Regions Bank 2010 Annual Report Download - page 171

Regions Bank may not, without approval of the Federal Reserve, declare or pay a dividend to Regions if the total of
all dividends declared in a calendar year exceeds the total of (a) Regions Bank’s net income for that year and (b) its
retained net income for the preceding two calendar years, less any required transfers to additional paid-in capital or
to a fund for the retirement of preferred stock. As a result of the losses incurred by Regions Bank in 2010, 2009, and
2008, Regions Bank cannot, without approval from the Federal Reserve, declare or pay a dividend to Regions until
such time as Regions Bank is able to satisfy the criteria discussed in the preceding sentence. Given the losses in
2010, 2009, and 2008, Regions Bank does not expect to be able to pay dividends to Regions in the near term
without obtaining regulatory approval. 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.
In addition, Regions must adhere to various U.S. Department of Housing and Urban Development (“HUD”)
regulatory guidelines including required minimum capital to maintain their Federal Housing Administration
approved status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of
December 31, 2010, Regions was in compliance with HUD guidelines. Regions is also subject to various capital
requirements by secondary market investors.
NOTE 14. STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
On November 14, 2008, Regions completed the sale of 3.5 million shares of its Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, par value $1.00 and liquidation preference $1,000.00 per share (and $3.5
billion liquidation preference in the aggregate) to the U.S. Treasury as part of the Capital Purchase Program
(“CPP”). Regions will pay the U.S. Treasury on a quarterly basis a 5 percent dividend, or $175 million annually,
for each of the first five years of the investment, and 9 percent thereafter unless Regions redeems the shares.
Regions performed a discounted cash flow analysis to value the preferred stock at the date of issuance. For
purposes of this analysis, Regions assumed that the preferred stock would most likely be redeemed five years
from the valuation date based on optimal financial budgeting considerations. Regions used the Bloomberg USD
US Bank BBB index to derive the market yield curve as of the valuation date to discount future expected cash
flows to the valuation date. The discount rate used to value the preferred stock was 7.46 percent, based on this
yield curve at a 5-year maturity. Dividends were assumed to be accrued until redemption. While the discounting
was required based on a 5-year redemption, Regions did not have a 5-year security or similarly termed security
available. As a result, it was necessary to use a benchmark yield curve to calculate the 5-year value. To determine
the appropriate yield curve that was applicable to Regions, the yield to maturity on the outstanding debt
instrument with the longest dated maturity (8.875% junior subordinated notes due June 2048) was compared to
the longest point on the USD US Bank BBB index as of November 14, 2008. Regions concluded that the yield to
maturity as of the valuation date of the debt, which was 11.03 percent, was consistent with the indicative yield of
the curve noted above. The longest available point on this curve was 10.55 percent at 30 years.
As part of its purchase of the preferred securities, the U.S. Treasury also received a warrant to purchase
48.3 million shares of Regions’ common stock at an exercise price of $10.88 per share, subject to anti-dilution
and other adjustments. The warrant expires ten years from the issuance date. Regions used the Cox-Ross-
Rubinstein Binomial Option Pricing Model (“CRR Model”) to value the warrant at the date of issuance. The
CRR Model is a standard option pricing model which incorporates optimal early exercise in order to receive the
benefit of future dividend payments. Based on the transferability of the warrant, the CRR Model approach that
was applied assumes that the warrant holder will not sub-optimally exercise its warrant. The following
assumptions were used in the CRR Model:
157