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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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)
Registrant's telephone number, including area code: (205) 944-1300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK -- PAR VALUE $.625
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 28, 2002.
COMMON STOCK, $.625 PAR VALUE -- $7,199,006,551*
*Excludes as shares held by affiliates only shares held by the registrant's
401(k) plan, supplemental 401(k) plan, directors' stock investment plan and
executive officers who are directors without prejudice to a determination of
control.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 28, 2002.
Common Stock, $.625 Par Value--229,752,922 shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement to be dated approximately April 10,
2002 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
(a) The Registrant, Regions Financial Corporation (the "Registrant" or
"Regions"), is a regional financial holding company headquartered in Birmingham,
Alabama, which operated 677 full-service banking offices in Alabama, Arkansas,
Florida, Georgia, Louisiana, North Carolina, South Carolina, Tennessee and Texas
as of December 31, 2001. At that date, Regions had total consolidated assets of
approximately $45.4 billion, total consolidated deposits of approximately $31.5
billion, and total consolidated stockholders' equity of approximately $4.0
billion.
Regions was organized under the laws of the state of Delaware and commenced
operations in 1971 under the name First Alabama Bancshares, Inc. On May 2, 1994,
the name of First Alabama Bancshares, Inc. was changed to Regions Financial
Corporation. Regions' principal executive offices are located at 417 North 20th
Street, Birmingham, Alabama 35203, and its telephone number at such address is
(205) 944-1300.
At December 31, 2001, Regions operated three state-chartered commercial
bank subsidiaries (collectively, the "Subsidiary Banks") in Alabama, Arkansas,
Florida, Georgia, Louisiana, North Carolina, South Carolina, Tennessee and
Texas. Regions also operates various financial service subsidiaries providing
other financial services in the fields of investment banking, asset management,
trust, mutual funds, securities brokerage, mortgage banking, insurance, leasing,
commercial accounts receivable factoring, and other specialty financing.
In Alabama, Regions operates through Regions Bank, which operates 166
banking offices throughout the state. At December 31, 2001, these offices had
30% of Regions' total consolidated assets and 32% of total consolidated
deposits.
In Arkansas, Regions Bank operates 111 banking offices throughout the
state. At December 31, 2001, these offices had 14% of total consolidated assets
and total consolidated deposits.
In Florida, Regions Bank operates through 64 banking offices in the
northwest and central regions of the state. At December 31, 2001, these offices
had 7% of Regions' total consolidated assets and 8% of total consolidated
deposits.
In Georgia, Regions Bank operates 137 banking offices throughout the state.
At December 31, 2001, these offices had 24% of total consolidated assets and 20%
of Regions' total consolidated deposits.
In Louisiana, Regions Bank operates 87 banking offices throughout the
state. At December 31, 2001, these offices had 10% of total consolidated assets
and 12% of Regions' total consolidated deposits.
In North Carolina, Park Meridian Bank operates three banking offices in the
Charlotte area. At December 31, 2001, these offices had 1% of Regions' total
consolidated assets and total consolidated deposits.
In South Carolina, Regions Bank operates 33 banking offices throughout the
state. At December 31, 2001, these offices had 4% of Regions' total consolidated
assets and 3% of total consolidated deposits.
In Tennessee, Regions Bank operates 38 banking offices. At December 31,
2001, these offices had 5% of Regions' total consolidated assets and total
consolidated deposits.
In Texas, (i) Regions Bank and (ii) First Bank of Texas operate 38 banking
offices in the state. At December 31, 2001, these offices had 5% of Regions'
total consolidated assets and total consolidated deposits.
In addition to the Subsidiary Banks, Regions provides additional financial
services through various banking-related subsidiaries, the most significant of
which provide brokerage and investment services, mortgage banking, insurance
brokerage, credit life insurance, commercial accounts receivable factoring, and
specialty financing.
Morgan Keegan & Company, Inc., acquired in 2001 and a subsidiary of
Regions, is a regional full-service brokerage and investment banking firm.
Morgan Keegan offers products and services including securities
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brokerage, asset management, financial planning, mutual funds, securities
underwriting, sales and trading, and investment banking. Morgan Keegan, one of
the largest investment firms in the South, employs approximately 900 financial
advisors offering products and services from 142 offices located in Alabama,
Arkansas, Florida, Georgia, Kentucky, Massachusetts, Mississippi, New York,
Louisiana, North Carolina, South Carolina, Tennessee, Texas, and Virginia.
Regions Mortgage, Inc. (RMI), a subsidiary of Regions Bank, is engaged in
mortgage banking. Its primary business and source of income is the origination
and servicing of mortgage loans for long-term investors. RMI serviced
approximately $19.1 billion in real estate mortgages at December 31, 2001, and
it operates loan production offices in Alabama, Arkansas, Florida, Georgia,
Louisiana, North Carolina, South Carolina, Tennessee and Texas.
Rebsamen Insurance Inc., acquired in 2001 and a subsidiary of Regions, acts
as a general insurance broker for a full-line of insurance products, primarily
focusing on commercial property and casualty insurance customers.
Regions Agency, Inc., a subsidiary of Regions, acts as an insurance agent
or broker with respect to credit life and accident and health insurance and
other types of insurance relating to extensions of credit by the Subsidiary
Banks or banking-related subsidiaries.
Regions Life Insurance Company, a subsidiary of Regions, acts as a
re-insurer of credit life and accident and health insurance in connection with
the activities of certain affiliates of Regions.
Regions Interstate Billing Service, Inc. (RIBS), a subsidiary of Regions,
factors commercial accounts receivable and performs billing and collection
services. RIBS primarily serves clients related to the automotive service
industry.
EquiFirst Corporation, a subsidiary of EFC Holdings Corporation which is a
wholly-owned subsidiary of Regions Bank, provides specialty real estate
financing to consumers.
A substantial portion of the growth of Regions since commencing operations
in 1971 has been through the acquisition of other financial institutions,
including commercial banks and thrift institutions, and the assets and deposits
thereof. Since it began operations as a bank holding company, Regions has
completed 99 acquisitions of financial institutions and financial service
providers representing in aggregate (at the time the acquisitions were
completed) approximately $27.9 billion in assets. As part of its ongoing
strategic plan, Regions continually evaluates business combination
opportunities. As a result, business combination discussions and, in some cases,
negotiations take place, and future business combinations involving cash, debt,
or equity securities can be expected. Any future business combination or series
of business combinations that Regions might undertake may be material, in terms
of assets acquired or liabilities assumed, to Regions' financial condition.
Recent business combinations in the financial services industry have typically
involved the payment of a premium over book and market values. This practice
could result in dilution of book value and net income per share for the
acquirer.
Reference is made to Items 6 and 7 of this Annual Report on Form 10-K for
certain statistical (Guide 3) and other information.
This Annual Report on Form 10-K, 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 the following: 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.
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- 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, credit risk
and operational risk.
- Regions' ability to manage fluctuations in the value of assets and
liabilities and off-balance sheet exposure so to as 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.
- 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.
- 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.
(b) The primary business conducted by Registrant's banking affiliates, in
each geographic region, is banking, which includes provision of commercial and
retail banking services and, in some cases, trust services. Registrant's
bank-related subsidiaries perform services incidental to the business of
banking.
Reference is made to Note V. "Business Segment Information" to the
consolidated financial statements included under Item 8 of this Annual Report on
Form 10-K for information required by this item.
(c)(1) General. The Registrant is a financial holding company, registered
with the Board of Governors of the Federal Reserve System ("Federal Reserve")
under the Bank Holding Company Act of 1956, as amended ("BHC Act"). As such, the
Registrant and its subsidiaries are subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve.
The Gramm-Leach-Bliley Act, adopted in 1999, significantly relaxed
previously existing restrictions on the activities of banks and bank holding
companies. Under such Act, an eligible bank holding company may elect to be a
"financial holding company" and thereafter may engage in a range of activities
that are financial
3
in nature and that were not previously permissible for banks and bank holding
companies. For a bank holding company to be eligible for financial holding
company status, all of its subsidiary financial institutions must be
well-capitalized and well-managed. A bank holding company may become a financial
holding company by filing a declaration with the Federal Reserve Board that it
elects to become a financial holding company. A financial holding company may
engage directly or through a subsidiary in the statutorily authorized activities
of securities dealing, underwriting, and market making, insurance underwriting
and agency activities, merchant banking, and insurance company portfolio
investments, and in any activity that the Federal Reserve Board determines by
rule or order to be financial in nature or incidental to such financial
activity. The Federal Reserve Board must deny expanded authority to any bank
holding company that received less than a satisfactory rating on its most recent
Community Reinvestment Act review as of the time it submits its declaration.
The Gramm-Leach-Bliley Act also permits securities brokerage firms and
insurance companies to own banks and bank holding companies. The Act also seeks
to streamline and coordinate regulation of integrated financial holding
companies, providing generally for "umbrella" regulation of financial holding
companies by the Federal Reserve Board, and for functional regulation of banking
activities by bank regulators, securities activities by securities regulators,
and insurance activities by insurance regulators.
In December 2000, Regions filed a declaration to become a financial holding
company, which was approved by the Federal Reserve in January 2001.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5.0% of the voting shares of the bank; (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (iii) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, and consideration of convenience and needs issues includes the
parties' performance under the Community Reinvestment Act of 1977 (the "CRA"),
both of which are discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") repealed the prior statutory restrictions on
interstate acquisitions of banks by bank holding companies, such that the
Registrant, and any other bank holding company located in Alabama may now
acquire a bank located in any other state, and any bank holding company located
outside Alabama may lawfully acquire any Alabama-based bank, regardless of state
law to the contrary, in either case subject to certain deposit-percentage, aging
requirements, and other restrictions. The Interstate Banking Act also generally
provided that, after June 1, 1997, national and state-chartered banks may branch
interstate through acquisitions of banks in other states.
The BHC Act limits the activities of a bank holding company to banking or
managing banks, engaging in activities that are so closely related to banking
and managing banks as to be a proper incident thereto, and, in the case of bank
holding companies that are also qualified as financial holding companies,
engaging in the financial activities described above. Activities that the
Federal Reserve has determined to be permissible for a bank holding company
include factoring accounts receivable, acquiring and servicing loans, leasing
personal property, performing certain data processing services, acting as agent
or broker in selling credit life insurance and certain other type of insurance
in connection with credit transactions, and conducting certain insurance
underwriting activities. The BHC act does not place territorial limitations on
permissible nonbanking activities
4
of bank holding companies. Despite prior approval, the Federal Reserve has the
power to order any bank holding company or its subsidiaries to terminate any
activity or to terminate its ownership or control of any subsidiary when the
Federal Reserve has reasonable grounds to believe that continuation of such
activity or such ownership or control constitutes a serious risk to the
financial soundness, safety, or stability of any bank subsidiary of the bank
holding company.
The Subsidiary Banks of the Registrant are members of the Federal Deposit
Insurance Corporation ("FDIC"), and as such, their deposits are insured by the
FDIC to the extent provided by law. The Subsidiary Banks are also subject to
numerous state and federal statutes and regulations that affect its business
activities and operations, and are supervised and examined by one or more state
or federal bank regulatory agencies.
The Subsidiary Banks are state-chartered banks. Regions Bank is a member of
the Federal Reserve System and is subject to supervision and examination by the
Federal Reserve and the state banking authorities of Alabama, the state in which
it is headquartered. The other Subsidiary Banks are not members of the Federal
Reserve System, and consequently they are subject to supervision and regulation
by the FDIC, as well as the applicable state banking authorities. The federal
banking regulator of the Subsidiary Banks, as well as the appropriate state
banking authority for the Subsidiary Banks, regularly examines the operations of
the Subsidiary Banks and is given authority to approve or disapprove mergers,
consolidations, the establishment of branches, and similar corporate actions.
The federal and state banking regulators also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.
The Subsidiary Banks are subject to the provisions of the CRA. Under the
terms of the CRA, the Subsidiary Banks have a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire communities, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each appropriate federal bank regulatory agency, in connection with its
examination of a subsidiary depository institution, to assess such institution's
record in assessing and meeting the credit needs of the community served by that
institution, including low-and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to:
(i) charter a national bank; (ii) obtain deposit insurance coverage for a newly
chartered institution; (iii) establish a new branch office that will accept
deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or other bank holding company, the Federal Reserve will assess
the records of each subsidiary depository institution of the applicant bank
holding company, and such records may be the basis for denying the application.
The Subsidiary Banks received a "satisfactory" CRA rating in their most recent
examination.
Payment of Dividends. The Registrant is a legal entity separate and
distinct from its banking and other subsidiaries. The principal source of cash
flow of the Registrant, including cash flow to pay dividends to its
stockholders, is dividends from the Subsidiary Banks. There are statutory and
regulatory limitations on the payment of dividends by the Subsidiary Banks to
the Registrant as well as the Registrant to its stockholders.
As to the payment of dividends, the Subsidiary Banks are subject to the
laws and regulations of the state in which they are headquartered and to the
regulations of the Federal Reserve or FDIC, as the case may be.
If, in the opinion of a federal regulatory agency, an institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the institution, could
include the payment of dividends), such agency may require, after notice and
hearing, that such institution cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete an
institution's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), an insured institution may not pay any dividend if
payment would cause it to become undercapitalized or if it already is
undercapitalized. See "Prompt Corrective Action." Moreover, the Federal Reserve
and the FDIC
5
have issued policy statements which provide that bank holding companies and
insured banks should generally pay dividends only out of current operating
earnings.
At December 31, 2001, under dividend restrictions imposed under federal and
state laws, the Subsidiary Banks, without obtaining governmental approvals,
could declare aggregate dividends to the Registrant of approximately $265
million.
The payment of dividends by the Registrant and the Subsidiary Banks may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.
Capital Adequacy. The Registrant and the Subsidiary Banks are required to
comply with the capital adequacy standards established by the Federal Reserve in
the case of the Registrant and Regions Bank and the FDIC in the case of the
other Subsidiary Banks. There are two basic measures of capital adequacy for
bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items.
The minimum guideline for the ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance-sheet items, such as standby
letters of credit) is 8.0%. At least half of the Total Capital must be composed
of common equity, undivided profits, minority interests in the equity accounts
of consolidated subsidiaries, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves. The minimum guideline for Tier 1 Capital ratio is 4.0%. At December
31, 2001, the Registrant's consolidated Tier 1 Capital and Total Capital ratios
were 9.66% and 13.23%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets (the "Leverage Ratio"), of 3.0% for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis
points. The Registrant's Leverage Ratio at December 31, 2001, was 7.41%. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Federal Reserve has indicated that it
will consider a "tangible Tier 1 Capital leverage ratio" (deducting all
intangibles) and other indicators of capital strength in evaluating proposals
for expansion or new activities.
The Registrant's Subsidiary Banks are subject to risk-based and leverage
capital requirements adopted by the applicable federal regulator. The capital
adequacy requirements adopted by the FDIC are substantially similar to those
adopted by the Federal Reserve. The Registrant's Subsidiary Banks were in
compliance with applicable minimum capital requirements as of December 31, 2001.
Neither the Registrant nor its Subsidiary Banks have been advised by any federal
banking agency of any specific minimum capital ratio requirement applicable to
them.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "Prompt Corrective
Action."
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Support of Subsidiary Banks. Under Federal Reserve policy, the Registrant
is expected to act as a source of financial strength to, and to commit resources
to support, the Subsidiary Banks. This support may be required at times when,
absent such Federal Reserve policy, the Registrant may not be inclined to
provide it. In addition, any capital loans by a bank holding company to the
Subsidiary Banks are subordinate in right of payment to deposits and to certain
other indebtedness of such Subsidiary Banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a Subsidiary Banks will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Prompt Corrective Action. FDICIA establishes a system of prompt corrective
action to resolve the problems of undercapitalized institutions. Under this
system, which became effective in December 1992, the federal banking regulators
are required to establish five capital categories ("well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized") and to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, with respect to
institutions in the three undercapitalized categories, the severity of which
will depend upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, FDICIA requires the banking regulator
to appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category.
Under the agency rule implementing the prompt corrective action provisions,
an institution that (i) has a Total Capital ratio of 10.0% or greater, a Tier 1
Capital ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater and
(ii) is not subject to any written agreement, order, capital directive, or
prompt corrective action directive issued by the appropriate federal banking
agency is deemed to be "well capitalized." An institution with a Total Capital
ratio of 8.0% or greater, a Tier 1 Capital ratio of 4.0% or greater, and a
Leverage Ratio of 4.0% or greater is considered to be "adequately capitalized."
A depository institution that has a Total Capital ratio of less than 8.0%, a
Tier 1 Capital ratio of less than 4.0%, or a Leverage Ratio of less than 4.0% is
considered to be "undercapitalized." A depository institution that has a Total
Capital ratio of less than 6.0%, a Tier 1 Capital ratio of less than 3.0%, or a
Leverage Ratio of less than 3.0% is considered to be "significantly
undercapitalized," and an institution that has a tangible equity capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 Capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets with
certain exceptions. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling bank holding company under FDICIA to fund a
capital restoration plan is limited to the lesser of 5.0% of an undercapitalized
subsidiary's assets and the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions: (i) sell enough shares, including voting shares, to become
adequately capitalized; (ii) merge with (or be sold to) another institution (or
holding company), but only if grounds exist for appointing a conservator or
receiver; (iii) restrict certain transactions with banking affiliates as if the
"sister bank" exception to the requirements of
7
Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict
transactions with bank or nonbank affiliates; (v) restrict interest rates that
the institution pays on deposits to "prevailing rates" in the institution's
"region"; (vi) restrict asset growth or reduce total assets; (vii) alter,
reduce, or terminate activities; (viii) hold a new election of directors; (ix)
dismiss any director or senior executive officer who held office for more than
180 days immediately before the institution became undercapitalized, provided
that in requiring dismissal of a director or senior officer, the agency must
comply with certain procedural requirements, including the opportunity for an
appeal in which the director or officer will have the burden of proving his or
her value to the institution; (x) employ "qualified" senior executive officers;
(xi) cease accepting deposits from correspondent depository institutions; (xii)
divest certain nondepository affiliates which pose a danger to the institution;
or (xiii) be divested by a parent holding company. In addition, without the
prior approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to any senior executive
officer or increase the rate of compensation for such an officer without
regulatory approval.
At December 31, 2001, the Registrant's Subsidiary Banks had the requisite
capital levels to qualify as well capitalized.
FDIC Insurance Assessments. Pursuant to FDICIA, the FDIC adopted a
risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities. The risk-based system, which went into effect on January
1, 1994, assigns an institution to one of three capital categories: (i) well
capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These
three categories are substantially similar to the prompt corrective action
categories described above, with the "undercapitalized" category including
institutions that are undercapitalized, significantly undercapitalized, and
critically undercapitalized for prompt corrective action purposes. An
institution is also assigned by the FDIC to one of three supervisory subgroups
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied.
Regions' Subsidiary Banks are assessed at the well-capitalized level where
the premium rate is currently zero. Like all insured banks, Regions' Subsidiary
Banks also must pay a quarterly assessment of approximately $.02 per $100 of
assessable deposits to pay off bonds that were issued in the late 1980's by a
government corporation, the financing corporation, to raise funds to cover costs
of the resolution of the savings and loan crisis.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Safety and Soundness Standards. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. In 1995, the federal bank regulatory
agencies adopted guidelines prescribing safety and soundness standards pursuant
to FDICIA, as amended. The guidelines establish general standards relating to
internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines require, among other
things, appropriate systems and practices to identify and manage the risk and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or
8
disproportionate to the services performed by an executive officer, employee,
director, or principal stockholder. In addition, the agencies adopted
regulations that authorize, but do not require, an agency to order an
institution that has been given notice by an agency that it is not satisfying
any of such safety and soundness standards to submit a compliance plan. If,
after being so notified, an institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an acceptable compliance
plan, the agency must issue an order directing action to correct the deficiency
and may issue an order directing other actions of the types to which an
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. See "Prompt Corrective Action." If an institution fails to
comply with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties. The federal bank regulatory
agencies also proposed guidelines for asset quality and earnings standards.
Depositor Preference. The Omnibus Budget Reconciliation Act of 1993
provides that deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution in the "liquidation or other resolution" of such an institution by
any receiver.
Other. The United States Congress continues to consider a number of
wide-ranging proposals for altering the structure, regulation, and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or in what form further legislation may be adopted or the extent to
which the business of the Registrant may be affected thereby.
Registrant's broker/dealer subsidiary, Morgan Keegan & Company, Inc., is
subject to regulation by the Securities and Exchange Commission, the National
Association of Securities Dealers, and certain state securities commissions.
(i) The following chart shows for the last three years the percentage
of total revenues contributed by each of the major categories of income.
2001 2000 1999
----- ----- -----
Interest and fees on loans.................................. 60.9% 67.5% 64.9%
Interest on securities...................................... 12.1 15.7 16.6
Interest on mortgage loans held for sale.................... 1.0 0.9 2.4
Interest on margin receivables.............................. 0.5 0.0 0.0
Interest on federal funds sold.............................. 0.4 0.1 0.1
Other interest income....................................... 0.8 0.1 0.1
Brokerage and investment income............................. 8.9 1.1 1.1
Trust department income..................................... 1.4 1.5 1.6
Service charges on deposit accounts......................... 6.6 6.0 5.8
Mortgage servicing and origination fees..................... 2.4 2.2 3.0
Other non-interest income................................... 5.0 4.9 4.4
----- ----- -----
Total Revenues.................................... 100.0% 100.0% 100.0%
===== ===== =====
(ii) There has been no public announcement, and no information
otherwise has become public, about a material new product or line of
business.
(iii) The monetary policies of the Federal Reserve affect the
operations of Registrant's Subsidiary Banks. Through changes in the reserve
requirements against bank and thrift deposits, open market operations in
U.S. Government securities and changes in the discount rate on borrowings,
the Federal Reserve influences the cost and availability of funds obtained
for lending and investing.
The monetary policies of the Federal Reserve have had a significant
effect on the operating results of financial institutions in the past and
are expected to do so in the future. The impact of such policies on the
future business and earnings of the Registrant cannot be predicted.
(iv) The Registrant does not have any material patents, trademarks,
licenses, franchises, or concessions.
9
(v) No material portion of the Registrant's business is of a seasonal
nature.
(vi) The primary sources of funds for the Subsidiary Banks are
deposits and borrowed funds. The Registrant's primary sources of operating
funds are service fees, dividends, and interest, which it receives from
bank and bank-related subsidiaries.
(vii) No material part of the business of the Registrant is dependent
upon a single customer or a few customers. No single customer or affiliated
group of customers accounts for 10% or more of Registrant's consolidated
revenues.
(viii) Information concerning backlog orders is not relevant to an
understanding of the business of the Registrant.
(ix) No material portion of the business of the Registrant is subject
to renegotiation of profits or termination of contracts or subcontracts by
governmental authorities.
(x) All aspects of the Registrant's business are highly competitive.
The Registrant's subsidiaries compete with other financial institutions
located in Alabama, Arkansas, northwest and central Florida, Georgia,
Louisiana, North Carolina, South Carolina, Tennessee, Texas and other
adjoining states, as well as large banks in major financial centers and
other financial intermediaries, such as savings and loan associations,
credit unions, consumer finance companies, brokerage firms, insurance
companies, investment companies, mutual funds, other mortgage companies and
financial service operations of major commercial and retail corporations.
As of December 31, 2001, the Registrant was the second largest bank
holding company headquartered in Alabama based on assets. For information
with respect to the Registrant's markets and the size of the Subsidiary
Banks operating in such markets, see the information provided under
subsection (a) of this Item 1.
Customers for banking services and other financial services offered by
Regions' subsidiaries are generally influenced by convenience, quality of
service, personal contacts, price of services, and availability of
products. Although the ranking of Registrant's position varies in different
markets, Registrant believes that its affiliates effectively compete with
other financial service companies in their relevant market areas.
Under present banking laws, the Registrant and any other bank holding
company located in Alabama are now able to acquire a bank located in any
other state, and a bank holding company located outside Alabama could
acquire any Alabama-based bank, in either case subject to certain deposit
percentage and other restrictions. Federal banking laws also generally
permit national and state-chartered banks to branch interstate through
acquisitions of banks in other states. To the extent that large bank
holding companies make acquisitions in the markets in which Regions
operates, competition in the Registrant's markets could further intensify.
(xi) There were no material expenditures during the last three fiscal
years on research and development activities by the Registrant.
(xii) Regulations of any governmental authority concerning the
discharge of materials into the environment are expected to have no
material effect on the Registrant or any of its subsidiaries.
(xiii) As of December 31, 2001, Registrant, its affiliate bank and
other subsidiaries had a total of 15,921 full-time-equivalent employees.
(d) Registrant neither engages in foreign operations nor derives a
significant portion of its business from customers in foreign countries.
10
ITEM 2. PROPERTIES
The corporate headquarters of the Registrant occupy several floors of the
main Birmingham banking facility of Regions Bank, located at 417 North 20th
Street, Birmingham, Alabama 35203.
The Registrant and its subsidiaries, including the Subsidiary Banks,
operate through 909 office facilities, of which 664 are owned by the Registrant
or one of its subsidiaries and 245 are subject to building or ground leases. Of
the 677 branch office facilities operated by the Subsidiary Banks at December
31, 2001, 476 are wholly owned by the Subsidiary Banks and 201 are subject to
building or ground leases.
For offices in premises leased by the Registrant and its subsidiaries,
annual rentals totaled approximately $31,201,000 as of December 31, 2001. During
2001, the Registrant and its subsidiaries received approximately $9,936,000 in
rentals for space leased to others. At December 31, 2001, there were no
encumbrances on the offices, equipment and other operational facilities owned by
the Registrant and its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note L "Commitments and Contingencies", to the
consolidated financial statements included under Item 8 of this Annual Report on
Form 10-K.
The Registrant continues to be concerned about the general trend in
litigation in state and other courts involving large damage awards against
financial service company defendants. Registrant directly or through its
subsidiaries is party to approximately 189 cases in the ordinary course of
business, some of which seek class action treatment or punitive damages.
Notwithstanding these concerns, Registrant believes, based on consultation
with legal counsel, that the outcome of pending litigation will not have a
material effect on Registrant's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Common Stock Market Prices and Dividend information for the year ended
December 31, 2001, is included under Item 8 of this Annual Report filed on Form
10-K in Note X to the Consolidated Financial Statements.
11
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL SUMMARY
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
COMPOUND
ANNUAL GROWTH
CHANGE RATE
2001 2000 1999 1998 1997 1996 2000-2001 1996-2001
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS, YIELDS, AND PER SHARE AMOUNTS)
SUMMARY OF OPERATING RESULTS
Interest income:
Interest and fees on
loans.................... $2,458,503 $2,588,143 $2,201,786 $2,072,204 $1,837,392 $1,554,478 -5.01% 9.60%
Income on federal funds
sold..................... 17,890 5,537 4,256 17,610 16,882 11,060 223.10 10.10
Taxable interest on
securities............... 445,919 561,974 524,935 417,121 355,591 331,895 -20.65 6.08
Tax-free interest on
securities............... 40,434 41,726 39,484 39,981 42,836 34,536 -3.10 3.20
Other interest income...... 92,891 36,863 84,225 50,870 23,883 22,314 151.99 33.01
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Total interest
income............... 3,055,637 3,234,243 2,854,686 2,597,786 2,276,584 1,954,283 -5.52 9.35
Interest expense:
Interest on deposits....... 1,135,695 1,372,260 1,056,799 1,065,054 954,782 826,844 -17.24 6.55
Interest on short-term
borrowings............... 188,108 276,243 329,518 174,906 108,617 75,827 -31.90 19.93
Interest on long-term
borrowings............... 306,341 196,943 42,514 33,008 33,977 39,788 55.55 50.41
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Total interest
expense.............. 1,630,144 1,845,446 1,428,831 1,272,968 1,097,376 942,459 -11.67 11.58
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Net interest
income............... 1,425,493 1,388,797 1,425,855 1,324,818 1,179,208 1,011,824 2.64 7.10
Provision for loan losses... 165,402 127,099 113,658 60,505 89,663 46,026 30.14 29.15
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Net interest income
after provision for
loan losses.......... 1,260,091 1,261,698 1,312,197 1,264,313 1,089,545 965,798 -0.13 5.46
Non-interest income:
Brokerage and investment
banking income........... 358,974 41,303 36,983 27,987 24,727 12,284 769.12 96.40
Trust department income.... 56,681 57,675 53,434 55,218 44,227 41,660 -1.72 6.35
Service charges on deposit
accounts................. 267,263 231,670 194,984 171,344 151,618 124,960 15.36 16.42
Mortgage servicing and
origination fees......... 97,082 82,732 103,118 111,555 93,327 92,757 17.35 0.92
Securities gains
(losses)................. 32,106 (39,928) 160 7,002 498 3,311 180.41 57.52
Other...................... 169,779 227,758 148,462 101,591 92,585 70,131 -25.46 19.34
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Total non-interest
income............... 981,885 601,210 537,141 474,697 406,982 345,103 63.32 23.26
Non-interest expense:
Salaries and employee
benefits................. 879,688 588,857 551,569 528,409 480,842 413,768 49.39 16.28
Net occupancy expense...... 86,901 70,675 61,635 62,887 61,933 55,163 22.96 9.52
Furniture and equipment
expense.................. 87,727 74,213 72,013 68,595 56,304 49,971 18.21 11.91
Merger and consolidation
expense and SAIF
assessment............... 0 0 0 121,438 0 33,777 NM NM
Other...................... 469,709 387,437 379,095 322,379 302,697 284,355 21.23 10.56
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Total non-interest
expense.............. 1,524,025 1,121,182 1,064,312 1,103,708 901,776 837,034 35.93 12.73
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Income before income
taxes................ 717,951 741,726 785,026 635,302 594,751 473,867 -3.21 8.66
Applicable income taxes..... 209,017 214,203 259,640 213,590 197,222 156,008 -2.42 6.02
---------- ---------- ---------- ---------- ---------- ---------- ------ -----
Net income........... $ 508,934 $ 527,523 $ 525,386 $ 421,712 $ 397,529 $ 317,859 -3.52% 9.87%
========== ========== ========== ========== ========== ========== ====== =====
Average number of shares
outstanding................ 224,733 220,762 221,617 220,114 209,781 194,241 1.80% 2.96%
Average number of shares
outstanding -- diluted..... 227,063 221,989 223,967 223,781 213,750 197,751 2.29 2.80
Per share:
Net income........... $ 2.26 $ 2.39 $ 2.37 $ 1.92 $ 1.89 $ 1.64 -5.44% 6.62%
Net income,
diluted.............. 2.24 2.38 2.35 1.88 1.86 1.61 -5.88 6.83
Cash dividends
declared............. 1.12 1.08 1.00 0.92 0.80 0.70 3.70 9.86
12
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
HISTORICAL FINANCIAL SUMMARY -- (CONTINUED)
2001 2000 1999 1998 1997 1996
----- ----- ----- ----- ----- -----
YIELDS AND COSTS (TAXABLE EQUIVALENT BASIS)
Earning assets:
Taxable securities..................................... 6.17% 6.51% 6.35% 6.42% 6.50% 6.37%
Tax-free securities.................................... 7.95 7.64 7.91 8.26 8.42 8.07
Federal funds sold..................................... 3.21 6.27 4.49 5.45 5.99 5.19
Loans (net of unearned income)......................... 8.13 8.63 8.33 8.88 8.98 8.99
Other earning assets................................... 5.58 8.95 7.06 6.59 7.32 8.10
Total earning assets........................... 7.61 8.15 7.83 8.27 8.42 8.35
Interest-bearing liabilities
Interest-bearing deposits.............................. 4.30 5.03 4.32 4.61 4.63 4.58
Short-term borrowings.................................. 4.55 6.26 5.07 5.16 5.67 5.46
Long-term borrowings................................... 6.39 6.42 6.33 7.32 6.69 6.66
Total interest-bearing liabilities............. 4.61 5.31 4.52 4.73 4.76 4.70
Net yield on interest earning assets........... 3.66 3.55 3.94 4.25 4.41 4.36
RATIOS
Net income to:
Average stockholders' equity........................... 13.49%(a) 16.31%(b) 17.13% 14.62%(c) 15.38% 14.71%(d)
Average total assets................................... 1.14(a) 1.23(b) 1.33 1.24(c) 1.35 1.25(d)
Efficiency............................................... 61.86(a) 54.35(b) 53.60 60.82(c) 57.78 61.84(d)
Dividend payout.......................................... 49.56 45.19 42.19 47.92 42.33 42.68
Average loans to average deposits........................ 99.71 94.63 91.35 86.93 84.94 82.42
Average stockholders' equity to average total assets..... 8.45 7.54 7.74 8.47 8.75 8.50
Average interest-bearing deposits to average total
deposits............................................... 85.07 85.67 84.40 85.83 85.25 85.87
---------------
(a) Ratios for 2001 excluding $17.8 million in after-tax merger and other
non-recurring charges are as follows: Return on average stockholders' equity
13.96%, Return on average total assets 1.18%, and Efficiency 60.91%.
(b) Ratios for 2000 excluding $44.0 million in after-tax gain from sale of
credit card portfolio and $26.2 million in after-tax loss from sale of
securities are as follows: Return on average stockholders' equity 15.76%,
Return on average total assets 1.19%, and Efficiency 56.19%.
(c) Ratios for 1998 excluding $80.7 million in after-tax charges for merger and
consolidation charges are as follows: Return on average stockholders' equity
17.42%, Return on average total assets 1.48%, and Efficiency 54.13%.
(d) Ratios for 1996 excluding $20.2 million in after-tax charges for SAIF
assessment and merger expenses are as follows: Return on average
stockholders' equity 15.64%, Return on average total assets 1.33%, and
Efficiency 60.93%.
13
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
HISTORICAL FINANCIAL SUMMARY -- (CONTINUED)
ANNUAL
CHANGE
2001 2000 1999 1998 1997 1996 2000-2001
----------- ----------- ----------- ----------- ----------- ----------- ---------
(AVERAGE DAILY BALANCES IN THOUSANDS)
ASSETS
Earning assets:
Taxable securities............... $ 7,357,832 $ 8,651,052 $ 8,244,603 $ 6,473,392 $ 5,443,877 $ 5,151,154 -14.95%
Tax-exempt securities............ 787,219 801,330 745,064 728,511 769,516 665,685 -1.76
Federal funds sold............... 556,843 88,361 94,875 323,293 282,006 213,280 530.19
Loans, net of unearned income.... 30,946,736 30,130,808 26,478,349 23,379,317 20,535,989 17,329,462 2.71
Other earning assets............. 1,685,237 413,548 1,195,729 773,077 327,265 276,257 307.51
----------- ----------- ----------- ----------- ----------- -----------
Total earning assets....... 41,333,867 40,085,099 36,758,620 31,677,590 27,358,653 23,635,838 3.12
Allowance for loan losses........ (384,645) (360,353) (328,188) (313,521) (284,606) (244,012) 6.74
Cash and due from banks.......... 932,787 1,094,874 1,237,318 981,930 1,003,864 811,790 -14.80
Other non-earning assets......... 2,773,123 2,069,717 1,940,182 1,711,042 1,460,675 1,222,811 33.99
----------- ----------- ----------- ----------- ----------- -----------
Total assets............... $44,655,132 $42,889,337 $39,607,932 $34,057,041 $29,538,586 $25,426,427 4.12%
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Non-interest-bearing............. $ 4,634,198 $ 4,561,900 $ 4,520,405 $ 3,812,177 $ 3,565,848 $ 2,970,682 1.58%
Interest-bearing................. 26,401,047 27,279,092 24,465,254 23,081,727 20,611,654 18,056,076 -3.22
----------- ----------- ----------- ----------- ----------- -----------
Total deposits............. 31,035,245 31,840,992 28,985,659 26,893,904 24,177,502 21,026,758 -2.53
Borrowed funds:
Short-term....................... 4,132,264 4,408,689 6,502,860 3,386,392 1,917,127 1,389,922 -6.27
Long-term........................ 4,793,657 3,069,465 671,665 450,808 507,775 597,034 56.17
----------- ----------- ----------- ----------- ----------- -----------
Total borrowed funds....... 8,925,921 7,478,154 7,174,525 3,837,200 2,424,902 1,986,956 19.36
Other liabilities................ 921,937 335,931 380,798 441,188 352,124 251,244 174.44
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities.......... 40,883,103 39,655,077 36,540,982 31,172,292 26,954,528 23,264,958 3.10
Stockholders' equity............. 3,772,029 3,234,260 3,066,950 2,884,749 2,584,058 2,161,469 16.63
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $44,655,132 $42,889,337 $39,607,932 $34,057,041 $29,538,586 $25,426,427 4.12%
=========== =========== =========== =========== =========== ===========
COMPOUND
GROWTH
RATE
1996-2001
---------
ASSETS
Earning assets:
Taxable securities............... 7.39%
Tax-exempt securities............ 3.41
Federal funds sold............... 21.16
Loans, net of unearned income.... 12.30
Other earning assets............. 43.57
Total earning assets....... 11.83
Allowance for loan losses........ 9.53
Cash and due from banks.......... 2.82
Other non-earning assets......... 17.79
Total assets............... 11.92%
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Non-interest-bearing............. 9.30%
Interest-bearing................. 7.89
Total deposits............. 8.10
Borrowed funds:
Short-term....................... 24.35
Long-term........................ 51.68
Total borrowed funds....... 35.05
Other liabilities................ 29.69
Total liabilities.......... 11.94
Stockholders' equity............. 11.78
Total liabilities and
stockholders' equity..... 11.92%
14
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
HISTORICAL FINANCIAL SUMMARY -- (CONTINUED)
ANNUAL
CHANGE
2001 2000 1999 1998 1997 1996 2000-2001
----------- ----------- ----------- ----------- ----------- ----------- ---------
YEAR-END BALANCES
Assets........................... $45,382,712 $43,688,293 $42,714,395 $36,831,940 $31,414,058 $26,993,344 3.88%
Securities....................... 7,847,159 8,994,171 10,913,044 7,969,137 6,315,923 5,742,375 -12.75
Loans, net of unearned income.... 30,885,348 31,376,463 28,144,675 24,365,587 21,881,123 18,395,552 -1.57
Non-interest-bearing deposits.... 5,085,337 4,512,883 4,419,693 4,577,125 3,744,198 3,143,968 12.68
Interest-bearing deposits........ 26,462,986 27,509,608 25,569,401 23,772,941 21,266,823 18,875,444 -3.80
----------- ----------- ----------- ----------- ----------- -----------
Total deposits............. 31,548,323 32,022,491 29,989,094 28,350,066 25,011,021 22,019,412 -1.48
Long-term debt................... 4,747,674 4,478,027 1,750,861 571,040 445,529 570,545 6.02
Stockholders' equity............. 4,035,765 3,457,944 3,065,112 3,000,401 2,679,821 2,274,563 16.71
Stockholders' equity per share... $ 17.54 $ 15.73 $ 13.89 $ 13.61 $ 12.75 $ 11.82 11.51%
Market price per share of common
stock at year end.............. $ 29.94 $ 27.31 $ 25.13 $ 40.31 $ 42.19 $ 25.85 9.63%
COMPOUND
GROWTH
RATE
1996-2001
---------
YEAR-END BALANCES
Assets........................... 10.95%
Securities....................... 6.44
Loans, net of unearned income.... 10.92
Non-interest-bearing deposits.... 10.10
Interest-bearing deposits........ 6.99
Total deposits............. 7.46
Long-term debt................... 52.77
Stockholders' equity............. 12.15
Stockholders' equity per share... 8.21%
Market price per share of common
stock at year end.............. 2.98%
---------------
Notes to Historical Financial Summary:
(1) Amounts in all periods have been restated to reflect significant business
transactions accounted for as poolings of interests, including significant
combinations through the year ended December 31, 2001.
(2) All per share amounts give retroactive recognition to the effect of stock
dividends and stock splits.
(3) Non-accruing loans, of an immaterial amount, are included in earning assets.
No adjustment has been made for these loans in the calculation of yields.
(4) Yields are computed on a taxable equivalent basis, net of interest
disallowance, using marginal federal income tax rates of 35% for 2001-1996.
(5) This summary should be read in conjunction with the related consolidated
financial statements and notes thereto under Item 8 on pages 50 to 84 of
this Annual Report on Form 10-K.
15
ITEM 7. 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 years 1999, 2000 and 2001; however, financial information for prior years
will also be presented when appropriate.
In preparing financial information, management is required to make
significant estimates and assumptions that affect the reported amounts of assets
and liabilities and 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, and
income taxes, and are summarized in the following discussion and notes to the
consolidated financial statements.
Regions' primary business is providing traditional commercial and retail
banking services to customers throughout the South. In 2001, Regions' banking
affiliates contributed approximately $486 million to consolidated net income.
Regions' primary banking affiliate, Regions Bank, operates as a state-chartered
(Alabama) bank with operations in Alabama, Arkansas, Florida, Georgia,
Louisiana, South Carolina, Tennessee and Texas. In the fourth quarter of 2001,
Regions acquired two additional state-chartered banks, one in Texas and one in
North Carolina. As of December 31, 2001, these banks had not yet been merged
into Regions Bank and continued to operate as separate affiliates of Regions.
Selected information as of December 31, 2001, on Regions' commercial and retail
banking operations, by state, is shown below:
FULL-SERVICE
ASSETS LOANS DEPOSITS OFFICES
------ ----- -------- ------------
Alabama.............................................. 30% 30% 32% 166
Arkansas............................................. 14 14 14 111
Georgia.............................................. 24 24 20 137
Louisiana............................................ 10 10 12 87
Florida.............................................. 7 7 8 64
Texas................................................ 5 5 5 38
South Carolina....................................... 4 4 3 33
Tennessee............................................ 5 5 5 38
North Carolina....................................... 1 1 1 3
--- --- --- ---
Totals..................................... 100% 100% 100% 677
=== === === ===
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 in the South. Morgan Keegan was
acquired in March 2001 and contributed approximately $37.0 million to net income
in 2001. Regions mortgage banking subsidiary, Regions Mortgage, Inc., provides
residential mortgage loan origination and servicing activities for customers.
Regions Mortgage services approximately $19.1 billion in mortgage loans and in
2001 contributed approximately $20.4 million to net income. Regions provides
full-line insurance brokerage services through Rebsamen Insurance, Inc., one of
the 50 largest insurance brokers in the country. Rebsamen was acquired in
February 2001 and contributed approximately $3.1 million to net income in 2001.
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 Kentucky, Mississippi,
Virginia, New York and Massachusetts.
16
The acquisitions of community banks and of other financial service
companies have contributed significantly to Regions' growth during the last
three years. The community bank acquisitions have enabled Regions to expand into
new markets and strengthen its presence in existing markets. The acquisitions of
other financial service companies have allowed Regions to better diversify its
revenue stream and to offer additional products and services to its customers.
Acquisition activity in 1999 focused on strengthening several of Regions'
existing markets. In early 1999, Regions acquired two Georgia-based
institutions, VB&T Bancshares Corporation located in Valdosta and Bullsboro
BancShares, Inc. located in Newnan, which combined added approximately $176
million in assets. The VB&T transaction increased Regions' presence in Southwest
Georgia while the Bullsboro transaction increased Regions' suburban-Atlanta
franchise.
Also in early 1999, Regions increased its presence in Tennessee through the
acquisition of Meigs County Bancshares, Inc., a $114 million institution located
in Decatur, a part of Regions' middle Tennessee market.
Regions' 1999 expansion activity in Arkansas was in the northeast portion
of the state. In March, Regions acquired Arkansas Banking Company located in
Jonesboro. This transaction, which added $355 million in assets, significantly
increased Regions' presence in the Jonesboro market.
At the end of 1999, Regions acquired Minden Bancshares, Inc., which is
located in Minden, Louisiana. This transaction added $319 million in assets to
Regions' existing market in the northwest corner of the state.
Regions' acquisition activity in 2000 strengthened its community banking
franchise in Arkansas, Florida, Tennessee and Louisiana, while expanding into
the rapidly growing Austin, Texas market. These five acquisitions combined,
added $885 million in assets, $494 million in loans and $753 million in
deposits.
In Arkansas, Regions acquired from Amsouth Bank, five branches located in
Fort Smith, Arkansas. This branch purchase added $186 million in assets.
In Florida, Regions expanded into Ormond Beach through the acquisition of
East Coast Bank Corporation with assets of $108 million.
Regions expanded its Tennessee presence through the acquisition of LCB
Corporation in Fayetteville with $173 million in assets.
In Louisiana, Regions continued to strengthen its market presence through
the acquisition of First National Bancshares of Louisiana, Inc. of Alexandria
with assets of $304 million.
Regions expanded its Texas franchise by acquiring an institution in the
Austin market area. The acquisition of Heritage Bancorp, Inc., of Hutto, added
$114 million in assets.
In 2001, Regions significantly diversified its revenue stream and product
offerings through the acquisition of two other financial service companies. The
Morgan Keegan acquisition in March greatly expanded Regions abilities to provide
securities brokerage, investment banking, asset management and mutual fund
services. Morgan Keegan, headquartered in Memphis, Tennessee, added
approximately $368 million to non-interest income in 2001. The February
acquisition of Rebsamen Insurance enabled Regions to offer insurance services to
customers. Rebsamen, headquartered in Little Rock, Arkansas, is a full-line
general insurance broker that provides primarily commercial property and
casualty insurance brokerage services. Rebsamen added approximately $30.7
million to other non-interest income in 2001.
Also in 2001, Regions expanded its community banking franchise into the
Charlotte, North Carolina, market with the acquisition of Park Meridian
Financial Corporation. Park Meridian operates through three banking offices and
added approximately $310 million in assets. Regions also expanded into the
Houston, Texas market with the acquisition of First Bancshares of Texas, Inc.
First Bancshares added approximately $189 million in assets and six banking
offices.
17
Regions' business combinations over the last three years are summarized in
the following chart.
ACCOUNTING
DATE COMPANY HEADQUARTERS LOCATION TOTAL ASSETS TREATMENT
---- ------- --------------------- -------------- ----------
(IN THOUSANDS)
2001
February Rebsamen Insurance, Inc. Little Rock, Arkansas $ 32,082 Purchase
March Morgan Keegan, Inc. Memphis, Tennessee 2,008,179 Purchase
November Park Meridian Financial Charlotte, North 309,844 Purchase
Corporation Carolina
December First Bancshares of Texas, Inc. Houston, Texas 188,953 Purchase
2000
January LCB Corporation Fayetteville, 173,157 Purchase
Tennessee
May Five Branches of Amsouth Bank Fort Smith, Arkansas 186,361 Purchase
August Heritage Bancorp, Inc. Hutto, Texas 114,370 Purchase
August First National Bancshares of Alexandria, Louisiana 303,793 Purchase
Louisiana, Inc.
September East Coast Bank Corporation Ormond Beach, Florida 107,779 Purchase
1999
January VB&T Bancshares Corporation Valdosta, Georgia 75,733 Pooling
January Bullsboro BancShares, Inc. Newnan, Georgia 100,682 Pooling
January Meigs County Bancshares, Inc. Decatur, Tennessee 114,407 Pooling
March Arkansas Banking Company Jonesboro, Arkansas 354,981 Purchase
December Minden Bancshares, Inc. Minden, Louisiana 318,955 Purchase
As of December 31, 2001, Regions had two pending community bank
acquisitions. Independence Bank National Association, which operates three
offices in the Houston, Texas area, has approximately $107 million in assets.
Brookhollow Bancshares, Inc., which operates four offices in the Dallas, Texas
area, has approximately $141 million in assets. These transactions are expected
to close in the first half of 2002.
See Note Q to the consolidated financial statements for additional
information regarding the pending acquisitions.
FINANCIAL CONDITION
Regions' financial condition depends primarily on the quality and nature of
its assets, liabilities and capital structure, the market and economic
conditions, and the quality of its personnel.
LOANS AND ALLOWANCE FOR LOAN LOSSES
As a financial institution, Regions' primary investment is loans. At
December 31, 2001, loans represented 74% of Regions' earning assets.
Over the last four years loans increased a total of $9.0 billion, a
compound growth rate of 9%. Regions experienced significant loan growth in 1999
and 2000, with loans increasing $3.8 billion and $3.2 billion, respectively. In
2001, however, loans balances declined $491 million due primarily to increased
prepayments of residential mortgage loans. Loans acquired in connection with
acquisitions over the last four years contributed $2.7 billion of growth. In
1999 and 2000, respectively, acquisitions added $567 million and $494 million in
loans. The acquisitions in 2001 added approximately $325 million in loans.
During 1999, Regions securitized $1.3 billion in single-family residential
mortgage loans. These assets were transferred from the loan portfolio to the
available for sale securities portfolio. The securitization of these loans gave
Regions additional flexibility for funding purposes and results in a lower
risk-weighted capital
18
allocation for these assets. In 2000, Regions sold its credit card portfolio,
which totaled $278 million. Adjusting for the effect of the securitization and
sale, loans would have increased $5.1 billion or 21% in 1999 and $3.5 billion or
12% in 2000.
All major categories of loans have shared in the growth in the loan
portfolio over the last four years, with the strongest growth occurring in
commercial and real estate construction loans. Over the last four years,
commercial, financial and agricultural loans increased $4.7 billion or 92%. Real
estate construction loans increased $2.1 billion or 132% over the same period.
Real estate mortgage loans increased $1.2 billion or 12%, and consumer loans
increased $1.0 billion or 20% over the last four years. The increase in real
estate mortgage loans and consumer loans, respectively, is net of the $1.3
billion single-family residential mortgage loan securitization and the $278
million credit card portfolio sale previously discussed.
Regions' real estate mortgage portfolio includes $5.0 billion of mortgage
loans that were originated by Regions' mortgage subsidiary and are secured by
single-family residences primarily located within Regions' geographic footprint.
These loans increased approximately $1.9 billion in 1999 and $1.2 billion in
2000 but declined $1.7 billion in 2001. The decline in 2001 reflects management
initiatives to reduce capital allocated to lower margin products and to manage
sensitivity to changing interest rate environments. In 1999 and 2000 increases
in the real estate mortgage portfolio accounted for approximately 49%, and 38%
respectively, of the growth in total loans in 1999 and 2000. The increase in
1999 is net of the securitization of the $1.3 billion in single-family
residential mortgages. Eighty-three percent (based on outstanding balances) of
these mortgage loans consists of adjustable-rate mortgages (ARM's) that have
rates approximately 275 basis points above one of several money market indices
when fully priced.
Regions' real estate portfolio also includes $1.1 billion of single-family
mortgage loans obtained in various acquisitions, which are being serviced by
Regions' mortgage subsidiary. Fixed-rate single-family mortgages with a weighted
average interest rate of 7.82% and a weighted average remaining term of 12.9
years comprise 41% of this portfolio. Single-family ARM's, which have rates
approximately 200 to 300 basis points above one of several money market indices
when fully priced, comprise the remaining 59% of the overall balance of these
loans.
Lending at Regions is generally organized along three functional lines:
commercial loans (including financial and agricultural), real estate loans and
consumer loans. The composition of the portfolio by these major categories is
presented below (with real estate loans further broken down between construction
and mortgage loans):
DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, NET OF UNEARNED INCOME)
Commercial...................... $ 9,727,204 $ 9,039,818 $ 8,183,633 $ 7,119,093 $ 5,073,698
Real estate -- construction..... 3,664,677 3,271,692 2,439,104 1,865,972 1,582,706
Real estate -- mortgage......... 11,309,126 13,114,655 11,728,601 9,608,147 10,072,195
Consumer........................ 6,184,341 5,950,298 5,793,337 5,772,375 5,152,524
----------- ----------- ----------- ----------- -----------
Total................. $30,885,348 $31,376,463 $28,144,675 $24,365,587 $21,881,123
=========== =========== =========== =========== ===========
The amounts of total gross loans (excluding residential mortgages on 1-4
family residences and consumer loans) outstanding at December 31, 2001, based on
remaining scheduled repayments of principal, due in (1) one year or less, (2)
more than one year but less than five years and (3) more than five years, are
shown in the following table. The amounts due after one year are classified
according to sensitivity to changes in interest rates.
LOANS MATURING
---------------------------------------------------------
WITHIN AFTER ONE BUT AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS TOTAL
---------- ----------------- ---------- -----------
(IN THOUSANDS)
Commercial, financial and agricultural..... $4,179,593 $3,984,677 $1,747,757 $ 9,912,027
Real estate -- construction................ 2,203,254 1,280,470 189,466 3,673,190
Real estate -- mortgage.................... 559,584 1,769,588 1,136,336 3,465,508
---------- ---------- ---------- -----------
Total............................ $6,942,431 $7,034,735 $3,073,559 $17,050,725
========== ========== ========== ===========
19
SENSITIVITY OF LOANS TO
CHANGES IN INTEREST RATES
--------------------------
PREDETERMINED VARIABLE
RATE RATE
------------- ----------
(IN THOUSANDS)
Due after one year but within five years.................... $3,390,586 $3,644,149
Due after five years........................................ 1,270,196 1,803,363
---------- ----------
Total............................................. $4,660,782 $5,447,512
========== ==========
A sound credit policy and careful, consistent credit review are vital to a
successful lending program. All affiliates of Regions operate under written loan
policies which attempt to maintain a consistent lending philosophy, provide
sound traditional credit decisions, provide an adequate risk-adjusted return and
render service to the communities in which the banks are located. Regions'
lending policy generally confines loans to local customers or to national firms
doing business locally. Credit reviews and loan examinations help confirm that
affiliates are adhering to these loan policies.
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 year 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 year; (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 which 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 which 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 which 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 losses 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.
Over the last five years, the year-end allowance for loan losses as a
percentage of loans ranged from a low of 1.20% in 2000 to a high of 1.39% in
1997. At December 31, 2001, the allowance for loan losses as a percentage of
loans was 1.36%. 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
20
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 reserve 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.
The ratio of non-performing assets (including loans past due 90 days or
more and other real estate) to loans and other real estate increased from 0.91%
at December 31, 1997 to 1.15% at December 31, 1998. The favorable effect on
non-performing asset levels from generally improving economic conditions during
this period in Regions' markets, were offset by the effect of non-performing
assets added by certain acquisitions, resulting in the unfavorable trend in this
ratio. The ratio of non-performing assets (including loans past due 90 days or
more and other real estate) to loans and other real estate declined to 0.93% at
December 31, 1999, and to 0.87% at December 31, 2000 due primarily to decreases
in commercial and consumer loan delinquencies. This ratio increased to 1.29% at
the end of 2001, as commercial and real estate non-performing loans increased
due to weaker economic conditions.
The allowance for loan losses as a percentage of non-performing loans
(including loans past due 90 days or more) was 117% at December 31, 2001,
compared to 153% at December 31, 2000, and to 135% at December 31, 1999.
The analysis of loan loss experience (see chart following) shows that net
loan losses, over the last five years, ranged from a high of $126.8 million in
2001 to a low of $56.1 million in 1997. Net loan losses were $94.1 million in
2000, $99.2 million in 1999, and $66.4 million in 1998. Over the last five
years, net loan losses averaged 0.34% of average loans and were 0.41% of average
loans in 2001. Regions' higher level of net loan losses in 2001 resulted
primarily from higher charge-off of commercial credits, partially offset by
lower levels of losses in the real estate and consumer categories. Weaker
economic conditions, particularly post September 11, contributed to higher
commercial loan losses.
In order to assess the risk characteristics of the loan portfolio, it is
appropriate to consider the three major categories of loans -- commercial, real
estate and consumer.
Regions' commercial loan portfolio is highly diversified within the markets
served by the Company. Geographically, the largest concentration is the 25% of
the portfolio in the state of Alabama. Loans in Georgia and Arkansas account for
23% and 20% respectively, of the commercial loan portfolio, followed by
Louisiana with 10%, Tennessee with 7%, Florida and Texas with 5% each, South
Carolina with 4% and North Carolina with 1%. A small portion of these loans is
secured by properties outside Regions' banking market areas.
The Alabama economy has experienced relatively stable growth over the last
several years. Industries important in the Alabama economy include vehicle and
vehicle parts manufacturing and assembly, lumber and wood products, health care
services, and steel production. High technology and defense related industries
are important in the northern part of the state. Agriculture, particularly
poultry, beef cattle and cotton, are also important to the state's economy.
The economy of northern Georgia, where the majority of Regions' Georgia
franchise is located, is diversified with a strong presence in poultry
production, carpet manufacturing, automotive manufacturing related industries,
tourism, and various service sector industries. Atlanta recently ranked second
nationally in the growth of jobs in the software industry. A well developed
transportation system has contributed to the growth in north Georgia. This area
has experienced rapid population growth and has very favorable household income
characteristics, relative to many of Regions' other markets. In recent years,
Georgia's population has grown at twice the national rate.
In the southern region of Georgia, while agriculture is important, other
industries play an important role in the economy. Georgia ranks as the nation's
top producer of paper and paper board products. Albany and Valdosta, Regions'
primary market areas, are hubs for retail trade and health care for the entire
South Georgia market. These markets are also home to numerous Fortune 500
Company manufacturing and production facilities.
21
The Arkansas economy is supported in part by the forest products industry
due to the abundance of corporate owned forests and public lands. In recent
years, retail trade, transportation and steel production have become
increasingly important to the state's economy.
Natural resources are very important to the Louisiana economy. Energy and
petrochemical industries play a significant role in the economy. Shipping,
shipbuilding, and other transportation equipment industries are strong in the
state's durable goods industries. Tourism, amusement and recreation, service,
and health care industries are also important to the Louisiana economy. Cotton,
rice and sugarcane are among Louisiana's most important agricultural commodities
while Louisiana's fishing industry is the second largest in the nation.
The North Carolina economy is diversified with manufacturing, agriculture,
financial services and textiles as its primary industries. North Carolina has
experienced population growth well in excess of the national average in recent
years. The economy is further supported by three state universities, which
provide stable employment and serve as research centers in the area.
The economy along the I-85 corridor in South Carolina is home to numerous
multinational manufacturers, resulting in one of the highest per capita foreign
investment areas in the nation. South Carolina has experienced population growth
in excess of the national average and auto manufacturing has become increasingly
important in recent years.
Tennessee's economy is heavily influenced by automobile manufacturing,
tourism, entertainment and recreation, health care and other service industries.
With one out of four Tennesseeans employed in service industries, the state's
economy is very dependent on this sector.
The economy in the state of Texas has been among the strongest in the
nation in recent years as evidenced by its top rank among the states for the
creation of new jobs. In addition to oil and gas and agriculture, the Texas
economy is supported by telecommunications, computer and technology research and
the health care industry.
The northwestern part of Florida and the central Florida area have also
experienced excellent economic growth during the last several years. Tourism and
space research are very important to the Florida economy, and military payrolls
are significant in the panhandle area. Florida has experienced strong
in-migration, contributing to strong construction activity and a growing
retirement-age population. Population growth rates in Florida have been 50%
higher than the national average. Citrus fruit production is also important in
the state.
The economy, in the markets served by Regions, continues to be among the
best in the nation, however, general economic conditions deteriorated throughout
the nation in 2001. Slower economic growth combined with the unprecedented
events of September 11, resulted in a weaker economy than in recent years. This
weakening resulted in higher loan losses in 2001.
From 1997 to 2001, net losses on commercial loans ranged from a low of
0.03% in 1997 to a high of 0.88% in 2001. The higher level of commercial loan
losses in 2001 resulted primarily from losses in agricultural ($17.3 million)
and the steel industry ($14.6 million). Future losses are a function of many
variables, of which general economic conditions are the most important. Assuming
moderate economic growth during 2002 in Regions' market areas, net commercial
loan losses in 2002 are expected to be slightly below the 2001 level.
Regions' real estate loan portfolio consists of construction and land
development loans, loans to businesses for long-term financing of land and
buildings, loans on one-to-four family residential properties, loans to mortgage
banking companies (which are secured primarily by loans on one-to-four family
residential properties and are known as warehoused mortgage loans) and various
other loans secured by real estate.
Real estate construction loans increased $393 million in 2001 to $3.7
billion. At December 31, 2001, these loans represented 11.9% of Regions' total
loan portfolio, compared to 7.2% at the end of 1997. Strong economic growth and
new development in Regions' market areas have enabled Regions to steadily
increase construction loans. Most of the construction loans relate to shopping
centers, apartment complexes, commercial buildings and residential property
development. These loans are normally secured by land and buildings and are
generally backed by commitments for long-term financing from other financial
institutions.
22
Real estate construction loans are closely monitored by management, since these
loans are generally considered riskier than other types of loans and are
particularly vulnerable in economic downturns and in periods of high interest
rates. Regions generally requires higher levels of borrower equity investment in
addition to other underwriting requirements for this type of lending as compared
to other real estate lending. Regions has not been an active lender to real
estate developers outside its market areas.
The loans to businesses for long-term financing of land and buildings are
primarily to commercial customers within Regions' markets. Total loans secured
by non-farm, non-residential properties totaled $5.7 billion at December 31,
2001. Although some risk is inherent in this type of lending, the Company
attempts to minimize this risk by generally making the majority of these type
loans only on owner-occupied properties, and by requiring collateral values
which exceed the loan amount, adequate cash flow to service the debt, and in
most cases, the personal guaranties of principals of the borrowers.
Regions also attempts to mitigate the risks of real estate lending by
adhering to standard loan underwriting policies and by diversifying the
portfolio both geographically within its market area and within industry groups.
Loans on one-to-four family residential properties, which total
approximately 70% of Regions' real estate mortgage portfolio, are principally on
single-family residences. These loans are geographically dispersed throughout
the southeastern states and some are guaranteed by government agencies or
private mortgage insurers. Historically, this category of loans has not produced
sizable loan losses; however, it is subject to some of the same risks as other
real estate lending. Warehoused mortgage loans, since they are secured primarily
by loans on one-to-four family residential properties, are similar to these
loans in terms of risk.
From 1997 to 2000, net losses on real estate loans ranged from a high of
0.11% of real estate loans in 1998 and 1999, to a low of 0.03% of real estate
loans in 1997. In 2001 real estate loan losses were 0.04% of average real estate
loans, primarily as a result of lower commercial real estate loan charge-offs.
These losses depend, to a large degree, on the level of interest rates, economic
conditions and collateral values, and thus, are very difficult to predict.
Management expects 2002 net real estate loan losses to be slightly above the
2001 level.
Regions' consumer loan portfolio consists of $5.2 billion in consumer loans
and $1.0 billion in personal lines of credit (including home equity loans).
Consumer loans are primarily borrowings of individuals for home improvements,
automobiles and other personal and household purposes. Regions' consumer loan
portfolio includes $943 million in indirect installment loans at December 31,
2001 and $1.2 billion at December 31, 2000. During the past five years, the
ratio of net consumer loan losses to consumer loans ranged from a low of 0.62%
in 2001 to a high of 1.09% in 1999. The lower level of net consumer loan losses
in 2001 was primarily due to improvements in the collection and recovery
process, standardizing and improvement of underwriting procedures, and reduced
credit card charge-offs because the credit card portfolio was sold in 2000.
Consumer loan losses are difficult to predict, but historically have tended to
increase during periods of economic weakness. Management expects net consumer
loan losses in 2002 to be near the 2001 level assuming moderate economic growth
in 2002.
23
The following table presents information on non-performing loans and real
estate acquired in settlement of loans:
DECEMBER 31,
----------------------------------------------------
NON-PERFORMING ASSETS 2001 2000 1999 1998 1997
--------------------- -------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Non-performing loans:
Loans accounted for on a non-accrual
basis.................................. $269,764 $197,974 $169,904 $124,718 $138,149
Loans contractually past due 90 days or
more as to principal or interest
payments (exclusive of non-accrual
loans)................................. 46,845 35,903 71,952 134,411 29,020
Loans whose terms have been renegotiated
to provide a reduction or deferral of
interest or principal because of a
deterioration in the financial position
of the borrower (exclusive of
non-accrual loans and loans past due 90
days or more).......................... 42,807 12,372 8,390 4,550 12,616
Real estate acquired in settlement of loans
("other real estate")..................... 40,872 28,443 12,662 17,273 20,511
-------- -------- -------- -------- --------
Total............................. $400,288 $274,692 $262,908 $280,952 $200,296
======== ======== ======== ======== ========
Non-performing assets as a percentage of
loans and other real estate............... 1.29% .87% .93% 1.15% 0.91%
The following analysis presents a five year history of the allowance for
loan losses and loan loss data:
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Allowance for loan losses:
Balance at beginning of year.... $ 376,508 $ 338,375 $ 315,412 $ 304,223 $ 253,248
Loans charged off:
Commercial.................... 95,584 51,617 35,589 24,214 15,534
Real estate................... 11,705 13,673 15,781 13,366 7,174
Installment................... 61,760 66,456 77,867 56,159 65,571
----------- ----------- ----------- ----------- -----------
Total................. 169,049 131,746 129,237 93,739 88,279
Recoveries:
Commercial.................... 11,138 15,639 12,934 10,473 14,265
Real estate................... 5,027 2,750 1,109 1,655 3,879
Installment................... 26,043 19,249 16,006 15,201 14,027
----------- ----------- ----------- ----------- -----------
Total................. 42,208 37,638 30,049 27,329 32,171
Net loans charged off:
Commercial.................... 84,446 35,978 22,655 13,741 1,269
Real estate................... 6,678 10,923 14,672 11,711 3,295
Installment................... 35,717 47,207 61,861 40,958 51,544
----------- ----------- ----------- ----------- -----------
Total................. 126,841 94,108 99,188 66,410 56,108
Allowance of acquired banks..... 4,098 5,142 8,493 17,094 17,420
Provision charged to expense.... 165,402 127,099 113,658 60,505 89,663
----------- ----------- ----------- ----------- -----------
Balance at end of year.......... $ 419,167 $ 376,508 $ 338,375 $ 315,412 $ 304,223
=========== =========== =========== =========== ===========
24
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Average loans outstanding:
Commercial.................... $ 9,567,538 $ 8,811,864 $ 7,661,595 $ 7,060,917 $ 4,536,710
Real estate................... 15,598,488 15,595,695 13,144,153 10,479,084 10,768,271
Installment................... 5,780,710 5,723,249 5,672,601 5,839,316 5,231,008
----------- ----------- ----------- ----------- -----------
Total................. $30,946,736 $30,130,808 $26,478,349 $23,379,317 $20,535,989
=========== =========== =========== =========== ===========
Net charge-offs as percent of
average loans outstanding:
Commercial.................... .88% .41% .30% .19% .03%
Real estate................... .04 .07 .11 .11 .03
Installment................... .62 .82 1.09 .70 .99
Total................. .41% .31% .37% .28% .27%
Net charge-offs as percent of:
Provision for loan losses..... 76.7% 74.0% 87.3% 109.8% 62.6%
Allowance for loan losses..... 30.3 25.0 29.3 21.1 18.4
Allowance as percentage of
loans, net of unearned
income........................ 1.36% 1.20% 1.20% 1.29% 1.39%
Provision for loan losses (net
of tax effect) as percentage
of net income................. 20.3% 15.1% 13.5% 9.0% 14.1%
At December 31, 2001, non-accrual loans totaled $269.8 million or 0.87% of
loans, compared to $198.0 million or 0.63% of loans at December 31, 2000. The
increase in non-accrual loans at December 31, 2001, was primarily due to
increased levels of commercial and real estate loans being placed on non-accrual
status. Commercial loans comprised $126.1 million of the 2001 total, with real
estate loans accounting for $140.1 million and consumer loans $3.5 million.
Regions' non-performing loan portfolio is composed primarily of a number of
small to medium sized loans that are diversified geographically throughout its
franchise. The 25 largest non-accrual loans range from $13.4 million to $1.2
million, with only one non-accrual loan in excess of $10 million. The majority
of these loans are to borrowers in manufacturing related industries and real
estate development. Of the $269.8 million in non-accrual loans at December 31,
2001, approximately $80.6 million (30% of total non-accrual loans) are secured
by single-family residences, which historically have had very low loss ratios.
Loans contractually past due 90 days or more were 0.15% of total loans at
December 31, 2001, compared to 0.11% of total loans at December 31, 2000. Since
December 31, 2000, loan delinquencies in the consumer area have increased
primarily due to weaker economic conditions. Loans past due 90 days or more at
December 31, 2001, consisted of $20.5 million in commercial and real estate
loans and $26.3 million in consumer loans.
Renegotiated loans were 0.14% and 0.04% of loans at December 31, 2001 and
2000, respectively. Renegotiated loans increased during the last year primarily
due to a single credit to a manufacturing company being added to renegotiated
status in 2001.
Other real estate declined from 1997 to 1999, but increased to $28.4
million at December 31, 2000 and $40.9 million at December 31, 2001. Other real
estate, added through the normal course of business, with no geographic
concentration, and by acquisitions in 2001, was partially offset by sales of
other real estate. Other real estate is recorded at the lower of (1) the
recorded investment in the loan or (2) the estimated net realizable value of the
collateral. Although Regions does not anticipate material loss upon disposition
of other real estate, sustained periods of adverse economic conditions,
substantial declines in real estate values in Regions' markets, actions by bank
regulatory agencies, or other factors, could result in additional loss from
other real estate.
25
The amount of interest income recognized in 2001 on the $269.8 million of
non-accruing loans outstanding at year end was approximately $10.0 million. If
these loans had been current in accordance with their original terms,
approximately $25.7 million would have been recognized on these loans in 2001.
Approximately $1.8 million in interest income would have been recognized in 2001
under the original terms of the $42.8 million in renegotiated loans outstanding
at December 31, 2001. Approximately $1.7 million in interest income was actually
recognized in 2001 on these loans.
In the normal course of business, Regions makes commitments under various
terms to lend funds to its customers. These commitments include (among others)
revolving credit agreements, term loan agreements and short-term borrowing
arrangements, which are usually for working capital needs. Letters of credit are
also issued, which under certain conditions could result in loans. See Note L to
the consolidated financial statements for additional information on commitments.
The commercial, real estate and consumer loan portfolios are highly
diversified in terms of industry concentrations. The following table shows the
largest concentrations in terms of the customer's Standard Industrial
Classification Code at December 31, 2001 and 2000:
2001 2000
--------------------------- ---------------------------
% %
% OF NON- % OF NON-
STANDARD INDUSTRIAL CLASSIFICATION AMOUNT TOTAL ACCRUAL AMOUNT TOTAL ACCRUAL
---------------------------------- --------- ----- ------- --------- ----- -------
(DOLLAR AMOUNTS IN MILLIONS)
Individuals............................... $15,293.9 49.1% 0.7% $17,560.1 55.8% 0.5%
Services:
Physicians.............................. 265.5 0.9 0.3 288.3 0.9 0.3
Business services....................... 138.2 0.4 0.3 209.8 0.7 0.0
Religious organizations................. 388.9 1.2 0.4 343.6 1.1 0.6
Legal services.......................... 108.0 0.3 0.9 98.9 0.3 0.7
All other services...................... 3,243.1 10.4 1.4 2,728.3 8.7 0.9
--------- ----- --------- -----
Total services.................. 4,143.7 13.2 1.2 3,668.9 11.7 0.8
Manufacturing:
Electrical equipment.................... 56.6 0.2 0.0 93.6 0.3 0.1
Food and kindred products............... 77.2 0.2 0.1 38.5 0.1 1.3
Rubber and plastic products............. 40.5 0.1 2.6 31.6 0.1 3.5
Lumber and wood products................ 192.6 0.6 0.3 188.4 0.6 0.4
Fabricated metal products............... 157.0 0.5 1.9 169.6 0.5 0.5
All other manufacturing................. 737.6 2.4 2.6 669.4 2.1 1.8
--------- ----- --------- -----
Total manufacturing............. 1,261.5 4.0 1.9 1,191.1 3.7 1.3
Wholesale trade........................... 765.0 2.5 0.5 689.9 2.2 0.6
Finance, insurance and real estate:
Real estate............................. 4,048.9 13.0 0.8 1,349.4 4.3 0.9
Banks and credit agencies............... 161.7 0.5 0.5 149.6 0.5 0.0
All other finance, insurance and real
estate............................... 791.7 2.5 0.4 2,402.4 7.6 0.1
--------- ----- --------- -----
Total finance, insurance and
real estate................... 5,002.3 16.0 0.7 3,901.4 12.4 0.3
Construction:
Residential building construction....... 1,013.6 3.3 0.8 576.6 1.8 0.7
General contractors and builders........ 424.3 1.4 0.9 764.7 2.4 1.8
All other construction.................. 439.5 1.4 2.1 348.5 1.1 1.6
--------- ----- --------- -----
Total construction.............. 1,877.4 6.1 1.1 1,689.8 5.3 1.4
26
2001 2000
--------------------------- ---------------------------
% %
% OF NON- % OF NON-
STANDARD INDUSTRIAL CLASSIFICATION AMOUNT TOTAL ACCRUAL AMOUNT TOTAL ACCRUAL
---------------------------------- --------- ----- ------- --------- ----- -------
(DOLLAR AMOUNTS IN MILLIONS)
Retail trade:
Automobile dealers...................... $ 391.6 1.3% 0.5% $ 514.8 1.6% 0.1%
All other retail trade.................. 826.1 2.7 1.1 706.8 2.3 0.9
--------- ----- --------- -----
Total retail trade.............. 1,217.7 4.0 0.9 1,221.6 3.9 0.5
Agriculture, forestry and fishing......... 610.9 2.0 1.8 527.9 1.7 1.4
Transportation, communication, electrical,
gas and sanitary........................ 538.9 1.7 0.8 448.5 1.4 0.9
Mining (including oil and gas
extraction)............................. 78.4 0.3 0.4 50.2 0.2 1.9
Public administration..................... 91.2 0.3 0.0 0.0 0.0 0.0
Other..................................... 256.1 0.8 1.2 523.3 1.7 1.5
--------- ----- --------- -----
Total........................... $31,137.0 100.0% 0.9% $31,472.7 100.0% 0.6%
========= ===== ========= =====
INTEREST-BEARING DEPOSITS IN OTHER BANKS
Interest-bearing deposits in other banks are used primarily as temporary
investments and generally have short-term maturities. This category of earning
assets decreased from $9.7 million at December 31, 1999, to $3.2 million at
December 31, 2000. During 2000, maturities from these assets were reinvested in
alternative investments. In 2001, interest-bearing deposits in other banks
increased $663.9 million due to balances added in connection with acquisitions,
principally Morgan Keegan, which maintains interest-bearing deposits in other
banks in the normal course of its business.
SECURITIES
The following table shows the carrying values of securities as follows:
DECEMBER 31,
-------------------------------------
2001 2000 1999
---------- ----------- ----------
(IN THOUSANDS)
Securities held to maturity:
U.S. Treasury and Federal agency securities.............. $ 30,541 $2,573,461 $2,639,214
Obligations of states and political subdivisions......... 3,131 670,252 635,034
Mortgage-backed securities............................... -0- 295,477 380,677
Other securities......................................... 378 12 399,354
---------- ---------- ----------
Total............................................ $ 34,050 $3,539,202 $4,054,279
========== ========== ==========
Securities available for sale:
U.S. Treasury and Federal agency securities.............. $ 741,458 $ 785,537 $ 568,561
Obligations of states and political subdivisions......... 711,547 142,073 158,260
Mortgage-backed securities............................... 6,065,222 4,255,433 5,973,995
Other securities......................................... 9,205 1,294 3,336
Equity securities........................................ 285,677 270,632 154,613
---------- ---------- ----------
Total............................................ $7,813,109 $5,454,969 $6,858,765
========== ========== ==========
27
In 2001, total securities decreased $1.1 billion or 13%. U.S. Treasury and
Federal agency securities decreased $2.6 billion due primarily to calls and
sales. A portion of the proceeds from the calls and sales of U.S. Treasury and
Federal agency securities were not reinvested in this category of securities as
a part of management's initiative to allocate less capital to lower margin
assets and to reduce sensitivity to changing interest rates. Mortgage-backed
securities increased $1.5 billion due to purchases in 2001. Obligations of
states and political subdivisions decreased $97.6 million or 12% in 2001 due to
calls, sales and maturities. Other securities increased in 2001 due to
acquisition activity.
Total securities decreased $1.9 billion or 18% in 2000. This decline
resulted from the sale of $1.4 billion of available for sale securities in
addition to maturities of securities not being reinvested in this category of
earning assets. U.S. Treasury and Federal agency securities increased $151
million. Obligations of states and political subdivisions increased $19 million.
Mortgage-backed securities decreased $1.8 billion in 2000 due to the sale of
securities and other maturities.
In 2001, upon the adoption of Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS
133), Regions elected to reclassify a significant portion of securities from the
held to maturity category to the available for sale category to provide
additional flexibility in managing the securities portfolio.
Regions' investment portfolio policy stresses quality and liquidity. At
December 31, 2001, the average contractual maturity of U.S. Treasury and Federal
agency securities was 3.1 years and that of obligations of states and political
subdivisions was 7.4 years. The average contractual and expected maturity of
mortgage-backed securities was 20.9 years and 3.1 years, respectively. Other
securities had an average contractual maturity of 6.1 years. Overall, the
average maturity of the portfolio was 17.8 years using contractual maturities
and 3.5 years using expected maturities. Expected maturities differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
The estimated fair market value of Regions' securities held to maturity
portfolio at December 31, 2001, was approximately the amount carried on Regions'
books. Regions' securities available for sale portfolio at December 31, 2001,
included net unrealized gains of $104.6 million. Regions' securities held to
maturity and securities available for sale portfolios included gross unrealized
gains of $105.1 million and gross unrealized losses of $460,000 at December 31,
2001. Market values of these portfolios vary significantly as interest rates
change; however, management expects normal maturities from the securities
portfolios to meet liquidity needs.
Of Regions' tax-free securities rated by Moody's Investors Service, Inc.,
99% are rated "A" or better. The portfolio is carefully monitored to assure no
unreasonable concentration of securities in the obligations of a single debtor,
and current credit reviews are conducted on each security holding.
28
The following table shows the maturities of securities (excluding equity
securities) at December 31, 2001, the weighted average yields and the taxable
equivalent adjustment used in calculating the yields:
SECURITIES MATURING
-----------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS TOTAL
-------- ---------- ---------- --------- ----------
(IN THOUSANDS)
Securities held to maturity:
U.S. Treasury and Federal agency
securities...................... $ 10,088 $ 17,552 $ 2,279 $ 622 $ 30,541
Obligations of states and political
subdivisions.................... -0- 2,878 253 -0- 3,131
Mortgage-backed securities......... -0- -0- -0- -0- -0-
Other securities................... 375 3 -0- -0- 378
-------- ---------- -------- -------- ----------
Total...................... $ 10,463 $ 20,433 $ 2,532 $ 622 $ 34,050
======== ========== ======== ======== ==========
Weighted average yield............. 4.92% 5.53% 6.06% 5.88% 5.39%
Securities available for sale:
U.S. Treasury and Federal agency
securities...................... $ 32,520 $ 610,080 $ 97,338 $ 1,520 $ 741,458
Obligations of states and political
subdivisions.................... 42,361 176,065 294,561 198,560 711,547
Mortgage-backed securities......... 151,743 5,488,799 378,486 46,194 6,065,222
Other securities................... 7,631 203 371 1,000 9,205
-------- ---------- -------- -------- ----------
Total...................... $234,255 $6,275,147 $770,756 $247,274 $7,527,432
======== ========== ======== ======== ==========
Weighted average yield............. 5.99% 5.78% 6.41% 7.10% 5.90%
Taxable equivalent adjustment for
calculation of yield............... $ 1,311 $ 5,537 $ 9,122 $ 6,144 $ 22,114
---------------
Note: The weighted average yields are calculated on the basis of the yield to
maturity based on the book value of each security. Weighted average yields
on tax-exempt obligations have been computed on a fully taxable equivalent
basis using a tax rate of 35%. Yields on tax-exempt obligations have not
been adjusted for the non-deductible portion of interest expense used to
finance the purchase of tax-exempt obligations.
TRADING ACCOUNT ASSETS
Trading account assets increased significantly in 2001, due to the
acquisition of Morgan Keegan. Trading account assets are held for the purpose of
selling at a profit and are carried at market value.
The following table shows the carrying value of trading account assets by
type of security.
DECEMBER 31,
2001
--------------
(IN THOUSANDS)
Trading account assets:
U.S. Treasury and Federal agency securities............... $355,346
Obligations of states and political subdivisions.......... 329,313
Other securities.......................................... 57,237
--------
Total............................................. $741,896
========
29
MARGIN RECEIVABLES
Margin receivables, which totaled $523.9 million at December 31, 2001, were
added to Regions' consolidated statement of condition as a result of the
acquisition of Morgan Keegan. 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.
LIQUIDITY
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 which are available
for cash needs (see previous table on Securities Maturing). Maturities in the
loan portfolio also provide a steady flow of funds (see previous table on Loans
Maturing). At December 31, 2001, commercial loans, real estate construction
loans and commercial mortgage loans with an aggregate balance of $6.9 billion,
as well as securities of $245 million, were due to mature in one year or less.
Additional funds are provided from payments on consumer loans and one-to-four
family residential mortgage loans. Historically, the Company's 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 increased from 93.85% at December 31, 1999, to
97.98% at December 31, 2000, but declined slightly to 97.90% at December 31,
2001, as loans and deposits grew at only modest rates in 2001.
As shown in the Consolidated Statement of Cash Flows, operating activities
provided significant levels of funds in 1999 and 2000, due primarily to high
levels of net income. Operating activities were a net user of funds in 2001 as
mortgage loans held for sale and other assets increased and other liabilities
decreased. Investing activities, primarily in loans and securities, were a net
user of funds in 1999 and 2000 but was a net provider of funds in 2001 as loan
and security balances declined. Strong loan growth in prior years required a
significant amount of funds for investing activities. Funds needed for investing
activities were provided primarily by deposits, purchased funds, and borrowings.
Financing activities provided more funds in 1999 due to more reliance on short
and long-term borrowings. In 2000, a significant portion of the short-term
borrowings were repaid using proceeds from the sale of securities available for
sale and from deposit growth. Financing activities were a net user of funds in
2001, as deposits balances declined and Regions (excluding borrowings added in
connection with acquisitions) was less dependent on borrowed funds as a funding
source. Cash dividends and the open-market purchase of the Company's common
stock also required funds in 1999, 2000 and 2001. Funds needed for the two
pending community bank acquisitions as of December 31, 2001, are expected to be
provided by short-term and long-term borrowings.
Standard & Poor's Corporation has assigned high quality ratings to Regions
Bank's certificates of deposit. Regions Bank's short-term certificates of
deposit are rated "A-1" by Standard & Poor's Corporation and long-term
certificates of deposit are rated "A+".
Moody's Investors Service has also given similar quality ratings to Regions
Bank's short- and long-term debt and certificates of deposit. Short-term debt
and certificates of deposit are rated "P-1" and long-term debt and certificates
of deposit are rated "Aa3".
Fitch IBCA has rated Regions Bank's short-term debt and certificates of
deposits "F1+" and Regions Bank's long-term debt and certificates of deposits
"AA-".
30
The $675 million in subordinated debt issued by Regions and outstanding at
December 31, 2001, is rated "A-" by Standard & Poor's Corporation, "A2" by
Moody's Investors Service, and "A" by Fitch IBCA. Regions' trust preferred
securities are rated "BBB+" by Standard & Poor's Corporation, "a1" by Moody's
Investors Service, and "A" by Fitch IBCA.
Regions' and its banking subsidiaries' high quality ratings from nationally
recognized rating agencies enhance the Company's ability to raise funds in
national money markets. The high ratings also help to attract both loan and
deposit customers in local markets.
Historically, Regions has found short- and intermediate-term credit readily
available on reasonable terms from money center or regional banks. Regions'
management places constant emphasis on the maintenance of adequate liquidity to
meet conditions which might reasonably be expected to occur.
DEPOSITS
Deposits are Regions' primary source of funds, providing funding for 75%
and 79% of average earning assets in 2001 and 2000, respectively. During the
last four years, average total deposits grew at a compound annual rate of 6%.
Average deposits grew $2.1 billion or 8% in 1999 and $2.9 billion or 10% in
2000. In 2001, average deposits declined $805 million or 3%. Acquisitions
contributed average deposit growth of $495 million in 1999, $427 million in 2000
and $43 million in 2001.
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. Regions' success at
competing for deposits is discussed below.
Average non-interest bearing deposits have grown at a compound growth rate
of 7% since 1998. This category of deposits grew 19% in 1999 but only 1% in 2000
and 2% in 2001. Despite modest growth in 2000 and 2001, non-interest-bearing
deposits continue to be a significant funding source for Regions, accounting for
16%, 14% and 15% of average total deposits in 1999, 2000 and 2001 respectively.
During 1999, 2000 and 2001, the rate paid on savings accounts was less
attractive to customers, relative to other investment alternatives. As a result,
savings accounts have decreased at a 7% compound growth rate since 1998. Savings
accounts declined 4% in 1999, 10% in 2000 and 5% in 2001. Management expects
savings accounts to continue to be a stable-funding source, but does not expect
any significant growth given the current interest rate environment. In 2001,
savings accounts accounted for 4% of average total deposits.
During 1999 and 2000, interest-bearing transaction accounts decreased 49%
and 12%, respectively due to less attractive rates relative to other investment
alternatives. In 2001, interest-bearing transaction accounts increased 37%, as
investors migrated toward more liquid assets given recent market condition.
During 2000 and 2001, interest-bearing transaction accounts accounted for 1% and
2%, respectively, of average total deposits.
Money market savings products continue to be Regions' fastest growing
deposits, increasing at a compound annual rate of 17% since 1998. Customers have
responded to Regions' competitive money market savings products by continuing to
invest in these accounts. The results are increases in average balances of 20%
in 1999, 12% in 2000 and 19% in 2001. Money market savings products are one of
Regions' most significant funding sources, accounting for 31% of average total
deposits in 1999, 32% of average total deposits in 2000 and 39% of average total
deposits in 2001.
31
Certificates of deposit of $100,000 or more increased 20% in 1999 and 6% in
2000 due to their increased use as a funding source. In 2001, certificates of
deposit of $100,000 or more declined 9% as these products were priced less
aggressively than in prior years. Since 1998, certificates of deposit of
$100,000 or more have increased at a compound annual rate of 5%, and in 2001
accounted for 13% of average total deposits.
Other interest-bearing deposits (certificates of deposit of less than
$100,000 and time open accounts) declined 3% in 1999 but increased 18% in 2000.
In 2000, new deposit products and higher rates resulted in higher balances in
this category. Other interest-bearing deposits declined 23% in 2001 as rates on
these accounts were less attractive to investors and Regions' reduced
utilization of certain wholesale deposits as a funding source. This category of
deposits continues to be one of Regions' primary funding sources; it accounted
for 27% of average total deposits in 2001, down from 34% of average total
deposits in 2000.
The sensitivity of Regions' deposit rates to changes in market interest
rates is reflected in the Company's average interest rate paid on
interest-bearing deposits (see table following on Average Rates Paid). During
early 1999, market interest rates generally declined but increased in the last
half of 1999 and throughout 2000. In 2001, market interest rates declined
dramatically. The Fed reduced rates 11 times (475 basis points) in 2001. While
Regions' average interest rate paid on interest-bearing deposits follows these
trends, a lag period exists between the change in market rates and the repricing
of the deposits. The rate paid on interest-bearing deposits decreased from 4.61%
in 1998 to 4.32% in 1999 but increased to 5.03% in 2000. In 2001, the rate paid
on interest-bearing deposits declined to 4.30%.
A detail of interest-bearing deposit balances at December 31, 2001 and
2000, and the interest expense on these deposits for the three years ended
December 31, 2001, is presented in Note H to the consolidated financial
statements.
The following table presents the detail of interest-bearing deposits and
maturities of the larger time deposits:
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS)
Interest-bearing deposits of less than $100,000............. $22,843,437 $22,848,236
Time deposits of $100,000 or more, maturing in:
3 months or less.......................................... 1,161,763 1,116,456
Over 3 through 6 months................................... 455,340 704,118
Over 6 through 12 months.................................. 669,104 1,700,906
Over 12 months............................................ 1,333,342 1,139,892
----------- -----------
Total.................................................. 3,619,549 4,661,372
----------- -----------
Total............................................. $26,462,986 $27,509,608
=========== ===========
The following table presents the average amounts of deposits outstanding by
category for the three years ended December 31, 2001:
AVERAGE AMOUNTS OUTSTANDING
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
Non-interest-bearing demand deposits.............. $ 4,634,198 $ 4,561,900 $ 4,520,405
Interest-bearing transaction accounts............. 556,724 405,404 458,094
Savings accounts.................................. 1,261,294 1,329,580 1,477,688
Money market savings accounts..................... 12,132,612 10,160,829 9,095,569
Certificates of deposit of $100,000 or more....... 4,062,631 4,464,330 4,218,828
Other interest-bearing deposits................... 8,387,786 10,918,949 9,215,075
----------- ----------- -----------
Total interest-bearing deposits......... 26,401,047 27,279,092 24,465,254
----------- ----------- -----------
Total deposits.......................... $31,035,245 $31,840,992 $28,985,659
=========== =========== ===========
32
The following table presents the average rates paid on deposits by category
for the three years ended December 31, 2001:
AVERAGE RATES PAID
--------------------
2001 2000 1999
---- ---- ----
Interest-bearing transaction accounts....................... 1.95% 4.04% 4.22%
Savings accounts............................................ 1.12 1.51 1.61
Money market savings accounts............................... 3.03 4.20 3.27
Certificates of deposit of $100,000 or more................. 5.81 6.08 5.36
Other interest-bearing deposits............................. 6.05 5.84 5.32
Total interest-bearing deposits................... 4.30% 5.03% 4.32%
BORROWED FUNDS
Regions' short-term borrowings consist of federal funds purchased and
security repurchase agreements, commercial paper, Federal Home Loan Bank
structured notes, due to brokerage customers, and other short-term borrowings.
Federal funds purchased and security repurchase agreements are used to
satisfy daily funding needs and, when advantageous, for rate arbitrage. Federal
funds purchased and security repurchase agreements totaled $1.8 billion and $2.0
billion at December 31, 2001 and 2000, respectively. Balances in these accounts
can fluctuate significantly on a day-to-day basis. The average daily balance of
federal funds purchased and security repurchase agreements, net of federal funds
sold and security reverse repurchase agreements, decreased $456 million in 2000
and $1.5 billion in 2001. The declines in 2000 and 2001 resulted from paydowns
of purchased fund positions funded by the sale of the credit card portfolio, the
calls, sales and maturities of available for sale securities and increased
utilization of alternative longer term funding.
Throughout 2000 and 2001, Federal Home Loan Bank structured notes were used
as a short-term funding source, primarily due to their favorable interest rate.
These structured notes have original stated maturities in excess of one year,
but are callable, at the option of the Federal Home Loan Bank, at various times
less than one year. Because of the call feature, the structured notes are
considered short term. As of December 31, 2001 and 2000, $1.1 billion of
structured notes were outstanding.
Regions' brokerage subsidiary maintains certain lines of credit with
unaffiliated banks. As of December 31, 2001, $151.3 million was outstanding
under these agreements with an average interest rate of 1.9%.
At December 31, 2001 and 2000, $27.8 million in commercial paper was
outstanding, compared to $56.8 million at December 31, 1999. The Company issues
commercial paper through its private placement commercial paper program. Company
policy limits total commercial paper outstanding, at any time, to $75 million.
The level of commercial paper outstanding depends on the funding requirements of
the Company and the cost of commercial paper compared to alternative borrowing
sources.
Through its brokerage subsidiary, Regions maintains a due to brokerage
customer position. This represents uninvested funds in the customers' brokerage
account. The due to brokerage customers totaled $932.8 million at December 31,
2001, with an interest rate of 2.3%.
The other short-term borrowings increased $82.6 million from December 31,
2000 to December 31, 2001, primarily due to an increase in the short sale
liability, which is frequently used by Regions' brokerage subsidiary to offset
other market risks, which are undertaken in the normal course of business. The
increase is due to higher levels of business activity, associated with the
addition of Morgan Keegan.
Regions' long-term borrowings consist primarily of subordinated notes,
Federal Home Loan Bank borrowings, trust preferred securities and other
long-term notes payable.
In 2001, subordinated notes increased $475 million. This increase is due to
the $500 million issuance, in February 2001, of ten year 7.00% subordinated
notes. Partially offsetting this issuance was the $25 million maturity, in
August 2001, of Regions' 7.65% subordinated notes.
33
Federal Home Loan Bank long-term advances decreased $506 million in 2001.
Regions utilized other sources of funding with more favorable interest rates
during 2001. Membership in the Federal Home Loan Bank system provides access to
an additional source of lower-cost funds.
During 2000 and 2001, Regions utilized Federal Home Loan Bank structured
notes with original call periods in excess of one year. These structured notes
have a stated ten year maturity but are callable, at the option of the Federal
Home Loan Bank, between one and two years. As of December 31, 2001 and 2000,
$3.6 billion of long-term Federal Home Loan Bank advances were outstanding.
Regions issued $288 million of trust preferred securities in February 2001.
These securities, which qualify as Tier 1 capital, have an interest rate of
8.00% and a 30-year term, but are callable after five years. In addition,
Regions assumed $4 million of trust preferred securities in connection with an
acquisition.
Other long-term notes payable consist of redeemable trust preferred
securities, notes issued to former stockholders of acquired banks, notes for
equipment financing, and miscellaneous notes payable. Other long-term borrowings
increased $8.7 million in 2001 due to certain notes payable assumed in
connection with acquired companies.
STOCKHOLDERS' EQUITY
Over the past three years, stockholders' equity has increased at a compound
annual growth rate of 10.4%. Stockholders' equity has grown from $3.0 billion at
the beginning of 1999 to $4.0 billion at year-end 2001. Internally generated
retained earnings contributed $851 million of this growth and $37 million was
attributable to the exercise of stock options and to the issuance of stock for
employee incentive plans. In addition, equity issued in connection with
acquisitions, net of treasury share repurchases, added $113 million to equity
with increases in other components of equity adding $33 million. The internal
capital generation rate (net income less dividends as a percentage of average
stockholders' equity) was 6.9% in 2001, compared to 8.9% in 2000 and 9.9% in
1999.
Regions' ratio of stockholders' equity to total assets was 8.89% at
December 31, 2001, compared to 7.92% at December 31, 2000, and 7.18% at December
31, 1999.
Regions and its bank subsidiary 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 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 hold additional 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.
34
The following chart summarizes the applicable bank regulatory capital
requirements. Regions' capital ratios at December 31, 2001, substantially
exceeded all regulatory requirements.
BANK REGULATORY CAPITAL REQUIREMENTS
MINIMUM
REGULATORY REGIONS AT
REQUIREMENT DECEMBER 31, 2001
----------- -----------------
Tier 1 capital to risk-adjusted assets...................... 4.00% 9.66%
Total risk-based capital to risk-adjusted assets............ 8.00 13.23
Tier 1 leverage ratio....................................... 3.00 7.41
At December 31, 2001, Tier 1 capital totaled $3.2 billion, total risk-based
capital totaled $4.4 billion, and risk-adjusted assets totaled $32.2 billion.
Total capital at the bank affiliate also has an important effect on the
amount of FDIC insurance premiums paid. Institutions not considered well
capitalized can be subject to higher rates for FDIC insurance. As of December
31, 2001, Regions' banking affiliate had the requisite capital levels to qualify
as well capitalized.
Regions attempts to balance the return to stockholders through the payment
of dividends, with the need to maintain strong capital levels for future growth
opportunities. In 2001, Regions returned 50% of earnings to its stockholders in
the form of dividends. Total dividends declared by Regions in 2001 were $250.3
million or $1.12 per share, an increase of 4% from the $1.08 per share in 2000.
In January 2002, the Board of Directors declared a 4% increase in the
quarterly cash dividend from $.28 to $.29 per share. This is the 31st
consecutive year that Regions has increased cash dividends.
35
The following table shows the percentage distribution of Regions'
consolidated average balances of assets, liabilities and stockholders' equity
for the five years ended December 31, 2001:
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
ASSETS
Earning assets:
Taxable securities................................... 16.5% 20.1% 20.8% 19.0% 18.4%
Non-taxable securities............................... 1.8 1.9 1.9 2.1 2.6
Federal funds sold................................... 1.2 0.2 0.2 0.9 1.0
Loans (net of unearned income):
Commercial........................................ 21.5 20.5 19.3 20.7 15.4
Real estate....................................... 34.9 36.4 33.2 30.8 36.5
Installment....................................... 12.9 13.3 14.4 17.1 17.7
----- ----- ----- ----- -----
Total loans.................................. 69.3 70.2 66.9 68.6 69.6
Allowance for loan losses......................... (0.9) (0.8) (0.8) (0.9) (1.0)
----- ----- ----- ----- -----
Net loans.................................... 68.4 69.4 66.1 67.7 68.6
Other earning assets.............................. 3.8 1.0 3.0 2.3 1.1
----- ----- ----- ----- -----
Total earning assets......................... 91.7 92.6 92.0 92.0 91.7
Cash and due from banks................................ 2.1 2.6 3.1 3.0 3.4
Other non-earning assets............................... 6.2 4.8 4.9 5.0 4.9
----- ----- ----- ----- -----
Total assets................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing................................. 10.4% 10.6% 11.4% 11.2% 12.1%
Interest-bearing..................................... 59.1 63.6 61.8 67.8 69.8
----- ----- ----- ----- -----
Total deposits............................... 69.5 74.2 73.2 79.0 81.9
Borrowed funds:
Short-term........................................... 9.3 10.3 16.4 9.9 6.5
Long-term............................................ 10.7 7.2 1.7 1.3 1.7
----- ----- ----- ----- -----
Total borrowed funds......................... 20.0 17.5 18.1 11.2 8.2
Other liabilities...................................... 2.1 0.8 1.0 1.3 1.2
----- ----- ----- ----- -----
Total liabilities............................ 91.6 92.5 92.3 91.5 91.3
Stockholders' equity................................... 8.4 7.5 7.7 8.5 8.7
----- ----- ----- ----- -----
Total liabilities and stockholders' equity... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
36
OPERATING RESULTS
Net income decreased 4% in 2001, increased less than 1% in 2000, but
increased 25% in 1999. Operating income, net income excluding costs associated
with the Morgan Keegan transaction and other non-recurring charges totaled
$526.7 million in 2001, a 3% increase compared to 2000. The accompanying table
presents the dollar amount and percentage change in the important components of
income that occurred in 2000 and 2001.
SUMMARY OF CHANGES IN OPERATING RESULTS
INCREASE (DECREASE)
----------------------------------
2001 COMPARED 2000 COMPARED
TO 2000 TO 1999
--------------- ---------------
AMOUNT % AMOUNT %
-------- --- -------- ---
(DOLLAR AMOUNTS IN THOUSANDS)
Net interest income.................................... $ 36,696 3% $(37,058) (3)%
Provision for loan losses............................ 38,303 30 13,441 12
-------- --------
Net interest income after provision for loan losses.... (1,607) 0 (50,499) (4)
Non-interest income:
Brokerage and investment income...................... 317,671 NM 4,320 12
Trust department income.............................. (994) (2) 4,241 8
Service charges on deposit accounts.................. 35,593 15 36,686 19
Mortgage servicing and origination fees.............. 14,350 17 (20,386) (20)
Securities transactions.............................. 72,034 NM (40,088) NM
Other................................................ (57,979) (25) 79,296 53
-------- --------
Total non-interest income.................... 380,675 63 64,069 12
Non-interest expense:
Salaries and employee benefits....................... 290,831 49 37,288 7
Net occupancy expense................................ 16,226 23 9,040 15
Furniture and equipment expense...................... 13,514 18 2,200 3
Other................................................ 82,272 21 8,342 2
-------- --------
Total non-interest expense................... 402,843 36 56,870 5
-------- --------
Income before income taxes................... (23,775) (3) (43,300) (6)
Applicable income taxes................................ (5,186) (2) (45,437) (18)
-------- --------
Net income................................... $(18,589) (4)% $ 2,137 0%
======== ========
Operating income............................. $ 17,025 3% $(15,665) (3)%
NET INTEREST INCOME
Net interest income (interest income less interest expense) is Regions'
principal source of income. Net interest income increased 3% in 2001 but
declined 3% in 2000. On a taxable equivalent basis, net interest income
increased 7% in 2001 but declined 2% in 2000. The table on page 41 provides
additional information to analyze the changes in net interest income.
In 2000, modest growth in interest-earning assets combined with unfavorable
changes in interest rates resulted in lower net interest income. During 2000,
average interest-earning assets grew 2%, but unfavorable changes in
interest-bearing liability rates resulted in lower net interest income. In 2001,
growth in interest-earning assets (average) continued at modest rates (3%),
combined with higher spreads on those earning assets, resulted in increased net
interest income.
Regions measures its ability to produce net interest income with a ratio
called the interest margin. The interest margin is net interest income (on a
taxable equivalent basis) as a percentage of average earning assets. The
interest margin decreased from 3.94% in 1999 to 3.55% in 2000 but increased to
3.66% in 2001. Changes in the interest margin occur primarily due to two
factors: (1) the interest rate spread (the difference between the taxable
equivalent yield on earning assets and the rate on interest-bearing liabilities)
and (2) the percentage of earning assets funded by interest-bearing liabilities.
37
The first factor affecting Regions' interest margin is the interest rate
spread. Regions' average interest rate spread was 3.31% in 1999, 2.84% in 2000,
and 3.00% in 2001. Market interest rates, both the level of rates and the slope
of the yield curve (the spread between short-term rates and longer-term rates),
affect the interest rate spread by influencing the pricing on most categories of
Regions' interest-earning assets and interest-bearing liabilities.
In the last half of 1999, the Fed instituted three 25 basis point rate
increases, resulting in a 5.50% Federal funds rate at the end of 1999.
Throughout the first six months of 2000, the Fed raised the Federal Funds rate
three times totaling 100 basis points resulting in a rate of 6.50%. The Fed
began reducing the Federal Funds rate in early 2001. Throughout 2001, the Fed
lowered the rate eleven times totaling 475 basis points. These reductions
resulted in a near record low Federal Funds rate of 1.75%.
Regions' interest-earning asset yields and interest-bearing liability rates
were both lower in 2001 compared to 2000 reflecting the declining market
interest rates experienced in 2001. As market interest rates declined in 2001,
Regions' interest-bearing liability rates decreased faster than did
interest-earning asset yields. The interest rate spread expanded in 2001 because
interest-earning asset yields decreased 16 basis points less than did
interest-bearing liability rates.
The mix of earning assets can also affect the interest rate spread. During
2001, loans, which are typically Regions' highest yielding earning asset,
decreased slightly as a percentage of earning assets partially mitigating the
effects of changing earning asset yields and interest-bearing liability rates.
Average loans as a percentage of earning assets were 75.2% in 2000 and 74.9% in
2001.
The second factor affecting the interest margin is the percentage of
earning assets funded by interest-bearing liabilities. Funding for Regions'
earning assets comes from interest-bearing liabilities, non-interest-bearing
liabilities and stockholders' equity. The net spread on earning assets funded by
non-interest-bearing liabilities and stockholders' equity is higher than the net
spread on earning assets funded by interest-bearing liabilities. The percentage
of earning assets funded by interest-bearing liabilities was 86% in 1999, 87% in
2000 and 85% in 2001. The change in the percentage of earning assets funded by
interest-bearing liabilities had a positive effect on net interest income in
2001. In 2001, equity, issued in connection with acquisitions, funded a larger
percentage of earning assets than in 2000 or 1999. In prior years, the trend had
been for a greater percentage of new funding for earning assets to come from
interest-bearing sources. In the future, management expects that an increasing
percentage of funding will be provided from interest-bearing liabilities.
MARKET RISK -- INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to a change in interest rates, exchange rates
and equity prices. Regions' primary market risk is interest rate risk.
The primary objective of Asset/Liability Management at Regions is to manage
interest rate risk and achieve reasonable stability in net interest income
throughout interest rate cycles. This is achieved by maintaining the proper
balance of rate sensitive earning assets, rate sensitive liabilities and
off-balance sheet interest rate hedges. The relationship of rate sensitive
earning assets to rate sensitive liabilities, adjusted for the effect of
off-balance sheet hedges (interest rate sensitivity), is the principal factor in
projecting the effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest-bearing liabilities
are those that can be repriced to current market rates within a relatively short
time period. Management monitors the rate sensitivity of earning assets and
interest-bearing liabilities over the entire life of these instruments, but
places particular emphasis on the first year. At December 31, 2001,
approximately 63% of earning assets and 52% of the funding for these earning
assets are scheduled to be repriced to current market rates at least once during
2002.
The accompanying table shows Regions' rate sensitive position at December
31, 2001, as measured by gap analysis (the difference between the earning asset
and interest-bearing liability amounts scheduled to be repriced to current
market rates in subsequent periods). Over the next 12 months approximately $4.8
billion more earning assets than interest-bearing liabilities can be repriced to
current market rates at least once. As a result, the one-year cumulative gap
(the ratio of rate sensitive assets to rate sensitive liabilities) at
38
December 31, 2001, was 1.23, indicating a asset sensitive position. However,
this ratio is only one of the tools that management uses to measure rate
sensitivity.
Historically, Regions has not experienced the level of net interest income
volatility indicated by gap analysis. The primary reason for the lack of
volatility is that Regions has a relatively large base of core deposits that do
not reprice on a contractual basis. These deposit products include regular
savings, interest-bearing transaction accounts and a portion of money market
savings accounts. Balances for these accounts are reported in the less than one
year categories. However, the rates paid are typically not directly related to
market interest rates, since management exercises some discretion in adjusting
these rates as market rates change.
Another reason for the lack of volatility in net interest income is that
Regions' loan and security portfolios contain fixed-rate mortgage-related
products, including whole loans, mortgage-backed securities and collateralized
mortgage obligations having amortization and cash flow characteristics that vary
with the level of market interest rates. These earning assets are generally
reported in the non-sensitive category. In fact, a portion of these earning
assets may pay-off within one year or less because their cash flow
characteristics are materially impacted by mortgage refinancing activity. If
assets that are not sensitive to market interest rate changes were redistributed
based on expected cash flows and probable repricing intervals, Regions' one-year
cumulative gap indicates a slightly less asset sensitive position.
Regions uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools used is simulation analysis. Simulation
analysis is the primary method of estimating earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to test
the sensitivity of Regions' net interest income and stockholders' equity to both
the level of interest rates and the slope of the yield curve. Simulation
analysis uses a more detailed version of the information shown in the
accompanying table and adds adjustments for the expected timing and magnitude of
asset and liability cash flows, as well as the expected timing and magnitude of
repricings of deposits that do not reprice on a contractual basis. In addition,
simulation analysis includes adjustments for the lag between movements in market
interest rates and the movement of administered rates on prime rate loans,
interest-bearing transaction accounts, regular savings and money market savings
accounts. These adjustments are made to reflect more accurately possible future
cash flows, repricing behavior and ultimately net interest income. Simulation
analysis indicates that Regions is slightly asset sensitive, given modest
movements in interest rates.
FORWARD-LOOKING STATEMENTS
The section that follows, "Exposure to Interest Rate Shifts", contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risk and uncertainties. Although Regions believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results discussed in these
forward-looking statements.
Exposure to Interest Rate Shifts. Based on the aforementioned discussion,
management can estimate the effect shifts in interest rates may have upon the
Company's net interest income, Regions' principal source of income.
The following table demonstrates the expected effect a given, gradual (over
twelve months beginning at December 31, 2001) parallel interest rate shift would
have on Regions net interest income.
CHANGE IN INTEREST RATES $ CHANGE IN NET % CHANGE IN NET
(IN BASIS POINTS) INTEREST INCOME INTEREST INCOME
------------------------ --------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
+200...................................................... $53,000 3.5%
+100...................................................... 30,000 2.0
-100...................................................... (28,000) (1.9)
-200...................................................... (66,000) (4.4)
39
In the event of a shift in interest rates, management would attempt to take
certain actions to mitigate the negative impact to net interest income. These
actions include but are not limited to, restructuring of interest-earning
assets, seeking alternative funding sources and entering into interest rate swap
agreements.
INTEREST RATE SENSITIVITY ANALYSIS
DECEMBER 31, 2001
RATE SENSITIVE PERIOD
--------------------------------------------------------------------
OVER 1
YEAR OR
1-3 4-6 7-12 NON-
MONTHS MONTHS MONTHS TOTAL SENSITIVE TOTAL
--------- -------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN MILLIONS)
Earning Assets:
Loans, net of unearned
income................. $15,619.9 $2,277.8 $ 2,353.6 $20,251.3 $10,634.0 $30,885.3
Securities held to
maturity............... 2.5 2.2 1.1 5.8 28.3 34.1
Securities available for
sale................... 911.2 1,026.6 1,191.3 3,129.1 4,684.0 7,813.1
Interest bearing deposits
in other banks......... 667.2 -- -- 667.2 -- 667.2
Federal funds sold and
securities purchased
under agreements to
resell................. 92.6 -- -- 92.6 -- 92.6
Mortgage loans held for
sale................... 890.2 -- -- 890.2 -- 890.2
Trading account assets.... 741.9 -- -- 741.9 -- 741.9
Margin receivables........ 523.9 -- -- 523.9 -- 523.9
--------- -------- --------- --------- --------- ---------
Total earning
assets.......... $19,449.4 $3,306.6 $ 3,546.0 $26,302.0 $15,346.3 $41,648.3
========= ======== ========= ========= ========= =========
Percent of total
earning
assets.......... 46.7% 8.0% 8.5% 63.2% 36.8% 100.0%
Funding Sources:
Non-interest-bearing
deposits............... -- -- -- -- $ 5,085.3 $ 5,085.3
Savings deposits.......... $ 1,317.4 -- -- $ 1,317.4 -- 1,317.4
Other time deposits....... 8,594.7 $2,926.2 $ 4,031.0 15,551.9 9,593.7 25,145.6
Short-term borrowings..... 2,877.2 100.0 1,121.2 4,098.4 -- 4,098.4
Long-term borrowings...... 405.5 0.1 83.4 489.0 4,258.7 4,747.7
--------- -------- --------- --------- --------- ---------
Total
interest-bearing
liabilities..... 13,194.8 3,026.3 5,235.6 21,456.7 13,852.4 35,309.1
Stockholders' equity...... -- -- -- -- 1,253.9 1,253.9
--------- -------- --------- --------- --------- ---------
Total funding
sources......... $13,194.8 $3,026.3 $ 5,235.6 $21,456.7 $20,191.6 $41,648.3
========= ======== ========= ========= ========= =========
Percent of total
funding
sources......... 31.7% 7.2% 12.6% 51.5% 48.5% 100.0%
Interest sensitive gap...... $ 6,254.6 $ 280.3 $(1,689.6) $ 4,845.3 $(4,845.3) --
Cumulative interest
sensitive gap............. $ 6,254.6 $6,534.9 $ 4,845.3 $ 4,845.3 -- --
As percent of total earning
assets.................... 15.0% 15.7% 11.6% 11.6% -- --
Ratio of earning assets to
funding sources........... 1.47 1.09 0.68 1.23 0.76 1.00
Cumulative ratio............ 1.47 1.40 1.23 1.23 1.00 1.00
40
ANALYSIS OF CHANGES IN NET INTEREST INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2001 OVER 2000 2000 OVER 1999
--------------------------------- --------------------------------
VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL
-------- ---------- --------- -------- ---------- --------
(IN THOUSANDS)
Increase (decrease) in:
Interest income on:
Loans...................... $ 68,691 $(198,331) $(129,640) $311,802 $ 74,555 $386,357
Federal funds sold......... 16,255 (3,902) 12,353 (309) 1,590 1,281
Taxable securities......... (80,119) (35,936) (116,055) 26,250 10,789 37,039
Non-taxable securities..... (729) (563) (1,292) 2,940 (698) 2,242
Other earning assets....... 74,872 (18,844) 56,028 (65,500) 18,138 (47,362)
-------- --------- --------- -------- --------- --------
Total................. 78,970 (257,576) (178,606) 275,183 104,374 379,557
Interest expense on:
Savings deposits........... (985) (4,960) (5,945) (2,289) (1,403) (3,692)
Other interest-bearing
deposits................. (41,114) (189,506) (230,620) 142,597 176,556 319,153
Borrowed funds............. 84,665 (63,402) 21,263 16,303 84,851 101,154
-------- --------- --------- -------- --------- --------
Total................. 42,566 (257,868) (215,302) 156,611 260,004 416,615
Increase (decrease) in net
interest income............... $ 36,404 $ 292 $ 36,696 $118,572 $(155,630) $(37,058)
======== ========= ========= ======== ========= ========
---------------
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.
PROVISION FOR LOAN LOSSES
The provision for loan losses is used to fund the allowance for loan
losses. Actual loan losses, net of recoveries, are charged directly to the
allowance. The expense recorded each year is a reflection of management's
judgment as to the adequacy of the allowance. For an analysis and discussion of
the allowance for loan losses, refer to the section entitled "Loans and
Allowance for Loan Losses." The 1999 provision for loan losses increased to
$113.7 million due to higher charge-offs, primarily consumer and commercial, and
strong internal loan growth. During 2000, the provision for loan losses
increased to $127.1 million (.42% of average loans) due to inherent losses
associated with the loan portfolio and management's evaluation of current
economic factors. The provision for loan loses totaled $165.4 million (.53% of
average loans), in 2001, a $38.3 million increase compared to the prior year.
The higher provision was the result of increased loan losses in 2001, weaker
economic conditions and management's assessment of current economic trends. The
resulting year-end allowance for loan losses increased $42.7 million to $419.2
million. Unfavorable changes in the previously discussed factors considered by
management in determining the adequacy of the provision for loan losses and the
resulting allowance could require higher provisions for loan losses in the
future.
NON-INTEREST INCOME
BROKERAGE AND INVESTMENT BANKING
Income from brokerage and investment banking increased significantly in
2001 as compared to 2000 or 1999. Brokerage and investment income totaled $359.0
million in 2001 compared to $41.3 million and $37.0 million in 2000 and 1999,
respectively. Comparisons with prior years are affected by the acquisition of
Morgan Keegan, Inc., which was acquired on March 30, 2001. This transaction was
accounted for as a purchase and therefore only includes income of Morgan Keegan
from the date of acquisition. (see Note Q to the consolidated financial
statements). Brokerage and investment income is significantly affected by
numerous economic and market conditions. As of December 31, 2001, Morgan Keegan
employed approximately 900 financial advisors. Customer assets totaled
approximately $31.6 billion at year end.
41
Morgan Keegan Performance
The addition of Morgan Keegan significantly diversified Regions' revenue
stream. Non-interest income as a percent of total revenue equaled 39% in 2001,
compared to 31% in 2000. Morgan Keegan contributed $36.7 million to net income
in 2001. Revenues from the fixed income capital markets division totaled $159.1
million, or 37.8% of Morgan Keegan's total revenue in 2001, and was the top
revenue producing line of business. This line of business has benefited from
significant fixed income issuance and refinance activity resulting from the
historically low levels of interest rates in 2001, while other divisions have
been negatively impacted by weaker market conditions. Private client and equity
capital markets revenue totaled $131 million and $32 million, respectively.
The following table shows the components of the contribution by Morgan
Keegan for the nine months ended December 31, 2001. The Morgan Keegan
transaction was completed on March 30, 2001, therefore only income generated
from that date forward is included in Regions' consolidated financial
statements. For presentation purposes, information for the nine months ended
December 31, 2000 has been included in the following table, but is not included
in Regions consolidated financial statements.
MORGAN KEEGAN SUMMARY INCOME STATEMENT
NINE MONTHS ENDED
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Revenues:
Commissions............................................... $ 98,035 $101,233
Principal transactions.................................... 172,019 114,454
Investment banking........................................ 48,575 40,223
Interest.................................................. 52,363 85,096
Investment advisory....................................... 34,148 32,448
Other..................................................... 15,108 15,401
-------- --------
Total revenues.................................... 420,248 388,855
Expense:
Interest.................................................. 32,459 62,977
Non-interest expense...................................... 330,006* 276,720
-------- --------
Total expenses.................................... 362,465 339,697
-------- --------
Income before taxes......................................... 57,783 49,158
Income taxes................................................ 21,070 18,300
-------- --------
Net income.................................................. $ 36,713 $ 30,858
======== ========
---------------
* Excludes $19.7 million in amortization of excess purchase price.
The following table shows the breakout of revenue by division contributed
by Morgan Keegan.
MORGAN KEEGAN BREAKOUT OF REVENUE BY DIVISION
NINE MONTHS ENDED DECEMBER 31, 2001
FIXED
INCOME EQUITY INTEREST
PRIVATE CAPITAL CAPITAL INVESTMENT AND
CLIENT MARKETS MARKETS ADVISORY OTHER
-------- -------- ------- ---------- --------
(AMOUNTS IN THOUSANDS)
Gross revenue............................. $131,190 $159,054 $32,366 $34,631 $63,007
% of gross revenue........................ 31.2% 37.8% 7.7% 8.2% 15.1%
42
TRUST INCOME
Trust income declined 2% in 2001 and 3% in 1999, but increased 8% in 2000.
Trust sales efforts are promoted throughout the company by strong sales goals
and cash incentives. In addition to continued sales efforts, trust income is
also affected by the securities markets, because most trust fees are calculated
as a percentage of trust asset values. In 1999, trust fees decreased due to
customer attrition in certain newly entered markets, partially offset by sales
initiatives. Stronger market conditions and sales initiatives resulted in higher
trust income in 2000. In 2001, weaker securities markets, combined with the
extraordinary events of September 11 and their impact on the economy, had an
adverse impact on trust income.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
Service charge income increased 14% in 1999, 19% in 2000 and 15% in 2001
due to increases in the number of deposit accounts, improved management
initiatives and standardization in the pricing of certain deposit accounts and
related services. The collection rate of fees charged for deposit services
continues to improve but remains a focus of management.
MORTGAGE SERVICING AND ORIGINATION FEES
The primary source of this category of income is Regions' mortgage banking
affiliate -- Regions Mortgage, Inc. (RMI). RMI's primary business and source of
income is the origination and servicing of mortgage loans for long-term
investors.
In 2001, mortgage servicing and origination fees increased 17%, from $82.7
million in 2000 to $97.1 million in 2001. Origination fees increased in 2001 due
to an increase in the number of loans closed as the result of lower mortgage
interest rates. Servicing fees were lower in 2001 as compared to 2000 due to
lower numbers of loans serviced in 2001. At December 31, 2001, Regions'
servicing portfolio totaled $19.1 billion and included approximately 244,000
loans. At December 31, 2000 and 1999, the servicing portfolio totaled $21.6
billion and $24.1 billion, respectively. The decline in the servicing portfolio
during 2001 resulted from high levels of prepayments due to the low interest
rate environment, partially offset by higher levels of production in 2001.
In 2000, mortgage servicing and origination fees decreased 20%, from $103.1
million in 1999 to $82.7 million in 2000. Origination fees were lower due to a
decrease in the number of loans closed as a result of an increase in interest
rates in 2000. Servicing fees were also lower in 2000 as compared to 1999 due to
lower numbers of loans serviced as a result of sales of blocks of mortgage
servicing assets.
In 1999, mortgage servicing and origination fees decreased 8%, from $111.6
million in 1998 to $103.1 million in 1999. Origination fees were lower due to a
decrease in the number of loans closed as a result of an increase in mortgage
interest rates. Servicing fees were also lower due to narrowing servicing
margins on 1999 loan production.
RMI, through its retail and correspondent lending operations, produced
mortgage loans totaling $4.1 billion, $2.4 billion, and $5.6 billion in 2001,
2000 and 1999, respectively. RMI produces loans from 76 offices in Alabama,
Arkansas, Florida, Georgia, Louisiana, North Carolina, South Carolina,
Tennessee, and Texas, and from other correspondent offices located throughout
the United States.
A summary of mortgage servicing rights, which are included in other assets
in the consolidated statement 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.
43
MORTGAGE SERVICING RIGHTS
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year................................ $129,568 $144,276 $141,926
Net additions............................................. 48,384 18,912 37,545
Amortization.............................................. (41,358) (33,620) (35,195)
-------- -------- --------
Balance at end of year...................................... $136,594 $129,568 $144,276
======== ======== ========
SECURITIES GAINS (LOSSES)
In 1999, net gains of $160,000 were reported from sale of available for
sale securities. These gains were primarily related to the sale of government
and agency securities.
Regions recognized net losses, in 2000, of $39.9 million related to the
disposition of securities available for sale. This loss primarily related to the
sale of $1.2 billion in lower-yielding mortgage related securities as part of a
first quarter balance sheet repositioning.
In 2001, Regions reported net security gains of $32.1 million. These gains
resulted from the sale of approximately $554 million of various available for
sale agency, mortgage-related and municipal securities.
OTHER INCOME
Refer to Note O to the consolidated financial statements for an analysis of
the significant components of other income. Fee and commission income declined
in 2001 primarily due to lower revenue from credit card referral fees. In 2000
fee and commission income increased from revisions in charges for certain
services, an increased emphasis on charging customers for services performed and
an increased customer base due to internal growth and acquisitions. During 1999,
fee and commission income was lower than the prior year due to lower safe
deposit fees and credit card fees. These decreases were partially offset by
higher international department income, brokerage fees and automated teller
machine fees.
Insurance premium and commission income increased significantly in 2001,
due to the acquisition of Rebsamen Insurance, Inc. (see Note Q to the
consolidated financial statements). This income results primarily from the sale
of casualty, liability and workers compensation insurance to commercial
customers as well as credit life and accident and health insurance to consumer
loan customers.
In 2001, Regions began operations of a capital markets division. This
division primarily assists existing commercial customer with capital market
products including interest rate swaps, caps and floors. Typically, Regions
enters into offsetting hedge agreements limiting the company's exposure related
to capital market products. Capital market income totaled $8.6 million in 2001.
During 2000, Regions recognized a pre-tax gain of $67.2 million in
connection with the sale of its $278 million credit card portfolio.
In 2001, 2000 and 1999, Regions sold blocks of mortgage servicing assets
that did not fit into Regions' long-term strategy for mortgage servicing
operations. These sales resulted in pre-tax gains of $2.9 million, $19.9 million
and $7.5 million, respectively.
A $1.9 million gain was recognized in 2001, which was associated with the
sale of certain interests in an ATM network.
During 1999, Regions sold its joint venture banking interests, which was
acquired in connection with an acquisition.
44
NON-INTEREST EXPENSE
In the second quarter of 2001, Regions incurred $23.3 million in
non-recurring charges associated with the Morgan Keegan acquisition and with
Regions branch rationalization initiatives. Included in these costs were
severance payments, contract buyouts, lease buyouts, write-off of fixed and
other assets, and certain other conversion costs.
Morgan Keegan and the other acquisitions in 2001 added a significant amount
of non-interest expense to Regions consolidated non-interest expense for 2001.
The following table demonstrates the impact of the non-recurring charges
discussed above and the impact of the expenses added by the 2001 acquisitions on
each of the components of non-interest expense.
NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31, 2001
LESS:
LESS: EXPENSES
NON- ADDED
AS RECURRING BY AS
REPORTED CHARGES ACQUISITIONS ADJUSTED
---------- --------- ------------ ----------
(IN THOUSANDS)
Salaries and employee benefits..................... $ 879,688 $ 8,607 $262,858 $ 608,223
Net occupancy expense.............................. 86,901 242 22,780 63,879
Furniture and equipment expense.................... 87,727 12 1,056 86,659
Other expenses..................................... 469,709 14,431 65,350 389,928
---------- ------- -------- ----------
Total.................................... $1,524,025 $23,292 $352,044 $1,148,689
========== ======= ======== ==========
Total non-interest expense increased $402.8 million or 36% in 2001 on an as
reported basis. On an as adjusted basis, which excludes the non-recurring
charges and the non-interest expenses added by the 2001 acquisitions, total
non-interest expense increased $27.5 million or 2.5%.
SALARIES AND EMPLOYEE BENEFITS
Total salaries and benefits increased 49% in 2001, 7% in 2000 and 4% in
1999. The significant increase in 2001 was primarily the result of the
acquisition of Morgan Keegan, Inc., which added 2,307 employees to Regions'
payroll. Included in the 2001 increase is $8.6 million of non-recurring costs
discussed above. The increases in 2000 and 1999, resulted from normal merit and
promotional adjustments, increased incentive payments tied to performance, the
effects of inflation and higher benefit costs.
At December 31, 2001, Regions had 15,921 full-time equivalent employees,
compared to 14,390 at December 31, 2000 and 14,606 at December 31, 1999. The
increase in employees in 2001 resulted primarily from personnel added in
connection with acquisitions.
Salaries, excluding benefits, totaled $533.9 million in 2001, compared to
$433.0 million in 2000 and $410.1 million in 1999. Higher employment levels in
2001, due to acquisitions and increased business activity, resulted in higher
salaries. Increased salaries in 2000 were primarily the result of normal merit
and promotional adjustments.
Regions provides employees who meet established employment requirements
with a benefits package which includes pension, profit sharing, and medical,
life and disability insurance plans. The total cost to Regions for fringe
benefits, including payroll taxes, equals approximately 27% of salaries.
Beginning in 2001, employees could elect to have profit sharing paid in
cash or contributed to their 401(k) plan. The combination of the cash payments
and contributions to employee 401(k) plans was equal to approximately 3% of
after-tax income in 2001 and 5% in 2000 and 1999.
Commissions and incentives expense increased to $204.0 million in 2001,
compared to $46.3 million in 2000 and $53.2 million in 1999. The increase in
commissions and incentives were primarily the result of
45
commissions paid at Morgan Keegan ($141.8 million). At Morgan Keegan,
commissions and incentives are the primary method of compensation, which is
typical in the brokerage and investment banking industry. In general, incentives
continue to be used to reward employees for selling products and services, for
productivity improvements and for achievement of other corporate goals. Regions'
long-term incentive plan provides for the granting of stock options, restricted
stock and performance shares (see Note R to the consolidated financial
statements). The long-term incentive plan is intended to assist the Company in
attracting, retaining, motivating and rewarding employees who make a significant
contribution to the Company's long-term success, and to encourage employees to
acquire and maintain an equity interest in the Company. Regions also uses cash
incentive plans to reward employees for achievement of various goals.
Payroll taxes increased 30% in 2001, 4% in 2000 and 5% in 1999. Increases
in the Social Security tax base, combined with increased salary levels were the
primary reasons for increased payroll taxes.
Group insurance expense increased 47% and 54% in 2001 and 2000,
respectively. These increases were the result of increased levels of covered
employees and higher claims cost. In 1999, as a result of reduced claims costs,
group insurance expense declined 13%.
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 offices throughout
Alabama, Arkansas, Florida, Georgia, Louisiana, North Carolina, South Carolina,
Tennessee, and Texas.
Net occupancy expense increased 23% in 2001 and 15% in 2000 due to
acquisitions, new and acquired branch offices, rising price levels, and
increased business activity. In 1999, occupancy expense declined as costs
savings were realized from certain 1998 acquisitions.
FURNITURE AND EQUIPMENT EXPENSE
Furniture and equipment expense increased 18% in 2001, 3% in 2000, and 5%
in 1999. These increases resulted from acquisitions, rising price levels,
expenses related to equipment for new branch offices, and increased depreciation
and service contract expenses associated with other new back office and branch
equipment.
OTHER EXPENSES
Refer to Note O to the consolidated financial statements for an analysis of
the significant components of other expense. Increases in this category of
expense generally resulted from acquisitions, expanded programs, increased
business activity and rising price levels.
Other non-credit losses increased in 2001 as well as in 2000, but declined
in 1999. Other non-credit losses primarily include charges for items unrelated
to the extension of credit such as fraud losses, litigation losses, write-downs
of other real estate, insurance claims and miscellaneous losses. In 2001, other
expenses included $14.4 million of non-recurring costs previously discussed.
Amortization of excess purchase price increased significantly in 2001. This
increase is due to higher levels of excess purchase price, which was recorded in
connection with the 2001 acquisitions.
Amortization of mortgage servicing rights increased in 2001 and 1999, but
declined in 2000. Accelerated amortization rates due to the low interest rate
environment and increased prepayments of the underlying mortgages combined with
the retention of servicing rights on much of Regions mortgage subsidiary's
production resulted in additional amortization expense in 2001 and 1999.
Mortgage servicing rights amortization expense declined in 2000 due to slower
prepayment activity on the underlying mortgages than in other years.
46
Included in the other expenses for 2001 is a $2.5 million write-down of
mortgage servicing rights, recognized as a result of impairment of mortgage
serving assets due to increased prepayments of mortgage loans.
Gains or losses on sales of mortgages result from changes in the fair
market value of mortgages held in inventory while awaiting sale to long-term
investors. Purchased commitments covering the sale of mortgages held in
inventory are used to mitigate market losses. (See Note M to the consolidated
financial statements for additional information.)
The increase in other miscellaneous expenses in 2001 resulted primarily
from increases in travel, insurance costs, safe keeping fees, and equity asset
line origination costs paid to third parties.
APPLICABLE INCOME TAX
Regions' provision for income taxes decreased 2.4% in 2001. This decrease
was caused primarily by a 3.2% decline in income before taxes. The Company's
effective income tax rates for 2001, 2000, and 1999 were 29.1%, 28.9% and 33.1%,
respectively. The effective tax rate increased slightly in 2001, primarily due
to certain non-deductible expenses associated with the acquisition of Morgan
Keegan.
During the fourth quarter of 2000, Regions recapitalized a mortgage-related
subsidiary by raising Tier 2 capital, which resulted in a reduction in taxable
income of that subsidiary attributable to Regions. The reduction in the taxable
income of this subsidiary attributable to Regions is expected to result in a
lower effective tax rate applicable to the consolidated taxable income before
taxes of Regions for future periods. The impact, on Regions' effective tax rate
applicable to consolidated income before taxes, of the reduction in the
subsidiary's taxable income attributable to Regions will, however, depend on a
number of factors, including, but not limited to, the amount of assets in the
subsidiary, the yield of the assets in the subsidiary, the cost of funding the
subsidiary, possible loan losses in the subsidiary, the level of expenses of the
subsidiary, the level of income attributable to obligations of states and
political subdivisions, and various other factors. Note P to the consolidated
financial statements provides additional information about the provision for
income taxes.
Regions' 1998, 1999, 2000 and 2001 consolidated federal income tax returns
are open for examination. From time to time Regions engages in business
strategies that may also have an effect on its tax liabilities. While the
Company has obtained the opinion of advisors that the tax aspects of these
strategies should prevail, examination of Regions' income tax returns or changes
in tax law may impact the tax benefits of these strategies. Regions believes
adequate provisions for income tax have been recorded for all years open for
review.
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 planning strategies to maximize
realization of the deferred tax asset. Management believes that the subsidiaries
will generate sufficient operating earnings to realize the deferred tax
benefits.
EFFECTS OF INFLATION
The majority of assets and liabilities of a financial institution are
monetary in nature; therefore, a financial institution differs greatly from most
commercial and industrial companies, which have significant investments in fixed
assets or inventories. However, inflation does have an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio. Inflation also affects other expenses which
tend to rise during periods of general inflation.
Management believes the most significant impact of inflation on financial
results is the Company's ability to react to changes in interest rates. As
discussed previously, management is attempting to maintain an essentially
balanced position between rate sensitive assets and liabilities in order to
protect net interest income from being affected by wide interest rate
fluctuations.
47
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to page 38 through 39 "Market Risk -- Interest Rate
Sensitivity" and to pages 39 through 40 "Forward Looking Statements" included in
Management's Discussion and Analysis under Item 7 of this Annual Report on Form
10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent auditors of
Regions Financial Corporation and subsidiaries are set forth in the pages listed
below.
Report of Independent Auditors.............................. 49
Consolidated Statements of Condition -- December 31, 2001
and 2000.................................................. 50
Consolidated Statements of Income -- Years ended December
31, 2001, 2000 and 1999................................... 51
Consolidated Statements of Cash Flows -- Years ended
December 31, 2001, 2000, and 1999......................... 52
Consolidated Statements of Changes in Stockholders'
Equity -- Years ended December 31, 2001, 2000 and 1999.... 53
Notes to Consolidated Financial Statements -- December 31,
2001...................................................... 55
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
48
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Regions Financial Corporation
We have audited the accompanying consolidated statements of condition of
Regions Financial Corporation and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Regions
Financial Corporation and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Birmingham, Alabama
February 22, 2002
49
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(DOLLAR AMOUNTS IN
THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and due from banks..................................... $ 1,239,598 $ 1,210,872
Interest-bearing deposits in other banks.................... 667,186 3,246
Securities held to maturity (aggregate estimated market
value of $34,054 in 2001 and $3,536,283 in 2000).......... 34,050 3,539,202
Securities available for sale............................... 7,813,109 5,454,969
Trading account assets...................................... 741,896 13,437
Mortgage loans held for sale................................ 890,193 222,902
Federal funds sold and securities purchased under agreements
to resell................................................. 92,543 95,550
Margin receivables.......................................... 523,941 -0-
Loans....................................................... 31,136,977 31,472,656
Unearned income............................................. (251,629) (96,193)
----------- -----------
Loans, net of unearned income...................... 30,885,348 31,376,463
Allowance for loan losses................................... (419,167) (376,508)
----------- -----------
Net loans.......................................... 30,466,181 30,999,955
Premises and equipment...................................... 647,176 598,632
Interest receivable......................................... 249,630 349,637
Due from customers on acceptances........................... 63,854 107,912
Other assets................................................ 1,953,355 1,091,979
----------- -----------
$45,382,712 $43,688,293
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing...................................... $ 5,085,337 $ 4,512,883
Interest-bearing.......................................... 26,462,986 27,509,608
----------- -----------
Total deposits..................................... 31,548,323 32,022,491
Borrowed funds:
Short-term borrowings:
Federal funds purchased and securities sold under
agreements to repurchase............................... 1,803,177 1,996,812
Commercial paper........................................ 27,750 27,750
Other short-term borrowings............................. 2,267,473 1,108,580
----------- -----------
Total short-term borrowings........................ 4,098,400 3,133,142
Long-term borrowings...................................... 4,747,674 4,478,027
----------- -----------
Total borrowed funds............................... 8,846,074 7,611,169
Bank acceptances outstanding................................ 63,854 107,912
Other liabilities........................................... 888,696 488,777
----------- -----------
Total liabilities.................................. 41,346,947 40,230,349
Stockholders' equity:
Preferred stock, par value $1.00 a share:
Authorized 5,000,000 shares............................. -0- -0-
Common stock, par value $.625 a share:
Authorized 500,000,000 shares, Issued 230,081,087 shares
in 2001 and 222,567,831 shares in 2000................. 143,801 139,105
Surplus................................................... 1,252,809 1,058,733
Undivided profits......................................... 2,591,962 2,333,285
Treasury stock, at cost -- 0 shares in 2001 and 2,798,813
shares in 2000.......................................... -0- (67,135)
Unearned restricted stock................................. (11,234) (6,952)
Accumulated other comprehensive income.................... 58,427 908
----------- -----------
Total stockholders' equity......................... 4,035,765 3,457,944
----------- -----------
$45,382,712 $43,688,293
=========== ===========
---------------
( ) Indicates deduction.
See notes to consolidated financial statements.
50
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Interest income:
Interest and fees on loans............................... $2,458,503 $2,588,143 $2,201,786
Interest on securities:
Taxable interest income............................... 445,919 561,974 524,935
Tax-exempt interest income............................ 40,434 41,726 39,484
---------- ---------- ----------
Total interest on securities..................... 486,353 603,700 564,419
Interest on mortgage loans held for sale................. 41,740 34,511 81,002
Interest on margin receivables........................... 20,731 -0- -0-
Income on federal funds sold and securities purchased
under agreements to resell............................ 17,890 5,537 4,256
Interest on time deposits in other banks................. 11,083 1,096 1,741
Interest on trading account assets....................... 19,337 1,256 1,482
---------- ---------- ----------
Total interest income............................ 3,055,637 3,234,243 2,854,686
Interest expense:
Interest on deposits..................................... 1,135,695 1,372,260 1,056,799
Interest on short-term borrowings........................ 188,108 276,243 329,518
Interest on long-term borrowings......................... 306,341 196,943 42,514
---------- ---------- ----------
Total interest expense........................... 1,630,144 1,845,446 1,428,831
---------- ---------- ----------
Net interest income.............................. 1,425,493 1,388,797 1,425,855
Provision for loan losses.................................. 165,402 127,099 113,658
---------- ---------- ----------
Net interest income after provision for loan
losses......................................... 1,260,091 1,261,698 1,312,197
Non-interest income:
Brokerage and investment banking......................... 358,974 41,303 36,983
Trust department income.................................. 56,681 57,675 53,434
Service charges on deposit accounts...................... 267,263 231,670 194,984
Mortgage servicing and origination fees.................. 97,082 82,732 103,118
Securities gains (losses)................................ 32,106 (39,928) 160
Other.................................................... 169,779 227,758 148,462
---------- ---------- ----------
Total non-interest income........................ 981,885 601,210 537,141
Non-interest expense:
Salaries and employee benefits........................... 879,688 588,857 551,569
Net occupancy expense.................................... 86,901 70,675 61,635
Furniture and equipment expense.......................... 87,727 74,213 72,013
Other.................................................... 469,709 387,437 379,095
---------- ---------- ----------
Total non-interest expense....................... 1,524,025 1,121,182 1,064,312
---------- ---------- ----------
Income before income taxes....................... 717,951 741,726 785,026
Applicable income taxes.................................... 209,017 214,203 259,640
---------- ---------- ----------
Net income....................................... $ 508,934 $ 527,523 $ 525,386
========== ========== ==========
Average number of shares outstanding....................... 224,733 220,762 221,617
Average number of shares outstanding, diluted.............. 227,063 221,989 223,967
Per share:
Net income............................................... $ 2.26 $ 2.39 $ 2.37
Net income, diluted...................................... 2.24 2.38 2.35
Cash dividends declared.................................. 1.12 1.08 1.00
See notes to consolidated financial statements.
51
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
Operating activities:
Net income................................................ $ 508,934 $ 527,523 $ 525,386
Adjustments to reconcile net cash provided by operating
activities:
Gain from divestiture of banking interests.............. -0- -0- (18,399)
Gain on sale of credit card portfolio................... -0- (67,220) -0-
Gain on sale of specialty finance division.............. -0- (4,113) -0-
Depreciation and amortization of premises and
equipment............................................. 69,260 63,838 60,424
Provision for loan losses............................... 165,402 127,099 113,658
Net (accretion) of securities........................... (2,224) (3,729) (775)
Amortization of loans and other assets.................. 109,486 78,218 71,148
Accretion of deposits and borrowings.................... 941 714 725
Provision for losses on other real estate............... 1,134 1,184 507
Deferred income taxes................................... 23,690 95,094 10,217
Loss (gain) on sale of premises and equipment........... 2,126 (1,165) (1,416)
Realized security (gains) losses........................ (32,106) 39,928 (160)
(Increase) decrease in trading account assets........... (138,461) 1,106 34,844
(Increase) decrease in mortgages held for sale.......... (663,797) 344,229 360,537
(Increase) decrease in margin receivable................ (823) -0- -0-
Decrease (increase) in interest receivable.............. 102,477 (34,804) (5,648)
(Increase) in other assets.............................. (282,164) (160,253) (72,157)
Increase (decrease) in other liabilities................ 99,140 (59,715) (86,591)
Stock issued to employees under incentive plan.......... -0- 3,088 4,959
Other................................................... 4,872 3,026 2,259
----------- ----------- -----------
Net cash (used) provided by operating activities... (32,113) 954,048 999,518
Investing activities:
Net decrease (increase) in loans.......................... 692,109 (3,112,075) (3,302,893)
Proceeds from sale of credit card portfolio............... -0- 344,785 -0-
Proceeds from sale of specialty finance division.......... -0- 8,063 -0-
Proceeds from sale of securities available for sale....... 553,523 1,332,916 6,711
Proceeds from maturity of securities held to maturity..... 153,581 588,846 454,979
Proceeds from maturity of securities available for sale... 4,577,170 883,401 1,924,258
Purchase of securities held to maturity................... (21,746) (42,467) (1,529,850)
Purchase of securities available for sale................. (3,828,818) (484,469) (3,828,310)
Net (increase) decrease in interest-bearing deposits in
other banks............................................. (120,433) 13,056 158,521
Proceeds from sale of premises and equipment.............. 10,227 86,093 25,625
Purchase of premises and equipment........................ (83,390) (150,044) (111,143)
Net decrease (increase) in customers' acceptance
liability............................................... 44,058 (35,814) (15,052)
Acquisitions net of cash acquired......................... (19,437) 218,764 195,485
----------- ----------- -----------
Net cash provided (used) by investing activities... 1,956,844 (348,945) (6,021,669)
Financing activities:
Net (decrease) increase in deposits....................... (865,960) 1,279,720 794,881
Net (decrease) increase in short-term borrowings.......... (567,108) (4,565,755) 3,111,469
Proceeds from long-term borrowings........................ 1,154,785 3,644,077 3,154,206
Payments on long-term borrowings.......................... (928,961) (917,074) (1,983,385)
Proceeds from recapitalization of subsidiary.............. -0- 150,000 -0-
Net (decrease) increase in bank acceptance liability...... (44,058) 35,814 15,052
Cash dividends............................................ (250,257) (238,447) (221,928)
Purchase of treasury stock................................ (406,733) (149,119) (255,271)
Proceeds from exercise of stock options................... 9,280 2,607 13,676
----------- ----------- -----------
Net cash (used) provided by financing activities... (1,899,012) (758,177) 4,628,700
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents... 25,719 (153,074) (393,451)
Cash and cash equivalents at beginning of year.............. 1,306,422 1,459,496 1,852,947
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 1,332,141 $ 1,306,422 $ 1,459,496
=========== =========== ===========
See notes to consolidated financial statements.
52
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER TREASURY UNEARNED
COMMON UNDIVIDED COMPREHENSIVE STOCK, RESTRICTED
STOCK SURPLUS PROFITS INCOME (LOSS) AT COST STOCK TOTAL
-------- ---------- ---------- ------------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE AT JANUARY 1, 1999.............. $138,316 $1,147,357 $1,729,334 $ 24,952 $(32,603) $ (6,955) $3,000,401
Comprehensive income:
Net income............................ 525,386 525,386
Unrealized losses on available for
sale securities, net of
reclassification adjustment......... (160,052) (160,052)
---------- --------- ----------
Comprehensive income.................. 525,386 (160,052) 365,334
Equity from immaterial poolings of
interests............................. 1,085 12,410 11,417 24,912
Cash dividends declared:
Regions-$1.00 per share............... (221,928) (221,928)
Purchase of treasury stock.............. (255,271) (255,271)
Treasury stock retired relating to
acquisitions accounted for as
purchases............................. (2,786) (156,685) 159,471 -0-
Stock issued for acquisitions........... 2,786 128,735 131,521
Retirement of treasury stock............ (2,331) (126,072) 128,403 -0-
Stock issued to employees under
incentive plan, net................... 68 4,163 (24) 4,207
Stock options exercised................. 759 12,917 13,676
Amortization of unearned restricted
stock................................. 2,260 2,260
-------- ---------- ---------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1999............ $137,897 $1,022,825 $2,044,209 $(135,100) $ -0- $ (4,719) $3,065,112
Comprehensive income:
Net income............................ 527,523 527,523
Unrealized gains on available for sale
securities, net of reclassification
adjustment.......................... 136,008 136,008
---------- --------- ----------
Comprehensive income.................. 527,523 136,008 663,531
Cash dividends declared:
Regions-$1.08 per share............... (238,447) (238,447)
Purchase of treasury stock.............. (149,119) (149,119)
Treasury stock retired relating to
acquisitions accounted for as
purchases............................. (2,342) (79,642) 81,984 -0-
Stock issued for acquisitions........... 3,112 108,545 111,657
Stock issued to employees under
incentive plan, net................... 198 4,638 (5,258) (422)
Stock options exercised................. 240 2,367 2,607
Amortization of unearned restricted
stock................................. 3,025 3,025
-------- ---------- ---------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 2000............ $139,105 $1,058,733 $2,333,285 $ 908 $(67,135) $ (6,952) $3,457,944
Comprehensive income:
Net income............................ 508,934 508,934
Unrealized gains on available for sale
securities, net of reclassification
adjustment.......................... 64,422 64,422
Other comprehensive loss from
derivatives......................... (6,903) (6,903)
---------- --------- ----------
Comprehensive income.................. 508,934 57,519 566,453
Cash dividends declared:
Regions-$1.12 per share............... (250,257) (250,257)
Purchase of treasury stock.............. (406,733) (406,733)
Treasury stock retired relating to
acquisitions accounted for as
purchases............................. (10,317) (463,551) 473,868 -0-
Stock issued for acquisitions........... 14,392 641,929 656,321
Stock issued to employees under
incentive plan, net................... 158 6,881 (8,592) (1,553)
53
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
ACCUMULATED
OTHER TREASURY UNEARNED
COMMON UNDIVIDED COMPREHENSIVE STOCK, RESTRICTED
STOCK SURPLUS PROFITS INCOME (LOSS) AT COST STOCK TOTAL
-------- ---------- ---------- ------------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock options exercised................. 463 8,817 9,280
Amortization of unearned restricted
stock................................. 4,310 4,310
-------- ---------- ---------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 2001............ $143,801 $1,252,809 $2,591,962 $ 58,427 $ -0- $(11,234) $4,035,765
======== ========== ========== ========= ======== ======== ==========
DISCLOSURE OF 2001 RECLASSIFICATION
AMOUNT:
Unrealized holding gains on
available for sale securities
arising during the period................................................. $ 85,291
Less:
Reclassification
adjustment, net of tax, for
net gains realized in net
income.................................................................... 20,869
Other comprehensive loss
from derivatives.......................................................... 6,903
---------
Comprehensive income,
net of taxes of $37,931................................................... $ 57,519
=========
---------------
( ) Indicates deduction.
See notes to consolidated financial statements.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 service 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.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Regions and
its subsidiaries. Significant intercompany balances and transactions have been
eliminated. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the statement of condition dates and revenues and expenses for
the periods shown. Actual results could differ from the estimates and
assumptions used in the consolidated financial statements.
Certain amounts in prior year financial statements have been reclassified
to conform to the current year presentation.
SECURITIES
The Company's policies for investments in debt and equity securities are as
follows. Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designations as of the
date of each statement of condition.
Debt securities are classified as securities held to maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Securities held to maturity are stated at amortized cost.
Debt securities not classified as securities held to maturity or trading
account assets, and marketable equity securities not classified as trading
account assets, are classified as securities available for sale. Securities
available for sale are stated at estimated fair value, with unrealized gains and
losses, net of taxes, reported as a component of other comprehensive income.
The amortized cost of debt securities classified as securities held to
maturity or securities available for sale is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security, using the
effective yield method. Such amortization or accretion is included in interest
on securities. Realized gains and losses are included in securities gains
(losses). The cost of the securities sold is based on the specific
identification method.
In January 2001, upon adoption of FAS 133, Regions elected to reclassify
$3.4 billion of securities from the held to maturity category to the available
for sale category. At the time of transfer, the unrealized loss associated with
the securities reclassified totaled $2.1 million.
TRADING ACCOUNT ASSETS
Trading account assets, which are held for the purpose of selling at a
profit, consist of debt and marketable equity securities and are carried at
estimated market value. Gains and losses, both realized and unrealized, are
included in brokerage income. Trading account gains totaled $21.6 million,
$534,000 and $1.2 million in 2001, 2000 and 1999, respectively.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale have been designated as one of the hedged
items in a fair value hedging relationship under FAS 133. Therefore, to the
extent changes in fair value are attributable to the interest rate
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk being hedged, the change in fair value is recognized in income as an
adjustment to the carrying amount of mortgage loans held for sale. Otherwise,
mortgage loans held for sale are accounted for under the lower of cost or market
method. The fair values are based on quoted market prices of similar
instruments, adjusted for differences in loan characteristics. Gains and losses
on mortgages held for sale are included in other expense.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are generally treated as collateralized financing
transactions and are recorded at market value plus accrued interest. It is
Regions' policy to take possession of securities purchased under resell
agreements.
LOANS
Interest on loans is generally accrued based upon the principal amount
outstanding.
Through provisions charged directly to operating expense, Regions has
established an allowance for loan losses. This allowance is reduced by actual
loan losses and increased by subsequent recoveries, if any.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, historical loan loss experience, current economic conditions,
collateral values of properties securing loans, volume, growth, quality and
composition of the loan portfolio and other relevant factors. Unfavorable
changes in any of these, or other factors, or the availability of new
information, could require that the allowance for loan losses be increased in
future periods. The method used to determine the amount of loss inherent in the
loan portfolio and thereby assess the adequacy of the recorded balance of the
allowance for loan losses involves identifying portfolios of loans with similar
characteristics for which estimates of inherent probable losses can be made. The
estimates are based on historical loss factors as adjusted for current business
and economic conditions. The loss factors are applied to the respective
portfolios in order to determine the overall allowance adequacy.
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.
On loans which are considered impaired, 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.
MARGIN RECEIVABLES
Margin receivables, which represent funds advanced to broker/dealer
customers for the purchase of securities, are carried at cost and secured by
certain marketable securities in the customer's brokerage account.
PREMISES AND EQUIPMENT
Premises and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation is
computed using the straight-line and declining-balance methods over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the estimated useful lives of the improvements (or
the terms of the leases if shorter).
Estimated useful lives generally are as follows:
Premises and leasehold improvements......................... 10-40 years
Furniture and equipment..................................... 3-12 years
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets, consisting of (1) the excess of cost over the fair value
of net assets of acquired businesses (excess purchase price) and (2) amounts
capitalized for the right to service mortgage loans, are included in other
assets. The excess of cost over the fair value of net assets of acquired
businesses, which totaled $1,030,441,000 (net of accumulated amortization of
$197.8 million) at December 31, 2001, and $473,807,000 (net of accumulated
amortization of $145.7 million) at December 31, 2000, is being amortized over
periods of 12 to 25 years, principally using the straight-line method of
amortization.
Amounts capitalized for the right to service mortgage loans, which totaled
$136,594,000 at December 31, 2001 and $129,568,000 at December 31, 2000, are
being amortized over the estimated remaining servicing life of the loans,
considering appropriate prepayment assumptions. The estimated fair values of
capitalized mortgage servicing rights were $202 million and $266 million at
December 31, 2001 and 2000, respectively. The fair value of mortgage servicing
rights is calculated by discounting estimated future cash flows from the
servicing assets, using market discount rates, and using expected future
prepayment rates. In 2001, 2000 and 1999, Regions capitalized $48.8 million,
$26.9 million and $37.5 million in mortgage servicing rights, respectively. In
2001, 2000 and 1999, Regions' amortization of mortgage servicing rights was
$41.4 million, $33.6 million and $35.2 million, respectively. Intangible assets
are evaluated periodically for impairment. For purposes of evaluating
impairment, the Company stratifies its mortgage servicing portfolio on the basis
of certain risk characteristics including loan type and note rate. Changes in
interest rates, prepayment speeds, or other factors, could result in impairment
of the servicing asset and a charge against earnings.
The Company's excess purchase price is reviewed periodically 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 the business unit, or other factors could result in a
decline in the projected fair value. If the projected fair value is less than
the carrying amount, a loss would be recognized to reduce the carrying amount to
fair value.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative financial instruments to manage interest
rate risk, facilitate asset/liability management strategies, and manage other
exposures. All derivative financial instruments are recognized on the statement
of condition as assets or liabilities at fair value as required by FAS 133.
Derivative financial instruments that qualify under FAS 133 in a hedging
relationship are designated, based on the exposure being hedged, as either fair
value or cash flow hedges. Fair value hedge relationships mitigate exposure to
the change in fair value of an asset, liability or firm commitment. Under the
fair value hedging model, gains or losses attributable to the change in fair
value of the derivative instrument, as well as the gains and losses attributable
to the change in fair value of the hedged item, are recognized in earnings in
the period in which the change in fair value occurs.
Cash flow hedge relationships mitigate exposure to the variability of
future cash flows or other forecasted transactions. Under the cash flow hedging
model, the effective portion of the gain or loss related to the derivative
instrument is recognized as a component of other comprehensive income. The
ineffective portion of the gain or loss related to the derivative instrument, if
any, is recognized in earnings during the period of change. Amounts recorded in
other comprehensive income are amortized to earnings in the period or periods
during which the hedged item impacts earnings. For derivative financial
instruments not designated as a fair value or cash flow hedges, gains and losses
related to the change in fair value are recognized in earnings during the period
of change in fair value.
The Company formally documents all hedging relationships between hedging
instruments and the hedged item, as well as its risk management objective and
strategy for entering various hedge transactions. The Company performs an
assessment, at inception and on an ongoing basis, whether the hedging
relationship has
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been highly effective in offsetting changes in fair values or cash flows of
hedged items and whether they are expected to continue to be highly effective in
the future.
PENSION, PROFIT-SHARING AND 401(K) PLANS
Regions has pension, profit-sharing and 401(k) plans covering substantially
all employees. Annual contributions to the profit-sharing plans are determined
at the discretion of the Board of Directors. Regions' contributions to the
401(k) plan are determined using a multiple of the employee's contribution to
the plan, based on the employee's length of service. The 401(k) match is
invested in Regions' common stock. Pension expense is computed using the
projected unit credit (service prorate) actuarial cost method and the pension
plan is funded using the aggregate actuarial cost method. Annual contributions
to all the plans do not exceed the maximum amounts allowable for federal income
tax purposes.
INCOME TAXES
Regions and its subsidiaries file a consolidated federal income tax return.
Regions accounts for income taxes using the liability method pursuant to
Financial Accounting Standards Board Statement 109, "Accounting for Income
Taxes." Under this method, the Company's deferred tax assets and liabilities
were determined by applying federal and state tax rates currently in effect to
its cumulative temporary book/tax differences. Temporary differences are
differences between financial statement carrying amounts and the corresponding
tax bases of assets and liabilities. Deferred taxes are provided as a result of
such temporary differences.
From time to time the company engages in business strategies that may also
have an effect on its tax liabilities. If the tax effects of a strategy are
significant, the company's practice is to obtain the opinion of advisors that
the tax effects of such strategies should prevail if challenged.
PER SHARE AMOUNTS
Earnings per share computations are based upon the weighted average number
of shares outstanding during the periods. Diluted earnings per share
computations are based upon the weighted average number of shares outstanding
during the period plus the dilutive effect of outstanding stock options and
stock performance awards.
TREASURY STOCK
The purchase of the Company's common stock is recorded at cost. At the date
of retirement or subsequent reissue, the treasury stock account is reduced by
the cost of such stock.
STATEMENT OF CASH FLOWS
Cash equivalents include cash and due from banks and federal funds sold and
securities purchased under agreements to resell. Regions paid $1.7 billion in
2001, $1.8 billion in 2000, and $1.4 billion in 1999 for interest on deposits
and borrowings. Income tax payments totaled $152 million for 2001, $278 million
for 2000, and $216 million for 1999. Loans transferred to other real estate
totaled $74 million in 2001, $58 million in 2000, and $30 million in 1999. The
securitization of loans during 1999 resulted in the transfer of $1.3 billion
from loans to securities available for sale. In December 2001, Regions retired
1.8 million shares of treasury stock, with a cost of $52.5 million.
Additionally, in December 1999, Regions retired 6.2 million shares of treasury
stock, with a cost of $212.5 million.
NOTE B. RESTRICTIONS ON CASH AND DUE FROM BANKS
Regions' subsidiary banks are required to maintain reserve balances with
the Federal Reserve Bank. The average amount of the reserve balances maintained
for the year ended December 31, 2001 and 2000 was approximately $9.4 million and
$7.6 million, respectively.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C. SECURITIES
The amortized cost and estimated fair value of securities held to maturity
and securities available for sale at December 31, 2001, are as follows:
DECEMBER 31, 2001
-------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
SECURITIES HELD TO MATURITY:
U.S. Treasury & Federal agency securities....... $ 30,541 $ -0- $ (79) $ 30,462
Obligations of states and political
subdivisions.................................. 3,131 83 -0- 3,214
Other securities................................ 378 -0- -0- 378
---------- -------- ----- ----------
Total................................. $ 34,050 $ 83 $ (79) $ 34,054
========== ======== ===== ==========
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury & Federal agency securities....... $ 735,736 $ 5,722 $ -0- $ 741,458
Obligations of states and political
subdivisions.................................. 694,459 17,107 (19) 711,547
Mortgage backed securities...................... 5,983,300 82,079 (157) 6,065,222
Other securities................................ 9,181 24 -0- 9,205
Equity securities............................... 285,817 65 (205) 285,677
---------- -------- ----- ----------
Total................................. $7,708,493 $104,997 $(381) $7,813,109
========== ======== ===== ==========
The cost and estimated fair value of securities held to maturity and
securities available for sale at December 31, 2001 by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
DECEMBER 31, 2001
-----------------------
ESTIMATED
FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
SECURITIES HELD TO MATURITY:
Due in one year or less..................................... $ 10,463 $ 10,398
Due after one year through five years....................... 20,433 20,482
Due after five years through ten years...................... 2,532 2,564
Due after ten years......................................... 622 610
---------- ----------
Total............................................. $ 34,050 $ 34,054
========== ==========
SECURITIES AVAILABLE FOR SALE:
Due in one year or less..................................... $ 81,535 $ 82,512
Due after one year through five years....................... 774,806 786,348
Due after five years through ten years...................... 386,025 392,270
Due after ten years......................................... 197,010 201,080
Mortgage backed securities.................................. 5,983,300 6,065,222
Equity securities........................................... 285,817 285,677
---------- ----------
Total............................................. $7,708,493 $7,813,109
========== ==========
Proceeds from sales of securities available for sale in 2001, were $554
million. Gross realized gains and losses were $36.7 million and $4.6 million,
respectively. Proceeds from sales of securities available for sale in 2000 were
$1.3 billion, with gross realized gains and losses of $768,000 and $40.7
million, respectively.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Proceeds from sales of securities available for sale in 1999 were $6.7 million
with gross realized gains and losses of $167,000 and $7,000, respectively.
In 2001, upon adoption of FAS 133, Regions elected to reclassify a
significant portion of securities from held to maturity category to available
for sale category.
The amortized cost and estimated fair value of securities held to maturity
and securities available for sale at December 31, 2000, are as follows:
DECEMBER 31, 2000
-------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
SECURITIES HELD TO MATURITY:
U.S. Treasury & Federal agency securities.......... $2,573,461 $ 507 $(12,733) $2,561,235
Obligations of states and political subdivisions... 670,252 11,220 -0- 681,472
Mortgage backed securities......................... 295,477 656 (2,569) 293,564
Other securities................................... 12 -0- -0- 12
---------- ------- -------- ----------
Total.................................... $3,539,202 $12,383 $(15,302) $3,536,283
========== ======= ======== ==========
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury & Federal agency securities.......... $ 766,079 $19,466 $ (8) $ 785,537
Obligations of states and political subdivisions... 139,814 2,374 (115) 142,073
Mortgage backed securities......................... 4,276,363 1,651 (22,581) 4,255,433
Other securities................................... 1,262 34 (2) 1,294
Equity securities.................................. 270,018 614 -0- 270,632
---------- ------- -------- ----------
Total.................................... $5,453,536 $24,139 $(22,706) $5,454,969
========== ======= ======== ==========
Securities with carrying values of $5,466,650,000 and $6,108,564,000 at
December 31, 2001, and 2000, respectively, were pledged to secure public funds,
trust deposits and certain borrowing arrangements.
NOTE D. LOANS
The loan portfolio at December 31, 2001 and 2000, consisted of the
following:
DECEMBER 31
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS)
Commercial.................................................. $ 9,912,027 $ 9,070,249
Real estate-construction.................................... 3,673,189 3,279,037
Real estate-mortgage........................................ 11,315,761 13,129,200
Consumer.................................................... 6,236,000 5,994,170
----------- -----------
31,136,977 31,472,656
Unearned income............................................. (251,629) (96,193)
----------- -----------
Total............................................. $30,885,348 $31,376,463
=========== ===========
Directors and executive officers of Regions and its principal subsidiaries,
including the directors' and officers' families and affiliated companies, are
loan and deposit customers and have other transactions with Regions in the
ordinary course of business. Total loans to these persons (excluding loans which
in the aggregate do not exceed $60,000 to any such person) at December 31, 2001,
and 2000, were approximately $102 million and $220 million respectively. During
2001, $19 million of new loans were made and repayments totaled $137 million.
These loans were made in the ordinary course of business and on substantially
the same
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other persons and involve no unusual risk
of collectibility.
Loans sold with recourse totaled $1.1 billion and $1.5 billion at December
31, 2001, and 2000, respectively.
The loan portfolio is diversified geographically, primarily within Alabama,
Arkansas, Louisiana, Georgia, North Carolina, South Carolina, northwest and
central Florida, Texas, and Tennessee.
The recorded investment in impaired loans was $180 million at December 31,
2001, and $129 million at December 31, 2000. The average amount of impaired
loans during 2001 was $171 million.
In March 2000, Regions completed the sale of its $278 million credit card
portfolio. As a result of the transaction, Regions recognized a $67.2 million
pre-tax gain ($44.0 million after tax), which is included in other non-interest
income on the consolidated statement of income. For a summary of non-interest
income, refer to Note O of the consolidated financial statements.
NOTE E. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Balance at beginning of year................................ $ 376,508 $ 338,375 $ 315,412
Allowance of purchased institutions at acquisition date... 4,098 5,142 8,493
Provision charged to operating expense.................... 165,402 127,099 113,658
Loan losses:
Charge-offs............................................... (169,049) (131,746) (129,237)
Recoveries................................................ 42,208 37,638 30,049
--------- --------- ---------
Net loan losses........................................... (126,841) (94,108) (99,188)
--------- --------- ---------
Balance at end of year...................................... $ 419,167 $ 376,508 $ 338,375
========= ========= =========
NOTE F. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Land........................................................ $ 129,011 $ 122,862
Premises.................................................... 602,798 556,355
Furniture and equipment..................................... 473,500 393,716
Leasehold improvements...................................... 55,342 55,668
---------- ----------
1,260,651 1,128,601
Allowances for depreciation and amortization................ (613,475) (529,969)
---------- ----------
Total............................................. $ 647,176 $ 598,632
========== ==========
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net occupancy expense is summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Gross occupancy expense..................................... $96,837 $79,245 $69,853
Less rental income.......................................... 9,936 8,570 8,218
------- ------- -------
Net occupancy expense..................................... $86,901 $70,675 $61,635
======= ======= =======
NOTE G. OTHER REAL ESTATE
Other real estate acquired in satisfaction of indebtedness ("foreclosure")
is carried in other assets at the lower of the recorded investment in the loan
or the estimated net realizable value of the collateral. Other real estate
totaled $40,872,000 at December 31, 2001, and $28,443,000 at December 31, 2000.
Gain or loss on the sale of other real estate is included in other expense.
NOTE H. DEPOSITS
The following schedule presents the detail of interest-bearing deposits:
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS)
Interest-bearing transaction accounts....................... $ 843,749 $ 438,644
Interest-bearing accounts in foreign office................. 3,252,853 3,627,365
Savings accounts............................................ 1,317,435 1,239,748
Money market savings accounts............................... 9,558,502 7,469,967
Certificates of deposit ($100,000 or more).................. 3,252,239 4,153,204
Time deposits ($100,000 or more)............................ 367,310 508,168
Other interest-bearing deposits............................. 7,870,898 10,072,512
----------- -----------
Total............................................. $26,462,986 $27,509,608
=========== ===========
The following schedule details interest expense on deposits:
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Interest-bearing transaction accounts...................... $ 10,831 $ 16,388 $ 19,343
Interest-bearing accounts in foreign office................ 180,375 207,822 71,920
Savings accounts........................................... 14,106 20,051 23,743
Money market savings accounts.............................. 187,299 219,133 225,327
Certificates of deposit ($100,000 or more)................. 235,959 271,605 226,146
Other interest-bearing deposits............................ 507,125 637,261 490,320
---------- ---------- ----------
Total............................................ $1,135,695 $1,372,260 $1,056,799
========== ========== ==========
The aggregate amount of maturities of all time deposits in each of the next
five years is as follows: 2002-$4.9 billion; 2003-$3.5 billion; 2004-$589.1
million; 2005-$656.7 million; and 2006-$210.6 million.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I. BORROWED FUNDS
Following is a summary of short-term borrowings:
DECEMBER 31
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Federal funds purchased.................................... $1,523,666 $1,906,781 $4,596,540
Securities sold under agreements to repurchase............. 279,511 90,031 1,018,073
Federal Home Loan Bank structured notes.................... 1,100,000 1,100,000 950,000
Federal Home Loan Bank advances............................ -0- -0- 600,000
Notes payable to unaffiliated banks........................ 151,300 7,800 400,000
Commercial paper........................................... 27,750 27,750 56,750
Treasury tax and loan note................................. -0- -0- 2,229
Due to brokerage customers................................. 932,781 -0- -0-
Short sale liability....................................... 83,392 780 1,393
---------- ---------- ----------
Total............................................ $4,098,400 $3,133,142 $7,624,985
========== ========== ==========
DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Maximum amount outstanding at any month-end:
Federal funds purchased and securities sold under
agreements to repurchase.............................. $2,817,611 $4,460,134 $5,614,613
Aggregate short-term borrowings.......................... 5,160,424 5,722,597 8,475,717
Average amount outstanding (based on average of daily
balances)................................................ 4,132,264 4,408,689 6,502,860
Weighted average interest rate at year end................. 3.2% 6.5% 5.6%
Weighted average interest rate on amounts outstanding
during the year (based on average of daily balances)..... 4.6% 6.3% 5.1%
Federal funds purchased and securities sold under agreements to repurchase
had weighted average maturities of two, two, and ten days at December 31, 2001,
2000 and 1999, respectively. Weighted average rates on these dates were 1.7%,
6.5%, and 5.4%, respectively.
Federal Home Loan Bank structured notes have an original stated maturity
ranging from two to five years but are callable within one year. The structured
notes had weighted average rates of 6.4%, 6.4% and 5.0% at December 31, 2001,
2000 and 1999, respectively.
The Federal Home Loan Bank advances represent borrowings with original
stated maturities of less than one year. These notes had a weighted average
interest rate on December 31, 1999, of 6.1%. No Federal Home Loan Bank advances,
with an original maturity of less than one year, were outstanding as of December
31, 2001 or 2000.
Regions brokerage subsidiary maintains certain lines of credit with
unaffiliated banks that provides for maximum borrowings of $505 million. As of
December 31, 2001, $151.3 million was outstanding under these agreements with a
weighted average interest rate of 1.9%.
Commercial paper maturities ranged from 4 to 714 days at December 31, 2001,
from 218 to 718 days at December 31, 2000 and from 4 to 689 days at December 31,
1999. Weighted average maturities were 392, 422 and 481 days at December 31,
2001, 2000 and 1999, respectively. The weighted average interest rates on these
dates were 5.5%, 6.5% and 5.8%, respectively.
Through its brokerage subsidiary, Regions maintains a due to brokerage
customer position, which represents uninvested funds in the customers' brokerage
account. At December 31, 2001, these funds had an interest rate of 2.3%.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The short-sale liability represents Regions' trading obligation to deliver
certain securities at a predetermined date and price. These securities had
weighted average interest rates of 4.1%, 5.4% and 4.4% at December 31, 2001,
2000 and 1999, respectively.
Long-term borrowings consist of the following:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
7.80% subordinated notes.................................... $ 75,000 $ 75,000
7.65% subordinated notes.................................... -0- 25,000
7.75% subordinated notes.................................... 100,000 100,000
7.00% subordinated notes.................................... 500,000 -0-
Federal Home Loan Bank structured notes..................... 3,555,000 3,555,000
Federal Home Loan Bank advances............................. 150,520 656,382
Trust preferred securities.................................. 291,838 -0-
Industrial development revenue bonds........................ 2,400 2,600
Other notes payable......................................... 72,916 64,045
---------- ----------
Total............................................. $4,747,674 $4,478,027
========== ==========
In March 2001, Regions issued $500 million of 7.00% subordinated notes, due
March 1, 2011. The $25 million of 7.65% subordinated notes originally issued in
July 1994, matured in August 2001. In September 1994, Regions issued $100
million of 7.75% subordinated notes, due September 15, 2024. The $100 million of
7.75% subordinated notes may be redeemed in whole or in part at the option of
the holders thereof on September 15, 2004, at 100% of the principal amount to be
redeemed, together with accrued interest. In December 1992, Regions issued $75
million of 7.80% subordinated notes, due December 1, 2002. All issues of these
notes are subordinated and subject in right of payment of principal and interest
to the prior payment in full of all senior indebtedness of the Company,
generally defined as all indebtedness and other obligations of the Company to
its creditors, except subordinated indebtedness. Payment of the principal of the
notes may be accelerated only in the case of certain events involving
bankruptcy, insolvency proceedings or reorganization of the Company. The
subordinated notes described above, qualify as "Tier 2 capital" under Federal
Reserve guidelines.
Federal Home Loan Bank structured notes have a stated original ten year
maturity but are callable between one to two years. The structured notes had a
weighted average interest rate of 6.0% at December 31, 2001.
Federal Home Loan Bank advances represent borrowings with fixed interest
rates ranging from 4.8% to 8.1% and with maturities of one to nineteen years.
These borrowings, as well as the short-term borrowings from the Federal Home
Loan Bank, are secured by Federal Home Loan Bank stock (carried at cost of
$244.0 million) and by first mortgage loans on one-to-four family dwellings held
by the bank subsidiary (approximately $3.8 billion at December 31, 2001). The
maximum amount that could be borrowed from Federal Home Loan Banks under the
current borrowing agreements and without further investment in Federal Home Loan
Bank stock is approximately $7 billion.
In February 2001, Regions issued $288 million of 8.00% trust preferred
securities. These securities have a 30-year term, are callable in five years and
qualify as Tier 1 Capital. In addition, Regions assumed $4 million of trust
preferred securities in connection with an acquisition.
The industrial development revenue bonds mature on July 1, 2008, with
principal of $200,000 payable annually and interest at a tax effected prime rate
payable monthly.
Other notes payable at December 31, 2001, had a weighted average interest
rate of 7.5% and a weighted average maturity of 10.0 years.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate amount of maturities of all long-term debt in each of the
next five years is as follows: 2002-$188,455,571; 2003-$2,801,846;
2004-$101,619,721; 2005-$1,396,407; 2006-$1,281,215.
Substantially all consolidated net assets are owned by the subsidiaries and
the primary source of operating cash available to Regions is provided by
dividends from the subsidiaries. Statutory limits are placed on the amount of
dividends the subsidiary bank can pay without prior regulatory approval. In
addition, regulatory authorities require the maintenance of minimum capital to
asset ratios at banking subsidiaries. At December 31, 2001, the banking
subsidiary could pay approximately $265 million in dividends without prior
approval.
Management believes that none of these dividend restrictions will
materially affect Regions' dividend policy. In addition to dividend
restrictions, federal statutes also prohibit unsecured loans from banking
subsidiaries to the parent company. Because of these limitations, substantially
all of the net assets of Regions' subsidiaries are restricted, except for the
amount which can be paid to the parent in the form of dividends.
NOTE J. EMPLOYEE BENEFIT PLANS
Regions has a defined benefit pension plan covering substantially all
employees employed at or before December 31, 2000. After January 1, 2001, the
plan is closed to new entrants. Benefits under the plan are based on years of
service and the employee's highest five years of compensation during the last
ten years of employment. Regions' funding policy is to contribute annually at
least the amount required by IRS minimum funding standards. Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
The Company also sponsors a supplemental executive retirement program,
which is a non-qualified plan that provides certain senior executive officers
defined pension benefits in relation to their compensation.
The following table sets forth the plans' funded status, using a September
30 measurement date, and amounts recognized in the consolidated statement of
condition:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Projected benefit obligation, beginning of year............. $214,180 $199,116
Service cost................................................ 9,924 8,861
Interest cost............................................... 17,236 15,557
Actuarial losses............................................ 19,654 1,166
Benefit payments............................................ (11,595) (10,520)
-------- --------
Projected benefit obligation, end of year................... $249,399 $214,180
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year................ $277,076 $257,180
Actual return on plan assets................................ (23,857) 30,017
Company contributions....................................... 551 399
Benefit payments............................................ (11,595) (10,520)
-------- --------
Fair value of plan assets, end of year...................... $242,175 $277,076
======== ========
Funded status of plan....................................... $ (7,224) $ 62,896
Unrecognized net actuarial loss (gain)...................... 44,358 (25,168)
Unamortized prior service cost.............................. (3,268) (3,875)
-------- --------
Prepaid pension cost........................................ $ 33,866 $ 33,853
======== ========
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension cost included the following components:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Service cost-benefits earned during the period......... $ 9,924 $ 8,861 $ 10,572
Interest cost on projected benefit obligation.......... 17,236 15,557 14,791
Expected (return) on plan assets....................... (25,845) (24,003) (22,026)
Net (deferral)......................................... (777) (1,083) (1,146)
-------- -------- --------
Net periodic pension expense (benefit)................. $ 538 $ (668) $ 2,191
======== ======== ========
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.75% and 4.50%, respectively, at December 31,
2001; 8.25% and 4.50%, respectively, at December 31, 2000; and 8.00% and 4.50%,
respectively, at December 31, 1999. The expected long-term rate of return on
plan assets was 9.5% at December 31, 2001, 2000, and 1999.
Contributions to employee profit sharing plans totaled $28,125,000 and
$24,300,000 for 2000 and 1999, respectively. Beginning with the 2001 plan year,
Regions' employees could elect to receive their profit sharing contribution as a
cash payment or defer it into their 401(k) account. Contributions in 2001
totaled $16,422,0000, with $9,357,000 paid in cash and $7,065,000 deferred into
the 401(k) plan.
Beginning in 2001, Regions modified the existing 401(k) plan to incorporate
a company match of employee contributions. This match, ranging from 150% to 200%
of the employee contribution (up to 3% of annual salary), is based on time of
service and is invested in Regions common stock. In 2001, Regions contribution
to the 401(k) plan on behalf of employees totaled $14.3 million.
The 2000 contribution to the employee stock ownership plan totaled
$3,125,000 compared to $2,700,000 in 1999. Contributions were used to purchase
Regions common stock for the benefit of participating employees. The employee
stock ownership plan was discontinued effective January 1, 2001.
Contributions to the employee stock purchase plan in 2000 and 1999 were
$2,197,000 and $2,171,000, respectively. The employee stock purchase plan was
discontinued effective January 1, 2001.
Regions sponsors a defined benefit postretirement health care plan that
covers certain retired employees. Currently the Company pays a portion of the
costs of certain health care benefits for all eligible employees that retired
before January 1, 1989. No health care benefits are provided for employees
retiring at normal retirement age after December 31, 1988. For employees
retiring before normal retirement age, the Company currently pays a portion
(based upon length of active service at the time of retirement) of the costs of
certain health care benefits until the retired employee becomes eligible for
Medicare. The plan is contributory and contains other cost-sharing features such
as deductibles and co-payments. Retiree health care benefits, as well as similar
benefits for active employees, are provided through a group insurance program in
which premiums are based on the amount of benefits paid. The Company's policy is
to fund the Company's share of the cost of health care benefits in amounts
determined at the discretion of management.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plan's funded status, using a September
30 measurement date, and amounts recognized in the consolidated statement of
condition:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Projected benefit obligation, beginning of year............. $ 18,265 $ 15,494
Service cost................................................ 1,367 1,106
Interest cost............................................... 1,466 1,208
Actuarial losses............................................ 3,105 1,446
Benefit payments............................................ (1,207) (989)
-------- --------
Projected benefit obligation, end of year................... $ 22,996 $ 18,265
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year................ $ 247 $ 182
Actual return on plan assets................................ -0- -0-
Company contributions....................................... 1,285 1,054
Benefit payments............................................ (1,207) (989)
-------- --------
Fair value of plan assets, end of year...................... $ 325 $ 247
======== ========
Funded status of plan....................................... $(22,671) $(18,018)
Recognized net actuarial loss............................... 8,211 5,774
-------- --------
Accrued postretirement benefit cost......................... $(14,460) $(12,244)
======== ========
Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Service cost-benefits earned during the period.............. $1,367 $1,106 $1,234
Interest cost on benefit obligation......................... 1,466 1,208 1,219
Net amortization............................................ 590 590 591
Recognized (gain)........................................... -0- (126) -0-
------ ------ ------
Net periodic postretirement benefit cost.................... $3,423 $2,778 $3,044
====== ====== ======
The assumed health care cost trend rate was 7.6% for 2002 and is assumed to
decrease gradually to 5.1% by 2007 and remain at that level thereafter.
Increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation at
December 31, 2001, by $2,236,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 2001 by
$345,000. Decreasing the assumed health care cost trend rates by one percentage
in each year would decrease the accumulated postretirement benefit obligation at
December 31, 2001, by $1,972,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 2001 by
$321,000. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at December 31, 2001, and 8.25% at
December 31, 2000.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K. LEASES
Rental expense for all leases amounted to approximately $36,492,000,
$19,241,000 and $16,523,000 for 2001, 2000 and 1999, respectively. The
approximate future minimum rental commitments as of December 31, 2001, for all
noncancelable leases with initial or remaining terms of one year or more are
shown in the following table. Included in these amounts are all renewal options
reasonably assured of being exercised.
EQUIPMENT PREMISES TOTAL
--------- -------- --------
(IN THOUSANDS)
2002........................................................ $1,064 $ 27,265 $ 28,329
2003........................................................ 1,039 23,852 24,891
2004........................................................ 632 19,914 20,546
2005........................................................ 429 16,444 16,873
2006........................................................ 377 11,952 12,329
2007-2011................................................... 367 23,034 23,401
2012-2016................................................... 436 11,515 11,951
2017-2021................................................... 448 2,987 3,435
2022-End.................................................... 1,877 676 2,553
------ -------- --------
Total............................................. $6,669 $137,639 $144,308
====== ======== ========
NOTE L. COMMITMENTS AND CONTINGENCIES
To accommodate the financial needs of its customers, Regions makes
commitments under various terms to lend funds to consumers, businesses and other
entities. These commitments include (among others) revolving credit agreements,
term loan commitments and short-term borrowing agreements. Many of these loan
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of these commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements. Standby letters of credit are also issued, which
commit Regions to make payments on behalf of customers if certain specified
future events occur. Historically, a large percentage of standby letters of
credit also expire without being funded.
Both loan commitments and standby letters of credit have credit risk
essentially the same as that involved in extending loans to customers and are
subject to normal credit approval procedures and policies. Collateral is
obtained based on management's assessment of the customer's credit.
Loan commitments totaled $6.5 billion at December 31, 2001, and $6.3
billion at December 31, 2000. Standby letters of credit were $926.6 million at
December 31, 2001, and $762.7 million at December 31, 2000. Commitments under
commercial letters of credit used to facilitate customers' trade transactions
were $39.8 million at December 31, 2001, and $48.1 million at December 31, 2000.
The Company and its affiliates are defendants in litigation and claims
arising from the normal course of business. Based on consultation with legal
counsel, management is of the opinion that the outcome of pending and threatened
litigation will not have a material effect on Regions' consolidated financial
statements.
NOTE M. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Regions maintains positions in derivative financial instruments to manage
interest rate risk, 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 hedge accounting, according to Statement
of Financial Accounting Standards No. 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.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regions utilizes certain derivative instruments to hedge the variability of
cash flows related to interest payments under 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. During 2001, Regions booked $7.5 million to other
comprehensive income as a result of cash flow hedges, of which approximately
$600,000 was amortized to interest expense. For the year ended December 31,
2001, Regions recognized a $6.9 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. The
amount expected to be reclassified during the next twelve months is $1.4
million. Other non-interest expense for the year ended December 31, 2001
included a gain of $835,000 attributable to cash flow hedge ineffectiveness. No
gains or losses were recognized during 2001 related to components of derivative
instruments that were excluded from the assessment of hedge effectiveness.
Regions hedges the changes in fair value of assets or firm commitments
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 year ended December 31, 2001, Regions recognized a net hedging loss of
$16,000 in other non-interest expense attributable to ineffectiveness in fair
value hedges of forward contracts. The gross contract amount of forward
contracts, which totaled $551 million and $157 million at December 31, 2001, and
2000, respectively, represents the extent of Regions' involvement.
Regions has also entered into interest rate swap agreements converting a
portion of its fixed rate long-term debt to floating rate. These derivative
instruments are included in other assets or other liabilities on the statement
of financial condition. For the year ended December 31, 2001, there was no
ineffectiveness recorded to earnings related to these fair value hedges. No
gains or losses were recognized during 2001 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 swap and
option contracts with customers and market counterparties. The portfolio is used
to generate trading profit and help clients manage interest rate risk.
Transactions within the portfolio generally involve the exchange of fixed and
floating rate payments without the exchange of the underlying principal amounts.
The fair value of the trading portfolio at December 31, 2001, was $7.8 million.
The Company utilizes put and call option contracts to hedge mortgage loan
originations in process. Option contracts represent rights to purchase or sell
securities or other money market instruments at a specified price and within a
specified period of time at the option of the holder. There were no option
contracts outstanding as of December 31, 2001 or December 31, 2000. The
commitment fees paid for option contracts reflect the maximum exposure to the
Company.
Foreign currency exchange contracts involve the trading 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 facilitate the
management of fluctuations in foreign exchange rates. The notional amount of
forward foreign exchange contracts totaled $19 million and $44 million at
December 31, 2001 and 2000, respectively. The Company is subject to the risk
that another party will fail to perform and the gross amount of the contracts
represents the Company's maximum exposure to credit risk.
In the normal course of business, Regions' brokerage subsidiary enters into
underwriting and forward and future commitments. At December 31, 2001, the
contract amount of future contracts to purchase and sell U.S. Government and
municipal securities was approximately $27 million and $22 million,
respectively. The brokerage subsidiary typically settles its position by
entering into equal but opposite contracts and, as such, the contract amounts do
not necessarily represent future cash requirements. Settlement of the
transactions relating to such commitments is not expected to have a material
effect on the subsidiary's financial position. Transactions involving future
settlement give rise to market risk, which represents the potential loss that
can
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE N. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amount reported in the
consolidated statements of condition and cash flows approximates the estimated
fair value.
Interest-bearing deposits in other banks: The carrying amount reported in
the consolidated statement of condition approximates the estimated fair value.
Securities held to maturity: Estimated fair values are based on quoted
market prices, where available. If quoted market prices are not available,
estimated fair values are based on quoted market prices of comparable
instruments.
Securities available for sale: Estimated fair values, which are the
amounts recognized in the consolidated statements of condition, are based on
quoted market prices, where available. If quoted market prices are not
available, estimated fair values are based on quoted market prices of comparable
instruments.
Trading account assets: Estimated fair values, which are the amounts
recognized in the consolidated statements of condition, are based on quoted
market prices, where available. If quoted market prices are not available,
estimated fair values are based on quoted market prices of comparable
instruments.
Mortgage loans held for sale: Mortgage loans held for sale have been
designated as one of the hedged items in a fair value hedging relationship under
FAS 133. Therefore, to the extent changes in fair value are attributable to the
interest rate risk being hedged, the change in fair value is recognized in
income as an adjustment to the carrying amount of mortgage loans held for sale.
Otherwise, mortgage loans held for sale are accounted for under the lower of
cost or market method. The fair values are based on quoted market prices of
similar instruments, adjusted for differences in loan characteristics.
Margin receivables: The carrying amount reported in the consolidated
statement of condition approximates the estimated fair value.
Loans: Estimated fair values for variable rate loans, which reprice
frequently and have no significant credit risk, are based on carrying value.
Estimated fair values for all other loans are estimated using discounted cash
flow analyses, based on interest rates currently offered on loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest reported in the consolidated statements of condition approximates the
fair value.
Deposit liabilities: The fair value of non-interest bearing demand
accounts, interest-bearing transaction accounts, savings accounts, money market
accounts and certain other time open accounts is the amount payable on demand at
the reporting date (i.e., the carrying amount). Fair values for certificates of
deposit are estimated by using discounted cash flow analyses, using the interest
rates currently offered for deposits of similar maturities.
Short-term borrowings: The carrying amount reported in the consolidated
statements of condition approximates the estimated fair value.
Long-term borrowings: Fair values are estimated using discounted cash flow
analyses, based on the current rates offered for similar borrowing arrangements.
Loan commitments, standby and commercial letters of credit: Estimated fair
values for these off-balance-sheet instruments are based on standard fees
currently charged to enter into similar agreements.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------- -------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents......... $ 1,332,141 $ 1,332,141 $ 1,306,422 $ 1,306,422
Interest-bearing deposits in other
banks.......................... 667,186 667,186 3,246 3,246
Securities held to maturity....... 34,050 34,054 3,539,202 3,536,283
Securities available for sale..... 7,813,109 7,813,109 5,454,969 5,454,969
Trading account assets............ 741,896 741,896 13,437 13,437
Mortgage loans held for sale...... 890,193 890,193 222,902 222,902
Margin receivables................ 523,941 523,941 -0- -0-
Loans, net (excluding leases)..... 29,758,086 30,659,756 30,496,577 31,036,366
Financial liabilities:
Deposits.......................... 31,548,323 31,829,103 32,022,491 32,134,570
Short-term borrowings............. 4,098,400 4,098,400 3,133,142 3,133,142
Long-term borrowings.............. 4,747,674 4,932,359 4,478,027 4,707,750
Off-balance-sheet instruments:
Loan commitments.................. -0- (61,529) -0- (59,358)
Standby letters of credit......... -0- (13,899) -0- (11,440)
Commercial letters of credit...... -0- (100) -0- (120)
NOTE O. OTHER INCOME AND EXPENSE
Other income consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Fees and commissions........................................ $ 49,040 $ 50,916 $ 42,351
Insurance premiums and commissions.......................... 43,872 14,505 13,432
Capital market income....................................... 8,641 -0- -0-
Gain on sale of credit card portfolio....................... -0- 67,220 -0-
Gain on sale of mortgage servicing rights................... 2,851 19,888 7,526
Divestiture of banking interest............................. -0- -0- 18,399
Gain on sale of interest in ATM network..................... 1,932 -0- -0-
Other miscellaneous income.................................. 63,443 75,229 66,754
-------- -------- --------
Total............................................. $169,779 $227,758 $148,462
======== ======== ========
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other expense consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Stationery, printing and supplies........................... $ 16,658 $ 14,415 $ 20,533
Advertising and business development........................ 23,139 20,762 22,052
Postage and freight......................................... 20,365 17,846 20,503
FDIC insurance.............................................. 5,412 5,059 6,546
Telephone................................................... 33,752 34,243 26,951
Legal and other professional fees........................... 37,344 29,741 32,374
Other non-credit losses..................................... 60,702 43,520 30,872
Outside computer services................................... 21,431 19,942 24,078
Amortization of mortgage servicing rights................... 41,359 33,619 35,195
Amortization of excess purchase price....................... 52,109 29,164 23,995
(Gain) loss on sale of mortgages by subsidiaries............ (22,896) 3,991 9,521
Other miscellaneous expenses................................ 180,334 135,135 126,475
-------- -------- --------
Total............................................. $469,709 $387,437 $379,095
======== ======== ========
NOTE P. INCOME TAXES
At December 31, 2001, Regions has net operating loss carryforwards for
federal tax purposes of $2.6 million that expire in years 2003 through 2013.
These carryforwards resulted from various acquired financial institutions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Regions' deferred tax assets and liabilities as of December 31, 2001 and 2000
are listed below.
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Loan loss allowance....................................... $157,291 $136,316
Net operating loss carryforwards.......................... 992 2,498
Other..................................................... 68,193 56,925
-------- --------
Total deferred tax assets......................... 226,476 195,739
Deferred tax liabilities:
Tax over book depreciation................................ 5,806 8,503
Accretion of bond discount................................ 2,287 12,704
Direct lease financing.................................... 83,807 63,663
Pension................................................... 14,510 13,692
Mark to market securities available for sale.............. 36,910 525
Originated mortgage servicing rights...................... 23,686 17,391
Other..................................................... 46,858 18,468
-------- --------
Total deferred tax liabilities.................... 213,864 134,946
-------- --------
Net deferred tax asset.................................... $ 12,612 $ 60,793
======== ========
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Applicable income taxes for financial reporting purposes differs from the
amount computed by applying the statutory federal income tax rate of 35% for the
reasons below:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- --------- ---------
(IN THOUSANDS)
Tax on income computed at statutory federal income tax
rate..................................................... $251,283 $ 259,604 $ 274,759
Increases (decreases) in taxes resulting from:
Tax exempt income from obligations of states and political
subdivisions............................................. (17,490) (17,082) (15,634)
State income tax, net of federal tax benefit............... 3,770 2,291 2,605
Effect of recapitalization of subsidiary................... (40,000) (24,000) -0-
Non-deductible goodwill.................................... 17,634 10,711 7,919
Tax credits................................................ (17,671) -0- -0-
Other, net................................................. 11,491 (17,321) (10,009)
-------- --------- ---------
Total............................................ $209,017 $ 214,203 $ 259,640
======== ========= =========
Effective tax rate......................................... 29.1% 28.9% 33.1%
During the fourth quarter of 2000, Regions recapitalized one of its
subsidiaries by raising Tier 2 capital through issuance of a new class of
participating preferred stock of this subsidiary. Regions is not subject to tax
on the portion of the subsidiary's income allocated to the holders of the
preferred stock for federal income tax purposes.
The provisions for income taxes (benefit) in the consolidated statements of
income are summarized below. Included in these amounts are income taxes of
$11,237,000, ($13,975,000) and $56,000 in 2001, 2000 and 1999, respectively,
related to securities transactions.
CURRENT DEFERRED TOTAL
-------- -------- --------
(IN THOUSANDS)
2001
Federal..................................................... $180,184 $23,033 $203,217
State....................................................... 5,143 657 5,800
-------- ------- --------
Total............................................. $185,327 $23,690 $209,017
======== ======= ========
2000
Federal..................................................... $199,974 $10,705 $210,679
State....................................................... 3,345 179 3,524
-------- ------- --------
Total............................................. $203,319 $10,884 $214,203
======== ======= ========
1999
Federal..................................................... $259,422 $(3,790) $255,632
State....................................................... 4,067 (59) 4,008
-------- ------- --------
Total............................................. $263,489 $(3,849) $259,640
======== ======= ========
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE Q. BUSINESS COMBINATIONS
During 2001 Regions completed the following business combinations:
ACCOUNTING
DATE COMPANY HEADQUARTERS LOCATION TOTAL ASSETS TREATMENT
---- ------- --------------------- -------------- ----------
(IN THOUSANDS)
February Rebsamen Insurance, Inc. Little Rock, Arkansas $ 32,082 Purchase
March Morgan Keegan, Inc. Memphis, Tennessee 2,008,179 Purchase
November Park Meridian Financial Corporation Charlotte, North Carolina 309,844 Purchase
December First Bancshares of Texas, Inc. Houston, Texas 188,953 Purchase
The total consideration paid for these business combinations was
approximately 23.0 million shares of Regions' common stock (including treasury
stock reissued) valued at $656 million and $236 million in cash. Total
intangible assets recorded in connection with the purchase transactions totaled
approximately $587 million.
During 2000 Regions completed the following additional business
combinations:
ACCOUNTING
DATE COMPANY HEADQUARTERS LOCATION TOTAL ASSETS TREATMENT
---- ------- --------------------- -------------- ----------
(IN THOUSANDS)
January LCB Corporation Fayetteville, $173,157 Purchase
Tennessee
May Branches of Amsouth Bank Fort Smith, Arkansas 186,361 Purchase
August Heritage Bancorp, Inc. Hutto, Texas 114,370 Purchase
August First National Bancshares of Louisiana, Inc. Alexandria, Louisiana 303,793 Purchase
September East Coast Bank Corporation Ormond Beach, Florida 107,779 Purchase
Because the 2001 and 2000 business combinations were accounted for as
purchases, Regions' consolidated financial statements include the results of
operations of those companies only from their respective dates of acquisition.
The following unaudited summary information presents the consolidated results of
operations of Regions on a pro forma basis, as if all the above companies had
been acquired on January 1, 2000. The pro forma summary information does not
necessarily reflect the results of operations that would have occurred, if the
acquisitions had occurred at the beginning of the periods presented, or of
results which may occur in the future.
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
Interest income............................................. $3,156,122 $3,353,170
Interest expense............................................ 1,705,718 1,955,386
---------- ----------
Net interest income....................................... 1,450,404 1,397,784
Provision for loan losses................................... 166,362 128,267
Non-interest income......................................... 1,273,091 1,070,132
Non-interest expense........................................ 1,823,485 1,588,517
---------- ----------
Income before income taxes................................ 733,648 751,132
Applicable income taxes..................................... 217,915 228,145
---------- ----------
Net income.................................................. $ 515,733 $ 522,987
========== ==========
Net income per share........................................ $2.26 $2.30
Net income per share, diluted............................... 2.24 2.29
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following chart summarizes the assets acquired and liabilities assumed
in connection with business combinations in 2001 and 2000.
2001 2000
-------- --------
(IN THOUSANDS)
Cash and due from banks..................................... $190,871 $156,263
Interest-bearing deposits in other banks.................... 543,507 6,649
Securities held to maturity................................. 12,050 31,084
Securities available for sale............................... 138,997 150,086
Trading account assets...................................... 589,998 -0-
Margin receivables.......................................... 523,118 -0-
Loans, net.................................................. 324,497 490,403
Other assets................................................ 689,072 26,203
Deposits.................................................... 390,851 752,963
Borrowings.................................................. 1,576,189 74,074
Other liabilities........................................... 231,172 9,269
As of December 31, 2001, Regions' had the following pending business
combinations:
APPROXIMATE
----------------
ASSET ACCOUNTING
INSTITUTION SIZE VALUE(1) CONSIDERATION TREATMENT
----------- ----- -------- ------------- ----------
(IN MILLIONS)
Brookhollow Bancshares, Inc., headquartered in Dallas,
Texas................................................. $141 $27 Cash Purchase
Independence Bank, National Association, headquartered
in Houston, Texas..................................... $107 $20 Cash Purchase
---------------
(1) Computed as of the date of announcement of the transaction.
NOTE R. STOCK OPTION AND LONG-TERM INCENTIVE PLANS
Regions has stock option plans for certain key employees that provide for
the granting of options to purchase up to 5,720,000 (excluding options assumed
in connection with acquisitions) shares of Regions' common stock. 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 can not 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. The plans also permit the granting of
stock appreciation rights to holders of stock options. Stock appreciation rights
were attached to 24,694 and 81,755 of the options outstanding at December 31,
2000 and 1999, respectively. No stock appreciation rights were attached to
options outstanding at December 31, 2001.
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. A
maximum of 5,500,000 shares of restricted stock and 30,000,000 shares of
performance awards may be granted. During 2001 and 2000, Regions granted 329,750
and 256,042 shares, respectively, as restricted stock. No restricted stock was
granted in 1999. Grantees of restricted stock must remain employed with Regions
for certain periods from the date of the grant at the same or a higher level in
order for the shares to be released. However, during this period the grantee is
eligible to receive dividends and exercise voting privileges on such restricted
shares. In 2001, 2000, and 1999, 134,227; 59,216 and 150,384 restricted shares,
respectively, were released. Issuance of performance award shares is dependent
upon achievement of certain performance criteria and is, therefore, deferred
until the end of the performance period. In 1999, 411,372 performance awards
were granted, and in 2000 199,091 performance
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
award shares were issued. No performance awards were granted or issued in 2001.
Total expense for restricted stock was $4,310,000 in 2001, $2,753,000 in 2000,
and $2,117,000 in 1999. Total expense for performance shares was $3,274,000 in
1999. In 2000, a decline in Regions' common stock price resulted in a benefit of
$1,212,000. In 2001, the failure to achieve certain performance criteria
resulted in a benefit of $5,452,084.
In connection with the business combinations with other companies in 2001
and in prior years, Regions assumed stock options, which were previously granted
by those companies and converted those options, based on the appropriate
exchange ratio, into options to acquire Regions' common stock. The common stock
for such options has been registered under the Securities Act of 1933 by Regions
and is not included in the maximum number of shares that may be granted by
Regions under its existing stock option plans.
Stock option activity (including assumed options) over the last three years
is summarized as follows:
WEIGHTED
OPTION AVERAGE
SHARES UNDER PRICE EXERCISE
OPTION PER SHARE PRICES
------------ --------------- --------
Balance at January 1, 1999............................. 6,783,452 $ 3.39 -- $41.38 $ 22.05
Options assumed through acquisitions................. 498,625 6.06 -- 17.81 9.83
Granted.............................................. 1,242,172 34.66 -- 37.47 35.67
Exercised............................................ (1,292,088) 3.39 -- 37.85 12.61
Canceled............................................. (94,632) 8.01 -- 41.34 29.47
----------
Outstanding at December 31, 1999....................... 7,137,529 $ 4.35 -- $41.38 $ 25.16
Options assumed through acquisitions................. 21,133 10.00 10.00
Granted.............................................. 2,283,354 20.09 -- 24.26 20.14
Exercised............................................ (450,865) 4.35 -- 20.88 10.22
Canceled............................................. (200,718) 4.81 -- 41.38 33.28
----------
Outstanding at December 31, 2000....................... 8,790,433 $ 4.35 -- $41.38 $ 24.40
Options assumed through acquisitions................. 575,993 7.30 -- 27.41 20.14
Granted.............................................. 9,555,042 27.91 -- 32.30 28.56
Exercised............................................ (914,782) 4.35 -- 26.06 15.78
Canceled............................................. (724,774) 14.19 -- 41.34 28.40
----------
Outstanding at December 31, 2001....................... 17,281,912 $ 5.01 -- $41.38 $ 26.85
==========
Exercisable at December 31, 2001..................... 8,250,609 $ 5.01 -- $41.38 $ 25.01
During 2001, Regions granted approximately 5.9 million options (included in
the table above) as a part of retention packages for Morgan Keegan's employees.
These options were granted to retain certain key employees important to the
success of the business combination.
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 as if the fair-value method had been applied in
measuring compensation costs is presented below for the years ended December 31:
2001 2000 1999
-------- -------- --------
Pro forma net income (in thousands)......................... $475,081 $517,931 $520,625
Pro forma net income per share.............................. $2.11 $2.35 $2.35
Pro forma net income per share, diluted..................... 2.09 2.33 2.32
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regions' options outstanding have a weighted average remaining contractual
life of 7.9 years. The weighted average fair value of options granted was $4.83
in 2001, $3.52 in 2000 and $6.63 in 1999. 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 2001: expected dividend yield of
3.7%; expected option life of 5 years; expected volatility of 22.2%; and a risk
free interest rate of 4.3%. The 2000 assumptions used in the model included:
expected dividend yield of 3.9%; expected option life of 5 years; expected
volatility of 22.2%; and a risk free interest rate of 5.0%. The 1999 assumptions
were: expected dividend yield of 4.0%; expected option life of 5 years; expected
volatility of 20.7%; and a risk free interest rate of 6.3%.
Since the exercise price of the Company's employee stock options equals the
market price of underlying stock on the date of grant, no compensation expense
is recognized.
The effects of applying Statement 123 for providing pro forma disclosures
are not likely to be representative of the effects on reported net income for
future years.
NOTE S. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are condensed financial statements of Regions Financial
Corporation:
STATEMENTS OF CONDITION
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 271,676 $ 314,911
Loans to subsidiaries....................................... 302,950 -0-
Securities held to maturity................................. 3,131 3,121
Securities available for sale............................... 179 179
Premises and equipment...................................... 11,648 12,095
Investment in subsidiaries:
Banks..................................................... 3,645,417 3,419,775
Non-banks................................................. 884,844 15,749
---------- ----------
4,530,261 3,435,524
Other assets................................................ 60,270 47,121
---------- ----------
$5,180,115 $3,812,951
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper............................................ $ 27,750 $ 27,750
Long-term borrowings........................................ 996,025 219,839
Other liabilities........................................... 120,575 107,418
---------- ----------
Total liabilities........................................... 1,144,350 355,007
Stockholders' equity:
Common stock.............................................. 143,801 139,105
Surplus................................................... 1,252,809 1,058,733
Undivided profits......................................... 2,650,389 2,334,193
Treasury stock............................................ -0- (67,135)
Unearned restricted stock................................. (11,234) (6,952)
---------- ----------
Total stockholders' equity........................ 4,035,765 3,457,944
---------- ----------
$5,180,115 $3,812,951
========== ==========
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Income:
Dividends received from subsidiaries:
Banks.................................................. $450,000 $568,533 $392,749
Non-banks.............................................. -0- -0- 3,000
-------- -------- --------
450,000 568,533 395,749
Service fees from subsidiaries............................ 54,309 47,049 32,826
Interest from subsidiaries................................ 17,124 4,144 3,694
Other..................................................... 2,253 6,213 19,345
-------- -------- --------
523,686 625,939 451,614
Expenses:
Salaries and employee benefits............................ 23,242 16,936 14,216
Interest.................................................. 67,130 19,557 21,556
Net occupancy expense..................................... 1,609 1,322 1,167
Furniture and equipment expense........................... 896 784 1,339
Legal and other professional fees......................... 9,408 11,976 7,326
Amortization of excess purchase price..................... 20,878 18,683 15,098
Other expenses............................................ 11,640 8,502 8,757
-------- -------- --------
134,803 77,760 69,459
Income before income taxes and equity in undistributed
earnings of subsidiaries.................................. 388,883 548,179 382,155
Applicable income taxes (credit)............................ (15,585) (7,022) (694)
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries.............................................. 404,468 555,201 382,849
Equity in undistributed earnings of subsidiaries:
Banks..................................................... 93,327 (32,230) 138,787
Non-banks................................................. 11,139 4,552 3,750
-------- -------- --------
104,466 (27,678) 142,537
-------- -------- --------
Net Income........................................ $508,934 $527,523 $525,386
======== ======== ========
Aggregate maturities of long-term borrowings in each of the next five years
for the parent company only are as follows: $75,690,000 in 2002; $710,000 in
2003; $100,850,000 in 2004; $870,000 in 2005; and $910,000 in 2006. Standby
letters of credit issued by the parent company totaled $6.1 million at December
31, 2001. This amount is included in total standby letters of credit disclosed
in Note L.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Operating activities:
Net income................................................ $ 508,934 $ 527,523 $ 525,386
Adjustments to reconcile net cash provided by
Operating activities:
Equity in undistributed earnings of subsidiaries....... (104,465) 27,678 (142,537)
Provision for depreciation and amortization............ 26,828 22,661 18,636
(Decrease) increase in other liabilities............... (32,760) (58,569) 104,491
(Gain) loss on sale of premises and equipment.......... (19) 2 93
(Increase) in other assets............................. (34,027) (29,547) (3,417)
Stock issued to employees under incentive plan......... -0- 3,088 4,959
--------- --------- ---------
Net cash provided by Operating activities......... 364,491 492,836 507,611
Investing activities:
Investment in subsidiaries................................ (232,630) 100,181 18,525
Principal payments (advances) on loans to subsidiaries.... (302,950) 6,200 54,900
Sale and purchases of premises and equipment.............. (622) 134 (3,778)
Maturity of securities held to maturity................... -0- 793 15
Purchase of available for sale securities................. -0- (123) (56)
--------- --------- ---------
Net cash (used) provided by investing
activities...................................... (536,202) 107,185 69,606
Financing activities:
(Decrease) increase in commercial paper borrowings........ -0- (29,000) -0-
Cash dividends............................................ (250,257) (238,447) (221,928)
Purchase of treasury stock................................ (406,733) (149,119) (255,271)
Proceeds from long-term borrowings........................ 802,846 8,122 6,701
Principal payments on long-term borrowings................ (26,660) (1,730) (13,428)
Exercise of stock options................................. 9,280 2,607 13,676
--------- --------- ---------
Net cash provided (used) by financing
activities...................................... 128,476 (407,567) (470,250)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents.......... (43,235) 192,454 106,967
Cash and cash equivalents at beginning of year............ 314,911 122,457 15,490
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 271,676 $ 314,911 $ 122,457
========= ========= =========
NOTE T. REGULATORY CAPITAL REQUIREMENTS
Regions and its banking subsidiaries are subject to regulatory capital
requirements administered by federal banking agencies. These regulatory capital
requirements involve quantitative measures of the Company's assets, liabilities
and certain off-balance sheet items, and also qualitative judgments by the
regulators. Failure to meet minimum capital requirements can subject the Company
to a series of increasingly restrictive regulatory actions. As of December 31,
2001, the most recent notification from federal banking agencies categorized
Regions and its significant subsidiaries as "well capitalized" under the
regulatory framework.
Minimum capital requirements for all banks are Tier 1 Capital of at least
4% of risk-weighted assets, Total Capital of at least 8% of risk-weighted assets
and a Leverage Ratio of 3%, plus an additional 100 to 200 basis point cushion in
certain circumstances, of adjusted quarterly average assets. Tier 1 Capital
consists principally of stockholders' equity, excluding unrealized gains and
losses on securities available for sale, less excess purchase price and certain
other intangibles. Total Capital consists of Tier 1 Capital plus certain debt
instruments and the allowance for loan losses, subject to limitation.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regions' and its most significant subsidiary's capital levels at December
31, 2001 and 2000, exceeded the "well capitalized" levels, as shown below:
DECEMBER 31, 2001 TO BE
---------------------- WELL
AMOUNT RATIO CAPITALIZED
-------------- ----- -----------
(IN THOUSANDS)
Tier 1 Capital:
Regions Financial Corporation....................... $ 3,234,909 9.66% 6.00%
Regions Bank........................................ 3,036,633 9.58 6.00
Total Capital:
Regions Financial Corporation....................... $ 4,428,174 13.23% 10.00%
Regions Bank........................................ 3,629,944 11.45 10.00
Leverage:
Regions Financial Corporation....................... $ 3,234,909 7.41% 5.00%
Regions Bank........................................ 3,036,633 7.42 5.00
DECEMBER 31, 2000 TO BE
---------------------- WELL
AMOUNT RATIO CAPITALIZED
-------------- ----- -----------
(IN THOUSANDS)
Tier 1 Capital:
Regions Financial Corporation....................... $ 2,982,652 9.14% 6.00%
Regions Bank........................................ 2,951,565 9.27 6.00
Total Capital:
Regions Financial Corporation....................... $ 3,730,852 11.44% 10.00%
Regions Bank........................................ 3,524,765 11.07 10.00
Leverage:
Regions Financial Corporation....................... $ 2,982,652 6.90% 5.00%
Regions Bank........................................ 2,951,565 6.96 5.00
NOTE U. EARNINGS PER SHARE
The following table sets forth the computation of basic net income per
share and diluted net income per share.
2001 2000 1999
-------- -------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Numerator:
For basic net income per share and diluted net income per
share, net income...................................... $508,934 $527,523 $525,386
======== ======== ========
Denominator:
For basic net income per share --
Weighted average shares outstanding....................... 224,733 220,762 221,617
Effect of dilutive securities:
Stock options............................................. 2,330 1,015 2,138
Performance shares........................................ -0- 212 212
-------- -------- --------
2,330 1,227 2,350
-------- -------- --------
For diluted net income per share............................ 227,063 221,989 223,967
======== ======== ========
Basic net income per share.................................. $ 2.26 $ 2.39 $ 2.37
======== ======== ========
Diluted net income per share................................ $ 2.24 $ 2.38 $ 2.35
======== ======== ========
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE V. 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 represent 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
activity 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 Regions mortgage subsidiary. Investment banking
includes trust activities and all brokerage and investment activities associated
with Morgan Keegan and, for periods prior to the acquisition of Morgan Keegan,
the activities of Regions' securities brokerage subsidiary. 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.
At the end of 2000, Regions implemented a new funds transfer pricing system
affecting the method by which unit banks are reported within each region. This
methodology is based on duration matched transfer pricing. The new system was in
place for the full year of 2001 and influences comparability with the prior
year. Additionally in 2001, Regions modified the allocation of the provision for
loan losses. As such, prior periods have been reclassified to conform to present
year presentation.
The accounting policies used by each reportable segment are the same as
those discussed in Note A (summary of significant accounting policies). The
following table presents financial information for each reportable segment.
TOTAL BANKING
---------------------------------------
COMMUNITY MORTGAGE
BANKING TREASURY COMBINED BANKING
----------- ----------- ----------- --------
(IN THOUSANDS)
2001
Net interest income........................... $ 1,168,997 $ 198,963 $ 1,367,960 $ 22,815
Provision for loan losses..................... 157,298 2,528 159,826 421
Non-interest income........................... 366,327 35,057 401,384 143,185
Non-interest expense.......................... 728,438 45,289 773,727 115,015
Income taxes (benefit)........................ 243,911 69,826 313,737 18,945
----------- ----------- ----------- --------
Net income (loss)........................... $ 405,677 $ 116,377 $ 522,054 $ 31,619
=========== =========== =========== ========
Average assets................................ $24,254,887 $15,270,888 $39,525,775 $902,011
INVESTMENT
BANKING/
BROKERAGE/ TOTAL
TRUST INSURANCE OTHER COMPANY
---------- --------- --------- -----------
(IN THOUSANDS)
Net interest income............................ $ 22,878 $ 3,139 $ 8,701 $ 1,425,493
Provision for loan losses...................... -0- -0- 5,155 165,402
Non-interest income............................ 428,977 45,056 (36,717) 981,885
Non-interest expense........................... 374,260 33,686 227,337 1,524,025
Income taxes (benefit)......................... 28,493 4,477 (156,635) 209,017
---------- ------- --------- -----------
Net income (loss)............................ $ 49,102 $10,032 $(103,873) $ 508,934
========== ======= ========= ===========
Average assets................................. $3,339,654 $87,263 $ 800,429 $44,655,132
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOTAL BANKING
---------------------------------------
COMMUNITY MORTGAGE
BANKING TREASURY COMBINED BANKING
----------- ----------- ----------- --------
(IN THOUSANDS)
2000
Net interest income........................... $ 1,229,868 $ (63,888) $ 1,165,980 $ 12,553
Provision for loan losses..................... 116,243 3,348 119,591 102
Non-interest income........................... 314,527 108 314,635 141,346
Non-interest expense.......................... 673,909 22,903 696,812 103,685
Income taxes (benefit)........................ 280,483 (33,762) 246,721 19,085
----------- ----------- ----------- --------
Net income (loss)........................... $ 473,760 $ (56,269) $ 417,491 $ 31,027
=========== =========== =========== ========
Average assets................................ $23,061,148 $17,970,601 $41,031,749 $784,148
INVESTMENT
BANKING/
BROKERAGE/ TOTAL
TRUST INSURANCE OTHER COMPANY
---------- --------- -------- -----------
(IN THOUSANDS)
Net interest income..................................... $ 1,904 $ 2,475 $205,885 $ 1,388,797
Provision for loan losses............................... -0- -0- 7,406 127,099
Non-interest income..................................... 98,311 14,817 32,101 601,210
Non-interest expense.................................... 73,208 5,902 241,575 1,121,182
Income taxes (benefit).................................. 10,123 3,224 (64,950) 214,203
-------- ------- -------- -----------
Net income (loss)..................................... $ 16,884 $ 8,166 $ 53,955 $ 527,523
======== ======= ======== ===========
Average assets.......................................... $592,466 $44,997 $435,977 $42,889,337
TOTAL BANKING
---------------------------------------
COMMUNITY MORTGAGE
BANKING TREASURY COMBINED BANKING
----------- ----------- ----------- ----------
(IN THOUSANDS)
1999
Net interest income..................................... $ 1,173,424 $ 107,190 $ 1,280,614 $ 20,469
Provision for loan losses............................... 101,862 2,671 104,533 106
Non-interest income..................................... 282,764 6,999 289,763 147,769
Non-interest expense.................................... 633,278 16,283 649,561 125,187
Income taxes (benefit).................................. 268,702 35,801 304,503 16,121
----------- ----------- ----------- ----------
Net income............................................ $ 452,346 $ 59,434 $ 511,780 $ 26,824
=========== =========== =========== ==========
Average assets.......................................... $20,530,531 $14,352,431 $34,882,962 $1,553,300
INVESTMENT
BANKING/
BROKERAGE/ TOTAL
TRUST INSURANCE OTHER COMPANY
---------- --------- ---------- -----------
(IN THOUSANDS)
Net interest income..................................... $ 4,862 $ 2,036 $ 117,874 $ 1,425,855
Provision for loan losses............................... -0- -0- 9,019 113,658
Non-interest income..................................... 92,119 11,894 (4,404) 537,141
Non-interest expense.................................... 65,092 5,704 218,768 1,064,312
Income taxes (benefit).................................. 11,889 1,708 (74,581) 259,640
-------- ------- ---------- -----------
Net income............................................ $ 20,000 $ 6,518 $ (39,736) $ 525,386
======== ======= ========== ===========
Average assets.......................................... $680,284 $38,305 $2,453,081 $39,607,932
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE W. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (Statement 144). Statement 144 supersedes Statement of Financial
Accounting Standards No. 121 and provides a single accounting model for
long-lived assets to be disposed of. Although retaining many of the fundamental
recognition and measurement provisions of Statement 121, the new rules
significantly change the criteria that would have to be met to classify an asset
as held-for-sale. Statement 144 also supersedes the provisions of APB Opinion 30
with regard to reporting the effects of a disposal of a segment of a business
and will require expected future operating losses from discontinued operations
to be displayed in discontinued operations in the period(s) in which the loses
are incurred (rather than as of the measurement date as presently required by
APB 30). Statement 144 is effective for fiscal years beginning after December
15, 2001. Regions does not anticipate that this statement will have a material
impact on its financial position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (Statement 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement
142). Statement 141 prohibits the use of the pooling-of-interests method to
account for business combinations initiated after June 30, 2001. Statement 142
provides guidance for the amortization of goodwill arising from the use of the
purchase method to account for business combinations. Goodwill arising from
purchase business combinations completed after June 30, 2001, will not be
amortized. Amortization of goodwill from purchase business combinations
completed prior to July 1, 2001, will not cease until adoption of Statement 142.
The accounting for goodwill and other intangible assets required under Statement
142 is effective for fiscal years beginning after December 15, 2001. Upon
adoption of Statement 142, the amortization of excess purchase price will be
discontinued, resulting in an expected increase in annual net income of
approximately $.23 per diluted share, based on the excess purchase price balance
at December 31, 2001. The FASB continues to address implementation issues
related to Statement 142. In the event the FASB issues additional guidance,
Statement 142's impact on net income could be effected.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE X. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS, COMMON STOCK MARKET PRICES
AND DIVIDENDS (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001
Total interest income.............................. $807,268 $794,420 $756,095 $697,854
Total interest expense............................. 460,134 443,268 400,283 326,459
-------- -------- -------- --------
Net interest income................................ 347,134 351,152 355,812 371,395
Provision for loan losses.......................... 28,500 28,990 30,000 77,912
-------- -------- -------- --------
Net interest income after provision for loan
losses........................................... 318,634 322,162 325,812 293,483
Total non-interest income, excluding securities
gains............................................ 148,296 269,033 253,400 279,050
Securities gains (losses).......................... 474 (7) 4,534 27,105
Total non-interest expense......................... 294,721 429,366 392,370 407,568
Income taxes....................................... 49,931 49,023 56,177 53,886
-------- -------- -------- --------
Net income......................................... $122,752 $112,799 $135,199 $138,184
======== ======== ======== ========
Per share:
Net income....................................... $ .57 $ .50 $ .59 $ .60
Net income, diluted.............................. .57 .49 .59 .60
Cash dividends declared.......................... .28 .28 .28 .28
Market price:
Low........................................... 26.00 27.63 25.73 26.25
High.......................................... 32.06 32.99 32.50 30.29
2000
Total interest income.............................. $780,229 $792,587 $824,694 $836,733
Total interest expense............................. 426,113 443,896 482,575 492,862
-------- -------- -------- --------
Net interest income................................ 354,116 348,691 342,119 343,871
Provision for loan losses.......................... 29,177 27,804 32,746 37,372
-------- -------- -------- --------
Net interest income after provision for loan
losses........................................... 324,939 320,887 309,373 306,499
Total non-interest income, excluding securities
gains............................................ 206,810 137,583 146,719 150,026
Securities (losses) gains.......................... (40,018) 67 28 (5)
Total non-interest expense......................... 271,135 272,787 273,339 303,921
Income taxes....................................... 74,591 60,457 54,922 24,233
-------- -------- -------- --------
Net income......................................... $146,005 $125,293 $127,859 $128,366
======== ======== ======== ========
Per share:
Net income....................................... $ .66 $ .57 $ .58 $ .58
Net income, diluted.............................. .66 .57 .58 .58
Cash dividends declared.......................... .27 .27 .27 .27
Market price:
Low........................................... 18.31 19.13 19.88 20.06
High.......................................... 25.25 25.50 25.25 28.00
Regions Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol RGBK. Market prices shown represent sales
prices as reported by Nasdaq. At December 31, 2001, there were 54,512
shareholders of record of Regions Financial Corporation Common Stock.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
between Registrant and Ernst & Young LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
All information presented under the captions "Information On Directors" and
"Section 16 Transaction" of the Registrant's proxy statement to be dated
approximately April 10, 2002, are incorporated by reference.
Executive officers of the Registrant as of December 31, 2001, are as
follows:
POSITION AND
OFFICES HELD WITH OFFICER
EXECUTIVE OFFICER AGE REGISTRANT AND SUBSIDIARIES SINCE
----------------- --- --------------------------- -------
Carl E. Jones, Jr..................... 61 Chairman, Director, President and 1983*
Chief Executive Officer, Registrant
and Regions Bank; Director Regions
Mortgage, Inc., Regions Interstate
Billing Service, Inc., and EFC
Holdings Corporation.
Richard D. Horsley.................... 59 Vice Chairman, Director and Executive 1972
Financial Officer, Registrant and
Regions Bank; Director and Vice
President, Regions Agency, Inc.;
Director, Regions Life Insurance
Company, Regions Mortgage, Inc., and
EFC Holdings Corporation.
Allen B. Morgan, Jr................... 59 Director, Registrant and Regions Bank; 2001*
Chairman and Director Morgan Keegan
& Company, Inc.
John I. Fleischauer, Jr............... 53 President/West Region; Director, 1999*
Regions Bank.
Wilbur B. Hufham...................... 64 President/Central Region; Director, 1983*
Regions Bank; Director Regions
Mortgage, Inc.
Peter D. Miller....................... 55 President/East Region; Director, 1996*
Regions Bank.
William E. Askew...................... 52 Executive Vice President -- Retail 1987
Banking Division, Registrant and
Regions Bank.
D. Bryan Jordan....................... 40 Executive Vice President and 2000
Comptroller, Registrant and Regions
Bank; Director, Regions Asset
Management Company, Inc. and
Rebsamen Insurance, Inc.
E. Cris Stone......................... 59 Executive Vice President -- Corporate 1988
Banking, Registrant and Regions
Bank; Director and Vice President,
Regions Financial Leasing, Inc.;
Director Regions Interstate Billing
Service, Inc.
85
POSITION AND
OFFICES HELD WITH OFFICER
EXECUTIVE OFFICER AGE REGISTRANT AND SUBSIDIARIES SINCE
----------------- --- --------------------------- -------
Samuel E. Upchurch, Jr. .............. 50 Executive Vice President, General 1994
Counsel and Corporate Secretary,
Registrant and Regions Bank;
Director Regions Interstate Billing
Service, Inc., EFC Holdings
Corporation, Rebsamen Insurance,
Inc. and Regions Asset Management
Company, Inc.
---------------
* The years indicated are those in which the individual was first deemed to be
an executive officer of Registrant, although in every case the individual had
been an executive officer of a subsidiary of Registrant for a number of years.
ITEM 11. EXECUTIVE COMPENSATION
All information presented under the caption "Executive Compensation and
Other Transaction", excluding the information under the subheading "Compensation
Committee Executive Compensation Report" of the Registrant's proxy statement to
be dated approximately April 10, 2002, are incorporated herein by reference. All
information presented under the caption "Executive Compensation Report" of the
Registrant's proxy statement to be dated approximately April 10, 2002, are
specifically not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All information presented under the captions "Voting Securities and
Principal Holders Thereof" and "Information on Directors" of the Registrant's
proxy statement to be dated approximately April 10, 2002, are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All information presented under the caption "Other Transactions", of the
Registrant's proxy statement to be dated approximately April 10, 2002, are
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) and (2) Financial Statement Schedules.
The following consolidated financial statements and report of independent
auditors of Regions Financial Corporation and subsidiaries are included in Item
8 of this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Statements of Condition -- December 31, 2001 and 2000
Consolidated Statements of Income -- Years ended December 31, 2001, 2000
and 1999
Consolidated Statements of Cash Flows -- Years ended December 31, 2001,
2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements -- December 31, 2001
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
86
14(a)(3) Listing of Exhibits:
SEC ASSIGNED
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
3. -- Bylaws as last amended on March 17, 1999, incorporated
herein by reference from the exhibits to the registration
statement filed with the Commission and assigned file number
333-86975.
-- Certificate of Incorporation as last amended on June 18,
1999, incorporated herein by reference from the exhibits to
the registration statement filed with the Commission and
assigned file number 333-86975.
4.1 -- Subordinated Notes Trust Indenture dated as of December 1,
1992, between Registrant and Bankers Trust Company
incorporated by reference from the exhibits to the
registration statement filed with the Commission and
assigned file number 33-45714.
4.2 -- Trust Indenture dated as of February 26, 2001, between
Registrant and Bankers Trust Company incorporated by
reference from the exhibits to the registration statement
filed with the Commission and assigned file number
333-54552.
4.3 -- First Supplemental Indenture dated as of February 26, 2001,
between Registrant and Bankers Trust Company incorporated by
reference from Registrant's current report on Form 8-K dated
as of February 26, 2001 and filed as of March 5, 2001.
4.4 -- Amended Declaration Trust of Regions Financing Trust I dated
as of February 26, 2001, incorporated by reference from the
exhibits to the registration statement filed with the
Commission and assigned file number 333-54552.
4.5 -- Preferred Securities Guaranty Agreement of Registrant dated
as of February 26, 2001, incorporated by reference from the
exhibits to the registration statement filed with the
Commission and assigned file number 333-54552.
4.6 -- Second Supplemental Indenture dated as of February 26, 2001,
between Registrant and Bankers Trust Company incorporated by
reference from Registrant's current report on Form 8-K dated
as of March 5, 2001 and filed as of March 13, 2001.
10.1* -- Regions Amended and Restated 1991 Long-Term Incentive Plan
incorporated by reference from Exhibit B to the Registrant's
proxy statement filed with the Commission and dated March
16, 1995.
10.2* -- Regions Management Incentive Plan Amended and Restated as of
January 1, 1999, incorporated by reference from Appendix B
to the Registrant's proxy statement filed with the
Commission and dated April 7, 1999.
10.3* -- Regions 1999 Long-Term Incentive Plan incorporated by
reference from Appendix C to the Registrant's proxy
statement filed with the Commission and dated April 7, 1999.
10.4 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Carl E. Jones, Jr., President and Chief
Executive Officer.
10.5 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Richard D. Horsley, Executive Financial
Officer.
10.6 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Allen B. Morgan, Jr., Chief Executive
Officer of Morgan Keegan & Company, Inc.
10.7 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and John I. Fleischauer, Jr., Regional
President.
10.8 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Wilbur B. Hufham, Regional President.
10.9 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Peter D. Miller, Regional President.
87
SEC ASSIGNED
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
10.10 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and William E. Askew, Executive Vice
President.
10.11 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and E. Cris Stone, Executive Vice President.
21. -- List of Subsidiaries of the Registrant.
23. -- Consent of Independent Auditors.
24. -- Power of Attorney
---------------
* Represents a compensatory plan agreement that is required to be filed under
this item.
14(b) Reports on Form 8-K filed in the fourth quarter of 2001:
Report on Form 8-K, dated October 18, 2001, was filed under items 5
and 7 and related to the Registrant's results of operations for the
quarter and nine months ended September 30, 2001.
14(c) The Exhibits not incorporated herein by reference are submitted as a
separate part of this report.
Note: Copies of the aforementioned exhibits are available to stockholders upon
request to:
Stockholder Assistance
417 North 20th Street
P. O. Box 10247
Birmingham, Alabama 35202-10247
14(d) Financial statement schedules:
None.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGIONS FINANCIAL CORPORATION
/s/ Samuel E. Upchurch, Jr.
--------------------------------------
Samuel E. Upchurch, Jr.
Executive Vice President, General
Counsel
and Corporate Secretary
Date: 3/19/02
/s/ D. Bryan Jordan
--------------------------------------
D. Bryan Jordan
Executive Vice President and
Comptroller
Date: 3/16/02
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Carl E. Jones, Jr. Chairman, Chief Executive Officer, 3/19/02
----------------------------------------------------- President and Director
Carl E. Jones, Jr.
* Richard D. Horsley Vice Chairman, Executive Financial 3/19/02
----------------------------------------------------- Officer and Director
Richard D. Horsley
* Allen B. Morgan, Jr. Director and Chief Executive 3/19/02
----------------------------------------------------- Officer Morgan Keegan & Company,
Allen B. Morgan, Jr. Inc.
* Sheila S. Blair Director 3/19/02
-----------------------------------------------------
Sheila S. Blair
* James B. Boone, Jr. Director 3/19/02
-----------------------------------------------------
James B. Boone, Jr.
* James S. M. French Director 3/19/02
-----------------------------------------------------
James S. M. French
* Olin B. King Director 3/19/02
-----------------------------------------------------
Olin B. King
* Michael W. Murphy Director 3/19/02
-----------------------------------------------------
Michael W. Murphy
* Henry E. Simpson Director 3/19/02
-----------------------------------------------------
Henry E. Simpson
* W. Woodrow Stewart Director 3/19/02
-----------------------------------------------------
W. Woodrow Stewart
89
SIGNATURE TITLE DATE
--------- ----- ----
* Lee J. Styslinger, Jr. Director 3/19/02
-----------------------------------------------------
Lee J. Styslinger, Jr.
* John H. Watson Director 3/19/02
-----------------------------------------------------
John H. Watson
* C. Kemmons Wilson, Jr. Director 3/19/02
-----------------------------------------------------
C. Kemmons Wilson, Jr.
*By: /s/ Samuel E. Upchurch, Jr. 3/19/02
------------------------------------------------
Samuel E. Upchurch, Jr.
as attorney-in-fact pursuant to a power of attorney
90
ANNUAL REPORT ON FORM 10-K
ITEM 14(C)
EXHIBITS
EXHIBITS INDEX
SEC ASSIGNED
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
3. -- Bylaws as last amended on March 17, 1999, incorporated
herein by reference from the exhibits to the registration
statement filed with the Commission and assigned file number
333-86975.
Certificate of Incorporation as last amended on June 18,
1999, incorporated herein by reference from the exhibits to
the registration statement filed with the Commission and
assigned file number 333-86975.
4.1 -- Subordinated Notes Trust Indenture dated as of December 1,
1992, between Registrant and Bankers Trust Company
incorporated by reference from the exhibits to the
registration statement filed with the Commission and
assigned file number 33-45714.
4.2 -- Trust Indenture dated as of February 26, 2001, between
Registrant and Bankers Trust Company incorporated by
reference from the exhibits to the registration statement
filed with the Commission and assigned file number
333-54552.
4.3 -- First Supplemental Indenture dated as of February 26, 2001,
between Registrant and Bankers Trust Company incorporated by
reference from Registrant's current report on Form 8-K dated
as of February 26, 2001 and filed as of March 5, 2001.
4.4 -- Amended Declaration Trust of Regions Financing Trust I dated
as of February 26, 2001, incorporated by reference from the
exhibits to the registration statement filed with the
Commission and assigned file number 333-54552.
4.5 -- Preferred Securities Guaranty Agreement of Registrant dated
as of February 26, 2001, incorporated by reference from the
exhibits to the registration statement filed with the
Commission and assigned file number 333-54552.
4.6 -- Second Supplemental Indenture dated as of February 26, 2001,
between Registrant and Bankers Trust Company incorporated by
reference from Registrant's current report on Form 8-K dated
as of March 5, 2001 and filed as of March 13, 2001.
10.1 -- Regions Amended and Restated 1991 Long-Term Incentive Plan
incorporated by reference from Exhibit B to the Registrant's
proxy statement filed with the Commission and dated March
16, 1995.
10.2 -- Regions Management Incentive Plan Amended and Restated as of
January 1, 1999, incorporated by reference from Appendix B
to the Registrant's proxy statement filed with the
Commission and dated April 7, 1999.
10.3 -- Regions 1999 Long-Term Incentive Plan incorporated by
reference from Appendix C to the Registrant's proxy
statement filed with the Commission and dated April 7, 1999.
10.4 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Carl E. Jones, Jr., President and Chief
Executive Officer.
10.5 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Richard D. Horsley, Executive Financial
Officer.
10.6 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Allen B. Morgan, Jr., Chief Executive
Officer of Morgan Keegan & Company, Inc.
10.7 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and John I. Fleischauer, Jr., Regional
President.
10.8 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Wilbur B. Hufham, Regional President.
10.9 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and Peter D. Miller, Regional President.
10.10 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and William E. Askew, Executive Vice
President.
SEC ASSIGNED
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
10.11 -- Employment Agreement dated as of September 1, 2001, between
the Registrant and E. Cris Stone, Executive Vice President.
21. -- List of Subsidiaries of the Registrant.
23. -- Consent of Independent Auditors.
24. -- Power of Attorney