RF-2014.03.31 10-Q
Table of Contents


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

 
Form 10-Q
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2014
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)
 
(IRS Employer
Identification No.)
 
 
1900 Fifth Avenue North
Birmingham, Alabama
 
35203
(Address of principal executive offices)
 
(Zip Code)
(800) 734-4667
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The number of shares outstanding of each of the issuer’s classes of common stock was 1,379,007,243 shares of common stock, par value $.01, outstanding as of May 2, 2014.

Table of Contents


REGIONS FINANCIAL CORPORATION
FORM 10-Q
INDEX
 
 
 
 
 
Page
Part I. Financial Information
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
 
 
Item 4.
 
 
 
 
 
Part II. Other Information
 
 
Item 1.
 
 
Item 2.
 
 
Item 6.
 
 
 
 
 
 


2
Table of Contents


Forward-Looking Statements
This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The terms “Regions,” the “Company,” “we,” “us” and “our” mean Regions Financial Corporation, a Delaware corporation, and its subsidiaries when appropriate. The words “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “targets,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can,” and similar expressions often signify forward-looking statements. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s 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, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, those described below:

•
Current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, unemployment rates and potential reduction of economic growth.
•
Possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations.
•
The effects of a possible downgrade in the U.S. government’s sovereign credit rating or outlook.
•
Possible changes in market interest rates.
•
Any impairment of our goodwill or other intangibles, or any adjustment of valuation allowances on our deferred tax assets due to adverse changes in the economic environment, declining operations of the reporting unit, or other factors.
•
Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.
•
Changes in the speed of loan prepayments, loan origination and sale volumes, charge-offs, loan loss provisions or actual loan losses.
•
Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.
•
Our ability to effectively compete with other financial services companies, some of whom possess greater financial resources than we do and are subject to different regulatory standards than we are.
•
Loss of customer checking and savings account deposits as customers pursue other, higher-yield investments.
•
Our ability to develop and gain acceptance from current and prospective customers for new products and services in a timely manner.
•
Changes in laws and regulations affecting our businesses, including changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies.
•
Our ability to obtain regulatory approval (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 issue or redeem preferred stock or other regulatory capital instruments.
•
Our ability to comply with applicable capital and liquidity requirements (including finalized Basel III capital standards), including our ability to generate capital internally or raise capital on favorable terms.
•
The costs and other 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.
•
Any adverse change to our ability to collect interchange fees in a profitable manner, whether such change is the result of regulation, litigation, legislation, or other governmental action.
•
Our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business.
•
Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits.
•
Any inaccurate or incomplete information provided to us by our customers or counterparties.
•
Inability of our framework to manage risks associated with our business, including operational risk and credit risk.
•
The inability of our internal disclosure controls and procedures to prevent, detect or mitigate any material errors or fraudulent acts.
•
The effects of geopolitical instability, including wars, conflicts and terrorist attacks.
•
The effects of man-made and natural disasters, including fires, floods, droughts, tornadoes, hurricanes and environmental damage.
•
Our ability to keep pace with technological changes.
•
Our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft.


3
Table of Contents


•
Possible downgrades in our credit ratings or outlook.
•
The effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally.
•
The effects of the failure of any component of our business infrastructure which is provided by a third party.
•
Our ability to receive dividends from our subsidiaries.
•
Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies.
•
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. We assume no obligation to update or revise any forward-looking statements that are made from time to time.
See also the “Forward-Looking Statements” and “Risk Factors” sections of Regions’ Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission.


4
Table of Contents


PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2014
 
December 31, 2013
 
(In millions, except share data)
Assets
 
 
 
Cash and due from banks
$
2,072

 
$
1,661

Interest-bearing deposits in other banks
3,114

 
3,612

Federal funds sold and securities purchased under agreements to resell
10

 
—

Trading account securities
117

 
111

Securities held to maturity (estimated fair value of $2,294 and $2,307, respectively)
2,317

 
2,353

Securities available for sale
21,615

 
21,485

Loans held for sale (includes $344 and $429 measured at fair value, respectively)
395

 
1,055

Loans, net of unearned income
75,680

 
74,609

Allowance for loan losses
(1,261
)
 
(1,341
)
Net loans
74,419

 
73,268

Other interest-earning assets
86

 
86

Premises and equipment, net
2,194

 
2,216

Interest receivable
316

 
313

Goodwill
4,816

 
4,816

Mortgage servicing rights at fair value
288

 
297

Other identifiable intangible assets
294

 
295

Other assets
5,880

 
5,828

Total assets
$
117,933

 
$
117,396

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
31,154

 
$
30,083

Interest-bearing
62,239

 
62,370

Total deposits
93,393

 
92,453

Borrowed funds:
 
 
 
Short-term borrowings:
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1,981

 
2,182

Long-term borrowings
4,226

 
4,830

Total borrowed funds
6,207

 
7,012

Other liabilities
2,201

 
2,163

Total liabilities
101,801

 
101,628

Stockholders’ equity:
 
 
 
Preferred stock, authorized 10 million shares:
 
 
 
Series A, non-cumulative perpetual, par value $1.00 (liquidation preference $1,000.00) per share, including related surplus, net of discount;
Issued—500,000 shares
442

 
450

Common stock, par value $.01 per share:
 
 
 
Authorized 3 billion shares
 
 
 
Issued including treasury stock—1,419,451,253 and 1,419,006,360 shares, respectively
14

 
14

Additional paid-in capital
19,179

 
19,216

Retained earnings (deficit)
(1,897
)
 
(2,216
)
Treasury stock, at cost—41,264,356 and 41,285,676 shares, respectively
(1,377
)
 
(1,377
)
Accumulated other comprehensive income (loss), net
(229
)
 
(319
)
Total stockholders’ equity
16,132

 
15,768

Total liabilities and stockholders’ equity
$
117,933

 
$
117,396


See notes to consolidated financial statements.


5
Table of Contents


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31
 
2014
 
2013
 
(In millions, except per share data)
Interest income on:
 
 
 
Loans, including fees
$
732

 
$
743

Securities - taxable
154

 
156

Loans held for sale
8

 
9

Trading account securities
2

 
1

Other interest-earning assets
2

 
2

Total interest income
898

 
911

Interest expense on:
 
 
 
Deposits
27

 
42

Long-term borrowings
55

 
71

Total interest expense
82

 
113

Net interest income
816

 
798

Provision for loan losses
2

 
10

Net interest income after provision for loan losses
814

 
788

Non-interest income:
 
 
 
Service charges on deposit accounts
173

 
184

Card and ATM fees
79

 
76

Mortgage income
40

 
72

Securities gains (losses), net
2

 
15

Other
144

 
154

Total non-interest income
438

 
501

Non-interest expense:
 
 
 
Salaries and employee benefits
455

 
447

Net occupancy expense
93

 
90

Furniture and equipment expense
70

 
69

Other
199

 
236

Total non-interest expense
817

 
842

Income from continuing operations before income taxes
435

 
447

Income tax expense
128

 
114

Income from continuing operations
307

 
333

Discontinued operations:
 
 
 
Income from discontinued operations before income taxes
19

 
4

Income tax expense
7

 
2

Income from discontinued operations, net of tax
12

 
2

Net income
$
319

 
$
335

Net income from continuing operations available to common shareholders
$
299

 
$
325

Net income available to common shareholders
$
311

 
$
327

Weighted-average number of shares outstanding:
 
 
 
Basic
1,378

 
1,413

Diluted
1,390

 
1,423

Earnings per common share from continuing operations:
 
 
 
Basic
$
0.22

 
$
0.23

Diluted
0.21

 
0.23

Earnings per common share:
 
 
 
Basic
$
0.23

 
$
0.23

Diluted
0.22

 
0.23

Cash dividends declared per common share
0.03

 
0.01


See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31
 
2014
 
2013
 
(In millions)
Net income
$
319

 
$
335

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

 
—

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

Net change in unrealized losses on securities transferred to held to maturity
2

 
—

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $49 and ($43) tax effect, respectively)
79

 
(68
)
Less: reclassification adjustments for securities gains (losses) realized in net income (net of $1 and $5 tax effect, respectively)
1

 
10

Net change in unrealized gains (losses) on securities available for sale, net of tax
78

 
(78
)
Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $14 and $1 tax effect, respectively)
23

 
1

Less: reclassification adjustments for gains (losses) realized in net income (net of $11 and $6 tax effect, respectively)
17

 
9

Net change in unrealized gains (losses) on derivative instruments, net of tax
6

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

 
(1
)
Less: reclassification adjustments for amortization of actuarial loss and prior service cost realized in net income, and other (net of ($2) and ($6) tax effect, respectively)
(4
)
 
(10
)
Net change from defined benefit pension plans, net of tax
4

 
9

Other comprehensive income (loss), net of tax
90

 
(77
)
Comprehensive income
$
409

 
$
258

See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Treasury
Stock,
At Cost
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(In millions, except share and per share data)
BALANCE AT JANUARY 1, 2013
1

 
$
482

 
1,413

 
$
15

 
$
19,652

 
$
(3,338
)
 
$
(1,377
)
 
$
65

 
$
15,499

Net income
—

 
—

 
—

 
—

 
—

 
335

 
—

 
—

 
335

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

 
—

 
—

 
—

 
—

 
—

 
—

 
(78
)
 
(78
)
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8
)
 
(8
)
Net change from defined benefit pension plans, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9

 
9

Cash dividends declared—$0.01 per share
—

 
—

 
—

 
—

 
(14
)
 
—

 
—

 
—

 
(14
)
Series A preferred stock dividends
—

 
(8
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(8
)
Common stock transactions:
 
 
 
 
 
 
 
 

 

 

 

 

Impact of stock transactions under compensation plans, net
—

 
—

 
—

 
—

 
5

 
—

 
—

 
—

 
5

BALANCE AT MARCH 31, 2013
1

 
$
474

 
1,413

 
$
15

 
$
19,643

 
$
(3,003
)
 
$
(1,377
)
 
$
(12
)
 
$
15,740

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2014
1

 
$
450

 
1,378

 
$
14

 
$
19,216

 
$
(2,216
)
 
$
(1,377
)
 
$
(319
)
 
$
15,768

Net income
—

 
—

 
—

 
—

 
—

 
319

 
—

 
—

 
319

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

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
2

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

 
—

 
—

 
—

 
—

 
—

 
—

 
78

 
78

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

 
—

 
—

 
—

 
—

 
—

 
—

 
6

 
6

Net change from defined benefit pension plans, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4

 
4

Cash dividends declared—$0.03 per share
—

 
—

 
—

 
—

 
(41
)
 
—

 
—

 
—

 
(41
)
Series A preferred stock dividends
—

 
(8
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(8
)
Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchase
—

 
—

 
(1
)
 
—

 
(8
)
 
—

 
—

 
—

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

 
—

 
1

 
—

 
12

 
—

 
—

 
—

 
12

BALANCE AT MARCH 31, 2014
1

 
$
442

 
1,378

 
$
14

 
$
19,179

 
$
(1,897
)
 
$
(1,377
)
 
$
(229
)
 
$
16,132


See notes to consolidated financial statements.


8
Table of Contents


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31
 
2014
 
2013
 
(In millions)
Operating activities:
 
 
 
Net income
$
319

 
$
335

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
2

 
10

Depreciation, amortization and accretion, net
122

 
171

Provision for losses on other real estate, net
—

 
3

Securities (gains) losses, net
(2
)
 
(15
)
Deferred income tax expense
115

 
121

Originations and purchases of loans held for sale
(511
)
 
(1,247
)
Proceeds from sales of loans held for sale
640

 
1,567

Gain on TDRs held for sale, net
(35
)
 
—

(Gain) loss on sale of loans, net
(7
)
 
(43
)
Net change in operating assets and liabilities:
 
 
 
Trading account securities
(6
)
 
(5
)
Other interest-earning assets
—

 
798

Interest receivable
(3
)
 
(22
)
Other assets
(250
)
 
226

Other liabilities
36

 
(758
)
Other
1

 
(11
)
Net cash from operating activities
421

 
1,130

Investing activities:
 
 
 
Proceeds from sales of securities available for sale
185

 
388

Proceeds from maturities of securities held to maturity
36

 
2

Proceeds from maturities of securities available for sale
711

 
1,765

Purchases of securities available for sale
(846
)
 
(2,527
)
Proceeds from sales of loans
580

 
48

Purchases of loans
(246
)
 
(220
)
Net change in loans
(963
)
 
(2
)
Net purchases of premises and equipment
(37
)
 
(33
)
Net cash from investing activities
(580
)
 
(579
)
Financing activities:
 
 
 
Net change in deposits
940

 
(1,341
)
Net change in short-term borrowings
(201
)
 
256

Payments on long-term borrowings
(600
)
 
—

Cash dividends on common stock
(41
)
 
(14
)
Cash dividends on preferred stock
(8
)
 
(8
)
Repurchase of common stock
(8
)
 
—

Net cash from financing activities
82

 
(1,107
)
Net change in cash and cash equivalents
(77
)
 
(556
)
Cash and cash equivalents at beginning of year
5,273

 
5,489

Cash and cash equivalents at end of period
$
5,196

 
$
4,933


See notes to consolidated financial statements.


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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2014 and 2013
NOTE 1. BASIS OF PRESENTATION
Regions Financial Corporation (“Regions” or the “Company”) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located primarily in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The Company is subject to competition from other financial institutions, is subject to the regulations of certain government agencies and undergoes periodic examinations by certain of those regulatory authorities.
The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with accounting principles generally accepted in the United States (“GAAP”) and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions’ Form 10-K for the year ended December 31, 2013. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.
On January 11, 2012, Regions entered into an agreement to sell Morgan Keegan & Company, Inc. (“Morgan Keegan”) and related affiliates. The transaction closed on April 2, 2012. See Note 2 and Note 14 for further details. Results of operations for the entities sold are presented separately as discontinued operations for all periods presented on the consolidated statements of income. This presentation is consistent with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.
Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. For example, the "card and ATM fees" line item on the consolidated statements of income represents the combined amounts of credit card/bank card income and debit card and ATM related revenue. Debit card and ATM related revenue was previously included in the "service charges on deposit accounts" line item. Credit card/bank card income was previously included in the "other" non-interest income line item. These reclassifications are immaterial and have no effect on net income, comprehensive income, total assets or total stockholders’ equity as previously reported.
NOTE 2. DISCONTINUED OPERATIONS
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and related affiliates to Raymond James Financial, Inc. (“Raymond James”). The transaction closed on April 2, 2012. Regions Investment Management, Inc. (formerly known as Morgan Asset Management, Inc.) and Regions Trust were not included in the sale. In connection with the closing of the sale, Regions agreed to indemnify Raymond James for all litigation matters related to pre-closing activities. See Note 14 for related disclosure.


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The following table represents the condensed results of operations for discontinued operations:
 
Three Months Ended March 31
 
2014
 
2013
 
(In millions, except per share data)
Non-interest expense:
 
 
 
Professional and legal expenses
$
(19
)
 
$
(5
)
Other
—

 
1

Total non-interest expense
(19
)
 
(4
)
Income from discontinued operations before income taxes
19

 
4

Income tax expense
7

 
2

Income from discontinued operations, net of tax
$
12

 
$
2

Earnings per common share from discontinued operations:
 
 
 
Basic
$
0.01

 
$
0.00

Diluted
$
0.01

 
$
0.00


NOTE 3. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities held to maturity and securities available for sale are as follows:
 
March 31, 2014
 
 
 
Recognized in OCI (1)
 
 
 
Not recognized in OCI
 
 
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1

 
$
—

 
$
—

 
$
1

 
$
—

 
$
—

 
$
1

Federal agency securities
351

 
—

 
(14
)
 
337

 
—

 
—

 
337

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,840

 
—

 
(79
)
 
1,761

 
—

 
(17
)
 
1,744

Commercial agency
226

 
—

 
(8
)
 
218

 
—

 
(6
)
 
212

 
$
2,418

 
$
—

 
$
(101
)
 
$
2,317

 
$
—

 
$
(23
)
 
$
2,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
57

 
$
—

 
$
—

 
$
57

 
 
 
 
 
$
57

Federal agency securities
81

 
1

 
—

 
82

 
 
 
 
 
82

Obligations of states and political subdivisions
4

 
—

 
—

 
4

 
 
 
 
 
4

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
15,498

 
209

 
(121
)
 
15,586

 
 
 
 
 
15,586

Residential non-agency
8

 
1

 
—

 
9

 
 
 
 
 
9

Commercial agency
1,125

 
6

 
(13
)
 
1,118

 
 
 
 
 
1,118

Commercial non-agency
1,264

 
13

 
(23
)
 
1,254

 
 
 
 
 
1,254

Corporate and other debt securities
2,838

 
51

 
(44
)
 
2,845

 
 
 
 
 
2,845

Equity securities
648

 
12

 
—

 
660

 
 
 
 
 
660

 
$
21,523

 
$
293

 
$
(201
)
 
$
21,615

 
 
 
 
 
$
21,615

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


11
Table of Contents


 
December 31, 2013
 
 
 
Recognized in OCI (1)
 
 
 
Not recognized in OCI
 
 
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1

 
$
—

 
$
—

 
$
1

 
$
—

 
$
—

 
$
1

Federal agency securities
351

 
—

 
(15
)
 
336

 
—

 
(3
)
 
333

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,878

 
—

 
(81
)
 
1,797

 
—

 
(37
)
 
1,760

Commercial agency
227

 
—

 
(8
)
 
219

 
—

 
(6
)
 
213

 
$
2,457

 
$
—

 
$
(104
)
 
$
2,353

 
$
—

 
$
(46
)
 
$
2,307

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

 
$
—

 
$
—

 
$
56

 
 
 
 
 
$
56

Federal agency securities
88

 
1

 
—

 
89

 
 
 
 
 
89

Obligations of states and political subdivisions
5

 
—

 
—

 
5

 
 
 
 
 
5

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
15,664

 
183

 
(170
)
 
15,677

 
 
 
 
 
15,677

Residential non-agency
8

 
1

 
—

 
9

 
 
 
 
 
9

Commercial agency
947

 
4

 
(16
)
 
935

 
 
 
 
 
935

Commercial non-agency
1,232

 
12

 
(33
)
 
1,211

 
 
 
 
 
1,211

Corporate and other debt securities
2,855

 
44

 
(72
)
 
2,827

 
 
 
 
 
2,827

Equity securities
664

 
12

 
—

 
676

 
 
 
 
 
676

 
$
21,519

 
$
257

 
$
(291
)
 
$
21,485

 
 
 
 
 
$
21,485

_________
(1) The gross unrealized losses recognized in other comprehensive income (OCI) on held to maturity securities resulted from a transfer of available for sale securities to held to maturity in the second quarter of 2013.
 
 
During the second quarter of 2013, Regions transferred securities with a fair value of $2.4 billion from available for sale to held to maturity. Management determined it has both the positive intent and ability to hold these securities to maturity. The securities were reclassified at fair value at the time of transfer and represented a non-cash transaction. Accumulated other comprehensive income included net pre-tax unrealized losses of $111 million on the securities at the date of transfer. These unrealized losses and the offsetting OCI components are being amortized into net interest income over the remaining life of the related securities as a yield adjustment, resulting in no impact on future net income.
Equity securities in the tables above included the following amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock. Shares in the Federal Reserve Bank and FHLB are accounted for at amortized cost, which approximates fair value.
 
March 31, 2014
 
December 31, 2013
 
(In millions)
Federal Reserve Bank
$
472

 
$
472

Federal Home Loan Bank
34

 
67

Securities with carrying values of $12.7 billion and $12.5 billion at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements.
The amortized cost and estimated fair value of securities available for sale and securities held to maturity at March 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


12
Table of Contents


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

 
$
1

Due after one year through five years
1

 
1

Due after five years through ten years
350

 
336

Mortgage-backed securities:
 
 
 
Residential agency
1,840

 
1,744

Commercial agency
226

 
212

 
$
2,418

 
$
2,294

Securities available for sale:
 
 
 
Due in one year or less
$
74

 
$
75

Due after one year through five years
1,080

 
1,098

Due after five years through ten years
1,440

 
1,421

Due after ten years
386

 
394

Mortgage-backed securities:
 
 
 
Residential agency
15,498

 
15,586

Residential non-agency
8

 
9

Commercial agency
1,125

 
1,118

Commercial non-agency
1,264

 
1,254

Equity securities
648

 
660

 
$
21,523

 
$
21,615

The following tables present gross unrealized losses and the related estimated fair value of securities available for sale and held to maturity at March 31, 2014 and December 31, 2013. For securities transferred to held to maturity from available for sale, the analysis in the tables below is comparing the securities' original amortized cost to its current estimated fair value. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more.
 
March 31, 2014
 
Less Than Twelve
Months
 
Twelve Months or More
 
Total
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Federal agency securities
$
192

 
$
(8
)
 
$
144

 
$
(6
)
 
$
336

 
$
(14
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
941

 
(50
)
 
801

 
(45
)
 
1,742

 
(95
)
Commercial agency
165

 
(11
)
 
46

 
(4
)
 
211

 
(15
)
 
$
1,298

 
$
(69
)
 
$
991

 
$
(55
)
 
$
2,289

 
$
(124
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
11

 
$
—

 
$
4

 
$
—

 
$
15

 
$
—

Federal agency securities
—

 
—

 
10

 
—

 
10

 
—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
5,825

 
(114
)
 
291

 
(8
)
 
6,116

 
(122
)
Commercial agency
635

 
(12
)
 
—

 
—

 
635

 
(12
)
Commercial non-agency
546

 
(17
)
 
146

 
(6
)
 
692

 
(23
)
All other securities
1,087

 
(30
)
 
262

 
(14
)
 
1,349

 
(44
)
 
$
8,104

 
$
(173
)
 
$
713

 
$
(28
)
 
$
8,817

 
$
(201
)



13
Table of Contents


 
December 31, 2013
 
Less Than Twelve
Months
 
Twelve Months or More
 
Total
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
(In millions)
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Federal agency securities
$
190

 
$
(9
)
 
$
142

 
$
(8
)
 
$
332

 
$
(17
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
1,236

 
(77
)
 
521

 
(41
)
 
1,757

 
(118
)
Commercial agency
212

 
(15
)
 
—

 
—

 
212

 
(15
)
 
$
1,638

 
$
(101
)
 
$
663

 
$
(49
)
 
$
2,301

 
$
(150
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
15

 
$
—

 
$
1

 
$
—

 
$
16

 
$
—

Federal agency securities
3

 
—

 
9

 
—

 
12

 
—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
6,153

 
(161
)
 
270

 
(9
)
 
6,423

 
(170
)
Commercial agency
610

 
(17
)
 
—

 
—

 
610

 
(17
)
Commercial non-agency
711

 
(30
)
 
62

 
(3
)
 
773

 
(33
)
All other securities
1,422

 
(58
)
 
209

 
(13
)
 
1,631

 
(71
)
 
$
8,914

 
$
(266
)
 
$
551

 
$
(25
)
 
$
9,465

 
$
(291
)
The number of individual securities in an unrealized loss position in the tables above decreased from 1,052 at December 31, 2013 to 936 at March 31, 2014. The decrease in the number of securities and the total amount of unrealized losses from year-end 2013 was primarily due to changes in interest rates. In the instances where an unrealized loss did occur, there was no indication of an adverse change in credit on any of the underlying securities in the tables above. Management believes no individual unrealized loss represented an other-than-temporary impairment as of those dates. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, the securities before the recovery of their amortized cost basis, which may be at maturity.
Gross realized gains and gross realized losses on sales of securities available for sale are shown in the table below. The cost of securities sold is based on the specific identification method.
 
Three Months Ended March 31
 
2014
 
2013
 
(In millions)
Gross realized gains
$
3

 
$
16

Gross realized losses
(1
)
 
(1
)
Securities gains, net
$
2

 
$
15

    


14
Table of Contents


NOTE 4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
LOANS
The following table presents the distribution of Regions' loan portfolio by segment and class, net of unearned income:
 
March 31, 2014
 
December 31, 2013
 
(In millions, net of unearned income)
Commercial and industrial
$
30,466

 
$
29,413

Commercial real estate mortgage—owner-occupied
9,257

 
9,495

Commercial real estate construction—owner-occupied
375

 
310

Total commercial
40,098

 
39,218

Commercial investor real estate mortgage
5,338

 
5,318

Commercial investor real estate construction
1,654

 
1,432

Total investor real estate
6,992

 
6,750

Residential first mortgage
12,136

 
12,163

Home equity
11,148

 
11,294

Indirect
3,253

 
3,075

Consumer credit card
917

 
948

Other consumer
1,136

 
1,161

Total consumer
28,590

 
28,641

 
$
75,680

 
$
74,609

During the three months ended March 31, 2014 and 2013, Regions purchased approximately $246 million and $220 million, respectively, in indirect loans from a third party.
At March 31, 2014, $13.6 billion in loans held by Regions were pledged to secure borrowings from the FHLB. At March 31, 2014, an additional $29.1 billion of loans held by Regions were pledged to the Federal Reserve Bank.

ALLOWANCE FOR CREDIT LOSSES
Regions determines the appropriate level of the allowance on at least a quarterly basis. Refer to Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements to the Annual Report on Form 10-K for the year ended December 31, 2013, 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, 2014 and 2013. The total allowance for loan losses and the related loan portfolio ending balances as of March 31, 2014 and 2013 are disaggregated to detail the amounts derived through individual evaluation and collective evaluation for impairment. Prior to the second quarter of 2013, only impaired loans with the amount of impairment measured at a note-level (i.e. non-accrual commercial and investor real-estate loans greater than or equal to $2.5 million) were reported as individually evaluated in the tables below. In the second quarter of 2013, Regions revised its presentation to also reflect all TDRs as individually evaluated for impairment. The allowance for loan losses and the loan portfolio ending balances related to collectively evaluated loans included the remainder of the portfolio. Prior period amounts were reclassified to conform to this presentation.
Beginning in the third quarter of 2013, Regions revised its estimation process for non-accrual commercial and investor real-estate loans less than $2.5 million to utilize the same discounted cash flow analysis used for accruing and non-accruing TDRs less than $2.5 million described in Note 1 “Summary of Significant Accounting Policies” to the Annual Report on Form 10-K for the year ended December 31, 2013. This change in the estimation process did not have a material impact to the overall level of the allowance for loan losses or the provision for loan losses. As a result, the March 31, 2014 allowance for loan losses and the loan portfolio ending balances for loans individually evaluated for impairment reflect this revision in the tables below.
 
 
 
 
 
 


15
Table of Contents


 
Three Months Ended March 31, 2014
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2014
$
711

 
$
236

 
$
394

 
$
1,341

Provision (credit) for loan losses
5

 
(27
)
 
24

 
2

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(41
)
 
(9
)
 
(74
)
 
(124
)
Recoveries
17

 
8

 
17

 
42

Net loan losses
(24
)
 
(1
)
 
(57
)
 
(82
)
Allowance for loan losses, March 31, 2014
692

 
208

 
361

 
1,261

Reserve for unfunded credit commitments,
January 1, 2014
63

 
12

 
3

 
78

Provision (credit) for unfunded credit losses
—

 
(1
)
 
1

 
—

Reserve for unfunded credit commitments,
March 31, 2014
63

 
11

 
4

 
78

Allowance for credit losses, March 31, 2014
$
755

 
$
219

 
$
365

 
$
1,339

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
223

 
$
98

 
$
90

 
$
411

Collectively evaluated for impairment
469

 
110

 
271

 
850

Total allowance for loan losses
$
692

 
$
208

 
$
361

 
$
1,261

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,006

 
$
676

 
$
869

 
$
2,551

Collectively evaluated for impairment
39,092

 
6,316

 
27,721

 
73,129

Total loans evaluated for impairment
$
40,098

 
$
6,992

 
$
28,590

 
$
75,680



16
Table of Contents


 
Three Months Ended March 31, 2013
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2013
$
847

 
$
469

 
$
603

 
$
1,919

Provision (credit) for loan losses
17

 
(31
)
 
24

 
10

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(99
)
 
(23
)
 
(102
)
 
(224
)
Recoveries
17

 
9

 
18

 
44

Net loan losses
(82
)
 
(14
)
 
(84
)
 
(180
)
Allowance for loan losses, March 31, 2013
782

 
424

 
543

 
1,749

Reserve for unfunded credit commitments,
January 1, 2013
69

 
10

 
4

 
83

Provision for unfunded credit losses
5

 
—

 
—

 
5

Reserve for unfunded credit commitments,
March 31, 2013
74

 
10

 
4

 
88

Allowance for credit losses, March 31, 2013
$
856

 
$
434

 
$
547

 
$
1,837

Portion of ending allowance for loan losses:
 
 

 

 

Individually evaluated for impairment*
$
189

 
$
185

 
$
185

 
$
559

Collectively evaluated for impairment*
593

 
239

 
358

 
1,190

Total allowance for loan losses
$
782

 
$
424

 
$
543

 
$
1,749

Portion of loan portfolio ending balance:
 
 

 

 

Individually evaluated for impairment*
$
1,001

 
$
1,172

 
$
1,642

 
$
3,815

Collectively evaluated for impairment*
36,738

 
6,150

 
27,233

 
70,121

Total loans evaluated for impairment
$
37,739

 
$
7,322

 
$
28,875

 
$
73,936

*As discussed above, prior period amounts have been reclassified to conform to the current period classification.
PORTFOLIO SEGMENT RISK FACTORS
The following describe the risk characteristics relevant to each of the portfolio segments.
Commercial—The commercial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial also includes owner-occupied commercial real estate loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations.
Investor Real Estate—Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment is comprised 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 valuation of real estate.
Consumer—The consumer loan portfolio segment includes residential first mortgage, home equity, indirect, 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 lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. Consumer credit card includes Regions branded consumer credit card accounts.


17
Table of Contents


Other consumer loans include direct consumer installment loans and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
CREDIT QUALITY INDICATORS
The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of March 31, 2014 and December 31, 2013. Commercial and investor real estate loan portfolio segments are detailed by categories related to underlying credit quality and probability of default. Regions assigns these categories at loan origination and reviews the relationship utilizing a risk-based approach on, at minimum, an annual basis or at any time management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Both quantitative and qualitative factors are considered in this review process. These categories are utilized to develop the associated allowance for credit losses.
•
Pass—includes obligations where the probability of default is considered low;
•
Special Mention—includes obligations that have potential weakness which may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. Obligations in this category may also be subject to economic or market conditions which may, in the future, have an adverse effect on debt service ability;
•
Substandard Accrual—includes obligations that exhibit a well-defined weakness which 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, 2014
 
Pass
 
Special  Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
29,289

 
$
501

 
$
396

 
$
280

 
$
30,466

Commercial real estate mortgage—owner-occupied
8,356

 
237

 
357

 
307

 
9,257

Commercial real estate construction—owner-occupied
350

 
6

 
3

 
16

 
375

Total commercial
$
37,995

 
$
744

 
$
756

 
$
603

 
$
40,098

Commercial investor real estate mortgage
$
4,558

 
$
269

 
$
302

 
$
209

 
$
5,338

Commercial investor real estate construction
1,556

 
54

 
36

 
8

 
1,654

Total investor real estate
$
6,114

 
$
323

 
$
338

 
$
217

 
$
6,992