RF-2013.3.31-10Q
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, 2013
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 1,413,378,469 shares of common stock, par value $.01, outstanding as of May 3, 2013.


Table of Contents

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

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Forward-Looking Statements
This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation (“Regions”) under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of Regions may include forward-looking statements. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, we, together with our subsidiaries, unless the context implies otherwise, claim the protection afforded by the safe harbor in the Act. 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:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law in July 2010, and a number of legislative, regulatory and tax proposals remain pending. Future and proposed rules, including those that are part of the Basel III process, are expected to require banking institutions to increase levels of capital. All of the foregoing may have significant effects on Regions and the financial services industry, the exact nature and extent of which cannot be determined at this time.
Possible additional loan losses, impairment of goodwill and other intangibles, and adjustment of valuation allowances on deferred tax assets and the impact on earnings and capital.
Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins. Increases in benchmark interest rates could also increase debt service requirements for customers whose terms include a variable interest rate, which may negatively impact the ability of borrowers to pay as contractually obligated.
Possible changes in general economic and business conditions in the United States in general and in the communities Regions serves in particular, including any prolonging or worsening of the current challenging economic conditions, including unemployment levels.
Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.
Possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations, may have an adverse effect on business.
Possible regulations issued by the Consumer Financial Protection Bureau or other regulators which might adversely impact Regions’ business model or products and services.
Possible stresses in the financial and real estate markets, including possible deterioration in property values.
Regions’ 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 Regions’ business.
Regions’ ability to expand into new markets and to maintain profit margins in the face of competitive pressures.
Regions’ ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Regions’ customers and potential customers.
Regions’ ability to keep pace with technological changes.
Regions’ ability to effectively identify and manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk, reputational risk, counterparty risk, international risk, and regulatory and compliance risk.
Regions’ ability to ensure adequate capitalization which is impacted by inherent uncertainties in forecasting credit losses.
The cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative, or arbitral rulings or proceedings.
The effects of increased competition from both banks and non-banks.
The effects of geopolitical instability and risks such as terrorist attacks.
Regions' ability to identify and address data security breaches.
Possible changes in consumer and business spending and saving habits could affect Regions’ ability to increase assets and to attract deposits.
The effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes, and the effects of man-made disasters.
Possible downgrades in ratings issued by rating agencies.
Possible changes in the speed of loan prepayments by Regions’ customers and loan origination or sales volumes.
Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.

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The effects of problems encountered by larger or similar financial institutions that adversely affect Regions or the banking industry generally.
Regions’ ability to receive dividends from its subsidiaries.
The effects of the failure of any component of Regions’ business infrastructure which is provided by a third party.
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 Regions’ reputation resulting from developments related to any of the items identified above.
The words “believe,” “expect,” “anticipate,” “project,” and similar expressions often signify forward-looking statements. 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, 2012 as filed with the Securities and Exchange Commission.

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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions, except share data)
Assets
 
 
 
 
Cash and due from banks
 
$
1,796

 
$
1,979

Interest-bearing deposits in other banks
 
3,137

 
3,510

Trading account securities
 
121

 
116

Securities available for sale
 
27,089

 
27,244

Securities held to maturity (estimated fair value of $9 and $11, respectively)
 
8

 
10

Loans held for sale (includes $1,016 and $1,282 measured at fair value, respectively)
 
1,082

 
1,383

Loans, net of unearned income
 
73,936

 
73,995

Allowance for loan losses
 
(1,749
)
 
(1,919
)
Net loans
 
72,187

 
72,076

Other interest-earning assets
 
102

 
900

Premises and equipment, net
 
2,252

 
2,279

Interest receivable
 
366

 
344

Goodwill
 
4,816

 
4,816

Mortgage servicing rights at fair value
 
236

 
191

Other identifiable intangible assets
 
331

 
345

Other assets
 
6,195

 
6,154

Total assets
 
$
119,718

 
$
121,347

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits:
 
 
 
 
Non-interest-bearing
 
$
29,971

 
$
29,963

Interest-bearing
 
64,162

 
65,511

Total deposits
 
94,133

 
95,474

Borrowed funds:
 
 
 
 
Short-term borrowings:
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
 
1,829

 
1,449

Other short-term borrowings
 
1

 
125

Total short-term borrowings
 
1,830

 
1,574

Long-term borrowings
 
5,847

 
5,861

Total borrowed funds
 
7,677

 
7,435

Other liabilities
 
2,168

 
2,939

Total liabilities
 
103,978

 
105,848

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
 
474

 
482

Common stock, par value $.01 per share:
 
 
 
 
Authorized 3 billion shares
 
 
 
 
Issued including treasury stock—1,454,665,741 and 1,454,626,952 shares, respectively
 
15

 
15

Additional paid-in capital
 
19,643

 
19,652

Retained earnings (deficit)
 
(3,003
)
 
(3,338
)
Treasury stock, at cost—41,287,272 and 41,287,460 shares, respectively
 
(1,377
)
 
(1,377
)
Accumulated other comprehensive income (loss), net
 
(12
)
 
65

Total stockholders’ equity
 
15,740

 
15,499

Total liabilities and stockholders’ equity
 
$
119,718

 
$
121,347


See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31
 
2013
 
2012
 
(In millions, except per share data)
Interest income on:
 
 
 
Loans, including fees
$
743

 
$
812

Securities - taxable
156

 
174

Loans held for sale
9

 
7

Trading account securities
1

 
1

Other interest-earning assets
2

 
3

Total interest income
911

 
997

Interest expense on:
 
 
 
Deposits
42

 
88

Long-term borrowings
71

 
82

Total interest expense
113

 
170

Net interest income
798

 
827

Provision for loan losses
10

 
117

Net interest income after provision for loan losses
788

 
710

Non-interest income:
 
 
 
Service charges on deposit accounts
242

 
254

Investment fee income
27

 
28

Mortgage income
72

 
77

Trust department income
49

 
49

Securities gains, net
15

 
12

Other
96

 
104

Total non-interest income
501

 
524

Non-interest expense:
 
 
 
Salaries and employee benefits
447

 
442

Net occupancy expense
90

 
94

Furniture and equipment expense
69

 
64

Other
236

 
313

Total non-interest expense
842

 
913

Income from continuing operations before income taxes
447

 
321

Income tax expense
114

 
82

Income from continuing operations
333

 
239

Discontinued operations:
 
 
 
Income (loss) from discontinued operations before income taxes
4

 
(65
)
Income tax expense (benefit)
2

 
(25
)
Income (loss) from discontinued operations, net of tax
2

 
(40
)
Net income
$
335

 
$
199

Net income from continuing operations available to common shareholders
$
325

 
$
185

Net income available to common shareholders
$
327

 
$
145

Weighted-average number of shares outstanding:
 
 
 
Basic
1,413

 
1,282

Diluted
1,423

 
1,283

Earnings per common share from continuing operations:
 
 
 
Basic
$
0.23

 
$
0.14

Diluted
0.23

 
0.14

Earnings per common share:
 
 
 
Basic
$
0.23

 
$
0.11

Diluted
0.23

 
0.11

Cash dividends declared per common share
0.01

 
0.01

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended March 31
 
2013
 
2012
 
(In millions)
Net income
$
335

 
$
199

Other comprehensive income (loss), net of tax:*
 
 
 
Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $(43) and zero tax effect for the three months ended March 31, 2013 and 2012, respectively)
(68
)
 
2

Less: reclassification adjustments for securities gains realized in net income (net of $5 and $4 tax effect for the three months ended March 31, 2013 and 2012, respectively)
10

 
8

Net change in unrealized gains (losses) on securities available for sale, net of tax
(78
)
 
(6
)
Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains on derivatives arising during the period (net of $1 and $6 tax effect for the three months ended March 31, 2013 and 2012, respectively)
1

 
10

Less: reclassification adjustments for gains realized in net income (net of $6 and $6 tax effect for the three months ended March 31, 2013 and 2012, respectively)
9

 
10

Net change in unrealized gains (losses) on derivative instruments, net of tax
(8
)
 

Defined benefit pension plans and other post employment benefits:
 
 
 
Net actuarial gains (losses) arising during the period (net of zero and $1 tax effect for the three months ended March 31, 2013 and 2012, respectively)
(1
)
 
4

Less: reclassification adjustments for amortization of actuarial loss and prior service cost realized in net income, and other (net of $(6) and $(7) tax effect for the three months ended March 31, 2013 and 2012, respectively)
(10
)
 
(11
)
Net change from defined benefit pension plans, net of tax
9

 
15

Other comprehensive income (loss), net of tax*
$
(77
)
 
$
9

Comprehensive income
$
258

 
$
208

________
* All other comprehensive amounts are shown net of tax.

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, 2012(1)
4

 
$
3,419

 
1,259

 
$
13

 
$
18,855

 
$
(4,322
)
 
$
(1,397
)
 
$
(69
)
 
$
16,499

Net income

 

 

 

 

 
199

 

 

 
199

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

 

 

 

 

 

 

 
(6
)
 
(6
)
Net change from defined benefit pension plans, net of tax

 

 

 

 

 

 

 
15

 
15

Cash dividends declared—$0.01 per share(1)

 

 

 

 
(13
)
 

 

 

 
(13
)
Preferred dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury preferred stock dividends

 

 

 

 

 
(44
)
 

 

 
(44
)
Preferred stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount accretion

 
10

 

 

 

 
(10
)
 

 

 

Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuance of 153 million shares of common stock

 

 
153

 
2

 
873

 

 

 

 
875

Impact of stock transactions under compensation plans, net

 

 

 

 
6

 

 
3

 

 
9

BALANCE AT MARCH 31, 2012(1)
4

 
$
3,429

 
1,412

 
$
15

 
$
19,721

 
$
(4,177
)
 
$
(1,394
)
 
$
(60
)
 
$
17,534

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

_________
(1)
Prior period cash dividends declared on common stock have been reclassified from retained earnings (deficit) to additional paid-in capital to correct an error in classification. Refer to Note 14 "Stockholder's Equity and Accumulated Other Comprehensive Income (Loss)" in Regions' Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion.

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three Months Ended March 31
 
2013
 
2012
 
(In millions )
Operating activities:
 
 
 
Net income
$
335

 
$
199

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
10

 
117

Depreciation, amortization and accretion, net
171

 
171

Provision for losses on other real estate, net
3

 
15

Securities (gains) losses, net
(15
)
 
(12
)
Deferred income tax expense
121

 
55

Originations and purchases of loans held for sale
(1,247
)
 
(1,029
)
Proceeds from sales of loans held for sale
1,567

 
1,313

(Gain) loss on sale of loans, net
(43
)
 
(38
)
Net change in operating assets and liabilities:
 
 
 
Trading account assets
(5
)
 
139

Other interest-earning assets
798

 
31

Interest receivable
(22
)
 
(36
)
Other assets
226

 
48

Other liabilities
(758
)
 
(218
)
Other
(11
)
 

Net cash from operating activities
1,130

 
755

Investing activities:
 
 
 
Proceeds from sales of securities available for sale
388

 
1,398

Proceeds from maturities of securities available for sale
1,765

 
1,594

Proceeds from maturities of securities held to maturity
2

 
1

Purchases of securities available for sale
(2,527
)
 
(5,075
)
Proceeds from sales of loans
48

 
159

Purchases of loans
(220
)
 
(174
)
Net change in loans
(2
)
 
337

Net purchases of premises and equipment
(33
)
 
(37
)
Net cash from investing activities
(579
)
 
(1,797
)
Financing activities:
 
 
 
Net change in deposits
(1,341
)
 
1,511

Net change in short-term borrowings
256

 
(159
)
Payments on long-term borrowings

 
(900
)
Cash dividends on common stock
(14
)
 
(13
)
Cash dividends on Series A preferred stock issued to the U.S. Treasury

 
(44
)
Cash dividends on Series A preferred stock
(8
)
 

Net proceeds from issuance of common stock

 
875

Net cash from financing activities
(1,107
)
 
1,270

Net change in cash and cash equivalents
(556
)
 
228

Cash and cash equivalents at beginning of year
5,489

 
7,245

Cash and cash equivalents at end of period
$
4,933

 
$
7,473


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, 2013 and 2012
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 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, 2012. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q. See Note 17.
On January 11, 2012, Regions entered into an agreement to sell Morgan Keegan & Company, Inc. (“Morgan Keegan”) and related affiliates. The transaction closed on April 2, 2012. See Note 2 and Note 15 for further details. Results of operations for the entities sold are presented separately as discontinued operations for all periods presented on the consolidated statements of income. Other expenses related to the transaction are also included in discontinued operations. This presentation is consistent with the consolidated financial statements included in the 2012 Form 10-K.
Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation, except as otherwise noted. These reclassifications are immaterial and have no effect on net income, comprehensive income, total assets or total stockholders’ equity as previously reported.
NOTE 2. DISCONTINUED OPERATIONS
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and related affiliates to Raymond James Financial, Inc. (“Raymond James”). The transaction closed on April 2, 2012. Regions Investment Management, Inc. (formerly known as Morgan Asset Management, Inc.) and Regions Trust were not included in the sale. In connection with the closing of the sale, Regions agreed to indemnify Raymond James for all litigation matters related to pre-closing activities. See Note 15 for related disclosure.

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The following table represents the condensed results of operations for discontinued operations for the three months ended March 31:
 
 
Three Months Ended March 31
 
2013
 
2012
 
(In millions, except per share data)
Interest income
$

 
$
8

Interest expense

 
1

Net interest income

 
7

Non-interest income:
 
 
 
Brokerage, investment banking and capital markets

 
233

Other

 
7

Total non-interest income

 
240

Non-interest expense:
 
 
 
Salaries and employee benefits

 
171

Net occupancy expense

 
9

Furniture and equipment expense

 
8

Professional and legal expenses
(5
)
 
96

Other
1

 
28

Total non-interest expense
(4
)
 
312

Income (loss) from discontinued operations before income taxes
4

 
(65
)
Income tax expense (benefit)
2

 
(25
)
Income (loss) from discontinued operations, net of tax
$
2

 
$
(40
)
Earnings (loss) per common share from discontinued operations:
 
 
 
Basic
$
0.00

 
$
(0.03
)
Diluted
$
0.00

 
$
(0.03
)


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NOTE 3. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities available for sale and securities held to maturity are as follows:

 
March 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(In millions)
Securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
53

 
$
1

 
$

 
$
54

Federal agency securities
485

 
3

 
(1
)
 
487

Obligations of states and political subdivisions
7

 

 

 
7

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential agency
20,469

 
493

 
(27
)
 
20,935

Residential non-agency
11

 
1

 

 
12

Commercial agency
789

 
20

 
(1
)
 
808

Commercial non-agency
1,131

 
30

 
(3
)
 
1,158

Corporate and other debt securities
2,906

 
67

 
(16
)
 
2,957

Equity securities
663

 
8

 

 
671

 
$
26,514

 
$
623

 
$
(48
)
 
$
27,089

Securities held to maturity:
 
 
 
 
 
 
 
U.S. Treasury securities
$
2

 
$

 
$

 
$
2

Federal agency securities
1

 

 

 
1

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential agency
5

 
1

 

 
6

 
$
8

 
$
1

 
$

 
$
9

 
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(In millions)
Securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
50

 
$
2

 
$

 
$
52

Federal agency securities
550

 
4

 
(1
)
 
553

Obligations of states and political subdivisions
9

 

 

 
9

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential agency
20,721

 
574

 
(18
)
 
21,277

Residential non-agency
12

 
1

 

 
13

Commercial agency
705

 
20

 

 
725

Commercial non-agency
1,055

 
43

 

 
1,098

Corporate and other debt securities
2,762

 
81

 
(8
)
 
2,835

Equity securities
679

 
4

 
(1
)
 
682

 
$
26,543

 
$
729

 
$
(28
)
 
$
27,244

Securities held to maturity:
 
 
 
 
 
 
 
U.S. Treasury securities
$
2

 
$

 
$

 
$
2

Federal agency securities
2

 

 

 
2

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential agency
6

 
1

 

 
7

 
$
10

 
$
1

 
$

 
$
11


12

Table of Contents

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
2013
 
December 31
2012
 
 
(In millions)
Federal Reserve Bank
 
$
484

 
$
484

Federal Home Loan Bank
 
67

 
73

Securities with carrying values of $14.1 billion and $11.8 billion at March 31, 2013 and December 31, 2012, 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, 2013, 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)
Securities available for sale:
 
 
 
 
Due in one year or less
 
$
42

 
$
42

Due after one year through five years
 
920

 
940

Due after five years through ten years
 
2,047

 
2,077

Due after ten years
 
442

 
446

Mortgage-backed securities:
 
 
 
 
Residential agency
 
20,469

 
20,935

Residential non-agency
 
11

 
12

Commercial agency
 
789

 
808

Commercial non-agency
 
1,131

 
1,158

Equity securities
 
663

 
671

 
 
$
26,514

 
$
27,089

Securities held to maturity:
 
 
 
 
Due in one year or less
 
$
1

 
$
1

Due after one year through five years
 
2

 
2

Due after five years through ten years
 

 

Due after ten years
 

 

Mortgage-backed securities:
 
 
 
 
Residential agency
 
5

 
6

 
 
$
8

 
$
9


The following tables present gross unrealized losses and the related estimated fair value of securities available for sale at March 31, 2013 and December 31, 2012. There were no gross unrealized losses on debt securities held to maturity at either March 31, 2013 or December 31, 2012. 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.
 

13

Table of Contents

 
 
March 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)
U.S. Treasury securities
 
$
7

 
$

 
$

 
$

 
$
7

 
$

Federal agency securities
 
351

 
(1
)
 
5

 

 
356

 
(1
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
 
2,717

 
(26
)
 
121

 
(1
)
 
2,838

 
(27
)
Residential non-agency
 
4

 

 

 

 
4

 

Commercial agency
 
110

 
(1
)
 

 

 
110

 
(1
)
Commercial non-agency
 
314

 
(3
)
 

 

 
314

 
(3
)
All other securities
 
924

 
(15
)
 
14

 
(1
)
 
938

 
(16
)
 
 
$
4,427

 
$
(46
)
 
$
140

 
$
(2
)
 
$
4,567

 
$
(48
)
 
 
 
December 31, 2012
 
 
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)
Federal agency securities
 
$
350

 
$
(1
)
 
$

 
$

 
$
350

 
$
(1
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
 
1,777

 
(16
)
 
157

 
(2
)
 
1,934

 
(18
)
All other securities
 
884

 
(9
)
 

 

 
884

 
(9
)
 
 
$
3,011

 
$
(26
)
 
$
157

 
$
(2
)
 
$
3,168

 
$
(28
)

For the securities included in the tables above, management does not believe any individual unrealized loss, which was comprised of 415 securities and 378 securities at March 31, 2013 and December 31, 2012, respectively, 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.
Credit-related impairment charges were immaterial for the three months ended March 31, 2013 and 2012.
Cash proceeds from sale, 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
 
 
2013
 
2012
 
 
(In millions)
Proceeds
 
$
388

 
$
1,398

 
 
 
 
 
Gross realized gains
 
$
16

 
$
12

Gross realized losses
 
(1
)
 

Securities gains, net
 
$
15

 
$
12




14

Table of Contents

NOTE 4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
LOANS
The following table presents the distribution by loan segment and class of Regions’ loan portfolio, net of unearned income:
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions, net of unearned income)
Commercial and industrial
 
$
27,602

 
$
26,674

Commercial real estate mortgage—owner-occupied
 
9,812

 
10,095

Commercial real estate construction—owner-occupied
 
325

 
302

Total commercial
 
37,739

 
37,071

Commercial investor real estate mortgage
 
6,338

 
6,808

Commercial investor real estate construction
 
984

 
914

Total investor real estate
 
7,322

 
7,722

Residential first mortgage
 
12,875

 
12,963

Home equity
 
11,546

 
11,800

Indirect
 
2,483

 
2,336

Consumer credit card
 
851

 
906

Other consumer
 
1,120

 
1,197

Total consumer
 
28,875

 
29,202

 
 
$
73,936

 
$
73,995

During the three months ended March 31, 2013 and 2012, Regions purchased approximately $220 million and $174 million, respectively, in indirect loans from a third party.
At March 31, 2013, $11.3 billion in loans held by Regions were pledged to secure borrowings from the FHLB. At March 31, 2013, an additional $25.4 billion of loans held by Regions were pledged to the Federal Reserve Bank.

ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents management’s estimate of credit losses inherent in the loan and credit commitment portfolios as of period-end. The allowance for credit losses consists of two components: the allowance for loan and lease losses and the reserve for unfunded credit commitments. Management’s assessment of the appropriateness of the allowance for credit losses is based on a combination of both of these components. Regions determines its allowance for credit losses in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments.
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, 2013 and 2012. The total allowance for credit losses as of March 31, 2013 and 2012 is then disaggregated to detail the amounts derived through individual evaluation and the amounts calculated through collective evaluation. The allowance for loan losses related to individually evaluated loans includes reserves for non-accrual loans and leases equal to or greater than $2.5 million. The allowance for loan losses related to collectively evaluated loans includes the remainder of the portfolio.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

15

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 commitments
 
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
 
$
74

 
$
65

 
$
1

 
$
140

Collectively evaluated for impairment
 
708

 
359

 
542

 
1,609

Total allowance for loan losses
 
$
782

 
$
424

 
$
543

 
$
1,749

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
384

 
$
304

 
$
2

 
$
690

Collectively evaluated for impairment
 
37,355

 
7,018

 
28,873

 
73,246

Total loans evaluated for impairment
 
$
37,739

 
$
7,322

 
$
28,875

 
$
73,936



16

Table of Contents

 
 
Three Months Ended March 31, 2012
 
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
 
(In millions)
Allowance for loan losses, January 1, 2012
 
$
1,030

 
$
991

 
$
724

 
$
2,745

Provision (credit) for loan losses
 
61

 
(10
)
 
66

 
117

Loan losses:
 
 
 
 
 
 
 
 
Charge-offs
 
(125
)
 
(95
)
 
(156
)
 
(376
)
Recoveries
 
16

 
12

 
16

 
44

Net loan losses
 
(109
)
 
(83
)
 
(140
)
 
(332
)
Allowance for loan losses, March 31, 2012
 
982

 
898

 
650

 
2,530

Reserve for unfunded credit commitments, January 1, 2012
 
30

 
26

 
22

 
78

Provision (credit) for unfunded credit commitments
 
14

 

 
(1
)
 
13

Reserve for unfunded credit commitments, March 31, 2012
 
44

 
26

 
21

 
91

Allowance for credit losses, March 31, 2012
 
$
1,026

 
$
924

 
$
671

 
$
2,621

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
105

 
$
146

 
$
2

 
$
253

Collectively evaluated for impairment
 
877

 
752

 
648

 
2,277

Total allowance for loan losses
 
$
982

 
$
898

 
$
650

 
$
2,530

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
475

 
$
532

 
$
7

 
$
1,014

Collectively evaluated for impairment
 
35,835

 
9,579

 
30,292

 
75,706

Total loans evaluated for impairment
 
$
36,310

 
$
10,111

 
$
30,299

 
$
76,720

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, 2013 and December 31, 2012. 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, 2013
 
 
Pass
 
Special Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
 
(In millions)
Commercial and industrial
 
$
26,280

 
$
430

 
$
537

 
$
355

 
$
27,602

Commercial real estate mortgage—owner-occupied
 
8,767

 
231

 
394

 
420

 
9,812

Commercial real estate construction—owner-occupied
 
274

 
2

 
37

 
12

 
325

Total commercial
 
$
35,321

 
$
663

 
$
968

 
$
787

 
$
37,739

Commercial investor real estate mortgage
 
$
4,813

 
$
373

 
$
701

 
$
451

 
$
6,338

Commercial investor real estate construction
 
827

 
100

 
44

 
13

 
984

Total investor real estate
 
$
5,640

 
$
473

 
$
745

 
$
464

 
$
7,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
 
$
12,674

 
$
201

 
$
12,875

Home equity
 
 
 
 
 
11,413

 
133

 
11,546

Indirect
 
 
 
 
 
2,482

 
1

 
2,483

Consumer credit card
 
 
 
 
 
851

 

 
851

Other consumer
 
 
 
 
 
1,120

 

 
1,120

Total consumer
 
 
 
 
 
$
28,540

 
$
335

 
$
28,875

 
 
 
 
 
 
 
 
 
 
$
73,936

 

18

Table of Contents

 
 
December 31, 2012
 
 
Pass
 
Special
Mention
 
Substandard
Accrual
 
Non-accrual
 
Total
 
 
(In millions)
Commercial and industrial
 
$
25,225

 
$
560

 
$
480

 
$
409

 
$
26,674

Commercial real estate mortgage—owner-occupied
 
8,976

 
240

 
440

 
439

 
10,095

Commercial real estate construction—owner-occupied
 
278

 
3

 
7

 
14

 
302

Total commercial
 
$
34,479

 
$
803

 
$
927

 
$
862

 
$
37,071

Commercial investor real estate mortgage
 
$
5,089

 
$
435

 
$
827

 
$
457

 
$
6,808

Commercial investor real estate construction
 
733

 
98

 
63

 
20

 
914

Total investor real estate
 
$
5,822

 
$
533

 
$
890

 
$
477

 
$
7,722

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrual
 
Non-accrual
 
Total
 
 
 
 
 
 
(In millions)
Residential first mortgage
 
 
 
 
 
$
12,749

 
$
214

 
$
12,963

Home equity
 
 
 
 
 
11,672

 
128

 
11,800

Indirect
 
 
 
 
 
2,336

 

 
2,336

Consumer credit card
 
 
 
 
 
906

 

 
906

Other consumer
 
 
 
 
 
1,197

 

 
1,197

Total consumer
 
 
 
 
 
$
28,860

 
$
342

 
$
29,202

 
 
 
 
 
 
 
 
 
 
$
73,995



19

Table of Contents

AGING ANALYSIS
The following tables include an aging analysis of days past due (DPD) for each portfolio segment and class as of March 31, 2013 and December 31, 2012:
 
 
 
March 31, 2013
 
 
Accrual Loans
 
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
 
(In millions)
Commercial and industrial
 
$
40

 
$
14

 
$
8

 
$
62

 
$
27,247

 
$
355

 
$
27,602

Commercial real estate
mortgage—owner-occupied
 
34

 
15

 
9

 
58

 
9,392

 
420

 
9,812

Commercial real estate construction—owner-occupied
 
1

 
1

 

 
2

 
313

 
12

 
325

Total commercial
 
75

 
30

 
17

 
122

 
36,952

 
787

 
37,739

Commercial investor real estate mortgage
 
33

 
39

 
25

 
97

 
5,887

 
451

 
6,338

Commercial investor real estate construction
 
3

 
4

 

 
7

 
971

 
13

 
984

Total investor real estate
 
36

 
43

 
25

 
104

 
6,858

 
464

 
7,322

Residential first mortgage
 
138

 
86

 
301

 
525

 
12,674

 
201

 
12,875

Home equity
 
79

 
48

 
79

 
206

 
11,413

 
133

 
11,546

Indirect
 
26

 
5

 
3

 
34

 
2,482

 
1

 
2,483

Consumer credit card
 
5

 
4

 
14

 
23

 
851

 

 
851

Other consumer
 
14

 
4

 
3

 
21

 
1,120

 

 
1,120

Total consumer
 
262

 
147

 
400

 
809

 
28,540

 
335

 
28,875

 
 
$
373

 
$
220

 
$
442

 
$
1,035

 
$
72,350

 
$
1,586

 
$
73,936

 
 
 
December 31, 2012
 
 
Accrual Loans
 
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
 
(In millions)
Commercial and industrial
 
$
27

 
$
23

 
$
19

 
$
69

 
$
26,265

 
$
409

 
$
26,674

Commercial real estate
mortgage—owner-occupied
 
49

 
28

 
6

 
83

 
9,656

 
439

 
10,095

Commercial real estate construction—owner-occupied
 

 

 

 

 
288

 
14

 
302

Total commercial
 
76

 
51

 
25

 
152

 
36,209

 
862

 
37,071

Commercial investor real estate mortgage
 
38

 
42

 
11

 
91

 
6,351

 
457

 
6,808

Commercial investor real estate construction
 
1

 
1

 

 
2

 
894

 
20

 
914

Total investor real estate
 
39

 
43

 
11

 
93

 
7,245

 
477

 
7,722

Residential first mortgage
 
149

 
86

 
307

 
542

 
12,749

 
214

 
12,963

Home equity
 
100

 
53

 
87

 
240

 
11,672

 
128

 
11,800

Indirect
 
31

 
9

 
3

 
43

 
2,336

 

 
2,336

Consumer credit card
 
7

 
7

 
14

 
28

 
906

 

 
906

Other consumer
 
19

 
5

 
3

 
27

 
1,197

 

 
1,197

Total consumer
 
306

 
160

 
414

 
880

 
28,860

 
342

 
29,202

 
 
$
421

 
$
254

 
$
450

 
$
1,125

 
$
72,314

 
$
1,681

 
$
73,995


20

Table of Contents


IMPAIRED LOANS
The following tables present details related to the Company’s impaired loans as of March 31, 2013 and December 31, 2012. Loans deemed to be impaired include non-accrual commercial and investor real estate loans, excluding leases, and all troubled debt restructurings ("TDRs") (including accruing commercial, investor real estate, and consumer TDRs). Loans which have been fully charged-off do not appear in the tables below.
 
 
Non-accrual Impaired Loans As of March 31, 2013
 
 
 
 
 
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
$
446

 
$
96

 
$
350

 
$
73

 
$
277

 
$
105

 
45.1
%
Commercial real estate mortgage—owner-occupied
477

 
57

 
420

 
50

 
370

 
128

 
38.8

Commercial real estate construction—owner-occupied
14

 
2

 
12

 
4

 
8

 
3

 
35.7

Total commercial
937

 
155

 
782

 
127

 
655

 
236

 
41.7

Commercial investor real estate mortgage
549

 
98

 
451

 
56

 
395

 
123

 
40.3

Commercial investor real estate construction
20

 
7

 
13

 

 
13

 
5

 
60.0

Total investor real estate
569

 
105

 
464

 
56

 
408

 
128

 
40.9

Residential first mortgage
144

 
50

 
94

 

 
94

 
12

 
43.1

Home equity
32

 
10

 
22

 

 
22

 
2

 
37.5

Total consumer
176

 
60

 
116

 

 
116

 
14

 
42.0

Total
$
1,682

 
$
320

 
$
1,362

 
$
183

 
$
1,179

 
$
378

 
41.5
%
 

21

Table of Contents

 
 
Accruing Impaired Loans As of March 31, 2013
 
 
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
 
$
308

 
$
6

 
$
302

 
$
43

 
15.9
%
Commercial real estate mortgage—owner-occupied
 
189

 
4

 
185

 
22

 
13.8

Commercial real estate construction—owner-occupied
 
27

 

 
27

 
4

 
14.8

Total commercial
 
524

 
10

 
514

 
69

 
15.1

Commercial investor real estate mortgage
 
710

 
11

 
699

 
82

 
13.1

Commercial investor real estate construction
 
114

 

 
114

 
15

 
13.2

Total investor real estate
 
824

 
11

 
813

 
97

 
13.1

Residential first mortgage
 
1,108

 
15

 
1,093

 
141

 
14.1

Home equity
 
399

 
5

 
394

 
30

 
8.8

Indirect
 
1

 

 
1

 

 

Consumer credit card
 
1

 

 
1

 

 

Other consumer
 
36

 

 
36

 

 

Total consumer
 
1,545

 
20

 
1,525

 
171

 
12.4

Total
 
$
2,893

 
$
41

 
$
2,852

 
$
337

 
13.1
%

 
Total Impaired Loans As of March 31, 2013
 
 
 
 
 
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
$
754

 
$
102

 
$
652

 
$
73

 
$
579

 
$
148

 
33.2
%
Commercial real estate mortgage—owner-
occupied
666

 
61

 
605

 
50

 
555

 
150

 
31.7

Commercial real estate construction—owner-occupied
41

 
2

 
39

 
4

 
35

 
7

 
22.0

Total commercial
1,461

 
165

 
1,296

 
127

 
1,169

 
305

 
32.2

Commercial investor real estate mortgage
1,259

 
109

 
1,150

 
56

 
1,094

 
205

 
24.9

Commercial investor real estate construction
134

 
7

 
127

 

 
127

 
20

 
20.1

Total investor real estate
1,393

 
116

 
1,277

 
56

 
1,221

 
225

 
24.5

Residential first mortgage
1,252

 
65

 
1,187

 

 
1,187

 
153

 
17.4

Home equity
431

 
15

 
416

 

 
416

 
32

 
10.9

Indirect
1

 

 
1

 

 
1

 

 

Consumer credit card
1

 

 
1

 

 
1

 

 

Other consumer
36

 

 
36

 

 
36

 

 

Total consumer
1,721

 
80

 
1,641

 

 
1,641

 
185

 
15.4

Total impaired loans
$
4,575

 
$
361

 
$
4,214

 
$
183

 
$
4,031

 
$
715

 
23.5
%


22

Table of Contents

_________
(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.

 
Non-accrual Impaired Loans As of December 31, 2012
 
 
 
 
 
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
$
467

 
$
62

 
$
405

 
$
63

 
$
342

 
$
128

 
40.7
%
Commercial real estate mortgage—owner-occupied
503

 
64

 
439

 
44

 
395

 
148

 
42.1

Commercial real estate construction—owner-occupied
18

 
4

 
14

 
4

 
10

 
3

 
38.9

Total commercial
988

 
130

 
858

 
111

 
747

 
279

 
41.4

Commercial investor real estate mortgage
560

 
103

 
457

 
54

 
403

 
132

 
42.0

Commercial investor real estate construction
26

 
6

 
20

 
2

 
18

 
7

 
50.0

Total investor real estate
586

 
109

 
477

 
56

 
421

 
139

 
42.3

Residential first mortgage
152

 
55

 
97

 

 
97

 
13

 
44.7

Home equity
32

 
11

 
21

 

 
21

 
2

 
40.6

Total consumer
184

 
66

 
118

 

 
118

 
15

 
44.0

Total
$
1,758

 
$
305

 
$
1,453

 
$
167

 
$
1,286

 
$
433

 
42.0
%
 

23

Table of Contents

 
 
Accruing Impaired Loans As of December 31, 2012
 
 
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
 
$
299

 
$
7

 
$
292

 
$
42

 
16.4
%
Commercial real estate mortgage—owner-occupied
 
213

 
4

 
209

 
25

 
13.6

Commercial real estate construction—owner-occupied
 
1

 

 
1

 

 

Total commercial
 
513

 
11

 
502

 
67

 
15.2

Commercial investor real estate mortgage
 
782

 
10

 
772

 
97

 
13.7

Commercial investor real estate construction
 
107

 

 
107

 
16

 
15.0

Total investor real estate
 
889

 
10

 
879

 
113

 
13.8

Residential first mortgage
 
1,101

 
13

 
1,088

 
144

 
14.3

Home equity
 
411

 
5

 
406

 
36

 
10.0

Indirect
 
2

 
1

 
1

 

 
50.0

Other consumer
 
40

 

 
40

 
1

 
2.5

Total consumer
 
1,554

 
19

 
1,535

 
181

 
12.9

Total
 
$
2,956

 
$
40

 
$
2,916

 
$
361

 
13.6
%

 
Total Impaired Loans As of December 31, 2012
 
 
 
 
 
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
$
766

 
$
69

 
$
697

 
$
63

 
$
634

 
$
170

 
31.2
%
Commercial real estate mortgage—owner-
occupied
716

 
68

 
648

 
44

 
604

 
173

 
33.7

Commercial real estate construction—owner-occupied
19

 
4

 
15

 
4

 
11

 
3

 
36.8

Total commercial
1,501

 
141

 
1,360

 
111

 
1,249

 
346

 
32.4

Commercial investor real estate mortgage
1,342

 
113

 
1,229

 
54

 
1,175

 
229

 
25.5

Commercial investor real estate construction
133

 
6

 
127

 
2

 
125

 
23

 
21.8

Total investor real estate
1,475

 
119

 
1,356

 
56

 
1,300

 
252

 
25.2

Residential first mortgage
1,253

 
68

 
1,185

 

 
1,185

 
157

 
18.0

Home equity
443

 
16

 
427

 

 
427

 
38

 
12.2

Indirect
2

 
1

 
1

 

 
1

 

 
50.0

Other consumer
40

 

 
40

 

 
40

 
1

 
2.5

Total consumer
1,738

 
85

 
1,653

 

 
1,653

 
196

 
16.2

Total impaired loans
$
4,714

 
$
345

 
$
4,369

 
$
167

 
$
4,202

 
$
794

 
24.2
%



24

Table of Contents

_________
(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, 2013 and 2012. Interest income recognized represents interest on accruing loans modified in a TDR. TDRs are considered impaired loans.
 
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
Average
Balance
 
Interest
Income
Recognized
 
Average
Balance
 
Interest
Income
Recognized
 
 
(In millions)
Commercial and industrial
 
$
679

 
$
4

 
$
730

 
$
4

Commercial real estate mortgage—owner-occupied
 
635

 
3

 
785

 
3

Commercial real estate construction—owner-occupied
 
31

 

 
28

 

Total commercial
 
1,345

 
7

 
1,543

 
7

Commercial investor real estate mortgage
 
1,189

 
8

 
1,636

 
10

Commercial investor real estate construction
 
135

 
2

 
294

 
2

Total investor real estate
 
1,324

 
10

 
1,930

 
12

Residential first mortgage
 
1,189

 
10

 
1,131

 
10

Home equity
 
422

 
5

 
444

 
5

Indirect
 
2

 

 
1

 

Consumer credit card
 
1

 

 

 

Other consumer
 
37

 
1

 
52

 

Total consumer
 
1,651

 
16

 
1,628

 
15

Total impaired loans
 
$
4,320

 
$
33

 
$
5,101

 
$
34

In addition to the impaired loans detailed in the tables above, there were approximately $66 million in non-performing loans classified as held for sale at March 31, 2013, compared to $89 million at December 31, 2012. These loans are larger balance credits, primarily investor real estate, where management does not have the intent to hold the loans for the foreseeable future. The loans are carried at an amount approximating a price which will be recoverable through the loan sale market. During the three months ended March 31, 2013, approximately $31 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $18 million recorded upon transfer. During the three months ended March 31, 2012, approximately $93 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $53 million recorded upon transfer. At March 31, 2013 and December 31, 2012, non-accrual loans including loans held for sale totaled $1.7 billion and $1.8 billion, respectively.


TROUBLED DEBT RESTRUCTURINGS (TDRs)

The majority of Regions’ commercial and investor real estate TDRs are the result of renewals where the only concession is that the interest rate at renewal is not considered to be a market rate. Consumer TDRs generally involve an interest rate concession. Accordingly, the financial impact of the modifications is best illustrated by the impact to the allowance calculation at the loan or pool level as a result of the loans being considered impaired due to their status as a TDR.


25

Table of Contents

None of the modified consumer loans listed in the following TDR disclosures were collateral-dependent at the time of modification. At March 31, 2013, approximately $119 million in residential first mortgage TDRs were in excess of 180 days past due and are considered collateral-dependent. At March 31, 2013, approximately $11.5 million in home equity first lien TDRs were in excess of 180 days past due and $7.6 million in home equity second lien TDRs were in excess of 120 days past due and are considered collateral-dependent.
Further discussion related to TDRs, including their impact on the allowance for loan losses, and designation of TDRs in periods subsequent to the modification is included in the Annual Report on Form 10-K for the year ended December 31, 2012.
The following tables present loans by portfolio segment and class modified in a TDR, and the financial impact of those modifications, for the periods presented. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. The majority of TDRs reported are in the commercial and investor real estate portfolio segments. Total commercial and investor real estate loans reported as new TDRs totaled approximately $208 million and $396 million for the three months ended March 31, 2013 and 2012, respectively.
 
 
 
Three Months Ended March 31, 2013
 
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
 
 
 
(Dollars in millions)
Commercial and industrial
 
114

 
$
155

 
$
1

Commercial real estate mortgage—owner-occupied
 
76

 
99

 
1

Commercial real estate construction—owner-occupied
 
1

 
26

 

Total commercial
 
191

 
280

 
2

Commercial investor real estate mortgage
 
111

 
205

 
1

Commercial investor real estate construction
 
22

 
36

 

Total investor real estate
 
133

 
241

 
1

Residential first mortgage
 
86

 
59

 
7

Home equity
 
34

 
10

 
1

Consumer credit card
 
21

 
1

 

Indirect and other consumer
 
31

 
1

 

Total consumer
 
172

 
71

 
8

 
 
496

 
$
592

 
$
11

 

26

Table of Contents

 
 
Three Months Ended March 31, 2012
 
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
 
 
 
(Dollars in millions)
Commercial and industrial
 
199

 
$
151

 
$
1

Commercial real estate mortgage—owner-occupied
 
145

 
116

 
1

Commercial real estate construction—owner-occupied
 
6

 
4

 

Total commercial
 
350

 
271

 
2

Commercial investor real estate mortgage
 
187

 
450

 
4

Commercial investor real estate construction
 
70

 
42

 
1

Total investor real estate
 
257

 
492

 
5

Residential first mortgage
 
352

 
67

 
8

Home equity
 
309

 
23

 
2

Indirect and other consumer
 
161

 
3

 

Total consumer
 
822

 
93

 
10

 
 
1,429

 
$
856

 
$
17


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As described previously, the consumer modifications granted by Regions are rate concessions, and not forgiveness of principal. The majority of the commercial and investor real estate modifications are renewals where there is no reduction in interest rate or forgiveness of principal. Accordingly, Regions most often does not record a charge-off at the modification date. A limited number of 2012 modifications included above were A/B note restructurings, where the B-note was charged off. There were no charge-offs recorded for any loans modified during the three months ended March 31, 2013.

Defaulted TDRs
The following table presents TDRs by portfolio segment and class which defaulted during the three months ended March 31, 2013 and 2012, and which were modified in the previous twelve months (i.e., the twelve months prior to the default). For purposes of this disclosure, default is defined as 90 days past due and still accruing for the consumer portfolio segment, and placement on non-accrual status for the commercial and investor real estate portfolio segments. Consideration of defaults in the calculation of the allowance for loan losses is described in detail in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2012.
 

27

Table of Contents

 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
(In millions)
Defaulted During the Period, Where Modified in a TDR Twelve Months Prior to Default
 
 
 
 
Commercial and industrial
 
$
12

 
$
36

Commercial real estate mortgage—owner-occupied
 
9

 
11

Commercial real estate construction—owner-occupied
 

 
1

Total commercial
 
21

 
48

Commercial investor real estate mortgage
 
40

 
60

Commercial investor real estate construction
 
1

 
7

Total investor real estate
 
41

 
67

Residential first mortgage
 
18

 
21

Home equity
 
2

 
6

Total consumer
 
20

 
27

 
 
$
82

 
$
142

Commercial and investor real estate loans which were on non-accrual status at the time of the latest modification are not included in the default table above, as they are already considered to be in default at the time of the restructuring. At March 31, 2013, approximately $142 million of commercial and investor real estate loans modified in a TDR during the three months ended March 31, 2013 were on non-accrual status. Approximately 1.7 percent of this amount was 90 days past due.
At March 31, 2013, Regions had restructured binding unfunded commitments totaling $226 million where a concession was granted and the borrower was in financial difficulty.
NOTE 5. SERVICING OF FINANCIAL ASSETS
The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights. 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 mortgage servicing rights under the fair value measurement method:
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
(In millions)
 
Carrying value, beginning of period
$
191

 
$
182

 
Additions
44

 
14

 
Increase (decrease) in fair value:
 
 
 
 
Due to change in valuation inputs or assumptions
10

 
9

 
Economic amortization associated with borrower repayments
(9
)
 
(6
)
 
Carrying value, end of period
$
236

 
$
199

 
On March 29, 2013, the Company completed a transaction to purchase the rights to service approximately $3 billion in residential mortgage loans. The mortgage servicing rights asset was increased by the purchase price of approximately $28 million in the first quarter of 2013.

28

Table of Contents

Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to mortgage servicing rights (excluding related derivative instruments) are as follows:
 
 
March 31
 
2013
 
2012
 
(Dollars in millions)
Unpaid principal balance
$
28,739

 
$
26,163

Weighted-average prepayment speed (CPR; percentage)
12.9
%
 
16.3
%
Estimated impact on fair value of a 10% increase
$
(12
)
 
$
(12
)
Estimated impact on fair value of a 20% increase
$
(23
)
 
$
(23
)
Option-adjusted spread (basis points)
1,055

 
1,171

Estimated impact on fair value of a 10% increase
$
(8
)
 
$
(6
)
Estimated impact on fair value of a 20% increase
$
(16
)
 
$
(13
)
Weighted-average coupon interest rate
4.7
%
 
5.2
%
Weighted-average remaining maturity (months)
278

 
279

Weighted-average servicing fee (basis points)
27.8

 
28.6

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 mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above.
The following table presents servicing related fees, which includes contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of mortgage loans:
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
(In millions)
 
Servicing related fees and other ancillary income
$
19

 
$
21

 
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 a repurchase liability related to mortgage loans sold with representations and warranty provisions. This repurchase liability is reported in other liabilities on the consolidated balance sheets and reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income. The table below presents an analysis of Regions’ repurchase liability related to mortgage loans sold with representations and warranty provisions:
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
(In millions)
 
Beginning balance
$
40

 
$
32

 
Additions
8

 
9

 
Losses
(8
)
 
(8
)
 
Ending balance
$
40

 
$
33

 

29

Table of Contents

During the first quarters of 2013 and 2012, settled repurchase claims were related to one or more of the following alleged breaches: 1) underwriting guideline violations; 2) misrepresentation of income, assets or employment; or 3) property valuation not properly supported. These claims stem primarily from the 2006—2008 vintages.
NOTE 6. GOODWILL
Goodwill allocated to each reportable segment is presented as follows:
 
 
March 31, 2013
 
December 31, 2012
 
(In millions)
Business Services
$
2,552

 
$
2,552

Consumer Services
1,797

 
1,797

Wealth Management
467

 
467

 
$
4,816

 
$
4,816

Regions evaluates each reporting unit’s goodwill for impairment on an annual basis in the fourth quarter, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.

During the first quarter of 2013, Regions assessed the indicators of goodwill impairment for all three reporting units as of January 31, 2013, and through the date of the filing of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. The indicators assessed included:

Recent operating performance,
Changes in market capitalization,
Regulatory actions and assessments,
Changes in the business climate (including legislation, legal factors and competition),
Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and
Trends in the banking industry.
While the assessment of these indicators did not indicate impairment, Regions determined that quantitative testing of goodwill was required for all of Regions’ reporting units for the March 31, 2013 interim period due to the shortfall between Regions’ market capitalization and book value. The results of the interim test indicated that goodwill was not impaired as of the test date.
A detailed description of the Company's methodology and valuation approaches used to determine the estimated fair value of each reporting unit is included in the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2012.
Listed in the table below are assumptions used in estimating the fair value of each reporting unit for the March 31, 2013 interim period. The table includes the discount rates used in the income approach, the market multipliers used in the market approaches, and the public company method control premium applied to each reporting unit.
 
As of First Quarter 2013
Business
Services
 
Consumer
Services
 
Wealth
Management
Discount rate used in income approach
14
%
 
13
%
 
13
%
Public company method market multiplier(1)
1.2
x
 
1.1
x
 
14.4
x
Transaction method market multiplier(2)
1.3
x
 
1.3
x
 
24.5
x

30

Table of Contents

_________
(1)
For the Business Services and Consumer Services reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings. In addition to the multipliers, a 30 percent control premium was assumed for the Business Services reporting unit, a 40 percent control premium was assumed for the Consumer Services reporting unit and a 30 percent control premium was assumed for the Wealth Management reporting unit based on current market factors. Because the control premium considers potential revenue synergies and cost savings for similar financial services transactions, reporting units operating in businesses that have greater barriers to entry tend to have greater control premiums.
(2)
For the Business Services and Consumer Services reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings.
As of Fourth Quarter 2012
Business
Services
 
Consumer
Services
 
Wealth
Management
Discount rate used in income approach
14
%
 
13
%
 
13
%
Public company method market multiplier(1)
1.2
x
 
1.0
x
 
14.0
x
Transaction method market multiplier(2)
1.3
x
 
1.3
x
 
25.2
x
_________
(1)
For the Business Services and Consumer Services reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings. In addition to the multipliers, a 20 percent control premium was assumed for the Business Services reporting unit, a 40 percent control premium was assumed for the Consumer Services reporting unit and a 30 percent control premium was assumed for the Wealth Management reporting unit based on current market factors. Because the control premium considers potential revenue synergies and cost savings for similar financial services transactions, reporting units operating in businesses that have greater barriers to entry tend to have greater control premiums.
(2)
For the Business Services and Consumer Services reporting units, these multipliers are applied to tangible book value. For the Wealth Management reporting unit, this multiplier is applied to earnings.


NOTE 7. SHORT-TERM BORROWINGS
OFFSETTING

Regions has certain securities sold under agreements to repurchase that are subject to enforceable master netting agreements which include full rights of setoff. The following table presents the Company's gross amounts for these financial instruments as of March 31, 2013 and December 31, 2012:
 
 
Offsetting Financial Liabilities
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
 
 
 
 
 
Gross amounts recognized
 
$
173

 
$

Gross amounts offset in the consolidated balance sheets
 

 

Net amounts presented in the consolidated balance sheets
 
173

 

Gross amounts of financial instruments not offset in the consolidated balance sheets
 

 

Net amounts
 
$
173

 
$


There were no securities sold under agreements to repurchase that were subject to enforceable master netting agreements at December 31, 2012.

Regions also has enforceable master netting agreements with certain derivative counterparties. Refer to Note 12 for additional information.



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NOTE 8. STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

On November 1, 2012, Regions issued 20 million depositary shares each representing a 1/40th ownership interest in a share of the Company’s 6.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (“Series A Preferred stock”), with a liquidation preference of $1,000 per share of Series A Preferred Stock (equivalent to $25 per depositary share). The issuance generated proceeds of approximately $486 million, net of issuance costs. The Board of Directors declared $8 million in cash dividends on this Series A Preferred Stock during the first quarter of 2013. Due to the Company being in a retained deficit position, the preferred dividends are recorded as a reduction of preferred stock, including related surplus.

On March 19, 2012, the Company issued 153 million shares of common stock at $5.90 per share, generating proceeds of approximately $875 million, net of issuance costs.
On November 14, 2008, Regions completed the sale of 3.5 million shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Treasury as part of the Capital Purchase Program (“CPP”). As part of its purchase of the preferred securities, the U.S. Treasury also received a warrant to purchase 48.3 million shares of Regions’ common stock. On April 4, 2012, Regions repurchased all 3.5 million shares of the Series A preferred stock issued to the U.S. Treasury Department under the CPP and in early May of 2012, Regions repurchased the warrant from the U.S. Treasury Department for $45 million. The transaction reduced additional paid-in capital within stockholders’ equity by $45 million. The warrant repurchase did not impact results of operations.
At December 31, 2012, Regions had 23 million common shares available for repurchase through open market transactions under an existing share repurchase authorization. On March 19, 2013, Regions' Board of Directors authorized a new $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2013 through the end of the first quarter of 2014. The new plan replaces the prior share repurchase authorization. There were no treasury stock purchases through open market transactions during the first three months of 2013 or 2012. The Company began to repurchase shares in the open market pursuant to the new plan in April 2013. As of May 6, 2013, Regions had repurchased approximately 10 million shares of common stock at a total cost of approximately $82 million before commissions.
The Board of Directors declared a $0.01 per share cash dividend on its common stock for the first quarters of both 2013 and 2012. On April 24, 2013, the Board of Directors declared an increased second quarter 2013 dividend of $0.03 per share which will be paid on July 1, 2013.
Activity within the balances in accumulated other comprehensive income (loss) is shown in the following tables for the three months ended March 31, 2013 and 2012.
 
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
 
Unrealized
gains on
securities
available
for
sale
 
Unrealized
gains 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
 
Unrealized
gains on
securities
available
for
sale
 
Unrealized
gains 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
$
436

 
$
93

 
$
(464
)
 
$
65

 
$
322

 
$
84

 
$
(475
)
 
$
(69
)
Net change
(78
)
 
(8
)
 
9

 
(77
)
 
(6
)
 

 
15

 
9

End of period
$
358

 
$
85

 
$
(455
)
 
$
(12
)
 
$
316

 
$
84

 
$
(460
)
 
$
(60
)

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The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2013:
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)(1)
 
Affected Line Item in the Consolidated Statements of Income
 
 
(In millions)
 
 
Unrealized gains and losses on available-for-sale securities:
 
 
 
 
 
 
$
15

 
Securities gains, net
 
 
(5
)
 
Tax (expense) or benefit
 
 
$
10

 
Net of tax
 
 
 
 
 
Gains and losses on cash flow hedges:
 
 
 
 
Interest rate contracts
 
$
15

 
Net interest income
 
 
(6
)
 
Tax (expense) or benefit
 
 
$
9

 
Net of tax

 
 
 
 
Amortization of defined benefit pension items:
 
 
 
 
Prior-service cost
 
$

 
(2) 
Actuarial gains/(losses)
 
(16
)
 
(2) 
 
 
(16
)
 
Total before tax
 
 
6

 
Tax (expense) or benefit
 
 
$
(10
)
 
Net of tax
 
 
 
 
 
Total reclassifications for the period
 
$
9

 
Net of tax
_________
(1) Amounts in parentheses indicate reductions to net income.
(2) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost and are included in salaries and employee benefits on the consolidated statements of income (see Note 11 for additional details).



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NOTE 9. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share:
 
 
Three Months Ended March 31
 
2013
 
2012
 
(In millions, except per share amounts)
Numerator:
 
 
 
Income from continuing operations
$
333

 
$
239

Preferred stock dividends and accretion
(8
)
 
(54
)
Income from continuing operations available to common shareholders
325

 
185

Income (loss) from discontinued operations, net of tax
2

 
(40
)
Net income available to common shareholders
$
327

 
$
145

Denominator:
 
 
 
Weighted-average common shares outstanding—basic
1,413

 
1,282

Potential common shares
10

 
1

Weighted-average common shares outstanding—diluted
1,423

 
1,283

Earnings per common share from continuing operations(1):
 
 
 
Basic
$
0.23

 
$
0.14

Diluted
0.23

 
0.14

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

 
(0.03
)
Diluted
0.00

 
(0.03
)
Earnings per common share(1) :
 
 
 
Basic
0.23

 
0.11

Diluted
0.23

 
0.11

________
(1)
 Certain per share amounts may not appear to reconcile due to rounding.
For earnings (loss) per common share from discontinued operations, basic and diluted weighted-average common shares outstanding are the same for the three months ended March 31, 2012 due to the net loss.
The effect from the assumed exercise of 26 million and 39 million stock options for the three months ended March 31, 2013 and 2012, respectively, was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share.

NOTE 10. SHARE-BASED PAYMENTS
Regions has long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock, restricted stock awards and units, performance awards and/or stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by shareholders. Incentive awards usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans range from seven to ten years from the date of the grant.

On May 13, 2010, the shareholders of the Company approved the Regions Financial Corporation 2010 Long-Term Incentive Plan (“2010 LTIP”), which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2010 LTIP authorizes 100 million common share equivalents available for grant, where grants of options count as one share equivalent and grants of full value awards (e.g., shares of restricted stock, restricted stock units and performance stock units) count as 2.25 share equivalents. Unless otherwise determined by the Compensation Committee of the Board of Directors, grants of restricted stock, restricted stock units, and performance stock units accrue dividends as they are declared by the Board of Directors, and the dividends are paid

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upon vesting of the award. The 2010 LTIP closed all prior long-term incentive plans to new grants, and, accordingly, prospective grants must be made under the 2010 LTIP or a successor plan. All existing grants under prior long-term incentive plans were unaffected by this amendment. The number of remaining share equivalents available for future issuance under the 2010 LTIP was approximately 66 million at March 31, 2013.
STOCK OPTIONS
No stock option grants were made during the first three months of 2013 or 2012. The following table summarizes the activity related to stock options during the first three months of 2013 and 2012:
 
 
Three Months Ended March 31
 
2013
 
2012
 
Number of
Options
 
Weighted-Average
Exercise
Price
 
Number of
Options
 
Weighted-Average
Exercise
Price
Outstanding at beginning of period
38,258,204

 
$
23.09

 
46,351,349

 
$
23.62

Granted

 

 

 

Exercised
(103,902
)
 
6.44

 
(177,892
)
 
3.29

Canceled/Forfeited
(3,305,365
)
 
25.77

 
(3,931,244
)
 
25.91

Outstanding at end of period
34,848,937

 
$
22.89

 
42,242,213

 
$
23.50

Exercisable at end of period
31,974,662

 
$
24.33

 
36,593,195

 
$
26.06

RESTRICTED STOCK AWARDS AND PERFORMANCE STOCK AWARDS
During the first three months of 2013, Regions made no restricted stock awards or performance stock awards. During the first three months of 2012, Regions made restricted stock grants that vest based upon a service condition. Dividend payments during the vesting period are deferred to the end of the vesting term. The fair value of these restricted shares, restricted stock units and performance stock units was estimated based upon the fair value of the underlying shares on the date of the grant. The valuation was not adjusted for the deferral of dividends.
The following table summarizes the activity related to restricted and performance stock awards and units:
 
 
Three Months Ended March 31
 
2013
 
2012
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value
Non-vested at beginning of period
11,945,179

 
$
6.15

 
6,280,360

 
$
7.60

Granted

 

 
465,080

 
5.72

Vested
(516,682
)
 
6.87

 
(16,437
)
 
23.15

Forfeited
(107,746
)
 
6.13

 
(137,615
)
 
4.52

Non-vested at end of period
11,320,751

 
$
6.14

 
6,591,388

 
$
7.50



NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS

Regions has a qualified defined benefit pension plan (the "pension plan") covering only certain employees as the pension plan is closed to new entrants. The Company also sponsors supplemental executive retirement programs (collectively the "SERP"), which are non-qualified plans that provide certain senior executive officers defined benefits in relation to their compensation.

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Net periodic pension cost, which is recorded in salaries and benefits on the consolidated statements of income, included the following components:

 
Qualified Plan
 
Non-qualified Plans
 
Total
 
Three Months Ended March 31
 
Three Months Ended March 31
 
Three Months Ended March 31
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
(In millions)
Service cost
$
10

 
$
10

 
$
1

 
$
1

 
$
11

 
$
11

Interest cost
21

 
21

 
1

 
1

 
22

 
22

Expected return on plan assets
(33
)
 
(29
)
 

 

 
(33
)
 
(29
)
Amortization of actuarial loss
16

 
17

 

 

 
16

 
17

Amortization of prior service cost

 

 

 
1

 

 
1

Net periodic pension cost
$
14

 
$
19

 
$
2

 
$
3

 
$
16

 
$
22


Regions' funding policy to the qualified pension plan is to contribute annually at least the minimum amount required by Internal Revenue Service funding standards. During the first quarter, Regions made no contribution for the 2013 plan year.

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 month periods ended March 31, 2013 or 2012.


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Table of Contents

NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The following tables present the notional amount and estimated fair value of derivative instruments on a gross basis as of March 31, 2013 and December 31, 2012:
 
 
March 31, 2013
 
December 31, 2012
 
 
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
 
$
5,109

 
$
80

 
$
1

 
$
5,388

 
$
101

 
$
1

Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
2,225

 
6

 
5

 
1,000

 
2

 

Total derivatives designated as hedging instruments
 
$
7,334

 
$
86

 
$
6

 
$
6,388

 
$
103

 
$
1

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
46,137

 
$
1,529

 
$
1,565

 
$
46,054

 
$
1,746

 
$
1,775

Interest rate options
 
3,289

 
20

 
2

 
3,274

 
25

 
4

Interest rate futures and forward commitments
 
35,582

 
7

 
10

 
43,908

 
10

 
13

Other contracts
 
2,162

 
35

 
34

 
2,213

 
31

 
32

Total derivatives not designated as hedging instruments
 
$
87,170

 
$
1,591

 
$
1,611

 
$
95,449

 
$
1,812

 
$
1,824

Total derivatives
 
$
94,504

 
$
1,677

 
$
1,617

 
$
101,837

 
$
1,915

 
$
1,825

_________
(1)
Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities on the consolidated balance sheets.
HEDGING DERIVATIVES
Derivatives entered into to manage interest rate risk and facilitate asset/liability management strategies are designated as hedging derivatives. Derivative financial instruments that qualify in a hedging relationship are classified, based on the exposure being hedged, as either fair value hedges or cash flow hedges. The Company formally documents all hedging relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for entering into various hedge transactions. The Company performs periodic assessments to determine whether the hedging relationship has been highly effective in offsetting changes in fair values or cash flows of hedged items and whether the relationship is expected to continue to be highly effective in the future.
When a hedge is terminated or hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be recorded in the consolidated balance sheets at its fair value, with changes in fair value recognized currently in investment fee income. Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the consolidated balance sheets and recognized currently in other non-interest expense. Gains and losses that were accumulated in accumulated other comprehensive income (loss) pursuant to the hedge of a forecasted transaction are recognized immediately in other non-interest expense.

FAIR VALUE HEDGES
Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item, are recognized in earnings in the period in which the change in fair value occurs. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. Hedge ineffectiveness exists to the extent that the changes in fair value of the derivative do not offset the changes in fair value of the hedged item and is recorded as other non-interest expense.

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Table of Contents

Regions enters into interest rate swap agreements to manage interest rate exposure on the Company’s fixed-rate borrowings, which includes long-term debt and certificates of deposit. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreements. Regions enters into interest rate swap agreements to manage interest rate exposure on certain of the Company's fixed-rate available for sale securities. These agreements involve the payment of fixed-rate amounts in exchange for floating-rate interest receipts. Regions also enters into forward sale commitments to hedge changes in the fair value of available-for-sale securities.
CASH FLOW HEDGES
Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. For cash flow hedge relationships, the effective portion of the gain or loss related to the derivative instrument is recognized as a component of accumulated other comprehensive income (loss). Ineffectiveness is measured by comparing the change in fair value of the respective derivative instrument and the change in fair value of a “perfectly effective” hypothetical derivative instrument. Ineffectiveness will be recognized in earnings only if it results from an overhedge. The ineffective portion of the gain or loss related to the derivative instrument, if any, is recognized in earnings as other non-interest expense during the period of change. Amounts recorded in accumulated other comprehensive income (loss) are recognized in earnings in the periods during which the hedged item impacts earnings.
Regions enters into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on LIBOR-based loans. The agreements effectively modify the Company’s exposure to interest rate risk by utilizing receive fixed/pay LIBOR interest rate swaps.
Regions issues long-term fixed-rate debt for various funding needs. Regions enters into receive LIBOR/pay fixed forward starting swaps to hedge risks of changes in the projected quarterly interest payments attributable to changes in the benchmark interest rate ("LIBOR") during the time leading up to the probable issuance date of the new long term fixed-rate debt.
Regions purchases Eurodollar futures to hedge the variability in future cash flows based on forecasted resets of one-month LIBOR-based floating-rate loans due to changes in the benchmark interest rate.
Regions enters into interest rate option contracts to protect cash flows through the maturity date of the hedging instrument on designated one-month LIBOR floating-rate loans from adverse extreme market interest rate changes.
Regions recognized an unrealized after-tax gain of $85 million and an unrealized after-tax loss of $43 million in accumulated other comprehensive income (loss) at March 31, 2013 and 2012, respectively, related to terminated cash flow hedges of loan and debt instruments which will be amortized into earnings in conjunction with the recognition of interest payments through 2017. Regions recognized pre-tax income of $12 million and a pre-tax loss of $4 million during the three months ended March 31, 2013 and 2012, respectively, related to the amortization of cash flow hedges of loan and debt instruments.
Regions expects to reclassify out of accumulated other comprehensive income (loss) and into earnings approximately $62 million in pre-tax income due to the receipt or payment of interest payments on all cash flow hedges within the next twelve months. Included in this amount is $46 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 six years as of March 31, 2013.


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Table of Contents

The following tables present the effect of derivative instruments on the consolidated statements of income:

 
 
Gain or (Loss) Recognized in Income on Derivatives
 
Location of Amounts Recognized in Income on Derivatives and Related Hedged Item
 
Gain or (Loss) Recognized in Income on Related Hedged Item
 
 
Three Months Ended March 31
 
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
 
2013
 
2012
 
 
(In millions)
 
 
 
(In millions)
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps on:
 
 
 
 
 
 
 
 
 
 
Debt/CDs
 
$
23

 
$
31

 
Interest expense
 
$
3

 
$
3

Debt/CDs
 
(21
)
 
(15
)
 
Other non-interest expense
 
21

 
12

Forward commitments on:
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 

 
(3
)
 
Other non-interest expense
 

 
3

Total
 
$
2

 
$
13

 
 
 
$
24

 
$
18

 
 
 
Effective Portion(3)
 
 
Gain or (Loss) Recognized in AOCI(1)
 
Location of Amounts Reclassified from AOCI into Income
 
(Gain) or Loss Reclassified from AOCI into Income(2)
 
 
Three Months Ended March 31
 
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
 
2013
 
2012
 
 
(In millions)
 
 
 
(In millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(10
)
 
$
(3
)
 
Interest income on loans
 
$
19

 
$
20

Forward starting swaps
 
2

 
2

 
Interest expense on debt
 
(4
)
 
(4
)
Total
 
$
(8
)
 
$
(1
)
 
 
 
$
15

 
$
16

_________
(1) After-tax
(2) Pre-tax
(3) All cash flow hedges were highly effective for all periods presented, and the change in fair value attributed to hedge ineffectiveness was not material.
 

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
The Company maintains a derivatives trading portfolio of interest rate swaps, option contracts, and futures and forward commitments used to meet the needs of its customers. The portfolio is used to generate trading profit and to help clients manage market risk. The Company is subject to the credit risk that a counterparty will fail to perform. The Company is also subject to market risk, which is evaluated by the Company and monitored by the asset/liability management process. Separate derivative contracts are entered into to reduce overall market exposure to pre-defined limits. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through earnings and included in other assets and other liabilities.
Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. At March 31, 2013 and December 31, 2012, Regions had $631 million and $775 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, which are recorded at fair value with changes in fair value recorded in mortgage income. At March 31, 2013 and December 31, 2012, Regions had $1.5 billion and $1.9 billion, respectively, in total notional amount related to these forward sale commitments.

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Table of Contents

Regions has elected to account for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the consolidated statement of income effect of changes in the fair value of its mortgage servicing rights. As of March 31, 2013 and December 31, 2012, the total notional amount related to these contracts was $4.0 billion and $4.7 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, 2013 and 2012, respectively:
 
 
 
Three Months Ended
March 31
Derivatives Not Designated as Hedging Instruments
 
2013
 
2012
 
 
(In millions)
Investment fee income:
 
 
 
 
Interest rate swaps
 
$
11

 
$
4

Interest rate options
 
2

 

Other contracts
 
4

 
3

Total investment fee income
 
17

 
7

Mortgage income:
 
 
 
 
Interest rate swaps
 
(5
)
 
(3
)
Interest rate options
 
(4
)
 
5

Interest rate futures and forward commitments
 
(4
)
 
16

Total mortgage income
 
(13
)
 
18

 
 
$
4

 
$
25

Credit risk, defined as all positive exposures not collateralized with cash or other assets, at March 31, 2013 and December 31, 2012, totaled approximately $632 million and $713 million, respectively. This amount represents the net credit risk on all trading and other derivative positions held by Regions.

CREDIT DERIVATIVES
Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty when the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2013 and 2018. Credit derivatives whereby Regions has sold credit protection have maturities between 2013 and 2018. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.
Regions’ maximum potential amount of future payments under these contracts as of March 31, 2013 was approximately $32 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, 2013 and 2012 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.

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Table of Contents

CONTINGENT FEATURES
Certain of Regions’ derivative instrument contracts with broker-dealers contain provisions 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. During the fourth quarter of 2010, Regions and Regions Bank experienced ratings downgrades from major credit rating agencies such that certain ratings for Regions and Regions Bank were below investment grade. As a result of these ratings downgrades, certain of Regions Bank's broker-dealer counterparties could have terminated these contracts at their discretion. In lieu of terminating these contracts, Regions Bank and certain of its broker-dealer counterparties amended the contracts such that Regions Bank was required to post additional collateral in the cumulative amount of $195 million as of December 31, 2010. As of March 31, 2013, the additional collateral posted was $98 million. During 2012, both Moody’s Investor Service ("Moody's) and Standard and Poor's ("S&P") upgraded certain credit ratings for both Regions and Regions Bank. Beginning in 2013, as a result of the ratings upgrades that occurred during 2012, some of this additional collateral has begun to be returned to Regions.
Some of these contracts with broker-dealers still contain credit-related termination provisions and/or credit-related provisions regarding the posting of collateral. At March 31, 2013, the net fair value of such contracts containing credit-related termination provisions that were in a liability position was $380 million, for which Regions had posted collateral of $446 million. At March 31, 2013, the net fair value of contracts that do not contain credit-related termination provisions that were in a liability position was $245 million, for which Regions had posted collateral of $244 million. Other derivative contracts with broker-dealers do not contain any credit-related provisions. These counterparties require complete overnight collateralization.
The aggregate fair value of all derivative instruments with any credit-risk-related contingent features that were in a liability position on March 31, 2013 and December 31, 2012, was $459 million and $499 million, respectively, for which Regions had posted collateral of $524 million and $641 million, respectively, in the normal course of business.
OFFSETTING
Regions engages in derivatives transactions with dealers and customers. These derivatives transactions are subject to enforceable master netting agreements, which include a right of setoff by the non-defaulting or non-affected party upon early termination of the derivatives transaction. The following table presents the Company's gross derivative positions, including collateral posted or received, as of March 31, 2013 and December 31, 2012:
 
 
Offsetting Derivative Assets
 
Offsetting Derivative Liabilities
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
 
 
 
 
 
 
 
 
 
Gross amounts recognized
 
$
1,686

 
$
1,910

 
$
1,590

 
$
1,797

Gross amounts offset in the consolidated balance sheets
 
1,037

 
1,095

 
1,575

 
1,095

Net amounts presented in the consolidated balance sheets
 
649

 
815

 
15

 
702

Gross amounts not offset in the consolidated balance sheets:
 
 
 
 
 
 
 
 
Financial instruments
 
11

 
11

 

 

Cash collateral received/posted(1)
 

 
88

 

 
678

Net amounts
 
$
638

 
$
716

 
$
15

 
$
24

_________
(1) Cash collateral totals are for netting counterparties only. Regions began netting cash collateral against the net derivative asset or liability in 2013.

Regions also has enforceable master netting agreements associated with certain securities sold under agreements to repurchase. Refer to Note 7 for additional information.


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Table of Contents

NOTE 13. FAIR VALUE MEASUREMENTS
Fair value guidance establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These strata include:

Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),

Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and

Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements of the 2012 Annual Report on Form 10-K for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Regions rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. There were no such transfers during the three month periods ended March 31, 2013 and 2012. Trading account securities and securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occur at the beginning of a reporting period.


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Table of Contents

The following tables present assets and liabilities measured at estimated fair value on a recurring basis and non-recurring basis as of March 31, 2013 and December 31, 2012:
 
 
March 31, 2013
 
 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated Fair Value
 
(In millions)
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading account securities
$
121

 
$

 
$

 
$
121

 
 
$
116

 
$

 
$

 
$
116

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
54

 
$

 
$

 
$
54

 
 
$
52

 
$

 
$

 
$
52

Federal agency securities

 
487

 

 
487

 
 

 
553

 

 
553

Obligations of states and political subdivisions

 
7

 

 
7

 
 

 
9

 

 
9

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency

 
20,935

 

 
20,935

 
 

 
21,277

 

 
21,277

Residential non-agency

 

 
12

 
12

 
 

 

 
13

 
13

Commercial agency

 
808

 

 
808

 
 

 
725

 

 
725

Commercial non-agency

 
1,158

 

 
1,158

 
 

 
1,098

 

 
1,098

Other debt securities

 
2,955

 
2

 
2,957

 
 

 
2,833

 
2

 
2,835

Equity securities(1)
120

 

 

 
120

 
 
125

 

 

 
125

Total securities available for sale
$
174

 
$
26,350

 
$
14

 
$
26,538

 
 
$
177

 
$
26,495

 
$
15

 
$
26,687

Mortgage loans held for sale
$

 
$
1,016

 
$

 
$
1,016

 
 
$

 
$
1,282

 
$

 
$
1,282

Mortgage servicing rights
$

 
$

 
$
236

 
$
236

 
 
$

 
$

 
$
191

 
$
191

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1,615

 
$

 
$
1,615

 
 
$

 
$
1,849

 
$

 
$
1,849

Interest rate options

 
2

 
18

 
20

 
 

 
3

 
22

 
25

Interest rate futures and forward commitments

 
7

 

 
7

 
 

 
10

 

 
10

Other contracts

 
35

 

 
35

 
 

 
31

 

 
31

Total derivative assets(2)
$

 
$
1,659

 
$
18

 
$
1,677

 
 
$

 
$
1,893

 
$
22

 
$
1,915

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1,571

 
$

 
$
1,571

 
 
$

 
$
1,776

 
$

 
$
1,776

Interest rate options

 
2

 

 
2

 
 

 
4

 

 
4

Interest rate futures and forward commitments

 
10

 

 
10

 
 

 
13

 

 
13

Other contracts

 
34

 

 
34

 
 

 
32

 

 
32

Total derivative liabilities(2)
$

 
$
1,617

 
$

 
$
1,617

 
 
$

 
$
1,825

 
$

 
$
1,825

Nonrecurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$
31

 
$
31

 
 
$

 
$

 
$
51

 
$
51

Foreclosed property and other real estate

 
50

 
29

 
79

 
 

 
41

 
40

 
81

_________
(1) Excludes Federal Reserve Bank and Federal Home Loan Bank Stock totaling $484 million and $67 million at March 31, 2013 and $484 million and $73 million at December 31, 2012, respectively.
(2) At March 31, 2013, derivatives include approximately $946 million related to legally enforceable master netting agreements that allow the Company to settle positive and negative positions. In 2013, Regions began netting cash collateral received and posted against the net derivative asset or liability. At March 31, 2013, derivatives presented above exclude cash collateral received of $89 million and cash collateral posted of $625 million with counterparties. At December 31, 2012, derivatives include approximately $1.1 billion related to legally enforceable master netting agreements that allow the Company to settle positive and negative positions. At December 31, 2012, derivatives presented above exclude cash collateral received of $55 million and cash collateral posted of $827 million with counterparties.


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Table of Contents

Assets and liabilities in all levels could result in volatile and material price fluctuations. Realized and unrealized gains and losses on Level 3 assets represent only a portion of the risk to market fluctuations in Regions’ consolidated balance sheets. Further, derivatives included in Levels 2 and 3 are used by the Asset and Liability Management Committee of the Company in a holistic approach to managing price fluctuation risks.

The following tables illustrate a rollforward for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012, respectively. The tables do not reflect the change in fair value attributable to any related economic hedges the Company used to mitigate the interest rate risk associated with these assets and liabilities. The net changes in realized gains (losses) included in earnings related to Level 3 assets and liabilities held at March 31, 2013 and 2012 are not material.
 
 
Three Months Ended March 31, 2013
 
 
 
Total Realized /
Unrealized
Gains or Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening Balance January 1, 2013
 
Included
in
Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance
March 31,
2013
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-agency MBS
$
13

 

  

 

 

 

 
(1
)
 

 

 
$
12

Other debt securities
2

 

  

 

 

 

 

 

 

 
2

Total securities available for sale
$
15

 

  

 

 

 

 
(1
)
 

 

 
$
14

Mortgage servicing rights
$
191

 
1

(a)  

 
44

 

 

 

 

 

 
$
236

Total interest rate options derivatives, net
$
22

 
33

(a)  

 

 

 

 
(37
)
 

 

 
$
18

_________
(a)
 Included in mortgage income.


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Table of Contents

 
Three Months Ended March 31, 2012

 
 
Total Realized /
Unrealized
Gains or Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening Balance January 1, 2012
 
Included
in
Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance
March 31,
2012
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading account assets(c):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
139

 
(3
)


 
4

 

 

 
(16
)
 

 

 
$
124

Commercial agency MBS
51

 
2

  

 
368

 

 

 
(317
)
 

 

 
104

Other securities
1

 
4

  

 
2,248

 

 

 
(2,240
)
 

 

 
13

Total trading account assets(d)
$
191

 
3

(a)  

 
2,620

 

 

 
(2,573
)
 

 

 
$
241

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
20

 

  
(2
)
 

 

 

 
(2
)
 

 

 
$
16

Residential non-agency MBS
16

 

  

 

 

 

 
(1
)
 

 

 
15

Other debt securities

 

 

 

 

 

 

 
3

 

 
3

Total securities available for sale
$
36

 

  
(2
)
 

 

 

 
(3
)
 
3

 

 
$
34

Mortgage servicing rights
$
182

 
3

(b)  

 
14

 

 

 

 

 

 
$
199

Trading account liabilities(c):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial agency
$
5

 

  

 
37

 

 

 

 

 

 
$
42

Other securities
2

 

  

 
12

 

 

 
(4
)
 

 

 
10

Total trading account liabilities(d)
$
7

 

  

 
49

 

 

 
(4
)
 

 

 
$
52

Total interest rate options derivatives, net
$
13

 
41

(b)  

 

 

 

 
(36
)
 

 

 
$
18

_________
(a)
Included in discontinued operations, on a net basis.
(b)
Included in mortgage income.
(c)
Income from trading account assets primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period.
(d)
All amounts related to trading account assets and trading account liabilities are related to Morgan Keegan (see Note 2 for discussion of sale of Morgan Keegan).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents the fair value adjustments related to non-recurring fair value measurements:
 
 
Three Months Ended
March 31
 
 
2013
 
2012
 
 
(In millions)
 
Loans held for sale
$
(19
)
 
$
(56
)
 
Foreclosed property and other real estate
(11
)
 
(19
)
 
The following tables present detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2013 and December 31, 2012. 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, 2013 and December 31, 2012 are included. Following the tables are a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

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Table of Contents

 
 
March 31, 2013
 
Level 3
Estimated Fair Value at
March 31, 2013
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential non-agency
$12
 
Discounted cash flow
 
Spread to LIBOR
 
5.3% -69.8% (16.4%)
 
 
 
 
 
Weighted-average prepayment speed (CPR; percentage)
 
6.3% -32.4% (12.3%)
 
 
 
 
 
Probability of default
 
0.2%-1.3% (1.1%)
 
 
 
 
 
Loss severity
 
38.7% -100.0% (47.7%)
Other debt securities
$2
 
Market comparable
 
Evaluated quote on same issuer/comparable bond
 
98.1% -100.0% (99.3%)
 
 
 
 
 
Comparability adjustments
 
1.9% (1.9%)
Mortgage servicing rights(a)
$236
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
9.6% -25.9% (12.9%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
5.0% -23.6% (10.6%)
Derivative assets:
 
 
 
 
 
 
 
Interest rate options
$18
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
9.6% -25.9% (12.9%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
5.0% -23.6% (10.6%)
 
 
 
 
 
Pull-through
 
52.3% -99.7% (63.1%)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans held for sale
$31
 
Multiple data points, including discount to appraised value of collateral based on recent market activity for sales of similar loans
 
Appraisal comparability adjustment (discount)
 
2.0% -100.0% (51.0%)
Foreclosed property and other real estate
$29
 
 Discount to appraised value of property based on recent market activity for sales of similar properties
 
 Appraisal comparability adjustment (discount)
 
26.0% -100.0% (37.1%)
_________
(a)
See Note 5 for additional disclosures related to assumptions used in the fair value calculation for mortgage servicing rights.


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Table of Contents

 
December 31, 2012
 
Level 3
Estimated Fair Value at
December 31, 2012
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential non-agency
$13
 
Discounted cash flow
 
Spread to LIBOR
 
5.4% -69.9% (16.9%)
 
 
 
 
 
Weighted-average prepayment speed (CPR; percentage)
 
7.6% -30.3% (12.2%)
 
 
 
 
 
Probability of default
 
0.2% - 1.2% (1.0%)
 
 
 
 
 
Loss severity
 
39.3% -100.0% (48.1%)
Other debt securities
$2
 
Market comparable
 
Evaluated quote on same issuer/comparable bond
 
99.1% -100.0% (99.6%)
 
 
 
 
 
Comparability adjustments
 
1.0% (1.0%)
Mortgage servicing rights(a)
$191
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
4.7% -25.9% (17.6%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
1.0% -23.6% (7.5%)
Derivative assets:
 
 
 
 
 
 
 
Interest rate options
$22
 
Discounted cash flow
 
Weighted-average prepayment speed (CPR; percentage)
 
4.7% -25.9% (17.6%)
 
 
 
 
 
Option-adjusted spread (percentage)
 
1.0% -23.6% (7.5%)
 
 
 
 
 
Pull-through
 
55.7% -98.8% (76.9%)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans held for sale
$51
 
Multiple data points, including discount to appraised value of collateral based on recent market activity for sales of similar loans
 
Appraisal comparability adjustment (discount)
 
8.0% -94.0% (46.3%)
Foreclosed property and other real estate
$40
 
 Discount to appraised value of property based on recent market activity for sales of similar properties
 
 Appraisal comparability adjustment (discount)
 
35.0% -100.0% (36.2%)
_________
(a) See Note 7 to the consolidated financial statements of the 2012 Annual Report on Form 10-K for additional disclosures related to assumptions used in the fair value calculation for mortgage servicing rights.

RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Securities available for sale
Mortgage-backed securities: residential non-agency—The fair value reported in this category relates to retained interests in legacy securitizations. Significant unobservable inputs include the spread to LIBOR, constant prepayment rate, probability of default, and loss severity in the event of default. Significant increases in any of these inputs in isolation would result in significantly lower fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates.
Other debt securities—Significant unobservable inputs include evaluated quotes on comparable bonds for the same issuer and management-determined comparability adjustments. Changes in the evaluated quote on comparable bonds would result in a directionally similar change in the fair value of the other debt securities.

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Table of Contents

Mortgage Servicing Rights
The significant unobservable inputs used in the fair value measurement of mortgage servicing rights ("MSR") are option adjusted spreads (“OAS”) and prepayment speed. This method requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk adjusted rate. Additionally, the impact of prepayments and changes in the OAS are based on a variety of underlying inputs such as servicing costs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The net change in unrealized gains (losses) included in earnings related to MSRs held at period end are disclosed as the changes in valuation inputs or assumptions. See Note 5 for these amounts and additional disclosures related to assumptions used in the fair value calculation for MSRs.
Derivative assets
Interest rate options—These instruments are interest rate lock agreements made in the normal course of originating residential mortgage loans. Significant unobservable inputs in the fair value measurement are OAS, prepayment speeds, and pull-through. The impact of OAS and prepayment speed inputs in the valuation of these derivative instruments are consistent with the MSR discussion above. Pull-through is an estimate of the number of interest rate lock commitments that will ultimately become funded loans. Increases or decreases in the pull-through assumption will have a corresponding impact on the value of these derivative assets.
NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Loans held for sale
Loans held for sale are valued based on multiple data points indicating the fair value for each loan. The primary data point for non-performing loans held for sale is a discount to the appraised value of the underlying collateral, which considers the return required by potential buyers of the loans. Management establishes this discount or comparability adjustment based on recent sales of loans secured by similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.
Foreclosed property and other real estate
Foreclosed property and other real estate are valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

FAIR VALUE OPTION
Regions has elected the fair value option for FNMA and FHLMC eligible thirty-year residential mortgage loans held for sale. Additionally, Regions previously elected the fair value option for FNMA and FHLMC eligible fifteen-year residential mortgage loans originated with the intent to sell. During the fourth quarter of 2012, Regions began the process of retaining fifteen-year residential mortgage loans on its balance sheet. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value:
 
 
March 31, 2013
 
December 31, 2012
 
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
$
1,016

 
$
987

 
$
29

 
$
1,282

 
$
1,235

 
$
47

Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of income. The following table details net gains resulting from changes in

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Table of Contents

fair value of these loans which were recorded in mortgage income in the consolidated statements of income during the three months ended March 31, 2013 and 2012, respectively. These changes in fair value are mostly offset by economic hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
 
 
Mortgage loans held for sale, at fair value
 
 
Three Months Ended
March 31
 
 
2013
 
2012
 
 
(In millions)
 
Net gains (losses) resulting from changes in fair value
$
(18
)
 
$
(10
)
 


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, 2013 are as follows:
 
 
March 31, 2013
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,933

 
$
4,933

 
$
4,933

 
$

 
$

Trading account securities
121

 
121

 
121

 

 

Securities available for sale
27,089

 
27,089

 
174

 
26,901

 
14

Securities held to maturity
8

 
9

 
2

 
7

 

Loans held for sale
1,082

 
1,082

 

 
1,016

 
66

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
70,536

 
64,773

 

 

 
64,773

Other interest-earning assets
102

 
102

 

 
102

 

Derivatives, net
60

 
60

 

 
42

 
18

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
94,133

 
94,183

 

 
94,183

 

Short-term borrowings
1,830

 
1,830

 

 
1,830

 

Long-term borrowings
5,847

 
6,189

 
1,084

 

 
5,105

Loan commitments and letters of credit
128

 
667

 

 

 
667

Indemnification obligation
268

 
248

 

 

 
248

_________
(1)
Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate.
(2)
The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at March 31, 2013 was $5.8 billion or 8.2 percent.
(3)
Excluded from this table is the lease carrying amount of $1.7 billion at March 31, 2013.


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The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments as of December 31, 2012 are as follows:
 
 
December 31, 2012
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,489

 
$
5,489

 
$
5,489

 
$

 
$

Trading account securities
116

 
116

 
116

 

 

Securities available for sale
27,244

 
27,244

 
177

 
27,052

 
15

Securities held to maturity
10

 
11

 
2

 
9

 

Loans held for sale
1,383

 
1,383

 

 
1,282

 
101

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
70,574

 
63,961

 

 

 
63,961

Other interest-earning assets
900

 
900

 

 
900

 

Derivatives, net
90

 
90

 

 
68

 
22

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
95,474

 
95,528

 

 
95,528

 

Short-term borrowings
1,574

 
1,574

 

 
1,574

 

Long-term borrowings
5,861

 
6,138

 
1,037

 

 
5,101

Loan commitments and letters of credit
121

 
667

 

 

 
667

Indemnification obligation
345

 
329

 

 

 
329

_________
(1)
Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate.
(2)
The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at December 31, 2012 was $6.6 billion or 9.4 percent.
(3)
Excluded from this table is the lease carrying amount of $1.5 billion at December 31, 2012.

NOTE 14. BUSINESS SEGMENT INFORMATION
Each of Regions’ reportable segments is a strategic business unit that serves specific needs of Regions’ customers based on the products and services provided. The segments are based on the manner in which management views the financial performance of the business. The Company has three reportable segments: Business Services, Consumer Services and Wealth Management, with the remainder split between Discontinued Operations and Other. During the third quarter of 2012, Regions reorganized its internal management structure and, accordingly, its segment reporting structure. Historically, Regions’ primary business segment was Banking/Treasury, representing the Company’s banking network (including the Consumer and Commercial Banking function along with the Treasury function). Other segments included Investment Banking/Brokerage/Trust and Insurance. During the second quarter of 2012, Regions consummated the sale of Morgan Keegan (the primary component of Investment Banking/Brokerage/Trust). Shortly thereafter, Regions announced organizational changes to better integrate and execute the Company’s strategic priorities across all lines of business and geographies. As a result, Regions revised its reportable segments. Prior periods’ information has been restated to conform to the current periods’ presentation.

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The following tables present financial information for each reportable segment for the period indicated.
 
 
 
Three Months Ended March 31, 2013
 
 
Business
Services
 
Consumer
Services
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
 
(In millions)
Net interest income (loss)
 
$
465

 
$
475

 
$
34

 
$
(176
)
 
$
798

 
$

 
$
798

Provision for loan losses
 
95

 
78

 
7

 
(170
)
 
10

 

 
10

Non-interest income
 
107

 
275

 
96

 
23

 
501

 

 
501

Non-interest expense
 
250

 
473

 
104

 
15

 
842

 
(4
)
 
838

Income before income taxes
 
227

 
199

 
19

 
2

 
447

 
4

 
451

Income tax expense (benefit)
 
86

 
75

 
8

 
(55
)
 
114

 
2

 
116

Net income
 
$
141

 
$
124

 
$
11

 
$
57

 
$
333

 
$
2

 
$
335

Average assets
 
$
47,180

 
$
29,208

 
$
3,067

 
$
39,668

 
$
119,123

 
$

 
$
119,123


 
 
Three Months Ended March 31, 2012
 
 
Business
Services
 
Consumer
Services
 
Wealth
Management
 
Other
 
Continuing
Operations
 
Discontinued
Operations
 
Consolidated
 
 
(In millions)
Net interest income (loss)
 
$
510

 
$
470

 
$
38

 
$
(191
)
 
$
827

 
$
7

 
$
834

Provision for loan losses
 
189

 
131

 
12

 
(215
)
 
117

 

 
117

Non-interest income
 
123

 
295

 
93

 
13

 
524

 
240

 
764

Non-interest expense
 
254

 
506

 
109

 
44

 
913

 
312

 
1,225

Income (loss) before income taxes
 
190

 
128

 
10

 
(7
)
 
321

 
(65
)
 
256

Income tax expense (benefit)
 
72

 
48

 
4

 
(42
)
 
82

 
(25
)
 
57

Net income (loss)
 
$
118

 
$
80

 
$
6

 
$
35

 
$
239

 
$
(40
)
 
$
199

Average assets
 
$
49,232

 
$
29,981

 
$
3,678

 
$
40,865

 
$
123,756

 
$
2,776

 
$
126,532

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

NOTE 15. COMMITMENTS, CONTINGENCIES AND GUARANTEES
COMMERCIAL COMMITMENTS
Regions issues off-balance sheet financial instruments in connection with lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to Regions’ normal credit approval policies and procedures. Regions measures inherent risk associated with these instruments by recording a reserve for unfunded commitments based on an assessment of the likelihood that the guarantee will be funded and the creditworthiness of the customer or counterparty. Collateral is obtained based on management’s assessment of the creditworthiness of the customer.

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Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table:
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
Unused commitments to extend credit
 
$
38,087

 
$
38,160

Standby letters of credit
 
1,850

 
1,872

Commercial letters of credit
 
38

 
27

Liabilities associated with standby letters of credit
 
40

 
37

Assets associated with standby letters of credit
 
39

 
37

Reserve for unfunded credit commitments
 
88

 
83

Unused commitments to extend credit—To accommodate the financial needs of its customers, Regions makes commitments under various terms to lend funds to consumers, businesses and other entities. These commitments include (among others) credit card and other revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
Standby letters of credit—Standby letters of credit are also issued to customers which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expired 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 affiliates are subject to loss contingencies related to litigation and claims arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Regions establishes accruals for litigation and claims 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. In addition, as previously discussed, Regions has agreed to indemnify Raymond James for all legal matters resulting from pre-closing activities in conjunction with the sale of Morgan Keegan and recorded an indemnification obligation at fair value in the second quarter of 2012. The indemnification obligation had a carrying amount of approximately $268 million and an estimated fair value of $248 million as of March 31, 2013 (see Note 13). For certain matters, when able to do so, Regions also estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Where Regions is able to estimate such possible losses, Regions estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, in an aggregate amount up to approximately $60 million as of March 31, 2013, with it also being reasonably possible that Regions could incur no losses in excess of amounts accrued. The legal contingencies included in the reasonably possible estimate include those that are subject to the indemnification agreement with Raymond James.
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified damages; damages other than compensatory such as punitive damages; multiple defendants and jurisdictions; whether discovery has begun or not; and whether the claim involves a class action. There are numerous factors that result in a greater degree of complexity in class-action lawsuits as compared to other types of litigation. Due to the many intricacies involved in class-action lawsuits at the early stages of these matters, obtaining clarity on a reasonable estimate is difficult which may call into question its reliability. As a result of some of these factors, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below. The aggregated estimated amount provided above therefore may not include an estimate for every matter disclosed below.
Beginning in December 2007, Regions and certain of its affiliates have been named in class-action lawsuits filed in federal and state courts on behalf of investors who purchased shares of certain Regions Morgan Keegan Select Funds (the “Funds”) and shareholders of Regions. These cases have been consolidated into class-actions and shareholder derivative actions for the open-end and closed-end Funds. The Funds were formerly managed by Regions Investment Management, Inc. (“Regions Investment Management”). Regions Investment Management no longer manages these Funds, which were transferred to Hyperion Brookfield

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Asset Management (“Hyperion”) in 2008. Certain of the Funds have since been terminated by Hyperion. The complaints contain various allegations, including claims that the Funds and the defendants misrepresented or failed to disclose material facts relating to the activities of the Funds. Plaintiffs have requested equitable relief and unspecified monetary damages. These cases are in various stages and no classes have been certified. Settlement discussions are ongoing in certain cases, and the Court has granted preliminary approval of a settlement in the closed-end Funds class-action and shareholder derivative case. A hearing for final approval of the closed-end Funds class actions was held on April 12, 2013. As of May 6, 2013, a final order was pending. Certain of the shareholders in these Funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating in the class actions. These lawsuits and proceedings are subject to the indemnification agreement with Raymond James discussed above.
In October 2010, a purported class-action lawsuit was filed by Regions’ stockholders in the U.S. District Court for the Northern District of Alabama against Regions and certain former officers of Regions. The lawsuit alleges violations of the federal securities laws, including allegations that statements that were materially false and misleading were included in filings made with the Securities and Exchange Commission ("SEC"). The plaintiffs have requested equitable relief and unspecified monetary damages. On June 7, 2011, the trial court denied Regions’ motion to dismiss this lawsuit. On June 14, 2012, the trial court granted class certification. The Eleventh Circuit Court of Appeals is reviewing the trial court’s grant of class-action certification. The case is now stayed pending that review.
Regions has received inquiries and subpoenas from government authorities primarily concerning accounting matters from 2009 and earlier periods that also have been the subject of the civil litigation mentioned above. Regions is cooperating in providing responses to these inquiries and subpoenas. In addition, the Board of Directors is conducting investigations regarding certain of the matters raised in these inquiries and subpoenas.
In December 2009, Regions and certain current and former directors and officers were named in a consolidated shareholder derivative action filed in Jefferson County, Alabama. The complaint alleges mismanagement, waste of corporate assets, breach of fiduciary duty and unjust enrichment relating to bonuses and other benefits received by executive management. Plaintiffs requested equitable relief and unspecified monetary damages. The case was dismissed with prejudice on December 6, 2012. Plaintiffs' motion to alter, amend or vacate that judgment was denied on March 25, 2013. Plaintiffs appealed the denial of their motion to the Alabama Supreme Court on April 18, 2013.
In July 2006, Morgan Keegan and a former Morgan Keegan analyst were named as defendants in a lawsuit filed by a Canadian insurance and financial services company and its American subsidiary in the Circuit Court of Morris County, New Jersey. Plaintiffs made claims under a civil Racketeer Influenced and Corrupt Organizations (“RICO”) statute, for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs allege that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs to improperly drive down plaintiffs’ stock price, so that others could profit from short positions. Plaintiffs allege that defendants’ actions damaged their reputations and harmed their business relationships. Plaintiffs allege a number of categories of damages they sustained, including lost insurance business, lost financings and increased financing costs, increased audit fees and directors and officers insurance premiums and lost acquisitions, and have requested monetary damages. On September 12, 2012, the trial court dismissed the case with prejudice. Plaintiffs have filed an appeal. This matter is subject to the indemnification agreement with Raymond James.
The SEC and states of Missouri and Texas are investigating alleged securities law violations by Morgan Keegan in the underwriting and sale of certain municipal bonds. An enforcement action was brought by the Missouri Secretary of State on April 4, 2013, seeking monetary penalties and other relief. A civil action was brought by institutional investors of the bonds on March 19, 2012, seeking a return of their investment and unspecified compensatory and punitive damages. A class action was brought on behalf of retail purchasers of the bonds on September 4, 2012, seeking unspecified compensatory and punitive damages. These actions are in the early stages. These matters are also subject to the indemnification agreement with Raymond James.
While the final outcome of litigation and claims exposures is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation will not have a material effect on Regions’ business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to Regions’ business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

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GUARANTEES
INDEMNIFICATION OBLIGATION
As discussed in Note 2, on April 2, 2012 (“Closing Date”), Regions closed the sale of Morgan Keegan and related affiliates to Raymond James. In connection with the sale, Regions agreed to indemnify Raymond James for all legal matters related to pre-closing activities, including matters filed subsequent to the Closing Date that relate to actions that occurred prior to closing. Losses under the indemnification include legal and other expenses, such as costs for judgments, settlements and awards associated with the defense and resolution of the indemnified matters. The maximum potential amount of future payments that Regions could be required to make under the indemnification is indeterminable due to the indefinite term of some of the obligations. However, Regions expects the majority of ongoing legal matters to be resolved within approximately two to three years.

As of the Closing Date, the fair value of the indemnification obligation, which includes defense costs and unasserted claims, was approximately $385 million, of which approximately $256 million was recognized as a reduction to the gain on sale of Morgan Keegan. The fair value was determined through the use of a present value calculation that takes into account the future cash flows that a market participant would expect to receive from holding the indemnification liability as an asset. Regions performed a probability-weighted cash flow analysis and discounted the result at a credit-adjusted risk free rate. The fair value of the indemnification liability includes amounts that Regions had previously determined meet the definition of probable and reasonably estimable. Adjustments to the indemnification obligation are recorded within professional and legal expenses within discontinued operations (see Note 2). As of March 31, 2013, the carrying value of the indemnification obligation was approximately $268 million.
VISA INDEMNIFICATION

As a member of the Visa USA network, Regions, along with other members, indemnified Visa USA against litigation. On October 3, 2007, Visa USA was restructured and acquired several Visa affiliates. In conjunction with this restructuring, Regions' indemnification of Visa USA was modified to cover specific litigation (“covered litigation”).

A portion of Visa's proceeds from its initial public offering ("IPO") was escrowed to fund the covered litigation. During the first quarter of 2013, Visa made a settlement payment related to the covered litigation which reduced Regions' share of the escrow account to approximately zero at March 31, 2013 compared to $22 million at December 31, 2012. Regions made a corresponding adjustment to reduce its liability to approximately zero at March 31, 2013 compared to $22 million at December 31, 2012. To the extent that the amount available under the escrow arrangement, or subsequent fundings of the escrow account via reductions in the class B share conversion ratio, is insufficient to fully resolve the covered litigation, Visa will enforce the indemnification obligations of Visa USA's members for any excess amount. At this time, Regions has concluded that it is not probable that covered litigation exposure will exceed the class B share value.

NOTE 16. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that eliminates offsetting of financial instruments disclosure differences between GAAP and International Financial Reporting Standards ("IFRS"). New disclosures are required for recognized financial instruments, such as derivatives, repurchase agreements, and reverse repurchase agreements, that are either (1) offset on the balance sheet in accordance with the FASB's offsetting guidance or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether they are offset in accordance with the FASB's offsetting guidance. The objective of the new disclosure requirements is to enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. This amended guidance was applied retrospectively and was effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Regions adopted this guidance with first quarter 2013 financial reporting. See Notes 7 and 12 for the newly-required disclosures.
In July 2012, the FASB issued new accounting guidance related to the impairment of indefinite-lived intangible assets. The guidance simplifies how entities test indefinite-lived intangible assets, other than goodwill, and is similar to the new qualitative impairment test for goodwill. The guidance allows entities to elect to first perform qualitative tests to determine the likelihood that the indefinite-lived intangible asset's fair value is less than its carrying value. If it is determined that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the entity would then perform the first step of the impairment test. The guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Regions adopted this guidance beginning with the first quarter 2013 financial reporting. The guidance did not have a material impact upon adoption.

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In February 2013, the FASB issued new accounting guidance related to disclosure of significant amounts reclassified out of accumulated other comprehensive income by component and the respective line items of net income. The guidance was effective for fiscal periods beginning after December 15, 2012. Regions adopted this guidance beginning with the first quarter 2013 financial reporting. See Note 8 for the newly-required disclosure.

Further information related to recent accounting pronouncements and accounting changes adopted by Regions prior to the first quarter of 2013 is included in the Annual Report on Form 10-K for the year ended December 31, 2012.

NOTE 17. SUBSEQUENT EVENTS

On April 25, 2013, Regions launched a tender offer for a portion of its outstanding 7.75% Senior Notes due 2014 (the “2014 Notes”) and 5.75% Senior Notes due 2015 (the “2015 Notes” and, collectively with the 2014 Notes, the “Senior Notes”). Pursuant to the terms and conditions of the tender offer, Regions will purchase up to $350 million aggregate principal amount of Senior Notes, with priority given to any 2014 Notes tendered. Regions will not purchase more than $150 million aggregate principal amount of 2015 Notes. The tender offer has an early tender premium for Senior Notes tendered by May 10, 2013. Estimated pre-tax losses on early extinguishment related to this tender offer are expected to range between $25 million and $30 million.

On April 26, 2013, the $250 million 4.875% parent company senior notes matured. On April 1, 2013, the $500 million 4.85% subordinated notes issued by Regions Bank matured.

On April 30, 2013, Regions issued $750 million of 2.00% parent company senior notes due May 15, 2018. The Company expects to use a portion of the proceeds from this offering to satisfy its obligations in connection with the tender offer discussed above.

On March 19, 2013, Regions' Board of Directors authorized a new $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2013 through the end of the first quarter of 2014. The Company began to repurchase shares in the open market pursuant to the new plan in April 2013. As of May 6, 2013, Regions had repurchased approximately 10 million shares of common stock at a total cost of approximately $82 million before commissions.
On April 30, 2013, Regions provided notice that it will redeem its 6.625% Junior Subordinated Notes due 2047 ("JSNs"). The JSNs are currently all held by Regions Financing Trust II ("the Trust"). This will cause the Trust to redeem all issued and outstanding 6.625% Trust Preferred Securities issued by Regions Financing Trust II ("Trust Preferred Securities"). The aggregate principal amount of JSNs and Trust Preferred Securities outstanding as of April 30, 2013 was approximately $498 million. The redemptions are scheduled to occur on May 31, 2013.



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

INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporation’s (“Regions” or "the Company”) Quarterly Report on Form 10-Q to the Securities and Exchange Commission (“SEC”) and updates Regions’ Form 10-K for the year ended December 31, 2012, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions’ financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three months ended March 31, 2013 compared to the three months ended March 31, 2012 for the statement of income. For the balance sheet, the emphasis of this discussion will be the balances as of March 31, 2013 compared to December 31, 2012.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See pages 3 and 4 for additional information regarding forward-looking statements.

CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, which operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of asset management, wealth management, securities brokerage, insurance and other specialty financing.
Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At March 31, 2013, Regions operated 1,709 total branch outlets in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions operates under three business segments: Business Services, Consumer Services, and Wealth Management with the remainder split between Discontinued Operations and Other. See Note 14 “Business Segment Information” to the consolidated financial statements for more information regarding Regions’ segment reporting structure. Regions also provides full-line insurance brokerage services primarily through Regions Insurance, Inc. which is included in the Wealth Management segment.
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. (“Morgan Keegan”) and related affiliates to Raymond James Financial, Inc. (“Raymond James”). The sale closed on April 2, 2012. Regions Investment Management, Inc. and Regions Trust were not included in the sale; they are included in the Wealth Management segment. See Note 2 “Discontinued Operations” to the consolidated financial statements for further discussion.
Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and non-interest income sources. Net interest income is the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions’ net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, mortgage servicing and secondary marketing, trust and asset management activities, insurance activities, capital markets, and other customer services, which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy, professional fees, deposit administrative fees, other real estate owned 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 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.



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FIRST QUARTER OVERVIEW
Regions reported net income available to common shareholders of $327 million, or $0.23 per diluted share, in the first quarter of 2013 compared to net income available to common shareholders of $145 million, or $0.11 per diluted share, in the first quarter of 2012. A significant decline in the first quarter 2013 provision for loan losses, decreased non-interest expenses, and decreased expense on preferred stock were the drivers of the improvement in results from the prior year period.
For the first quarter of 2013, net interest income (taxable-equivalent basis) from continuing operations totaled $811 million compared to $839 million in the first quarter of 2012. The net interest margin (taxable-equivalent basis) was 3.13 percent in the first quarter of 2013 compared to 3.09 percent in the first quarter of 2012. A smaller balance sheet, marked by a decline in loan volumes and average earning assets, and lower yields on both loans and securities, contributed to the decline in net interest income. The net interest margin increased primarily as a result of lower levels of non-accrual loans, a decline in lower yielding other interest-earning assets and continued improvement in deposit costs. Deposit costs were 18 basis points for the first quarter of 2013, as compared to 37 basis points for the first quarter of 2012.
The provision for loan losses totaled $10 million in the first quarter of 2013 compared to $117 million during the first quarter of 2012. Credit metrics, including net charge-offs, non-accrual, criticized and classified loan balances, and inflows of non-performing loans showed continued improving trends through the first three months of 2013 compared to 2012.
Net charge-offs totaled $180 million, or an annualized 0.99 percent of average loans, in the first quarter of 2013, compared to $332 million, or an annualized 1.73 percent for the first quarter of 2012. Net charge-offs were lower across most major loan categories when comparing the first quarter of 2013 period to the prior year period.
The allowance for loan losses at March 31, 2013 was 2.37 percent of total loans, net of unearned income, compared to 2.59 percent at December 31, 2012. Total non-performing assets were $1.8 billion at March 31, 2013, compared to $1.9 billion at December 31, 2012.
Non-interest income from continuing operations for the first quarter of 2013 was $501 million, compared to $524 million for the first quarter of 2012. Service charges on deposit accounts decreased $12 million in the first quarter of 2013 compared to the corresponding 2012 period primarily as a result of account attrition, overdraft policy changes and modified customer behavior. Mortgage income decreased $5 million in the first quarter of 2013 compared to the corresponding 2012 period due to the cost of hedging mortgage servicing rights and a change in strategy to retain 15 year fixed rate residential mortgage production versus selling into the secondary market. The Company also had a $7 million leveraged lease termination gain in the first quarter of 2012 that was not repeated in the first quarter of 2013.
Total non-interest expense from continuing operations was $842 million in the first quarter of 2013, a $71 million decrease from the first quarter of 2012. Amortization of core deposit intangible decreased $15 million due to a change in estimated life that was determined at year-end 2012. Other real estate owned expense decreased $21 million in the first quarter of 2013 compared to the first quarter of 2012 as result of declining balances and stabilizing real estate values. Deposit administrative fees decreased $14 million for the first quarter of 2013 when compared to the first quarter of 2012 due to improved performance metrics which improve the fee calculation. Lastly, the Company extinguished a liability in the fourth quarter of 2012 related to an investment by a third party in a subsidiary, which eliminated the subsidiary dividend amounts and other related costs of approximately $16 million that were historically expensed in the first quarter.
A discussion of activity within discontinued operations is included at the end of the Management’s Discussion and Analysis section of this report.

TOTAL ASSETS
Regions’ total assets at March 31, 2013 were $119.7 billion, compared to $121.3 billion at December 31, 2012. The decrease in total assets from year-end 2012 resulted mainly from a decrease in other interest-earning assets, as well as decreases in interest-bearing deposits in other banks and loans held for sale. The reduction in other interest-earning assets is a result of netting cash collateral against the related net derivative liability which began in the first quarter of 2013. Refer to Note 12 "Derivative Financial Instruments and Hedging Activities" for further information. The decrease in interest-bearing deposits in other banks is a result of normal day-to-day operating variations. The decrease in loans held for sale is due to a reduction in the number of mortgage refinances in the first quarter of 2013.


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SECURITIES
The following table details the carrying values of securities, including both available for sale and held to maturity:
Table 1—Securities
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
U.S. Treasury securities
 
$
56

 
$
54

Federal agency securities
 
488

 
555

Obligations of states and political subdivisions
 
7

 
9

Mortgage-backed securities:
 
 
 
 
Residential agency
 
20,940

 
21,283

Residential non-agency
 
12

 
13

Commercial agency
 
808

 
725

Commercial non-agency
 
1,158

 
1,098

Corporate and other debt securities
 
2,957

 
2,835

Equity securities
 
671

 
682

 
 
$
27,097

 
$
27,254

Securities totaled $27.1 billion at March 31, 2013, a decrease of $0.2 billion from year-end 2012 levels. During the first three months of 2013, Regions purchased approximately $2.0 billion in available for sale mortgage-backed securities and $455 million in available for sale high quality investment grade corporate bonds. These purchases were partially offset by sales of approximately $405 million in available for sale mortgage-backed securities, sales of approximately $285 million in available for sale high quality investment grade corporate bonds, as well as paydowns and maturities.
Securities available for sale, which comprise nearly all 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 MARKET RISK-INTEREST RATE RISK and LIQUIDITY).



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LOANS
Loans, net of unearned income, represented approximately 70 percent of Regions’ interest-earning assets. 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, 2013
 
December 31, 2012
 
 
(In millions, net of unearned income)
Commercial and industrial
 
$
27,602

 
$
26,674

Commercial real estate mortgage—owner-occupied
 
9,812

 
10,095

Commercial real estate construction—owner-occupied
 
325

 
302

Total commercial
 
37,739

 
37,071

Commercial investor real estate mortgage
 
6,338

 
6,808

Commercial investor real estate construction
 
984

 
914

Total investor real estate
 
7,322

 
7,722

Residential first mortgage
 
12,875

 
12,963

Home equity
 
11,546

 
11,800

Indirect
 
2,483

 
2,336

Consumer credit card
 
851

 
906

Other consumer
 
1,120

 
1,197

Total consumer
 
28,875

 
29,202

 
 
$
73,936

 
$
73,995

Loans, net of unearned income, totaled $73.9 billion at March 31, 2013, relatively flat from year-end 2012 levels. Continued growth in commercial and industrial and indirect auto loan portfolios almost completely offset declines in investor real estate, commercial real estate mortgage, residential first mortgage and home equity products during the first three months of 2013.
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 have increased $928 million or 3% since year-end due to Regions’ integrated approach to specialized lending. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. These loans declined $283 million or 3% from year-end 2012 as a result of continued customer deleveraging. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. During the first quarter of 2013, total commercial loan balances increased $668 million, or 1.8%.
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, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. The investor real estate loan segment declined $400 million from 2012 year-end balances primarily due to continued payoffs and pay downs.
Residential First Mortgage—Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. These loans experienced an $88 million or 1% decline from year-end 2012, primarily due to customers continuing to pay down real estate debt. At the end of 2012, Regions began the process of retaining 15 year fixed-rate mortgage production on the balance sheet which has slowed the pace of decline. Approximately $180 million of these loans were retained on the balance sheet in the first quarter of 2013.

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 home.

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Substantially all of this portfolio was originated through Regions’ branch network. During the first quarter of 2013, home equity balances decreased $254 million to $11.5 billion, driven by continued consumer deleveraging and refinancing.
Indirect—Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. This portfolio class increased $147 million from year-end 2012, reflecting continued growth from the late 2010 re-entry into the indirect auto lending business. Regions currently has approximately 2,000 dealers in its network.
Consumer Credit Card—During the second quarter of 2011, Regions completed the purchase of approximately $1.0 billion of existing Regions-branded consumer credit card accounts from FIA Card Services. The products are primarily open-ended variable interest rate consumer credit card loans. In the third quarter of 2012, Regions assumed the servicing of these loans from FIA Card Services. Consumer credit card balances declined $55 million to $851 million during the first quarter of 2013.
Other Consumer—Other consumer loans include direct consumer installment loans, overdrafts and other revolving loans. Other consumer loans totaled $1.1 billion at March 31, 2013, relatively unchanged from prior year end.
CREDIT QUALITY
Certain of Regions’ loans have been particularly vulnerable to weak economic conditions over the past several years, mainly investor real estate loans and home equity products (particularly Florida second lien). These loan types have a higher risk of non-collection than other loans.
The Company has made considerable efforts to de-risk its balance sheet. A primary focus has been reducing the Company's exposure in the investor real estate portfolio. Total investor real estate loans represented approximately 24% of total loans at December 31, 2008, and has been actively managed down to approximately 10% of total loans at March 31, 2013.
Home equity lending, while improving, remains a stressed portfolio for the Company. Total home equity lending represented approximately 16% of total loans at both March 31, 2013 and December 31, 2012. Losses in this portfolio generally track overall economic conditions. The main source of economic stress has been in Florida, where residential property values have declined significantly while unemployment rates remain high. Losses in Florida where Regions is in a second lien position are higher than first lien losses. The following sections provide further detail on the home equity portfolio.
HOME EQUITY
The home equity portfolio totaled $11.5 billion at March 31, 2013 as compared to $11.8 billion at December 31, 2012. Substantially all of this portfolio was originated through Regions’ branch network.
The following tables provide details related to the home equity portfolio as follows:
Table 3—Selected Home Equity Portfolio Information
 
 
 
As of and for the Three Months Ended March 31, 2013
 
 
Florida
 
All Other States
 
Total
 
 
1st Lien
 
2nd Lien
 
Total
 
1st Lien
 
2nd Lien
 
Total
 
1st Lien
 
2nd Lien
 
Total
 
 
(Dollars in millions)
Balance
 
$
1,844

 
$
2,355

 
$
4,199

 
$
3,781

 
$
3,566

 
$
7,347

 
$
5,625

 
$
5,921

 
$
11,546

Net charge-offs
 
5

 
17

 
22

 
5

 
10

 
15

 
10

 
27

 
37

Net charge-off %(1)
 
1.13
%
 
2.87
%
 
2.11
%
 
0.56
%
 
1.14
%
 
0.85
%
 
0.75
%
 
1.83
%
 
1.30
%
 
 
 
As of and for the Three Months Ended March 31, 2012
 
 
Florida
 
All Other States
 
Total
 
 
1st Lien
 
2nd Lien
 
Total
 
1st Lien
 
2nd Lien
 
Total
 
1st Lien
 
2nd Lien
 
Total
 
 
(Dollars in millions)
Balance
 
$
1,934

 
$
2,682

 
$
4,616

 
$
3,826

 
$
4,200

 
$
8,026

 
$
5,760

 
$
6,882

 
$
12,642

Net charge-offs
 
10

 
39

 
49

 
8

 
18

 
26

 
18

 
57

 
75

Net charge-off %(1)
 
2.03
%
 
5.74
%
 
4.27
%
 
0.86
%
 
1.70
%
 
1.30
%
 
1.25
%
 
3.28
%
 
2.39
%
________
(1)
 Net charge-off percentages are calculated on an annualized basis as a percent of average balances.

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Net charge-offs were an annualized 1.30 percent of home equity loans for the first three months of 2013 compared to an annualized 2.39 percent through the first three months of 2012. Losses in Florida-based credits remained at elevated levels, but the related net charge-off percentage decreased to 2.11 percent for the three months ended March 31, 2013 from 4.27 percent for the three months ended March 31, 2012. Tighter underwriting standards in place since 2008 and stabilizing home values in Florida are contributing to this improvement.
Of the $11.5 billion home equity portfolio at March 31, 2013, approximately $10.1 billion were home equity lines of credit and $1.4 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in May 2009, new home equity lines of credit have a 10-year draw period and a 10-year repayment period. Previously, the home equity lines of credit had a 20-year term with a balloon payment upon maturity or a 5-year draw period with a balloon payment upon maturity. The term “balloon payment” means there are no principal payments required until the balloon payment is due for interest-only lines of credit. As of March 31, 2013, none of Regions' home equity lines of credit have converted to mandatory amortization under the contractual terms. The majority of home equity lines of credit will either mature with a balloon payment or convert to amortizing status after fiscal year 2020.
Of the $10.1 billion of home equity lines of credit as of March 31, 2013, approximately 90 percent require monthly interest-only payments while the remaining approximately 10 percent require a payment equal to 1.5 percent of the outstanding balance, which would include some principal repayment. As of March 31, 2013, approximately 29 percent of borrowers were only paying the minimum amount due on the home equity line. In addition, approximately 56 percent of the home equity lines of credit balances have the option to amortize either all or a portion of their balance. As of March 31, 2013, approximately $371 million of the home equity line of credit balances have elected this option.
Regions' home equity loans have higher default and delinquency rates than home equity lines of credit, which is expected at origination of the loans, due to more stringent underwriting guidelines for a line of credit versus a loan reflecting the nature of the credit being extended. Therefore, home equity loans secured with a second lien are expected to and do have higher delinquency and loss rates than home equity lines of credit with a second lien.
Regions is unable to track payment status on first liens held by another institution, including payment status related to loan modifications. When Regions’ second lien position becomes delinquent, an attempt is made to contact the first lien holder and inquire as to the payment status of the first lien. However, Regions does not continuously monitor the payment status of the first lien position. Short sale offers and settlement agreements are often received by the home equity junior lien holders well before the loan balance reaches the delinquency threshold for charge-off consideration, potentially resulting in a full balance payoff/charge-off. Regions is presently monitoring the status of all first lien position loans that the Company owns or services and has a second lien, and is taking appropriate action when delinquent.
OTHER CONSUMER CREDIT QUALITY DATA
The Company calculates an estimate of the current value of property secured as collateral for both home equity and residential first mortgage lending products (“current LTV”). The estimate is based on home price indices compiled by the Federal Housing Finance Agency (“FHFA”). The FHFA data indicates trends for Metropolitan Statistical Areas (“MSAs”). Regions uses the FHFA valuation trends from the MSAs in the Company's footprint in its estimate. The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential first mortgage and home equity classes of the consumer portfolio segment. Current LTV data for the remaining loans in the portfolio is not available, primarily because some of the loans are serviced by others. Data may also not be available due to mergers and systems integrations. The amounts in the table represent the entire loan balance. For purposes of the table below, if the loan balance exceeds the current estimated collateral, the entire balance is included in the “Above 100%” category, regardless of the amount of collateral available to partially offset the shortfall. The balances in the "Above 100%" category as a percentage of the portfolio balances slightly decreased in the residential first mortgage and home equity portfolios to 12% and 16%, respectively, as of March 31, 2013.

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Table 4—Estimated Current Loan to Value Ranges
 
 
 
March 31, 2013
 
December 31, 2012
 
 
Residential
First Mortgage
 
Home
Equity
 
Residential
First Mortgage
 
Home
Equity
 
 
 
 
(In millions)
 
 
Estimated current loan to value:
 
 
 
 
 
 
 
 
Above 100%
 
$
1,536

 
$
1,885

 
$
1,662

 
$
1,988

80% - 100%
 
2,490

 
2,155

 
2,610

 
2,234

Below 80%
 
8,395

 
6,672

 
8,248

 
6,677

Data not available
 
454

 
834

 
443

 
901

 
 
$
12,875

 
$
11,546

 
$
12,963

 
$
11,800



Regions qualitatively considers factors such as periodic updates of FICO scores, unemployment, home prices, and geography as credit quality indicators for consumer loans. FICO scores are obtained at origination as part of Regions' formal underwriting process. Refreshed FICO scores are obtained by the Company quarterly for all revolving accounts and home equity lines of credit and semi-annually for all other consumer loans. Regions considers FICO scores less than 620 to be indicative of higher credit risk and obtains additional collateral in most of these instances. The following table presents 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 remained constant at 8% of the combined portfolios at both March 31, 2013 and December 31, 2012.
Table 5—Estimated Current FICO Score Ranges
 
 
 
March 31, 2013
 
 
Residential
First Mortgage
 
Home
Equity
 
Indirect
 
Consumer
Credit Card
 
Other
Consumer
 
 
(In millions)
Below 620
 
$
1,175

 
$
771

 
$
216

 
$
45

 
$
97

620 - 680
 
1,243

 
1,112

 
394

 
131

 
145

681-720
 
1,455

 
1,462

 
438

 
206

 
179

Above 720
 
8,145

 
7,579

 
1,273

 
469

 
415

Data not available
 
857

 
622

 
162

 

 
284

 
 
$
12,875

 
$
11,546

 
$
2,483

 
$
851

 
$
1,120

 
 
 
December 31, 2012
 
 
Residential
First Mortgage
 
Home
Equity
 
Indirect
 
Consumer
Credit Card
 
Other
Consumer
 
 
(In millions)
Below 620
 
$
1,212

 
$
789

 
$
218

 
$
57

 
$
97

620 - 680
 
1,259

 
1,125

 
352

 
135

 
134

681-720
 
1,435

 
1,447

 
354

 
211

 
160

Above 720
 
8,214

 
7,561

 
1,085

 
494

 
383

Data not available
 
843

 
878

 
327

 
9

 
423

 
 
$
12,963

 
$
11,800

 
$
2,336

 
$
906

 
$
1,197




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Table of Contents

ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents management’s estimate of credit losses inherent in the loan and credit commitment portfolios as of period-end. The allowance for credit losses consists of two components: the allowance for loan and lease losses and the reserve for unfunded credit commitments. Management’s assessment of the appropriateness of the allowance for credit losses is based on a combination of both of these components. Regions determines its allowance for credit losses in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. Additional discussion of the methodology used to calculate the allowance for credit losses is included in Note 6 “Allowance for Credit Losses” to the consolidated financial statements in the 2012 Annual Report on Form 10-K, as well as related discussion in Management’s Discussion and Analysis.
The allowance for loan losses totaled $1.7 billion at March 31, 2013 and $1.9 billion at December 31, 2012. The allowance for loan losses as a percentage of net loans was 2.37 percent at March 31, 2013 and 2.59 percent on December 31, 2012. The reserve for unfunded credit commitments was $88 million at March 31, 2013 compared to $83 million at December 31, 2012. Net charge-offs as a percentage of average loans (annualized) were 0.99 percent and 1.73 percent in the first three months of 2013 and 2012, respectively. Net charge-offs were lower across most categories, period over period, particularly in the case of commercial investor real estate mortgage as a result of the recent ongoing portfolio de-risking and fundamental improvement in credit performance. In addition to lower levels of charge-offs, credit quality metrics have improved during the first quarter of 2013 compared to 2012, including lower levels of non-accrual, criticized and classified loans, and lower inflows of non-accrual loans. The provision for loan losses totaled $10 million in the first quarter of 2013 compared to $117 million during the first quarter of 2012. Net charge-offs exceeded the provision for loan losses for the first quarter of 2013, primarily resulting from the continued improving credit metrics referred to above, as well as an overall reduction in loan balances, problem loan resolutions and a continuing mix shift in loans out of higher risk investor real estate and into less risky commercial and industrial loans.
Management considers the current level of allowance for credit losses appropriate to absorb losses inherent in the loan portfolio and unfunded commitments. Management’s determination of the appropriateness of the allowance for credit losses requires the use of judgments and estimations that may change in the future. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance for credit losses to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require changes in the level of the allowance based on their judgments and estimates.
Management expects that net loan charge-offs in 2013 will continue to improve compared to 2012. Economic trends such as real estate valuations, interest rates and unemployment will impact the future levels of net charge-offs and provision and may result in volatility from quarter to quarter during the remainder of 2013. Additionally, changes in circumstances related to individually large credits or certain portfolios may result in volatility. Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 6 “Allowance for Credit Losses.”


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Activity in the allowance for credit losses is summarized as follows:
Table 6—Allowance for Credit Losses
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
(In millions)
Allowance for loan losses at beginning of year
 
$
1,919

 
$
2,745

Loans charged-off:
 
 
 
 
Commercial and industrial
 
71

 
73

Commercial real estate mortgage—owner-occupied
 
28

 
50

Commercial real estate construction—owner-occupied
 

 
2

Commercial investor real estate mortgage
 
22

 
73

Commercial investor real estate construction
 
1

 
22

Residential first mortgage
 
23

 
40

Home equity
 
45

 
83

Indirect
 
9

 
6

Consumer credit card
 
10

 
12

Other consumer
 
15

 
15

 
 
224

 
376

Recoveries of loans previously charged-off:
 
 
 
 
Commercial and industrial
 
13

 
12

Commercial real estate mortgage—owner-occupied
 
3

 
4

Commercial real estate construction—owner-occupied
 
1

 

Commercial investor real estate mortgage
 
8

 
9

Commercial investor real estate construction
 
1

 
3

Residential first mortgage
 
1

 
1

Home equity
 
8

 
8

Indirect
 
3

 
2

Consumer credit card
 
1

 

Other consumer
 
5

 
5

 
 
44

 
44

Net charge-offs:
 
 
 
 
Commercial and industrial
 
58

 
61

Commercial real estate mortgage—owner-occupied
 
25

 
46

Commercial real estate construction—owner-occupied
 
(1
)
 
2

Commercial investor real estate mortgage
 
14

 
64

Commercial investor real estate construction
 

 
19

Residential first mortgage
 
22

 
39

Home equity
 
37

 
75

Indirect
 
6

 
4

Consumer credit card
 
9

 
12

Other consumer
 
10

 
10

 
 
180

 
332

Provision for loan losses
 
10

 
117

Allowance for loan losses at March 31
 
$
1,749

 
$
2,530

Reserve for unfunded credit commitments at beginning of year
 
$
83

 
$
78

Provision for unfunded credit commitments
 
5

 
13

Reserve for unfunded credit commitments at March 31
 
$
88

 
$
91

Allowance for credit losses at March 31
 
$
1,837

 
$
2,621

Loans, net of unearned income, outstanding at end of period
 
$
73,936

 
$
76,720

Average loans, net of unearned income, outstanding for the period
 
$
73,919

 
$
77,168

Ratios:
 
 
 
 
Allowance for loan losses at end of period to loans, net of unearned income
 
2.37
%
 
3.30
%
Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale
 
1.10x

 
1.18x

Net charge-offs as percentage of:
 
 
 
 
Average loans, net of unearned income (annualized)
 
0.99
%
 
1.73
%
Provision for loan losses
 
1,800.0

 
283.8


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TROUBLED DEBT RESTRUCTURINGS
Residential first mortgage, home equity, consumer credit card and other consumer TDRs are consumer loans modified under the Customer Assistance Program. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modification was offered as a workout alternative. As a result of clarified accounting literature that was effective for third quarter 2011, renewals of classified commercial and investor real estate loans are refutably considered to be TDRs, even if no reduction in interest rate is offered, because the existing terms are considered to be below market. More detailed information is included in Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements. The following table summarizes TDRs for the periods ending March 31, 2013 and December 31, 2012:
Table 7—Troubled Debt Restructurings
 
 
 
March 31, 2013
 
December 31, 2012
 
 
Loan
Balance
 
Allowance for
Loan Losses
 
Loan
Balance
 
Allowance for
Loan Losses
 
 
(In millions)
Accruing:
 
 
 
 
 
 
 
 
Commercial
 
$
511

 
$
68

 
$
500

 
$
67

Investor real estate
 
790

 
93

 
873

 
112

Residential first mortgage
 
996

 
128

 
984

 
131

Home equity
 
382

 
29

 
391

 
35

Consumer Credit Card
 
1

 

 

 

Other consumer
 
37

 

 
41

 
1

 
 
$
2,717

 
$
318

 
$
2,789

 
$
346

Non-accrual status or 90 days past due and still accruing:
 
 
 
 
 
 
 
 
Commercial
 
$
289

 
$
87

 
$
291

 
$
83

Investor real estate
 
278

 
73

 
251

 
73

Residential first mortgage
 
191

 
25

 
201

 
27

Home equity
 
34

 
3

 
37

 
3

 
 
792

 
188

 
780

 
186

 
 
$
3,509

 
$
506

 
$
3,569

 
$
532

_________
 Note: All loans listed in the table above are considered impaired under applicable accounting literature.


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NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
Table 8—Non-Performing Assets
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
Non-performing loans:
 
 
 
 
Commercial and industrial
 
$
355

 
$
409

Commercial real estate mortgage—owner-occupied
 
420

 
439

Commercial real estate construction—owner-occupied
 
12

 
14

Total commercial
 
787

 
862

Commercial investor real estate mortgage
 
451

 
457

Commercial investor real estate construction
 
13

 
20

Total investor real estate
 
464

 
477

Residential first mortgage
 
201

 
214

Home equity
 
133

 
128

Indirect
 
1

 

Total non-performing loans, excluding loans held for sale
 
1,586

 
1,681

Non-performing loans held for sale
 
66

 
89

Total non-performing loans(1)
 
1,652

 
1,770

Foreclosed properties
 
136

 
149

Total non-performing assets(1)
 
$
1,788

 
$
1,919

Accruing loans 90 days past due:
 
 
 
 
Commercial and industrial
 
$
8

 
$
19

Commercial real estate mortgage—owner-occupied
 
9

 
6

Total commercial
 
17

 
25

Commercial investor real estate mortgage
 
25

 
11

Residential first mortgage(2)(3)
 
203

 
220

Home equity
 
79

 
87

Indirect
 
3

 
3

Consumer credit card
 
14

 
14

Other consumer
 
3

 
3

 
 
$
344

 
$
363

Restructured loans not included in the categories above
 
$
2,717

 
$
2,789

Non-performing loans(1) to loans and non-performing loans held for sale
 
2.23
%
 
2.39
%
Non-performing assets(1) to loans, foreclosed properties and non-performing loans held for sale
 
2.41
%
 
2.59
%
_________
(1)
Exclusive of accruing loans 90 days past due
(2)
Excludes residential first mortgage loans that are 100% guaranteed by FHA and also those 100% guaranteed by GNMA where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $98 million at March 31, 2013 and $87 million at December 31, 2012.
(3)
Regions began excluding 100% guaranteed residential first mortgages from all past due metrics as of March 31, 2013. All prior periods presented have been restated to conform to this presentation.
Non-performing assets totaled $1.8 billion at March 31, 2013, compared to $1.9 billion at December 31, 2012. Foreclosed properties, a subset of non-performing assets, totaled $136 million and $149 million at March 31, 2013 and December 31, 2012, respectively. The decrease in non-performing assets and foreclosed properties during 2013 reflects the Company’s efforts to work through problem assets and reduce the riskiest exposures.


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Based on current expectations for the economy, management anticipates non-performing assets to continue to improve in 2013 as compared to 2012. Economic trends such as real estate valuations, interest rates and unemployment, as well as the level of disposition activity, will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility throughout the remainder of 2013.


Loans past due 90 days or more and still accruing were $344 million at March 31, 2013, a decrease from $363 million at December 31, 2012.
At March 31, 2013, Regions had approximately $250-$350 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 may migrate to non-accrual status in the next quarter.
In order to arrive at the estimate of potential problem loans, personnel from geographic regions forecast certain larger dollar loans that may potentially be downgraded to non-accrual at a future time, depending on the occurrence of future events. These personnel consider a variety of factors, including the borrower’s capacity and willingness to meet the contractual repayment terms, make principal curtailments or provide additional collateral when necessary, and provide current and complete financial information including global cash flows, contingent liabilities and sources of liquidity. A probability weighting is assigned to the listing of loans due to the inherent level of uncertainty related to potential actions that a borrower or guarantor may take to prevent the loan from reaching problem status. Regions assigns the probability weighting based on an assessment of the likelihood that the necessary actions required to prevent problem loan status will occur. Additionally, for other loans (for example, smaller dollar loans), a factor based on trends and experience is applied 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 substandard accrual. Detailed disclosures for substandard accrual loans (as well as other credit quality metrics) are included in Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements.

The following table provides an analysis of non-accrual loans (excluding loans held for sale) by portfolio segment for the three months ended March 31, 2013:
Table 9—Analysis of Non-Accrual Loans
 
 
 
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2013
 
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
 
(In millions)
Balance at beginning of period
 
$
862

 
$
477

 
$
342

 
$
1,681

Additions
 
166

 
116

 
(5
)
 
277

Net payments/other activity
 
(63
)
 
(74
)
 

 
(137
)
Return to accrual
 
(52
)
 
(14
)
 

 
(66
)
Charge-offs on non-accrual loans(2)
 
(97
)
 
(22
)
 
(1
)
 
(120
)
Transfers to held for sale(3)
 
(18
)
 
(12
)
 
(1
)
 
(31
)
Transfers to foreclosed properties
 
(8
)
 
(5
)
 

 
(13
)
Sales
 
(3
)
 
(2
)
 

 
(5
)
Balance at end of period
 
$
787

 
$
464

 
$
335

 
$
1,586

_________
(1)
All net activity within the consumer portfolio segment other than sales and transfers to held for sale (including related charge-offs) is included as a single net number within the additions line, due to the relative immateriality of consumer non-accrual loans.
(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 $18 million recorded upon transfer.


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LOANS HELD FOR SALE
Loans held for sale totaled $1.1 billion at March 31, 2013, consisting primarily of $1 billion of residential real estate mortgage loans and $66 million of non-performing investor real estate loans. At December 31, 2012, loans held for sale totaled $1.4 billion, consisting primarily of $1.3 billion of residential real estate mortgage loans and $89 million of non-performing investor real estate loans. The level of residential real estate mortgage loans held for sale fluctuates depending on the timing of origination and sale to third parties.


The following table provides an analysis of non-performing loans held for sale for the three months ended March 31, 2013 and 2012:
Table 10—Non-Performing Loans Held For Sale
 
 
 
Three Months Ended March 31
 
 
2013
 
2012
 
 
(In millions)
Balance at beginning of period
 
$
89

 
$
328

Transfers in
 
31

 
93

Sales
 
(36
)
 
(145
)
Writedowns
 
(1
)
 
(2
)
Loans moved from held for sale/other activity
 
(11
)
 
(8
)
Transfers to foreclosed properties
 
(6
)
 
(17
)
Balance at end of period
 
$
66

 
$
249


ALL OTHER INTEREST-EARNING ASSETS
All other interest-earning assets, which are comprised of interest-bearing deposits in other banks, trading account securities, and other interest-earning assets, decreased approximately $1.2 billion from year-end 2012 to March 31, 2013, primarily due to a decrease in other interest-earning assets as a result of netting cash collateral against the related net derivative liability which began in the first quarter of 2013. Refer to Note 12 "Derivative Financial Instruments and Hedging Activities" for further information. Additionally, a reduction in interest-bearing deposits in other banks contributed to the overall decrease and was a result of normal day-to-day operating variations.

GOODWILL
Goodwill totaled $4.8 billion at both March 31, 2013 and December 31, 2012 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 impairment may exist (refer to Note 1 “Summary of Significant Accounting Policies” to the 2012 consolidated financial statements filed on Form 10-K for the year ended December 31, 2012 for further discussion of when Regions tests goodwill for impairment).
A test of goodwill for impairment consists of two steps. In Step One, the fair value of the reporting unit is compared to its carrying amount, including goodwill. To the extent that the estimated fair value of the reporting unit exceeds the carrying value, impairment is not indicated and no further testing is required. Conversely, if the estimated fair value of the reporting unit is below its carrying amount, Step Two must be performed. Step Two consists of determining the implied estimated fair value of goodwill, which is the net difference between the valuation adjustments of assets and liabilities and the valuation adjustment to equity (from Step One) of the reporting unit. The carrying value of equity for each reporting unit is determined from an allocation based upon risk weighted assets. Adverse changes in the economic environment, declining operations of the reporting unit, or other factors could result in a decline in the estimated implied fair value of goodwill. If the estimated implied fair value of goodwill is less than the carrying amount, a loss would be recognized to reduce the carrying amount to the estimated implied fair value.

The estimated fair value of the reporting unit is determined using both income and market approaches. Within the income approach, which is the primary valuation approach, Regions utilizes the capital asset pricing model (“CAPM”) in order to derive the base discount rate. The inputs to the CAPM include the 20-year risk-free rate, 5-year beta for a select peer set, and a market risk premium based on published data. Once the output of the CAPM is determined, a size premium is added (also based on a

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published source) as well as a company-specific risk premium for each reporting unit, which is an estimate determined by the Company and meant to compensate for the risk inherent in the future cash flow projections and inherent differences (such as business model and market perception of risk) between Regions and the peer set.
In estimating future cash flows, a balance sheet as of the test date and a statement of income for the last twelve months of activity for each reporting unit is compiled. From that point, future balance sheets and statements of income are projected based on the inputs. Cash flows are based on expected future capitalization requirements due to balance sheet growth and anticipated changes in regulatory capital requirements. The baseline cash flows utilized in all models correspond to the most recent internal forecasts and/or budgets that range from 1 to 3 years. These internal forecasts are based on inputs developed in the Company’s internal strategic and capital planning processes.
Regions uses the guideline public company method and the guideline transaction method as the two market approaches. The public company method applies a value multiplier derived from each reporting unit’s peer group to tangible book value or earnings (for Wealth Management) and an implied control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions considering the absolute and relative potential revenue synergies and cost savings. The transaction method applies a value multiplier to a financial metric of the reporting unit based on comparable observed purchase transactions in the financial services industry for the reporting unit (where available).
Refer to Note 6 “Goodwill” for further discussion of these approaches and related assumptions. The fair values of assets and liabilities in Step Two are determined using an exit price concept. Refer to the discussion of fair value in Note 1 “Summary of Significant Accounting Policies” to the 2012 consolidated financial statements filed on Form 10-K for the year ended December 31, 2012 for discussions of the exit price concept and the determination of fair values of financial assets and liabilities.
The results of the calculations for the first quarter of 2013 indicated that the estimated fair value of the Consumer Services and Wealth Management reporting units of $5.6 billion and $1.2 billion, respectively, were greater than their carrying amounts of $5.4 billion and $1.0 billion, respectively, and the estimated fair value of the Business Services reporting unit was less than its carrying amount. During the first quarter, the carrying amount and estimated fair value of the Business Services reporting unit was $9.0 billion and $7.3 billion, respectively. Therefore, Step Two of the goodwill impairment test was performed for the Business Services reporting unit. The carrying amount of goodwill for the Business Services reporting unit was $2.6 billion. In Step Two, the fair value of the Business Services reporting unit’s assets, both tangible and intangible, and liabilities were determined using estimates of the amounts at which the assets (or liabilities) could be bought (or incurred) or sold (settled) in a taxable transaction between willing participants. The effects of the Step Two adjustments, which were primarily write-downs of assets to fair value, exceeded any reductions in the value of equity determined in Step One; accordingly the calculation of implied goodwill exceeded its carrying amount by approximately 45 percent resulting in no impairment for the Business Services reporting unit as of the January 31, 2013 test date.
The table below summarizes the discount rate used in the goodwill impairment test of each reporting unit for the first quarter of 2013 and the fourth quarter of 2012:
 
 
 
Business
Services
 
Consumer
Services
 
Wealth
Management
Discount Rate:
 
 
 
 
 
 
First quarter 2013
 
14
%
 
13
%
 
13
%
Fourth quarter 2012
 
14
%
 
13
%
 
13
%
Specific factors as of the date of filing the financial statements that could negatively impact the assumptions used in assessing goodwill for impairment include: a protracted decline in the Company’s market capitalization; disparities in the level of fair value changes in net assets (especially loans) compared to equity; increases in book values of equity of a reporting unit in excess of the increase in fair value of equity; adverse business trends resulting from litigation and/or regulatory actions; higher loan losses; lengthened forecasts of higher unemployment relative to pre-crisis levels beyond 2013; future increased minimum regulatory capital requirements above current thresholds (refer to Note 13 “Regulatory Capital Requirements and Restrictions” to the 2012 consolidated financial statements filed on Form 10-K for the year ended December 31, 2012 for a discussion of current minimum regulatory requirements); future federal rules and regulations resulting from the Dodd-Frank Act; and/or a protraction in the current low level of interest rates significantly beyond 2014.
The following table presents an analysis of independent changes in market factors and significant assumptions that could adversely impact the carrying balance of goodwill in the Business Services reporting unit.

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Table 11—Goodwill Sensitivity
Impact to the Carrying Value of Goodwill
Business Services Reporting Unit
 
Change in Discount Rate
Estimated Amount
of Impairment
 
(In millions)
+ 3.8% (from 14% to 17.8%)
(a)

+ 5.0%
(201
)
+ 6.0%
(366
)
 
 
Improvement in Loan Fair Values(b)
 
+ 2.70 Percentage Points (from a discount of 6.9% to 4.2%)
(a)

+ 3.70 Percentage Points
(420
)
+ 4.70 Percentage Points
(845
)
_________
(a)
Represents the point at which the implied fair value of goodwill would approximate its carrying value.
(b)
Business Services loan discount to fair value is 6.9%.

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in implied fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the implied fair value of goodwill is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another which may either magnify or counteract the effect of the change.

FORECLOSED PROPERTIES
Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or fair value of the property less estimated costs to sell. The following table summarizes foreclosed property activity for the three months ended March 31, 2013 and 2012:
Table 12—Foreclosed Properties
 
 
 
Three Months Ended
March 31
 
 
2013
 
2012
 
 
(In millions)
Balance at beginning of period
 
$
149

 
$
296

Transfer from loans
 
60

 
94

Valuation adjustments
 
(11
)
 
(19
)
Foreclosed property sold
 
(59
)
 
(129
)
Payments and other
 
(3
)
 
(1
)
 
 
(13
)
 
(55
)
Balance at end of period
 
$
136

 
$
241

_________
Note: Approximately 71 percent and 74 percent of the ending balances at March 31, 2013 and 2012, respectively, relate to properties transferred into foreclosed properties during the previous twelve months.
Valuation adjustments are primarily recorded in other non-interest expense; adjustments are also recorded as a charge to the allowance for loan losses if incurred within 60 days after the date of transfer from loans. Valuation adjustments are primarily the cost of adjusting foreclosed properties to estimated fair value after these assets have been classified as foreclosed properties. Foreclosed property sold represents the net book value of the properties sold.


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OTHER ASSETS
Other assets increased $41 million from December 31, 2012 to $6.2 billion as of March 31, 2013, primarily due to the timing of settlements of securities sales, which was partially offset by lower balances related to derivatives, deferred tax assets, prepaid expenses, and escrow advances.

DEPOSITS
Regions competes with other banking and financial services companies for a share of the deposit market. Regions’ ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers’ needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service, competitive pricing and providing convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as internet banking.

The following table summarizes deposits by category:
Table 13—Deposits
 
 
March 31, 2013
 
December 31, 2012

 
 
(In millions)
Non-interest-bearing demand
 
$
29,971

 
$
29,963

Savings accounts
 
6,159

 
5,760

Interest-bearing transaction accounts
 
20,004

 
21,096

Money market accounts—domestic
 
25,411

 
24,901

Money market accounts—foreign
 
332

 
311

Low-cost deposits
 
81,877

 
82,031

Time deposits
 
12,256

 
13,443

Customer deposits
 
94,133

 
95,474

Corporate treasury time deposits
 

 

 
 
$
94,133

 
$
95,474

Total deposits at March 31, 2013 decreased approximately $1.3 billion compared to year-end 2012 levels. The overall decrease in deposits was driven by a significant decrease in time deposits due to continued maturities with minimal reinvestment by customers as a result of the decline in rates offered on the products.

SHORT-TERM BORROWINGS
The following is a summary of short-term borrowings:
Table 14—Short-Term Borrowings
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
Company funding sources:
 
 
 
 
Federal funds purchased
 
$
28

 
$
21

Securities sold under agreements to repurchase
 
173

 

 
 
201

 
21

Customer-related borrowings:
 
 
 
 
Securities sold under agreements to repurchase
 
1,628

 
1,428

Customer collateral
 

 
125

Other
 
1

 

 
 
1,629

 
1,553

 
 
$
1,830

 
$
1,574


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COMPANY FUNDING SOURCES
Federal funds purchased and securities sold under agreements to repurchase used for funding purposes totaled $201 million at March 31, 2013 compared to $21 million at December 31, 2012. The level of these borrowings can fluctuate significantly on a day-to-day basis, depending on funding needs and which sources of funds are used to satisfy those needs. All such arrangements are considered typical of the banking and brokerage industries and are accounted for as borrowings.
Selected data for short-term borrowings used for funding purposes is presented below:
 
 
 
Three Months Ended
March 31
 
 
2013
 
2012
 
 
(Dollars in millions)
Federal funds purchased:
 
 
 
 
Balance at quarter-end
 
$
28

 
$
19

Average outstanding (based on average daily balances)
 
28

 
23

Maximum amount outstanding at any month-end during the quarter
 
29

 
28

Weighted-average interest rate at quarter-end
 
0.1
%
 
0.2
%
Weighted-average interest rate on amounts outstanding during the quarter (based on average daily balances)
 
0.1
%
 
0.1
%
Securities sold under agreements to repurchase:
 
 
 
 
Balance at quarter-end
 
$
173

 
$
885

Average outstanding (based on average daily balances)
 
81

 
520

Maximum amount outstanding at any month-end during the quarter
 
173

 
885

Weighted-average interest rate at quarter-end
 
0.1
%
 
0.1
%
Weighted-average interest rate on amounts outstanding during the quarter (based on average daily balances)
 
0.1
%
 
0.1
%
CUSTOMER-RELATED BORROWINGS
Short-term borrowings that are the result of customer activity related to investment opportunities totaled $1.6 billion at both March 31, 2013 and December 31, 2012.
Repurchase agreements are also offered as commercial banking products as short-term investment opportunities for customers. At the end of each business day, customer balances are swept into the agreement account. In exchange for cash, Regions sells the customer securities with a commitment to repurchase them on the following business day. The repurchase agreements are collateralized to allow for market fluctuations. Securities from Regions Bank’s investment portfolio are used as collateral. From the customer’s perspective, the investment earns more than a traditional money market instrument. From Regions’ standpoint, the repurchase agreements are similar to deposit accounts, although they are not insured by the FDIC or guaranteed by the United States or governmental agencies. Regions Bank does not manage the level of these investments on a daily basis as the transactions are initiated by the customers. The level of these borrowings can fluctuate significantly on a day-to-day basis.

Customer collateral was zero at March 31, 2013 and $125 million at December 31, 2012. These balances represent cash collateral posted by customers related to derivative transactions. Regions began netting cash collateral, subject to enforceable master netting agreements, against the net derivative asset or liability beginning in 2013.



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LONG-TERM BORROWINGS
Long-term borrowings are summarized as follows:
Table 15—Long-Term Borrowings
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions)
Regions Financial Corporation (Parent):
 
 
 
 
4.875% senior notes due April 2013
 
$
250

 
$
250

7.75% senior notes due November 2014
 
696

 
696

5.75% senior notes due June 2015
 
497

 
497

7.75% subordinated notes due September 2024
 
100

 
100

6.75% subordinated debentures due November 2025
 
161

 
161

7.375% subordinated notes due December 2037
 
300

 
300

6.625% junior subordinated notes due May 2047
 
498

 
498

Other long-term debt
 
3

 
3

Valuation adjustments on hedged long-term debt
 
54

 
62

 
 
2,559

 
2,567

Regions Bank:
 
 
 
 
Federal Home Loan Bank advances
 
1,010

 
1,010

4.85% subordinated notes due April 2013
 
500

 
499

5.20% subordinated notes due April 2015
 
348

 
348

7.50% subordinated notes due May 2018
 
750

 
750

6.45% subordinated notes due June 2037
 
497

 
497

Other long-term debt
 
174

 
174

Valuation adjustments on hedged long-term debt
 
9

 
16

 
 
3,288

 
3,294

 
 
$
5,847

 
$
5,861

Long-term borrowings decreased approximately $14 million since year-end 2012 primarily due to market fluctuations related to valuations on hedged debt. FHLB advances have a weighted-average interest rate of 1.4 percent at both March 31, 2013 and December 31, 2012, with a weighted average maturity of 1.11 years.

On April 25, 2013, Regions launched a tender offer for a portion of its outstanding 7.75% Senior Notes due 2014 (the “2014 Notes”) and 5.75% Senior Notes due 2015 (the “2015 Notes” and, collectively with the 2014 Notes, the “Senior Notes”). Pursuant to the terms and conditions of the tender offer, Regions will purchase up to $350 million aggregate principal amount of Senior Notes, with priority given to any 2014 Notes tendered. Regions will not purchase more than $150 million aggregate principal amount of 2015 Notes. The tender offer has an early tender premium for Senior Notes tendered by May 10, 2013. Estimated pre-tax losses on early extinguishment related to this tender offer are expected to range between $25 million and $30 million.
  
On April 26, 2013, the $250 million 4.875% parent company senior notes matured. On April 1, 2013, the $500 million 4.85% subordinated notes issued by Regions Bank matured.

On April 30, 2013, Regions issued $750 million of 2.00% parent company senior notes due May 15, 2018. The Company expects to use a portion of the proceeds from this offering to satisfy its obligations in connection with the tender offer.
On April 30, 2013, Regions provided notice that it will redeem its 6.625% Junior Subordinated Notes due 2047 ("JSNs"). The JSNs are currently all held by Regions Financing Trust II ("the Trust"). This will cause the Trust to redeem all issued and outstanding 6.625% Trust Preferred Securities issued by Regions Financing Trust II ("Trust Preferred Securities"). The aggregate principal amount of JSNs and Trust Preferred Securities outstanding as of April 30, 2013 was approximately $498 million. The redemptions are scheduled to occur on May 31, 2013.



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STOCKHOLDERS’ EQUITY
Stockholders’ equity was $15.7 billion at March 31, 2013 compared to $15.5 billion at December 31, 2012. On March 19, 2012, Regions issued 153 million shares of common stock at $5.90 per share. The proceeds from the sale, net of issuance costs, increased equity by approximately $875 million.
On November 1, 2012, Regions issued $500 million in depositary shares each representing a fractional ownership interest in a share of the Company’s 6.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share. The net proceeds from the issuance increased equity by approximately $486 million. During the first quarter of 2013, cash dividends on preferred stock reduced equity by $8 million.
Additionally, during the first three months of 2013, net income increased stockholders’ equity by $335 million, while cash dividends reduced equity by $14 million. Changes in accumulated other comprehensive income decreased equity by $77 million.
On April 4, 2012, Regions repurchased all 3.5 million shares of Series A preferred stock issued to the U.S. Treasury and in early May of 2012, Regions repurchased the related warrant from the U.S. Treasury. Therefore, there was $54 million in preferred dividends and discount accretion in the first quarter of 2012 and none in the first quarter of 2013.
Regions’ Board of Directors declared a $0.01 per share cash dividend for the first quarters of both 2013 and 2012. On April 24, 2013, the Board of Directors approved an increase in the second quarter 2013 dividend to $0.03 per share which will be paid on July 1, 2013.
As part of its most recent Comprehensive Capital Analysis and Review ("CCAR") submission, Regions' proposed capital plans that included up to $350 million in common share repurchases. The Federal Reserve did not object to these plans, and Regions' Board of Directors has approved the share repurchase plan. The share repurchase authority granted by the Board of Directors is available from the beginning of the second quarter of 2013 through the first quarter of 2014. The Company began to repurchase shares in the open market pursuant to the new plan in April 2013. As of May 6, 2013, Regions had repurchased approximately 10 million shares of common stock at a total cost of approximately $82 million before commissions.
Regions’ ratio of stockholders’ equity to total assets was 13.15 percent at March 31, 2013 and 12.77 percent at December 31, 2012. Regions’ ratio of tangible common stockholders’ equity (stockholder's equity less preferred stock, goodwill and other identifiable intangibles and the related deferred tax liability) to total tangible assets was 8.98 percent at March 31, 2013, compared to 8.63 percent at December 31, 2012 (see Table 18 “GAAP to Non-GAAP Reconciliation” for further discussion).
See Note 8 “Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)” for further information related to common shares available for repurchase and dividends.

REGULATORY CAPITAL REQUIREMENTS
Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies. These regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions. Currently, there are two basic measures of capital adequacy: a risk-based measure and a leverage measure.
The risk-based capital requirements are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and interest rate risk, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with specified risk-weighting factors. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Banking organizations that are considered to have excessive risk exposures are required to maintain higher levels of capital.
The minimum standard for the ratio of total capital to risk-weighted assets is 8 percent. At least 50 percent of that capital level (which equates to a 4 percent minimum) must consist of common equity, undivided profits, qualifying trust preferred securities, non-cumulative perpetual preferred stock, senior perpetual preferred stock issued to the U.S. Treasury under the Capital Purchase Program, minority interests relating to qualifying common or noncumulative perpetual preferred stock issued by a consolidated U.S. depository institution or foreign bank subsidiary, less goodwill, disallowed deferred tax assets and certain other intangibles (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of a limited amount of other preferred stock, mandatorily convertible securities, subordinated debt, and a limited amount of the allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital” or total capital. However, under the Collins Amendment, which was passed as a section of the Dodd-Frank Act, trust preferred securities will be eliminated as an element of Tier 1 capital. This disallowance of trust preferred securities

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was to be phased in from January 1, 2013 to January 1, 2016. However, the Federal Reserve has announced a delay in the implementation of the capital rules governing the phase out of the trust preferred securities. As of March 31, 2013, Regions had $501 million of trust preferred securities that are subject to the Collins Amendment and $474 million of preferred stock that is exempt from the Collins Amendment.
The minimum guidelines to be considered well capitalized for Total capital and Tier 1 capital are 10 percent and 6 percent, respectively. As of March 31, 2013 and December 31, 2012, the most recent notification from Federal banking agencies categorized Regions and its significant subsidiaries as well capitalized under the regulatory framework.
The Company believes that no changes in conditions or events have occurred since March 31, 2013, which would result in changes that would cause Regions or Regions Bank to fall below the well capitalized level.
The banking regulatory agencies also have adopted regulations that supplement the risk-based guidelines to include a minimum ratio of 3 percent of Tier 1 capital to average assets less goodwill, disallowed deferred tax assets, and certain other intangibles (the “Leverage ratio”). Depending upon the risk profile of the institution and other factors, the regulatory agencies may require a Leverage ratio of 1 percent to 2 percent above the minimum 3 percent level.
In recent years, the Federal Reserve and banking regulators began supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. This measure has been a key component of assessments of capital adequacy under the CCAR process. While not currently prescribed in amount by federal banking regulations, analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity and/or the Tier 1 common equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP or prescribed in amount by federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations (see Table 18 “GAAP to Non-GAAP Reconciliation” for further details).
Regions is evaluating the anticipated impact of Basel III, which was originally expected to be phased in beginning in 2013. The Federal Reserve has announced a delay in the implementation of the final rules; however, when implemented there will be a phase in period of up to 6 years. The Company’s estimated Tier 1 common ratio as of March 31, 2013, based on Regions’ current understanding of the Basel III requirements, as proposed by the U.S. Notices of Proposed Rulemaking (“NPR”) released in June 2012, was approximately 9.12 percent and therefore exceeded the Basel III minimum of 7 percent for Tier 1 common. In January 2013, the Basel Committee published an update that included revisions to the liquidity coverage ratio (“LCR”) calculation. Also included in this update were provisions concerning, among other things, lower deposit run-off assumptions and full implementation on a phased-in schedule. Starting in 2015, firms will be required to be at a minimum compliance ratio of 60 percent, with equal annual increases until the 100 percent minimum requirement is reached in 2019. Based on Regions' understanding and interpretation of the rules for the calculation for the LCR under Basel III, Regions is currently above the 100 percent coverage minimum. The Company anticipates being fully compliant with the LCR requirements upon finalization and implementation. However, should Regions’ cash position or investment mix change in the future, Regions’ ability to meet the liquidity coverage ratio may be impacted. Additionally, there is still need for clarification of the Basel III rules as well as interpretation and implementation by U.S. banking regulators, so the ultimate impact of Basel III on Regions is not completely known at this point. The NPR comment period ended in October 2012; changes to the calculation resulting from the comment process could result in materially different capital ratios from the amounts estimated. Because the Basel III capital calculations are not formally defined by GAAP and are not currently prescribed in amount by the federal banking regulations, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently than Regions’ disclosed calculations (see Table 18 “GAAP to Non-GAAP Reconciliation” for further details).

See the “Supervision and Regulation—Capital Requirements” subsection of the “Business” section and the “Risk Factors” section of Regions’ Annual Report on Form 10-K for the year ended December 31, 2012 for more information.

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The following chart summarizes the applicable holding company and bank regulatory capital requirements. Regions’ capital ratios at March 31, 2013 and December 31, 2012 exceeded all regulatory requirements.
Table 16—Regulatory Capital Requirements
 
 
 
March 31, 2013
Ratio
 
December 31, 2012
Ratio
 
To Be Well
Capitalized
Tier 1 common (non-GAAP):
 
 
 
 
 
 
Regions Financial Corporation
 
11.23
%
 
10.84
%
 
NA(2)

Tier 1 capital:
 
 
 
 
 
 
Regions Financial Corporation
 
12.38
%
 
12.00
%
 
6.00
%
Regions Bank
 
13.31

 
13.25

 
6.00

Total capital:
 
 
 
 
 
 
Regions Financial Corporation
 
15.76
%
 
15.38
%
 
10.00
%
Regions Bank
 
16.09

 
16.04

 
10.00

Leverage(1):
 
 
 
 
 
 
Regions Financial Corporation
 
10.11
%
 
9.65
%
 
5.00
%
Regions Bank
 
10.86

 
10.65

 
5.00

_________
(1)
The Leverage ratio requires an additional 100 to 200 basis-point cushion, in certain circumstances, of adjusted quarterly average assets.
(2)
The Board of Governors of the Federal Reserve System assesses banks' capital levels in periods of stress against a minimum Tier 1 common capital level of 5%.

LIQUIDITY
GENERAL
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. Regions intends to fund obligations primarily through cash generated from normal operations. In addition to these obligations, Regions has obligations related to potential litigation contingencies. See Note 15 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional discussion of the Company’s funding requirements.
Assets, consisting principally of loans and securities, are funded by customer deposits, purchased funds, borrowed funds and stockholders’ equity. Regions’ goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s cash flow needs. The challenges of the current market environment demonstrate the importance of having and using various sources of liquidity to satisfy the Company’s funding requirements.
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' holding company cash is managed to a conservative three step evaluation. The Minimum Cash Requirement requires the parent to hold the greater of (1) two years of corporate dividends, debt service, and maturities by utilizing cash on hand, and the next four quarters’ expected dividend capacity from Regions Bank, (2) enough cash “on hand” with no upstream dividend capacity from Regions Bank to meet corporate dividends, debt service payments, and maturities for the next 12 months, or (3) a minimum cash requirement of $500 million. Regions runs similar testing scenarios and has minimum liquidity requirements for the bank and subsidiaries. The Company's funding and contingency planning does not currently include any reliance on unsecured sources. Risk limits are established within the Company's Asset and Liability Committee ("ALCO"), which regularly reviews compliance with the established limits.

The securities portfolio is one of Regions’ primary sources of liquidity. Maturities of securities provide a constant flow of funds available for cash needs (see Note 3 “Securities” to the consolidated financial statements). The agency guaranteed mortgage portfolio is another source of liquidity in various secured borrowing capacities.
Maturities in the loan portfolio also provide a steady flow of funds. Additional funds are provided from payments on consumer loans and one-to-four family residential first mortgage loans. In addition, liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not currently rely on unsecured wholesale market funding. Historically, Regions’ liquidity has been enhanced by its relatively stable customer deposit base.
Regions elected to exit the FDIC's TAG program on July 1, 2010. The TAG program was a component of the Temporary Liquidity Guarantee Program, whereby the FDIC guaranteed all funds held at participating institutions beyond the $250,000

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deposit insurance limit in qualifying transaction accounts. The decision to exit the program did not have a significant impact on liquidity. The Dodd-Frank Act permanently increased the FDIC coverage limit to $250,000. As a result of the Dodd-Frank Act, effective December 31, 2010, unlimited coverage for non-interest bearing demand transaction accounts was provided until January 1, 2013. During the first quarter of 2013, average non-interest bearing transaction accounts declined approximately $1.2 billion compared to the fourth quarter of 2012; however, increases in average interest-bearing checking, savings and money market accounts more than offset this decline.
Regulation Q prohibited banks from paying interest on business checking accounts in accordance with the Glass-Steagall Act of 1933. However, the Dodd-Frank Act repealed Regulation Q. In July 2011, financial institutions, such as Regions, were allowed to offer interest on corporate checking accounts. Regions responded to these changes by enhancing its existing core interest-bearing products. However, due to the low interest rate environment and unlimited FDIC insurance available on non-interest bearing balances until January 1, 2013, the Company did not experience, nor does it anticipate experiencing, significant migration of business customer balances from non-interest bearing accounts to interest-bearing accounts.
Due to the potential for uncertainty and inconsistency in the unsecured funding markets, Regions has been maintaining higher levels of cash liquidity by depositing excess cash with the Federal Reserve Bank, which is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At March 31, 2013, Regions had approximately $3.1 billion in excess cash on deposit with the Federal Reserve. Regions’ borrowing availability with the Federal Reserve Bank as of March 31, 2013, based on assets pledged as collateral on that date, was $19.9 billion.
Regions periodically accesses funding markets through sales of securities with agreements to repurchase. Repurchase agreements are also offered through a commercial banking sweep product as a short-term investment opportunity for customers. All such arrangements are considered typical of the banking and brokerage industries and are accounted for as borrowings.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of March 31, 2013, Regions’ borrowing availability from the FHLB totaled $6.7 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank and its subsidiaries have pledged certain residential first mortgage loans on one-to-four family dwellings and home equity lines of credit as collateral for the FHLB advances outstanding. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. Regions held $67 million in FHLB stock at March 31, 2013. The FHLB has been and is expected to continue to be a reliable and economical source of funding.
In February 2013, Regions filed a shelf registration statement with the U.S. Securities and Exchange Commission. This shelf registration does not have a capacity limit and can be utilized by Regions to issue various debt and/or equity securities. The registration statement will expire in February 2016.
Regions’ Bank Note program allows Regions Bank to issue up to $20 billion aggregate principal amount of bank notes outstanding at any one time. No issuances have been made under this program as of March 31, 2013. Notes issued under the program may be senior notes with maturities from 30 days to 15 years and subordinated notes with maturities from 5 years to 30 years. These notes are not deposits and they are not insured or guaranteed by the FDIC.
Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt, trust preferred securities and preferred shares in privately negotiated or open market transactions for cash or common shares. Regulatory approval would be required for retirement of some instruments.
RATINGS
Table 17 “Credit Ratings” reflects the debt ratings information of Regions Financial Corporation and Regions Bank by Standard & Poor's ("S&P"), Moody’s, Fitch and Dominion Bond Rating Service ("DBRS") as of March 31, 2013 and December 31, 2012.


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Table 17—Credit Ratings
 
 
 
 
 
 
 
 
 
 
 
  
As of March 31, 2013 and December 31, 2012
 
  
Standard  & Poor's
  
Moody’s
 
Fitch
  
DBRS
Regions Financial Corporation
  
 
  
 
 
 
  
 
Senior notes
  
BBB-
  
Ba1
 
BBB-
  
BBB
Subordinated notes
  
BB+
  
Ba2
 
BB+
  
BBBL
Junior subordinated notes
  
BB
  
Ba3
 
B+
  
BBBL
Regions Bank
  
 
  
 
 
 
  
 
Short-term debt
  
A-2
  
P-3
 
F3
  
R-2H
Long-term bank deposits
  
BBB
  
Baa3
 
BBB
  
BBBH
Long-term debt
  
BBB
  
Baa3
 
BBB-
  
BBBH
Subordinated debt
  
BBB-
  
Ba1
 
BB+
  
BBB
Outlook
  
Stable
  
Stable
 
Positive
  
Stable

In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, acceptability of its letters of credit, and funding of variable rate demand notes ("VRDNs"), thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section in the Annual Report on Form 10-K for the year ended December 31, 2012 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.

OPERATING RESULTS
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 “fee income ratio”, “efficiency ratio”, “return on average assets from continuing operations”, “return on average tangible common stockholders’ equity”, average and end of period “tangible common stockholders’ equity”, “Tier 1 common equity”, and “Basel III Tier 1 common equity” and related ratios. Regions believes that the exclusion of these significant items in expressing earnings and certain other financial measures provides a meaningful base for period-to-period comparisons, which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions’ business because management does not consider the activities related to the adjustments to be indications of ongoing operations. Regions believes that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management. Management and the Board of Directors utilize these non-GAAP financial measures as follows:

Preparation of Regions’ operating budgets
Monthly financial performance reporting
Monthly close-out reporting of consolidated results (management only)
Presentations to investors of Company performance
The efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as non-interest expense divided by total revenue on a taxable-equivalent basis. The fee income ratio (non-GAAP) is generally calculated as non-interest income divided by total revenue. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Non-interest expense (GAAP) is the numerator for the 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 fee income ratio. Net interest income on a taxable-equivalent basis (GAAP) and non-interest income (GAAP) are added together to arrive at total revenue (GAAP). Adjustments are made to arrive at adjusted total revenue (non-GAAP), which is the denominator for the fee income and efficiency ratios.

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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. In connection with the Federal Reserve’s CCAR process, these regulators are supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. While not prescribed in amount by federal banking regulations, analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity and/or the Tier 1 common equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP or prescribed in amount by federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity and Tier 1 common equity, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on these same bases.
Tier 1 common equity is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity (non-GAAP). Tier 1 common equity is also divided by the risk-weighted assets to determine the Tier 1 common equity ratio (non-GAAP). The amounts disclosed as risk-weighted assets are calculated consistent with banking regulatory requirements.
Regions currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulations. When implemented by U.S. bank regulatory agencies and fully phased-in, Basel III will change capital requirements and place greater emphasis on common equity. The Federal Reserve has announced a delay in the implementation date of the final rules. However, when implemented there will be a phase in period of up to 6 years. The U.S. bank regulatory agencies have not yet finalized regulations governing the implementation of Basel III. Accordingly, the calculations provided below are estimates, based on Regions’ current understanding of the framework, including the Company’s reading of the original requirements, as well as the U. S. Notices of Proposed Rulemaking (“NPR”) released in June 2012, and informal feedback received through the regulatory process. Regions’ understanding of the framework is evolving and will likely change as the regulations are finalized. The NPR comment period ended in October 2012; changes to the calculation resulting from the comment process could result in materially different capital ratios from the amounts estimated. Because the Basel III implementation regulations are not formally defined by GAAP and have not yet been finalized and codified, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using the Basel III framework, Regions believes that it is useful to provide investors information enabling them to assess Regions’ capital adequacy on the same basis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to stockholders.
 
The following tables provide: 1) a reconciliation of net income (GAAP) to income available to common shareholders (GAAP), 2) a reconciliation of net income available to common shareholders (GAAP) to income from continuing operations available to common shareholders (GAAP), 3) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income (non-GAAP), 4) a computation of adjusted total revenue (non-GAAP), 5) a computation of the adjusted fee income ratio (non-GAAP), 6) a computation of the adjusted efficiency ratio (non-GAAP), 7) a computation of return on average assets from continuing operations (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 and adjusted ratios (non-GAAP), 9) a reconciliation of stockholders’ equity (GAAP) to Tier 1 capital (regulatory) and to Tier 1 common equity (non-GAAP) and calculations of related ratios, and 10) a reconciliation of stockholders’ equity (GAAP) to Basel III Tier 1 common equity (non-GAAP) and calculation of the related ratio based on Regions’ current understanding of the Basel III requirements as proposed by the U.S. Notices of Proposed Rulemaking released in June 2012.


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Table 18—GAAP to Non-GAAP Reconciliation
 
 
 
 
 
Three Months Ended March 31
 
 
 
 
2013
 
2012
 
 
 
 
(In millions, except per share data)
INCOME
 
 
 
 
 
 
Net income (GAAP)
 
 
 
$
335

 
$
199

Preferred dividends and accretion (GAAP)
 
 
 
(8
)
 
(54
)
Net income available to common shareholders (GAAP)
 
A

327

 
145

Income (loss) from discontinued operations, net of tax (GAAP)
 
 
 
2

 
(40
)
Income from continuing operations available to common shareholders (GAAP)
 
B
 
$
325

 
$
185

FEE INCOME AND EFFICIENCY RATIOS
 
 
 
 
 
 
Non-interest expense from continuing operations (GAAP)
 
C
 
$
842

 
$
913

Net interest income from continuing operations (GAAP)
 
 
 
798

 
827

Taxable-equivalent adjustment
 
 
 
13

 
12

Net interest income from continuing operations, taxable-equivalent basis
 
 
 
811

 
839

Non-interest income from continuing operations (GAAP)
 
 
 
501

 
524

Significant items:
 
 
 
 
 
 
Securities gains, net
 
 
 
(15
)
 
(12
)
Leveraged lease termination gains, net
 
 
 

 
(7
)
Adjusted non-interest income (non-GAAP)
 
D
 
486

 
505

Adjusted total revenue (non-GAAP)
 
E
 
$
1,297

 
$
1,344

Adjusted fee income ratio (non-GAAP)
 
D/E
 
37.47
%
 
37.57
%
Adjusted efficiency ratio (non-GAAP)
 
C/E
 
64.92
%
 
67.93
%
RETURN ON AVERAGE ASSETS
 
 
 
 
 
 
Average assets (GAAP)—continuing operations(1)
 
F
 
$
119,123

 
$
123,756

Return on average assets from continuing operations (GAAP)(2)
 
B/F
 
1.11
%
 
0.59
%
RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Average stockholders’ equity (GAAP)
 
 
 
$
15,552

 
$
16,715

Less:  Average intangible assets (GAAP)
 
 
 
5,154

 
5,253

Average deferred tax liability related to intangibles (GAAP)
 
 
 
(190
)
 
(198
)
Average preferred equity (GAAP)
 
 
 
476

 
3,423

Average tangible common stockholders’ equity (non-GAAP)
 
G
 
$
10,112

 
$
8,237

Return on average tangible common stockholders’ equity (non-GAAP)(2)
 
A/G
 
13.12
%
 
7.08
%


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Table of Contents

 
 
 
 
Three Months Ended March 31
 
 
 
 
2013
 
2012
 
 
 
 
(In millions, except per share data)
TANGIBLE COMMON RATIOS
 
 
 
 
 
 
Ending stockholders’ equity (GAAP)
 
 
 
$
15,740

 
$
17,534

Less: Ending intangible assets (GAAP)
 
 
 
5,147

 
5,236

  Ending deferred tax liability related to intangibles (GAAP)
 
 
 
(189
)
 
(195
)
  Ending preferred equity (GAAP)
 
 
 
474

 
3,429

Ending tangible common stockholders’ equity (non-GAAP)
 
H
 
$
10,308

 
$
9,064

Ending total assets (GAAP)
 
 
 
$
119,718

 
$
128,282

Less: Ending intangible assets (GAAP)
 
 
 
5,147

 
5,236

  Ending deferred tax liability related to intangibles (GAAP)
 
 
 
(189
)
 
(195
)
Ending tangible assets (non-GAAP)
 
I
 
$
114,760

 
$
123,241

End of period shares outstanding
 
J
 
1,413

 
1,412

Tangible common stockholders’ equity to tangible assets (non-GAAP)
 
H/I
 
8.98
%
 
7.35
%
Tangible common book value per share (non-GAAP)
 
H/J
 
$
7.29

 
$
6.42

 
 
 
 
 
 
 
TIER 1 COMMON RISK-BASED RATIO(3)
 
 
 
 
 
 
Stockholders’ equity (GAAP)
 
 
 
$
15,740

 
$
17,534

Accumulated other comprehensive loss
 
 
 
12

 
60

Non-qualifying goodwill and intangibles
 
 
 
(4,819
)
 
(4,881
)
Disallowed deferred tax assets
 
 
 

 
(345
)
Disallowed servicing assets
 
 
 
(37
)
 
(36
)
Qualifying non-controlling interests
 
 
 
93

 
92

Qualifying trust preferred securities
 
 
 
501

 
846

Tier 1 capital (regulatory)
 
 
 
11,490

 
13,270

Qualifying non-controlling interests
 
 
 
(93
)
 
(92
)
Qualifying trust preferred securities
 
 
 
(501
)
 
(846
)
Preferred stock
 
 
 
(474
)
 
(3,429
)
Tier 1 common equity (non-GAAP)
 
K
 
$
10,422

 
$
8,903

Risk-weighted assets (regulatory)
 
L
 
$
92,787

 
$
92,546

Tier 1 common risk-based ratio (non-GAAP)
 
K/L
 
11.23
%
 
9.62
%
BASEL III TIER 1 COMMON RATIO(4)
 
 
 
 
 
 
Stockholders’ equity (GAAP)
 
 
 
$
15,740

 
$
17,534

Non-qualifying goodwill and intangibles(5)
 
 
 
(4,956
)
 
(5,041
)
Adjustments, including other comprehensive income related to cash flow hedges, disallowed deferred tax assets, threshold deductions and other adjustments
 
 
 
(301
)
 
(680
)
Preferred stock
 
 
 
(474
)
 
(3,429
)
Basel III tier 1 common equity (non-GAAP)
 
M
 
10,009

 
8,384

Basel I risk-weighted assets (regulatory)
 
 
 
92,787

 
92,546

Basel III risk-weighted assets (non-GAAP)(6)
 
N
 
109,728

 
94,334

Basel III tier 1 common ratio (non-GAAP)
 
M/N
 
9.12
%
 
8.89
%

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 _________
(1)
Return on average assets from continuing operations does not include average assets related to discontinued operations of $2,776 million for the three months ended March 31, 2012.
(2)
Income statement amounts have been annualized in calculation.
(3)
Current quarter amount and the resulting ratio are estimated.
(4)
Estimate based on June 2012 U.S. Notices of Proposed Rulemaking.
(5)
Under Basel III, regulatory capital must be reduced by purchased credit card relationship intangible assets. These assets are partially allowed in Basel I capital.
(6)
Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III. The amount included above is a reasonable approximation, based on our understanding of the requirements.



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NET INTEREST INCOME AND MARGIN
The following table presents an analysis of net interest income (on a taxable-equivalent basis), the net interest margin, and the net interest spread for the three months ended March 31, 2013 and 2012:
Table 19—Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations
 
 
 
Three Months Ended March 31
 
 
 
2013
 
2012
 
 
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
 
 
(Dollars in millions; yields on taxable-equivalent basis)
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading account securities
 
$
117

 
$
1

 
3.20
%
$
182

 
$
2

 
4.42

%
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
26,893

 
156

 
2.35
 
25,659

 
173

 
2.71

 
Tax-exempt
 
7

 

 
 
33

 

 

 
Loans held for sale
 
1,206

 
9

 
3.17
 
1,047

 
7

 
2.69

 
Loans, net of unearned income(1)(2)
 
73,919

 
756

 
4.14
 
77,168

 
824

 
4.29

 
Other interest-earning assets
 
2,821

 
2

 
0.26
 
5,140

 
3

 
0.23

 
Total interest-earning assets
 
104,963

 
924

 
3.57
 
109,229

 
1,009

 
3.72

 
Allowance for loan losses
 
(1,894
)
 
 
 
 
 
(2,745
)
 
 
 
 
 
Cash and due from banks
 
1,766

 
 
 
 
 
1,987

 
 
 
 
 
Other non-earning assets
 
14,288

 
 
 
 
 
15,285

 
 
 
 
 
 
 
$
119,123

 
 
 
 
 
$
123,756

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
 
$
5,929

 
1

 
0.10
 
$
5,362

 
1

 
0.08

 
Interest-bearing transaction accounts
 
20,440

 
6

 
0.11
 
19,657

 
6

 
0.12

 
Money market accounts(6)
 
25,477

 
9

 
0.14
 
23,552

 
12

 
0.20

 
Time deposits
 
12,904

 
26

 
0.81
 
19,053

 
69

 
1.46

 
Total interest-bearing deposits(3)
 
64,750

 
42

 
0.26
 
67,624

 
88

 
0.52

 
Federal funds purchased and securities sold under agreements to repurchase
 
1,786

 

 
0.10
 
1,572

 

 

 
Other short-term borrowings
 
25

 

 
0.01
 
63

 

 

 
Long-term borrowings
 
5,857

 
71

 
4.89
 
7,585

 
82

 
4.35

 
Total interest-bearing liabilities
 
72,418

 
113

 
0.63
 
76,844

 
170

 
0.89

 
Net interest spread
 
 
 
 
 
2.94
 
 
 
 
 
2.83

 
Non-interest-bearing deposits(3)(6)
 
29,114

 
 
 
 
 
28,437

 
 
 
 
 
Other liabilities
 
2,047

 
 
 
 
 
2,745

 
 
 
 
 
Stockholders’ equity
 
15,544

 
 
 
 
 
15,730

 
 
 
 
 
 
 
$
119,123

 
 
 
 
 
$
123,756

 
 
 
 
 
Net interest income/margin on a taxable-equivalent basis from continuing operations(4)(5)
 
 
 
$
811

 
3.13
%
 
 
$
839

 
3.09

%

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_________
Notes:
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $17 million and $14 million for the three months ended March 31, 2013 and 2012, 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 0.18% and 0.37% for the three months ended March 31, 2013 and 2012, respectively.
(4)
The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.
(5)
The table above does not include average interest-earning assets, average interest-bearing liabilities, interest income, or interest expense for discontinued operations for the three months ended March 31, 2012 (see Note 2 to the consolidated financial statements). If these assets, liabilities, and net interest income were included in the calculation, the consolidated net interest income and margin on a taxable equivalent basis would have been $846 million and 3.07% for the three months ended March 31, 2012.
(6)
Prior period amounts have been reclassified to conform to the current period classification.

For the first quarter of 2013, continuing operations net interest income (taxable-equivalent basis) totaled $811 million compared to $839 million in the first quarter of 2012. The net interest margin (taxable-equivalent basis) was 3.13% for the first quarter of 2013, compared to 3.09% for the first quarter of 2012. Net interest margin increased primarily as a result of declines in overall deposit costs, lower levels of non-accrual loans and a decline in low-yielding other interest earning assets, primarily cash held at the Federal Reserve.


MARKET RISK—INTEREST RATE RISK
Regions’ primary market risk is interest rate risk, including uncertainty with respect to absolute interest rate levels as well as uncertainty with respect to relative interest rate levels, which is impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income in various interest rate scenarios compared to a base case scenario. Net interest income sensitivity is a useful short-term indicator of Regions’ interest rate risk.
Sensitivity Measurement—Financial simulation models are Regions’ primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions’ balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that result from both strategic plans and from customer behavior. Among the assumptions are expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the lag time in pricing deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior.
The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain a reasonable and stable net interest income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario based on “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Regions also prepares a minus 50 basis points scenario, as minus 100 and 200 basis scenarios are of limited use in the current rate environment. Up-rate scenarios of greater magnitude are also analyzed, and are of increased importance as the current and historic low levels of interest rates increase the relative likelihood of a rapid and substantial increase in interest rates. Regions also includes simulations of gradual interest rate movements that may more realistically mimic potential interest rate movements. These gradual scenarios include curve steepening, flattening, and parallel movements of various magnitudes phased in over a six-month period, and include rate shifts of minus 50 basis points and plus 100 and 200 basis points.
Exposure to Interest Rate Movements—As of March 31, 2013, Regions was moderately asset sensitive to both gradual and instantaneous rate shifts as compared to the base case for the measurement horizon ending March 2014. The exposure reflected in the minus 50 basis points scenario reflects the risk of accelerating prepayment activity as spurred by exceptionally low levels of long-term interest rates, as well as the risk that short-term interest rates (such as the Fed Funds rate and the rate of Interest On

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Excess Reserves) decline to zero. The table below summarizes Regions’ position, and the scenarios are inclusive of all interest-rate risk hedging activities. Note that wherever scenarios would indicate negative interest rates, a minimum of zero is applied.

Table 20—Interest Rate Sensitivity
 
 
 

Estimated Annual Change
in Net Interest Income
March 31, 2013
 
(In millions)
Gradual Change in Interest Rates
 
+ 200 basis points
$312
+ 100 basis points
170
- 50 basis points
(98)
 
 
Instantaneous Change in Interest Rates
 
+ 200 basis points
$404
+ 100 basis points
235
- 50 basis points
(138)
Interest rate movements may also have an impact on the value of Regions’ securities portfolio, which can directly impact the carrying value of stockholders’ equity. Regions from time to time may hedge these price movements with derivatives (as discussed below).
Derivatives—Regions uses financial derivative instruments for management of interest rate sensitivity. The Asset and Liability Committee (“ALCO”), which consists of members of Regions’ senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks.
Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. A Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Company's customers and are used to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform.
Regions has made use of interest rate swaps to effectively convert a portion of its fixed-rate funding position to a variable-rate position and, in some cases, to effectively convert a portion of its variable-rate loan portfolio to fixed-rate. Regions also uses derivatives to manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing.
Regions manages the credit risk of these instruments in much the same way as it manages credit risk of the loan portfolios by establishing credit limits for each counterparty and through collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with and collateral received from and/or posted to that counterparty. The “Credit Risk” section in Regions’ Annual Report on Form 10-K for the year ended December 31, 2012 contains more information on the management of credit risk.

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Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivatives instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income.
The primary objective of Regions’ hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions’ execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 12 “Derivative Financial Instruments and Hedging Activities” to the consolidated financial statements for a tabular summary of Regions’ quarter-end derivatives positions and further discussion.
Regions accounts for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative and balance sheet transactions to mitigate the impact of market value fluctuations related to mortgage servicing rights. 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. 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 mortgage servicing asset, all of which tend to be sensitive to interest rate movements. Regions also has prepayment risk that would be reflected in non-interest income in the form of servicing income on loans sold. Regions actively monitors prepayment exposure as part of its overall net interest income forecasting and interest rate risk management. In particular, because current interest rates are relatively low, Regions is actively managing exposure to declining prepayments that are expected to coincide with increasing interest rates in both the loan and securities portfolio.
MARKET RISK—BROKERAGE AND OTHER MARKET ACTIVITY RISK
Regions’ capital markets business, which includes derivatives and foreign exchange trading activities, expose it to market risk. Further, the Company is exposed to non-trading market risk from mortgage hedging activities which include secondary marketing of loans to government-sponsored entities and mortgage servicing rights valuation.

To manage trading risks arising from interest rate and equity price risks, Regions uses a Value at Risk (“VaR”) model along with other risk management methods to measure the potential fair value the Company could lose on its trading positions given a specified statistical confidence level and time-to-liquidate time horizon.

The end-of-period 10-day VaR was approximately $684 thousand at March 31, 2013. Maximum 10-day VaR utilization during the first quarter of 2013 was $1.1 million, minimum 10-day VaR utilization during the period was $422 thousand and average 10-day VaR during the same period was $625 thousand. The end-of-period Stressed VaR ("SVaR") was approximately $2.2 million at March 31, 2013. Maximum SVaR utilization during the first quarter of 2013 was $2.2 million, minimum SVaR utilization during the period was $1.3 million and average SVaR during the same period was $1.5 million. During the first quarter of 2013, there were no VaR versus actual gains/losses back-testing exceptions (actual gains/losses never exceeded VaR on any given day during the quarter).


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INFORMATION SECURITY RISK
Information security risks for large financial institutions such as Regions have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties. Regions spends significant resources on operational and information security. Regions is a member of the Financial Services Information Sharing and Analysis Center ("FS-ISAC"). The FS-ISAC is a nonprofit organization and is funded entirely by its member firms and sponsors. Total membership exceeds 4,400 organizations primarily focused in the U.S. financial services sector. The overall objective of FS-ISAC is to protect the financial services sector against cyber and physical threats and risk. It acts as a trusted third party that provides anonymity to allow members to submit threat, vulnerability and incident information in a non-attributable and trusted manner so information that would normally not be shared is instead provided for the good of the membership. In addition to FS-ISAC, Regions is a member of BITS, the technology arm of the Financial Services Roundtable. BITS serves the financial community and its members by providing industry best practices on a variety of security and fraud topics. Regions also maintains a close working relationship with its regulators and law enforcement partners to keep them updated on pertinent risks.
Denial of service attacks, hacking or terrorist activities, could disrupt the Company's or the Company's customers' or other third parties' business operations. For example, in October 2012, December 2012, March 2013, and April 2013, a group launched denial of service attacks against a number of large financial services institutions, including Regions. These events did not result in a breach of Regions' client data, and account information remained secure; however, the attacks did adversely affect the performance of Regions Bank's website, www.regions.com, and, in some instances, temporarily prevented customers from accessing Regions Bank's secure websites. In addition, some outbound internet slowness existed. The October 2012 event was resolved within approximately one day. The December 2012 events occurred over two days, but each individual event was of a shorter duration than the October 2012 event and was promptly resolved. The March 2013 and April 2013 events were all resolved during the same business day of the attack. In all cases, the attacks primarily resulted in inconvenience to employees and customers. Regions engages employees from all lines of business, not just information technology, to combat these attacks. Regions will continue to commit the resources necessary to mitigate these growing risks. In addition, Regions has contracts with vendors to provide denial of service mitigation and these vendors have also continued to commit the necessary resources to support Regions in the event of an attack.

INTERNATIONAL RISK
Regions has minimal sovereign credit exposure. This includes an immaterial amount in government securities issued by a single non-European sovereign, as well as a guarantee on a leveraged lease from a Western European government agency. However, Regions does have country exposure, which is defined as the aggregation of exposure Regions has with financial institutions, companies, or individuals in a given country outside of the United States. The majority of these exposures are in the form of corporate bonds purchased for the bank's investment portfolio, derivative hedges (interest rate and foreign exchange) and leveraged lease guarantees. This exposure is concentrated in highly-rated, Western European countries but not in those most severely affected by the Eurozone turmoil.
In addition to Western Europe and Australia, Regions’ corporate securities include investments in corporations domiciled in countries in Eastern Europe and North America. Regions has other smaller exposures in the form of trade confirmations, due from clearing accounts and loan participations with counterparties domiciled in countries in other regions, such as Central and South America, Asia and the Middle East/North Africa region.
At March 31, 2013, Regions’ international exposure was approximately $1.2 billion in total outstandings. Approximately 70 percent of the total exposure relates to corporate bonds. Approximately 53 percent of the total exposure relates to highly-rated Western European entities.
Regions’ Counterparty Risk department is responsible for the setting of country limits and managing of the outstanding country exposure for all departments of the bank as well as monitoring compliance of the outstanding exposure to the established limits. Reports are sent to Counterparty Risk by the lines of business on a monthly basis to demonstrate their compliance with their set limits. Counterparty Risk conducts a formal, quarterly assessment of the exposure, on both an outstanding and limit basis, which is then distributed to upper management for review.


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CREDIT RISK
Regions’ objective regarding credit risk is to maintain a high-quality credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has a diversified loan portfolio in terms of product type, collateral and geography. See Table 2 for further details of each loan portfolio segment. See the “Credit Risk” section of the Form 10-K for the year ended December 31, 2012 for a discussion of risk characteristics of each loan type.

PROVISION FOR LOAN LOSSES
The provision for loan losses is used to maintain the allowance for loan losses at a level that in management’s judgment is appropriate to absorb probable losses inherent in the portfolio at the balance sheet date. The provision for loan losses totaled $10 million in the first quarter of 2013 compared to $117 million during the first quarter of 2012. Net charge-offs as a percentage of average loans (annualized) were 0.99 percent and 1.73 percent in the first three months of 2013 and 2012, respectively. Net charge-offs were lower across most major loan categories when comparing the 2013 period to the prior year period. Net charge-offs exceeded provision for loan losses for the first quarter of 2013 primarily due to the continued improving credit metrics, including lower levels of non-accrual loans and criticized and classified loans (see Table 6 “Allowance for Credit Losses”), as well as, an overall reduction in loan balances, problem loan resolutions, and a continuing mix shift in loans out of higher risk investor real estate and second lien home equity lending and into less risky commercial and industrial loans.

NON-INTEREST INCOME
The following table presents a summary of non-interest income. For expanded discussion of certain significant non-interest income items, refer to the discussion of each component following the table presented.
Table 21—Non-Interest Income from Continuing Operations
 
 
 
Three Months Ended
March 31
 
 
2013
 
2012
 
 
(In millions)
Service charges on deposit accounts
 
$
242

 
$
254

Investment fee income
 
27

 
28

Mortgage income
 
72

 
77

Trust department income
 
49

 
49

Securities gains, net
 
15

 
12

Insurance commissions and fees
 
30

 
28

Bank-owned life insurance
 
22

 
21

Commercial credit fee income
 
16

 
19

Net loss from affordable housing
 
(17
)
 
(14
)
Credit card/bank card income
 
18

 
23

Other miscellaneous income
 
27

 
27

 
 
$
501

 
$
524

 
 
 
 
 
Service charges on deposit accounts—Service charges on deposit accounts decreased $12 million for the quarter ended March 31, 2013, as compared to the first quarter of 2012. The decrease between periods is due to lower non-sufficient fund fees primarily driven by overdraft policy changes related to Regulation E, improving quality of checking accounts and changes in customer behavior which is an industry-wide trend.
Mortgage income—Mortgage income decreased $5 million for the first quarter of 2013 as compared to the first quarter of 2012. The decrease was driven by the Company's decision to start retaining its 15-year residential first mortgage originations on its balance sheet beginning in the fourth quarter of 2012 as opposed to selling them in the secondary market and an increase in the cost of hedging mortgage servicing rights.
Credit card / bank card income—Credit card / bank card income decreased $5 million for the first quarter of 2013 as compared to the first quarter of 2012. Credit card income is derived from activity related to the Regions-branded credit card portfolio purchased from FIA Card Services in the second quarter of 2011 and any subsequent originations. Bank card income relates to commercial

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purchasing cards. In the third quarter of 2012, the Company began recording credit card relationship reward costs as a reduction of credit card revenue, which resulted in the decrease period over period.

NON-INTEREST EXPENSE
The following table presents a summary of non-interest expense. For expanded discussion of certain significant non-interest expense items, refer to the discussion of each component following the table presented.

Table 22—Non-Interest Expense from Continuing Operations
 
 
 
Three Months Ended
March 31
 
 
2013
 
2012
 
 
(In millions)
Salaries and employee benefits
 
$
447

 
$
442

Net occupancy expense
 
90

 
94

Furniture and equipment expense
 
69

 
64

Professional and legal expenses
 
31

 
27

Amortization of core deposit intangible
 
7

 
22

Other real estate owned expense
 
2

 
23

Credit/checkcard expenses
 
9

 
20

Deposit administrative fee
 
33

 
47

Marketing
 
23

 
17

Subsidiary dividend
 

 
16

Outside services
 
22

 
18

Other miscellaneous expenses
 
109

 
123

 
 
$
842

 
$
913

 
 
 
 
 
Salaries and employee benefits—Salaries and employee benefits increased $5 million for the first quarter of 2013 when compared to the first quarter of 2012. The increase is primarily due to incentive increases and annual merit increases, partially offset by decreased pension costs.

Amortization of core deposit intangible—Amortization of core deposit intangible decreased $15 million for the first quarter of 2013 when compared to the first quarter of 2012. Regions' annual 2012 impairment test reflected an increase in the estimated life of Regions' core deposit intangibles, which resulted in a decrease in amortization beginning in the first quarter of 2013.

Other real estate owned expense—Other real estate owned (“OREO”) expense includes the cost of adjusting foreclosed properties to estimated fair value after these assets have been classified as OREO, net gains and losses on sales of properties, and other costs to maintain the property such as property taxes, security, and grounds maintenance. OREO expense decreased $21 million for the first quarter of 2013 when compared to the first quarter of 2012. The decline in expense was due to lower OREO balances and stabilizing real estate values. See the "Foreclosed Properties" section.

Credit / checkcard expense—Credit / checkcard expenses decreased $11 million for the first quarter of 2013 when compared to the first quarter of 2012. In the third quarter of 2012, the Company began recording credit card relationship reward costs as a reduction of credit card revenue.

Deposit administrative fee—Deposit administrative fees decreased $14 million for the first quarter of 2013 when compared to the first quarter of 2012. The decrease is related to lower asset balances, improved performance metrics and a reduction in higher risk loans, all of which impact the fee calculation.
Subsidiary Dividend—During the fourth quarter of 2012, the Company extinguished a liability related to an investment by a third party in Regions Asset Management Company, Inc., which eliminated the subsidiary dividend amounts that were historically expensed in the first quarter.

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Other miscellaneous expenses—Other miscellaneous expenses decreased $14 million for the first quarter of 2013 as compared to the same period of 2012. The primary driver of the decrease was a lower provision for unfunded credit commitments. This item also includes expenses for communications, postage, supplies, certain credit-related costs and business development services.

INCOME TAXES
The Company’s income tax expense from continuing operations for the three months ended March 31, 2013 was $114 million compared to an income tax expense of $82 million for the same period in 2012, resulting in an effective tax rate of 25.5 percent for both periods. The effective tax rate for the first quarter of 2013 was negatively impacted by the increase in pre-tax income which was offset by a combined reduction in unrecognized tax benefits and the valuation allowance of $13 million.
The Company's effective tax rate is affected by recurring items such as affordable housing tax credits, bank-owned life insurance and tax-exempt income, which are expected to be consistent in the near term. The effective tax rate could also be affected by other items, such as the termination of certain leveraged leases and changes in the valuation allowance. If any of these items are considered to be discrete, the comparability of the effective tax rate from period to period may be impacted.
At March 31, 2013, the Company reported a net deferred tax asset of $688 million, compared to $763 million at December 31, 2012. The change of $75 million is principally due to continued reductions in the allowance for loan losses. Of the March 31, 2013 ending net deferred tax asset, $376 million was generated from differences between the financial statement carrying amounts and the corresponding tax bases of assets and liabilities, of which a significant portion relates to the allowance for loan losses. These net deferred tax assets have not yet reduced taxable income and therefore do not have a set expiration date. The remaining $312 million net deferred tax asset balance relates to tax carryforwards that have defined expiration dates which are typically 15 or 20 years from the date of creation.

DISCONTINUED OPERATIONS
Regions reported income from discontinued operations of $2 million, or $0.00 per diluted common share, for the first quarter of 2013, compared to a loss of $40 million, or $(0.03) per diluted common share, for the first quarter of 2012. Morgan Keegan was sold on April 2, 2012. During 2012, discontinued operations was mainly comprised of professional and legal expenses. The first quarter 2013 income from discontinued operations was the result of a recovery of legal expenses.


Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to pages 84 through 86 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, 2013, there have been no changes in Regions’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Regions’ internal control over financial reporting.


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PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
Information required by this item is set forth in Note 15, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements (Unaudited) in Part I. Item 1. of this report, which is incorporated herein by reference.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information concerning Regions’ repurchases of its outstanding common stock during the three month period ended March 31, 2013, 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 Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
January 1 – 31, 2013
 

 

 

 
23,072,300

February 1 – 28, 2013
 

 

 

 
23,072,300

March 1 – 19, 2013
 

 

 

 
23,072,300

Total
 

 

 

 

On January 18, 2007, Regions’ Board of Directors authorized the repurchase of 50 million shares of Regions’ common stock through open market or privately negotiated transactions and announced the authorization of this repurchase. As indicated in the table above, approximately 23.1 million shares remained available for repurchase under that authorization. On March 19, 2013, Regions' Board of Directors authorized, and Regions announced, a new $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2013 through the end of the first quarter of 2014. The new plan replaces the repurchases authorized on January 18, 2007. The Company began to repurchase shares in the open market pursuant to the new plan in April 2013. As of May 6, 2013, Regions had repurchased approximately 10 million shares of common stock at a total cost of approximately $82 million before commissions.
Restrictions on Dividends and Repurchase of Stock
Holders of Regions common stock are only entitled to receive such dividends as Regions’ Board of Directors may declare out of funds legally available for such payments. Furthermore, holders of Regions common stock are subject to the prior dividend rights of any holders of Regions preferred stock then outstanding.
Regions understands the importance of returning capital to shareholders. Management will continue to execute the capital planning process, including evaluation of the amount of the common dividend, with the Board of Directors and in conjunction with the regulatory supervisors, subject to the Company’s results of operations. Also, Regions is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
The terms of Regions’ outstanding junior subordinated debt securities prohibit Regions from declaring or paying any dividends or distributions on Regions’ capital stock, including its common stock, or purchasing, acquiring, or making a liquidation payment on such stock, if Regions has given notice of its election to defer interest payments but the related deferral period has not yet commenced or a deferral period is continuing.
On November 1, 2012, Regions completed the sale of 20,000,000 depositary shares each representing a 1/40th ownership interest in a share of its 6.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (“Series A Preferred Stock”), with a liquidation preference of $1,000 per share of Series A Preferred Stock (equivalent to $25 per depositary share). The terms of the Series A Preferred Stock prohibit Regions from declaring or paying any dividends on any junior series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series A Preferred Stock for the most recently completed dividend period. The Series A Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment date on or after December 15, 2017 or in whole, but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations establishing the Series A Preferred Stock).

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Item 6. Exhibits
The following is a list of exhibits including items incorporated by reference

3.1
 
Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q Quarterly Report filed by registrant on August 6, 2012
 
 
3.2
 
Certificate of Designations, incorporated by reference to Exhibit 3.3 to Form 8-A filed by registrant on November 1, 2012
 
 
3.3
 
By-laws as amended and restated, incorporated by reference to Exhibit 3.2 to Form 8-K Current Report filed by registrant on May 14, 2010
 
 
10.1
 
Amendment Number Six to the Regions Financial Corporation Supplemental 401(k) Plan

 
 
10.2
 
Form of Notice and Form of Restricted Stock Unit Award Agreement

 
 
10.3
 
Form of Notice and Form of Performance Stock Unit Award Agreement

 
 
 
10.4
 
Form of Notice and Form of Performance Unit Award Agreement

 
 
12
 
Computation of Ratio of Earnings to Fixed Charges
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101
 
Interactive Data File


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized.
 
 
 
 
DATE: May 8, 2013
 
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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