For question B, I don't know the differences between gradual parallel shifts and instantaneous parallel shifts in yield curves. And how to connect it with question C? I don't see the connection. In the question it states that part b should influence part c.

Fourth Assignment Analysis of Financial Institutions and Financial Instruments Fall 2017 Professor Callen The questions below are based on excerpts from Regions Financial Form 10-K filing for the fiscal year ending December 31, 2008. Please answer the questions in bullet point form. Back ground Material: Regions is the fourteenth largest bank holding company in the U.S., headquartered in Birmington Alabama, and significantly exposed to loans in the Southeast, especially Florida. In November 2005, Regions acquired AmSouth Bancorporation, a bank holding company with $52 billion of assets that also was headquartered in Birmingham, Alabama, which explains much of Regions' growth from 2005 to 2006. Regions also sold EquiFirst, a wholesale subprime mortgage lender, to Barclays in April 2007. Part of this assignment is to find the relevant material in the (partial) 10K report provided you below. The excerpts included more material than you need to answer these questions. Questions a) By what percentage did Regions' net interest margin decrease (slightly) from 2007 to 2008? List the main reasons why Regions' net interest margin decreased from 2007 to 2008. b) Provide a likely reason why Regions' net interest income sensitivity to gradual parallel shifts in yield curves is very similar to Regions' net interest income sensitivity to instantaneous parallel shifts in yield curves at the end of 2008. (You would expect it to be about half as large.) c) Estimate the size of Regions' 0-1 year repricing gap at the end of 2008. Show your work and indicate any assumptions that you are making. (Hint: Your answer to part b should influence the answer to this part. (Hint: Think about what this implies about 0-1 year repricing gap.) d) Was Regions' (100 basis point) net interest sensitivity for 2007 a good predictor of the 2008 results? Why or why not? 1 Excerpts from Regions Financial Form 10-K filing for the year ending December 31, 2008 Item 1. Business Region Financial Corporation (together with its subsidiaries on a consolidated basis, \"Regions\" or \"Company\") is a financial holding company headquartered in Birmingham, Alabama, which operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing. At December 31, 2008, Regions had total consolidated assets of approximately $146.2 billion, total consolidated deposits of approximately $90.9 billion and total consolidated stockholders' equity of approximately $16.8 billion. Regions is a Delaware corporation that, on July 1, 2004, became the successor by merger to Union Planters Corporation and the former Regions Financial Corporation. Its principal executive offices are located at 1900 Fifth Avenue North, Birmingham, Alabama 35203, and its telephone number at that address is (205) 944-1300. Banking Operations Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At December 31, 2008, Regions operated approximately 2,300 ATMs and 1,900 banking offices in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The following table reflects the distribution of branch locations in each of the states in which Regions conducts its banking operations. Branches Alabama Arkansas Florida Georgia Illinois Indiana Iowa Kentucky Louisiana Mississippi Missouri North Carolina South Carolina Tennessee Texas Virginia Totals 251 114 420 155 72 66 18 19 129 155 68 9 37 300 84 3 1,900 Other Financial Services Operations In addition to its banking operations, Regions provides additional financial services through the following subsidiaries: Morgan Keegan & Company, Inc. (\"Morgan Keegan\"), a subsidiary of Regions Financial Corporation, is a full-service regional brokerage and investment banking firm. Morgan Keegan offers products and services including 2 securities brokerage, asset management, financial planning, mutual funds, securities underwriting, sales and trading, and investment banking. Morgan Keegan also manages the delivery of trust services, which are provided pursuant to the trust powers of Regions Bank. Morgan Keegan, one of the largest investment firms in the South, employs over 1,200 financial advisors offering products and services from over 300 offices located in Alabama, Arkansas, Florida, Georgia, Illinois, Kentucky, Louisiana, Massachusetts, Mississippi, New York, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions Insurance Group, Inc., a subsidiary of Regions Financial Corporation, is an insurance broker that offers insurance products through its subsidiaries Regions Insurance, Inc. (formerly Rebsamen Insurance, Inc.), headquartered in Little Rock, Arkansas, and Regions Insurance Services, Inc., headquartered in Memphis, Tennessee. Through its insurance brokerage operations in Alabama, Arkansas, Indiana, Louisiana, Missouri, Mississippi, Tennessee and Texas, Regions Insurance, Inc. offers insurance coverage for various lines of personal and commercial insurance, such as property, casualty, life, health and accident insurance. Regions Insurance Services, Inc. offers credit-related insurance products, such as title, term life, credit life, environmental, crop and mortgage insurance, as well as debt cancellation products to customers of Regions. With $117.1 million in annual revenues and 27 offices in eight states, Regions Insurance Group, Inc. is one of the largest insurance brokers in the United States. Regions has several subsidiaries and affiliates which are agents or reinsurers of credit life insurance products relating to the activities of certain affiliates of Regions. Regions Equipment Finance Corporation, a subsidiary of Regions Bank, provides domestic and international equipment financing products, focusing on commercial clients. 2008 OVERVIEW The year ended December 31, 2008 was an extremely tumultuous year for the U.S. economy and, more specifically, for the financial services industry. Deteriorating home values, among other factors, provided a catalyst for declining valuations across nearly all asset classes, including loans and securities. The property value declines, which began in late 2007, continued to build throughout 2008. While Regions did not have material exposure to many of the issues that plagued the industry (e.g., sub-prime loans, structured investment vehicles, collateralized debt obligations), the Company's exposure to the residential housing sector, primarily within its commercial real estate and construction loan portfolios, pressured its loan portfolio, resulting in increased credit costs and other real estate expenses. In another significant event, the results of goodwill impairment testing in the fourth quarter of 2008 indicated that the estimated fair value of Regions' General Banking/Treasury reporting unit goodwill was less than its book value, requiring a $6.0 billion non-cash charge to earnings. As a result of these factors, Regions reported a net loss from continuing operations of $5.6 billion or $8.07 per diluted common share in 2008. Not included in this amount was an $11.5 million after-tax loss related to EquiFirst, which was accounted for as discontinued operations. Included in the 2008 net loss was a $6.0 billion goodwill impairment charge ($8.63 per diluted share) and $124.1 million in after-tax merger-related expenses ($0.18 per diluted share). Net income from continuing operations was $1.95 per diluted share in 2007, including a reduction of $0.31 per diluted share related to $217.5 million in after-tax merger-related expenses. Excluding merger-related charges and goodwill impairment charges, annual earnings per common share from continuing operations was $0.74 in 2008 as compared to $2.26 in 2007. Significant drivers of 2008 results include a much higher provision for loan losses and lower net interest income. Offsetting to some extent was Regions' solid fee income, including revenues from Morgan Keegan. Net interest income was $3.8 billion in 2008 compared to $4.4 billion in 2007. The decrease resulted in a lower net interest margin, which declined to 3.23 percent during 2008 compared to 3.79 percent in 2007. The net interest margin was negatively impacted primarily by factors directly and indirectly associated with the erosion of economic and industry conditions in late 2007 and throughout 2008. These factors include an unfavorable variation in the general level and shape of the yield curve (exemplified by recent Federal Reserve interest rate reductions), intensification of price-based competition for retail deposits, disintermediation of deposits into other non-bank asset classes, rate increases for new debt issuances, and rising non-performing asset levels. Moreover, the costs of maintenance of the Company's liquidity profile in the presently stressed environment (including maintaining prudent levels of excess liquidity) have increased, further pressuring the net interest margin. 3 Net charge-offs totaled $1.5 billion, or 1.59 percent of average loans in 2008 compared to $270.5 million, or 0.29 percent of average loans in 2007. The increased loss rate resulted from deteriorating economic conditions during 2008, especially related to the housing sector. More specifically, approximately $639.0 million of 2008 net charges-offs were related to non-performing loan dispositions or transfers to held for sale as compared to none in 2007. Non-performing assets increased $853.9 million between December 31, 2007 and December 31, 2008 to $1.7 billion, primarily due to continued weakness in the Company's residential homebuilder portfolio, which began experiencing significant pressure toward the end of 2007. This pressure was due to a combination of declining residential real estate demand and resulting price and collateral value declines in certain of the Company's markets, particularly areas of Florida and Atlanta, Georgia. Condominium loans, mainly in Florida, were also a driver of the increase in non-performing assets. Regions aggressively managed its exposure to its most stressed assets by selling or transferring to held for sale approximately $1.3 billion of non-performing loans during 2008. Non-performing assets held for sale totaled $423.3 million at December 31, 2008. The provision for loan losses is used to maintain the allowance for loan losses at a level that, in management's judgment, is adequate to cover losses inherent in the loan portfolio as of the balance sheet date. During 2008, the provision for loan losses from continuing operations increased to $2.1 billion compared to $555.0 million in 2007. The provision rose due to weakening conditions in the broad economy and, more specifically, in the residential housing market, which most significantly impacted management's estimate of inherent losses in the residential homebuilder, condominium, home equity and residential mortgage portfolios. As a result of the increased provision for loan losses and despite significantly higher loan charge-offs, which increased $1.3 billion, Regions increased its allowance for credit losses to 1.95 percent of total loans, net of unearned income, at December 31, 2008, as compared to 1.45 percent at December 31, 2007. Total loans increased by 2.1 percent in 2008, driven mainly by commercial and industrial and home equity lending. Partially offsetting this growth, demand for residential-related real estate lending softened during the year, primarily a result of the challenging economic backdrop and industry-wide tightening of credit. Deposits declined 4.1 percent in 2008 as compared to 2007, driven by a decline in foreign deposits utilized as an alternative to overnight funding. Customer deposits, defined as total deposits less deposits used for corporate treasury purposes (e.g. overnight funding sources), increased by 4.6 percent during 2008, driven largely by higher certificate of deposit balances. CRITICAL ACCOUNTING POLICIES Allowance for Credit Losses The allowance for credit losses (\"allowance\") consists of the allowance for loan losses and the reserve for unfunded credit commitments. Management evaluates the adequacy of the allowance based on the total of these two components. Determining the appropriate level of the allowance is one of the most critical and complex accounting estimates for any financial institution. Accounting guidance requires Regions to make a number of estimates related to the level of credit losses inherent in the portfolio at year-end. A full discussion of these estimates and other factors can be found in the \"Allowance for Credit Losses\" section within the discussion of credit risk, found in a later section of this report. The allowance is sensitive to a variety of internal factors, such as portfolio performance and assigned risk ratings, and external factors, such as interest rates and the general health of the economy. Management reviews scenarios having different assumptions for variables that could result in increases or decreases in probable inherent credit losses, which may materially impact Regions' estimate of the allowance and results of operations. Management's estimate of the allowance for commercial products, which includes commercial, construction, and commercial real estate mortgage loans, could be affected by risk rating upgrades or downgrades as a result of fluctuations in the general economy, developments within a particular industry, or changes in an individual's credit due to factors particular to that credit, such as competition, management or business performance. A reasonably possible scenario would be an estimated 20 percent migration of lower risk-related pass credits to criticized status, which could increase estimated inherent losses by approximately $218.2 million. A 20 percent reduction in the level of criticized credits is also a reasonably possible scenario, which would result in an approximate $111.8 million decrease in estimated inherent losses. 4 For residential real estate mortgages, home equity lending and other consumer-related loans, individual products are reviewed on a group basis or in loan pools (e.g., residential real estate mortgage pools). The total of all residential loans, including residential real estate mortgages and home equity lending, represents approximately 32 percent of total loans. Losses can be affected by such factors as collateral value, loss severity, the economy and other uncontrollable factors. A 20-basis-point increase or decrease in the estimated loss rates on these residential loans would change estimated inherent losses by approximately $61.7 million. The loss analysis related to other consumer-related loans includes reasonably possible scenarios with estimated loss rates increasing or decreasing by 50 basis points, which would increase or decrease the related estimated inherent losses by approximately $30.8 million, respectively. Additionally, the estimate of the allowance for credit losses for the entire portfolio may change due to modifications in the mix and level of loan balances outstanding and general economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment or employment rates, bankruptcy filings, used car prices, real estate demand and values, and the effects of weather and natural disasters such as droughts and hurricanes. While no one factor is dominant, each has the ability to result in actual loan losses that could differ materially from originally estimated amounts. OPERATING RESULTS NET INTEREST INCOME AND MARGIN Net interest income (interest income less interest expense) is Regions' principal source of income and is one of the most important elements of Regions' ability to meet its overall performance goals. Net interest income on a taxable-equivalent basis decreased 13 percent to $3.9 billion in 2008 from $4.4 billion in 2007, resulting in a decline in the net interest margin, which declined from 3.79 percent in 2007 to 3.23 percent in 2008. The net interest margin was impacted substantially by developments in the aforementioned economic and operating environment in 2008. More specifically, changes in market interest rates and the yield curve were closely connected with economic developments during the year. Regions' balance sheet was in an asset sensitive position during 2008, meaning that decreases in interest rates cause contraction in the Company's net interest margin. As such, falling rates in 2008 led to an unfavorable change in the yield curve and, in turn, the net interest margin. However, changes in the level and shape of the yield curve were largely symptomatic of the pervasive disturbances in the financial markets and the broader economy, observed particularly during the second half of 2008. Amidst the many complex implications of this recent financial turmoil, these forces intensified price-based competition in the retail deposit space (increasing the interest cost of maintaining and acquiring deposits), raised wholesale funding costs (increasing the costs of liquidity management), prompted a disintermediation out of conventional bank deposits into other asset classes, and increased the level of non-performing assets. During 2008, the Federal Reserve lowered the Federal funds rate by approximately 400 basis points in response to mounting concerns of a recession. As indicated above, Regions was asset sensitive at year-end 2008 and anticipates this positioning to continue to pressure net interest income during 2009. Table 3 \"Consolidated Average Daily Balances and Yield/Rate Analysis Including Discontinued Operations\" presents a detail of net interest income, on a fully taxable-equivalent basis, the net interest margin, and the net interest spread. 5 Table 3Consolidated Average Daily Balances and Yield/Rate Analysis Including Discontinued Operations Average Balance 2008 Income/ Expense 2007 Yield/ Average Income/ Yield/ Average Rate Balance Expense Rate Balance (Dollars in thousands; yields on taxable-equivalent basis) 2006 Income/ Expense Yield/ Rate Assets Interest-earning assets: Federal funds sold and securities purchased under agreements to resell Trading account assets Securities: $ Taxable Tax-exempt Loans held for sale Loans held for sale divestitures Loans, net of unearned income(1)(2) Other interest-earning assets 867,868 1,472,922 $ 16,897,189 753,700 664,456 827,622 61,065 35,733 Total interest-earning assets Allowance for loan losses 18,623 65,769 2.15 % $ 4.47 4.90 8.10 5.38 1,020,994 1,441,565 $ 50,801 72,199 4.98 % $ 961,127 5.01 1,133,966 $ 39,269 67,917 4.09 % 5.99 16,981,646 736,762 1,538,813 856,043 62,751 110,950 5.04 8.52 7.21 12,638,833 470,003 2,286,604 608,171 4.81 50,961 10.84 176,672 7.73 283,697 21,521 7.59 262,884 20,087 7.64 97,601,272 1,872,964 5,562,261 29,042 5.70 1.55 94,372,061 588,141 6,900,007 38,500 7.31 6.55 64,765,653 589,794 4,805,931 40,441 7.42 6.86 120,130,371 6,600,115 5.49 116,963,679 8,112,772 6.94 83,108,864 5,809,449 6.99 (1,413,085 ) (1,063,011 ) (833,691 ) Cash and due from banks 2,522,344 2,848,590 2,153,838 Other non-earning assets 22,707,395 20,007,361 11,371,266 $ 143,947,025 $ 138,756,619 $ 95,800,277 Liabilities and Stockholders' Equity Interest-bearing liabilities: Savings accounts Interest-bearing transaction accounts Money market accounts Money market accounts foreign Time depositscustomer Interest-bearing deposits divestitures $ 3,743,595 $ 4,350 0.12 % $ 3,797,413 $ 10,879 0.29 % $ 3,205,123 $ 12,356 0.39 % 15,057,653 18,269,092 127,123 326,219 0.84 1.79 15,553,355 19,455,402 311,672 629,187 2.00 3.23 10,664,995 11,442,827 168,320 325,398 1.58 2.84 2,827,806 28,301,406 46,343 1,099,090 1.64 3.88 3,821,607 28,524,600 154,806 1,282,132 4.05 4.49 2,714,183 22,129,808 111,061 899,208 4.09 4.06 374,179 12,091 3.23 365,642 11,974 3.27 Total customer depositsinterestbearing 68,199,552 1,603,125 2.35 71,526,556 2,400,767 3.36 50,522,578 1,528,317 3.03 Time depositsnon customer Other foreign deposits 2,082,891 2,074,274 74,714 46,231 3.59 2.23 1,338,340 3,857,657 69,961 193,155 5.23 5.01 896,835 2,081,440 45,673 106,177 5.09 5.10 Total treasury deposits interest-bearing 4,157,165 120,945 2.91 5,195,997 263,116 5.06 2,978,275 151,850 5.10 72,356,717 1,724,070 2.38 76,722,553 2,663,883 3.47 53,500,853 1,680,167 3.14 7,697,505 170,993 2.22 8,080,179 377,595 4.67 5,162,196 233,208 4.52 Total interest-bearing deposits Federal funds purchased and securities sold under 6 agreements to repurchase Other short-term borrowings Long-term borrowings 8,703,601 13,509,689 198,395 626,976 2.28 4.64 1,901,897 9,697,823 81,872 552,947 4.30 5.70 1,089,223 6,855,601 42,289 385,152 3.88 5.62 Total interest-bearing liabilities 102,267,512 2,720,434 2.66 96,402,452 3,676,297 3.81 66,607,873 2,340,816 3.51 Net interest spread 2.83 3.13 3.48 Customer deposits non-interest-bearing Other liabilities 17,720,285 19,002,548 13,965,594 4,019,821 3,315,160 2,858,178 Stockholders' equity 19,939,407 20,036,459 12,368,632 $ 143,947,025 $ 138,756,619 $ 95,800,277 Net interest income/margin on a taxableequivalent basis(3) $ 3,879,681 3.23 % $ 4,436,475 3.79 % $ 3,468,633 4.17 % Notes: (1) Loans, net of unearned income include non-accrual loans for all periods presented. (2) Interest income includes loan fees of $33,800,000, $65,673,000 and $78,360,000 for the years ended December 31, 2008, 2007 and 2006, respectively. (3) The computation of taxable-equivalent net interest income is based on the stautory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. 7 Table 4Volume and Yield/Rate Variances Volume 2008 Compared to 2007 2007 Compared to 2006 Change Due to Change Due to Yield/ Rate Net Volume Yield/ Rate (Taxable-equivalent basisin thousands) Net Interest income on: Federal funds sold and securities purchased under agreements to resell $ (6,715 ) $ (25,463 ) $ (32,178 ) $ 2,564 $ 8,968 $ 11,532 Trading account assets 1,542 (7,972 ) (6,430 ) 16,542 (12,260 ) 4,282 Securities: Taxable (4,239 ) (24,182 ) (28,421 ) 217,710 30,162 247,872 Tax-exempt 1,420 (3,106 ) (1,686 ) 24,422 (12,632 ) 11,790 Loans held for sale (51,972 ) (23,245 ) (75,217 ) (54,572 ) (11,150 ) (65,722 ) Loans held for sale divestitures (21,521 ) (21,521 ) 1,580 (146 ) 1,434 Loans, net of unearned income 229,110 (1,566,856 ) (1,337,746 ) 2,165,675 (71,599 ) 2,094,076 Other interest-earning assets 36,539 (45,997 ) (9,458 ) (113 ) (1,828 ) (1,941 ) Total interest-earning assets Interest expense on: Savings accounts Interest-bearing transaction accounts Money market accounts Money market accounts foreign Time depositscustomer Interest-bearing deposits divestitures Total customer depositsinterestbearing Time depositsnon customer Other foreign deposits Total treasury depositsinterestbearing Total interestbearing deposits Federal funds purchased and securities sold under agreements to repurchase 184,164 (1,696,821 ) (1,512,657 ) 2,373,808 (70,485 ) (152 ) (6,377 ) (6,529 ) 2,038 (3,515 ) (9,633 ) (36,306 ) (174,916 ) (266,662 ) (184,549 ) (302,968 ) 90,250 254,001 53,102 49,788 143,352 303,789 (32,971 ) (9,958 ) (75,492 ) (173,084 ) (108,463 ) (183,042 ) 44,871 280,020 (1,126 ) 102,904 43,745 382,924 (12,091 ) 277 (160 ) 117 (12,091 ) 200,993 2,303,323 (1,477 ) (101,111 ) (696,531 ) (797,642 ) 671,457 872,450 31,112 (66,776 ) (26,359 ) (80,148 ) 4,753 (146,924 ) 23,049 88,971 1,239 (1,993 ) 24,288 86,978 (35,664 ) (106,507 ) (142,171 ) 112,020 (754 ) 111,266 (136,775 ) (803,038 ) (939,813 ) 783,477 200,239 983,716 (17,106 ) (189,496 ) (206,602 ) 136,100 8,287 144,387 8 Other short-term borrowings Long-term borrowings 171,058 189,898 (54,535 ) (115,869 ) Total interest-bearing liabilities 207,075 (1,162,938 ) Increase (decrease) in net interest income 116,523 74,029 (955,863 ) 34,547 161,974 5,036 5,821 39,583 167,795 1,116,098 219,383 1,335,481 $ (22,911 ) $ (533,883 ) $ (556,794 ) $ 1,257,710 $ (289,868 ) $ 967,842 Notes: 1. 2. The change in interest not due solely to volume or yield/rate has been allocated to the volume column and yield/rate column in proportion to the relationship of the absolute dollar amounts of the change in each. The computation of taxable net interest income is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. Comparing 2008 to 2007, interest-earning asset yields were lower, decreasing 145 basis points on average. While interest-bearing liability rates were also lower, declining by 115 basis points, this improvement in funding cost was not enough to offset the drop in interest-earning asset yields. As a result, the net average interest rate spread declined 30 basis points to 2.83 percent in 2008 as compared to 3.13 percent in 2007. Changes in market interest rates, an increase in competition for deposits, and Regions' asset sensitive position were the most significant drivers of changes in Regions' rates and yields. In terms of changes in the broad interest rate environment, the Federal Funds rate, which is an influential driver of loan and deposit pricing on the shorter end of the yield curve, declined approximately 400 basis points during 2008, ending the year at approximately 0.25 percent. Longer-term rates experienced similar movement, with the yield on the benchmark 10-year U.S. Treasury note declining 166 basis points over the same period and ending the year at 2.25 percent. Both interest-earning assets and interest-bearing liabilities were impacted by these changes in market rates. More specifically, these rate declines immediately impact loan yields in a downward fashion, since approximately 55 percent of the Company's interest-earning assets are tied to the prime rate or London Inter-Bank Offered Rate (\"LIBOR\"). The mix of interest-earning assets can also affect the interest rate spread. Regions' primary types of interestearning assets are loans and investment securities. Certain types of interest-earning assets have historically generated larger spreads. For example, loans typically generate larger spreads than other assets, such as securities, Federal funds sold or securities purchased under agreement to resell. However, in 2008, the spread on loans decreased due to lower interest rates and higher levels of assets on non-accrual status. Average interest-earning assets at December 31, 2008 totaled $120.1 billion, an increase of $3.2 billion as compared to the prior year. On an average basis, interest-earning assets were 2.7 percent higher in 2008. The proportion of average interest-earning assets to average total assets measures the effectiveness of management's efforts to invest available funds into the most profitable interest-earning vehicles and represented 83 percent and 84 percent for 2008 and 2007, respectively. Average loans as a percentage of average interest-earning assets were 81 percent in 2008 and 2007. The categories which comprise interest-earning assets are shown in Table 3 \"Consolidated Average Daily Balances and Yield/Rate Analysis Including Discontinued Operations\". Another significant factor affecting the net interest margin is the percentage of interest-earning assets funded by interest-bearing liabilities. Funding for Regions' interest-earning assets comes from interest-bearing and noninterest-bearing sources. The percentage of average interest-earning assets funded by average interest-bearing liabilities was 85 percent in 2008 and 82 percent in 2007. Table 4 \"Volume and Yield/Rate Variances\" provides additional information with which to analyze the changes in net interest income. 9 BALANCE SHEET ANALYSIS At December 31, 2008, Regions reported total assets of $146.2 billion compared to $141.0 billion at the end of 2007, an increase of approximately $5.2 billion or 3.7 percent. The balance sheet growth reflects an increase in loans outstanding, primarily commercial and industrial and home equity balances, as well as an increase in interestbearing deposits in other banks, primarily the Federal Reserve Bank. Offsetting these growth drivers, Regions' assets were reduced by the goodwill impairment charge taken during the fourth quarter of 2008. Loans Average loans, net of unearned income, represented 81 percent of average interest-earning assets at December 31, 2008. Lending at Regions is generally organized along three functional lines: commercial and industrial loans (including financial and agricultural), real estate loans (commercial mortgage and construction loans) and consumer loans (residential first mortgage, home equity, indirect and other consumer loans). The composition of the portfolio by these major categories is presented in Table 9 \"Loan Portfolio.\" Regions manages loan growth with a focus on risk management and risk adjusted return on capital. Total loans, net of unearned income, increased at a relatively slow pace during 2008. A challenging economic environment, particularly in the real estate sector, was the primary factor leading to the modest growth. Regions is continuing to make credit available to consumers, small businesses and commercial companies as intended by Treasury and the Congress in establishing the government investment in banks (See \"Stockholders' Equity\" section found later in this report). During the fourth quarter of 2008, the government's investment of $3.5 billion strengthened Regions' regulatory capital, which supported origination of approximately $16.5 billion in new and renewed loans and lines, including unfunded commitments. This lending production was during an economic environment when lending is typically flat or reduced. Table 9 shows a year-over-year comparison of loans by loan type. Table 9Loan Portfolio 2008 Commercial and industrial Commercial real estate (1) Construction Residential first mortgage (1) Home equity Indirect Other consumer 2007 2006 2005 (In thousands, net of unearned income) 2004 $ 23,595,418 26,208,325 10,634,063 15,839,015 16,130,255 3,853,770 1,157,839 $ 20,906,617 23,107,176 13,301,898 16,959,545 14,962,007 3,938,113 2,203,491 $ 24,145,411 19,646,423 14,121,030 15,583,920 14,888,599 4,037,539 2,127,680 $ 14,728,006 24,773,539 7,362,219 n/a 7,794,684 1,353,929 2,392,536 $ 15,028,015 26,059,454 5,472,463 n/a 6,634,487 1,641,629 2,690,906 $ 97,418,685 $ 95,378,847 $ 94,550,602 $ 58,404,913 $ 57,526,954 (1) Breakout of residential first mortgage not available for 2005 and 2004 due to the AmSouth merger; residential first mortgage is included in commercial real estate for 2005 and 2004. Table 10Selected Loan Maturities Within One Year Commercial and industrial $ 7,631,231 Loans Maturing After One But Within After Five Years Five Years (In thousands) $ 12,278,452 $ 3,685,735 Total $ 23,595,418 10 Commercial real estate Construction 7,750,421 5,531,291 12,684,320 3,960,550 5,773,584 1,142,222 26,208,325 10,634,063 $ 20,912,943 $ 28,923,322 $ 10,601,541 $ 60,437,806 Predetermined Variable Rate Rate (In thousands) Due after one year but within five years Due after five years $ 8,497,816 5,964,953 $ 20,425,506 4,636,588 $ 14,462,769 $ 25,062,094 Note: Table 10 excludes residential first mortgage, home equity, indirect and other consumer loans. Commercial and IndustrialCommercial and industrial loans represent loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. During 2008, commercial and industrial loan balances increased 13 percent, driven by a combination of new production, increased line utilization, selective market share gains, and higher funding under letters of credit supporting Variable Rate Demand Notes (\"VRDNs\"). Commercial Real EstateCommercial real estate loans consist of loans to operating businesses, loans for real estate development, and various other loans secured by real estate. Commercial real estate loans to operating businesses are for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. These loans, sometimes referred to as \"owner occupied commercial real estate\