10-Q
Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
Form 10-Q
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2015
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 1,305,468,694 shares of common stock, par value $.01, outstanding as of November 2, 2015.


Table of Contents


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


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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.
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 no regulatory objection (as part of the comprehensive capital analysis and review ("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 applicable capital and liquidity requirements (including the Basel III capital standards), including our ability to generate capital internally or raise capital on favorable terms, and if we fail to meet requirements, our financial condition could be negatively impacted.
The 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.
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.
Any inaccurate or incomplete information provided to us by our customers or counterparties.
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.


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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.
Our inability to keep pace with technological changes could result in losing business to competitors.
Our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information; increased costs; losses; or adverse effects to our reputation.
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 Financial Accounting Standards Board or other regulatory agencies could materially affect how we report our financial results.
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, 2014 as filed with the Securities and Exchange Commission and available on its website at www.sec.gov.


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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2015
 
December 31, 2014
 
(In millions, except share data)
Assets
 
 
 
Cash and due from banks
$
1,726

 
$
1,601

Interest-bearing deposits in other banks
3,217

 
2,303

Federal funds sold and securities purchased under agreements to resell
65

 
100

Trading account securities
106

 
106

Securities held to maturity (estimated fair value of $2,048 and $2,209, respectively)
2,001

 
2,175

Securities available for sale
22,714

 
22,580

Loans held for sale (includes $421 and $440 measured at fair value, respectively)
453

 
541

Loans, net of unearned income
81,063

 
77,307

Allowance for loan losses
(1,115
)
 
(1,103
)
Net loans
79,948

 
76,204

Other interest-earning assets
93

 
89

Premises and equipment, net
2,122

 
2,193

Interest receivable
316

 
310

Goodwill
4,831

 
4,816

Residential mortgage servicing rights at fair value
241

 
257

Other identifiable intangible assets
263

 
275

Other assets
6,693

 
6,013

Total assets
$
124,789

 
$
119,563

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
34,117

 
$
31,747

Interest-bearing
63,061

 
62,453

Total deposits
97,178

 
94,200

Borrowed funds:
 
 
 
Short-term borrowings:
 
 
 
Federal funds purchased and securities sold under agreements to repurchase

 
1,753

Other short-term borrowings

 
500

Total short-term borrowings

 
2,253

Long-term borrowings
7,364

 
3,462

Total borrowed funds
7,364

 
5,715

Other liabilities
3,295

 
2,775

Total liabilities
107,837

 
102,690

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
836

 
884

Common stock, authorized 3 billion shares, par value $.01 per share:
 
 
 
Issued including treasury stock—1,345,648,066 and 1,395,204,638 shares, respectively
13

 
14

Additional paid-in capital
18,019

 
18,767

Retained earnings (deficit)
(400
)
 
(1,177
)
Treasury stock, at cost—41,261,008 and 41,262,645 shares, respectively
(1,377
)
 
(1,377
)
Accumulated other comprehensive income (loss), net
(139
)
 
(238
)
Total stockholders’ equity
16,952

 
16,873

Total liabilities and stockholders’ equity
$
124,789

 
$
119,563


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
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share data)
Interest income on:
 
 
 
 
 
 
 
Loans, including fees
$
748

 
$
736

 
$
2,201

 
$
2,205

Securities - taxable
146

 
154

 
448

 
464

Loans held for sale
5

 
5

 
12

 
17

Trading account securities

 

 
4

 
2

Other interest-earning assets
2

 
2

 
5

 
7

Total interest income
901

 
897

 
2,670

 
2,695

Interest expense on:
 
 
 
 
 
 
 
Deposits
27

 
26

 
82

 
78

Short-term borrowings

 

 
1

 
1

Long-term borrowings
38

 
50

 
116

 
156

Total interest expense
65

 
76

 
199

 
235

Net interest income
836

 
821

 
2,471

 
2,460

Provision for loan losses
60

 
24

 
172

 
61

Net interest income after provision for loan losses
776

 
797

 
2,299

 
2,399

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
167

 
181

 
496

 
528

Card and ATM fees
93

 
85

 
268

 
248

Mortgage income
39

 
39

 
125

 
122

Securities gains (losses), net
7

 
7

 
18

 
15

Other
191

 
185

 
650

 
516

Total non-interest income
497

 
497

 
1,557

 
1,429

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
470

 
456

 
1,405

 
1,354

Net occupancy expense
90

 
92

 
270

 
275

Furniture and equipment expense
77

 
73

 
224

 
213

Other
258

 
205

 
835

 
621

Total non-interest expense
895

 
826

 
2,734

 
2,463

Income from continuing operations before income taxes
378

 
468

 
1,122

 
1,365

Income tax expense
116

 
151

 
335

 
450

Income from continuing operations
262

 
317

 
787

 
915

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations before income taxes
(6
)
 
5

 
(16
)
 
26

Income tax expense (benefit)
(2
)
 
2

 
(6
)
 
10

Income (loss) from discontinued operations, net of tax
(4
)
 
3

 
(10
)
 
16

Net income
$
258

 
$
320

 
$
777

 
$
931

Net income from continuing operations available to common shareholders
$
246

 
$
297

 
$
739

 
$
879

Net income available to common shareholders
$
242

 
$
300

 
$
729

 
$
895

Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
Basic
1,319

 
1,378

 
1,333

 
1,378

Diluted
1,326

 
1,389

 
1,343

 
1,390

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.22

 
$
0.55

 
$
0.64

Diluted
0.19

 
0.21

 
0.55

 
0.63

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
0.22

 
$
0.55

 
$
0.65

Diluted
0.18

 
0.22

 
0.54

 
0.64

Cash dividends declared per common share
0.06

 
0.05

 
0.17

 
0.13


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
 
2015
 
2014
 
(In millions)
Net income
$
258

 
$
320

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

 

Less: reclassification adjustments for amortization of unrealized losses on securities transferred to held to maturity (net of ($1) and ($1) tax effect, respectively)
(2
)
 
(2
)
Net change in unrealized losses on securities transferred to held to maturity, net of tax
2

 
2

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $28 and ($53) tax effect, respectively)
47

 
(87
)
Less: reclassification adjustments for securities gains (losses) realized in net income (net of $2 and $2 tax effect, respectively)
5

 
5

Net change in unrealized gains (losses) on securities available for sale, net of tax
42

 
(92
)
Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $75 and ($10) tax effect, respectively)
121

 
(16
)
Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $16 and $13 tax effect, respectively)
25

 
21

Net change in unrealized gains (losses) on derivative instruments, net of tax
96

 
(37
)
Defined benefit pension plans and other post employment benefits:
 
 
 
Net actuarial gains (losses) arising during the period (net of zero and zero tax effect, respectively)
(1
)
 

Less: reclassification adjustments for amortization of actuarial loss and prior service cost realized in net income, (net of ($4) and ($2) tax effect, respectively)
(9
)
 
(5
)
Net change from defined benefit pension plans and other post employment benefits, net of tax
8

 
5

Other comprehensive income (loss), net of tax
148

 
(122
)
Comprehensive income
$
406

 
$
198

 
 
 
 
 
Nine Months Ended September 30
 
2015
 
2014
 
(In millions)
Net income
$
777

 
$
931

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 ($4) tax effect, respectively)
(6
)
 
(6
)
Net change in unrealized losses on securities transferred to held to maturity, net of tax
6

 
6

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of ($17) and $87 tax effect, respectively)
(25
)
 
143

Less: reclassification adjustments for securities gains (losses) realized in net income (net of $6 and $5 tax effect, respectively)
12

 
10

Net change in unrealized gains (losses) on securities available for sale, net of tax
(37
)
 
133

Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $107 and $30 tax effect, respectively)
175

 
48

Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $41 and $35 tax effect, respectively)
67

 
56

Net change in unrealized gains (losses) on derivative instruments, net of tax
108

 
(8
)
Defined benefit pension plans and other post employment benefits:
 
 
 
Net actuarial gains (losses) arising during the period (net of zero and $2 tax effect, respectively)
(2
)
 
1

Less: reclassification adjustments for amortization of actuarial loss and prior service cost realized in net income (net of($13) and $(6) tax effect, respectively)
(24
)
 
(13
)
Net change from defined benefit pension plans and other post employment benefits, net of tax
22

 
14

Other comprehensive income (loss), net of tax
99

 
145

Comprehensive income
$
876

 
$
1,076

See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Treasury
Stock,
At Cost
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(In millions, except per share data)
BALANCE AT JANUARY 1, 2014
1

 
$
450

 
1,378

 
$
14

 
$
19,216

 
$
(2,324
)
 
$
(1,377
)
 
$
(319
)
 
$
15,660

Net income

 

 

 

 

 
931

 

 

 
931

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

 

 

 

 

 

 

 
133

 
133

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

 

 

 

 

 

 

 
(8
)
 
(8
)
Net change from employee benefit plans, net of tax

 

 

 

 

 

 

 
14

 
14

Cash dividends declared—$0.13 per share

 

 

 

 
(180
)
 

 

 

 
(180
)
Preferred stock dividends

 
(36
)
 

 

 

 

 

 

 
(36
)
Preferred stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuance of 500 thousand shares of Series B, fixed to floating rate, non-cumulative perpetual preferred stock, including related surplus

 
486

 

 

 

 

 

 

 
486

Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchase

 

 
(1
)
 

 
(8
)
 

 

 

 
(8
)
Impact of stock transactions under compensation plans, net

 

 
2

 

 
41

 

 

 

 
41

BALANCE AT SEPTEMBER 30, 2014
1

 
$
900

 
1,379

 
$
14

 
$
19,069

 
$
(1,393
)
 
$
(1,377
)
 
$
(174
)
 
$
17,039

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 
5

 

 
22

 

 

 

 
22

BALANCE AT SEPTEMBER 30, 2015
1

 
$
836

 
1,304

 
$
13

 
$
18,019

 
$
(400
)
 
$
(1,377
)
 
$
(139
)
 
$
16,952


See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Nine Months Ended September 30
 
2015
 
2014
 
(In millions)
Operating activities:
 
 
 
Net income
$
777

 
$
931

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
172

 
61

Depreciation, amortization and accretion, net
384

 
391

Securities (gains) losses, net
(18
)
 
(15
)
Deferred income tax expense
68

 
176

Originations and purchases of loans held for sale
(1,931
)
 
(1,848
)
Proceeds from sales of loans held for sale
2,087

 
1,948

Gain on TDRs held for sale, net

 
(35
)
(Gain) loss on sale of loans, net
(70
)
 
(89
)
(Gain) loss on early extinguishment of debt
43

 

Net change in operating assets and liabilities:
 
 
 
Trading account securities

 
8

Other interest-earning assets
(4
)
 
(5
)
Interest receivable and other assets
116

 
(53
)
Other liabilities
(95
)
 
64

Other
36

 
(16
)
Net cash from operating activities
1,565

 
1,518

Investing activities:
 
 
 
Proceeds from maturities of securities held to maturity
174

 
130

Proceeds from sales of securities available for sale
1,201

 
1,384

Proceeds from maturities of securities available for sale
2,958

 
2,350

Purchases of securities available for sale
(4,382
)
 
(4,524
)
Proceeds from sales of loans
59

 
649

Purchases of loans
(857
)
 
(814
)
Purchases of mortgage servicing rights
(4
)
 
(12
)
Net change in loans
(3,291
)
 
(1,662
)
Net purchases of other assets
(193
)
 
(164
)
Net cash from investing activities
(4,335
)
 
(2,663
)
Financing activities:
 
 
 
Net change in deposits
2,978

 
1,677

Net change in short-term borrowings
(2,253
)
 
(289
)
Proceeds from long-term borrowings
4,997

 

Payments on long-term borrowings
(1,142
)
 
(1,001
)
Cash dividends on common stock
(226
)
 
(180
)
Cash dividends on preferred stock
(48
)
 
(36
)
Repurchase of common stock
(544
)
 
(8
)
Net proceeds from issuance of preferred stock

 
486

Other
12

 
6

Net cash from financing activities
3,774

 
655

Net change in cash and cash equivalents
1,004

 
(490
)
Cash and cash equivalents at beginning of year
4,004

 
5,273

Cash and cash equivalents at end of period
$
5,008

 
$
4,783


See notes to consolidated financial statements.


9

Table of Contents


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
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 primarily in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The Company is subject to competition from other financial institutions, is subject to the regulations of certain government agencies and undergoes periodic examinations by certain of those 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 accounting principles generally accepted in the United States (“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, 2014. 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 & Company, Inc. (“Morgan Keegan”) and related affiliates. The transaction closed on April 2, 2012. See Note 2 and Note 15 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, 2014.
Effective January 1, 2015, the Company adopted new guidance related to the accounting for investments in qualified affordable housing projects. For investments that met the criteria specified in the guidance, Regions elected to use the proportional amortization method. Under this method, the initial investment is amortized in proportion to the actual tax credits and other tax benefits to be received in the current period as compared to the total tax credits and other tax benefits expected to be received over the life of the investment. The amortization and tax benefits are included as a component of income tax expense. The guidance required retrospective application. All prior period amounts impacted by this guidance have been revised. The cumulative effect of the retrospective application was a $116 million decrease to retained earnings (deficit), a $22 million increase to other interest-earning assets and a $138 million decrease to other assets. The Company's total investments in qualified affordable housing projects were $918 million and $818 million at September 30, 2015 and December 31, 2014, respectively. These investments are reflected in other assets on Regions' consolidated balance sheets. The Company recognized $77 million and $67 million of amortization expense and $87 million and $78 million of tax credits related to these investments during the nine months ended September 30, 2015 and 2014, respectively. The Company also recognized $19 million and $17 million of other tax benefits related to these investments for nine months ended September 30, 2015 and 2014, respectively.
Certain other prior period amounts have 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 Financial, Inc. (“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 15 for related disclosure.


10

Table of Contents


The following table represents the condensed results of operations for discontinued operations:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share data)
Non-interest income:
 
 
 
 
 
 
 
Insurance proceeds
$

 
$
19

 
$

 
$
19

Total non-interest income

 
19

 

 
19

Non-interest expense:
 
 
 
 
 
 
 
Professional and legal expenses
7

 
14

 
16

 
(8
)
Other
(1
)
 

 

 
1

Total non-interest expense
6

 
14

 
16

 
(7
)
Income (loss) from discontinued operations before income taxes
(6
)
 
5

 
(16
)
 
26

Income tax expense (benefit)
(2
)
 
2

 
(6
)
 
10

Income (loss) from discontinued operations, net of tax
$
(4
)
 
$
3

 
$
(10
)
 
$
16

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

 
$
(0.01
)
 
$
0.01

Diluted
$
(0.00
)
 
$
0.00

 
$
(0.01
)
 
$
0.01

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, 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

 

 
(11
)
 
339

 
11

 

 
350

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,540

 

 
(64
)
 
1,476

 
36

 

 
1,512

Commercial agency
190

 

 
(5
)
 
185

 

 

 
185

 
$
2,081

 
$

 
$
(80
)
 
$
2,001

 
$
47

 
$

 
$
2,048

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
180

 
$
2

 
$

 
$
182

 
 
 
 
 
$
182

Federal agency securities
222

 
4

 

 
226

 
 
 
 
 
226

Obligations of states and political subdivisions
1

 

 

 
1

 
 
 
 
 
1

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
15,613

 
238

 
(31
)
 
15,820

 
 
 
 
 
15,820

Residential non-agency
6

 

 

 
6

 
 
 
 
 
6

Commercial agency
2,379

 
36

 
(1
)
 
2,414

 
 
 
 
 
2,414

Commercial non-agency
1,404

 
13

 
(7
)
 
1,410

 
 
 
 
 
1,410

Corporate and other debt securities
1,798

 
17

 
(53
)
 
1,762

 
 
 
 
 
1,762

Equity securities
887

 
8

 
(2
)
 
893

 
 
 
 
 
893

 
$
22,490

 
$
318

 
$
(94
)
 
$
22,714

 
 
 
 
 
$
22,714



11

Table of Contents



 
December 31, 2014
 
 
 
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

 

 
(12
)
 
338

 
6

 

 
344

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,698

 

 
(71
)
 
1,627

 
35

 
(1
)
 
1,661

Commercial agency
216

 

 
(7
)
 
209

 

 
(6
)
 
203

 
$
2,265

 
$

 
$
(90
)
 
$
2,175

 
$
41

 
$
(7
)
 
$
2,209

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
176

 
$

 
$

 
$
176

 
 
 
 
 
$
176

Federal agency securities
233

 
2

 

 
235

 
 
 
 
 
235

Obligations of states and political subdivisions
2

 

 

 
2

 
 
 
 
 
2

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
15,788

 
283

 
(33
)
 
16,038

 
 
 
 
 
16,038

Residential non-agency
7

 
1

 

 
8

 
 
 
 
 
8

Commercial agency
1,959

 
14

 
(9
)
 
1,964

 
 
 
 
 
1,964

Commercial non-agency
1,489

 
14

 
(9
)
 
1,494

 
 
 
 
 
1,494

Corporate and other debt securities
1,980

 
36

 
(26
)
 
1,990

 
 
 
 
 
1,990

Equity securities
662

 
12

 
(1
)
 
673

 
 
 
 
 
673

 
$
22,296

 
$
362

 
$
(78
)
 
$
22,580

 
 
 
 
 
$
22,580

_________
(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.
Equity securities in the tables above included the following amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock. Shares in the Federal Reserve Bank and FHLB are accounted for at amortized cost, which approximates fair value.
 
September 30, 2015
 
December 31, 2014
 
(In millions)
Federal Reserve Bank
$
484

 
$
488

Federal Home Loan Bank
197

 
39

Securities with carrying values of $13.4 billion and $12.1 billion at September 30, 2015 and December 31, 2014, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. Included within total pledged securities is approximately $50 million and zero of encumbered U.S. Treasury securities at September 30, 2015 and December 31, 2014, respectively.
The amortized cost and estimated fair value of securities available for sale and securities held to maturity at September 30, 2015, 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.


12

Table of Contents


 
Amortized
Cost
 
Estimated
Fair Value
 
(In millions)
Securities held to maturity:
 
 
 
Due in one year or less
$
1

 
$
1

Due after one year through five years
350

 
350

Mortgage-backed securities:
 
 
 
Residential agency
1,540

 
1,512

Commercial agency
190

 
185

 
$
2,081

 
$
2,048

Securities available for sale:
 
 
 
Due in one year or less
$
95

 
$
95

Due after one year through five years
835

 
842

Due after five years through ten years
968

 
952

Due after ten years
303

 
282

Mortgage-backed securities:
 
 
 
Residential agency
15,613

 
15,820

Residential non-agency
6

 
6

Commercial agency
2,379

 
2,414

Commercial non-agency
1,404

 
1,410

Equity securities
887

 
893

 
$
22,490

 
$
22,714

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, 2015 and December 31, 2014. 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, 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:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
223

 
$
(3
)
 
$
1,173

 
$
(25
)
 
$
1,396

 
$
(28
)
Commercial agency

 

 
185

 
(5
)
 
185

 
(5
)
 
$
223

 
$
(3
)
 
$
1,358

 
$
(30
)
 
$
1,581

 
$
(33
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
4

 
$

 
$
9

 
$

 
$
13

 
$

Federal agency securities

 

 
3

 

 
3

 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
3,658

 
(20
)
 
816

 
(11
)
 
4,474

 
(31
)
Commercial agency
348

 
(1
)
 
160

 

 
508

 
(1
)
Commercial non-agency
432

 
(4
)
 
248

 
(3
)
 
680

 
(7
)
All other securities
708

 
(29
)
 
299

 
(26
)
 
1,007

 
(55
)
 
$
5,150

 
$
(54
)
 
$
1,535

 
$
(40
)
 
$
6,685

 
$
(94
)



13

Table of Contents


 
December 31, 2014
 
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
$

 
$

 
$
344

 
$
(6
)
 
$
344

 
$
(6
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency

 

 
1,659

 
(37
)
 
1,659

 
(37
)
Commercial agency

 

 
203

 
(13
)
 
203

 
(13
)
 
$

 
$

 
$
2,206

 
$
(56
)
 
$
2,206

 
$
(56
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
74

 
$

 
$
3

 
$

 
$
77

 
$

Federal agency securities

 

 
3

 

 
3

 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,178

 
(5
)
 
2,587

 
(28
)
 
3,765

 
(33
)
Commercial agency
464

 
(4
)
 
316

 
(5
)
 
780

 
(9
)
Commercial non-agency
242

 
(1
)
 
500

 
(8
)
 
742

 
(9
)
All other securities
400

 
(7
)
 
455

 
(20
)
 
855

 
(27
)
 
$
2,358

 
$
(17
)
 
$
3,864

 
$
(61
)
 
$
6,222

 
$
(78
)
The number of individual positions in an unrealized loss position in the tables above increased from 827 at December 31, 2014 to 843 at September 30, 2015. The changes in the number of positions and the total amount of unrealized losses from year-end 2014 were primarily due to changes in interest rates and spreads within various fixed income products. In instances where an unrealized loss existed, there was no indication of a material 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, 2015. Such impairments were the result of the Company either having decided to sell or a belief that, pursuant to certain governance, it is more likely than not that the Company will be required to sell certain positions. For the quarter ending September 30, 2015, such impairments totaled $6 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 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
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Gross realized gains
$
15

 
$
9

 
$
29

 
$
25

Gross realized losses
(2
)
 
(2
)
 
(5
)
 
(8
)
Other-than-temporary-impairment ("OTTI")
(6
)
 

 
(6
)
 
(2
)
Securities gains, net
$
7

 
$
7

 
$
18


$
15

    


14

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, 2015
 
December 31, 2014
 
(In millions, net of unearned income)
Commercial and industrial
$
35,906

 
$
32,732

Commercial real estate mortgage—owner-occupied
7,741

 
8,263

Commercial real estate construction—owner-occupied
406

 
407

Total commercial
44,053

 
41,402

Commercial investor real estate mortgage
4,386

 
4,680

Commercial investor real estate construction
2,525

 
2,133

Total investor real estate
6,911

 
6,813

Residential first mortgage
12,730

 
12,315

Home equity
10,947

 
10,932

Indirect—vehicles
3,895

 
3,642

Indirect—other consumer
490

 
206

Consumer credit card
1,016

 
1,009

Other consumer
1,021

 
988

Total consumer
30,099

 
29,092

 
$
81,063

 
$
77,307

During the three months ended September 30, 2015 and 2014, Regions purchased approximately $310 million and $296 million, respectively, in indirect-vehicles and indirect-other consumer loans from third parties. During the nine months ended September 30, 2015 and 2014, the comparable loan purchase amounts were approximately $857 million and $814 million, respectively.
At September 30, 2015, $14.6 billion in net eligible loans held by Regions were pledged to secure borrowings from the FHLB. At September 30, 2015, an additional $30.9 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, 2014, 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, 2015 and 2014. The total allowance for loan losses and the related loan portfolio ending balances as of September 30, 2015 and 2014 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 troubled debt restructurings ("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.


15

Table of Contents


 
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

 
Three Months Ended September 30, 2014
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, July 1, 2014
$
705

 
$
190

 
$
334

 
$
1,229

Provision (credit) for loan losses
18

 
(23
)
 
29

 
24

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(49
)
 
(5
)
 
(66
)
 
(120
)
Recoveries
21

 
6

 
18

 
45

Net loan losses
(28
)
 
1

 
(48
)
 
(75
)
Allowance for loan losses, September 30, 2014
695

 
168

 
315

 
1,178

Reserve for unfunded credit commitments, July 1, 2014
74

 
12

 
3

 
89

Provision (credit) for unfunded credit losses
(21
)
 
(3
)
 

 
(24
)
Reserve for unfunded credit commitments, September 30, 2014
53

 
9

 
3

 
65

Allowance for credit losses, September 30, 2014
$
748

 
$
177

 
$
318

 
$
1,243

 
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



16

Table of Contents


 
Nine Months Ended September 30, 2014
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2014
$
711

 
$
236

 
$
394

 
$
1,341

Provision (credit) for loan losses
62

 
(68
)
 
67

 
61

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(130
)
 
(21
)
 
(203
)
 
(354
)
Recoveries
52

 
21

 
57

 
130

Net loan losses
(78
)
 

 
(146
)
 
(224
)
Allowance for loan losses, September 30, 2014
695

 
168

 
315

 
1,178

Reserve for unfunded credit commitments, January 1, 2014
63

 
12

 
3

 
78

Provision (credit) for unfunded credit losses
(10
)
 
(3
)
 

 
(13
)
Reserve for unfunded credit commitments, September 30, 2014
53

 
9

 
3

 
65

Allowance for credit losses, September 30, 2014
$
748

 
$
177

 
$
318

 
$
1,243

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
204

 
$
80

 
$
79

 
$
363

Collectively evaluated for impairment
491

 
88

 
236

 
815

Total allowance for loan losses
$
695

 
$
168

 
$
315

 
$
1,178

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
758

 
$
466

 
$
849

 
$
2,073

Collectively evaluated for impairment
40,115

 
6,352

 
28,067

 
74,534

Total loans evaluated for impairment
$
40,873

 
$
6,818

 
$
28,916

 
$
76,607


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.
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.


17

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, 2015 and December 31, 2014. Commercial and investor real estate loan portfolio segments are detailed by categories related to underlying credit quality and probability of default. Regions assigns these categories at loan origination and reviews the relationship utilizing a risk-based approach on, at minimum, an annual basis or at any time management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Both quantitative and qualitative factors are considered in this review process. These categories are utilized to develop the associated allowance for credit losses.
Pass—includes obligations where the probability of default is considered low;
Special Mention—includes obligations that have potential weakness which may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. Obligations in this category may also be subject to economic or market conditions which may, in the future, have an adverse effect on debt service ability;
Substandard Accrual—includes obligations that exhibit a well-defined weakness that presently jeopardizes debt repayment, even though they are currently performing. These obligations are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected;
Non-accrual—includes obligations where management has determined that full payment of principal and interest is in doubt.
Substandard accrual and non-accrual loans are often collectively referred to as “classified.” Special mention, substandard accrual, and non-accrual loans are often collectively referred to as “criticized and classified.” Classes in the consumer portfolio segment are disaggregated by accrual status.
 
September 30, 2015
 
Pass
 
Special  Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
33,972

 
$
878

 
$
706

 
$
350

 
$
35,906

Commercial real estate mortgage—owner-occupied
6,872

 
347

 
289

 
233

 
7,741

Commercial real estate construction—owner-occupied
369

 
21

 
13

 
3

 
406

Total commercial
$
41,213

 
$
1,246

 
$
1,008

 
$
586

 
$
44,053

Commercial investor real estate mortgage
$
4,020

 
$
158

 
$
169

 
$
39

 
$
4,386

Commercial investor real estate construction
2,477

 
12

 
35

 
1

 
2,525

Total investor real estate
$
6,497

 
$
170

 
$
204

 
$
40

 
$
6,911

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
$
12,663

 
$
67

 
$
12,730

Home equity
 
 
 
 
10,851

 
96

 
10,947

Indirect—vehicles
 
 
 
 
3,895

 

 
3,895

Indirect—other consumer
 
 
 
 
490

 

 
490

Consumer credit card
 
 
 
 
1,016

 

 
1,016

Other consumer
 
 
 
 
1,021

 

 
1,021

Total consumer
 
 
 
 
$
29,936

 
$
163

 
$
30,099

 
 
 
 
 
 
 
 
 
$
81,063

 


18

Table of Contents


 
December 31, 2014
 
Pass
 
Special
Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
31,492

 
$
626

 
$
362

 
$
252

 
$
32,732

Commercial real estate mortgage—owner-occupied
7,425

 
315

 
285

 
238

 
8,263

Commercial real estate construction—owner-occupied
387

 
9

 
8

 
3

 
407

Total commercial
$
39,304

 
$
950

 
$
655

 
$
493

 
$
41,402

Commercial investor real estate mortgage
$
4,152

 
$
234

 
$
171

 
$
123

 
$
4,680

Commercial investor real estate construction
2,060

 
22

 
49

 
2

 
2,133

Total investor real estate
$
6,212

 
$
256

 
$
220

 
$
125

 
$
6,813

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
$
12,206

 
$
109

 
$
12,315

Home equity
 
 
 
 
10,830

 
102

 
10,932

Indirect—vehicles
 
 
 
 
3,642

 

 
3,642

Indirect—other consumer
 
 
 
 
206

 

 
206

Consumer credit card
 
 
 
 
1,009

 

 
1,009

Other consumer
 
 
 
 
988

 

 
988

Total consumer
 
 
 
 
$
28,881

 
$
211

 
$
29,092

 
 
 
 
 
 
 
 
 
$
77,307


AGING ANALYSIS
The following tables include an aging analysis of days past due (DPD) for each portfolio segment and class as of September 30, 2015 and December 31, 2014:
 
September 30, 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

 
$
5

 
$
7

 
$
23

 
$
35,556

 
$
350

 
$
35,906

Commercial real estate
mortgage—owner-occupied
28

 
13

 
6

 
47

 
7,508

 
233

 
7,741

Commercial real estate construction—owner-occupied
1

 

 

 
1

 
403

 
3

 
406

Total commercial
40

 
18

 
13

 
71

 
43,467

 
586

 
44,053

Commercial investor real estate mortgage
18

 
6

 
2

 
26

 
4,347

 
39

 
4,386

Commercial investor real estate construction
1

 

 

 
1

 
2,524

 
1

 
2,525

Total investor real estate
19

 
6

 
2

 
27

 
6,871

 
40

 
6,911

Residential first mortgage
91

 
48

 
231

 
370

 
12,663

 
67

 
12,730

Home equity
67

 
31

 
51

 
149

 
10,851

 
96

 
10,947

Indirect—vehicles
40

 
12

 
8

 
60

 
3,895

 

 
3,895

Indirect—other consumer
1

 
1

 

 
2

 
490

 

 
490

Consumer credit card
6

 
5

 
11

 
22

 
1,016

 

 
1,016

Other consumer
12

 
2

 
4

 
18

 
1,021

 

 
1,021

Total consumer
217

 
99

 
305

 
621

 
29,936

 
163

 
30,099

 
$
276

 
$
123

 
$
320

 
$
719

 
$
80,274

 
$
789

 
$
81,063

 


19

Table of Contents


 
December 31, 2014
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
16

 
$
7

 
$
7

 
$
30

 
$
32,480

 
$
252

 
$
32,732

Commercial real estate
mortgage—owner-occupied
21

 
13

 
5

 
39

 
8,025

 
238

 
8,263

Commercial real estate construction—owner-occupied
1

 

 

 
1

 
404

 
3

 
407

Total commercial
38

 
20

 
12

 
70

 
40,909

 
493

 
41,402

Commercial investor real estate mortgage
17

 
3

 
3

 
23

 
4,557

 
123

 
4,680

Commercial investor real estate construction

 

 

 

 
2,131

 
2

 
2,133

Total investor real estate
17

 
3

 
3

 
23

 
6,688

 
125

 
6,813

Residential first mortgage
99

 
64

 
247

 
410

 
12,206

 
109

 
12,315

Home equity
73

 
38

 
63

 
174

 
10,830

 
102

 
10,932

Indirect—vehicles
43

 
10

 
7

 
60

 
3,642

 

 
3,642

Indirect—other consumer

 

 

 

 
206

 

 
206

Consumer credit card
8

 
5

 
12

 
25

 
1,009

 

 
1,009

Other consumer
13

 
4

 
3

 
20

 
988

 

 
988

Total consumer
236

 
121

 
332

 
689

 
28,881

 
211

 
29,092

 
$
291

 
$
144

 
$
347

 
$
782

 
$
76,478

 
$
829

 
$
77,307


IMPAIRED LOANS
The following tables present details related to the Company’s impaired loans as of September 30, 2015 and December 31, 2014. Loans deemed to be impaired include all TDRs and all non-accrual commercial and investor real estate loans, excluding leases. Loans which have been fully charged-off do not appear in the tables below.
 
Non-accrual Impaired Loans As of September 30, 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
$
380

 
$
31

 
$
349

 
$
42

 
$
307

 
$
104

 
35.5
%
Commercial real estate mortgage—owner-occupied
252

 
19

 
233

 
38

 
195

 
60

 
31.3

Commercial real estate construction—owner-occupied
3

 

 
3

 

 
3

 
1

 
33.3

Total commercial
635

 
50

 
585

 
80

 
505

 
165

 
33.9

Commercial investor real estate mortgage
47

 
8

 
39

 
16

 
23

 
10

 
38.3

Commercial investor real estate construction
1

 

 
1

 

 
1

 

 

Total investor real estate
48

 
8

 
40

 
16

 
24

 
10

 
37.5

Residential first mortgage
55

 
18

 
37

 

 
37

 
5

 
41.8

Home equity
21

 
6

 
15

 

 
15

 

 
28.6

Total consumer
76

 
24

 
52

 

 
52

 
5

 
38.2

 
$
759

 
$
82

 
$
677

 
$
96

 
$
581

 
$
180

 
34.5
%
 


20

Table of Contents


 
Accruing Impaired Loans As of September 30, 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
$
66

 
$
2

 
$
64

 
$
12

 
21.2
%
Commercial real estate mortgage—owner-occupied
100

 
6

 
94

 
10

 
16.0

Commercial real estate construction—owner-occupied
1

 

 
1

 

 

Total commercial
167

 
8

 
159

 
22

 
18.0

Commercial investor real estate mortgage
157

 
8

 
149

 
16

 
15.3

Commercial investor real estate construction
4

 
1

 
3

 
1

 
50.0

Total investor real estate
161

 
9

 
152

 
17

 
16.1

Residential first mortgage
456

 
12

 
444

 
57

 
15.1

Home equity
341

 
7

 
334

 
8

 
4.4

Indirect—vehicles
1

 

 
1

 

 

Consumer credit card
2

 

 
2

 

 

Other consumer
13

 

 
13

 

 

Total consumer
813

 
19

 
794

 
65

 
10.3

 
$
1,141

 
$
36

 
$
1,105

 
$
104

 
12.3
%

 
Total Impaired Loans As of September 30, 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
$
446

 
$
33

 
$
413

 
$
42

 
$
371

 
$
116

 
33.4
%
Commercial real estate mortgage—owner-occupied
352

 
25

 
327

 
38

 
289

 
70

 
27.0

Commercial real estate construction—owner-occupied
4

 

 
4

 

 
4

 
1

 
25.0

Total commercial
802

 
58

 
744

 
80

 
664

 
187

 
30.5

Commercial investor real estate mortgage
204

 
16

 
188

 
16

 
172

 
26

 
20.6

Commercial investor real estate construction
5

 
1

 
4

 

 
4

 
1

 
40.0

Total investor real estate
209

 
17

 
192

 
16

 
176

 
27

 
21.1

Residential first mortgage
511

 
30

 
481

 

 
481

 
62

 
18.0

Home equity
362

 
13

 
349

 

 
349

 
8

 
5.8

Indirect—vehicles
1

 

 
1

 

 
1

 

 

Consumer credit card
2

 

 
2

 

 
2

 

 

Other consumer
13

 

 
13

 

 
13

 

 

Total consumer
889

 
43

 
846

 

 
846

 
70

 
12.7

 
$
1,900

 
$
118

 
$
1,782

 
$
96

 
$
1,686

 
$
284

 
21.2
%



21

Table of Contents



 
Non-accrual Impaired Loans As of December 31, 2014
 
 
 
 
 
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
$
286

 
$
36

 
$
250

 
$
11

 
$
239

 
$
83

 
41.6
%
Commercial real estate mortgage—owner-occupied
267

 
29

 
238

 
43

 
195

 
69

 
36.7

Commercial real estate construction—owner-occupied
3

 

 
3

 

 
3

 
1

 
33.3

Total commercial
556

 
65

 
491

 
54

 
437

 
153

 
39.2

Commercial investor real estate mortgage
162

 
39

 
123

 
26

 
97

 
30

 
42.6

Commercial investor real estate construction
3

 
1

 
2

 

 
2

 
1

 
66.7

Total investor real estate
165

 
40

 
125

 
26

 
99

 
31

 
43.0

Residential first mortgage
79

 
26

 
53

 

 
53

 
7

 
41.8

Home equity
22

 
7

 
15

 

 
15

 
1

 
36.4

Total consumer
101

 
33

 
68

 

 
68

 
8

 
40.6

 
$
822

 
$
138

 
$
684

 
$
80

 
$
604

 
$
192

 
40.1
%
 
 
Accruing Impaired Loans As of December 31, 2014
 
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
$
102

 
$
3

 
$
99

 
$
17

 
19.6
%
Commercial real estate mortgage—owner-occupied
162

 
10

 
152

 
16

 
16.0

Total commercial
264

 
13

 
251

 
33

 
17.4

Commercial investor real estate mortgage
267

 
8

 
259

 
28

 
13.5

Commercial investor real estate construction
33

 

 
33

 
6

 
18.2

Total investor real estate
300

 
8

 
292

 
34

 
14.0

Residential first mortgage
426

 
11

 
415

 
57

 
16.0

Home equity
359

 
6

 
353

 
13

 
5.3

Indirect—vehicles
1

 

 
1

 

 

Consumer credit card
2

 

 
2

 

 

Other consumer
17

 

 
17

 

 

Total consumer
805

 
17

 
788

 
70

 
10.8

 
$
1,369

 
$
38

 
$
1,331

 
$
137

 
12.8
%



22

Table of Contents


 
Total Impaired Loans As of December 31, 2014
 
 
 
 
 
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
$
388

 
$
39

 
$
349

 
$
11

 
$
338

 
$
100

 
35.8
%
Commercial real estate mortgage—owner-occupied
429

 
39

 
390

 
43

 
347

 
85

 
28.9

Commercial real estate construction—owner-occupied
3

 

 
3

 

 
3

 
1

 
33.3

Total commercial
820

 
78

 
742

 
54

 
688

 
186

 
32.2

Commercial investor real estate mortgage
429

 
47

 
382

 
26

 
356

 
58

 
24.5

Commercial investor real estate construction
36

 
1

 
35

 

 
35

 
7

 
22.2

Total investor real estate
465

 
48

 
417

 
26

 
391

 
65

 
24.3

Residential first mortgage
505

 
37

 
468

 

 
468

 
64

 
20.0

Home equity
381

 
13

 
368

 

 
368

 
14

 
7.1

Indirect—vehicles
1

 

 
1

 

 
1

 

 

Consumer credit card
2

 

 
2

 

 
2

 

 

Other consumer
17

 

 
17

 

 
17

 

 

Total consumer
906

 
50

 
856

 

 
856

 
78

 
14.1

 
$
2,191

 
$
176

 
$
2,015

 
$
80

 
$
1,935

 
$
329

 
23.0
%
________
(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.

The following table presents the average balances of total impaired loans and interest income for the three and nine months ended September 30, 2015 and 2014. 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
 
2015
 
2014
 
2015
 
2014
 
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
$
379

 
$
1

 
$
296

 
$
2

 
$
378

 
$
4

 
$
382

 
$
7

Commercial real estate mortgage—owner-occupied
322

 
2

 
464

 
2

 
350

 
7

 
491

 
9

Commercial real estate construction—owner-occupied
4

 

 
30

 
1

 
4

 

 
36

 
1

Total commercial
705

 
3

 
790

 
5

 
732

 
11

 
909

 
17

Commercial investor real estate mortgage
210

 
2

 
446

 
4

 
266

 
8

 
532

 
18

Commercial investor real estate construction
14

 

 
44

 

 
26

 
1

 
68

 
2

Total investor real estate
224

 
2

 
490

 
4

 
292

 
9

 
600

 
20

Residential first mortgage
477

 
3

 
451

 
3

 
476

 
11

 
454

 
10

Home equity
352

 
5

 
379

 
5

 
357

 
14

 
383

 
15

Indirect—vehicles
1

 

 
1

 

 
1

 

 
1

 

Consumer credit card
2

 

 
2

 

 
2

 

 
2

 

Other consumer
13

 
1

 
19

 

 
15

 
1

 
22

 
1

Total consumer
845

 
9

 
852

 
8

 
851

 
26

 
862

 
26

Total impaired loans
$
1,774

 
$
14

 
$
2,132

 
$
17

 
$
1,875

 
$
46

 
$
2,371

 
$
63



23

Table of Contents


TROUBLED DEBT RESTRUCTURINGS
Regions regularly modifies commercial and investor real estate loans in order to facilitate a workout strategy. Typical modifications include accommodations, such as renewals and forbearances. The majority of Regions’ commercial and investor real estate TDRs are the result of renewals of classified loans at an interest rate that is not considered to be a market interest rate. For smaller dollar commercial loans, Regions may periodically grant interest rate and other term concessions, similar to those under the consumer program described below.
Regions works to meet the individual needs of consumer borrowers to stem foreclosure through the Customer Assistance Program ("CAP"). Regions designed the program to allow for customer-tailored modifications with the goal of keeping customers in their homes and avoiding foreclosure where possible. Modification may be offered to any borrower experiencing financial hardship regardless of the borrower’s payment status. Consumer TDRs primarily involve an interest rate concession; however under the CAP, Regions may also offer a short-term deferral, a term extension, a new loan product, or a combination of these options. For loans restructured under the CAP, Regions expects to collect the original contractually due principal. The gross original contractual interest may be collectible, depending on the terms modified. The length of the CAP modifications ranges from temporary payment deferrals of three months to term extensions for the life of the loan. All such modifications are considered TDRs regardless of the term because they are concessionary in nature and because the customer documents a hardship in order to participate.
As noted above, the majority of Regions’ TDRs are the result of interest rate concession and not a forgiveness of principal. Accordingly, the financial impact of the modifications is best illustrated by the impact to the allowance calculation at the loan or pool level, as a result of the loans being considered impaired due to their TDR status. Regions most often does not record a charge-off at the modification date.
None of the modified consumer loans listed in the following TDR disclosures were collateral-dependent at the time of modification. At September 30, 2015, approximately $44 million in residential first mortgage TDRs were in excess of 180 days past due and were considered collateral-dependent. At September 30, 2015, approximately $7 million in home equity first lien TDRs were in excess of 180 days past due and approximately $5 million in home equity second lien TDRs were in excess of 120 days past due, both of which were considered collateral-dependent.
Further discussion related to TDRs, including their impact on the allowance for loan losses and designation of TDRs in periods subsequent to the modification is included in Note 1 in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014.
The following tables present the end of period balance for loans modified in a TDR during the periods presented by portfolio segment and class, and the financial impact of those modifications. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. The end of period balance, for the period in which it was added, of total loans first reported as new TDRs totaled approximately $217 million and $316 million for the nine months ended September 30, 2015 and 2014, respectively.
 
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

 


24

Table of Contents


 
Three Months Ended September 30, 2014
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
67

 
$
72

 
$
2

Commercial real estate mortgage—owner-occupied
61

 
49

 
1

Total commercial
128

 
121

 
3

Commercial investor real estate mortgage
43

 
66

 
1

Commercial investor real estate construction
8

 
24

 
1

Total investor real estate
51

 
90

 
2

Residential first mortgage
144

 
26

 
4

Home equity
142

 
8

 

Consumer credit card
40

 
1

 

Indirect—vehicles and other consumer
77

 
1

 

Total consumer
403

 
36

 
4

 
582

 
$
247

 
$
9

 
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



25

Table of Contents


 
Nine Months Ended September 30, 2014
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
216

 
$
236

 
$
4

Commercial real estate mortgage—owner-occupied
218

 
196

 
4

Commercial real estate construction—owner-occupied
3

 
3

 

Total commercial
437

 
435

 
8

Commercial investor real estate mortgage
193

 
274

 
5

Commercial investor real estate construction
36

 
39

 
1

Total investor real estate
229

 
313

 
6

Residential first mortgage
408

 
71

 
11

Home equity
481

 
28

 

Consumer credit card
104

 
1

 

Indirect—vehicles and other consumer
194

 
3

 

Total consumer
1,187

 
103

 
11

 
1,853

 
$
851

 
$
25

Defaulted TDRs
The following table presents, by portfolio segment and class, TDRs that defaulted during the three and nine months ended September 30, 2015 and 2014, 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, 2014.
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Defaulted During the Period, Where Modified in a TDR Twelve Months Prior to Default
 
 
 
 
 
 
 
Commercial and industrial
$
4

 
$
2

 
$
8

 
$
48

Commercial real estate mortgage—owner-occupied
3

 
10

 
6

 
17

Total commercial
7

 
12

 
14

 
65

Commercial investor real estate mortgage

 
1

 
1

 
5

Commercial investor real estate construction

 

 

 
1

Total investor real estate

 
1

 
1

 
6

Residential first mortgage
7

 
2

 
15

 
14

Home equity
1

 

 
2

 
2

Total consumer
8

 
2

 
17

 
16

 
$
15

 
$
15

 
$
32

 
$
87

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, 2015, approximately $30 million of commercial and investor real estate loans modified in a TDR during the three months ended September 30, 2015 were on non-accrual status. Approximately 1.63 percent of this amount was 90 days past due.
At September 30, 2015, Regions had restructured binding unfunded commitments totaling $71 million where a concession was granted and the borrower was in financial difficulty.


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NOTE 5. SERVICING OF FINANCIAL ASSETS
RESIDENTIAL MORTGAGE BANKING ACTIVITIES
The fair value of residential mortgage servicing rights 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 mortgage servicing rights. The Company compares fair value estimates and assumptions to observable market data when available, and also considers recent market activity and actual portfolio experience.
The table below presents an analysis of residential mortgage servicing rights under the fair value measurement method:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Carrying value, beginning of period
$
268

 
$
276

 
$
257

 
$
297

Additions
9

 
9

 
28

 
24

Increase (decrease) in fair value(1):
 
 
 
 
 
 
 
Due to change in valuation inputs or assumptions
(25
)
 

 
(14
)
 
(20
)
Economic amortization associated with borrower repayments
(11
)
 
(8
)
 
(30
)
 
(24
)
Carrying value, end of period
$
241

 
$
277

 
$
241

 
$
277

________
(1) "Economic amortization associated with borrower repayments" includes both total loan payoffs as well as partial paydowns. Prior to the fourth quarter of 2014, this line item reflected total loan payoffs only, while partial paydowns were included in the "Due to change in valuation inputs or assumptions" line item. The 2014 three and nine months ended amount disclosed in the table has been reclassified to reflect the revised presentation.
Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to residential mortgage servicing rights (excluding related derivative instruments) are as follows:
 
September 30
 
2015
 
2014
 
(Dollars in millions)
Unpaid principal balance
$
26,220

 
$
26,943

Weighted-average prepayment speed (CPR; percentage)
12.0
%
 
10.9
%
Estimated impact on fair value of a 10% increase
$
(13
)
 
$
(15
)
Estimated impact on fair value of a 20% increase
$
(25
)
 
$
(28
)
Option-adjusted spread (basis points)
999

 
789

Estimated impact on fair value of a 10% increase
$
(9
)
 
$
(8
)
Estimated impact on fair value of a 20% increase
$
(18
)
 
$
(17
)
Weighted-average coupon interest rate
4.4
%
 
4.5
%
Weighted-average remaining maturity (months)
279

 
279

Weighted-average servicing fee (basis points)
27.9

 
27.8

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the residential mortgage servicing rights 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
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Servicing related fees and other ancillary income
$
21

 
$
21

 
$
62

 
$
64

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


27

Table of Contents


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 a 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. The table below presents an analysis of Regions’ repurchase liability related to residential mortgage loans sold with representations and warranty provisions:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Beginning balance
$
20

 
$
34

 
$
26

 
$
39

Additions (reductions), net
(6
)
 
(5
)
 
(10
)
 
(3
)
Losses

 
(1
)
 
(2
)
 
(8
)
Ending balance
$
14

 
$
28

 
$
14

 
$
28

COMMERCIAL MORTGAGE BANKING ACTIVITIES
On July 18, 2014, Regions was approved as a Fannie Mae Delegated Underwriting and Servicing ("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 mortgage servicing rights accounted for under the amortization method and $15 million in intangible assets associated with the DUS license purchased. Regions also assumed a one-third loss share guarantee associated with the purchased portfolio and any future originations. Regions estimated the fair value of the loss share guarantee to be approximately $4 million. See Note 1 "Summary of Significant Accounting Policies" in the 2014 Annual Report on Form 10-K for additional information.
As of September 30, 2015, the DUS servicing portfolio remained at approximately $1.0 billion, the related commercial mortgage servicing rights were valued at approximately $13 million due to new loan originations, and the loss share guarantee was valued at approximately $2 million.
NOTE 6. GOODWILL
Goodwill allocated to each reportable segment (each a reporting unit) is presented as follows: 
 
September 30, 2015
 
December 31, 2014
 
(In millions)
Corporate Bank
$
2,258

 
$
2,258

Consumer Bank
2,095

 
2,095

Wealth Management
478

 
463

 
$
4,831

 
$
4,816

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 in the Annual Report on Form 10-K for the year ended December 31, 2014. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill.


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Table of Contents


During the third quarter of 2015, Regions assessed events and circumstances for all three reporting units as of September 30, 2015 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.
Results of the 2014 annual test indicated that the estimated fair value of each reporting unit exceeded its carrying amount 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 values as of September 30, 2015. Therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the September 30, 2015 interim period.
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, 2015
 
December 31, 2014
 
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

 
$
395

 
$
419

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

 
441

 
465

 
 
 
 
 
 
 
 
$
1,000

 
$
836

 
$
884

_________
(1) Dividends, if declared, will be paid quarterly at an annual rate equal to (i) for each period beginning prior to September 15, 2024, 6.375%, and (ii) for each period beginning on or after September 15, 2024, three-month LIBOR plus 3.536%.
For each preferred stock issuance listed above, Regions issued depositary shares, each representing a 1/40th ownership interest in a share of the Company's preferred stock, with a liquidation preference of $1,000.00 per share of preferred stock (equivalent to $25.00 per depositary share). Dividends on the preferred stock, if declared, accrue and are payable quarterly in arrears. The preferred stock has no stated maturity and redemption is solely at Regions' option, subject to regulatory approval, in whole, or in part, after the earliest redemption date or in whole, but not in part, within 90 days following a regulatory capital treatment event for the Series A preferred stock or at any time following a regulatory capital treatment event for the Series B preferred stock.
The Board of Directors declared $8 million in cash dividends on Series A Preferred Stock during the first, second, and third quarters of 2015 and 2014. Series B Preferred Stock dividends were $8 million for the first, second, and third quarters of 2015 compared to $12 million in the third quarter of 2014. Due to the timing of the second quarter of 2014 Series B preferred issuance, preferred dividends in the third quarter of 2014 reflected a longer coupon period. Because the Company was in a retained deficit position, preferred dividends were recorded as a reduction of preferred stock, including related surplus.
COMMON STOCK
During the first quarter of 2015, Regions received no objection from the Federal Reserve to its 2015 capital plan that was submitted as part of the Comprehensive Capital Analysis and Review ("CCAR") process. On April 23, 2015, Regions' Board of Directors approved an increase of its quarterly common stock dividend to $0.06 per share effective with the quarterly dividend paid in July 2015, as well as the authorization of a new $875 million common stock repurchase plan, permitting repurchases from the beginning of the second quarter of 2015 through the end of the second quarter of 2016. Through September 30, 2015, Regions repurchased approximately 44 million shares of common stock at a total cost of approximately $442 million under this plan. The Company continued to repurchase shares in the fourth quarter of 2015, and as of November 3, 2015, Regions had additional repurchases of approximately 1.4 million shares of common stock at a total cost of approximately $13.6 million. All common shares repurchased under this plan were immediately retired and therefore are not included in treasury stock.


29

Table of Contents


As part of its 2014 CCAR submission, Regions' Board of Directors approved an increase to its quarterly common stock dividend from $0.03 per share to $0.05 per share effective with the quarterly dividend paid in July 2014, as well as a $350 million common stock repurchase plan. The Company closed out this repurchase plan in the first quarter of 2015, repurchasing an additional approximately 11 million shares of common stock at a total cost of approximately $102 million. These shares were immediately retired and therefore are not included in treasury stock.
The Board of Directors declared a $0.06 per share cash dividend on common stock for the 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. The Board of Directors declared a $0.05 per share cash dividend on common stock for the second and third quarters of 2014, and a $0.03 per share cash dividend for the first quarter of 2014, totaling $0.13 per share cash dividend for the first nine months of 2014.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity within the balances in accumulated other comprehensive income (loss) is shown in the following tables:
 
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
)
 
Three Months Ended September 30, 2014
 
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
$
(60
)
 
$
203

 
$
44

 
$
(239
)
 
$
(52
)
Net change
2

 
(92
)
 
(37
)
 
5

 
(122
)
End of period
$
(58
)
 
$
111

 
$
7

 
$
(234
)
 
$
(174
)
 
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
)


30

Table of Contents


 
Nine Months Ended September 30, 2014
 
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
$
(64
)
 
$
(22
)
 
$
15

 
$
(248
)
 
$
(319
)
Net change
6

 
133

 
(8
)
 
14

 
145

End of period
$
(58
)
 
$
111

 
$
7

 
$
(234
)
 
$
(174
)
The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Affected Line Item in the Consolidated Statements of Income
 
(In millions)
 
 
Unrealized losses on securities transferred to held to maturity:
 
 
 
 
 
 
$
(3
)
 
$
(3
)
 
Net interest income
 
1

 
1

 
Tax (expense) or benefit
 
$
(2
)
 
$
(2
)
 
Net of tax
Unrealized gains and (losses) on available-for-sale securities:
 
 
 
 
 
 
$
7

 
$
7

 
Securities gains, net
 
(2
)
 
(2
)
 
Tax (expense) or benefit
 
$
5

 
$
5

 
Net of tax
 
 
 
 
 
 
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
41

 
$
34

 
Net interest income
 
(16
)
 
(13
)
 
Tax (expense) or benefit
 
$
25

 
$
21

 
Net of tax
 
 
 
 
 
 
Amortization of defined benefit pension plans and other post employment benefits:
 
 
 
 
 
Prior-service cost
$
(1
)
 
$

 
(2) 
Actuarial gains (losses)
(12
)
 
(7
)
 
(2) 
 
(13
)
 
(7
)
 
Total before tax
 
4

 
2

 
Tax (expense) or benefit
 
$
(9
)
 
$
(5
)
 
Net of tax
 
 
 
 
 
 
Total reclassifications for the period
$
19

 
$
19

 
Net of tax



31

Table of Contents


 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
 
 
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:
 
 
 
 
 
 
$
(10
)
 
$
(10
)
 
Net interest income
 
4

 
4

 
Tax (expense) or benefit
 
$
(6
)
 
$
(6
)
 
Net of tax
Unrealized gains and (losses) on available-for-sale securities:
 
 
 
 
 
 
$
18

 
$
15

 
Securities gains, net
 
(6
)
 
(5
)
 
Tax (expense) or benefit
 
$
12

 
$
10

 
Net of tax
 
 
 
 
 
 
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
108

 
$
91

 
Net interest income
 
(41
)
 
(35
)
 
Tax (expense) or benefit
 
$
67

 
$
56

 
Net of tax
 
 
 
 
 
 
Amortization of defined benefit pension plans and other post employment benefits:
 
 
 
 
 
Prior-service cost
$
(1
)
 
$
(1
)
 
(2) 
Actuarial gains (losses)
(36
)
 
(18
)
 
(2) 
 
(37
)
 
(19
)
 
Total before tax
 
13

 
6

 
Tax (expense) or benefit
 
$
(24
)
 
$
(13
)
 
Net of tax
 
 
 
 
 
 
Total reclassifications for the period
$
49

 
$
47

 
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).



32

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
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
262

 
$
317

 
$
787

 
$
915

Preferred stock dividends
(16
)
 
(20
)
 
(48
)
 
(36
)
Income from continuing operations available to common shareholders
246

 
297

 
739

 
879

Income (loss) from discontinued operations, net of tax
(4
)
 
3

 
(10
)
 
16

Net income available to common shareholders
$
242

 
$
300

 
$
729

 
$
895

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
1,319

 
1,378

 
1,333

 
1,378

Potential common shares
7

 
11

 
10

 
12

Weighted-average common shares outstanding—diluted
1,326

 
1,389

 
1,343

 
1,390

Earnings per common share from continuing operations available to common shareholders(1):
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.22

 
$
0.55

 
$
0.64

Diluted
0.19

 
0.21

 
0.55

 
0.63

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

 
(0.01
)
 
0.01

Diluted
(0.00
)
 
0.00

 
(0.01
)
 
0.01

Earnings per common share(1):
 
 
 
 
 
 
 
Basic
0.18

 
0.22

 
0.55

 
0.65

Diluted
0.18

 
0.22

 
0.54

 
0.64

________
(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 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. The effect from the assumed exercise of 23 million and 24 million stock options for the three and nine months ended September 30, 2014, respectively, was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share.
NOTE 9. SHARE-BASED PAYMENTS
Regions administers long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock awards, performance awards and stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by stockholders. Incentive awards usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans are typically ten years from the date of the grant.
On April 23, 2015, the stockholders of the Company approved the Regions Financial Corporation 2015 Long Term Incentive Plan ("2015 LTIP"), which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2015 LTIP authorizes 60 million common share equivalents available for grant, where grants of options and grants of full value awards (e.g., shares of


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restricted stock, restricted stock units and performance stock units) count as one share equivalent. Unless otherwise determined by the Compensation Committee of the Board of Directors, grants of restricted stock, restricted stock units, and performance stock units accrue dividends, or their notional equivalent, as they are declared by the Board of Directors, 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 54 million at September 30, 2015.
STOCK OPTIONS
The following table summarizes the activity related to stock options:
 
Nine Months Ended September 30
 
2015
 
2014
 
Number of
Options
 
Weighted-Average
Exercise Price
 
Number of
Options
 
Weighted-Average
Exercise Price
Outstanding at beginning of period
25,316,676

 
$
23.07

 
32,127,235

 
$
22.81

Exercised
(535,107
)
 
6.92

 
(2,166,521
)
 
4.52

Canceled/Forfeited
(5,410,769
)
 
31.82

 
(4,486,405
)
 
30.44

Outstanding at end of period
19,370,800

 
$
21.07

 
25,474,309

 
$
23.02

Exercisable at end of period
19,370,800

 
$
21.07

 
25,474,309

 
$
23.02

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
 
2015
 
2014
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
Non-vested at beginning of period
18,427,409

 
$
8.07

 
16,212,198

 
$
6.83

Granted
6,622,682

 
9.90

 
5,368,113

 
11.22

Vested
(8,106,010
)
 
6.07

 
(2,623,699
)
 
6.82

Forfeited
(506,271
)
 
8.54

 
(459,102
)
 
8.06

Non-vested at end of period
16,437,810

 
$
9.51

 
18,497,510

 
$
8.07



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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 supplemental executive retirement program (the "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
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Service cost
$
10

 
$
9

 
$
1

 
$
1

 
$
11

 
$
10

Interest cost
21

 
21

 
2

 
2

 
23

 
23

Expected return on plan assets
(38
)
 
(34
)
 

 

 
(38
)
 
(34
)
Amortization of actuarial loss
11

 
6

 
1

 
1

 
12

 
7

Amortization of prior service cost

 

 
1

 

 
1

 

Settlement charge

 

 

 

 

 

Net periodic pension cost
$
4

 
$
2

 
$
5

 
$
4

 
$
9

 
$
6

 
Qualified Plan
 
Non-qualified Plans
 
Total
 
Nine Months Ended September 30
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Service cost
$
30

 
$
25

 
$
4

 
$
3

 
$
34

 
$
28

Interest cost
63

 
65

 
5

 
5

 
68

 
70

Expected return on plan assets
(112
)
 
(103
)
 

 

 
(112
)
 
(103
)
Amortization of actuarial loss
33

 
16

 
3

 
2

 
36

 
18

Amortization of prior service cost

 

 
1

 
1

 
1

 
1

Settlement charge

 

 

 
3

 

 
3

Net periodic pension cost
$
14

 
$
3

 
$
13

 
$
14

 
$
27

 
$
17

Regions' policy for funding the qualified pension plan is to contribute annually at least the amount required by Internal Revenue Service ("IRS") minimum funding standards. Regions made a contribution of $150 million for the 2014 plan year during the first quarter of 2015. Regions also made a $100 million contribution for the 2015 plan year in the fourth quarter of 2015.
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, 2015 or 2014.
NOTE 11. INCOME TAXES
During the second quarter of 2015, the Company reached an agreement with the IRS to settle audits for the tax years 2010, 2011 and 2012. The settlement reduced income tax expense by $4 million, including a reduction in unrecognized tax benefits ("UTBs") of $3 million. The Company has entered the IRS’s Compliance Assurance Process program for 2015.
State audit settlements during the nine months ended September 30, 2015 resulted in a reduction in income tax expense of $6 million. With few exceptions, the Company is no longer subject to state and local tax examinations for tax years before 2008. Currently there are disputed tax positions taken in previously filed tax returns with certain states. The Company continues to evaluate these positions and intends to defend proposed adjustments made by these tax authorities. The Company does not anticipate the ultimate resolution of these examinations will result in a material change to its business, financial position, results of operations or cash flows.
As of September 30, 2015 and December 31, 2014, the balance in the Company’s UTBs was $37 million and $50 million, respectively. The decrease of $13 million is principally related to state audit settlements and the IRS audit previously discussed. As of September 30, 2015 and December 31, 2014, the balance of UTBs that would reduce the effective tax rate, if recognized, was $24 million and $34 million, respectively.


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NOTE 12. 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, 2015 and December 31, 2014.
 
September 30, 2015
 
December 31, 2014
 
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
$
2,650

 
$
21

 
$
37

 
$
2,817

 
$
6

 
$
30

Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
9,800

 
199

 

 
8,050

 
38

 
31

Total derivatives designated as hedging instruments
$
12,450

 
$
220

 
$
37

 
$
10,867

 
$
44

 
$
61

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
39,976

 
$
645

 
$
668

 
$
45,860

 
$
941

 
$
972

Interest rate options
2,954

 
15

 
1

 
3,016

 
10

 
2

Interest rate futures and forward commitments
18,801

 
10

 
14

 
17,978

 
3

 
8

Other contracts
4,713

 
189

 
183

 
4,149

 
217

 
211

Total derivatives not designated as hedging instruments
$
66,444

 
$
859

 
$
866

 
$
71,003

 
$
1,171

 
$
1,193

Total derivatives
$
78,894

 
$
1,079

 
$
903

 
$
81,870

 
$
1,215

 
$
1,254

_________
(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, 2014 for additional information regarding accounting policies for derivatives.
FAIR VALUE HEDGES
Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment.
Regions enters into interest rate swap agreements to manage interest rate exposure on the Company’s fixed-rate borrowings, which includes long-term debt and certificates of deposit. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreements. Regions enters into interest rate swap agreements to manage interest rate exposure on certain of the Company's fixed-rate available for sale debt securities. These agreements involve the payment of fixed-rate amounts in exchange for floating-rate interest receipts.
CASH FLOW HEDGES
Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions.
Regions enters into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on LIBOR-based loans. The agreements effectively modify the Company’s exposure to interest rate risk by utilizing receive fixed/pay LIBOR interest rate swaps.
Regions issues long-term fixed-rate debt for various funding needs. Regions may enter into receive LIBOR/pay fixed forward starting swaps to hedge risks of changes in the projected quarterly interest payments attributable to changes in the benchmark interest rate ("LIBOR") during the time leading up to the probable issuance date of the new long-term fixed-rate debt.
Regions recognized an unrealized after-tax gain of $24 million and $40 million in accumulated other comprehensive income (loss) at September 30, 2015 and 2014, respectively, related to terminated cash flow hedges of loan and debt instruments, which


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will be amortized into earnings in conjunction with the recognition of interest payments through 2021. Regions recognized pre-tax income of $11 million and $14 million during the three months ended September 30, 2015 and 2014, respectively, and pre-tax income of $33 million and $37 million during the nine months ended September 30, 2015 and 2014, respectively, related to the amortization of cash flow hedges of loan and debt instruments.
Regions expects to reclassify out of accumulated other comprehensive income (loss) and into earnings approximately $146 million in pre-tax income due to the receipt of interest payments on all cash flow hedges within the next twelve months. Included in this amount is $26 million in pre-tax net gains related to the amortization of discontinued cash flow hedges. The maximum length of time over which Regions is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately ten years as of September 30, 2015.
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
 
2015
 
2014
 
 
 
2015
 
2014
 
(In millions)
 
 
 
(In millions)
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps on:
 
 
 
 
 
 
 
 
 
Debt/CDs
$
5

 
$
4

 
Interest expense
 
$
(1
)
 
$
7

Debt/CDs
10

 
(11
)
 
Other non-interest expense
 
(11
)
 
10

Securities available for sale
(3
)
 
(4
)
 
Interest income
 

 

Securities available for sale
(23
)
 

 
Other non-interest expense
 
21

 
(2
)
Total
$
(11
)
 
$
(11
)
 
 
 
$
9

 
$
15

 
 
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
 
2015
 
2014
 
 
 
2015
 
2014
 
(In millions)
 
 
 
(In millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
96

 
$
(37
)
 
Interest income on loans
 
$
41

 
$
34

Forward starting swaps

 

 
Interest expense on debt
 

 

Total
$
96

 
$
(37
)
 
 
 
$
41

 
$
34


 
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
 
2015
 
2014
 
 
 
2015
 
2014
 
(In millions)
 
 
 
(In millions)
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps on:
 
 
 
 
 
 
 
 
 
Debt/CDs
$
13

 
$
19

 
Interest expense
 
$
5

 
$
15

Debt/CDs
14

 
(25
)
 
Other non-interest expense
 
(15
)
 
27

Securities available for sale
(11
)
 
(12
)
 
Interest income
 

 

Securities available for sale
(18
)
 
(32
)
 
Other non-interest expense
 
15

 
25

Total
$
(2
)
 
$
(50
)
 
 
 
$
5

 
$
67



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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
 
2015
 
2014
 
 
 
2015
 
2014
 
(In millions)
 
 
 
(In millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
108

 
$
(11
)
 
Interest income on loans
 
$
108

 
$
96

Forward starting swaps

 
3

 
Interest expense on debt
 

 
(5
)
Total
$
108

 
$
(8
)
 
 
 
$
108

 
$
91

______
(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 maintains a derivatives portfolio of interest rate swaps, option contracts, and futures and forward commitments used to meet the needs of its customers. The portfolio is primarily used to help clients manage market risk. The Company is subject to the credit risk that a counterparty will fail to perform. The Company is also subject to market risk, which is evaluated by the Company and monitored by the asset/liability management process. Separate derivative contracts are entered into to reduce overall market exposure to pre-defined limits. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through earnings and included in other assets and other liabilities.
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, 2015 and December 31, 2014, Regions had $353 million and $233 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 the lower of cost or market with changes to the value of the related forward sale commitments recorded in capital markets fee income and other. At September 30, 2015 and December 31, 2014, Regions had $708 million and $621 million, respectively, in total notional amount related to these forward sale commitments.
Regions has elected to account for residential mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the consolidated statement of income effect of changes in the fair value of its residential mortgage servicing rights. As of September 30, 2015 and December 31, 2014, the total notional amount related to these contracts was $3.5 billion and $3.7 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, 2015 and 2014:


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Three Months Ended September 30
 
Nine Months Ended September 30
Derivatives Not Designated as Hedging Instruments
2015
 
2014
 
2015
 
2014
 
(In millions)
Capital markets fee income and other(1):
 
 
 
 
 
 
 
Interest rate swaps
$
3

 
$
5

 
$
11

 
$
10

Interest rate options
5

 

 
9

 

Interest rate futures and forward commitments
1

 
1

 

 

Other contracts
8

 
2

 
1

 
8

Total capital markets fee income and other
17

 
8

 
21

 
18

Mortgage income:
 
 
 
 
 
 
 
Interest rate swaps
22

 
1

 
19

 
19

Interest rate options

 
(3
)
 
4

 
3

Interest rate futures and forward commitments
(8
)
 
9

 
(1
)
 
1

Total mortgage income
14

 
7

 
22

 
23

 
$
31

 
$
15

 
$
43

 
$
41

______
(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, 2015 and December 31, 2014, totaled approximately $585 million and $392 million, respectively. This amount represents the net credit risk on all trading and other derivative positions held by Regions.
CREDIT DERIVATIVES
Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty when the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2016 and 2020. Credit derivatives whereby Regions has sold credit protection have maturities between 2016 and 2025. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.
Regions’ maximum potential amount of future payments under these contracts as of September 30, 2015 was approximately $114 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, 2015 and 2014 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.
CONTINGENT FEATURES
Certain of Regions’ derivative instrument contracts with broker-dealers contain credit-related termination provisions and/or credit-related provisions regarding the posting of collateral, allowing those broker-dealers to terminate the contracts in the event that Regions’ and/or Regions Bank’s credit ratings falls below specified ratings from certain major credit rating agencies. The aggregate fair value of all derivative instruments with any credit-risk-related contingent features that were in a liability position on September 30, 2015 and December 31, 2014, was $221 million and $272 million, respectively, for which Regions had posted collateral of $219 million and $272 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, 2015 and December 31, 2014.


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Offsetting Derivative Assets
 
Offsetting Derivative Liabilities
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
 
(In millions)
Gross amounts subject to offsetting
$
905

 
$
1,157

 
$
778

 
$
1,195

Gross amounts not subject to offsetting
174

 
58

 
125

 
59

Gross amounts recognized
1,079

 
1,215

 
903

 
1,254

Gross amounts offset in the consolidated balance sheets(1)
489

 
815

 
637

 
1,054

Net amounts presented in the consolidated balance sheets
590

 
400

 
266

 
200

Gross amounts not offset in the consolidated balance sheets:
 
 
 
 
 
 
 
Financial instruments
5

 
8

 
50

 

Cash collateral received/posted

 

 
42

 
29

Net amounts
$
585

 
$
392

 
$
174

 
$
171

________
(1)
At September 30, 2015, gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $127 million and cash collateral posted of $278 million. At December 31, 2014, gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $111 million and cash collateral posted of $354 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 13. 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, 2014 for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. There were no such transfers during the nine month periods ended September 30, 2015 and 2014. Trading account securities and securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the observability of inputs used in valuing the security. Such transfers are accounted for as if they occur at the beginning of a reporting period.


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The following table presents assets and liabilities measured at estimated fair value on a recurring basis and non-recurring basis as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
 
December 31, 2014
 
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
$
106

 
$

 
$

 
$
106

 
 
$
106

 
$

 
$

 
$
106

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
182

 
$

 
$

 
$
182

 
 
$
176

 
$

 
$

 
$
176

Federal agency securities

 
226

 

 
226

 
 

 
235

 

 
235

Obligations of states and political subdivisions

 
1

 

 
1

 
 

 
2

 

 
2

Mortgage-backed securities (MBS):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency

 
15,820

 

 
15,820

 
 

 
16,038

 

 
16,038

Residential non-agency

 

 
6

 
6

 
 

 

 
8

 
8

Commercial agency

 
2,414

 

 
2,414

 
 

 
1,964

 

 
1,964

Commercial non-agency

 
1,410

 

 
1,410

 
 

 
1,494

 

 
1,494

Corporate and other debt securities

 
1,759

 
3

 
1,762

 
 

 
1,987

 
3

 
1,990

Equity securities(1)
212

 

 

 
212

 
 
146

 

 

 
146

Total securities available for sale
$
394

 
$
21,630

 
$
9

 
$
22,033

 
 
$
322

 
$
21,720

 
$
11

 
$
22,053

Mortgage loans held for sale
$

 
$
421

 
$

 
$
421

 
 
$

 
$
440

 
$

 
$
440

Residential mortgage servicing rights
$

 
$

 
$
241

 
$
241

 
 
$

 
$

 
$
257

 
$
257

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
865

 
$

 
$
865

 
 
$

 
$
985

 
$

 
$
985

Interest rate options

 
2

 
13

 
15

 
 

 
2

 
8

 
10

Interest rate futures and forward commitments

 
10

 

 
10

 
 

 
3

 

 
3

Other contracts

 
189

 

 
189

 
 

 
217

 

 
217

Total derivative assets
$

 
$
1,066

 
$
13

 
$
1,079

 
 
$

 
$
1,207

 
$
8

 
$
1,215

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
705

 
$

 
$
705

 
 
$

 
$
1,033

 
$

 
$
1,033

Interest rate options

 
1

 

 
1

 
 

 
2

 

 
2

Interest rate futures and forward commitments

 
14

 

 
14

 
 

 
8

 

 
8

Other contracts

 
183

 

 
183

 
 

 
211

 

 
211

Total derivative liabilities
$

 
$
903

 
$

 
$
903

 
 
$

 
$
1,254

 
$

 
$
1,254

Nonrecurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$
15

 
$
15

 
 
$

 
$

 
$
33

 
$
33

Foreclosed property and other real estate

 
36

 
14

 
50

 
 

 
41

 
8

 
49

_______
(1) Excludes Federal Reserve Bank and Federal Home Loan Bank Stock totaling $484 million and $197 million, respectively, at September 30, 2015 and $488 million and $39 million, respectively, at December 31, 2014.
Assets and liabilities in all levels could result in volatile and material price fluctuations. Realized and unrealized gains and losses on Level 3 assets represent only a portion of the risk to market fluctuations in Regions’ consolidated balance sheets. Further, derivatives included in Levels 2 and 3 are used by the Asset and Liability Management Committee of the Company in a holistic approach to managing price fluctuation risks.


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Table of Contents


The following tables illustrate a rollforward for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2015 and 2014. 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, 2015 and 2014 are not material.
 
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

(2)  

 

 

 

 
(32
)
 

 

 
$
13

 
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening
Balance
July 1,
2014
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance
September 30,
2014
 
Included
in Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
9

 

  

 

 

 

 

 

 

 
$
9

Corporate and other debt securities
2

 

  

 
1

 

 

 

 

 

 
3

Total securities available for sale
$
11

 

  

 
1

 

 

 

 

 

 
$
12

Residential mortgage servicing rights
$
276

 
(8
)
(1)  

 
9

 

 

 

 

 

 
$
277

Total derivatives, net
$
12

 
20

(1)  

 

 

 

 
(23
)
 

 

 
$
9



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Table of Contents


 
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

(3)  

 

 

 

 
(80
)
 

 

 
$
13


 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening
Balance
January 1,
2014
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance September 30,
2014
 
Included
in Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
9

 

  

 

 

 

 

 

 

 
$
9

Corporate and other debt securities
2

 

  

 
4

 

 

 
(3
)
 

 

 
3

Total securities available for sale
$
11

 

  

 
4

 

 

 
(3
)
 

 

 
$
12

Residential mortgage servicing rights
$
297

 
(44
)
(1)  

 
24

 

 

 

 

 

 
$
277

Total derivatives, net
$
5

 
70

(1)  

 

 

 

 
(66
)
 

 

 
$
9

_________
(1) Included in mortgage income.
(2) Approximately $1 million was included in capital markets fee income and other and $31 million was included in mortgage income.
(3) 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
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Loans held for sale
$
(5
)
 
$
(11
)
 
$
(16
)
 
$
(34
)
Foreclosed property and other real estate
(9
)
 
(4
)
 
(56
)
 
(18
)
The following tables present detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of September 30, 2015 and December 31, 2014. 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, 2015 and December 31, 2014 are included. Following the tables are a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.


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Table of Contents


 
September 30, 2015
 
Level 3
Estimated Fair Value at
September 30, 2015
 
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
$6
 
Discounted cash flow
 
Spread to LIBOR
 
5.5% - 50.0% (14.7%)
 
 
 
 
 
Weighted-average prepayment speed (CPR; percentage)
 
6.5% - 34.9% (13.4%)
 
 
 
 
 
Probability of default
 
1.5%
 
 
 
 
 
Loss severity
 
40.5%
Corporate and other debt securities
$3
 
Market comparable
 
Evaluated quote on same issuer/comparable bond
 
100.0%
Residential mortgage servicing rights(1)
$241
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
11.4% - 12.5% (12.0%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
8.7% - 17.3% (10.0%)
Derivative assets:
 
 
 
 
 
 
 
Interest rate options
$12
 
Interest rate lock commitments on the residential mortgage loans are valued using discounted cash flows
 
Weighted-average prepayment speed (CPR; percentage)
 
11.4% - 12.5% (12.0%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
8.7% - 17.3% (10.0%)
 
 
 
 
 
Pull-through
 
3.5% - 99.1% (86.8%)
 
$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
$15
 
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)
 
12.8% - 96.2% (52.1%)
Foreclosed property and other real estate
$11
 
 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% - 65.5% (44.4%)
 
$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)
 
2.7% - 11.0% (8.7%)
_________
(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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Table of Contents


 
December 31, 2014
 
Level 3
Estimated Fair Value at
December 31, 2014
 
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
$8
 
Discounted cash flow
 
Spread to LIBOR
 
5.4% - 49.9% (12.3%)
 
 
 
 
 
Weighted-average prepayment speed (CPR; percentage)
 
6.3% - 15.0% (9.5%)
 
 
 
 
 
Probability of default
 
1.4%
 
 
 
 
 
Loss severity
 
37.4%
Corporate and other debt securities
$3
 
Market comparable
 
Evaluated quote on same issuer/comparable bond
 
99.9%
Residential mortgage servicing rights(1)
$257
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
9.9% - 22.4% (12.0%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
7.7% - 11.3% (9.0%)
Derivative assets:
 
 
 
 
 
 
 
Interest rate options
$8
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
9.9% - 22.4% (12.0%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
7.7% - 11.3% (9.0%)
 
 
 
 
 
Pull-through
 
7.3% - 99.1% (87.8%)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans held for sale
$33
 
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)
 
8.3% - 90.9% (53.3%)
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)
 
3.7% - 73.0% (29.6%)
_________
(1) See Note 7 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2014 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.

RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
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, constant prepayment rate, probability of default, and loss severity in the event of default. Significant increases in any of these inputs in isolation would result in significantly lower fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates.
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 other debt securities.


45

Table of Contents


Residential mortgage servicing rights
The significant unobservable inputs used in the fair value measurement of residential mortgage servicing rights ("MSR") are option-adjusted spreads (“OAS”) and prepayment speed. This method requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk adjusted rate. Additionally, the impact of prepayments and changes in the OAS are based on a variety of underlying inputs such as servicing costs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The net change in unrealized gains (losses) included in earnings related to MSRs held at period end are disclosed as the changes in valuation inputs or assumptions included in the MSR rollforward table in Note 5. See Note 5 for these amounts and additional disclosures related to assumptions used in the fair value calculation for MSRs.
Derivative assets
Residential mortgage interest rate options—These instruments are interest rate lock agreements made in the normal course of originating residential mortgage loans. Significant unobservable inputs in the fair value measurement are OAS, prepayment speeds, and pull-through. The impact of OAS and prepayment speed inputs in the valuation of these derivative instruments are consistent with the MSR discussion above. Pull-through is an estimate of the number of interest rate lock commitments that will ultimately become funded loans. Increases or decreases in the pull-through assumption will have a corresponding impact on the value of these derivative assets.
Commercial mortgage interest rate options—These instruments are interest rate lock agreements made in the normal course of originating commercial mortgage loans. The significant unobservable input in the fair value measurement using discounted cash flows is the internal rates of return. The Company's internal rates of return are compared against those of market competitors, and should those rates change the Company's rates would also change in a similar direction.
NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Loans held for sale
Commercial loans held for sale are valued based on multiple data points indicating the fair value for each loan. The primary data point for loans held for sale is a discount to the appraised value of the underlying collateral, which considers the return required by potential buyers of the loans. Management establishes this discount or comparability adjustment based on recent sales of loans secured by similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted. These non-recurring fair value measurements are typically recorded on the date an updated appraisal is received.
Foreclosed property and other real estate
Property in foreclosure is valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. These non-recurring fair value measurements are typically recorded on the date an updated offered quote or appraisal is received.
Bank owned property available for sale is valued based on estimated third-party valuations utilizing recent sales data from similar transactions. A broker's opinion of value is obtained to further support the asset valuations. Updated valuations along with actual sales results of similar properties can further impact these values. These non-recurring fair value measurements are typically recorded on the date an updated third-party valuation is received.
FAIR VALUE OPTION
Regions has elected the fair value option for all FNMA and FHLMC eligible residential mortgage loans originated with the intent to sell. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets.


46

Table of Contents


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, 2015
 
December 31, 2014
 
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
$
421

 
$
401

 
$
20

 
$
440

 
$
421

 
$
19

Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of income. The following table details net gains resulting from changes in fair value of these loans, which were recorded in mortgage income in the consolidated statements of income during the three and nine months ended September 30, 2015 and 2014. 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
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net gains (losses) resulting from changes in fair value
$
8

 
$
(6
)
 
$

 
$
11

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, 2015 are as follows:
 
September 30, 2015
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,008

 
$
5,008

 
$
5,008

 
$

 
$

Trading account securities
106

 
106

 
106

 

 

Securities held to maturity
2,001

 
2,048

 
1

 
2,047

 

Securities available for sale
22,714

 
22,714

 
394

 
22,311

 
9

Loans held for sale
453

 
453

 

 
421

 
32

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
78,111

 
74,659

 

 

 
74,659

Other interest-earning assets
93

 
93

 

 
93

 

Derivative assets
1,079

 
1,079

 

 
1,066

 
13

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
903

 
903

 

 
903

 

Deposits
97,178

 
97,219

 

 
97,219

 

Long-term borrowings
7,364

 
7,642

 

 
4,801

 
2,841

Loan commitments and letters of credit
103

 
478

 

 

 
478

Indemnification obligation
201

 
197

 

 

 
197

_________
(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, 2015 was $3.5 billion or 4.4 percent.
(3)
Excluded from this table is the lease carrying amount of $1.8 billion at September 30, 2015.


47

Table of Contents



The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments as of December 31, 2014 are as follows:
 
December 31, 2014
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,004

 
$
4,004

 
$
4,004

 
$

 
$

Trading account securities
106

 
106

 
106

 

 

Securities held to maturity
2,175

 
2,209

 
1

 
2,208

 

Securities available for sale
22,580

 
22,580

 
322

 
22,247

 
11

Loans held for sale
541

 
541

 

 
440

 
101

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
74,482

 
70,114

 

 

 
70,114

Other interest-earning assets
89

 
89

 

 
89

 

Derivative assets
1,215

 
1,215

 

 
1,207

 
8

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
1,254

 
1,254

 

 
1,254

 

Deposits
94,200

 
94,186

 

 
94,186

 

Short-term borrowings
2,253

 
2,253

 

 
2,253

 

Long-term borrowings
3,462

 
3,871

 

 
3,504

 
367

Loan commitments and letters of credit
106

 
539

 

 

 
539

Indemnification obligation
206

 
198

 

 

 
198

_________
(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, 2014 was $4.4 billion or 5.9 percent.
(3)
Excluded from this table is the lease carrying amount of $1.7 billion at December 31, 2014.
NOTE 14. 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 fourth quarter of 2014, Regions reorganized its internal management structure and, accordingly, its segment reporting structure. Previously, Regions’ three operating segments were Business Services, Consumer Services, and Wealth Management. Under the organizational realignment, Regions has created a Consumer Bank, which consists principally of the previous Consumer Services segment with businesses that serve retail and small business banking customers, and a Corporate Bank, which consists principally of the previous Business Services segment with businesses that serve middle-market and large commercial clients. Previously, small business banking was included within Business Services, but is now included in the Consumer Bank as its product set is more consistent with those offered in that segment. The Wealth Management segment remained unchanged during the reorganization. Segment results for all periods presented have been recast to reflect this organizational realignment. Additional information about the Company's reportable segments is included in Regions' Annual Report on Form 10-K for the year ended December 31, 2014.
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.


48

Table of Contents


The following tables present financial information for each reportable segment for the period indicated.
 
Three Months Ended September 30, 2015
 
Corporate Bank
 
Consumer
Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income (loss)
$
287

 
$
613

 
$
41

 
$
(105
)
 
$
836

 
$

 
$
836

Provision (credit) for loan losses
8

 
50

 
2

 

 
60

 

 
60

Non-interest income
103

 
279

 
104

 
11

 
497

 

 
497

Non-interest expense
151

 
600

 
108

 
36

 
895

 
6

 
901

Income (loss) before income taxes
231

 
242

 
35

 
(130
)
 
378

 
(6
)
 
372

Income tax expense (benefit)
88

 
92

 
13

 
(77
)
 
116

 
(2
)
 
114

Net income (loss)
$
143

 
$
150

 
$
22

 
$
(53
)
 
$
262

 
$
(4
)
 
$
258

Average assets
$
46,671

 
$
38,548

 
$
2,917

 
$
34,784

 
$
122,920

 
$

 
$
122,920

 
Three Months Ended September 30, 2014
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income (loss)
$
283

 
$
615

 
$
44

 
$
(121
)
 
$
821

 
$

 
$
821

Provision (credit) for loan losses
3

 
72

 

 
(51
)
 
24

 

 
24

Non-interest income
95

 
287

 
90

 
25

 
497

 
19

 
516

Non-interest expense
133

 
575

 
100

 
18

 
826

 
14

 
840

Income (loss) before income taxes
242

 
255

 
34

 
(63
)
 
468

 
5

 
473

Income tax expense (benefit)
92

 
97

 
13

 
(51
)
 
151

 
2

 
153

Net income (loss)
$
150

 
$
158

 
$
21

 
$
(12
)
 
$
317

 
$
3

 
$
320

Average assets
$
43,573

 
$
38,357

 
$
2,933

 
$
33,806

 
$
118,669

 
$

 
$
118,669

 
Nine Months Ended September 30, 2015
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income (loss)
$
850

 
$
1,820

 
$
125

 
$
(324
)
 
$
2,471

 
$

 
$
2,471

Provision (credit) for loan losses
2

 
151

 
7

 
12

 
172

 

 
172

Non-interest income
291

 
830

 
301

 
135

 
1,557

 

 
1,557

Non-interest expense
458

 
1,804

 
318

 
154

 
2,734

 
16

 
2,750

Income (loss) before income taxes
681

 
695

 
101

 
(355
)
 
1,122

 
(16
)
 
1,106

Income tax expense (benefit)
259

 
264

 
38

 
(226
)
 
335

 
(6
)
 
329

Net income (loss)
$
422

 
$
431

 
$
63

 
$
(129
)
 
$
787

 
$
(10
)
 
$
777

Average assets
$
45,908

 
$
38,240

 
$
2,906

 
$
34,408

 
$
121,462

 
$

 
$
121,462



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Nine Months Ended September 30, 2014
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income (loss)
$
853

 
$
1,841

 
$
133

 
$
(367
)
 
$
2,460

 
$

 
$
2,460

Provision (credit) for loan losses
4

 
219

 
1

 
(163
)
 
61

 

 
61

Non-interest income
243

 
848

 
273

 
65

 
1,429

 
19

 
1,448

Non-interest expense
400

 
1,721

 
300

 
42

 
2,463

 
(7
)
 
2,456

Income (loss) before income taxes
692

 
749

 
105

 
(181
)
 
1,365

 
26

 
1,391

Income tax expense (benefit)
264

 
284

 
40

 
(138
)
 
450

 
10

 
460

Net income
$
428

 
$
465

 
$
65

 
$
(43
)
 
$
915

 
$
16

 
$
931

Average assets
$
43,282

 
$
38,449

 
$
2,954

 
$
33,407

 
$
118,092

 
$

 
$
118,092

NOTE 15. 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, 2015
 
December 31, 2014
 
(In millions)
Unused commitments to extend credit
$
45,595

 
$
43,724

Standby letters of credit
1,467

 
1,697

Commercial letters of credit
40

 
71

Liabilities associated with standby letters of credit
38

 
40

Assets associated with standby letters of credit
39

 
40

Reserve for unfunded credit commitments
64

 
65

Unused commitments to extend credit—To accommodate the financial needs of its customers, Regions makes commitments under various terms to lend funds to consumers, businesses and other entities. These commitments include (among others) credit card and other revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
Standby letters of credit—Standby letters of credit are also issued to customers, which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments Regions could be required to make and represents Regions’ maximum credit risk.
Commercial letters of credit—Commercial letters of credit are issued to facilitate foreign or domestic trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.
LEGAL CONTINGENCIES
Regions, its affiliates and subsidiaries, and current and former officers, directors and employees, are sometimes collectively referred to as Regions and certain Related Persons. Regions and its subsidiaries are subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel. Regions establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. Some of Regions' exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible


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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 $201 million and an estimated fair value of approximately $197 million as of September 30, 2015 (see Note 13).
When it is practicable, Regions estimates possible loss contingencies, whether or not there is an accrued probable loss. When Regions is able to estimate such possible losses, and when it is reasonably possible Regions could incur losses in excess of amounts accrued, Regions discloses the aggregate estimation of such possible losses. Regions currently estimates that it is reasonably possible that it may experience losses in excess of what Regions has accrued in an aggregate amount up to approximately $40 million as of September 30, 2015, with it also being reasonably possible that Regions could incur no losses in excess of amounts accrued. However, as available information changes, the matters for which Regions is able to estimate, as well as the estimates themselves will be adjusted accordingly. The reasonably possible estimate includes legal contingencies that are subject to the indemnification agreement with Raymond James.
Assessments of litigation and claims exposure are difficult because they involve inherently unpredictable factors including, but not limited to, the following: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known if a class will be certified or how a potential class, if certified, will be defined. As a result, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below, and the aggregated estimated amount provided above may not include an estimate for every matter disclosed below.
Beginning in December 2007, Regions and certain of its affiliates were named in class-action lawsuits filed in federal and state courts on behalf of investors who purchased shares of certain Regions Morgan Keegan Select Funds (the “Funds”) and stockholders of Regions. These class-action lawsuits have all been resolved among the parties. Court approvals for settlements in the open-end Funds class action and for the investors represented by the Trustee Ad Litem are being sought. Certain of the shareholders in these Funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating in the class actions. These lawsuits and proceedings are subject to the indemnification agreement with Raymond James discussed above.
In July 2006, Morgan Keegan and a former Morgan Keegan analyst were named as defendants in a lawsuit filed by a Canadian insurance and financial services company and its American subsidiary in the Circuit Court of Morris County, New Jersey. Plaintiffs alleged claims under a civil Racketeer Influenced and Corrupt Organizations (“RICO”) statute and claims for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs allege that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs to improperly drive down plaintiffs’ stock price, so that others could profit from short positions. Plaintiffs allege that defendants’ actions damaged their reputations and harmed their business relationships. Plaintiffs seek monetary damages for a number of categories of alleged damages, including lost insurance business, lost financings and increased financing costs, increased audit fees and directors and officers insurance premiums and lost acquisitions. In September 2012, the trial court dismissed the case with prejudice. Plaintiffs have filed an appeal. This matter is subject to the indemnification agreement with Raymond James.
The Securities and Exchange Commission ("SEC") and states of Missouri and Texas are investigating alleged securities law violations by Morgan Keegan in the underwriting and sale of $39 million in municipal bonds. An enforcement action brought by the Missouri Secretary of State in April 2013, seeking monetary penalties and other relief, was dismissed and refiled in November 2013. Additionally a class action was brought on behalf of retail purchasers of the bonds in September 2012, seeking unspecified compensatory and punitive damages. The parties agreed to settlement terms in January 2015, and the United States District Court for the Western District of Missouri approved the settlement on October 2, 2015. An agreement in principle has been reached with all remaining investors who opted out of the class action. These matters are all subject to the indemnification agreement with Raymond James.
In October 2010, a class-action lawsuit was filed by Regions’ stockholders in the U.S. District Court for the Northern District of Alabama (the “District Court”) against Regions and certain former officers of Regions (the "2010 Claim"). In May 2015, Regions entered into a settlement agreement to settle the 2010 Claim for $90 million, all of which had been previously reserved. Regions was subsequently reimbursed in full by its insurance providers. As a result, a $90 million recovery was recognized during the second quarter of 2015. The District Court granted final approval of the settlement in September 2015.


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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 have filed an opposition to the action.
Regions is involved in formal and informal information-gathering requests, investigations, reviews, examinations and proceedings by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding Regions’ business, Regions' business practices and policies and the conduct of persons with whom Regions does business. Additional inquiries will arise from time to time. In connection with those inquiries, Regions receives document requests, subpoenas and other requests for information. The inquiries, including those described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on Regions' consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in our business practices, and could result in additional expenses and collateral costs, including reputational damage.
In 2013, Regions received investigative requests from the Office of Inspector General of the Department of Housing and Urban Development ("HUD") regarding its residential mortgage loan origination, underwriting and quality control practices for Federal Housing Administration ("FHA") insured loans made by Regions. Regions continues to fully cooperate in this investigation and is in discussions to resolve this inquiry. In September 2014, Regions received an investigative request from the Office of Inspector General of the Federal Housing Finance Agency ("FHFA") regarding its residential mortgage loan origination, underwriting and quality control practices for loans Regions sold to Fannie Mae and Freddie Mac; this matter is still in the early stages of investigation, and Regions is fully cooperating with the inquiry. Both of these inquiries are part of industry-wide investigations. Many institutions have settled these matters on terms that included large monetary penalties, including, in some cases, civil money penalties under applicable banking laws.
While the final outcome of litigation and claims exposures or of any inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not have a material effect on Regions’ business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to Regions’ business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.
GUARANTEES
INDEMNIFICATION OBLIGATION
As discussed in Note 2, on April 2, 2012 (“Closing Date”), Regions closed the sale of Morgan Keegan and related affiliates to Raymond James. In connection with the sale, Regions agreed to indemnify Raymond James for all legal matters related to pre-closing activities, including matters filed subsequent to the Closing Date that relate to actions that occurred prior to closing. Losses under the indemnification include legal and other expenses, such as costs for judgments, settlements and awards associated with the defense and resolution of the indemnified matters. The maximum potential amount of future payments that Regions could be required to make under the indemnification is indeterminable due to the indefinite term of some of the obligations. However, Regions expects the majority of ongoing legal matters related to the indemnification 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, 2015, the carrying value of the indemnification obligation was approximately $201 million.
VISA INDEMNIFICATION
As a member of the Visa USA network, Regions, along with other members, indemnified Visa USA against litigation. On October 3, 2007, Visa USA was restructured and acquired several Visa affiliates. In conjunction with this restructuring, Regions' indemnification of Visa USA was modified to cover specific litigation (“covered litigation”).
A portion of Visa's proceeds from its initial public offering ("IPO") was put into escrow to fund the covered litigation. To the extent that the amount available under the escrow arrangement, or subsequent fundings of the escrow account resulting from reductions in the class B share conversion ratio, is insufficient to fully resolve the covered litigation, Visa will enforce the


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indemnification obligations of Visa USA's members for any excess amount. At this time, Regions has concluded that it is not probable that covered litigation exposure will exceed the class B share value.
NOTE 16. RECENT ACCOUNTING PRONOUNCEMENTS    
In January 2014, the FASB issued new accounting guidance related to the accounting for investments in qualified affordable housing projects. The guidance allows the holder of these investments to apply a proportional amortization method, which recognizes the amortized cost of the investment as a component of income tax expense, provided that the investment meets certain criteria. The guidance is silent regarding balance sheet classification. Regions believes it would not be appropriate to classify the investment as a deferred tax asset. The decision to apply the proportional amortization method is an accounting policy election. Entities may also elect to continue to account for these investments using the equity method. The guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and was adopted by Regions for financial reporting beginning with the first quarter of 2015. The adoption is required to be applied retrospectively to all prior periods presented. The cumulative effect to retained earnings (deficit) as of January 1, 2015 of adopting this guidance was reduction of $116 million. Refer to Note 1 for additional information.
In January 2014, the FASB issued new accounting guidance regarding the reclassification of residential real estate collateralized consumer mortgage loans upon foreclosures. The guidance requires reclassification of a consumer mortgage loan to other real estate owned upon obtaining legal title to the residential property, which could occur either through foreclosure or through a deed in lieu of foreclosure or similar legal agreement. The existence of a borrower redemption right will not prevent the lender from reclassifying a loan to other real estate once the lender obtains legal title to the property. In addition, entities are required to disclose the amount of foreclosed residential real estate properties and the recorded investment in residential real estate mortgage loans in the process of foreclosure on both an interim and annual basis. This guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014 and was adopted by Regions on a prospective basis with the first quarter of 2015 reporting. This guidance did not have a material impact upon adoption.
In June 2014, the FASB issued new accounting guidance that requires two accounting changes related to the transfer and servicing of repurchase agreements and similar transactions. First, the new guidance changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the new guidance requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting treatment for the repurchase agreement. The new guidance also requires certain disclosures for transfers of financial assets and repurchase agreements. The disclosure of certain transactions accounted for as a sale is required to be presented for fiscal years and interim periods within those years beginning after December 15, 2014 and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowing is required to be presented for fiscal years beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The accounting changes were effective for fiscal years and interim periods within those years beginning after December 15, 2014 and were adopted by Regions with the first quarter 2015 reporting. This guidance did not have a material impact upon adoption.
In August 2014, the FASB issued new accounting guidance regarding the classification and measurement of foreclosed mortgage loans that are guaranteed by the government (including loans guaranteed by the FHA and the VA). The guidance addresses diversity in practice by requiring creditors to derecognize the mortgage loan upon foreclosure and to recognize a separate other receivable if the following conditions are met: (a) the government guarantee of the loan is not separable from the loan before foreclosure; (b) upon foreclosure, the creditor has the intent to convey the real estate to the guarantor and to make a claim on the guarantee, and also has the ability to make a recovery under the claim; and (c) claim amounts based on the fair value of the property are fixed upon foreclosure. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014 and was adopted by Regions on a prospective basis with the first quarter of 2015 reporting. This guidance did not have a material impact upon adoption.
In August 2014, the FASB issued new accounting guidance to offer a measurement alternative for reporting entities that consolidate a collateralized financing entity ("CFE") in which the financial assets and financial liabilities are measured at fair value, with changes in fair values reflected in earnings. Under the measurement alternative, the reporting entity could elect to measure both the CFE’s financial assets and financial liabilities using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. This guidance became effective for the first quarter of 2015 financial reporting period. This guidance did not have a material impact upon adoption.
In February 2015, the FASB issued new accounting guidance that eliminates the consolidation model created specifically for limited partnerships and creates a single model for evaluating consolidation of legal entities. The new guidance does the following: (a) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (b) eliminates the presumption that a general partner should consolidate a limited partnership; (c) modifies the consolidation analysis for all reporting entities associated with VIEs, particularly those that have fee arrangements and related


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party relationships; and (d) provides a scope exception from the consolidation guidance for reporting entities with interests in legal entities that are similar to investment companies as defined in the Investment Company Act of 1940. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.
In April 2015, the FASB issued new accounting guidance that requires entities to present debt issuance costs related to a recognized liability as a direct deduction from the carrying amount of the debt liability. The new guidance is similar to existing presentation requirements for debt discounts and does not affect entities’ recognition and measurement of debt issuance costs. Previously, entities were required to present debt issuance costs as deferred charges in the asset section of the statement of financial position. The guidance is effective for annual and interim periods beginning after December 15, 2015. All entities must apply the guidance on a retrospective basis and provide the required disclosures for a change in accounting principle in the period of adoption. Early adoption is permitted. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.
In April 2015, the FASB issued new accounting guidance on the accounting for fees paid in a cloud computing arrangement. The standard provides guidance on how customers should evaluate whether such arrangements contain a software license that should be accounted for separately. A customer that determines a cloud computing arrangement contains a software license must account for the license consistently with the acquisition of other software licenses. If an arrangement does not contain a software license, the customer is required to account for it as a service contract. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. The guidance is effective for annual and interim periods beginning after December 15, 2015. Entities can elect to apply the guidance either retrospectively or prospectively to all cloud computing arrangements entered into or materially modified after the effective date. Early adoption is permitted. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.
In May 2015, the FASB issued new accounting guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient pursuant to previous guidance. The guidance is effective for annual and interim periods beginning after December 15, 2015. All entities must apply the guidance on a retrospective basis. Early adoption is permitted. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.
In July 2015, the FASB issued new accounting guidance to reduce the complexity in employee benefit plan accounting. The standard provides three parts to simplify the process. Part I notes that fully benefit-responsive investment contracts will be measured, presented and disclosed only at contract value, and plans are no longer required to reconcile contract value to fair value. Part II simplifies the disclosure of plan investments by allowing the following: (a) plan assets will be grouped and disclosed by general type either on the face of the financial statements or in the notes, and will no longer be disaggregated in multiple ways; (b) plans are no longer required to disclose individual plan assets that constitute 5 percent or more of net assets available for benefits; (c) the net appreciation or depreciation in investments for the period will be presented in aggregate and is no longer required to be disaggregated and disclosed by general type; and (d) plans with investment funds measured using the net asset value per share practical expedient will no longer be required to disclose the investment’s strategy. Part III allows a measurement date practical expedient and permits plans to measure investments and investment-related accounts as of a month-end that is closest to the plan’s fiscal year-end when the fiscal year-end does not coincide with a month-end. The guidance is effective for fiscal years beginning after December 15, 2015. Entities should apply the amendments in Parts I and II retrospectively for all financial statements presented and should apply the amendments in Part III prospectively. Early adoption is permitted for any of the three parts individually. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.
In August 2015, the FASB issued a standard that defers the effective date of the new revenue recognition standard, issued in May 2014, by one year. The new revenue recognition standard is discussed in the Annual Report on Form 10-K for the year ended December 31, 2014. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of the date of the original effective date, for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Regions is in the process of reviewing the potential impact the adoption of this guidance will have to its consolidated financial statements.
In September 2015, the FASB issued new accounting guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The following key changes were made: (a) acquirers will recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date; (b) acquirers will disclose the amounts and reasons for adjustments to the provisional amounts; and (c) acquirers will disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. Regions believes the adoption of this guidance will not have a material impact to its consolidated financial statements.
Further information related to recent accounting pronouncements and accounting changes adopted by Regions prior to the third quarter of 2015 is included in the Annual Report on Form 10-K for the year ended December 31, 2014.


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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 Securities and Exchange Commission (“SEC”) and updates Regions’ Annual Report on Form 10-K for the year ended December 31, 2014, 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. Effective January 1, 2015, the Company adopted new guidance related to the accounting for investments in qualified affordable housing projects. The guidance required retrospective application. All prior period amounts impacted by this guidance have been revised. 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, 2015 compared to the three and nine months ended September 30, 2014 for the consolidated statements of income. For the consolidated balance sheet, the emphasis of this discussion will be the balances as of September 30, 2015 compared to December 31, 2014.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See pages 3 and 4 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, which operates in the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of asset management, wealth management, securities brokerage, insurance, trust services 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, 2015, Regions operated 1,630 total branch outlets in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. 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 14 “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 & Company, Inc. (“Morgan Keegan”) and related affiliates to Raymond James Financial, Inc. (“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 non-interest income sources. Net interest income is 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 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. 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, deposit administrative fees, 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 August 3, 2015, Regions announced the acquisition of The A.I. Group, Inc. The A.I. Group, Inc. has offices in greater Atlanta and Athens, Georgia and provides employee benefits consulting and insurance brokerage services focusing on mid-sized and large employers throughout the United States.


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On October 23, 2015, Regions announced the acquisition of BlackArch Partners, a private, middle-market mergers and acquisitions advisory firm headquartered in Charlotte, North Carolina. BlackArch Partners will maintain its name, leadership and headquarters in Charlotte and will operate as a Regions' subsidiary within the Corporate Bank.
THIRD QUARTER OVERVIEW
Regions reported net income available to common shareholders of $242 million, or $0.18 per diluted share, in the third quarter of 2015 compared to $300 million, or $0.22 per diluted share, in the third quarter of 2014. Net income available to common shareholders from continuing operations was $246 million, or $0.19 per diluted share, in the third quarter of 2015 compared to $297 million, or $0.21 per diluted share, in the third quarter of 2014. The primary drivers in the decline in results from the prior year period were increased provision for loan losses and non-interest expenses, partially offset by increases in net interest income.
For the third quarter of 2015, net interest income (taxable-equivalent basis) from continuing operations totaled $855 million, up $18 million compared to the third quarter of 2014. The net interest margin (taxable-equivalent basis) was 3.13 percent for the third quarter of 2015 and 3.18 percent in the third quarter of 2014. Although the average balances of loans and securities increased in the third quarter of 2015 compared to the third quarter of 2014, their yields declined. While rates paid on interest-bearing liabilities also declined during this period, spread compression, loan mix shifts and an 11 basis point reduction in asset yields outweighed this benefit and ultimately contributed to the 5 basis point compression in net interest margin. Total deposit costs were 11 basis points for both of the third quarters of 2015 and 2014. Total funding costs, which include deposits, short-term borrowings and long-term debt, were 25 basis points for the third quarter of 2015, as compared to 30 basis points for the third quarter of 2014, reflecting continued liability management efforts implemented by the Company.
The provision for loan losses totaled $60 million in the third quarter of 2015 compared to $24 million during the third quarter of 2014. The increase in provision expense during the third quarter of 2015 compared to the 2014 period was primarily attributable to increased reserves for energy related loans and loan growth. 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 $60 million, or an annualized 0.30 percent of average loans, in the third quarter of 2015, compared to $75 million, or an annualized 0.39 percent for the third quarter of 2014. Net charge-offs were lower across most major loan categories when comparing the third quarter of 2015 period to the prior year period.
The allowance for loan losses at September 30, 2015 was 1.38 percent of total loans, net of unearned income, compared to 1.43 percent at December 31, 2014. Total non-performing assets were $926 million at September 30, 2015, compared to $991 million at December 31, 2014.
Non-interest income from continuing operations was $497 million for both of the third quarters of 2015 and 2014. Most non-interest income categories experienced modest growth; however, this was offset by reductions in service charges on deposit accounts and other miscellaneous income. See Table 16 "GAAP to Non-GAAP Reconciliation" for a reconciliation of this non-GAAP measure.
Total non-interest expense from continuing operations was $895 million in the third quarter of 2015, a $69 million increase from the third quarter of 2014, driven primarily by a $26 million increase in deposit administrative fees, a $24 million increase in provision (credit) for unfunded credit losses, and a $14 million increase in salaries and employee benefits. The increase in deposit administrative fees in the third quarter of 2015 included an expense of $23 million related to prior assessments. These increases were partially offset by an $11 million decrease in professional, legal and regulatory expenses.
Income tax expense from continuing operations for the three months ended September 30, 2015 was $116 million compared to income tax expense of $151 million for the same period in 2014. Income tax expense was lower in the current period as compared to the prior year period primarily due to lower pre-tax income.
A discussion of activity within discontinued operations is included at the end of the Management’s Discussion and Analysis section of this report.
BALANCE SHEET ANALYSIS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased approximately $1.0 billion from year-end 2014 to September 30, 2015, due primarily to an increase in interest-bearing deposits in other banks as a result of normal day-to-day operating variations.


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SECURITIES
The following table details the carrying values of securities, including both available for sale and held to maturity:
Table 1—Securities
 
September 30, 2015
 
December 31, 2014
 
(In millions)
U.S. Treasury securities
$
183

 
$
177

Federal agency securities
565

 
573

Obligations of states and political subdivisions
1

 
2

Mortgage-backed securities:
 
 
 
Residential agency
17,296

 
17,665

Residential non-agency
6

 
8

Commercial agency
2,599

 
2,173

Commercial non-agency
1,410

 
1,494

Corporate and other debt securities
1,762

 
1,990

Equity securities
893

 
673

 
$
24,715

 
$
24,755

Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. Total securities at September 30, 2015 were relatively unchanged from year-end 2014. See Note 3 "Securities" to the consolidated financial statements for additional information.
Securities available for sale, which constitute the majority of the securities portfolio, are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company. See the "Market Risk-Interest Rate Risk" and "Liquidity Risk" sections for more information.
LOANS HELD FOR SALE
Loans held for sale totaled $453 million at September 30, 2015, consisting primarily of $422 million of residential real estate mortgage loans, $4 million of commercial mortgage loans, and $26 million of non-performing loans. At December 31, 2014, loans held for sale totaled $541 million, consisting of $442 million of residential real estate mortgage loans, $61 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.


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LOANS
Loans, net of unearned income, represented approximately 74 percent of Regions’ interest-earning assets at September 30, 2015. 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, 2015
 
December 31, 2014
 
(In millions, net of unearned income)
Commercial and industrial
$
35,906

 
$
32,732

Commercial real estate mortgage—owner-occupied
7,741

 
8,263

Commercial real estate construction—owner-occupied
406

 
407

Total commercial
44,053

 
41,402

Commercial investor real estate mortgage
4,386

 
4,680

Commercial investor real estate construction
2,525

 
2,133

Total investor real estate
6,911

 
6,813

Residential first mortgage
12,730

 
12,315

Home equity
10,947

 
10,932

Indirect—vehicles
3,895

 
3,642

Indirect—other consumer
490

 
206

Consumer credit card
1,016

 
1,009

Other consumer
1,021

 
988

Total consumer
30,099

 
29,092

 
$
81,063

 
$
77,307

PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2014 year-end, and highlight the related risk characteristics. Regions believes that its loan portfolio is well diversified by product, client, and geography throughout its footprint. However, the loan portfolio may be exposed to certain concentrations of credit risk which exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. See Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements for additional discussion.
Commercial
The commercial portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases and other expansion projects. Commercial and industrial loans increased $3.2 billion or 10 percent since year-end driven primarily by Regions’ market based corporate and commercial bankers serving middle market clients and the Company's asset based lending and corporate real estate groups. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. These loans declined $522 million or 6 percent from year-end 2014 as a result of continued customer deleveraging. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower.
The commercial portfolio segment generated the majority of the Company's loan growth in the first nine months of 2015, particularly commercial and industrial loans. Over half of the Company’s total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as disclosed in "Table 11—Selected Industry Balances" in the Annual Report on Form 10-K for the year ended December 31, 2014. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry. At September 30, 2015 and December 31, 2014, no single industry exceeded 15 percent of the total commercial portfolio balance.
Beginning late in 2014, oil prices began declining, and Regions has been monitoring the prices for both direct and indirect impacts on its energy lending portfolio. Regions’ energy industry loan balances at September 30, 2015 amounted to approximately $2.7 billion, consisting of loans directly related to energy, 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 exposures were approximately $554 million at September 30, 2015. The entire energy-related portfolio, combining direct and indirect exposures, was approximately $3.3 billion at September 30, 2015.


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Regions' energy-related portfolio is geographically concentrated primarily in Texas and, to a lesser extent, in South Louisiana. Regions employs a variety of risk management strategies, including the use of concentration limits and continuous monitoring, as well as utilizing underwriting with borrowing base structures tied to energy commodity reserve bases or other tangible assets. Additionally, heightened credit requirements have been adopted for select segments of the portfolio. Regions also employs experienced lending and underwriting teams including petroleum engineers, all with extensive energy sector experience through multiple economic cycles. If the current low level of oil prices continues, this energy-related portfolio may be subject to additional pressure on credit quality metrics including past due, criticized, and non-performing loans, as well as net charge-offs. A relatively small number of customers comprises Regions' energy-related portfolio, which provides the Company granular insight into the financial health of those borrowers. Through its on-going portfolio credit quality assessment, Regions will continue to assess the impact to the loan loss allowance and make adjustments as appropriate.
Investor Real Estate
Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Total investor real estate loans increased $98 million from 2014 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 $415 million increase from year-end 2014, as prepayments have slowed. Approximately $2.3 billion in new loan originations were retained on the balance sheet through the first nine months of 2015.
Home Equity
Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower's residence, allows customers to borrow against the equity in their homes. The home equity portfolio totaled $10.9 billion at both September 30, 2015 and December 31, 2014. 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, 2015. 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 3—Home Equity Lines of Credit - Future Principal Payment Resets
 
First Lien
 
% of Total
 
Second Lien
 
% of Total
 
Total
 
(Dollars in millions)
2015
$
7

 
0.09
%
 
$
46

 
0.58
%
 
$
53

2016
26

 
0.33

 
33

 
0.41

 
59

2017
5

 
0.06

 
10

 
0.13

 
15

2018
14

 
0.18

 
22

 
0.28

 
36

2019
98

 
1.23

 
87

 
1.09

 
185

2020-2024
1,343

 
16.86

 
1,228

 
15.42

 
2,571

2025-2029
2,460

 
30.88

 
2,584

 
32.44

 
5,044

Thereafter
1

 

 
2

 
0.02

 
3

Total
$
3,954

 
49.63
%
 
$
4,012

 
50.37
%
 
$
7,966

Of the $10.9 billion home equity portfolio at September 30, 2015, approximately $8.0 billion were home equity lines of credit and $2.9 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, 2015, 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 2019.


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Of the $8.0 billion of home equity lines of credit as of September 30, 2015, approximately 90 percent require monthly interest-only payments while the remaining approximately 10 percent require a payment equal to 1.5 percent of the outstanding balance, which would include some principal repayment. As of September 30, 2015, approximately 29 percent of borrowers were only paying the minimum amount due on the home equity line. In addition, approximately 61 percent of the home equity lines of credit balances have the option to amortize either all or a portion of their balance. As of September 30, 2015, approximately $262 million of the home equity line of credit balances have elected this option.
Regions is unable to track payment status on first liens held by another institution, including payment status related to loan modifications. When Regions’ second lien position becomes delinquent, an attempt is made to contact the first lien holder and inquire as to the payment status of the first lien. However, Regions does not continuously monitor the payment status of the first lien position. Short sale offers and settlement agreements are often received by the home equity junior lien holders well before the loan balance reaches the delinquency threshold for charge-off consideration, potentially resulting in a full balance payoff/charge-off. Regions is presently monitoring the status of all first lien position loans that the Company owns or services and has a second lien, and is taking appropriate action when delinquent. Regions services the first lien on approximately 25 percent of the entire second lien home equity portfolio as of September 30, 2015.
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 Metropolitan Statistical Areas (“MSAs”). Regions uses the third party valuation trends from the MSAs in the Company's footprint in its estimate. The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential first mortgage and home equity classes of the consumer portfolio segment. Current LTV data for the remaining loans in the portfolio is not available, primarily because some of the loans are serviced by others. Data may also not be available due to mergers and systems integrations. The amounts in the table represent the entire loan balance. For purposes of the table below, if the loan balance exceeds the current estimated collateral, the entire balance is included in the “Above 100%” category, regardless of the amount of collateral available to partially offset the shortfall. The balances in the “Above 100%” category as a percentage of the portfolio balances declined to 2 percent in the residential first mortgage portfolio and to 5 percent in the home equity portfolio at September 30, 2015.
Table 4—Estimated Current Loan to Value Ranges
 
September 30, 2015
 
December 31, 2014
 
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%
$
273

 
$
131

 
$
431

 
$
435

 
$
198

 
$
633

80% - 100%
1,686

 
482

 
919

 
1,743

 
536

 
1,078

Below 80%
10,245

 
5,854

 
2,808

 
9,626

 
5,282

 
2,696

Data not available
526

 
110

 
212

 
511

 
179

 
330

 
$
12,730

 
$
6,577

 
$
4,370

 
$
12,315

 
$
6,195

 
$
4,737

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 $253 million from year-end 2014, reflecting continued growing demand for automobile loans.
Indirect—Other Consumer
Indirect-other consumer lending represents other point of sale lending through third parties. This portfolio class increased $284 million from year-end 2014 primarily due to new point of sale initiatives.


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Consumer Credit Card
Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances increased $7 million from year-end 2014.
Other Consumer
Other consumer loans primarily include direct consumer loans, overdrafts and other revolving loans. Other consumer loans increased $33 million from year-end 2014.
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. 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, 2015 and December 31, 2014.
Table 5—Estimated Current FICO Score Ranges
 
September 30, 2015
 
Residential
First Mortgage
 
Home Equity
 
Indirect(1)
 
Consumer
Credit Card
 
Other
Consumer
 
 
1st Lien
 
2nd Lien
 
 
 
 
(In millions)
Below 620
$
790

 
$
303

 
$
255

 
$
355

 
$
51

 
$
79

620-680
1,013

 
544

 
443

 
519

 
151

 
149

681-720
1,453

 
806

 
557

 
573

 
239

 
194

Above 720
8,502

 
4,749

 
3,018

 
2,255

 
574

 
516

Data not available
972

 
175

 
97

 
683

 
1

 
83

 
$
12,730

 
$
6,577

 
$
4,370

 
$
4,385

 
$
1,016

 
$
1,021

 
December 31, 2014
 
Residential
First Mortgage
 
Home Equity
 
Indirect(1)
 
Consumer
Credit Card
 
Other
Consumer
 
 
1st Lien
 
2nd Lien
 
 
 
 
(In millions)
Below 620
$
827

 
$
345

 
$
318

 
$
377

 
$
52

 
$
82

620-680
1,031

 
544

 
491

 
500

 
150

 
140

681-720
1,355

 
740

 
617

 
550

 
231

 
181

Above 720
8,228

 
4,337

 
3,162

 
2,032

 
575

 
475

Data not available
874

 
229

 
149

 
389

 
1

 
110

 
$
12,315

 
$
6,195

 
$
4,737

 
$
3,848

 
$
1,009

 
$
988

           
(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 and lease 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, 2014, as well as related discussion in Management’s Discussion and Analysis.
The allowance for loan losses remained at $1.1 billion at September 30, 2015 as compared to December 31, 2014. Although the balance remained constant, the allowance for loan losses as a percentage of net loans declined from 1.43 percent at December 31, 2014 to 1.38 percent at September 30, 2015. The decrease in the percentage is primarily attributable to growth in the loan portfolio. Management expects that net loan charge-offs in 2015 will decline compared to those experienced in 2014; however, economic


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trends such as interest rates, unemployment, volatility in commodity prices and real estate valuations will impact the future levels of net charge-offs and may result in volatility during the remainder of 2015.
Although, Regions' allowance for loan losses as a percentage of net loans decreased, the provision for loan losses increased for the first nine months of 2015 as compared to the same period in 2014. During the first nine months of 2015, the provision for loan losses exceeded net charge-offs by approximately $12 million. The increase in loan loss provision reflects loan growth, increased reserves for energy related loans and the results of the Shared National Credit industry-wide exam. Management expects that the provision for loan losses in 2015 will increase compared to 2014 for the same reasons.
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. 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 6 “Allowance for Credit Losses.”


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Activity in the allowance for credit losses is summarized as follows:
Table 6—Allowance for Credit Losses
 
Nine Months Ended September 30
 
2015
 
2014
 
(Dollars in millions)
Allowance for loan losses at beginning of year
$
1,103

 
$
1,341

Loans charged-off:
 
 
 
Commercial and industrial
73

 
80

Commercial real estate mortgage—owner-occupied
19

 
48

Commercial real estate construction—owner-occupied

 
2

Commercial investor real estate mortgage
14

 
20

Commercial investor real estate construction
1

 
1

Residential first mortgage
20

 
29

Home equity
54

 
70

Indirect-vehicles
29

 
27

Consumer credit card
27

 
28

Other consumer
45

 
49

 
282

 
354

Recoveries of loans previously charged-off:
 
 
 
Commercial and industrial
37

 
40

Commercial real estate mortgage—owner-occupied
12

 
12

Commercial real estate construction—owner-occupied

 

Commercial investor real estate mortgage
13

 
17

Commercial investor real estate construction
5

 
4

Residential first mortgage
7

 
7

Home equity
21

 
25

Indirect-vehicles
12

 
10

Consumer credit card
4

 
4

Other consumer
11

 
11

 
122

 
130

Net charge-offs:
 
 
 
Commercial and industrial
36

 
40

Commercial real estate mortgage—owner-occupied
7

 
36

Commercial real estate construction—owner-occupied

 
2

Commercial investor real estate mortgage
1

 
3

Commercial investor real estate construction
(4
)
 
(3
)
Residential first mortgage
13

 
22

Home equity
33

 
45

Indirect-vehicles
17

 
17

Consumer credit card
23

 
24

Other consumer
34

 
38

 
160

 
224

Provision for loan losses
172

 
61

Allowance for loan losses at September 30
$
1,115

 
$
1,178

Reserve for unfunded credit commitments at beginning of year
$
65

 
$
78

Provision (credit) for unfunded credit losses
(1
)
 
(13
)
Reserve for unfunded credit commitments at September 30
$
64

 
$
65

Allowance for credit losses at September 30
$
1,179

 
$
1,243

Loans, net of unearned income, outstanding at end of period
$
81,063

 
$
76,607

Average loans, net of unearned income, outstanding for the period
$
79,254

 
$
75,940

Ratios:
 
 
 
Allowance for loan losses at end of period to loans, net of unearned income
1.38
%
 
1.54
%
Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale
1.41x

 
1.41x

Net charge-offs as percentage of average loans, net of unearned income (annualized)
0.27
%
 
0.39
%


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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 Customer Assistance Program ("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 TDRs for the periods presented:
Table 7—Troubled Debt Restructurings 
 
September 30, 2015
 
December 31, 2014
 
Loan
Balance
 
Allowance for
Loan Losses
 
Loan
Balance
 
Allowance for
Loan Losses
 
(In millions)
Accruing:
 
 
 
 
 
 
 
Commercial
$
159

 
$
22

 
$
251

 
$
33

Investor real estate
151

 
17

 
290

 
34

Residential first mortgage
392

 
51

 
356

 
49

Home equity
328

 
7

 
343

 
12

Indirect—vehicles
1

 

 
1

 

Consumer credit card
2

 

 
2

 

Other consumer
13

 

 
17

 

 
1,046

 
97

 
1,260

 
128

Non-accrual status or 90 days past due and still accruing:
 
 
 
 
 
 
 
Commercial
118

 
28

 
93

 
24

Investor real estate
25

 
4

 
67

 
15

Residential first mortgage
88

 
11

 
112

 
15

Home equity
21

 
1

 
25

 
1

 
252

 
44

 
297

 
55

Total TDRs - Loans
$
1,298

 
$
141

 
$
1,557

 
$
183

 
 
 
 
 
 
 
 
TDRs - Held For Sale
14

 

 
29

 

Total TDRs
$
1,312

 
$
141

 
$
1,586

 
$
183

_________
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 8—Analysis of Changes in Commercial and Investor Real Estate TDRs
 
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

 
Nine Months Ended September 30, 2014
 
Commercial
 
Investor
Real Estate
 
(In millions)
Balance, beginning of period
$
624

 
$
668

Inflows
155

 
87

Outflows
 
 
 
Charge-offs
(24
)
 
(9
)
Foreclosure
(2
)
 
(3
)
Payments, sales and other (1)
(319
)
 
(345
)
Balance, end of period
$
434

 
$
398

                 
(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 $36 million of commercial loans and $48 million of investor real estate loans refinanced or restructured as new loans and removed from TDR classification for the nine months ended September 30, 2015. During the nine months ended September 30, 2014, $70 million of commercial loans and $45 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 9—Non-Performing Assets
 
September 30, 2015
 
December 31, 2014
 
(Dollars in millions)
Non-performing loans:
 
 
 
Commercial and industrial
$
350

 
$
252

Commercial real estate mortgage—owner-occupied
233

 
238

Commercial real estate construction—owner-occupied
3

 
3

Total commercial
586

 
493

Commercial investor real estate mortgage
39

 
123

Commercial investor real estate construction
1

 
2

Total investor real estate
40

 
125

Residential first mortgage
67

 
109

Home equity
96

 
102

Total consumer
163

 
211

Total non-performing loans, excluding loans held for sale
789

 
829

Non-performing loans held for sale
26

 
38

Total non-performing loans(1)
815

 
867

Foreclosed properties
111

 
124

Total non-performing assets(1)
$
926

 
$
991

Accruing loans 90 days past due:
 
 
 
Commercial and industrial
$
7

 
$
7

Commercial real estate mortgage—owner-occupied
6

 
5

Total commercial
13

 
12

Commercial investor real estate mortgage
2

 
3

Total investor real estate
2

 
3

Residential first mortgage(2)
121

 
122

Home equity
51

 
63

Indirect—vehicles
8

 
7

Consumer credit card
11

 
12

Other consumer
4

 
3

Total consumer
195

 
207

 
$
210

 
$
222

Restructured loans not included in the categories above
$
1,046

 
$
1,260

Non-performing loans(1) to loans and non-performing loans held for sale
1.00
%
 
1.12
%
Non-performing assets(1) to loans, foreclosed properties and non-performing loans held for sale
1.14
%
 
1.28
%
_________
(1)
Excludes accruing loans 90 days past due.
(2)
Excludes residential first mortgage loans that are 100% guaranteed by the Federal Housing Administration (FHA) and all guaranteed loans sold to the Government National Mortgage Association (GNMA) where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $110 million at September 30, 2015 and $125 million at December 31, 2014.
The decrease in total non-performing assets during the first nine months of 2015 reflects the Company's continuing efforts to work through problem assets and manage the riskiest exposures. Non-performing commercial and industrial loans have increased over this period primarily as a result of pressure on the energy lending portfolio as discussed in the "Portfolio Characteristics" section. Economic trends such as interest rates, unemployment, volatility in commodity prices and real estate valuations will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility throughout 2015.


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Loans past due 90 days or more and still accruing, excluding government guaranteed loans, were $210 million at September 30, 2015, a decrease from $222 million at December 31, 2014.
At September 30, 2015, Regions had approximately $150 million to $225 million of potential problem commercial and investor real estate loans that were not included in non-accrual loans, but for which management had concerns as to the ability of such borrowers to comply with their present loan repayment terms. This is a likely estimate of the amount of commercial and investor real estate loans that have the potential to migrate to non-accrual status in the next quarter.
In order to arrive at the estimate of potential problem loans, personnel from geographic regions forecast certain larger dollar loans that may potentially be downgraded to non-accrual at a future time, depending on the occurrence of future events. These personnel consider a variety of factors, including the borrower’s capacity and willingness to meet the contractual repayment terms, make principal curtailments or provide additional collateral when necessary, and provide current and complete financial information including global cash flows, contingent liabilities and sources of liquidity. Based upon the consideration of these factors, a probability weighting is assigned to loans to reflect the potential for migration to the pool of potential problem loans during this specific time period. Additionally, for other loans (for example, smaller dollar loans), a trend analysis is incorporated to determine the estimate of potential future downgrades. Because of the inherent uncertainty in forecasting future events, the estimate of potential problem loans ultimately represents the estimated aggregate dollar amounts of loans as opposed to an individual listing of loans.
The majority of the loans on which the potential problem loan estimate is based are considered criticized and classified. Detailed disclosures for substandard accrual loans (as well as other credit quality metrics) are included in Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements.
The following table provides an analysis of non-accrual loans (excluding loans held for sale) by portfolio segment:
Table 10—Analysis of Non-Accrual Loans
 
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



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Non-Accrual Loans, Excluding Loans Held for Sale
Nine Months Ended September 30, 2014
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
577

 
$
248

 
$
257

 
$
1,082

Additions
462

 
85

 
(32
)
 
515

Net payments/other activity
(260
)
 
(138
)
 

 
(398
)
Return to accrual
(86
)
 
(21
)
 

 
(107
)
Charge-offs on non-accrual loans(2)
(126
)
 
(21
)
 
(1
)
 
(148
)
Transfers to held for sale(3)
(56
)
 
(12
)
 
(1
)
 
(69
)
Transfers to foreclosed properties
(21
)
 
(6
)
 

 
(27
)
Sales
(11
)
 

 

 
(11
)
Balance at end of period
$
479

 
$
135

 
$
223

 
$
837

________
(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 $16 million and $26 million recorded upon transfer for the nine months ended September 30, 2015 and 2014, respectively.
GOODWILL
Goodwill totaled $4.8 billion at both September 30, 2015 and December 31, 2014 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 2014 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014 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 2015 did not indicate that the estimated fair values of the Company’s reporting units (Corporate Bank, Consumer Bank and Wealth Management) had declined below their respective carrying values; therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the September 30, 2015 interim period.
OTHER ASSETS
Other assets increased approximately $680 million from December 31, 2014 to $6.7 billion as of September 30, 2015. The increase was primarily due to timing differences between settlement and trade date accounting.


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DEPOSITS
Regions competes with other banking and financial services companies for a share of the deposit market. Regions’ ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers’ needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service, competitive pricing and providing convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as internet banking.
The following table summarizes deposits by category:
Table 11—Deposits
 
September 30, 2015
 
December 31, 2014
 
(In millions)
Non-interest-bearing demand
$
34,117

 
$
31,747

Savings
7,184

 
6,653

Interest-bearing transaction
21,096

 
21,544

Money market—domestic
26,541

 
25,396

Money market—foreign
256

 
265

Low-cost deposits
89,194

 
85,605

Time deposits
7,784

 
8,595

       Customer deposits
96,978

 
94,200

Corporate treasury time deposits
200

 

 
$
97,178

 
$
94,200

Total deposits at September 30, 2015 increased approximately $3.0 billion compared to year-end 2014 levels. The growth was primarily driven by consumer deposits with broad based geographic increases in non-interest-bearing demand, savings and money market—domestic categories. This growth was partially offset by continued declines in consumer time deposits.
SHORT-TERM BORROWINGS
Table 12—Short-Term Borrowings
 
September 30, 2015
 
December 31, 2014
 
(In millions)
Company funding sources:
 
 
 
Federal Home Loan Bank advances
$

 
$
500

 
 
 
 
Customer-related borrowings:
 
 
 
Securities sold under agreements to repurchase

 
1,753

 
$

 
$
2,253

Company Funding Sources
In the near term, Regions expects the use of wholesale unsecured borrowings, such as Federal funds purchased, to remain low. Short-term secured borrowings, including Federal Home Loan Bank ("FHLB") advances, are a core portion of Regions' funding strategy and quantities of advances vary depending on the different funding needs of the Bank.
Regions has taken an approach to maintain higher levels of cash at the Federal Reserve Bank. These higher levels of cash have reduced the amount of short-term funds needed to cover normal monthly cash flow needs. The securities financing market and specifically short-term FHLB advances, however, continue to provide reliable funding at attractive rates. See the "Liquidity Risk" section for further detail of Regions' borrowing capacity with the FHLB.
Customer-Related Borrowings
Repurchase agreements were historically offered as short-term investment opportunities for customers. The repurchase agreements were collateralized to allow for market fluctuations. U.S. Treasury and agency securities from Regions Bank's investment portfolio were used as collateral.
As a result of Regions' work toward compliance with the new Liquidity Coverage Ratio, customer repurchase agreement products and balances were fully phased out effective July 1, 2015. See the "Liquidity Coverage Ratio" discussion within the "Regulatory Requirements" section of Management's Discussion and Analysis for additional information.


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LONG-TERM BORROWINGS
Table 13—Long-Term Borrowings
 
September 30, 2015
 
December 31, 2014
 
(In millions)
Regions Financial Corporation (Parent):
 
 
 
5.75% senior notes due June 2015
$

 
$
499

2.00% senior notes due May 2018
749

 
748

7.75% subordinated notes due September 2024
100

 
100

6.75% subordinated debentures due November 2025
159

 
160

7.375% subordinated notes due December 2037
300

 
300

Valuation adjustments on hedged long-term debt
(1
)
 
(8
)
 
1,307

 
1,799

Regions Bank:
 
 
 
Federal Home Loan Bank advances
4,255

 
8

2.25% senior notes due September 2018
750

 

5.20% subordinated notes due April 2015

 
350

7.50% subordinated notes due May 2018
500

 
750

6.45% subordinated notes due June 2037
497

 
497

3.80% affiliate subordinated notes due February 2025
150

 

Other long-term debt
49

 
57

Valuation adjustments on hedged long-term debt
6

 
1

 
6,207

 
1,663

Elimination of 3.80% affiliate subordinated notes due February 2025
(150
)
 

Total consolidated
$
7,364

 
$
3,462

Long-term borrowings increased approximately $3.9 billion since year-end 2014. The increase was primarily the result of a $4.2 billion increase in FHLB advances and an issuance of $750 million of 2.25% senior bank notes that occurred during the third quarter of 2015. These increases were offset by approximately $850 million in maturities of senior and subordinated notes during the second quarter of 2015 and the repurchase of approximately $250 million of subordinated notes during the first quarter of 2015. The first quarter repurchase was a result of a tender offer that Regions Bank launched in February of 2015 for a portion of its outstanding 7.50% subordinated notes due 2018. Pre-tax losses on early extinguishment related to the execution of this tender offer were $43 million.
Long-term FHLB advances have a weighted-average interest rate of 0.67 percent for September 30, 2015 and 1.7 percent for December 31, 2014 with remaining maturities ranging from one to sixteen years and a weighted-average of 1.5 years.
STOCKHOLDERS’ EQUITY
Stockholders’ equity was $17.0 billion at September 30, 2015 as compared to $16.9 billion at December 31, 2014. During the first nine months of 2015, net income increased stockholders’ equity by $777 million, while cash dividends on common stock reduced stockholders' equity by $226 million. Changes in accumulated other comprehensive income increased stockholders' equity by $99 million, primarily due to the net change in the value of derivative instruments. Common stock repurchased during the first nine months of 2015 reduced stockholders' equity by $544 million.
During the first quarter of 2015, Regions received no objection from the Federal Reserve to its 2015 capital plan that was submitted as part of the Comprehensive Capital Analysis and Review ("CCAR") process. On April 23, 2015, Regions' Board of Directors approved an increase of its quarterly common stock dividend to $0.06 per share effective with the quarterly dividend paid in July 2015, as well as the authorization of a new $875 million common stock repurchase plan, permitting repurchases from the beginning of the second quarter of 2015 through the end of the second quarter of 2016. Through September 30, 2015, Regions repurchased approximately 44 million shares of common stock at a total cost of approximately $442 million under this plan. The Company continued to repurchase shares in the fourth quarter of 2015, and as of November 3, 2015, Regions had additional repurchases of approximately 1.4 million shares of common stock at a total cost of approximately $13.6 million. All common shares repurchased under this plan were immediately retired and therefore are not included in treasury stock.
As part of its 2014 CCAR submission, Regions' Board of Directors approved an increase to its quarterly common stock dividend from $0.03 per share to $0.05 per share effective with the quarterly dividend paid in July 2014, as well as a $350 million common stock repurchase plan. The Company closed out this repurchase plan in the first quarter of 2015, repurchasing an additional


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approximately 11 million shares of common stock at a total cost of approximately $102 million. These shares were immediately retired and therefore are not included in treasury stock.
Regions’ Board of Directors declared a cash dividend for both the second and third quarters of 2015 of $0.06 per common share and $0.05 per common share for the first quarter of 2015. The Board declared a $0.05 per share cash dividend for both the second and third quarters of 2014 and a $0.03 per share cash dividend for the first quarter of 2014. The Board of Directors also declared $48 million in cash dividends on preferred stock during the first nine months of 2015 compared to $36 million during the first nine months of 2014. The increase in preferred dividends resulted from the issuance of an additional series of preferred stock during the second quarter of 2014. Because the Company was in a retained deficit position, common dividends were recorded as a reduction of additional paid-in capital and preferred dividends were recorded as a reduction of preferred stock, including related surplus.
See Note 7 “Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)” for additional information.
REGULATORY REQUIREMENTS
CAPITAL RULES
Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies. These regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions. Previously under Basel I, there were two basic measures of capital adequacy: a risk-based measure and a leverage measure.
In July 2013, Regions' and Regions Bank's primary federal regulator, the Federal Reserve, published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The Final Rules implement the Basel Committee on Banking Supervision's (the "Basel Committee") December 2010 framework known as Basel III for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Final Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank. The Final Rules define the components of capital and address other issues affecting the numerator in regulatory capital ratios. The Final Rules also address risk weights and other issues affecting the denominator in regulatory capital ratios and replace the previous risk-weighting approach, which was derived from Basel I, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee's 2004 Basel II capital accords. The Final Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The Final Rules were effective for Regions and Regions Bank on January 1, 2015 (subject to a phase-in period).
The Final Rules, among other things, (i) introduce a measure called Common Equity Tier 1 (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.
Under the Final Rules, the initial minimum capital ratios as of January 1, 2015 were as follows:
4.5% CET1 to risk-weighted assets.
6.0% Tier 1 capital to risk-weighted assets.
8.0% Total capital to risk-weighted assets.
The Final Rules also introduce a new capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. In addition, the Final Rules provide for a countercyclical capital buffer applicable only to advanced approach institutions. Currently the countercyclical capital buffer is not applicable to Regions or Regions Bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the combined capital conservation buffer and capital will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
When fully phased-in on January 1, 2019, the Final Rules will require Regions and Regions Bank to maintain an additional capital conservation buffer of 2.5% of CET1 to risk-weighted assets, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The Final Rules provide for a number of deductions from and adjustments to CET1. For example, goodwill and certain other intangible assets, as well as certain deferred tax assets are deducted. Mortgage servicing rights, certain other deferred tax assets and significant investments in non-consolidated financial entities are also deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the Final Rules, the effects of certain accumulated other comprehensive items are included; however, standardized approach banking organizations, including Regions and Regions Bank, may make a one-time permanent election to exclude these items. Regions and Regions Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations


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on the fair value of their securities portfolios. The Final Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. As of September 30, 2015, Regions did not have any hybrid securities subject to disallowance.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a 4-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to Regions Bank, the Final Rules also revise the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the previous 6%); and (iii) eliminating the provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Final Rules do not change the total risk-based capital requirement for any prompt corrective action category.
The Final Rules prescribe a standardized approach for risk weightings that expands the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 1,250% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to Basel I rules impacting Regions' determination of risk-weighted assets include, among other things:
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction exposures.
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days or more past due (previously set at 100%).
Providing for a 20% credit conversion factor for the unused portion of a loan commitment with an original maturity of less than one year that is not unconditionally cancellable (previously set at 0%).
Eliminating the previous 50% cap on the risk weight for derivative exposures.
Replacing the previous Ratings Based Approach for certain asset-backed securities with a Simplified Supervisory Formula Approach ("SSFA") which results in risk weights ranging from 20% to 1,250%.
Effective January 1, 2018, applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets that are includible in capital (previously set at 100%).
In addition, the Final Rules also provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.


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Table 14—Regulatory Capital Requirements
Transitional Basis Basel III Risk-Based Capital Rules
September 30, 2015
Ratio(1)
 
To Be Well
Capitalized
Basel III common equity Tier 1 ratio:
 
 
 
Regions Financial Corporation
10.98
%
 
N/A

Regions Bank
11.79

 
6.50

Tier 1 capital:
 
 
 
Regions Financial Corporation
11.73
%
 
6.00
%
Regions Bank
11.79

 
8.00

Total capital:
 
 
 
Regions Financial Corporation
14.00
%
 
10.00
%
Regions Bank
13.75

 
10.00

Leverage:
 
 
 
Regions Financial Corporation
10.36
%
 
N/A

Regions Bank
10.42

 
5.00


Basel I Risk-Based Capital Rules
December 31, 2014
Ratio
 
To Be Well
Capitalized
Tier 1 capital:
 
 
 
Regions Financial Corporation
12.54
%
 
6.00
%
Regions Bank
12.30

 
6.00

Total capital:
 
 
 
Regions Financial Corporation
15.26
%
 
10.00
%
Regions Bank
14.45

 
10.00

Leverage(2):
 
 
 
Regions Financial Corporation
10.86
%
 
5.00
%
Regions Bank
10.64

 
5.00

________
(1)
Current quarter ratios are estimated.
(2)
The Leverage ratio requires an additional 100 to 200 basis-point cushion, in certain circumstances, of adjusted quarterly average assets.
Additionally, analysts and banking regulators have assessed Regions’ capital adequacy using tangible common stockholders’ equity. Because tangible common stockholders’ equity is not formally defined by GAAP or prescribed in amount by federal banking regulations, this measure is currently considered to be a non-GAAP financial measure and other entities may calculate it differently than Regions’ disclosed calculation (see Table 16 “GAAP to Non-GAAP Reconciliation” for further details).
LIQUIDITY COVERAGE RATIO ("LCR")
In 2014, the Federal Reserve Board, the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") approved a final rule implementing a minimum liquidity coverage ratio ("LCR") requirement for certain large bank holding companies, savings and loan holding companies and depository institutions, and a less stringent LCR requirement (the "modified LCR") for other banking organizations, such as Regions, with $50 billion or more in total consolidated assets. The final rule imposes a monthly reporting requirement. In January 2016, the minimum phased-in LCR requirement will be 90 percent, followed by 100 percent in January 2017. The Company anticipates being fully compliant with the LCR requirements upon implementation without having to make any significant changes to its current balance sheet. However, should the Company's cash position or investment mix change in the future, the Company's ability to meet the LCR requirement may be impacted.
See the “Supervision and Regulation—Capital Requirements” subsection of the “Business” section and the “Risk Factors” section of the Company's Annual Report on Form 10-K for the year ended December 31, 2014 for more information.


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RATINGS
Table 15 “Credit Ratings” reflects the debt ratings information of Regions Financial Corporation and Regions Bank by Standard and Poor's ("S&P"), Moody’s, Fitch and Dominion Bond Rating Service ("DBRS") as of September 30, 2015 and December 31, 2014.
Table 15—Credit Ratings
 
As of September 30, 2015
 
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
 
 
 
 
Senior notes
BBB
Baa3
BBB
BBB
Subordinated notes
BBB-
Baa3
BBB-
BBBL
Regions Bank
 
 
 
 
Short-term debt
A-2
P-2
F2
R-1L
Long-term bank deposits(1)
N/A
A3
BBB+
BBBH
Long-term debt
BBB+
A3
BBB
BBBH
Subordinated debt
BBB
Baa3
BBB-
BBB
Outlook
Stable
Stable
Stable
Stable

 
As of December 31, 2014
 
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
 
 
 
 
Senior notes
BBB
Ba1
BBB
BBB
Subordinated notes
BBB-
Ba2
BBB-
BBBL
Regions Bank
 
 
 
 
Short-term debt
A-2
P-3
F2
R-1L
Long-term bank deposits(1)
N/A
Baa3
BBB+
BBBH
Long-term debt
BBB+
Baa3
BBB
BBBH
Subordinated debt
BBB
Ba1
BBB-
BBB
Outlook
Stable
Positive
Stable
Stable
_________
(1)
S&P does not provide a rating for Long-term bank deposits therefore the rating is N/A.
On May 14, 2015, Moody's upgraded its rating on Regions Financial Corporation's senior and subordinated notes. At the same time Moody's also upgraded its rating on Regions Bank's long-term bank deposits and short-term debt, long-term debt, and subordinated debt. The upgrades are attributed to the Bank's enhanced risk management infrastructure and a decline in asset concentrations.
In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, acceptability of its letters of credit, and funding of variable rate demand notes ("VRDNs"), thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section in the Annual Report on Form 10-K for the year ended December 31, 2014 for more information.
A security rating is not a recommendation to buy, sell or hold securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
NON-GAAP MEASURES
The table below presents computations of earnings and certain other financial measures, which exclude certain significant items that are included in the financial results presented in accordance with GAAP. These non-GAAP financial measures include “adjusted fee income ratio”, “adjusted efficiency ratio”, “return on average tangible common stockholders’ equity”, average and end of period “tangible common stockholders’ equity”, and “Basel III CET1, on a fully phased-in basis” and related ratios. Regions believes that expressing earnings and certain other financial measures excluding these significant items provides a meaningful base for period-to-period comparisons, which management believes will assist investors in analyzing the operating results of the


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Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions’ business because management does not consider the activities related to the adjustments to be indications of ongoing operations. Regions believes that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management. Management and the Board of Directors utilize these non-GAAP financial measures as follows:
Preparation of Regions’ operating budgets
Monthly financial performance reporting
Monthly close-out reporting of consolidated results (management only)
Presentations to investors of Company performance
The adjusted efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as non-interest expense divided by total revenue on a taxable-equivalent basis. The adjusted fee income ratio (non-GAAP) is generally calculated as non-interest income divided by total revenue on a taxable-equivalent basis. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Non-interest expense (GAAP) is presented excluding adjustments to arrive at adjusted non-interest expense (non-GAAP), which is the numerator for the adjusted efficiency ratio. Non-interest income (GAAP) is presented excluding adjustments to arrive at adjusted non-interest income (non-GAAP), which is the numerator for the adjusted fee income ratio. Net interest income on a taxable-equivalent basis and non-interest income are added together to arrive at total revenue on a taxable-equivalent basis. Adjustments are made to arrive at adjusted total revenue on a taxable-equivalent basis (non-GAAP), which is the denominator for the adjusted efficiency and adjusted fee income ratios.
Tangible common stockholders’ equity ratios have become a focus of some investors in analyzing the capital position of the Company absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulatory bodies have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. Analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity measure. Because tangible common stockholders’ equity is not formally defined by GAAP, this measure is considered to be a non-GAAP financial measure and other entities may calculate it differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on this same basis.
In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulations. When fully phased-in, Basel III will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In July 2013, the Federal Reserve released final rules detailing the U.S. implementation of Basel III. Regions, as a standardized approach bank, began transitioning to the Basel III framework in January 2015 subject to a phase-in period extending through January 2019. Because the Basel III implementation regulations will not be fully phased-in until 2019 and, are not formally defined by GAAP, these measures are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess Regions’ capital adequacy using the fully phased-in Basel III framework, Regions believes that it is useful to provide investors information enabling them to assess Regions’ capital adequacy on the same basis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to stockholders.
The following table provides: 1) a reconciliation of net income (GAAP) to net income available to common shareholders (GAAP), 2) a reconciliation of non-interest expense from continuing operations (GAAP) to adjusted non-interest expense (non-GAAP), 3) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income (non-GAAP), 4) a computation of adjusted total revenue (non-GAAP), 5) a computation of the adjusted efficiency ratio (non-GAAP), 6) a computation of the adjusted fee income ratio (non-GAAP), 7) a reconciliation of average and ending stockholders’ equity (GAAP) to average and ending tangible common stockholders’ equity (non-GAAP) and calculations of related ratios (non-GAAP), 8) a reconciliation of stockholders’ equity (GAAP) to Basel III CET1, on a fully phased-in basis (non-GAAP), and calculation of the related ratio based on Regions’ current understanding of the Basel III requirements (non-GAAP).


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Table 16—GAAP to Non-GAAP Reconciliation 

 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in millions, except per share data)
INCOME (LOSS)
 
 
 
 
 
 
 
 
Net income (GAAP)
 
$
258

 
$
320

 
$
777

 
$
931

Preferred dividends (GAAP)
 
(16
)
 
(20
)
 
(48
)
 
(36
)
Net income available to common shareholders (GAAP)
A
$
242

 
$
300

 
$
729

 
$
895

ADJUSTED FEE INCOME AND EFFICIENCY RATIOS
 
 
 
 
 
 
 
 
Non-interest expense from continuing operations (GAAP)
 
$
895

 
$
826

 
$
2,734

 
$
2,463

Significant items:
 
 
 
 
 
 
 
 
Professional, legal and regulatory expenses (1)(2)
 

 

 
(48
)
 
7

   Branch consolidation, property and equipment charges
 
(1
)
 

 
(50
)
 
(6
)
       Gain on sale of TDRs held for sale, net
 

 

 

 
35

Loss on early extinguishment of debt
 

 

 
(43
)
 

Adjusted non-interest expense (non-GAAP)
B
$
894

 
$
826

 
$
2,593

 
$
2,499

Net interest income (GAAP)
 
$
836

 
$
821

 
$
2,471

 
$
2,460

Taxable-equivalent adjustment
 
19

 
16

 
55

 
46

Net interest income from continuing operations, taxable-equivalent basis
 
855

 
837

 
2,526

 
2,506

Non-interest income from continuing operations (GAAP)
 
497

 
497

 
1,557

 
1,429

Significant items:
 
 
 
 
 
 
 
 
Securities gains, net
 
(7
)
 
(7
)
 
(18
)
 
(15
)
Insurance proceeds
 

 

 
(90
)
 

Leveraged lease termination gains, net
 
(6
)
 
(9
)
 
(8
)
 
(10
)
Adjusted non-interest income (non-GAAP)
C
484

 
481

 
1,441

 
1,404

Adjusted total revenue, taxable-equivalent basis (non-GAAP)
D
$
1,339

 
$
1,318

 
$
3,967

 
$
3,910

Adjusted efficiency ratio (non-GAAP)(3)
B/D
66.76
%
 
62.69
%
 
65.38
%
 
63.91
%
Adjusted fee income ratio (non-GAAP)
C/D
36.18
%
 
36.48
%
 
36.33
%
 
35.91
%
RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Average stockholders’ equity (GAAP)
 
$
16,866

 
$
16,930

 
$
16,924

 
$
16,466

Less:  Average intangible assets (GAAP)
 
5,089

 
5,105

 
5,087

 
5,105

Average deferred tax liability related to intangibles (GAAP)
 
(169
)
 
(182
)
 
(171
)
 
(184
)
Average preferred stock (GAAP)
 
838

 
903

 
857

 
710

Average tangible common stockholders’ equity (non-GAAP)
E
$
11,108

 
$
11,104

 
$
11,151

 
$
10,835

Return on average tangible common stockholders’ equity (non-GAAP)(4)
A/E
8.65
%
 
10.74
%
 
8.74
%
 
11.04
%



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September 30, 2015
 
December 31, 2014
 
 
(Dollars in millions, except per share data)
TANGIBLE COMMON RATIOS
 
 
 
 
Ending stockholders’ equity (GAAP)
 
$
16,952

 
$
16,873

Less: Ending intangible assets (GAAP)
 
5,094

 
5,091

  Ending deferred tax liability related to intangibles (GAAP)
 
(168
)
 
(172
)
  Ending preferred stock (GAAP)
 
836

 
884

Ending tangible common stockholders’ equity (non-GAAP)
F
$
11,190

 
$
11,070

Ending total assets (GAAP)
 
$
124,789

 
$
119,563

Less: Ending intangible assets (GAAP)
 
5,094

 
5,091

  Ending deferred tax liability related to intangibles (GAAP)
 
(168
)
 
(172
)
Ending tangible assets (non-GAAP)
G
$
119,863

 
$
114,644

End of period shares outstanding
H
1,304

 
1,354

Tangible common stockholders’ equity to tangible assets (non-GAAP)
F/G
9.34
%
 
9.66
%
Tangible common book value per share (non-GAAP)
F/H
$
8.58

 
$
8.18

BASEL III COMMON EQUITY TIER 1 RATIO—FULLY PHASED-IN PRO-FORMA (5)
 
 
 
 
Stockholders’ equity (GAAP)
 
$
16,952

 
 
Non-qualifying goodwill and intangibles
 
(4,913
)
 
 
Adjustments, including all components of accumulated other comprehensive income, disallowed deferred tax assets, threshold deductions and other adjustments
 
41

 
 
Preferred stock (GAAP)
 
(836
)
 
 
Basel III common equity Tier 1Fully Phased-In Pro-Forma (non-GAAP)
I
$
11,244

 
 
Basel III risk-weighted assetsFully Phased-In Pro-Forma (non-GAAP)(6)
J
$
104,645

 
 
Basel III common equity Tier 1 ratioFully Phased-In Pro-Forma (non-GAAP)
I/J
10.75
%
 
 
 _________
(1)
Regions recorded $50 million and $100 million of contingent legal and regulatory accruals during the second quarter of 2015 and the fourth quarter of 2014, respectively, related to previously disclosed matters. The fourth quarter of 2014 accruals were settled in the second quarter of 2015 for $2 million less than originally estimated and a corresponding recovery was recognized.
(2)
Regions recorded a non-tax deductible regulatory charge of $58 million during the fourth quarter of 2013 related to previously disclosed inquiries from government authorities. These matters were settled in the second quarter of 2014 for $7 million less than originally estimated and a corresponding recovery was recognized.
(3)
Excluding a $23 million deposit administrative fee adjustment to prior assessments recorded in the third quarter of 2015, the adjusted efficiency ratio would have been 65.0%.
(4)
Income statement amounts have been annualized in calculation.
(5)
Current quarter amounts and the resulting ratio are estimated. Regulatory capital measures for periods prior to the first quarter of 2015 were not revised to reflect the retrospective application of new accounting guidance related to investments in qualified affordable housing projects. As a result, prior period measures and calculations have been removed from the table.
(6)
Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III on a fully phased-in basis. The amounts included above are a reasonable approximation, based on our understanding of the requirements.


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OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 17—Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations
 
Three Months Ended September 30
 
2015
 
2014
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(Dollars in millions; yields on taxable-equivalent basis)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
3

 
$

 
0.86
%
 
$
4

 
$

 
0.86
%
Trading account securities
111

 

 
1.13

 
101

 

 
0.94

Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
24,560

 
146

 
2.36

 
24,264

 
154

 
2.51

Tax-exempt
1

 

 

 
3

 

 

Loans held for sale
492

 
5

 
3.58

 
512

 
5

 
3.95

Loans, net of unearned income(1)(2)
80,615

 
767

 
3.78

 
76,279

 
752

 
3.91

Other interest-earning assets
2,793

 
2

 
0.25

 
3,287

 
2

 
0.28

Total interest-earning assets
108,575

 
920

 
3.36

 
104,450

 
913

 
3.47

Allowance for loan losses
(1,111
)
 
 
 
 
 
(1,214
)
 
 
 
 
Cash and due from banks
1,687

 
 
 
 
 
1,781

 
 
 
 
Other non-earning assets
13,769

 
 
 
 
 
13,652

 
 
 
 
 
$
122,920

 
 
 
 
 
$
118,669

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
7,182

 
2

 
0.13

 
$
6,639

 
1

 
0.12

Interest-bearing checking
20,992

 
4

 
0.08

 
20,944

 
5

 
0.10

Money market
26,793

 
7

 
0.10

 
26,348

 
7

 
0.11

Time deposits
8,110

 
14

 
0.67

 
8,856

 
13

 
0.56

Total interest-bearing deposits(3)
63,077

 
27

 
0.17

 
62,787

 
26

 
0.17

Federal funds purchased and securities sold under agreements to repurchase
46

 

 
0.12

 
1,796

 

 
0.06

Other short-term borrowings
250

 

 
0.15

 

 

 

Long-term borrowings
6,112

 
38

 
2.45

 
3,820

 
50

 
5.12

Total interest-bearing liabilities
69,485

 
65

 
0.37

 
68,403

 
76

 
0.44

Non-interest-bearing deposits(3)
34,089

 

 

 
31,184

 

 

Total funding sources
103,574

 
65

 
0.25

 
99,587

 
76

 
0.30

Net interest spread
 
 
 
 
2.99

 
 
 
 
 
3.03

Other liabilities
2,472

 
 
 
 
 
2,168

 
 
 
 
Stockholders’ equity
16,874

 
 
 
 
 
16,914

 
 
 
 
 
$
122,920

 
 
 
 
 
$
118,669

 
 
 
 
Net interest income/margin on a taxable-equivalent basis from continuing operations(4)
 
 
$
855

 
3.13
%
 
 
 
$
837

 
3.18
%
_________
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $14 million and $18 million for the three months ended September 30, 2015 and 2014, respectively.
(3)
Total deposit costs may be calculated by dividing total interest expense on deposits by the sum of interest-bearing deposits and non-interest-bearing deposits. The rates for total deposit costs equal 0.11% for both three months ended September 30, 2015 and 2014.
(4)
The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.


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Nine Months Ended September 30
 
2015
 
2014
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(Dollars in millions; yields on taxable-equivalent basis)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
8

 
$

 
0.82
%
 
$
10

 
$

 
0.86
%
Trading account securities
109

 
4

 
4.82

 
109

 
2

 
2.68

Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
24,633

 
448

 
2.43

 
23,999

 
464

 
2.58

Tax-exempt
2

 

 

 
3

 

 

Loans held for sale
454

 
12

 
3.49

 
592

 
17

 
3.92

Loans, net of unearned income(1)(2)
79,254

 
2,256

 
3.81

 
75,940

 
2,251

 
3.96

Other interest-earning assets
2,626

 
5

 
0.28

 
3,213

 
7

 
0.28

Total interest-earning assets
107,086

 
2,725

 
3.40

 
103,866

 
2,741

 
3.53

Allowance for loan losses
(1,102
)
 
 
 
 
 
(1,260
)
 
 
 
 
Cash and due from banks
1,722

 
 
 
 
 
1,788

 
 
 
 
Other non-earning assets
13,756

 
 
 
 
 
13,698

 
 
 
 
 
$
121,462

 
 
 
 
 
$
118,092

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
7,076

 
7

 
0.13

 
$
6,583

 
5

 
0.12

Interest-bearing checking
21,416

 
13

 
0.08

 
20,737

 
14

 
0.09

Money market
26,554

 
21

 
0.10

 
26,091

 
22

 
0.11

Time deposits
8,285

 
41

 
0.66

 
9,112

 
37

 
0.53

Total interest-bearing deposits(3)
63,331

 
82

 
0.17

 
62,523

 
78
 
0.17

Federal funds purchased and securities sold under agreements to repurchase
783

 

 
0.05

 
1,968

 
1

 
0.08

Other short-term borrowings
452

 
1

 
0.20

 
18

 

 
0.23

Long-term borrowings
4,138

 
116

 
3.74

 
4,205

 
156

 
4.95

Total interest-bearing liabilities
68,704

 
199

 
0.39

 
68,714

 
235
 
0.46

Non-interest-bearing deposits(3)
33,357

 

 

 
30,776

 

 

Total funding sources
102,061

 
199

 
0.26

 
99,490

 
235
 
0.32

Net interest spread
 
 
 
 
3.01

 
 
 
 
 
3.07

Other liabilities
2,472

 
 
 
 
 
2,146

 
 
 
 
Stockholders’ equity
16,929

 
 
 
 
 
16,456

 
 
 
 
 
$
121,462

 
 
 
 
 
$
118,092

 
 
 
 
Net interest income/margin on a taxable-equivalent basis from continuing operations(4)
 
 
$
2,526

 
3.15
%
 
 
 
$
2,506

 
3.23
%
_________
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $45 million and $59 million for the nine months ended September 30, 2015 and 2014, respectively.
(3)
Total deposit costs may be calculated by dividing total interest expense on deposits by the sum of interest-bearing deposits and non-interest-bearing deposits. The rates for total deposit costs equal 0.11% for both nine months ended September 30, 2015 and 2014.
(4)
The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.
For the third quarter of 2015, net interest income (taxable-equivalent basis) totaled $855 million compared to $837 million in the third quarter of 2014. The net interest margin (taxable-equivalent basis) was 3.13 percent for the third quarter of 2015 and 3.18 percent for the third quarter of 2014. For the first nine months of 2015 and 2014, net interest income (taxable-equivalent basis) totaled $2.5 billion for both periods. The net interest margin (taxable-equivalent basis) was 3.15 percent for the first nine months of 2015, compared to 3.23 percent for the first nine months of 2014. Although average earning assets increased over these comparable periods, the associated yields declined primarily due to reduced market interest rates on loans and securities. These declines in yield were only partially offset by lower funding costs.


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Management continues to expect moderate economic growth and an improving labor market throughout the remainder of 2015. However, uncertainty around the economy has increased over recent months, primarily driven by global factors. While it is expected that short term interest rates will begin increasing over the coming months, the timing of an eventual interest rate increase remains uncertain. To the extent that interest rates do begin to rise, the pace of increases is expected to be gradual. Regions’ balance sheet is in a moderately asset sensitive position and should benefit from an increase in either long-term or short-term interest rates. Therefore, if economic conditions were to improve more rapidly, thereby spurring a more rapid rise in interest rates, both net interest income and the resulting net interest margin would respond favorably. However, if interest rates remain persistently low, net interest income would still be expected to grow modestly, but continued pressure on the net interest margin would also be expected.
MARKET RISK—INTEREST RATE RISK
Regions’ primary market risk is interest rate risk, including uncertainty with respect to absolute interest rate levels as well as uncertainty with respect to relative interest rate levels, which is impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income in various interest rate scenarios compared to a base case scenario. Net interest income sensitivity is a useful short-term indicator of Regions’ interest rate risk.
Sensitivity Measurement—Financial simulation models are Regions’ primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions’ balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that result from both strategic plans and from customer behavior. Among the assumptions are expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the pricing of deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior.
The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain a reasonable and stable net interest income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario based on “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Regions also prepares a minus 50 basis points scenario, as minus 100 and 200 basis points scenarios are of limited use in the current rate environment. Simulations of gradual interest rate movements are included and may more realistically mimic potential interest rate movements. These gradual scenarios represent a parallel curve shift of minus 50, plus 100 and plus 200 basis points phased in over a six-month period. Other scenarios are also analyzed, including curve steepening, curve flattening and up-rate scenarios of greater magnitude. These scenarios are of increased importance as the current and historic low levels of interest rates increase the relative likelihood of a substantial increase in interest rates.
Exposure to Interest Rate Movements—As of September 30, 2015, Regions was moderately asset sensitive to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the measurement horizon ending September 2016. The estimated exposure associated with the parallel yield curve shift of minus 50 basis points in the table below reflects the combined impacts of movements in short-term and long-term rates. Long-term interest rate reductions will drive yields lower on certain fixed rate loans newly originated or renewed, prospective yields lower on certain investment portfolio purchases, as well as higher amortization of premium on existing securities in the investment portfolio. The decline in short-term interest rates (such as the Fed Funds rate and the rate of Interest on Excess Reserves) will lead to a reduction of yield on assets and liabilities contractually tied to such rates, but since rates have been at low levels for such an extended period, it is expected that declines in deposit costs will only partially offset the decline in asset yields.
As described above, the balance sheet is estimated to be moderately asset sensitive to both short-term and long-term rates. Long-term interest rates remain lower than levels which prevailed throughout the majority of 2014, and well below longer-run historical norms. Similarly, most short-term rates have remained largely steady at historic lows. Current simulation models estimate that, as compared to the base case, net interest income over a 12-month horizon would respond favorably by approximately $107 million if long-term rates were to immediately and on a sustained basis exceed the base scenario by 100 basis points. Conversely, if long-term rates were to immediately and on a sustained basis underperform the base case by 50 basis points, then net interest income, as compared to the base case, would decline by approximately $67 million.


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The table below summarizes Regions' positioning in various parallel yield curve shifts. The scenarios are inclusive of all interest rate risk hedging activities.
Table 18—Interest Rate Sensitivity
 
Estimated Annual Change
in Net Interest Income
September 30, 2015
 
(In millions)
Gradual Change in Interest Rates
 
+ 200 basis points

$205

+ 100 basis points
113

- 50 basis points
(88
)
 
 
Instantaneous Change in Interest Rates
 
+ 200 basis points

$234

+ 100 basis points
143

- 50 basis points
(118
)
As discussed above, the interest rate sensitivity analysis presented in Table 18 is informed by a variety of assumptions and estimates regarding the course of the balance sheet in both the baseline scenario as well as the scenarios of instantaneous and gradual shifts in the yield curve. Though there are many assumptions which affect the estimates for net interest income, those pertaining to deposit pricing, deposit mix and overall balance sheet composition are particularly impactful. Given the uncertainties associated with the prolonged period of low interest rates, management evaluates the impact to its sensitivity analysis of these key assumptions.
The Company’s baseline balance sheet growth assumptions include continued moderate loan and deposit growth with a composition largely reflecting a continuation of recent trends. The behavior of deposits in response to changes in interest rate levels is largely informed by analyses of prior rate cycles, but with suitable adjustments based on management’s expectations in the current rate environment. In the + 200 basis point gradual interest rate change scenario in Table 18, the total cumulative interest bearing deposit re-pricing sensitivity is expected to be approximately 60 percent of changes in short-term market rates (e.g. Federal Funds), as compared to approximately 55 percent in the 2004 to 2007 historical timeframe. A 5 percentage point higher sensitivity than the 60 percent baseline would reduce 12 month net interest income in the gradual +200 basis points scenario by approximately $50 million.
Similarly, management assumes that the change in the mix of deposits in a rising rate environment versus the baseline balance sheet growth assumptions is informed by analyses of prior rate cycles. Management assumes that in rising rate scenarios, some shift from non-interest bearing to interest-bearing products will occur. The magnitude of the shift is rate dependent, but equates to approximately $3.5 billion over 12 months in the gradual +200 basis point scenario in Table 18. In the event this shift increased by an additional $3.0 billion over 12 months, the result would be a reduction of 12 month net interest income in the gradual +200 basis points scenario by approximately $24 million. Sensitivity calculations are hypothetical and should not be considered to be predictive of future results.
Interest rate movements may also have an impact on the value of Regions’ securities portfolio, which can directly impact the carrying value of stockholders’ equity. Regions from time to time may hedge these price movements with derivatives (as discussed below).
Derivatives—Regions uses financial derivative instruments for management of interest rate sensitivity. The Asset and Liability Committee (“ALCO”), which consists of members of Regions’ senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks.
Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. A Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts


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are executed on behalf of the Company's customers and are used to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform.
Regions has made use of interest rate swaps to effectively convert a portion of its fixed-rate funding position and available for sale securities portfolios to a variable-rate position and, in some cases, to effectively convert a portion of its variable-rate loan portfolios to fixed-rate. Regions also uses derivatives to manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing.
The following table presents additional information about the interest rate derivatives used by Regions to manage interest rate risk:
Table 19—Hedging Derivatives by Interest Rate Risk Management Strategy
 
September 30, 2015
 
 
 
Estimated Fair Value
 
Weighted-Average
 
Notional
Amount
 
Gain
 
Loss
 
Maturity (Years)
 
Receive Rate
 
Pay Rate
 
(Dollars in millions)
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Derivatives in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable
$
2,096

 
$
21

 
$

 
2.1

 
1.2
%
 
0.3
%
     Receive variable/pay fixed
554

 

 
37

 
10.9

 
0.3

 
2.6

Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable
9,800

 
199

 

 
5.8

 
1.7

 
0.2

     Total derivatives designated as hedging instruments
$
12,450

 
$
220

 
$
37

 
5.4

 
1.5
%
 
0.3
%
Regions manages the credit risk of these instruments in much the same way as it manages credit risk of the loan portfolios by establishing credit limits for each counterparty and through collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with and collateral received from and/or posted to that counterparty. The majority of interest rate derivatives traded by Regions are subject to mandatory clearing. The counterparty risk for cleared trades effectively moves from the executing broker to the clearinghouse allowing Regions to benefit from the risk mitigation controls in place at the respective clearinghouse. The “Credit Risk” section in Regions’ Annual Report on Form 10-K for the year ended December 31, 2014 contains more information on the management of credit risk.
Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivatives instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income.
The primary objective of Regions’ hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions’ execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 12 “Derivative Financial Instruments and Hedging Activities” to the consolidated financial statements for a tabular summary of Regions’ quarter-end derivatives positions and further discussion.
Regions accounts for residential mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative and balance sheet transactions to mitigate the impact of market value fluctuations related to residential mortgage servicing rights. Derivative instruments entered into in the future could be materially different from the current risk profile of Regions’ current portfolio.


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MARKET RISK—PREPAYMENT RISK
Regions, like most financial institutions, is subject to changing prepayment speeds on mortgage-related assets under different interest rate environments. Prepayment risk is a significant risk to earnings and specifically to net interest income. For example, mortgage loans and other financial assets may be prepaid by a debtor, so that the debtor may refinance its obligations at lower rates. As loans and other financial assets prepay in a falling rate environment, Regions must reinvest these funds in lower-yielding assets. Prepayments of assets carrying higher rates reduce Regions’ interest income and overall asset yields. Conversely, in a rising rate environment, these assets will prepay at a slower rate, resulting in opportunity cost by not having the cash flow to reinvest at higher rates. Prepayment risk can also impact the value of securities and the carrying value of equity. Regions’ greatest exposures to prepayment risks primarily rest in its mortgage-backed securities portfolio, the mortgage fixed-rate loan portfolio and the residential mortgage servicing asset, all of which tend to be sensitive to interest rate movements. Each of these assets is also exposed to prepayment risk due to factors which are not necessarily the result of interest rates, but rather due to changes in policies or programs related, either directly or indirectly, to the U.S. Government's governance over certain lending and financing within the mortgage market. Such policies can work to either encourage or discourage financing dynamics and represent a risk that is extremely difficult to forecast and may be the result of non-economic factors. The Company attempts to monitor and manage such exposures within reasonable expectations while acknowledging all such risks cannot be foreseen or avoided. Further, Regions has prepayment risk that would be reflected in non-interest income in the form of servicing income on loans sold. Regions actively monitors prepayment exposure as part of its overall net interest income forecasting and interest rate risk management. In particular, because current interest rates are relatively low, Regions is actively managing exposure to declining prepayments that may occur in the loan and securities portfolio in the event of increasing market interest rates.
LIQUIDITY RISK
Liquidity is an important factor in the financial condition of Regions and affects Regions’ ability to meet the borrowing needs and deposit withdrawal requirements of its customers. In 2014, the Federal Reserve Board, the OCC and the FDIC released the final version of the Liquidity Coverage Ratio. The rule is designed to ensure that financial institutions have the necessary assets on hand to withstand short-term liquidity disruptions. See the "Liquidity Coverage Ratio" discussion included in the "Regulatory Capital Requirements" section of Management's Discussion and Analysis for additional information.
Regions intends to fund its obligations primarily through cash generated from normal operations. In addition to these obligations, Regions has obligations related to potential litigation contingencies. See Note 15 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional discussion of the Company’s funding requirements.
Assets, consisting principally of loans and securities, are funded by customer deposits, purchased funds, borrowed funds and stockholders’ equity. Regions’ goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s cash flow needs. Having and using various sources of liquidity to satisfy the Company’s funding requirements is important.
In order to ensure an appropriate level of liquidity is maintained, Regions performs specific procedures including scenario analyses and stress testing at the bank, holding company, and affiliate levels. Regions' liquidity policy requires the holding company to maintain cash sufficient to cover the greater of (1) 18 months of debt service and other cash needs or (2) a minimum cash balance of $500 million. Compliance with the holding company cash requirements is reported to the Risk Committee of the Board of Directors on a quarterly basis. Regions also has minimum liquidity requirements for the Bank and subsidiaries. The Bank's funding and contingency planning does not currently include any reliance on short-term unsecured sources. Risk limits are established within the Company's ALCO, which regularly reviews compliance with the established limits.
The securities portfolio is one of Regions’ primary sources of liquidity. Proceeds from maturities and principal and interest payments of securities provide a constant flow of funds available for cash needs (see Note 3 “Securities” to the consolidated financial statements). The agency guaranteed mortgage portfolio is another source of liquidity in various secured borrowing capacities.
Maturities in the loan portfolio also provide a steady flow of funds. Additional funds are provided from payments on consumer loans and one-to-four family residential first mortgage loans. In addition, liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not currently rely on short-term unsecured wholesale market funding. Regions’ liquidity has been further enhanced by its relatively stable customer deposit base.
The balance with the Federal Reserve Bank is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At September 30, 2015, Regions had approximately $3.2 billion in cash on deposit with the Federal Reserve, an increase from approximately $2.3 billion at December 31, 2014.
Regions’ borrowing availability with the Federal Reserve Bank as of September 30, 2015, based on assets pledged as collateral on that date, was $21.6 billion.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of September 30, 2015, Regions’ borrowing availability from the FHLB totaled $11.7 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank pledged certain residential first mortgage loans on


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one-to-four family dwellings and home equity lines of credit as collateral for the FHLB advances outstanding. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. Refer to Note 3 "Securities" to the consolidated financial statements for additional information regarding these investments. The FHLB has been and is expected to continue to be a reliable and economical source of funding.
Regions maintains a shelf registration statement with the U.S. Securities and Exchange Commission that can be utilized by Regions to issue various debt and/or equity securities. Regions also maintains a Bank Note program that allows Regions Bank to issue up to $5 billion aggregate principal amount of bank notes outstanding at any one time. Refer to Note 12 "Long-Term Borrowings" to the consolidated financial statements in the 2014 Annual Report on Form 10-K for additional information.
Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt in privately negotiated or open market transactions for cash or common shares. Regulatory approval would be required for retirement of some instruments.
CREDIT RISK
Regions’ objective regarding credit risk is to maintain a high-quality credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has a diversified loan portfolio in terms of product type, collateral and geography. See Table 2 for further details of each loan portfolio segment. See the “Portfolio Characteristics” and “Credit Risk” sections of the Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of risk characteristics of each loan type.
INFORMATION SECURITY RISK
Operational risks comprise several elements, including information security risks. Information security risks such as evolving and adaptive cyber attacks, for large financial institutions such as Regions, have generally increased in recent years and will continue to increase in part because of the proliferation of new technologies, the use of mobile devices, the internet, and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties or fraud on the part of employees. Regions spends significant resources to identify and mitigate threats to the confidentiality, availability and integrity of our information systems.
Regions is a member of the Financial Services Information Sharing and Analysis Center ("FS-ISAC"). The FS-ISAC is a nonprofit organization and is funded entirely by its member firms and sponsors. The overall objective of FS-ISAC is to protect the financial services sector against cyber and physical threats and risk. It acts as a trusted third party that provides anonymity to allow members to submit threat, vulnerability and incident information in a non-attributable and trusted manner so information that would normally not be shared is instead provided for the good of the membership. In addition to FS-ISAC, Regions is a member of BITS, the technology arm of the Financial Services Roundtable. BITS serves the financial community and its members by providing industry best practices on a variety of security and fraud topics. Regions also maintains a close working relationship with its regulators and law enforcement partners to keep them updated on pertinent risks.
Even if Regions successfully prevents data breaches to its own networks, the Company may still incur losses that result from customers' account information obtained through breaches of retailers' networks where customers have transacted business. The fraud losses, as well as the costs of investigations and re-issuing new customer cards impact Regions' financial results. In addition, Regions also relies on some vendors to provide certain components of our business infrastructure, which may also increase information security risk.
Regions will continue to commit the resources necessary to mitigate these growing risks, as well as continue to develop and enhance controls, processes and systems to protect our networks, computers, and data from attacks or unauthorized access in addition to our strong commitment to comprehensive risk management and oversight of third-party relationships involving vendors. Moreover, Regions has contracts with vendors to provide denial of service mitigation and these vendors have also continued to commit the necessary resources to support Regions in the event of an attack. Even though Regions devotes significant resources to combat cyber security risks, there is no guarantee that these measures will provide absolute security.
REGULATORY RISK
In 2014, the Federal Reserve Bank of Atlanta began a regularly scheduled Community Reinvestment Act ("CRA") examination of Regions Bank covering 2012 and 2013 performance. This review includes, among other things, a review of Regions Bank's previously disclosed public consent orders. Although the examination is not final, the Company expects Regions Bank's overall CRA rating to be downgraded. A downgrade in Regions Bank's overall CRA rating would impose restrictions on the Company's ability to undertake certain activities, including mergers and acquisitions of insured depository institutions and applications to open branches or certain other facilities, until such time as the rating is improved. Regions Bank's next CRA examination is expected to commence during the second half of 2016, although the timing of that exam and any results therefrom may not occur until later.


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PROVISION FOR LOAN LOSSES
The provision for loan losses is used to maintain the allowance for loan losses at a level that in management’s judgment is appropriate to absorb probable losses inherent in the portfolio at the balance sheet date. The provision for loan losses totaled $60 million in the third quarter of 2015 compared to $24 million during the third quarter of 2014. The provision for loan losses totaled $172 million for the first nine months of 2015 compared to $61 million for the first nine months of 2014. Refer to the “Allowance for Credit Losses” section of Management's Discussion and Analysis for further detail.
NON-INTEREST INCOME
Table 20—Non-Interest Income from Continuing Operations
 
Three Months Ended September 30
 
Change September 30, 2015 vs. September 30, 2014
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in millions)
Service charges on deposit accounts
$
167

 
$
181

 
$
(14
)
 
(7.7
)%
Card and ATM fees
93

 
85

 
8

 
9.4
 %
Investment management and trust fee income
49

 
47

 
2

 
4.3
 %
Mortgage income
39

 
39

 

 
 %
Insurance commissions and fees
38

 
31

 
7

 
22.6
 %
Bank-owned life insurance
17

 
20

 
(3
)
 
(15.0
)%
Capital markets fee income and other
29

 
24

 
5

 
20.8
 %
Commercial credit fee income
20

 
16

 
4

 
25.0
 %
Investment services fee income
15

 
12

 
3

 
25.0
 %
Securities gains, net
7

 
7

 

 
 %
Net revenue from affordable housing
2

 

 
2

 
NM

Other miscellaneous income
21

 
35

 
(14
)
 
(40.0
)%
 
$
497

 
$
497

 
$

 
 %
 
Nine Months Ended September 30
 
Change September 30, 2015 vs. September 30, 2014
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in millions)
Service charges on deposit accounts
$
496

 
$
528

 
$
(32
)
 
(6.1
)%
Card and ATM fees
268

 
248

 
20

 
8.1
 %
Investment management and trust fee income
151

 
143

 
8

 
5.6
 %
Mortgage income
125

 
122

 
3

 
2.5
 %
Insurance commissions and fees
106

 
93

 
13

 
14.0
 %
Bank-owned life insurance
55

 
62

 
(7
)
 
(11.3
)%
Capital markets fee income and other
76

 
53

 
23

 
43.4
 %
Commercial credit fee income
57

 
46

 
11

 
23.9
 %
Investment services fee income
40

 
33

 
7

 
21.2
 %
Securities gains, net
18

 
15

 
3

 
20.0
 %
Net revenue from affordable housing
10

 
2

 
8

 
400.0
 %
Insurance proceeds
90

 

 
90

 
NM

Other miscellaneous income
65

 
84

 
(19
)
 
(22.6
)%
 
$
1,557

 
$
1,429

 
$
128

 
9.0
 %
_________
NM - Not Meaningful
Service charges on deposit accounts—Service charges on deposit accounts include non-sufficient fund fees and other service charges. The decreases during the third quarter and first nine months of 2015 compared to the same periods of 2014 were primarily due to an $8 million and $25 million reduction of fees in the third quarter and year-to-date periods, respectively, resulting from a product discontinuation that concluded in the fourth quarter of 2014.
Card and ATM fees—Card and ATM fees include the combined amounts of credit card/bank card income and debit card and ATM related revenue. The increases in the third quarter and first nine months of 2015 compared to the same periods of 2014 were


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primarily the result of increased checking accounts, as well as increased transactions driven in part by the continued migration from cash and checks to cards. Additionally, an increase in active credit cards generated greater purchase activity resulting in higher interchange income.
Insurance commissions and fees—Regions sells property and casualty, life and health, mortgage, and other specialty insurance and credit related products to businesses and individuals. The increases in the third quarter and first nine months of 2015 compared to the same periods of 2014 were partially due to the third quarter of 2015 acquisition of an insurance team from Atlanta, Georgia that specializes in group employee benefits.
Capital markets fee income and other—Capital markets fee income and other primarily relates to capital raising activities that includes securities underwriting and placement, loan syndication and placement, as well as foreign exchange, derivatives and advisory services. The increases in the third quarter and first nine months of 2015 compared to the same periods of 2014 were primarily due to increased loan syndication fees as well as mergers and acquisitions advisory fees which the company began recognizing in the second quarter of 2015.
Commercial credit fee income—Commercial credit fee income includes letters of credit fees and unused commercial commitment fees. The increases in the third quarter and first nine months of 2015 compared to the same periods of 2014 included the reclassification of unused commitment fees from interest income starting in the second quarter of 2015. Prior period amounts remain in interest income.
Investment services fee income—Investment services fee income represents income earned through investment advisory services. Primary revenue streams include sales of annuity and brokerage products. The increase in investment services fee income in the third quarter and first nine months of 2015 compared to the same periods of 2014 was primarily driven by an increase in sales resulting from an increased number of financial consultants.
Net revenue from affordable housing—Beginning in 2015, Regions adopted new accounting guidance that allows companies with qualified affordable housing investments to apply a proportional amortization method that recognizes the amortized cost of the investment as a component of income tax expense. The guidance requires retrospective application to all prior periods presented. Actual gains or losses resulting from the sale of these investments, cash distributions from the investments and any future impairment represent the only transactions that will continue to be reflected in this line item. Refer to Note 1 "Basis of Presentation" for additional information. The increase in revenue for the nine months ended September 30, 2015 reflects a higher level of gains on sales of investments compared to the 2014 period.
Insurance proceeds—Insurance proceeds recognized in the second quarter of 2015 were related to the settlement of the previously disclosed and accrued 2010 class-action lawsuit.
Other miscellaneous income—Other miscellaneous income decreased in the third quarter and first nine months of 2015 compared to the same periods of 2014 primarily due to lower commercial leasing residual gains and decreased asset values held for employee benefit purposes.


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NON-INTEREST EXPENSE

Table 21—Non-Interest Expense from Continuing Operations
 
Three Months Ended September 30
 
Change September 30, 2015 vs. September 30, 2014
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in millions)
Salaries and employee benefits
$
470

 
$
456

 
$
14

 
3.1
 %
Net occupancy expense
90

 
92

 
(2
)
 
(2.2
)%
Furniture and equipment expense
77

 
73

 
4

 
5.5
 %
Professional, legal and regulatory expenses
25

 
36

 
(11
)
 
(30.6
)%
Outside services
38

 
32

 
6

 
18.8
 %
Marketing
24

 
23

 
1

 
4.3
 %
Deposit administrative fee
46

 
20

 
26

 
130.0
 %
Credit/checkcard expenses
15

 
11

 
4

 
36.4
 %
Provision (credit) for unfunded credit losses

 
(24
)
 
24

 
(100.0
)%
Other miscellaneous expenses
110

 
107

 
3

 
2.8
 %
 
$
895

 
$
826

 
$
69

 
8.4
 %
 
Nine Months Ended September 30
 
Change September 30, 2015 vs. September 30, 2014
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in millions)
Salaries and employee benefits
$
1,405

 
$
1,354

 
$
51

 
3.8
 %
Net occupancy expense
270

 
275

 
(5
)
 
(1.8
)%
Furniture and equipment expense
224

 
213

 
11

 
5.2
 %
Professional, legal and regulatory expenses
115

 
101

 
14

 
13.9
 %
Outside services
109

 
94

 
15

 
16.0
 %
Marketing
75

 
71

 
4

 
5.6
 %
Deposit administrative fee
83

 
55

 
28

 
50.9
 %
Branch consolidation, property and equipment charges
50

 
6

 
44

 
NM

Loss on early extinguishment of debt
43

 

 
43

 
NM

Provision (credit) for unfunded credit losses
(1
)
 
(13
)
 
12

 
(92.3
)%
Gain on sale of TDRs held for sale, net

 
(35
)
 
35

 
(100.0
)%
Other miscellaneous expenses
361

 
342

 
19

 
5.6
 %
 
$
2,734

 
$
2,463

 
$
271

 
11.0
 %
_________
NM - Not Meaningful
Salaries and employee benefits—Salaries and employee benefits are comprised of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and medical, life and disability insurance, as well as, expenses from liabilities held for employee benefit purposes. Salaries and employee benefits increased during the third quarter and first nine months of 2015 compared to the same periods of 2014 primarily due to increases in base salaries. The year to date period also included higher pension and health insurance expenses, as well as higher incentives concurrent with increased revenue partially offset by lower expenses related to declining valuations on liabilities held for employee benefit purposes. Headcount increased from 23,599 at September 30, 2014 to 23,952 at September 30, 2015.
Professional, legal and regulatory expenses—Professional, legal and regulatory expenses consist of amounts related to legal, consulting, other professional fees and regulatory charges. Professional, legal and regulatory expenses decreased during the third quarter of 2015 compared to the third quarter of 2014. Regions recorded $50 million and $100 million of contingent legal and regulatory accruals during the second quarter of 2015 and the fourth quarter of 2014, respectively, related to previously disclosed matters. The fourth quarter of 2014 accruals were settled in the second quarter of 2015 for $2 million less than originally estimated and a corresponding recovery was recognized. Excluding these items, professional, legal and regulatory expenses decreased $34 million during the first nine months of 2015 compared to the same period of 2014 primarily due to lower consulting fees and lower legal fees resulting from a declining case load as well as legal fee recoveries.
Outside services—Outside services consists of expenses related to routine services provided by third parties, such as contract labor, servicing costs, data processing, loan pricing and research, data license purchases, data subscriptions, and check printing.


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Outside services increased during the third quarter and first nine months of 2015 compared to the same periods of 2014 primarily due to increases in certain fees paid in connection with revenue growth as well as increased servicing costs related to continued purchases of indirect loans from third parties.
Deposit administrative fee—Deposit administrative fees increased during the third quarter and first nine months of 2015 compared to the same periods of 2014 primarily due to a $23 million adjustment to prior assessments recorded in the third quarter of 2015 that exceeded the benefit of refunds of previously incurred fees recognized in prior quarters. Based on the current assessment rules, future run rates for this expense should be in the $22 million to $25 million range per quarter.
Branch consolidation, property and equipment charges—Branch consolidation, property and equipment charges during the first nine months of 2015 resulted from the transfer of land, previously held for future branch expansion, to held for sale in the second quarter of 2015 based on changes in management's intent. As part of the Company's on-going retail network strategy, management identified certain parcels of land that are no longer intended to be developed. Regions also made the decision to close 50 branches in the fourth quarter of 2014. Valuation adjustments related to owned branches were recorded in the fourth quarter of 2014. Accelerated depreciation and lease write-off charges were recorded through and at the actual branch close date, which was during the first quarter of 2015.
Loss on early extinguishment of debt—During the first quarter of 2015, Regions redeemed approximately $250 million of its 7.50 percent subordinated notes, incurring a related early extinguishment charge.
Provision (credit) for unfunded credit losses—During the second quarter of 2014, the Company recognized an $11 million increase in the reserve for unfunded credit losses reflecting increased reserves on individual instruments. During the third quarter of 2014, the Company realized a $24 million recovery resulting from a large credit funding.
Gain on sale of TDRs held for sale, net—During the fourth quarter of 2013, Regions transferred approximately $535 million of certain primarily accruing residential first mortgage loans classified as TDRs to loans held for sale. During the first quarter of 2014, substantially all of these loans were sold resulting in a $35 million pre-tax net gain.
Other miscellaneous expenses—Other miscellaneous expenses increased during the first nine months of 2015 compared to the same period of 2014 primarily due to decreased gains on sales of non-performing loans held for sale.
INCOME TAXES
The Company’s income tax expense from continuing operations for the three months ended September 30, 2015 was $116 million compared to income tax expense of $151 million for the same period in 2014, resulting in effective tax rates of 30.7 percent and 32.1 percent, respectively. The effective tax rate is lower in the current period as compared to the prior comparable period principally due to permanent tax preferences offsetting a higher percentage of pre-tax income than was offset in the prior period.
Income tax expense from continuing operations for the nine months ended September 30, 2015 was $335 million compared to income tax expense of $450 million for the same period in 2014, resulting in effective tax rates of 29.9 percent and 32.9 percent, respectively. The effective tax rate was lower in the year-to-date period principally due to permanent tax preferences offsetting a higher percentage of pre-tax income than was offset in the prior period, audit settlements reached with the Internal Revenue Service (“IRS”) and state taxing authorities and a tax benefit related to state deferred tax assets. The state deferred tax benefit relates to an improved methodology implemented to estimate the effective state income tax rate.
The Company’s effective tax rate is affected by recurring items such as amortization related to its investments in affordable housing investments net of affordable housing tax credits and other tax benefits, bank-owned life insurance and tax-exempt income. The effective tax rate is also affected by items that may occur in any given period but are not consistent from period to period, such as the termination of certain leveraged leases. Accordingly, the comparability of the effective tax rate from period to period may be impacted.
In the first quarter of 2015, the Company adopted new accounting guidance that allows companies with qualified affordable housing investments to apply a proportional amortization method that recognizes the cost of the investment as a component of income tax expense. This election resulted in an increase to income tax expense, and the resulting effective tax rate. Prior periods have been restated for this change. Refer to Note 1 "Basis of Presentation" for additional information.
At September 30, 2015, the Company reported a net deferred tax asset of $238 million compared to $368 million at December 31, 2014. The decrease in the net deferred tax asset is due principally to an increase in unrealized gains on derivative instruments partially offset by a decrease in unrealized gains on securities available for sale, as well as decreases related to employee benefits and state net operating losses.
DISCONTINUED OPERATIONS
Morgan Keegan was sold on April 2, 2012. Regions' results from discontinued operations are presented in Note 2 "Discontinued Operations" to the consolidated financial statements. The three and nine months ended September 30, 2015 losses from discontinued operations were primarily the result of legal fees incurred during the period.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to pages 80 through 83 included in Management’s Discussion and Analysis.
Item 4. Controls and Procedures
Based on an evaluation, as of the end of the period covered by this Form 10-Q, under the supervision and with the participation of Regions’ management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that Regions’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective. During the quarter ended September 30, 2015, there have been no changes in Regions’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Regions’ internal control over financial reporting.



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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information required by this item is set forth in Note 15, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements (Unaudited) in Part I. Item 1. of this report, which is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information concerning Regions’ repurchases of its outstanding common stock during the three month period ended September 30, 2015, is set forth in the following table:
Issuer Purchases of Equity Securities
Period
Total Number of
Shares Purchased
 
Average Price Paid
Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Plans or Programs
July 1-31, 2015
7,532,687

 
$
10.54

 
7,532,687

 
$
623,817,701

August 1-31, 2015
9,036,805

 
$
10.50

 
9,036,805

 
$
528,836,421

September 1-30, 2015
10,000,000

 
$
9.57

 
10,000,000

 
$
432,963,371

Total 3rd Quarter
26,569,492

 
$
10.16

 
26,569,492

 
$
432,963,371

On April 23, 2015, Regions' Board of Directors authorized a new $875 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2015 through the end of the second quarter of 2016. As of September 30, 2015, Regions had repurchased approximately 44 million shares of common stock at a total cost of approximately $442 million under this plan. The Company continued to repurchase shares under this plan in the fourth quarter of 2015, and as of November 3, 2015, Regions had additional repurchases of approximately 1.4 million shares of common stock at a total cost of approximately $13.6 million. These shares were immediately retired upon repurchase and therefore will not be included in treasury stock.
Restrictions on Dividends and Repurchase of Stock
Holders of Regions common stock are only entitled to receive such dividends as Regions’ Board of Directors may declare out of funds legally available for such payments. Furthermore, holders of Regions common stock are subject to the prior dividend rights of the holders of Regions preferred stock then outstanding.
Regions understands the importance of returning capital to shareholders. Management will continue to execute the capital planning process, including evaluation of the amount of the common dividend, with the Board of Directors and in conjunction with the regulatory supervisors, subject to the Company’s results of operations. Also, Regions is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
On November 1, 2012, Regions completed the sale of 20 million depositary shares each representing a 1/40th ownership interest in a share of its 6.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (“Series A Preferred Stock”), with a liquidation preference of $1,000 per share of Series A Preferred Stock (equivalent to $25 per depositary share). The terms of the Series A Preferred Stock prohibit Regions from declaring or paying any dividends on any junior series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series A Preferred Stock for the most recently completed dividend period. The Series A Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment date on or after December 15, 2017, or in whole, but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations establishing the Series A Preferred Stock).
On April 29, 2014, Regions completed the sale of 20 million depositary shares each representing a 1/40th ownership interest in a share of its 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share (“Series B Preferred Stock”), with a liquidation preference of $1,000 per share of Series B Preferred Stock (equivalent to $25 per depositary share). The terms of the Series B Preferred Stock prohibit Regions from declaring or paying any dividends on any junior series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series B Preferred Stock for the most recently completed dividend period. The Series B Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment date on or after September 15, 2024, or in whole but not in part, at any time following a regulatory capital treatment event (as defined in the certificate of designations establishing the Series B Preferred Stock).


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Item 6. Exhibits
The following is a list of exhibits including items incorporated by reference
3.1
 
Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q Quarterly Report filed by registrant on August 6, 2012.
 
 
3.2
 
Certificate of Designations, incorporated by reference to Exhibit 3.3 to Form 8-A filed by registrant on November 1, 2012.
 
 
 
3.3
 
Certificate of Designations, incorporated by reference to Exhibit 3.3 to the Form 8-A filed by registrant on April 28, 2014.
 
 
3.4
 
By-laws as amended and restated, incorporated by reference to Exhibit 3.2 to Form 8-K Current Report filed by registrant on February 12, 2015.
 
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
 
Interactive Data File



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
DATE: November 4, 2015
 
Regions Financial Corporation
 
 
 
 
/S/    HARDIE B. KIMBROUGH, JR.        
 
 
Hardie B. Kimbrough, Jr.
Executive Vice President and Controller
(Chief Accounting Officer and Authorized Officer)



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