Edgar Filing: REGIONS FINANCIAL CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2017



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from	to

Commission File Number: 001-34034




Regions Financial Corporation
(Exact name of registrant as specified in its charter)




Delaware		63-0589368
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1900 Fifth Avenue North Birmingham, Alabama		35203
(Address of principal executive offices)		(Zip Code)

(800) 734-4667

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No

The number of shares outstanding of each of the issuer’s classes of common stock was 1,195,080,193 shares of common stock, par value $.01, outstanding as of August 2, 2017.

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REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX



		Page
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets—June 30, 2017 and December 31, 2016	8
	Consolidated Statements of Income—Three and six months ended June 30, 2017 and 2016	9
	Consolidated Statements of Comprehensive Income—Three and six months ended June 30, 2017 and 2016	10
	Consolidated Statements of Changes in Stockholders’ Equity—Six months ended June 30, 2017 and 2016	11
	Consolidated Statements of Cash Flows—Six months ended June 30, 2017 and 2016	12
	Notes to Consolidated Financial Statements	13
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	62
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	94
Item 4.	Controls and Procedures	94

Part II. Other Information
Item 1.	Legal Proceedings	95
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	95
Item 6.	Exhibits	97

Signatures		98

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Glossary of Defined Terms

Agencies - collectively, FNMA, FHLMC and GNMA.

ALCO - Asset/Liability Management Committee.

AOCI - Accumulated other comprehensive income.

ASU - Accounting Standards Update.

ATM - Automated teller machine.

Basel I - Basel Committee's 1988 Regulatory Capital Framework (First Accord).

Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord).

Basel III Rules - Final capital rules adopting the Basel III capital framework approved by U.S. federal

regulators in 2013.

Basel Committee - Basel Committee on Banking Supervision.

BHC - Bank Holding Company.

BITS - Technology arm of the Financial Services Roundtable.

Bank - Regions Bank.

Board - The Company’s Board of Directors.

CAP - Customer Assistance Program.

CCAR - Comprehensive Capital Analysis and Review.

CD - Certificate of deposit.

CEO - Chief Executive Officer.

CET1 - Common Equity Tier 1.

CFPB - Consumer Financial Protection Bureau.

Company - Regions Financial Corporation and its subsidiaries.

CPR - Constant (or Conditional) Prepayment Rate.

CRA - Community Reinvestment Act of 1977.

Dodd-Frank Act - The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

DPD - Days Past Due.

DUS - Fannie Mae Delegated Underwriting & Servicing.

FASB - Financial Accounting Standards Board.

FDIC - Federal Deposit Insurance Corporation.

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

FHA - Federal Housing Administration.

FHLB - Federal Home Loan Bank.

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

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

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

FRB - Federal Reserve Bank.

GAAP - Generally Accepted Accounting Principles in the United States.

GCM - Guideline Public Company Method.

GDP - Gross Domestic Product.

GNMA - Government National Mortgage Association.

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GTM - Guideline Transaction Method.

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

IP - Intellectual Property.

IPO - Initial public offering.

LCR - Liquidity coverage ratio.

LIBOR - London InterBank Offered Rates.

LTIP - Long-term incentive plan.

LTV - Loan to value.

MBS - Mortgage-backed securities.

Morgan Keegan - Morgan Keegan & Company, Inc.

MSAs - Metropolitan Statistical Areas.

MSR - Mortgage servicing right.

NM - Not meaningful.

NPR - Notice of Proposed Rulemaking.

OAS - Option-Adjusted Spread.

OCC - Office of the Comptroller of the Currency.

OCI - Other comprehensive income.

OIS - Overnight indexed swap.

OTTI - Other-than-temporary impairment.

Raymond James - Raymond James Financial, Inc.

RICO - Racketeer Influenced and Corrupt Organizations Act.

SEC - U.S. Securities and Exchange Commission.

SERP - Supplemental Executive Retirement Plan.

SSFA - Simplified Supervisory Formula Approach.

TDR - Troubled debt restructuring.

U.S. - United States.

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

UTB - Unrecognized tax benefits.

VIE - Variable interest entity.

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Forward-Looking Statements

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


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


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


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


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


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


•	Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and leases, including operating leases.


•	Changes in the speed of loan prepayments, loan origination and sale volumes, charge-offs, loan loss provisions or actual loan losses where our allowance for loan losses may not be adequate to cover our eventual losses.


•	Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.


•	Our ability to effectively compete with other financial services companies, some of whom possess greater financial resources than we do and are subject to different regulatory standards than we are.


•	Loss of customer checking and savings account deposits as customers pursue other, higher-yield investments, which could increase our funding costs.


•	Our inability to develop and gain acceptance from current and prospective customers for new products and services in a timely manner could have a negative impact on our revenue.


•	The effects of any developments, changes or actions relating to any litigation or regulatory proceedings brought against us or any of our subsidiaries.

•

Changes in laws and regulations affecting our businesses, such as the Dodd-Frank Act and other legislation and regulations relating to bank products and services, as well as changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies, which could require us to change certain business practices, increase compliance risk, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.

•

Our ability to obtain a regulatory non-objection (as part of the CCAR process or otherwise) to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or redeem preferred stock or other regulatory capital instruments, may impact our ability to return capital to stockholders and market perceptions of us.


•	Our ability to comply with stress testing and capital planning requirements (as part of the CCAR process or otherwise) may continue to require a significant investment of our managerial resources due to the importance and intensity of such tests and requirements.

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•	Our ability to comply with applicable capital and liquidity requirements (including, among other things, the Basel III capital standards and the LCR rule), including our ability to generate capital internally or raise capital on favorable terms, and if we fail to meet requirements, our financial condition could be negatively impacted.


•	The Basel III framework calls for additional risk-based capital surcharges for globally systemically important banks. Although we are not subject to such surcharges, it is possible that in the future we may become subject to similar surcharges.


•	The costs, including possibly incurring fines, penalties, or other negative effects (including reputational harm) of any adverse judicial, administrative, or arbitral rulings or proceedings, regulatory enforcement actions, or other legal actions to which we or any of our subsidiaries are a party, and which may adversely affect our results.


•	Our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business.


•	Our ability to execute on our strategic and operational plans, including our ability to fully realize the financial and non-financial benefits relating to our strategic initiatives.


•	The success of our marketing efforts in attracting and retaining customers.


•	Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits, which could adversely affect our net income.


•	Our ability to recruit and retain talented and experienced personnel to assist in the development, management and operation of our products and services may be affected by changes in laws and regulations in effect from time to time.


•	Fraud or misconduct by our customers, employees or business partners.


•	Any inaccurate or incomplete information provided to us by our customers or counterparties.


•	The risks and uncertainties related to our acquisition and integration of other companies.


•	Inability of our framework to manage risks associated with our business such as credit risk and operational risk, including third-party vendors and other service providers, which could, among other things, result in a breach of operating or security systems as a result of a cyber attack or similar act.


•	The inability of our internal disclosure controls and procedures to prevent, detect or mitigate any material errors or fraudulent acts.


•	The effects of geopolitical instability, including wars, conflicts and terrorist attacks and the potential impact, directly or indirectly, on our businesses.


•	The effects of man-made and natural disasters, including fires, floods, droughts, tornadoes, hurricanes, and environmental damage, which may negatively affect our operations and/or our loan portfolios and increase our cost of conducting business.

•

Changes in commodity market prices and conditions could adversely affect the cash flows of our borrowers operating in industries that are impacted by changes in commodity prices (including businesses indirectly impacted by commodities prices such as businesses that transport commodities or manufacture equipment used in the production of commodities), which could impair their ability to service any loans outstanding to them and/or reduce demand for loans in those industries.


•	Our inability to keep pace with technological changes could result in losing business to competitors.

•

Our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information; disruption or damage to our systems; increased costs; losses; or adverse effects to our reputation.


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


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


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


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


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


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

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•	Changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect how we report our financial results.


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


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

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

See also the reports filed with the Securities and Exchange Commission, including the discussion under the “Risk Factors” section of Regions’ Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission and available on its website at www.sec.gov.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	June 30, 2017			December 31, 2016
	(In millions, except share data)
Assets
Cash and due from banks	$	1,873		$	1,853
Interest-bearing deposits in other banks	2,258			3,583
Federal funds sold and securities purchased under agreements to resell	—			15
Trading account securities	178			124
Securities held to maturity (estimated fair value of $1,770 and $1,369, respectively)	1,754			1,362
Securities available for sale	23,608			23,781
Loans held for sale (includes $379 and $447 measured at fair value, respectively)	573			718
Loans, net of unearned income	80,127			80,095
Allowance for loan losses	(1,041		)	(1,091		)
Net loans	79,086			79,004
Other earning assets	1,537			1,644
Premises and equipment, net	2,060			2,096
Interest receivable	313			319
Goodwill	4,904			4,904
Residential mortgage servicing rights at fair value	346			324
Other identifiable intangible assets	198			221
Other assets	5,955			6,020
Total assets	$	124,643		$	125,968
Liabilities and Stockholders’ Equity
Deposits:
Non-interest-bearing	$	37,119		$	36,046
Interest-bearing	60,974			62,989
Total deposits	98,093			99,035
Borrowed funds:
Short-term borrowings:
Other short-term borrowings	600			—
Total short-term borrowings	600			—
Long-term borrowings	6,765			7,763
Total borrowed funds	7,365			7,763
Other liabilities	2,292			2,506
Total liabilities	107,750			109,304
Stockholders’ equity:
Preferred stock, authorized 10 million shares, par value $1.00 per share
Non-cumulative perpetual, liquidation preference $1,000.00 per share, including related surplus, net of issuance costs; issued—1,000,000 shares	820			820
Common stock, authorized 3 billion shares, par value $.01 per share:
Issued including treasury stock—1,240,526,496 and 1,255,839,866 shares, respectively	12			13
Additional paid-in capital	16,828			17,092
Retained earnings	1,089			666
Treasury stock, at cost—41,259,320 and 41,259,319 shares, respectively	(1,377		)	(1,377		)
Accumulated other comprehensive income (loss), net	(479		)	(550		)
Total stockholders’ equity	16,893			16,664
Total liabilities and stockholders’ equity	$	124,643		$	125,968

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Three Months Ended June 30					Six Months Ended June 30
	2017			2016		2017		2016
	(In millions, except per share data)
Interest income, including other financing income on:
Loans, including fees	$	801		$	762	$	1,574	$	1,530
Securities - taxable	151			145		299		292
Loans held for sale	4			4		8		7
Trading account securities	—			1		2		4
Other earning assets	9			8		21		18
Operating lease assets	24			32		51		64
Total interest income, including other financing income	989			952		1,955		1,915
Interest expense on:
Deposits	37			28		72		55
Short-term borrowings	2			—		2		—
Long-term borrowings	50			50		100		97
Total interest expense	89			78		174		152
Depreciation expense on operating lease assets	18			26		40		53
Total interest expense and depreciation expense on operating lease assets	107			104		214		205
Net interest income and other financing income	882			848		1,741		1,710
Provision for loan losses	48			72		118		185
Net interest income and other financing income after provision for loan losses	834			776		1,623		1,525
Non-interest income:
Service charges on deposit accounts	169			166		337		325
Card and ATM fees	104			99		208		194
Investment management and trust fee income	57			52		113		102
Mortgage income	40			46		81		84
Securities gains (losses), net	1			6		1		1
Other	154			157		295		326
Total non-interest income	525			526		1,035		1,032
Non-interest expense:
Salaries and employee benefits	497			480		975		955
Net occupancy expense	86			86		171		172
Furniture and equipment expense	85			79		165		157
Other	241			270		475		500
Total non-interest expense	909			915		1,786		1,784
Income from continuing operations before income taxes	450			387		872		773
Income tax expense	133			115		261		228
Income from continuing operations	317			272		611		545
Discontinued operations:
Income (loss) from discontinued operations before income taxes	(1		)	5		10		5
Income tax expense (benefit)	—			2		4		2
Income (loss) from discontinued operations, net of tax	(1		)	3		6		3
Net income	$	316		$	275	$	617	$	548
Net income from continuing operations available to common shareholders	$	301		$	256	$	579	$	513
Net income available to common shareholders	$	300		$	259	$	585	$	516
Weighted-average number of shares outstanding:
Basic	1,202			1,265		1,205		1,275
Diluted	1,212			1,268		1,218		1,279
Earnings per common share from continuing operations:
Basic	$	0.25		$	0.20	$	0.48	$	0.40
Diluted	0.25			0.20		0.48		0.40
Earnings per common share:
Basic	$	0.25		$	0.20	$	0.49	$	0.40
Diluted	0.25			0.20		0.48		0.40
Cash dividends declared per common share	0.07			0.065		0.135		0.125

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended June 30
	2017			2016
	(In millions)
Net income	$	316		$	275
Other comprehensive income (loss), net of tax:
Unrealized losses on securities transferred to held to maturity:
Unrealized losses on securities transferred to held to maturity during the period (net of zero and zero tax effect, respectively)	—			—
Less: reclassification adjustments for amortization of unrealized losses on securities transferred to held to maturity (net of ($1) and ($3) tax effect, respectively)	(1		)	(5		)
Net change in unrealized losses on securities transferred to held to maturity, net of tax	1			5
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period (net of $30 and $62 tax effect, respectively)	51			103
Less: reclassification adjustments for securities gains (losses) realized in net income (net of zero and $2 tax effect, respectively)	1			4
Net change in unrealized gains (losses) on securities available for sale, net of tax	50			99
Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
Unrealized holding gains (losses) on derivatives arising during the period (net of $21 and $51 tax effect, respectively)	37			84
Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $8 and $13 tax effect, respectively)	14			22
Net change in unrealized gains (losses) on derivative instruments, net of tax	23			62
Defined benefit pension plans and other post employment benefits:
Net actuarial gains (losses) arising during the period (net of zero and $1 tax effect, respectively)	—			—
Less: reclassification adjustments for amortization of actuarial loss and settlements realized in net income (net of ($7) and ($3) tax effect, respectively)	(12		)	(5		)
Net change from defined benefit pension plans and other post employment benefits, net of tax	12			5
Other comprehensive income (loss), net of tax	86			171
Comprehensive income	$	402		$	446

	Six Months Ended June 30
	2017			2016
	(In millions)
Net income	$	617		$	548
Other comprehensive income (loss), net of tax:
Unrealized losses on securities transferred to held to maturity:
Unrealized losses on securities transferred to held to maturity during the period (net of zero and zero tax effect, respectively)	—			—
Less: reclassification adjustments for amortization of unrealized losses on securities transferred to held to maturity (net of ($2) and ($4) tax effect, respectively)	(3		)	(7		)
Net change in unrealized losses on securities transferred to held to maturity, net of tax	3			7
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period (net of $31 and $187 tax effect, respectively)	52			308
Less: reclassification adjustments for securities gains (losses) realized in net income (net of zero and zero tax effect, respectively)	1			1
Net change in unrealized gains (losses) on securities available for sale, net of tax	51			307
Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
Unrealized holding gains (losses) on derivatives arising during the period (net of $20 and $153 tax effect, respectively)	33			249
Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $20 and $28 tax effect, respectively)	33			46
Net change in unrealized gains (losses) on derivative instruments, net of tax	—			203
Defined benefit pension plans and other post employment benefits:
Net actuarial gains (losses) arising during the period (net of zero and $1 tax effect, respectively)	(1		)	—
Less: reclassification adjustments for amortization of actuarial loss and settlements realized in net income (net of ($10) and ($6) tax effect, respectively)	(18		)	(11		)
Net change from defined benefit pension plans and other post employment benefits, net of tax	17			11
Other comprehensive income (loss), net of tax	71			528
Comprehensive income	$	688		$	1,076

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY



	Preferred Stock			Common Stock					Additional Paid-In Capital			Retained Earnings (Deficit)			Treasury Stock, At Cost			Accumulated Other Comprehensive Income (Loss), Net			Total
	Shares	Amount		Shares		Amount			Additional Paid-In Capital			Retained Earnings (Deficit)			Treasury Stock, At Cost			Accumulated Other Comprehensive Income (Loss), Net			Total
	(In millions, except per share data)
BALANCE AT JANUARY 1, 2016	1	$	820	1,297		$	13		$	17,883		$	(115	)	$	(1,377	)	$	(380	)	$	16,844
Net income	—	—		—		—			—			548			—			—			548
Amortization of unrealized losses on securities transferred to held to maturity, net of tax	—	—		—		—			—			—			—			7			7
Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment	—	—		—		—			—			—			—			307			307
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment	—	—		—		—			—			—			—			203			203
Net change from employee benefit plans, net of tax	—	—		—		—			—			—			—			11			11
Cash dividends declared—$0.125 per share	—	—		—		—			—			(159		)	—			—			(159		)
Preferred stock dividends	—	—		—		—			—			(32		)	—			—			(32		)
Common stock transactions:
Impact of share repurchases	—	—		(42	)	—			(354		)	—			—			—			(354		)
Impact of stock transactions under compensation plans, net and other	—	—		4		—			10			—			—			—			10
BALANCE AT JUNE 30, 2016	1	$	820	1,259		$	13		$	17,539		$	242		$	(1,377	)	$	148		$	17,385

BALANCE AT JANUARY 1, 2017	1	$	820	1,214		$	13		$	17,092		$	666		$	(1,377	)	$	(550	)	$	16,664
Net income	—	—		—		—			—			617			—			—			617
Amortization of unrealized losses on securities transferred to held to maturity, net of tax	—	—		—		—			—			—			—			3			3
Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment	—	—		—		—			—			—			—			51			51
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment	—	—		—		—			—			—			—			—			—
Net change from employee benefit plans, net of tax	—	—		—		—			—			—			—			17			17
Cash dividends declared—$0.135 per share	—	—		—		—			—			(162		)	—			—			(162		)
Preferred stock dividends	—	—		—		—			—			(32		)	—			—			(32		)
Common stock transactions:
Impact of share repurchases	—	—		(19	)	(1		)	(274		)	—			—			—			(275		)
Impact of stock transactions under compensation plans, net and other	—	—		4		—			10			—			—			—			10
BALANCE AT JUNE 30, 2017	1	$	820	1,199		$	12		$	16,828		$	1,089		$	(1,377	)	$	(479	)	$	16,893

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended June 30
	2017			2016
	(In millions)
Operating activities:
Net income	$	617		$	548
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	118			185
Depreciation, amortization and accretion, net	274			267
Securities (gains) losses, net	(1		)	(1		)
Deferred income tax expense	62			10
Originations and purchases of loans held for sale	(1,729		)	(1,837		)
Proceeds from sales of loans held for sale	1,922			1,823
(Gain) loss on sale of loans, net	(54		)	(59		)
Net change in operating assets and liabilities:
Trading account securities	(54		)	26
Other earning assets	67			83
Interest receivable and other assets	(21		)	(126		)
Other liabilities	(88		)	197
Other	42			28
Net cash from operating activities	1,155			1,144
Investing activities:
Proceeds from maturities of securities held to maturity	101			305
Proceeds from sales of securities available for sale	592			1,527
Proceeds from maturities of securities available for sale	1,755			1,983
Purchases of securities available for sale	(2,208		)	(4,092		)
Purchases of securities held to maturity	(494		)	—
Proceeds from sales of loans	13			47
Purchases of loans	(147		)	(579		)
Purchases of mortgage servicing rights	(18		)	(24		)
Net change in loans	(110		)	(202		)
Net purchases of other assets	(45		)	(41		)
Net cash from investing activities	(561		)	(1,076		)
Financing activities:
Net change in deposits	(942		)	(1,185		)
Net change in short-term borrowings	600			(8		)
Proceeds from long-term borrowings	1,250			1,607
Payments on long-term borrowings	(2,252		)	(1,000		)
Cash dividends on common stock	(241		)	(154		)
Cash dividends on preferred stock	(32		)	(32		)
Repurchases of common stock	(275		)	(354		)
Taxes paid related to net share settlement of equity awards	(22		)	(14		)
Other	—			(5		)
Net cash from financing activities	(1,914		)	(1,145		)
Net change in cash and cash equivalents	(1,320		)	(1,077		)
Cash and cash equivalents at beginning of year	5,451			5,314
Cash and cash equivalents at end of period	$	4,131		$	4,237

See notes to consolidated financial statements.

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Six Months Ended June 30, 2017 and 2016

NOTE 1. BASIS OF PRESENTATION

Regions Financial Corporation (“Regions” or the "Company”) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located across the South, Midwest and Texas. The Company competes with other financial institutions located in the states in which it operates, as well as other adjoining states. Regions is subject to the regulations of certain government agencies and undergoes periodic examinations by certain regulatory authorities.

The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with GAAP and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions’ Annual Report on Form 10-K for the year ended December 31, 2016. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.

On January 11, 2012, Regions entered into an agreement to sell Morgan Keegan and related affiliates. The transaction closed on April 2, 2012. See Note 2 and Note 14 for further details. Results of operations for the entities sold are presented separately as discontinued operations for all periods presented on the consolidated statements of income. This presentation is consistent with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.

NOTE 2. DISCONTINUED OPERATIONS

On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan and related affiliates to Raymond James. The transaction closed on April 2, 2012. Regions Investment Management, Inc. (formerly known as Morgan Asset Management, Inc.) and Regions Trust were not included in the sale. In connection with the closing of the sale, Regions agreed to indemnify Raymond James for all litigation matters related to pre-closing activities. See Note 14 for related disclosure.

The following table represents the condensed results of operations for discontinued operations:



	Three Months Ended June 30						Six Months Ended June 30
	2017			2016			2017			2016
	(In millions, except per share data)
Non-interest expense:
Professional and legal expenses/(recoveries)	$	—		$	(5	)	$	(11	)	$	(5	)
Other	1			—			1			—
Total non-interest expense	1			(5		)	(10		)	(5		)
Income (loss) from discontinued operations before income taxes	(1		)	5			10			5
Income tax expense (benefit)	—			2			4			2
Income (loss) from discontinued operations, net of tax	$	(1	)	$	3		$	6		$	3
Earnings (loss) per common share from discontinued operations:
Basic	$	(0.00	)	$	0.00		$	0.00		$	0.00
Diluted	$	(0.00	)	$	0.00		$	0.00		$	0.00

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NOTE 3. SECURITIES

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



	June 30, 2017
			Recognized in OCI ⁽¹⁾							Not Recognized in OCI
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Securities held to maturity:
Mortgage-backed securities:
Residential agency	$	1,149	$	—	$	(45	)	$	1,104	$	14	$	(2	)	$	1,116
Commercial agency	654		—		(4		)	650		6		(2		)	654
	$	1,803	$	—	$	(49	)	$	1,754	$	20	$	(4	)	$	1,770

Securities available for sale:
U.S. Treasury securities	$	313	$	1	$	—		$	314						$	314
Federal agency securities	25		—		—			25							25
Mortgage-backed securities:
Residential agency	17,648		87		(211		)	17,524							17,524
Residential non-agency	3		—		—			3							3
Commercial agency	3,475		17		(18		)	3,474							3,474
Commercial non-agency	811		6		(1		)	816							816
Corporate and other debt securities	1,226		29		(6		)	1,249							1,249
Equity securities	194		9		—			203							203
	$	23,695	$	149	$	(236	)	$	23,608						$	23,608

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	December 31, 2016
			Recognized in OCI ⁽¹⁾							Not Recognized in OCI
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Securities held to maturity:
Mortgage-backed securities:
Residential agency	$	1,249	$	—	$	(49	)	$	1,200	$	12	$	(3	)	$	1,209
Commercial agency	167		—		(5		)	162		—		(2		)	160
	$	1,416	$	—	$	(54	)	$	1,362	$	12	$	(5	)	$	1,369

Securities available for sale:
U.S. Treasury securities	$	303	$	1	$	(1	)	$	303						$	303
Federal agency securities	35		—		—			35							35
Obligations of states and political subdivisions	1		—		—			1							1
Mortgage-backed securities:
Residential agency	17,531		95		(255		)	17,371							17,371
Residential non-agency	4		—		—			4							4
Commercial agency	3,486		9		(32		)	3,463							3,463
Commercial non-agency	1,124		8		(3		)	1,129							1,129
Corporate and other debt securities	1,272		19		(17		)	1,274							1,274
Equity securities	194		7		—			201							201
	$	23,950	$	139	$	(308	)	$	23,781						$	23,781

_________

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

Securities with carrying values of $9.3 billion and $11.6 billion at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. Included within total pledged securities is approximately $50 million of encumbered U.S. Treasury securities at both June 30, 2017 and December 31, 2016.

The amortized cost and estimated fair value of securities held to maturity and securities available for sale at June 30, 2017, 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.

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	Amortized Cost		Estimated Fair Value
	(In millions)
Securities held to maturity:
Mortgage-backed securities:
Residential agency	$	1,149	$	1,116
Commercial agency	654		654
	$	1,803	$	1,770
Securities available for sale:
Due in one year or less	$	75	$	75
Due after one year through five years	722		731
Due after five years through ten years	556		566
Due after ten years	211		216
Mortgage-backed securities:
Residential agency	17,648		17,524
Residential non-agency	3		3
Commercial agency	3,475		3,474
Commercial non-agency	811		816
Equity securities	194		203
	$	23,695	$	23,608

The following tables present gross unrealized losses and the related estimated fair value of securities held to maturity and available for sale at June 30, 2017 and December 31, 2016. For securities transferred to held to maturity from available for sale, the analysis in the tables below is comparing the securities' original amortized cost to its current estimated fair value. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.



	June 30, 2017
	Less Than Twelve Months					Twelve Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(In millions)
Securities held to maturity:
Mortgage-backed securities:
Residential agency	$	786	$	(21	)	$	330	$	(12	)	$	1,116	$	(33	)
Commercial agency	29		(1		)	155		(5		)	184		(6		)
	$	815	$	(22	)	$	485	$	(17	)	$	1,300	$	(39	)

Securities available for sale:
U.S. Treasury securities	$	86	$	—		$	18	$	—		$	104	$	—
Mortgage-backed securities:
Residential agency	11,593		(202		)	539		(9		)	12,132		(211		)
Commercial agency	1,318		(18		)	44		—			1,362		(18		)
Commercial non-agency	261		(1		)	29		—			290		(1		)
All other securities	154		(1		)	132		(5		)	286		(6		)
	$	13,412	$	(222	)	$	762	$	(14	)	$	14,174	$	(236	)

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	December 31, 2016
	Less Than Twelve Months					Twelve Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(In millions)
Securities held to maturity:
Mortgage-backed securities:
Residential agency	$	850	$	(26	)	$	359	$	(14	)	$	1,209	$	(40	)
Commercial agency	—		—			160		(7		)	160		(7		)
	$	850	$	(26	)	$	519	$	(21	)	$	1,369	$	(47	)

Securities available for sale:
U.S. Treasury securities	$	112	$	(1	)	$	18	$	—		$	130	$	(1	)
Mortgage-backed securities:
Residential agency	12,071		(245		)	570		(10		)	12,641		(255		)
Commercial agency	2,199		(31		)	45		(1		)	2,244		(32		)
Commercial non-agency	402		(2		)	176		(1		)	578		(3		)
All other securities	382		(6		)	218		(11		)	600		(17		)
	$	15,166	$	(285	)	$	1,027	$	(23	)	$	16,193	$	(308	)

The number of individual positions in an unrealized loss position in the tables above decreased from 1,613 at December 31, 2016 to 1,458 at June 30, 2017. The decrease in the number of securities and the total amount of unrealized losses from year-end 2016 was primarily due to changes in market interest rates. In instances where an unrealized loss existed, there was no indication of an adverse change in credit on the underlying positions in the tables above. As it relates to these positions, management believes no individual unrealized loss, other than those discussed below, represented an OTTI as of those dates. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, the positions before the recovery of their amortized cost basis, which may be at maturity.

As part of the Company's normal process for evaluating OTTI, management did identify a limited number of positions where an OTTI was believed to exist as of June 30, 2017. For the six months ended June 30, 2017, such impairments were immaterial.

Gross realized gains and gross realized losses on sales of securities available for sale, as well as OTTI losses, are shown in the table below. The cost of securities sold is based on the specific identification method.



	Three Months Ended June 30						Six Months Ended June 30
	2017			2016			2017			2016
	(In millions)
Gross realized gains	$	3		$	13		$	4		$	29
Gross realized losses	(2		)	(7		)	(3		)	(27		)
OTTI	—			—			—			(1		)
Securities gains (losses), net	$	1		$	6		$	1		$	1

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NOTE 4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

LOANS

The following table presents the distribution of Regions' loan portfolio by segment and class, net of unearned income:



	June 30, 2017		December 31, 2016
	(In millions, net of unearned income)
Commercial and industrial	$	35,656	$	35,012
Commercial real estate mortgage—owner-occupied	6,445		6,867
Commercial real estate construction—owner-occupied	388		334
Total commercial	42,489		42,213
Commercial investor real estate mortgage	4,126		4,087
Commercial investor real estate construction	2,163		2,387
Total investor real estate	6,289		6,474
Residential first mortgage	13,765		13,440
Home equity	10,419		10,687
Indirect—vehicles	3,653		4,040
Indirect—other consumer	1,188		920
Consumer credit card	1,183		1,196
Other consumer	1,141		1,125
Total consumer	31,349		31,408
	$	80,127	$	80,095

During the three months ended June 30, 2017, Regions purchased approximately $143 million in indirect-other consumer loans from third parties. During the three months ended June 30, 2016, Regions purchased approximately $300 million in indirect-vehicles and indirect-other consumer loans from third parties. During the six months ended June 30, 2017 and 2016, the comparable loan purchase amounts were approximately $147 million and $579 million, respectively.

At June 30, 2017, $18.2 billion in securities and net eligible loans held by Regions were pledged to secure current and potential borrowings from the FHLB. At June 30, 2017, an additional $22.2 billion in net eligible loans held by Regions were pledged to the FRB for potential borrowings.

ALLOWANCE FOR CREDIT LOSSES

Regions determines the appropriate level of the allowance on a quarterly basis. Refer to Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements to the Annual Report on Form 10-K for the year ended December 31, 2016, for a description of the methodology.

ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES

The following tables present analyses of the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2017 and 2016. The total allowance for loan losses and the related loan portfolio ending balances are disaggregated to detail the amounts derived through individual evaluation and collective evaluation for impairment. The allowance for loan losses related to individually evaluated loans is attributable to reserves for non-accrual commercial and investor real estate loans and all TDRs. The allowance for loan losses and the loan portfolio ending balances related to collectively evaluated loans is attributable to the remainder of the portfolio.

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	Three Months Ended June 30, 2017
	Commercial			Investor Real Estate			Consumer			Total
	(In millions)
Allowance for loan losses, April 1, 2017	$	727		$	87		$	247		$	1,061
Provision (credit) for loan losses	7			(9		)	50			48
Loan losses:
Charge-offs	(38		)	(1		)	(60		)	(99		)
Recoveries	11			5			15			31
Net loan losses	(27		)	4			(45		)	(68		)
Allowance for loan losses, June 30, 2017	707			82			252			1,041
Reserve for unfunded credit commitments, April 1, 2017	66			4			—			70
Provision (credit) for unfunded credit losses	(3		)	—			—			(3		)
Reserve for unfunded credit commitments, June 30, 2017	63			4			—			67
Allowance for credit losses, June 30, 2017	$	770		$	86		$	252		$	1,108

Three Months Ended June 30, 2016

Commercial