1,400 223 -0- 400 236 -0-
Futures and
forward
commitments 395 1,465 -0- 240 -0- 1
Foreign exchange
forwards -0- 7 -0- -0- 16 -0-
Total $5,733 $5,604 $180 $1,828 $1,888 $14
*Credit Risk Amount is defined as all positive exposures not
collateralized with cash on deposit. Any credit risk arising under
option contracts is combined with swaps to reflect netting
agreements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
The following discussion and financial information is presented to
aid in understanding Regions Financial Corporation's ("Regions" or
the "Company") financial position and results of operations. The
emphasis of this discussion will be on the three months ended March
31, 2003, as compared to the three months ended March 31, 2002, and
the three months ended December 31, 2002.
CORPORATE PROFILE
Regions' primary business is providing traditional commercial and
retail banking services to customers throughout the South. Regions'
banking affiliate, Regions Bank, operates as an Alabama state-
chartered bank with branch offices in Alabama, Arkansas, Florida,
Georgia, Louisiana, North Carolina, South Carolina, Tennessee, and
Texas.
In addition to providing traditional commercial and retail banking
services, Regions provides other financial services in the fields of
investment banking, asset management, trust, mutual funds,
securities brokerage, mortgage banking, insurance, leasing, and
other specialty financing. Regions has no foreign operations,
although it maintains an international department to assist
customers with their foreign transactions. Regions provides
investment banking and brokerage services from 142 offices of Morgan
Keegan & Company, Inc. ("Morgan Keegan"), one of the largest
investment firms based in the South. Regions' mortgage banking
subsidiaries, Regions Mortgage, Inc. ("RMI") and EquiFirst
Corporation ("EquiFirst"), provide residential mortgage loan
origination and servicing activities for customers. RMI services
approximately $17.1 billion in mortgage loans. Regions provides
full-line insurance brokerage services through Rebsamen Insurance,
Inc., one of the 50 largest insurance brokers in the country.
Credit life insurance services for customers are provided through
other Regions' affiliates.
The Company's principal market areas are located in the states of
Alabama, Arkansas, Florida, Georgia, Louisiana, North Carolina,
South Carolina, Tennessee, and Texas. Morgan Keegan also operates
offices in Illinois, Kentucky, Mississippi, New York, Massachusetts,
and Virginia.
FIRST QUARTER HIGHLIGHTS
Net income for the first quarter of 2003 totaled a record $158.6
million or $.71 per diluted share, compared to $154.1 million or
$.66 per diluted share for the first quarter of 2002 and $156.2
million or $.70 per diluted share for the fourth quarter of 2002.
Average earning assets increased 7% over the first quarter of 2002
and 3% annualized over the fourth quarter of 2002. The primary areas
of growth were commercial and real estate loans and securities.
Average total deposits increased 5% over the first quarter 2002 and
2% annualized over the fourth quarter of 2002. Growth in lower cost
deposits have been partially offset by declines in certificates of
deposit and wholesale deposits.
Net charge-offs declined to 0.25% of average loans on an
annualized basis in the first quarter of 2003, compared to 0.40% in
the fourth quarter of 2002 and 0.26% in the first quarter of 2002.
One commercial loan charge-off accounted for approximately 25% of
net charge-offs in the first quarter of 2003. Non-performing assets
increased slightly to $339.6 million in the first quarter of 2003.
Increases of $18 million in non-accrual loans and $4 million in
other real estate, offset by a small decrease in renegotiated loans,
accounted for the increase over fourth quarter 2002. Loans past due
greater than 90 days increased $6.7 million in the first quarter
2003, compared to the prior quarter. The allowance for loan losses
as a percentage of loans, net of unearned income, totaled 1.42% at
March 31, 2003, compared to 1.41% at December 31, 2002, and 1.40% at
March 31, 2002.
The net interest margin declined 8 basis points to 3.50% in the
first quarter of 2003, compared to the prior quarter, as a result of
lower interest rates and the securitization and sale of
approximately $800 million in the fourth quarter of 2002 and $570
million in the first quarter of 2003 of indirect automobile loans.
Excluding the impact of the securitizations, the net interest margin
would have been approximately 3.54% for the first quarter of 2003
compared to 3.85% in the first quarter of 2002.
Securities gains totaled $9.9 million in the first quarter of
2003, compared to $25.2 million in the fourth quarter 2002 and $1.9
million in the first quarter of 2002.
Non-interest income, excluding securities gains, increased $54.9
million over the first quarter of 2002, but declined $6.0 million
from the fourth quarter of 2002. The primary drivers of these
changes were non-banking lines of business. Brokerage and investment
banking revenues totaled $125.0 million in the first quarter of
2003, compared to $112.9 million in the first quarter of 2002 and
$140.2 million in the fourth quarter of 2002. Regions' mortgage
servicing and origination fees totaled $28.2 million in the first
quarter 2003, an increase of $3.5 million over the first quarter of
2002, but a slight decrease of $1.6 million compared to the fourth
quarter of 2002. Gains from the sale of securitized indirect auto
loans totaled $6.8 million in the first quarter of 2003, compared to
$7.5 million in the fourth quarter 2002.
Non-interest expense declined 12% in the first quarter of 2003
compared to the fourth quarter 2002, excluding $17 million in
impairment on mortgage servicing rights and a $5.2 million charge
related to the prepayment of Federal Home Loan Bank advances in the
fourth quarter of 2002. This decline was due to reductions in all
categories of non-interest expense including salaries and incentives
expense, net occupancy expense, furniture and equipment expense, and
other areas of non-interest expense. Compared to the first quarter
2002, total non-interest expense increased 11%.
CRITICAL ACCOUNTING POLICIES
In preparing financial information, management is required to make
significant estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses for the
periods shown. The accounting principles followed by Regions and
the methods of applying these principles conform with accounting
principles generally accepted in the United States and general
banking practices. Estimates and assumptions most significant to
Regions are related primarily to allowance for loan losses,
intangibles, income taxes, securitizations and pensions and are
summarized in the following discussion and the notes to the
Consolidated Financial Statements included under Item 8 of the
Annual Report on Form
10-K.
Management's determination of the adequacy of the allowance for
loan losses, which is based on the factors and risk identification
procedures discussed in the following pages, requires the use of
judgments and estimates that may change in the future. Changes in
the factors used by management to determine the adequacy of the
allowance or the availability of new information could cause the
allowance for loan losses to be increased or decreased in future
periods. In addition, bank regulatory agencies, as part of their
examination process, may require that additions be made to the
allowance for loan losses based on their judgments and estimates.
Regions' excess purchase price (the amount in excess of book value
of acquired institutions) is reviewed at least annually to ensure
that there have been no events or circumstances resulting in an
impairment of the recorded amount of excess purchase price. Adverse
changes in the economic environment, operations of acquired business
units, or other factors could result in a decline in projected fair
values. If the estimated fair value is less than the carrying
amount, a loss would be recognized to reduce the carrying amount to
implied fair value.
For purposes of evaluating mortgage servicing impairment, Regions
stratifies its mortgage servicing portfolio on the basis of certain
risk characteristics including loan type and contractual note rate.
Changes in interest rates, prepayment speeds or other factors could
result in impairment of the servicing asset and a charge against
earnings to reduce the recorded carrying amount.
Management's determination of the realization of the deferred tax
asset is based upon management's judgment of various future events
and uncertainties, including the timing and amount of future income
earned by certain subsidiaries and the implementation of various tax
plans to maximize realization of the deferred tax asset. Management
believes that the subsidiaries will generate sufficient operating
earnings to realize the deferred tax benefits. Regions' recent
consolidated federal income tax returns are open for examination.
From time to time Regions engages in business plans that may also
have an effect on its tax liabilities. While Regions has obtained
the opinion of advisors that the tax aspects of these plans should
prevail, examination of Regions' income tax returns or changes in
tax law may impact these plans and resulting provisions for income
taxes.
Management is required to make various assumptions in valuing its
pension assets and liabilities. These assumptions include the
expected rate of return on plan assets, the discount rate, and the
rate of increase in future compensation levels. Changes to these
assumptions could impact earnings in future periods. Regions takes
into account the plan asset mix and expert opinions in determining
the expected rate of return on plan assets. Regions considers the
Moody's AA Corporate Bond yields and other market interest rates in
setting the appropriate discount rate. In addition, Regions reviews
expected inflationary and merit increases to compensation in
determining the rate increase in future compensation levels.
During the first quarter of 2003 and the fourth quarter of 2002,
Regions securitized automobile loans as a source of funding. Regions
accounted for these transactions as sales in accordance with the
guidance of Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". When selling this category of
financial assets, estimates of future cash flows are an integral
part of determining the gain or loss and subsequently evaluating any
impairment of any retained interest, such as a servicing asset or
residual interest. The most critical assumptions in estimating cash
flows and related fair value include prepayment speeds, expected
credit losses, and discount rate. Management reviews these
assumptions on a quarterly basis and the assumptions are adjusted if
deemed appropriate.
ACQUISITIONS
Comparisons with March 31, 2002 are affected by the acquisitions
of Brookhollow Bancshares, Inc. and Independence Bank, National
Association (accounted for as purchases). These acquisitions are
summarized as follows:
Total
Date Headquarters Assets Accounting
Acquired Company Acquired Location (in thousands) Treatment
April Brookhollow Bancshares, Dallas,
2002 Inc. Texas $166,916 Purchase
May Independence Bank, Houston,
2002 National Association Texas 112,408 Purchase
TOTAL ASSETS
Regions' total assets at March 31, 2003 were $48.5 billion -- an
increase of 10% compared to March 31, 2002 and 1% compared to
December 31, 2002. This growth was primarily the result of increases
in investment securities, loans, loans held for sale, short-term
investments, and other assets.
LOANS AND ALLOWANCE FOR LOAN LOSSES
LOAN PORTFOLIO
Regions' primary investment is loans. At March 31, 2003, loans
represented 72% of Regions' earning assets.
The following table includes a distribution of Regions' loan
portfolio.
Loan Portfolio
(period end data)
First Fourth First
(in thousands) Quarter Quarter Quarter
2003 2002 2002
Commercial $10,987,725 $11,080,812 $10,047,659
Residential mortgages 7,832,514 7,978,284 8,597,748
Other real estate loans 5,199,901 4,497,486 3,851,239
Construction 3,636,628 3,603,820 3,635,556
Branch installment 1,550,386 1,632,443 1,680,452
Indirect installment 393,890 375,438 1,349,760
Consumer lines of credit 1,330,412 1,219,286 1,029,961
Student loans 629,546 598,205 559,270
$31,561,002 $30,985,774 $30,751,645
Total loans at March 31, 2003, increased 3% from March 31, 2002,
and 2% over year-end 2002. The increase since March 31, 2002, was
primarily due to growth in commercial loans, real estate loans and
lines of credit, partially offset by a decline in consumer loans. At
September 30, 2002, Regions reclassified approximately $1.1 billion
of its indirect auto loan portfolio as loans held for sale (see
LOANS HELD FOR SALE). Adjusting for the effects of the securitized
loans and the loans added by acquisitions, total loans increased 6%
over the first quarter 2002. The average yield on loans during the
first quarter of 2003 was 5.86% compared to 6.93% during the three
months ended March 31, 2002, and 6.19% during the three months ended
December 31, 2002.
ALLOWANCE FOR LOAN LOSSES
Every loan carries some degree of credit risk. This risk is
reflected in the consolidated financial statements by the allowance
for loan losses, the amount of loans charged off and the provision
for loan losses charged to operating expense. It is Regions' policy
that when a loss is identified, it is charged against the allowance
for loan losses in the current period. The policy regarding
recognition of losses requires immediate recognition of a loss if
significant doubt exists as to principal repayment.
Regions' provision for loan losses is a reflection of actual
losses experienced during the period and management's judgment as to
the adequacy of the allowance for loan losses. Some of the factors
considered by management in determining the amount of the provision
and resulting allowance include: (1) detailed reviews of individual
loans; (2) gross and net loan charge-offs in the current period; (3)
the current level of the allowance in relation to total loans and to
historical loss levels; (4) past due and non-accruing loans; (5)
collateral values of properties securing loans; (6) the composition
of the loan portfolio (types of loans) and risk profiles; and (7)
management's analysis of economic conditions and the resulting
impact on Regions' loan portfolio.
A coordinated effort is undertaken to identify credit losses in
the loan portfolio for management purposes and to establish the loan
loss provision and resulting allowance for accounting purposes. A
regular, formal and ongoing loan review is conducted to identify
loans with unusual risks or possible losses. The primary
responsibility for this review rests with the management of the
individual banking offices. Their work is supplemented with reviews
by Regions' internal audit staff and corporate loan examiners. This
process provides information that helps in assessing the quality of
the portfolio, assists in the prompt identification of problems and
potential problems, and aids in deciding if a loan represents a
probable loss that should be recognized or a risk for which an
allowance should be maintained.
If, as a result of Regions' loan review and evaluation procedures,
it is determined that payment of interest on a loan is questionable,
it is Regions' policy to reverse interest previously accrued on the
loan against interest income. Interest on such loans is thereafter
recorded on a "cash basis" and is included in earnings only when
actually received in cash and when full payment of principal is no
longer doubtful.
Although it is Regions' policy to immediately charge off as a loss
all loan amounts judged to be uncollectible, historical experience
indicates that certain losses exist in the loan portfolio that have
not been specifically identified. To anticipate and provide for
these unidentifiable losses, the allowance for loan losses is
established by charging the provision for loan loss expense against
current earnings. No portion of the resulting allowance is in any
way allocated or restricted to any individual loan or group of
loans. The entire allowance is available to absorb losses from any
and all loans.
Regions' determination of its allowance for loan losses is
determined in accordance with Statement of Financial Accounting
Standards Nos. 114 and 5. In determining the amount of the
allowance for loan losses, management uses information from its loan
review process to stratify the loan portfolio into risk grades. The
higher-risk-graded loans in the portfolio are assigned estimated
amounts of loss based on several factors, including current and
historical loss experience of each higher-risk category, regulatory
guidelines for losses in each higher-risk category and management's
judgment of economic conditions and the resulting impact on the
higher-risk-graded loans. All loans deemed to be impaired, which
include non-accrual loans and loans past due 90 days or more,
excluding loans to individuals, are evaluated individually. The vast
majority of Regions' impaired loans are dependent upon collateral
for repayment. For these loans, impairment is measured by evaluating
collateral value as compared to the current investment in the loan.
For all other loans, Regions compares the amount of estimated
discounted cash flows to the investment in the loan. In the event a
particular loan's collateral value is not sufficient to support the
collection of the investment in the loan, a charge is immediately
taken against the allowance for loan losses. The amount of the
allowance for loan losses related to the higher-risk loans
(including impaired loans) was approximately 73% at March 31, 2003,
compared to 72% at December 31, 2002.
In addition to establishing allowance levels for specifically
identified higher-risk-graded loans, management determines allowance
levels for all other loans in the portfolio for which historical
experience indicates that certain losses exist. These loans are
categorized by loan type and assigned estimated amounts of loss
based on several factors, including current and historical loss
experience of each loan type and management's judgment of economic
conditions and the resulting impact on each category of loans. The
amount of the allowance for loan losses related to all other loans
in the portfolio for which historical experience indicates that
certain losses exist was approximately 27% of Regions' allowance for
loan losses at March 31, 2003, compared to 28% at December 31, 2002.
The amount of the allowance related to these loans is combined with
the amount of the allowance related to the higher-risk-graded loans
to evaluate the overall level of the allowance for loan losses.
Management considers the current level of the allowance for loan
losses adequate to absorb possible losses from loans in the
portfolio. Management's determination of the adequacy of the
allowance for loan losses, which is based on the factors and risk
identification procedures previously discussed, requires the use of
judgments and estimations that may change in the future. Changes in
the factors used by management to determine the adequacy of the
allowance or the availability of new information could cause the
allowance for loan losses to be increased or decreased in future
periods. In addition, bank regulatory agencies, as part of their
examination process, may require that additions be made to the
allowance for loan losses based on their judgments and estimates.
Activity in the allowance for loans losses is summarized as
follows:
(dollars in thousands) March 31, March 31,
2003 2002
Balance at beginning of period $437,164 $419,167
Loans charged-off:
Commercial 16,555 9,676
Real estate 3,924 4,138
Installment 9,930 15,480
Total 30,409 29,294
Recoveries:
Commercial 3,994 2,372
Real estate 1,374 1,114
Installment 6,081 6,218
Total 11,449 9,704
Net loans charged off:
Commercial 12,561 7,304
Real estate 2,550 3,024
Installment 3,849 9,262
Total 18,960 19,590
Provision charged to expense 31,500 30,000
Balance at end of period $449,704 $429,577
Average loans outstanding:
Commercial $10,844,435 $ 9,914,066
Real estate 14,942,384 14,803,160
Installment 5,328,585 5,925,553
Total $31,115,404 $30,642,779
Net charge-offs as percent of
average loans outstanding
(annualized):
Commercial .47% .30%
Real estate .07% .08%
Installment .29% .63%
Total .25% .26%
Net loan losses as a percentage of average loans (annualized) were
0.25% in the first quarter of 2003 compared to 0.26% in the first
quarter 2002 and 0.40% in the fourth quarter of 2002. First quarter
2003 net loan losses included a $4.8 million loss related to a
commercial credit. At March 31, 2003, the allowance for loan losses
was 1.42% of loans, compared to 1.40% at March 31, 2002, and 1.41%
at year-end 2002. The allowance for loan losses as a percentage of
non-performing loans was 140% at March 31, 2003, compared to 118%
at March 31, 2002, and 147% at December 31, 2002. The allowance for
loan losses as a percentage of non-performing assets was 117% at
March 31, 2003, compared to 105% at March 31, 2002, and 123 % at
December 31, 2002.
NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
(dollars in thousands) March 31, December 31, March 31,
2003 2002 2002
Non-accruing loans $244,500 $226,470 $277,939
Loans past due 90
days or more 45,171 38,499 44,914
Renegotiated loans 31,524 32,280 42,183
Other real estate 63,585 59,606 44,008
Total $384,780 $356,855 $409,044
Non-performing assets as a
percentage of loans and
other real estate 1.22% 1.15% 1.33%
Non-accruing loans at March 31, 2003, declined $33.4 million from
March 31, 2002 levels but increased $18.0 million from year-end 2002
levels. This increase since year-end is primarily related to
commercial credits, including a single manufacturing credit of $11.3
million. At March 31, 2003, real estate loans comprised $122.1
million ($78.5 million in residential) of total non-accruing loans,
with commercial loans accounting for $118.0 million and consumer
loans accounting for $4.4 million. Loans past due 90 days or more
increased $257,000 compared to March 31, 2002 and $6.7 million from
year-end 2002 levels. Other real estate increased $19.6 million from
March 31, 2002 and $4.0 million since year-end 2002 levels, as
additional properties were foreclosed.
INTEREST BEARING DEPOSITS IN OTHER BANKS
Interest-bearing deposits in other banks are used primarily as
temporary investments and generally have short-term maturities. At
March 31, 2003 this category of earning asset totaled $185.6 million
compared to $303.6 million at December 31, 2002 and $251.7 million
at March 31, 2002, as maturities were not reinvested in this earning
asset category.
SECURITIES
The following table shows the carrying values of securities as
follows:
March 31, December 31, March 31,
2003 2002 2002
(in thousands)
Securities held to maturity:
U.S. Treasury and Federal
agency securities $28,587 $30,571 $31,120
Obligations of states and
political subdivisions 2,331 2,335 3,134
Other securities 1 3 259
Total $30,919 $32,909 $34,513
Securities available for sale:
U.S. Treasury and Federal
agency securities $2,635,272 $1,957,593 $1,066,334
Obligations of states and
political subdivisions 529,070 543,798 615,744
Mortgage-backed securities 6,168,399 6,147,946 5,841,104
Other securities 89,879 42,315 11,852
Equity securities 257,394 270,039 283,694
Total $9,680,014 $8,961,691 $7,818,728
Total securities at March 31, 2003, increased 24% from March 31,
2002 levels and 8% from year-end 2002 levels. Security balances have
increased primarily through the purchase of agency securities to
manage the Company's interest rate sensitivity and liquidity
position.
LOANS HELD FOR SALE
Loans held for sale increased $505 million compared to March 31,
2002, but declined $527 million since year-end 2002. At September
30, 2002, Regions reclassified approximately $1.1 billion of its
indirect auto loan portfolio as loans held for sale. Regions
securitized and sold approximately $800 million during the fourth
quarter of 2002 and $570 million during the first quarter of 2003 of
indirect consumer auto loans classified as loans held for sale.
Securities totaling $14.5 million related to the first quarter of
2003 securitization were retained by Regions and are included in
securities available for sale. At March 31, 2003, there were
approximately $65 million in indirect auto loans held for sale.
MARGIN RECEIVABLES
Margin receivables at March 31, 2003, totaled $448.5 million
compared to $565.9 million at March 31, 2002, and $432.3 million at
December 31, 2002. Margin receivables represent funds advanced to
brokerage customers for the purchase of securities that are secured
by certain marketable securities held in the customer's brokerage
account. The risk of loss from these receivables is minimized by
requiring that customers maintain marketable securities in the
brokerage account which have a fair market value substantially in
excess of the funds advanced to the customer. Fluctuations in these
balances are caused by trends in general market conditions,
volatility in equity retail products, and investor sentiment toward
economic stability.
LIQUIDITY
GENERAL
Liquidity is an important factor in the financial condition of
Regions and affects Regions' ability to meet the borrowing needs and
deposit withdrawal requirements of its customers. Assets, consisting
principally of loans and securities, are funded by customer
deposits, purchased funds, borrowed funds and stockholders' equity.
The securities portfolio is one of Regions' primary sources of
liquidity. Maturities of securities provide a constant flow of funds
available for cash needs. Maturities in the loan portfolio also
provide a steady flow of funds. Additional funds are provided from
payments on consumer loans and one-to-four family residential
mortgage loans. Historically, Regions' high levels of earnings have
also contributed to cash flow. In addition, liquidity needs can be
met by the purchase of funds in state and national money markets.
Regions' liquidity also continues to be enhanced by a relatively
stable deposit base.
The loan to deposit ratio at March 31, 2003, was 97.50% compared
to 102.24% at March 31, 2002 and 94.11% at December 31, 2002.
Regions filed a $1.5 billion universal shelf registration
statement in November 2001 and a $1.0 billion universal shelf
registration statement in January 2001. Under these registration
statements, Regions issued $600 million of subordinated notes in May
2002, $500 million of subordinated notes in February 2001 and $288
million of trust preferred securities in February 2001.
Consequently, $1.1 billion of various debt securities could be
registered and subsequently issued, at market rates, under these
registration statements.
In addition, Regions Bank has the requisite agreements in place to
issue and sell up to $1 billion of its bank notes to institutional
investors through placement agents. As of March 31, 2003, there were
no outstanding bank notes under this program.
Morgan Keegan maintains certain lines of credit with unaffiliated
banks to manage liquidity in the ordinary course of business.
Regions securitized and sold approximately $800 million in the
fourth quarter of 2002 and $570 million in the first quarter of 2003
of indirect consumer auto loans, utilizing an additional funding
source (see LOANS HELD FOR SALE). Securitizations provide additional
flexibility to Regions in managing liquidity.
RATINGS
The table below reflects the most recent debt ratings of Regions
Financial Corporation and Regions Bank by Standard & Poor's
Corporation, Moody's Investors Service and Fitch IBCA:
S&P Moody's Fitch
Regions Financial Corporation:
Subordinated notes A- A2 A
Trust preferred securities BBB+ A1 A
Regions Bank:
Short-term certificates of deposit A-1 P-1 F1+
Short-term debt A-1 P-1 F1+
Long-term certificates of deposit A+ Aa3 AA-
Long-term debt A+ Aa3 AA-
A security rating is not a recommendation to buy, sell or hold
securities, and the ratings above are subject to revision or
withdrawal at any time by the assigning rating agency. Each rating
should be evaluated independently of any other rating.
DEPOSITS
Regions competes with other banking and financial services
companies for a share of the deposit market. Regions' ability to
compete in the deposit market depends heavily on how effectively the
Company meets customers' needs. Regions employs both traditional and
non-traditional means to meet customers' needs and enhance
competitiveness. The traditional means include providing well-
designed products, providing a high level of customer service,
providing attractive pricing and expanding the traditional branch
network to provide convenient branch locations for customers
throughout the Southern United States. Regions also employs non-
traditional approaches to enhance its competitiveness. These
include providing centralized, high quality telephone banking
services and alternative product delivery channels like Internet
banking.
Total deposits at March 31, 2003, increased 8% from March 31,
2002, but declined 2% from year-end 2002 levels. Compared to March
31, 2002, non-interest bearing deposits, interest bearing checking,
money market, and savings accounts increased $1.5 billion or 11%,
but were offset by a $972 million or 10% decline in retail
certificates of deposit, due to market interest rate changes.
Wholesale deposits increased from March 31, 2002 levels, as rates on
these deposits were more favorable compared to other funding
sources.
The following table presents the average rates paid on deposits by
category for the three months ended March 31, 2003 and 2002:
Average Rates Paid
March 31,
2003 2002
Interest-bearing transaction accounts 1.17% 1.24%
Savings accounts 0.32 0.53
Money market savings accounts 0.85 1.44
Certificates of deposit of $100,000 or more 3.09 4.37
Other interest-bearing deposits 3.32 4.74
Total interest-bearing deposits 2.01% 2.70%
The following table presents the average amounts of deposits
outstanding by category for the three months ended March 31, 2003
and 2002:
Average Amounts
Outstanding
2003 2002
(in thousands)
Non-interest-bearing demand deposits $ 5,068,365 $4,842,479
Interest-bearing transaction accounts 1,867,494 797,264
Savings accounts 1,421,953 1,361,590
Money market savings accounts 10,769,247 13,125,489
Certificates of deposit of $100,000 or
more 3,403,813 3,119,462
Other interest-bearing deposits 9,758,166 7,614,430
Total interest-bearing deposits 27,220,673 26,018,235
Total deposits $32,289,038 $30,860,714
BORROWINGS
Following is a summary of short-term borrowings:
(in thousands) March 31, December 31, March 31,
2003 2002 2002
Federal funds purchased $1,430,601 $1,180,368 $1,638,032
Securities sold under
agreements to repurchase 1,966,734 1,022,893 639,576
Federal Home Loan Bank
structured notes 850,000 850,000 1,100,000
Notes payable to
unaffiliated banks 204,500 56,009 213,700
Commercial paper 17,250 17,250 26,750
Due to brokerage customers 512,797 651,078 688,726
Broker margin calls 104,539 111,321 -0-
Short sale liability 145,164 196,538 144,317
Total $5,231,585 $4,085,457 $4,451,101
Net federal funds purchased and security repurchase agreements
totaled $3.0 billion at March 31, 2003, $1.9 billion at year-end
2002, and $2.1 billion at March 31, 2002. The level of federal funds
and security repurchase agreements can fluctuate significantly on a
day-to-day basis, depending on funding needs and which sources of
funds are used to satisfy those needs. During the first quarter of
2003, net funds purchased averaged $2.1 billion compared to $1.1
billion for the first quarter of 2002. Other short-term borrowings
and commercial paper decreased $339 million since March 31, 2002,
and $48 million since year-end 2002.
Long-term borrowings are summarized as follows:
(in thousands) March 31, December 31, March 31,
2003 2002 2002
6 3/8% subordinated notes $ 600,000 $ 600,000 $ -0-
7.80% subordinated notes -0- -0- 75,000
7.00% subordinated notes 500,000 500,000 500,000
7.75% subordinated notes 100,000 100,000 100,000
Federal Home Loan Bank
structured notes 3,585,000 3,585,000 3,585,000
Federal Home Loan Bank
advances 104,217 97,553 115,889
Trust preferred securities 291,781 291,792 291,827
Industrial development
revenue bonds 2,200 2,200 2,400
Mark-to-market on hedged
long-term debt 150,924 151,265 (25,017)
Other long-term debt 58,010 58,299 66,119
Total $5,392,132 $5,386,109 $4,711,218
Long-term borrowings have increased $681 million since March 31,
2002. This increase in long-term borrowings resulted primarily from
the May 2002 issuance of $600 million of 6 3/8% fixed rate
subordinated notes due May 2012. The subordinated notes stated 6
3/8% fixed rate has been swapped to a LIBOR based floating rate.
STOCKHOLDERS' EQUITY
Stockholders' equity was $4.3 billion at March 31, 2003, an
increase of 4% over March 31, 2002, and a 2% increase since year-end
2002. Since March 31, 2002, Regions repurchased and retired 9.4
million shares of treasury stock totaling $320.6 million.
Accumulated other comprehensive income totaled $157.1 million at
March 31, 2003, compared to $52.2 million at March 31, 2002, and
$164.1 million at year-end 2002. Regions' ratio of equity to total
assets was 8.81% at March 31, 2003, compared to 9.24% at March 31,
2002 and 8.72% at December 31, 2002.
Regions and its subsidiaries are required to comply with capital
adequacy standards established by banking regulatory agencies.
Currently, there are two basic measures of capital adequacy: a risk-
based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in credit risk
profiles among banks and bank holding companies, to account for off-
balance sheet exposure and interest rate risk, and to minimize
disincentives for holding liquid assets. Assets and off-balance
sheet items are assigned to broad risk categories, each with
specified risk-weighting factors. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance sheet items. Banking organizations that are considered
to have excessive interest rate risk exposure are required to
maintain higher levels of capital.
The minimum standard for the ratio of total capital to risk-
weighted assets is 8%. At least 50% of that capital level must
consist of common equity, undivided profits and non-cumulative
perpetual preferred stock, less goodwill and certain other
intangibles ("Tier 1 capital"). The remainder ("Tier 2 capital")
may consist of a limited amount of other preferred stock, mandatory
convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier 1 capital and Tier 2
capital is "total risk-based capital."
The banking regulatory agencies also have adopted regulations that
supplement the risk-based guidelines to include a minimum ratio of
3% of Tier 1 capital to average assets less goodwill (the "leverage
ratio"). Depending upon the risk profile of the institution and
other factors, the regulatory agencies may require a leverage ratio
of 1% to 2% above the minimum 3% level.
The following chart summarizes the applicable bank regulatory
capital requirements. Regions' capital ratios at March 31, 2003,
substantially exceeded all regulatory requirements.
BANK REGULATORY CAPITAL REQUIREMENTS
Well
Minimum Capitalized Regions at
Regulatory Regulatory March 31,
Requirement Requirement 2003
Tier 1 capital to risk-
adjusted assets 4.00% 6.00% 9.17%
Total risk-based capital
to risk-adjusted assets 8.00 10.00 14.03
Tier 1 leverage ratio 3.00 5.00 7.03
OPERATING RESULTS
Net income for the first quarter of 2003 totaled $158.6 million or
$0.71 per diluted share, an 8% increase (on a per share diluted
basis) over the first quarter of 2002. Compared to the fourth
quarter of 2002, net income increased (on a per share diluted basis)
from $.70 to $.71. Annualized return on stockholders' equity for the
first quarter of 2003 was 15.23% compared to 15.31% for the same
period in 2002. Annualized return on assets for the first quarter of
2003 was 1.34% compared to 1.40% for the first quarter of 2002.
NET INTEREST INCOME
The following table presents a summary of net interest income for
the quarters ended March 31, 2003, December 31, 2002, and March 31,
2002.
(dollars in thousands) March 31, December 31, March 31,
2003 2002 2002
Interest income $575,986 $616,000 $641,576
Interest expense 216,083 243,434 271,790
Net interest income 359,903 372,566 369,786
Tax equivalent adjustment 17,083 19,310 18,318
Net interest income
(taxable equivalent) $376,986 $391,876 $388,104
Net interest margin 3.50% 3.58% 3.85%
Net interest income (taxable equivalent basis) for the first
quarter of 2003 decreased $11.1 million, or 3%, compared to the same
period in 2002 and $14.9 million, or 4% compared to the fourth
quarter of 2002. The decline in net interest income from first
quarter and fourth quarter 2002 is due to continued compression in
the net interest margin due to lower interest rates, partially
offset by increases in earning assets. The net yield on
interest-earning assets (taxable equivalent basis) was 3.50% in the
first quarter of 2003 compared to 3.85% during the same period in
2002 and 3.58% during the fourth quarter of 2002. The yield on
interest-earning assets declined 31 basis points in the first
quarter, while the rate on interest-bearing liabilities declined 24
basis points, compared to the prior quarter.
Analysis of Changes in Net Interest Income
Quarter ended March 31,
(in thousands) 2003 over 2002
Volume Yield/Rate Total
Increase (decrease) in:
Interest income on:
Loans $ 7,793 $(82,331) $(74,538)
Federal funds sold 493 (80) 413
Taxable securities 16,354 (16,366) (12)
Non-taxable securities (1,759) (474) (2,233)
Other earning assets 11,203 (423) 10,780
Total 34,084 (99,674) (65,590)
Interest expense on:
Savings deposits 77 (751) (674)
Other interest-bearing deposits 7,638 (45,539) (37,901)
Borrowed funds 16,700 (33,832) (17,132)
Total 24,415 (80,122) (55,707)
Increase in net interest income $ 9,669 $(19,552) $ (9,883)
Note: The change in interest due to both rate and volume has been
allocated to change due to volume and change due to rate in
proportion to the absolute dollar amounts of the change in
each.
MARKET RISK
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due to changes in interest
rates, exchange rates, commodity prices, equity prices, or the
credit quality of debt securities.
The overall level of market risk taking activity within Regions
has recently reached the minimum threshold level as determined by
the Federal Reserve Bank which will require future compliance with
the 1996 market risk amendment to the Basel Capital Accord. As such,
Regions is in process of implementing the protocols and processes
necessary to meet the market risk measurement and risk management
objectives of the Accord.
Interest Rate Sensitivity
Regions' primary market risk is interest rate risk, including
uncertainty with respect to absolute interest rate levels as well as
uncertainty with respect to relative interest rate levels which
impact both the shape and the slope of the various yield curves
affecting the financial products and services that the Company
offers. To quantify this risk Regions measures the change in its net
interest income in various interest rate scenarios as compared to a
base case scenario. Net interest income sensitivity (as measured
over 12 months) is a useful short-term indicator of the Regions'
interest rate risk.
Sensitivity Measurement. Financial simulation models are Regions'
primary tools used to measure interest rate exposure. Using a wide
range of hypothetical deterministic and stochastic simulations,
these tools provide management with extensive information on the
potential impact to net interest income caused by changes in
interest rates.
These models are structured to simulate cash flows and accrual
characteristics of the many products both on and off Regions'
balance sheet. Assumptions are made about the direction and
volatility of interest rates, the slope of the yield curve, and
about the changing composition of the balance sheet that result from
both strategic plans and from customer behavior. Among the
assumptions are expectations of balance sheet growth and
composition, the pricing and maturity characteristics of existing
business and the characteristics of future business. Interest rate
related risks are expressly considered, such as pricing spreads, the
lag time in pricing administered rate accounts, prepayments and
other option risks. Regions considers these factors, as well as the
degree of certainty or uncertainty surrounding their future
behavior.
Off-balance sheet items are used in hedging the values of selected
assets and liabilities from changes in interest rates. The effect of
these hedges is included in the simulations of net interest income.
The primary objectives of Asset/Liability Management at Regions
are balance sheet coordination and the management of interest rate
risk in achieving reasonable and stable net interest income
throughout various interest rate cycles. A standard set of alternate
interest rate scenarios is compared to the results of the base case
scenario to determine the extent of potential fluctuations and to
establish exposure limits. The standard set of interest rate
scenarios includes the traditional instantaneous parallel rate
shifts of plus and minus 100 and 200 basis points. In addition,
Regions includes simulations of gradual interest rate movements that
may more realistically mimic potential interest rate movements. The
gradual scenarios include curve steepening, flattening, and parallel
movements of various magnitudes phased in over 6- to 12-month
periods.
Exposure to Interest Rate Movements. Based on the foregoing
discussion, management has estimated the potential effect of shifts
in interest rates on net interest income. As of March 31, 2003,
Regions maintains an almost balanced position to a gradual rate
shift of plus or minus 100 basis points. The following table
demonstrates the expected effect that a gradual (over six months
beginning at March 31, 2003 and 2002, respectively) parallel
interest rate shift would have on Regions' net interest income.
March 31, 2003 March 31, 2002
$ Change in % Change in $ Change in % Change in
Change in Net Interest Net Interest Net Interest Net Interest
Interest Rates Income Income Income Income
(in basis points) (dollars in thousands)
+200 $15,000 1.0% $46,000 3.1%
+100 9,000 0.6 25,000 1.7
-100 (15,000) (1.1) (28,000) (1.9)
-200 (54,000) (3.7) (68,000) (4.5)
Derivatives
Regions uses financial derivative instruments for management of
interest rate sensitivity. The Asset and Liability Committee in its
oversight role for the management of interest rate sensitivity
approves the use of derivatives in balance sheet hedging strategies.
The most common derivatives the Company employs are interest rate
swaps, interest rate options, forward sale commitments, and interest
rate and foreign exchange forward contracts.
Interest rate swaps are contractual agreements typically entered
into to exchange fixed for variable streams of interest payments.
The notional principal is not exchanged but is used as a reference
for the size of the interest payments. Interest rate options are
contracts that allow the buyer to purchase or sell a financial
instrument at a pre-determined price and time. Forward sale
commitments are contractual obligations to sell money market
instruments at a future date for an already agreed upon price.
Foreign exchange forwards are contractual agreements to receive or
deliver a foreign currency at an agreed upon future date and price.
Regions has made use of interest rate swaps and interest rate
options to convert a portion of its fixed-rate funding position to a
variable rate. Regions also uses derivatives to manage interest rate
and pricing risk associated with its mortgage origination business.
Futures contracts and forward sales commitments are used to protect
the value of the loan pipeline from changes in interest rates. In
the period of time that elapses between the origination and sale of
mortgage loans, changes in interest rates have the potential to
cause a decline in the value of the loans in this held for sale
portfolio. Futures and forward sale commitment positions are used to
protect the Company from the risk of such adverse changes. The
change in value of the hedging contracts is expected to be highly
effective in offsetting the change in value of specific assets and
liabilities over the life of the hedge relationship.
Regions also uses derivatives to meet the needs of its customers.
Interest rate swaps, interest rate options, futures and forward
commitments and foreign exchange forwards are the most common
derivatives sold to customers. Positions with similar
characteristics are used to offset the market risk and minimize
income statement volatility associated with this portfolio. Those
instruments, which are used to service customers, are entered into
the trading account, with changes in value recorded in the income
statement.
Brokerage and Market Making Activity
Morgan Keegan's business activities expose it to market risk,
including its securities inventory positions and securities held for
investment.
Morgan Keegan trades for its own account in corporate and tax-
exempt securities and U.S. government, agency and guaranteed
securities. Most of these transactions are entered into to
facilitate the execution of customers' orders to buy or sell these
securities. In addition, it trades certain equity securities in
order to "make a market" in these securities. Morgan Keegan's
trading activities require the commitment of capital. All principal
transactions place the subsidiary's capital at risk. Profits and
losses are dependent upon the skills of employees and market
fluctuations. In some cases, in order to hedge the risks of carrying
inventory, Morgan Keegan enters into a low level of activity
involving U.S. Treasury note futures.
Morgan Keegan, as part of its normal brokerage activities, assumes
short positions on securities. The establishment of short positions
exposes Morgan Keegan to off-balance sheet risk in the event that
prices increase, as it may be obligated to cover such positions at a
loss. Morgan Keegan manages its exposure to these instruments by
entering into offsetting or other positions in a variety of
financial instruments.
Morgan Keegan will occasionally hedge a portion of its long
proprietary inventory position through the use of short positions in
financial future contracts, which are included in securities sold,
not yet purchased at market value. At March 31, 2003, Morgan Keegan
had no outstanding futures contracts. The contract amounts do not
necessarily represent future cash requirements.
In the normal course of business, Morgan Keegan enters into
underwriting and forward and future commitments. At March 31, 2003,
the contract amounts of futures contracts were $13 million to
purchase and $105 million to sell U.S. Government and municipal
securities. Morgan Keegan 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 Regions' consolidated 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. Regions'
exposure to market risk is determined by a number of factors,
including the size, composition and diversification of positions
held, the absolute and relative levels of interest rates, and market
volatility.
Interest rate risk at Morgan Keegan arises from the exposure of
holding interest-sensitive financial instruments such as government,
corporate and municipal bonds and certain preferred equities. Morgan
Keegan manages its exposure to interest rate risk by setting and
monitoring limits and, where feasible, hedging with offsetting
positions in securities with similar interest rate risk
characteristics. Securities inventories are marked to market, and
accordingly there are no unrecorded gains or losses in value. While
a significant portion of the securities inventories have contractual
maturities in excess of five years, these inventories, on average,
turn over in excess of twelve times per year. Accordingly, the
exposure to interest rate risk inherent in Morgan Keegan's
securities inventories is less than that of similar financial
instruments held by firms in other industries. Morgan Keegan's
equity securities inventories are exposed to risk of loss in the
event of unfavorable price movements. The equity securities
inventories are marked to market and there are no unrecorded gains
or losses.
Morgan Keegan is also subject to credit risk arising from non-
performance by trading counterparties, customers, and issuers of
debt securities owned. This risk is managed by imposing and
monitoring position limits, monitoring trading counterparties,
reviewing security concentrations, holding and marking to market
collateral and conducting business through clearing organizations
that guarantee performance. Morgan Keegan regularly participates as
an agent in the trading of some derivative securities for its
customers; however, this activity does not involve Morgan Keegan
acquiring a position or commitment in these products and this
trading is not a significant portion of Morgan Keegan's business.
Morgan Keegan does not participate in the trading of derivative
securities that have off-balance sheet risk.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $31.5 million or .41%
(annualized) of average loans in the first quarter of 2003, compared
to $30.0 million or .40% (annualized) of average loans in the first
quarter of 2002 and $32.5 million or .42% (annualized) of average
loans in the fourth quarter of 2002. The provision for loan losses
recorded in the first quarter of 2003 was based on management's
assessment of inherent losses associated with the loan portfolio and
management's evaluation of current and future economic conditions
(see ALLOWANCE FOR LOAN LOSSES).
NON-INTEREST INCOME
The following table presents a summary of non-interest income for
the quarters ended March 31, 2003, December 31, 2002, and March 31,
2002.
(in thousands) March 31, December 31, March 31,
2003 2002 2002
Brokerage and investment
banking $125,027 $140,240 $112,855
Trust department income 17,106 15,038 15,747
Service charges on
deposit accounts 69,725 72,249 66,034
Mortgage servicing and
origination fees 28,228 29,834 24,679
Securities gains 9,898 25,228 1,856
Other 91,605 80,300 57,437
Total non-interest income $341,589 $362,889 $278,608
Total non-interest income (excluding securities transactions)
increased $54.9 million in the first quarter of 2003 compared to the
first quarter of 2002 due to increases in all categories of non-
interest income. Non-interest income (excluding securities
transactions) declined $6.0 million compared to the fourth quarter
of 2002 as a result of a slight decline in revenues for both
brokerage and mortgage banking, partially offset by a record quarter
in the insurance business included in the other category.
BROKERAGE AND INVESTMENT BANKING
Brokerage and investment banking income reflected an increase of
$12.2 million in the first quarter of 2003 compared to the same
period in 2002 due to strong growth in the fixed income markets over
the course of 2002. Compared to the fourth quarter of 2002,
brokerage and investment banking income decreased $15.2 million due
to reduced transaction levels in the first quarter.
The following table shows the breakout of revenue by division
contributed by Morgan Keegan for the three months ended March 31,
2003, December 31, 2002, and March 31, 2002.
Morgan Keegan
Breakout of Revenue by Division
Fixed-
income Equity Regions
($ amounts in Private Capital Capital MK Investment Interest
thousands) Client Markets Markets Trust Advisory & Other
Three months ended
March 31, 2003:
$ amount of revenue $40,720 $65,546 $9,673 $15,158 $14,802 $13,963
% of gross revenue 25.5% 41.0% 6.1% 9.5% 9.3% 8.6%
Three months ended
December 31, 2002:
$ amount of revenue $44,017 $71,179 $13,588 $15,406 $15,622 $15,467
% of gross revenue 25.1% 40.6% 7.8% 8.8% 8.9% 8.8%
Three months ended
March 31, 2002:
$ amount of revenue $43,519 $49,538 $10,385 $16,158 $11,650 $13,483
% of gross revenue 30.1% 34.2% 7.1% 11.2% 8.1% 9.3%
The following table shows the components of revenue contributed by
Morgan Keegan for the three months ended March 31, 2003, December
31, 2002, and March 31, 2002.
Morgan Keegan
Summary Income
Statement
Three Three Three
($ amounts in months months months % Change % Change
thousands) Ended Ended Ended from from
March 31, Dec. 31, March 31, Dec. 31, March 31,
2003 2002 2002 2002 2002
Revenues:
Commissions $34,175 $38,589 $32,496 (11.4)% 5.2%
Principal
transaction 68,015 66,125 54,642 2.9 24.5
Investment banking 12,184 22,497 14,765 (45.8) (17.5)
Interest 12,925 12,960 12,081 (.3) 7.0
Trust fees and
services 15,158 15,407 16,082 (1.6) (5.7)
Investment
advisory 13,616 15,497 11,598 (12.1) 17.4
Other 3,790 4,204 3,070 (9.8) 23.4
Total revenues 159,863 175,279 144,734 (8.8) 10.5
Expenses:
Interest expense 7,517 6,679 6,452 12.5 16.5
Non-interest
expense 126,226 135,747 118,397 (7.0) 6.6
Total expenses 133,743 142,426 124,849 (6.1) 7.1
Income before income
taxes 26,120 32,853 19,885 (20.5) 31.4
Income taxes 9,687 12,277 7,289 (21.1) 32.9
Net income $16,433 $20,576 $12,596 (20.1)% 30.5%
TRUST INCOME
Trust department income for the first quarter of 2003 increased
$1.4 million or 9% compared to the first quarter of 2002 and $2.1
million or 14% compared to the fourth quarter of 2002. Beginning in
2002, trust sales efforts were managed through Morgan Keegan. Morgan
Keegan's expertise and experience in asset management and sales
contributed to the higher trust fees.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
Service charges on deposit accounts increased $3.7 million or 6%
in the first quarter of 2003 over first quarter of 2002 due to
management's continued focus on fee collection efforts. Compared to
the fourth quarter of 2002, service charges on deposit accounts
decreased $2.5 million or 3%.
MORTGAGE SERVICING AND ORIGINATION FEES
The primary source of this category of income is Regions' mortgage
banking affiliates, RMI and EquiFirst. RMI's primary business and
source of income is the origination and servicing of mortgage loans
for long-term investors. EquiFirst typically originates mortgage
loans which are sold to third-party investors with servicing
released. Net gains and losses related to the sale of mortgage loans
are included in other non-interest income.
Mortgage servicing and origination fees increased $3.5 million or
14% in the first quarter of 2003 compared to the first quarter of
2002 due to the significant mortgage activity resulting from the
historically low interest rate environment over the past twelve
months. Compared to the fourth quarter of 2002, mortgage servicing
and origination fees declined $1.6 million or 5% due to a slight
decrease in production levels and fewer loans serviced. Single-
family mortgage production was $2.2 billion in the first quarter of
2003, compared to $1.4 billion in the first quarter of 2002 and $2.3
billion in the fourth quarter of 2002. The mortgage company's
servicing portfolio totaled $17.1 billion at March 31, 2003,
compared to $18.8 billion at March 31, 2002, and $17.3 billion at
December 31, 2002.
A summary of mortgage servicing rights, which are included in
other assets in the consolidated statements of condition, is
presented as follows. The balances shown represent the original
amounts capitalized, less accumulated amortization and valuation
adjustments, for the right to service mortgage loans that are owned
by other investors. The carrying values of mortgage servicing
rights are affected by various factors, including prepayments of the
underlying mortgages. A significant change in prepayments of
mortgages in the servicing portfolio could result in significant
changes in the valuation adjustments.
Three Months Ended
(dollars in thousands) March 31, March 31,
2003 2002
Balance at beginning of year $147,487 $140,369
Additions 15,082 10,014
Amortization (11,472) (4,777)
151,097 145,606
Valuation adjustment (40,310) (3,775)
Balance at end of period $110,787 $141,831
Mortgage servicing asset as a
percent of servicing portfolio 0.65% 0.75%
SECURITIES GAINS
Securities gains totaled $9.9 million in the first quarter of
2003, resulting from the sale of approximately $215 million in
agency securities in the first quarter. Securities gains totaled
$1.9 million in the first quarter of 2002 and $25.2 million in the
fourth quarter of 2002.
OTHER INCOME
The components of other income consist mainly of fees and
commissions, insurance premiums, customer derivative fees and gains
related to the sale of mortgage loans. Other non-interest income for
the first quarter of 2003 increased $34.2 million over the first
quarter of 2002 and $11.3 million over the fourth quarter of 2002
due primarily to strong performance by insurance operations and
higher gains resulting from mortgage banking activities. Gains on
sales of securitized indirect auto loans included in non-interest
income were $6.8 million in the first quarter of 2003 and $7.5
million in the fourth quarter of 2002.
NON-INTEREST EXPENSE
The following table presents a summary of non-interest expense for
the quarters ended March 31, 2003, December 31, 2002, and March 31,
2002.
(in thousands) March 31, December 31, March 31,
2003 2002 2002
Salaries and employee
benefits $272,619 $280,660 $237,362
Net occupancy expense 25,712 26,319 22,548
Furniture and equipment
expense 20,312 22,689 22,100
Other 129,531 154,174 120,350
Total non-interest expense $448,174 $483,842 $402,360
Total non-interest expense increased $45.8 million or 11% in the
first quarter of 2003 compared to the same period in 2002. Compared
to the fourth quarter of 2002, total non-interest expense decreased
$35.7 million or 7%. The largest portion of this decrease was due to
a $5.2 million charge related to the prepayment of $250 million of
Federal Home Loan Bank advances and a $17.0 million mortgage
servicing rights impairment charge, both taken in the fourth quarter
of 2002. Excluding these amounts, non-interest expense decreased
$13.5 million compared to the fourth quarter of 2002.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits were up $35.3 million or 15% in the
first quarter of 2003 compared to the same period in 2002, due to
higher incentive costs associated with Morgan Keegan and mortgage
banking, increased pension costs, and normal merit increases.
Salaries and employee benefits decreased $8.0 million or 3% compared
to the fourth quarter of 2002 due to lower commissions and
incentives primarily related to lower production volumes in the
brokerage and mortgage banking areas. As of March 31, 2003, Regions
had 16,040 full time equivalent employees.
NET OCCUPANCY EXPENSE
Net occupancy expense includes rents, depreciation and
amortization, utilities, maintenance, insurance, taxes and other
expenses of premises occupied by Regions and its affiliates.
Regions' affiliates operate banking offices throughout Alabama,
Arkansas, Florida, Georgia, Louisiana, North Carolina, South
Carolina, Tennessee, and Texas.
Net occupancy expense increased $3.2 million or 14% in the first
quarter of 2003 over the first quarter of 2002 due to expenses
related to new and acquired branch offices and the new operations
center. Compared to the fourth quarter of 2002, net occupancy
expense decreased $607,000 or 2%.
FURNITURE AND EQUIPMENT EXPENSE
Furniture and equipment expense decreased $1.8 million or 8% in
the first quarter of 2003 compared to the same period in 2002 and
$2.4 million or 10% compared to the fourth quarter of 2002.
OTHER EXPENSES
The significant components of other expense include other non-
credit losses, amortization and impairment of mortgage servicing
rights and computer and other outside services. Other non-interest
expense increased $9.2 million or 8% in the first quarter of 2003
compared to the same period in 2002 due primarily to higher
amortization of mortgage servicing rights. Compared to the fourth
quarter of 2002, other non-interest expense decreased $24.6 million
or 16% due to the prepayment and mortgage servicing rights
impairment charges taken in the fourth quarter of 2002 discussed
above. Excluding the $5.2 million prepayment charge and $17.0
million mortgage servicing rights impairment charge, other non-
interest expense decreased $2.4 million from fourth quarter levels.
APPLICABLE INCOME TAXES
Income tax expense for the first quarter of 2003 increased $1.2
million or 2% over the first quarter of 2002 due to a higher level
of taxable income. Regions effective tax rates for the first quarter
of 2003 and 2002 were 28.5% and 28.7%, respectively.
Regions' consolidated federal income tax returns, for the years
1998-2002, are open for examination. From time to time Regions
engages in business plans that may also have an effect on its tax
liabilities. While Regions has obtained the opinion of advisors that
the tax aspects of these plans should prevail, examination of
Regions' income tax returns or changes in tax law may impact the tax
benefits of these plans. Regions believes adequate provisions for
income tax have been recorded for all years open for review.
Item 3.Qualitative and Quantitative Disclosures about Market Risk
Reference is made to pages 28 through 31 `Market Risk' included in
Management's Discussion and Analysis.
Item 4. Controls and Procedures
Based on their evaluation, as of a date within 90 days of the
filing of this Form 10-Q, Regions' Chairman of the Board, President
and Chief Executive Officer and Executive Vice President and Chief
Financial Officer have concluded that Regions' disclosure controls
and procedures (as defined in Rule 13a-14 under the Securities
Exchange Act of 1934) are effective. There have been no significant
changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
99.1 Certification pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first
quarter of 2003.
However, a report on Form 8-K, dated January 16, 2003,
was furnished, under item 9 in connection with the
Registrant's results of operations for the quarter and
year ended December 31, 2002.
A report on Form 8-K, dated January 28, 2003, was
furnished, under item 9 in connection with the
Registrant's presentation at the Salomon Smith Barney's
Sixth Annual Financial Services Conference in New York
City.
A report on Form 8-K, dated March 4, 2003, was furnished,
under item 9 in connection with the Registrant's
presentation at JPMorgan's Fixed Income Investor Financial
Services Conference in New York City.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by undersigned thereunto duly authorized.
Regions Financial Corporation
DATE: May 14, 2003 /s/ Ronald C. Jackson
Ronald C. Jackson
Senior Vice President and
Comptroller
(Chief Accounting Officer and
Duly Authorized Officer)
CERTIFICATIONS
I, Carl E. Jones, Jr., Chairman of the Board, President and Chief
Executive Officer of Regions Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Regions
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ Carl E. Jones, Jr. Date: May 14, 2003
Carl E. Jones, Jr.
Chairman of the Board, President, and
Chief Executive Officer
I, D Bryan Jordan, Executive Vice President and Chief Financial
Officer of Regions Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Regions
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ D. Bryan Jordan Date: May 14, 2003
D. Bryan Jordan
Executive Vice President and
Chief Financial Officer