The Quarterly
RF Q2 2016 10-Q

Regions Financial Corp (RF) SEC Quarterly Report (10-Q) for Q3 2016

RF 2016 10-K
RF Q2 2016 10-Q RF 2016 10-K

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 September 30, 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)

(800) 734-4667

(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     ý   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ý   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 1,230,974,878 shares of common stock, par value $.01, outstanding as of November 2, 2016.


Table of Contents



REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX

Page

Part I. Financial Information

Item 1.

Financial Statements (Unaudited)

Consolidated Balance Sheets-September 30, 2016 and December 31, 2015

8

Consolidated Statements of Income-Three and nine months ended September 30, 2016 and 2015

9

Consolidated Statements of Comprehensive Income-Three and nine months ended September 30, 2016 and 2015

10

Consolidated Statements of Changes in Stockholders' Equity-Nine months ended September 30, 2016 and 2015

11

Consolidated Statements of Cash Flows-Nine months ended September 30, 2016 and 2015

12

Notes to Consolidated Financial Statements

13

Item 2.

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

61

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

97

Item 4.

Controls and Procedures

97

Part II. Other Information

Item 1.

Legal Proceedings

98

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

98

Item 6.

Exhibits

99

Signatures

100


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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 - Federal Deposit Insurance Corporation.

Federal Reserve - Board of Governors of the Federal Reserve System.

FHA - Federal Housing Administration.

FHLB - Federal Home Loan Bank.

FHLMC - Federal Home Loan Mortgage Corporation, known as Freddie Mac.

FNMA - Federal National Mortgage Association, known as Fannie Mae.

FS-ISAC - Financial Services - Information Sharing & Analysis Center.

FRB - Federal Reserve Bank.

GAAP - Generally Accepted Accounting Principles in the United States.

GCM - Guideline Public Company Method.

GNMA - Government National Mortgage Association.

GTM - Guideline Transaction Method.

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


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IP - Intellectual Property.

IPO - Initial public offering.

LCR - Liquidity coverage ratio.

LIBOR - London InterBank Offered Rates.

LTIP - Long-term incentive plan.

LTV - Loan to value.

MBS - Mortgage-backed securities.

Morgan Keegan - Morgan Keegan & Company, Inc.

MSAs - Metropolitan Statistical Areas.

MSR - Mortgage servicing right.

NM - Not meaningful.

NPR - Notice of Proposed Rulemaking.

OAS - Option-Adjusted Spread.

OCC - Office of the Comptroller of the Currency.

OCI - Other comprehensive income.

OIS - Overnight indexed swap.

OTTI - Other-than-temporary impairment.

Raymond James - Raymond James Financial, Inc.

RICO - Racketeer Influenced and Corrupt Organizations Act.

SEC - U.S. Securities and Exchange Commission.

SERP - Supplemental Executive Retirement Plan.

SSFA - Simplified Supervisory Formula Approach.

TDR - Troubled debt restructuring.

U.S. - United States.

U.S. Treasury - United States Department of the Treasury.

UTB - Unrecognized tax benefits.

VIE - Variable interest entity.




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Forward-Looking Statements

This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by us or on our behalf to analysts, investors, the media and others, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The terms "Regions," the "Company," "we," "us" and "our" mean Regions Financial Corporation, a Delaware corporation, and its subsidiaries when or where appropriate. The words "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "targets," "projects," "outlook," "forecast," "will," "may," "could," "should," "can," and similar expressions often signify forward-looking statements . Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management's current expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, and because they also relate to the future they are likewise subject to inherent uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Therefore, we caution you against relying on any of these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described below:

Current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, unemployment rates and potential reductions of economic growth, which may adversely affect our lending and other businesses and our financial results and conditions.

Possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, which could have a material adverse effect on our earnings.

The effects of a possible downgrade in the U.S. government's sovereign credit rating or outlook, which could result in risks to us and general economic conditions that we are not able to predict.

Possible changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital and liquidity.

Any impairment of our goodwill or other intangibles, or any adjustment of valuation allowances on our deferred tax assets due to adverse changes in the economic environment, declining operations of the reporting unit, or other factors.

Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.

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.


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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; disruption or damage to our systems; increased costs; losses; or adverse effects to our reputation.

Our ability to realize our efficiency ratio target as part of our expense management initiatives.

Significant disruption of, or loss of public confidence in, the Internet and services and devices used to access the Internet could affect the ability of our customers to access their accounts and conduct banking transactions.

Possible downgrades in our credit ratings or outlook could increase the costs of funding from capital markets.

The effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally could require us to change certain business practices, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.

The effects of the failure of any component of our business infrastructure provided by a third party could disrupt our businesses; result in the disclosure of and/or misuse of confidential information or proprietary information; increase our costs; negatively affect our reputation; and cause losses.

Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends to stockholders.

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.


6


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Other risks identified from time to time in reports that we file with the SEC.

The effects of any damage to our reputation resulting from developments related to any of the items identified above.

You should not place undue reliance on any forward-looking statements, which speak only as of the date made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible to predict all of them. We assume no obligation to update or revise any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.

See also the reports filed with the Securities and Exchange Commission, including the discussion under the "Risk Factors" section of Regions' Annual Report on Form 10-K for the year ended December 31, 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

September 30, 2016

December 31, 2015

(In millions, except share data)

Assets

Cash and due from banks

$

1,928


$

1,382


Interest-bearing deposits in other banks

2,310


3,932


Trading account securities

120


143


Securities held to maturity (estimated fair value of $1,485 and $1,969, respectively)

1,431


1,946


Securities available for sale

23,859


22,710


Loans held for sale (includes $549 and $353 measured at fair value, respectively)

571


448


Loans, net of unearned income

80,883


81,162


Allowance for loan losses

(1,126

)

(1,106

)

Net loans

79,757


80,056


Other earning assets

1,505


1,652


Premises and equipment, net

2,075


2,152


Interest receivable

305


319


Goodwill

4,882


4,878


Residential mortgage servicing rights at fair value

238


252


Other identifiable intangible assets

228


259


Other assets

5,968


5,921


Total assets

$

125,177


$

126,050


Liabilities and Stockholders' Equity

Deposits:

Non-interest-bearing

$

36,321


$

34,862


Interest-bearing

62,968


63,568


Total deposits

99,289


98,430


Borrowed funds:

Short-term borrowings:

Other short-term borrowings

-


10


Total short-term borrowings

-


10


Long-term borrowings

6,054


8,349


Total borrowed funds

6,054


8,359


Other liabilities

2,469


2,417


Total liabilities

107,812


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-1,277,600,517 and 1,338,591,703 shares, respectively

13


13


Additional paid-in capital

17,339


17,883


Retained earnings (deficit)

465


(115

)

Treasury stock, at cost-41,259,320 and 41,261,018 shares, respectively

(1,377

)

(1,377

)

Accumulated other comprehensive income (loss), net

105


(380

)

Total stockholders' equity

17,365


16,844


Total liabilities and stockholders' equity

$

125,177


$

126,050



See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions, except per share data)

Interest income, including other financing income on:

Loans, including fees

$

763


$

748


$

2,293


$

2,201


Securities - taxable

135


137


427


423


Loans held for sale

4


5


11


12


Trading account securities

-


-


4


4


Other earning assets

9


11


27


30


Operating lease assets

31


-


95


-


Total interest income, including other financing income

942


901


2,857


2,670


Interest expense on:

Deposits

31


27


86


82


Short-term borrowings

-


-


-


1


Long-term borrowings

51


38


148


116


Total interest expense

82


65


234


199


Depreciation expense on operating lease assets

25


-


78


-


Total interest expense and depreciation expense on operating lease assets

107


65


312


199


Net interest income and other financing income

835


836


2,545


2,471


Provision for loan losses

29


60


214


172


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

806


776


2,331


2,299


Non-interest income:

Service charges on deposit accounts

166


167


491


496


Card and ATM fees

105


93


299


268


Mortgage income

46


39


130


125


Securities gains, net

-


7


1


18


Other

282


191


710


650


Total non-interest income

599


497


1,631


1,557


Non-interest expense:

Salaries and employee benefits

486


470


1,441


1,405


Net occupancy expense

87


90


259


270


Furniture and equipment expense

80


77


237


224


Other

281


258


781


835


Total non-interest expense

934


895


2,718


2,734


Income from continuing operations before income taxes

471


378


1,244


1,122


Income tax expense

152


116


380


335


Income from continuing operations

319


262


864


787


Discontinued operations:

Income (loss) from discontinued operations before income taxes

2


(6

)

7


(16

)

Income tax expense (benefit)

1


(2

)

3


(6

)

Income (loss) from discontinued operations, net of tax

1


(4

)

4


(10

)

Net income

$

320


$

258


$

868


$

777


Net income from continuing operations available to common shareholders

$

303


$

246


$

816


$

739


Net income available to common shareholders

$

304


$

242


$

820


$

729


Weighted-average number of shares outstanding:

Basic

1,246


1,319


1,266


1,333


Diluted

1,252


1,326


1,270


1,343


Earnings per common share from continuing operations:

Basic

$

0.24


$

0.19


$

0.64


$

0.55


Diluted

0.24


0.19


0.64


0.55


Earnings per common share:

Basic

$

0.24


$

0.18


$

0.65


$

0.55


Diluted

0.24


0.18


0.65


0.54


Cash dividends declared per common share

0.065


0.06


0.19


0.17


See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended September 30

2016

2015

(In millions)

Net income

$

320


$

258


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 ($4) and ($1) tax effect, respectively)

(5

)

(2

)

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

5


2


Unrealized gains (losses) on securities available for sale:

Unrealized holding gains (losses) arising during the period (net of ($7) and $28 tax effect, respectively)

(13

)

47


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

-


5


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

(13

)

42


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

Unrealized holding gains (losses) on derivatives arising during the period (net of ($12) and $75 tax effect, respectively)

(18

)

121


Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $13 and $16 tax effect, respectively)

22


25


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

(40

)

96


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

)

(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

)

(9

)

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

5


8


Other comprehensive income (loss), net of tax

(43

)

148


Comprehensive income

$

277


$

406


Nine Months Ended September 30

2016

2015

(In millions)

Net income

$

868


$

777


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 ($8) and ($4) tax effect, respectively)

(12

)

(6

)

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

12


6


Unrealized gains (losses) on securities available for sale:

Unrealized holding gains (losses) arising during the period (net of $180 and ($17) tax effect, respectively)

295


(25

)

Less: reclassification adjustments for securities gains (losses) realized in net income (net of zero and $6 tax effect, respectively)

1


12


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

294


(37

)

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

Unrealized holding gains (losses) on derivatives arising during the period (net of $141 and $107 tax effect, respectively)

231


175


Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $41 and $41 tax effect, respectively)

68


67


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

163


108


Defined benefit pension plans and other post employment benefits:

Net actuarial gains (losses) arising during the period (net of $1 and zero tax effect, respectively)

(1

)

(2

)

Less: reclassification adjustments for amortization of actuarial loss and prior service cost realized in net income (net of ($9) and ($13) tax effect, respectively)

(17

)

(24

)

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

16


22


Other comprehensive income (loss), net of tax

485


99


Comprehensive income

$

1,353


$

876


See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Preferred Stock

Common Stock

Additional

Paid-In

Capital

Retained

Earnings

(Deficit)

Treasury

Stock,

At Cost

Accumulated

Other

Comprehensive

Income (Loss), Net

Total

Shares

Amount

Shares

Amount

(In millions, except per share data)

BALANCE AT JANUARY 1, 2015

1


$

884


1,354


$

14


$

18,767


$

(1,177

)

$

(1,377

)

$

(238

)

$

16,873


Net income

-


-


-


-


-


777


-


-


777


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

-


-


-


-


-


-


-


6


6


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

-


-


-


-


-


-


-


(37

)

(37

)

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

-


-


-


-


-


-


-


108


108


Net change from employee benefit plans, net of tax

-


-


-


-


-


-


-


22


22


Cash dividends declared-$0.17 per share

-


-


-


-


(226

)

-


-


-


(226

)

Preferred stock dividends

-


(48

)

-


-


-


-


-


-


(48

)

Common stock transactions:

Impact of share repurchase

-


-


(55

)

(1

)

(544

)

-


-


-


(545

)

Impact of stock transactions under compensation plans, net and other

-


-


5


-


22


-


-


-


22


BALANCE AT SEPTEMBER 30, 2015

1


$

836


1,304


$

13


$

18,019


$

(400

)

$

(1,377

)

$

(139

)

$

16,952


BALANCE AT JANUARY 1, 2016

1


$

820


1,297


$

13


$

17,883


$

(115

)

$

(1,377

)

$

(380

)

$

16,844


Net income

-


-


-


-


-


868


-


-


868


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

-


-


-


-


-


-


-


12


12


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

-


-


-


-


-


-


-


294


294


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

-


-


-


-


-


-


-


163


163


Net change from employee benefit plans, net of tax

-


-


-


-


-


-


-


16


16


Cash dividends declared-$0.19 per share

-


-


-


-


-


(240

)

-


-


(240

)

Preferred stock dividends

-


-


-


-


-


(48

)

-


-


(48

)

Common stock transactions:

Impact of share repurchase

-


-


(65

)

-


(569

)

-


-


-


(569

)

Impact of stock transactions under compensation plans, net and other

-


-


4


-


25


-


-


-


25


BALANCE AT SEPTEMBER 30, 2016

1


$

820


1,236


$

13


$

17,339


$

465


$

(1,377

)

$

105


$

17,365



See notes to consolidated financial statements.


11


Table of Contents



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


Nine Months Ended September 30

2016

2015

(In millions)

Operating activities:

Net income

$

868


$

777


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

Provision for loan losses

214


172


Depreciation, amortization and accretion, net

425


384


Securities (gains) losses, net

(1

)

(18

)

Deferred income tax expense

18


68


Originations and purchases of loans held for sale

(2,767

)

(1,931

)

Proceeds from sales of loans held for sale

2,711


2,087


(Gain) loss on sale of loans, net

(95

)

(70

)

(Gain) loss on early extinguishment of debt

14


43


Net change in operating assets and liabilities:

Trading account securities

23


-


Other earning assets

69


(158

)

Interest receivable and other assets

28


116


Other liabilities

157


(95

)

Other

76


36


Net cash from operating activities

1,740


1,411


Investing activities:

Proceeds from maturities of securities held to maturity

522


174


Proceeds from sales of securities available for sale

1,873


1,142


Proceeds from maturities of securities available for sale

3,325


2,958


Purchases of securities available for sale

(6,108

)

(4,169

)

Proceeds from sales of loans

86


59


Purchases of loans

(779

)

(857

)

Purchases of mortgage servicing rights

(35

)

(4

)

Net change in loans

720


(3,291

)

Net purchases of other assets

(107

)

(193

)

Net cash from investing activities

(503

)

(4,181

)

Financing activities:

Net change in deposits

859


2,978


Net change in short-term borrowings

(10

)

(2,253

)

Proceeds from long-term borrowings

1,607


4,997


Payments on long-term borrowings

(3,910

)

(1,142

)

Cash dividends on common stock

(236

)

(226

)

Cash dividends on preferred stock

(48

)

(48

)

Repurchase of common stock

(569

)

(544

)

Other

(6

)

12


Net cash from financing activities

(2,313

)

3,774


Net change in cash and cash equivalents

(1,076

)

1,004


Cash and cash equivalents at beginning of year

5,314


4,004


Cash and cash equivalents at end of period

$

4,238


$

5,008



See notes to consolidated financial statements.


12


Table of Contents



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Nine Months Ended September 30, 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 September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions, except per share data)

Non-interest expense:

Professional and legal expenses/(recoveries)

$

(2

)

$

7


$

(8

)

$

16


Other

-


(1

)

1


-


Total non-interest expense

(2

)

6


(7

)

16


Income (loss) from discontinued operations before income taxes

2


(6

)

7


(16

)

Income tax expense (benefit)

1


(2

)

3


(6

)

Income (loss) from discontinued operations, net of tax

$

1


$

(4

)

$

4


$

(10

)

Earnings (loss) per common share from discontinued operations:

Basic

$

0.00


$

(0.00

)

$

0.00


$

(0.01

)

Diluted

$

0.00


$

(0.00

)

$

0.00


$

(0.01

)


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:

September 30, 2016

Recognized in OCI (1)

Not Recognized in OCI

Amortized

Cost

Gross Unrealized Gains

Gross Unrealized Losses

Carrying Value

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Estimated

Fair

Value

(In millions)

Securities held to maturity:

Mortgage-backed securities:

Residential agency

$

1,316


-


(52

)

1,264


53


-


$

1,317


Commercial agency

171


-


(4

)

167


1


-


168


$

1,487


$

-


$

(56

)

$

1,431


$

54


$

-


$

1,485


Securities available for sale:

U.S. Treasury securities

$

237


$

5


$

-


$

242


$

242


Federal agency securities

37


1


-


38


38


Mortgage-backed securities:

Residential agency

17,189


328


(11

)

17,506


17,506


Residential non-agency

4


1


-


5


5


Commercial agency

3,333


81


(1

)

3,413


3,413


Commercial non-agency

1,125


19


(3

)

1,141


1,141


Corporate and other debt securities

1,304


47


(17

)

1,334


1,334


Equity securities

170


10


-


180


180


$

23,399


$

492


$

(32

)

$

23,859


$

23,859



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 $10.9 billion and $11.9 billion at September 30, 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 September 30, 2016 and December 31, 2015 , respectively.

The amortized cost and estimated fair value of securities available for sale and securities held to maturity at September 30, 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:

Mortgage-backed securities:

Residential agency

$

1,316


$

1,317


Commercial agency

171


168


$

1,487


$

1,485


Securities available for sale:

Due in one year or less

$

52


$

52


Due after one year through five years

463


475


Due after five years through ten years

808


836


Due after ten years

255


251


Mortgage-backed securities:

Residential agency

17,189


17,506


Residential non-agency

4


5


Commercial agency

3,333


3,413


Commercial non-agency

1,125


1,141


Equity securities

170


180


$

23,399


$

23,859


The following tables present gross unrealized losses and the related estimated fair value of securities available for sale and held to maturity at September 30, 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.

September 30, 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

$

-


$

-


$

388


$

(4

)

$

388


$

(4

)

Commercial agency

-


-


169


(3

)

169


(3

)

$

-


$

-


$

557


$

(7

)

$

557


$

(7

)

Securities available for sale:

U.S. Treasury securities

$

4


$

-


$

2


$

-


$

6


$

-


Federal agency securities

-


-


2


-


2


-


Mortgage-backed securities:

Residential agency

1,491


(4

)

604


(7

)

2,095


(11

)

       Residential non-agency

3


-


-


-


3


-


Commercial agency

282


(1

)

46


-


328


(1

)

Commercial non-agency

94


(1

)

245


(2

)

339


(3

)

All other securities

23


-


253


(17

)

276


(17

)

$

1,897


$

(6

)

$

1,152


$

(26

)

$

3,049


$

(32

)



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 520 at September 30, 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 market interest rates. In instances where an unrealized loss existed, there was no indication of an adverse change in credit on the underlying positions in the tables above. As it relates to these positions, management believes no individual unrealized loss, other than those discussed below, represented an 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 September 30, 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 nine months ended September 30, 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 September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

Gross realized gains

$

1


$

15


$

30


$

29


Gross realized losses

(1

)

(2

)

(28

)

(5

)

OTTI

-


(6

)

(1

)

(6

)

Securities gains (losses), net

$

-


$

7


$

1



$

18



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:

September 30, 2016

December 31, 2015

(In millions, net of unearned income)

Commercial and industrial

$

35,388


$

35,821


Commercial real estate mortgage-owner-occupied

7,007


7,538


Commercial real estate construction-owner-occupied

349


423


Total commercial

42,744


43,782


Commercial investor real estate mortgage

4,306


4,255


Commercial investor real estate construction

2,458


2,692


Total investor real estate

6,764


6,947


Residential first mortgage

13,402


12,811


Home equity

10,749


10,978


Indirect-vehicles

4,076


3,984


Indirect-other consumer

838


545


Consumer credit card

1,123


1,075


Other consumer

1,187


1,040


Total consumer

31,375


30,433


$

80,883


$

81,162


During the three months ended September 30, 2016 and 2015 , Regions purchased approximately $200 million and $310 million , respectively, in indirect-vehicles and indirect-other consumer loans from third parties. During the nine months ended September 30, 2016 and 2015, the comparable loan purchase amounts were approximately $779 million and $857 million , respectively.

At September 30, 2016 , $14.7 billion in securities and net eligible loans held by Regions were pledged to secure current and potential borrowings from the FHLB. At September 30, 2016 , an additional $19.7 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 and nine months ended September 30, 2016 and 2015 . The total allowance for loan losses and the related loan portfolio ending balances as of September 30, 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 September 30, 2016

Commercial

Investor Real

Estate

Consumer

Total

(In millions)

Allowance for loan losses, July 1, 2016

$

825


$

87


$

239


$

1,151


Provision (credit) for loan losses

(15

)

(7

)

51


29


Loan losses:

Charge-offs

(31

)

(1

)

(62

)

(94

)

Recoveries

19


5


16


40


Net loan losses

(12

)

4


(46

)

(54

)

Allowance for loan losses, September 30, 2016

798


84


244


1,126


Reserve for unfunded credit commitments, July 1, 2016

59


5


-


64


Provision (credit) for unfunded credit losses

8


-


-


8


Reserve for unfunded credit commitments, September 30, 2016

67


5


-


72


Allowance for credit losses, September 30, 2016

$

865


$

89


$

244


$

1,198


Three Months Ended September 30, 2015

Commercial

Investor Real

Estate

Consumer

Total

(In millions)

Allowance for loan losses, July 1, 2015

$

740


$

123


$

252


$

1,115


Provision (credit) for loan losses

32


(16

)

44


60


Loan losses:

Charge-offs

(33

)

(3

)

(59

)

(95

)

Recoveries

14


5


16


35


Net loan losses

(19

)

2


(43

)

(60

)

Allowance for loan losses, September 30, 2015

753


109


253


1,115


Reserve for unfunded credit commitments, July 1, 2015

59


5


-


64


Provision (credit) for unfunded credit losses

-


-


-


-


Reserve for unfunded credit commitments, September 30, 2015

59


5


-


64


Allowance for credit losses, September 30, 2015

$

812


$

114


$

253


$

1,179


Nine Months Ended September 30, 2016

Commercial

Investor Real

Estate

Consumer

Total

(In millions)

Allowance for loan losses, January 1, 2016

$

758


$

97


$

251


$

1,106


Provision (credit) for loan losses

108


(21

)

127


214


Loan losses:

Charge-offs

(102

)

(2

)

(184

)

(288

)

Recoveries

34


10


50


94


Net loan losses

(68

)

8


(134

)

(194

)

Allowance for loan losses, September 30, 2016

798


84


244


1,126


Reserve for unfunded credit commitments, January 1, 2016

47


5


-


52


Provision (credit) for unfunded credit losses

20


-


-


20


Reserve for unfunded credit commitments, September 30, 2016

67


5


-


72


Allowance for credit losses, September 30, 2016

$

865


$

89


$

244


$

1,198


Portion of ending allowance for loan losses:

Individually evaluated for impairment

$

252


$

19


$

62


$

333


Collectively evaluated for impairment

546


65


182


793


Total allowance for loan losses

$

798


$

84


$

244


$

1,126


Portion of loan portfolio ending balance:

Individually evaluated for impairment

$

1,119


$

140


$

785


$

2,044


Collectively evaluated for impairment

41,625


6,624


30,590


78,839


Total loans evaluated for impairment

$

42,744


$

6,764


$

31,375


$

80,883



19


Table of Contents



Nine Months Ended September 30, 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

142


(44

)

74


172


Loan losses:

Charge-offs

(92

)

(15

)

(175

)

(282

)

Recoveries

49


18


55


122


Net loan losses

(43

)

3


(120

)

(160

)

Allowance for loan losses, September 30, 2015

753


109


253


1,115


Reserve for unfunded credit commitments, January 1, 2015

57


8


-


65


Provision (credit) for unfunded credit losses

2


(3

)

-


(1

)

Reserve for unfunded credit commitments, September 30, 2015

59


5


-


64


Allowance for credit losses, September 30, 2015

$

812


$

114


$

253


$

1,179


Portion of ending allowance for loan losses:

Individually evaluated for impairment

$

187


$

27


$

70


$

284


Collectively evaluated for impairment

566


82


183


831


Total allowance for loan losses

$

753


$

109


$

253


$

1,115


Portion of loan portfolio ending balance:

Individually evaluated for impairment

$

744


$

192


$

846


$

1,782


Collectively evaluated for impairment

43,309


6,719


29,253


79,281


Total loans evaluated for impairment

$

44,053


$

6,911


$

30,099


$

81,063



PORTFOLIO SEGMENT RISK FACTORS

The following describe the risk characteristics relevant to each of the portfolio segments.

Commercial -The commercial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers' business operations, and the sensitivity to market fluctuations in commodity prices.

Investor Real Estate -Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions' investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions' markets. Additionally, these loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Loans in this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer -The consumer loan portfolio segment includes residential first mortgage, home equity, indirect-vehicles, indirect-other consumer, consumer credit card, and other consumer loans. Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower's residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is secured directly affect the amount of credit extended and, in addition, changes in these values impact the depth of potential losses. Indirect-vehicles lending, which is lending initiated through third-party business partners, largely consists of loans made through automotive dealerships. Indirect-other consumer lending represents other point of sale lending through third parties. Consumer credit card includes Regions branded consumer credit card accounts. Other consumer loans include other revolving consumer accounts, direct consumer loans, and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.


20


Table of Contents



CREDIT QUALITY INDICATORS

The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of September 30, 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 that may, if not reversed or corrected, weaken the credit or inadequately protect the Company's position at some future date. Obligations in this category may also be subject to economic or market conditions that may, in the future, have an adverse effect on debt service ability;

Substandard Accrual-includes obligations that exhibit a well-defined weakness that presently jeopardizes debt repayment, even though they are currently performing. These obligations are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected;

Non-accrual-includes obligations where management has determined that full payment of principal and interest is in doubt.

Substandard accrual and non-accrual loans are often collectively referred to as "classified." Special mention, substandard accrual, and non-accrual loans are often collectively referred to as "criticized and classified." Classes in the consumer portfolio segment are disaggregated by accrual status.

September 30, 2016

Pass

Special  Mention

Substandard

Accrual

Non-accrual

Total

(In millions)

Commercial and industrial

$

32,854


$

744


$

1,097


$

693


$

35,388


Commercial real estate mortgage-owner-occupied

6,288


257


241


221


7,007


Commercial real estate construction-owner-occupied

326


10


10


3


349


Total commercial

$

39,468


$

1,011


$

1,348


$

917


$

42,744


Commercial investor real estate mortgage

$

4,056


$

129


$

103


$

18


$

4,306


Commercial investor real estate construction

2,242


189


26


1


2,458


Total investor real estate

$

6,298


$

318


$

129


$

19


$

6,764


Accrual

Non-accrual

Total

(In millions)

Residential first mortgage

$

13,352


$

50


$

13,402


Home equity

10,657


92


10,749


Indirect-vehicles

4,076


-


4,076


Indirect-other consumer

838


-


838


Consumer credit card

1,123


-


1,123


Other consumer

1,187


-


1,187


Total consumer

$

31,233


$

142


$

31,375


$

80,883



21


Table of Contents



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



AGING ANALYSIS

The following tables include an aging analysis of days past due (DPD) for each portfolio segment and class as of September 30, 2016 and December 31, 2015 :

September 30, 2016

Accrual Loans

30-59 DPD

60-89 DPD

90+ DPD

Total

30+ DPD

Total

Accrual

Non-accrual

Total

(In millions)

Commercial and industrial

$

14


$

7


$

5


$

26


$

34,695


$

693


$

35,388


Commercial real estate

mortgage-owner-occupied

50


9


3


62


6,786


221


7,007


Commercial real estate construction-owner-occupied

1


1


-


2


346


3


349


Total commercial

65


17


8


90


41,827


917


42,744


Commercial investor real estate mortgage

5


1


-


6


4,288


18


4,306


Commercial investor real estate construction

-


-


-


-


2,457


1


2,458


Total investor real estate

5


1


-


6


6,745


19


6,764


Residential first mortgage

87


58


205


350


13,352


50


13,402


Home equity

54


25


39


118


10,657


92


10,749


Indirect-vehicles

46


11


9


66


4,076


-


4,076


Indirect-other consumer

3


2


-


5


838


-


838


Consumer credit card

8


7


13


28


1,123


-


1,123


Other consumer

14


5


3


22


1,187


-


1,187


Total consumer

212


108


269


589


31,233


142


31,375


$

282


$

126


$

277


$

685


$

79,805


$

1,078


$

80,883



22


Table of Contents



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



IMPAIRED LOANS

The following tables present details related to the Company's impaired loans as of September 30, 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 that have been fully charged-off do not appear in the tables below.

Non-accrual Impaired Loans As of September 30, 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

$

733


$

49


$

684


$

81


$

603


$

162


28.8

%

Commercial real estate mortgage-owner-occupied

239


18


221


38


183


56


31.0


Commercial real estate construction-owner-occupied

4


1


3


-


3


2


75.0


Total commercial

976


68


908


119


789


220


29.5


Commercial investor real estate mortgage

21


3


18


5


13


6


42.9


Commercial investor real estate construction

1


-


1


-


1


-


-


Total investor real estate

22


3


19


5


14


6


40.9


Residential first mortgage

43


13


30


-


30


4


39.5


Home equity

12


1


11


-


11


-


8.3


Total consumer

55


14


41


-


41


4


32.7


$

1,053


$

85


$

968


$

124


$

844


$

230


29.9

%


23


Table of Contents



Accruing Impaired Loans As of September 30, 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

$

150


$

2


$

148


$

26


18.7

%

Commercial real estate mortgage-owner-occupied

68


5


63


6


16.2


Total commercial

218


7


211


32


17.9


Commercial investor real estate mortgage

93


7


86


9


17.2


Commercial investor real estate construction

35


-


35


4


11.4


Total investor real estate

128


7


121


13


15.6


Residential first mortgage

441


12


429


52


14.5


Home equity

302


-


302


6


2.0


Consumer credit card

2


-


2


-


-


Other consumer

11


-


11


-


-


Total consumer

756


12


744


58


9.3


$

1,102


$

26


$

1,076


$

103


11.7

%


Total Impaired Loans As of September 30, 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

$

883


$

51


$

832


$

81


$

751


$

188


27.1

%

Commercial real estate mortgage-owner-occupied

307


23


284


38


246


62


27.7


Commercial real estate construction-owner-occupied

4


1


3


-


3


2


75.0


Total commercial

1,194


75


1,119


119


1,000


252


27.4


Commercial investor real estate mortgage

114


10


104


5


99


15


21.9


Commercial investor real estate construction

36


-


36


-


36


4


11.1


Total investor real estate

150


10


140


5


135


19


19.3


Residential first mortgage

484


25


459


-


459


56


16.7


Home equity

314


1


313


-


313


6


2.2


Consumer credit card

2


-


2


-


2


-


-


Other consumer

11


-


11


-


11


-


-


Total consumer

811


26


785


-


785


62


10.9


$

2,155


$

111


$

2,044


$

124


$

1,920


$

333


20.6

%



24


Table of Contents




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

%

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

%



25


Table of Contents



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.



26


Table of Contents



The following table presents the average balances of total impaired loans and interest income for the three and nine months ended September 30, 2016 and 2015 . Interest income recognized represents interest on accruing loans modified in a TDR. TDRs are considered impaired loans.

Three Months Ended September 30

Nine Months Ended September 30

2016

2015

2016

2015

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

Average

Balance

Interest

Income

Recognized

(In millions)

Commercial and industrial

$

816


$

1


$

379


$

1


$

670


$

4


$

378


$

4


Commercial real estate mortgage-owner-occupied

296


1


322


2


313


3


350


7


Commercial real estate construction-owner-occupied

4


-


4


-


3


-


4


-


Total commercial

1,116


2


705


3


986


7


732


11


Commercial investor real estate mortgage

117


1


210


2


128


4


266


8


Commercial investor real estate construction

36


1


14


-


31


1


26


1


Total investor real estate

153


2


224


2


159


5


292


9


Residential first mortgage

464


4


477


3


473


12


476


11


Home equity

317


3


352


5


328


12


357


14


Indirect-vehicles

-


-


1


-


-


-


1


-


Consumer credit card

2


-


2


-


2


-


2


-


Other consumer

11


1


13


1


12


1


15


1


Total consumer

794


8


845


9


815


25


851


26


Total impaired loans

$

2,063


$

12


$

1,774


$

14


$

1,960


$

37


$

1,875


$

46


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 September 30, 2016 , approximately $38 million in residential first mortgage TDRs were in excess of 180 days past due and were considered collateral-dependent. At September 30, 2016 , approximately $5 million in home equity first lien TDRs were in excess of 180 days past due and approximately $4 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.


27


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. Loans first reported as TDRs during the nine months ended September 30, 2016 and 2015 totaled approximately $347 million and $217 million , respectively.

Three Months Ended September 30, 2016

Financial Impact

of Modifications

Considered TDRs

Number of

Obligors

Recorded

Investment

Increase in

Allowance at

Modification

(Dollars in millions)

Commercial and industrial

47


$

117


$

2


Commercial real estate mortgage-owner-occupied

22


26


1


Total commercial

69


143


3


Commercial investor real estate mortgage

19


27


-


Commercial investor real estate construction

3


25


1


Total investor real estate

22


52


1


Residential first mortgage

51


9


1


Home equity

57


2


-


Consumer credit card

14


1


-


Indirect-vehicles and other consumer

47


1


-


Total consumer

169


13


1


260


$

208


$

5


Three Months Ended September 30, 2015

Financial Impact

of Modifications

Considered TDRs

Number of

Obligors

Recorded

Investment

Increase in

Allowance at

Modification

(Dollars in millions)

Commercial and industrial

47


$

43


$

1


Commercial real estate mortgage-owner-occupied

44


26


1


Total commercial

91


69


2


Commercial investor real estate mortgage

32


68


2


Commercial investor real estate construction

1


1


-


Total investor real estate

33


69


2


Residential first mortgage

92


31


4


Home equity

139


8


-


Consumer credit card

30


-


-


Indirect-vehicles and other consumer

69


1


-


Total consumer

330


40


4


454


$

178


$

8



28


Table of Contents



Nine Months Ended September 30, 2016

Financial Impact
of Modifications
Considered TDRs

Number of
Obligors

Recorded
Investment

Increase in
Allowance at
Modification

(Dollars in millions)

Commercial and industrial

142


$

298


$

8


Commercial real estate mortgage-owner-occupied

98


60


2


Total commercial

240


358


10


Commercial investor real estate mortgage

68


87


1


Commercial investor real estate construction

8


36


1


Total investor real estate

76


123


2


Residential first mortgage

189


38


5


Home equity

263


13


-


Consumer credit card

65


1


-


Indirect-vehicles and other consumer

148


2


-


Total consumer

665


54


5


981


$

535


$

17


Nine Months Ended September 30, 2015

Financial Impact
of Modifications
Considered TDRs

Number of
Obligors

Recorded
Investment

Increase in
Allowance at
Modification

(Dollars in millions)

Commercial and industrial

150


$

145


$

3


Commercial real estate mortgage-owner-occupied

147


88


3


Total commercial

297


233


6


Commercial investor real estate mortgage

92


107


3


Commercial investor real estate construction

14


8


-


Total investor real estate

106


115


3


Residential first mortgage

321


83


11


Home equity

451


23


-


Consumer credit card

103


1


-


Indirect-vehicles and other consumer

265


3


-


Total consumer

1,140


110


11


1,543


$

458


$

20


Defaulted TDRs

The following table presents, by portfolio segment and class, TDRs that defaulted during the three and nine months ended September 30, 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 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 .


29


Table of Contents



Three Months Ended September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

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

Commercial and industrial

$

16


$

4


$

28


$

8


Commercial real estate mortgage-owner-occupied

1


3


2


6


Total commercial

17


7


30


14


Commercial investor real estate mortgage

1


-


2


1


Commercial investor real estate construction

1


-


1


-


Total investor real estate

2


-


3


1


Residential first mortgage

7


7


18


15


Home equity

-


1


1


2


Total consumer

7


8


19


17


$

26


$

15


$

52


$

32


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 September 30, 2016 , approximately $66 million of commercial and investor real estate loans modified in a TDR during the three months ended September 30, 2016 were on non-accrual status. Approximately 1.2 percent of this amount was 90 days past due.

At September 30, 2016 , Regions had restructured binding unfunded commitments totaling $51 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 September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

Carrying value, beginning of period

$

216


$

268


$

252


$

257


Additions

34


9


73


28


Increase (decrease) in fair value (1) :

Due to change in valuation inputs or assumptions

(2

)

(25

)

(60

)

(14

)

Economic amortization associated with borrower repayments

(10

)

(11

)

(27

)

(30

)

Carrying value, end of period

$

238


$

241


$

238


$

241


________

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


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


On September 1, 2016, the Company purchased the rights to service approximately $2.8 billion in residential mortgage loans for approximately $22 million . However, the Company paid $11 million as of September 30, 2016 and the balance of $11 million will be paid in the fourth quarter of 2016.



30


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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:

September 30

2016

2015

(Dollars in millions)

Unpaid principal balance

$

29,657


$

26,220


Weighted-average prepayment speed (CPR; percentage)

12.3

%

12.0

%

Estimated impact on fair value of a 10% increase

$

(13

)

$

(13

)

Estimated impact on fair value of a 20% increase

$

(24

)

$

(25

)

Option-adjusted spread (basis points)

1,060


999


Estimated impact on fair value of a 10% increase

$

(9

)

$

(9

)

Estimated impact on fair value of a 20% increase

$

(18

)

$

(18

)

Weighted-average coupon interest rate

4.2

%

4.4

%

Weighted-average remaining maturity (months)

280


279


Weighted-average servicing fee (basis points)

27.6


27.9


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 September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

Servicing related fees and other ancillary income

$

21


$

21


$

63


$

62


Residential mortgage loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. Regions may be required to repurchase these loans at par, or make-whole or indemnify the purchasers for losses incurred when representations and warranties are breached.

Regions maintains an immaterial repurchase liability related to residential mortgage loans sold with representations and warranty provisions. This repurchase liability is reported in other liabilities on the consolidated balance sheets and reflects management's estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income.

COMMERCIAL MORTGAGE BANKING ACTIVITIES

On July 18, 2014, Regions was approved as a Fannie Mae DUS lender and acquired a DUS servicing portfolio totaling approximately $1.0 billion . The Fannie Mae DUS program provides liquidity to the multi-family housing market. As part of the transaction, Regions recorded $12 million in commercial MSRs and $15 million in intangible assets associated with the DUS license purchased. Regions also assumed a loss share guarantee associated with the purchased portfolio and any future originations. Regions estimated the fair value of the loss share guarantee to be approximately $4 million . See Note 1 "Summary of Significant Accounting Policies" in the 2015 Annual Report on Form 10-K for additional information. Also see Note 14 herein for additional information related to the guarantee.

As of September 30, 2016 and December 31, 2015 , the DUS servicing portfolio was approximately $1.7 billion and $1.2 billion , respectively. The related commercial MSRs were valued at approximately $28 million and $16 million at September 30, 2016 and December 31, 2015 , respectively. The loss share guarantee was valued at approximately $3 million at both September 30, 2016 and December 31, 2015 .


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Table of Contents



NOTE 6. GOODWILL

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

September 30, 2016

December 31, 2015

(In millions)

Corporate Bank

$

2,452


$

2,305


Consumer Bank

1,978


2,095


Wealth Management

452


478


$

4,882


$

4,878


Regions evaluates each reporting unit's goodwill for impairment on an annual basis in the fourth quarter, or more often if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. A detailed description of the Company's methodology and valuation approaches used to determine the estimated fair value of each reporting unit is included in the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2015. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill.

During the third quarter of 2016, Regions assessed events and circumstances for all three reporting units as of September 30, 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.

During the first quarter of 2016, Regions reorganized its internal management structure and, accordingly, its segment reporting structure. Due to the organizational realignment, Regions determined that quantitative testing of goodwill was required for all reporting units, and goodwill was reallocated to each reporting unit using a relative fair value approach. Results of the first quarter 2016 goodwill test indicated that the estimated fair value of each reporting unit exceeded its carrying amounts as of the test date. Additionally, after assessing the indicators noted above, Regions determined that it was not more likely than not that the fair value of each of its reporting units had declined below their carrying value as of September 30, 2016. Therefore, Regions determined that a test of goodwill impairment was not required for each of Regions' reporting units for the September 30, 2016 interim period.


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Table of Contents



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:

September 30, 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 each of the first three quarters of 2016 and 2015. Series B Preferred Stock dividends were also $8 million for each of the first three 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.

In the event Series A and Series B preferred shares are redeemed at the liquidation amounts, $113 million and $67 million excess of the redemption amount over the carrying amount will be recognized, respectively. Approximately $100 million of Series A preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $13 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders. Approximately $52 million of Series B preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $15 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders.

COMMON STOCK

On June 29, 2016, Regions received no objection from the Federal Reserve to its 2016 capital plan that was submitted as part of the CCAR process. In addition to continuing the $0.065 quarterly common stock dividend, actions that Regions may undertake as outlined in its capital plan include the repurchase of up to $640 million in common shares. The capital plan also provides the potential for a dividend increase beginning in the second quarter of 2017, which is expected to be considered by the Board in early 2017.

On July 14, 2016, Regions' Board authorized a new $640 million common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2016 through the second quarter of 2017. As of September 30, 2016, Regions had repurchased approximately 23.1 million shares of common stock at a total cost of approximately $215 million . On October 12, 2016, Regions' Board authorized an additional $120 million repurchase, which increases the total amount authorized under the plan to $760 million . The Company continued to repurchase shares under this plan in the fourth quarter of 2016, and as of November 3, 2016, Regions had additional repurchases of approximately 10.9 million shares of common stock at a total cost of approximately $116.7 million . All of these shares were immediately retired upon repurchase and therefore will not be included in treasury stock.

The Board declared a $0.065 per share cash dividend on common stock for the second and third quarter s of 2016 and $0.06 per common share for the first quarter of 2016, totaling $0.19 per share cash dividend for the first nine months of 2016. The Board declared a $0.06 per share cash dividend on common stock for the second and third quarters of 2015, and a $0.05 per share cash dividend for the first quarter of 2015, totaling $0.17 per share cash dividend for the first nine months of 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. During the first quarter of 2016, the Company achieved positive retained earnings and common stock dividends were recorded as a reduction of retained earnings.


33


Table of Contents



ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

Three Months Ended September 30, 2016

Unrealized losses on securities transferred to held to maturity

Unrealized gains (losses) on securities available for sale

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

Defined benefit

pension plans and other post

employment

benefits

Accumulated

other

comprehensive

income (loss),

net of tax

(In millions)

Beginning of period

$

(40

)

$

297


$

278


$

(387

)

$

148


Net change

5


(13

)

(40

)

5


(43

)

End of period

$

(35

)

$

284


$

238


$

(382

)

$

105


Three Months Ended September 30, 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

$

(51

)

$

96


$

45


$

(377

)

$

(287

)

Net change

2


42


96


8


148


End of period

$

(49

)

$

138


$

141


$

(369

)

$

(139

)

Nine Months Ended September 30, 2016

Unrealized losses on securities transferred to held to maturity

Unrealized gains (losses) on securities available for sale

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

Defined benefit pension plans and other post employment benefits

Accumulated other comprehensive
income (loss), net of tax

(In millions)

Beginning of period

$

(47

)

$

(10

)

$

75


$

(398

)

$

(380

)

Net change

12


294


163


16


485


End of period

$

(35

)

$

284


$

238


$

(382

)

$

105


Nine Months Ended September 30, 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

6


(37

)

108


22


99


End of period

$

(49

)

$

138


$

141


$

(369

)

$

(139

)


34


Table of Contents



The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 :

Three Months Ended September 30, 2016

Three Months Ended September 30, 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:

$

(9

)

$

(3

)

Net interest income and other financing income

4


1


Tax (expense) or benefit

$

(5

)

$

(2

)

Net of tax

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

$

-


$

7


Securities gains (losses), net

-


(2

)

Tax (expense) or benefit

$

-


$

5


Net of tax

Gains and (losses) on cash flow hedges:

Interest rate contracts

$

35


$

41


Net interest income and other financing income

(13

)

(16

)

Tax (expense) or benefit

$

22


$

25


Net of tax

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

Prior-service cost

$

-


$

(1

)

(2)

Actuarial gains (losses)

(9

)

(12

)

(2)

(9

)

(13

)

Total before tax

3


4


Tax (expense) or benefit

$

(6

)

$

(9

)

Net of tax

Total reclassifications for the period

$

11


$

19


Net of tax



35


Table of Contents



Nine Months Ended September 30, 2016

Nine Months Ended September 30, 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:

$

(20

)

$

(10

)

Net interest income and other financing income

8


4


Tax (expense) or benefit

$

(12

)

$

(6

)

Net of tax

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

$

1


$

18


Securities gains (losses), net

-


(6

)

Tax (expense) or benefit

$

1


$

12


Net of tax

Gains and (losses) on cash flow hedges:

Interest rate contracts

$

109


$

108


Net interest income and other financing income

(41

)

(41

)

Tax (expense) or benefit

$

68


$

67


Net of tax

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

Prior-service cost

$

-


$

(1

)

(2)

Actuarial gains (losses)

(26

)

(36

)

(2)

(26

)

(37

)

Total before tax

9


13


Tax (expense) or benefit

$

(17

)

$

(24

)

Net of tax

Total reclassifications for the period

$

40


$

49


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).


36


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 September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions, except per share amounts)

Numerator:

Income from continuing operations

$

319


$

262


$

864


$

787


Preferred stock dividends

(16

)

(16

)

(48

)

(48

)

Income from continuing operations available to common shareholders

303


246


816


739


Income (loss) from discontinued operations, net of tax

1


(4

)

4


(10

)

Net income available to common shareholders

$

304


$

242


$

820


$

729


Denominator:

Weighted-average common shares outstanding-basic

1,246


1,319


1,266


1,333


Potential common shares

6


7


4


10


Weighted-average common shares outstanding-diluted

1,252


1,326


1,270


1,343


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

Basic

$

0.24


$

0.19


$

0.64


$

0.55


Diluted

0.24


0.19


0.64


0.55


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

Basic

0.00


(0.00

)

0.00


(0.01

)

Diluted

0.00


(0.00

)

0.00


(0.01

)

Earnings per common share (1) :

Basic

0.24


0.18


0.65


0.55


Diluted

0.24


0.18


0.65


0.54


________

(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 and nine months ended September 30, 2015 due to a net loss.

The effect from the assumed exercise of 27 million and 29 million stock options for the three and nine months ended September 30, 2016 , 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. The effect from the assumed exercise of 29 million stock options for both the three and nine months ended September 30, 2015 was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share.

NOTE 9. SHARE-BASED PAYMENTS

Regions administers long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock awards, performance awards and stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by stockholders. Incentive awards usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans are typically ten years from the date of the grant.

On April 23, 2015, the stockholders of the Company approved the Regions Financial Corporation 2015 LTIP , which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2015 LTIP authorizes 60 million common share equivalents


37


Table of Contents



available for grant, where grants of options and grants of full value awards (e.g., shares of restricted stock, restricted stock units and performance stock units) count as one share equivalent. Unless otherwise determined by the Compensation Committee of the Board, grants of restricted stock, restricted stock units, and performance stock units accrue dividends, or their notional equivalent, as they are declared by the Board, and are paid upon vesting of the award. Upon adoption of the 2015 LTIP, Regions closed the prior long-term incentive plan to new grants, and, accordingly, prospective grants must be made under the 2015 LTIP or a successor plan. All existing grants under prior long-term incentive plans are unaffected by adoption of the 2015 LTIP. The number of remaining share equivalents available for future issuance under the 2015 LTIP was approximately 48 million at September 30, 2016 .

STOCK OPTIONS

The following table summarizes the activity related to stock options:

Nine Months Ended September 30

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


Exercised

(568,882

)

5.86


(535,107

)

6.92


Forfeited or expired

(3,840,704

)

34.68


(5,410,769

)

31.82


Outstanding at end of period

14,940,571


$

18.14


19,370,800


$

21.07


Exercisable at end of period

14,940,571


$

18.14


19,370,800


$

21.07


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:

Nine Months Ended September 30

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

6,840,385


7.92


6,622,682


9.90


Vested

(5,735,271

)

8.25


(8,106,010

)

6.07


Forfeited

(686,347

)

9.18


(506,271

)

8.54


Non-vested at end of period

16,793,009


$

9.31


16,437,810


$

9.51



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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 September 30

2016

2015

2016

2015

2016

2015

(In millions)

Service cost

$

9


$

10


$

1


$

1


$

10


$

11


Interest cost

19


21


1


2


20


23


Expected return on plan assets

(36

)

(38

)

-


-


(36

)

(38

)

Amortization of actuarial loss

8


11


1


1


9


12


Amortization of prior service cost

-


-


-


1


-


1


Net periodic pension cost (credit)

$

-


$

4


$

3


$

5


$

3


$

9


Qualified Plan

Non-qualified Plans

Total

Nine Months Ended September 30

2016

2015

2016

2015

2016

2015

(In millions)

Service cost

$

26


$

30


$

3


$

4


$

29


$

34


Interest cost

55


63


4


5


59


68


Expected return on plan assets

(108

)

(112

)

-


-


(108

)

(112

)

Amortization of actuarial loss

24


33


2


3


26


36


Amortization of prior service cost

-


-


-


1


-


1


Net periodic pension cost (credit)

$

(3

)

$

14


$

9


$

13


$

6


$

27


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 remained 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 nine 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 nine months ended September 30, 2016 or 2015 .


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NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The following tables present the notional amount and estimated fair value of derivative instruments on a gross basis as of September 30, 2016 and December 31, 2015 .

September 30, 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

$

2,310


$

6


$

45


$

2,450


$

5


$

27


Derivatives in cash flow hedging relationships:

Interest rate swaps

9,000


97


2


9,800


109


9


Total derivatives designated as hedging instruments

$

11,310


$

103


$

47


$

12,250


$

114


$

36


Derivatives not designated as hedging instruments:

Interest rate swaps

$

41,529


$

641


$

655


$

40,612


$

496


$

528


Interest rate options

3,723


18


1


3,441


11


1


Interest rate futures and forward commitments

20,693


3


8


17,288


5


6


Other contracts

5,255


90


81


4,367


200


187


Total derivatives not designated as hedging instruments

$

71,200


$

752


$

745


$

65,708


$

712


$

722


Total derivatives

$

82,510


$

855


$

792


$

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 include 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 $179 million and $24 million in accumulated other comprehensive income (loss) at September 30, 2016 and 2015 , respectively, related to terminated cash flow hedges of loan instruments, which will be


40


Table of Contents



amortized into earnings in conjunction with the recognition of interest payments through 2025. Regions recognized pre-tax income of $22 million and $11 million during the three months ended September 30, 2016 and 2015 , respectively, and pre-tax income of $46 million and $33 million during the nine months ended September 30, 2016 and 2015 , respectively, related to the amortization of cash flow hedges of loan instruments.

Regions expects to reclassify out of accumulated other comprehensive income (loss) and into earnings approximately $123 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 $76 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 nine years as of September 30, 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 September 30

Three Months Ended September 30

2016

2015

2016

2015

(In millions)

(In millions)

Fair Value Hedges:

Interest rate swaps on:

Debt/CDs

$

2


$

5


Interest expense

$

-


$

(1

)

Debt/CDs

(23

)

10


Other non-interest expense

24


(11

)

Securities available for sale

(2

)

(3

)

Interest income

-


-


Securities available for sale

2


(23

)

Other non-interest expense

(5

)

21


Total

$

(21

)

$

(11

)

$

19


$

9


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 September 30

Three Months Ended September 30

2016

2015

2016

2015

(In millions)

(In millions)

Cash Flow Hedges:

Interest rate swaps

$

(40

)

$

96


Interest income on loans

$

35


$

41


Total

$

(40

)

$

96


$

35


$

41



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

Nine Months Ended September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

(In millions)

Fair Value Hedges:

Interest rate swaps on:

Debt/CDs

$

10


$

13


Interest expense

$

(2

)

$

5


Debt/CDs

4


14


Other non-interest expense

(3

)

(15

)

Securities available for sale

(7

)

(11

)

Interest income

-


-


Securities available for sale

(36

)

(18

)

Other non-interest expense

32


15


Total

$

(29

)

$

(2

)

$

27


$

5



41


Table of Contents



Effective Portion (3)

Gain or (Loss) Recognized in AOCI (1)

Location of Amounts Reclassified from AOCI into Income

Gain or (Loss) Reclassified from AOCI into Income (2)

Nine Months Ended September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

(In millions)

Cash Flow Hedges:

Interest rate swaps

$

163


$

108


Interest income on loans

$

109


$

108


Total

$

163


$

108


$

109


$

108


______

(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 September 30, 2016 and December 31, 2015 , Regions had $446 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 in mortgage income. Commercial mortgage loans held for sale are recorded at either the lower of cost or market or at fair value based on management's election. At September 30, 2016 and December 31, 2015 , Regions had $802 million and $666 million , respectively, in total notional amounts related to these forward sale commitments. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to residential mortgage loans are included in mortgage income. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to commercial mortgage loans are included in capital markets fee income and other.

Regions has elected to account for residential MSRs at fair value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the effect of changes in the fair value of its residential MSRs on its consolidated statements of income. As of September 30, 2016 and December 31, 2015 , the total notional amount related to these contracts was $5.8 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 and nine months ended September 30, 2016 and 2015 :


42


Table of Contents



Three Months Ended September 30

Nine Months Ended September 30

Derivatives Not Designated as Hedging Instruments

2016

2015

2016

2015

(In millions)

Capital markets fee income and other (1) :

Interest rate swaps

$

4


$

3


$

7


$

11


Interest rate options

2


5


16


9


Interest rate futures and forward commitments

1


1


4


-


Other contracts

(11

)

8


(9

)

1


Total capital markets fee income and other

(4

)

17


18


21


Mortgage income:

Interest rate swaps

(3

)

22


45


19


Interest rate options

(1

)

-


7


4


Interest rate futures and forward commitments

8


(8

)

9


(1

)

Total mortgage income

4


14


61


22


$

-


$

31


$

79


$

43


______

(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 September 30, 2016 and December 31, 2015 , totaled approximately $463 million and $406 million , respectively. These amounts represent the net credit risk on all trading and other derivative positions held by Regions.

CREDIT DERIVATIVES

Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2016 and 2023. 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 if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.

Regions' maximum potential amount of future payments under these contracts as of September 30, 2016 was approximately $90 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 September 30, 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.

Regions has bought credit protection in the form of credit default indices. These indices, which meet the definition of credit derivatives, were entered into in the ordinary course of business to economically hedge credit spread risk in commercial mortgage loans held for sale whereby the fair value option has been elected. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if losses on the underlying index exceed a certain threshold, dependent upon the tranche rating of the capital structure.

CONTINGENT FEATURES

Certain of Regions' derivative instrument contracts with broker-dealers contain credit-related termination provisions and/or credit-related provisions regarding the posting of collateral, allowing those broker-dealers to terminate the contracts in the event that Regions' and/or Regions Bank's credit ratings falls below specified ratings from certain major credit rating agencies. The aggregate fair values of all derivative instruments with any credit-risk-related contingent features that were in a liability position on September 30, 2016 and December 31, 2015 , were $193 million and $180 million , respectively, for which Regions had posted collateral of $191 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 September 30, 2016 and December 31, 2015 .


43


Table of Contents



Offsetting Derivative Assets

Offsetting Derivative Liabilities

September 30, 2016

December 31, 2015

September 30, 2016

December 31, 2015

(In millions)

Gross amounts subject to offsetting

$

712


$

718


$

616


$

677


Gross amounts not subject to offsetting

143


108


176


81


Gross amounts recognized

855


826


792


758


Gross amounts offset in the consolidated balance sheets (1)

388


409


571


558


Net amounts presented in the consolidated balance sheets

467


417


221


200


Gross amounts not offset in the consolidated balance sheets:

Financial instruments

4


5


51


50


Cash collateral received/posted

-


6


129


52


Net amounts

$

463


$

406


$

41


$

98


________

(1)

At September 30, 2016 , gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $271 million and cash collateral posted of $88 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. In the third quarter of 2016, Regions began utilizing OIS curves as fair value measurement inputs for the valuation of interest rate and commodity derivatives. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. There were no such transfers during the nine month periods ended September 30, 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 securities. Such transfers are accounted for as if they occur at the beginning of a reporting period.



44


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 September 30, 2016 and December 31, 2015 :

September 30, 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

$

120


$

-


$

-


$

120


$

110


$

-


$

33


$

143


Securities available for sale:

U.S. Treasury securities

$

242


$

-


$

-


$

242


$

228


$

-


$

-


$

228


Federal agency securities

-


38


-


38


-


218


-


218


Obligations of states and political subdivisions

-


-


-


-


-


1


-


1


Mortgage-backed securities (MBS):

Residential agency

-


17,506


-


17,506


-


16,062


-


16,062


Residential non-agency

-


-


5


5


-


-


5


5


Commercial agency

-


3,413


-


3,413


-


3,018


-


3,018


Commercial non-agency

-


1,141


-


1,141


-


1,231


-


1,231


Corporate and other debt securities

-


1,331


3


1,334


-


1,664


3


1,667


Equity securities

180


-


-


180


280


-


-


280


Total securities available for sale

$

422


$

23,429


$

8


$

23,859


$

508


$

22,194


$

8


$

22,710


Mortgage loans held for sale

$

-


$

459


$

90


$

549


$

-


$

353


$

-


$

353


Residential mortgage servicing rights

$

-


$

-


$

238


$

238


$

-


$

-


$

252


$

252


Derivative assets:

Interest rate swaps

$

-


$

744


$

-


$

744


$

-


$

610


$

-


$

610


Interest rate options

-


2


16


18


-


1


10


11


Interest rate futures and forward commitments

-


3


-


3


-


5


-


5


Other contracts

4


86


-


90


-


200


-


200


Total derivative assets

$

4


$

835


$

16


$

855


$

-


$

816


$

10


$

826


Derivative liabilities:

Interest rate swaps

$

-


$

702


$

-


$

702


$

-


$

564


$

-


$

564


Interest rate options

-


1


-


1


-


1


-


1


Interest rate futures and forward commitments

-


8


-


8


-


6


-


6


Other contracts

-


81


-


81


-


187


-


187


Total derivative liabilities

$

-


$

792


$

-


$

792


$

-


$

758


$

-


$

758


Non-recurring fair value measurements

Loans held for sale

$

-


$

-


$

11


$

11


$

-


$

-


$

36


$

36


Foreclosed property and other real estate

-


38


12


50


-


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 ALCO of the Company in a holistic approach to managing price fluctuation risks.


45


Table of Contents



The following tables illustrate rollforwards for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 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 September 30, 2016 and 2015 are not material.

Three Months Ended September 30, 2016

Opening
Balance July 1,
2016

Total Realized /

Unrealized

Gains or Losses

Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

Transfers
out of
Level 3

Closing
Balance September 30, 2016

Included

in

Earnings

Included

in Other

Compre-

hensive

Income

(Loss)

(In millions)

Level 3 Instruments Only

Securities available for sale:

Residential non-agency MBS

$

5


-


-


-


-


-


-


-


-


$

5


Corporate and other debt securities

3


-


-


-


-


-


-


-


-


3


Total securities available for sale

$

8


-


-


-


-


-


-


-


-


$

8


Commercial mortgage loans held for sale

$

30


-


-


-


-


60


-


-


-


$

90


Residential mortgage servicing rights

$

216


(12

)

(1) 

-


34


-


-


-


-


-


$

238


Total derivatives, net

$

17


32


(2) 

-


-


-


-


(33

)

-


-


$

16


Three Months Ended September 30, 2015

Opening
Balance July 1, 2015

Total Realized /
Unrealized
Gains or Losses

Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

Transfers
out of
Level 3

Closing
Balance September 30, 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

$

6


-


-


-


-


-


-


-


-


$

6


Corporate and other debt securities

3


-


-


-


-


-


-


-


-


3


Total securities available for sale

$

9


-


-


-


-


-


-


-


-


$

9


Residential mortgage servicing rights

$

268


(36

)

(1) 

-


9


-


-


-


-


-


$

241


Total derivatives, net

$

13


32


(3) 

-


-


-


-


(32

)

-


-


$

13



46


Table of Contents



Nine Months Ended September 30, 2016

Opening
Balance
January 1,
2016

Total Realized /

Unrealized

Gains or Losses

Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

Transfers
out of
Level 3

Closing
Balance September 30, 2016

Included

in

Earnings

Included

in Other

Compre-

hensive

Income

(Loss)

(In millions)

Level 3 Instruments Only

Trading account securities

$

33


(2

)

(4) 

-


-


(31

)

-


-


-


-


$

-


Securities available for sale:

Residential non-agency MBS

$

5


-


-


-


-


-


-


-


-


$

5


Corporate and other debt securities

3


-


-


-


-


-


-


-


-


3


Total securities available for sale

$

8


-


-


-


-


-


-


-


-


$

8


Commercial mortgage loans held for sale

$

-


-


-


-


-


90


-


-


-


$

90


Residential mortgage servicing rights

$

252


(87

)

(1) 

-


73


-


-


-


-


-


$

238


Total derivatives, net

$

10


105


(5) 

-


-


-


-


(99

)

-


-


$

16


Nine Months Ended September 30, 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 September 30, 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


-


-


-


-


-


(2

)

-


-


$

6


Corporate and other debt securities

3


-


-


-


-


-


-


-


-


3


Total securities available for sale

$

11


-


-


-


-


-


(2

)

-


-


$

9


Residential mortgage servicing rights

$

257


(44

)

(1) 

-


28


-


-


-


-


-


$

241


Total derivatives, net

$

8


85


(6) 

-


-


-


-


(80

)

-


-


$

13


_________

(1) Included in mortgage income.

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

(3) Approximately $1 million was included in capital markets fee income and other and $31 million was included in mortgage income.

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

(5) Approximately $16 million was included in capital markets fee income and other and $89 million was included in mortgage income.

(6) Approximately $5 million was included in capital markets fee income and other and $80 million was included in mortgage income.

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

Three Months Ended September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

Loans held for sale

$

(3

)

$

(5

)

$

(25

)

$

(16

)

Foreclosed property and other real estate

(8

)

(9

)

(35

)

(56

)

The following tables present detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of September 30, 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 September 30, 2016 , and December 31, 2015 , are included. Following the tables are descriptions of the valuation techniques and the sensitivity of the techniques to changes in the significant unobservable inputs.


47


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September 30, 2016

Level 3
Estimated Fair Value at
September 30, 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% - 70.0% (23.0%)

Weighted-average prepayment speed (CPR; percentage)

3.8% - 27.2% (11.9%)

Probability of default

3.4%

Loss severity

55.9%

Corporate and other debt securities

$3

Market comparable

Evaluated quote on same issuer/comparable bond

100.3%

Commercial mortgage loans held for sale

$90

Market comparable

Credit spreads for bonds in the commercial MBS

0.4% - 6.0% (1.4%)

Residential mortgage servicing rights (1)

$238

Discounted cash flow

Weighted-average prepayment speed (CPR; percentage)

10.4% - 28.8% (12.3%)

OAS (percentage)

8.2% - 13.5% (10.6%)

Derivative assets:

Interest rate options

$15

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

Weighted-average prepayment speed (CPR; percentage)

10.4% - 28.8% (12.3%)

OAS (percentage)

8.2% - 13.5% (10.6%)

Pull-through

28.5% - 99.4% (77.6%)

$1

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

$11

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)

4.0% - 96.0% (56.2%)

Foreclosed property and other real estate

$8

 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% - 80.9% (54.0%)

$4

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)

35.0%

_________

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



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December 31, 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%)

OAS (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%)

OAS (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.



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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 a 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.

Commercial mortgage loans held for sale

Commercial mortgage loans held for sale are based on traded market prices for comparable commercial mortgage-backed securitizations, into which the loans will be placed, adjusted for movements of interest rates and credit spreads. Significant unobservable inputs include credit spreads for bonds in commercial mortgage-backed securitizations.

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 rate of return. The Company's internal rates of return are compared against those of market competitors, and should those rates change the Company's rates would also change in a similar direction.

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.


50


Table of Contents



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.

FAIR VALUE OPTION

Regions has elected the fair value option for all FNMA and FHLMC eligible residential mortgage loans and certain commercial mortgage loans originated with the intent to sell. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of residential mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets. Fair values of commercial mortgage loans held for sale are based on traded market prices for comparable commercial mortgage-backed securitizations, into which the loans will be placed, adjusted for movements of interest rates and credit spreads.

The 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:

September 30, 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

$

549


$

529


$

20


$

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 (losses) resulting from changes in fair value of these loans, which were recorded in mortgage income in the consolidated statements of income during the three and nine months ended September 30, 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 September 30

Nine Months Ended September 30

2016

2015

2016

2015

(In millions)

Net gains (losses) resulting from changes in fair value

$

-


$

8


$

9


$

-



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Table of Contents



The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments as of September 30, 2016 are as follows:

September 30, 2016

Carrying

Amount

Estimated

Fair

Value (1)

Level 1

Level 2

Level 3

(In millions)

Financial assets:

Cash and cash equivalents

$

4,238


$

4,238


$

4,238


$

-


$

-


Trading account securities

120


120


120


-


-


Securities held to maturity

1,431


1,485


-


1,485


-


Securities available for sale

23,859


23,859


422


23,429


8


Loans held for sale

571


549


-


459


90


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

78,821


74,713


-


-


74,713


Other earning assets (4)

771


771


-


771


-


Derivative assets

855


855


4


835


16


Financial liabilities:

Derivative liabilities

792


792


-


792


-


Deposits

99,289


99,375


-


99,375


-


Short-term borrowings

-


-


-


-


-


Long-term borrowings

6,054


6,369


-


4,102


2,267


Loan commitments and letters of credit

105


512


-


-


512


Indemnification obligation

32


30


-


-


30


_________

(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 September 30, 2016 was $4.1 billion or 5.2 percent.

(3)

Excluded from this table is the capital lease carrying amount of $936 million at September 30, 2016 .

(4)

Excluded from this table is the operating lease carrying amount of $ 734 million at September 30, 2016 .



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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 .

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.


53


Table of Contents



The following tables present financial information for each reportable segment for the period indicated.

Three Months Ended September 30, 2016

Corporate Bank

Consumer

Bank

Wealth

Management

Other

Continuing

Operations

Discontinued

Operations

Consolidated

(In millions)

Net interest income and other financing income (loss)

$

352


$

514


$

43


$

(74

)

$

835


$

-


$

835


Provision (credit) for loan losses

72


74


5


(122

)

29


-


29


Non-interest income

130


291


107


71


599


-


599


Non-interest expense

220


532


120


62


934


(2

)

932


Income (loss) before income taxes

190


199


25


57


471


2


473


Income tax expense (benefit)

72


76


10


(6

)

152


1


153


Net income (loss)

$

118


$

123


$

15


$

63


$

319


$

1


$

320


Average assets

$

53,798


$

34,843


$

3,233


$

33,955


$

125,829


$

-


$

125,829


Three Months Ended September 30, 2015

Corporate Bank

Consumer Bank

Wealth

Management

Other

Continuing

Operations

Discontinued

Operations

Consolidated

(In millions)

Net interest income and other financing income (loss)

$

385


$

507


$

41


$

(97

)

$

836


$

-


$

836


Provision (credit) for loan losses

77


70


6


(93

)

60


-


60


Non-interest income

112


272


104


9


497


-


497


Non-interest expense

226


522


115


32


895


6


901


Income (loss) before income taxes

194


187


24


(27

)

378


(6

)

372


Income tax expense (benefit)

74


71


9


(38

)

116


(2

)

114


Net income (loss)

$

120


$

116


$

15


$

11


$

262


$

(4

)

$

258


Average assets

$

53,647


$

33,710


$

3,161


$

32,402


$

122,920


$

-


$

122,920


Nine Months Ended September 30, 2016

Corporate Bank

Consumer Bank

Wealth

Management

Other

Continuing

Operations

Discontinued

Operations

Consolidated

(In millions)

Net interest income and other financing income (loss)

$

1,087


$

1,529


$

131


$

(202

)

$

2,545


$

-


$

2,545


Provision (credit) for loan losses

216


215


17


(234

)

214


-


214


Non-interest income

380


831


321


99


1,631


-


1,631


Non-interest expense

645


1,552


350


171


2,718


(7

)

2,711


Income (loss) before income taxes

606


593


85


(40

)

1,244


7


1,251


Income tax expense (benefit)

230


225


33


(108

)

380


3


383


Net income (loss)

$

376


$

368


$

52


$

68


$

864


$

4


$

868


Average assets

$

54,420


$

34,373


$

3,235


$

33,706


$

125,734


$

-


$

125,734



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Table of Contents



Nine Months Ended September 30, 2015

Corporate Bank

Consumer Bank

Wealth

Management

Other

Continuing

Operations

Discontinued

Operations

Consolidated

(In millions)

Net interest income and other financing income (loss)

$

1,141


$

1,510


$

125


$

(305

)

$

2,471


$

-


$

2,471


Provision (credit) for loan losses

225


206


17


(276

)

172


-


172


Non-interest income

318


806


303


130


1,557


-


1,557


Non-interest expense

662


1,547


335


190


2,734


16


2,750


Income (loss) before income taxes

572


563


76


(89

)

1,122


(16

)

1,106


Income tax expense (benefit)

218


214


29


(126

)

335


(6

)

329


Net income (loss)

$

354


$

349


$

47


$

37


$

787


$

(10

)

$

777


Average assets

$

53,016


$

33,288


$

3,150


$

32,008


$

121,462


$

-


$

121,462


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:

September 30, 2016

December 31, 2015

(In millions)

Unused commitments to extend credit

$

44,330


$

45,516


Standby letters of credit

1,423


1,477


Commercial letters of credit

88


63


Liabilities associated with standby letters of credit

33


32


Assets associated with standby letters of credit

33


33


Reserve for unfunded credit commitments

72


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 and its subsidiaries are subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel. Regions establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. Some of Regions' exposure with respect to loss contingencies may be offset by applicable insurance


55


Table of Contents



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 $32 million and an estimated fair value of approximately $30 million as of September 30, 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 any such losses in excess of amounts accrued, including legal contingencies that are subject to the indemnification agreement with Raymond James, would be immaterial to Regions' financial statements as a whole. However, as available information changes, the matters for which Regions is able to estimate, as well as the estimates themselves will be adjusted accordingly.

Assessments of litigation and claims exposure are difficult because they involve inherently unpredictable factors including, but not limited to, the following: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below, and the aggregated estimated amount discussed above may not include an estimate for every matter disclosed below.

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. Final court approvals for settlements in the open-end Funds class action and for the investors represented by the Trustee Ad Litem have been granted. 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. Oral argument was held on October 17, 2016. This matter is 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 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, which was denied by the court on June 24, 2016. The plaintiffs filed an appeal with the Alabama Supreme Court, which dismissed the appeal on October 14, 2016.

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.    


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Regions entered into a final Settlement Agreement, dated September 13, 2016, with the Department of Justice on behalf of HUD to settle and fully release previously disclosed potential claims related to Regions Bank's underwriting and origination of FHA insured mortgage loans endorsed for FHA insurance between January 1, 2006 and December 31, 2011 that resulted in claims submitted through January 7, 2015. Regions had previously disclosed that it had reached an agreement in principle with the Department of Justice relating to this matter. Regions settled this matter for $52.4 million , without admitting liability, in order to avoid the expense and distraction of potential litigation. Regions was fully reserved for the entire settlement amount as of the end of the second quarter of 2016. Further, Regions' insurers reimbursed Regions approximately $47 million of such amount, which was recognized within non-interest income in the third quarter of 2016.

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, which is part of an industry-wide investigation.

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 September 30, 2016 , the carrying value of the indemnification obligation was approximately $32 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 September 30, 2016 , and December 31, 2015 , the Company's DUS servicing portfolio totaled approximately $1.7 billion and $1.2 billion , respectively. Regions' maximum quantifiable contingent liability related to its loss share guarantee was approximately $516 million and $356 million at September 30, 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 consolidated balance sheets was approximately $3 million at both September 30, 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.


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NOTE 15. RECENT ACCOUNTING PRONOUNCEMENTS    

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 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 believes the adoption of this guidance will not have a material impact to its consolidated financial statements.



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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 that 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 potentially results in bifurcation of more embedded options than would occur when solely 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 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 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 transition 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 not early adopting and believes the adoption of this guidance will not have a material impact to its consolidated financial statements.

In April 2016, the FASB issued new accounting guidance for revenue recognition that is related to contracts with customers. This guidance is expected to clarify how an entity should evaluate revenue in circumstances regarding granting licenses of intellectual property. The guidance also includes information regarding identifying differences when dealing with promised goods and services. 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 May 2016, the FASB issued additional new accounting guidance for revenue recognition that is also related to contracts with customers. This guidance, as well as the guidance issued in April 2016, is intended to promote more consistent application of the standards as well as reduce the cost and complexity of applying the revenue guidance. The guidance contains amendments related to collectability, noncash consideration, and completed contracts at transition. 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 June 2016, the FASB issued new accounting guidance regarding the measurement of credit losses on financial instruments. The new guidance will apply to most financial assets measured at amortized cost and certain other instruments including loans, debt securities held to maturity, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments, standby letters of credit, etc.). The guidance will replace the current incurred loss accounting model with an expected loss approach, whereby entities must consider all available relevant information when estimating those expected credit losses, including details about past events, current conditions and reasonable and supportable forecasts. The guidance eliminates the current accounting model for purchased credit impaired loans and debt securities. Regarding securities available for sale, credit losses are to be recognized as allowances rather than reductions in the amortized cost of the securities, which will require remeasurement of the related allowance at each reporting period. The guidance includes enhanced disclosure requirements intended to help financial statement users better understand estimates and judgments used in estimating credit losses. The guidance is effective for annual and interim periods beginning after December 15, 2019. However, entities can apply these amendments as early as fiscal years beginning after December 15, 2018. Regions is evaluating the impact to its consolidated financial statements upon adoption.

In August 2016, the FASB issued new accounting guidance regarding the classification and presentation of certain cash receipts and cash payments. The guidance makes targeted improvements where current guidance is either unclear or silent in order to reduce areas where diversity in practice exists with respect to classification within the statement of cash flows. Specifically, clarification on classification and presentation of the following cash receipts and payments is addressed: (a) cash payments made


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in connection with settling a debt arrangement before its maturity date and related debt extinguishment costs; (b) cash payments made at maturity of a zero-coupon debt instrument; (c) cash payments made to settle a contingent consideration liability arising from a business combination that are not made within a relatively short time period after the acquisition date; (d) cash proceeds received from the settlement of insurance claims, including lump-sum settlements; (e) cash proceeds received from the settlement of corporate-owned or bank-owned life insurance policies, as well as premiums paid on these policies; (f) distributions received from equity method investees not accounted for under the fair value option and; (g) treatment of a transferor's beneficial interest obtained in a financial asset securitization. The guidance also clarifies the application of the predominance principle when cash receipts or payments have separately identifiable cash flows. The guidance should be applied on a retrospective basis, unless impracticable, for periods beginning after December 15, 2017. Early adoption is permitted, including in an interim period, given all amendments are adopted in the same period. Regions is evaluating the impact to its consolidated financial statements upon adoption.







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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis is part of Regions Financial Corporation's ("Regions" or the "Company") Quarterly Report on Form 10-Q to the SEC and updates Regions' Annual Report on Form 10-K for the year ended December 31, 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 and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 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 5 through 7 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 September 30, 2016 , Regions operated 1,597 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.

Recent Acquisitions

On October 17, 2016, Regions announced the acquisition of the low income housing tax credit corporate fund syndication and asset management businesses of First Sterling Financial, Inc., which is one of the leading national syndicators of investment funds benefiting from low income housing tax credits. The acquisition complements Regions' existing low income housing tax credit origination business and further expands the Company's capabilities to serve more clients and communities.


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THIRD QUARTER OVERVIEW

Regions reported net income available to common shareholders of $304 million , or $0.24 per diluted share, in the third quarter of 2016 compared to $242 million , or $0.18 per diluted share, in the third quarter of 2015 . Net income available to common shareholders from continuing operations was $303 million , or $0.24 per diluted share, compared to $246 million , or $0.19 per diluted share, over these same periods. Net interest income and other financing income remained relatively flat period over period. Non-interest income increased in the third quarter of 2016, but was partially offset by an increase in non-interest expense.

For the third quarter of 2016 , net interest income and other financing income (taxable-equivalent basis) from continuing operations totaled $856 million , up $1 million compared to the third quarter of 2015 . The net interest margin (taxable-equivalent basis) was 3.06 percent for the third quarter of 2016 and 3.13 percent in the third quarter of 2015 . The average balance of total earning assets increased in the third quarter of 2016 compared to the third quarter of 2015, while the related yields decreased for the comparable quarters. The average balance of total interest-bearing liabilities increased period over period primarily due to an increase in long-term borrowings. These increases were partially offset by a decrease in average interest bearing deposits, all of which resulted in an increase in total funding costs from 25 to 30 basis points for the third quarter of 2016.

The provision for loan losses totaled $29 million in the third quarter of 2016 compared to $60 million during the third quarter of 2015 . The decrease is attributable to a reduction in loans outstanding and credit quality improvements in the energy portfolio. 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 $54 million , or an annualized 0.26 percent of average loans, in the third quarter of 2016 , compared to $60 million, or an annualized 0.30 percent for the third quarter of 2015 . Commercial and industrial loan net charge-offs decreased, while total consumer net charge-offs increased slightly, when comparing the third quarter of 2016 to the prior year. See Note 4 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional information.

The allowance for loan losses at September 30, 2016 , was 1.39 percent of total loans, net of unearned income, compared to 1.36 percent at December 31, 2015 . Total non-performing assets were $1.2 billion at September 30, 2016 , compared to $920 million at December 31, 2015 . While the overall credit quality of the energy portfolio has improved with energy prices beginning to stabilize, this increase was driven primarily by a select few large energy and energy-related loans.

Non-interest income from continuing operations was $599 million for the third quarter of 2016 compared to $497 million for the third quarter of 2015 . This increase was primarily driven by $47 million of insurance proceeds that were received in the third quarter of 2016, a recovery of $10 million related to the 2010 Gulf of Mexico oil spill, increases in card and ATM fees, and an increase in capital markets fee income and other. See Table 21 "Non-Interest Income from Continuing Operations" for more detail.

Total non-interest expense from continuing operations was $934 million in the third quarter of 2016 , a $39 million increase from the third quarter of 2015 . The increase was driven by an additional work day, an increase in incentives related to capital markets income growth, a $14 million charge related to the early extinguishment of debt , and expenses related to VISA class B shares that were sold in a prior year. These increases were partially offset by a decrease in FDIC insurance assessments related to additional assessments incurred during the third quarter of 2015 for prior period assessment adjustments. See Table 22 "Non-Interest Expense from Continuing Operations" for more detail.

Income tax expense from continuing operations for the three months ended September 30, 2016 was $152 million compared to income tax expense of $116 million for the same period in 2015 . See "Income Taxes" toward the end of the Management's Discussion and Analysis section of this report for more detail.

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

2016 Expectations

Management expectations for 2016 are noted below:

Average loan growth relatively stable compared to fourth quarter of 2015 average balances; change from previous guidance expecting growth of 3 to 5 percent and tracking to the lower end of the range. Change in guidance results from several factors including a decrease in average direct energy loans, a continued strategy to limit exposure with regard to investor real estate loans, loan growth being impacted by continued softness in demand for middle market commercial and small business loans, management of concentration risk limits, and a continued focus on achieving appropriate risk-adjusted returns.

Average deposits relatively stable compared to fourth quarter of 2015 average balances

Net interest income and other financing income up 2 to 4 percent


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Adjusted non-interest income (non-GAAP) growth of more than 6 percent; change from previous guidance of up 4 to 6 percent on a full year basis, and expectation to be at the high end of the range resulting from fee-based revenue strategic initiatives exceeding expectations

Plan to eliminate $300 million of existing non-interest expenses between 2016 and 2018, with a target to eliminate an additional $100 million by 2019; change from previous guidance of $300 million expense eliminations between 2016 and 2018, with 35 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) of approximately 63 percent; change from the previous guidance of less than 63 percent

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

Full year net charge-offs of 25 to 35 basis points

The reconciliation with respect to these forward-looking non-GAAP measures is expected to be consistent with the actual non-GAAP reconciliations within Management's Discussion and Analysis of this Form 10-Q. For more information related to the Company's 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 $1.1 billion from year-end 2015 to September 30, 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 partially offset by an 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

September 30, 2016

December 31, 2015

(In millions)

U.S. Treasury securities

$

242


$

229


Federal agency securities

38


558


Obligations of states and political subdivisions

-


1


Mortgage-backed securities:

Residential agency

18,770


17,491


Residential non-agency

5


5


Commercial agency

3,580


3,194


Commercial non-agency

1,141


1,231


Corporate and other debt securities

1,334


1,667


Equity securities

180


280


$

25,290


$

24,656


Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. Total securities at September 30, 2016 increased slightly 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.


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LOANS HELD FOR SALE

Loans held for sale totaled $571 million at September 30, 2016 , consisting primarily of $460 million of residential real estate mortgage loans, $96 million of commercial mortgage loans and $15 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.

LOANS

Loans, net of unearned income, represented approximately 73 percent of Regions' interest-earning assets at September 30, 2016 . The following table presents the distribution of Regions' loan portfolio by portfolio segment and class, net of unearned income:

Table 2-Loan Portfolio

September 30, 2016

December 31, 2015

(In millions, net of unearned income)

Commercial and industrial

$

35,388


$

35,821


Commercial real estate mortgage-owner-occupied

7,007


7,538


Commercial real estate construction-owner-occupied

349


423


Total commercial

42,744


43,782


Commercial investor real estate mortgage

4,306


4,255


Commercial investor real estate construction

2,458


2,692


Total investor real estate

6,764


6,947


Residential first mortgage

13,402


12,811


Home equity

10,749


10,978


Indirect-vehicles

4,076


3,984


Indirect-other consumer

838


545


Consumer credit card

1,123


1,075


Other consumer

1,187


1,040


Total consumer

31,375


30,433


$

80,883


$

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 decreased $433 million since year-end 2015 driven primarily by declines in direct energy loans, softness in demand for middle market commercial small business loans, management of concentration risk limits, and a continued focus on achieving appropriate risk-adjusted returns. 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 $531 million from year-end 2015 as a result of continued customer deleveraging. Owner-occupied commercial real estate construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower.

Over half of the Company's total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry. No single industry exceeded 15 percent of the total commercial portfolio balance at September 30, 2016 or December 31, 2015 .


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Table 3-Selected Industry Exposure

September 30, 2016

Loans

Unfunded Commitments

Total Exposure

(In millions)

Administrative, support, waste and repair

$

909


$

473


$

1,382


Agriculture

692


251


943


Educational services

1,840


252


2,092


Energy

2,237


2,032


4,269


Financial services (1)

3,651


3,090


6,741


Government and public sector

2,414


54


2,468


Healthcare

4,216


1,470


5,686


Information

1,252


823


2,075


Manufacturing (1)

3,984


4,061


8,045


Professional, scientific and technical services (1)

1,698


1,143


2,841


Real estate (1)

6,450


5,375


11,825


Religious, leisure, personal and non-profit services

1,974


528


2,502


Restaurant, accommodation and lodging

2,434


694


3,128


Retail trade

2,786


2,332


5,118


Transportation and warehousing (1)

2,153


1,018


3,171


Utilities

1,092


1,812


2,904


Wholesale goods (1)

2,837


2,485


5,322


Other

125


887


1,012


Total commercial

$

42,744


$

28,780


$

71,524


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



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________

(1)

Regions' definition of indirect energy-related lending includes certain balances within each of these selected industry categories. As of September 30, 2016, total indirect energy-related loans were approximately $514 million, with approximately $483 million included in commercial loans and $31 million in investor real estate loans. Total unfunded commitments for indirect energy-related lending were $432 million as of September 30, 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 September 30, 2016 amounted to approximately $2.2 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 $514 million at September 30, 2016 . The entire energy-related portfolio, combining direct and indirect loans, was approximately $2.8 billion or 3 percent of total loans at September 30, 2016 . Regions also has $145 million of 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. Given the recent volatility in oil prices, this energy-related portfolio may be subject to additional pressure on credit quality metrics including past due, criticized, and non-performing loans, as well as net charge-offs. Regions' energy-related portfolio consists of a relatively small number of customers, which provides the Company granular insight into the financial health of those borrowers. Through its on-going portfolio credit quality assessment, Regions will continue to assess the impact to the allowance for loan losses 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 decreased $183 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 $591 million increase from year-end 2015 , as prepayments have slowed. Approximately $2.4 billion in new loan originations were retained on the balance sheet through the first nine months of 2016 .


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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 $10.7 billion at September 30, 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 September 30, 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

$

11


0.15

%

$

20


0.26

%

$

31


2017

4


0.06


8


0.11


12


2018

12


0.17


18


0.24


30


2019

80


1.08


72


0.98


152


2020

166


2.24


129


1.75


295


2021-2025

1,422


19.24


1,410


19.08


2,832


2026-2030

2,044


27.65


1,993


26.97


4,037


Thereafter

-


-


1


0.02


1


Total

$

3,739


50.59

%

$

3,651


49.41

%

$

7,390


Of the $10.7 billion home equity portfolio at September 30, 2016 , approximately $7.4 billion were home equity lines of credit and $3.3 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 September 30, 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 1 percent in the residential first mortgage portfolio and to 3 percent in the home equity portfolio at September 30, 2016 .


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Table 5-Estimated Current Loan to Value Ranges

September 30, 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%

$

157


$

91


$

263


$

267


$

127


$

417


80% - 100%

1,723


384


719


1,703


497


886


Below 80%

10,988


6,184


2,835


10,288


5,965


2,785


Data not available

534


103


170


553


107


194


$

13,402


$

6,762


$

3,987


$

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 $92 million from year-end 2015 .

Indirect-Other Consumer

Indirect-other consumer lending represents other point of sale lending through third parties. This portfolio class increased $293 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 increased $48 million from year-end 2015 .

Other Consumer

Other consumer loans primarily include direct consumer loans, overdrafts and other revolving loans. Other consumer loans increased $147 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 are refreshed semiannually. 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 September 30, 2016 and December 31, 2015 .

Table 6-Estimated Current FICO Score Ranges

September 30, 2016

Residential

First Mortgage

Home Equity

Indirect-Vehicles

Indirect-Other Consumer

Consumer

Credit Card

Other

Consumer

1st Lien

2nd Lien

(In millions)

Below 620

$

819


$

307


$

220


$

438


$

22


$

60


$

82


620-680

949


538


368


536


83


194


157


681-720

1,455


850


511


566


126


261


210


Above 720

9,408


4,924


2,826


2,437


333


607


557


Data not available

771


143


62


99


274


1


181


$

13,402


$

6,762


$

3,987


$

4,076


$

838


$

1,123


$

1,187



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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 $1.1 billion at both September 30, 2016 and December 31, 2015 . The allowance for loan losses as a percentage of net loans increased from 1.36 percent at December 31, 2015 to 1.39 percent at September 30, 2016 . The increase in the percentage is primarily attributable to the migration of energy loans, resulting in an increase in energy related allowance for loan losses. Total allowance for loan losses for the direct energy portfolio was approximately 8 percent at September 30, 2016 compared to approximately 6 percent at year-end 2015.

Management expects that net loan charge-offs will be in the 0.25 percent to 0.35 percent range for the 2016 year. Economic trends such as interest rates, unemployment, volatility in commodity prices and collateral valuations will impact the future levels of net charge-offs and may result in volatility during the remainder of 2016 .

The provision for loan losses increased for the first nine months of 2016 as compared to the same period in 2015. During the first nine months of 2016 , the provision for loan losses exceeded net charge-offs by approximately $20 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."


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

Table 7-Allowance for Credit Losses

Nine Months Ended September 30

2016

2015

(Dollars in millions)

Allowance for loan losses at beginning of year

$

1,106


$

1,103


Loans charged-off:

Commercial and industrial

82


73


Commercial real estate mortgage-owner-occupied

19


19


Commercial real estate construction-owner-occupied

1


-


Commercial investor real estate mortgage

2


14


Commercial investor real estate construction

-


1


Residential first mortgage

11


20


Home equity

45


54


Indirect - vehicles

36


29


Indirect - other consumer

10


-


Consumer credit card

30


27


Other consumer

52


45


288


282


Recoveries of loans previously charged-off:

Commercial and industrial

25


37


Commercial real estate mortgage-owner-occupied

9


12


Commercial real estate construction-owner-occupied

-


-


Commercial investor real estate mortgage

8


13


Commercial investor real estate construction

2


5


Residential first mortgage

2


7


Home equity

21


21


Indirect - vehicles

14


12


Indirect - other consumer

-


-


Consumer credit card

4


4


Other consumer

9


11


94


122


Net charge-offs:

Commercial and industrial

57


36


Commercial real estate mortgage-owner-occupied

10


7


Commercial real estate construction-owner-occupied

1


-


Commercial investor real estate mortgage

(6

)

1


Commercial investor real estate construction

(2

)

(4

)

Residential first mortgage

9


13


Home equity

24


33


Indirect - vehicles

22


17


Indirect - other consumer

10


-


Consumer credit card

26


23


Other consumer

43


34


194


160


Provision for loan losses

214


172


Allowance for loan losses at September 30

$

1,126


$

1,115


Reserve for unfunded credit commitments at beginning of year

$

52


$

65


Provision (credit) for unfunded credit losses

20


(1

)

Reserve for unfunded credit commitments at September 30

$

72


$

64


Allowance for credit losses at September 30

$

1,198


$

1,179


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

$

80,883


$

81,063


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

$

81,583


$

79,254


Ratios:

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

1.39

%

1.38

%

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

1.04x


1.41x


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

0.32

%

0.27

%


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TROUBLED DEBT RESTRUCTURINGS (TDRs)

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulty. Residential first mortgage, home equity, indirect-vehicles, consumer credit card and other consumer TDRs are consumer loans modified under the CAP. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where 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

September 30, 2016

December 31, 2015

Loan

Balance

Allowance for

Loan Losses

Loan

Balance

Allowance for

Loan Losses

(In millions)

Accruing:

Commercial

$

211


$

32


$

146


$

20


Investor real estate

120


13


157


17


Residential first mortgage

383


47


398


52


Home equity

296


5


323


7


Indirect-vehicles

-


-


1


-


Consumer credit card

2


-


2


-


Other consumer

11


-


12


-


1,023


97


1,039


96


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

Commercial

194


39


135


37


Investor real estate

9


3


22


3


Residential first mortgage

76


9


81


10


Home equity

17


-


18


-


296


51


256


50


Total TDRs - Loans

$

1,319


$

148


$

1,295


$

146


TDRs - Held For Sale

6


-


8


-


Total TDRs

$

1,325


$

148


$

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.


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

Nine Months Ended September 30, 2016

Commercial

Investor
Real Estate

(In millions)

Balance, beginning of period

$

281


$

179


Inflows

299


27


Outflows

Charge-offs

(15

)

-


Payments, sales and other (1)

(160

)

(77

)

Balance, end of period

$

405


$

129


Nine Months Ended September 30, 2015

Commercial

Investor
Real Estate

(In millions)

Balance, beginning of period

$

344


$

357


Inflows

128


27


Outflows

Charge-offs

(9

)

(8

)

Foreclosure

-


(31

)

Payments, sales and other (1)

(186

)

(169

)

Balance, end of period

$

277


$

176


(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 $31 million of commercial loans and $7 million of investor real estate loans refinanced or restructured as new loans and removed from TDR classification for the nine months ended September 30, 2016 . During the nine months ended September 30, 2015 , $36 million of commercial loans and $48 million of investor real estate loans were refinanced or restructured as new loans and removed from TDR classification.


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NON-PERFORMING ASSETS

Non-performing assets are summarized as follows:

Table 10-Non-Performing Assets

September 30, 2016

December 31, 2015

(Dollars in millions)

Non-performing loans:

Commercial and industrial

$

693


$

325


Commercial real estate mortgage-owner-occupied

221


268


Commercial real estate construction-owner-occupied

3


2


Total commercial

917


595


Commercial investor real estate mortgage

18


31


Commercial investor real estate construction

1


-


Total investor real estate

19


31


Residential first mortgage

50


63


Home equity

92


93


Total consumer

142


156


Total non-performing loans, excluding loans held for sale

1,078


782


Non-performing loans held for sale

15


38


Total non-performing loans (1)

1,093


820


Foreclosed properties

95


100


Total non-performing assets (1)

$

1,188


$

920


Accruing loans 90 days past due:

Commercial and industrial

$

5


$

9


Commercial real estate mortgage-owner-occupied

3


3


Total commercial

8


12


Commercial investor real estate mortgage

-


4


Total investor real estate

-


4


Residential first mortgage (2)

106


113


Home equity

39


59


Indirect-vehicles

9


9


Consumer credit card

13


12


Other consumer

3


4


Total consumer

170


197


$

178


$

213


Restructured loans not included in the categories above

$

1,023


$

1,039


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

1.35

%

1.01

%

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

1.47

%

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 $99 million at September 30, 2016 and $107 million at December 31, 2015 .

Non-performing loans have increased during 2016 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 collateral 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 $178 million at September 30, 2016 , a decrease from $213 million at December 31, 2015 .


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At September 30, 2016 , Regions had approximately $200 million to $275 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
Nine Months Ended September 30, 2016

Commercial

Investor

Real Estate

Consumer (1)

Total

(In millions)

Balance at beginning of period

$

595


$

31


$

156


$

782


Additions

724


16


(13

)

727


Net payments/other activity

(223

)

(12

)

-


(235

)

Return to accrual

(34

)

(12

)

-


(46

)

Charge-offs on non-accrual loans (2)

(97

)

(2

)

-


(99

)

Transfers to held for sale (3)

(40

)

(1

)

(1

)

(42

)

Transfers to foreclosed properties

(3

)

-


-


(3

)

Sales

(5

)

(1

)

-


(6

)

Balance at end of period

$

917


$

19


$

142


$

1,078



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Non-Accrual Loans, Excluding Loans Held for Sale
Nine Months Ended September 30, 2015

Commercial

Investor

Real Estate

Consumer (1)

Total

(In millions)

Balance at beginning of period

$

493


$

125


$

211


$

829


Additions

505


27


(46

)

486


Net payments/other activity

(169

)

(43

)

-


(212

)

Return to accrual

(119

)

(16

)

-


(135

)

Charge-offs on non-accrual loans (2)

(88

)

(14

)

(1

)

(103

)

Transfers to held for sale (3)

(28

)

(6

)

(1

)

(35

)

Transfers to foreclosed properties

(6

)

(33

)

-


(39

)

Sales

(2

)

-


-


(2

)

Balance at end of period

$

586


$

40


$

163


$

789


________

(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 $19 million and $16 million recorded upon transfer for the nine months ended September 30, 2016 and 2015 , respectively.

GOODWILL

Goodwill totaled $4.9 billion at both September 30, 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).

The result of the assessment performed for the third quarter of 2016 did not indicate that the estimated fair values of the Company's reporting units (Corporate Bank, Consumer Bank and Wealth Management) had declined below their respective carrying values. Therefore, Regions determined that a test of goodwill