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REGIONS FINANCIAL CORP - Quarter Report: 2017 June (Form 10-Q)

Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2017
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from
 
to
                               
Commission File Number: 001-34034
 
 
 
Regions Financial Corporation
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
Delaware
 
63-0589368
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1900 Fifth Avenue North
Birmingham, Alabama
 
35203
(Address of principal executive offices)
 
(Zip Code)
(800) 734-4667
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company  ¨ 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The number of shares outstanding of each of the issuer’s classes of common stock was 1,195,080,193 shares of common stock, par value $.01, outstanding as of August 2, 2017.

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REGIONS FINANCIAL CORPORATION
FORM 10-Q
INDEX
 
 
 
 
 
Page
Part I. Financial Information
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
Part II. Other Information
 
 
Item 1.
 
 
Item 2.
 
 
Item 6.
 
 
 
 
 
 

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Glossary of Defined Terms
Agencies - collectively, FNMA, FHLMC and GNMA.
ALCO - Asset/Liability Management Committee.
AOCI - Accumulated other comprehensive income.
ASU - Accounting Standards Update.
ATM - Automated teller machine.
Basel I - Basel Committee's 1988 Regulatory Capital Framework (First Accord).
Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord).
Basel III Rules - Final capital rules adopting the Basel III capital framework approved by U.S. federal
regulators in 2013.
Basel Committee - Basel Committee on Banking Supervision.
BHC - Bank Holding Company.
BITS - Technology arm of the Financial Services Roundtable.
Bank - Regions Bank.
Board - The Company’s Board of Directors.
CAP - Customer Assistance Program.
CCAR - Comprehensive Capital Analysis and Review.
CD - Certificate of deposit.
CEO - Chief Executive Officer.
CET1 - Common Equity Tier 1.
CFPB - Consumer Financial Protection Bureau.
Company - Regions Financial Corporation and its subsidiaries.
CPR - Constant (or Conditional) Prepayment Rate.
CRA - Community Reinvestment Act of 1977.
Dodd-Frank Act - The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
DPD - Days Past Due.
DUS - Fannie Mae Delegated Underwriting & Servicing.
FASB - Financial Accounting Standards Board.
FDIC - Federal Deposit Insurance Corporation.
Federal Reserve - Board of Governors of the Federal Reserve System.
FHA - Federal Housing Administration.
FHLB - Federal Home Loan Bank.
FHLMC - Federal Home Loan Mortgage Corporation, known as Freddie Mac.
FNMA - Federal National Mortgage Association, known as Fannie Mae.
FS-ISAC - Financial Services - Information Sharing & Analysis Center.
FRB - Federal Reserve Bank.
GAAP - Generally Accepted Accounting Principles in the United States.
GCM - Guideline Public Company Method.
GDP - Gross Domestic Product.
GNMA - Government National Mortgage Association.

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GTM - Guideline Transaction Method.
HUD - U.S. Department of Housing and Urban Development.
IP - Intellectual Property.
IPO - Initial public offering.
LCR - Liquidity coverage ratio.
LIBOR - London InterBank Offered Rates.
LTIP - Long-term incentive plan.
LTV - Loan to value.
MBS - Mortgage-backed securities.
Morgan Keegan - Morgan Keegan & Company, Inc.
MSAs - Metropolitan Statistical Areas.
MSR - Mortgage servicing right.
NM - Not meaningful.
NPR - Notice of Proposed Rulemaking.
OAS - Option-Adjusted Spread.
OCC - Office of the Comptroller of the Currency.
OCI - Other comprehensive income.
OIS - Overnight indexed swap.
OTTI - Other-than-temporary impairment.
Raymond James - Raymond James Financial, Inc.
RICO - Racketeer Influenced and Corrupt Organizations Act.
SEC - U.S. Securities and Exchange Commission.
SERP - Supplemental Executive Retirement Plan.
SSFA - Simplified Supervisory Formula Approach.
TDR - Troubled debt restructuring.
U.S. - United States.
U.S. Treasury - United States Department of the Treasury.
UTB - Unrecognized tax benefits.
VIE - Variable interest entity.



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Forward-Looking Statements
This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by us or on our behalf to analysts, investors, the media and others, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The terms “Regions,” the “Company,” “we,” “us” and “our” mean Regions Financial Corporation, a Delaware corporation, and its subsidiaries when or where appropriate. The words “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “targets,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can,” and similar expressions often signify forward-looking statements. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s current expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, and because they also relate to the future they are likewise subject to inherent uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Therefore, we caution you against relying on any of these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described below:
Current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, unemployment rates and potential reductions of economic growth, which may adversely affect our lending and other businesses and our financial results and conditions.
Possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, which could have a material adverse effect on our earnings.
The effects of a possible downgrade in the U.S. government’s sovereign credit rating or outlook, which could result in risks to us and general economic conditions that we are not able to predict.
Possible changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital and liquidity.
Any impairment of our goodwill or other intangibles, or any adjustment of valuation allowances on our deferred tax assets due to adverse changes in the economic environment, declining operations of the reporting unit, or other factors.
Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and leases, including operating leases.
Changes in the speed of loan prepayments, loan origination and sale volumes, charge-offs, loan loss provisions or actual loan losses where our allowance for loan losses may not be adequate to cover our eventual losses.
Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.
Our ability to effectively compete with other financial services companies, some of whom possess greater financial resources than we do and are subject to different regulatory standards than we are.
Loss of customer checking and savings account deposits as customers pursue other, higher-yield investments, which could increase our funding costs.
Our inability to develop and gain acceptance from current and prospective customers for new products and services in a timely manner could have a negative impact on our revenue.
The effects of any developments, changes or actions relating to any litigation or regulatory proceedings brought against us or any of our subsidiaries.
Changes in laws and regulations affecting our businesses, such as the Dodd-Frank Act and other legislation and regulations relating to bank products and services, as well as changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies, which could require us to change certain business practices, increase compliance risk, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.
Our ability to obtain a regulatory non-objection (as part of the CCAR process or otherwise) to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or redeem preferred stock or other regulatory capital instruments, may impact our ability to return capital to stockholders and market perceptions of us.
Our ability to comply with stress testing and capital planning requirements (as part of the CCAR process or otherwise) may continue to require a significant investment of our managerial resources due to the importance and intensity of such tests and requirements.

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Our ability to comply with applicable capital and liquidity requirements (including, among other things, the Basel III capital standards and the LCR rule), including our ability to generate capital internally or raise capital on favorable terms, and if we fail to meet requirements, our financial condition could be negatively impacted.
The Basel III framework calls for additional risk-based capital surcharges for globally systemically important banks. Although we are not subject to such surcharges, it is possible that in the future we may become subject to similar surcharges.
The costs, including possibly incurring fines, penalties, or other negative effects (including reputational harm) of any adverse judicial, administrative, or arbitral rulings or proceedings, regulatory enforcement actions, or other legal actions to which we or any of our subsidiaries are a party, and which may adversely affect our results.
Our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business.
Our ability to execute on our strategic and operational plans, including our ability to fully realize the financial and non-financial benefits relating to our strategic initiatives.
The success of our marketing efforts in attracting and retaining customers.
Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits, which could adversely affect our net income.
Our ability to recruit and retain talented and experienced personnel to assist in the development, management and operation of our products and services may be affected by changes in laws and regulations in effect from time to time.
Fraud or misconduct by our customers, employees or business partners.
Any inaccurate or incomplete information provided to us by our customers or counterparties.
The risks and uncertainties related to our acquisition and integration of other companies.
Inability of our framework to manage risks associated with our business such as credit risk and operational risk, including third-party vendors and other service providers, which could, among other things, result in a breach of operating or security systems as a result of a cyber attack or similar act.
The inability of our internal disclosure controls and procedures to prevent, detect or mitigate any material errors or fraudulent acts.
The effects of geopolitical instability, including wars, conflicts and terrorist attacks and the potential impact, directly or indirectly, on our businesses.
The effects of man-made and natural disasters, including fires, floods, droughts, tornadoes, hurricanes, and environmental damage, which may negatively affect our operations and/or our loan portfolios and increase our cost of conducting business.
Changes in commodity market prices and conditions could adversely affect the cash flows of our borrowers operating in industries that are impacted by changes in commodity prices (including businesses indirectly impacted by commodities prices such as businesses that transport commodities or manufacture equipment used in the production of commodities), which could impair their ability to service any loans outstanding to them and/or reduce demand for loans in those industries.
Our inability to keep pace with technological changes could result in losing business to competitors.
Our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information; disruption or damage to our systems; increased costs; losses; or adverse effects to our reputation.
Our ability to realize our adjusted efficiency ratio target as part of our expense management initiatives.
Significant disruption of, or loss of public confidence in, the Internet and services and devices used to access the Internet could affect the ability of our customers to access their accounts and conduct banking transactions.
Possible downgrades in our credit ratings or outlook could increase the costs of funding from capital markets.
The effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally could require us to change certain business practices, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.
The effects of the failure of any component of our business infrastructure provided by a third party could disrupt our businesses; result in the disclosure of and/or misuse of confidential information or proprietary information; increase our costs; negatively affect our reputation; and cause losses.
Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends to stockholders.

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Changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect how we report our financial results.
Other risks identified from time to time in reports that we file with the SEC.
The effects of any damage to our reputation resulting from developments related to any of the items identified above.
You should not place undue reliance on any forward-looking statements, which speak only as of the date made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible to predict all of them. We assume no obligation to update or revise any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.
See also the reports filed with the Securities and Exchange Commission, including the discussion under the “Risk Factors” section of Regions’ Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission and available on its website at www.sec.gov.

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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2017
 
December 31, 2016
 
(In millions, except share data)
Assets
 
 
 
Cash and due from banks
$
1,873

 
$
1,853

Interest-bearing deposits in other banks
2,258

 
3,583

Federal funds sold and securities purchased under agreements to resell

 
15

Trading account securities
178

 
124

Securities held to maturity (estimated fair value of $1,770 and $1,369, respectively)
1,754

 
1,362

Securities available for sale
23,608

 
23,781

Loans held for sale (includes $379 and $447 measured at fair value, respectively)
573

 
718

Loans, net of unearned income
80,127

 
80,095

Allowance for loan losses
(1,041
)
 
(1,091
)
Net loans
79,086

 
79,004

Other earning assets
1,537

 
1,644

Premises and equipment, net
2,060

 
2,096

Interest receivable
313

 
319

Goodwill
4,904

 
4,904

Residential mortgage servicing rights at fair value
346

 
324

Other identifiable intangible assets
198

 
221

Other assets
5,955

 
6,020

Total assets
$
124,643

 
$
125,968

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
37,119

 
$
36,046

Interest-bearing
60,974

 
62,989

Total deposits
98,093

 
99,035

Borrowed funds:
 
 
 
Short-term borrowings:
 
 
 
Other short-term borrowings
600

 

Total short-term borrowings
600

 

Long-term borrowings
6,765

 
7,763

Total borrowed funds
7,365

 
7,763

Other liabilities
2,292

 
2,506

Total liabilities
107,750

 
109,304

Stockholders’ equity:
 
 
 
Preferred stock, authorized 10 million shares, par value $1.00 per share
 
 
 
Non-cumulative perpetual, liquidation preference $1,000.00 per share, including related surplus, net of issuance costs; issued—1,000,000 shares
820

 
820

Common stock, authorized 3 billion shares, par value $.01 per share:
 
 
 
Issued including treasury stock—1,240,526,496 and 1,255,839,866 shares, respectively
12

 
13

Additional paid-in capital
16,828

 
17,092

Retained earnings
1,089

 
666

Treasury stock, at cost—41,259,320 and 41,259,319 shares, respectively
(1,377
)
 
(1,377
)
Accumulated other comprehensive income (loss), net
(479
)
 
(550
)
Total stockholders’ equity
16,893

 
16,664

Total liabilities and stockholders’ equity
$
124,643

 
$
125,968


See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share data)
Interest income, including other financing income on:
 
 
 
 
 
 
 
Loans, including fees
$
801

 
$
762

 
$
1,574

 
$
1,530

Securities - taxable
151

 
145

 
299

 
292

Loans held for sale
4

 
4

 
8

 
7

Trading account securities

 
1

 
2

 
4

Other earning assets
9

 
8

 
21

 
18

Operating lease assets
24

 
32

 
51

 
64

Total interest income, including other financing income
989

 
952

 
1,955

 
1,915

Interest expense on:
 
 
 
 
 
 
 
Deposits
37

 
28

 
72

 
55

Short-term borrowings
2

 

 
2

 

Long-term borrowings
50

 
50

 
100

 
97

Total interest expense
89

 
78

 
174

 
152

Depreciation expense on operating lease assets
18

 
26

 
40

 
53

Total interest expense and depreciation expense on operating lease assets
107

 
104

 
214

 
205

Net interest income and other financing income
882

 
848

 
1,741

 
1,710

Provision for loan losses
48

 
72

 
118

 
185

Net interest income and other financing income after provision for loan losses
834

 
776

 
1,623

 
1,525

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
169

 
166

 
337

 
325

Card and ATM fees
104

 
99

 
208

 
194

Investment management and trust fee income
57

 
52

 
113

 
102

Mortgage income
40

 
46

 
81

 
84

Securities gains (losses), net
1

 
6

 
1

 
1

Other
154

 
157

 
295

 
326

Total non-interest income
525

 
526

 
1,035

 
1,032

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
497

 
480

 
975

 
955

Net occupancy expense
86

 
86

 
171

 
172

Furniture and equipment expense
85

 
79

 
165

 
157

Other
241

 
270

 
475

 
500

Total non-interest expense
909

 
915

 
1,786

 
1,784

Income from continuing operations before income taxes
450

 
387

 
872

 
773

Income tax expense
133

 
115

 
261

 
228

Income from continuing operations
317

 
272

 
611

 
545

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations before income taxes
(1
)
 
5

 
10

 
5

Income tax expense (benefit)

 
2

 
4

 
2

Income (loss) from discontinued operations, net of tax
(1
)
 
3

 
6

 
3

Net income
$
316

 
$
275

 
$
617

 
$
548

Net income from continuing operations available to common shareholders
$
301

 
$
256

 
$
579

 
$
513

Net income available to common shareholders
$
300

 
$
259

 
$
585

 
$
516

Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
Basic
1,202

 
1,265

 
1,205

 
1,275

Diluted
1,212

 
1,268

 
1,218

 
1,279

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.20

 
$
0.48

 
$
0.40

Diluted
0.25

 
0.20

 
0.48

 
0.40

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.20

 
$
0.49

 
$
0.40

Diluted
0.25

 
0.20

 
0.48

 
0.40

Cash dividends declared per common share
0.07

 
0.065

 
0.135

 
0.125

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30
 
2017
 
2016
 
(In millions)
Net income
$
316

 
$
275

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
Unrealized losses on securities transferred to held to maturity during the period (net of zero and zero tax effect, respectively)

 

Less: reclassification adjustments for amortization of unrealized losses on securities transferred to held to maturity (net of ($1) and ($3) tax effect, respectively)
(1
)
 
(5
)
Net change in unrealized losses on securities transferred to held to maturity, net of tax
1

 
5

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $30 and $62 tax effect, respectively)
51

 
103

Less: reclassification adjustments for securities gains (losses) realized in net income (net of zero and $2 tax effect, respectively)
1

 
4

Net change in unrealized gains (losses) on securities available for sale, net of tax
50

 
99

Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $21 and $51 tax effect, respectively)
37

 
84

Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $8 and $13 tax effect, respectively)
14

 
22

Net change in unrealized gains (losses) on derivative instruments, net of tax
23

 
62

Defined benefit pension plans and other post employment benefits:
 
 
 
Net actuarial gains (losses) arising during the period (net of zero and $1 tax effect, respectively)

 

Less: reclassification adjustments for amortization of actuarial loss and settlements realized in net income (net of ($7) and ($3) tax effect, respectively)
(12
)
 
(5
)
Net change from defined benefit pension plans and other post employment benefits, net of tax
12

 
5

Other comprehensive income (loss), net of tax
86

 
171

Comprehensive income
$
402

 
$
446

 
 
 
 
 
Six Months Ended June 30
 
2017
 
2016
 
(In millions)
Net income
$
617

 
$
548

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
Unrealized losses on securities transferred to held to maturity during the period (net of zero and zero tax effect, respectively)

 

Less: reclassification adjustments for amortization of unrealized losses on securities transferred to held to maturity (net of ($2) and ($4) tax effect, respectively)
(3
)
 
(7
)
Net change in unrealized losses on securities transferred to held to maturity, net of tax
3

 
7

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $31 and $187 tax effect, respectively)
52

 
308

Less: reclassification adjustments for securities gains (losses) realized in net income (net of zero and zero tax effect, respectively)
1

 
1

Net change in unrealized gains (losses) on securities available for sale, net of tax
51

 
307

Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $20 and $153 tax effect, respectively)
33

 
249

Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $20 and $28 tax effect, respectively)
33

 
46

Net change in unrealized gains (losses) on derivative instruments, net of tax

 
203

Defined benefit pension plans and other post employment benefits:
 
 
 
Net actuarial gains (losses) arising during the period (net of zero and $1 tax effect, respectively)
(1
)
 

Less: reclassification adjustments for amortization of actuarial loss and settlements realized in net income (net of ($10) and ($6) tax effect, respectively)
(18
)
 
(11
)
Net change from defined benefit pension plans and other post employment benefits, net of tax
17

 
11

Other comprehensive income (loss), net of tax
71

 
528

Comprehensive income
$
688

 
$
1,076

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Treasury
Stock,
At Cost
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(In millions, except per share data)
BALANCE AT JANUARY 1, 2016
1

 
$
820

 
1,297

 
$
13

 
$
17,883

 
$
(115
)
 
$
(1,377
)
 
$
(380
)
 
$
16,844

Net income

 

 

 

 

 
548

 

 

 
548

Amortization of unrealized losses on securities transferred to held to maturity, net of tax

 

 

 

 

 

 

 
7

 
7

Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment

 

 

 

 

 

 

 
307

 
307

Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment

 

 

 

 

 

 

 
203

 
203

Net change from employee benefit plans, net of tax

 

 

 

 

 

 

 
11

 
11

Cash dividends declared—$0.125 per share

 

 

 

 

 
(159
)
 

 

 
(159
)
Preferred stock dividends

 

 

 

 

 
(32
)
 

 

 
(32
)
Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchases

 

 
(42
)
 

 
(354
)
 

 

 

 
(354
)
Impact of stock transactions under compensation plans, net and other

 

 
4

 

 
10

 

 

 

 
10

BALANCE AT JUNE 30, 2016
1

 
$
820

 
1,259

 
$
13

 
$
17,539

 
$
242

 
$
(1,377
)
 
$
148

 
$
17,385

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2017
1

 
$
820

 
1,214

 
$
13

 
$
17,092

 
$
666

 
$
(1,377
)
 
$
(550
)
 
$
16,664

Net income

 

 

 

 

 
617

 

 

 
617

Amortization of unrealized losses on securities transferred to held to maturity, net of tax

 

 

 

 

 

 

 
3

 
3

Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment

 

 

 

 

 

 

 
51

 
51

Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment

 

 

 

 

 

 

 

 

Net change from employee benefit plans, net of tax

 

 

 

 

 

 

 
17

 
17

Cash dividends declared—$0.135 per share

 

 

 

 

 
(162
)
 

 

 
(162
)
Preferred stock dividends

 

 

 

 

 
(32
)
 

 

 
(32
)
Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchases

 

 
(19
)
 
(1
)
 
(274
)
 

 

 

 
(275
)
Impact of stock transactions under compensation plans, net and other

 

 
4

 

 
10

 

 

 

 
10

BALANCE AT JUNE 30, 2017
1

 
$
820

 
1,199

 
$
12

 
$
16,828

 
$
1,089

 
$
(1,377
)
 
$
(479
)
 
$
16,893


See notes to consolidated financial statements.

11


Table of Contents


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Six Months Ended June 30
 
2017
 
2016
 
(In millions)
Operating activities:
 
 
 
Net income
$
617

 
$
548

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
118

 
185

Depreciation, amortization and accretion, net
274

 
267

Securities (gains) losses, net
(1
)
 
(1
)
Deferred income tax expense
62

 
10

Originations and purchases of loans held for sale
(1,729
)
 
(1,837
)
Proceeds from sales of loans held for sale
1,922

 
1,823

(Gain) loss on sale of loans, net
(54
)
 
(59
)
Net change in operating assets and liabilities:
 
 
 
Trading account securities
(54
)
 
26

Other earning assets
67

 
83

Interest receivable and other assets
(21
)
 
(126
)
Other liabilities
(88
)
 
197

Other
42

 
28

Net cash from operating activities
1,155

 
1,144

Investing activities:
 
 
 
Proceeds from maturities of securities held to maturity
101

 
305

Proceeds from sales of securities available for sale
592

 
1,527

Proceeds from maturities of securities available for sale
1,755

 
1,983

Purchases of securities available for sale
(2,208
)
 
(4,092
)
Purchases of securities held to maturity
(494
)
 

Proceeds from sales of loans
13

 
47

Purchases of loans
(147
)
 
(579
)
Purchases of mortgage servicing rights
(18
)
 
(24
)
Net change in loans
(110
)
 
(202
)
Net purchases of other assets
(45
)
 
(41
)
Net cash from investing activities
(561
)
 
(1,076
)
Financing activities:
 
 
 
Net change in deposits
(942
)
 
(1,185
)
Net change in short-term borrowings
600

 
(8
)
Proceeds from long-term borrowings
1,250

 
1,607

Payments on long-term borrowings
(2,252
)
 
(1,000
)
Cash dividends on common stock
(241
)
 
(154
)
Cash dividends on preferred stock
(32
)
 
(32
)
Repurchases of common stock
(275
)
 
(354
)
Taxes paid related to net share settlement of equity awards
(22
)
 
(14
)
Other

 
(5
)
Net cash from financing activities
(1,914
)
 
(1,145
)
Net change in cash and cash equivalents
(1,320
)
 
(1,077
)
Cash and cash equivalents at beginning of year
5,451

 
5,314

Cash and cash equivalents at end of period
$
4,131

 
$
4,237


See notes to consolidated financial statements.

12


Table of Contents


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and Six Months Ended June 30, 2017 and 2016
NOTE 1. BASIS OF PRESENTATION
Regions Financial Corporation (“Regions” or the "Company”) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located across the South, Midwest and Texas. The Company competes with other financial institutions located in the states in which it operates, as well as other adjoining states. Regions is subject to the regulations of certain government agencies and undergoes periodic examinations by certain regulatory authorities.
The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with GAAP and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions’ Annual Report on Form 10-K for the year ended December 31, 2016. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.
On January 11, 2012, Regions entered into an agreement to sell Morgan Keegan and related affiliates. The transaction closed on April 2, 2012. See Note 2 and Note 14 for further details. Results of operations for the entities sold are presented separately as discontinued operations for all periods presented on the consolidated statements of income. This presentation is consistent with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.
NOTE 2. DISCONTINUED OPERATIONS
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and related affiliates to Raymond James. The transaction closed on April 2, 2012. Regions Investment Management, Inc. (formerly known as Morgan Asset Management, Inc.) and Regions Trust were not included in the sale. In connection with the closing of the sale, Regions agreed to indemnify Raymond James for all litigation matters related to pre-closing activities. See Note 14 for related disclosure.
The following table represents the condensed results of operations for discontinued operations:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share data)
Non-interest expense:
 
 
 
 
 
 
 
Professional and legal expenses/(recoveries)
$

 
$
(5
)
 
$
(11
)
 
$
(5
)
Other
1

 

 
1

 

Total non-interest expense
1

 
(5
)
 
(10
)
 
(5
)
Income (loss) from discontinued operations before income taxes
(1
)
 
5

 
10

 
5

Income tax expense (benefit)

 
2

 
4

 
2

Income (loss) from discontinued operations, net of tax
$
(1
)
 
$
3

 
$
6

 
$
3

Earnings (loss) per common share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.00
)
 
$
0.00

 
$
0.00

 
$
0.00

Diluted
$
(0.00
)
 
$
0.00

 
$
0.00

 
$
0.00


13


Table of Contents


NOTE 3. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities held to maturity and securities available for sale are as follows:
 
June 30, 2017
 
 
 
Recognized in OCI (1)
 
 
 
Not Recognized in OCI
 
 
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
1,149

 
$

 
$
(45
)
 
$
1,104

 
$
14

 
$
(2
)
 
$
1,116

Commercial agency
654

 

 
(4
)
 
650

 
6

 
(2
)
 
654

 
$
1,803

 
$

 
$
(49
)
 
$
1,754

 
$
20

 
$
(4
)
 
$
1,770

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
313

 
$
1

 
$

 
$
314

 
 
 
 
 
$
314

Federal agency securities
25

 

 

 
25

 
 
 
 
 
25

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
17,648

 
87

 
(211
)
 
17,524

 
 
 
 
 
17,524

Residential non-agency
3

 

 

 
3

 
 
 
 
 
3

Commercial agency
3,475

 
17

 
(18
)
 
3,474

 
 
 
 
 
3,474

Commercial non-agency
811

 
6

 
(1
)
 
816

 
 
 
 
 
816

Corporate and other debt securities
1,226

 
29

 
(6
)
 
1,249

 
 
 
 
 
1,249

Equity securities
194

 
9

 

 
203

 
 
 
 
 
203

 
$
23,695

 
$
149

 
$
(236
)
 
$
23,608

 
 
 
 
 
$
23,608


14


Table of Contents



 
December 31, 2016
 
 
 
Recognized in OCI (1)
 
 
 
Not Recognized in OCI
 
 
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
1,249

 
$

 
$
(49
)
 
$
1,200

 
$
12

 
$
(3
)
 
$
1,209

Commercial agency
167

 

 
(5
)
 
162

 

 
(2
)
 
160

 
$
1,416

 
$

 
$
(54
)
 
$
1,362

 
$
12

 
$
(5
)
 
$
1,369

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
303

 
$
1

 
$
(1
)
 
$
303

 
 
 
 
 
$
303

Federal agency securities
35

 

 

 
35

 
 
 
 
 
35

Obligations of states and political subdivisions
1

 

 

 
1

 
 
 
 
 
1

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
17,531

 
95

 
(255
)
 
17,371

 
 
 
 
 
17,371

Residential non-agency
4

 

 

 
4

 
 
 
 
 
4

Commercial agency
3,486

 
9

 
(32
)
 
3,463

 
 
 
 
 
3,463

Commercial non-agency
1,124

 
8

 
(3
)
 
1,129

 
 
 
 
 
1,129

Corporate and other debt securities
1,272

 
19

 
(17
)
 
1,274

 
 
 
 
 
1,274

Equity securities
194

 
7

 

 
201

 
 
 
 
 
201

 
$
23,950

 
$
139

 
$
(308
)
 
$
23,781

 
 
 
 
 
$
23,781

_________
(1) The gross unrealized losses recognized in OCI on securities held to maturity resulted from a transfer of securities available for sale to held to maturity in the second quarter of 2013.

Securities with carrying values of $9.3 billion and $11.6 billion at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. Included within total pledged securities is approximately $50 million of encumbered U.S. Treasury securities at both June 30, 2017 and December 31, 2016.
The amortized cost and estimated fair value of securities held to maturity and securities available for sale at June 30, 2017, 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.

15


Table of Contents


 
Amortized
Cost
 
Estimated
Fair Value
 
(In millions)
Securities held to maturity:
 
 
 
Mortgage-backed securities:
 
 
 
Residential agency
$
1,149

 
$
1,116

Commercial agency
654

 
654

 
$
1,803

 
$
1,770

Securities available for sale:
 
 
 
Due in one year or less
$
75

 
$
75

Due after one year through five years
722

 
731

Due after five years through ten years
556

 
566

Due after ten years
211

 
216

Mortgage-backed securities:
 
 
 
Residential agency
17,648

 
17,524

Residential non-agency
3

 
3

Commercial agency
3,475

 
3,474

Commercial non-agency
811

 
816

Equity securities
194

 
203

 
$
23,695

 
$
23,608

The following tables present gross unrealized losses and the related estimated fair value of securities held to maturity and available for sale at June 30, 2017 and December 31, 2016. For securities transferred to held to maturity from available for sale, the analysis in the tables below is comparing the securities' original amortized cost to its current estimated fair value. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.
 
June 30, 2017
 
Less Than Twelve Months
 
Twelve Months or More
 
Total
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
786

 
$
(21
)
 
$
330

 
$
(12
)
 
$
1,116

 
$
(33
)
Commercial agency
29

 
(1
)
 
155

 
(5
)
 
184

 
(6
)
 
$
815

 
$
(22
)
 
$
485

 
$
(17
)
 
$
1,300

 
$
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
86

 
$

 
$
18

 
$

 
$
104

 
$

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
11,593

 
(202
)
 
539

 
(9
)
 
12,132

 
(211
)
Commercial agency
1,318

 
(18
)
 
44

 

 
1,362

 
(18
)
Commercial non-agency
261

 
(1
)
 
29

 

 
290

 
(1
)
All other securities
154

 
(1
)
 
132

 
(5
)
 
286

 
(6
)
 
$
13,412

 
$
(222
)
 
$
762

 
$
(14
)
 
$
14,174

 
$
(236
)


16


Table of Contents


 
December 31, 2016
 
Less Than Twelve Months
 
Twelve Months or More
 
Total
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
850

 
$
(26
)
 
$
359

 
$
(14
)
 
$
1,209

 
$
(40
)
Commercial agency

 

 
160

 
(7
)
 
160

 
(7
)
 
$
850

 
$
(26
)
 
$
519

 
$
(21
)
 
$
1,369

 
$
(47
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
112

 
$
(1
)
 
$
18

 
$

 
$
130

 
$
(1
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
12,071

 
(245
)
 
570

 
(10
)
 
12,641

 
(255
)
Commercial agency
2,199

 
(31
)
 
45

 
(1
)
 
2,244

 
(32
)
Commercial non-agency
402

 
(2
)
 
176

 
(1
)
 
578

 
(3
)
All other securities
382

 
(6
)
 
218

 
(11
)
 
600

 
(17
)
 
$
15,166

 
$
(285
)
 
$
1,027

 
$
(23
)
 
$
16,193

 
$
(308
)
The number of individual positions in an unrealized loss position in the tables above decreased from 1,613 at December 31, 2016 to 1,458 at June 30, 2017. The decrease in the number of securities and the total amount of unrealized losses from year-end 2016 was primarily due to changes in market interest rates. In instances where an unrealized loss existed, there was no indication of an adverse change in credit on the underlying positions in the tables above. As it relates to these positions, management believes no individual unrealized loss, other than those discussed below, represented an OTTI as of those dates. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, the positions before the recovery of their amortized cost basis, which may be at maturity.
As part of the Company's normal process for evaluating OTTI, management did identify a limited number of positions where an OTTI was believed to exist as of June 30, 2017. For the six months ended June 30, 2017, such impairments were immaterial.
Gross realized gains and gross realized losses on sales of securities available for sale, as well as OTTI losses, are shown in the table below. The cost of securities sold is based on the specific identification method.
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Gross realized gains
$
3

 
$
13

 
$
4

 
$
29

Gross realized losses
(2
)
 
(7
)
 
(3
)
 
(27
)
OTTI

 

 

 
(1
)
Securities gains (losses), net
$
1

 
$
6

 
$
1


$
1

    

17


Table of Contents


NOTE 4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
LOANS
The following table presents the distribution of Regions' loan portfolio by segment and class, net of unearned income:
 
June 30, 2017
 
December 31, 2016
 
(In millions, net of unearned income)
Commercial and industrial
$
35,656

 
$
35,012

Commercial real estate mortgage—owner-occupied
6,445

 
6,867

Commercial real estate construction—owner-occupied
388

 
334

Total commercial
42,489

 
42,213

Commercial investor real estate mortgage
4,126

 
4,087

Commercial investor real estate construction
2,163

 
2,387

Total investor real estate
6,289

 
6,474

Residential first mortgage
13,765

 
13,440

Home equity
10,419

 
10,687

Indirect—vehicles
3,653

 
4,040

Indirect—other consumer
1,188

 
920

Consumer credit card
1,183

 
1,196

Other consumer
1,141

 
1,125

Total consumer
31,349

 
31,408

 
$
80,127

 
$
80,095

During the three months ended June 30, 2017, Regions purchased approximately $143 million in indirect-other consumer loans from third parties. During the three months ended June 30, 2016, Regions purchased approximately $300 million in indirect-vehicles and indirect-other consumer loans from third parties. During the six months ended June 30, 2017 and 2016, the comparable loan purchase amounts were approximately $147 million and $579 million, respectively.
At June 30, 2017, $18.2 billion in securities and net eligible loans held by Regions were pledged to secure current and potential borrowings from the FHLB. At June 30, 2017, an additional $22.2 billion in net eligible loans held by Regions were pledged to the FRB for potential borrowings.
ALLOWANCE FOR CREDIT LOSSES
Regions determines the appropriate level of the allowance on a quarterly basis. Refer to Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements to the Annual Report on Form 10-K for the year ended December 31, 2016, for a description of the methodology.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
The following tables present analyses of the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2017 and 2016. The total allowance for loan losses and the related loan portfolio ending balances are disaggregated to detail the amounts derived through individual evaluation and collective evaluation for impairment. The allowance for loan losses related to individually evaluated loans is attributable to reserves for non-accrual commercial and investor real estate loans and all TDRs. The allowance for loan losses and the loan portfolio ending balances related to collectively evaluated loans is attributable to the remainder of the portfolio.

18


Table of Contents


 
Three Months Ended June 30, 2017
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, April 1, 2017
$
727

 
$
87

 
$
247

 
$
1,061

Provision (credit) for loan losses
7

 
(9
)
 
50

 
48

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(38
)
 
(1
)
 
(60
)
 
(99
)
Recoveries
11

 
5

 
15

 
31

Net loan losses
(27
)
 
4

 
(45
)
 
(68
)
Allowance for loan losses, June 30, 2017
707

 
82

 
252

 
1,041

Reserve for unfunded credit commitments, April 1, 2017
66

 
4

 

 
70

Provision (credit) for unfunded credit losses
(3
)
 

 

 
(3
)
Reserve for unfunded credit commitments, June 30, 2017
63

 
4

 

 
67

Allowance for credit losses, June 30, 2017
$
770

 
$
86

 
$
252

 
$
1,108

 
Three Months Ended June 30, 2016
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, April 1, 2016
$
821

 
$
91

 
$
239

 
$
1,151

Provision (credit) for loan losses
38

 
(4
)
 
38

 
72

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(42
)
 
(1
)
 
(55
)
 
(98
)
Recoveries
8

 
1

 
17

 
26

Net loan losses
(34
)
 

 
(38
)
 
(72
)
Allowance for loan losses, June 30, 2016
825

 
87

 
239

 
1,151

Reserve for unfunded credit commitments, April 1, 2016
48

 
5

 

 
53

Provision (credit) for unfunded credit losses
11

 

 

 
11

Reserve for unfunded credit commitments, June 30, 2016
59

 
5

 

 
64

Allowance for credit losses, June 30, 2016
$
884

 
$
92

 
$
239

 
$
1,215

 
Six Months Ended June 30, 2017
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2017
$
753

 
$
85

 
$
253

 
$
1,091

Provision (credit) for loan losses
33

 
(8
)
 
93

 
118

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(96
)
 
(2
)
 
(125
)
 
(223
)
Recoveries
17

 
7

 
31

 
55

Net loan losses
(79
)
 
5

 
(94
)
 
(168
)
Allowance for loan losses, June 30, 2017
707

 
82

 
252

 
1,041

Reserve for unfunded credit commitments, January 1, 2017
64

 
5

 

 
69

Provision (credit) for unfunded credit losses
(1
)
 
(1
)
 

 
(2
)
Reserve for unfunded credit commitments, June 30, 2017
63

 
4

 

 
67

Allowance for credit losses, June 30, 2017
$
770

 
$
86

 
$
252

 
$
1,108

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
228

 
$
17

 
$
57

 
$
302

Collectively evaluated for impairment
479

 
65

 
195

 
739

Total allowance for loan losses
$
707

 
$
82

 
$
252

 
$
1,041

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,052

 
$
120

 
$
747

 
$
1,919

Collectively evaluated for impairment
41,437

 
6,169

 
30,602

 
78,208

Total loans evaluated for impairment
$
42,489

 
$
6,289

 
$
31,349

 
$
80,127


19


Table of Contents


 
Six Months Ended June 30, 2016
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2016
$
758

 
$
97

 
$
251

 
$
1,106

Provision (credit) for loan losses
123

 
(14
)
 
76

 
185

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(71
)
 
(1
)
 
(122
)
 
(194
)
Recoveries
15

 
5

 
34

 
54

Net loan losses
(56
)
 
4

 
(88
)
 
(140
)
Allowance for loan losses, June 30, 2016
825

 
87

 
239

 
1,151

Reserve for unfunded credit commitments, January 1, 2016
47

 
5

 

 
52

Provision (credit) for unfunded credit losses
12

 

 

 
12

Reserve for unfunded credit commitments, June 30, 2016
59

 
5

 

 
64

Allowance for credit losses, June 30, 2016
$
884

 
$
92

 
$
239

 
$
1,215

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
264

 
$
20

 
$
65

 
$
349

Collectively evaluated for impairment
561

 
67

 
174

 
802

Total allowance for loan losses
$
825

 
$
87

 
$
239

 
$
1,151

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,046

 
$
156

 
$
815

 
$
2,017

Collectively evaluated for impairment
42,615

 
6,806

 
30,264

 
79,685

Total loans evaluated for impairment
$
43,661

 
$
6,962

 
$
31,079

 
$
81,702


PORTFOLIO SEGMENT RISK FACTORS
The following describe the risk characteristics relevant to each of the portfolio segments.
Commercial—The commercial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations, and the sensitivity to market fluctuations in commodity prices.
Investor Real Estate—Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, these loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Loans in this portfolio segment are particularly sensitive to the valuation of real estate.
Consumer—The consumer loan portfolio segment includes residential first mortgage, home equity, indirect-vehicles, indirect-other consumer, consumer credit card, and other consumer loans. Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is secured directly affect the amount of credit extended and, in addition, changes in these values impact the depth of potential losses. Indirect-vehicles lending, which is lending initiated through third-party business partners, largely consists of loans made through automotive dealerships. Indirect-other consumer lending represents other point of sale lending through third parties. Consumer credit card includes Regions branded consumer credit card accounts. Other consumer loans include other revolving consumer accounts, direct consumer loans, and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

20


Table of Contents


CREDIT QUALITY INDICATORS
The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of June 30, 2017, and December 31, 2016. Commercial and investor real estate loan portfolio segments are detailed by categories related to underlying credit quality and probability of default. Regions assigns these categories at loan origination and reviews the relationship utilizing a risk-based approach on, at minimum, an annual basis or at any time management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Both quantitative and qualitative factors are considered in this review process. These categories are utilized to develop the associated allowance for credit losses.
Pass—includes obligations where the probability of default is considered low;
Special Mention—includes obligations that have potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. Obligations in this category may also be subject to economic or market conditions that may, in the future, have an adverse effect on debt service ability;
Substandard Accrual—includes obligations that exhibit a well-defined weakness that presently jeopardizes debt repayment, even though they are currently performing. These obligations are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected;
Non-accrual—includes obligations where management has determined that full payment of principal and interest is in doubt.
Substandard accrual and non-accrual loans are often collectively referred to as “classified.” Special mention, substandard accrual, and non-accrual loans are often collectively referred to as “criticized and classified.” Classes in the consumer portfolio segment are disaggregated by accrual status.
 
June 30, 2017
 
Pass
 
Special  Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
33,456

 
$
643

 
$
1,017

 
$
540

 
$
35,656

Commercial real estate mortgage—owner-occupied
5,893

 
189

 
215

 
148

 
6,445

Commercial real estate construction—owner-occupied
372

 
7

 
6

 
3

 
388

Total commercial
$
39,721

 
$
839

 
$
1,238

 
$
691

 
$
42,489

Commercial investor real estate mortgage
$
3,712

 
$
270

 
$
132

 
$
12

 
$
4,126

Commercial investor real estate construction
2,065

 
53

 
45

 

 
2,163

Total investor real estate
$
5,777

 
$
323

 
$
177

 
$
12

 
$
6,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
$
13,719

 
$
46

 
$
13,765

Home equity
 
 
 
 
10,346

 
73

 
10,419

Indirect—vehicles
 
 
 
 
3,652

 
1

 
3,653

Indirect—other consumer
 
 
 
 
1,188

 

 
1,188

Consumer credit card
 
 
 
 
1,183

 

 
1,183

Other consumer
 
 
 
 
1,141

 

 
1,141

Total consumer
 
 
 
 
$
31,229

 
$
120

 
$
31,349

 
 
 
 
 
 
 
 
 
$
80,127

 

21


Table of Contents


 
December 31, 2016
 
Pass
 
Special
Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
32,619

 
$
658

 
$
1,112

 
$
623

 
$
35,012

Commercial real estate mortgage—owner-occupied
6,190

 
221

 
246

 
210

 
6,867

Commercial real estate construction—owner-occupied
308

 
8

 
15

 
3

 
334

Total commercial
$
39,117

 
$
887

 
$
1,373

 
$
836

 
$
42,213

Commercial investor real estate mortgage
$
3,766

 
$
190

 
$
114

 
$
17

 
$
4,087

Commercial investor real estate construction
2,192

 
129

 
66

 

 
2,387

Total investor real estate
$
5,958

 
$
319

 
$
180

 
$
17

 
$
6,474

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
$
13,390

 
$
50

 
$
13,440

Home equity
 
 
 
 
10,595

 
92

 
10,687

Indirect—vehicles
 
 
 
 
4,040

 

 
4,040

Indirect—other consumer
 
 
 
 
920

 

 
920

Consumer credit card
 
 
 
 
1,196

 

 
1,196

Other consumer
 
 
 
 
1,125

 

 
1,125

Total consumer
 
 
 
 
$
31,266

 
$
142

 
$
31,408

 
 
 
 
 
 
 
 
 
$
80,095


AGING ANALYSIS
The following tables include an aging analysis of DPD for each portfolio segment and class as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
17

 
$
6

 
$
4

 
$
27

 
$
35,116

 
$
540

 
$
35,656

Commercial real estate mortgage—owner-occupied
23

 
8

 
2

 
33

 
6,297

 
148

 
6,445

Commercial real estate construction—owner-occupied
1

 

 

 
1

 
385

 
3

 
388

Total commercial
41

 
14

 
6

 
61

 
41,798

 
691

 
42,489

Commercial investor real estate mortgage
12

 
5

 

 
17

 
4,114

 
12

 
4,126

Commercial investor real estate construction

 

 

 

 
2,163

 

 
2,163

Total investor real estate
12

 
5

 

 
17

 
6,277

 
12

 
6,289

Residential first mortgage
83

 
55

 
169

 
307

 
13,719

 
46

 
13,765

Home equity
57

 
19

 
30

 
106

 
10,346

 
73

 
10,419

Indirect—vehicles
42

 
12

 
8

 
62

 
3,652

 
1

 
3,653

Indirect—other consumer
5

 
4

 

 
9

 
1,188

 

 
1,188

Consumer credit card
9

 
5

 
15

 
29

 
1,183

 

 
1,183

Other consumer
11

 
3

 
3

 
17

 
1,141

 

 
1,141

Total consumer
207

 
98

 
225

 
530

 
31,229

 
120

 
31,349

 
$
260

 
$
117

 
$
231

 
$
608

 
$
79,304

 
$
823

 
$
80,127

 

22


Table of Contents


 
December 31, 2016
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
59

 
$
11

 
$
6

 
$
76

 
$
34,389

 
$
623

 
$
35,012

Commercial real estate mortgage—owner-occupied
29

 
7

 
2

 
38

 
6,657

 
210

 
6,867

Commercial real estate construction—owner-occupied
1

 

 

 
1

 
331

 
3

 
334

Total commercial
89

 
18

 
8

 
115

 
41,377

 
836

 
42,213

Commercial investor real estate mortgage
6

 
8

 

 
14

 
4,070

 
17

 
4,087

Commercial investor real estate construction

 

 

 

 
2,387

 

 
2,387

Total investor real estate
6

 
8

 

 
14

 
6,457

 
17

 
6,474

Residential first mortgage
99

 
63

 
212

 
374

 
13,390

 
50

 
13,440

Home equity
60

 
22

 
33

 
115

 
10,595

 
92

 
10,687

Indirect—vehicles
56

 
14

 
10

 
80

 
4,040

 

 
4,040

Indirect—other consumer
5

 
3

 

 
8

 
920

 

 
920

Consumer credit card
9

 
7

 
15

 
31

 
1,196

 

 
1,196

Other consumer
13

 
5

 
5

 
23

 
1,125

 

 
1,125

Total consumer
242

 
114

 
275

 
631

 
31,266

 
142

 
31,408

 
$
337

 
$
140

 
$
283

 
$
760

 
$
79,100

 
$
995

 
$
80,095


IMPAIRED LOANS
The following tables present details related to the Company’s impaired loans as of June 30, 2017 and December 31, 2016. Loans deemed to be impaired include all TDRs and all non-accrual commercial and investor real estate loans, excluding leases. Loans that have been fully charged-off do not appear in the tables below.
 
Non-accrual Impaired Loans As of June 30, 2017
 
 
 
 
 
Book Value(3)
 
 
 
 
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Total
Impaired
Loans on
Non-accrual
Status
 
Impaired
Loans on
Non-accrual
Status with
No Related
Allowance
 
Impaired
Loans on
Non-accrual
Status with
Related
Allowance
 
Related
Allowance
for Loan
Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
665

 
$
130

 
$
535

 
$
71

 
$
464

 
$
131

 
39.2
%
Commercial real estate mortgage—owner-occupied
164

 
16

 
148

 
21

 
127

 
43

 
36.0

Commercial real estate construction—owner-occupied
3

 

 
3

 

 
3

 
1

 
33.3

Total commercial
832

 
146

 
686

 
92

 
594

 
175

 
38.6

Commercial investor real estate mortgage
14

 
2

 
12

 
4

 
8

 
4

 
42.9

Total investor real estate
14

 
2

 
12

 
4

 
8

 
4

 
42.9

Residential first mortgage
27

 
1

 
26

 

 
26

 
3

 
14.8

Home equity
11

 
1

 
10

 

 
10

 

 
9.1

Total consumer
38

 
2

 
36

 

 
36

 
3

 
13.2

 
$
884

 
$
150

 
$
734

 
$
96

 
$
638

 
$
182

 
37.6
%
 

23


Table of Contents


 
Accruing Impaired Loans As of June 30, 2017
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Book Value(3)
 
Related
Allowance for
Loan Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
297

 
$
7

 
$
290

 
$
46

 
17.8
%
Commercial real estate mortgage—owner-occupied
80

 
5

 
75

 
7

 
15.0

Commercial real estate construction—owner-occupied
1

 

 
1

 

 

Total commercial
378

 
12

 
366

 
53

 
17.2

Commercial investor real estate mortgage
56

 
2

 
54

 
5

 
12.5

Commercial investor real estate construction
54

 

 
54

 
8

 
14.8

Total investor real estate
110

 
2

 
108

 
13

 
13.6

Residential first mortgage
429

 
1

 
428

 
50

 
11.9

Home equity
272

 

 
272

 
4

 
1.5

Indirect—vehicles
1

 

 
1

 

 

Consumer credit card
1

 

 
1

 

 

Other consumer
9

 

 
9

 

 

Total consumer
712

 
1

 
711

 
54

 
7.7

 
$
1,200

 
$
15

 
$
1,185

 
$
120

 
11.3
%

 
Total Impaired Loans As of June 30, 2017
 
 
 
 
 
Book Value(3)
 
 
 
 
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Total
Impaired
Loans
 
Impaired
Loans with No
Related
Allowance
 
Impaired
Loans with
Related
Allowance
 
Related
Allowance
for Loan
Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
962

 
$
137

 
$
825

 
$
71

 
$
754

 
$
177

 
32.6
%
Commercial real estate mortgage—owner-occupied
244

 
21

 
223

 
21

 
202

 
50

 
29.1

Commercial real estate construction—owner-occupied
4

 

 
4

 

 
4

 
1

 
25.0

Total commercial
1,210

 
158

 
1,052

 
92

 
960

 
228

 
31.9

Commercial investor real estate mortgage
70

 
4

 
66

 
4

 
62

 
9

 
18.6

Commercial investor real estate construction
54

 

 
54

 

 
54

 
8

 
14.8

Total investor real estate
124

 
4

 
120

 
4

 
116

 
17

 
16.9

Residential first mortgage
456

 
2

 
454

 

 
454

 
53

 
12.1

Home equity
283

 
1

 
282

 

 
282

 
4

 
1.8

Indirect—vehicles
1

 

 
1

 

 
1

 

 

Consumer credit card
1

 

 
1

 

 
1

 

 

Other consumer
9

 

 
9

 

 
9

 

 

Total consumer
750

 
3

 
747

 

 
747

 
57

 
8.0

 
$
2,084

 
$
165

 
$
1,919

 
$
96

 
$
1,823

 
$
302

 
22.4
%


24


Table of Contents



 
Non-accrual Impaired Loans As of December 31, 2016
 
 
 
 
 
Book Value(3)
 
 
 
 
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Total
Impaired
Loans on
Non-accrual
Status
 
Impaired
Loans on
Non-accrual
Status with
No Related
Allowance
 
Impaired
Loans on
Non-accrual
Status with
Related
Allowance
 
Related
Allowance
for Loan
Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
685

 
$
72

 
$
613

 
$
126

 
$
487

 
$
138

 
30.7
%
Commercial real estate mortgage—owner-occupied
231

 
21

 
210

 
39

 
171

 
53

 
32.0

Commercial real estate construction—owner-occupied
4

 
1

 
3

 

 
3

 
2

 
75.0

Total commercial
920

 
94

 
826

 
165

 
661

 
193

 
31.2

Commercial investor real estate mortgage
18

 
1

 
17

 
5

 
12

 
5

 
33.3

Total investor real estate
18

 
1

 
17

 
5

 
12

 
5

 
33.3

Residential first mortgage
41

 
12

 
29

 

 
29

 
4

 
39.0

Home equity
12

 
1

 
11

 

 
11

 

 
8.3

Total consumer
53

 
13

 
40

 

 
40

 
4

 
32.1

 
$
991

 
$
108

 
$
883

 
$
170

 
$
713

 
$
202

 
31.3
%
 
 
Accruing Impaired Loans As of December 31, 2016
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Book Value(3)
 
Related
Allowance for
Loan Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
187

 
$
1

 
$
186

 
$
33

 
18.2
%
Commercial real estate mortgage—owner-occupied
60

 
4

 
56

 
5

 
15.0

Commercial real estate construction—owner-occupied
1

 

 
1

 

 

Total commercial
248

 
5

 
243

 
38

 
17.3

Commercial investor real estate mortgage
82

 
8

 
74

 
7

 
18.3

Commercial investor real estate construction
16

 

 
16

 
1

 
6.3

Total investor real estate
98

 
8

 
90

 
8

 
16.3

Residential first mortgage
435

 
10

 
425

 
51

 
14.0

Home equity
292

 

 
292

 
5

 
1.7

Indirect—vehicles
1

 

 
1

 

 

Consumer credit card
2

 

 
2

 

 

Other consumer
10

 

 
10

 

 

Total consumer
740

 
10

 
730

 
56

 
8.9

 
$
1,086

 
$
23

 
$
1,063

 
$
102

 
11.5
%


25


Table of Contents


 
Total Impaired Loans As of December 31, 2016
 
 
 
 
 
Book Value(3)
 
 
 
 
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Total
Impaired
Loans
 
Impaired
Loans with No
Related
Allowance
 
Impaired
Loans with
Related
Allowance
 
Related
Allowance for
Loan Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
872

 
$
73

 
$
799

 
$
126

 
$
673

 
$
171

 
28.0
%
Commercial real estate mortgage—owner-occupied
291

 
25

 
266

 
39

 
227

 
58

 
28.5

Commercial real estate construction—owner-occupied
5

 
1

 
4

 

 
4

 
2

 
60.0

Total commercial
1,168

 
99

 
1,069

 
165

 
904

 
231

 
28.3

Commercial investor real estate mortgage
100

 
9

 
91

 
5

 
86

 
12

 
21.0

Commercial investor real estate construction
16

 

 
16

 

 
16

 
1

 
6.3

Total investor real estate
116

 
9

 
107

 
5

 
102

 
13

 
19.0

Residential first mortgage
476

 
22

 
454

 

 
454

 
55

 
16.2

Home equity
304

 
1

 
303

 

 
303

 
5

 
2.0

Indirect—vehicles
1

 

 
1

 

 
1

 

 

Consumer credit card
2

 

 
2

 

 
2

 

 

Other consumer
10

 

 
10

 

 
10

 

 

Total consumer
793

 
23

 
770

 

 
770

 
60

 
10.5

 
$
2,077

 
$
131

 
$
1,946

 
$
170

 
$
1,776

 
$
304

 
20.9
%
________
(1)
Unpaid principal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied.
(2)
Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance.
(3)
Book value represents the unpaid principal balance less charge-offs and payments applied; it is shown before any allowance for loan losses.
(4)
Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the unpaid principal balance.


26


Table of Contents


The following table presents the average balances of total impaired loans and interest income for the three and six months ended June 30, 2017 and 2016. Interest income recognized represents interest on accruing loans modified in a TDR.
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
 
(In millions)
Commercial and industrial
$
846

 
$
4

 
$
719

 
$
2

 
$
833

 
$
6

 
$
597

 
$
3

Commercial real estate mortgage—owner-occupied
229

 
1

 
314

 
1

 
246

 
2

 
321

 
2

Commercial real estate construction—owner-occupied
4

 

 
3

 

 
5

 

 
3

 

Total commercial
1,079

 
5

 
1,036

 
3

 
1,084

 
8

 
921

 
5

Commercial investor real estate mortgage
76

 
1

 
126

 
1

 
84

 
2

 
134

 
3

Commercial investor real estate construction
53

 
1

 
28

 

 
43

 
1

 
28

 

Total investor real estate
129

 
2

 
154

 
1

 
127

 
3

 
162

 
3

Residential first mortgage
460

 
4

 
479

 
4

 
457

 
8

 
478

 
8

Home equity
286

 
3

 
328

 
4

 
290

 
7

 
332

 
9

Indirect—vehicles

 

 

 

 

 

 
1

 

Consumer credit card
2

 

 
2

 

 
2

 

 
2

 

Other consumer
9

 

 
12

 

 
10

 

 
12

 

Total consumer
757

 
7

 
821

 
8

 
759

 
15

 
825

 
17

Total impaired loans
$
1,965

 
$
14

 
$
2,011

 
$
12

 
$
1,970

 
$
26

 
$
1,908

 
$
25

TROUBLED DEBT RESTRUCTURINGS
Regions regularly modifies commercial and investor real estate loans in order to facilitate a workout strategy. Similarly, Regions works to meet the individual needs of consumer borrowers to stem foreclosure through its CAP. Refer to Note 6 "Allowance For Credit Losses" in the 2016 Annual Report on Form 10-K for additional information regarding the Company's TDRs.
None of the modified consumer loans listed in the following TDR disclosures were collateral-dependent at the time of modification. At June 30, 2017, approximately $18 million in residential first mortgage TDRs were in excess of 180 days past due and were considered collateral-dependent. At June 30, 2017, approximately $5 million in home equity first lien TDRs were in excess of 180 days past due and approximately $2 million in home equity second lien TDRs were in excess of 120 days past due, both of which were considered collateral-dependent.
Further discussion related to TDRs, including their impact on the allowance for loan losses and designation of TDRs in periods subsequent to the modification is included in Note 1 "Summary of Significant Accounting Policies" in the 2016 Annual Report on Form 10-K.

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The following tables present the end of period balance for loans modified in a TDR during the periods presented by portfolio segment and class, and the financial impact of those modifications. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. Loans first reported as TDRs during the six months ended June 30, 2017 and 2016 totaled approximately $328 million and $211 million, respectively.
 
Three Months Ended June 30, 2017
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
38

 
$
193

 
$
4

Commercial real estate mortgage—owner-occupied
30

 
37

 
1

Commercial real estate construction—owner-occupied
1

 
1

 

Total commercial
69

 
231

 
5

Commercial investor real estate mortgage
13

 
29

 
1

Commercial investor real estate construction
2

 
44

 
1

Total investor real estate
15

 
73

 
2

Residential first mortgage
52

 
17

 
2

Home equity
33

 
2

 

Consumer credit card
24

 

 

Indirect—vehicles and other consumer
40

 

 

Total consumer
149

 
19

 
2

 
233

 
$
323

 
$
9


 
Three Months Ended June 30, 2016
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
57

 
$
122

 
$
4

Commercial real estate mortgage—owner-occupied
46

 
21

 
1

Total commercial
103

 
143

 
5

Commercial investor real estate mortgage
24

 
17

 

Commercial investor real estate construction
3

 
10

 

Total investor real estate
27

 
27

 

Residential first mortgage
75

 
15

 
2

Home equity
89

 
5

 

Consumer credit card
27

 

 

Indirect—vehicles and other consumer
47

 

 

Total consumer
238

 
20

 
2

 
368

 
$
190

 
$
7


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Table of Contents


 
Six Months Ended June 30, 2017
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
69

 
$
292

 
$
7

Commercial real estate mortgage—owner-occupied
61

 
65

 
2

Commercial real estate construction—owner-occupied
3

 
2

 

Total commercial
133

 
359

 
9

Commercial investor real estate mortgage
25

 
48

 
1

Commercial investor real estate construction
5

 
70

 
2

Total investor real estate
30

 
118

 
3

Residential first mortgage
101

 
25

 
3

Home equity
91

 
7

 

Consumer credit card
43

 

 

Indirect—vehicles and other consumer
87

 
1

 

Total consumer
322

 
33

 
3

 
485

 
$
510

 
$
15

 
Six Months Ended June 30, 2016
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
95

 
$
181

 
$
6

Commercial real estate mortgage—owner-occupied
76

 
34

 
1

Total commercial
171

 
215

 
7

Commercial investor real estate mortgage
49

 
60

 
1

Commercial investor real estate construction
5

 
11

 

Total investor real estate
54

 
71

 
1

Residential first mortgage
138

 
29

 
4

Home equity
206

 
11

 

Consumer credit card
51

 

 

Indirect—vehicles and other consumer
101

 
1

 

Total consumer
496

 
41

 
4

 
721

 
$
327

 
$
12

Defaulted TDRs
The following table presents, by portfolio segment and class, TDRs that defaulted during the three and six months ended June 30, 2017 and 2016, and that were modified in the previous twelve months (i.e., the twelve months prior to the default). For purposes of this disclosure, default is defined as placement on non-accrual status for the commercial and investor real estate portfolio segments, and 90 days past due and still accruing for the consumer portfolio segment. Consideration of defaults in the calculation of the allowance for loan losses is described in detail in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.

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Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Defaulted During the Period, Where Modified in a TDR Twelve Months Prior to Default
 
 
 
 
 
 
 
Commercial and industrial
$
6

 
$
6

 
$
8

 
$
12

Commercial real estate mortgage—owner-occupied

 

 

 
1

Total commercial
6

 
6

 
8

 
13

Commercial investor real estate mortgage

 

 

 
1

Total investor real estate

 

 

 
1

Residential first mortgage
2

 
8

 
5

 
11

Home equity
1

 
1

 
1

 
1

Total consumer
3

 
9

 
6

 
12

 
$
9

 
$
15

 
$
14

 
$
26

Commercial and investor real estate loans that were on non-accrual status at the time of the latest modification are not included in the default table above, as they are already considered to be in default at the time of the restructuring. At June 30, 2017, approximately $57 million of commercial and investor real estate loans modified in a TDR during the three months ended June 30, 2017 were on non-accrual status. Approximately 0.9 percent of this amount was 90 days past due.
At June 30, 2017, Regions had restructured binding unfunded commitments totaling $18 million where a concession was granted and the borrower was in financial difficulty.
NOTE 5. SERVICING OF FINANCIAL ASSETS
RESIDENTIAL MORTGAGE BANKING ACTIVITIES
The fair value of residential MSRs is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of residential MSRs. The Company compares fair value estimates and assumptions to observable market data where available, and also considers recent market activity and actual portfolio experience.
The table below presents an analysis of residential MSRs under the fair value measurement method:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Carrying value, beginning of period
$
326

 
$
239

 
$
324

 
$
252

Additions
39

 
8

 
47

 
39

Increase (decrease) in fair value(1):
 
 
 
 
 
 
 
Due to change in valuation inputs or assumptions
(8
)
 
(22
)
 
(3
)
 
(58
)
Economic amortization associated with borrower repayments
(11
)
 
(9
)
 
(22
)
 
(17
)
Carrying value, end of period
$
346

 
$
216

 
$
346

 
$
216

________
(1) "Economic amortization associated with borrower repayments" includes both total loan payoffs as well as partial paydowns.

On February 29, 2016, the Company purchased the rights to service approximately $2.6 billion in residential mortgage loans for approximately $24 million.

On April 28, 2017, the Company purchased the rights to service approximately $2.7 billion in residential mortgage loans for approximately $30 million.

Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to residential MSRs (excluding related derivative instruments) are as follows:

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June 30
 
2017
 
2016
 
(Dollars in millions)
Unpaid principal balance
$
33,055

 
$
27,360

Weighted-average prepayment speed (CPR; percentage)
7.9
%
 
16.5
%
Estimated impact on fair value of a 10% increase
$
(19
)
 
$
(12
)
Estimated impact on fair value of a 20% increase
$
(35
)
 
$
(24
)
Option-adjusted spread (basis points)
1,052

 
999

Estimated impact on fair value of a 10% increase
$
(14
)
 
$
(8
)
Estimated impact on fair value of a 20% increase
$
(28
)
 
$
(15
)
Weighted-average coupon interest rate
4.2
%
 
4.3
%
Weighted-average remaining maturity (months)
281

 
279

Weighted-average servicing fee (basis points)
27.4

 
27.8

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of residential MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above.
The following table presents servicing related fees, which includes contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of residential mortgage loans:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Servicing related fees and other ancillary income
$
24

 
$
22

 
$
47

 
$
42

Residential mortgage loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. Regions may be required to repurchase these loans at par, or make-whole or indemnify the purchasers for losses incurred when representations and warranties are breached.
Regions maintains an immaterial repurchase liability related to residential mortgage loans sold with representations and warranty provisions. This repurchase liability is reported in other liabilities on the consolidated balance sheets and reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income.
COMMERCIAL MORTGAGE BANKING ACTIVITIES
On July 18, 2014, Regions was approved as a Fannie Mae DUS lender and acquired a DUS servicing portfolio totaling approximately $1.0 billion. The Fannie Mae DUS program provides liquidity to the multi-family housing market. As part of the transaction, Regions recorded $12 million in commercial MSRs and $15 million in intangible assets associated with the DUS license purchased. Regions also assumed a loss share guarantee associated with the purchased portfolio and any future originations. Regions estimated the fair value of the loss share guarantee to be approximately $4 million. See Note 1 "Summary of Significant Accounting Policies" in the 2016 Annual Report on Form 10-K for additional information. Also see Note 14 herein for additional information related to the guarantee.
As of June 30, 2017 and December 31, 2016, the DUS servicing portfolio was approximately $2.0 billion and $1.8 billion, respectively. The related commercial MSRs were valued at approximately $35 million and $30 million at June 30, 2017 and December 31, 2016, respectively. The estimated fair value of the loss share guarantee was valued at approximately $4 million at both June 30, 2017 and December 31, 2016.

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NOTE 6. GOODWILL
Goodwill allocated to each reportable segment (each a reporting unit) is presented as follows: 
 
June 30, 2017
 
December 31, 2016
 
(In millions)
Corporate Bank
$
2,474

 
$
2,474

Consumer Bank
1,978

 
1,978

Wealth Management
452

 
452

 
$
4,904

 
$
4,904

Regions evaluates each reporting unit’s goodwill for impairment on an annual basis in the fourth quarter, or more often if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. A detailed description of the Company’s methodology and valuation approaches used to determine the estimated fair value of each reporting unit is included in the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill.
During the second quarter of 2017, Regions assessed events and circumstances for all three reporting units as of June 30, 2017, and through the date of the filing of this Quarterly Report on Form 10-Q that could potentially indicate goodwill impairment. The indicators assessed included:
Recent operating performance,
Changes in market capitalization,
Regulatory actions and assessments,
Changes in the business climate (including legislation, legal factors, and competition),
Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and
Trends in the banking industry.
After assessing the indicators noted above, Regions determined that it was not more likely than not that the fair value of each of its reporting units had declined below their carrying value as of June 30, 2017. Therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the June 30, 2017 interim period.


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NOTE 7. STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
PREFERRED STOCK
The following table presents a summary of the non-cumulative perpetual preferred stock:    
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Issuance Date
 
Earliest Redemption Date
 
Dividend Rate
 
Liquidation Amount
 
Carrying Amount
 
Carrying Amount
 
(Dollars in millions)
Series A
11/1/2012
 
12/15/2017
 
6.375
%
 
 
$
500

 
$
387

 
$
387

Series B
4/29/2014
 
9/15/2024
 
6.375
%
(1) 
 
500

 
433

 
433

 
 
 
 
 
 
 
 
$
1,000

 
$
820

 
$
820

_________
(1) Dividends, if declared, will be paid quarterly at an annual rate equal to (i) for each period beginning prior to September 15, 2024, 6.375%, and (ii) for each period beginning on or after September 15, 2024, three-month LIBOR plus 3.536%.
For each preferred stock issuance listed above, Regions issued depositary shares, each representing a 1/40th ownership interest in a share of the Company's preferred stock, with a liquidation preference of $1,000.00 per share of preferred stock (equivalent to $25.00 per depositary share). Dividends on the preferred stock, if declared, accrue and are payable quarterly in arrears. The preferred stock has no stated maturity and redemption is solely at Regions' option, subject to regulatory approval, in whole, or in part, after the earliest redemption date or in whole, but not in part, within 90 days following a regulatory capital treatment event for the Series A preferred stock or at any time following a regulatory capital treatment event for the Series B preferred stock.
The Board of Directors declared $16 million in cash dividends on Series A Preferred Stock during the first six months of 2017 and 2016. Series B Preferred Stock dividends were also $16 million for the first six months of 2017 and 2016.
In the event Series A and Series B preferred shares are redeemed at the liquidation amounts, $113 million and $67 million excess of the redemption amount over the carrying amount will be recognized, respectively. Approximately $100 million of Series A preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $13 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders. Approximately $52 million of Series B preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $15 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders.
COMMON STOCK
On June 28, 2017, Regions received no objection from the Federal Reserve to its 2017 capital plan that was submitted as part of the CCAR process, which included the repurchase of common shares and a common stock dividend increase. As part of the Company's capital plan, the Board authorized a new $1.47 billion common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2017 through the second quarter of 2018. The capital plan also included a proposed increase of the quarterly common stock dividend to $0.09 per common share beginning in the third quarter of 2017, subject to quarterly Board approval. The Company began to repurchase shares under this plan in the third quarter of 2017, and as of August 3, 2017, Regions had additional repurchases of approximately 9.9 million shares of common stock at a total cost of approximately $144.9 million. All of these shares were immediately retired upon repurchase and, therefore, will not be included in treasury stock.
Prior to the new common stock repurchase plan, Regions had authorization to repurchase $760 million in common shares. As of June 30, 2017, Regions had repurchased approximately 65.8 million shares of common stock at a total cost of approximately $760 million under this plan and concluded the plan during the second quarter of 2017.
Regions’ Board declared a cash dividend for the second quarter of 2017 of $0.07 per common share compared to $0.065 per common share for the first quarter of 2017, totaling $0.135 per common share for the first six months of 2017. The Board declared a $0.065 per share cash dividend on common stock for the second quarter of 2016 as compared to $0.06 per common share for the first quarter of 2016, totaling $0.125 per common share for the first six months of 2016.
On July 27, 2017, Regions' Board approved an increase of the quarterly common stock dividend to $0.09 per share.



33


Table of Contents


ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity within the balances in accumulated other comprehensive income (loss), net is shown in the following tables:
 
Three Months Ended June 30, 2017
 
Unrealized losses on securities transferred to held to maturity
 
Unrealized gains (losses) on securities available for sale
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges
 
Defined benefit
pension plans and other post
employment
benefits
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
(In millions)
Beginning of period
$
(31
)
 
$
(105
)
 
$
(12
)
 
$
(417
)
 
$
(565
)
Net change
1

 
50

 
23

 
12

 
86

End of period
$
(30
)
 
$
(55
)
 
$
11

 
$
(405
)
 
$
(479
)
 
Three Months Ended June 30, 2016
 
Unrealized losses on securities transferred to held to maturity
 
Unrealized gains (losses) on securities available for sale
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges
 
Defined benefit pension plans and other post employment benefits
 
Accumulated other comprehensive
income (loss), net of tax
 
(In millions)
Beginning of period
$
(45
)
 
$
198

 
$
216

 
$
(392
)
 
$
(23
)
Net change
5

 
99

 
62

 
5

 
171

End of period
$
(40
)
 
$
297

 
$
278

 
$
(387
)
 
$
148

 
Six Months Ended June 30, 2017
 
Unrealized losses on securities transferred to held to maturity
 
Unrealized gains (losses) on securities available for sale
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges
 
Defined benefit pension plans and other post employment benefits
 
Accumulated other comprehensive
income (loss), net of tax
 
(In millions)
Beginning of period
$
(33
)
 
$
(106
)
 
$
11

 
$
(422
)
 
$
(550
)
Net change
3

 
51

 

 
17

 
71

End of period
$
(30
)
 
$
(55
)
 
$
11

 
$
(405
)
 
$
(479
)
 
Six Months Ended June 30, 2016
 
Unrealized losses on securities transferred to held to maturity
 
Unrealized gains (losses) on securities available for sale
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges
 
Defined benefit pension plans and other post employment benefits
 
Accumulated other comprehensive
income (loss), net of tax
 
(In millions)
Beginning of period
$
(47
)
 
$
(10
)
 
$
75

 
$
(398
)
 
$
(380
)
Net change
7

 
307

 
203

 
11

 
528

End of period
$
(40
)
 
$
297

 
$
278

 
$
(387
)
 
$
148


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Table of Contents


The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Affected Line Item in the Consolidated Statements of Income
 
(In millions)
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
 
 
 
$
(2
)
 
$
(8
)
 
Net interest income and other financing income
 
1

 
3

 
Tax (expense) or benefit
 
$
(1
)
 
$
(5
)
 
Net of tax
Unrealized gains and (losses) on available for sale securities:
 
 
 
 
 
 
$
1

 
$
6

 
Securities gains (losses), net
 

 
(2
)
 
Tax (expense) or benefit
 
$
1

 
$
4

 
Net of tax
 
 
 
 
 
 
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
22

 
$
35

 
Net interest income and other financing income
 
(8
)
 
(13
)
 
Tax (expense) or benefit
 
$
14

 
$
22

 
Net of tax
 
 
 
 
 
 
Amortization of defined benefit pension plans and other post employment benefits:
 
 
 
 
 
Actuarial gains (losses) and settlements
$
(19
)
 
$
(8
)
 
(2) 
 
(19
)
 
(8
)
 
Total before tax
 
7

 
3

 
Tax (expense) or benefit
 
$
(12
)
 
$
(5
)
 
Net of tax
 
 
 
 
 
 
Total reclassifications for the period
$
2

 
$
16

 
Net of tax

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Table of Contents


 
Six Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2016
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Affected Line Item in the Consolidated Statements of Income
 
(In millions)
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
 
 
 
$
(5
)
 
$
(11
)
 
Net interest income and other financing income
 
2

 
4

 
Tax (expense) or benefit
 
$
(3
)
 
$
(7
)
 
Net of tax
Unrealized gains and (losses) on available for sale securities:
 
 
 
 
 
 
$
1

 
$
1

 
Securities gains (losses), net
 

 

 
Tax (expense) or benefit
 
$
1

 
$
1

 
Net of tax
 
 
 
 
 
 
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
53

 
$
74

 
Net interest income and other financing income
 
(20
)
 
(28
)
 
Tax (expense) or benefit
 
$
33

 
$
46

 
Net of tax
 
 
 
 
 
 
Amortization of defined benefit pension plans and other post employment benefits:
 
 
 
 
 
Actuarial gains (losses) and settlements
$
(28
)
 
$
(17
)
 
(2) 
 
(28
)
 
(17
)
 
Total before tax
 
10

 
6

 
Tax (expense) or benefit
 
$
(18
)
 
$
(11
)
 
Net of tax
 
 
 
 
 
 
Total reclassifications for the period
$
13

 
$
29

 
Net of tax
________
(1) Amounts in parentheses indicate reductions to net income.
(2) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost and are included in salaries and employee benefits on the consolidated statements of income (see Note 10 for additional details).

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Table of Contents


NOTE 8. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
317

 
$
272

 
$
611

 
$
545

Preferred stock dividends
(16
)
 
(16
)
 
(32
)
 
(32
)
Income from continuing operations available to common shareholders
301

 
256

 
579

 
513

Income (loss) from discontinued operations, net of tax
(1
)
 
3

 
6

 
3

Net income available to common shareholders
$
300

 
$
259

 
$
585

 
$
516

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
1,202

 
1,265

 
1,205

 
1,275

Potential common shares
10

 
3

 
13

 
4

Weighted-average common shares outstanding—diluted
1,212

 
1,268

 
1,218

 
1,279

Earnings per common share from continuing operations available to common shareholders(1):
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.20

 
$
0.48

 
$
0.40

Diluted
0.25

 
0.20

 
0.48

 
0.40

Earnings (loss) per common share from discontinued operations(1):
 
 
 
 
 
 
 
Basic
$
(0.00
)
 
$
0.00

 
$
0.00

 
$
0.00

Diluted
(0.00
)
 
0.00

 
0.00

 
0.00

Earnings per common share(1):
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.20

 
$
0.49

 
$
0.40

Diluted
0.25

 
0.20

 
0.48

 
0.40

________
(1)
 Certain per share amounts may not appear to reconcile due to rounding.
The effect from the assumed exercise of 15 million stock options, restricted stock units and awards and performance stock units for both the three months and six months ended June 30, 2017 was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share. The effect from the assumed exercise of 30 million for both the three and six months ended June 30, 2016 was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share.
NOTE 9. SHARE-BASED PAYMENTS
Regions administers long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock awards, performance awards and stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by stockholders. Incentive awards usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans are typically ten years from the date of the grant.
On April 23, 2015, the stockholders of the Company approved the Regions Financial Corporation 2015 LTIP , which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2015 LTIP authorizes 60 million common share equivalents available for grant, where grants of options and grants of full value awards (e.g., shares of restricted stock, restricted stock units and performance stock units) count as one share equivalent. Unless otherwise determined by the Compensation Committee of the Board, grants of restricted stock, restricted stock units, and performance stock units accrue dividends, or their notional equivalent, as they are declared by the Board, and are paid upon vesting of the award. Upon adoption of the 2015 LTIP, Regions closed the prior long-term incentive plan to new grants, and, accordingly, prospective grants must be made under the 2015 LTIP or a successor plan. All existing grants under prior long-term incentive plans are unaffected by adoption of the 2015 LTIP. The number of remaining share equivalents available for future issuance under the 2015 LTIP was approximately 45 million at June 30, 2017.

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STOCK OPTIONS
The following table summarizes the activity related to stock options:
 
Six Months Ended June 30
 
2017
 
2016
 
Number of
Options
 
Weighted-Average
Exercise Price
 
Number of
Options
 
Weighted-Average
Exercise Price
Outstanding at beginning of period
13,455,047

 
$
19.37

 
19,350,157

 
$
21.06

Exercised
(964,494
)
 
6.61

 
(227,492
)
 
6.91

Forfeited or expired
(2,656,188
)
 
34.71

 
(3,819,783
)
 
34.72

Outstanding at end of period
9,834,365

 
$
16.48

 
15,302,882

 
$
17.86

Exercisable at end of period
9,834,365

 
$
16.48

 
15,302,882

 
$
17.86

RESTRICTED STOCK AWARDS AND PERFORMANCE STOCK AWARDS
Regions periodically grants restricted stock awards that vest upon service conditions. Regions also periodically grants restricted stock awards and performance stock awards that vest based upon service conditions and performance conditions. Incremental shares earned above the performance target associated with previous performance stock awards are included when and if performance targets are achieved. Dividend payments during the vesting period are deferred to the end of the vesting term. The fair value of these restricted shares, restricted stock units and performance stock units was estimated based upon the fair value of the underlying shares on the date of the grant. The valuation was not adjusted for the deferral of dividends.
The following table summarizes the activity related to restricted stock awards and performance stock awards:
 
Six Months Ended June 30
 
2017
 
2016
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
Non-vested at beginning of period
16,558,942

 
$
9.31

 
16,374,242

 
$
9.51

Granted
3,891,181

 
14.56

 
6,820,768

 
7.92

Vested
(4,515,854
)
 
11.12

 
(5,600,419
)
 
8.21

Forfeited
(370,270
)
 
9.96

 
(690,623
)
 
9.19

Non-vested at end of period
15,563,999

 
$
10.09

 
16,903,968

 
$
9.31


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NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFITS
Effective January 1, 2016, Regions separated its defined benefit pension plan qualified under the Internal Revenue Code into two plans. The new plan was created primarily for participants who were actively employed on January 1, 2016 and all other participants were retained in the existing plan. Regions' defined benefit pension plans cover only certain employees as the pension plans are closed to new entrants.The Company also sponsors a SERP, which is a non-qualified pension plan that provides certain senior executive officers defined benefits in relation to their compensation.
Net periodic pension cost, which is recorded in salaries and employee benefits on the consolidated statements of income, included the following components:
 
Qualified Plans
 
Non-qualified Plans
 
Total
 
Three Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Service cost
$
9

 
$
8

 
$
1

 
$
1

 
$
10

 
$
9

Interest cost
18

 
18

 
1

 
2

 
19

 
20

Expected return on plan assets
(36
)
 
(36
)
 

 

 
(36
)
 
(36
)
Amortization of actuarial loss
8

 
8

 
1

 

 
9

 
8

Settlement charge

 

 
10

 

 
10

 

Net periodic pension cost (credit)
$
(1
)
 
$
(2
)
 
$
13

 
$
3

 
$
12

 
$
1

 
Qualified Plans
 
Non-qualified Plans
 
Total
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Service cost
$
17

 
$
17

 
$
2

 
$
2

 
$
19

 
$
19

Interest cost
36

 
36

 
2

 
3

 
38

 
39

Expected return on plan assets
(71
)
 
(72
)
 

 

 
(71
)
 
(72
)
Amortization of actuarial loss
16

 
16

 
2

 
1

 
18

 
17

Settlement charge

 

 
10

 

 
10

 

Net periodic pension cost (credit)
$
(2
)
 
$
(3
)
 
$
16

 
$
6

 
$
14

 
$
3


The settlement charge relates to the settlement of liabilities under the SERP for certain plan participants during the second quarter of 2017.
Regions' funding policy is to contribute annually at least the amount required by IRS minimum funding standards. Regions made no contribution to the plan during the first six months of 2017.
Regions also provides other postretirement benefits such as defined benefit health care plans and life insurance plans that cover certain retired employees. There was no material impact from other postretirement benefits on the consolidated financial statements for the six months ended June 30, 2017 or 2016.

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NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The following tables present the notional amount and estimated fair value of derivative instruments on a gross basis as of June 30, 2017 and December 31, 2016. The variation margin payments made during 2017 for derivatives cleared through the Chicago Mercantile Exchange are legally characterized as settlements of the derivatives. As a result, these variation margin payments are netted against the fair value of the respective derivative contracts in the balance sheet and related disclosures.
 
June 30, 2017
 
December 31, 2016
 
Notional
Amount
 
Estimated Fair Value
 
Notional
Amount
 
Estimated Fair Value
 
Gain(1)
 
Loss(1)
 
Gain(1)
 
Loss(1)
 
(In millions)
Derivatives in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
2,168

 
$
1

 
$
30

 
$
2,257

 
$
7

 
$
40

Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
7,400

 
20

 
158

 
9,000

 
19

 
269

Total derivatives designated as hedging instruments
$
9,568

 
$
21

 
$
188

 
$
11,257

 
$
26

 
$
309

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
40,578

 
$
337

 
$
382

 
$
41,851

 
$
412

 
$
467

Interest rate options
3,873

 
24

 
10

 
3,877

 
24

 
12

Interest rate futures and forward commitments
21,062

 
6

 
9

 
18,605

 
11

 
6

Other contracts
6,402

 
72

 
73

 
5,813

 
106

 
93

Total derivatives not designated as hedging instruments
$
71,915

 
$
439

 
$
474

 
$
70,146

 
$
553

 
$
578

Total derivatives
$
81,483

 
$
460

 
$
662

 
$
81,403

 
$
579

 
$
887

_________
(1)
Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities on the consolidated balance sheets.
HEDGING DERIVATIVES
Derivatives entered into to manage interest rate risk and facilitate asset/liability management strategies are designated as hedging derivatives. Derivative financial instruments that qualify in a hedging relationship are classified, based on the exposure being hedged, as either fair value hedges or cash flow hedges. See Note 1 "Summary of Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2016, for additional information regarding accounting policies for derivatives.
FAIR VALUE HEDGES
Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment.
Regions enters into interest rate swap agreements to manage interest rate exposure on the Company’s fixed-rate borrowings, which includes long-term debt and certificates of deposit. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreements. Regions enters into interest rate swap agreements to manage interest rate exposure on certain of the Company's fixed-rate available for sale debt securities. These agreements involve the payment of fixed-rate amounts in exchange for floating-rate interest receipts.
CASH FLOW HEDGES
Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions.
Regions enters into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on LIBOR-based loans. The agreements effectively modify the Company’s exposure to interest rate risk by utilizing receive fixed/pay LIBOR interest rate swaps.
Regions issues long-term fixed-rate debt for various funding needs. Regions may enter into receive LIBOR/pay fixed forward starting swaps to hedge risks of changes in the projected quarterly interest payments attributable to changes in the benchmark interest rate (LIBOR) during the time leading up to the probable issuance date of the new long-term fixed-rate debt.

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Table of Contents


Regions recognized an unrealized after-tax gain of $140 million and $77 million in accumulated other comprehensive income (loss) at June 30, 2017 and 2016, respectively, related to terminated cash flow hedges of loan instruments, which will be amortized into earnings in conjunction with the recognition of interest payments through 2025. Regions recognized pre-tax income of $18 million and $12 million during the three months ended June 30, 2017 and 2016, respectively, and pre-tax income of $37 million and $24 million during the six months ended June 30, 2017 and 2016, respectively, related to the amortization of discontinued cash flow hedges of loan instruments.
Regions expects to reclassify out of accumulated other comprehensive income (loss) and into earnings approximately $60 million in pre-tax income due to the receipt or payment of interest payments on all cash flow hedges within the next twelve months. Included in this amount is $60 million in pre-tax net gains related to the amortization of discontinued cash flow hedges. The maximum length of time over which Regions is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately eight years as of June 30, 2017.
The following tables present the effect of hedging derivative instruments on the consolidated statements of income:
 
Gain or (Loss) Recognized in Income on Derivatives
 
Location of Amounts Recognized in Income on Derivatives and Related Hedged Item
 
Gain or (Loss) Recognized in Income on Related Hedged Item
 
Three Months Ended June 30
 
 
 
Three Months Ended June 30
 
2017
 
2016
 
 
 
2017
 
2016
 
(In millions)
 
 
 
(In millions)
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps on:
 
 
 
 
 
 
 
 
 
Debt/CDs
$

 
$
4

 
Interest expense
 
$

 
$
(1
)
Debt/CDs
7

 
12

 
Other non-interest expense
 
(6
)
 
(12
)
Securities available for sale
(1
)
 
(2
)
 
Interest income
 

 

Securities available for sale
(4
)
 
(12
)
 
Other non-interest expense
 
4

 
12

Total
$
2

 
$
2

 
 
 
$
(2
)
 
$
(1
)
 
 
Effective Portion(3)
 
Gain or (Loss) Recognized in AOCI(1)
 
Location of Amounts Reclassified from AOCI into Income
 
Gain or (Loss) Reclassified from AOCI into Income(2)
 
Three Months Ended June 30
 
 
 
Three Months Ended June 30
 
2017
 
2016
 
 
 
2017
 
2016
 
(In millions)
 
 
 
(In millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
23

 
$
62

 
Interest income on loans
 
$
22

 
$
35

Total
$
23

 
$
62

 
 
 
$
22

 
$
35

 
Gain or (Loss) Recognized in Income on Derivatives
 
Location of Amounts Recognized in Income on Derivatives and Related Hedged Item
 
Gain or (Loss) Recognized in Income on Related Hedged Item
 
Six Months Ended June 30
 
 
 
Six Months Ended June 30
 
2017
 
2016
 
 
 
2017
 
2016
 
(In millions)
 
 
 
(In millions)
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps on:
 
 
 
 
 
 
 
 
 
Debt/CDs
$
1

 
$
8

 
Interest expense
 
$

 
$
(2
)
Debt/CDs
5

 
27

 
Other non-interest expense
 
(4
)
 
(27
)
Securities available for sale
(2
)
 
(5
)
 
Interest income
 

 

Securities available for sale
(2
)
 
(38
)
 
Other non-interest expense
 
1

 
37

Total
$
2

 
$
(8
)
 
 
 
$
(3
)
 
$
8


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Table of Contents


 
Effective Portion(3)
 
Gain or (Loss) Recognized in AOCI(1)
 
Location of Amounts Reclassified from AOCI into Income
 
Gain or (Loss) Reclassified from AOCI into Income(2)
 
Six Months Ended June 30
 
 
 
Six Months Ended June 30
 
2017
 
2016
 
 
 
2017
 
2016
 
(In millions)
 
 
 
(In millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
203

 
Interest income on loans
 
$
53

 
$
74

Total
$

 
$
203

 
 
 
$
53

 
$
74

______
(1) After-tax
(2) Pre-tax
(3) All cash flow hedges were highly effective for all periods presented, and the change in fair value attributed to hedge ineffectiveness was not material.

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
The Company holds a portfolio of interest rate swaps, option contracts, and futures and forward commitments that result from transactions with its commercial customers in which they manage their risks by entering into a derivative with Regions. The Company monitors and manages the net risk in this customer portfolio and enters into separate derivative contracts in order to reduce the overall exposure to pre-defined limits. For both derivatives with its end customers and derivatives Regions enters into to mitigate the risk in this portfolio, the Company is subject to market risk and the risk that the counterparty will default. The contracts in this portfolio are not designated as accounting hedges and are marked-to market through earnings (in capital markets fee income and other) and included in other assets and other liabilities, as appropriate.
Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. At June 30, 2017 and December 31, 2016, Regions had $319 million and $274 million, respectively, in total notional amount of interest rate lock commitments. Regions manages market risk on interest rate lock commitments and mortgage loans held for sale with corresponding forward sale commitments. Residential mortgage loans held for sale are recorded at fair value with changes in fair value recorded in mortgage income. Commercial mortgage loans held for sale are recorded at either the lower of cost or market or at fair value based on management's election. At June 30, 2017 and December 31, 2016, Regions had $802 million and $786 million, respectively, in total notional amounts related to these forward sale commitments. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to residential mortgage loans are included in mortgage income. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to commercial mortgage loans are included in capital markets fee income and other.
Regions has elected to account for residential MSRs at fair value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the effect of changes in the fair value of its residential MSRs in its consolidated statements of income. As of June 30, 2017 and December 31, 2016, the total notional amount related to these contracts was $7.5 billion and $7.2 billion, respectively.
The following table presents the location and amount of gain or (loss) recognized in income on derivatives not designated as hedging instruments in the consolidated statements of income for the three and six months ended June 30, 2017 and 2016:

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Table of Contents


 
Three Months Ended June 30
 
Six Months Ended June 30
Derivatives Not Designated as Hedging Instruments
2017
 
2016
 
2017
 
2016
 
(In millions)
Capital markets fee income and other(1):
 
 
 
 
 
 
 
Interest rate swaps
$
4

 
$
(1
)
 
$
6

 
$
3

Interest rate options
8

 
4

 
10

 
14

Interest rate futures and forward commitments
3

 
2

 
5

 
3

Other contracts
(7
)
 
14

 
(15
)
 
2

Total capital markets fee income and other
8

 
19

 
6

 
22

Mortgage income:
 
 
 
 
 
 
 
Interest rate swaps
8

 
19

 
6

 
48

Interest rate options
(3
)
 
3

 
(1
)
 
8

Interest rate futures and forward commitments
1

 
(1
)
 
(7
)
 
1

Total mortgage income
6

 
21

 
(2
)
 
57

 
$
14

 
$
40

 
$
4

 
$
79

______
(1) Capital markets fee income and other is included in Other income on the consolidated statements of income.
Credit risk, defined as all positive exposures not collateralized with cash or other assets or reserved for, at June 30, 2017 and December 31, 2016, totaled approximately $272 million and $334 million, respectively. These amounts represent the net credit risk on all trading and other derivative positions held by Regions.
CREDIT DERIVATIVES
Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2017 and 2024. Credit derivatives whereby Regions has sold credit protection have maturities between 2017 and 2025. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.
Regions’ maximum potential amount of future payments under these contracts as of June 30, 2017 was approximately $275 million. This scenario would only occur if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at June 30, 2017 and 2016 was immaterial. In transactions where Regions has sold credit protection, recourse to collateral associated with the original swap transaction is available to offset some or all of Regions’ obligation.
Regions has bought credit protection in the form of credit default indices. These indices, which meet the definition of credit derivatives, were entered into in the ordinary course of business to economically hedge credit spread risk in commercial mortgage loans held for sale whereby the fair value option has been elected. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if losses on the underlying index exceed a certain threshold, dependent upon the tranche rating of the capital structure.
CONTINGENT FEATURES
Certain of Regions’ derivative instrument contracts with broker-dealers contain credit-related termination provisions and/or credit-related provisions regarding the posting of collateral, allowing those broker-dealers to terminate the contracts in the event that Regions’ and/or Regions Bank’s credit ratings falls below specified ratings from certain major credit rating agencies. The aggregate fair values of all derivative instruments with any credit-risk-related contingent features that were in a liability position on June 30, 2017 and December 31, 2016, were $114 million and $141 million, respectively, for which Regions had posted collateral of $114 million and $141 million, respectively, in the normal course of business.
OFFSETTING
Regions engages in derivatives transactions with dealers and customers. These derivatives transactions are subject to enforceable master netting agreements, which include a right of setoff by the non-defaulting or non-affected party upon early termination of the derivatives transaction. The following table presents the Company's gross derivative positions, including collateral posted or received, as of June 30, 2017 and December 31, 2016.

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Table of Contents


 
Offsetting Derivative Assets
 
Offsetting Derivative Liabilities
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
 
(In millions)
Gross amounts subject to offsetting
$
298

 
$
414

 
$
396

 
$
583

Gross amounts not subject to offsetting
162

 
165

 
266

 
304

Gross amounts recognized
460

 
579

 
662

 
887

Gross amounts offset in the consolidated balance sheets(1)
184

 
241

 
288

 
541

Net amounts presented in the consolidated balance sheets
276

 
338

 
374

 
346

Gross amounts not offset in the consolidated balance sheets:
 
 
 
 
 
 
 
Financial instruments
4

 
4

 
50

 
50

Cash collateral received/posted

 

 
232

 
227

Net amounts
$
272

 
$
334

 
$
92

 
$
69

________
(1)
At June 30, 2017, gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $55 million and cash collateral posted of $159 million. At December 31, 2016, gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $48 million and cash collateral posted of $349 million.
Gross amounts of derivatives not subject to offsetting primarily consist of derivatives cleared through a Central Counterparty Clearing House and interest rate lock commitments to originate mortgage loans.
NOTE 12. FAIR VALUE MEASUREMENTS
See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. There were no such transfers during the six month periods ended June 30, 2017 and 2016. Trading account securities and securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the observability of inputs used in valuing the securities. Such transfers are accounted for as if they occur at the beginning of a reporting period.


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Table of Contents


The following table presents assets and liabilities measured at estimated fair value on a recurring basis and non-recurring basis as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated Fair Value
 
(In millions)
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading account securities
$
178

 
$

 
$

 
$
178

 
 
$
124

 
$

 
$

 
$
124

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
314

 
$

 
$

 
$
314

 
 
$
303

 
$

 
$

 
$
303

Federal agency securities

 
25

 

 
25

 
 

 
35

 

 
35

Obligations of states and political subdivisions

 

 

 

 
 

 
1

 

 
1

Mortgage-backed securities (MBS):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency

 
17,524

 

 
17,524

 
 

 
17,371

 

 
17,371

Residential non-agency

 

 
3

 
3

 
 

 

 
4

 
4

Commercial agency

 
3,474

 

 
3,474

 
 

 
3,463

 

 
3,463

Commercial non-agency

 
816

 

 
816

 
 

 
1,129

 

 
1,129

Corporate and other debt securities

 
1,245

 
4

 
1,249

 
 

 
1,271

 
3

 
1,274

Equity securities
203

 

 

 
203

 
 
201

 

 

 
201

Total securities available for sale
$
517

 
$
23,084

 
$
7

 
$
23,608

 
 
$
504

 
$
23,270

 
$
7

 
$
23,781

Loans held for sale
$

 
$
379

 
$

 
$
379

 
 
$

 
$
414

 
$
33

 
$
447

Residential mortgage servicing rights
$

 
$

 
$
346

 
$
346

 
 
$

 
$

 
$
324

 
$
324

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
358

 
$

 
$
358

 
 
$

 
$
438

 
$

 
$
438

Interest rate options

 
11

 
13

 
24

 
 

 
13

 
11

 
24

Interest rate futures and forward commitments

 
6

 

 
6

 
 

 
11

 

 
11

Other contracts
2

 
70

 

 
72

 
 
2

 
104

 

 
106

Total derivative assets
$
2

 
$
445

 
$
13

 
$
460

 
 
$
2

 
$
566

 
$
11

 
$
579

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
570

 
$

 
$
570

 
 
$

 
$
776

 
$

 
$
776

Interest rate options

 
10

 

 
10

 
 

 
12

 

 
12

Interest rate futures and forward commitments

 
9

 

 
9

 
 

 
6

 

 
6

Other contracts
2

 
71

 

 
73

 
 
1

 
92

 

 
93

Total derivative liabilities
$
2

 
$
660

 
$

 
$
662

 
 
$
1

 
$
886

 
$

 
$
887

Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$
7

 
$
7

 
 
$

 
$

 
$
7

 
$
7

Foreclosed property and other real estate

 
31

 
10

 
41

 
 

 
29

 
6

 
35

Assets and liabilities in all levels could result in volatile and material price fluctuations. Realized and unrealized gains and losses on Level 3 assets represent only a portion of the risk to market fluctuations in Regions’ consolidated balance sheets. Further, derivatives included in Levels 2 and 3 are used by the ALCO of the Company in a holistic approach to managing price fluctuation risks.

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The following tables illustrate rollforwards for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2017 and 2016. The tables do not reflect the change in fair value attributable to any related economic hedges the Company used to mitigate the interest rate risk associated with these assets and liabilities. The net changes in realized gains (losses) included in earnings related to Level 3 assets and liabilities held at June 30, 2017 and 2016 are not material.
 
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening
Balance April 1,
2017
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance June 30, 2017
 
 
Included
in
Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
4

 

  

 

 

 

 
(1
)
 

 

 
$
3

Corporate and other debt securities
3

 

  

 

 

 

 

 
1

 

 
4

Total securities available for sale
$
7

 

  

 

 

 

 
(1
)
 
1

 

 
$
7

Commercial mortgage loans held for sale
$
33

 

 

 
7

 
(40
)
 

 

 

 

 
$

Residential mortgage servicing rights
$
326

 
(19
)
(1)  

 
39

 

 

 

 

 

 
$
346

Total derivatives, net
$
12

 
33

(2)  

 

 

 

 
(32
)
 

 

 
$
13

 
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening
Balance April 1, 2016
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance June 30, 2016
 
Included
in Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
5

 

  

 

 

 

 

 

 

 
$
5

Corporate and other debt securities
3

 

  

 

 

 

 

 

 

 
3

Total securities available for sale
$
8

 

  

 

 

 

 

 

 

 
$
8

Commercial mortgage loans held for sale
$

 

 

 

 

 
30

 

 

 

 
$
30

Residential mortgage servicing rights
$
239

 
(31
)
(1)  

 
8

 

 

 

 

 

 
$
216

Total derivatives, net
$
21

 
35

(4)  

 

 

 

 
(39
)
 

 

 
$
17


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Table of Contents


 
Six Months Ended June 30, 2017
 
Opening
Balance
January 1,
2017
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance June 30, 2017
 
 
Included
in
Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
4

 

  

 

 

 

 
(1
)
 

 

 
$
3

Corporate and other debt securities
3

 

 

 

 

 

 

 
1

 

 
4

Total securities available for sale
$
7

 

  

 

 

 

 
(1
)
 
1

 

 
$
7

Commercial mortgage loans held for sale
$
33

 

 

 
7

 
(40
)
 

 

 

 

 
$

Residential mortgage servicing rights
$
324

 
(25
)
(1)  

 
47

 

 

 

 

 

 
$
346

Total derivatives, net
$
11

 
56

(5)  

 

 

 

 
(54
)
 

 

 
$
13

 
Six Months Ended June 30, 2016
 
Opening
Balance
January 1,
2016
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance June 30, 2016
 
Included
in Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading account securities
$
33

 
(2
)
(3) 

 

 
(31
)
 

 

 

 

 
$

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
5

 

  

 

 

 

 

 

 

 
$
5

Corporate and other debt securities
3

 

  

 

 

 

 

 

 

 
3

Total securities available for sale
$
8

 

  

 

 

 

 

 

 

 
$
8

Commercial mortgage loans held for sale
$

 

 

 

 

 
30

 

 

 

 
$
30

Residential mortgage servicing rights
$
252

 
(75
)
(1)  

 
39

 

 

 

 

 

 
$
216

Total derivatives, net
$
10

 
73

(6)  

 

 

 

 
(66
)
 

 

 
$
17

_________
(1) Included in mortgage income.
(2) Approximately $8 million was included in capital markets fee income and other and $25 million was included in mortgage income.
(3) Included in capitals markets fee income and other.
(4) Approximately $4 million was included in capital markets fee income and other and $31 million was included in mortgage income.
(5) Approximately $10 million was included in capital markets fee income and other and $46 million was included in mortgage income.
(6) Approximately $13 million was included in capital markets fee income and other and $60 million was included in mortgage income.

The following table presents the fair value adjustments related to non-recurring fair value measurements:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Loans held for sale
$
(3
)
 
$
(18
)
 
$
(7
)
 
$
(22
)
Foreclosed property and other real estate
(11
)
 
(20
)
 
(15
)
 
(27
)

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The following tables present detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2017, and December 31, 2016. The tables include the valuation techniques and the significant unobservable inputs utilized. The range of each significant unobservable input as well as the weighted-average within the range utilized at June 30, 2017, and December 31, 2016, are included. Following the tables are descriptions of the valuation techniques and the sensitivity of the techniques to changes in the significant unobservable inputs.
 
June 30, 2017
 
Level 3
Estimated Fair Value at
June 30, 2017
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Residential non-agency MBS
$3
 
Discounted cash flow
 
Spread to LIBOR
 
5.4% - 69.9% (22.9%)
 
 
 
 
 
Weighted-average CPR (%)
 
3.8% - 29.3% (11.4%)
 
 
 
 
 
Probability of default
 
1.3%
 
 
 
 
 
Loss severity
 
88.0%
Corporate and other debt securities
$4
 
Market comparable
 
Evaluated quote on same issuer/comparable bond
 
100.1%
Residential mortgage servicing rights(1)
$346
 
Discounted cash flow
 
Weighted-average CPR (%)
 
5.8% - 26.7% (7.9%)
 
 
 
 
 
OAS (%)
 
8.2% - 13.7% (10.5%)
Derivative assets:
 
 
 
 
 
 
 
Interest rate options
$9
 
Interest rate lock commitments on the residential mortgage loans are valued using discounted cash flows
 
Weighted-average CPR (%)
 
5.8% - 26.7% (7.9%)
 
 
 
 
 
OAS (%)
 
8.2% - 13.7% (10.5%)
 
 
 
 
 
Pull-through
 
16.1% - 99.4% (80.0%)
 
$4
 
Interest rate lock commitments on the commercial mortgage loans are valued using discounted cash flows
 
Internal rate of return
 
7.0% - 17.0% (11.8%)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans held for sale
$7
 
Commercial loans held for sale are valued based on multiple data points, including discount to appraised value of collateral based on recent market activity for sales of similar loans
 
Appraisal comparability adjustment (discount)
 
31.5% - 93.6% (60.8%)
Foreclosed property and other real estate
$2
 
 Property in foreclosure is valued by discount to appraised value of property based on recent market activity for sales of similar properties
 
 Appraisal comparability adjustment (discount)
 
25.0% - 38.8% (34.0%)
 
$8
 
Bank owned property valuations are based on comparable sales and local broker network estimates provided by a third-party real estate services provider
 
Estimated third-party valuations utilizing available sales data for similar transactions (discount)
 
6.4% - 72.4% (39.9%)
_________
(1) See Note 5 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.

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December 31, 2016
 
Level 3
Estimated Fair Value at
December 31, 2016
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Residential non-agency MBS
$4
 
Discounted cash flow
 
Spread to LIBOR
 
5.5% - 70.0% (23.0%)
 
 
 
 
 
Weighted-average CPR (%)
 
3.5% - 29.5% (12.2%)
 
 
 
 
 
Probability of default
 
3.1%
 
 
 
 
 
Loss severity
 
63.6%
Corporate and other debt securities
$3
 
Market comparable
 
Evaluated quote on same issuer/comparable bond
 
100.3%
Commercial mortgage loans held for sale
$33
 
Market comparable
 
Credit spreads for bonds in the commercial MBS
 
0.4% - 5.8% (1.3%)
Residential mortgage servicing rights(1)
$324
 
Discounted cash flow
 
Weighted-average CPR (%)
 
5.7% - 24.3% (7.6%)
 
 
 
 
 
OAS (%)
 
8.2% - 13.6% (10.5%)
Derivative assets:
 
 
 
 
 
 
 
Interest rate options
$8
 
Interest rate lock commitments on the residential mortgage loans are valued using discounted cash flows
 
Weighted-average CPR (%)
 
5.7% - 24.3% (7.6%)
 
 
 
 
 
OAS (%)
 
8.2% - 13.6% (10.5%)
 
 
 
 
 
Pull-through
 
14.9% - 99.4% (78.3%)
 
$3
 
Interest rate lock commitments on the commercial mortgage loans are valued using discounted cash flows
 
Internal rate of return
 
7.0% - 17.0% (12.0%)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans held for sale
$7
 
Commercial loans held for sale are valued based on multiple data points, including discount to appraised value of collateral based on recent market activity for sales of similar loans
 
Appraisal comparability adjustment (discount)
 
26.2% - 69.4% (48.1%)
Foreclosed property and other real estate
$1
 
 Property in foreclosure is valued by discount to appraised value of property based on recent market activity for sales of similar properties
 
 Appraisal comparability adjustment (discount)
 
25.0% - 60.3% (37.0%)
 
$5
 
Bank owned property valuations are based on comparable sales and local broker network estimates provided by a third-party real estate services provider
 
Estimated third-party valuations utilizing available sales data for similar transactions (discount)
 
5.9% - 29.6% (15.8%)
_________
(1) See Note 7 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.


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RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Securities available for sale
Residential non-agency MBS—The fair value reported in this category relates to retained interests in legacy securitizations. Significant unobservable inputs include the spread to LIBOR, CPR, probability of default, and loss severity in the event of default. Significant increases in spread to LIBOR, probability of default and loss given default in isolation would result in significantly lower fair value. A significant increase in CPR in isolation would result in an increase to fair value.
Corporate and other debt securities—Significant unobservable inputs include evaluated quotes on comparable bonds for the same issuer and management-determined comparability adjustments. Changes in the evaluated quote on comparable bonds would result in a directionally similar change in the fair value of the corporate and other debt securities.
Commercial mortgage loans held for sale
Commercial mortgage loans held for sale are valued based on traded market prices for comparable commercial mortgage-backed securitizations, into which the loans will be placed, adjusted for movements of interest rates and credit spreads. Significant unobservable inputs include credit spreads for bonds in commercial mortgage-backed securitizations. An increase in credit spreads would result in a decrease in fair value.
Residential mortgage servicing rights
The significant unobservable inputs used in the fair value measurement of residential MSRs are OAS and CPR. This valuation requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk adjusted rate. Additionally, the impact of prepayments and changes in the OAS are based on a variety of underlying inputs such as servicing costs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The net change in unrealized gains (losses) included in earnings related to MSRs held at period end are disclosed as the changes in valuation inputs or assumptions included in the MSR rollforward table in Note 5. See Note 5 for these amounts and additional disclosures related to assumptions used in the fair value calculation for MSRs.
Derivative assets
Residential mortgage interest rate options—These instruments are interest rate lock agreements made in the normal course of originating residential mortgage loans. Significant unobservable inputs in the fair value measurement are OAS, CPR, and pull-through. The impact of OAS and CPR inputs in the valuation of these derivative instruments are consistent with the MSR discussion above. Pull-through is an estimate of the number of interest rate lock commitments that will ultimately become funded loans. Increases or decreases in the pull-through assumption will have a corresponding impact on the value of these derivative assets.
Commercial mortgage interest rate options—These instruments are interest rate lock agreements made in the normal course of originating commercial mortgage loans. The significant unobservable input in the fair value measurement using discounted cash flows is the internal rate of return. The Company's internal rates of return are compared against those of market competitors, and should those rates change the Company's rates would also change in a similar direction and the fair value of the option would change inversely.
NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Loans held for sale
Commercial loans held for sale are valued based on multiple data points indicating the fair value for each loan. The primary data point for loans held for sale is a discount to the appraised value of the underlying collateral, which considers the return required by potential buyers of the loans. Management establishes this discount or comparability adjustment based on recent sales of loans secured by similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted. These non-recurring fair value measurements are typically recorded on the date an updated appraisal is received.
Foreclosed property and other real estate
Property in foreclosure is valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. These non-recurring fair value measurements are typically recorded on the date an updated offered quote or appraisal is received.
Bank owned property available for sale is valued based on estimated third-party valuations utilizing recent sales data from similar transactions. A broker's opinion of value is obtained to further support the asset valuations. Updated valuations along with

50


Table of Contents


actual sales results of similar properties can further impact these values. These non-recurring fair value measurements are typically recorded on the date an updated third-party valuation is received.
FAIR VALUE OPTION
Regions has elected the fair value option for all FNMA and FHLMC eligible residential mortgage loans and certain commercial mortgage loans originated with the intent to sell. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of residential mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets. Fair values of commercial mortgage loans held for sale are based on traded market prices for comparable commercial mortgage-backed securitizations, into which the loans will be placed, adjusted for movements of interest rates and credit spreads.
The Company also elected to measure commercial and industrial loans held for sale at fair value, as these loans are actively traded in the secondary market. The Company is able to obtain fair value estimates for substantially all of these loans through a third party valuation service that is broadly used by market participants. While most of the loans are traded in the market, the volume and level of trading activity is subject to variability and the loans are not exchange-traded. Therefore, these loans have been classified as Level 2.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value:
 
June 30, 2017
 
December 31, 2016
 
Aggregate
Fair Value
 
Aggregate
Unpaid
Principal
 
Aggregate Fair
Value Less
Aggregate
Unpaid
Principal
 
Aggregate
Fair Value
 
Aggregate
Unpaid
Principal
 
Aggregate Fair
Value Less
Aggregate
Unpaid
Principal
 
(In millions)
Mortgage loans held for sale, at fair value
$
379

 
$
365

 
$
14

 
$
447

 
$
443

 
$
4

Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of income. The following table details net gains and losses resulting from changes in fair value of these loans, which were recorded in mortgage and capital markets income in the consolidated statements of income during the three and six months ended June 30, 2017 and 2016. These changes in fair value are mostly offset by economic hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
 
Net gains (losses) resulting from changes in fair value
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Mortgage loans held for sale, at fair value
$
2

 
$
7

 
$
8

 
$
9


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Table of Contents


The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2017 are as follows:
 
June 30, 2017
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,131

 
$
4,131

 
$
4,131

 
$

 
$

Trading account securities
178

 
178

 
178

 

 

Securities held to maturity
1,754

 
1,770

 

 
1,770

 

Securities available for sale
23,608

 
23,608

 
517

 
23,084

 
7

Loans held for sale
573

 
573

 

 
573

 

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
78,166

 
74,429

 

 

 
74,429

Other earning assets(4)
940

 
940

 

 
940

 

Derivative assets
460

 
460

 
2

 
445

 
13

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
662

 
662

 
2

 
660

 

Deposits
98,093

 
98,141

 

 
98,141

 

Short-term borrowings
600

 
600

 

 
600

 

Long-term borrowings
6,765

 
7,099

 

 
4,760

 
2,339

Loan commitments and letters of credit
99

 
430

 

 

 
430

Indemnification obligation
24

 
24

 

 

 
24

_________
(1)
Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate.
(2)
The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at June 30, 2017 was $3.7 billion or 4.8 percent.
(3)
Excluded from this table is the capital lease carrying amount of $920 million at June 30, 2017.
(4)
Excluded from this table is the operating lease carrying amount of $597 million at June 30, 2017.


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Table of Contents


The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments as of December 31, 2016 are as follows:
 
December 31, 2016
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,451

 
$
5,451

 
$
5,451

 
$

 
$

Trading account securities
124

 
124

 
124

 

 

Securities held to maturity
1,362

 
1,369

 

 
1,369

 

Securities available for sale
23,781

 
23,781

 
504

 
23,270

 
7

Loans held for sale
718

 
722

 

 
689

 
33

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
78,128

 
74,063

 

 

 
74,063

Other earning assets(4)
956

 
956

 

 
956

 

Derivative assets
579

 
579

 
2

 
566

 
11

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
887

 
887

 
1

 
886

 

Deposits
99,035

 
99,081

 

 
99,081

 

Long-term borrowings
7,763

 
8,008

 

 
5,408

 
2,600

Loan commitments and letters of credit
102

 
484

 

 

 
484

Indemnification obligation
28

 
26

 

 

 
26

_________
(1)
Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate.
(2)
The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at December 31, 2016 was $4.1 billion or 5.2 percent.
(3)
Excluded from this table is the capital lease carrying amount of $876 million at December 31, 2016.
(4)
Excluded from this table is the operating lease carrying amount of $688 million at December 31, 2016.
NOTE 13. BUSINESS SEGMENT INFORMATION
Each of Regions’ reportable segments is a strategic business unit that serves specific needs of Regions’ customers based on the products and services provided. The segments are based on the manner in which management views the financial performance of the business. The Company has three reportable segments: Corporate Bank, Consumer Bank, and Wealth Management, with the remainder split between Discontinued Operations and Other. Additional information about the Company's reportable segments is included in Regions' Annual Report on Form 10-K for the year ended December 31, 2016.
The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. As these enhancements are made, financial results presented by each reportable segment may be periodically revised.
The following tables present financial information for each reportable segment for the period indicated.

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Table of Contents


 
Three Months Ended June 30, 2017
 
Corporate Bank
 
Consumer
Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income and other financing income (loss)
$
360

 
$
532

 
$
48

 
$
(58
)
 
$
882

 
$

 
$
882

Provision (credit) for loan losses
66

 
71

 
5

 
(94
)
 
48

 

 
48

Non-interest income
118

 
287

 
109

 
11

 
525

 

 
525

Non-interest expense
221

 
515

 
120

 
53

 
909

 
1

 
910

Income (loss) before income taxes
191

 
233

 
32

 
(6
)
 
450

 
(1
)
 
449

Income tax expense (benefit)
72

 
88

 
12

 
(39
)
 
133

 

 
133

Net income (loss)
$
119

 
$
145

 
$
20

 
$
33

 
$
317

 
$
(1
)
 
$
316

Average assets
$
52,056

 
$
34,911

 
$
3,135

 
$
33,741

 
$
123,843

 
$

 
$
123,843

 
Three Months Ended June 30, 2016
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income and other financing income (loss)
$
361

 
$
510

 
$
43

 
$
(66
)
 
$
848

 
$

 
$
848

Provision (credit) for loan losses
71

 
70

 
6

 
(75
)
 
72

 

 
72

Non-interest income
118

 
282

 
106

 
20

 
526

 

 
526

Non-interest expense
220

 
508

 
118

 
69

 
915

 
(5
)
 
910

Income (loss) before income taxes
188

 
214

 
25

 
(40
)
 
387

 
5

 
392

Income tax expense (benefit)
71

 
81

 
10

 
(47
)
 
115

 
2

 
117

Net income (loss)
$
117

 
$
133

 
$
15

 
$
7

 
$
272

 
$
3

 
$
275

Average assets
$
54,747

 
$
34,331

 
$
3,241

 
$
33,093

 
$
125,412

 
$

 
$
125,412

 
Six Months Ended June 30, 2017
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income and other financing income (loss)
$
700

 
$
1,050

 
$
94

 
$
(103
)
 
$
1,741

 
$

 
$
1,741

Provision (credit) for loan losses
134

 
145

 
11

 
(172
)
 
118

 

 
118

Non-interest income
231

 
561

 
221

 
22

 
1,035

 

 
1,035

Non-interest expense
437

 
1,027

 
242

 
80

 
1,786

 
(10
)
 
1,776

Income (loss) before income taxes
360

 
439

 
62

 
11

 
872

 
10

 
882

Income tax expense (benefit)
137

 
167

 
23

 
(66
)
 
261

 
4

 
265

Net income (loss)
$
223

 
$
272

 
$
39

 
$
77

 
$
611

 
$
6

 
$
617

Average assets
$
52,197

 
$
34,979

 
$
3,149

 
$
33,999

 
$
124,324

 
$

 
$
124,324


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Six Months Ended June 30, 2016
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income and other financing income (loss)
$
736

 
$
1,015

 
$
88

 
$
(129
)
 
$
1,710

 
$

 
$
1,710

Provision (credit) for loan losses
144

 
141

 
11

 
(111
)
 
185

 

 
185

Non-interest income
249

 
540

 
213

 
30

 
1,032

 

 
1,032

Non-interest expense
437

 
1,015

 
230

 
102

 
1,784

 
(5
)
 
1,779

Income (loss) before income taxes
404

 
399

 
60

 
(90
)
 
773

 
5

 
778

Income tax expense (benefit)
154

 
152

 
23

 
(101
)
 
228

 
2

 
230

Net income (loss)
$
250

 
$
247

 
$
37

 
$
11

 
$
545

 
$
3

 
$
548

Average assets
$
54,733

 
$
34,136

 
$
3,237

 
$
33,580

 
$
125,686

 
$

 
$
125,686

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES
COMMERCIAL COMMITMENTS
Regions issues off-balance sheet financial instruments in connection with lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to Regions’ normal credit approval policies and procedures. Regions measures inherent risk associated with these instruments by recording a reserve for unfunded commitments based on an assessment of the likelihood that the guarantee will be funded and the creditworthiness of the customer or counterparty. Collateral is obtained based on management’s assessment of the creditworthiness of the customer.
Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table:
 
June 30, 2017
 
December 31, 2016
 
(In millions)
Unused commitments to extend credit
$
44,078

 
$
44,408

Standby letters of credit
1,352

 
1,425

Commercial letters of credit
58

 
46

Liabilities associated with standby letters of credit
32

 
34

Assets associated with standby letters of credit
33

 
34

Reserve for unfunded credit commitments
67

 
69

Unused commitments to extend credit—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) credit card and other 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—Standby letters of credit are also issued to customers, which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments Regions could be required to make and represents Regions’ maximum credit risk.
Commercial letters of credit—Commercial letters of credit are issued to facilitate foreign or domestic trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.
LEGAL CONTINGENCIES
Regions and its subsidiaries are subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel. Regions establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted

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as circumstances change. Some of Regions' exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies however, Regions does not take into account the availability of insurance coverage. To the extent that Regions has an insurance recovery, the proceeds are recorded in the period the recovery is received.
In addition, as previously discussed, Regions has agreed to indemnify Raymond James for all legal matters resulting from pre-closing activities in conjunction with the sale of Morgan Keegan and recorded an indemnification obligation at fair value in the second quarter of 2012. The indemnification obligation had a carrying amount of approximately $24 million and an estimated fair value of approximately $24 million as of June 30, 2017 (see Note 12).
When it is practicable, Regions estimates possible loss contingencies, whether or not there is an accrued probable loss. When Regions is able to estimate such possible losses, and when it is reasonably possible Regions could incur losses in excess of amounts accrued, Regions discloses the aggregate estimation of such possible losses. Regions currently estimates that any such losses in excess of amounts accrued, including legal contingencies that are subject to the indemnification agreement with Raymond James, would be immaterial to Regions' financial statements as a whole. However, as available information changes, the matters for which Regions is able to estimate, as well as the estimates themselves will be adjusted accordingly.
Assessments of litigation and claims exposure are difficult because they involve inherently unpredictable factors including, but not limited to, the following: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below, and the aggregated estimated amount discussed above may not include an estimate for every matter disclosed below.
In July 2006, Morgan Keegan and a former Morgan Keegan analyst were named as defendants in a lawsuit filed by a Canadian insurance and financial services company and its American subsidiary in the Circuit Court of Morris County, New Jersey. Plaintiffs alleged civil claims under the RICO Act and claims for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs allege that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs to improperly drive down plaintiffs’ stock price, so that others could profit from short positions. Plaintiffs allege that defendants’ actions damaged their reputations and harmed their business relationships. Plaintiffs seek monetary damages for a number of categories of alleged damages, including lost insurance business, lost financings and increased financing costs, increased audit fees and directors and officers insurance premiums and lost acquisitions. In September 2012, the trial court dismissed the case with prejudice. Plaintiffs filed an appeal, and in April 2017, the appellate court affirmed the dismissal of the plaintiffs’ claims under the RICO Act. The appellate court reversed the trial court’s dismissal of the commercial disparagement and tortious interference claims and remanded those claims but limited the plaintiffs’ damages. Plaintiffs filed an appeal with the Supreme Court of New Jersey in May 2017. This matter is subject to the indemnification agreement with Raymond James.
Regions is involved in formal and informal information-gathering requests, investigations, reviews, examinations and proceedings by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding Regions’ business, Regions' business practices and policies, and the conduct of persons with whom Regions does business. Additional inquiries will arise from time to time. In connection with those inquiries, Regions receives document requests, subpoenas and other requests for information. The inquiries, including those described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on Regions' consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in our business practices, and could result in additional expenses and collateral costs, including reputational damage.    
Regions is cooperating with an investigation by the United States Attorney’s Office for the Eastern District of New York pertaining to Regions ' banking relationship with a former customer and accounts maintained by entities and individuals affiliated with the customer who may be involved in criminal activity, as well as related aspects of Regions' Anti-Money Laundering and Bank Secrecy Act compliance program.
While the final outcome of litigation and claims exposures or of any inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not have a material effect on Regions’ business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to Regions’ business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

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GUARANTEES
INDEMNIFICATION OBLIGATION
As discussed in Note 2, on April 2, 2012 (“Closing Date”), Regions closed the sale of Morgan Keegan and related affiliates to Raymond James. In connection with the sale, Regions agreed to indemnify Raymond James for all legal matters related to pre-closing activities, including matters filed subsequent to the Closing Date that relate to actions that occurred prior to closing. Losses under the indemnification include legal and other expenses, such as costs for judgments, settlements and awards associated with the defense and resolution of the indemnified matters. The maximum potential amount of future payments that Regions could be required to make under the indemnification is indeterminable due to the indefinite term of some of the obligations. However, Regions expects the majority of ongoing legal matters to be resolved during 2017, except for the July 2006 Morris County, New Jersey, matter which may extend beyond 2017.
As of the Closing Date, the fair value of the indemnification obligation, which includes defense costs and unasserted claims, was approximately $385 million, of which approximately $256 million was recognized as a reduction to the gain on sale of Morgan Keegan. The fair value was determined through the use of a present value calculation that takes into account the future cash flows that a market participant would expect to receive from holding the indemnification liability as an asset. Regions performed a probability-weighted cash flow analysis and discounted the result at a credit-adjusted risk free rate. The fair value of the indemnification liability includes amounts that Regions had previously determined meet the definition of probable and reasonably estimable. Adjustments to the indemnification obligation are recorded within professional and legal expenses within discontinued operations (see Note 2). As of June 30, 2017, the carrying value of the indemnification obligation was approximately $24 million.
FANNIE MAE DUS LOSS SHARE GUARANTEE
Regions is a Fannie Mae DUS lender. The Fannie Mae DUS program provides liquidity to the multi-family housing market. Regions services loans sold to Fannie Mae and is required to provide a loss share guarantee equal to one-third of the majority of its DUS servicing portfolio. At June 30, 2017 and December 31, 2016, the Company's DUS servicing portfolio totaled approximately $2.0 billion and $1.8 billion, respectively. Regions' maximum quantifiable contingent liability related to its loss share guarantee was approximately $687 million and $559 million at June 30, 2017 and December 31, 2016, respectively. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. Therefore, the maximum quantifiable contingent liability is not representative of the actual loss the Company would be expected to incur. The estimated fair value of the associated loss share guarantee recorded as a liability on the Company's consolidated balance sheets was approximately $4 million at both June 30, 2017 and December 31, 2016. Refer to Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2016, for additional information.

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NOTE 15. RECENT ACCOUNTING PRONOUNCEMENTS    
Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Adopted (or partially adopted) in 2017
ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
The ASU amends Topic 815, Derivatives and Hedging, and addresses how a change in the counterparty to a derivative contract affects a hedging relationship. The ASU may be adopted either prospectively or on a modified retrospective basis.
January 1, 2017
Adopted on a prospective basis January 1, 2017.

No material impact.
ASU 2016-06, Contingent Put and Call Options in Debt Instruments
The ASU amends Topic 815, Derivatives and Hedging, and clarifies that entities should solely use the four-step decision sequence described in current derivatives accounting guidance. This sequence should be used when assessing whether contingent exercise provisions associated with a put or call option are clearly and closely related to their debt hosts. The ASU should be adopted on a modified retrospective basis.
January 1, 2017
Adopted January 1, 2017.

No material impact.
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting
The ASU amends Topic 323, Investments-Equity Method and Joint Ventures, and eliminates the requirement for an investor to retrospectively apply the equity method to investments when its ownership interest (or degree of influence in an investee) increases to a level that triggers the equity method of accounting. This ASU should be adopted prospectively.
January 1, 2017
Adopted on a prospective basis January 1, 2017.

No material impact.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
This ASU amends Topic 718, Stock Compensation, and intends to improve and simplify accounting for employee share-based payments. The amendments update the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The transition method of accounting application (i.e. prospective, retrospective or modified retrospective application) differs by amendment and is defined in the guidance.
January 1, 2017
Adopted on January 1, 2017.

There was no material impact at adoption related to the reclassification of excess tax benefits previously recognized in additional paid-in capital to income tax expense (prospective basis), cash flow statement reclassification related to excess tax benefits (prospective basis) or cash flow statement reclassification related to taxes paid for employee withholdings on share-based awards (retrospective basis).

Additionally, the Company has no previously unrecognized excess tax benefits; therefore, there was no impact.

The Company elected to retain its existing accounting policy election to estimate award forfeitures.
ASU 2016-17, Interest Held through Related Parties That Are Under Common Control


This ASU amends Topic 810, Consolidation, and prescribes that when determining whether a single decision maker is the primary beneficiary of a variable interest entity (VIE), a single decision maker will no longer be required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety.
January 1, 2017


Adopted on January 1, 2017.

No material impact.


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Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Not Yet Adopted
ASU 2014-09, Revenue from Contracts with Customers

ASU 2015-14, Deferral of the Effective Date

ASU 2016-08, Principal versus Agent Considerations

ASU 2016-10, Identifying Performance Obligations and Licensing

ASU 2016-12, Narrow-Scope Improvements and Practical Expedience

ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry topics of the Codification. The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU may be adopted either retrospectively or on a modified retrospective basis.
January 1, 2018
Early adoption is permitted beginning January 1, 2017.
Regions has established a revenue recognition standard implementation team, led by the Corporate Controller’s group with assistance from the various lines of business and finance management to evaluate the potential impact of adopting this guidance. The implementation team has substantially completed the initial scoping and determined that approximately $1.7 billion of 2016 non-interest income would be within the scope of the new revenue recognition standard, when adopted. Non-interest income streams that are out of scope of the new standard include mortgage income, securities gains (losses), bank-owned life insurance and certain other components within non-interest income. Based on the completed contract reviews thus far by the implementation team, any potential changes in revenue recognition for those contracts are not expected to result in a material impact to Regions upon adoption. The implementation team is currently finalizing its reviews of contracts related to investment management and trust fees, insurance commissions and fees and investment services fees. The implementation team is also in process of developing additional quantitative and qualitative disclosures that may be required upon the adoption of the new revenue recognition standard.

ASU 2017-01, Clarifying the Definition of a Business
This ASU amends Topic 805, Business Combinations, and provides additional accounting guidance to better determine when a set of assets and activities is a business. The ASU should be adopted prospectively.
January 1, 2018
Early adoption is permitted for certain transactions as described in guidance.
Regions is evaluating the impact upon adoption; however, the impact is not expected to be material.
ASU 2017-04, Simplifying the Test for Goodwill Impairment
This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.
January 1, 2020

Early adoption is permitted.
Regions believes the adoption of this guidance will not have a material impact. Regions does not plan to early adopt.
2017-05, Other Income- Gains and Losses from the Derecognition of Nonfinancial Assets
This ASU amends Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, to clarify the scope and to add guidance for partial sales of nonfinancial assets. The new standard adds a definition for in-substance nonfinancial assets and clarifies that nonfinancial assets within a legal entity are within the scope of ASC 606. This ASU should be adopted in conjunction with ASU 2014-09 using a retrospective or modified retrospective approach.
January 1, 2018
Regions is evaluating the impact upon adoption; however, the impact is not expected to be material.
2017-07, Compensation- Retirement Benefits
This ASU amends Topic 715, Retirement Benefits, and provides more prescriptive guidance around the presentation of net period pension and postretirement benefit cost in the income statement. The amendment requires that the service cost component be disaggregated from other components of net periodic benefit cost in the income statement.
January 1, 2018
Regions is evaluating the impact upon adoption; however, the impact is not expected to be material. Regions does not plan to early adopt.
2017-08, Receivables- Nonrefundable Fees and Other Costs
This ASU amends Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Current guidance generally requires entities to amortize a premium as a yield adjustment over the contractual life of the instrument. Shortening the amortization period is generally expected to more closely align the recognition of interest income with expectations incorporated into the pricing of the underlying securities. The amendments do not affect the accounting treatment of discounts. This ASU should be adopted on a modified retrospective basis.
January 1, 2019

Early adoption permitted, including in an interim period.
Regions is evaluating the impact upon adoption; however, the impact is not expected to be material.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments


This ASU amends Topic 230, Statement of Cash Flows, and provides clarification with respect to classification within the statement on cash flows where current guidance is unclear or silent. The ASU should be adopted retrospectively.

January 1, 2018
Early adoption is permitted.

Regions is evaluating the impact upon adoption; however, the impact is not expected to be material. Regions does not plan to early adopt.


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Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Not Yet Adopted (continued)
ASU 2016-02, Leases
This ASU creates ASU Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year.  There are not significant changes to lessor accounting; however, there were certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures. This ASU should be adopted on a modified retrospective basis.
January 1, 2019
This ASU supersedes the lease accounting requirements in Topic 840, Leases. Regions has established a leasing standard implementation team comprised of the Corporate Controller’s group, Corporate Real Estate and other business and finance management to plan and execute the adoption of the new leasing standard.  The implementation team has substantially completed the identification of Regions’ leases that will need to be measured and reported as a right-of-use asset and corresponding liability for future rental payments. The implementation team is currently working with a lease administration vendor to set up and test the accounting for the lease contracts on the lease administration system. Based on the December 31, 2016 lease portfolio, Regions has approximately $761 million of future lease obligations that would be measured and recognized when the new guidance is adopted (refer to Note 24 to the 2016 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016). While this amount represents a large majority of the leases that are within the scope of the new leasing standard, the implementation team will continue reviewing service contracts up through the effective date and may identify additional leases embedded in those arrangements that will be within the scope of the new standard. Between now and January 1, 2019, Regions will likely have changes to the lease portfolio as the Company continues to evaluate and execute branch and occupancy optimization initiatives. In addition to final determination of the lease portfolio at the effective date, the initial measurement of the right-of-use asset and the corresponding liability will be affected by certain key assumptions such as expectations of renewals or extensions and the interest rate to be used to discount the future lease obligations. Up through the date of adoption, the evaluation of the impact of the standard will be adjusted based on new leases that are executed, leases that are terminated prior to the effective date, and any leases with changes to key assumptions or expectations such as renewals and extensions, and discount rates. While there will be some changes to income statement classification, the implementation team does not expect the adoption of the standard to have a material impact to pre-tax income. Regions does not anticipate early adoption of the new standard.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and debt securities. Additional quantitative and qualitative disclosures are required upon adoption.

While the CECL model does not apply to AFS debt securities, the ASU does require entities to record an allowance when recognizing credit losses for AFS securities, rather than reduce the amortized cost of the securities by direct write-offs.

The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.
January 1, 2020

Early adoption permitted beginning January 1, 2019.
Regions has formed a cross-functional implementation team co-led by Finance and Risk Management. The implementation team has developed a high-level project plan and is keeping current with the broader industry’s perspective and insights, delivering educational and awareness sessions across the Company, identifying and researching key decision points, and evaluating the financial and operational implications of adoption.

Regions expects the guidance will result in an increase in the allowance for credit losses given the change from accounting for losses inherent in the loan portfolio to accounting for losses over the remaining expected life of the portfolio. The guidance will also result in the establishment of an allowance for credit loss on held to maturity debt securities. The amount of the increase in these allowances will be impacted by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2017-09, Stock Compensation: Scope of Modification Accounting

This ASU amends Topic 718, Compensation- Stock Compensation, and clarifies when modification accounting should be applied to changes in terms or conditions of share-based payment awards. The amendments narrow the scope of modification accounting by clarifying that modification accounting should be applied to awards if the change affects the fair value, vesting conditions, or classification of the award. The amendments do not impact current disclosure requirements for modifications, regardless of whether modification accounting is required under the new guidance.

January 1, 2018

Early adoption permitted, including in an interim period.

Regions is evaluating the impact upon adoption; however, the impact is not expected to be material.


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Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Not Yet Adopted (continued)
ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities

This ASU amends ASC Topic 825, Financial Instruments-Overall, and addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provisions require investments in equity securities to be measured at fair value with changes in the fair value recognized through net income (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value. Except for disclosure requirements that will be adopted prospectively, the ASU must be adopted on a modified retrospective basis.

January 1, 2018
Early adoption permitted beginning January 1, 2016 or 2017 for the amendment related to separate presentation in other comprehensive income.

Regions is evaluating the impact upon adoption; however, the impact is not expected to be material. Regions does not plan to early adopt.





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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporation’s (“Regions” or the “Company”) Quarterly Report on Form 10-Q to the SEC and updates Regions’ Annual Report on Form 10-K for the year ended December 31, 2016, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions’ financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain other prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of June 30, 2017 compared to December 31, 2016.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See pages 5 through 7 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, that operates in the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of asset management, wealth management, securities brokerage, insurance brokerage, trust services, merger and acquisition advisory services and other specialty financing.
Regions conducts its banking operations through Regions Bank, an Alabama state-chartered commercial bank that is a member of the Federal Reserve System. At June 30, 2017, Regions operated 1,492 total branch outlets across the South, Midwest and Texas. Regions operates under three reportable business segments: Corporate Bank, Consumer Bank, and Wealth Management with the remainder split between Discontinued Operations and Other. See Note 13 “Business Segment Information” to the consolidated financial statements for more information regarding Regions’ segment reporting structure. Regions also provides full-line insurance brokerage services primarily through Regions Insurance, Inc., which is included in the Wealth Management segment.
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and related affiliates to Raymond James. The sale closed on April 2, 2012. Regions Investment Management, Inc. and Regions Trust were not included in the sale; they are included in the Wealth Management segment. See Note 2 “Discontinued Operations” to the consolidated financial statements for further discussion.
Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and other financing income as well as non-interest income sources. Net interest income and other financing income is primarily the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions’ net interest income and other financing income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Net interest income and other financing income also includes rental income and depreciation expense associated with operating leases for which Regions is the lessor. Non-interest income includes fees from service charges on deposit accounts, card and ATM fees, mortgage servicing and secondary marketing, investment management and trust activities, insurance activities, capital markets and other customer services which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy, professional, legal and regulatory expenses, FDIC insurance assessments, and other operating expenses, as well as income taxes.
Economic conditions, competition, new legislation and related rules impacting regulation of the financial services industry and the monetary and fiscal policies of the Federal government significantly affect most, if not all, financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions’ market areas.
Regions’ business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in convenient locations.
SECOND QUARTER OVERVIEW
Regions reported net income available to common shareholders of $300 million, or $0.25 per diluted share, in the second quarter of 2017 compared to $259 million, or $0.20 per diluted share, in the second quarter of 2016. Net income available to common shareholders from continuing operations was $301 million, or $0.25 per diluted share, compared to $256 million, or $0.20 per diluted share, over these same periods. The primary drivers of the increases in results from the prior year periods were increased net interest income and other financing income and decreased provision for loan losses.

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For the second quarter of 2017, net interest income and other financing income (taxable-equivalent basis) from continuing operations totaled $904 million, up $35 million compared to the second quarter of 2016. The net interest margin (taxable-equivalent basis) was 3.32 percent for the second quarter of 2017 and 3.15 percent in the second quarter of 2016. Net interest margin (taxable-equivalent basis) benefited from higher market interest rates, prudent deposit cost management, the impact of balance sheet management strategies, including higher securities balances, and favorable credit-related interest recoveries, partially offset by lower average loan balances.
The provision for loan losses totaled $48 million in the second quarter of 2017 compared to $72 million during the second quarter of 2016. The decrease is attributable to improvement in credit quality as evidenced by the stability in oil prices and a reduction in non-performing loans. Volatility in certain credit metrics is to be expected, especially related to large dollar commercial credits and fluctuating commodity prices.
Net charge-offs totaled $68 million, or an annualized 0.34 percent of average loans, in the second quarter of 2017, compared to $72 million, or an annualized 0.35 percent for the second quarter of 2016. See Note 4 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional information.
The allowance for loan losses at June 30, 2017, was 1.30 percent of total loans, net of unearned income, compared to 1.36 percent at December 31, 2016. Total non-performing assets were $912 million at June 30, 2017, compared to $1.1 billion at December 31, 2016.
Non-interest income from continuing operations was $525 million for the second quarter of 2017 compared to $526 million for the second quarter of 2016. Increases in service charges on deposit accounts, card and ATM fees and investment management and trust fee income were offset by decreased mortgage income and securities gains, resulting in non-interest income remaining consistent year-over-year. See Table 20 "Non-Interest Income from Continuing Operations" for more detail.
Total non-interest expense from continuing operations was $909 million in the second quarter of 2017, a $6 million decrease from the second quarter of 2016. The decrease was primarily driven by decreases in branch consolidation, property and equipment charges and the provision for unfunded credit losses, partially offset by higher salaries and employee benefits. See Table 21 "Non-Interest Expense from Continuing Operations" for more detail.
Income tax expense from continuing operations for the three months ended June 30, 2017 was $133 million compared to income tax expense of $115 million for the same period in 2016. See "Income Taxes" toward the end of the Management’s Discussion and Analysis section of this report for more detail.
A discussion of activity within discontinued operations is included at the end of the Management’s Discussion and Analysis section of this report.
2017 Expectations
Management expectations for 2017 are noted below:
Excluding the impact of a terminated third-party arrangement within the indirect-vehicle loan portfolio, full year average loans are expected to be flat to slightly down compared to the prior year
Full year average deposit growth relatively stable compared to the prior year
Net interest income and other financing income up 3 to 5 percent on a full year basis
Adjusted non-interest income (non-GAAP) growth of 1 to 3 percent on a full year basis
Adjusted non-interest expenses (non-GAAP) flat to up 1 percent on a full year basis
Full year adjusted efficiency ratio (non-GAAP) of approximately 62 percent
Positive adjusted operating leverage (non-GAAP) of 2 to 4 percent on a full year basis
Full year effective tax rate expected in the 30 percent to 31 percent range
Full year net charge-offs of 35 to 50 basis points
The reconciliation with respect to these forward-looking non-GAAP measures is expected to be consistent with the actual non-GAAP reconciliations within Management's Discussion and Analysis of this Form 10-Q. For more information related to the Company's 2017 expectations, including additional guidance within the ranges disclosed above, refer to the related sub-sections discussed in more detail within Management's Discussion and Analysis of this Form 10-Q.
BALANCE SHEET ANALYSIS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased approximately $1.3 billion from year-end 2016 to June 30, 2017. This decrease was due primarily to a decrease in interest-bearing deposits in other banks as a result of normal day-to-day operating variations.

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SECURITIES
The following table details the carrying values of securities, including both available for sale and held to maturity:
Table 1—Securities
 
June 30, 2017
 
December 31, 2016
 
(In millions)
U.S. Treasury securities
$
314

 
$
303

Federal agency securities
25

 
35

Obligations of states and political subdivisions

 
1

Mortgage-backed securities:
 
 
 
Residential agency
18,628

 
18,571

Residential non-agency
3

 
4

Commercial agency
4,124

 
3,625

Commercial non-agency
816

 
1,129

Corporate and other debt securities
1,249

 
1,274

Equity securities
203

 
201

 
$
25,362

 
$
25,143

Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. Total securities at June 30, 2017 increased slightly from year-end 2016. See Note 3 "Securities" to the consolidated financial statements for additional information.
Securities available for sale, which constitute the majority of the securities portfolio, are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company. See the "Market Risk-Interest Rate Risk" and "Liquidity Risk" sections for more information.
LOANS HELD FOR SALE
Loans held for sale totaled $573 million at June 30, 2017, consisted of $379 million of residential real estate mortgage loans, $185 million of commercial mortgage loans, $8 million of non-performing loans, and $1 million of other loans. At December 31, 2016, loans held for sale totaled $718 million, consisting of $505 million of residential real estate mortgage loans, $200 million of commercial mortgage loans, and $13 million of non-performing loans. The level of residential real estate mortgage loans held for sale that are part of the Company's mortgage originations to be sold in the secondary market fluctuates depending on the timing of origination and sale to third parties. The level of commercial mortgage loans held for sale also fluctuates depending on timing.

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LOANS
Loans, net of unearned income, represented approximately 73 percent of Regions’ interest-earning assets at June 30, 2017. The following table presents the distribution of Regions’ loan portfolio by portfolio segment and class, net of unearned income:
Table 2—Loan Portfolio
 
June 30, 2017
 
December 31, 2016
 
(In millions, net of unearned income)
Commercial and industrial
$
35,656

 
$
35,012

Commercial real estate mortgage—owner-occupied
6,445

 
6,867

Commercial real estate construction—owner-occupied
388

 
334

Total commercial
42,489

 
42,213

Commercial investor real estate mortgage
4,126

 
4,087

Commercial investor real estate construction
2,163

 
2,387

Total investor real estate
6,289

 
6,474

Residential first mortgage
13,765

 
13,440

Home equity
10,419

 
10,687

Indirect—vehicles
3,653

 
4,040

Indirect—other consumer
1,188

 
920

Consumer credit card
1,183

 
1,196

Other consumer
1,141

 
1,125

Total consumer
31,349

 
31,408

 
$
80,127

 
$
80,095

PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2016 year-end, and highlight the related risk characteristics. Regions believes that its loan portfolio is well diversified by product, client, and geography throughout its footprint. However, the loan portfolio may be exposed to certain concentrations of credit risk which exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. See Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements for additional discussion.
Commercial
The commercial portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases and other expansion projects. Commercial and industrial loans increased $644 million since year-end 2016 driven primarily by new relationships and expansion of existing relationships in government and institutional banking, asset-based lending, financial services, and real estate investment trust portfolios, which more than offset declines in energy balances. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flows generated by business operations. These loans declined $422 million from year-end 2016 as a result of continued softness in demand and increasing competition for middle market and small business loans. Owner-occupied commercial real estate construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower.
Over half of the Company’s total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry.
The following tables provide detail of Regions' commercial lending balances in selected industries.


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Table 3—Selected Industry Exposure
 
June 30, 2017
 
Loans
 
Unfunded Commitments
 
Total Exposure
 
(In millions)
Administrative, support, waste and repair
$
1,008

 
$
562

 
$
1,570

Agriculture
585

 
252

 
837

Educational services
2,099

 
383

 
2,482

Energy
1,985

 
1,976

 
3,961

Financial services
3,533

 
3,045

 
6,578

Government and public sector
2,692

 
388

 
3,080

Healthcare
4,178

 
1,525

 
5,703

Information
974

 
956

 
1,930

Manufacturing (1)
4,420

 
3,658

 
8,078

Professional, scientific and technical services (1)
1,540

 
1,231

 
2,771

Real estate (1)
6,382

 
5,376

 
11,758

Religious, leisure, personal and non-profit services
1,926

 
536

 
2,462

Restaurant, accommodation and lodging
2,237

 
616

 
2,853

Retail trade
2,663

 
2,244

 
4,907

Transportation and warehousing (1)
1,891

 
817

 
2,708

Utilities
1,287

 
2,219

 
3,506

Wholesale goods (1)
3,095

 
2,272

 
5,367

Other (2)
(6
)
 
1,064

 
1,058

Total commercial
$
42,489

 
$
29,120

 
$
71,609

 
December 31, 2016 (3)
 
Loans
 
Unfunded Commitments
 
Total Exposure
 
(In millions)
Administrative, support, waste and repair
$
899

 
$
481

 
$
1,380

Agriculture
612

 
241

 
853

Educational services
1,929

 
307

 
2,236

Energy
2,097

 
1,968

 
4,065

Financial services (4)
3,473

 
3,228

 
6,701

Government and public sector
2,485

 
246

 
2,731

Healthcare
4,178

 
1,483

 
5,661

Information
1,111

 
817

 
1,928

Manufacturing (4)
4,101

 
4,024

 
8,125

Professional, scientific and technical services (4)
1,701

 
1,052

 
2,753

Real estate (4)
6,513

 
5,445

 
11,958

Religious, leisure, personal and non-profit services
1,934

 
495

 
2,429

Restaurant, accommodation and lodging
2,436

 
650

 
3,086

Retail trade
2,570

 
2,339

 
4,909

Transportation and warehousing (4)
2,196

 
1,005

 
3,201

Utilities
1,147

 
2,008

 
3,155

Wholesale goods (4)
2,795

 
2,396

 
5,191

Other (2)

36

 
1,162

 
1,198

Total commercial
$
42,213

 
$
29,347

 
$
71,560


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________
(1)
Regions' definition of indirect energy-related lending includes certain balances within each of these selected industry categories. As of June 30, 2017, total indirect energy-related loans were approximately $544 million, with approximately $516 million included in commercial loans and $28 million in investor real estate loans. Total unfunded commitments for indirect energy-related lending were $450 million as of June 30, 2017.
(2)
"Other" contains balances related to non-classifiable and invalid business industry codes offset by payments in process and fee accounts that are not available at the loan level.
(3)
As customers' businesses evolve (e.g. up or down the vertical manufacturing chain), Regions may need to change the assigned business industry code used to define the customer relationship. When these changes occur, Regions does not recast the customer history for prior periods into the new classification because the business industry code used in the prior period was deemed appropriate. As a result, year over year changes may be impacted.
(4)
Regions' definition of indirect energy-related lending includes certain balances within each of these selected industry categories. As of December 31, 2016, total indirect energy-related loans were approximately $536 million, with approximately $506 million included in commercial loans and $30 million in investor real estate loans. Total unfunded commitments for indirect energy-related lending were $446 million as of December 31, 2016.

Regions continues to monitor the impacts of low oil prices on both its direct and indirect energy lending portfolios. Regions’ direct energy loan balances at June 30, 2017 amounted to approximately $2.0 billion, consisting of loans such as oilfield services, exploration and production, and pipeline transportation of gas and crude oil. Other types of lending are tangentially impacted by the energy portfolio, such as petroleum wholesalers, oil and gas equipment manufacturing, air transportation, and petroleum bulk stations and terminals. These indirect energy loan balances were approximately $544 million at June 30, 2017. The entire energy-related portfolio, combining direct and indirect loans, was approximately $2.5 billion or 3 percent of total loans at June 30, 2017. Regions has $1 million of energy-related loans held for sale. Regions also has $97 million of energy-related operating leases. Regions evaluates the current value of these operating lease assets and tests for impairment when indicators of impairment are present. Economic trends such as volatility in commodity prices and collateral valuations, as well as circumstances related to individually large operating lease assets could result in impairment. If an impairment loss is deemed necessary on operating lease assets, the impairment is recorded through other non-interest income.
Regions’ energy-related portfolio is geographically concentrated primarily in Texas and, to a lesser extent, in southern Louisiana. Regions employs a variety of risk management strategies, including the use of concentration limits and continuous monitoring, as well as utilizing underwriting with borrowing base structures tied to energy commodity reserve bases or other tangible assets. Additionally, heightened credit requirements have been adopted for select segments of the portfolio. Regions also employs experienced lending and underwriting teams including petroleum engineers, all with extensive energy sector experience through multiple economic cycles. Given the recent volatility in oil prices, this energy-related portfolio may be subject to additional pressure on credit quality metrics including past due, criticized, and non-performing loans, as well as net charge-offs. Regions' energy-related portfolio consists of a relatively small number of customers, which provides the Company granular insight into the financial health of those borrowers. Through its on-going portfolio credit quality assessment, Regions will continue to assess the impact to the allowance and make adjustments as appropriate.
Investor Real Estate
Loans for real estate development are repaid through cash flows related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Total investor real estate loans decreased $185 million in comparison to 2016 year-end balances.
Due to the nature of the cash flows typically used to repay investor real estate loans, these loans are particularly vulnerable to weak economic conditions. As a result, this loan type has a higher risk of non-collection than other loans.
Residential First Mortgage
Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. These loans experienced a $325 million increase in comparison to 2016 year-end balances. Approximately $1.4 billion in new loan originations were retained on the balance sheet through the first six months of 2017.
Home Equity
Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower's residence, allows customers to borrow against the equity in their homes. The home equity portfolio totaled $10.4 billion at June 30, 2017 as compared to $10.7 billion at December 31, 2016. Substantially all of this portfolio was originated through Regions’ branch network.

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The following table presents information regarding the future principal payment reset dates for the Company's home equity lines of credit as of June 30, 2017. The balances presented are based on maturity date for lines with a balloon payment and draw period expiration date for lines that convert to a repayment period.
Table 4—Home Equity Lines of Credit - Future Principal Payment Resets
 
First Lien
 
% of Total
 
Second Lien
 
% of Total
 
Total
 
(Dollars in millions)
2017
$
4

 
0.06
%
 
$
9

 
0.13
%
 
$
13

2018
9

 
0.13

 
16

 
0.23

 
25

2019
69

 
1.00

 
60

 
0.88

 
129

2020
143

 
2.09

 
111

 
1.63

 
254

2021
170

 
2.48

 
148

 
2.16

 
318

2022-2026
1,546

 
22.58

 
1,623

 
23.70

 
3,169

2027-2031
1,560

 
22.78

 
1,379

 
20.14

 
2,939

Thereafter

 

 
1

 
0.01

 
1

Total
$
3,501

 
51.12
%
 
$
3,347

 
48.88
%
 
$
6,848

Of the $10.4 billion home equity portfolio at June 30, 2017, approximately $6.8 billion were home equity lines of credit and $3.6 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in December 2016, new home equity lines of credit have a 10-year draw period and a 20-year repayment term. During the 10-year draw period customers do not have an interest-only payment option, except on a very limited basis. From May 2009 to December 2016, home equity lines of credit had a 10-year draw period and a 10-year repayment period. Prior to May 2009, home equity lines of credit had a 20-year term with a balloon payment upon maturity or a 5-year draw period with a balloon payment upon maturity. The term “balloon payment” means there are no principal payments required until the balloon payment is due for interest-only lines of credit. As of June 30, 2017, none of Regions' home equity lines of credit have converted to mandatory amortization under the contractual terms. As presented in the table above, the majority of home equity lines of credit will either begin to mature with a balloon payment or convert to amortizing status after fiscal year 2020.
Other Consumer Credit Quality Data
The Company calculates an estimate of the current value of property secured as collateral for both residential first mortgage and home equity lending products (“current LTV”). The estimate is based on home price indices compiled by a third party. The third party data indicates trends for MSAs. Regions uses the third party valuation trends from the MSAs in the Company's footprint in its estimate. The trend data is applied to the loan portfolios, taking into account the age of the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential first mortgage and home equity classes of the consumer portfolio segment. Current LTV data for the remaining loans in the portfolio is not available, primarily because some of the loans are serviced by others. Data may also not be available due to mergers and systems integrations. The amounts in the table represent the entire loan balance. For purposes of the table below, if the loan balance exceeds the current estimated collateral, the entire balance is included in the “Above 100%” category, regardless of the amount of collateral available to partially offset the shortfall. The balances in the “Above 100%” category as a percentage of the portfolio balances were 1 percent in the residential first mortgage portfolio and 2 percent in the home equity portfolio at June 30, 2017.
Table 5—Estimated Current Loan to Value Ranges
 
June 30, 2017
 
December 31, 2016
 
Residential
First Mortgage
 
Home Equity
 
Residential
First Mortgage
 
Home Equity
 
 
1st Lien
 
2nd Lien
 
 
1st Lien
 
2nd Lien
 
(In millions)
Estimated current LTV:
 
 
 
 
 
 
 
 
 
 
 
Above 100%
$
117

 
$
59

 
$
165

 
$
139

 
$
82

 
$
235

80% - 100%
1,693

 
319

 
581

 
1,675

 
371

 
677

Below 80%
11,427

 
6,277

 
2,787

 
11,090

 
6,248

 
2,814

Data not available
528

 
89

 
142

 
536

 
99

 
161

 
$
13,765

 
$
6,744

 
$
3,675

 
$
13,440

 
$
6,800

 
$
3,887


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Indirect—Vehicles
Indirect-vehicles lending, which is lending initiated through third-party business partners, largely consists of loans made through automotive dealerships. This portfolio class decreased $387 million from year-end 2016, primarily because Regions terminated a third-party purchase arrangement during the fourth quarter of 2016. The balance is expected to continue to decrease during 2017.
Indirect—Other Consumer
Indirect-other consumer lending represents other point of sale lending through third parties. This portfolio class increased $268 million from year-end 2016 primarily due to continued growth in point of sale initiatives and the purchase of $138 million in loans during the second quarter of 2017.
Consumer Credit Card
Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances decreased $13 million from year-end 2016.
Other Consumer
Other consumer loans primarily include direct consumer loans, overdrafts and other revolving loans. Other consumer loans increased $16 million from year-end 2016.
Regions qualitatively considers factors such as periodic updates of FICO scores, unemployment, home prices, and geography as credit quality indicators for consumer loans. FICO scores are obtained at origination as part of Regions' formal underwriting process. Refreshed FICO scores are obtained by the Company quarterly for all consumer loans. Residential first mortgage FICO scores are also refreshed quarterly. The following tables present estimated current FICO score data for components of classes of the consumer portfolio segment. Current FICO data is not available for the remaining loans in the portfolio for various reasons; for example, if customers do not use sufficient credit, an updated score may not be available. Residential first mortgage and home equity balances with FICO scores below 620 were 5 percent of the combined portfolios for both June 30, 2017 and December 31, 2016.
Table 6—Estimated Current FICO Score Ranges
 
June 30, 2017
 
Residential
First Mortgage
 
Home Equity
 
Indirect—Vehicles
 
Indirect—Other Consumer
 
Consumer
Credit Card
 
Other
Consumer
 
 
1st Lien
 
2nd Lien
 
 
 
 
 
(In millions)
Below 620
$
779

 
$
284

 
$
187

 
$
371

 
$
28

 
$
77

 
$
77

620-680
859

 
516

 
318

 
449

 
109

 
207

 
149

681-720
1,362

 
831

 
471

 
471

 
175

 
268

 
224

Above 720
9,973

 
4,977

 
2,638

 
2,261

 
550

 
622

 
632

Data not available
792

 
136

 
61

 
101

 
326

 
9

 
59

 
$
13,765

 
$
6,744

 
$
3,675

 
$
3,653

 
$
1,188

 
$
1,183

 
$
1,141

 
December 31, 2016
 
Residential
First Mortgage
 
Home Equity
 
Indirect—Vehicles
 
Indirect—Other Consumer
 
Consumer
Credit Card
 
Other
Consumer
 
 
1st Lien
 
2nd Lien
 
 
 
 
 
(In millions)
Below 620
$
807

 
$
301

 
$
204

 
$
427

 
$
19

 
$
71

 
$
82

620-680
920

 
529

 
355

 
527

 
94

 
206

 
162

681-720
1,400

 
834

 
489

 
559

 
141

 
271

 
222

Above 720
9,578

 
4,988

 
2,775

 
2,402

 
382

 
647

 
597

Data not available
735

 
148

 
64

 
125

 
284

 
1

 
62

 
$
13,440

 
$
6,800

 
$
3,887

 
$
4,040

 
$
920

 
$
1,196

 
$
1,125


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ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (“allowance”) consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Discussion of the methodology used to calculate the allowance is included in Note 1 “Summary of Significant Accounting Policies” and Note 6 “Allowance for Credit Losses” to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2016, as well as related discussion in Management’s Discussion and Analysis.
The allowance for loan losses totaled $1.0 billion at June 30, 2017 as compared to $1.1 billion in December 31, 2016. The allowance for loan losses as a percentage of net loans decreased from 1.36 percent at December 31, 2016 to 1.30 percent at June 30, 2017. The decrease in the percentage is primarily attributable to a reduction in non-performing and criticized loans, decreased allowance associated with commercial charge-offs and continued improvement in the energy portfolio.
The provision for loan losses decreased for the first six months of 2017 as compared to the same period in 2016. During the first six months of 2017, the provision for loan losses was less than net charge-offs by approximately $50 million. Net charge-offs for the first six months of 2017 were approximately $28 million higher as compared to the same period in 2016, reflecting a small number of large-dollar commercial loan charge-offs within the energy, healthcare, and education sectors.
Although elevated charge-offs were experienced during the first six months of 2017 associated with larger dollar commercial credits, management expects that net loan charge-offs will be in the 0.35 percent to 0.50 percent range for the 2017 year. Economic trends such as interest rates, unemployment, volatility in commodity prices and collateral valuations will impact the future levels of net charge-offs and may result in volatility during the remainder of 2017. Additionally, changes in circumstances related to individually large credits or certain portfolios may result in volatility.
Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 7 “Allowance for Credit Losses.”

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Activity in the allowance for credit losses is summarized as follows:
Table 7—Allowance for Credit Losses
 
Six Months Ended June 30
 
2017
 
2016
 
(Dollars in millions)
Allowance for loan losses at beginning of year
$
1,091

 
$
1,106

Loans charged-off:
 
 
 
Commercial and industrial
83

 
57

Commercial real estate mortgage—owner-occupied
13

 
13

Commercial real estate construction—owner-occupied

 
1

Commercial investor real estate mortgage
2

 
1

Commercial investor real estate construction

 

Residential first mortgage
6

 
7

Home equity
18

 
35

Indirectvehicles
26

 
23

Indirectother consumer
11

 
6

Consumer credit card
27

 
19

Other consumer
37

 
32

 
223

 
194

Recoveries of loans previously charged-off:
 
 
 
Commercial and industrial
13

 
10

Commercial real estate mortgage—owner-occupied
4

 
5

Commercial real estate construction—owner-occupied

 

Commercial investor real estate mortgage
6

 
4

Commercial investor real estate construction
1

 
1

Residential first mortgage
2

 
2

Home equity
10

 
14

Indirectvehicles
10

 
9

Indirectother consumer

 

Consumer credit card
3

 
3

Other consumer
6

 
6

 
55

 
54

Net charge-offs:
 
 
 
Commercial and industrial
70

 
47

Commercial real estate mortgage—owner-occupied
9

 
8

Commercial real estate construction—owner-occupied

 
1

Commercial investor real estate mortgage
(4
)
 
(3
)
Commercial investor real estate construction
(1
)
 
(1
)
Residential first mortgage
4

 
5

Home equity
8

 
21

Indirectvehicles
16

 
14

Indirectother consumer
11

 
6

Consumer credit card
24

 
16

Other consumer
31

 
26

 
168

 
140

Provision for loan losses
118

 
185

Allowance for loan losses at June 30
$
1,041

 
$
1,151

Reserve for unfunded credit commitments at beginning of year
$
69

 
$
52

Provision (credit) for unfunded credit losses
(2
)
 
12

Reserve for unfunded credit commitments at June 30
$
67

 
$
64

Allowance for credit losses at June 30
$
1,108

 
$
1,215

Loans, net of unearned income, outstanding at end of period
$
80,127

 
$
81,702

Average loans, net of unearned income, outstanding for the period
$
80,144

 
$
81,735

Ratios:
 
 
 
Allowance for loan losses at end of period to loans, net of unearned income
1.30
%
 
1.41
%
Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale
1.27x

 
1.12x

Net charge-offs as percentage of average loans, net of unearned income (annualized)
0.42
%
 
0.34
%

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TROUBLED DEBT RESTRUCTURINGS (TDRs)
TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulty. Residential first mortgage, home equity, indirect-vehicles, consumer credit card and other consumer TDRs are consumer loans modified under the CAP. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modifications were offered as a workout alternative. Renewals of classified commercial and investor real estate loans are considered to be TDRs, even if no reduction in interest rate is offered, if the existing terms are considered to be below market. More detailed information is included in Note 4 "Loans and the Allowance For Credit Losses" to the consolidated financial statements. The following table summarizes the loan balance and related allowance for accruing and non-accruing TDRs for the periods presented:
Table 8—Troubled Debt Restructurings 
 
June 30, 2017
 
December 31, 2016
 
Loan
Balance
 
Allowance for
Loan Losses
 
Loan
Balance
 
Allowance for
Loan Losses
 
(In millions)
Accruing:
 
 
 
 
 
 
 
Commercial
$
366

 
$
53

 
$
241

 
$
38

Investor real estate
108

 
14

 
90

 
8

Residential first mortgage
388

 
45

 
380

 
46

Home equity
268

 
4

 
286

 
5

Indirect—vehicles
1

 

 
1

 

Consumer credit card
1

 

 
2

 

Other consumer
9

 

 
10

 

 
1,141

 
116

 
1,010

 
97

Non-accrual status or 90 days past due and still accruing:
 
 
 
 
 
 
 
Commercial
227

 
52

 
279

 
65

Investor real estate
2

 
1

 
5

 
2

Residential first mortgage
66

 
8

 
74

 
9

Home equity
14

 

 
17

 

 
309

 
61

 
375

 
76

Total TDRs - Loans
$
1,450

 
$
177

 
$
1,385

 
$
173

 
 
 
 
 
 
 
 
TDRs - Held For Sale
3

 

 
3

 

Total TDRs
$
1,453

 
$
177

 
$
1,388

 
$
173

_________
Note: All loans listed in the table above are considered impaired under applicable accounting literature.
The following table provides an analysis of the changes in commercial and investor real estate TDRs. TDRs with subsequent restructurings that meet the definition of a TDR are only reported as TDR inflows in the period they were first modified. Other than resolutions such as charge-offs, foreclosures, payments, sales and transfers to held for sale, Regions may remove loans from TDR classification if the following conditions are met: the borrower's financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, the loan has not been restructured as an "A" note/"B" note, the loan has been reported as a TDR over one fiscal year-end and the loan is subsequently refinanced or restructured at market terms such that it qualifies as a new loan.
For the consumer portfolio, changes in TDRs are primarily due to inflows from CAP modifications and outflows from payments and charge-offs. Given the types of concessions currently being granted under the CAP, as detailed in Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements, Regions does not expect that the market interest rate condition will be widely achieved. Therefore, Regions expects consumer loans modified through CAP to continue to be identified as TDRs for the remaining term of the loan.

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Table 9—Analysis of Changes in Commercial and Investor Real Estate TDRs
 
Six Months Ended June 30, 2017
 
 Six Months Ended June 30, 2016
 
Commercial
 
Investor
Real Estate
 
Commercial
 
Investor
Real Estate
 
(In millions)
Balance, beginning of period
$
520

 
$
95

 
$
281

 
$
179

Inflows
272

 
50

 
177

 
11

Outflows
 
 
 
 
 
 
 
Charge-offs
(10
)
 
(1
)
 
(12
)
 

Foreclosure
(1
)
 

 

 

Payments, sales and other (1)
(188
)
 
(34
)
 
(85
)
 
(49
)
Balance, end of period
$
593

 
$
110

 
$
361

 
$
141

_________
(1) The majority of this category consists of payments and sales. "Other" outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held for sale. It also includes $8 million of commercial loans and none of investor real estate loans refinanced or restructured as new loans and removed from TDR classification for the six months ended June 30, 2017. During the six months ended June 30, 2016, $22 million of commercial loans and $6 million of investor real estate loans were refinanced or restructured as new loans and removed from TDR classification.

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NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
Table 10—Non-Performing Assets
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Non-performing loans:
 
 
 
Commercial and industrial
$
540

 
$
623

Commercial real estate mortgage—owner-occupied
148

 
210

Commercial real estate construction—owner-occupied
3

 
3

Total commercial
691

 
836

Commercial investor real estate mortgage
12

 
17

Commercial investor real estate construction

 

Total investor real estate
12

 
17

Residential first mortgage
46

 
50

Home equity
73

 
92

Indirect - vehicles
1

 

Total consumer
120

 
142

Total non-performing loans, excluding loans held for sale
823

 
995

Non-performing loans held for sale
8

 
13

Total non-performing loans(1)
831

 
1,008

Foreclosed properties
81

 
90

Total non-performing assets(1)
$
912

 
$
1,098

Accruing loans 90 days past due:
 
 
 
Commercial and industrial
$
4

 
$
6

Commercial real estate mortgage—owner-occupied
2

 
2

Total commercial
6

 
8

Residential first mortgage(2)
84

 
99

Home equity
30

 
33

Indirect—vehicles
8

 
10

Consumer credit card
15

 
15

Other consumer
3

 
5

Total consumer
140

 
162

 
$
146

 
$
170

Restructured loans not included in the categories above
$
1,141

 
$
1,010

Non-performing loans(1) to loans and non-performing loans held for sale
1.04
%
 
1.26
%
Non-performing assets(1) to loans, foreclosed properties and non-performing loans held for sale
1.14
%
 
1.37
%
_________
(1)
Excludes accruing loans 90 days past due.
(2)
Excludes residential first mortgage loans that are 100% guaranteed by the FHA and all guaranteed loans sold to the GNMA where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $85 million at June 30, 2017 and $113 million at December 31, 2016.
Non-performing loans at June 30, 2017 have decreased compared to year-end levels, due to improvement in credit quality as evidenced by stability in oil prices. Economic trends such as interest rates, unemployment, volatility in commodity prices and collateral valuations will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility throughout 2017.
Loans past due 90 days or more and still accruing, excluding government guaranteed loans, were $146 million at June 30, 2017, a decrease from $170 million at December 31, 2016.
At June 30, 2017, Regions had approximately $125 million to $200 million of potential problem commercial and investor real estate loans that were not included in non-accrual loans, but for which management had concerns as to the ability of such

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borrowers to comply with their present loan repayment terms. This is a likely estimate of the amount of commercial and investor real estate loans that have the potential to migrate to non-accrual status in the next quarter.
In order to arrive at the estimate of potential problem loans, personnel from geographic regions forecast certain larger dollar loans that may potentially be downgraded to non-accrual at a future time, depending on the occurrence of future events. These personnel consider a variety of factors, including the borrower’s capacity and willingness to meet the contractual repayment terms, make principal curtailments or provide additional collateral when necessary, and provide current and complete financial information including global cash flows, contingent liabilities and sources of liquidity. Based upon the consideration of these factors, a probability weighting is assigned to loans to reflect the potential for migration to the pool of potential problem loans during this specific time period. Additionally, for other loans (for example, smaller dollar loans), a trend analysis is incorporated to determine the estimate of potential future downgrades. Because of the inherent uncertainty in forecasting future events, the estimate of potential problem loans ultimately represents the estimated aggregate dollar amounts of loans as opposed to an individual listing of loans.
The majority of the loans on which the potential problem loan estimate is based are considered criticized and classified. Detailed disclosures for substandard accrual loans (as well as other credit quality metrics) are included in Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements.
The following table provides an analysis of non-accrual loans (excluding loans held for sale) by portfolio segment:
Table 11—Analysis of Non-Accrual Loans
 
Non-Accrual Loans, Excluding Loans Held for Sale
Six Months Ended June 30, 2017
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
836

 
$
17

 
$
142

 
$
995

Additions
257

 
6

 

 
263

Net payments/other activity
(231
)
 
(4
)
 
(22
)
 
(257
)
Return to accrual
(68
)
 
(4
)
 

 
(72
)
Charge-offs on non-accrual loans(2)
(91
)
 
(1
)
 

 
(92
)
Transfers to held for sale(3)
(10
)
 
(2
)
 

 
(12
)
Transfers to foreclosed properties
(2
)
 

 

 
(2
)
Sales

 

 

 

Balance at end of period
$
691

 
$
12

 
$
120

 
$
823


 
Non-Accrual Loans, Excluding Loans Held for Sale
Six Months Ended June 30, 2016
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
595

 
$
31

 
$
156

 
$
782

Additions
522

 
11

 

 
533

Net payments/other activity
(152
)
 
(5
)
 
(2
)
 
(159
)
Return to accrual
(21
)
 
(2
)
 

 
(23
)
Charge-offs on non-accrual loans(2)
(68
)
 
(1
)
 

 
(69
)
Transfers to held for sale(3)
(30
)
 

 
(1
)
 
(31
)
Transfers to foreclosed properties
(2
)
 

 

 
(2
)
Sales
(5
)
 
(1
)
 

 
(6
)
Balance at end of period
$
839

 
$
33

 
$
153

 
$
1,025

________
(1)
All net activity within the consumer portfolio segment other than sales and transfers to held for sale (including related charge-offs) is included as a single net number within the net payments/other activity line.
(2)
Includes charge-offs on loans on non-accrual status and charge-offs taken upon sale and transfer of non-accrual loans to held for sale.
(3)
Transfers to held for sale are shown net of charge-offs of $4 million and $16 million recorded upon transfer for the six months ended June 30, 2017 and 2016, respectively.

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GOODWILL
Goodwill totaled $4.9 billion at both June 30, 2017 and December 31, 2016 and is allocated to each of Regions’ reportable segments (each a reporting unit), at which level goodwill is tested for impairment on an annual basis or more often if events and circumstances indicate the fair value of the reporting unit may have declined below the carrying value (refer to Note 1 “Summary of Significant Accounting Policies” to the 2016 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of when Regions tests goodwill for impairment and the Company's methodology and valuation approaches used to determine the estimated fair value of each reporting unit).
The result of the assessment performed for the second quarter of 2017 did not indicate that the estimated fair values of the Company’s reporting units (Corporate Bank, Consumer Bank and Wealth Management) had declined below their respective carrying values. Therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the June 30, 2017 interim period.
DEPOSITS
Regions competes with other banking and financial services companies for a share of the deposit market. Regions’ ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers’ needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service, competitive pricing and convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as mobile and internet banking.
The following table summarizes deposits by category:
Table 12—Deposits
 
June 30, 2017
 
December 31, 2016
 
(In millions)
Non-interest-bearing demand
$
37,119

 
$
36,046

Savings
8,346

 
7,840

Interest-bearing transaction
19,233

 
20,259

Money market—domestic
26,384

 
27,293

Money market—foreign
71

 
186

Low-cost deposits
91,153

 
91,624

Time deposits
6,940

 
7,183

       Customer deposits
98,093

 
98,807

Corporate treasury time deposits

 
228

 
$
98,093

 
$
99,035

Total deposits at June 30, 2017 decreased approximately $942 million compared to year-end 2016 levels. The decrease was driven primarily by declines in interest-bearing transaction and domestic money market accounts totaling $1.9 billion. Interest-bearing transaction accounts have declined primarily due to the Company's strategic reductions of certain trust customer deposits, which require collateralization by securities, and have been shifted into other fee income-producing customer investments. Money market accounts declined since year-end as a result of a decision to reduce higher-cost retail brokered sweep deposits that were no longer a necessary component of the Company's funding strategy. These decreases were partially offset by continued growth in non-interest-bearing demand and savings accounts totaling $1.6 billion. Customer time deposits declined $243 million due to maturities with minimal reinvestment by customers as a result of continued customer preference for more liquid deposit products as market interest rates remain low. Also, corporate treasury time deposits declined from $228 million to zero as a result of the lack of loan demand decreasing the need for wholesale deposit funding alternatives.
SHORT-TERM BORROWINGS
Short-term borrowings, which consist of FHLB advances, totaled $600 million at June 30, 2017 compared to zero at December 31, 2016. The levels of these borrowings can fluctuate depending on the Company's funding needs and the sources utilized.
In the near term, Regions expects the use of wholesale unsecured borrowings for its funding needs to remain low. Short-term secured borrowings, such as securities sold under agreements to repurchase and FHLB advances, are a core portion of Regions' funding strategy.
The securities financing market and specifically short-term FHLB advances continue to provide reliable funding at attractive rates. See the "Liquidity Risk" section for further detail of Regions' borrowing capacity with the FHLB.


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LONG-TERM BORROWINGS
Table 13—Long-Term Borrowings
 
June 30, 2017
 
December 31, 2016
 
(In millions)
Regions Financial Corporation (Parent):
 
 
 
2.00% senior notes due May 2018
$
101

 
$
100

3.20% senior notes due February 2021
1,102

 
1,102

7.75% subordinated notes due September 2024
100

 
100

6.75% subordinated debentures due November 2025
158

 
159

7.375% subordinated notes due December 2037
297

 
297

Valuation adjustments on hedged long-term debt
(26
)
 
(30
)
 
1,732

 
1,728

Regions Bank:
 
 
 
Federal Home Loan Bank advances
3,254

 
4,254

2.25% senior notes due September 2018
748

 
748

7.50% subordinated notes due May 2018
499

 
499

6.45% subordinated notes due June 2037
495

 
495

3.80% affiliate subordinated notes due February 2025
150

 
150

Other long-term debt
38

 
40

Valuation adjustments on hedged long-term debt
(1
)
 
(1
)
 
5,183

 
6,185

Elimination of 3.80% affiliate subordinated notes due February 2025
(150
)
 
(150
)
Total consolidated
$
6,765

 
$
7,763

Long-term borrowings decreased approximately $1.0 billion since year-end 2016. The decrease was the result of a $1.0 billion decrease in the FHLB advances.
Long-term FHLB advances have a weighted-average interest rate of 1.1 percent at June 30, 2017 and 0.8 percent at December 31, 2016 with remaining maturities ranging from less than one year to fourteen years and a weighted-average of 0.4 years.
STOCKHOLDERS’ EQUITY
Stockholders’ equity was $16.9 billion at June 30, 2017 as compared to $16.7 billion at December 31, 2016. During the first six months of 2017, net income increased stockholders’ equity by $617 million, while cash dividends on common stock reduced stockholders' equity by $162 million and cash dividends on preferred stock reduced stockholder's equity by $32 million. Changes in accumulated other comprehensive income increased stockholders' equity by $71 million, primarily due to the net change in unrealized gains (losses) on securities available for sale. Common stock repurchased during the first six months of 2017 reduced stockholders' equity by $275 million. These shares were immediately retired and therefore are not included in treasury stock.
On June 28, 2017, Regions received no objection from the Federal Reserve to its 2017 capital plan that was submitted as part of the CCAR process, which included the repurchase of common shares and a common stock dividend increase.
See Note 7 “Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)” for additional information.
REGULATORY REQUIREMENTS
CAPITAL RULES
Regions and Regions Bank are required to comply with regulatory capital requirements established by federal and state 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.
Under the Basel III Rules, Regions is designated as a standardized approach bank and, as such, began transitioning to the Basel III Rules in January 2015 subject to a phase-in period extending to January 2019. When fully phased in, the Basel III Rules will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the Basel III Rules place greater emphasis on common equity. The Basel III Rules, among other things,

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(i) introduce a measure called CET1, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to prior regulations. The Basel III Rules also provide for a number of deductions from and adjustments to CET1.
Additionally, the Basel III Rules introduce a new capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is on top of minimum risk-weighted asset ratios. The Basel III Rules also prescribe an expanded standardized approach for risk weightings of assets to derive the capital ratios. Additional discussion of the Basel III Rules and their applicability to Regions is included in Note 14 "Regulatory Capital Requirements and Restrictions" to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2016, as well as related discussion in Management's Discussion and Analysis.
The following table summarizes the applicable holding company and bank regulatory requirements:
Table 14—Regulatory Capital Requirements
Transitional Basis Basel III Regulatory Capital Rules (1)
June 30, 2017
Ratio (2)
 
December 31, 2016
Ratio
 
Minimum
Requirement
 
To Be Well
Capitalized
Basel III common equity Tier 1 capital:
 
 
 
 
 
 
 
Regions Financial Corporation
11.47
%
 
11.21
%
 
4.50
%
 
N/A

Regions Bank
12.49

 
12.14

 
4.50

 
6.50
%
Tier 1 capital:
 
 
 
 
 
 
 
Regions Financial Corporation
12.27
%
 
11.98
%
 
6.00
%
 
6.00
%
Regions Bank
12.49

 
12.14

 
6.00

 
8.00

Total capital:
 
 
 
 
 
 
 
Regions Financial Corporation
14.30
%
 
14.15
%
 
8.00
%
 
10.00
%
Regions Bank
14.23

 
14.00

 
8.00

 
10.00

Leverage capital:
 
 
 
 
 
 
 
Regions Financial Corporation
10.41
%
 
10.20
%
 
4.00
%
 
N/A

Regions Bank
10.61

 
10.34

 
4.00

 
5.00
%
________
(1)
The 2017 and 2016 capital ratios were calculated at different points of the phase-in period under the Basel III Rules and therefore are not directly comparable.
(2)
The current quarter Basel III CET1 capital, Tier 1 capital, Total capital, and Leverage capital ratios are estimated.
 
 
 
 
LIQUIDITY COVERAGE RATIO
The Federal Reserve, the OCC and the FDIC approved a final rule in 2014 implementing a minimum LCR requirement for certain large BHCs, savings and loan holding companies and depository institutions, and a less stringent LCR requirement (the "modified LCR") for other banking organizations, such as Regions, with $50 billion or more in total consolidated assets. The final rule imposes a monthly calculation requirement. As of January 1, 2017, the LCR calculation rule has been fully phased in. In December 2016, the Federal Reserve issued a final rule on the public disclosure of the LCR calculation that requires BHCs, such as Regions, to disclose publicly, on a quarterly basis, quantitative and qualitative information about certain components of its LCR beginning October 1, 2018.
At June 30, 2017, the Company was fully compliant with the LCR requirements. However, should the Company's cash position or investment mix change in the future, the Company's ability to meet the LCR requirement may be impacted, and additional funding may need to be sourced to remain compliant.
See the “Supervision and Regulation—Liquidity Regulation” subsection of the “Business” section and the “Risk Factors” section of the Company's Annual Report on Form 10-K for the year ended December 31, 2016 for more information.

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RATINGS
Table 15 “Credit Ratings” reflects the debt ratings information of Regions Financial Corporation and Regions Bank by Standard and Poor's ("S&P"), Moody’s, Fitch and Dominion Bond Rating Service ("DBRS") as of June 30, 2017 and December 31, 2016.
Table 15—Credit Ratings
 
As of June 30, 2017
 
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
 
 
 
 
Senior unsecured debt
BBB
Baa2
BBB
BBBH
Subordinated debt
BBB-
Baa2
BBB-
BBB
Regions Bank
 
 
 
 
Short-term
A-2
P-1
F2
R-1L
Long-term bank deposits
N/A
A2
BBB+
AL
Long-term rating
BBB+
A2
BBB
N/A
Senior unsecured debt
BBB+
Baa2
BBB
AL
Subordinated debt
BBB
Baa2
BBB-
BBBH
Outlook
Positive
Stable
Positive
Stable

 
As of December 31, 2016
 
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
 
 
 
 
Senior unsecured debt
BBB
Baa2
BBB
BBBH
Subordinated debt
BBB-
Baa2
BBB-
BBB
Regions Bank
 
 
 
 
Short-term
A-2
P-1
F2
R-1L
Long-term bank deposits
N/A
A2
BBB+
AL
Long-term rating
BBB+
A2
BBB
N/A
Senior unsecured debt
BBB+
Baa2
BBB
AL
Subordinated debt
BBB
Baa2
BBB-
BBBH
Outlook
Stable
Stable
Positive
Stable
_______
N/A - Not applicable.
In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, and acceptability of its letters of credit, thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section in the Annual Report on Form 10-K for the year ended December 31, 2016 for more information.
A security rating is not a recommendation to buy, sell or hold securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

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NON-GAAP MEASURES
The table below presents computations of earnings and certain other financial measures, which exclude certain significant items that are included in the financial results presented in accordance with GAAP. These non-GAAP financial measures include “adjusted allowance for loan losses to non-performing loans, excluding loans held for sale ratio,” “adjusted efficiency ratio,” “adjusted fee income ratio,” “return on average tangible common stockholders’ equity,” average and end of period “tangible common stockholders’ equity,” and “Basel III CET1, on a fully phased-in basis” and related ratios. Regions believes that expressing earnings and certain other financial measures excluding these significant items provides a meaningful base for period-to-period comparisons, which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions’ business because management does not consider the activities related to the adjustments to be indications of ongoing operations. Regions believes that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management. Management and the Board utilize these non-GAAP financial measures as follows:
Preparation of Regions’ operating budgets
Monthly financial performance reporting
Monthly close-out reporting of consolidated results (management only)
Presentations to investors of Company performance
The adjusted allowance for loan losses to non-performing loans, excluding loans held for sale ratio (non-GAAP), which is a measure of credit quality performance, is generally calculated as adjusted allowance for loan losses divided by adjusted total non-accrual loans, excluding loans held for sale. Management believes that excluding the portion of the allowance for loan losses related to direct energy loans and the direct energy non-accrual loans will assist investors in analyzing the Company's credit quality performance absent the volatility that has been experienced by energy businesses. The allowance for loan losses (GAAP) is presented excluding the portion of the allowance related to direct energy loans to arrive at the adjusted allowance for loan losses (non-GAAP). Total non-accrual loans (GAAP) is presented excluding direct energy non-accrual loans to arrive at adjusted total non-accrual loans, excluding loans held for sale (non-GAAP), which is the denominator for the allowance for loan losses to non-accrual loans ratio.
The adjusted efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as adjusted non-interest expense divided by adjusted total revenue on a taxable-equivalent basis. The adjusted fee income ratio (non-GAAP) is generally calculated as adjusted non-interest income divided by adjusted total revenue on a taxable-equivalent basis. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Non-interest expense (GAAP) is presented excluding adjustments to arrive at adjusted non-interest expense (non-GAAP), which is the numerator for the adjusted efficiency ratio. Non-interest income (GAAP) is presented excluding adjustments to arrive at adjusted non-interest income (non-GAAP), which is the numerator for the adjusted fee income ratio. Net interest income and other financing income on a taxable-equivalent basis and non-interest income are added together to arrive at total revenue on a taxable-equivalent basis. Adjustments are made to arrive at adjusted total revenue on a taxable-equivalent basis (non-GAAP), which is the denominator for the adjusted efficiency and adjusted fee income ratios.
Tangible common stockholders’ equity ratios have become a focus of some investors in analyzing the capital position of the Company absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulatory bodies have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. Analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity measure. Because tangible common stockholders’ equity is not formally defined by GAAP, this measure is considered to be a non-GAAP financial measure and other entities may calculate it differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on this same basis.
The Basel Committee's Basel III framework will strengthen international capital and liquidity regulations. When fully phased-in, Basel III will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the Basel III Rules place greater emphasis on common equity. The Federal Reserve released its final Basel III Rules detailing the U.S. implementation of Basel III in 2013. Regions, as a standardized approach bank, began transitioning to the Basel III framework in January 2015 subject to a phase-in period extending through January 2019. Because the Basel III implementation regulations will not be fully phased-in until 2019 and, are not formally defined by GAAP, these measures are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess Regions’ capital adequacy using the fully phased-in Basel III framework, Regions believes that it is useful to provide investors information enabling them to assess Regions’ capital adequacy on the same basis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under

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GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to stockholders.
The following tables provide: 1) a reconciliation of allowance for loan losses (GAAP) to adjusted allowance for loan losses (non-GAAP), 2) a reconciliation of non-accrual loans (GAAP) to adjusted non-accrual loans (non-GAAP), 3) a computation of adjusted allowance for loan losses to non-performing loans, excluding loans held for sale (non-GAAP), 4) a reconciliation of net income (GAAP) to net income available to common shareholders (GAAP), 5) a reconciliation of non-interest expense from continuing operations (GAAP) to adjusted non-interest expense (non-GAAP), 6) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income (non-GAAP), 7) a computation of adjusted total revenue (non-GAAP), 8) a computation of the adjusted efficiency ratio (non-GAAP), 9) a computation of the adjusted fee income ratio (non-GAAP), 10) a reconciliation of average and ending stockholders’ equity (GAAP) to average and ending tangible common stockholders’ equity (non-GAAP) and calculations of related ratios (non-GAAP), 11) a reconciliation of stockholders’ equity (GAAP) to Basel III CET1, on a fully phased-in basis (non-GAAP), and calculation of the related ratio based on Regions’ current understanding of the Basel III requirements (non-GAAP).
Table 16—GAAP to Non-GAAP Reconciliation 
 
 
June 30, 2017
 
December 31, 2016
 
 
(Dollars in millions)
ADJUSTED NON-ACCRUAL LOANS AND SELECTED RATIOS
 
 
 
 
Allowance for loan losses (GAAP)
A
$
1,041

 
$
1,091

Less: Direct energy portion
 
136

 
147

Adjusted allowance for loan losses (non-GAAP)
B
$
905

 
$
944

Total non-accrual loans (GAAP)
C
$
823

 
$
995

Less: Direct energy non-accrual loans
 
267

 
311

Adjusted total non-accrual loans (non-GAAP)
D
$
556

 
$
684

Allowance for loan losses to non-performing loans, excluding loans held for sale (GAAP)
A/C
1.27x

 
1.10x

Adjusted allowance for loan losses to non-performing loans, excluding loans held for sale (GAAP)
B/D
1.63x

 
1.38x

 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in millions)
INCOME
 
 
 
 
 
 
 
 
Net income (GAAP)
 
$
316

 
$
275

 
$
617

 
$
548

Preferred dividends (GAAP)
 
(16
)
 
(16
)
 
(32
)
 
(32
)
Net income available to common shareholders (GAAP)
E
$
300

 
$
259

 
$
585

 
$
516

ADJUSTED EFFICIENCY AND FEE INCOME RATIOS
 
 
 
 
 
 
 
 
Non-interest expense from continuing operations (GAAP)
F
$
909

 
$
915

 
$
1,786

 
$
1,784

Significant items:
 
 
 
 
 
 
 
 
Professional, legal and regulatory expenses (1)
 

 
(3
)
 

 
(3
)
   Branch consolidation, property and equipment charges
 
(7
)
 
(22
)
 
(8
)
 
(36
)
Salary and employee benefits—severance charges
 
(3
)
 
(1
)
 
(7
)
 
(13
)
Adjusted non-interest expense (non-GAAP)
G
$
899

 
$
889

 
$
1,771

 
$
1,732

Net interest income and other financing income (GAAP)
 
$
882

 
$
848

 
$
1,741

 
$
1,710

Taxable-equivalent adjustment
 
22

 
21

 
44

 
42

Net interest income and other financing income from continuing operations, taxable-equivalent basis
H
904

 
869

 
1,785

 
1,752

Non-interest income from continuing operations (GAAP)
I
525

 
526

 
1,035

 
1,032

Significant items:
 
 
 
 
 
 
 
 
Securities (gains) losses, net
 
(1
)
 
(6
)
 
(1
)
 
(1
)
Insurance proceeds (2)
 

 

 

 
(3
)
Gain on sale of affordable housing residential mortgage loans (3)
 
(5
)
 

 
(5
)
 

Adjusted non-interest income (non-GAAP)
J
$
519

 
$
520

 
$
1,029

 
$
1,028

Total revenue, taxable-equivalent basis
H+I=K
$
1,429

 
$
1,395

 
$
2,820

 
$
2,784

Adjusted total revenue, taxable-equivalent basis (non-GAAP)
H+J=L
$
1,423

 
$
1,389

 
$
2,814

 
$
2,780

Efficiency ratio (GAAP)
F/K
63.62
%
 
65.62
%
 
63.34
%
 
64.08
%
Adjusted efficiency ratio (non-GAAP)
G/L
63.18
%
 
63.98
%
 
62.97
%
 
62.30
%
Fee income ratio (GAAP)
I/K
36.75
%
 
37.70
%
 
36.71
%
 
37.07
%
Adjusted fee income ratio (non-GAAP)
J/L
36.48
%
 
37.46
%
 
36.56
%
 
37.00
%

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Three Months Ended June 30
 
Six Months Ended June 30
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in millions)
RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Average stockholders’ equity (GAAP)
 
$
16,803

 
$
17,151

 
$
16,727

 
$
17,119

Less: Average intangible assets (GAAP)
 
5,108

 
5,124

 
5,114

 
5,127

 Average deferred tax liability related to intangibles (GAAP)
 
(156
)
 
(163
)
 
(156
)
 
(164
)
 Average preferred stock (GAAP)
 
820

 
820

 
820

 
820

Average tangible common stockholders’ equity (non-GAAP)
M
$
11,031

 
$
11,370

 
$
10,949

 
$
11,336

Return on average tangible common stockholders’ equity (non-GAAP) (4)
E/M
10.91
%
 
9.15
%
 
10.77
%
 
9.15
%
 
 
June 30, 2017
 
December 31, 2016
 
 
(Dollars in millions, except per share data)
TANGIBLE COMMON RATIOS-CONSOLIDATED
 
 
 
 
Ending stockholders’ equity (GAAP)
 
$
16,893

 
$
16,664

Less: Ending intangible assets (GAAP)
 
5,102

 
5,125

  Ending deferred tax liability related to intangibles (GAAP)
 
(156
)
 
(155
)
  Ending preferred stock (GAAP)
 
820

 
820

Ending tangible common stockholders’ equity (non-GAAP)
N
$
11,127

 
$
10,874

Ending total assets (GAAP)
 
$
124,643

 
$
125,968

Less: Ending intangible assets (GAAP)
 
5,102

 
5,125

  Ending deferred tax liability related to intangibles (GAAP)
 
(155
)
 
(155
)
Ending tangible assets (non-GAAP)
O
$
119,696

 
$
120,998

End of period shares outstanding
P
1,199

 
1,215

Tangible common stockholders’ equity to tangible assets (non-GAAP)
N/O
9.30
%
 
8.99
%
Tangible common book value per share (non-GAAP)
N/P
$
9.28

 
$
8.95

BASEL III COMMON EQUITY TIER 1 RATIO—FULLY PHASED-IN PRO-FORMA (5)
 
 
 
 
Stockholders’ equity (GAAP)
 
$
16,893

 
$
16,664

Non-qualifying goodwill and intangibles
 
(4,932
)
 
(4,955
)
Adjustments, including all components of accumulated other comprehensive income, disallowed deferred tax assets, threshold deductions and other adjustments
 
432

 
489

Preferred stock (GAAP)
 
(820
)
 
(820
)
Basel III common equity Tier 1Fully Phased-In Pro-Forma (non-GAAP)
Q
$
11,573

 
$
11,378

Basel III risk-weighted assetsFully Phased-In Pro-Forma (non-GAAP) (6)
R
$
101,894

 
$
102,975

Basel III common equity Tier 1 ratioFully Phased-In Pro-Forma (non-GAAP)
Q/R
11.36
%
 
11.05
%
_________
(1)
Regions recorded $3 million of contingent legal and regulatory accruals during the second quarter of 2016.
(2)
Insurance proceeds recognized in 2016 are related to the settlement of the previously disclosed 2010 class-action lawsuit.
(3)
Gain on sale of affordable housing residential mortgage loans in the fourth quarter of 2016 was due to the decision to sell approximately $171 million of loans to Freddie Mac. Approximately $91 million were sold with recourse, resulting in a deferred gain of $5 million, which was recognized during the second quarter of 2017.
(4)
Income statement amounts have been annualized in calculation.
(5)
Current quarter amounts and the resulting ratio are estimated.
(6)
Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III on a fully phased-in basis. The amounts included above are a reasonable approximation, based on current understanding of the requirements.

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OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 17—Consolidated Average Daily Balances and Yield/Rate Analysis from Continuing Operations
 
Three Months Ended June 30
 
2017
 
2016
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(Dollars in millions; yields on taxable-equivalent basis)
Assets
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
1

 
$

 
%
 
$
3

 
$

 
%
Trading account securities
150

 

 

 
114

 
1

 
0.99

Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
25,269

 
151

 
2.40

 
24,682

 
145

 
2.36

Tax-exempt

 

 

 
1

 

 

Loans held for sale
509

 
4

 
3.43

 
458

 
4

 
3.45

Loans, net of unearned income (1)(2)
80,110

 
823

 
4.10

 
81,960

 
783

 
3.82

Investment in operating leases, net
631

 
6

 
2.88

 
792

 
6

 
2.81

Other earning assets
2,532

 
9

 
1.54

 
2,970

 
8

 
1.10

Total earning assets
109,202

 
993

 
3.63

 
110,980

 
947

 
3.41

Allowance for loan losses
(1,069
)
 
 
 
 
 
(1,158
)
 
 
 
 
Cash and due from banks
1,856

 
 
 
 
 
1,792

 
 
 
 
Other non-earning assets
13,854

 
 
 
 
 
13,798

 
 
 
 
 
$
123,843

 
 
 
 
 
$
125,412

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
8,359

 
4

 
0.15

 
$
7,794

 
2

 
0.14

Interest-bearing checking
19,272

 
8

 
0.19

 
20,760

 
5

 
0.09

Money market
26,712

 
10

 
0.15

 
26,585

 
7

 
0.11

Time deposits
7,005

 
15

 
0.87

 
7,338

 
14

 
0.73

Total interest-bearing deposits (3)
61,348

 
37

 
0.24

 
62,477

 
28

 
0.18

Other short-term borrowings
422

 
2

 
0.99

 

 

 

Long-term borrowings
6,748

 
50

 
2.97

 
8,523

 
50

 
2.33

Total interest-bearing liabilities
68,518

 
89

 
0.52

 
71,000

 
78

 
0.44

Non-interest-bearing deposits (3)
36,141

 

 

 
35,020

 

 

Total funding sources
104,659

 
89

 
0.34

 
106,020

 
78

 
0.29

Net interest spread
 
 
 
 
3.11

 
 
 
 
 
2.97

Other liabilities
2,387

 
 
 
 
 
2,241

 
 
 
 
Stockholders’ equity
16,797

 
 
 
 
 
17,151

 
 
 
 
 
$
123,843

 
 
 
 
 
$
125,412

 
 
 
 
Net interest income and other financing income/margin on a taxable-equivalent basis from continuing operations (4)
 
 
$
904

 
3.32
%
 
 
 
$
869

 
3.15
%
_________
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $6 million and $8 million for the three months ended June 30, 2017 and 2016, respectively.
(3)
Total deposit costs may be calculated by dividing total interest expense on deposits by the sum of interest-bearing deposits and non-interest-bearing deposits. The rates for total deposit costs equal 0.15% and 0.12% for the three months ended June 30, 2017 and 2016, respectively.
(4)
The computation of taxable-equivalent net interest income and other financing 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.

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Six Months Ended June 30
 
2017
 
2016
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(Dollars in millions; yields on taxable-equivalent basis)
Assets
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
1

 
$

 
%
 
$
7

 
$

 
%
Trading account securities
137

 
2

 
3.18

 
123

 
4

 
5.93

Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
25,170

 
299

 
2.40

 
24,650

 
292

 
2.38

Tax-exempt

 

 

 
1

 

 

Loans held for sale
525

 
8

 
3.20

 
410

 
7

 
3.38

Loans, net of unearned income (1)(2)
80,144

 
1,618

 
4.04

 
81,735

 
1,572

 
3.84

Investment in operating leases, net
655

 
11

 
3.07

 
809

 
11

 
2.76

Other earning assets
2,988

 
21

 
1.44

 
3,508

 
18

 
1.03

Total earning assets
109,620

 
1,959

 
3.58

 
111,243

 
1,904

 
3.42

Allowance for loan losses
(1,081
)
 
 
 
 
 
(1,133
)
 
 
 
 
Cash and due from banks
1,877

 
 
 
 
 
1,751

 
 
 
 
Other non-earning assets
13,908

 
 
 
 
 
13,825

 
 
 
 
 
$
124,324

 
 
 
 
 
$
125,686

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
8,205

 
7

 
0.16

 
$
7,642

 
5

 
0.15

Interest-bearing checking
19,592

 
16

 
0.17

 
21,002

 
10

 
0.09

Money market
26,968

 
19

 
0.14

 
26,703

 
14

 
0.11

Time deposits
7,075

 
30

 
0.85

 
7,353

 
26

 
0.70

Total interest-bearing deposits (3)
61,840

 
72

 
0.23

 
62,700

 
55
 
0.18

Other short-term borrowings
356

 
2

 
0.86

 
4

 

 

Long-term borrowings
7,103

 
100

 
2.82

 
8,665

 
97

 
2.23

Total interest-bearing liabilities
69,299

 
174

 
0.51

 
71,369

 
152
 
0.43

Non-interest-bearing deposits (3)
35,886

 

 

 
34,923

 

 

Total funding sources
105,185

 
174

 
0.33

 
106,292

 
152
 
0.29

Net interest spread
 
 
 
 
3.07

 
 
 
 
 
2.99

Other liabilities
2,416

 
 
 
 
 
2,275

 
 
 
 
Stockholders’ equity
16,723

 
 
 
 
 
17,119

 
 
 
 
 
$
124,324

 
 
 
 
 
$
125,686

 
 
 
 
Net interest income and other financing income/margin on a taxable-equivalent basis from continuing operations (4)
 
 
$
1,785

 
3.28
%
 
 
 
$
1,752

 
3.17
%
_________
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $11 million and $19 million for the six months ended June 30, 2017 and 2016, respectively.
(3)
Total deposit costs may be calculated by dividing total interest expense on deposits by the sum of interest-bearing deposits and non-interest-bearing deposits. The rates for total deposit costs equal 0.15% and 0.11% for the six months ended June 30, 2017 and 2016, respectively.
(4)
The computation of taxable-equivalent net interest income and other financing 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.
For the second quarter of 2017, net interest income and other financing income (taxable-equivalent basis) totaled $904 million compared to $869 million in the second quarter of 2016. The net interest margin (taxable-equivalent basis) was 3.32 percent for the second quarter of 2017 and 3.15 percent for the second quarter of 2016. Net interest income and other financing income (taxable-equivalent basis) totaled $1.8 billion for the first six months of both 2017 and 2016. The net interest margin (taxable-equivalent basis) was 3.28 percent and 3.17 percent for the first six months of 2017 and 2016, respectively. The increase in net interest margin (taxable-equivalent basis) for the second quarter and first six months of 2017, compared to the same periods of 2016, was primarily due to higher market interest rates, prudent deposit cost management, and the impact of balance sheet management strategies, including higher investment securities balances, partially offset by lower average loan balances.

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Management expects to increase net interest income and other financing income in the range of 3 to 5 percent on a full year basis.
MARKET RISK—INTEREST RATE RISK
Regions’ primary market risk is interest rate risk. This includes uncertainty with respect to absolute interest rate levels as well as relative interest rate levels, which are impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income and other financing income in various interest rate scenarios compared to a base case scenario. Net interest income and other financing income sensitivity to market rate movements is a useful short-term indicator of Regions’ interest rate risk.
Sensitivity Measurement—Financial simulation models are Regions’ primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income and other financing income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions’ balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that result from both strategic plans and from customer behavior. Among the assumptions are expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the pricing of deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior.
The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain reasonable and stable net interest income and other financing income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario based on “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. While not presented, up-rate scenarios of greater magnitude are also analyzed. Regions prepares a minus 50 basis points scenario, as minus 100 and 200 basis points scenarios are of limited use in the current rate environment. In addition to parallel curve shifts, multiple curve steepening and flattening scenarios are contemplated. Regions includes simulations of gradual interest rate movements phased in over a six-month period that may more realistically mimic the speed of potential interest rate movements.
Exposure to Interest Rate Movements—As of June 30, 2017, Regions was moderately asset sensitive to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the measurement horizon ending June 2018. The estimated exposure associated with the parallel yield curve shift of minus 50 basis points in the table below reflects the combined impacts of movements in short-term and long-term interest rates. The decline in short-term interest rates (such as the Fed Funds rate, the rate of Interest on Excess Reserves and 1 month LIBOR) will lead to a reduction of yield on assets and liabilities contractually tied to such rates. Recent Fed Funds increases have not resulted in a meaningful increase in deposit costs for Regions. Therefore, it is expected that declines in deposit costs will only partially offset the decline in asset yields. A reduction in long-term interest rates (such as intermediate to longer-term U.S. Treasuries, swap and mortgage rates) will drive yields lower on certain fixed rate, newly originated or renewed loans, reduce prospective yields on certain investment portfolio purchases, and increase amortization of premium expense on existing securities in the investment portfolio.
With respect to sensitivity to long-term interest rates, the balance sheet is estimated to be moderately asset sensitive. Current simulation models estimate that, as compared to the base case, net interest income and other financing income over a 12 month horizon would respond favorably by approximately $83 million if longer-term interest rates were to immediately and on a sustained basis exceed the base scenario by 100 basis points. Conversely, if longer-term interest rates were to immediately and on a sustained basis underperform the base case by 50 basis points, then net interest income and other financing income, as compared to the base case, would decline by approximately $50 million. While long-term rates have retracted from post-election highs, they remain moderately elevated through the second quarter, reducing the interest income sensitivity afforded by potential further extension of investment securities and the resulting impact on premium amortization. To the extent that interest rates do not materially decline, net interest income sensitivity driven by middle and long-term interest rates will be primarily attributable to changes in the level of reinvestment yields on fixed rate assets. The table below summarizes Regions' positioning in various parallel yield curve shifts (i.e. including both long-term and short-term interest rates). The scenarios are inclusive of all interest rate risk hedging activities.

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Table 18—Interest Rate Sensitivity
 
Estimated Annual Change
in Net Interest Income
June 30, 2017
 
(In millions)
Gradual Change in Interest Rates
 
+ 200 basis points

$231

+ 100 basis points
134

- 50 basis points
(68
)
 
 
Instantaneous Change in Interest Rates
 
+ 200 basis points

$224

+ 100 basis points
156

- 50 basis points
(107
)
As discussed above, the interest rate sensitivity analysis presented in Table 18 is informed by a variety of assumptions and estimates regarding the course of the balance sheet in both the baseline scenario as well as the scenarios of instantaneous and gradual shifts in the yield curve. Though there are many assumptions that affect the estimates for net interest income and other financing income, those pertaining to deposit pricing, deposit mix and overall balance sheet composition are particularly impactful. Given the uncertainties associated with the prolonged period of low interest rates, management evaluates the impact to its sensitivity analysis of these key assumptions. Sensitivity calculations are hypothetical and should not be considered to be predictive of future results.
The Company’s baseline balance sheet growth assumptions include moderate loan and deposit growth reflecting management's best estimate. The behavior of deposits in response to changes in interest rate levels is largely informed by analyses of prior rate cycles, but with suitable adjustments based on management’s expectations in the current rate environment. In the + 200 basis point gradual interest rate change scenario in Table 18, the total cumulative interest bearing deposit re-pricing sensitivity is expected to be approximately 60 percent of changes in short-term market rates (e.g., Fed Funds), as compared to approximately 55 percent in the 2004 to 2007 historical timeframe. A 5 percentage point higher sensitivity than the 60 percent baseline would reduce 12 month net interest income and other financing income in the gradual +200 basis points scenario by approximately $56 million. While the estimates should be used as a guide, differences may result driven by the pace of rate changes, and other market and competitive factors.
Similarly, management assumes that the change in the mix of deposits in a rising rate environment versus the baseline balance sheet growth assumptions is informed by analyses of prior rate cycles. Management assumes that in rising rate scenarios, some shift from non-interest bearing to interest-bearing products will occur. The magnitude of the shift is rate dependent, but equates to approximately $3.5 billion over 12 months in the gradual +200 basis point scenario in Table 18. In the event this shift increased by an additional $3.0 billion over 12 months, the result would be a reduction of 12 month net interest income and other financing income in the gradual +200 basis points scenario by approximately $25 million.
Interest rate movements may also have an impact on the value of Regions’ securities portfolio, which can directly impact the carrying value of stockholders’ equity. Regions from time to time may hedge these price movements with derivatives (as discussed below).
Derivatives—Regions uses financial derivative instruments for management of interest rate sensitivity. ALCO, which consists of members of Regions’ senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments.
Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. A Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Company's customers and are used by customers to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform.

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Regions has made use of interest rate swaps in balance sheet hedging strategies to effectively convert a portion of its fixed-rate funding position and available for sale securities portfolios to a variable-rate position and to effectively convert a portion of its variable-rate loan portfolios to fixed-rate. Regions also uses derivatives to economically manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing.
The following table presents additional information about the interest rate derivatives used by Regions to manage interest rate risk:
Table 19—Hedging Derivatives by Interest Rate Risk Management Strategy
 
June 30, 2017
 
 
 
Estimated Fair Value
 
Weighted-Average
 
Notional
Amount
 
Gain
 
Loss
 
Maturity (Years)
 
Receive Rate
 
Pay Rate
 
(Dollars in millions)
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Derivatives in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable
$
1,850

 
$

 
$
21

 
2.6

 
1.2
%
 
1.2
%
     Receive variable/pay fixed
318

 
1

 
9

 
10.3

 
1.2

 
2.5

Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable
7,400

 
20

 
158

 
5.9

 
1.4

 
1.1

     Total derivatives designated as hedging instruments
$
9,568

 
$
21

 
$
188

 
5.4

 
1.4
%
 
1.2
%

Regions manages the credit risk of these instruments in much the same way as it manages credit risk of the loan portfolios by establishing credit limits for each counterparty and through collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with and collateral received from and/or posted to that counterparty. The majority of interest rate derivatives traded by Regions are subject to mandatory clearing. The counterparty risk for cleared trades effectively moves from the executing broker to the clearinghouse allowing Regions to benefit from the risk mitigation controls in place at the respective clearinghouse. The “Credit Risk” section in Regions’ Annual Report on Form 10-K for the year ended December 31, 2016 contains more information on the management of credit risk.
Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivative instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income.
The primary objective of Regions’ hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and other financing income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions’ execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 11 “Derivative Financial Instruments and Hedging Activities” to the consolidated financial statements for a tabular summary of Regions’ quarter-end derivatives positions and further discussion.
Regions accounts for residential MSRs at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative and balance sheet transactions to economically mitigate the impact of market value fluctuations related to residential MSRs. Derivative instruments entered into in the future could be materially different from the current risk profile of Regions’ current portfolio.

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MARKET RISK—PREPAYMENT RISK
Regions, like most financial institutions, is subject to changing prepayment speeds on mortgage-related assets under different interest rate environments. Prepayment risk is a significant risk to earnings and specifically to net interest income and other financing income. For example, mortgage loans and other financial assets may be prepaid by a debtor, so that the debtor may refinance its obligations at lower rates. As loans and other financial assets prepay in a falling rate environment, Regions must reinvest these funds in lower-yielding assets. Prepayments of assets carrying higher rates reduce Regions’ interest income and overall asset yields. Conversely, in a rising rate environment, these assets will prepay at a slower rate, resulting in opportunity cost by not having the cash flow to reinvest at higher rates. Prepayment risk can also impact the value of securities and the carrying value of equity. Regions’ greatest exposures to prepayment risks primarily rest in its mortgage-backed securities portfolio, the mortgage fixed-rate loan portfolio and the residential MSR, all of which tend to be sensitive to interest rate movements. Each of these assets is also exposed to prepayment risk due to factors which are not necessarily the result of interest rates, but rather due to changes in policies or programs related, either directly or indirectly, to the U.S. Government's governance over certain lending and financing within the mortgage market. Such policies can work to either encourage or discourage financing dynamics and represent a risk that is extremely difficult to forecast and may be the result of non-economic factors. The Company attempts to monitor and manage such exposures within reasonable expectations while acknowledging all such risks cannot be foreseen or avoided. Further, Regions has prepayment risk that would be reflected in non-interest income in the form of servicing income on the residential MSR. Regions actively monitors prepayment exposure as part of its overall net interest income and other financing income forecasting and interest rate risk management.
LIQUIDITY RISK
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. In 2014, the FRB, the OCC and the FDIC released the final version of the liquidity coverage ratio rule, which is designed to ensure that financial institutions have the necessary assets on hand to withstand short-term liquidity disruptions. See the "Liquidity Coverage Ratio" discussion included in the "Regulatory Requirements" section of Management's Discussion and Analysis for additional information.
Regions intends to fund its obligations primarily through cash generated from normal operations. In addition to these obligations, Regions has obligations related to potential litigation contingencies. See Note 14 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional discussion of the Company’s funding requirements.
Assets, consisting principally of loans and securities, are funded by customer deposits, borrowed funds and stockholders’ equity. Regions’ goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s cash flow needs. Having and using various sources of liquidity to satisfy the Company’s funding requirements is important.
In order to ensure an appropriate level of liquidity is maintained, Regions performs specific procedures including scenario analyses and stress testing at the bank, holding company, and affiliate levels. Regions' liquidity policy requires the holding company to maintain cash sufficient to cover the greater of (1) 18 months of debt service and other cash needs or (2) a minimum cash balance of $500 million. Compliance with the holding company cash requirements is reported to the Risk Committee of the Board on a quarterly basis. Regions also has minimum liquidity requirements for the Bank and subsidiaries. The Bank's funding and contingency planning does not currently include any reliance on short-term unsecured sources. Risk limits are established within the Company's Liquidity Risk Oversight Committee and ALCO, which regularly reviews compliance with the established limits.
The securities portfolio is one of Regions’ primary sources of liquidity. Proceeds from maturities and principal and interest payments of securities provide a constant flow of funds available for cash needs (see Note 3 “Securities” to the consolidated financial statements). The agency guaranteed mortgage-backed securities portfolio is another source of liquidity in various secured borrowing capacities.
Maturities in the loan portfolio also provide a steady flow of funds. Additional funds are provided from payments on consumer loans and one-to-four family residential first mortgage loans. Regions’ liquidity is further enhanced by its relatively stable customer deposit base. Liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not currently rely on short-term unsecured wholesale market funding.
The balance with the FRB is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At June 30, 2017, Regions had approximately $2.3 billion in cash on deposit with the FRB, a decrease from approximately $3.6 billion at December 31, 2016.
Regions’ borrowing availability with the FRB as of June 30, 2017, based on assets pledged as collateral on that date, was $16.3 billion.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of June 30, 2017, Regions’ outstanding balance of FHLB borrowings was $3.9 billion and its total borrowing capacity from the FHLB totaled $14.1 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank pledged certain securities, commercial and real estate mortgage loans, residential first mortgage loans on one-to-four family

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dwellings and home equity lines of credit as collateral for the FHLB advances outstanding. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. The FHLB has been and is expected to continue to be a reliable and economical source of funding.
Regions maintains a shelf registration statement with the SEC that can be utilized by Regions to issue various debt and/or equity securities. Regions may also issue bank notes from time to time, either as part of a bank note program or as stand-alone issuances. Refer to Note 13 "Long-Term Borrowings" to the consolidated financial statements in the 2016 Annual Report on Form 10-K for additional information.
Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt in privately negotiated or open market transactions for cash or common shares. Regulatory approval would be required for retirement of some instruments.
CREDIT RISK
Regions’ objective regarding credit risk is to maintain a high-quality credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has a diversified loan portfolio in terms of product type, collateral and geography. See Table 2 for further details of each loan portfolio segment. See the “Portfolio Characteristics” section of the Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of risk characteristics of each loan type.
INFORMATION SECURITY RISK
Regions faces a variety of operational risks, including information security risks. Information security risks such as evolving and adaptive cyber-attacks, regularly conducted against Regions and other large financial institutions to compromise or disable information systems, have generally increased in recent years. This trend is expected to continue for a number of reasons, including the proliferation of new technologies, the use of mobile devices, more financial transactions conducted online, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties or fraud on the part of employees.
Regions devotes significant financial and non-financial resources to identify and mitigate threats to the confidentiality, availability and integrity of its information systems. Regions regularly assesses the threats and vulnerabilities to its environment so it can update and maintain its systems and controls to effectively mitigate these risks. Layered security controls are designed to complement each other to protect customer information and transactions. Regions will continue to commit the resources necessary to mitigate these growing cyber risks, as well as continue to develop and enhance controls, processes and technology to protect its systems from attacks or unauthorized access. In addition, Regions maintains a strong commitment to a comprehensive risk management program that includes oversight of third-party relationships involving vendors. The Board, through its various committees, is briefed at least quarterly on information security matters.
Regions participates in information sharing organizations such as FS-ISAC, to gather and share information among peer banks and other financial institutions to better prepare and protect its information systems from attack. FS-ISAC is a nonprofit organization whose objective is to protect the financial services sector against cyber and physical threats and risk. It acts as a trusted third party that provides anonymity to allow members to submit threat, vulnerability and incident information in a non-attributable and trusted manner so information that would normally not be shared is instead made available for the greater good of the membership. In addition to FS-ISAC, Regions is a member of BITS. BITS serves the financial community and its members by providing industry best practices on a variety of security and fraud topics.
Regions has contracts with vendors to provide denial of service mitigation. These vendors have also continued to commit the necessary resources to support Regions in the event of an attack. Even though Regions devotes significant resources to combat cyber security risks, there is no guarantee that these measures will provide absolute security. As an additional security measure, Regions has engaged a computer forensics firm and an industry-leading consulting firm on retainer in case of a breach event. Furthermore, some of Regions' exposure with respect to data breaches may be offset by applicable insurance.
Even if Regions successfully prevents data breaches to its own network, the Company may still incur losses that result from customers' account information obtained through breaches of retailers' networks where customers have transacted business. The fraud losses, as well as the costs of investigations and re-issuing new customer cards, impact Regions' financial results. In addition, Regions also relies on some vendors to provide certain components of its business infrastructure, and although Regions actively assesses and monitors the information security capabilities of these vendors, Regions' reliance on them may also increase exposure to information security risk.
PROVISION FOR LOAN LOSSES
The provision for loan losses is used to maintain the allowance for loan losses at a level that in management’s judgment is appropriate to absorb probable losses inherent in the portfolio at the balance sheet date. The provision for loan losses totaled $48 million in the second quarter of 2017 compared to $72 million during the second quarter of 2016. The provision for loan losses totaled $118 million for the first six months of 2017 compared to $185 million for the first six months of 2016. Refer to the “Allowance for Credit Losses” section of Management's Discussion and Analysis for further detail.

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NON-INTEREST INCOME
Table 20—Non-Interest Income from Continuing Operations
 
Three Months Ended June 30
 
Quarter-to-Date Change 6/30/2017 vs. 6/30/2016
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in millions)
Service charges on deposit accounts
$
169

 
$
166

 
$
3

 
1.8
 %
Card and ATM fees
104

 
99

 
5

 
5.1
 %
Investment management and trust fee income
57

 
52

 
5

 
9.6
 %
Mortgage income
40

 
46

 
(6
)
 
(13.0
)%
Capital markets fee income and other
38

 
38

 

 
NM

Insurance commissions and fees
36

 
36

 

 
NM

Bank-owned life insurance
22

 
20

 
2

 
10.0
 %
Commercial credit fee income
18

 
18

 

 
NM

Investment services fee income
15

 
15

 

 
NM

Securities gains (losses), net
1

 
6

 
(5
)
 
(83.3
)%
Market value adjustments on employee benefit assets
2

 
8

 
(6
)
 
(75.0
)%
Other miscellaneous income
23

 
22

 
1

 
4.5
 %
 
$
525

 
$
526

 
$
(1
)
 
(0.2
)%
 
Six Months Ended June 30
 
Year-to-Date Change 6/30/2017 vs. 6/30/2016
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in millions)
Service charges on deposit accounts
$
337

 
$
325

 
$
12

 
3.7
 %
Card and ATM fees
208

 
194

 
14

 
7.2
 %
Investment management and trust fee income
113

 
102

 
11

 
10.8
 %
Mortgage income
81

 
84

 
(3
)
 
(3.6
)%
Capital markets fee income and other
70

 
79

 
(9
)
 
(11.4
)%
Insurance commissions and fees
73

 
76

 
(3
)
 
(3.9
)%
Bank-owned life insurance
41

 
53

 
(12
)
 
(22.6
)%
Commercial credit fee income
36

 
37

 
(1
)
 
(2.7
)%
Investment services fee income
31

 
31

 

 
NM

Insurance proceeds

 
3

 
(3
)
 
(100.0
)%
Securities gains (losses), net
1

 
1

 

 
NM

Market value adjustments on employee benefit assets
7

 
(4
)
 
11

 
(275.0
)%
Other miscellaneous income
37

 
51

 
(14
)
 
(27.5
)%
 
$
1,035

 
$
1,032

 
$
3

 
0.3
 %
________
NM - Not Meaningful


Service charges on deposit accounts—Service charges on deposit accounts include non-sufficient fund fees and other service charges. The increases during the second quarter of 2017 and first six months of 2017 compared to the same periods of 2016 was primarily due to checking account growth and increases in non-sufficient fund fees.
Card and ATM fees—Card and ATM fees include the combined amounts of credit card/bank card income and debit card and ATM related revenue. The increase in the second quarter and first six months of 2017 compared to the same periods of 2016 was primarily the result of increased checking accounts and related spending volume resulting in higher interchange income. Additionally, lower processing expenses contributed to the increases.
Investment management and trust fee income—Investment management and trust fee income represents income from asset management services provided to individuals, businesses and institutions. The increases in the second quarter of 2017 and the first six months of 2017 compared to the same periods of 2016 were primarily the result of increases in assets under administration.

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Capital markets fee income and other—Capital markets fee income and other primarily relates to capital raising activities that includes securities underwriting and placement, loan syndication and placement, as well as foreign exchange, derivatives, merger and acquisition and other advisory services. Capital markets fee income and other remained flat in the second quarter of 2017 compared to the same period in 2016, but decreased in the first six months of 2017 compared to the same periods in 2016. The decrease was primarily due to a reduction in fees generated from the placement of permanent financing for real estate customers and mergers and acquisitions advisory services. The decrease was partially offset by an increase in fees obtained from debt underwriting activities.
Bank-owned life insurance—Bank-owned life insurance decreased in the first six months of 2017 compared to the same period in 2016 primarily due to reduced claims benefits and a gain on exchange of policies that was recognized in the first quarter of 2016.
Securities gains (losses), net—Net securities gains (losses) primarily result from the Company's asset/liability management process.
Market value adjustments on employee benefit assets—Market value adjustments on employee benefit assets decreased in the second quarter and increased in the first six months of 2017 compared to the same periods of 2016 reflecting market value variations related to assets held for certain employee benefits. These adjustments are offset in salaries and employee benefits expense.
Other miscellaneous income—Other miscellaneous income includes net revenue from affordable housing, fees from safe deposit boxes, check fees, and other miscellaneous income. Net revenue from affordable housing includes actual gains and losses resulting from the sale of affordable housing investments, cash distributions from the investments and any related impairment charges. Other miscellaneous income decreased in the first six months of 2017 compared to the same period of 2016 primarily due to lower net revenue from affordable housing. In addition, operating lease impairment charges of $7 million and $5 million were recorded in the second and first quarters of 2017, respectively.

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NON-INTEREST EXPENSE

Table 21—Non-Interest Expense from Continuing Operations
 
Three Months Ended June 30
 
Quarter-to-Date Change 6/30/2017 vs. 6/30/2016
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in millions)
Salaries and employee benefits
$
497

 
$
480

 
$
17

 
3.5
 %
Net occupancy expense
86

 
86

 

 
NM

Furniture and equipment expense
85

 
79

 
6

 
7.6
 %
Outside services
43

 
39

 
4

 
10.3
 %
Marketing
22

 
28

 
(6
)
 
(21.4
)%
FDIC insurance assessments
26

 
17

 
9

 
52.9
 %
Professional, legal and regulatory expenses
28

 
21

 
7

 
33.3
 %
Branch consolidation, property and equipment charges
7

 
22

 
(15
)
 
(68.2
)%
Credit/checkcard expenses
12

 
14

 
(2
)
 
(14.3
)%
Provision (credit) for unfunded credit losses
(3
)
 
11

 
(14
)
 
(127.3
)%
Visa class B shares expense
1

 
2

 
(1
)
 
(50.0
)%
Other miscellaneous expenses
105

 
116

 
(11
)
 
(9.5
)%
 
$
909

 
$
915

 
$
(6
)
 
(0.7
)%
 
Six Months Ended June 30
 
Year-to-Date Change 6/30/2017 vs. 6/30/2016
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in millions)
Salaries and employee benefits
$
975

 
$
955

 
$
20

 
2.1
 %
Net occupancy expense
171

 
172

 
(1
)
 
(0.6
)%
Furniture and equipment expense
165

 
157

 
8

 
5.1
 %
Outside services
83

 
75

 
8

 
10.7
 %
Marketing
46

 
53

 
(7
)
 
(13.2
)%
FDIC insurance assessments
53

 
42

 
11

 
26.2
 %
Professional, legal and regulatory expenses
50

 
34

 
16

 
47.1
 %
Branch consolidation, property and equipment charges
8

 
36

 
(28
)
 
(77.8
)%
Credit/checkcard expenses
26

 
27

 
(1
)
 
(3.7
)%
Provision (credit) for unfunded credit losses
(2
)
 
12

 
(14
)
 
(116.7
)%
Visa class B shares expense
4

 
4

 

 
NM

Other miscellaneous expenses
207

 
217

 
(10
)
 
(4.6
)%
 
$
1,786

 
$
1,784

 
$
2

 
0.1
 %
________
NM - Not Meaningful

Salaries and employee benefits—Salaries and employee benefits are comprised of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and medical, life and disability insurance, as well as, expenses from liabilities held for employee benefit purposes. Salaries and employee benefits increased for the second quarter and first six months of 2017 compared to the same periods in 2016. The primary drivers of the increase were merit increases and a $10 million pension settlement charge that both occurred during the second quarter of 2017. The increase was offset by lower production-based incentives and a reduction in staffing levels. Full-time equivalent headcount decreased to 22,126 at June 30, 2017 from 22,447 at June 30, 2016 reflecting the impact of the Company's efficiency initiatives implemented as part of its three-year strategic plan.
Furniture and equipment expense—Furniture and equipment expense includes depreciation, maintenance and repairs, rent, taxes, and other expenses of equipment utilized by Regions and its affiliates. Furniture and equipment expense increased during the second quarter and the first six months of 2017 compared to the same periods of 2016 primarily due to the completion of certain capital investment projects.

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Outside services—Outside services consists of expenses related to routine services provided by third parties, such as contract labor, servicing costs, data processing, loan pricing and research, data license purchases, data subscriptions, and check printing. Outside services increased during the second quarter and the first six months of 2017 compared to the same periods of 2016 primarily due to increased servicing costs related to point-of-sale lending through third parties.
FDIC insurance assessments—FDIC insurance assessments increased during the second quarter and the first six months of 2017 compared to the same periods of 2016 due to the implementation of the FDIC assessment surcharge that went into effect in the third quarter of 2016, as well as the impact of a $6 million refund recognized in the second quarter of 2016.
Professional, legal and regulatory expenses—Professional, legal and regulatory expenses consist of amounts related to legal, consulting, other professional fees and regulatory charges. Professional, legal and regulatory expenses increased during the second quarter and first six months of 2017 compared to the same periods in 2016 due to an increase in legal settlement expense. Also contributing to the increase was a legal recovery of $7 million that was recognized in the first quarter of 2016.
Branch consolidation, property and equipment charges—Branch consolidation, property and equipment charges include valuation adjustments related to owned branches when the decision to close them is made. Accelerated depreciation and lease write-off charges are recorded for leased branches through and at the actual branch close date. Branch consolidation, property and equipment charges also include costs related to occupancy optimization initiatives.
Provision (credit) for unfunded credit losses—Provision (credit) for unfunded credit losses is the adjustment to the reserve for unfunded credit commitments. The provision for unfunded credit losses decreased during the second quarter and first six months of 2017 compared to the same periods of 2016. The (credit) for unfunded credit losses was primarily attributable to a reduction in the level of risk estimated for the unfunded credit commitments in the commercial and industrial portfolio.
Other miscellaneous expenses—Other miscellaneous expenses include expenses related to communications, postage, supplies, certain credit-related costs, foreclosed property expenses and mortgage repurchase costs. Other miscellaneous expenses decreased during the second quarter and the first six months of 2017 compared to the same periods of 2016 primarily due to lower foreclosed property expenses.
INCOME TAXES
The Company’s income tax expense from continuing operations for the three months ended June 30, 2017 was $133 million compared to income tax expense of $115 million for the same period in 2016, resulting in effective tax rates of 29.5 percent and 29.7 percent, respectively. Income tax expense from continuing operations for the six months ended June 30, 2017 was $261 million compared to income tax expense of $228 million for the same period in 2016, resulting in effective tax rates of 30.0 percent and 29.5 percent, respectively. Both current periods were impacted due to the Company’s permanent tax adjustments offsetting a smaller proportion of pre-tax income. This impact was more than offset in the quarter-to-date period and partially offset in the year-to-date period principally by net tax benefits related to share-based payments.
The effective tax rate is affected by many factors including, but not limited to, the level of pre-tax income, the mix of income between various tax jurisdictions with differing tax rates, net tax benefits related to affordable housing investments, bank-owned life insurance and tax-exempt interest. In addition, the effective tax rate is affected by items that may occur in any given period but are not consistent from period-to-period, such as the termination of certain leveraged leases, share-based payments, valuation allowance changes and changes to unrecognized tax benefits. Accordingly, the comparability of the effective tax rate between periods may be impacted.
At June 30, 2017, the Company reported a net deferred tax asset of $212 million compared to a net deferred asset of $308 million at December 31, 2016. The change is due principally to a decrease in the deferred tax asset related to employee benefits and a decrease in unrealized losses on securities available for sale.
Regions adopted new accounting guidance related to accounting for share-based payments effective January 1, 2017. The guidance eliminates additional paid-in capital pools and designates that all excess tax benefits and deficiencies should be recorded in income tax expense or benefit when the awards vest or are settled. As a result of adoption of the new guidance, expiring stock options resulted in an incremental increase to income tax expense of approximately $5 million in the second quarter of 2017. However, the increase in the second quarter of 2017 was offset by approximately $8 million of income tax benefits from the vesting of restricted and performance stock awards occurring during the quarter.
DISCONTINUED OPERATIONS
Morgan Keegan was sold on April 2, 2012. Regions' results from discontinued operations are presented in Note 2 "Discontinued Operations" to the consolidated financial statements. The three months ended June 30, 2017 loss from discontinued operations was immaterial and the six months ended June 30, 2017 income from discontinued operations was primarily the result of recoveries of legal expenses.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to pages 85 through 88 included in Management’s Discussion and Analysis.
Item 4. Controls and Procedures
Based on an evaluation, as of the end of the period covered by this Form 10-Q, under the supervision and with the participation of Regions’ management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that Regions’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective. During the quarter ended June 30, 2017, there have been no changes in Regions’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Regions’ internal control over financial reporting.


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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information required by this item is set forth in Note 14, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements (Unaudited) in Part I. Item 1. of this report, which is incorporated by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information concerning Regions’ repurchases of its outstanding common stock during the three month period ended June 30, 2017, is set forth in the following table:
Issuer Purchases of Equity Securities
Period
Total Number of
Shares Purchased
 
Average Price Paid
Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Plans or Programs
April 1-30, 2017
6,400,187

 
$
13.77

 
6,400,187

 
$
37,195,678

May 1-31, 2017
2,677,883

 
$
13.82

 
2,677,883

 
$
146,328

June 1-30, 2017

 
$

 

 
$
146,328

Total 2nd Quarter
9,078,070

 
$
13.78

 
9,078,070

 
$
146,328

On July 14, 2016, Regions' Board authorized a $640 million common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2016 through the second quarter of 2017. On October 12, 2016, Regions' Board authorized an additional $120 million repurchase, which increased the total amount authorized under the plan to $760 million. As of June 30, 2017, Regions had repurchased approximately 65.8 million shares of common stock at a total cost of approximately $760 million under this plan and concluded the plan during the second quarter of 2017.
Regions' Board authorized, effective June 28, 2017, a new $1.47 billion common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2017 through the end of the second quarter of 2018. The Company began to repurchase shares under this plan in the third quarter of 2017, and as of August 3, 2017, Regions had additional repurchases of approximately 9.9 million shares of common stock at a total cost of approximately $144.9 million. All of these shares were immediately retired upon repurchase and, therefore, will not be included in treasury stock.
Restrictions on Dividends and Repurchase of Stock
Holders of Regions common stock are only entitled to receive such dividends as Regions’ Board may declare out of funds legally available for such payments. Furthermore, holders of Regions common stock are subject to the prior dividend rights of the holders of Regions preferred stock then outstanding.
Regions understands the importance of returning capital to shareholders. Management will continue to execute the capital planning process, including evaluation of the amount of the common dividend, with the Board and in conjunction with the regulatory supervisors, subject to the Company’s results of operations. Also, Regions is a BHC, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
On November 1, 2012, Regions completed the sale of 20 million depositary shares, each representing a 1/40th ownership interest in a share of its 6.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (“Series A Preferred Stock”), with a liquidation preference of $1,000 per share of Series A Preferred Stock (equivalent to $25 per depositary share). The terms of the Series A Preferred Stock prohibit Regions from declaring or paying any dividends on any junior series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series A Preferred Stock for the most recently completed dividend period. The Series A Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment date on or after December 15, 2017, or in whole, but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations establishing the Series A Preferred Stock).
On April 29, 2014, Regions completed the sale of 20 million depositary shares, each representing a 1/40th ownership interest in a share of its 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share (“Series B Preferred Stock”), with a liquidation preference of $1,000 per share of Series B Preferred Stock (equivalent to $25 per depositary share). The terms of the Series B Preferred Stock prohibit Regions from declaring or paying any dividends on any junior series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series B Preferred Stock for the most recently completed dividend period. The Series B Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment

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date on or after September 15, 2024, or in whole but not in part, at any time following a regulatory capital treatment event (as defined in the certificate of designations establishing the Series B Preferred Stock).

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Item 6. Exhibits
The following is a list of exhibits including items incorporated by reference
3.1
 
Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q Quarterly Report filed by registrant on August 6, 2012.
 
 
3.2
 
Certificate of Designations, incorporated by reference to Exhibit 3.3 to Form 8-A filed by registrant on November 1, 2012.
 
 
 
3.3
 
Certificate of Designations, incorporated by reference to Exhibit 3.3 to the Form 8-A filed by registrant on April 28, 2014.
 
 
3.4
 
By-laws as amended and restated, incorporated by reference to Exhibit 3.2 to Form 8-K Current Report filed by registrant on July 27, 2017.
 
 
 
10.1
 
Amendment Number Three to the Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan Restated as of January 1, 2014.
 
 
 
10.2
 
Amendment Number Two to the Regions Financial Corporation Supplemental 401(k) Plan Restated as of January 1, 2014.
 
 
 
10.3
 
2017 Form of Notice and Form of Restricted Stock Unit Award Agreement under Regions Financial Corporation 2015 Long Term Incentive Plan.
 
 
 
10.4
 
2017 Form of Notice and Form of Performance Stock Unit Award Agreement under Regions Financial Corporation 2015 Long Term Incentive Plan.
 
 
 
10.5
 
2017 Form of Notice and Form of Performance Unit Award Agreement under Regions Financial Corporation 2015 Long Term Incentive Plan.
 
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
 
Interactive Data File


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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 the undersigned thereunto duly authorized.
 
 
 
 
DATE: August 4, 2017
 
Regions Financial Corporation
 
 
 
 
/S/    HARDIE B. KIMBROUGH, JR.        
 
 
Hardie B. Kimbrough, Jr.
Executive Vice President and Controller
(Chief Accounting Officer and Authorized Officer)


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