10-Q 1 rf-2019331x10xq.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2019
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 every Interactive Data File required to be submitted 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 such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
RF
New York Stock Exchange
Depositary Shares, each representing a 1/40th Interest in a Share of 6.375% Non-Cumulative Perpetual Preferred Stock, Series A
RF PRA
New York Stock Exchange
Depositary Shares, each representing a 1/40th Interest in a Share of 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B
RF PRB
New York Stock Exchange
Depositary Shares, each representing a 1/40th Interest in a Share of 5.700% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C
RF PRC
New York Stock Exchange

The number of shares outstanding of each of the issuer’s classes of common stock was 1,013,224,918 shares of common stock, par value $.01, outstanding as of May 6, 2019.

1



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.
 
 
 
 
 
 

2



Glossary of Defined Terms
Agencies - collectively, FNMA, FHLMC and GNMA.
ALCO - Asset/Liability Management Committee.
AOCI - Accumulated other comprehensive income.
ASC - Accounting Standards Codification.
ASU - Accounting Standards Update.
ATM - Automated teller machine.
Bank - Regions Bank.
Basel I - Basel Committee's 1988 Regulatory Capital Framework (First Accord).
Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord).
Basel III Rules - Final capital rules adopting the Basel III capital framework approved by U.S. federal
regulators in 2013.
Basel Committee - Basel Committee on Banking Supervision.
BHC - Bank Holding Company.
BITS - Technology arm of the Financial Services Roundtable.
Board - The Company’s Board of Directors.
CAP - Customer Assistance Program.
CCAR - Comprehensive Capital Analysis and Review.
CECL - Current Expected Credit Loss Approach.
CEO - Chief Executive Officer.
CET1 - Common Equity Tier 1.
CFPB - Consumer Financial Protection Bureau.
Company - Regions Financial Corporation and its subsidiaries.
CPR - Constant (or Conditional) Prepayment Rate.
CRA - Community Reinvestment Act of 1977.
Dodd-Frank Act - The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
DPD - Days Past Due.
DUS - Fannie Mae Delegated Underwriting & Servicing.
EGRRCPA - The Economic Growth, Regulatory Relief, and Consumer Protection Act.
ERI - Eligible Retained Income.
FASB - Financial Accounting Standards Board.
FDIC - The Federal Deposit Insurance Corporation.
Federal Reserve - The Board of Governors of the Federal Reserve System.
FHA - Federal Housing Administration.
FHLB - Federal Home Loan Bank.
FHLMC - Federal Home Loan Mortgage Corporation, known as Freddie Mac.
FICO - The Financing Corporation, established by the Competitive Equality Banking Act of
1987.
FICO scores - Personal credit scores based on the model introduced by the Fair Isaac Corporation.
FNMA - Federal National Mortgage Association, known as Fannie Mae.

3



FRB - Federal Reserve Bank.
FS-ISAC - Financial Services - Information Sharing & Analysis Center.
GAAP - Generally Accepted Accounting Principles in the United States.
GDP - Gross Domestic Product.
GNMA - Government National Mortgage Association.
HUD - U.S. Department of Housing and Urban Development.
IPO - Initial public offering.
IRS - Internal Revenue Service.
LCR - Liquidity coverage ratio.
LIBOR - London InterBank Offered Rate.
LLC - Limited Liability Company.
LROC - Liquidity Risk Oversight Committee.
LTIP - Long-term incentive plan.
LTV - Loan to value.
MBS - Mortgage-backed securities.
Morgan Keegan - Morgan Keegan & Company, Inc.
MSAs - Metropolitan Statistical Areas.
MSR - Mortgage servicing right.
NM - Not meaningful.
NPR - Notice of Public Ruling.
OAS - Option-Adjusted Spread.
OCC - Office of the Comptroller of the Currency.
OCI - Other comprehensive income.
OIS - Overnight Indexed Swap.
OTTI - Other-than-temporary impairment.
Raymond James - Raymond James Financial, Inc.
Regions Securities - Regions Securities LLC.
SCB - Stress Capital Buffer.
SEC - U.S. Securities and Exchange Commission.
SERP - Supplemental Executive Retirement Plan.
SOFR - Secured Overnight Funding Rate.
Tax Reform - H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent
Resolution on the Budget for Fiscal Year 2018.
TDR - Troubled debt restructuring.
U.S. - United States.
U.S. Treasury - The United States Department of the Treasury.
UTB - Unrecognized tax benefits.
VIE - Variable interest entity.
Visa - The Visa, U.S.A. Inc. card association or its affiliates, collectively.

4



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” as used herein mean collectively Regions Financial Corporation, a Delaware corporation, together with its subsidiaries when or where appropriate. The words “future,” “anticipates,” “assumes,” “intends,” “plans,” “seeks,” “believes,” “predicts,” “potential,” “objectives,” “estimates,” “expects,” “targets,” “projects,” “outlook,” “forecast,” “would,” “will,” “may,” “might,” “could,” “should,” “can,” and similar terms and 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 possible declines in property values, increases in 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.
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, any repricing of assets, or any adjustment of valuation allowances on our deferred tax assets due to changes in law, adverse changes in the economic environment, declining operations of the reporting unit or other factors.
The effect of changes in tax laws, including the effect of any future interpretations of or amendments to Tax Reform, which may impact our earnings, capital ratios and our ability to return capital to stockholders.
Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and leases, including operating leases.
Changes in the speed of loan prepayments, loan origination and sale volumes, charge-offs, loan loss provisions or actual loan losses where our allowance for loan losses may not be adequate to cover our eventual losses.
Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.
Loss of customer checking and savings account deposits as customers pursue other, higher-yield investments, which could increase our funding costs.
Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits, which could adversely affect our net income.
Our ability to effectively compete with other traditional and non-traditional financial services companies, some of whom possess greater financial resources than we do or are subject to different regulatory standards than we are.
Our inability to develop and gain acceptance from current and prospective customers for new products and services and the enhancement of existing products and services to meet customers’ needs and respond to emerging technological trends in a timely manner could have a negative impact on our revenue.
Our inability to keep pace with technological changes could result in losing business to competitors.
Changes in laws and regulations affecting our businesses, including legislation and regulations relating to bank products and services, as well as changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies, which could require us to change certain business practices, increase compliance risk, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.
Our ability to obtain a regulatory non-objection (as part of the CCAR process or otherwise) to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or redeem preferred stock or other regulatory capital instruments, may impact our ability to return capital to stockholders and market perceptions of us.

5



Our ability to comply with stress testing and capital planning requirements (as part of the CCAR process or otherwise) may continue to require a significant investment of our managerial resources due to the importance and intensity of such tests and requirements.
Our ability to comply with applicable capital and liquidity requirements (including, among other things, the Basel III capital standards and the LCR rule), including our ability to generate capital internally or raise capital on favorable terms, and if we fail to meet requirements, our financial condition could be negatively impacted.
The effects of any developments, changes or actions relating to any litigation or regulatory proceedings brought against us or any of our subsidiaries.
The costs, including possibly incurring fines, penalties, or other negative effects (including reputational harm) of any adverse judicial, administrative, or arbitral rulings or proceedings, regulatory enforcement actions, or other legal actions to which we or any of our subsidiaries are a party, and which may adversely affect our results.
Our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business.
Our ability to execute on our strategic and operational plans, including our ability to fully realize the financial and non-financial benefits relating to our strategic initiatives.
The risks and uncertainties related to our acquisition or divestiture of businesses.
The success of our marketing efforts in attracting and retaining customers.
Our ability to recruit and retain talented and experienced personnel to assist in the development, management and operation of our products and services may be affected by changes in laws and regulations in effect from time to time.
Fraud or misconduct by our customers, employees or business partners.
Any inaccurate or incomplete information provided to us by our customers or counterparties.
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 or failure to deliver our services effectively.
Dependence on key suppliers or vendors to obtain equipment and other supplies for our business on acceptable terms.
The inability of our internal 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.The severity and impact of future earthquakes, fires, hurricanes, tornadoes, droughts, floods and other weather-related events are difficult to predict and may be exacerbated by global climate change.
Changes in commodity market prices and conditions could adversely affect the cash flows of our borrowers operating in industries that are impacted by changes in commodity prices (including businesses indirectly impacted by commodities prices such as businesses that transport commodities or manufacture equipment used in the production of commodities), which could impair their ability to service any loans outstanding to them and/or reduce demand for loans in those industries.
Our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, including account take-overs, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage to our systems, increased costs, losses, or adverse effects to our reputation.
Our ability to realize our adjusted efficiency ratio target as part of our expense management initiatives.
Possible cessation or market replacement of LIBOR and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments, and loans.
Possible downgrades in our credit ratings or outlook could increase the costs of funding from capital markets.
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.
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.

6



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 shareholders.
Changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect our financial statements and how we report those results, and expectations and preliminary analyses relating to how such changes will affect our financial results could prove incorrect.
Other risks identified from time to time in reports that we file with the SEC.
Fluctuations in the price of our common stock and inability to complete stock repurchases in the time frame and/or on the terms anticipated.
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 and do not intend 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 SEC, including the discussion under the “Risk Factors” section of Regions’ Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC and available on its website at www.sec.gov.

7



PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2019
 
December 31, 2018
 
(In millions, except share data)
Assets
 
 
 
Cash and due from banks
$
1,666

 
$
2,018

Interest-bearing deposits in other banks
2,141

 
1,520

Debt securities held to maturity (estimated fair value of $1,454 and $1,460, respectively)
1,451

 
1,482

Debt securities available for sale
23,786

 
22,729

Loans held for sale (includes $284 and $251 measured at fair value, respectively)
318

 
304

Loans, net of unearned income
84,430

 
83,152

Allowance for loan losses
(853
)
 
(840
)
Net loans
83,577

 
82,312

Other earning assets
1,617

 
1,719

Premises and equipment, net
2,026

 
2,045

Interest receivable
388

 
375

Goodwill
4,829

 
4,829

Residential mortgage servicing rights at fair value
386

 
418

Other identifiable intangible assets, net
108

 
115

Other assets
6,509

 
5,822

Total assets
$
128,802

 
$
125,688

Liabilities and Equity
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
34,775

 
$
35,053

Interest-bearing
60,945

 
59,438

Total deposits
95,720

 
94,491

Borrowed funds:
 
 
 
Short-term borrowings:
 
 
 
Other short-term borrowings
1,600

 
1,600

Total short-term borrowings
1,600

 
1,600

Long-term borrowings
12,957

 
12,424

Total borrowed funds
14,557

 
14,024

Other liabilities
3,002

 
2,083

Total liabilities
113,279

 
110,598

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

 
820

Common stock, authorized 3 billion shares, par value $.01 per share:
 
 
 
Issued including treasury stock—1,053,966,945 and 1,065,858,925 shares, respectively
11

 
11

Additional paid-in capital
13,584

 
13,766

Retained earnings
3,066

 
2,828

Treasury stock, at cost—41,032,675 and 41,032,676 shares, respectively
(1,371
)
 
(1,371
)
Accumulated other comprehensive income (loss), net
(598
)
 
(964
)
Total stockholders’ equity
15,512

 
15,090

Noncontrolling interest
11

 

Total equity
15,523

 
15,090

Total liabilities and equity
$
128,802

 
$
125,688


See notes to consolidated financial statements.

8



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions, except per share data)
Interest income, including other financing income on:
 
 
 
Loans, including fees
$
981

 
$
851

Debt securities - taxable
165

 
154

Loans held for sale
3

 
3

Other earning assets
19

 
19

Operating lease assets
15

 
20

Total interest income, including other financing income
1,183

 
1,047

Interest expense on:
 
 
 
Deposits
108

 
49

Short-term borrowings
13

 
1

Long-term borrowings
102

 
72

Total interest expense
223

 
122

Depreciation expense on operating lease assets
12

 
16

Total interest expense and depreciation expense on operating lease assets
235

 
138

Net interest income and other financing income
948

 
909

Provision (credit) for loan losses
91

 
(10
)
Net interest income and other financing income after provision (credit) for loan losses
857

 
919

Non-interest income:
 
 
 
Service charges on deposit accounts
175

 
171

Card and ATM fees
109

 
104

Investment management and trust fee income
57

 
58

Capital markets income
42

 
50

Mortgage income
27

 
38

Securities gains (losses), net
(7
)
 

Other
99

 
86

Total non-interest income
502

 
507

Non-interest expense:
 
 
 
Salaries and employee benefits
478

 
495

Net occupancy expense
82

 
83

Furniture and equipment expense
76

 
81

Other
224

 
225

Total non-interest expense
860

 
884

Income from continuing operations before income taxes
499

 
542

Income tax expense
105

 
128

Income from continuing operations
394

 
414

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

 

Income tax expense (benefit)

 

Income (loss) from discontinued operations, net of tax

 

Net income
$
394

 
$
414

Net income from continuing operations available to common shareholders
$
378

 
$
398

Net income available to common shareholders
$
378

 
$
398

Weighted-average number of shares outstanding:
 
 
 
Basic
1,019

 
1,127

Diluted
1,028

 
1,141

Earnings per common share from continuing operations:
 
 
 
Basic
$
0.37

 
$
0.35

Diluted
0.37

 
0.35

Earnings per common share:
 
 
 
Basic
$
0.37

 
$
0.35

Diluted
0.37

 
0.35

See notes to consolidated financial statements.

9



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions)
Net income
$
394

 
$
414

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 zero and ($1) tax effect, respectively)
(1
)
 
(2
)
Net change in unrealized losses on securities transferred to held to maturity, net of tax
1

 
2

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $77 and ($104) tax effect, respectively)
240

 
(310
)
Less: reclassification adjustments for securities gains (losses) realized in net income (net of ($2) and zero tax effect, respectively)
(5
)
 

Net change in unrealized gains (losses) on securities available for sale, net of tax
245

 
(310
)
Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $36 and ($31) tax effect, respectively)
107

 
(92
)
Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of ($2) and $3 tax effect, respectively)
(6
)
 
8

Net change in unrealized gains (losses) on derivative instruments, net of tax
113

 
(100
)
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 realized in net income (net of ($2) and ($2) tax effect, respectively)
(7
)
 
(7
)
Net change from defined benefit pension plans and other post employment benefits, net of tax
7

 
6

Other comprehensive income (loss), net of tax
366

 
(402
)
Comprehensive income
$
760

 
$
12

See notes to consolidated financial statements.

10



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 
Stockholders' Equity
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock,
At Cost
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
 
Non-
controlling
Interest
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
(In millions, except per share data)
BALANCE AT JANUARY 1, 2018
1

 
$
820

 
1,133

 
$
12

 
$
15,858

 
$
1,628

 
$
(1,377
)
 
$
(749
)
 
$
16,192

 
$

Cumulative effect from change in accounting guidance

 

 

 

 

 
(2
)
 

 

 
(2
)
 

Net income

 

 

 

 

 
414

 

 

 
414

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
(402
)
 
(402
)
 

Cash dividends declared

 

 

 

 

 
(101
)
 

 

 
(101
)
 

Preferred stock dividends

 

 

 

 

 
(16
)
 

 

 
(16
)
 

Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchases

 

 
(12
)
 

 
(235
)
 

 

 

 
(235
)
 

Impact of stock transactions under compensation plans, net

 

 
1

 

 
16

 

 

 

 
16

 

BALANCE AT MARCH 31, 2018
1

 
$
820

 
1,122

 
$
12

 
$
15,639

 
$
1,923

 
$
(1,377
)
 
$
(1,151
)
 
$
15,866

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2019
1

 
$
820

 
1,025

 
$
11

 
$
13,766

 
$
2,828

 
$
(1,371
)
 
$
(964
)
 
$
15,090

 
$

Cumulative effect from change in accounting guidance

 

 

 

 

 
2

 

 

 
2

 

Net income

 

 

 

 

 
394

 

 

 
394

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
366

 
366

 

Cash dividends declared

 

 

 

 

 
(142
)
 

 

 
(142
)
 

Preferred stock dividends

 

 

 

 

 
(16
)
 

 

 
(16
)
 

Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchases

 

 
(12
)
 

 
(190
)
 

 

 

 
(190
)
 

Impact of stock transactions under compensation plans, net

 

 

 

 
8

 

 

 

 
8

 

Other

 

 

 

 

 

 

 

 

 
11

BALANCE AT MARCH 31, 2019
1

 
$
820

 
1,013

 
$
11

 
$
13,584

 
$
3,066

 
$
(1,371
)
 
$
(598
)
 
$
15,512

 
$
11


See notes to consolidated financial statements.

11



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three Months Ended March 31
 
2019
 
2018
 
(In millions)
Operating activities:
 
 
 
Net income
$
394

 
$
414

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision (credit) for loan losses
91

 
(10
)
Depreciation, amortization and accretion, net
105

 
121

Securities (gains) losses, net
7

 

Deferred income tax expense
19

 
103

Originations and purchases of loans held for sale
(510
)
 
(690
)
Proceeds from sales of loans held for sale
515

 
587

(Gain) loss on sale of loans, net
(25
)
 
(14
)
Net change in operating assets and liabilities:
 
 
 
Other earning assets
90

 
235

Interest receivable and other assets
(381
)
 
(61
)
Other liabilities
222

 
(529
)
Other
51

 
(2
)
Net cash from operating activities
578

 
154

Investing activities:
 
 
 
Proceeds from maturities of debt securities held to maturity
30

 
46

Proceeds from sales of debt securities available for sale
139

 
7

Proceeds from maturities of debt securities available for sale
799

 
798

Purchases of debt securities available for sale
(1,241
)
 
(876
)
Net proceeds from (payments for) bank-owned life insurance
(2
)
 
1

Proceeds from sales of loans
185

 
272

Purchases of loans
(171
)
 
(70
)
Purchases of mortgage servicing rights
(8
)
 
(2
)
Net change in loans
(1,383
)
 
(164
)
Net purchases of other assets
(36
)
 
(56
)
Net cash from investing activities
(1,688
)
 
(44
)
Financing activities:
 
 
 
Net change in deposits
1,229

 
101

Net change in short-term borrowings

 
(500
)
Proceeds from long-term borrowings
12,025

 
4,350

Payments on long-term borrowings
(11,525
)
 
(4,500
)
Cash dividends on common stock
(143
)
 
(102
)
Cash dividends on preferred stock
(16
)
 
(16
)
Repurchases of common stock
(190
)
 
(235
)
Taxes paid related to net share settlement of equity awards

 
(1
)
Other
(1
)
 
(3
)
Net cash from financing activities
1,379

 
(906
)
Net change in cash and cash equivalents
269

 
(796
)
Cash and cash equivalents at beginning of year
3,538

 
3,981

Cash and cash equivalents at end of period
$
3,807

 
$
3,185


See notes to consolidated financial statements.

12



REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2019 and 2018
NOTE 1. BASIS OF PRESENTATION
Regions Financial Corporation (“Regions” or the "Company”) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located across the South, Midwest and Texas. The Company competes with other financial institutions located in the states in which it operates, as well as other adjoining states. Regions is subject to the regulations of certain government agencies and undergoes periodic examinations by certain regulatory authorities.
The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with GAAP and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions’ Annual Report on Form 10-K for the year ended December 31, 2018. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.
Effective January 1, 2019, the Company adopted new accounting guidance related to several topics. See Note 5 and Note 14 for related disclosures.
NOTE 2. DEBT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of debt securities held to maturity and debt securities available for sale are as follows:
 
March 31, 2019
 
 
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
853

 
$

 
$
(31
)
 
$
822

 
$
7

 
$
(3
)
 
$
826

Commercial agency
632

 

 
(3
)
 
629

 
4

 
(5
)
 
628

 
$
1,485

 
$

 
$
(34
)
 
$
1,451

 
$
11

 
$
(8
)
 
$
1,454

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
175

 
$
1

 
$
(2
)
 
$
174

 
 
 
 
 
$
174

Federal agency securities
45

 

 

 
45

 
 
 
 
 
45

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
17,639

 
59

 
(257
)
 
17,441

 
 
 
 
 
17,441

Residential non-agency
2

 

 

 
2

 
 
 
 
 
2

Commercial agency
4,188

 
17

 
(28
)
 
4,177

 
 
 
 
 
4,177

Commercial non-agency
731

 
3

 
(4
)
 
730

 
 
 
 
 
730

Corporate and other debt securities
1,211

 
12

 
(6
)
 
1,217

 
 
 
 
 
1,217

 
$
23,991

 
$
92

 
$
(297
)
 
$
23,786

 
 
 
 
 
$
23,786


13



 
December 31, 2018
 
 
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
883

 
$

 
$
(32
)
 
$
851

 
$
1

 
$
(10
)
 
$
842

Commercial agency
634

 

 
(3
)
 
631

 

 
(13
)
 
618

 
$
1,517

 
$

 
$
(35
)
 
$
1,482

 
$
1

 
$
(23
)
 
$
1,460

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
284

 
$

 
$
(4
)
 
$
280

 
 
 
 
 
$
280

Federal agency securities
43

 

 

 
43

 
 
 
 
 
43

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
17,064

 
26

 
(466
)
 
16,624

 
 
 
 
 
16,624

Residential non-agency
2

 

 

 
2

 
 
 
 
 
2

Commercial agency
3,891

 
8

 
(64
)
 
3,835

 
 
 
 
 
3,835

Commercial non-agency
768

 
2

 
(10
)
 
760

 
 
 
 
 
760

Corporate and other debt securities
1,206

 
2

 
(23
)
 
1,185

 
 
 
 
 
1,185

 
$
23,258

 
$
38

 
$
(567
)
 
$
22,729

 
 
 
 
 
$
22,729

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

Debt securities with carrying values of $8.3 billion and $7.9 billion at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. Included within total pledged securities is approximately $24 million of encumbered U.S. Treasury securities at both March 31, 2019 and December 31, 2018.
The amortized cost and estimated fair value of debt securities held to maturity and debt securities available for sale at March 31, 2019, 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.
 
Amortized
Cost
 
Estimated
Fair Value
 
(In millions)
Debt securities held to maturity:
 
 
 
Mortgage-backed securities:
 
 
 
Residential agency
$
853

 
$
826

Commercial agency
632

 
628

 
$
1,485

 
$
1,454

Debt securities available for sale:
 
 
 
Due in one year or less
$
71

 
$
71

Due after one year through five years
956

 
958

Due after five years through ten years
350

 
352

Due after ten years
54

 
55

Mortgage-backed securities:
 
 
 
Residential agency
17,639

 
17,441

Residential non-agency
2

 
2

Commercial agency
4,188

 
4,177

Commercial non-agency
731

 
730

 
$
23,991

 
$
23,786

The following tables present gross unrealized losses and the related estimated fair value of debt securities held to maturity and debt securities available for sale at March 31, 2019 and December 31, 2018. For debt securities transferred to held to maturity

14



from available for sale, the analysis in the tables below is comparing the securities' original amortized cost to its current estimated fair value. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.
 
March 31, 2019
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$

 
$

 
$
826

 
$
(27
)
 
$
826

 
$
(27
)
Commercial agency

 

 
160

 
(8
)
 
160

 
(8
)
 
$

 
$

 
$
986

 
$
(35
)
 
$
986

 
$
(35
)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$

 
$
149

 
$
(2
)
 
$
149

 
$
(2
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,366

 
(10
)
 
11,801

 
(247
)
 
13,167

 
(257
)
Commercial agency

 

 
2,937

 
(28
)
 
2,937

 
(28
)
Commercial non-agency

 

 
444

 
(4
)
 
444

 
(4
)
Corporate and other debt securities
57

 
(1
)
 
380

 
(5
)
 
437

 
(6
)
 
$
1,423

 
$
(11
)
 
$
15,711

 
$
(286
)
 
$
17,134

 
$
(297
)

 
December 31, 2018
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$

 
$

 
$
842

 
$
(42
)
 
$
842

 
$
(42
)
Commercial agency
486

 
(7
)
 
132

 
(9
)
 
618

 
(16
)
 
$
486

 
$
(7
)
 
$
974

 
$
(51
)
 
$
1,460

 
$
(58
)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$

 
$
261

 
$
(4
)
 
$
261

 
$
(4
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
2,830

 
(37
)
 
11,010

 
(429
)
 
13,840

 
(466
)
Commercial agency
1,073

 
(13
)
 
2,254

 
(51
)
 
3,327

 
(64
)
Commercial non-agency
229

 
(1
)
 
404

 
(9
)
 
633

 
(10
)
Corporate and other debt securities
659

 
(11
)
 
310

 
(12
)
 
969

 
(23
)
 
$
4,791

 
$
(62
)
 
$
14,239

 
$
(505
)
 
$
19,030

 
$
(567
)
The number of individual debt positions in an unrealized loss position in the tables above decreased from 1,379 at December 31, 2018 to 1,172 at March 31, 2019. The decrease in the number of securities and the total amount of unrealized losses from year-end 2018 was primarily due to changes in market interest rates. In instances where an unrealized loss existed, there was no indication of an adverse change in credit on the underlying positions in the tables above. As it relates to these positions, management believes no individual unrealized loss, other than those discussed below, represented an OTTI as of those dates. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, the positions before the recovery of their amortized cost basis, which may be at maturity.
As part of the Company's normal process for evaluating OTTI, management did identify a limited number of positions where an OTTI was believed to exist as of March 31, 2019.

15



Gross realized gains and gross realized losses on sales of debt 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 March 31
 
2019
 
2018
 
(In millions)
Gross realized gains
$

 
$

Gross realized losses
(6
)
 

OTTI
(1
)
 

Debt securities available for sale gains (losses), net
$
(7
)
 
$


NOTE 3. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
LOANS
The following table presents the distribution of Regions' loan portfolio by segment and class, net of unearned income:
 
March 31, 2019
 
December 31, 2018
 
(In millions, net of unearned income)
Commercial and industrial
$
40,985

 
$
39,282

Commercial real estate mortgage—owner-occupied
5,522

 
5,549

Commercial real estate construction—owner-occupied
434

 
384

Total commercial
46,941

 
45,215

Commercial investor real estate mortgage
4,715

 
4,650

Commercial investor real estate construction
1,871

 
1,786

Total investor real estate
6,586

 
6,436

Residential first mortgage
14,113

 
14,276

Home equity
9,014

 
9,257

Indirect—vehicles
2,759

 
3,053

Indirect—other consumer
2,547

 
2,349

Consumer credit card
1,274

 
1,345

Other consumer
1,196

 
1,221

Total consumer
30,903

 
31,501

 
$
84,430

 
$
83,152

During the three months ended March 31, 2019 and 2018, Regions purchased approximately $171 million and $70 million in indirect-other consumer loans from third parties, respectively.
During the three months ended March 31, 2019, Regions sold $167 million of affordable housing residential mortgage loans.
In January 2019, Regions decided to discontinue its indirect auto lending business due to competition-based margin compression impacting overall returns on the portfolio. Regions ceased originating new indirect auto loans in the first quarter of 2019 and intends to complete any in-process indirect auto loan closings by the end of the second quarter of 2019. The Company will remain in the direct auto lending business.
At March 31, 2019, $21.9 billion in securities and net eligible loans held by Regions were pledged to secure current and potential borrowings from the FHLB. At March 31, 2019, an additional $25.9 billion in net eligible loans held by Regions were pledged to the FRB for potential borrowings.

16



ALLOWANCE FOR CREDIT LOSSES
Regions determines the appropriate level of the allowance on a quarterly basis. Refer to Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements to the Annual Report on Form 10-K for the year ended December 31, 2018, for a description of the methodology.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
The following tables present analyses of the allowance for credit losses by portfolio segment for the three months ended March 31, 2019 and 2018. The total allowance for loan losses and the related loan portfolio ending balances are disaggregated to detail the amounts derived through individual evaluation and collective evaluation for impairment. The allowance for loan losses related to individually evaluated loans is attributable to reserves for non-accrual commercial and investor real estate loans and all TDRs. The allowance for loan losses and the loan portfolio ending balances related to collectively evaluated loans is attributable to the remainder of the portfolio.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2019
$
520

 
$
58

 
$
262

 
$
840

Provision (credit) for loan losses
38

 
(5
)
 
58

 
91

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(30
)
 

 
(72
)
 
(102
)
Recoveries
9

 
1

 
14

 
24

Net loan (losses) recoveries
(21
)
 
1

 
(58
)
 
(78
)
Allowance for loan losses, March 31, 2019
537

 
54

 
262

 
853

Reserve for unfunded credit commitments, January 1, 2019
47

 
4

 

 
51

Provision (credit) for unfunded credit losses
(1
)
 

 

 
(1
)
Reserve for unfunded credit commitments, March 31, 2019
46

 
4

 

 
50

Allowance for credit losses, March 31, 2019
$
583

 
$
58

 
$
262

 
$
903

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
119

 
$
3

 
$
29

 
$
151

Collectively evaluated for impairment
418

 
51

 
233

 
702

Total allowance for loan losses
$
537

 
$
54

 
$
262

 
$
853

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
523

 
$
22

 
$
411

 
$
956

Collectively evaluated for impairment
46,418

 
6,564

 
30,492

 
83,474

Total loans evaluated for impairment
$
46,941

 
$
6,586

 
$
30,903

 
$
84,430


17



 
Three Months Ended March 31, 2018
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2018
$
591

 
$
64

 
$
279

 
$
934

Provision (credit) for loan losses
(24
)
 
(4
)
 
18

 
(10
)
Loan losses:
 
 
 
 
 
 
 
Charge-offs
(30
)
 
(8
)
 
(74
)
 
(112
)
Recoveries
10

 
2

 
16

 
28

Net loan (losses) recoveries
(20
)
 
(6
)
 
(58
)
 
(84
)
Allowance for loan losses, March 31, 2018
547

 
54

 
239

 
840

Reserve for unfunded credit commitments, January 1, 2018
49

 
4

 

 
53

Provision (credit) for unfunded credit losses
(4
)
 

 

 
(4
)
Reserve for unfunded credit commitments, March 31, 2018
45

 
4

 

 
49

Allowance for credit losses, March 31, 2018
$
592

 
$
58

 
$
239

 
$
889

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
150

 
$
10

 
$
29

 
$
189

Collectively evaluated for impairment
397

 
44

 
210

 
651

Total allowance for loan losses
$
547

 
$
54

 
$
239

 
$
840

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
700

 
$
96

 
$
476

 
$
1,272

Collectively evaluated for impairment
42,437

 
5,491

 
30,622

 
78,550

Total loans evaluated for impairment
$
43,137

 
$
5,587

 
$
31,098

 
$
79,822


PORTFOLIO SEGMENT RISK FACTORS
The following describe the risk characteristics relevant to each of the portfolio segments.
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 or other expansion projects. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations, and the sensitivity to market fluctuations in commodity prices.
Investor Real Estate—Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, these loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Loans in this portfolio segment are particularly sensitive to the valuation of real estate.
Consumer—The consumer 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 lending 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.

18



CREDIT QUALITY INDICATORS
The following tables present credit quality indicators for portfolio segments and classes, excluding loans held for sale, as of March 31, 2019, and December 31, 2018. Commercial and investor real estate portfolio segments are detailed by categories related to underlying credit quality and probability of default. Regions assigns these categories at loan origination and reviews the relationship utilizing a risk-based approach on, at minimum, an annual basis or at any time management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Both quantitative and qualitative factors are considered in this review process. These categories are utilized to develop the associated allowance for credit losses.
Pass—includes obligations where the probability of default is considered low;
Special Mention—includes obligations that have potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. Obligations in this category may also be subject to economic or market conditions that may, in the future, have an adverse effect on debt service ability;
Substandard Accrual—includes obligations that exhibit a well-defined weakness that presently jeopardizes debt repayment, even though they are currently performing. These obligations are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected;
Non-accrual—includes obligations where management has determined that full payment of principal and interest is in doubt.
Substandard accrual and non-accrual loans are often collectively referred to as “classified.” Special mention, substandard accrual, and non-accrual loans are often collectively referred to as “criticized and classified.” Classes in the consumer portfolio segment are disaggregated by accrual status.
 
March 31, 2019
 
Pass
 
Special  Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
39,534

 
$
668

 
$
447

 
$
336

 
$
40,985

Commercial real estate mortgage—owner-occupied
5,159

 
197

 
99

 
67

 
5,522

Commercial real estate construction—owner-occupied
403

 
12

 
5

 
14

 
434

Total commercial
$
45,096

 
$
877

 
$
551

 
$
417

 
$
46,941

Commercial investor real estate mortgage
$
4,464

 
$
168

 
$
75

 
$
8

 
$
4,715

Commercial investor real estate construction
1,848

 
18

 
5

 

 
1,871

Total investor real estate
$
6,312

 
$
186

 
$
80

 
$
8

 
$
6,586

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
$
14,079

 
$
34

 
$
14,113

Home equity
 
 
 
 
8,950

 
64

 
9,014

Indirect—vehicles
 
 
 
 
2,759

 

 
2,759

Indirect—other consumer
 
 
 
 
2,547

 

 
2,547

Consumer credit card
 
 
 
 
1,274

 

 
1,274

Other consumer
 
 
 
 
1,196

 

 
1,196

Total consumer
 
 
 
 
$
30,805

 
$
98

 
$
30,903

 
 
 
 
 
 
 
 
 
$
84,430

 

19



 
December 31, 2018
 
Pass
 
Special
Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
37,963

 
$
666

 
$
346

 
$
307

 
$
39,282

Commercial real estate mortgage—owner-occupied
5,193

 
208

 
81

 
67

 
5,549

Commercial real estate construction—owner-occupied
356

 
7

 
13

 
8

 
384

Total commercial
$
43,512

 
$
881

 
$
440

 
$
382

 
$
45,215

Commercial investor real estate mortgage
$
4,444

 
$
52

 
$
143

 
$
11

 
$
4,650

Commercial investor real estate construction
1,773

 
6

 
7

 

 
1,786

Total investor real estate
$
6,217

 
$
58

 
$
150

 
$
11

 
$
6,436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
$
14,236

 
$
40

 
$
14,276

Home equity
 
 
 
 
9,194

 
63

 
9,257

Indirect—vehicles
 
 
 
 
3,053

 

 
3,053

Indirect—other consumer
 
 
 
 
2,349

 

 
2,349

Consumer credit card
 
 
 
 
1,345

 

 
1,345

Other consumer
 
 
 
 
1,221

 

 
1,221

Total consumer
 
 
 
 
$
31,398

 
$
103

 
$
31,501

 
 
 
 
 
 
 
 
 
$
83,152


AGING ANALYSIS
The following tables include an aging analysis of DPD for each portfolio segment and class as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
24

 
$
11

 
$
11

 
$
46

 
$
40,649

 
$
336

 
$
40,985

Commercial real estate mortgage—owner-occupied
10

 
2

 
1

 
13

 
5,455

 
67

 
5,522

Commercial real estate construction—owner-occupied

 

 

 

 
420

 
14

 
434

Total commercial
34

 
13

 
12

 
59

 
46,524

 
417

 
46,941

Commercial investor real estate mortgage
1

 

 

 
1

 
4,707

 
8

 
4,715

Commercial investor real estate construction

 
1

 

 
1

 
1,871

 

 
1,871

Total investor real estate
1

 
1

 

 
2

 
6,578

 
8

 
6,586

Residential first mortgage
77

 
43

 
142

 
262

 
14,079

 
34

 
14,113

Home equity
44

 
24

 
37

 
105

 
8,950

 
64

 
9,014

Indirect—vehicles
34

 
9

 
7

 
50

 
2,759

 

 
2,759

Indirect—other consumer
13

 
7

 
1

 
21

 
2,547

 

 
2,547

Consumer credit card
11

 
8

 
20

 
39

 
1,274

 

 
1,274

Other consumer
15

 
5

 
4

 
24

 
1,196

 

 
1,196

Total consumer
194

 
96

 
211

 
501

 
30,805

 
98

 
30,903

 
$
229

 
$
110

 
$
223

 
$
562

 
$
83,907

 
$
523

 
$
84,430

 

20



 
December 31, 2018
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
80

 
$
22

 
$
8

 
$
110

 
$
38,975

 
$
307

 
$
39,282

Commercial real estate mortgage—owner-occupied
12

 
7

 

 
19

 
5,482

 
67

 
5,549

Commercial real estate construction—owner-occupied

 

 

 

 
376

 
8

 
384

Total commercial
92

 
29

 
8

 
129

 
44,833

 
382

 
45,215

Commercial investor real estate mortgage
6

 

 

 
6

 
4,639

 
11

 
4,650

Commercial investor real estate construction

 

 

 

 
1,786

 

 
1,786

Total investor real estate
6

 

 

 
6

 
6,425

 
11

 
6,436

Residential first mortgage
85

 
53

 
150

 
288

 
14,236

 
40

 
14,276

Home equity
47

 
26

 
34

 
107

 
9,194

 
63

 
9,257

Indirect—vehicles
40

 
11

 
9

 
60

 
3,053

 

 
3,053

Indirect—other consumer
13

 
7

 
1

 
21

 
2,349

 

 
2,349

Consumer credit card
12

 
9

 
20

 
41

 
1,345

 

 
1,345

Other consumer
15

 
5

 
5

 
25

 
1,221

 

 
1,221

Total consumer
212

 
111

 
219

 
542

 
31,398

 
103

 
31,501

 
$
310

 
$
140

 
$
227

 
$
677

 
$
82,656

 
$
496

 
$
83,152


IMPAIRED LOANS
The following tables present details related to the Company’s impaired loans as of March 31, 2019 and December 31, 2018. Loans deemed to be impaired include all TDRs and all non-accrual commercial and investor real estate loans, excluding leases. Loans that have been fully charged-off do not appear in the tables below.
 
Non-accrual Impaired Loans As of March 31, 2019
 
 
 
 
 
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
$
426

 
$
90

 
$
336

 
$
111

 
$
225

 
$
77

 
39.2
%
Commercial real estate mortgage—owner-occupied
75

 
8

 
67

 
8

 
59

 
25

 
44.0

Commercial real estate construction—owner-occupied
16

 
2

 
14

 
1

 
13

 
3

 
31.3

Total commercial
517

 
100

 
417

 
120

 
297

 
105

 
39.7

Commercial investor real estate mortgage
8

 

 
8

 

 
8

 
2

 
25.0

Total investor real estate
8

 

 
8

 

 
8

 
2

 
25.0

Residential first mortgage
27

 
7

 
20

 

 
20

 
2

 
33.3

Home equity
11

 
1

 
10

 

 
10

 

 
9.1

Total consumer
38

 
8

 
30

 

 
30

 
2

 
26.3

 
$
563

 
$
108

 
$
455

 
$
120

 
$
335

 
$
109

 
38.5
%
 

21



 
Accruing Impaired Loans As of March 31, 2019
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Book Value(3)
 
Related
Allowance for
Loan Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
84

 
$

 
$
84

 
$
12

 
14.3
%
Commercial real estate mortgage—owner-occupied
24

 
2

 
22

 
2

 
16.7

Total commercial
108

 
2

 
106

 
14

 
14.8

Commercial investor real estate mortgage
14

 
1

 
13

 
1

 
14.3

Commercial investor real estate construction
1

 

 
1

 

 

Total investor real estate
15

 
1

 
14

 
1

 
13.3

Residential first mortgage
199

 
9

 
190

 
20

 
14.6

Home equity
186

 
1

 
185

 
7

 
4.3

Consumer credit card
1

 

 
1

 

 

Other consumer
5

 

 
5

 

 

Total consumer
391

 
10

 
381

 
27

 
9.5

 
$
514

 
$
13

 
$
501

 
$
42

 
10.7
%

 
Total Impaired Loans As of March 31, 2019
 
 
 
 
 
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
$
510

 
$
90

 
$
420

 
$
111

 
$
309

 
$
89

 
35.1
%
Commercial real estate mortgage—owner-occupied
99

 
10

 
89

 
8

 
81

 
27

 
37.4

Commercial real estate construction—owner-occupied
16

 
2

 
14

 
1

 
13

 
3

 
31.3

Total commercial
625

 
102

 
523

 
120

 
403

 
119

 
35.4

Commercial investor real estate mortgage
22

 
1

 
21

 

 
21

 
3

 
18.2

Commercial investor real estate construction
1

 

 
1

 

 
1

 

 

Total investor real estate
23

 
1

 
22

 

 
22

 
3

 
17.4

Residential first mortgage
226

 
16

 
210

 

 
210

 
22

 
16.8

Home equity
197

 
2

 
195

 

 
195

 
7

 
4.6

Consumer credit card
1

 

 
1

 

 
1

 

 

Other consumer
5

 

 
5

 

 
5

 

 

Total consumer
429

 
18

 
411

 

 
411

 
29

 
11.0

 
$
1,077

 
$
121

 
$
956

 
$
120

 
$
836

 
$
151

 
25.3
%


22




 
Non-accrual Impaired Loans As of December 31, 2018
 
 
 
 
 
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
$
384

 
$
77

 
$
307

 
$
113

 
$
194

 
$
62

 
36.2
%
Commercial real estate mortgage—owner-occupied
76

 
9

 
67

 
13

 
54

 
23

 
42.1

Commercial real estate construction—owner-occupied
9

 
1

 
8

 

 
8

 
3

 
44.4

Total commercial
469

 
87

 
382

 
126

 
256

 
88

 
37.3

Commercial investor real estate mortgage
11

 

 
11

 
4

 
7

 
1

 
9.1

Total investor real estate
11

 

 
11

 
4

 
7

 
1

 
9.1

Residential first mortgage
31

 
8

 
23

 

 
23

 
2

 
32.3

Home equity
11

 
2

 
9

 

 
9

 

 
18.2

Total consumer
42

 
10

 
32

 

 
32

 
2

 
28.6

 
$
522

 
$
97

 
$
425

 
$
130

 
$
295

 
$
91

 
36.0
%
 
 
Accruing Impaired Loans As of December 31, 2018
 
Unpaid
Principal
Balance(1)
 
Charge-offs
and Payments
Applied(2)
 
Book Value(3)
 
Related
Allowance for
Loan Losses
 
Coverage %(4)
 
(Dollars in millions)
Commercial and industrial
$
84

 
$

 
$
84

 
$
14

 
16.7
%
Commercial real estate mortgage—owner-occupied
26

 
2

 
24

 
2

 
15.4

Total commercial
110

 
2

 
108

 
16

 
16.4

Commercial investor real estate mortgage
15

 
1

 
14

 
1

 
13.3

Total investor real estate
15

 
1

 
14

 
1

 
13.3

Residential first mortgage
194

 
9

 
185

 
18

 
13.9

Home equity
195

 

 
195

 
6

 
3.1

Consumer credit card
1

 

 
1

 

 

Other consumer
6

 

 
6

 

 

Total consumer
396

 
9

 
387

 
24

 
8.3

 
$
521

 
$
12

 
$
509

 
$
41

 
10.2
%


23



 
Total Impaired Loans As of December 31, 2018
 
 
 
 
 
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
$
468

 
$
77

 
$
391

 
$
113

 
$
278

 
$
76

 
32.7
%
Commercial real estate mortgage—owner-occupied
102

 
11

 
91

 
13

 
78

 
25

 
35.3

Commercial real estate construction—owner-occupied
9

 
1

 
8

 

 
8

 
3

 
44.4

Total commercial
579

 
89

 
490

 
126

 
364

 
104

 
33.3

Commercial investor real estate mortgage
26

 
1

 
25

 
4

 
21

 
2

 
11.5

Total investor real estate
26

 
1

 
25

 
4

 
21

 
2

 
11.5

Residential first mortgage
225

 
17

 
208

 

 
208

 
20

 
16.4

Home equity
206

 
2

 
204

 

 
204

 
6

 
3.9

Consumer credit card
1

 

 
1

 

 
1

 

 

Other consumer
6

 

 
6

 

 
6

 

 

Total consumer
438

 
19

 
419

 

 
419

 
26

 
10.3

 
$
1,043

 
$
109

 
$
934

 
$
130

 
$
804

 
$
132

 
23.1
%
________
(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 months ended March 31, 2019 and 2018. Interest income recognized represents interest on accruing loans modified in a TDR.
 
Three Months Ended March 31
 
2019
 
2018
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
 
(In millions)
Commercial and industrial
$
411

 
$
1

 
$
533

 
$
3

Commercial real estate mortgage—owner-occupied
93

 
1

 
166

 
3

Commercial real estate construction—owner-occupied
13

 

 
6

 

Total commercial
517

 
2

 
705

 
6

Commercial investor real estate mortgage
21

 

 
76

 
1

Commercial investor real estate construction

 

 
30

 

Total investor real estate
21

 

 
106

 
1

Residential first mortgage
209

 
1

 
288

 
2

Home equity
198

 
3

 
252

 
3

Consumer credit card
1

 

 
1

 

Other consumer
6

 

 
8

 

Total consumer
414

 
4

 
549

 
5

Total impaired loans
$
952

 
$
6

 
$
1,360

 
$
12


24



TROUBLED DEBT RESTRUCTURINGS
Regions regularly modifies commercial and investor real estate loans in order to facilitate a workout strategy. Similarly, Regions works to meet the individual needs of consumer borrowers to stem foreclosure through its CAP. Refer to Note 6 "Allowance For Credit Losses" in the 2018 Annual Report on Form 10-K for additional information regarding the Company's TDRs.
Further discussion related to TDRs, including their impact on the allowance for loan losses and designation of TDRs in periods subsequent to the modification is included in Note 1 "Summary of Significant Accounting Policies" in the 2018 Annual Report on Form 10-K.
The following tables present the end of period balance for loans modified in a TDR during the periods presented by portfolio segment and class, and the financial impact of those modifications. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. Loans first reported as TDRs during the three months ended March 31, 2019 and 2018 totaled approximately $85 million and $171 million, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
26

 
$
78

 
$
1

Commercial real estate mortgage—owner-occupied
17

 
12

 

Commercial real estate construction—owner-occupied
1

 
2

 

Total commercial
44

 
92

 
1

Commercial investor real estate mortgage
3

 
11

 

Commercial investor real estate construction
2

 

 

Total investor real estate
5

 
11

 

Residential first mortgage
34

 
10

 
1

Home equity
34

 
3

 

Consumer credit card
18

 

 

Indirect—vehicles and other consumer
30

 

 

Total consumer
116

 
13

 
1

 
165

 
$
116

 
$
2

 
Three Months Ended March 31, 2018
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
29

 
$
164

 
$
2

Commercial real estate mortgage—owner-occupied
18

 
14

 

Total commercial
47

 
178

 
2

Commercial investor real estate mortgage
10

 
19

 
1

Total investor real estate
10

 
19

 
1

Residential first mortgage
53

 
8

 
1

Home equity
17

 
1

 

Consumer credit card
14

 

 

Indirect—vehicles and other consumer
13

 

 

Total consumer
97

 
9

 
1

 
154

 
$
206

 
$
4


25



 
 
 
 
TDRs that defaulted during the three months ended March 31, 2019 and 2018, and that were modified in the previous twelve months (i.e., the twelve months prior to default) were immaterial. At March 31, 2019, approximately $18 million of commercial and investor real estate loans modified as TDRs during the three months ended March 31, 2019 were on non-accrual status.
At March 31, 2019, Regions had restructured binding unfunded commitments totaling $7 million where a concession was granted and the borrower was in financial difficulty.
NOTE 4. SERVICING OF FINANCIAL ASSETS
RESIDENTIAL MORTGAGE BANKING ACTIVITIES
The fair value of residential MSRs is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of residential MSRs. The Company compares fair value estimates and assumptions to observable market data where available, and also considers recent market activity and actual portfolio experience.
The table below presents an analysis of residential MSRs under the fair value measurement method:
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions)
Carrying value, beginning of period
$
418

 
$
336

Additions
7

 
8

Increase (decrease) in fair value:
 
 
 
Due to change in valuation inputs or assumptions
(28
)
 
22

Economic amortization associated with borrower repayments (1)
(11
)
 
(10
)
Carrying value, end of period
$
386

 
$
356

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

On March 27, 2019, the Company sold $167 million of affordable housing residential mortgage loans and as part of the transaction kept the rights to service the loans, which resulted in a retained residential MSR of approximately $2 million.

Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to residential MSRs (excluding related derivative instruments) are as follows:
 
March 31
 
2019
 
2018
 
(Dollars in millions)
Unpaid principal balance
$
36,050

 
$
31,641

Weighted-average CPR (%)
10.4
%
 
9.0
%
Estimated impact on fair value of a 10% increase
$
(21
)
 
$
(24
)
Estimated impact on fair value of a 20% increase
$
(38
)
 
$
(43
)
Option-adjusted spread (basis points)
759

 
842

Estimated impact on fair value of a 10% increase
$
(12
)
 
$
(12
)
Estimated impact on fair value of a 20% increase
$
(23
)
 
$
(24
)
Weighted-average coupon interest rate
4.2
%
 
4.1
%
Weighted-average remaining maturity (months)
279

 
280

Weighted-average servicing fee (basis points)
27.1

 
27.3

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 MSRs is calculated without changing any other assumption, while in reality changes in one

26



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 include contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of residential mortgage loans:
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions)
Servicing related fees and other ancillary income
$
26

 
$
23

Residential mortgage loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. Regions may be required to repurchase these loans at par, or make-whole or indemnify the purchasers for losses incurred when representations and warranties are breached.
Regions maintains an immaterial repurchase liability related to residential mortgage loans sold with representations and warranty provisions. This repurchase liability is reported in other liabilities on the consolidated balance sheets and reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income.
COMMERCIAL MORTGAGE BANKING ACTIVITIES
Regions is an approved DUS lender. The DUS program provides liquidity to the multi-family housing market. In connection with the DUS program, Regions services commercial mortgage loans, retains commercial MSRs and intangible assets associated with the DUS license, and assumes a loss share guarantee associated with the loans. See Note 1 "Summary of Significant Accounting Policies" in the 2018 Annual Report on Form 10-K for additional information. Also see Note 12 for additional information related to the guarantee.
As of March 31, 2019 and December 31, 2018, the DUS servicing portfolio was approximately $3.6 billion. The related commercial MSRs were approximately $55 million and $56 million at March 31, 2019 and December 31, 2018, respectively. The estimated fair value of the loss share guarantee was approximately $4 million at both March 31, 2019 and December 31, 2018.

27



NOTE 5. LEASES
LESSEE
Regions' lease portfolio is primarily composed of property leases that are classified as either operating or finance leases with the majority classified as operating leases. Property leases, which primarily include office locations and retail branches, typically have original lease terms ranging from 1 year to 20 years, some of which may also include an option to extend the lease beyond the original lease term. In some circumstances, Regions may also have an option to terminate the lease early with advance notice. Regions includes renewal and termination options within the lease term if deemed reasonably certain of exercise. As most leases do not state an implicit rate, Regions utilizes the incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. Leases with a term of 12 months or less are not recorded on the balance sheet, and Regions continues to recognize lease payments as an expense over the lease term as appropriate. The remainder of the lease portfolio is comprised of equipment leases that have remaining lease terms of 1 year to 3 years.
As of March 31, 2019, assets and liabilities recorded under operating leases for properties is $430 million and $511 million, respectively. The difference between the asset and liability balance is largely the result of lease liabilities that existed prior to the January 1, 2019 adoption of the new accounting guidance for leases. The asset is recorded within other assets and the lease liability is recorded within other liabilities on the consolidated balance sheet.
Lease expense is comprised of the following:
 
Three Months Ended March 31, 2019
 
(In millions)
Operating lease cost
$
21

Other information related to operating leases is as follows:
 
Three Months Ended March 31, 2019
Weighted-average remaining lease term (years)
9.2

Weighted-average discount rate (%)
3.3
%
Future, undiscounted minimum lease payments on operating leases are as follows:
 
March 31, 2019
 
(In millions)
2019
$
70

2020
90

2021
80

2022
71

2023
63

Thereafter
248

Total lease payments
$
622

Less: Computed interest
111

Total present value of lease liabilities
$
511

LESSOR
Regions engages in both direct financing and sales-type leasing. Regions also has portfolios of leveraged and operating leases. These arrangements provide equipment financing for leased assets, such as vehicles and aircraft. At the commencement date, Regions (lessor) enters into an agreement with the customer (lessee) to lease the underlying equipment for a specified lease term. The lease agreements may provide customers the option to terminate the lease by buying the equipment at fair market value at the time of termination or at the end of the lease term. Regions' equipment finance asset management group performs due diligence procedures on the lease residual and overall equipment values as part of the origination process. Regions performs lease residual value reviews on an ongoing basis.. In order to manage the residual value risk inherent in some of its direct financing leases, Regions purchases residual value insurance from an independent third party. The sales-type, direct financing and leveraged leases are recorded within loans on the consolidated balance sheet and operating leases are recorded within other earning assets on the consolidated balance sheet.
The following table presents a summary of Regions' sales-type, direct financing, operating, and leveraged leases:

28



 
As of and For the Three Months Ended March 31, 2019
 
Sales-Type and Direct Financing
 
Operating
 
Leveraged
 
Total
 
(In millions)
Net interest income and other financing income
$
8

 
$
3

 
$
3

 
$
14

 
 
 
 
 
 
 
 
Lease receivable
1,046

 
152

 
185

 
1,383

Unearned income
(245
)
 
(39
)
 
(125
)
 
(409
)
Guaranteed residual
42

 

 

 
42

Unguaranteed residual
136

 
236

 
159

 
531

Total net investment
$
979

 
$
349

 
$
219

 
$
1,547


The following table presents the minimum future payments due from customers for sales-type, direct financing, and operating leases:
 
March 31, 2019
 
Sales-Type and Direct Financing
 
Operating
 
Total
 
(In millions)
2019
$
142

 
$
40

 
$
182

2020
149

 
43

 
192

2021
115

 
30

 
145

2022
94

 
17

 
111

2023
76

 
8

 
84

Thereafter
470

 
14

 
484

 
$
1,046

 
$
152

 
$
1,198

NOTE 6. STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
PREFERRED STOCK
The following table presents a summary of the non-cumulative perpetual preferred stock:    
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
Issuance Date
 
Earliest Redemption Date
 
Dividend Rate
 
Liquidation Amount
 
Carrying Amount
 
Carrying Amount
 
(Dollars in millions)
Series A
11/1/2012
 
12/15/2017
 
6.375
%
 
 
$
500

 
$
387

 
$
387

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

 
433

 
433

 
 
 
 
 
 
 
 
$
1,000

 
$
820

 
$
820

_________
(1) Dividends, if declared, will be paid quarterly at an annual rate equal to (i) for each period beginning prior to September 15, 2024, 6.375%, and (ii) for each period beginning on or after September 15, 2024, three-month LIBOR plus 3.536%.
For each preferred stock issuance listed above, Regions issued depositary shares, each representing a 1/40th ownership interest in a share of the Company's preferred stock, with a liquidation preference of $1,000.00 per share of preferred stock (equivalent to $25.00 per depositary share). Dividends on the preferred stock, if declared, accrue and are payable quarterly in arrears. The preferred stock has no stated maturity and redemption is solely at Regions' option, subject to regulatory approval, in whole, or in part, after the earliest redemption date or in whole, but not in part, within 90 days following a regulatory capital treatment event for the Series A preferred stock or at any time following a regulatory capital treatment event for the Series B preferred stock.
The Board of Directors declared $8 million in cash dividends on both Series A and Series B Preferred Stock during the first three months of 2019 and 2018.
In the event Series A and Series B preferred shares are redeemed at the liquidation amounts, $113 million and $67 million excess of the redemption amount over the carrying amount will be recognized, respectively. Approximately $100 million of Series

29



A preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $13 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders. Approximately $52 million of Series B preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $15 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders.
On April 30, 2019, Regions completed the issuance of $500 million in depositary shares each representing a 1/40th ownership interest in a share of the Company's 5.7% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share ("Series C Preferred Stock"), with a liquidation preference of $1,000.00 per share of Series C Preferred Stock (equivalent to $25.00 per depositary share). Dividends will be paid quarterly at an annual rate equal to (i) for each period beginning prior to August 15, 2029, 5.7%, and (ii) for each period beginning on or after August 15, 2029, three-month LIBOR plus 3.148%.
COMMON STOCK
On June 28, 2018, Regions received no objection from the Federal Reserve to its 2018 capital plan that was submitted as part of the CCAR process, which included the repurchase of common shares and a common stock dividend increase. As part of the Company's capital plan, the Board authorized a $2.031 billion common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2018 through the second quarter of 2019. This plan is inclusive of the capital generated from the sale of Regions Insurance Group, Inc. and related affiliates during the third quarter of 2018 (see Note 3 "Discontinued Operations" of the Annual Report on Form 10-K for the year ended December 31, 2018 for more information). The capital plan included a proposed increase of the quarterly common stock dividend to $0.14 per common share that began in the third quarter of 2018.
Regions declared a $0.14 per share cash dividend on the common stock for the first quarter of 2019 as compared to $0.09 per common share for the first quarter of 2018.
As of March 31, 2019, Regions has repurchased 102.6 million shares of common stock under the 2018 capital plan at a total cost of approximately $1.8 billion. The Company also continued open market share repurchases under its capital plan in the second quarter of 2019. As of May 7, 2019, Regions had repurchased approximately 4.8 million shares of common stock at a total cost of approximately $74.5 million. All of these shares were immediately retired upon repurchase and, therefore, will not be included in treasury stock.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity within the balances in accumulated other comprehensive income (loss), net is shown in the following tables:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
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
$
(27
)
 
$
(397
)
 
$
(63
)
 
$
(477
)
 
$
(964
)
Net change
1

 
245

 
113

 
7

 
366

End of period
$
(26
)
 
$
(152
)
 
$
50

 
$
(470
)
 
$
(598
)
 
Three Months Ended March 31, 2018
 
Unrealized losses on securities transferred to held to maturity
 
Unrealized gains (losses) on securities available for sale
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges
 
Defined benefit pension plans and other post employment benefits
 
Accumulated other comprehensive
income (loss), net of tax
 
(In millions)
Beginning of period
$
(33
)
 
$
(153
)
 
$
(51
)
 
$
(512
)
 
$
(749
)
Net change
2

 
(310
)
 
(100
)
 
6

 
(402
)
End of period
$
(31
)
 
$
(463
)
 
$
(151
)
 
$
(506
)
 
$
(1,151
)


30



The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2018 and 2019:
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Three Months Ended
March 31, 2018
 
 
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:
 
 
 
 
 
 
$
(1
)
 
$
(3
)
 
Net interest income and other financing income
 

 
1

 
Tax (expense) or benefit
 
$
(1
)
 
$
(2
)
 
Net of tax
Unrealized gains and (losses) on available for sale securities:
 
 
 
 
 
 
$
(7
)
 
$

 
Securities gains (losses), net
 
2

 

 
Tax (expense) or benefit
 
$
(5
)
 
$

 
Net of tax
 
 
 
 
 
 
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
(8
)
 
$
11

 
Net interest income and other financing income
 
2

 
(3
)
 
Tax (expense) or benefit
 
$
(6
)
 
$
8

 
Net of tax
 
 
 
 
 
 
Amortization of defined benefit pension plans and other post employment benefits:
 
 
 
 
 
                 Actuarial gains (losses)(2)
$
(9
)
 
$
(9
)
 
Total before tax
 
2

 
2

 
Tax (expense) or benefit
 
$
(7
)
 
$
(7
)
 
Net of tax
 
 
 
 
 
 
Total reclassifications for the period
$
(19
)
 
$
(1
)
 
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 other non-interest expense on the consolidated statements of income (See Note 8 for additional details).

31



NOTE 7. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic earnings per common share and diluted earnings per common share:
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions, except per share amounts)
Numerator:
 
 
 
Income from continuing operations
$
394

 
$
414

Preferred stock dividends
(16
)
 
(16
)
Income from continuing operations available to common shareholders
378

 
398

Income from discontinued operations, net of tax

 

Net income available to common shareholders
$
378

 
$
398

Denominator:
 
 
 
Weighted-average common shares outstanding—basic
1,019

 
1,127

Potential common shares
9

 
14

Weighted-average common shares outstanding—diluted
1,028

 
1,141

Earnings per common share from continuing operations available to common shareholders(1):
 
 
 
Basic
$
0.37

 
$
0.35

Diluted
0.37

 
0.35

Earnings per common share from discontinued operations(1)(2)(3):
 
 
 
Basic
$
0.00

 
$
0.00

Diluted
0.00

 
0.00

Earnings per common share(1):
 
 
 
Basic
$
0.37

 
$
0.35

Diluted
0.37

 
0.35

_________
(1)
Certain per share amounts may not appear to reconcile due to rounding.
(2)
On April 4, 2018, Regions entered into a stock purchase agreement to sell Regions Insurance Group, Inc to BB&T Insurance Holdings, Inc. The transaction closed on July 2, 2018. The transaction generated an after-tax gain of $196 million. On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and Company and related affiliates to Raymond James Financial Inc. The sale closed on April 2, 2012.
(3)
In a period where there is a loss from discontinued operations, basic weighted-average common shares outstanding are used to determine both basic and diluted earnings per share.

The effects from the assumed exercise of 5 million and 6 million stock options, restricted stock units and awards and performance stock units for the three months ended March 31, 2019 and 2018, respectively, were 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.

32



NOTE 8. PENSION AND OTHER POSTRETIREMENT BENEFITS
Regions' defined benefit pension plans cover certain employees as the pension plans are closed to new entrants. The Company also sponsors a SERP, which is a non-qualified pension plan that provides certain senior executive officers defined benefits in relation to their compensation.
Net periodic pension cost (credit) includes the following components:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Qualified Plans
 
Non-qualified Plans
 
Total
 
Three Months Ended March 31
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Service cost
$
8

 
$
9

 
$
1

 
$
1

 
$
9

 
$
10

Interest cost
19

 
18

 
1

 
1

 
20

 
19

Expected return on plan assets
(34
)
 
(37
)
 

 

 
(34
)
 
(37
)
Amortization of actuarial loss
8

 
8

 
1

 
1

 
9

 
9

Net periodic pension cost (credit)
$
1

 
$
(2
)
 
$
3

 
$
3

 
$
4

 
$
1

The service cost component of net periodic pension cost (credit) is recorded in salaries and employee benefits on the consolidated statements of income. Components other than service cost are recorded in other non-interest expense on the consolidated statements of income.
Regions' funding policy for the qualified plans is to contribute annually at least the amount required by IRS minimum funding standards. Regions made no contributions during the first three months of 2019.
Regions also provides other postretirement benefits, such as defined benefit health care plans and life insurance plans, that cover certain retired employees. There was no material impact from other postretirement benefits on the consolidated financial statements for the three months ended March 31, 2019 or 2018.

33



NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The following tables present the notional amount and estimated fair value of derivative instruments on a gross basis as of March 31, 2019 and December 31, 2018.
 
March 31, 2019
 
December 31, 2018
 
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
$
3,731

 
 
 
 
 
$
3,231

 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
9,750

 
 
 
 
 
8,750

 
 
 
 
Interest rate floors (2)
4,750

 
$
106

 
 
 
3,250

 
$
72

 
 
Total derivatives designated as hedging instruments
$
18,231

 
$
106

 
 
 
$
15,231

 
$
72

 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
52,521

 
$
261

 
$
200

 
$
49,737

 
$
193

 
$
237

Interest rate options
7,370

 
25

 
13

 
7,178

 
29

 
20

Interest rate futures and forward commitments
4,182

 
4

 
8

 
7,961

 
4

 
9

Other contracts
7,027

 
31

 
36

 
7,287

 
72

 
74

Total derivatives not designated as hedging instruments
$
71,100

 
$
321

 
$
257

 
$
72,163

 
$
298

 
$
340

Total derivatives
$
89,331

 
$
427

 
$
257

 
$
87,394

 
$
370

 
$
340

 
 
 
 
 
 
 
 
 
 
 
 
Total gross derivative instruments, before netting
 
 
$
427

 
$
257

 
 
 
$
370

 
$
340

Less: Legally enforceable master netting agreements
 
 
90

 
90

 
 
 
108

 
108

Less: Cash collateral received/posted
 
 
131

 
79

 
 
 
135

 
71

Total gross derivative instruments, after netting (3)
 
 
$
206

 
$
88

 
 
 
$
127

 
$
161

_________
(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. There is no fair value presented for contracts that are characterized as settled daily.
(2)
Estimated fair value includes premium and change in fair value of the interest rate floors.
(3)
As of both March 31, 2019 and December 31, 2018, financial instruments posted of $24 million were not offset in 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, 2018, 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. 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 and floor 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 and interest rate floors.
Regions recognized an unrealized after-tax gain of $47 million and $136 million in accumulated other comprehensive income (loss) at March 31, 2019 and 2018, respectively, related to discontinued cash flow hedges of loan instruments, which will be amortized into earnings in conjunction with the recognition of interest payments through 2025. Regions recognized pre-tax income

34



of $5 million and $15 million during the three months ended March 31, 2019 and 2018, respectively related to the amortization of discontinued cash flow hedges of loan instruments.
Regions expects to reclassify into earnings approximately $31 million in pre-tax expense due to the receipt or payment of interest payments on all cash flow hedges within the next twelve months. Included in this amount is $9 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 seven years as of March 31, 2019, and a portion of these hedges are forward starting.
The following tables present the effect of hedging derivative instruments on the consolidated statements of income and the total amounts for the respective line items effected:

 
Three Months Ended March 31, 2019
 
Interest Income
 
Interest Expense
 
Non-interest expense
 
Debt securities-taxable
 
Loans, including fees
 
Deposits
 
Long-term borrowings
 
Other
 
(In millions)
Total amounts presented in the consolidated statements of income
$
165

 
$
981

 
$
108

 
$
102

 
$
224

 
 
 
 
 
 
 
 
 
 
Gains/(losses) on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
   Amounts related to interest settlements on derivatives
$

 
$

 
$

 
$
(6
)
 
$

   Recognized on derivatives
(1
)
 

 

 
33

 

   Recognized on hedged items
1

 

 

 
(33
)
 

Net income (expense) recognized on fair value hedges
$

 
$

 
$

 
$
(6
)
 
$

 
 
 
 
 
 
 
 
 
 
Gains/(losses) on cash flow hedging relationships: (1)
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income (2)
$

 
$
(8
)
 
$

 
$

 
$

Net income (expense) recognized on cash flow hedges
$

 
$
(8
)
 
$

 
$

 
$


 
Three Months Ended March 31, 2018
 
Interest Income
 
Interest Expense
 
Non-interest expense
 
Securities-taxable
 
Loans, including fees
 
Deposits
 
Long-term borrowings
 
Other
 
(In millions)
Total amounts presented in the consolidated statements of income
$
154

 
$
851

 
$
49

 
$
72

 
$
225

 
 
 
 
 
 
 
 
 
 
Gains/(losses) on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
Amounts related to interest settlements on derivatives
$

 
$

 
$

 
$
(1
)
 
$

Recognized on derivatives
3

 

 

 
(32
)
 

Recognized on hedged items
(3
)
 

 

 
32

 

Net income (expense) recognized on fair value hedges
$

 
$

 
$

 
$
(1
)
 
$

 
 
 
 
 
 
 
 
 
 
Gains/(losses) on cash flow hedging relationships: (1)
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income (2)
$

 
$
11

 
$

 
$

 
$

Net income (expense) recognized on cash flow hedges
$

 
$
11

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_____
(1)
See Note 6 for gain or (loss) recognized for cash flow hedges in AOCI.
(2)
Pre-tax


35



The following table presents the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships.
 
March 31, 2019
 
Hedged Items Currently Designated
 
Hedged Items No Longer Designated
 
Carrying Amount of Assets/(Liabilities)
 
Hedge Accounting Basis Adjustment
 
Carrying Amount of Assets/(Liabilities)
 
Hedge Accounting Basis Adjustment
 
(In millions)
Debt securities available for sale
$
86

 
$
1

 
$
653

 
$
4

Long-term borrowings
(3,652
)
 
16

 

 


 
December 31, 2018
 
Hedged Items Currently Designated
 
Hedged Items No Longer Designated
 
Carrying Amount of Assets/(Liabilities)
 
Hedge Accounting Basis Adjustment
 
Carrying Amount of Assets/(Liabilities)
 
Hedge Accounting Basis Adjustment
 
(In millions)
Debt securities available for sale
$
85

 
$

 
$
604

 
$
4

Long-term borrowings
(3,103
)
 
50

 

 


DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
The Company holds a portfolio of interest rate swaps, option contracts, and futures and forward commitments that result from transactions with its commercial customers in which they manage their risks by entering into a derivative with Regions. The Company monitors and manages the net risk in this customer portfolio and enters into separate derivative contracts in order to reduce the overall exposure to pre-defined limits. For both derivatives with its end customers and derivatives Regions enters into to mitigate the risk in this portfolio, the Company is subject to market risk and the risk that the counterparty will default. The contracts in this portfolio are not designated as accounting hedges and are marked-to market through earnings (in capital markets fee income and other) and included in other assets and other liabilities, as appropriate.
Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. At March 31, 2019 and December 31, 2018, Regions had $320 million and $191 million, respectively, in total notional amount of interest rate lock commitments. Regions manages market risk on interest rate lock commitments and mortgage loans held for sale with corresponding forward sale commitments. Residential mortgage loans held for sale are recorded at fair value with changes in fair value recorded in mortgage income. Commercial mortgage loans held for sale are recorded at either the lower of cost or market or at fair value based on management's election. At March 31, 2019 and December 31, 2018, Regions had $539 million and $429 million, respectively, in total notional amounts related to these forward sale commitments. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to residential mortgage loans are included in mortgage income. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to commercial mortgage loans are included in capital markets fee income and other.
Regions has elected to account for residential MSRs at fair value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the effect of changes in the fair value of its residential MSRs in its consolidated statements of income. As of March 31, 2019 and December 31, 2018, the total notional amount related to these contracts was $4.0 billion and $5.7 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 months ended March 31, 2019 and 2018:

36



 
Three Months Ended March 31
Derivatives Not Designated as Hedging Instruments
2019
 
2018
 
(In millions)
Capital markets income:
 
 
 
Interest rate swaps
$
1

 
$
7

Interest rate options
2

 
7

Interest rate futures and forward commitments
2

 
1

Other contracts

 
2

Total capital markets income
5

 
17

Mortgage income:
 
 
 
Interest rate swaps
20

 
(18
)
Interest rate options
3

 
3

Interest rate futures and forward commitments
2

 
(3
)
Total mortgage income
25

 
(18
)
 
$
30

 
$
(1
)
Credit risk, defined as all positive exposures not collateralized with cash or other assets or reserved for, at March 31, 2019 and December 31, 2018, totaled approximately $178 million and $130 million, respectively. These amounts represent the net credit risk on all trading and other derivative positions held by Regions.
CREDIT DERIVATIVES
Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Swap participations, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2019 and 2026. Swap participations, whereby Regions has sold credit protection have maturities between 2019 and 2038. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.
Regions’ maximum potential amount of future payments under these contracts as of March 31, 2019 was approximately $563 million. This scenario would only occur if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at March 31, 2019 and 2018 was immaterial. In transactions where Regions has sold credit protection, recourse to collateral associated with the original swap transaction is available to offset some or all of Regions’ obligation.
Regions has bought credit protection in the form of credit default indices. These indices, which meet the definition of credit derivatives, were entered into in the ordinary course of business to economically hedge credit spread risk in commercial mortgage loans held for sale whereby the fair value option has been elected. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if losses on the underlying index exceed a certain threshold, dependent upon the tranche rating of the capital structure.
CONTINGENT FEATURES
Certain of Regions’ derivative instrument contracts with broker-dealers contain credit-related termination provisions and/or credit-related provisions regarding the posting of collateral, allowing those broker-dealers to terminate the contracts in the event that Regions’ and/or Regions Bank’s credit ratings falls below specified ratings from certain major credit rating agencies. The aggregate fair values of all derivative instruments with any credit-risk-related contingent features that were in a liability position on March 31, 2019 and December 31, 2018, were $50 million and $45 million, respectively, for which Regions had posted collateral of $49 million and $43 million, respectively, in the normal course of business.

37



NOTE 10. 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, 2018 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. Marketable equity securities and debt securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the observability of inputs used in valuing the securities. Such transfers are accounted for as if they occur at the beginning of a reporting period.
The following table presents assets and liabilities measured at estimated fair value on a recurring basis and non-recurring basis as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Estimated Fair Value
 
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Estimated Fair Value
 
(In millions)
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
174

 
$

 
$

 
$
174

 
 
$
280

 
$

 
$

 
$
280

Federal agency securities

 
45

 

 
45

 
 

 
43

 

 
43

Mortgage-backed securities (MBS):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency

 
17,441

 

 
17,441

 
 

 
16,624

 

 
16,624

Residential non-agency

 

 
2

 
2

 
 

 

 
2

 
2

Commercial agency

 
4,177

 

 
4,177

 
 

 
3,835

 

 
3,835

Commercial non-agency

 
730

 

 
730

 
 

 
760

 

 
760

Corporate and other debt securities

 
1,211

 
6

 
1,217

 
 

 
1,182

 
3

 
1,185

Total debt securities available for sale
$
174

 
$
23,604

 
$
8

 
$
23,786

 
 
$
280

 
$
22,444

 
$
5

 
$
22,729

Loans held for sale
$

 
$
284

 
$

 
$
284

 
 
$

 
$
251

 
$

 
$
251

Marketable equity securities
$
348

 
$

 
$

 
$
348

 
 
$
429

 
$

 
$

 
$
429

Residential mortgage servicing rights
$

 
$

 
$
386

 
$
386

 
 
$

 
$

 
$
418

 
$
418

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
261

 
$

 
$
261

 
 
$

 
$
193

 
$

 
$
193

Interest rate options

 
123

 
8

 
131

 
 

 
96

 
5

 
101

Interest rate futures and forward commitments

 
4

 

 
4

 
 

 
4

 

 
4

Other contracts
1

 
30

 

 
31

 
 
2

 
70

 

 
72

Total derivative assets
$
1

 
$
418

 
$
8

 
$
427

 
 
$
2

 
$
363

 
$
5

 
$
370

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
200

 
$

 
$
200

 
 
$

 
$
237

 
$

 
$
237

Interest rate options

 
13

 

 
13

 
 

 
20

 

 
20

Interest rate futures and forward commitments

 
8

 

 
8

 
 

 
9

 

 
9

Other contracts
1

 
31

 
4

 
36

 
 
2

 
69

 
3

 
74

Total derivative liabilities
$
1

 
$
252

 
$
4

 
$
257

 
 
$
2

 
$
335

 
$
3

 
$
340

Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$
14

 
$
14

 
 
$

 
$

 
$
10

 
$
10

Foreclosed property and other real estate

 
19

 
7

 
26

 
 

 
16

 
3

 
19

_________
(1)
All following disclosures related to Level 3 recurring and non-recurring assets do not include those deemed to be immaterial.
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 ALCO in a holistic approach to managing price fluctuation risks.

38



The following tables illustrate rollforwards for all material assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 and 2018, respectively. The net changes in realized gains (losses) included in earnings related to Level 3 assets and liabilities held at March 31, 2019 and 2018 are not material.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Opening
Balance
January 1,
2019
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance March 31, 2019
 
 
Included
in
Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
418

 
(39
)
(1)  
7

 

 

 

 

 

 

 
$
386

 
Three Months Ended March 31, 2018
 
Opening
Balance
January 1,
2018
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance March 31, 2018
 
 
Included
in Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
336

 
12

(1)  

 
8

 

 

 

 

 

 
$
356

_________
(1) Included in mortgage income.

The following table presents the fair value adjustments related to non-recurring fair value measurements:
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions)
Loans held for sale
$
(2
)
 
$
(3
)
Foreclosed property and other real estate
(8
)
 
(5
)
The following tables present detailed information regarding material assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2019, and December 31, 2018. The tables include the valuation techniques and the significant unobservable inputs utilized. The range of each significant unobservable input as well as the weighted-average within the range utilized at March 31, 2019, and December 31, 2018, are included. Following the tables are descriptions of the valuation techniques and the sensitivity of the techniques to changes in the significant unobservable inputs.
 
March 31, 2019
 
Level 3
Estimated Fair Value at
March 31, 2019
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Residential mortgage servicing rights(1)
$386
 
Discounted cash flow
 
Weighted-average CPR (%)
 
4.6% - 45.5% (10.4%)
 
 
 
 
 
OAS (%)
 
5.7% - 15.0% (7.6%)

39



_________
(1) See Note 4 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.

 
December 31, 2018
 
Level 3
Estimated Fair Value at
December 31, 2018
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Residential mortgage servicing rights(1)
$418
 
Discounted cash flow
 
Weighted-average CPR (%)
 
4.4% - 42.6% (9.0%)
 
 
 
 
 
OAS (%)
 
5.7% - 15.0% (7.6%)
_________
(1) See Note 7 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2018 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
Residential mortgage servicing rights
The significant unobservable inputs used in the fair value measurement of residential MSRs are OAS and CPR. This valuation requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk-adjusted rate. Additionally, the impact of prepayments and changes in the OAS are based on a variety of underlying inputs including 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 4. See Note 4 for these amounts and additional disclosures related to assumptions used in the fair value calculation for MSRs.
FAIR VALUE OPTION
Regions has elected the fair value option for all FNMA and FHLMC eligible residential mortgage loans and certain commercial mortgage loans originated with the intent to sell. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of residential mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value:
 
March 31, 2019
 
December 31, 2018
 
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
$
284

 
$
274

 
$
10

 
$
251

 
$
242

 
$
9

Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of income. The following table details net gains and losses resulting from changes in fair value of these loans, which were recorded in mortgage income in the consolidated statements of income during the three months ended March 31, 2019 and 2018. 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.

40



 
Net gains (losses) resulting from changes in fair value
 
Three Months Ended March 31
 
2019
 
2018
 
(In millions)
Mortgage loans held for sale, at fair value
$

 
$
(3
)
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of March 31, 2019 are as follows:
 
March 31, 2019
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,807

 
$
3,807

 
$
3,807

 
$

 
$

Debt securities held to maturity
1,451

 
1,454

 

 
1,454

 

Debt securities available for sale
23,786

 
23,786

 
174

 
23,604

 
8

Loans held for sale
318

 
318

 

 
302

 
16

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
82,379

 
81,608

 

 

 
81,608

Other earning assets(4)
1,268

 
1,268

 
348

 
920

 

Derivative assets
427

 
427

 
1

 
418

 
8

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
257

 
257

 
1

 
252

 
4

Deposits
95,720

 
95,772

 

 
95,772

 

Short-term borrowings
1,600

 
1,600

 

 
1,600

 

Long-term borrowings
12,957

 
13,328

 

 
12,400

 
928

Loan commitments and letters of credit
73

 
488

 

 

 
488

_________
(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 estimated changes in interest rates, market liquidity and credit spreads in the periods they are deemed to have occurred.
(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 on the loan portfolio's net carrying amount at March 31, 2019 was $771 million or 0.9 percent.
(3)
Excluded from this table is the capital lease carrying amount of $1.2 billion at March 31, 2019.
(4)
Excluded from this table is the operating lease carrying amount of $349 million at March 31, 2019.


41



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, 2018 are as follows:
 
December 31, 2018
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,538

 
$
3,538

 
$
3,538

 
$

 
$

Debt securities held to maturity
1,482

 
1,460

 

 
1,460

 

Debt securities available for sale
22,729

 
22,729

 
280

 
22,444

 
5

Loans held for sale
304

 
304

 

 
287

 
17

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
81,054

 
79,386

 

 

 
79,386

Other earning assets(4)
1,350

 
1,350

 
429

 
921

 

Derivative assets
370

 
370

 
2

 
363

 
5

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
340

 
340

 
2

 
335

 
3

Deposits
94,491

 
94,531

 

 
94,531

 

Short-term borrowings
1,600

 
1,600

 

 
1,600

 

Long-term borrowings
12,424

 
12,610

 

 
12,408

 
202

Loan commitments and letters of credit
79

 
435

 

 

 
435

_________
(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 estimated changes in interest rates, market liquidity and credit spreads in the periods they are deemed to have occurred.
(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 on the loan portfolio's net carrying amount at December 31, 2018 was $1.7 billion or 2.1 percent.
(3)
Excluded from this table is the capital lease carrying amount of $1.1 billion at December 31, 2018.
(4)
Excluded from this table is the operating lease carrying amount of $369 million at December 31, 2018.

NOTE 11. BUSINESS SEGMENT INFORMATION
Each of Regions’ reportable segments is a strategic business unit that serves specific needs of Regions’ customers based on the products and services provided. The segments are based on the manner in which management views the financial performance of the business. The Company has three reportable segments: Corporate Bank, Consumer Bank, and Wealth Management, with the remainder split between Discontinued Operations and Other. Additional information about the Company's reportable segments is included in Regions' Annual Report on Form 10-K for the year ended December 31, 2018.
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.
Discontinued operations includes all brokerage and investment activities associated with the sale of Morgan Keegan which closed on April 2, 2012, as well as the sale of Regions Insurance Group, Inc. and related affiliates, which closed on July 2, 2018. See Note 3 "Discontinued Operations" to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018 for further discussion.
The following tables present financial information for each reportable segment for the period indicated.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

42



 
Three Months Ended March 31, 2019
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income and other financing income (loss)
$
358

 
$
576

 
$
47

 
$
(33
)
 
$
948

 
$

 
$
948

Provision (credit) for loan losses
43

 
83

 
4

 
(39
)
 
91

 

 
91

Non-interest income
131

 
281

 
78

 
12

 
502

 

 
502

Non-interest expense
232

 
514

 
88

 
26

 
860

 

 
860

Income (loss) before income taxes
214

 
260

 
33

 
(8
)
 
499

 

 
499

Income tax expense (benefit)
53

 
65

 
8

 
(21
)
 
105

 

 
105

Net income (loss)
$
161

 
$
195

 
$
25

 
$
13

 
$
394

 
$

 
$
394

Average assets
$
53,851

 
$
35,401

 
$
2,203

 
$
34,088

 
$
125,543

 
$

 
$
125,543

 
Three Months Ended March 31, 2018
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
(In millions)
Net interest income and other financing income (loss)
$
337

 
$
531

 
$
49

 
$
(8
)
 
$
909

 
$

 
$
909

Provision (credit) for loan losses
46

 
77

 
4

 
(137
)
 
(10
)
 

 
(10
)
Non-interest income
144

 
277

 
77

 
9

 
507

 
34

 
541

Non-interest expense
229

 
517

 
90

 
48

 
884

 
34

 
918

Income (loss) before income taxes
206

 
214

 
32

 
90

 
542

 

 
542

Income tax expense (benefit)
52

 
54

 
8

 
14

 
128

 

 
128

Net income (loss)
$
154

 
$
160

 
$
24

 
$
76

 
$
414

 
$

 
$
414

Average assets
$
51,037

 
$
34,951

 
$
2,359

 
$
34,977

 
$
123,324

 
$
170

 
$
123,494

NOTE 12. COMMITMENTS, CONTINGENCIES AND GUARANTEES
COMMERCIAL COMMITMENTS
Regions issues off-balance sheet financial instruments in connection with lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to Regions’ normal credit approval policies and procedures. Regions measures inherent risk associated with these instruments by recording a reserve for unfunded commitments based on an assessment of the likelihood that the guarantee will be funded and the creditworthiness of the customer or counterparty. Collateral is obtained based on management’s assessment of the creditworthiness of the customer.
Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table:
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Unused commitments to extend credit
$
51,608

 
$
51,406

Standby letters of credit
1,396

 
1,428

Commercial letters of credit
124

 
44

Liabilities associated with standby letters of credit
24

 
28

Assets associated with standby letters of credit
25

 
29

Reserve for unfunded credit commitments
50

 
51

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

43



card and other revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
Standby letters of credit—Standby letters of credit are also issued to customers, which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments Regions could be required to make and represents Regions’ maximum credit risk.
Commercial letters of credit—Commercial letters of credit are issued to facilitate foreign or domestic trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.
LEGAL CONTINGENCIES
Regions and its subsidiaries are subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel. Regions establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. Some of Regions' exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies however, Regions does not take into account the availability of insurance coverage. To the extent that Regions has an insurance recovery, the proceeds are recorded in the period the recovery is received.
In addition, 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.
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 of up to approximately $20 million as of March 31, 2019, with it also being reasonably possible that Regions could incur no losses in excess of amounts accrued. However, as available information changes, the matters for which Regions is able to estimate, as well as the estimates themselves will be adjusted accordingly. The reasonably possible estimate includes legal contingencies that are subject to the indemnification agreement with Raymond James.
Assessments of litigation and claims exposure are difficult because they involve inherently unpredictable factors including, but not limited to, the following: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below, and the aggregated estimated amount discussed above may not include an estimate for every matter disclosed below.
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 the one described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on Regions' consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in our business practices, and could result in additional expenses and collateral costs, including reputational damage.    
Regions is cooperating with an investigation by the United States Attorney’s Office for the Eastern District of New York pertaining to Regions' banking relationship with a former customer and accounts maintained by related entities and individuals affiliated with the customer who may be involved in criminal activity, as well as related aspects of Regions' Anti-Money Laundering and Bank Secrecy Act compliance program.
While the final outcome of litigation and claims exposures or of any inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not have a material effect on

44



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 3 in the Annual Report on Form 10-K for the year ended December 31, 2018, 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. As of March 31, 2019, the carrying value and fair value of the indemnification obligation were immaterial.
FANNIE MAE DUS LOSS SHARE GUARANTEE
Regions is a DUS lender. The DUS program provides liquidity to the multi-family housing market. Regions services loans sold to Fannie Mae and is required to provide a loss share guarantee equal to one-third of the majority of its DUS servicing portfolio. At both March 31, 2019 and December 31, 2018, the Company's DUS servicing portfolio totaled approximately $3.6 billion. Regions' maximum quantifiable contingent liability related to its loss share guarantee was approximately $1.2 billion at both March 31, 2019 and December 31, 2018. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. Therefore, the maximum quantifiable contingent liability is not representative of the actual loss the Company would be expected to incur. The estimated fair value of the associated loss share guarantee recorded as a liability on the Company's consolidated balance sheets was approximately $4 million at both March 31, 2019 and December 31, 2018. Refer to Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018, for additional information.

45



NOTE 13. REVENUE RECOGNITION
The Company records revenue when control of the promised products or services is transferred to the customer, in an amount that reflects the consideration Regions expects to be entitled to receive in exchange for those products or services. 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, 2018, for descriptions of the accounting and reporting policies related to revenue recognition.
The following tables present total non-interest income disaggregated by major product category for each reportable segment for the period indicated.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Corporate Bank
 
Consumer
Bank
 
Wealth
Management
 
Other Segment Revenue
 
Other(1)
 
Continuing
Operations
 
Discontinued
Operations
 
(In millions)
Service charges on deposit accounts
$
39

 
$
133

 
$

 
$
1

 
$
2

 
$
175

 
$

Card and ATM fees
13

 
99

 

 
1

 
(4
)
 
109

 

Investment management and trust fee income

 

 
57

 

 

 
57

 

Capital markets income
21

 

 

 

 
21

 
42

 

Mortgage income

 

 

 

 
27

 
27

 

Investment services fee income

 

 
19

 

 

 
19

 

Commercial credit fee income

 

 

 

 
18

 
18

 

Bank-owned life insurance

 

 

 

 
23

 
23

 

Securities gains (losses), net

 

 

 

 
(7
)
 
(7
)
 

Market value adjustments on employee benefit assets - defined benefit

 

 

 

 
5

 
5

 

Market value adjustments on employee benefit assets - other

 

 

 

 
(1
)
 
(1
)
 

Other miscellaneous income
6

 
20

 
2

 
(6
)
 
13

 
35

 

 
$
79

 
$
252

 
$
78

 
$
(4
)
 
$
97

 
$
502

 
$

 
Three Months Ended March 31, 2018
 
Corporate Bank
 
Consumer
Bank
 
Wealth
Management
 
Other Segment Revenue
 
Other(1)
 
Continuing
Operations
 
Discontinued
Operations
 
(In millions)
Service charges on deposit accounts
$
37

 
$
131

 
$
1

 
$
1

 
$
1

 
$
171

 
$

Card and ATM fees
12

 
96

 

 

 
(4
)
 
104

 

Investment management and trust fee income

 

 
58

 

 

 
58

 

Capital markets income
18

 

 

 

 
32

 
50

 

Mortgage income

 

 

 

 
38

 
38

 

Investment services fee income

 

 
17

 

 

 
17

 

Commercial credit fee income

 

 

 

 
17

 
17

 

Bank-owned life insurance

 

 

 

 
17

 
17

 

Securities gains (losses), net

 

 

 

 

 

 

Market value adjustments on employee benefit assets - defined benefit

 

 

 

 
(1
)
 
(1
)
 

Market value adjustments on employee benefit assets - other

 

 

 

 

 

 

Insurance commissions and fees

 

 

 

 

 

 
34

Other miscellaneous income
5

 
9

 
1

 

 
21

 
36

 

 
$
72

 
$
236

 
$
77

 
$
1

 
$
121

 
$
507

 
$
34


46



________
(1)
This revenue is not impacted by the accounting guidance related to revenue from contracts with customers and continues to be recognized when earned in accordance with the Company's existing revenue recognition policy.
Regions elected the practical expedient related to contract costs and will continue to expense sales commissions and any related contract costs when incurred because the amortization period would have been one year or less.
Regions also elected the practical expedient related to remaining performance obligations and therefore did not disclose the value of unsatisfied performance obligations for 1) contracts with an original expected length of one year or less and 2) contracts for which revenue is recognized at the amount to which Regions has the right to invoice for services performed.

47



NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS    
Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Adopted (or partially adopted) in 2019
ASU 2016-02, Leases

ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842

ASU 2018-10, Narrow Amendments to Topic 842

ASU 2018-11, Targeted Improvements to Topic 842

ASU 2018-20, Narrow-Scope Improvements for Lessors

ASU 2019-01, Codification Improvements
This ASU creates ASC Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year. There are not significant changes to lessor accounting; however, there were certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures.
January 1, 2019
Regions adopted the standard on January 1, 2019 using the optional transition method, which allowed for a modified retrospective method of adoption with an immaterial cumulative effect adjustment to retained earnings without restating comparable periods. Regions elected the relief package of practical expedients for which there is no requirement to reassess existence of leases, their classification, and initial direct costs. Regions also applied the exemption for short-term leases with a term of less than one year, whereby Regions does not recognize a lease liability or right-of-use asset on the balance sheet but instead recognizes lease payments as an expense over the lease term as appropriate. For property leases, Regions did not elect the practical expedient to combine lease and non-lease components.

The standard resulted in recognition of right-of-use assets and lease liabilities for operating leases, while accounting for finance leases remains largely unchanged. Adoption of the standard resulted in the recognition of additional right-of-use assets and lease liabilities for operating leases of approximately $451 million as of January 1, 2019.

Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most leases do not state an implicit rate, Regions utilizes the incremental borrowing rate based on information available at the commencement date to determine the present value of the lease payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expenses are recognized on a straight-line basis over the lease term.
ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs
This ASU amends Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Current guidance generally requires entities to amortize a premium as a yield adjustment over the contractual life of the instrument. Shortening the amortization period is generally expected to more closely align the recognition of interest income with expectations incorporated into the pricing of the underlying securities. The amendments do not affect the accounting treatment of discounts. This ASU should be adopted on a modified retrospective basis.
January 1, 2019

The adoption of this guidance did not have a material impact.
ASU 2018-07,
Compensation - Stock Compensation
This ASU amends and expands the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services for non-employees. Under this guidance, the accounting for share-based payments to non-employees and employees will be substantially aligned. The measurement of equity-classified non-employee awards will now be fixed at the grant date.
January 1, 2019


The adoption of this guidance did not have a material impact.
ASU 2018-09, Codification Improvements
The FASB issued this ASU to clarify, improve, and correct errors in the Codification. The ASU covers nine amendments, which affect a wide variety of Topics including business combinations, debt, derivatives and hedging, and defined contribution pension plans. Some amendments do not require transition guidance and are effective upon issuance, while others will be applicable for Regions starting in 2019. However, all amendments are expected to have an immaterial impact to Regions.
January 1, 2019

The adoption of this guidance did not have a material impact.
ASU 2018-16, Derivatives and Hedging
This ASU amends Topic 815, Derivatives and Hedging, to expand the list of U.S. benchmark interest rates permitted in applying hedge accounting. The amendments permit all entities that elect to apply hedge accounting to benchmark interest rate hedges under ASC 815, Derivatives and Hedging, to use the OIS rate based on the SOFR as a U.S. benchmark interest rate in addition to the four eligible U.S. benchmark interest rates. The amendments should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.
January 1, 2019
The adoption of this guidance did not have a material impact.

48



Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Not Yet Adopted
ASU 2016-13, Measurement of Credit Losses on Financial Instruments

ASU 2018-19 Codification Improvements to Topic 326
This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and debt securities. Additional quantitative and qualitative disclosures are required upon adoption.

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

The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.
January 1, 2020
Regions’ cross-functional implementation team, which is co-led by Finance and Risk Management, has developed a project plan that results in running a CECL parallel production during 2019 and the adoption of the standard in the first quarter of 2020. Key project implementation activities for 2019 include finalization of models, the qualitative framework, and the production process; completion of documentation, policies and disclosures; development of supporting analytics; and process and control testing.

The project implementation plan also establishes a parallel processing timeline which began with a limited parallel run in the first quarter of 2019. The first quarter 2019 limited parallel run included running, validating and reconciling all models. However, the qualitative framework and certain internal controls have not been fully developed and therefore were not included in the first quarter parallel run. Parallel runs will be enhanced throughout the year to include the qualitative framework, supporting analytics, end-to-end governance, internal controls and disclosures.
 
Regions provides updates to senior management and to the Audit Committee and Risk Committee of the Board of Directors. These communications provide an update on the status of the implementation as discussed above.
 
Adoption of the standard may result in an overall material increase in the allowance for credit losses given the change from accounting for losses inherent in the loan portfolio to accounting for losses over the remaining contractual life of the portfolio. However, the impact at adoption will be influenced by the portfolios’ composition and quality at the adoption date as well as economic conditions and forecasts at that time. Based on initial modeling, the consumer loan portfolios are expected to experience an increase due to longer-dated loans in products such as residential first mortgages and home equity lending products. Additionally, there could be increases or decreases in the allowance in certain other loan portfolios at adoption.
 
Regions expects no material allowance on held to maturity securities because most of this portfolio consists of agency-backed securities that inherently have an immaterial risk of loss. Additionally, Regions expects no material impact to available for sale securities.
ASU 2017-04, Simplifying the Test for Goodwill Impairment
This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.
January 1, 2020

Early adoption is permitted.
Regions believes the adoption of this guidance will not have a material impact. Regions does not plan to early adopt.
ASU 2018-15, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
This ASU amends Topic 350-40, Intangibles-Goodwill and Other-Internal-Use Software, regarding a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor, i.e. a service contract. Customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The amendments also prescribe the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and require additional quantitative and qualitative disclosures.
January 1, 2020

Early adoption is permitted.
Regions believes the adoption of this guidance will not have a material impact. Regions does not plan to early adopt.
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
This ASU amends Topic 810, Consolidation, guidance on how all reporting entities evaluate indirect interests held through related parties in common control arrangements when determining whether fees paid to decision makers and service providers are variable interests.
January 1, 2020

Early adoption is permitted.

Regions believes the adoption of this guidance will not have a material impact. Regions does not plan to early adopt.


49



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 filed with the SEC and updates Regions’ Annual Report on Form 10-K for the year ended December 31, 2018, 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. See Note 1 "Basis of Presentation" and Note 14 "Recent Accounting Pronouncements" to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three months ended March 31, 2019 compared to the three months ended March 31, 2018 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of March 31, 2019 compared to December 31, 2018.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See pages 5 through 7 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, that operates in the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of asset management, wealth management, securities brokerage, trust services, merger and acquisition advisory services and other specialty financing.
Regions conducts its banking operations through Regions Bank, an Alabama state-chartered commercial bank that is a member of the Federal Reserve System. At March 31, 2019, Regions operated 1,456 total branch outlets. Regions carries out its strategies and derives its profitability from three reportable business segments: Corporate Bank, Consumer Bank, and Wealth Management, with the remainder split between Discontinued Operations and Other. See Note 11 “Business Segment Information” to the consolidated financial statements for more information regarding Regions’ segment reporting structure.
On April 4, 2018, Regions entered into a stock purchase agreement to sell Regions Insurance Group, Inc. and related affiliates to BB&T Insurance Holdings, Inc. The transaction closed on July 2, 2018. The gain associated with the transaction amounted to $281 million gain ($196 million after tax). On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and related affiliates to Raymond James. The sale closed on April 2, 2012. Regions Investment Management, Inc. and Regions Trust were not included in the sale; they are included in the Wealth Management segment. See Note 3 “Discontinued Operations” to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018 for further discussion.
Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and other financing income as well as non-interest income sources. Net interest income and other financing income is primarily the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions’ net interest income and other financing income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Net interest income and other financing income also includes rental income and depreciation expense associated with operating leases for which Regions is the lessor. Non-interest income includes fees from service charges on deposit accounts, card and ATM fees, mortgage servicing and secondary marketing, investment management and trust activities, capital markets and other customer services which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy, professional, legal and regulatory expenses, FDIC insurance assessments, and other operating expenses, as well as income taxes.
Economic conditions, competition, new legislation and related rules impacting regulation of the financial services industry and the monetary and fiscal policies of the Federal government significantly affect most, if not all, financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions’ market areas.
Regions’ business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in convenient locations.
FIRST QUARTER OVERVIEW
Regions reported net income available to common shareholders of $378 million, or $0.37 per diluted share, in the first quarter of 2019 compared to $398 million, or $0.35 per diluted share, in the first quarter of 2018. The primary driver of the decrease in net income from the prior year period was the increase in the provision for loan losses partially offset by higher net interest income and other financing income and lower non-interest expense.

50



For the first quarter of 2019, net interest income and other financing income (taxable-equivalent basis) totaled $961 million million, up $39 million compared to the first quarter of 2018. The net interest margin (taxable-equivalent basis) was 3.53 percent for the first quarter of 2019 and 3.46 percent in the first quarter of 2018. Net interest margin and net interest income and other financing income benefited primarily from higher interest rates partially offset by higher funding costs. Net interest income and other financing income also benefited from higher average loan balances.
The provision (credit) for loan losses totaled $91 million in the first quarter of 2019 compared to $(10) million during the first quarter of 2018. Refer to the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail.
Net charge-offs totaled $78 million, or an annualized 0.38 percent of average loans, in the first quarter of 2019, compared to $84 million, or an annualized 0.42 percent for the first quarter of 2018. See Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional information.
The allowance for loan losses at March 31, 2019 and December 31, 2018, was 1.01 percent of total loans, net of unearned income. Total non-performing loans increased to 0.62 percent of total loans, net of unearned income, at March 31, 2019, compared to 0.60 percent at December 31, 2018.
Non-interest income from continuing operations was $502 million for the first quarter of 2019 compared to $507 million for the first quarter of 2018. The decrease was primarily driven by declines in capital markets income and mortgage income, combined with net securities losses partially offset by increases in service charges on deposit accounts, card and ATM fees, and bank-owned life insurance. See Table 20 "Non-Interest Income from Continuing Operations" for more detail.
Total non-interest expense from continuing operations was $860 million in the first quarter of 2019, a $24 million decrease from the first quarter of 2018. The decrease was primarily driven by lower salaries and employee benefits expense, FDIC insurance assessments and professional fees partially offset by an increase in other non-interest expense. See Table 21 "Non-Interest Expense from Continuing Operations" for more detail.
Income tax expense from continuing operations for the three months ended March 31, 2019 was $105 million compared to $128 million for the same period in 2018. See "Income Taxes" toward the end of the Management’s Discussion and Analysis section of this report for more detail.
Near-term and Long-term Expectations
2019 Expectations
 
Three-Year Expectations (2019-2021)
Category
 
Expectation
 
Category
 
Expectation
Full year adjusted average loan growth
 
Low to mid-single digits
 
2021 adjusted return on average tangible common equity
 
18%-20%
Full year adjusted total revenue growth
 
2%-4%
 
2021 adjusted efficiency ratio
 
<55%
Full year adjusted non-interest expense
 
Relatively stable
 
Annual net charge-offs / average loans
 
40-65 basis points
Net charge-offs / average loans
 
40-50 basis points
 
 
 
 
Effective tax rate
 
20%-22%
 
Expect to generate positive operating leverage each year.
The reconciliation with respect to these forward-looking non-GAAP measures is expected to be consistent with the actual non-GAAP reconciliations within Management's Discussion and Analysis of this Form 10-Q. For more information related to the Company's near-term and long-term expectations, including additional guidance within the ranges disclosed above, refer to the related sub-sections discussed in more detail within Management's Discussion and Analysis of this Form 10-Q.
BALANCE SHEET ANALYSIS
The following sections provide expanded discussion of significant changes in certain line items in asset, liability, and equity categories.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased approximately $269 million from year-end 2018 to March 31, 2019, due primarily to an increase in cash on deposit with the FRB, as the result of normal day-to-day operating variations.

51



DEBT SECURITIES
The following table details the carrying values of debt securities, including both available for sale and held to maturity:
Table 1— Debt Securities
 
March 31, 2019
 
December 31, 2018
 
(In millions)
U.S. Treasury securities
$
174

 
$
280

Federal agency securities
45

 
43

Mortgage-backed securities:
 
 
 
Residential agency
18,263

 
17,475

Residential non-agency
2

 
2

Commercial agency
4,806

 
4,466

Commercial non-agency
730

 
760

Corporate and other debt securities
1,217

 
1,185

 
$
25,237

 
$
24,211

Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. See Note 2 "Debt Securities" to the consolidated financial statements for additional information.
Debt 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 $318 million at March 31, 2019, consisting of $288 million of residential real estate mortgage loans, $17 million of commercial mortgage and other loans, and $13 million of non-performing loans. At December 31, 2018, loans held for sale totaled $304 million, consisting of $256 million of residential real estate mortgage loans, $38 million of commercial mortgage and other loans, and $10 million of non-performing loans. The levels of residential real estate and commercial mortgage loans held for sale that are part of the Company's mortgage originations to be sold fluctuate depending on the timing of origination and sale to third parties.
LOANS
Loans, net of unearned income, represented approximately 74 percent of Regions’ interest-earning assets at March 31, 2019. The following table presents the distribution of Regions’ loan portfolio by portfolio segment and class, net of unearned income:
Table 2—Loan Portfolio
 
March 31, 2019
 
December 31, 2018
 
(In millions, net of unearned income)
Commercial and industrial
$
40,985

 
$
39,282

Commercial real estate mortgage—owner-occupied
5,522

 
5,549

Commercial real estate construction—owner-occupied
434

 
384

Total commercial
46,941

 
45,215

Commercial investor real estate mortgage
4,715

 
4,650

Commercial investor real estate construction
1,871

 
1,786

Total investor real estate
6,586

 
6,436

Residential first mortgage
14,113

 
14,276

Home equity
9,014

 
9,257

Indirect—vehicles
2,759

 
3,053

Indirect—other consumer
2,547

 
2,349

Consumer credit card
1,274

 
1,345

Other consumer
1,196

 
1,221

Total consumer
30,903

 
31,501

 
$
84,430

 
$
83,152


52



PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2018 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 3 “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 $1.7 billion since year-end 2018 driven primarily by an increase in line utilization, the expansion of existing customer relationships and addition of new relationships. The Company experienced increases in the corporate, middle market and real estate portfolios aided by growth within specialized lending groups, diversified lending groups and real estate investment trust portfolios. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flows generated by business operations. These loans declined $27 million from year-end 2018, reflecting a slowing pace of decline. Owner-occupied commercial real estate construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower.
Over half of the Company’s total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry.
The following tables provide detail of Regions' commercial lending balances in selected industries.


53



Table 3—Selected Industry Exposure
 
March 31, 2019
 
Loans
 
Unfunded Commitments
 
Total Exposure
 
(In millions)
Administrative, support, waste and repair
$
1,382

 
$
886

 
$
2,268

Agriculture
502

 
278

 
780

Educational services
2,594

 
594

 
3,188

Energy
2,292

 
2,343

 
4,635

Financial services
4,174

 
3,707

 
7,881

Government and public sector
2,854

 
522

 
3,376

Healthcare
3,880

 
1,770

 
5,650

Information
1,582

 
858

 
2,440

Manufacturing
4,899

 
3,733

 
8,632

Professional, scientific and technical services
1,832

 
1,427

 
3,259

Real estate
7,002

 
6,632

 
13,634

Religious, leisure, personal and non-profit services
1,670

 
775

 
2,445

Restaurant, accommodation and lodging
2,066

 
545

 
2,611

Retail trade
2,550

 
2,011

 
4,561

Transportation and warehousing
1,910

 
1,208

 
3,118

Utilities
1,837

 
2,257

 
4,094

Wholesale goods
3,561

 
2,395

 
5,956

Other (1)
354

 
2,697

 
3,051

Total commercial
$
46,941

 
$
34,638

 
$
81,579

 
December 31, 2018 (2)
 
Loans
 
Unfunded Commitments
 
Total Exposure
 
(In millions)
Administrative, support, waste and repair
$
1,353

 
$
882

 
$
2,235

Agriculture
550

 
235

 
785

Educational services
2,500

 
606

 
3,106

Energy
2,275

 
2,408

 
4,683

Financial services
4,063

 
3,670

 
7,733

Government and public sector
2,826

 
506

 
3,332

Healthcare
3,854

 
1,869

 
5,723

Information
1,446

 
1,002

 
2,448

Manufacturing
4,543

 
4,061

 
8,604

Professional, scientific and technical services
1,730

 
1,434

 
3,164

Real estate
6,696

 
6,567

 
13,263

Religious, leisure, personal and non-profit services
1,735

 
766

 
2,501

Restaurant, accommodation and lodging
2,071

 
590

 
2,661

Retail trade
2,362

 
2,267

 
4,629

Transportation and warehousing
1,869

 
974

 
2,843

Utilities
1,729

 
2,287

 
4,016

Wholesale goods
3,356

 
2,549

 
5,905

Other (1)
257

 
2,458

 
2,715

Total commercial
$
45,215

 
$
35,131

 
$
80,346

________
(1)
"Other" contains balances related to non-classifiable and invalid business industry codes offset by payments in process and fee accounts that are not available at the loan level.
(2)
As customers' businesses evolve (e.g. up or down the vertical manufacturing chain), Regions may need to change the assigned business industry code used to define the customer relationship. When these changes occur, Regions does not recast the customer history for prior periods into the new classification because the business industry code used in the prior period was deemed appropriate. As a result, comparable period changes may be impacted.

54



Investor Real Estate
Loans for real estate development are repaid through cash flows related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Total investor real estate loans increased $150 million in comparison to 2018 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.
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 decreased $163 million in comparison to 2018 year-end balances primarily due to the first quarter 2019 sale of $167 million of affordable housing residential mortgage loans, which generated an $8 million pre-tax gain. Approximately $469 million in new loan originations were retained on the balance sheet through the first three months of 2019.
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 $9.0 billion at March 31, 2019 as compared to $9.3 billion at December 31, 2018. Substantially all of this portfolio was originated through Regions’ branch network.
The following table presents information regarding the future principal payment reset dates for the Company's home equity lines of credit as of March 31, 2019. The balances presented are based on maturity date for lines with a balloon payment and draw period expiration date for lines that convert to a repayment period.
Table 4—Home Equity Lines of Credit - Future Principal Payment Resets
 
First Lien
 
% of Total
 
Second Lien
 
% of Total
 
Total
 
(Dollars in millions)
2019
$
45

 
0.79
%
 
$
40

 
0.70
%
 
$
85

2020
105

 
1.84

 
74

 
1.3

 
179

2021
122

 
2.13

 
106

 
1.86

 
228

2022
134

 
2.35

 
125

 
2.19

 
259

2023
165

 
2.90

 
151

 
2.63

 
316

2024-2028
2,314

 
40.56

 
2,189

 
38.37

 
4,503

2029-2033
75

 
1.32

 
58

 
1.02

 
133

Thereafter
1

 
0.01

 
1

 
0.03

 
2

Total
$
2,961

 
51.90
%
 
$
2,744

 
48.10
%
 
$
5,705

Of the $9.0 billion home equity portfolio at March 31, 2019, approximately $5.7 billion were home equity lines of credit and $3.3 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in December 2016, new home equity lines of credit have a 10-year draw period and a 20-year repayment term. During the 10-year draw period customers do not have an interest-only payment option, except on a very limited basis. From May 2009 to December 2016, home equity lines of credit had a 10-year draw period and a 10-year repayment term. Prior to May 2009, home equity lines of credit had a 20-year repayment 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.
Other Consumer Credit Quality Data
The Company calculates an estimate of the current value of property secured as collateral for both residential first mortgage and home equity lending products (“current LTV”). The estimate is based on home price indices compiled by a third party. The third party data indicates trends for MSAs. Regions uses the third party valuation trends from the MSAs in the Company's footprint in its estimate. The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential first mortgage and home equity classes of the consumer portfolio segment. Current LTV data for some loans in the portfolio is not 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

55



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.
Table 5—Estimated Current Loan to Value Ranges
 
March 31, 2019
 
December 31, 2018
 
Residential
First Mortgage
 
Home Equity
 
Residential
First Mortgage
 
Home Equity
 
 
1st Lien
 
2nd Lien
 
 
1st Lien
 
2nd Lien
 
(In millions)
Estimated current LTV:
 
 
 
 
 
 
 
 
 
 
 
Above 100%
$
76

 
$
25

 
$
47

 
$
64

 
$
28

 
$
52

80% - 100%
1,678

 
161

 
318

 
1,720

 
168

 
346

Below 80%
12,044

 
5,712

 
2,573

 
12,117

 
5,852

 
2,627

Data not available
315

 
66

 
112

 
375

 
66

 
118

 
$
14,113

 
$
5,964

 
$
3,050

 
$
14,276

 
$
6,114

 
$
3,143

Indirect—Vehicles
Indirect-vehicles lending, which is lending initiated through third-party business partners, largely consists of loans made through automotive dealerships. This portfolio class decreased $294 million from year-end 2018. The decrease is due to the termination of a third-party arrangement during the fourth quarter of 2016 and Regions' decision in January 2019 to discontinue its indirect auto lending business due to competition-based margin compression impacting overall returns on the portfolio. Regions ceased originating new indirect auto loans in the first quarter of 2019 and intends to complete any in-process indirect auto loan closings by the end of the second quarter of 2019. The Company will remain in the direct auto lending business.
Indirect—Other Consumer
Indirect-other consumer lending represents other point of sale lending through third parties. This portfolio class increased $198 million from year-end 2018, primarily due to continued growth in existing point of sale initiatives.
Consumer Credit Card
Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances decreased $71 million from year-end 2018 reflecting seasonality.
Other Consumer
Other consumer loans primarily include direct consumer loans, overdrafts and other revolving loans. Other consumer loans decreased $25 million from year-end 2018.
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 and refreshed FICO scores are obtained by the Company quarterly for all 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 5 percent of the combined portfolios for both March 31, 2019 and December 31, 2018.

56



Table 6—Estimated Current FICO Score Ranges
 
March 31, 2019
 
Residential
First Mortgage
 
Home Equity
 
Indirect—Vehicles
 
Indirect—Other Consumer
 
Consumer
Credit Card
 
Other
Consumer
 
 
1st Lien
 
2nd Lien
 
 
 
 
 
(In millions)
Below 620
$
711

 
$
246

 
$
144

 
$
264

 
$
62

 
$
101

 
$
71

620-680
722

 
417

 
247

 
307

 
233

 
226

 
145

681-720
1,249

 
686

 
364

 
345

 
460

 
279

 
222

Above 720
11,051

 
4,485

 
2,246

 
1,787

 
1,656

 
660

 
694

Data not available
380

 
130

 
49

 
56

 
136

 
8

 
64

 
$
14,113

 
$
5,964

 
$
3,050

 
$
2,759

 
$
2,547

 
$
1,274

 
$
1,196

 
December 31, 2018
 
Residential
First Mortgage
 
Home Equity
 
Indirect—Vehicles
 
Indirect—Other Consumer
 
Consumer
Credit Card
 
Other
Consumer
 
 
1st Lien
 
2nd Lien
 
 
 
 
 
(In millions)
Below 620
$
700

 
$
239

 
$
142

 
$
272

 
$
56

 
$
98

 
$
69

620-680
747

 
429

 
259

 
332

 
212

 
229

 
148

681-720
1,270

 
708

 
376

 
384

 
405

 
288

 
223

Above 720
11,104

 
4,610

 
2,316

 
1,992

 
1,474

 
721

 
704

Data not available
455

 
128

 
50

 
73

 
202

 
9

 
77

 
$
14,276

 
$
6,114

 
$
3,143

 
$
3,053

 
$
2,349

 
$
1,345

 
$
1,221

ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (“allowance”) consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Discussion of the methodology used to calculate the allowance is included in Note 1 “Summary of Significant Accounting Policies” and Note 6 “Allowance for Credit Losses” to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018, as well as related discussion in Management’s Discussion and Analysis.
The allowance for loan losses totaled $853 million at March 31, 2019 as compared to $840 million at December 31, 2018. The allowance for loan losses as a percentage of net loans was 1.01% at both March 31, 2019 and December 31, 2018.
The provision (credit) for loan losses increased by $101 million for the first quarter of 2019 as compared to the same period in 2018. During the first quarter of 2018, lower than anticipated losses associated with certain 2017 hurricanes resulted in a reduction of $30 million to the Company's hurricane-specific loan loss allowance, and the sale of $254 million in residential first mortgage loans consisting primarily of performing troubled debt restructured loans resulted in a $16 million net reduction to the provision for loan losses. Both of these factors, combined with broad-based improved credit metrics, resulted in the credit for loan losses for the first quarter of 2018. Higher loan balances and the stabilization and normalization of credit resulted in the increased provision for loan losses for the first quarter of 2019. The provision for loan losses for the first quarter of 2019 was approximately $13 million greater than net charge-offs, which included provision for loan growth. Net charge-offs for the first quarter of 2019 were approximately $6 million lower compared to the same period in 2018.
Management expects that net loan charge-offs will be in the 0.40 percent to 0.50 percent range for the 2019 year based on recent trends and current market conditions. Economic trends such as interest rates, unemployment, volatility in commodity prices and collateral valuations will impact the future levels of net charge-offs and may result in volatility of certain credit metrics during the remainder of 2019. Additionally, changes in circumstances related to individually large credits or certain portfolios may result in volatility.
Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 7 “Allowance for Credit Losses.”
Refer to Note 14 "Recent Accounting Pronouncements" to the consolidated financial statements for discussion regarding the pending accounting pronouncement that will replace the current incurred loss accounting model for the allowance for credit losses with a current expected credit loss approach (CECL), which will be effective for Regions on January 1, 2020.

57



Table 7—Allowance for Credit Losses
 
Three Months Ended March 31
 
2019
 
2018
 
(Dollars in millions)
Allowance for loan losses at beginning of year
$
840

 
$
934

Loans charged-off:
 
 
 
Commercial and industrial
27

 
25

Commercial real estate mortgage—owner-occupied
3

 
5

Commercial investor real estate mortgage

 
8

Residential first mortgage
1

 
8

Home equity
6

 
6

Indirectvehicles
9

 
12

Indirectother consumer
17

 
12

Consumer credit card
17

 
16

Other consumer
22

 
20

 
102

 
112

Recoveries of loans previously charged-off:
 
 
 
Commercial and industrial
6

 
8

Commercial real estate mortgage—owner-occupied
3

 
2

Commercial investor real estate mortgage
1

 
2

Residential first mortgage
1

 
1

Home equity
4

 
4

Indirectvehicles
4

 
5

Indirectother consumer

 

Consumer credit card
2

 
2

Other consumer
3

 
4

 
24

 
28

Net charge-offs:
 
 
 
Commercial and industrial
21

 
17

Commercial real estate mortgage—owner-occupied

 
3

Commercial investor real estate mortgage
(1
)
 
6

Residential first mortgage

 
7

Home equity
2

 
2

Indirectvehicles
5

 
7

Indirectother consumer
17

 
12

Consumer credit card
15

 
14

Other consumer
19

 
16

 
78

 
84

Provision (credit) for loan losses
91

 
(10
)
Allowance for loan losses at March 31
$
853

 
$
840

Reserve for unfunded credit commitments at beginning of year
$
51

 
$
53

Provision (credit) for unfunded credit losses
(1
)
 
(4
)
Reserve for unfunded credit commitments at March 31
$
50

 
$
49

Allowance for credit losses at March 31
$
903

 
$
889

Loans, net of unearned income, outstanding at end of period
$
84,430

 
$
79,822

Average loans, net of unearned income, outstanding for the period
$
83,725

 
$
79,891

Ratios:
 
 
 
Allowance for loan losses at end of period to loans, net of unearned income
1.01
%
 
1.05
%
Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale
163
%
 
140%

Net charge-offs as percentage of average loans, net of unearned income (annualized)
0.38
%
 
0.42
%

58



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, consumer credit card and other consumer TDRs are consumer loans modified under the CAP. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modifications were offered as a workout alternative. Renewals of classified commercial and investor real estate loans are considered to be TDRs, even if no reduction in interest rate is offered, if the existing terms are considered to be below market. More detailed information is included in Note 3 "Loans and the Allowance For Credit Losses" to the consolidated financial statements. The following table summarizes the loan balance and related allowance for accruing and non-accruing TDRs for the periods presented:
Table 8—Troubled Debt Restructurings 
 
March 31, 2019
 
December 31, 2018
 
Loan
Balance
 
Allowance for
Loan Losses
 
Loan
Balance
 
Allowance for
Loan Losses
 
(In millions)
Accruing:
 
 
 
 
 
 
 
Commercial
$
106

 
$
14

 
$
108

 
$
17

Investor real estate
14

 
1

 
14

 
1

Residential first mortgage
173

 
18

 
170

 
16

Home equity
180

 
7

 
189

 
6

Consumer credit card
1

 

 
1

 

Other consumer
5

 

 
6

 

 
479

 
40

 
488

 
40

Non-accrual status or 90 days past due and still accruing:
 
 
 
 
 
 
 
Commercial
220

 
24

 
183

 
18

Investor real estate
5

 

 
5

 

Residential first mortgage
37

 
4

 
38

 
4

Home equity
15

 
1

 
15

 

 
277

 
29

 
241

 
22

Total TDRs - Loans
$
756

 
$
69

 
$
729

 
$
62

 
 
 
 
 
 
 
 
TDRs - Held For Sale
8

 

 
5

 

Total TDRs
$
764

 
$
69

 
$
734

 
$
62

_________
Note: All loans listed in the table above are considered impaired under applicable accounting literature.
The following table provides an analysis of the changes in commercial and investor real estate TDRs. TDRs with subsequent restructurings that meet the definition of a TDR are only reported as TDR inflows in the period they were first modified. Other than resolutions such as charge-offs, foreclosures, payments, sales and transfers to held for sale, Regions may remove loans from TDR classification if the following conditions are met: the borrower's financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, the loan has not been restructured as an "A" note/"B" note, the loan has been reported as a TDR over one fiscal year-end and the loan is subsequently refinanced or restructured at market terms such that it qualifies as a new loan.
For the consumer portfolio, changes in TDRs are primarily due to inflows from CAP modifications and outflows from payments and charge-offs. Given the types of concessions currently being granted under the CAP, as detailed in Note 3 “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.

59



Table 9—Analysis of Changes in Commercial and Investor Real Estate TDRs
 
Three Months Ended
March 31, 2019
 
Three Months Ended
March 31, 2018
 
Commercial
 
Investor
Real Estate
 
Commercial
 
Investor
Real Estate
 
(In millions)
Balance, beginning of period
$
291

 
$
19

 
$
347

 
$
91

Inflows
74

 
1

 
165

 
48

Outflows:
 
 
 
 
 
 
 
Charge-offs
(8
)
 

 
(2
)
 

Payments, sales and other (1)
(31
)
 
(1
)
 
(83
)
 
(46
)
Balance, end of period
$
326

 
$
19

 
$
427

 
$
93

_________
(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 less than $1 million of both commercial loans and investor real estate loans refinanced or restructured as new loans and removed from TDR classification for the three months ended March 31, 2019. During the three months ended March 31, 2018, $8 million of commercial loans and $5 million of investor real estate loans were refinanced or restructured as new loans and removed from TDR classification.

60



NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
Table 10—Non-Performing Assets
 
March 31, 2019
 
December 31, 2018
 
(Dollars in millions)
Non-performing loans:
 
 
 
Commercial and industrial
$
336

 
$
307

Commercial real estate mortgage—owner-occupied
67

 
67

Commercial real estate construction—owner-occupied
14

 
8

Total commercial
417

 
382

Commercial investor real estate mortgage
8

 
11

Total investor real estate
8

 
11

Residential first mortgage
34

 
40

Home equity
64

 
63

Total consumer
98

 
103

Total non-performing loans, excluding loans held for sale
523

 
496

Non-performing loans held for sale
13

 
10

Total non-performing loans(1)
536

 
506

Foreclosed properties
53

 
52

Non-marketable investments received in foreclosure
8

 
8

Total non-performing assets(1)
$
597

 
$
566

Accruing loans 90 days past due:
 
 
 
Commercial and industrial
$
11

 
$
8

Commercial real estate mortgage—owner-occupied
1

 

Total commercial
12

 
8

Residential first mortgage(2)
66

 
66

Home equity
37

 
34

Indirect—vehicles
7

 
9

Indirect—other consumer
1

 
1

Consumer credit card
20

 
20

Other consumer
4

 
5

Total consumer
135

 
135

 
$
147

 
$
143

Restructured loans not included in the categories above
$
479

 
$
488

Non-performing loans(1) to loans and non-performing loans held for sale
0.63
%
 
0.61
%
Non-performing assets(1) to loans, foreclosed properties, non-marketable investments, and non-performing loans held for sale
0.71
%
 
0.68
%
_________
(1)
Excludes accruing loans 90 days past due.
(2)
Excludes residential first mortgage loans that are 100% guaranteed by the FHA and all guaranteed loans sold to the GNMA where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $76 million at March 31, 2019 and $84 million at December 31, 2018.
Non-performing loans at March 31, 2019 have increased compared to year-end levels as asset quality continued to normalize. Total commercial and investor real estate non-performing loans, excluding loans held for sale, that were paying as agreed (e.g., less than 30 days past due) represented approximately 60 percent of the total balance at March 31, 2019.
Economic trends such as interest rates, unemployment, volatility in commodity prices, and collateral valuations will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility.
Total loans past due 90 days or more and still accruing, excluding government guaranteed loans, were $147 million at March 31, 2019, an increase from $143 million at December 31, 2018.

61



At March 31, 2019, Regions had approximately $75 million to $135 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, credit personnel 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 3 “Loans and the Allowance for Credit Losses” to the consolidated financial statements.
The following table provides an analysis of non-accrual loans (excluding loans held for sale) by portfolio segment:
Table 11—Analysis of Non-Accrual Loans
 
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2019
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
382

 
$
11

 
$
103

 
$
496

Additions
104

 

 

 
104

Net payments/other activity
(29
)
 
(3
)
 
(5
)
 
(37
)
Return to accrual
(1
)
 

 

 
(1
)
Charge-offs on non-accrual loans(2)
(25
)
 

 

 
(25
)
Transfers to held for sale(3)
(12
)
 

 

 
(12
)
Transfers to real estate owned
(1
)
 

 

 
(1
)
Sales
(1
)
 

 

 
(1
)
Balance at end of period
$
417

 
$
8

 
$
98

 
$
523


 
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2018
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
528

 
$
6

 
$
116

 
$
650

Additions
78

 
18

 

 
96

Net payments/other activity
(84
)
 
(1
)
 
2

 
(83
)
Return to accrual
(16
)
 
(1
)
 

 
(17
)
Charge-offs on non-accrual loans(2)
(28
)
 
(8
)
 

 
(36
)
Transfers to held for sale(3)
(5
)
 

 
(2
)
 
(7
)
Sales
(2
)
 

 

 
(2
)
Balance at end of period
$
471

 
$
14

 
$
116

 
$
601

________
(1)
All net activity within the consumer portfolio segment other than sales and transfers to held for sale (including related charge-offs) is included as a single net number within the net payments/other activity line.
(2)
Includes charge-offs on loans on non-accrual status and charge-offs taken upon sale and transfer of non-accrual loans to held for sale.
(3)
Transfers to held for sale are shown net of charge-offs of $2 million and $3 million recorded upon transfer for the three months ended March 31, 2019 and 2018, respectively.

62



GOODWILL
Goodwill totaled $4.8 billion at both March 31, 2019 and December 31, 2018 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 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018 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 first quarter of 2019 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 March 31, 2019 interim period.
DEPOSITS
Regions competes with other banking and financial services companies for a share of the deposit market. Regions’ ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers’ needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service, competitive pricing and convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as mobile and internet banking.
The following table summarizes deposits by category:
Table 12—Deposits
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Non-interest-bearing demand
$
34,775

 
$
35,053

Savings
9,031

 
8,788

Interest-bearing transaction
19,724

 
19,175

Money market—domestic
23,806

 
24,111

Time deposits
7,704

 
7,122

Customer deposits
95,040

 
94,249

Corporate treasury time deposits
680

 
242

 
$
95,720

 
$
94,491

Total deposits at March 31, 2019 increased approximately $1.2 billion compared to year-end 2018 levels, with the deposit mix experiencing movement from lower cost to higher cost products. During the first quarter of 2019, balance increases in interest-bearing transaction accounts, savings, customer time deposits, and brokered treasury time deposits were partially offset by balance decreases in non-interest-bearing demand and money market accounts. Specifically, interest-bearing transaction and time deposit balances increased due to the offering of higher rates, portfolio remixing, and overall account growth. Savings account balances increased, generally reflecting seasonal trends. The non-interest-bearing demand decline was due primarily to customers using liquidity to pay down debt or invest in their businesses, as well as portfolio remixing. The decrease in money market account balances reflects the final portion of a longer-term initiative to reduce higher-cost retail brokered sweep deposits. Treasury brokered time deposits were used to supplement incremental balance sheet funding needs.
SHORT-TERM BORROWINGS
Short-term borrowings, which consist of FHLB advances, totaled $1.6 billion at both March 31, 2019 and December 31, 2018. The levels of these borrowings can fluctuate depending on the Company's funding needs and the sources utilized.
Short-term secured borrowings, such as securities sold under agreements to repurchase and FHLB advances, are a core portion of Regions' funding strategy.
The securities financing market and specifically short-term FHLB advances continue to provide reliable funding at attractive rates. See the "Liquidity Risk" section for further detail of Regions' borrowing capacity with the FHLB.


63




LONG-TERM BORROWINGS
Table 13—Long-Term Borrowings
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Regions Financial Corporation (Parent):
 
 
 
3.20% senior notes due February 2021
$
1,101

 
$
1,101

2.75% senior notes due August 2022
996

 
996

3.80% senior notes due August 2023
995

 
497

7.75% subordinated notes due September 2024
100

 
100

6.75% subordinated debentures due November 2025
157

 
157

7.375% subordinated notes due December 2037
298

 
298

Valuation adjustments on hedged long-term debt
(16
)
 
(47
)
 
3,631

 
3,102

Regions Bank:
 
 
 
FHLB advances
6,902

 
6,902

2.75% senior notes due April 2021
548

 
548

3 month LIBOR plus 0.38% of floating rate senior notes due April 2021
349

 
349

3.374% senior notes converting to 3 month LIBOR plus 0.50%, callable August 2020, due August 2021
499

 
499

3 month LIBOR plus 0.50% of floating rate senior notes, callable August 2020, due August 2021
499

 
499

6.45% subordinated notes due June 2037
495

 
495

Other long-term debt
34

 
33

Valuation adjustments on hedged long-term debt

 
(3
)
 
9,326

 
9,322

Total consolidated
$
12,957

 
$
12,424

Long-term borrowings increased by approximately $533 million since year-end 2018 due primarily to a $500 million issuance of senior notes through a reopening of the Company's 3.80% senior notes due August 2023, which were effectively converted to floating rate notes at 1 month LIBOR through the simultaneous execution of an interest rate swap.
Long-term FHLB advances have a weighted-average interest rate of 2.6 percent at both March 31, 2019 and December 31, 2018 with remaining maturities ranging from less than one year to nine years and a weighted-average of approximately 1 year.    
STOCKHOLDERS’ EQUITY
Stockholders’ equity was $15.5 billion at March 31, 2019 as compared to $15.1 billion at December 31, 2018. During the first three months of 2019, net income increased stockholders’ equity by $394 million, while cash dividends on common stock reduced stockholders' equity by $142 million and cash dividends on preferred stock reduced stockholder's equity by $16 million. Changes in accumulated other comprehensive income increased stockholders' equity by $366 million, primarily due to the net change in unrealized gains (losses) on securities available for sale and derivative instruments as a result of changes in market interest rates during the first quarter of 2019. Common stock repurchased during the first three months of 2019 reduced stockholders' equity by $190 million. These shares were immediately retired and therefore are not included in treasury stock.
Total equity includes noncontrolling interest of $11 million, representing the unowned portion of a low income housing tax credit fund syndication, of which Regions held the majority interest at March 31, 2019.
On June 28, 2018, Regions received no objection from the Federal Reserve to its 2018 capital plan that was submitted as part of the CCAR process, which included the repurchase of common shares and a common stock dividend increase.
See Note 6 “Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)” for additional information.

64



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 selected off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions.
Under the Basel III Rules, Regions is designated as a standardized approach bank. Additional discussion of the Basel III Rules, their applicability to Regions, recent proposals and final rules issued by the federal banking agencies and recent laws enacted that impact regulatory requirements is included in the "Regulatory Requirements" section of Management's Discussion and Analysis in the 2018 Annual Report on Form 10-K. Additional discussion is also included in Note 14 "Regulatory Capital Requirements and Restrictions" to the consolidated financial statements in the 2018 Annual Report on Form 10-K.
The following table summarizes the applicable holding company and bank regulatory requirements:
Table 14—Regulatory Capital Requirements
Transitional Basis Basel III Regulatory Capital Rules
March 31, 2019
Ratio (1)
 
December 31, 2018
Ratio
 
Minimum
Requirement
 
To Be Well
Capitalized
Basel III common equity Tier 1 capital:
 
 
 
 
 
 
 
Regions Financial Corporation
9.81
%
 
9.90
%
 
4.50
%
 
N/A

Regions Bank
11.50

 
11.59

 
4.50

 
6.50
%
Tier 1 capital:
 
 
 
 
 
 
 
Regions Financial Corporation
10.58
%
 
10.68
%
 
6.00
%
 
6.00
%
Regions Bank
11.50

 
11.59

 
6.00

 
8.00

Total capital:
 
 
 
 
 
 
 
Regions Financial Corporation
12.35
%
 
12.46
%
 
8.00
%
 
10.00
%
Regions Bank
12.82

 
12.92

 
8.00

 
10.00

Leverage capital:
 
 
 
 
 
 
 
Regions Financial Corporation
9.26
%
 
9.32
%
 
4.00
%
 
N/A

Regions Bank
10.08

 
10.12

 
4.00

 
5.00
%
________
(1) The current quarter Basel III CET1 capital, Tier 1 capital, Total capital, and Leverage capital ratios are estimated.
 
 
 
 
LIQUIDITY COVERAGE RATIO
Regions is currently subject to the Basel III-based U.S. LCR rule, which is a quantitative liquidity metric designed to ensure that a covered bank or BHC maintains an adequate level of unencumbered high-quality liquid assets under an acute 30-day liquidity stress scenario. Following the threshold amendments recently made by EGRRCPA, the LCR rule currently applies in a modified, less stringent, form to BHCs, such as Regions, having $100 billion or more but less than $250 billion in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. However, on October 31, 2018, the Federal Reserve, the OCC and the FDIC proposed rules that would, among other things, make institutions such as Regions with less than $250 billion in total consolidated assets no longer subject to the LCR requirement. The LCR rule also imposes a monthly calculation requirement. In December 2016, the Federal Reserve issued a final rule on the public disclosure of the LCR calculation that requires BHCs, such as Regions, to disclose publicly, on a quarterly basis, quantitative and qualitative information about certain components of its LCR beginning with results from the fourth quarter of 2018.
At March 31, 2019, the Company was fully compliant with the LCR requirements. Changes in the mix and size of the Company's balance sheet and investment portfolio are likely to occur in the future, and additional funding may need to be sourced to remain compliant.
See the “Supervision and Regulation—Liquidity Regulation” subsection of the “Business” section and the “Risk Factors” section in the 2018 Annual Report on Form 10-K for more information.

65



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 March 31, 2019 and December 31, 2018.
Table 15—Credit Ratings
 
As of March 31, 2019 and December 31, 2018
 
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
 
 
 
 
Senior unsecured debt
BBB+
Baa2
BBB+
AL
Subordinated debt
BBB
Baa2
BBB
BBBH
Regions Bank
 
 
 
 
Short-term
A-2
P-1
F2
R-IL
Long-term bank deposits
N/A
A2
A-
A
Senior unsecured debt
A-
Baa2
BBB+
A
Subordinated debt
BBB+
Baa2
BBB
AL
Outlook
Stable
Positive
Stable
Stable
 
 
 
 
 
_________
N/A - Not applicable.
In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, and acceptability of its letters of credit, thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section in the Annual Report on Form 10-K for the year ended December 31, 2018 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 average total loans,” “adjusted efficiency ratio,” “adjusted fee income ratio,” “return on average tangible common stockholders’ equity,” on a consolidated and continuing operations basis, and end of period “tangible common stockholders’ equity,” and “Basel III CET1, on a fully phased-in basis” and related ratios. Regions believes that expressing earnings and certain other financial measures excluding these significant items provides a meaningful base for period-to-period comparisons, which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions’ business because management does not consider the activities related to the adjustments to be indications of ongoing operations. Regions believes that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management. Management and the Board utilize these non-GAAP financial measures as follows:
Preparation of Regions’ operating budgets
Monthly financial performance reporting
Monthly close-out reporting of consolidated results (management only)
Presentations to investors of Company performance
Total average loans is presented including (1) the impact of the fourth quarter of 2018 reclassification of purchase cards to commercial and industrial loans from others assets, (2) excluding the impact of the first quarter 2018 residential first mortgage loan sale, and (3) excluding the indirect vehicles exit portfolio to arrive at adjusted average total loans (non-GAAP). Regions believes adjusting average total loans provides a meaning calculation of loan growth rates and presents them on the same basis as that applied by management.
The adjusted efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as adjusted non-interest expense divided by adjusted total revenue on a taxable-equivalent basis. The adjusted fee income ratio (non-GAAP) is generally calculated as adjusted non-interest income divided by adjusted total revenue on a taxable-equivalent basis. Management uses these

66



ratios to monitor performance and believes these measures provide meaningful information to investors. Non-interest expense (GAAP) is presented excluding adjustments to arrive at adjusted non-interest expense (non-GAAP), which is the numerator for the adjusted efficiency ratio. Non-interest income (GAAP) is presented excluding adjustments to arrive at adjusted non-interest income (non-GAAP), which is the numerator for the adjusted fee income ratio. Net interest income and other financing income on a taxable-equivalent basis and non-interest income are added together to arrive at total revenue on a taxable-equivalent basis. Adjustments are made to arrive at adjusted total revenue on a taxable-equivalent basis (non-GAAP), which is the denominator for the adjusted efficiency and adjusted fee income ratios.
Tangible common stockholders’ equity ratios have become a focus of some investors in analyzing the capital position of the Company absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulatory bodies have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. Analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity measure. Because tangible common stockholders’ equity is not formally defined by GAAP, this measure is considered to be a non-GAAP financial measure and other entities may calculate it differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on this same basis.
The calculation of the fully phased-in pro-forma "Common equity Tier 1" (CET1) is based on Regions’ understanding of the Final Basel III requirements. For Regions, the Basel III framework became effective on a phased-in approach starting in 2015 with full implementation extending to 2019. The Basel III rules are now fully phased in, other than with respect to deductions and adjustments whose transitional treatment has been extended until the federal banking agencies' September 2017 proposal to revise and simplify the capital treatment of selected categories of assets is finalized. The calculation provided in the following table includes estimated pro-forma amounts for the ratio on a fully phased-in basis. Regions’ current understanding of the final framework includes certain assumptions, including the Company’s interpretation of the requirements, and informal feedback received through the regulatory process. Regions’ understanding of the framework is evolving and will likely change as analyses and discussions with regulators continue. Because Regions is not currently subject to the fully phased-in capital rules, this pro-forma measure is considered to be a non-GAAP financial measure, and other entities may calculate it differently from Regions’ disclosed calculation. 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 the ability to assess Regions’ capital adequacy on this 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 tables provide: 1) a reconciliation of average total loans to adjusted average total loans (non-GAAP), 2) a reconciliation of net income (GAAP) to net income available to common shareholders (GAAP), 3) a reconciliation of non-interest expense from continuing operations (GAAP) to adjusted non-interest expense from continuing operations (non-GAAP), 4) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income from continuing operations (non-GAAP), 5) a computation of adjusted total revenue (non-GAAP), 6) a computation of the adjusted efficiency ratio (non-GAAP), 7) a computation of the adjusted fee income ratio (non-GAAP), 8) 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), 9) a reconciliation of stockholders’ equity (GAAP) to Basel III CET1, on a fully phased-in basis (non-GAAP), and 10) calculation of the related ratio based on Regions’ current understanding of the Basel III requirements (non-GAAP).
Table 16—GAAP to Non-GAAP Reconciliations 
 
Three Months Ended March 31
 
2019
 
2018
 
(Dollar in millions)
ADJUSTED AVERAGE BALANCES OF LOANS
 
 
 
Average total loans
$
83,725

 
$
79,891

Add: Purchasing card balances (1)

 
208

Less: Balances of residential first mortgage loans sold (2)

 
164

Less: Indirect—vehicles
2,924

 
3,309

Adjusted average total loans (non-GAAP)
$
80,801

 
$
76,626



67



 
 
Three Months Ended March 31
 
 
2019
 
2018
 
 
(Dollars in millions)
INCOME CONSOLIDATED
 
 
 
 
Net income (GAAP)
 
$
394

 
$
414

Preferred dividends (GAAP)
 
(16
)
 
(16
)
Net income available to common shareholders (GAAP)
A
$
378

 
$
398

ADJUSTED EFFICIENCY AND FEE INCOME RATIOS CONTINUING OPERATIONS
 
 
 
 
Non-interest expense (GAAP)
B
$
860

 
$
884

Significant items:
 
 
 
 
   Branch consolidation, property and equipment charges
 
(6
)
 
(3
)
   Expenses associated with residential mortgage loan sale
 

 
(4
)
Salary and employee benefits—severance charges
 
(2
)
 
(15
)
Adjusted non-interest expense (non-GAAP)
C
$
852

 
$
862

Net interest income and other financing income (GAAP)
D
$
948

 
$
909

Taxable-equivalent adjustment
 
13

 
13

Net interest income and other financing income, taxable-equivalent basis - continuing operations
E
961

 
922

Non-interest income (GAAP)
F
502

 
507

Significant items:
 
 
 
 
Securities (gains) losses, net
 
7

 

Leveraged lease termination gains
 

 
(4
)
Gain on sale of affordable housing residential mortgage loans (3)
 
(8
)
 

Adjusted non-interest income (non-GAAP)
G
$
501

 
$
503

Total revenue
D+F=H
$
1,450

 
$
1,416

Adjusted total revenue
D+G=I
$
1,449

 
$
1,412

Total revenue, taxable-equivalent basis
E+F=J
$
1,463

 
$
1,429

Adjusted total revenue, taxable-equivalent basis (non-GAAP)
E+G=K
$
1,462

 
$
1,425

Efficiency ratio (GAAP)
B/J
58.81
%
 
61.92
%
Adjusted efficiency ratio (non-GAAP)
C/K
58.29
%
 
60.54
%
Fee income ratio (GAAP)
F/J
34.31
%
 
35.49
%
Adjusted fee income ratio (non-GAAP)
G/K
34.26
%
 
35.29
%
RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS’ EQUITY CONSOLIDATED
 
 
 
 
Average stockholders’ equity (GAAP)
 
$
15,192

 
$
15,848

Less: Average intangible assets (GAAP)
 
4,940

 
5,076

 Average deferred tax liability related to intangibles (GAAP)
 
(94
)
 
(99
)
 Average preferred stock (GAAP)
 
820

 
820

Average tangible common stockholders’ equity (non-GAAP)
L
$
9,526

 
$
10,051

Return on average tangible common stockholders’ equity (non-GAAP)(4)
A/L
16.09
%
 
16.08
%

68



 
 
March 31, 2019
 
December 31, 2018
 
 
(Dollars in millions, except per share data)
TANGIBLE COMMON RATIOS CONSOLIDATED
 
 
 
 
Ending stockholders’ equity (GAAP)
 
$
15,512

 
$
15,090

Less: Ending intangible assets (GAAP)
 
4,937

 
4,944

  Ending deferred tax liability related to intangibles (GAAP)
 
(94
)
 
(94
)
  Ending preferred stock (GAAP)
 
820

 
820

Ending tangible common stockholders’ equity (non-GAAP)
M
$
9,849

 
$
9,420

Ending total assets (GAAP)
 
$
128,802

 
$
125,688

Less: Ending intangible assets (GAAP)
 
4,937

 
4,944

  Ending deferred tax liability related to intangibles (GAAP)
 
(94
)
 
(94
)
Ending tangible assets (non-GAAP)
N
$
123,959

 
$
120,838

End of period shares outstanding
O
1,013

 
1,025

Tangible common stockholders’ equity to tangible assets (non-GAAP)
M/N
7.95
%
 
7.80
%
Tangible common book value per share (non-GAAP)
M/O
$
9.72

 
$
9.19

 
 
March 31, 2019
 
December 31, 2018
 
 
(Dollars in millions, except per share data)
BASEL III COMMON EQUITY TIER 1 RATIO—FULLY PHASED-IN PRO-FORMA (5)
 
 
 
 
Stockholders’ equity (GAAP)
 
$
15,512

 
$
15,090

Non-qualifying goodwill and intangibles
 
(4,833
)
 
(4,839
)
Adjustments, including all components of accumulated other comprehensive income, disallowed deferred tax assets, threshold deductions and other adjustments
 
584

 
940

Preferred stock (GAAP)
 
(820
)
 
(820
)
Basel III common equity Tier 1Fully Phased-In Pro-Forma (non-GAAP)
P
$
10,443

 
$
10,371

Basel III risk-weighted assetsFully Phased-In Pro-Forma (non-GAAP) (6)
Q
$
107,128

 
$
105,475

Basel III common equity Tier 1 ratioFully Phased-In Pro-Forma (non-GAAP)
P/Q
9.75
%
 
9.83
%
_________
(1)
On December 31, 2018, purchasing cards were reclassified to commercial and industrial loans from other assets.
(2)
Adjustments to average loan balances assume a simple day-weighted average impact for the first quarter of 2018.
(3)
The gain on sale of affordable housing residential mortgage loans in the first quarter of 2019 was the result of the sale of approximately $167 million of loans.
(4)
Income statement amounts have been annualized in calculation.
(5) Current quarter amounts and the resulting ratio are estimated.
(6) Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III on a fully phased-in basis. The amounts included above are a reasonable approximation, based on current understanding of the requirements.

69



OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 17—Consolidated Average Daily Balances and Yield/Rate Analysis
 
Three Months Ended March 31
 
2019
 
2018
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(Dollars in millions; yields on taxable-equivalent basis)
Assets
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$

 
$

 
%
 
$
1

 
$

 
%
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Debt securities—taxable
24,251

 
165

 
2.72

 
24,588

 
154

 
2.52

Loans held for sale
302

 
3

 
3.63

 
359

 
3

 
3.21

Loans, net of unearned income (1)(2)
83,725

 
994

 
4.78

 
79,891

 
864

 
4.35

Investment in operating leases, net
364

 
3

 
3.41

 
472

 
4

 
2.82

Other earning assets
1,849

 
19

 
4.29

 
2,853

 
19

 
2.71

Total earning assets
110,491

 
1,184

 
4.31

 
108,164

 
1,044

 
3.88

Allowance for loan losses
(843
)
 
 
 
 
 
(933
)
 
 
 
 
Cash and due from banks
1,893

 
 
 
 
 
1,951

 
 
 
 
Other non-earning assets
14,002

 
 
 
 
 
14,312

 
 
 
 
 
$
125,543

 
 
 
 
 
$
123,494

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
8,852

 
4

 
0.17

 
$
8,615

 
4

 
0.18

Interest-bearing checking
19,309

 
33

 
0.69

 
19,935

 
16

 
0.32

Money market
23,989

 
40

 
0.68

 
24,601

 
14

 
0.24

Time deposits
8,124

 
31

 
1.56

 
6,813

 
15

 
0.91

Total interest-bearing deposits (3)
60,274

 
108

 
0.73

 
59,964

 
49

 
0.33

Federal funds purchased and securities sold under agreements to repurchase
343

 
2

 
2.41

 
103

 

 

Other short-term borrowings
1,735

 
11

 
2.55

 
156

 
1

 
1.46

Long-term borrowings
11,753

 
102

 
3.47

 
9,531

 
72

 
3.00

Total interest-bearing liabilities
74,105

 
223

 
1.22

 
69,754

 
122

 
0.71

Non-interest-bearing deposits (3)
33,896

 

 

 
35,464

 

 

Total funding sources
108,001

 
223

 
0.83

 
105,218

 
122

 
0.46

Net interest spread
 
 
 
 
3.09

 
 
 
 
 
3.17

Other liabilities
2,350

 
 
 
 
 
2,428

 
 
 
 
Stockholders’ equity
15,192

 
 
 
 
 
15,848

 
 
 
 
 
$
125,543

 
 
 
 
 
$
123,494

 
 
 
 
Net interest income and other financing income/margin on a taxable-equivalent basis (4)
 
 
$
961

 
3.53
%
 
 
 
$
922

 
3.46
%
_____
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $1 million and $5 million for the three months ended March 31, 2019 and 2018, 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 0.46% and 0.21% for the three months ended March 31, 2019 and 2018, respectively.
(4)
The computation of taxable-equivalent net interest income and other financing income is based on the statutory federal income tax rate of 21% for both March 31, 2019 and 2018, adjusted for applicable state income taxes net of the related federal tax benefit.
 
 
 
 
 
 
 
 
 
 
 
 




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For the first quarter of 2019, net interest income and other financing income (taxable-equivalent basis) totaled $961 million compared to $922 million in the first quarter of 2018. The net interest margin (taxable-equivalent basis) was 3.53 percent for the first quarter of 2019 and 3.46 percent for the first quarter of 2018. The increase in net interest margin (taxable-equivalent basis) for the first quarter of 2019, compared to the same period of 2018, was primarily due to higher market interest rates and higher yields on earning assets, particularly loans, exceeding the increase in total funding costs.
MARKET RISK—INTEREST RATE RISK
Regions’ primary market risk is interest rate risk. This includes uncertainty with respect to absolute interest rate levels as well as relative interest rate levels, which are impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income and other financing income in various interest rate scenarios compared to a base case scenario. Net interest income and other financing income sensitivity to market rate movements is a useful short-term indicator of Regions’ interest rate risk.
Sensitivity Measurement—Financial simulation models are Regions’ primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income and other financing income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions’ balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that results from both strategic plans and from customer behavior. Among the assumptions are expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the pricing of deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior.
The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain reasonable and stable net interest income and other financing income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario derived using “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Given low market rates by historical standards, the Company continues to present the minus 100 basis point shock. Rising and falling rate scenarios of greater magnitude are also analyzed. While not presented in Table 18, the impact of a larger magnitude down rate scenario based on historical yield curve minimums is explained in the following section. In addition to parallel curve shifts, multiple curve steepening and flattening scenarios are contemplated. Regions includes simulations of gradual interest rate movements phased in over a six-month period that may more realistically mimic the speed of potential interest rate movements.
Exposure to Interest Rate Movements—As of March 31, 2019, Regions was asset sensitive to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the measurement horizon ending March 2020. The estimated exposure associated with the parallel yield curve shift of minus 100 basis points in the table below reflects the combined impacts of movements in short-term and long-term interest rates. The decline in short-term interest rates (such as the Fed Funds rate, the rate of Interest on Excess Reserves and 1 month LIBOR) will lead to a reduction of yield on assets and liabilities contractually tied to such rates. Recent Fed Funds increases have resulted in a modest increase in deposit and other funding costs for Regions. Therefore, it is expected that declines in funding costs will only partially offset the decline in asset yields. A reduction in intermediate and long-term interest rates (such as intermediate to longer-term U.S. Treasuries, swap and mortgage rates) will drive yields lower on certain fixed rate, newly originated or renewed loans, reduce prospective yields on certain investment portfolio purchases, and increase amortization of premium expense on existing securities in the investment portfolio. At current rate levels, the interest income sensitivity afforded by potential further extension of investment securities and the resulting impact on premium amortization is reduced, making intermediate and long-term interest rate sensitivity primarily attributable to changes in the level of reinvestment yields on fixed rate assets.
With respect to sensitivity along the yield curve, the balance sheet is estimated to be asset sensitive to short-term, intermediate-term, and long-term rates individually. Current simulation models estimate that, as compared to the base case, net interest income and other financing income over a 12 month horizon would respond favorably by approximately $82 million if intermediate and longer-term interest rates were to immediately and on a sustained basis exceed the base scenario by 100 basis points. Conversely, if intermediate and longer-term interest rates were to immediately and on a sustained basis underperform the base case by 100 basis points, then net interest income and other financing income, as compared to the base case, would decline by approximately $119 million.
The table below summarizes Regions' positioning in various parallel yield curve shifts (i.e., including all yield curve tenors). The scenarios are inclusive of all interest rate risk hedging activities. Forward starting hedges that have been transacted are contemplated to the extent they start within the measurement horizon. Forward starting hedging relationships are currently being used to protect net interest income and other financing income as the macroeconomic cycle continues to evolve. Therefore, the Company's sensitivity levels are expected to decline to be roughly neutral in early 2020. More information regarding forward starting hedges is disclosed in Table 19 and its accompanying description.

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Table 18—Interest Rate Sensitivity
 
Estimated Annual Change
in Net Interest Income
March 31, 2019
 
(In millions)
Gradual Change in Interest Rates
 
+ 200 basis points

$164

+ 100 basis points
94

- 100 basis points
(124
)
 
 
Instantaneous Change in Interest Rates
 
+ 200 basis points

$145

+ 100 basis points
94

- 100 basis points
(179
)
As market interest rates have increased in recent years, larger magnitude falling rate shock scenarios have become possible, although the probability of such a movement is currently low. Regions has established a scenario by which yield curve tenors will fall to a consistent level. The shock magnitude for each tenor, when compared to market forward rates, equates to the lesser of -200 basis points, or a rate modestly lower than the historical all-time minimum. This provides a sufficiently punitive rate environment, while maintaining a higher level of reasonableness. An instantaneous shock under this environment would be expected to reduce net interest income and other financing income when compared to the base case by $384 million over the next 12 months.
As discussed above, the interest rate sensitivity analysis presented in Table 18 is informed by a variety of assumptions and estimates regarding the course of the balance sheet in both the baseline scenario as well as the scenarios of instantaneous and gradual shifts in the yield curve. Though there are many assumptions that affect the estimates for net interest income and other financing income, those pertaining to deposit pricing, deposit mix and overall balance sheet composition are particularly impactful. Given the uncertainties associated with the prolonged period of low interest rates, management evaluates the impact to its sensitivity analysis of these key assumptions. Sensitivity calculations are hypothetical and should not be considered to be predictive of future results.
The Company’s baseline balance sheet growth assumptions include moderate loan and deposit growth reflecting management's best estimate. The behavior of deposits in response to changes in interest rate levels is largely informed by analyses of prior rate cycles, but with suitable adjustments based on management’s expectations in the current rate environment. In the + 100 basis point gradual interest rate change scenario in Table 18, the interest-bearing deposit re-pricing sensitivity over the 12 month horizon is expected to be between 50 percent and 70 percent of changes in short-term market rates (e.g., Fed Funds). A 5 percentage point higher sensitivity than the baseline assumption would decrease 12 month net interest income and other financing income in the gradual +100 basis points scenario by approximately $22 million. While the estimates should be used as a guide, differences may result driven by the pace of rate changes, and other market and competitive factors.
Similarly, management assumes that the change in the mix of deposits in a rising rate environment versus the baseline balance sheet growth assumptions is informed by analyses of prior rate cycles. Management assumes that in rising rate scenarios, some shift from non-interest bearing to interest-bearing products will occur. As the rate cycle has progressed and a mix shift has become inherent in the baseline forecast, management has reduced the sensitivity impact on the shock scenarios. The magnitude of the shift is rate dependent and equates to approximately $1.5 billion over 12 months in the gradual +100 basis point scenario in Table 18. In the event this shift increased by an additional $1.5 billion over 12 months, the result would be a reduction of 12 month net interest income and other financing income in the gradual +100 basis points scenario by approximately $19 million.
Interest rate movements may also have an impact on the value of Regions’ securities portfolio, which can directly impact the carrying value of stockholders’ equity. Regions from time to time may hedge these price movements with derivatives (as discussed below).
Derivatives—Regions uses financial derivative instruments for management of interest rate sensitivity. ALCO, which consists of members of Regions’ senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments.
Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. A Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar

72



futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Company's customers and are used by customers to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform.
Regions has made use of interest rate swaps and floors in balance sheet hedging strategies to effectively convert a portion of its fixed-rate funding position and available for sale securities portfolios to a variable-rate position and to effectively convert a portion of its variable-rate loan portfolios to fixed-rate. Regions also uses derivatives to economically manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing.
The following table presents additional information about the hedging interest rate derivatives used by Regions to manage interest rate risk:
Table 19—Hedging Derivatives by Interest Rate Risk Management Strategy
 
March 31, 2019
 
 
 
Weighted-Average
 
 
 
Notional
Amount
 
Maturity (Years)
 
Receive Rate(1)
 
Pay Rate(1)
 
Strike Price(1)
 
(Dollars in millions)
Derivatives in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable swaps
$
3,650

 
3.0

 
1.9
%
 
2.6
%
 
%
     Receive variable/pay fixed swaps
81

 
4.6

 
2.6

 
2.4

 

Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable swaps
9,750

 
5.6

 
2.1

 
2.4

 

     Interest rate floors
4,750

 
5.9

 

 

 
2.1

     Total derivatives designated as hedging instruments
$
18,231

 
5.2

 
2.1
%
 
2.4
%
 
2.1
%
_________
(1)
Variable rate indexes on swap and floor contracts reference a combination of short-term LIBOR benchmarks, primarily 1 month LIBOR.
A portion of the cash flow hedging relationships designated above in Table 19 are forward starting, and therefore do not impact, or have limited impact to the estimated annual change in net interest income discussed in Table 18. As of March 31, 2019, $4.75 billion notional of the outstanding cash flow swaps were forward starting. All interest rate floors are forward starting. Forward starting swaps and floors have maturities of approximately five years from their respective start dates. Subsequent to March 31, 2019, the Company executed $750 million notional of forward starting cash flow swaps and $1.0 billion notional of forward starting floors with similar characteristics, start dates and maturities, to the forward starting hedges already transacted. Inclusive of these contracts, the total receive rate and strike price on all forward starting cash flow swaps and floors was 2.7 percent and 2.1 percent, respectively.
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. All interest rate swap 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, 2018 contains more information on the management of credit risk.
Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivative instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income.

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The primary objective of Regions’ hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and other financing income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions’ execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 9 “Derivative Financial Instruments and Hedging Activities” to the consolidated financial statements for a tabular summary of Regions’ quarter-end derivatives positions and further discussion.
Regions accounts for residential MSRs at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative and balance sheet transactions to economically mitigate the impact of market value fluctuations related to residential MSRs. Derivative instruments entered into in the future could be materially different from the current risk profile of Regions’ current portfolio.
MARKET RISK—PREPAYMENT RISK
Regions, like most financial institutions, is subject to changing prepayment speeds on mortgage-related assets under different interest rate environments. Prepayment risk is a significant risk to earnings and specifically to net interest income and other financing income. For example, mortgage loans and other financial assets may be prepaid by a debtor, so that the debtor may refinance its obligations at lower rates. As loans and other financial assets prepay in a falling rate environment, Regions must reinvest these funds in lower-yielding assets. Prepayments of assets carrying higher rates reduce Regions’ interest income and overall asset yields. Conversely, in a rising rate environment, these assets will prepay at a slower rate, resulting in opportunity cost by not having the cash flow to reinvest at higher rates. Prepayment risk can also impact the value of securities and the carrying value of equity. Regions’ greatest exposures to prepayment risks primarily rest in its mortgage-backed securities portfolio, the mortgage fixed-rate loan portfolio and the residential MSR, all of which tend to be sensitive to interest rate movements. Each of these assets is also exposed to prepayment risk due to factors which are not necessarily the result of interest rates, but rather due to changes in policies or programs related, either directly or indirectly, to the U.S. Government's governance over certain lending and financing within the mortgage market. Such policies can work to either encourage or discourage financing dynamics and represent a risk that is extremely difficult to forecast and may be the result of non-economic factors. The Company attempts to monitor and manage such exposures within reasonable expectations while acknowledging all such risks cannot be foreseen or avoided. Further, Regions has prepayment risk that would be reflected in non-interest income in the form of servicing income on the residential MSR. Regions actively monitors prepayment exposure as part of its overall net interest income and other financing income forecasting and interest rate risk management.
LIQUIDITY RISK
Liquidity is an important factor in the financial condition of Regions and affects Regions’ ability to meet the borrowing needs and deposit withdrawal requirements of its customers. The liquidity coverage ratio rule is designed to ensure that financial institutions have the necessary assets on hand to withstand short-term liquidity disruptions. See the "Liquidity Coverage Ratio" discussion included in the "Regulatory Requirements" section of Management's Discussion and Analysis for additional information.
Regions intends to fund its obligations primarily through cash generated from normal operations. See Note 12 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional discussion of the Company’s funding requirements. Regions also has obligations related to potential litigation contingencies.
Assets, consisting principally of loans and securities, are funded by customer deposits, borrowed funds and stockholders’ equity. Regions’ goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s cash flow needs. Having and using various sources of liquidity to satisfy the Company’s funding requirements is important.
In order to ensure an appropriate level of liquidity is maintained, Regions performs specific procedures including scenario analyses and stress testing at the bank, holding company, and affiliate levels. Regions' liquidity policy requires the holding company to maintain cash sufficient to cover the greater of (1) 18 months of debt service and other cash needs or (2) a minimum cash balance of $500 million. Cash and cash equivalents at the holding company totaled $2.3 billion at March 31, 2019. Compliance with the holding company cash requirements is reported to the Risk Committee of the Board on a quarterly basis. Regions also has minimum liquidity requirements for the Bank and subsidiaries. The Bank's funding and contingency planning does not currently include any reliance on short-term unsecured sources. Risk limits are established by the Board through its Risk Appetite Statement and Liquidity Policy. The Company's Board, LROC, and ALCO regularly review 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 2 “Debt Securities” to the consolidated financial statements). The agency guaranteed mortgage-backed securities portfolio is another source of liquidity in various secured borrowing capacities.
Maturities in the loan portfolio also provide a steady flow of funds. Additional funds are provided from payments on consumer loans and one-to-four family residential first mortgage loans. Regions’ liquidity is further enhanced by its relatively stable customer deposit base. Liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not currently rely on short-term unsecured wholesale market funding.

74



The balance with the FRB is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At March 31, 2019, Regions had approximately $2.1 billion in cash on deposit with the FRB, an increase from approximately $1.5 billion at December 31, 2018.
Regions’ borrowing availability with the FRB as of March 31, 2019, based on assets pledged as collateral on that date, was $19.8 billion.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of March 31, 2019, Regions’ outstanding balance of FHLB borrowings was $8.5 billion and its total borrowing capacity from the FHLB totaled $17.5 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank pledged certain securities, commercial and real estate mortgage loans, residential first mortgage loans on one-to-four family 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 8 "Other Earning Assets" to the consolidated financial statements in the 2018 Annual Report on Form 10-K for additional information. The FHLB has been and is expected to continue to be a reliable and economical source of funding.
Regions maintains a shelf registration statement with the SEC that can be utilized by Regions to issue various debt and/or equity securities. Additionally, Regions' Board has authorized Regions Bank to issue up to $10 billion in aggregate principal amount of bank notes outstanding at any one time. Refer to Note 13 "Long-Term Borrowings" to the consolidated financial statements in the 2018 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 credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has a diversified loan portfolio in terms of product type, collateral and geography. See Table 2 for further details of each loan portfolio segment. See the “Portfolio Characteristics” section of the Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risk characteristics of each loan type.
INFORMATION SECURITY RISK
Regions faces a variety of operational risks, including information security risks. Information security risks, such as evolving and adaptive cyber attacks that are conducted regularly against Regions and other large financial institutions to compromise or disable information systems, have generally increased in recent years. This trend is expected to continue for a number of reasons, including the proliferation of new technologies, including technology-based products and services used by us and our customers, the increasing use of mobile devices and cloud technologies, the ability to conduct more financial transactions online, and the increasing sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties or fraud on the part of employees.
Regions devotes significant financial and non-financial resources to identify and mitigate threats to the confidentiality, availability and integrity of its information systems. Regions regularly assesses the threats and vulnerabilities to its environment so it can update and maintain its systems and controls to effectively mitigate these risks. Layered security controls are designed to complement each other to protect customer information and transactions. Regions regularly tests its control environment utilizing practices such as penetration testing and more targeted assessments to ensure its controls are working as expected. Regions will continue to commit the resources necessary to mitigate these growing cyber risks, as well as continue to develop and enhance controls, processes and technology to protect its systems from attacks or unauthorized access. In addition, Regions maintains a strong commitment to a comprehensive risk management program that includes due diligence and oversight of third-party relationships with vendors.
Regions’ system of internal controls also incorporates an organization-wide protocol for the appropriate reporting and escalation of information security matters to management and the Board, to ensure effective and efficient resolution and, if necessary, disclosure of any matters. The Board is actively engaged in the oversight of Regions’ continuous efforts to reinforce and enhance its operational resilience. The Board monitors Regions’ information management risk policies and practices primarily through its Risk Committee, which oversees areas of operational risk such as information technology activities; risks associated with development, infrastructure, and cybersecurity; approval and oversight of information security risk assessments, strategies, policies and programs; and disaster recovery, business continuity, and incident response plans. Additionally, the Board’s Audit Committee regularly reviews Regions’ cybersecurity practices, mainly by receiving reports on the cybersecurity management program prepared by the Chief Information Security Officer, risk management, and Internal Audit. The Board, through its various committees, is briefed at least quarterly on information security matters.
Regions participates in information sharing organizations such as FS-ISAC, to gather and share information with peer banks and other financial institutions to better prepare and protect its information systems from attack. FS-ISAC is a nonprofit organization whose objective is to protect the financial services sector against cyber and physical threats and risk. It acts as a trusted third party

75



that provides anonymity to allow members to submit threat, vulnerability and incident information in a non-attributable and trusted manner so information that would normally not be shared is instead made available to other members for the greater good of the membership. In addition to FS-ISAC, Regions is a member of BITS. BITS serves the financial community and its members by providing industry best practices on a variety of security and fraud topics.
Regions has contracts with vendors to provide denial of service mitigation. These vendors have also committed the necessary resources to support Regions in the event of a cyber event. Even though Regions devotes significant resources to combat cyber security risks, there is no guarantee that these measures will provide absolute security. As an additional security measure, Regions has engaged a computer forensics firm and an industry-leading consulting firm on retainer in case of a cyber event. Regions has also developed and maintains robust business continuity and disaster recovery plans that it could implement in the event of a cyber event so as to mitigate the effects of any such event. Some of Regions' exposure with respect to data breaches may be offset by applicable insurance.
Even if Regions successfully prevents cyber attacks to its own network, the Company may still incur losses that result from customers' account information obtained through breaches of retailers' networks where customers have transacted business. The fraud losses, as well as the costs of investigations and re-issuing new customer cards, may impact Regions' financial results. In addition, Regions also relies on some vendors to provide certain components of its business infrastructure, and although Regions actively assesses and monitors the information security capabilities of these vendors, Regions' reliance on them may also increase exposure to information security risk.
In the event of a cyber-attack or other data breach, Regions may be required to incur significant expenses, including with respect to remediation costs, costs of implementing additional preventative measures, addressing any reputational harm and addressing any related regulatory inquiries or civil litigation arising from the event.

PROVISION (CREDIT) FOR LOAN LOSSES
The provision (credit) 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 (credit) for loan losses totaled $91 million in the first quarter of 2019 compared to $(10) million during the first quarter of 2018. 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 March 31
 
 3/31/2019 vs. 3/31/2018
 
2019
 
2018
 
Amount
 
Percent
 
(Dollars in millions)
Service charges on deposit accounts
$
175

 
$
171

 
$
4

 
2.3
 %
Card and ATM fees
109

 
104

 
5

 
4.8
 %
Investment management and trust fee income
57

 
58

 
(1
)
 
(1.7
)%
Capital markets income
42

 
50

 
(8
)
 
(16.0
)%
Mortgage income
27

 
38

 
(11
)
 
(28.9
)%
Investment services fee income
19

 
17

 
2

 
11.8
 %
Commercial credit fee income
18

 
17

 
1

 
5.9
 %
Bank-owned life insurance
23

 
17

 
6

 
35.3
 %
Securities gains (losses), net
(7
)
 

 
(7
)
 
NM

Market value adjustments on employee benefit assets - defined benefit
5

 
(1
)
 
6

 
NM

Market value adjustments on employee benefit assets - other
(1
)
 

 
(1
)
 
NM

Other miscellaneous income
35

 
36

 
(1
)
 
(2.8
)%
 
$
502

 
$
507

 
$
(5
)
 
(1.0
)%
________
NM - Not Meaningful

76



Service charges on deposit accounts—Service charges on deposit accounts include non-sufficient fund fees and other service charges. The increase during the first quarter of 2019 compared to the same period of 2018 was primarily due to continued customer account growth and increases in non-sufficient fund activity.
Capital markets income—Capital markets income primarily relates to capital raising activities that includes securities underwriting and placement, loan syndication and placement, as well as foreign exchange, derivatives, merger and acquisition and other advisory services. The decrease in the first quarter of 2019 compared to the same period in 2018 was primarily due to lower fees generated from the placement of permanent financing for real estate customers. Partially offsetting this decrease was an increase in merger and acquisition advisory services.
Mortgage income—Mortgage income is generated through the origination and servicing of residential mortgage loans for long-term investors and sales of residential mortgage loans in the secondary market. The decrease in mortgage income during the first three months of 2019 compared to the same period in 2018 was primarily due to reduction in the valuation of mortgage serving rights and related hedges, lower production and lower sales revenue. The decreases were partially offset by an increase in servicing income.
Bank-owned life insurance—Bank-owned life insurance increased in the first quarter of 2019 compared to the same period in 2018 due primarily to an increase in claims benefits and favorable market adjustments.
Securities gains (losses), net—Net securities gains (losses) primarily result from the Company's asset/liability management process. The net loss incurred during the first quarter of 2019 was primarily due to the sale of certain lower-yielding securities.
Market value adjustments on employee benefit assets—Market value adjustments on employee benefit assets, both defined benefit and other, are the reflection of market value variations related to assets held for certain employee benefits. The adjustments reported as employee benefit assets - other are offset in salaries and benefits.
Other miscellaneous income—Other miscellaneous income includes net revenue from affordable housing, valuation adjustments to equity investments, fees from safe deposit boxes, check fees and other miscellaneous income. Net revenue from affordable housing includes actual gains and losses resulting from the sale of affordable housing investments, cash distributions from the investments and any related impairment charges. Other miscellaneous income was relatively unchanged in the first quarter of 2019 compared to the same period in 2018. However, there were certain transactions in each quarter that offset. During the first quarter of 2018, $7 million in net gains associated with the sale of certain low income housing investments were recorded. During the first quarter of 2019, an $8 million gain associated with the sale of $167 million of affordable housing residential mortgage loans was recognized.
NON-INTEREST EXPENSE
Table 21—Non-Interest Expense from Continuing Operations
 
 
 
 
 
 
 
 
 
Three Months Ended March 31
 
3/31/2019 vs. 3/31/2018
 
2019
 
2018
 
Amount
 
Percent
 
(Dollars in millions)
Salaries and employee benefits
$
478

 
$
495

 
$
(17
)
 
(3.4
)%
Net occupancy expense
82

 
83

 
(1
)
 
(1.2
)%
Furniture and equipment expense
76

 
81

 
(5
)
 
(6.2
)%
Outside services
45

 
47

 
(2
)
 
(4.3
)%
Professional, legal and regulatory expenses
20

 
27

 
(7
)
 
(25.9
)%
Marketing
23

 
26

 
(3
)
 
(11.5
)%
FDIC insurance assessments
13

 
24

 
(11
)
 
(45.8
)%
Branch consolidation, property and equipment charges
6

 
3

 
3

 
100.0
 %
Visa class B shares expense
4

 
2

 
2

 
100.0
 %
Provision (credit) for unfunded credit losses
(1
)
 
(4
)
 
3

 
(75.0
)%
Other miscellaneous expenses
114

 
100

 
14

 
14.0
 %
 
$
860

 
$
884

 
$
(24
)
 
(2.7
)%
Salaries and employee benefits—Salaries and employee benefits consist 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 decreased for the first quarter of 2019 compared to the same period in 2018 primarily due to staffing reductions and lower severance charges. Severance charges totaled $2 million for first quarter 2019 compared to $15 million for first quarter 2018. Full-time equivalent headcount from

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continuing operations decreased to 20,056 at March 31, 2019 from 20,666 at March 31, 2018, reflecting the impact of the Company's efficiency initiatives implemented as part of its strategic priorities.
Professional fees—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 first quarter of 2019 compared to the first quarter of 2018 primarily due to lower consulting fees.
FDIC insurance assessments—FDIC insurance assessments decreased in the first quarter of 2019 compared to the same period of 2018 due to the discontinuation of the FDIC assessment surcharge that was implemented during the third quarter of 2016 and was in place throughout the first nine months of 2018.
Other miscellaneous expenses—Other miscellaneous expenses include expenses related to communications, postage, supplies, certain credit-related costs, foreclosed property expenses, mortgage repurchase costs, operational losses and other costs (benefits) related to employee benefit plans. Other miscellaneous expenses increased during the first quarter of 2019 compared to the same period of 2018 primarily due to an increase in non-service related pension costs associated with a lower discount rate as well as higher operational losses.
INCOME TAXES
The Company’s income tax expense from continuing operations for the three months ended March 31, 2019 was $105 million and $128 million for the three months ended March 31, 2018, resulting in effective taxes rates of 21.0 percent and 23.6 percent, respectively. The Company expects the full-year effective tax rate to be 20 to 22 percent for 2019.
Many factors impact the effective tax rate including, but not limited to, the level of pre-tax income, the mix of income between various tax jurisdictions with differing tax rates, net tax benefits related to affordable housing investments, bank-owned life insurance, tax-exempt interest, and nondeductible expenses. In addition, the effective tax rate is affected by items that may occur in any given period but are not consistent from period-to-period, such as the termination of certain leveraged leases, share-based payments, valuation allowance changes and changes to unrecognized tax benefits. Accordingly, the comparability of the effective tax rate between periods may be impacted.
At March 31, 2019, the Company reported a net deferred tax liability of $120 million compared to a net deferred tax asset of $20 million at December 31, 2018. This change was due primarily to a decrease in the deferred tax asset related to unrealized losses on available for sale securities and derivative instruments.
DISCONTINUED OPERATIONS
On April 4, 2018, Regions entered into a stock purchase agreement to sell Regions Insurance Group, Inc. and related affiliates to BB&T Insurance Holdings, Inc. The transaction closed on July 2, 2018. Morgan Keegan was sold on April 2, 2012.
Regions' results from discontinued operations are presented in Note 3 "Discontinued Operations" to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018. The results from discontinued operations for both the first quarter of 2019 and 2018 were immaterial.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to pages 72 through 75 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 March 31, 2019, 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 12, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements (Unaudited) in Part I. Item 1. of this report, which is incorporated by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information concerning Regions’ repurchases of its outstanding common stock during the three month period ended March 31, 2019, 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
January 1-31, 2019
 
3,092,227

 
$
15.42

 
3,092,227

 
$
332,061,751

February 1-28, 2019
 
4,269,778

 
$
15.50

 
4,269,778

 
$
265,808,406

March 1-31, 2019
 
4,809,858

 
$
15.76

 
4,809,858

 
$
189,920,841

Total 1st Quarter
 
12,171,863

 
$
15.58

 
12,171,863

 
$
189,920,841


Regions' Board authorized, effective June 28, 2018, a new $2.031 billion common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2018 through the end of the second quarter of 2019. As of March 31, 2019, Regions has repurchased approximately 102.6 million shares of common stock, through open market purchases and a contractual repurchase agreement, at a total cost of $1.8 billion under this plan. The Company also continued to repurchase shares on the open market under its capital plan in the second quarter of 2019. As of May 7, 2019, Regions had repurchased approximately 4.8 million shares of common stock at a total cost of approximately $74.5 million. All of these shares were immediately retired upon repurchase and, therefore, will not be included in treasury stock.


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Item 6. Exhibits
The following is a list of exhibits including items incorporated by reference
3.1
 
 
 
3.2
 
 
 
 
3.3
 
 
 
3.4
 
 
 
 
3.5
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
31.1
 
 
 
31.2
 
 
 
32
 
 
 
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: May 8, 2019
 
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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