10-Q 1 r10q101.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 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 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.625 Par Value-227,501,610 shares outstanding as of April 30, 2001 REGIONS FINANCIAL CORPORATION INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Condition - March 31, 2001, December 31, 2000 and March 31, 2000 2 Consolidated Statements of Income - Three months ended March 31, 2001 and March 31, 2000 3 Consolidated Statement of Stockholders' Equity - Three months ended March 31, 2001 4 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and March 31, 2000 5 Notes to Consolidated Financial Statements - March 31, 2001 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Qualitative and Quantitative Disclosures about Market Risk 23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) March 31 December 31 March 31 2001 2000 2000 ASSETS Cash and due from banks $ 1,043,984 $ 1,210,872 $ 1,038,303 Interest-bearing deposits in other banks 1,095,419 3,246 51,875 Investment securities 44,864 3,539,202 3,602,979 Securities available for sale 8,484,278 5,454,969 5,528,877 Trading account assets 601,374 13,437 24,155 Mortgage loans held for sale 466,614 222,902 351,978 Federal funds sold and securities purchased under agreement to resell 241,382 95,550 61,863 Loans 31,214,746 31,472,656 29,164,121 Unearned income (91,506) (96,193) (82,834) Loans, net of unearned income 31,123,240 31,376,463 29,081,287 Allowance for loan losses (381,570) (376,508) (352,998) Net Loans 30,741,670 30,999,955 28,728,289 Premises and equipment 624,841 598,632 585,934 Interest receivable 310,474 349,637 300,445 Due from customers on acceptances 107,472 107,912 85,624 Other assets 2,380,863 1,091,979 1,058,081 $46,143,235 $43,688,293 $41,418,403 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest-bearing $ 4,420,949 $ 4,512,883 $ 4,853,155 Interest-bearing 26,761,914 27,509,608 27,101,228 Total Deposits 31,182,863 32,022,491 31,954,383 Borrowed funds: Short-term borrowings: Federal funds purchased and securities sold under agreement to repurchase 2,548,869 1,996,812 3,136,794 Commercial paper 49,435 27,750 26,750 Other short-term borrowings 1,199,185 1,108,580 725,045 Total Short-term Borrowings 3,797,489 3,133,142 3,888,589 Long-term borrowings 5,220,594 4,478,027 2,032,411 Total Borrowed Funds 9,018,083 7,611,169 5,921,000 Bank acceptances outstanding 107,472 107,912 85,624 Other liabilities 2,033,358 488,777 316,662 Total Liabilities 42,341,776 40,230,349 38,277,669 Stockholders' Equity: Preferred Stock, par value $1.00 a share: Authorized 5,000,000 shares -0- -0- -0- Common Stock, par value $.625 a share: Authorized 500,000,000 shares, issued, including treasury stock, 228,520,059; 222,567,831; and 222,171,783 shares, respectively 142,825 139,105 138,857 Surplus 1,214,063 1,058,733 1,051,634 Undivided profits 2,397,684 2,333,285 2,130,595 Treasury stock, at cost - 0; 2,798,813; and 1,750,000 shares, respectively -0- (67,135) (38,696) Unearned restricted stock (6,098) (6,952) (4,216) Accumulated other comprehensive income (loss) 52,985 908 (137,440) Total Stockholders' Equity 3,801,459 3,457,944 3,140,734 $46,143,235 $43,688,293 $41,418,403
See notes to consolidated financial statements. REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended March 31 2001 2000 Interest Income: Interest and fees on loans $661,571 $602,957 Interest on securities: Taxable interest income 127,082 155,067 Tax-exempt interest income 10,278 10,161 Total Interest on Securities 137,360 165,228 Interest on mortgage loans held for sale 6,856 10,313 Income on federal funds sold and securities purchased under agreement to resell 522 1,129 Interest on time deposits in other banks 770 193 Interest on trading account assets 189 409 Total Interest Income 807,268 780,229 Interest Expense: Interest on deposits 338,107 319,177 Interest on short-term borrowings 48,808 77,956 Interest on long-term borrowings 73,219 28,980 Total Interest Expense 460,134 426,113 Net Interest Income 347,134 354,116 Provision for loan losses 28,500 29,177 Net Interest Income After Provision for Loan Losses 318,634 324,939 Non-Interest Income: Trust department income 14,986 14,051 Service charges on deposit accounts 63,273 53,408 Mortgage servicing and origination fees 21,200 21,956 Securities gains (losses) 474 (40,018) Other 48,837 117,395 Total Non-Interest Income 148,770 166,792 Non-Interest Expense: Salaries and employee benefits 159,391 147,253 Net occupancy expense 18,508 15,858 Furniture and equipment expense 17,727 16,997 Other 99,095 91,027 Total Non-Interest Expense 294,721 271,135 Income Before Income Taxes 172,683 220,596 Applicable income taxes 49,931 74,591 Net Income $122,752 $146,005 Average number of shares outstanding 214,872 221,299 Average number of shares outstanding- diluted 216,648 222,549 Per share: Net income $0.57 $0.66 Net income-diluted $0.57 $0.66 Cash dividends declared $0.28 $0.27
See notes to consolidated financial statements. REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS) (UNAUDITED) Accumulated Unearned Other Common Undivided Treasury Restricted Comprehensive Stock Surplus Profits Stock Stock Income Total BALANCE AT JANUARY 1, 2001 $139,105 $1,058,733 $2,333,285 $ (67,135) $(6,952) $ 908 $3,457,944 Comprehensive Income: Net Income 122,752 122,752 Other comprehensive income, net of tax Unrealized gains on available for sale securities, net of reclassification adjustment 52,077 52,077 Comprehensive income* 122,752 52,077 174,829 Cash dividends declared ($0.27 per common share) (58,353) (58,353) Purchase of treasury stock (355,848) (355,848) Treasury stock retired and reissued (9,173) (413,810) 422,983 -0- Common stock transactions: Stock issued for acquisitions 12,754 567,554 580,308 Stock options exercised 139 1,586 1,725 Amortization of unearned restricted stock 854 854 BALANCE AT MARCH 31, 2001 $142,825 $1,214,063 $2,397,684 $ -0- $(6,098) $52,985 $3,801,459 Disclosure of reclassification amount: Unrealized holding gains on available for sale securities arising during period $56,517 Less: Reclassification adjustment, net of tax, for gains and losses realized in net income 308 Net unrealized gains on available for sale securities, net of tax $56,209 FAS 133 Other comprehensive loss (4,132) Comprehensive income $52,077
*Comprehensive income as of March 31, 2000 was $143.7 million. See notes to consolidated financial statements. REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) Three Months Ended March 31 2001 2000 Operating Activities: Net income $ 122,752 $ 146,005 Adjustments to reconcile net cash provided by operating activities (Gain) on sale of credit card portfolio -0- (67,220) Depreciation and amortization of premises and equipment 15,617 15,109 Provision for loan losses 28,500 29,177 Net (accretion) of securities (1,600) (789) Amortization of loans and other assets 21,054 19,357 Amortization of deposits and borrowings 234 235 Provision for losses on other real estate 753 30 Deferred income taxes (3,444) (5,860) (Gain) on sale of premises and equipment (1,140) (613) Realized securities (gains) losses (475) 40,018 Decrease (increase) in trading account assets 2,061 (9,612) (Increase) decrease in mortgages held for sale (243,712) 215,153 Decrease (increase) in interest receivable 39,292 9,036 (Increase) in other assets (100,616) (88,935) Increase in other liabilities 219,100 111,197 Stock issued to employees -0- 3,088 Other 854 503 Net Cash Provided By Operating Activities 99,230 415,879 Investing Activities: Net decrease (increase) in loans 229,659 (1,116,740) Proceeds from sale of credit card portfolio -0- 344,785 Proceeds from sale of securities available for sale 10,013 1,139,147 Proceeds from maturity of investment securities 126,515 459,618 Proceeds from maturity of securities available for sale 1,116,566 256,927 Purchase of investment securities (2,128) (8,016) Purchase of securities available for sale (661,092) (78,226) Net (increase) in interest-bearing deposits in other banks (550,173) (37,530) Proceeds from sale of premises and equipment 11,086 3,185 Purchase of premises and equipment (17,986) (18,843) Net decrease (increase) in customers' acceptance liability 440 (13,526) Acquisitions net of cash acquired (92,811) 20,529 Net Cash Provided By Investing Activities 170,089 951,310 Financing Activities: Net (decrease) increase in deposits (839,862) 1,811,801 Net increase (decrease) in short-term borrowings 410,589 (3,736,396) Proceeds from long-term borrowings 946,389 446,940 Payments on long-term borrowings (394,575) (165,390) Net (decrease) increase in bank acceptance liability (440) 13,526 Cash dividends (58,353) (59,619) Purchase of treasury stock (355,848) (38,696) Proceeds from exercise of stock options 1,725 1,315 Net Cash (Used) By Financing Activities (290,375) (1,726,519) (Decrease) in Cash and Cash Equivalents (21,056) (359,330) Cash and Cash Equivalents, Beginning of Period 1,306,422 1,459,496 Cash and Cash Equivalents, End of Period $1,285,366 $1,100,166
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 NOTE A -- Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. For a summary of significant accounting policies that have been consistently followed, see NOTE A to the Consolidated Financial Statements included under Item 8 of the Annual Report on Form 10-K. It is management's opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included. Certain amounts in prior periods have been reclassified to conform to the current period presentation. NOTE B -- Business Combinations In February 2001, Regions acquired for cash Rebsamen Insurance, Inc., of Little Rock, Arkansas. This transaction, accounted for as a purchase, added approximately $32 million in assets and generated approximately $21.4 million in excess purchase price. In March 2001, Regions issued 20,406,427 shares of common stock and paid $203 million in cash in exchange for all the outstanding stock of Morgan Keegan, Inc., one of the South's largest investment firms headquartered in Memphis, Tennessee. This transaction, accounted for as a purchase, added $2.0 billion in assets and generated approximately $526.3 million in excess purchase price but had no impact on the Consolidated Statements of Income for the three months ended March 31, 2001. NOTE C -- Pending Acquisitions As of March 31, 2001, Regions has no pending business combinations. NOTE D -- New Accounting Standards In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (Statement 140) that replaces, in its entirety, Statement of Financial Accounting Standards No. 125. Statement 140 provides guidance for determining whether a liability has been extinguished. Statement 140 also provides guidance for accounting for servicing of financial assets, the receipt or pledging of collateral, and requires certain disclosures. Statement 140 is effective for transfers occurring after March 31, 2001. Regions continues to evaluate the impact of Statement 140 and does not expect it to be material to its financial statements. NOTE E -- Business Segment Information Regions' segment information is presented geographically, based on Regions' three operating regions in the Southeastern United States. Each region is a strategic business unit that serves a particular group of customers in a specified area. The company's three reportable regions are West, Central, and East. These regions represent the company's branch banking functions and have separate managements that are responsible for the operation of each business unit. The West region consists of the states of Arkansas, Louisiana, and east Texas. The Central region is made up of Alabama and Tennessee. The East region comprises Georgia, South Carolina, and Florida. In addition, Regions has included the activity of its treasury division, which includes its bond portfolio, indirect mortgage lending division, and other wholesale activities, and its mortgage banking division. The reportable segment designated "other" includes activity of Regions' broker dealer and insurance subsidiaries, the indirect consumer lending division, and the parent company. At the end of 2000, Regions implemented a new funds transfer pricing system effecting the method unit banks are reported within each region. This methodology is based on duration matched transfer pricing. The new system was in place for the first three months of 2001 and will influence comparability with the prior year. The accounting policies used by each reportable segment are the same as those discussed in Note A to the Consolidated Financial Statements included under Item 8 of the Annual Report on Form 10-K. The following table presents financial information for each reportable segment. Three months ended March 31, 2001 (in thousands) Mortgage Total West Central East Treasury Banking Other Company Net interest income $88,961 $96,406 $99,282 $ (631) $ 2,730 $60,386 $347,134 Provision for loan loss 6,236 7,411 7,470 5,933 398 1,052 28,500 Non-interest income 27,684 34,485 24,165 413 29,716 32,307 148,770 Non-interest expense 61,873 59,599 57,378 20,795 27,548 67,528 294,721 Income taxes 18,227 24,013 22,030 (10,124) 1,676 (5,891) 49,931 Net income $30,309 $39,868 $36,569 $(16,822) $ 2,824 $30,004 $122,752 Average assets $7,110,885 $8,449,350 $8,374,066 $17,851,661 $701,070 $875,811 $43,362,843 Three months ended March 31, 2000 (in thousands) Mortgage Total West Central East Treasury Banking Other Company Net interest income $95,128 $108,600 $100,948 $11,553 $ 2,516 $ 35,371 $354,116 Provision for loan loss 6,420 7,557 7,537 5,998 354 1,311 29,177 Non-interest income 24,046 31,244 20,523 38 34,613 56,328 166,792 Non-interest expense 56,093 53,928 54,708 4,862 27,565 73,979 271,135 Income taxes 22,421 31,241 24,019 275 3,464 (6,829) 74,591 Net income $34,240 $47,118 $ 35,207 $ 456 $ 5,746 $ 23,238 $146,005 Average assets $6,684,377 $7,792,854 $7,660,414 $17,165,099 $923,487 $2,362,675 $42,588,906
NOTE F -- Derivative Financial Instruments In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of Statement of Financial Accounting Standards No. 133" (Statement 138). Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (Statement 133) requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments (referred to as fair value hedges); hedges of the variable cash flows of forecasted transactions (cash flow hedges); and hedges of foreign currency exposures of net investments in foreign operations. Statement 133, deferred by Statement of Financial Accounting Standards No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Regions maintains positions in derivative financial instruments to manage interest rate risk, facilitate asset/liability management strategies, and to alter other risk exposures. The most common derivatives are forward rate agreements, interest rate swaps, put and call options, and interest rate caps and floors. Regions policy is to use derivative contracts to alter its exposure to interest rate risk. Regions utilizes certain derivative instruments to hedge the variable cash flows of forecasted transactions. To the extent that the hedge of future cash flows is effective, changes in the fair value of the derivative are recognized as a component of other comprehensive income in stockholders' equity. At March 31, 2001, Regions recognized a $4.1 million loss in other comprehensive income related to cash flow hedges. The Company will amortize a portion of this loss into earnings over time. The net gains and losses, included in other non-interest expense as a result of hedge ineffectiveness, were not material to the results of operations for the quarter ended March 31, 2001. Regions also 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. The amount of hedging gains and losses, which is reflected in other non-interest income, was not material to the results of operations for the quarter ended March 31, 2001. 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 positions. 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 March 31, 2001, was not material. Concurrent to the adoption of Statement of Financial Accounting Standard No. 133, Regions reclassified approximately $3.4 billion of its investment securities to securities available for sale to provide additional flexibility in managing its securities portfolio. The company reflected a $2.2 million unrealized loss in other comprehensive income associated with the transfer. Management's Discussion and Analysis of Financial Condition and Results of Operations Regions' total assets at March 31, 2001, were $46.1 billion -- an increase of 11% over a year earlier. This increase was due to growth in almost all categories of assets due to acquisition activity and internal growth, partially offset by a decline in the securities portfolio. Maturities from the securities portfolio were used to reduce short-term funding. Since year-end 2000, total assets have increased 6% despite a slight decline in loans. The increase was due primarily to growth in trading account assets and other assets related to the Morgan Keegan, Inc. acquisition. Comparisons with the prior year are affected by the acquisitions of branches of AmSouth Bancorporation, Heritage Bancorp, Inc., First National Bancshares of Louisiana, Inc., East Coast Bank Corporation, Rebsamen Insurance, Inc. and Morgan Keegan, Inc. (accounted for as purchases). Relevant 2000 and 2001 acquisitions are summarized as follows: Date Headquarters Total Assets Accounting Acquired Company Acquired Location (in thousands) Treatment May 2000 Branches of Fort Smith, $ 186,361 Purchase AmSouth Arkansas Bancorporation August Heritage Bancorp, Hutto, Texas 114,370 Purchase 2000 Inc. August First National Alexandria, 303,793 Purchase 2000 Bancshares of Louisiana Louisiana, Inc. September East Coast Bank Ormond Beach, 107,779 Purchase 2000 Corporation Florida February Rebsamen Little Rock, 32,082 Purchase 2001 Insurance, Inc. Arkansas March Morgan Keegan, Memphis, 2,008,179 Purchase 2001 Inc. Tennessee LOANS Loans increased 7% over the past 12 months. Excluding the effect of acquisitions, loans increased 6% over the prior year. Since year-end, total loans have decreased less than 1%. Declines in real estate mortgage loans were partially offset by growth in the commercial and industrial category. The average yield on loans during the first three months of 2001 was 8.76%, compared to 8.47% during the same period in 2000. Non-performing assets were as follows (in thousands): Mar. 31, Dec. 31, Mar. 31, 2001 2000 2000 Non-accruing loans $227,552 $197,974 $189,260 Loans past due 90 days or more 40,923 35,903 64,117 Renegotiated loans 11,024 12,372 12,969 Other real estate 29,012 28,443 13,474 Total $308,511 $274,692 $279,820 Non-performing assets as a percentage of loans and other real estate .99% .87% .96% Non-accruing loans have increased $38.3 million since March of last year and $29.6 million since year end. The increases were primarily in the commercial and real estate categories. Loans past due 90 days or more decreased $23.2 million, compared to March 2000, but have increased $5.0 million since year end. At March 31, 2001, real estate loans comprised $109.8 million of total non-accruing loans, with commercial loans accounting for $111.9 million and consumer loans $5.9 million. Other real estate increased $15.5 million since March 2000 due to parcels added in connection with acquisitions. Activity in the allowance for loan losses is summarized as follows (in thousands): Mar. 31, Mar. 31, 2001 2000 Balance at beginning of period $376,508 $338,375 Net loans charged-off: Commercial 14,390 2,345 Real estate 804 559 Installment 8,244 13,509 Total 23,438 16,413 Allowance of acquired banks -0- 1,859 Provision charged to expense 28,500 29,177 Balance at end of period $381,570 $352,998 Net loan losses in the first three months of 2001 and 2000 were 0.30% and 0.23% of average loans (annualized), respectively. At March 31, 2001 the allowance for loan losses stood at 1.23% of loans, compared to 1.21% a year ago and 1.20% at year end. The allowance for loan losses as a percentage of non-performing loans and non-performing assets was 137% and 124%, respectively, at March 31, 2001, compared to 133% and 126%, respectively, at March 31, 2000. The allowance for loan losses is maintained at a level deemed adequate by management to absorb possible losses from loans in the portfolio. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including but not limited to: (1) management's estimate of future economic conditions and the resulting impact on Regions, (2) management's estimate of the financial condition and liquidity of certain loan customers, and (3) management's estimate of collateral values of property securing certain loans. Because all of these factors and others involve the use of management's estimation and judgment, the allowance for loan losses is inherently subject to adjustment at future dates. At March 31, 2001, it is management's opinion that the allowance for loan losses is adequate. However, unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions, in excess of normal provisions, to the allowance for loan losses in future periods. No portion of the resulting allowance is in any way allocated or restricted to any individual loan or group of loans. The entire allowance is available to absorb losses from any and all loans. Regions uses a systematic approach to determine the adequacy of the allowance for loan losses. Regions' systematic approach includes assigning loss factors, based on historical data as adjusted for current business and economic conditions, to portfolios of loans with similar characteristics for which estimates of inherent probable losses can be made. The loss factors are applied to the respective portfolios in order to determine the overall allowance adequacy. 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 (7) management's analysis of economic conditions and the resulting impact on Regions' loan portfolio. 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. INVESTMENTS AND OTHER ASSETS Total securities have declined 7% since March 31, 2000 and 5% since year end. These declines resulted primarily from Regions' decision to reduce the securities portfolio and reduce short-term wholesale funding. Concurrently with the adoption of FASB Statement of Financial Accounting Standards No. 133, Regions reclassified significantly all of its investment securities to securities available for sale to provide additional flexibility in managing its securities portfolio. Mortgage loans held for sale have increased $115 million since March 31, 2000 and $244 million since year end as a result of higher levels of residential mortgage loan production at Regions' mortgage banking subsidiary. Residential mortgage loan production at Regions' mortgage banking subsidiary was approximately $737 million during the first three months of 2001, compared to $730 million during the same time period in 2000 and $437 million in the fourth quarter of 2000. Low mortgage interest rates have led to an increase in mortgage refinance activity. Interest-bearing deposits in other banks at March 31, 2001 totaled $1.1 billion, an increase of $1.0 billion compared to a year ago and an increase of $1.1 billion compared to year end. The Morgan Keegan acquisition accounts for $542 million of this increase. Premises and equipment have increased $26.2 million since year end and $38.9 million since March 31, 2000. These increases were due primarily to the addition of premises and equipment obtained through acquisitions. Other assets increased $1.3 billion over year end and the first quarter of last year. These increases were due primarily to $526.3 million in excess purchase price generated in the Morgan Keegan transaction. Additionally, $523.1 million in margin receivables were acquired. Other areas of increase include low income housing investments and prepaid items. DEPOSITS Total deposits have decreased 2% since March 31 of last year. Excluding the deposits acquired in connection with acquisitions, total deposits have decreased 4%. The decline resulted primarily from decreases in large certificates of deposit and other wholesale deposits. Since year end, total deposits have decreased 3%. Core deposits, which exclude wholesale deposits, have increased 2% since March of last year. BORROWINGS Net federal funds purchased and security repurchase agreements totaled $2.3 billion at March 31, 2001, $1.9 billion at year end and $3.1 billion at March 31, 2000. The decrease since the first quarter of last year resulted primarily from the pay down of outstanding federal funds purchased and security repurchase positions using the proceeds from the maturities in the securities portfolio and the increased utilization of long-term borrowings. The level of federal funds and security agreements can fluctuate significantly on a day-to-day basis, depending on funding needs and which sources of funds are used to satisfy those needs. During the first three months of 2001 net funds purchased averaged $2.1 billion compared to $4.3 billion for the same period of 2000, indicating decreased reliance on overnight purchased funds as a funding source. Other short-term borrowings increased $474 million since March 31, 2000 and $91 million since year end. Long-term borrowings have increased $742.6 million since year end, and $3.2 billion since March 31, 2000. These increases in long-term borrowings resulted primarily from Regions' continued utilization of Federal Home Loan Bank structured notes with call periods in excess of one year, as well as issuance of $500 million of subordinated debt and $288 million of trust preferred securities. A significant portion of the debt issuance was used to fund the repurchase of treasury stock and cash payments to satisfy cash elections associated with the Morgan Keegan transaction and the purchase of Rebsamen. STOCKHOLDERS' EQUITY Stockholders' equity was $3.8 billion at March 31, 2001, an increase of 21% over last year and an increase of 10% since year end. This increase results from the Company's acquisition of capital in addition to net stock issuances in connection with acquisitions. Accumulated other comprehensive income (loss) totaled $53.0 million at March 31, 2001, compared to $908,000 at year end and $(137.4) million at March of 2000. Regions' ratio of equity to total assets was 8.24% at March 31, 2001, compared to 7.58% a year ago and 7.92% at year end. Regions and its subsidiaries are required to comply with capital adequacy standards established by banking regulatory agencies. Currently, there are two basic measures of capital adequacy: a risk-based measure and a leverage measure. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and interest rate risk, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with specified risk-weighting factors. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Banking organizations that are considered to have excessive interest rate risk exposure are required to maintain higher levels of capital. The minimum standard for the ratio of total capital to risk- weighted assets is 8%. At least 50% of that capital level must consist of common equity, undivided profits and non-cumulative perpetual preferred stock, less goodwill and certain other intangibles ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of a limited amount of other preferred stock, mandatory convertible securities, subordinated debt and a limited amount of the allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based capital." The banking regulatory agencies also have adopted regulations which supplement the risk-based guidelines to include a minimum ratio of 3% of Tier 1 capital to average assets less goodwill (the "leverage ratio"). Depending upon the risk profile of the institution and other factors, the regulatory agencies may require a leverage ratio of 1% to 2% above the minimum 3% level. The following chart summarizes the applicable bank regulatory capital requirements. Regions' capital ratios at March 31, 2001, substantially exceeded all regulatory requirements. Bank Regulatory Capital Requirements Minimum Regions at Regulatory March 31, Requirement 2001 Tier 1 capital to risk-adjusted assets 4.00% 7.93% Total risk-based capital to Risk-adjusted assets 8.00 12.17 Tier 1 leverage ratio 3.00 6.34 LIQUIDITY Regions' primary sources of liquidity are maturities from its loan and securities portfolios. In addition to these sources of liquidity, Regions has access to purchased funds in the state and national money markets. Liquidity is further enhanced by a relatively stable source of deposits. At March 31, 2001 the loan to deposit ratio was 99.81%, compared to 91.01% a year ago and 97.98% at year end. Regions' management places constant emphasis on the maintenance of adequate liquidity to meet conditions that might reasonably be expected to occur. NET INTEREST INCOME Net interest income for the first three months of 2001 decreased $7.0 million or 2%, compared to the same period in 2000. The decreased net interest income resulted from higher funding costs, partially offset by higher yields on earning assets and a higher level of earning assets. The net yield on interest-earning assets (taxable equivalent basis) was 3.69% in the first three months of 2001, compared to 3.65% in the same period in 2000. 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. One of Regions' primary risks 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 and rate sensitive liabilities. Off-balance sheet hedges also provide Regions with a tool to reduce interest rate sensitivity. The relationship of rate sensitive earning assets to rate sensitive liabilities, adjusted for the effect of any 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. 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. 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. In addition, 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. Regions uses various 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 under varying interest rate conditions. Simulation analysis is used to test the sensitivity of Regions' net interest income to both the level of interest rates and the slope of the yield curve. Simulation analysis uses a detailed schedule with the contractual repricing characteristics of interest-earning assets and interest-bearing liabilities 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. FORWARD-LOOKING STATEMENTS The following section 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. Management estimates the effect shifts in interest rates may have upon Regions' net interest income. The following table demonstrates the expected effect a given interest rate shift would have on net interest income. Change in $ Change in Net Interest Rates Interest Income % Change in Net (in basis points) (in thousands) Interest Income +200 $ (10,658) (0.74)% +100 8,883 .62 -100 (33,704) (2.35) -200 (102,373) (7.13) PROVISION FOR LOAN LOSSES The provision for loan losses was $28.5 million or .37% annualized of average loans in the first three months of 2001, compared to $29.2 million or .41% annualized of average loans in the first three months of 2000. A provision for loan losses in excess of charge-offs was recorded in the first three months of 2001 due to management's assessment of inherent losses associated with the loan portfolio and management's evaluation of current economic conditions. NON-INTEREST INCOME Total non-interest income decreased $18.0 million or 11% compared to the first three months of 2000. Trust department income increased $935,000 compared to the first three months of 2000 due to higher advisory fees from mutual funds. An increase in the number of deposit accounts due to acquisitions and internal growth, and fee increases, resulted in service charges on deposit accounts increasing $9.9 million or 18% in the first three months of 2001 compared to the same period in 2000. Mortgage servicing and origination fees decreased $756,000 or 3% in the first three months of 2001 compared to the same period in 2000, primarily due to lower servicing fees related to sales of mortgage servicing rights and prepayments. Partially offsetting this decline was increased origination fees due to higher levels of new loan production in the first quarter of 2001. The mortgage company's servicing portfolio totaled $21.1 billion at March 31, 2001, compared to $23.8 billion at March 31, 2000. Security losses totaling $40.0 million were recorded in the first quarter of 2000 related to the sale of $1.2 billion in lower yielding mortgage related securities. Other non-interest income decreased $68.6 million in the first three months of 2001 compared to the same period in 2000. In the first quarter of 2000, Regions recognized a $67.2 million gain in connection with the sale of its credit card portfolio as well as a $4.4 million gain related to the sale of mortgage servicing rights, which are included in other non- interest income. NON-INTEREST EXPENSE Total non-interest expense increased $23.6 million or 9% in the first three months of 2001 compared to the same period in 2000. The Company has maintained its ongoing focus on cost control in 2001 and has undertaken several initiatives to reduce certain ongoing costs. Excluding acquisitions, non-interest expense increased $14.1 million or 5% in the first three months of 2001 compared to the same period in 2000. Salaries and employee bene fits were up 8% in the first three months of 2001 compared to the same period in 2000. These increases are due to a higher number of employees (16,584 FTE as of March 31, 2001) resulting from acquisitions, coupled with normal merit increases and higher benefit costs. Net occupancy expense and furniture and equipment expense increased 10% in the first three months of 2001 over the same period in 2000. These increases are primarily the result of higher levels of depreciation related to new branch equipment and assets acquired in connection with acquisitions. Other non-interest expense increased $8.1 million or 9% in the first three months of 2001 compared to the same period in 2000. The increase resulted from higher losses on sale of mortgages, excess purchase price amortization, legal fees and other non-credit losses. First quarter 2001 non-interest expense also includes $2.1 million in costs related to Regions continued branch rationalization. TAXES Income tax expense decreased $24.7 million or 33% over the first three months of 2000. The decline resulted from lower levels of taxable income and the continued realization of tax benefits related to the recapitalization of a subsidiary. Regions' effective tax rate for the first three months of 2001 and 2000 were 28.9% and 33.8%, respectively. The effective tax rate declined since last year, primarily due to realization of a portion of the tax benefits associated with the recapitalization of one of Regions' subsidiaries. During the fourth quarter of 2000, Regions recapitalized this subsidiary, raising Tier 2 capital, which resulted in a reduction in taxable income of this subsidiary attributable to Regions. The benefit to Regions of reduced taxable income of this subsidiary attributable to Regions is expected to result in lower effective tax rate applicable to consolidated income before taxes of Regions for future periods. Regions' effective tax rate applicable to consolidated income before taxes will be dependent upon 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. NET INCOME Net income for the first quarter totaled $122.8 million or $.57 per diluted share, a 14% decline (on a per share basis) compared to the first three months of 2000. Operating income, which excludes a net after-tax gain of $17.8 million resulting from the sale of the credit card portfolio and sale of securities in 2000, decreased 2% on a per-share diluted basis from the first quarter of last year. Annualized return on stockholders' equity during the first quarter of 2001 was 14.82%. In the first quarter of 2000, annualized return on stockholders' equity was 18.90% based on net income and 16.60% based on operating income. Annualized return on assets during the first quarter of 2001 was 1.15%. In the first quarter of 2000, annualized return on assets was 1.38% based on net income and 1.21% based on operating income. Item 3. Qualitative and Quantitative Disclosures about Market Risk Reference is made to pages 16 and 17 `Market Risk -- Interest Rate Sensitivity' and to page 18 `Forward-Looking Statements' included in Management's Discussion and Analysis. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K Report on Form 8-K, dated March 30, 2001, was filed under items 5 and 7 related to the Registrant's completed acquisition of Morgan Keegan, Inc. Report on Form 8-K, dated March 5, 2001, was filed under items 5 and 7 related to the Registrant's issuance of $500 million in subordinated debt. Report on Form 8-K, dated February 26, 2001, was filed under items 5 and 7 related to the Registrant's issuance of $288 million in trust preferred securities. Report on Form 8-K, dated January 18, 2001, was filed under items 5 and 7 related to the Registrant's issuance of a press release reporting on its results of operations for the quarter and fiscal year ended December 31, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized. Regions Financial Corporation DATE: May 14, 2001 /s/ D. Bryan Jordan D. Bryan Jordan Executive Vice President and Comptroller (Chief Accounting Officer and Duly Authorized Officer)