The Quarterly
RF 2015 10-K

Regions Financial Corp (RF) SEC Quarterly Report (10-Q) for Q1 2016

RF Q2 2016 10-Q
RF 2015 10-K RF Q2 2016 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 March 31, 2016

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)

(205) 581-7890

(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, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting 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   ¨

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 1,266,713,119 shares of common stock, par value $.01, outstanding as of May 4, 2016.


Table of Contents



REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX

Page

Part I. Financial Information

Item 1.

Financial Statements (Unaudited)

Consolidated Balance Sheets-March 31, 2016 and December 31, 2015

8

Consolidated Statements of Income-Three months ended March 31, 2016 and 2015

9

Consolidated Statements of Comprehensive Income-Three months ended March 31, 2016 and 2015

10

Consolidated Statements of Changes in Stockholders' Equity-Three months ended March 31, 2016 and 2015

11

Consolidated Statements of Cash Flows-Three months ended March 31, 2016 and 2015

12

Notes to Consolidated Financial Statements

13

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

55

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

87

Item 4.

Controls and Procedures

87

Part II. Other Information

Item 1.

Legal Proceedings

88

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

88

Item 6.

Exhibits

89

Signatures

90



2

Table of Contents



Glossary of Defined Terms

Agencies - collectively, FNMA, FHLMC and GNMA.

ALCO - Asset/Liability Management Committee.

AOCI - Accumulated other comprehensive income.

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 - The Federal Deposit Insurance Corporation.

Federal Reserve - The 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 Board.

GAAP - Generally Accepted Accounting Principles in the United States.

GCM - Guideline Public Company Method.

GNMA - Government National Mortgage Association.

GTM - Guideline Transaction Method.

HUD - U.S. Department of Housing and Urban Development.



3

Table of Contents



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.

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 - The United States Department of the Treasury.

UTB - Unrecognized tax benefits.

VIE - Variable interest entity.

VRDN - Variable Rate Demand Notes.




4

Table of Contents



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.

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.

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.



5

Table of Contents



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, "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; increased costs; losses; or adverse effects to our reputation.

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.

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.



6

Table of Contents



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, 2015 as filed with the Securities and Exchange Commission and available on its website at www.sec.gov.



7

Table of Contents



PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2016

December 31, 2015

(In millions, except share data)

Assets

Cash and due from banks

$

1,708


$

1,382


Interest-bearing deposits in other banks

2,682


3,932


Trading account securities

110


143


Securities held to maturity (estimated fair value of $1,953 and $1,969, respectively)

1,901


1,946


Securities available for sale

23,095


22,710


Loans held for sale (includes $322 and $353 measured at fair value, respectively)

351


448


Loans, net of unearned income

81,606


81,162


Allowance for loan losses

(1,151

)

(1,106

)

Net loans

80,455


80,056


Other earning assets

1,574


1,652


Premises and equipment, net

2,134


2,152


Interest receivable

314


319


Goodwill

4,878


4,878


Residential mortgage servicing rights at fair value

239


252


Other identifiable intangible assets

246


259


Other assets

5,852


5,921


Total assets

$

125,539


$

126,050


Liabilities and Stockholders' Equity

Deposits:

Non-interest-bearing

$

35,153


$

34,862


Interest-bearing

63,001


63,568


Total deposits

98,154


98,430


Borrowed funds:

Short-term borrowings:

Other short-term borrowings

-


10


Total short-term borrowings

-


10


Long-term borrowings

7,851


8,349


Total borrowed funds

7,851


8,359


Other liabilities

2,323


2,417


Total liabilities

108,328


109,206


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-1,316,074,413 and 1,338,591,703 shares, respectively

13


13


Additional paid-in capital

17,716


17,883


Retained earnings (deficit)

62


(115

)

Treasury stock, at cost-41,261,030 and 41,261,018 shares, respectively

(1,377

)

(1,377

)

Accumulated other comprehensive income (loss), net

(23

)

(380

)

Total stockholders' equity

17,211


16,844


Total liabilities and stockholders' equity

$

125,539


$

126,050



See notes to consolidated financial statements.



8

Table of Contents



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31

2016

2015

(In millions, except per share data)

Interest income, including other financing income on:

Loans, including fees

$

768


$

725


Securities - taxable

147


145


Loans held for sale

3


3


Trading account securities

3


3


Other earning assets

10


10


Operating lease assets

32


-


Total interest income, including other financing income

963


886


Interest expense on:

Deposits

27


28


Long-term borrowings

47


43


Total interest expense

74


71


Depreciation expense on operating lease assets

27


-


Total interest expense and depreciation expense on operating lease assets

101


71


Net interest income and other financing income

862


815


Provision for loan losses

113


49


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

749


766


Non-interest income:

Service charges on deposit accounts

159


161


Card and ATM fees

95


85


Mortgage income

38


40


Securities gains (losses), net

(5

)

5


Other

219


179


Total non-interest income

506


470


Non-interest expense:

Salaries and employee benefits

475


458


Net occupancy expense

86


91


Furniture and equipment expense

78


71


Other

230


285


Total non-interest expense

869


905


Income from continuing operations before income taxes

386


331


Income tax expense

113


95


Income from continuing operations

273


236


Discontinued operations:

Income (loss) from discontinued operations before income taxes

-


(4

)

Income tax expense (benefit)

-


(2

)

Income (loss) from discontinued operations, net of tax

-


(2

)

Net income

$

273


$

234


Net income from continuing operations available to common shareholders

$

257


$

220


Net income available to common shareholders

$

257


$

218


Weighted-average number of shares outstanding:

Basic

1,286


1,346


Diluted

1,291


1,358


Earnings per common share from continuing operations:

Basic

$

0.20


$

0.16


Diluted

0.20


0.16


Earnings per common share:

Basic

$

0.20


$

0.16


Diluted

0.20


0.16


Cash dividends declared per common share

0.06


0.05


See notes to consolidated financial statements.



9

Table of Contents



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended March 31

2016

2015

(In millions)

Net income

$

273


$

234


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 ($1) tax effect, respectively)

(2

)

(2

)

Net change in unrealized losses on securities transferred to held to maturity, net of tax

2


2


Unrealized gains (losses) on securities available for sale:

Unrealized holding gains (losses) arising during the period (net of $125 and $49 tax effect, respectively)

205


80


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

(3

)

3


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

208


77


Unrealized gains (losses) on derivative instruments designated as cash flow hedges:

Unrealized holding gains (losses) on derivatives arising during the period (net of $102 and $35 tax effect, respectively)

165


58


Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $15 and $12 tax effect, respectively)

24


21


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

141


37


Defined benefit pension plans and other post employment benefits:

Net actuarial gains (losses) arising during the period (net of zero and zero tax effect, respectively)

-


(1

)

Less: reclassification adjustments for amortization of actuarial loss and prior service cost realized in net income, (net of ($3) and ($4) tax effect, respectively)

(6

)

(8

)

Net change from defined benefit pension plans and other post employment benefits, net of tax

6


7


Other comprehensive income (loss), net of tax

357


123


Comprehensive income

$

630


$

357


See notes to consolidated financial statements.



10

Table of Contents



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, 2015

1


$

884


1,354


$

14


$

18,767


$

(1,177

)

$

(1,377

)

$

(238

)

$

16,873


Net income

-


-


-


-


-


234


-


-


234


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

-


-


-


-


-


-


-


2


2


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

-


-


-


-


-


-


-


77


77


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

-


-


-


-


-


-


-


37


37


Net change from employee benefit plans, net of tax

-


-


-


-


-


-


-


7


7


Cash dividends declared-$0.05 per share

-


-


-


-


(67

)

-


-


-


(67

)

Preferred stock dividends

-


(16

)

-


-


-


-


-


-


(16

)

Common stock transactions:

Impact of share repurchase

-


-


(11

)

-


(102

)

-


-


-


(102

)

Impact of stock transactions under compensation plans, net and other

-


-


-


-


6


-


-


-


6


BALANCE AT MARCH 31, 2015

1


$

868


1,343


$

14


$

18,604


$

(943

)

$

(1,377

)

$

(115

)

$

17,051


BALANCE AT JANUARY 1, 2016

1


$

820


1,297


$

13


$

17,883


$

(115

)

$

(1,377

)

$

(380

)

$

16,844


Net income

-


-


-


-


-


273


-


-


273


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

-


-


-


-


-


-


-


2


2


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

-


-


-


-


-


-


-


208


208


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

-


-


-


-


-


-


-


141


141


Net change from employee benefit plans, net of tax

-


-


-


-


-


-


-


6


6


Cash dividends declared-$0.06 per share

-


-


-


-


-


(80

)

-


-


(80

)

Preferred stock dividends

-


-


-


-


-


(16

)

-


-


(16

)

Common stock transactions:

Impact of share repurchase

-


-


(23

)

-


(175

)

-


-


-


(175

)

Impact of stock transactions under compensation plans, net and other

-


-


1


-


8


-


-


-


8


BALANCE AT MARCH 31, 2016

1


$

820


1,275


$

13


$

17,716


$

62


$

(1,377

)

$

(23

)

$

17,211



See notes to consolidated financial statements.



11

Table of Contents



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended March 31

2016

2015

(In millions)

Operating activities:

Net income

$

273


$

234


Adjustments to reconcile net income to net cash from operating activities:

Provision for loan losses

113


49


Depreciation, amortization and accretion, net

130


123


Securities (gains) losses, net

5


(5

)

Deferred income tax expense

20


38


Originations and purchases of loans held for sale

(482

)

(565

)

Proceeds from sales of loans held for sale

583


634


(Gain) loss on sale of loans, net

(21

)

(23

)

(Gain) loss on early extinguishment of debt

-


43


Net change in operating assets and liabilities:

Trading account securities

33


(1

)

Other earning assets

51


29


Interest receivable and other assets

108


(112

)

Other liabilities

(35

)

(121

)

Other

12


(6

)

Net cash from operating activities

790


317


Investing activities:

Proceeds from maturities of securities held to maturity

45


46


Proceeds from sales of securities available for sale

1,056


493


Proceeds from maturities of securities available for sale

774


863


Purchases of securities available for sale

(1,954

)

(1,232

)

Proceeds from sales of loans

30


37


Purchases of loans

(279

)

(256

)

Purchases of mortgage servicing rights

(5

)

-


Net change in loans

(266

)

(827

)

Net purchases of other assets

(57

)

(51

)

Net cash from investing activities

(656

)

(927

)

Financing activities:

Net change in deposits

(276

)

3,277


Net change in short-term borrowings

(10

)

(168

)

Proceeds from long-term borrowings

499


-


Payments on long-term borrowings

(1,000

)

(293

)

Cash dividends on common stock

(80

)

(67

)

Cash dividends on preferred stock

(16

)

(16

)

Repurchase of common stock

(175

)

(102

)

Other

-


1


Net cash from financing activities

(1,058

)

2,632


Net change in cash and cash equivalents

(924

)

2,022


Cash and cash equivalents at beginning of year

5,314


4,004


Cash and cash equivalents at end of period

$

4,390


$

6,026



See notes to consolidated financial statements.



12

Table of Contents



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended March 31, 2016 and 2015

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, 2015 . 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, 2015 .

During the fourth quarter of 2015, Regions reclassified its investments in FRB and FHLB stock from securities available for sale to other earning assets on its consolidated balance sheets. This reclassification has been made for all periods presented. Certain other prior period amounts have also been reclassified to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, comprehensive income, total assets or total stockholders' equity as previously reported.

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 March 31

2016

2015

(In millions, except per share data)

Non-interest expense:

Professional and legal expenses

$

-


$

4


Total non-interest expense

-


4


Income (loss) from discontinued operations before income taxes

-


(4

)

Income tax expense (benefit)

-


(2

)

Income (loss) from discontinued operations, net of tax

$

-


$

(2

)

Earnings (loss) per common share from discontinued operations:

Basic

$

0.00


$

(0.00

)

Diluted

$

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:

March 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:

U.S. Treasury securities

$

1


$

-


$

-


$

1


$

-


$

-


$

1


Federal agency securities

350


-


(9

)

341


9


-


350


Mortgage-backed securities:

Residential agency

1,445


-


(59

)

1,386


42


-


1,428


Commercial agency

178


-


(5

)

173


1


-


174


$

1,974


$

-


$

(73

)

$

1,901


$

52


$

-


$

1,953


Securities available for sale:

U.S. Treasury securities

$

232


$

4


$

-


$

236


$

236


Federal agency securities

214


3


-


217


217


Obligations of states and political subdivisions

1


-


-


1


1


Mortgage-backed securities:

Residential agency

16,219


259


(17

)

16,461


16,461


Residential non-agency

5


-


-


5


5


Commercial agency

2,937


62


(1

)

2,998


2,998


Commercial non-agency

1,207


14


(7

)

1,214


1,214


Corporate and other debt securities

1,654


32


(36

)

1,650


1,650


Equity securities

305


8


-


313


313


$

22,774


$

382


$

(61

)

$

23,095


$

23,095




14

Table of Contents




December 31, 2015

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:

U.S. Treasury securities

$

1


$

-


$

-


$

1


$

-


$

-


$

1


Federal agency securities

350


-


(10

)

340


9


-


349


Mortgage-backed securities:

Residential agency

1,490


-


(61

)

1,429


18


(2

)

1,445


Commercial agency

181


-


(5

)

176


-


(2

)

174


$

2,022


$

-


$

(76

)

$

1,946


$

27


$

(4

)

$

1,969


Securities available for sale:

U.S. Treasury securities

$

228


$

1


$

(1

)

$

228


$

228


Federal agency securities

219


-


(1

)

218


218


Obligations of states and political subdivisions

1


-


-


1


1


Mortgage-backed securities:

Residential agency

16,003


149


(90

)

16,062


16,062


Residential non-agency

5


-


-


5


5


Commercial agency

3,033


10


(25

)

3,018


3,018


Commercial non-agency

1,245


3


(17

)

1,231


1,231


Corporate and other debt securities

1,718


12


(63

)

1,667


1,667


Equity securities

272


10


(2

)

280


280


$

22,724


$

185


$

(199

)

$

22,710


$

22,710


_________

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


Securities with carrying values of $11.8 billion and $11.9 billion at March 31, 2016 and December 31, 2015 , respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. Included within total pledged securities is approximately $51 million and $50 million of encumbered U.S. Treasury securities at March 31, 2016 and December 31, 2015 , respectively.

The amortized cost and estimated fair value of securities available for sale and securities held to maturity at March 31, 2016 , 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:

Due in one year or less

$

1


$

1


Due after one year through five years

350


350


Mortgage-backed securities:

Residential agency

1,445


1,428


Commercial agency

178


174


$

1,974


$

1,953


Securities available for sale:

Due in one year or less

$

64


$

65


Due after one year through five years

801


811


Due after five years through ten years

957


963


Due after ten years

279


265


Mortgage-backed securities:

Residential agency

16,219


16,461


Residential non-agency

5


5


Commercial agency

2,937


2,998


Commercial non-agency

1,207


1,214


Equity securities

305


313


$

22,774


$

23,095


The following tables present gross unrealized losses and the related estimated fair value of securities available for sale and held to maturity at March 31, 2016 and December 31, 2015 . 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.

March 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

$

105


$

(1

)

$

1,300


$

(16

)

$

1,405


$

(17

)

Commercial agency

-


-


174


(4

)

174


(4

)

$

105


$

(1

)

$

1,474


$

(20

)

$

1,579


$

(21

)

Securities available for sale:

U.S. Treasury securities

$

6


$

-


$

1


$

-


$

7


$

-


Federal agency securities

-


-


1


-


1


-


Mortgage-backed securities:

Residential agency

1,099


(6

)

1,410


(11

)

2,509


(17

)

       Residential non-agency

3


-


-


-


3


-


Commercial agency

170


-


59


(1

)

229


(1

)

Commercial non-agency

283


(3

)

228


(4

)

511


(7

)

All other securities

276


(7

)

382


(29

)

658


(36

)

$

1,837


$

(16

)

$

2,081


$

(45

)

$

3,918


$

(61

)




16

Table of Contents



December 31, 2015

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:

Federal agency securities

$

198


$

(1

)

$

-


$

-


$

198


$

(1

)

Mortgage-backed securities:

Residential agency

322


(7

)

1,121


(38

)

1,443


(45

)

Commercial agency

-


-


174


(7

)

174


(7

)

$

520


$

(8

)

$

1,295


$

(45

)

$

1,815


$

(53

)

Securities available for sale:

U.S. Treasury securities

$

59


$

(1

)

$

8


$

-


$

67


$

(1

)

Federal agency securities

74


-


7


-


81


-


Mortgage-backed securities:

Residential agency

8,037


(73

)

791


(17

)

8,828


(90

)

Residential non-agency

3


-


-


-


3


-


Commercial agency

1,695


(20

)

273


(5

)

1,968


(25

)

Commercial non-agency

684


(12

)

264


(6

)

948


(18

)

All other securities

805


(36

)

307


(29

)

1,112


(65

)

$

11,357


$

(142

)

$

1,650


$

(57

)

$

13,007


$

(199

)

The number of individual positions in an unrealized loss position in the tables above decrease d from 1,081 at December 31, 2015 to 596 at March 31, 2016 . The decrease in the number of securities and the total amount of unrealized losses from year-end 2015 was primarily due to changes in 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 other-than-temporary impairment 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 other-than-temporary impairments, management did identify a limited number of positions where an other-than-temporary impairment was believed to exist as of March 31, 2016 . Such impairments were related to available for sale equity securities with current market values below the highest traded price in the last six months. For the quarter ending March 31, 2016 , such impairments totaled $1 million , and have been reflected as a reduction of net securities gains (losses) on the consolidated statements of income.

Gross realized gains and gross realized losses on sales of securities available for sale, as well as other-than-temporary impairment losses, are shown in the table below. The cost of securities sold is based on the specific identification method.

Three Months Ended March 31

2016

2015

(In millions)

Gross realized gains

$

16


$

5


Gross realized losses

(20

)

-


OTTI

(1

)

-


Securities gains (losses), net

$

(5

)

$

5




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:

March 31, 2016

December 31, 2015

(In millions, net of unearned income)

Commercial and industrial

$

36,200


$

35,821


Commercial real estate mortgage-owner-occupied

7,385


7,538


Commercial real estate construction-owner-occupied

346


423


Total commercial

43,931


43,782


Commercial investor real estate mortgage

4,516


4,255


Commercial investor real estate construction

2,554


2,692


Total investor real estate

7,070


6,947


Residential first mortgage

12,895


12,811


Home equity

10,914


10,978


Indirect-vehicles

4,072


3,984


Indirect-other consumer

652


545


Consumer credit card

1,045


1,075


Other consumer

1,027


1,040


Total consumer

30,605


30,433


$

81,606


$

81,162


During the three months ended March 31, 2016 and 2015 , Regions purchased approximately $279 million and $256 million , respectively, in indirect-vehicles and indirect-other consumer loans from third parties.

At March 31, 2016 , $14.6 billion in net eligible loans held by Regions were pledged to secure borrowings from the FHLB. At March 31, 2016 , an additional $31.5 billion in net eligible loans held by Regions were pledged to the Federal Reserve Bank for potential borrowings.

ALLOWANCE FOR CREDIT LOSSES

Regions determines the appropriate level of the allowance on at least 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, 2015 , 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 months ended March 31, 2016 and 2015 . The total allowance for loan losses and the related loan portfolio ending balances as of March 31, 2016 and 2015 , 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 March 31, 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

85


(10

)

38


113


Loan losses:

Charge-offs

(29

)

-


(67

)

(96

)

Recoveries

7


4


17


28


Net loan losses

(22

)

4


(50

)

(68

)

Allowance for loan losses, March 31, 2016

821


91


239


1,151


Reserve for unfunded credit commitments, January 1, 2016

47


5


-


52


Provision (credit) for unfunded credit losses

1


-


-


1


Reserve for unfunded credit commitments, March 31, 2016

48


5


-


53


Allowance for credit losses, March 31, 2016

$

869


$

96


$

239


$

1,204


Portion of ending allowance for loan losses:

Individually evaluated for impairment

$

254


$

20


$

66


$

340


Collectively evaluated for impairment

567


71


173


811


Total allowance for loan losses

$

821


$

91


$

239


$

1,151


Portion of loan portfolio ending balance:

Individually evaluated for impairment

$

949


$

155


$

827


$

1,931


Collectively evaluated for impairment

42,982


6,915


29,778


79,675


Total loans evaluated for impairment

$

43,931


$

7,070


$

30,605


$

81,606


Three Months Ended March 31, 2015

Commercial

Investor Real

Estate

Consumer

Total

(In millions)

Allowance for loan losses, January 1, 2015

$

654


$

150


$

299


$

1,103


Provision (credit) for loan losses

59


(25

)

15


49


Loan losses:

Charge-offs

(34

)

(8

)

(59

)

(101

)

Recoveries

17


8


22


47


Net loan losses

(17

)

-


(37

)

(54

)

Allowance for loan losses, March 31, 2015

696


125


277


1,098


Reserve for unfunded credit commitments, January 1, 2015

57


8


-


65


Provision (credit) for unfunded credit losses

1


-


-


1


Reserve for unfunded credit commitments, March 31, 2015

58


8


-


66


Allowance for credit losses, March 31, 2015

$

754


$

133


$

277


$

1,164


Portion of ending allowance for loan losses:

Individually evaluated for impairment

$

178


$

49


$

73


$

300


Collectively evaluated for impairment

518


76


204


798


Total allowance for loan losses

$

696


$

125


$

277


$

1,098


Portion of loan portfolio ending balance:

Individually evaluated for impairment

$

766


$

320


$

857


$

1,943


Collectively evaluated for impairment

41,395


6,601


28,304


76,300


Total loans evaluated for impairment

$

42,161


$

6,921


$

29,161


$

78,243



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



19

Table of Contents



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.

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.

CREDIT QUALITY INDICATORS

The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of March 31, 2016 , and  December 31, 2015 . 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 which 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 which 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.



20

Table of Contents



March 31, 2016

Pass

Special  Mention

Substandard

Accrual

Non-accrual

Total

(In millions)

Commercial and industrial

$

33,619


$

605


$

1,420


$

556


$

36,200


Commercial real estate mortgage-owner-occupied

6,685


248


198


254


7,385


Commercial real estate construction-owner-occupied

320


13


11


2


346


Total commercial

$

40,624


$

866


$

1,629


$

812


$

43,931


Commercial investor real estate mortgage

$

4,263


$

89


$

136


$

28


$

4,516


Commercial investor real estate construction

2,489


30


35


-


2,554


Total investor real estate

$

6,752


$

119


$

171


$

28


$

7,070


Accrual

Non-accrual

Total

(In millions)

Residential first mortgage

$

12,841


$

54


$

12,895


Home equity

10,815


99


10,914


Indirect-vehicles

4,072


-


4,072


Indirect-other consumer

652


-


652


Consumer credit card

1,045


-


1,045


Other consumer

1,027


-


1,027


Total consumer

$

30,452


$

153


$

30,605


$

81,606


December 31, 2015

Pass

Special

Mention

Substandard

Accrual

Non-accrual

Total

(In millions)

Commercial and industrial

$

33,639


$

963


$

894


$

325


$

35,821


Commercial real estate mortgage-owner-occupied

6,750


306


214


268


7,538


Commercial real estate construction-owner-occupied

385


21


15


2


423


Total commercial

$

40,774


$

1,290


$

1,123


$

595


$

43,782


Commercial investor real estate mortgage

$

3,926


$

140


$

158


$

31


$

4,255


Commercial investor real estate construction

2,658


4


30


-


2,692


Total investor real estate

$

6,584


$

144


$

188


$

31


$

6,947


Accrual

Non-accrual

Total

(In millions)

Residential first mortgage

$

12,748


$

63


$

12,811


Home equity

10,885


93


10,978


Indirect-vehicles

3,984


-


3,984


Indirect-other consumer

545


-


545


Consumer credit card

1,075


-


1,075


Other consumer

1,040


-


1,040


Total consumer

$

30,277


$

156


$

30,433


$

81,162





21

Table of Contents



AGING ANALYSIS

The following tables include an aging analysis of days past due (DPD) for each portfolio segment and class as of March 31, 2016 and December 31, 2015 :

March 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

$

19


$

5


$

3


$

27


$

35,644


$

556


$

36,200


Commercial real estate

mortgage-owner-occupied

22


12


3


37


7,131


254


7,385


Commercial real estate construction-owner-occupied

1


-


-


1


344


2


346


Total commercial

42


17


6


65


43,119


812


43,931


Commercial investor real estate mortgage

19


2


2


23


4,488


28


4,516


Commercial investor real estate construction

2


1


8


11


2,554


-


2,554


Total investor real estate

21


3


10


34


7,042


28


7,070


Residential first mortgage

76


51


220


347


12,841


54


12,895


Home equity

54


21


45


120


10,815


99


10,914


Indirect-vehicles

40


9


8


57


4,072


-


4,072


Indirect-other consumer

2


1


-


3


652


-


652


Consumer credit card

6


5


12


23


1,045


-


1,045


Other consumer

9


3


5


17


1,027


-


1,027


Total consumer

187


90


290


567


30,452


153


30,605


$

250


$

110


$

306


$

666


$

80,613


$

993


$

81,606


December 31, 2015

Accrual Loans

30-59 DPD

60-89 DPD

90+ DPD

Total

30+ DPD

Total

Accrual

Non-accrual

Total

(In millions)

Commercial and industrial

$

11


$

6


$

9


$

26


$

35,496


$

325


$

35,821


Commercial real estate

mortgage-owner-occupied

24


7


3


34


7,270


268


7,538


Commercial real estate construction-owner-occupied

-


1


-


1


421


2


423


Total commercial

35


14


12


61


43,187


595


43,782


Commercial investor real estate mortgage

14


13


4


31


4,224


31


4,255


Commercial investor real estate construction

2


-


-


2


2,692


-


2,692


Total investor real estate

16


13


4


33


6,916


31


6,947


Residential first mortgage

88


60


220


368


12,748


63


12,811


Home equity

58


26


59


143


10,885


93


10,978


Indirect-vehicles

49


14


9


72


3,984


-


3,984


Indirect-other consumer

2


1


-


3


545


-


545


Consumer credit card

7


5


12


24


1,075


-


1,075


Other consumer

11


4


4


19


1,040


-


1,040


Total consumer

215


110


304


629


30,277


156


30,433


$

266


$

137


$

320


$

723


$

80,380


$

782


$

81,162





22

Table of Contents



IMPAIRED LOANS

The following tables present details related to the Company's impaired loans as of March 31, 2016 and December 31, 2015 . Loans deemed to be impaired include all TDRs and all non-accrual commercial and investor real estate loans, excluding leases. Loans which have been fully charged-off do not appear in the tables below.

Non-accrual Impaired Loans As of March 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

$

598


$

52


$

546


$

78


$

468


$

164


36.1

%

Commercial real estate mortgage-owner-occupied

275


20


255


31


224


69


32.4


Commercial real estate construction-owner-occupied

2


-


2


-


2


2


100.0


Total commercial

875


72


803


109


694


235


35.1


Commercial investor real estate mortgage

33


5


28


13


15


6


33.3


Total investor real estate

33


5


28


13


15


6


33.3


Residential first mortgage

48


16


32


-


32


4


41.7


Home equity

14


1


13


-


13


-


7.1


Total consumer

62


17


45


-


45


4


33.9


$

970


$

94


$

876


$

122


$

754


$

245


34.9

%

Accruing Impaired Loans As of March 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

$

84


$

2


$

82


$

14


19.0

%

Commercial real estate mortgage-owner-occupied

67


4


63


5


13.4


Commercial real estate construction-owner-occupied

1


-


1


-


-


Total commercial

152


6


146


19


16.4


Commercial investor real estate mortgage

106


6


100


10


15.1


Commercial investor real estate construction

28


1


27


4


17.9


Total investor real estate

134


7


127


14


15.7


Residential first mortgage

458


12


446


55


14.6


Home equity

321


-


321


7


2.2


Indirect-vehicles

1


-


1


-


-


Consumer credit card

2


-


2


-


-


Other consumer

12


-


12


-


-


Total consumer

794


12


782


62


9.3


$

1,080


$

25


$

1,055


$

95


11.1

%




23

Table of Contents



Total Impaired Loans As of March 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

$

682


$

54


$

628


$

78


$

550


$

178


34.0

%

Commercial real estate mortgage-owner-occupied

342


24


318


31


287


74


28.7


Commercial real estate construction-owner-occupied

3


-


3


-


3


2


66.7


Total commercial

1,027


78


949


109


840


254


32.3


Commercial investor real estate mortgage

139


11


128


13


115


16


19.4


Commercial investor real estate construction

28


1


27


-


27


4


17.9


Total investor real estate

167


12


155


13


142


20


19.2


Residential first mortgage

506


28


478


-


478


59


17.2


Home equity

335


1


334


-


334


7


2.4


Indirect-vehicles

1


-


1


-


1


-


-


Consumer credit card

2


-


2


-


2


-


-


Other consumer

12


-


12


-


12


-


-


Total consumer

856


29


827


-


827


66


11.1


$

2,050


$

119


$

1,931


$

122


$

1,809


$

340


22.4

%



Non-accrual Impaired Loans As of December 31, 2015

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

$

363


$

41


$

322


$

26


$

296


$

98


38.3

%

Commercial real estate mortgage-owner-occupied

286


18


268


36


232


69


30.4


Commercial real estate construction-owner-occupied

2


-


2


-


2


1


50.0


Total commercial

651


59


592


62


530


168


34.9


Commercial investor real estate mortgage

36


5


31


13


18


8


36.1


Total investor real estate

36


5


31


13


18


8


36.1


Residential first mortgage

51


16


35


-


35


4


39.2


Home equity

14


1


13


-


13


-


7.1


Total consumer

65


17


48


-


48


4


32.3


$

752


$

81


$

671


$

75


$

596


$

180


34.7

%



24

Table of Contents



Accruing Impaired Loans As of December 31, 2015

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

$

68


$

1


$

67


$

13


20.6

%

Commercial real estate mortgage-owner-occupied

89


6


83


8


15.7


Commercial real estate construction-owner-occupied

1


-


1


-


-


Total commercial

158


7


151


21


17.7


Commercial investor real estate mortgage

141


8


133


13


14.9


Commercial investor real estate construction

27


-


27


5


18.5


Total investor real estate

168


8


160


18


15.5


Residential first mortgage

457


13


444


57


15.3


Home equity

328


-


328


7


2.1


Indirect-vehicles

1


-


1


-


-


Consumer credit card

2


-


2


-


-


Other consumer

12


-


12


-


-


Total consumer

800


13


787


64


9.6


$

1,126


$

28


$

1,098


$

103


11.6

%


Total Impaired Loans As of December 31, 2015

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

$

431


$

42


$

389


$

26


$

363


$

111


35.5

%

Commercial real estate mortgage-owner-occupied

375


24


351


36


315


77


26.9


Commercial real estate construction-owner-occupied

3


-


3


-


3


1


33.3


Total commercial

809


66


743


62


681


189


31.5


Commercial investor real estate mortgage

177


13


164


13


151


21


19.2


Commercial investor real estate construction

27


-


27


-


27


5


18.5


Total investor real estate

204


13


191


13


178


26


19.1


Residential first mortgage

508


29


479


-


479


61


17.7


Home equity

342


1


341


-


341


7


2.3


Indirect-vehicles

1


-


1


-


1


-


-


Consumer credit card

2


-


2


-


2


-


-


Other consumer

12


-


12


-


12


-


-


Total consumer

865


30


835


-


835


68


11.3


$

1,878


$

109


$

1,769


$

75


$

1,694


$

283


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.




25

Table of Contents



The following table presents the average balances of total impaired loans and interest income for the three months ended March 31, 2016 and 2015 . Interest income recognized represents interest on accruing loans modified in a TDR. TDRs are considered impaired loans.

Three Months Ended March 31

2016

2015

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

(In millions)

Commercial and industrial

$

476


$

1


$

359


$

1


Commercial real estate mortgage-owner-occupied

328


1


379


3


Commercial real estate construction-owner-occupied

3


-


3


-


Total commercial

807


2


741


4


Commercial investor real estate mortgage

141


2


331


3


Commercial investor real estate construction

28


-


33


1


Total investor real estate

169


2


364


4


Residential first mortgage

477


4


476


4


Home equity

337


5


363


5


Indirect-vehicles

1


-


1


-


Consumer credit card

2


-


2


-


Other consumer

12


-


15


-


Total consumer

829


9


857


9


Total impaired loans

$

1,805


$

13


$

1,962


$

17


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 program. Refer to Note 6 "Allowance For Credit Losses" in the 2015 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 March 31, 2016 , approximately $39 million in residential first mortgage TDRs were in excess of 180 days past due and were considered collateral-dependent. At March 31, 2016 , approximately $5 million in home equity first lien TDRs were in excess of 180 days past due and approximately $5 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 2015 Annual Report on Form 10-K.



26

Table of Contents



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. The end of period balance, for the period in which it was added, of total loans first reported as new TDRs totaled approximately $82 million and $107 million for the three months ended March 31, 2016 and 2015 , respectively.

Three Months Ended March 31, 2016

Financial Impact

of Modifications

Considered TDRs

Number of

Obligors

Recorded

Investment

Increase in

Allowance at

Modification

(Dollars in millions)

Commercial and industrial

38


$

59


$

2


Commercial real estate mortgage-owner-occupied

30


13


-


Total commercial

68


72


2


Commercial investor real estate mortgage

25


43


1


Commercial investor real estate construction

2


1


-


Total investor real estate

27


44


1


Residential first mortgage

63


14


2


Home equity

117


6


-


Consumer credit card

24


-


-


Indirect-vehicles and other consumer

54


1


-


Total consumer

258


21


2


353


$

137


$

5


Three Months Ended March 31, 2015

Financial Impact

of Modifications

Considered TDRs

Number of

Obligors

Recorded

Investment

Increase in

Allowance at

Modification

(Dollars in millions)

Commercial and industrial

41


$

57


$

1


Commercial real estate mortgage-owner-occupied

42


25


1


Total commercial

83


82


2


Commercial investor real estate mortgage

29


24


1


Commercial investor real estate construction

1


1


-


Total investor real estate

30


25


1


Residential first mortgage

133


32


4


Home equity

125


6


-


Consumer credit card

32


-


-


Indirect-vehicles and other consumer

87


1


-


Total consumer

377


39


4


490


$

146


$

7


Defaulted TDRs

The following table presents, by portfolio segment and class, TDRs that defaulted during the three months ended March 31, 2016 and 2015 , 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 90 days past due and still accruing for the consumer portfolio segment, and placement on non-accrual status for the commercial and investor real estate portfolio segments. Consideration of defaults in the calculation of



27

Table of Contents



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, 2015 .

Three Months Ended March 31

2016

2015

(In millions)

Defaulted During the Period, Where Modified in a TDR Twelve Months Prior to Default

Commercial and industrial

$

6


$

1


Commercial real estate mortgage-owner-occupied

1


1


Total commercial

7


2


Commercial investor real estate mortgage

1


1


Total investor real estate

1


1


Residential first mortgage

3


3


Total consumer

3


3


$

11


$

6


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 March 31, 2016 , approximately $34 million of commercial and investor real estate loans modified in a TDR during the three months ended March 31, 2016 were on non-accrual status. Approximately 1.52 percent of this amount was 90 days past due.

At March 31, 2016 , Regions had restructured binding unfunded commitments totaling $49 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 March 31

2016

2015

(In millions)

Carrying value, beginning of period

$

252


$

257


Additions

31


7


Increase (decrease) in fair value (1) :

Due to change in valuation inputs or assumptions

(36

)

(17

)

Economic amortization associated with borrower repayments

(8

)

(8

)

Carrying value, end of period

$

239


$

239


________

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


On February 29, 2016, the Company completed a transaction to purchase the rights to service approximately $2.6 billion in residential mortgage loans. The residential MSRs asset was increased by the purchase price of approximately $24 million .




28

Table of Contents



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:

March 31

2016

2015

(Dollars in millions)

Unpaid principal balance

$

28,035


$

26,903


Weighted-average prepayment speed (CPR; percentage)

14.3

%

12.7

%

Estimated impact on fair value of a 10% increase

$

(13

)

$

(14

)

Estimated impact on fair value of a 20% increase

$

(24

)

$

(27

)

Option-adjusted spread (basis points)

993


1,006


Estimated impact on fair value of a 10% increase

$

(9

)

$

(9

)

Estimated impact on fair value of a 20% increase

$

(17

)

$

(18

)

Weighted-average coupon interest rate

4.3

%

4.4

%

Weighted-average remaining maturity (months)

279


279


Weighted-average servicing fee (basis points)

27.8


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 March 31

2016

2015

(In millions)

Servicing related fees and other ancillary income

$

20


$

20


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 one-third 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 2015 Annual Report on Form 10-K for additional information. Also see Note 14 for additional information related to the guarantee.

As of March 31, 2016 , and December 31, 2015 , the DUS servicing portfolio was approximately $1.1 billion and $1.2 billion , respectively. The related commercial MSRs were valued at approximately $17 million and $16 million at March 31, 2016 and December 31, 2015 , respectively. The loss share guarantee was valued at approximately $3 million at both March 31, 2016 and December 31, 2015 .



29

Table of Contents



NOTE 6. GOODWILL

Goodwill allocated to each reportable segment (each a reporting unit) is presented as follows:

March 31, 2016

December 31, 2015

(In millions)

Corporate Bank

$

2,452


$

2,305


Consumer Bank

1,978


2,095


Wealth Management

448


478


$

4,878


$

4,878


Refer to Note 13 "Business Segment Information" for discussion of Regions' organizational realignment during the first quarter of 2016. Goodwill is allocated to each of Regions' reportable segments (each a reporting unit: Corporate Bank, Consumer Bank, and Wealth Management). 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. Due to the organizational realignment, Regions determined that quantitative testing of goodwill was required for all reporting units during the first quarter of 2016, and goodwill was reallocated to each reporting unit using a relative fair value approach.

Regions assessed the indicators of goodwill impairment for all three reporting units as part of the quantitative test during the first quarter of 2016. The results of the test indicated that the estimated fair value of each reporting unit exceeded its carrying amount as of the test date, therefore, the goodwill of each reporting unit is considered not impaired as of the testing date. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill.

Additionally, Regions assessed events and circumstances for all three reporting units as of March 31, 2016, 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.

Listed in the tables below are assumptions used in estimating the fair value of each reporting unit for the applicable testing period. The table includes the discount rates used in the income approach, the market multiples used in the market approaches, and the public company method control premium applied to each reporting unit. 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 Note 1 "Summary of Significant Accounting Policies" in the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2015.

As of First Quarter 2016

Corporate

Bank

Consumer

Bank

Wealth

Management

Discount rate used in income approach

11.25

%

11.00

%

12.00

%

Public company method market multiplier (1)

1.3x

1.5x

18.8x

Transaction method market multiplier (2)

1.8x

1.8x

25.8x

_________

(1)

For the Corporate Bank and Consumer Bank reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings. In addition to the multipliers, a 20 percent control premium was assumed for the Corporate Bank reporting unit, a 30 percent control premium was assumed for the Consumer Bank reporting unit and a 15 percent control premium was assumed for the Wealth Management reporting unit based on current market factors. Because the control premium considers potential revenue synergies and cost savings for similar financial services transactions, reporting units operating in businesses that have greater barriers to entry tend to have greater control premiums.

(2)

For the Corporate Bank and Consumer Bank reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings.



30

Table of Contents




As of Fourth Quarter 2015

Corporate

Bank

Consumer

Bank

Wealth

Management

Discount rate used in income approach

11.00

%

11.00

%

12.00

%

Public company method market multiplier (1)

1.9x

1.5x

18.5x

Transaction method market multiplier (2)

1.9x

1.9x

23.5x

_________

(1)

For the Corporate Bank and Consumer Bank reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings. In addition to the multipliers, a 10 percent control premium was assumed for the Corporate Bank reporting unit, a 30 percent control premium was assumed for the Consumer Bank reporting unit and a 15 percent control premium was assumed for the Wealth Management reporting unit based on current market factors. Because the control premium considers potential revenue synergies and cost savings for similar financial services transactions, reporting units operating in businesses that have greater barriers to entry tend to have greater control premiums.

(2)

For the Corporate Bank and Consumer Bank reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings.

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:

March 31, 2016

December 31, 2015

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 $8 million in cash dividends on Series A Preferred Stock during the first quarters of 2016 and 2015. Series B Preferred Stock dividends were $8 million for the first quarters of 2016 and 2015. Prior to the first quarter of 2016, the Company was in a retained deficit position and preferred dividends were recorded as a reduction of preferred stock, including related surplus. During the first quarter of 2016, the Company achieved positive retained earnings and preferred dividends were recorded as a reduction of retained earnings.

COMMON STOCK

During the first quarter of 2015, Regions received no objection from the Federal Reserve to its 2015 capital plan that was submitted as part of the CCAR process. On April 23, 2015, Regions' Board of Directors approved an increase of its quarterly common stock dividend to $0.06 per share effective with the quarterly dividend paid in July 2015. The Board also authorized a $875 million common stock repurchase plan, permitting repurchases from the beginning of the second quarter of 2015 through the end of the second quarter of 2016. Through March 31, 2016, Regions repurchased approximately 75 million shares of common stock at a total cost of approximately $695 million under this plan. The Company continued to repurchase shares in the second quarter of 2016, and as of May 5, 2016, Regions had additional repurchases of approximately 17.4 million shares of common stock at a total cost of approximately $160.5 million . These shares were immediately retired upon repurchase and therefore are not included in treasury stock.

The Board of Directors declared a $0.06 per share cash dividend on common stock for the first quarter of 2016 , and a $0.05 per share cash dividend for the first quarter of 2015. Prior to the first quarter of 2016, the Company was in a retained deficit position



31

Table of Contents



and common stock dividends were recorded as a reduction of additional paid-in capital. During the first quarter of 2016, the Company achieved positive retained earnings and common stock dividends were recorded as a reduction of retained earnings.

On April 21, 2016, Regions' Board of Directors approved an increase of the quarterly common stock dividend to $0.065 per share from the previous quarterly dividend rate of $0.06 per share.


ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Activity within the balances in accumulated other comprehensive income (loss) is shown in the following tables:

Three Months Ended March 31, 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

2


208


141


6


357


End of period

$

(45

)

$

198


$

216


$

(392

)

$

(23

)

Three Months Ended March 31, 2015

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

$

(55

)

$

175


$

33


$

(391

)

$

(238

)

Net change

2


77


37


7


123


End of period

$

(53

)

$

252


$

70


$

(384

)

$

(115

)



32

Table of Contents



The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 :

Three Months Ended March 31, 2016

Three Months Ended March 31, 2015

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:

$

(3

)

$

(3

)

Net interest income and other financing income

1


1


Tax (expense) or benefit

$

(2

)

$

(2

)

Net of tax

Unrealized gains and (losses) on available for sale securities:

$

(5

)

$

5


Securities gains (losses), net

2


(2

)

Tax (expense) or benefit

$

(3

)

$

3


Net of tax

Gains and (losses) on cash flow hedges:

Interest rate contracts

$

39


$

33


Net interest income and other financing income

(15

)

(12

)

Tax (expense) or benefit

$

24


$

21


Net of tax

Amortization of defined benefit pension plans and other post employment benefits:

Prior-service cost

$

-


$

-


(2)

Actuarial gains (losses)

(9

)

(12

)

(2)

(9

)

(12

)

Total before tax

3


4


Tax (expense) or benefit

$

(6

)

$

(8

)

Net of tax

Total reclassifications for the period

$

13


$

14


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).



33

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 March 31

2016

2015

(In millions, except per share amounts)

Numerator:

Income from continuing operations

$

273


$

236


Preferred stock dividends

(16

)

(16

)

Income from continuing operations available to common shareholders

257


220


Income (loss) from discontinued operations, net of tax

-


(2

)

Net income available to common shareholders

$

257


$

218


Denominator:

Weighted-average common shares outstanding-basic

1,286


1,346


Potential common shares

5


12


Weighted-average common shares outstanding-diluted

1,291


1,358


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

Basic

$

0.20


$

0.16


Diluted

0.20


0.16


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

Basic

0.00


(0.00

)

Diluted

0.00


(0.00

)

Earnings per common share (1) :

Basic

0.20


0.16


Diluted

0.20


0.16


________

(1)

 Certain per share amounts may not appear to reconcile due to rounding.

For earnings (loss) per common share from discontinued operations, basic and diluted weighted-average common shares outstanding are the same for the three months ended March 31, 2015 due to a net loss.

The effect from the assumed exercise of 30 million and 28 million stock options for the three months ended March 31, 2016 and 2015, respectively, 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 of Directors; 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 of Directors, 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



34

Table of Contents



number of remaining share equivalents available for future issuance under the 2015 LTIP was approximately 55 million at March 31, 2016 .

STOCK OPTIONS

The following table summarizes the activity related to stock options:

Three Months Ended March 31

2016

2015

Number of

Options

Weighted-Average

Exercise Price

Number of

Options

Weighted-Average

Exercise Price

Outstanding at beginning of period

19,350,157


$

21.06


25,316,676


$

23.07


Granted

-


-


-


-


Exercised

(39,823

)

7.00


(42,056

)

7.00


Forfeited or expired

(65,381

)

29.18


(4,867,902

)

33.77


Outstanding at end of period

19,244,953


$

21.06


20,406,718


$

20.98


Exercisable at end of period

19,244,953


$

21.06


20,406,718


$

20.98


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:

Three Months Ended March 31

2016

2015

Number of

Shares

Weighted-Average

Grant Date Fair Value

Number of

Shares

Weighted-Average
Grant Date Fair Value

Non-vested at beginning of period

16,374,242


$

9.51


18,427,409


$

8.07


Granted

23,835


9.44


454,147


5.88


Vested

(535,111

)

9.42


(591,101

)

6.15


Forfeited

(529,771

)

8.89


(152,044

)

8.06


Non-vested at end of period

15,333,195


$

9.54


18,138,411


$

8.13




35

Table of Contents



NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFITS

Regions has a defined benefit pension plan qualified under the Internal Revenue Code covering only certain employees as the pension plan is 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 Plan

Non-qualified Plans

Total

Three Months Ended March 31

2016

2015

2016

2015

2016

2015

(In millions)

Service cost

$

9


$

10


$

1


$

1


$

10


$

11


Interest cost

18


21


1


1


19


22


Expected return on plan assets

(36

)

(36

)

-


-


(36

)

(36

)

Amortization of actuarial loss

8


11


1


1


9


12


Amortization of prior service cost

-


-


-


-


-


-


Net periodic pension cost

$

(1

)

$

6


$

3


$

3


$

2


$

9


On December 31, 2015, Regions changed the basis for determining the assumption used to estimate the service and interest components of net periodic pension costs for pension and other postretirement benefits. This change provides a more precise measurement of service and interest costs and resulted in an immaterial impact to the pension benefit obligation as of December 31, 2015. Additionally, Regions separated the Regions Financial Corporation Retirement Plan into two plans, effective January 1, 2016, creating a new plan primarily for participants who were actively employed as of that date. The corresponding assets and liabilities of these participants will be transferred to the new plan in 2016. All other participants will remain in the existing plan. See Note 18 "Employee Benefit Plans" of the Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion.

Regions' policy for funding the qualified pension plan is to contribute annually at least the amount required by the IRS minimum funding standards. Regions made no contribution to the plan during the first three months of 2016.

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 three months ended March 31, 2016 or 2015 .



36

Table of Contents



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 March 31, 2016 and December 31, 2015 .

March 31, 2016

December 31, 2015

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

$

2,612


$

20


$

50


$

2,450


$

5


$

27


Derivatives in cash flow hedging relationships:

Interest rate swaps

9,800


219


3


9,800


109


9


Total derivatives designated as hedging instruments

$

12,412


$

239


$

53


$

12,250


$

114


$

36


Derivatives not designated as hedging instruments:

Interest rate swaps

$

41,306


$

692


$

694


$

40,612


$

496


$

528


Interest rate options

4,001


24


2


3,441


11


1


Interest rate futures and forward commitments

19,884


10


10


17,288


5


6


Other contracts

4,268


150


149


4,367


200


187


Total derivatives not designated as hedging instruments

$

69,459


$

876


$

855


$

65,708


$

712


$

722


Total derivatives

$

81,871


$

1,115


$

908


$

77,958


$

826


$

758


_________

(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, 2015 , 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.

Regions recognized an unrealized after-tax gain of $84 million and $25 million in accumulated other comprehensive income (loss) at March 31, 2016 and 2015 , respectively, related to terminated cash flow hedges of loan and debt instruments, which will



37

Table of Contents



be amortized into earnings in conjunction with the recognition of interest payments through 2025. Regions recognized pre-tax income of $12 million and $11 million during the three months ended March 31, 2016 and 2015 , respectively, related to the amortization of cash flow hedges of loan and debt instruments.

Regions expects to reclassify out of accumulated other comprehensive income (loss) and into earnings approximately $126 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 $41 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 ten years as of March 31, 2016 .

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 March 31

Three Months Ended March 31

2016

2015

2016

2015

(In millions)

(In millions)

Fair Value Hedges:

Interest rate swaps on:

Debt/CDs

$

4


$

4


Interest expense

$

(1

)

$

4


Debt/CDs

15


7


Other non-interest expense

(15

)

(7

)

Securities available for sale

(3

)

(4

)

Interest income

-


-


Securities available for sale

(26

)

(20

)

Other non-interest expense

25


19


Total

$

(10

)

$

(13

)

$

9


$

16


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 March 31

Three Months Ended March 31

2016

2015

2016

2015

(In millions)

(In millions)

Cash Flow Hedges:

Interest rate swaps

$

141


$

37


Interest income on loans

$

39


$

33


Forward starting swaps

-


-


Interest expense on debt

-


-


Total

$

141


$

37


$

39


$

33


______

(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 March 31, 2016 and December 31, 2015 , Regions had $809 million and $322 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



38

Table of Contents



in mortgage income. Commercial mortgage loans held for sale are recorded at the lower of cost or market. At March 31, 2016 and December 31, 2015 , Regions had $1.1 billion and $666 million , respectively, in total notional amount 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 market 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 consolidated statements of income effect of changes in the fair value of its residential MSRs. As of March 31, 2016 and December 31, 2015 , the total notional amount related to these contracts was $4.0 billion and $3.6 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 months ended March 31, 2016 and 2015 :

Three Months Ended March 31

Derivatives Not Designated as Hedging Instruments

2016

2015

(In millions)

Capital markets fee income and other (1) :

Interest rate swaps

$

4


$

4


Interest rate options

10


-


Interest rate futures and forward commitments

1


(1

)

Other contracts

(12

)

4


Total capital markets fee income and other

3


7


Mortgage income:

Interest rate swaps

29


13


Interest rate options

5


7


Interest rate futures and forward commitments

2


4


Total mortgage income

36


24


$

39


$

31


______

(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 March 31, 2016 and December 31, 2015 , totaled approximately $624 million and $406 million , respectively. This amount represents 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 when the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2016 and 2020. Credit derivatives whereby Regions has sold credit protection have maturities between 2016 and 2025. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when 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 March 31, 2016 was approximately $138 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 March 31, 2016 and 2015 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.



39

Table of Contents



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 value of all derivative instruments with any credit-risk-related contingent features that were in a liability position on March 31, 2016 and December 31, 2015 , was $202 million and $180 million , respectively, for which Regions had posted collateral of $198 million and $180 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 March 31, 2016 and December 31, 2015 .

Offsetting Derivative Assets

Offsetting Derivative Liabilities

March 31, 2016

December 31, 2015

March 31, 2016

December 31, 2015

(In millions)

Gross amounts subject to offsetting

$

895


$

718


$

736


$

677


Gross amounts not subject to offsetting

220


108


172


81


Gross amounts recognized

1,115


826


908


758


Gross amounts offset in the consolidated balance sheets (1)

469


409


614


558


Net amounts presented in the consolidated balance sheets

646


417


294


200


Gross amounts not offset in the consolidated balance sheets:

Financial instruments

5


5


51


50


Cash collateral received/posted

17


6


40


52


Net amounts

$

624


$

406


$

203


$

98


________

(1)

At March 31, 2016 , gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $103 million and cash collateral posted of $247 million . At December 31, 2015 , gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $108 million and cash collateral posted of $256 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, 2015 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 three month periods ended March 31, 2016 and 2015 . 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 security. Such transfers are accounted for as if they occur at the beginning of a reporting period.



40

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 March 31, 2016 and December 31, 2015 :

March 31, 2016

December 31, 2015

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

$

110


$

-


$

-


$

110


$

110


$

-


$

33


$

143


Securities available for sale:

U.S. Treasury securities

$

236


$

-


$

-


$

236


$

228


$

-


$

-


$

228


Federal agency securities

-


217


-


217


-


218


-


218


Obligations of states and political subdivisions

-


1


-


1


-


1


-


1


Mortgage-backed securities (MBS):

Residential agency

-


16,461


-


16,461


-


16,062


-


16,062


Residential non-agency

-


-


5


5


-


-


5


5


Commercial agency

-


2,998


-


2,998


-


3,018


-


3,018


Commercial non-agency

-


1,214


-


1,214


-


1,231


-


1,231


Corporate and other debt securities

-


1,647


3


1,650


-


1,664


3


1,667


Equity securities

313


-


-


313


280


-


-


280


Total securities available for sale

$

549


$

22,538


$

8


$

23,095


$

508


$

22,194


$

8


$

22,710


Mortgage loans held for sale

$

-


$

322


$

-


$

322


$

-


$

353


$

-


$

353


Residential mortgage servicing rights

$

-


$

-


$

239


$

239


$

-


$

-


$

252


$

252


Derivative assets:

Interest rate swaps

$

-


$

931


$

-


$

931


$

-


$

610


$

-


$

610


Interest rate options

-


3


21


24


-


1


10


11


Interest rate futures and forward commitments

-


10


-


10


-


5


-


5


Other contracts

-


150


-


150


-


200


-


200


Total derivative assets

$

-


$

1,094


$

21


$

1,115


$

-


$

816


$

10


$

826


Derivative liabilities:

Interest rate swaps

$

-


$

747


$

-


$

747


$

-


$

564


$

-


$

564


Interest rate options

-


2


-


2


-


1


-


1


Interest rate futures and forward commitments

-


10


-


10


-


6


-


6


Other contracts

-


149


-


149


-


187


-


187


Total derivative liabilities

$

-


$

908


$

-


$

908


$

-


$

758


$

-


$

758


Nonrecurring fair value measurements

Loans held for sale

$

-


$

-


$

8


$

8


$

-


$

-


$

36


$

36


Foreclosed property and other real estate

-


31


9


40


-


30


8


38


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 Asset and Liability Management Committee of the Company in a holistic approach to managing price fluctuation risks.



41

Table of Contents



The following tables illustrate a rollforward for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and 2015 . 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 March 31, 2016 and 2015 are not material.

Three Months Ended March 31, 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 March 31, 2016

Included

in

Earnings

Included

in Other

Compre-

hensive

Income

(Loss)

(In millions)

Level 3 Instruments Only

Trading account securities

$

33


(2

)

(1) 

-


-


(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


Residential mortgage servicing rights

$

252


(44

)

(2) 

-


31


-


-


-


-


-


$

239


Total derivatives, net

$

10


38


(3) 

-


-


-


-


(27

)

-


-


$

21


Three Months Ended March 31, 2015

Opening
Balance
January 1, 2015

Total Realized /
Unrealized
Gains or Losses

Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

Transfers
out of
Level 3

Closing
Balance
March 31, 2015

Included
in Earnings

Included
in Other
Compre-
hensive
Income
(Loss)

(In millions)

Level 3 Instruments Only

Securities available for sale:

Residential non-agency MBS

$

8


-


-


-


-


-


(1

)

-


-


$

7


Corporate and other debt securities

3


-


-


-


-


-


-


-


-


3


Total securities available for sale

$

11


-


-


-


-


-


(1

)

-


-


$

10


Residential mortgage servicing rights

$

257


(25

)

(2) 

-


7


-


-


-


-


-


$

239


Total derivatives, net

$

8


28


(2) 

-


-


-


-


(22

)

-


-


$

14


_________

(1) Included in capital markets fee income and other.

(2) Included in mortgage income.

(3) Approximately $9 million was included in capital markets fee income and other and $29 million was included in mortgage income.

The following table presents the fair value adjustments related to non-recurring fair value measurements:

Three Months Ended March 31

2016

2015

(In millions)

Loans held for sale

$

(4

)

$

(7

)

Foreclosed property and other real estate

(7

)

(7

)



42

Table of Contents



The following tables present detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2016 , and December 31, 2015 . 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 March 31, 2016 , and December 31, 2015 , are included. Following the tables are a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

March 31, 2016

Level 3
Estimated Fair Value at
March 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

$5

Discounted cash flow

Spread to LIBOR

5.5% - 70.1% (23.0%)

Weighted-average prepayment speed (CPR; percentage)

4.5% - 15.1% (9.6%)

Probability of default

3.3%

Loss severity

64.3%

Corporate and other debt securities

$3

Market comparable

Evaluated quote on same issuer/comparable bond

100.2%

Residential mortgage servicing rights (1)

$239

Discounted cash flow

Weighted-average prepayment speed (CPR; percentage)

12.2% - 14.6% (14.3%)

Option-adjusted spread (percentage)

8.7% - 13.4% (9.9%)

Derivative assets:

Interest rate options

$13

Interest rate lock commitments on the residential mortgage loans are valued using discounted cash flows

Weighted-average prepayment speed (CPR; percentage)

12.2% - 14.6% (14.3%)

Option-adjusted spread (percentage)

8.7% - 13.4% (9.9%)

Pull-through

20.0% - 99.4% (83.0%)

$8

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

$8

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)

21.6% - 84.3% (65.6%)

Foreclosed property and other real estate

$3

 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% - 66.1% (33.5%)

$6

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)

4.4% - 50.6% (30.5%)

_________

(1) See Note 5 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.



43

Table of Contents




December 31, 2015

Level 3
Estimated Fair Value at
December 31, 2015

Valuation

Technique

Unobservable

Input(s)

Quantitative Range of

Unobservable Inputs and

(Weighted-Average)

(Dollars in millions)

Recurring fair value measurements:

Trading account securities

$33

Market comparable

Spread from US High Yield B Effective Yield Index

4.7%

Securities available for sale:

Residential non-agency MBS

$5

Discounted cash flow

Spread to LIBOR

5.5% - 70.1% (23.0%)

Weighted-average prepayment speed (CPR; percentage)

5.6% - 11.9% (9.9%)

Probability of default

2.2%

Loss severity

74.3%

Corporate and other debt securities

$3

Market comparable

Evaluated quote on same issuer/comparable bond

100.2%

Residential mortgage servicing rights (1)

$252

Discounted cash flow

Weighted-average prepayment speed (CPR; percentage)

10.5% - 11.5% (10.9%)

Option-adjusted spread (percentage)

8.7% - 13.3% (10.0%)

Derivative assets:

Interest rate options

$9

Interest rate lock commitments on the residential loans are valued using discounted cash flows

Weighted-average prepayment speed (CPR; percentage)

10.5% - 11.5% (10.9%)

Option-adjusted spread (percentage)

8.7% - 13.3% (10.0%)

Pull-through

18.9% - 99.4% (80.7%)

$1

Interest rate lock commitments on the commercial mortgage loans are valued using discounted cash flows

Internal rate of return

12.0%

Nonrecurring fair value measurements:

Loans held for sale

$36

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)

11.1% - 85.7% (69.0%)

Foreclosed property and other real estate

$5

 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% - 44.0% (30.3%)

$3

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)

3.0% - 58.8% (39.2%)

_________

(1) See Note 7 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2015 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.




44

Table of Contents



RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Trading account securities

The fair value in this category relates to high yield corporate securities. Significant unobservable inputs include the spread to High Yield Index. A significant increase in this input would result in significantly lower fair value measurement.

Securities available for sale

Mortgage-backed securities: residential non-agency -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.

Residential mortgage servicing rights

The significant unobservable inputs used in the fair value measurement of residential MSRs are OAS and prepayment speed. 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, prepayment speeds, and pull-through. The impact of OAS and prepayment speed 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 rates 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.

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 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.



45

Table of Contents



FAIR VALUE OPTION

Regions has elected the fair value option for all FNMA and FHLMC eligible residential 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 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.

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:

March 31, 2016

December 31, 2015

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

$

322


$

308


$

14


$

353


$

341


$

12


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 resulting from changes in fair value of these loans, which were recorded in mortgage income in the consolidated statements of income during the three months ended March 31, 2016 and 2015 . 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.

Mortgage loans held for sale, at fair value

Three Months Ended March 31

2016

2015

(In millions)

Net gains (losses) resulting from changes in fair value

$

2


$

(4

)

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 March 31, 2016 are as follows:

March 31, 2016

Carrying

Amount

Estimated

Fair

Value (1)

Level 1

Level 2

Level 3

(In millions)

Financial assets:

Cash and cash equivalents

$

4,390


$

4,390


$

4,390


$

-


$

-


Trading account securities

110


110


110


-


-


Securities held to maturity

1,901


1,953


1


1,952


-


Securities available for sale

23,095


23,095


549


22,538


8


Loans held for sale

351


351


-


322


29


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

79,505


75,345


-


-


75,345


Other earning assets (4)

771


771


-


771


-


Derivative assets

1,115


1,115


-


1,094


21


Financial liabilities:

Derivative liabilities

908


908


-


908


-


Deposits

98,154


98,240


-


98,240


-


Long-term borrowings

7,851


8,103


-


3,056


5,047


Loan commitments and letters of credit

87


520


-


-


520


Indemnification obligation

73


62


-


-


62




46

Table of Contents



_________

(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 March 31, 2016 was $4.2 billion or 5.2 percent.

(3)

Excluded from this table is the capital lease carrying amount of $950 million at March 31, 2016 .

(4)

Excluded from this table is the operating lease carrying amount of $ 803 million at March 31, 2016 .


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, 2015 are as follows:

December 31, 2015

Carrying

Amount

Estimated

Fair

Value (1)

Level 1

Level 2

Level 3

(In millions)

Financial assets:

Cash and cash equivalents

$

5,314


$

5,314


$

5,314


$

-


$

-


Trading account securities

143


143


110


-


33


Securities held to maturity

1,946


1,969


1


1,968


-


Securities available for sale

22,710


22,710


508


22,194


8


Loans held for sale

448


448


-


353


95


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

79,140


75,399


-


-


75,399


Other earning assets (4)

818


818


-


818


-


Derivative assets

826


826


-


816


10


Financial liabilities:

Derivative liabilities

758


758


-


758


-


Deposits

98,430


98,464


-


98,464


-


Short-term borrowings

10


10


-


10


-


Long-term borrowings

8,349


8,615


-


5,775


2,840


Loan commitments and letters of credit

85


495


-


-


495


Indemnification obligation

77


67


-


-


67


_________

(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, 2015 was $3.7 billion or 4.7 percent.

(3)

Excluded from this table is the capital lease carrying amount of $916 million at December 31, 2015 .

(4)

Excluded from this table is the operating lease carrying amount of $834 million at December 31, 2015.



47

Table of Contents



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. During the first quarter of 2016, Regions reorganized its internal management structure and, accordingly, its segment reporting structure. Under the organizational realignment, Regions will continue to operate with the same three reporting units with the Relationship Management component of Business Banking moving to the Corporate Bank and the Branch Small Business component of Business Banking remaining part of the Consumer Bank. Previously, all of Business Banking was included within the Consumer Bank. The Wealth Management segment remained unchanged during the organizational realignment. Additionally, in prior years the provision for loan losses was allocated to each segment based on actual net charge-offs that had been recognized by the segment. During the first quarter of 2016, Regions began allocating the provision for loan losses to each segment using an estimated loss methodology with the difference between the consolidated provision for loan losses and the segments' estimated loss reflected in Other. Lastly, allocations of operational and overhead cost pools among the segments were modified during the first quarter of 2016 to better align the total costs to support each segment in accordance with the reorganized management structure. Segment results for all periods presented have been recast to reflect this organizational realignment, as well as the provision for loan losses methodology change and the cost allocation modifications. Additional information about the Company's reportable segments is included in Regions' Annual Report on Form 10-K for the year ended December 31, 2015.

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.

Three Months Ended March 31, 2016

Corporate Bank

Consumer

Bank

Wealth

Management

Other

Continuing

Operations

Discontinued

Operations

Consolidated

(In millions)

Net interest income and other financing income (loss)

$

374


$

505


$

45


$

(62

)

$

862


$

-


$

862


Provision (credit) for loan losses

72


71


6


(36

)

113


-


113


Non-interest income

131


258


108


9


506


-


506


Non-interest expense

210


511


111


37


869


-


869


Income (loss) before income taxes

223


181


36


(54

)

386


-


386


Income tax expense (benefit)

85


69


13


(54

)

113


-


113


Net income (loss)

$

138


$

112


$

23


$

-


$

273


$

-


$

273


Average assets

$

54,709


$

33,941


$

3,232


$

34,078


$

125,960


$

-


$

125,960




48

Table of Contents



Three Months Ended March 31, 2015

Corporate Bank

Consumer Bank

Wealth

Management

Other

Continuing

Operations

Discontinued

Operations

Consolidated

(In millions)

Net interest income and other financing income (loss)

$

375


$

505


$

43


$

(108

)

$

815


$

-


$

815


Provision (credit) for loan losses

73


68


6


(98

)

49


-


49


Non-interest income

99


256


100


15


470


-


470


Non-interest expense

212


508


109


76


905


4


909


Income (loss) before income taxes

189


185


28


(71

)

331


(4

)

327


Income tax expense (benefit)

72


70


11


(58

)

95


(2

)

93


Net income (loss)

$

117


$

115


$

17


$

(13

)

$

236


$

(2

)

$

234


Average assets

$

52,407


$

32,932


$

3,154


$

32,073


$

120,566


$

-


$

120,566


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:

March 31, 2016

December 31, 2015

(In millions)

Unused commitments to extend credit

$

44,957


$

45,516


Standby letters of credit

1,440


1,477


Commercial letters of credit

72


63


Liabilities associated with standby letters of credit

32


32


Assets associated with standby letters of credit

33


33


Reserve for unfunded credit commitments

53


52


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, its affiliates and subsidiaries, and current and former officers, directors and employees, are sometimes collectively referred to as Regions and certain Related Persons. Regions and its subsidiaries are subject to loss contingencies related to litigation,



49

Table of Contents



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 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 $73 million and an estimated fair value of approximately $62 million as of March 31, 2016 (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 it is reasonably possible that it may experience losses in excess of what Regions has accrued in an aggregate amount up to approximately $ 40 million as of March 31, 2016 , with it also being reasonably possible that Regions could incur no losses in excess of amounts accrued. However, as available information changes, the matters for which Regions is able to estimate, as well as the estimates themselves will be adjusted accordingly. The reasonably possible estimate includes legal contingencies that are subject to the indemnification agreement with Raymond James.

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 provided above may not include an estimate for every matter disclosed below.

Beginning in December 2007, Regions and certain of its affiliates were named in class-action lawsuits filed in federal and state courts on behalf of investors who purchased shares of certain Regions Morgan Keegan Select Funds (the "Funds") and stockholders of Regions. These class-action lawsuits have all been resolved among the parties. Court approvals for settlements in the open-end Funds class action and for the investors represented by the Trustee Ad Litem are being sought. Certain of the shareholders in these Funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating in the class actions. These lawsuits and proceedings are subject to the indemnification agreement with Raymond James discussed above.

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 have filed an appeal. This matter is subject to the indemnification agreement with Raymond James.

The Securities and Exchange Commission and states of Missouri and Texas conducted investigations regarding alleged securities law violations by Morgan Keegan in the underwriting and sale of $39 million in municipal bonds. An enforcement action brought by the Missouri Secretary of State in April 2013, seeking monetary penalties and other relief, was dismissed and refiled in November 2013. Additionally a class action was brought on behalf of retail purchasers of the bonds in September 2012, seeking unspecified compensatory and punitive damages. The parties agreed to settlement terms in January 2015, and the U.S. District Court for the Western District of Missouri approved the settlement on October 2, 2015. An agreement in principle was reached with the Missouri Secretary of State in December 2015, and settlement terms were finalized in February 2016. These matters are all subject to the indemnification agreement with Raymond James.

A previously dismissed shareholder derivative action was refiled in June 2015. The original action alleged mismanagement, waste of corporate assets, breach of fiduciary duty and unjust enrichment relating to bonuses and other benefits received by



50

Table of Contents



executive management. The named defendants filed an opposition to the action, and on April 5, 2016, the court dismissed the action with prejudice. On May 5, 2016, plaintiffs filed a motion asking the court to reconsider the dismissal.

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.    

In 2013, Regions received investigative requests from the Office of Inspector General of HUD regarding its residential mortgage loan origination, underwriting and quality control practices for FHA insured loans made by Regions. Regions has fully cooperated in this investigation and is in discussions to resolve this inquiry. In September 2014, Regions received an investigative request from the Office of Inspector General of the Federal Housing Finance Agency regarding its residential mortgage loan origination, underwriting and quality control practices for loans Regions sold to Fannie Mae and Freddie Mac. Regions has fully cooperated with the inquiry. Both of these inquiries are part of industry-wide investigations. Many institutions have settled these matters on terms that included large monetary penalties, including, in some cases, civil money penalties under applicable banking laws.

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.

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 within approximately one to two years.

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 March 31, 2016 , the carrying value of the indemnification obligation was approximately $73 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 March 31, 2016, and December 31, 2015, the Company's DUS servicing portfolio totaled approximately $1.1 billion and $1.2 billion , respectively. Regions' maximum quantifiable contingent liability related to its loss share guarantee is approximately $360 million and $356 million at March 31, 2016 and December 31, 2015, 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 balance sheet was approximately $3 million at March 31, 2016, and December 31, 2015. 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, 2015, for additional information.



51

Table of Contents



NOTE 15. RECENT ACCOUNTING PRONOUNCEMENTS    

In February 2015, the FASB issued new accounting guidance that eliminates the consolidation model created specifically for limited partnerships and creates a single model for evaluating consolidation of legal entities. The new guidance does the following: (a) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; (b) eliminates the presumption that a general partner should consolidate a limited partnership; (c) modifies the consolidation analysis for all reporting entities associated with VIEs, particularly those that have fee arrangements and related party relationships; and (d) provides a scope exception from the consolidation guidance for reporting entities with interests in legal entities that are similar to investment companies as defined in the Investment Company Act of 1940. The guidance became effective for annual and interim periods beginning after December 15, 2015, and was adopted by Regions for financial reporting beginning with the first quarter of 2016. This guidance did not have a material impact upon adoption.

In April 2015, the FASB issued new accounting guidance that requires entities to present debt issuance costs related to a recognized liability as a direct deduction from the carrying amount of the debt liability. The new guidance is similar to existing presentation requirements for debt discounts and does not affect entities' recognition and measurement of debt issuance costs. Previously, entities were required to present debt issuance costs as deferred charges in the asset section of the balance sheet. The guidance became effective for annual and interim periods beginning after December 15, 2015, and was adopted by Regions for financial reporting beginning with the first quarter of 2016. All entities should apply the guidance on a retrospective basis and provide the required disclosures for a change in accounting principle in the period of adoption. Because the impact of this guidance was not material to prior periods, retrospective application and the related disclosures were not necessary for Regions.

In April 2015, the FASB issued new accounting guidance on the accounting for fees paid in a cloud computing arrangement. The standard provides guidance on how customers should evaluate whether such arrangements contain a software license that should be accounted for separately. A customer that determines a cloud computing arrangement contains a software license must account for the license consistently with the acquisition of other software licenses. If an arrangement does not contain a software license, the customer is required to account for it as a service contract. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. The guidance became effective for annual and interim periods beginning after December 15, 2015, and was adopted by Regions for financial reporting beginning with the first quarter of 2016. Regions elected to apply the guidance prospectively to all cloud computing arrangements entered into or materially modified after the effective date. This guidance did not have a material impact upon adoption.

In May 2015, the FASB issued new accounting guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient pursuant to previous guidance. The guidance became effective for annual and interim periods beginning after December 15, 2015, and was adopted by Regions for financial reporting beginning with the first quarter of 2016. All entities should apply the guidance on a retrospective basis. This guidance did not have a material impact upon adoption and therefore retrospective application was not necessary for Regions.

In July 2015, the FASB issued new accounting guidance to reduce the complexity in employee benefit plan accounting. The standard provides three parts to simplify the process. Part I notes that fully benefit-responsive investment contracts will be measured, presented and disclosed only at contract value, and plans are no longer required to reconcile contract value to fair value. Part II simplifies the disclosure of plan investments by allowing the following: (a) plan assets will be grouped and disclosed by general type either on the face of the financial statements or in the notes, and will no longer be disaggregated in multiple ways; (b) plans are no longer required to disclose individual plan assets that constitute five percent or more of net assets available for benefits; (c) the net appreciation or depreciation in investments for the period will be presented in aggregate and is no longer required to be disaggregated and disclosed by general type; and (d) plans with investment funds measured using the net asset value per share practical expedient will no longer be required to disclose the investment's strategy. Part III allows a measurement date practical expedient and permits plans to measure investments and investment-related accounts as of a month-end that is closest to the plan's fiscal year-end when the fiscal year-end does not coincide with a month-end. The guidance became effective for fiscal years beginning after December 15, 2015 and was adopted by Regions for financial reporting beginning in the first quarter of 2016. Entities should apply the amendments in Parts I and II retrospectively for all financial statements presented and should apply the amendments in Part III prospectively. This guidance did not have a material impact upon adoption.

In August 2015, the FASB issued a standard that defers the effective date of the new revenue recognition standard, issued in May 2014, by one year. The new revenue recognition standard is discussed in the Annual Report on Form 10-K for the year ended December 31, 2014. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of the date of the original effective date, for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Regions is in the process of reviewing the potential impact the adoption of this guidance will have to its consolidated financial statements.

In September 2015, the FASB issued new accounting guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The following key changes were made: (a) acquirers will recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition



52

Table of Contents



date; (b) acquirers will disclose the amounts and reasons for adjustments to the provisional amounts; and (c) acquirers will disclose, by line item, the amount of the adjustment reflected in the current period income statement that would have been recognized in previous periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance became effective for annual and interim periods beginning after December 15, 2015, and was adopted by Regions for financial reporting beginning with the first quarter of 2016. This guidance did not have a material impact upon adoption.

In January 2016, the FASB issued accounting guidance on the recognition and measurement of financial assets and financial liabilities that supersedes existing guidance.  The new guidance: (a) requires equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in the fair value recognized through net income; (b) simplifies the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) 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 in accordance with the fair value option for financial instruments; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets.  This guidance is effective for annual and interim periods beginning after December 15, 2017.  Early adoption is not permitted except for the amendment related to separate presentation in other comprehensive income discussed above in (e).  Entities should apply the amendments by means of cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.  The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption.  Regions is evaluating the impact to its consolidated financial statements upon adoption.    

In February 2016, the FASB issued accounting guidance intended to improve the understanding and comparability of financial statements by providing users with more information relating primarily to a lessee's leasing activities. There are no significant changes expected to the income statement but lessees will be required 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.  Management will also be required under the new guidance to make significant judgments regarding the likelihood of exercising lease renewal or extension options in order to determine the appropriate lease term and amount of future minimum lease payments.  While the new guidance removes the current bright lines used to classify leases, the criteria are largely similar to current lease accounting.  Additionally, the new standard substantially changes sale-leaseback accounting requiring the lessee to record a right-of-use asset and aligning sale criteria with revenue recognition guidance.  This guidance expands both quantitative and qualitative required disclosures in order to provide financial statement users information on the timing, amount, and uncertainty of future cash flows from leases.  The revised leasing guidance is effective for fiscal years and interim periods beginning after December 15, 2018, with early application permitted. Regions is evaluating the impact to its consolidated financial statements upon adoption.

In March 2016, the FASB issued accounting guidance that clarifies and enhances the implementation guidance on principal versus agent considerations within the new revenue recognition standard . The amendments are as follows: (a) clarification regarding how an entity should identify the unit of accounting for the principal versus agent evaluation; (b) clarification regarding how the control principle applies to transactions such as service arrangements; (c) control indicators reframed to focus on evidence of a principal relationship rather than an agency relationship, as well as clarification added regarding the relationship between the control principle and the indicators; and (d) revisions to the examples presented in current guidance as well as the addition of new examples. The guidance is effective for annual and interim periods beginning after December 15, 2017. Regions is evaluating the impact to its consolidated financial statements upon adoption.

In March 2016, the FASB issued new accounting guidance that addresses how a change in the counterparty to a derivative contract affects a hedging relationship. This guidance clarifies that a novation (defined as replacing one counterparty to a derivative instrument with a new counterparty) of a derivative contract does not, in and of itself, require dedesignation of a hedging relationship or represent a change in the critical terms of the hedge relationship so long as (a) all other hedge accounting criteria are still met, (b) the hedging relationship is expected to remain highly effective, and (c) there are no concerns about the collectability of the derivative's cash flows (i.e. the creditworthiness of the new counterparty is similar to the one being replaced). The guidance is effective for annual and interim periods beginning after December 15, 2016 . The amendments may be applied prospectively or on a modified retrospective basis to all existing and new hedge accounting relationships in which a novation occurs after the effective date of the new guidance. Regions is evaluating the impact to its consolidated financial statements upon adoption.

In March 2016, the FASB issued new accounting guidance that 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. Based on differences in interpretation, some entities have also included an additional assessment, which considers whether the event that triggers the ability to exercise the put or call is indexed only to interest rates or credit risk of the entity. This additional assessment



53

Table of Contents



potentially results in bifurcation of more embedded options than would occur when just applying the decision sequence outlined in the guidance. This guidance should be applied to existing debt instruments on a modified retrospective basis and is effective for annual, and interim periods therein, beginning after December 15, 2016. Regions is evaluating the impact to its consolidated financial statements upon adoption.

In March 2016, the FASB issued new accounting guidance that 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. Currently, an entity must retrospectively adjust the investment, results of operations, and retained earnings as if the equity method had been in effect during all previous periods the investment was held. By eliminating this requirement, the FASB expects to reduce the cost and complexity when transitioning to the equity method. The guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.

In March 2016, the FASB issued new accounting guidance that intends to improve and simplify accounting for employee shared-based payments. The new guidance: (a) eliminates additional paid-in capital pools and designates that all excess tax benefits and deficiencies should be recorded in the income statement as income tax expense or benefit when the awards vest or are settled; entities should account for these income tax effects as discrete items in the reporting period in which they occur and exclude them from the estimated annual effective tax rate; (b) increases the permitted tax withholding limits from the employer's statutory minimum rate to the employee's maximum statutory rate before triggering liability classification; (c) changes the classification of excess tax benefits from a financing activity to an operating activity; (d) clarifies that cash paid to a tax authority when shares are withheld to satisfy an employer's statutory income tax withholding obligation is a financing activity; (e) allows an entity to make an entity-wide accounting policy election to either account for forfeitures based on the number of awards that are expected to vest or account for forfeitures as they occur. The guidance is effective for interim and annual periods beginning after December 31, 2016. The method of accounting application (i.e. prospective, retrospective or modified retrospective application) differs by amendment and is defined in the guidance. Early adoption is permitted, but entities must adopt all of the guidance in the same period. Regions is evaluating the impact to its consolidated financial statements upon adoption.






54

Table of Contents



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, 2015 , 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 months ended March 31, 2016 compared to the three months ended March 31, 2015 for the consolidated statements of income. For the consolidated balance sheet, the emphasis of this discussion will be the balances as of March 31, 2016 compared to December 31, 2015 .

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 3 and 4 for additional information regarding forward-looking statements.

CORPORATE PROFILE

Regions is a financial holding company headquartered in Birmingham, Alabama, which 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, 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 March 31, 2016 , Regions operated 1,605 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.

FIRST QUARTER OVERVIEW

Regions reported net income available to common shareholders of $257 million , or $0.20 per diluted share, in the first quarter of 2016 compared to $218 million , or $0.16 per diluted share, in the first quarter of 2015 . Net income available to common shareholders from continuing operations was $257 million, or $0.20 per diluted share, compared to $220 million, or $0.16 per diluted share, over these same periods. The primary drivers of the increase in results from the prior year period were increased net interest income and other financing income, combined with increases in non-interest income and decreases in non-interest expenses. These positive results were partially offset by the additional provision for loan losses.



55

Table of Contents



For the first quarter of 2016 , net interest income and other financing income (taxable-equivalent basis) from continuing operations totaled $883 million , up $51 million compared to the first quarter of 2015 . The net interest margin (taxable-equivalent basis) was 3.19 percent for the first quarter of 2016 and 3.18 percent in the first quarter of 2015 . Although the average balances of securities and other earning assets increased in the first quarter of 2016 compared to the first quarter of 2015 , their yields declined. Loan yields and rates paid on interest-bearing liabilities remained flat period over period. Total deposit costs were 11 basis points for the first quarter of 2016 and 12 basis points for the first quarter of 2015 . Total funding costs, which include deposits, short-term borrowings and long-term debt, were 28 basis points for the first quarter of 2016 , as compared to 29 basis points for the first quarter of 2015 , reflecting continued liability management efforts implemented by the Company.

The provision for loan losses totaled $113 million in the first quarter of 2016 compared to $49 million during the first quarter of 2015 . The increase in provision expense during the first quarter of 2016 compared to the 2015 period was primarily attributable to an increase in the allowance for loan losses for energy related loans (refer to "Table 3 - Selected Industry Exposure" and the discussion immediately following the table for additional energy related disclosures). Given the current phase of the credit cycle, 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 first quarter of 2016 , compared to $54 million, or an annualized 0.28 percent for the first quarter of 2015 . Net charge-offs were higher across most major loan categories, other than investor real estate, when comparing the first quarter of 2016 period to the prior year period.

The allowance for loan losses at March 31, 2016 , was 1.41 percent of total loans, net of unearned income, compared to 1.36 percent at December 31, 2015 . Total non-performing assets were $1.1 billion at March 31, 2016 , compared to $920 million at December 31, 2015 . Continued low oil prices prompted a number of large energy credits to be downgraded during the first quarter of 2016 causing the increase in non-performing assets.

Non-interest income from continuing operations was $506 million for the first quarter of 2016 compared to $470 million for the first quarter of 2015 . This increase was driven by increases in capital markets fee income, bank-owned life insurance, card and ATM fees and net revenue from affordable housing. These increases were offset by decreases in securities gains and other miscellaneous income. See Table 21 "Non-Interest Income from Continuing Operations" for more detail.

Total non-interest expense from continuing operations was $869 million in the first quarter of 2016 , a $36 million decrease from the first quarter of 2015 , driven primarily by a $43 million loss on early extinguishment of debt incurred in the first quarter of 2015, combined with decreased branch consolidation, property and equipment charges in 2016. These decreases were offset by increases in salaries and employee benefits as a result of severance related expenses and higher base salaries and incentives. See Table 22 "Non-Interest Expense from Continuing Operations" for more detail.

Income tax expense from continuing operations for the three months ended March 31, 2016 was $113 million compared to income tax expense of $95 million for the same period in 2015 . Income tax expense was higher in the current period primarily due to discrete tax benefits in the prior comparable period.

A discussion of activity within discontinued operations is included at the end of the Management's Discussion and Analysis section of this report.

2016 Expectations

Management expectations for 2016 are noted below:

Average loan growth of 3 percent to 5 percent compared to fourth quarter of 2015 average balances

Average deposit growth of 2 percent to 4 percent compared to fourth quarter of 2015 average balances

Net interest income and other financing income up 2 percent to 4 percent on a full year basis commensurate with average loan growth expectations

Adjusted non-interest income (non-GAAP) up 4 percent to 6 percent on a full year basis

Plan to eliminate $300 million of existing non-interest expenses between 2016 and 2018 in order to self-fund new initiatives; expect to achieve 35 percent to 45 percent of that reduction in 2016

Adjusted non-interest expenses (non-GAAP) flat to up modestly on a full year basis

Full year adjusted efficiency ratio (non-GAAP) less than 63 percent

Adjusted operating leverage (non-GAAP) of 2 percent to 4 percent on a full year basis

Net charge-offs of 25 to 35 basis points; given current price of oil, full year expectations are to be at the higher end of the range



56

Table of Contents



For more information related to the Company's 2016 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 $924 million from year-end 2015 to March 31, 2016 , due primarily to a decrease in interest-bearing deposits in other banks as a result of normal day-to-day operating variations. This decrease was offset by a modest increase in cash and due from banks.

SECURITIES

The following table details the carrying values of securities, including both available for sale and held to maturity:

Table 1-Securities

March 31, 2016

December 31, 2015

(In millions)

U.S. Treasury securities

$

237


$

229


Federal agency securities

558


558


Obligations of states and political subdivisions

1


1


Mortgage-backed securities:

Residential agency

17,847


17,491


Residential non-agency

5


5


Commercial agency

3,171


3,194


Commercial non-agency

1,214


1,231


Corporate and other debt securities

1,650


1,667


Equity securities

313


280


$

24,996


$

24,656


Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. Total securities at March 31, 2016 were relatively unchanged from year-end 2015 . 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 $351 million at March 31, 2016 , consisting primarily of $322 million of residential real estate mortgage loans, $7 million of commercial mortgage loans, and $22 million of non-performing loans. At December 31, 2015 , loans held for sale totaled $448 million , consisting of $354 million of residential real estate mortgage loans, $56 million of commercial mortgage loans, and $38 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.



57

Table of Contents



LOANS

Loans, net of unearned income, represented approximately 73 percent of Regions' interest-earning assets at March 31, 2016 . The following table presents the distribution of Regions' loan portfolio by portfolio segment and class, net of unearned income:

Table 2-Loan Portfolio

March 31, 2016

December 31, 2015

(In millions, net of unearned income)

Commercial and industrial

$

36,200


$

35,821


Commercial real estate mortgage-owner-occupied

7,385


7,538


Commercial real estate construction-owner-occupied

346


423


Total commercial

43,931


43,782


Commercial investor real estate mortgage

4,516


4,255


Commercial investor real estate construction

2,554


2,692


Total investor real estate

7,070


6,947


Residential first mortgage

12,895


12,811


Home equity

10,914


10,978


Indirect-vehicles

4,072


3,984


Indirect-other consumer

652


545


Consumer credit card

1,045


1,075


Other consumer

1,027


1,040


Total consumer

30,605


30,433


$

81,606


$

81,162


PORTFOLIO CHARACTERISTICS

The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2015 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 $379 million since year-end driven primarily by Regions' market based corporate and commercial bankers serving middle market clients and the Company's asset based lending and corporate real estate groups. 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. These loans declined $153 million from year-end 2015 as a result of continued customer deleveraging. 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.

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. No single industry exceeded 15 percent of the total commercial portfolio balance at March 31, 2016 or December 31, 2015 .



58

Table of Contents



Table 3-Selected Industry Exposure

March 31, 2016

Loans

Unfunded Commitments

Total Exposure

(In millions)

Administrative, support, waste and repair

$

894


$

539


$

1,433


Agriculture

693


311


1,004


Educational services

1,801


310


2,111


Energy

2,716


2,113


4,829


Financial services  (1)

3,605


3,161


6,766


Government and public sector

2,367


78


2,445


Healthcare

4,206


1,395


5,601


Information

1,186


717


1,903


Manufacturing (1)

4,629


3,639


8,268


Professional, scientific and technical services (1)

1,672


1,198


2,870


Real estate

6,450


4,938


11,388


Religious, leisure, personal and non-profit services

2,153


630


2,783


Restaurant, accommodation and lodging

2,578


644


3,222


Retail trade

2,678


2,495


5,173


Transportation and warehousing (1)

2,143


1,048


3,191


Utilities

1,069


1,791


2,860


Wholesale goods (1)

2,924


2,517


5,441


Other

167


1,769


1,936


Total commercial

$

43,931


$

29,293


$

73,224


December 31, 2015 (2)

Loans

Unfunded Commitments

Total Exposure

(In millions)

Administrative, support, waste and repair

$

901


$

575


$

1,476


Agriculture

747


295


1,042


Educational services

1,846


312


2,158


Energy

2,533


2,461


4,994


Financial services (3)

3,556


2,984


6,540


Government and public sector

2,408


238


2,646


Healthcare

4,322


1,407


5,729


Information

1,281


744


2,025


Manufacturing (3)

4,407


3,938


8,345


Professional, scientific and technical services (3)

1,730


1,114


2,844


Real estate

6,427


5,046


11,473


Religious, leisure, personal and non-profit services

2,165


600


2,765


Restaurant, accommodation and lodging

2,489


633


3,122


Retail trade

2,492


2,507


4,999


Transportation and warehousing (3)

2,228


1,084


3,312


Utilities

1,047


1,674


2,721


Wholesale goods (3)

2,981


2,588


5,569


Other

222


1,600


1,822


Total commercial

$

43,782


$

29,800


$

73,582




59

Table of Contents



________

(1)

Regions' definition of indirect energy-related lending includes certain balances within each of these selected industry categories. As of March 31, 2016, total indirect energy-related loans were approximately $503 million, with approximately $481 million included in commercial loans and $22 million in investor real estate loans. Total unfunded commitments for indirect energy-related lending were $512 million as of March 31, 2016.

(2)

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.

(3)

Regions' definition of indirect energy-related lending includes certain balances within each of these selected industry categories. As of December 31, 2015, total indirect energy-related loans were approximately $519 million, with approximately $497 million included in commercial loans and $22 million in investor real estate loans. Total unfunded commitments for indirect energy-related lending were $446 million as of December 31, 2015.

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 March 31, 2016 amounted to approximately $2.7 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 $503 million at March 31, 2016 . The entire energy-related portfolio, combining direct and indirect loans, was approximately $3.2 billion or 4 percent of total loans at March 31, 2016 (approximately $3.4 billion including energy-related operating leases).

Regions' energy-related portfolio is geographically concentrated primarily in Texas and, to a lesser extent, in South 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. If the current low level of oil prices continues, 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 loan loss allowance and make adjustments as appropriate.

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, 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 increased $123 million from 2015 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 $84 million increase from year-end 2015 , as prepayments have slowed. Approximately $585 million in new loan originations were retained on the balance sheet through the first three months of 2016 .



60

Table of Contents



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 $10.9 billion at March 31, 2016 as compared to $11.0 billion at December 31, 2015 . Substantially all of this portfolio was originated through Regions' branch network.

The following table presents information regarding the future principal payment reset dates for the Company's home equity lines of credit as of March 31, 2016 . 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)

2016

$

20


0.26

%

$

38


0.49

%

$

58


2017

4


0.05


10


0.13


14


2018

13


0.17


20


0.26


33


2019

89


1.16


79


1.02


168


2020

181


2.35


139


1.81


320


2021-2025

1,548


20.11


1,519


19.74


3,067


2026-2030

2,011


26.14


2,023


26.29


4,034


Thereafter

-


-


1


0.02


1


Total

$

3,866


50.24

%

$

3,829


49.76

%

$

7,695


Of the $10.9 billion home equity portfolio at March 31, 2016 , approximately $7.7 billion were home equity lines of credit and $3.2 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in May 2009, new home equity lines of credit have a 10-year draw period and a 10-year repayment period. Previously, the 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 March 31, 2016, 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 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 declined to 2 percent in the residential first mortgage portfolio and to 5 percent in the home equity portfolio at March 31, 2016 .



61

Table of Contents



Table 5-Estimated Current Loan to Value Ranges

March 31, 2016

December 31, 2015

Residential

First Mortgage

Home Equity

Residential

First Mortgage

Home Equity

1st Lien

2nd Lien

1st Lien

2nd Lien

(In millions)

Estimated current loan to value:

Above 100%

$

270


$

118


$

386


$

267


$

127


$

417


80% - 100%

1,743


504


883


1,703


497


886


Below 80%

10,329


5,997


2,734


10,288


5,965


2,785


Data not available

553


104


188


553


107


194


$

12,895


$

6,723


$

4,191


$

12,811


$

6,696


$

4,282


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 increased $88 million from year-end 2015 , reflecting continued growing demand for automobile loans.

Indirect-Other Consumer

Indirect-other consumer lending represents other point of sale lending through third parties. This portfolio class increased $107 million from year-end 2015 primarily due to new point of sale initiatives.

Consumer Credit Card

Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances decreased $30 million from year-end 2015 .

Other Consumer

Other consumer loans primarily include direct consumer loans, overdrafts and other revolving loans. Other consumer loans decreased $13 million from year-end 2015 .

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 revolving accounts and home equity lines of credit and semi-annually for all other consumer loans. Residential first mortgage FICO scores were refreshed in June of 2015. Home equity, indirect, consumer credit card and other consumer FICO scores were refreshed in December of 2015. 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 6 percent of the combined portfolios for both March 31, 2016 and December 31, 2015 .

Table 6-Estimated Current FICO Score Ranges

March 31, 2016

Residential

First Mortgage

Home Equity

Indirect (1)

Consumer

Credit Card

Other

Consumer

1st Lien

2nd Lien

(In millions)

Below 620

$

810


$

292


$

244


$

398


$

58


$

79


620-680

999


545


403


570


157


148


681-720

1,366


799


525


627


242


199


Above 720

8,917


4,908


2,925


2,451


588


533


Data not available

803


179


94


678


-


68


$

12,895


$

6,723


$

4,191


$

4,724


$

1,045


$

1,027




62

Table of Contents



December 31, 2015

Residential

First Mortgage

Home Equity

Indirect (1)

Consumer

Credit Card

Other

Consumer

1st Lien

2nd Lien

(In millions)

Below 620

$

768


$

311


$

249


$

421


$

55


$

86


620-680

1,013


531


415


549


158


150


681-720

1,489


789


530


611


247


191


Above 720

8,487


4,808


2,938


2,409


614


526


Data not available

1,054


257


150


539


1


87


$

12,811


$

6,696


$

4,282


$

4,529


$

1,075


$

1,040


(1)

Amount represents both indirect-vehicles and indirect-other consumer portfolio classes.

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. The allowance represents management's estimate of probable credit losses inherent in the loan and credit commitment portfolios as of period end. Regions determines its allowance in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. Additional 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, 2015 , as well as related discussion in Management's Discussion and Analysis.

The allowance for loan losses totaled $1.2 billion at March 31, 2016 as compared to $1.1 billion in December 31, 2015 . The allowance for loan losses as a percentage of net loans increased from 1.36 percent at December 31, 2015 to 1.41 percent at March 31, 2016 . The increase in the percentage is primarily attributable to the migration of a number of large energy loans into the classified credit quality category from the special mention category, resulting in an increase in energy related allowance for loan losses. Total allowance for loan losses for the direct energy portfolio was 8 percent at March 31, 2016 compared to 6 percent at year-end.

Management expects that net loan charge-offs for the remainder of 2016 will range from 0.25 percent to 0.35 percent. Given the current price of oil, management expects to be at the top end of that range. Economic trends such as interest rates, unemployment, volatility in commodity prices and real estate valuations will impact the future levels of net charge-offs and may result in volatility during the remainder of 2016 .

The provision for loan losses increased for the first three months of 2016 as compared to the same period in 2015. During the first three months of 2016 , the provision for loan losses exceeded net charge-offs by approximately $45 million . The increase in loan loss provision reflects an increase in the allowance for loan losses for energy related loans.

Management considers the current level of the allowance appropriate to absorb losses inherent in the loan and credit commitment portfolios. Management's determination of the appropriateness of the allowance requires the use of judgments and estimations that may change in the future. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. Management expects the allowance for credit losses to total loans ratio to vary over time due to changes in portfolio balances, economic conditions, loan mix and collateral values, or variations in other factors that may affect inherent losses. In addition, bank regulatory agencies, as part of their examination process, may require changes in the level of the allowance based on their judgments and estimates. Management attributes portions of the allowance to loans that it evaluates and determines to be impaired and to groups of loans that it evaluates collectively. However, the entire allowance is available to cover all charge-offs that arise from the loan portfolio.

Given the current phase of the credit cycle, volatility in certain credit metrics is to be expected. 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."



63

Table of Contents



Activity in the allowance for credit losses is summarized as follows:

Table 7-Allowance for Credit Losses

Three Months Ended March 31

2016

2015

(Dollars in millions)

Allowance for loan losses at beginning of year

$

1,106


$

1,103


Loans charged-off:

Commercial and industrial

23


27


Commercial real estate mortgage-owner-occupied

5


7


Commercial real estate construction-owner-occupied

1


-


Commercial investor real estate mortgage

-


8


Commercial investor real estate construction

-


-


Residential first mortgage

4


7


Home equity

20


17


Indirect - vehicles

13


10


Indirect - other consumer

3


-


Consumer credit card

10


10


Other consumer

17


15


96


101


Recoveries of loans previously charged-off:

Commercial and industrial

5


11


Commercial real estate mortgage-owner-occupied

2


6


Commercial real estate construction-owner-occupied

-


-


Commercial investor real estate mortgage

3


6


Commercial investor real estate construction

1


2


Residential first mortgage

1


4


Home equity

6


7


Indirect - vehicles

5


4


Indirect - other consumer

-


-


Consumer credit card

1


2


Other consumer

4


5


28


47


Net charge-offs:

Commercial and industrial

18


16


Commercial real estate mortgage-owner-occupied

3


1


Commercial real estate construction-owner-occupied

1


-


Commercial investor real estate mortgage

(3

)

2


Commercial investor real estate construction

(1

)

(2

)

Residential first mortgage

3


3


Home equity

14


10


Indirect - vehicles

8


6


Indirect - other consumer

3


-


Consumer credit card

9


8


Other consumer

13


10


68


54


Provision for loan losses

113


49


Allowance for loan losses at March 31

$

1,151


$

1,098


Reserve for unfunded credit commitments at beginning of year

$

52


$

65


Provision (credit) for unfunded credit losses

1


1


Reserve for unfunded credit commitments at March 31

$

53


$

66


Allowance for credit losses at March 31

$

1,204


$

1,164


Loans, net of unearned income, outstanding at end of period

$

81,606


$

78,243


Average loans, net of unearned income, outstanding for the period

$

81,510


$

77,942


Ratios:

Allowance for loan losses at end of period to loans, net of unearned income

1.41

%

1.40

%

Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale

1.16x


1.37x


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

0.34

%

0.28

%



64

Table of Contents



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 a modification was 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

March 31, 2016

December 31, 2015

Loan

Balance

Allowance for

Loan Losses

Loan

Balance

Allowance for

Loan Losses

(In millions)

Accruing:

Commercial

$

146


$

19


$

146


$

20


Investor real estate

119


13


157


17


Residential first mortgage

397


49


398


52


Home equity

316


7


323


7


Indirect-vehicles

1


-


1


-


Consumer credit card

2


-


2


-


Other consumer

12


-


12


-


993


88


1,039


96


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

Commercial

149


35


135


37


Investor real estate

27


3


22


3


Residential first mortgage

80


10


81


10


Home equity

19


-


18


-


275


48


256


50


Total TDRs - Loans

$

1,268


$

136


$

1,295


$

146


TDRs - Held For Sale

8


-


8


-


Total TDRs

$

1,276


$

136


$

1,303


$

146


_________

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 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, and the loan is subsequently refinanced or restructured at market terms and 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.



65

Table of Contents



Table 9-Analysis of Changes in Commercial and Investor Real Estate TDRs

Three Months Ended March 31, 2016

Commercial

Investor
Real Estate

(In millions)

Balance, beginning of period

$

281


$

179


Inflows

66


9


Outflows

Charge-offs

(8

)

-


Foreclosure

-


-


Payments, sales and other (1)

(44

)

(42

)

Balance, end of period

$

295


$

146


Three Months Ended March 31, 2015

Commercial

Investor
Real Estate

(In millions)

Balance, beginning of period

$

344


$

357


Inflows

70


12


Outflows

Charge-offs

(4

)

(5

)

Foreclosure

-


(14

)

Payments, sales and other (1)

(57

)

(74

)

Balance, end of period

$

353


$

276


(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 $11 million of commercial loans and $5 million of investor real estate loans refinanced or restructured as new loans and removed from TDR classification for the three months ended March 31, 2016 . During the three months ended March 31, 2015 , $17 million of commercial loans and $18 million of investor real estate loans were refinanced or restructured as new loans and removed from TDR classification.



66

Table of Contents



NON-PERFORMING ASSETS

Non-performing assets are summarized as follows:

Table 10-Non-Performing Assets

March 31, 2016

December 31, 2015

(Dollars in millions)

Non-performing loans:

Commercial and industrial

$

556


$

325


Commercial real estate mortgage-owner-occupied

254


268


Commercial real estate construction-owner-occupied

2


2


Total commercial

812


595


Commercial investor real estate mortgage

28


31


Total investor real estate

28


31


Residential first mortgage

54


63


Home equity

99


93


Total consumer

153


156


Total non-performing loans, excluding loans held for sale

993


782


Non-performing loans held for sale

22


38


Total non-performing loans (1)

1,015


820


Foreclosed properties

97


100


Total non-performing assets (1)

$

1,112


$

920


Accruing loans 90 days past due:

Commercial and industrial

$

3


$

9


Commercial real estate mortgage-owner-occupied

3


3


Total commercial

6


12


Commercial investor real estate mortgage

2


4


Commercial investor real estate construction

8


-


Total investor real estate

10


4


Residential first mortgage (2)

115


113


Home equity

45


59


Indirect-vehicles

8


9


Consumer credit card

12


12


Other consumer

5


4


Total consumer

185


197


$

201


$

213


Restructured loans not included in the categories above

$

993


$

1,039


Non-performing loans (1)  to loans and non-performing loans held for sale

1.24

%

1.01

%

Non-performing assets (1)  to loans, foreclosed properties and non-performing loans held for sale

1.36

%

1.13

%

_________

(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 $105 million at March 31, 2016 and $107 million at December 31, 2015 .

Non-performing commercial and industrial loans have increased over this period primarily as a result of pressure on the energy lending portfolio as discussed in the "Portfolio Characteristics" section. Economic trends such as interest rates, unemployment, volatility in commodity prices and real estate valuations will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility throughout 2016 .

Loans past due 90 days or more and still accruing, excluding government guaranteed loans, were $201 million at March 31, 2016 , a decrease from $213 million at December 31, 2015 .



67

Table of Contents



At March 31, 2016 , Regions had approximately $150 million to $225 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 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
Three Months Ended March 31, 2016

Commercial

Investor

Real Estate

Consumer (1)

Total

(In millions)

Balance at beginning of period

$

595


$

31


$

156


$

782


Additions

320


3


(3

)

320


Net payments/other activity

(56

)

(4

)

-


(60

)

Return to accrual

(10

)

(1

)

-


(11

)

Charge-offs on non-accrual loans (2)

(28

)

-


-


(28

)

Transfers to held for sale (3)

(8

)

-


-


(8

)

Transfers to foreclosed properties

(1

)

-


-


(1

)

Sales

-


(1

)

-


(1

)

Balance at end of period

$

812


$

28


$

153


$

993




68

Table of Contents




Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2015

Commercial

Investor

Real Estate

Consumer (1)

Total

(In millions)

Balance at beginning of period

$

493


$

125


$

211


$

829


Additions

138


8


(13

)

133


Net payments/other activity

(50

)

(14

)

-


(64

)

Return to accrual

(16

)

(10

)

-


(26

)

Charge-offs on non-accrual loans (2)

(32

)

(8

)

-


(40

)

Transfers to held for sale (3)

(10

)

(2

)

-


(12

)

Transfers to foreclosed properties

(4

)

(14

)

-


(18

)

Sales

(2

)

-


-


(2

)

Balance at end of period

$

517


$

85


$

198


$

800


________

(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 additions 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 $7 million recorded upon transfer for the three months ended March 31, 2016 and 2015 , respectively.

GOODWILL

Goodwill totaled $4.9 billion at both March 31, 2016 and December 31, 2015 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 2015 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2015 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). Refer to Note 13 for discussion of Regions' organizational realignment during the first quarter of 2016. In connection with the organizational realignment, management reallocated goodwill to the reporting units using a relative fair value approach.

The results of the calculations for the first quarter of 2016 indicated that the estimated fair values of the Corporate Bank, Consumer Bank and Wealth Management reporting units were $9.3 billion, $7.5 billion and $1.7 billion, respectively, which were greater than their carrying amounts of $9.0 billion, $5.8 billion and $1.2 billion, respectively. Therefore, the goodwill of each reporting unit was considered not impaired as of the testing date, and Step Two of the goodwill impairment test was not required.

The table below summarizes the discount rate used in the goodwill impairment test of each reporting unit for the first quarter 2016 and the 2015 annual goodwill impairment test:

Discount Rates

Corporate

Bank

Consumer

Bank

Wealth

Management

First quarter 2016

11.25

%

11.00

%

12.00

%

Fourth quarter 2015

11.00

%

11.00

%

12.00

%

Specific factors as of the date of filing the financial statements that could negatively impact the assumptions used in assessing goodwill for impairment include: a protracted decline in the Company's market capitalization; disparities in the level of fair value changes in net assets (especially loans) compared to equity; increases in book values of equity of a reporting unit in excess of the increase in fair value of equity; adverse business trends resulting from litigation and/or regulatory actions; higher loan losses; lengthened forecasts of high unemployment levels; future increased minimum regulatory capital requirements above current thresholds; and/or a protraction in the current low level of interest rates significantly beyond 2016.

For sensitivity analysis as of the first quarter of 2016, a discount rate of 12.25 percent for the Corporate Bank, 12.00 percent for the Consumer Bank and 13.00 percent for Wealth Management reporting unit would result in estimated fair values of equity of $8.5 billion, $6.7 billion, and $1.6 billion, respectively. The Consumer Bank and Wealth Management's estimated fair value would continue to exceed the book value by approximately $900 million and $400 million, respectively, and would not require Step Two procedures. The Corporate Bank's resulting fair value of equity would be $500 million less than its carrying value and would require Step Two procedures for the reporting unit. As part of the sensitivity analysis, Regions performed hypothetical Step



69

Table of Contents



Two procedures. In Step Two, the fair value of the reporting unit's assets, both tangible and intangible, and liabilities are determined using estimates of the amounts at which the assets (or liabilities) can be bought (or incurred) or sold (settled) in a taxable transaction between willing participants. The effects of the Step Two adjustments for the Corporate Bank, which would have been primarily write-downs of assets to fair value, would have exceeded any reductions in the value of equity determined in Step One. Therefore, there would have been no impairment to goodwill.

If the fourth quarter of 2015 inputs for GCM and GTM had remained the same for the first quarter of 2016, the estimated fair value would continue to exceed book value for the Corporate Bank, Consumer Bank and Wealth Management reporting units by approximately $1.0 billion, $1.7 billion and $500 million, respectively. This assumes all other assumptions would remain unchanged in the first quarter 2016 calculation.

Sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in implied 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 implied fair value of goodwill 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.

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 providing convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as internet banking.

The following table summarizes deposits by category:

Table 12-Deposits

March 31, 2016

December 31, 2015

(In millions)

Non-interest-bearing demand

$

35,153


$

34,862


Savings

7,768


7,287


Interest-bearing transaction

21,172


21,902


Money market-domestic

26,607


26,468


Money market-foreign

270


243


Low-cost deposits

90,970


90,762


Time deposits

7,161


7,468


       Customer deposits

98,131


98,230


Corporate treasury time deposits

23


200


$

98,154


$

98,430


Total deposits at March 31, 2016 decreased approximately $276 million compared to year-end 2015 levels. The decline was primarily driven by declines in interest-bearing transaction accounts, as well as continued declines in consumer and corporate treasury time deposits. These declines were largely offset by growth in non-interest-bearing demand, savings and money market-domestic categories.

SHORT-TERM BORROWINGS

Table 13-Short-Term Borrowings

March 31, 2016

December 31, 2015

(In millions)

Customer-related borrowings:

Customer collateral

$

-


$

10


$

-


$

10


Customer-Related Borrowings

Customer collateral includes cash collateral posted by customers related to derivative transactions.



70

Table of Contents



LONG-TERM BORROWINGS

Table 14-Long-Term Borrowings

March 31, 2016

December 31, 2015

(In millions)

Regions Financial Corporation (Parent):

2.00% senior notes due May 2018

$

747


$

749


3.20% senior notes due February 2021

497


-


7.75% subordinated notes due September 2024

100


100


6.75% subordinated debentures due November 2025

159


159


7.375% subordinated notes due December 2037

297


300


Valuation adjustments on hedged long-term debt

1


(7

)

1,801


1,301


Regions Bank:

Federal Home Loan Bank advances

4,255


5,255


2.25% senior notes due September 2018

747


749


7.50% subordinated notes due May 2018

499


500


6.45% subordinated notes due June 2037

495


497


3.80% affiliate subordinated notes due February 2025

150


150


Other long-term debt

47


48


Valuation adjustments on hedged long-term debt

7


(1

)

6,200


7,198


Elimination of 3.80% affiliate subordinated notes due February 2025

(150

)

(150

)

Total consolidated

$

7,851


$

8,349


Long-term borrowings decreased approximately $498 million since year-end 2015 . The decrease was primarily the result of a $1 billion decrease in FHLB advances offset by the issuance of $500 million of 3.20% senior notes that occurred during the first quarter of 2016.

Effective January 1, 2016, the Company adopted new guidance related to the accounting for debt issuance costs. All existing debt issuance costs were reclassified from other assets to long-term borrowings as direct deductions of the related debt instruments. The impact of the adoption of this guidance was not material to prior periods and therefore was not applied retrospectively.

Long-term FHLB advances have a weighted-average interest rate of 0.8 percent for March 31, 2016 and 0.7 percent for December 31, 2015 with remaining maturities ranging from one to fifteen years and a weighted-average of 1.0 years.

STOCKHOLDERS' EQUITY

Stockholders' equity was $17.2 billion at March 31, 2016 as compared to $16.8 billion at December 31, 2015 . During the first quarter of 2016, net income increased stockholders' equity by $273 million , while cash dividends on common stock reduced stockholders' equity by $80 million and cash dividends on preferred stock reduced stockholder's equity by $16 million. Changes in accumulated other comprehensive income increased stockholders' equity by $357 million, primarily due to the net change in the value of securities available for sale and derivative instruments. Common stock repurchased during the first quarter of 2016 reduced stockholders' equity by $175 million.

As part of its 2015 CCAR submission, Regions' Board authorized a $875 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2015 through the end of the second quarter of 2016. Through March 31, 2016, Regions repurchased approximately 75 million shares of common stock at a total cost of approximately $695 million under this plan. The Company continued to repurchase shares in the second quarter of 2016, and as of May 5, 2016, Regions had additional repurchases of approximately 17.4 million shares of common stock at a total cost of approximately $160.5 million . These shares were immediately retired upon repurchase and therefore are not included in treasury stock.

Regions' Board of Directors declared a cash dividend for the first quarter of 2016 of $0.06 per common share compared to $0.05 per common share for the first quarter of 2015. The Board of Directors also declared $16 million in cash dividends on preferred stock for both the first quarter of 2016 and 2015. Prior to the first quarter of 2016, the Company was in a retained deficit position and common stock dividends were recorded as a reduction of additional paid-in capital, while preferred dividends were recorded as a reduction of preferred stock, including related surplus. During the first quarter of 2016, the Company achieved positive retained earnings and both common stock and preferred dividends were recorded as a reduction of retained earnings.



71

Table of Contents



On April 21, 2016, Regions' Board of Directors approved an increase of the quarterly common stock dividend to $0.065 per share from the previous quarterly dividend rate of $0.06 per share.

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 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.

In 2013, the Federal Reserve released its final rules detailing the U.S. implementation of the Basel Committee on Bank Supervision's Basel III framework ("Basel III Rules"). 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 substantially revise the regulatory capital requirements applicable to BHCs and depository institutions, including Regions and Regions Bank. The Basel III Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The Basel III Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios to incorporate a more risk-sensitive approach. The Basel III Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules.

The Basel III Rules, among other things, (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.

Under the Basel III Rules, the initial minimum capital ratios as of January 1, 2015 were as follows:

4.5% CET1 to risk-weighted assets.

6.0% Tier 1 capital to risk-weighted assets.

8.0% Total capital to risk-weighted assets.

The Basel III Rules also introduce a new capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is on top of these minimum risk-weighted asset ratios. In addition, the Basel III Rules provide for a countercyclical capital buffer applicable only to advanced approach institutions. Currently the countercyclical capital buffer is not applicable to Regions or Regions Bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the combined capital conservation buffer and countercyclical capital buffer (when applicable) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

When fully phased in on January 1, 2019, the Basel III Rules will require Regions and Regions Bank to maintain an additional capital conservation buffer of 2.5% of CET1 to risk-weighted assets, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The Basel III Rules provide for a number of deductions from and adjustments to CET1. For example, goodwill and certain other intangible assets, as well as certain deferred tax assets are deducted. MSRs, certain other deferred tax assets and significant investments in non-consolidated financial entities are also deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Rules, the effects of certain accumulated other comprehensive items are included; however, standardized approach banking organizations, including Regions and Regions Bank, may make a one-time permanent election to exclude these items. Regions and Regions Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of their securities portfolios.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased in over a 4- year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a remaining 3-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

With respect to Regions Bank, the Basel III Rules also revise the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital



72

Table of Contents



ratio requirement for each category, with the required Tier 1 capital ratio for well-capitalized status being 8% (as compared to the previous 6%); and (iii) eliminating the provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Rules do not change the total capital requirement for any prompt corrective action category.

The Basel III Rules prescribe a standardized approach for risk weightings that expands the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 1,250% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to the prior capital rules impacting Regions' determination of risk-weighted assets include, among other things:

Applying a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction exposures (previously set at 100%).

Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are on non-accrual status or 90 days or more past due (previously set at 100%).

Providing for a 20% credit conversion factor for the unused portion of a loan commitment with an original maturity of less than one year that is not unconditionally cancellable (previously set at 0%).

Eliminating the previous 50% cap on the risk weight for derivative exposures.

Replacing the previous Ratings Based Approach for certain asset-backed securities with a SSFA which results in risk weights ranging from 20% to 1,250% (previously ranged from 100% to 1,250%).

Effective January 1, 2018, applying a 250% risk weight to the portion of MSRs and deferred tax assets that are includible in capital (previously set at 100%).

In addition, the Basel III Rules also provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

Table 15-Regulatory Capital Requirements

Transitional Basis Basel III Regulatory Capital Rules (1)

March 31, 2016

Ratio (2)

December 31, 2015

Ratio

To Be Well

Capitalized

Basel III common equity Tier 1 capital:

Regions Financial Corporation

10.87

%

10.93

%

N/A


Regions Bank

11.65


11.68


6.50

%

Tier 1 capital:

Regions Financial Corporation

11.61

%

11.65

%

6.00

%

Regions Bank

11.65


11.68


8.00


Total capital:

Regions Financial Corporation

13.85

%

13.88

%

10.00

%

Regions Bank

13.60


13.59


10.00


Leverage capital:

Regions Financial Corporation

10.13

%

10.25

%

N/A


Regions Bank

10.17


10.28


5.00

%

________

(1)

The 2016 and 2015 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 ("LCR")

The Federal Reserve Board, 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. In January 2016, the minimum phased-in LCR requirement was 90 percent, to be followed by 100 percent in January 2017. The regulatory agencies have released an NPR that would require public disclosures of certain LCR measures beginning in 2018. The comment period for this NPR ended in February 2016.



73

Table of Contents



At March 31, 2016, 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 would 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, 2015 for more information.

RATINGS

Table 16 "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 March 31, 2016 and December 31, 2015 .

Table 16-Credit Ratings

As of March 31, 2016 and December 31, 2015

S&P

Moody's

Fitch

DBRS

Regions Financial Corporation

Senior notes

BBB

Baa3

BBB

BBB

Subordinated notes

BBB-

Baa3

BBB-

BBBL

Regions Bank

Short-term debt

A-2

P-2

F2

R-1L

Long-term bank deposits (1)

N/A

A3

BBB+

BBBH

Long-term debt

BBB+

A3

BBB

BBBH

Subordinated debt

BBB

Baa3

BBB-

BBB

Outlook

Stable

Stable

Stable

Positive


_________

(1)

S&P does not provide a rating for Long-term bank deposits therefore the rating is N/A.

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, acceptability of its letters of credit, and funding of VRDNs, 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, 2015 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.

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 fee income ratio", "adjusted efficiency 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 of Directors 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 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 non-interest income divided by total revenue on a taxable-equivalent basis. Management uses these ratios to monitor



74

Table of Contents



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 non-GAAP financial measures 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 GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to stockholders.

The following table provides: 1) a reconciliation of net income (GAAP) to net income available to common shareholders (GAAP), 2) a reconciliation of non-interest expense from continuing operations (GAAP) to adjusted non-interest expense (non-GAAP), 3) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income (non-GAAP), 4) a computation of adjusted total revenue (non-GAAP), 5) a computation of the adjusted efficiency ratio (non-GAAP), 6) a computation of the adjusted fee income ratio (non-GAAP), 7) 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), 8) 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).



75

Table of Contents



Table 17-GAAP to Non-GAAP Reconciliation

Three Months Ended March 31

2016

2015

(Dollars in millions, except per share data)

INCOME

Net income (GAAP)

$

273


$

234


Preferred dividends (GAAP)

(16

)

(16

)

Net income available to common shareholders (GAAP)

A

$

257


$

218


ADJUSTED FEE INCOME AND EFFICIENCY RATIOS

Non-interest expense from continuing operations (GAAP)

$

869


$

905


Significant items:

   Branch consolidation, property and equipment charges

(14

)

(22

)

Loss on early extinguishment of debt

-


(43

)

Salary and employee benefits - severance charges

(12

)

-


Adjusted non-interest expense (non-GAAP)

B

$

843


$

840


Net interest income and other financing income (GAAP)

$

862


$

815


Taxable-equivalent adjustment

21


17


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

C

883


832


Non-interest income from continuing operations (GAAP)

506


470


Significant items:

Securities (gains) losses, net

5


(5

)

Insurance proceeds (1)

(3

)

-


Leveraged lease termination gains, net

-


(2

)

Adjusted non-interest income (non-GAAP)

D

508


463


Adjusted total revenue, taxable-equivalent basis (non-GAAP)

C+D=E

$

1,391


$

1,295


Adjusted efficiency ratio (non-GAAP)

B/E

60.63

%

64.91

%

Adjusted fee income ratio (non-GAAP)

D/E

36.54

%

35.75

%

RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS' EQUITY

Average stockholders' equity (GAAP)

$

17,086


$

16,963


Less:  Average intangible assets (GAAP)

5,131


5,089


Average deferred tax liability related to intangibles (GAAP)

(165

)

(172

)

Average preferred stock (GAAP)

820


878


Average tangible common stockholders' equity (non-GAAP)

F

$

11,300


$

11,168


Return on average tangible common stockholders' equity (non-GAAP) (2)

A/F

9.16

%

7.91

%




76

Table of Contents



March 31, 2016

December 31, 2015

(Dollars in millions, except per share data)

TANGIBLE COMMON RATIOS

Ending stockholders' equity (GAAP)

$

17,211


$

16,844


Less: Ending intangible assets (GAAP)

5,124


5,137


  Ending deferred tax liability related to intangibles (GAAP)

(164

)

(165

)

  Ending preferred stock (GAAP)

820


820


Ending tangible common stockholders' equity (non-GAAP)

G

$

11,431


$

11,052


Ending total assets (GAAP)

$

125,539


$

126,050


Less: Ending intangible assets (GAAP)

5,124


5,137


  Ending deferred tax liability related to intangibles (GAAP)

(164

)

(165

)

Ending tangible assets (non-GAAP)

H

$

120,579


$

121,078


End of period shares outstanding

I

1,275


1,297


Tangible common stockholders' equity to tangible assets (non-GAAP)

G/H

9.48

%

9.13

%

Tangible common book value per share (non-GAAP)

G/I

$

8.97


$

8.52


BASEL III COMMON EQUITY TIER 1 RATIO-FULLY PHASED-IN PRO-FORMA (3)

Stockholders' equity (GAAP)

$

17,211


$

16,844


Non-qualifying goodwill and intangibles

(4,947

)

(4,958

)

Adjustments, including all components of accumulated other comprehensive income, disallowed deferred tax assets, threshold deductions and other adjustments

(64

)

286


Preferred stock (GAAP)

(820

)

(820

)

Basel III common equity Tier 1 - Fully Phased-In Pro-Forma (non-GAAP)

J

$

11,380


$

11,352


Basel III risk-weighted assets - Fully Phased-In Pro-Forma (non-GAAP) (4)

K

$

106,227


$

106,188


Basel III common equity Tier 1 ratio - Fully Phased-In Pro-Forma (non-GAAP)

J/K

10.71

%

10.69

%

 _________

(1)

Insurance proceeds recognized in 2016 are related to the settlement of the previously disclosed 2010 class-action lawsuit.

(2)

Income statement amounts have been annualized in calculation.

(3)

Current quarter amounts and the resulting ratio are estimated.

(4)

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.



77

Table of Contents



OPERATING RESULTS

NET INTEREST INCOME AND MARGIN

Table 18-Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations

Three Months Ended March 31

2016

2015

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

$

11


$

-


-

%

$

21


$

-


-

%

Trading account securities

132


3


10.20


104


3


12.91


Securities:

Taxable (1)

24,618


147


2.39


24,170


145


2.43


Tax-exempt

1


-


-


2


-


-


Loans held for sale

362


3


3.30


406


3


3.46


Loans, net of unearned income (2)(3)

81,510


789


3.87


77,942


742


3.86


Investment in operating leases, net

825


5


2.71


-


-


-


Other earning assets (1)

4,046


10


0.98


3,486


10


1.11


Total earning assets

111,505


957


3.43


106,131


903


3.45


Allowance for loan losses

(1,108

)

(1,098

)

Cash and due from banks

1,710


1,773


Other non-earning assets

13,853


13,760


$

125,960


$

120,566


Liabilities and Stockholders' Equity

Interest-bearing liabilities:

Savings

$

7,491


3


0.16


$

6,878


2


0.14


Interest-bearing checking

21,244


5


0.10


21,769


5


0.09


Money market

26,821


7


0.10


26,381


7


0.11


Time deposits

7,368


12


0.67


8,500


14


0.65


Total interest-bearing deposits (4)

62,924


27


0.18


63,528


28


0.18


Federal funds purchased and securities sold under agreements to repurchase

-


-


-


1,685


-


-


Other short-term borrowings

8


-


-


161


-


-


Long-term borrowings

8,806


47


2.13


3,371


43


5.20


Total interest-bearing liabilities

71,738


74


0.42


68,745


71


0.42


Non-interest-bearing deposits (4)

34,826


-


-


32,255


-


-


Total funding sources

106,564


74


0.28


101,000


71


0.29


Net interest spread

3.01


3.03


Other liabilities

2,310


2,603


Stockholders' equity

17,086


16,963


$

125,960


$

120,566


Net interest income and other financing income/margin on a taxable-equivalent basis from continuing operations (5)

$

883


3.19

%

$

832


3.18

%

_________

(1)

Investments in FRB and FHLB stock were reclassified from securities available for sale to other earning assets during the fourth quarter of 2015. All periods presented have been revised to reflect this presentation.

(2)

Loans, net of unearned income include non-accrual loans for all periods presented.

(3)

Interest income includes net loan fees of $12 million and $17 million for the three months ended March 31, 2016 and 2015 , respectively.

(4)

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 0.11% and 0.12% for the three months ended March 31, 2016 and 2015 , respectively.

(5)

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.



78

Table of Contents



For the first quarter of 2016 , net interest income and other financing income (taxable-equivalent basis) totaled $883 million compared to $832 million in the first quarter of 2015. The net interest margin (taxable-equivalent basis) was 3.19 percent for the first quarter of 2016 and 3.18 percent for the first quarter of 2015. These increases were driven by higher average earning assets, modestly higher loan yields driven by increases in market interest rates and balance sheet optimization strategies that occurred between these comparable periods. Funding costs were also modestly lower. These positives were offset by marginally lower rates on investment securities.

Management expects to increase net interest income and other financing income in the range of 2 percent to 4 percent in 2016, commensurate with average loan growth in the 3 percent to 5 percent range relative to the fourth quarter of 2015. Should the Federal Reserve choose not to raise the targeted fed funds rate during the remainder of 2016, the Company would expect its net interest income and other financing income growth to be at the low to mid-point of that range.

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 a 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. Regions also prepares a minus 50 basis points scenario, as minus 100 and 200 basis points scenarios are of limited use in the current rate environment. Up-rate scenarios of greater magnitude are also analyzed as the current and historic low levels of interest rates increase the relative likelihood of a sizable increase in interest rates. Regions also includes simulations of gradual interest rate movements that may more realistically mimic the speed of potential interest rate movements. These gradual scenarios include curve steepening, flattening, and parallel movements of various magnitudes phased in over a six-month period, and include rate shifts of minus 50 basis points and plus 100 and 200 basis points.

Exposure to Interest Rate Movements- As of March 31, 2016 , 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 March 2017 . 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 rates. Long-term interest rate reductions 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 on existing securities in the investment portfolio. The decline in short-term interest rates (such as the Fed Funds rate and the rate of Interest on Excess Reserves) will lead to a reduction of yield on assets and liabilities contractually tied to such rates, but since interest rates have been at low levels for such an extended period, it is expected that declines in deposit costs will only partially offset the decline in asset yields.

The yield curve flattened in the first quarter of 2016 primarily driven by long-term interest rate declines, which resulted in a continuation of low interest rates by historical standards. Conversely, short-term interest rates retained the modest increases realized during the fourth quarter of 2015 as the Federal Reserve raised the Fed funds target range by 25 basis points in December. As described above, 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 $111 million if long-term interest rates were to immediately and on a sustained basis exceed the base scenario by 100 basis points. Conversely, if long-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 $65 million. 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.



79

Table of Contents



Table 19-Interest Rate Sensitivity

Estimated Annual Change

in Net Interest Income

March 31, 2016

(In millions)

Gradual Change in Interest Rates

+ 200 basis points


$224


+ 100 basis points

124


- 50 basis points

(75

)

Instantaneous Change in Interest Rates

+ 200 basis points


$263


+ 100 basis points

160


- 50 basis points

(132

)

As discussed above, the interest rate sensitivity analysis presented in Table 19 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 which 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 continued moderate loan and deposit growth with a composition largely reflecting a continuation of recent trends. 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 19, 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. Federal 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 $54 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 19. 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 $31 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. 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. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks.

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 to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform.



80

Table of Contents



Regions has made use of interest rate swaps to effectively convert a portion of its fixed-rate funding position and available for sale securities portfolios to a variable-rate position and, in some cases, to effectively convert a portion of its variable-rate loan portfolios to fixed-rate. Regions also uses derivatives to 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 20-Hedging Derivatives by Interest Rate Risk Management Strategy

March 31, 2016

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

$

2,110


$

20


$

-


2.7


1.3

%

0.6

%

     Receive variable/pay fixed

502


-


50


10.6


2.6


0.6


Derivatives in cash flow hedging relationships:

     Receive fixed/pay variable

9,800


219


3


5.3


1.5


0.5


     Total derivatives designated as hedging instruments

$

12,412


$

239


$

53


5.1


1.5

%

0.5

%

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, 2015 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 derivatives 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 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.



81

Table of Contents



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 mortgage servicing asset, 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 mortgage servicing asset. Regions actively monitors prepayment exposure as part of its overall net interest income and other financing income forecasting and interest rate risk management. In particular, because current interest rates are relatively low, Regions employs strategies to actively manage the potential exposure to declining prepayments that may occur in the loan and securities portfolio in the event of increasing market interest rates.

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 Federal Reserve Board, the OCC and the FDIC released the final version of the Liquidity Coverage Ratio. The rule 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 Federal Reserve Bank is the primary component of the balance sheet line item, "interest-bearing deposits in other banks." At March 31, 2016 , Regions had approximately $2.7 billion in cash on deposit with the Federal Reserve, a decrease from approximately $3.9 billion at December 31, 2015.

Regions' borrowing availability with the Federal Reserve Bank as of March 31, 2016 , based on assets pledged as collateral on that date, was $21.3 billion.

Regions' financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of March 31, 2016 , Regions' outstanding balance of FHLB borrowings was $4.3 billion and its total borrowing capacity from



82

Table of Contents



the FHLB totaled $12.2 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank pledged certain residential first mortgage loans on one-to-four family 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 U.S. Securities and Exchange Commission 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 2015 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, 2015 for a discussion of risk characteristics of each loan type.

INFORMATION SECURITY RISK

Operational risks comprise several elements, including information security risks. Information security risks such as evolving and adaptive cyber attacks, for large financial institutions such as Regions, have generally increased in recent years and will continue to increase in part because of the proliferation of new technologies, the use of mobile devices, the internet, and telecommunications technologies to conduct financial transactions, 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 spends significant resources to identify and mitigate threats to the confidentiality, availability and integrity of our information systems. Regions regularly assesses the threat environment to identify and mitigate threats. Our layered security controls are designed to complement each other to protect the confidentiality, integrity and availability of our customer's 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 our systems from attacks or unauthorized access. In addition, Regions maintains a strong commitment to a comprehensive risk management program to include oversight of third-party relationships involving vendors.

Regions participates in information sharing organizations such as FS-ISAC to gather and share information amongst peer banks to better prepare and protect our 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 provided for the good of the membership. In addition to FS-ISAC, Regions is a member of BITS, the technology arm of the Financial Services Roundtable. 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 and 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 placed a computer forensics firm and an industry-leading consulting firm on retainer in case of a breach event.

Even if Regions successfully prevents data breaches to its own networks, 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 our business infrastructure, which may also increase information security risk.

REGULATORY RISK

In 2014, the Federal Reserve Bank of Atlanta began a regularly scheduled CRA examination of Regions Bank covering 2012 and 2013 performance. This review included, among other things, a review of Regions Bank's previously disclosed public consent orders. As a result of the examination, the results of which were communicated during the fourth quarter of 2015, Regions Bank received "High Satisfactory" ratings on its CRA components, but its overall CRA rating was downgraded from "Satisfactory" to "Needs to Improve." The downgrade was attributed to the matters underlying Regions Bank's April 2015 public consent order with the CFPB related to overdrafts and Regulation E. Regions Bank had self-reported these matters and provided remuneration to affected customers during 2011 and 2012. This downgrade imposes restrictions on the Company's ability to undertake certain activities, including mergers and acquisitions of insured depository institutions and applications to open branches or certain other



83

Table of Contents



facilities until such time as the rating is improved. Regions Bank's next CRA examination is expected to commence during 2016, although the actual timing of the examination and any results therefrom will not be known until later.

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 $113 million in the first quarter of 2016 compared to $49 million during the first quarter of 2015 . Refer to the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail.

NON-INTEREST INCOME

Table 21-Non-Interest Income from Continuing Operations

Three Months Ended March 31

Change March 31, 2016 vs. March 31, 2015

2016

2015

Amount

Percent

(Dollars in millions)

Service charges on deposit accounts

$

159


$

161


$

(2

)

(1.2

)%

Card and ATM fees

95


85


10


11.8

 %

Investment management and trust fee income

50


51


(1

)

(2.0

)%

Mortgage income

38


40


(2

)

(5.0

)%

Insurance commissions and fees

40


35


5


14.3

 %

Capital markets fee income and other

41


20


21


105.0

 %

Insurance proceeds

3


-


3


NM


Commercial credit fee income

19


16


3


18.8

 %

Bank-owned life insurance

33


20


13


65.0

 %

Investment services fee income

16


12


4