10-Q 1 d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

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: 000-50831

 

 

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)

(205) 944-1300

(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.    x  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).    x  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 x 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    x  No

The number of shares outstanding of each of the issuer’s classes of common stock was 1,258,798,000 shares of common stock, par value $.01, outstanding as of July 29, 2011.

 

 

 


Table of Contents

REGIONS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

              Page  

Part I. Financial Information

  
  Item 1.   

Financial Statements (Unaudited)

  
    

Consolidated Balance Sheets—June 30, 2011, December 31, 2010 and June 30, 2010

     5   
    

Consolidated Statements of Operations—Three and six months ended June 30, 2011 and 2010

     6   
    

Consolidated Statements of Changes in Stockholders’ Equity—Six months ended June 30, 2011 and 2010

     7   
    

Consolidated Statements of Cash Flows—Six months ended June 30, 2011 and 2010

     8   
    

Notes to Consolidated Financial Statements

     9   
  Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54   
  Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     98   
  Item 4.   

Controls and Procedures

     98   

Part II. Other Information

  
  Item 1.   

Legal Proceedings

     99   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     99   
  Item 6.   

Exhibits

     100   

Signatures

     101   

 

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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 became law on July 21, 2010, and a number of legislative, regulatory and tax proposals remain pending. Additionally, the U.S. Treasury and federal banking regulators continue to implement, but are also beginning to wind down, a number of programs to address capital and liquidity in the banking system. Proposed rules, including those that are part of the Basel III process, could 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.

 

   

The impact of compensation and other restrictions imposed under the Troubled Asset Relief Program (“TARP”) until Regions repays the outstanding preferred stock and warrant issued under the TARP, including restrictions on Regions’ ability to attract and retain talented executives and associates.

 

   

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 would 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 unfavorable 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.

 

   

The current stresses in the financial and real estate markets, including possible continued 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.

 

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Regions’ ability to keep pace with technological changes.

 

   

Regions’ ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity 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.

 

   

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.

 

   

Potential dilution of holders of shares of Regions’ common stock resulting from the U.S. Treasury’s investment in TARP.

 

   

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.

 

   

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, 2010 and the “Forward-Looking Statements” section of Regions’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, 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

 

     June 30
2011
    December 31
2010
    June 30
2010
 
     (In millions, except share
and per share data)
 

Assets

      

Cash and due from banks

   $ 2,271      $ 1,643      $ 2,097   

Interest-bearing deposits in other banks

     5,452        4,880        4,562   

Federal funds sold and securities purchased under agreements to resell

     251        396        752   

Trading account assets

     1,223        1,116        1,261   

Securities available for sale

     23,828        23,289        24,166   

Securities held to maturity

     21        24        28   

Loans held for sale (includes $585, $1,174 and $819 measured at fair value, at June 30, 2011, December 31, 2010 and June 30, 2010, respectively)

     1,141        1,485        1,162   

Loans, net of unearned income

     81,176        82,864        85,945   

Allowance for loan losses

     (3,120     (3,185     (3,185
                        

Net loans

     78,056        79,679        82,760   

Other interest-earning assets

     1,207        1,219        1,082   

Premises and equipment, net

     2,481        2,569        2,588   

Interest receivable

     354        421        466   

Goodwill

     5,561        5,561        5,561   

Mortgage servicing rights

     268        267        220   

Other identifiable intangible assets

     420        385        443   

Other assets

     8,374        9,417        8,192   
                        

Total assets

   $ 130,908      $ 132,351      $ 135,340   
                        

Liabilities and Stockholders’ Equity

      

Deposits:

      

Non-interest-bearing

   $ 28,148      $ 25,733      $ 22,993   

Interest-bearing

     68,183        68,881        73,257   
                        

Total deposits

     96,331        94,614        96,250   

Borrowed funds:

      

Short-term borrowings:

      

Federal funds purchased and securities sold under agreements to repurchase

     1,740        2,716        1,929   

Other short-term borrowings

     982        1,221        1,035   
                        

Total short-term borrowings

     2,722        3,937        2,964   

Long-term borrowings

     11,646        13,190        15,415   
                        

Total borrowed funds

     14,368        17,127        18,379   

Other liabilities

     3,321        3,876        3,248   
                        

Total liabilities

     114,020        115,617        117,877   

Stockholders’ equity:

      

Preferred stock, authorized 10 million shares

      

Series A, cumulative perpetual participating, par value $1.00 (liquidation preference $1,000.00) per share, net of discount; Issued—3,500,000 shares

     3,399        3,380        3,360   

Common stock, par value $.01 per share:

      

Authorized 3 billion shares at June 30, 2011 and December 31, 2010, and 1.5 billion shares at June 30, 2010

      

Issued including treasury stock—1,301,331,383; 1,299,000,755 and 1,298,911,598 shares, respectively

     13        13        13   

Additional paid-in capital

     19,052        19,050        19,038   

Retained earnings (deficit)

     (4,000     (4,047     (3,849

Treasury stock, at cost—42,533,753; 42,764,258 and 42,969,345 shares, respectively

     (1,399     (1,402     (1,405

Accumulated other comprehensive income (loss), net

     (177     (260     306   
                        

Total stockholders’ equity

     16,888        16,734        17,463   
                        

Total liabilities and stockholders’ equity

   $ 130,908      $ 132,351      $ 135,340   
                        

See notes to consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months
Ended June 30
    Six Months Ended
June 30
 
     2011     2010     2011     2010  
     (In millions, except per share data)  

Interest income on:

        

Loans, including fees

   $ 856      $ 930      $ 1,723      $ 1,875   

Securities:

        

Taxable

     208        224        415        466   

Tax-exempt

     —          —          —          1   
                                

Total securities

     208        224        415        467   

Loans held for sale

     9        9        22        17   

Trading account assets

     6        9        13        21   

Other interest-earning assets

     7        8        13        15   
                                

Total interest income

     1,086        1,180        2,186        2,395   

Interest expense on:

        

Deposits

     126        194        265        436   

Short-term borrowings

     2        2        5        5   

Long-term borrowings

     94        128        189        267   
                                

Total interest expense

     222        324        459        708   
                                

Net interest income

     864        856        1,727        1,687   

Provision for loan losses

     398        651        880        1,421   
                                

Net interest income after provision for loan losses

     466        205        847        266   

Non-interest income:

        

Service charges on deposit accounts

     308        302        595        590   

Brokerage, investment banking and capital markets

     248        254        515        490   

Mortgage income

     50        63        95        130   

Trust department income

     51        49        101        97   

Securities gains, net

     24        —          106        59   

Leveraged lease termination gains

     —          —          —          19   

Other

     100        88        212        183   
                                

Total non-interest income

     781        756        1,624        1,568   

Non-interest expense:

        

Salaries and employee benefits

     561        560        1,155        1,135   

Net occupancy expense

     107        110        216        230   

Furniture and equipment expense

     79        79        156        153   

Regulatory charge

     —          200        —          200   

Other

     451        377        838        838   
                                

Total non-interest expense

     1,198        1,326        2,365        2,556   
                                

Income (loss) before income taxes

     49        (365     106        (722

Income tax benefit

     (60     (88     (72     (249
                                

Net income (loss)

   $ 109      $ (277   $ 178      $ (473
                                

Net income (loss) available to common shareholders

   $ 55      $ (335   $ 72      $ (590
                                

Weighted-average number of shares outstanding:

        

Basic

     1,258        1,200        1,257        1,197   

Diluted

     1,260        1,200        1,259        1,197   

Earnings (loss) per common share:

        

Basic

   $ 0.04      $ (0.28   $ 0.06      $ (0.49

Diluted

     0.04        (0.28     0.06        (0.49

Cash dividends declared per common share

     0.01        0.01        0.02        0.02   

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)
    Total  
    Shares     Amount     Shares     Amount            
    (In millions, except share and per share data)  

BALANCE AT JANUARY 1, 2010

    4      $ 3,602        1,193      $ 12      $ 18,781      $ (3,235   $ (1,409   $ 130      $ 17,881   

Comprehensive income (loss):

                 

Net income (loss)

    —          —          —          —          —          (473     —          —          (473

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

    —          —          —          —          —          —          —          234        234   

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

    —          —          —          —          —          —          —          (67     (67

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

    —          —          —          —          —          —          —          9        9   
                 

 

 

 

Comprehensive income (loss)

                    (297

Cash dividends declared—$0.02 per share

    —          —          —          —          —          (24     —          —          (24

Preferred dividends

    —          —          —          —          3        (100     —          —          (97

Preferred stock transactions:

                 

Conversion of mandatorily convertible preferred stock into 63 million shares of common stock

    —          (259     63        1        258        —          —          —          —     

Discount accretion

    —          17        —          —          —          (17     —          —          —     

Common stock transactions:

                 

Impact of stock transactions under compensation plans, net

    —          —          —          —          (4     —          4        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2010

    4      $ 3,360        1,256      $ 13      $ 19,038      $ (3,849   $ (1,405   $ 306      $ 17,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 1, 2011

    4      $ 3,380        1,256      $ 13      $ 19,050      $ (4,047   $ (1,402   $ (260   $ 16,734   

Comprehensive income (loss):

                 

Net income

    —          —          —          —          —          178        —          —          178   

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

    —          —          —          —          —          —          —          75        75   

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

    —          —          —          —          —          —          —          (4     (4

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

    —          —          —          —          —          —          —          12        12   
                 

 

 

 

Comprehensive income

                    261   

Cash dividends declared—$0.02 per share

    —          —          —          —          —          (25     —          —          (25

Preferred dividends

    —          —          —          —          —          (87     —          —          (87

Preferred stock transactions:

                 

Discount accretion

    —          19        —          —          —          (19     —          —          —     

Common stock transactions:

                 

Impact of stock transactions under compensation plans, net

    —          —          3        —          2        —          3        —          5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2011

    4      $ 3,399        1,259      $ 13      $ 19,052      $ (4,000   $ (1,399   $ (177   $ 16,888   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

*

See disclosure of reclassification adjustment amount and tax effect, as applicable, in Note 6 to the consolidated financial statements.

 

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REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
June 30
 
     2011     2010  
     (In millions)  

Operating activities:

    

Net income (loss)

   $ 178      $ (473

Adjustments to reconcile net cash provided by operating activities:

    

Provision for loan losses

     880        1,421   

Depreciation and amortization of premises and equipment

     138        145   

Provision for losses on other real estate, net

     58        64   

Net amortization of securities

     92        92   

Net amortization of loans and other assets

     98        109   

Net accretion of deposits and borrowings

     1        (3

Net securities gains

     (106     (59

Loss on early extinguishment of debt

     —          53   

Deferred income tax benefit

     (81     (146

Originations and purchases of loans held for sale

     (2,624     (2,294

Proceeds from sales of loans held for sale

     3,525        2,853   

Gain on sale of loans, net

     (37     (33

Valuation charges on loans held for sale

     6        16   

Branch consolidation and property and equipment charges

     77        —     

(Increase) decrease in trading account assets

     (107     1,778   

Decrease (increase) in other interest-earning assets

     12        (348

Decrease in interest receivable

     67        2   

Decrease (increase) in other assets

     1,246        (58

Decrease in other liabilities

     (543     (365

Other

     (38     41   
                

Net cash from operating activities

     2,842        2,795   

Investing activities:

    

Proceeds from sales of securities available for sale

     6,479        1,460   

Proceeds from maturites of:

    

Securities available for sale

     2,291        3,686   

Securities held to maturity

     4        3   

Purchases of securities available for sale

     (9,178     (4,899

Proceeds from sales of loans

     816        630   

Purchases of loans

     (1,545     —     

Net decrease in loans

     585        2,209   

Net purchases of premises and equipment

     (128     (71
                

Net cash from investing activities

     (676     3,018   

Financing activities:

    

Net increase (decrease) in deposits

     1,717        (2,430

Net decrease in short-term borrowings

     (1,215     (704

Proceeds from long-term borrowings

     1,001        743   

Payments on long-term borrowings

     (2,502     (3,901

Cash dividends on common stock

     (25     (24

Cash dividends on preferred stock

     (87     (97
                

Net cash from financing activities

     (1,111     (6,413
                

Increase (decrease) in cash and cash equivalents

     1,055        (600

Cash and cash equivalents at beginning of year

     6,919        8,011   
                

Cash and cash equivalents at end of period

   $ 7,974      $ 7,411   
                

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, 2011 and 2010

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 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, 2010.

Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.

Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, total assets or stockholders’ equity.

 

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NOTE 2—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:

 

     June 30, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 
     (In millions)  

Securities available for sale:

          

U.S. Treasury securities

   $ 85       $ 2       $ —        $ 87   

Federal agency securities

     773         2         (1     774   

Obligations of states and political subdivisions

     25         8         —          33   

Mortgage-backed securities:

          

Residential agency

     21,297         274         (45     21,526   

Residential non-agency

     16         1         —          17   

Commercial agency

     155         2         (1     156   

Commercial non-agency

     253         1         (2     252   

Other debt securities

     24         —           (2     22   

Equity securities

     961         —           —          961   
                                  
   $ 23,589       $ 290       $ (51   $ 23,828   
                                  

Securities held to maturity:

          

U.S. Treasury securities

   $ 5       $ —         $ —        $ 5   

Federal agency securities

     3         —           —          3   

Mortgage-backed securities:

          

Residential agency

     11         —           —          11   

Other debt securities

     2         —           —          2   
                                  
   $ 21       $ —         $ —        $ 21   
                                  

 

     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 
     (In millions)  

Securities available for sale:

          

U.S. Treasury securities

   $ 85       $ 6       $ —        $ 91   

Federal agency securities

     16         —           —          16   

Obligations of states and political subdivisions

     23         7         —          30   

Mortgage-backed securities:

          

Residential agency

     21,735         265         (155     21,845   

Residential non-agency

     20         2         —          22   

Commercial agency

     113         2         (3     112   

Commercial non-agency

     103         —           (3     100   

Other debt securities

     27         —           (2     25   

Equity securities

     1,047         1         —          1,048   
                                  
   $ 23,169       $ 283       $ (163   $ 23,289   
                                  

Securities held to maturity:

          

U.S. Treasury securities

   $ 5       $ 1       $ —        $ 6   

Federal agency securities

     5         —           —          5   

Mortgage-backed securities:

          

Residential agency

     12         1         —          13   

Other debt securities

     2         —           —          2   
                                  
   $ 24       $ 2       $ —        $ 26   
                                  

 

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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.

 

     June 30
2011
     December 31
2010
 
     (In millions)  

Federal Reserve Bank

   $ 460       $ 471   

Federal Home Loan Bank

     340         419   

Securities with carrying values of $13.4 billion and $15.4 billion at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements.

The cost and estimated fair value of securities available for sale and securities held to maturity at June 30, 2011, 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

   $ 64       $ 64   

Due after one year through five years

     800         803   

Due after five years through ten years

     15         15   

Due after ten years

     28         34   

Mortgage-backed securities:

     

Residential agency

     21,297         21,526   

Residential non-agency

     16         17   

Commercial agency

     155         156   

Commercial non-agency

     253         252   

Equity securities

     961         961   
                 
   $ 23,589       $ 23,828   
                 

Securities held to maturity:

     

Due in one year or less

   $ 2       $ 2   

Due after one year through five years

     6         6   

Due after five years through ten years

     2         2   

Due after ten years

     —           —     

Mortgage-backed securities:

     

Residential agency

     11         11   
                 
   $ 21       $ 21   
                 

 

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Table of Contents

The following tables present unrealized loss and estimated fair value of securities available for sale at June 30, 2011 and December 31, 2010. 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.

 

     Less Than Twelve
Months
    Twelve Months or
More
    Total  

June 30, 2011

   Estimated
Fair
Value
     Gross
Unrealized
Losses
    Estimated
Fair
Value
     Gross
Unrealized
Losses
    Estimated
Fair
Value
     Gross
Unrealized
Losses
 
     (In millions)  

Federal agency securities

   $ 220       $ (1   $ —         $ —        $ 220       $ (1

Mortgage-backed securities:

               

Residential agency

     6,090         (45     —           —          6,090         (45

Commercial agency

     65         (1     —           —          65         (1

Commercial non-agency

     129         (2     —           —          129         (2

All other securities

     —           —          6         (2     6         (2
                                                   
   $ 6,504       $ (49   $ 6       $ (2   $ 6,510       $ (51
                                                   

 

     Less Than Twelve
Months
    Twelve Months or
More
    Total  

December 31, 2010

   Estimated
Fair
Value
     Gross
Unrealized
Losses
    Estimated
Fair
Value
     Gross
Unrealized
Losses
    Estimated
Fair
Value
     Gross
Unrealized
Losses
 
     (In millions)  

Mortgage-backed securities:

               

Residential agency

   $ 11,023       $ (155   $ —         $ —        $ 11,023       $ (155

Commercial agency

     94         (3     —           —          94         (3

Commercial non-agency

     100         (3     —           —          100         (3

All other securities

     —           —          5         (2     5         (2
                                                   
   $ 11,217       $ (161   $ 5       $ (2   $ 11,222       $ (163
                                                   

There was no gross unrealized loss on debt securities held to maturity at either June 30, 2011 and December 31, 2010.

For the securities included in the tables above, management does not believe any individual unrealized loss, which was comprised of 253 securities and 292 securities at June 30, 2011 and December 31, 2010, respectively, represented an other-than-temporary impairment as of those dates. The unrealized losses are related primarily to the impact of higher interest rates and their impact on mortgage-backed securities. The Company does not intend to sell, and it is not likely that the Company will be required to sell, the securities before the recovery of their amortized cost basis, which may be at maturity.

Proceeds from sale, gross gains and gross 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
June 30
     Six Months Ended
June 30
 
     2011      2010      2011      2010  
     (In millions)      (In millions)  

Proceeds

   $ 4,060       $ 17       $ 6,479       $ 1,460   

Securities gains

     24         —           106         59   

Securities losses

     —           —           —           —     
                                   

Net securities gains

   $ 24       $ —         $ 106       $ 59   
                                   

 

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Table of Contents

The following table details net gains (losses) for trading account securities:

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2011     2010     2011      2010  
     (In millions)     (In millions)  

Total net gains (losses)

   $ 10      $ (5   $ 31       $ 9   

Unrealized portion

     (1     (12     13         4   

NOTE 3—Loans and the Allowance for Credit Losses

The following table presents the distribution by loan type of Regions’ loan portfolio, net of unearned income:

 

     June 30
2011
     December 31
2010
     June 30
2010
 
     (In millions, net of unearned income)  

Commercial and industrial

   $ 23,644       $ 22,540       $ 21,096   

Commercial real estate mortgage—owner occupied

     11,797         12,046         11,967   

Commercial real estate construction—owner occupied

     377         470         547   
                          

Total commercial

     35,818         35,056         33,610   

Commercial investor real estate mortgage

     11,836         13,621         15,152   

Commercial investor real estate construction

     1,595         2,287         3,778   
                          

Total investor real estate

     13,431         15,908         18,930   

Residential first mortgage

     14,306         14,898         15,567   

Home equity

     13,593         14,226         14,802   

Indirect

     1,704         1,592         1,900   

Consumer credit card

     1,134         —           —     

Other consumer

     1,190         1,184         1,136   
                          

Total consumer

     31,927         31,900         33,405   
                          
   $ 81,176       $ 82,864       $ 85,945   
                          

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.

Prior to 2011, the allowance for accruing commercial and investor real estate loans, as well as non-accrual loans in those portfolio segments below $2.5 million, was determined using categories of pools of loans with similar risk characteristics (i.e., pass, special mention, substandard accrual, and nonaccrual, as defined below). These categories were utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions. Beginning in 2011, these pools of loans were compiled at a more granular level. A probability of default and a loss given default were statistically calculated for each pool. These parameters, in combination with other account data and assumptions, were used to calculate the estimate of incurred loss. The Company made the change to provide enhanced segmentation, process controls, transparency, governance and information technology controls. The change did not have a material impact on the overall allowance for credit losses. The credit quality indicators for commercial and investor real estate loans disclosed in the tables below provide additional information regarding the underlying credit quality of Regions’ portfolio segments and classes, and the corresponding impact on the allowance for credit losses.

 

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The components of the calculation of the allowance for credit losses related to non-accrual commercial and investor real estate loans over $2.5 million, troubled debt restructurings (“TDRs”), unfunded commitments, and all consumer loans were calculated in 2011 in the same manner as before. Except for the changes to the calculation of the allowance for loan losses for accruing commercial and investor real estate loans and non-accrual loans in these portfolio segments below $2.5 million as described above, there were no changes to Regions’ allowance process or accounting policies related to the allowance for credit losses from those described in the Annual Report on Form 10-K for the year ended December 31, 2010.

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, which is based on the factors and risk identification procedures previously discussed, 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 adjusted in future periods.

The following tables present an analysis of the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2011. The total allowance for credit losses is then disaggregated to show the amounts derived through individual evaluation and the amounts calculated through collective evaluation. The allowance for credit losses related to individually evaluated loans includes reserves for non-accrual loans and leases, as well as TDRs, equal to or greater than $2.5 million. The allowance for credit losses related to collectively evaluated loans includes reserves for pools of loans with common risk characteristics.

 

     Three Months Ended June 30, 2011  
     Commercial     Investor Real
Estate
    Consumer     Total  
     (In millions)  

Allowance for loan losses, April 1, 2011

   $ 1,138      $ 1,285      $ 763      $ 3,186   

Allowance allocated to purchased loans

     10        —          74        84   

Provision for loan losses

     72        171        155        398   

Loan losses:

        

Charge-offs

     (107     (306     (166     (579

Recoveries

     14        3        14        31   
                                

Net loan losses

     (93     (303     (152     (548
                                

Allowance for loan losses, June 30, 2011

     1,127        1,153        840        3,120   
                                

Reserve for unfunded credit commitments, April 1, 2011

     37        17        24        78   

Provision for unfunded credit commitments

     (5     11        —          6   
                                

Reserve for unfunded credit commitments, June 30, 2011

     32        28        24        84   
                                

Allowance for credit losses, June 30, 2011

   $ 1,159      $ 1,181      $ 864      $ 3,204   
                                

 

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Table of Contents
     Six Months Ended June 30, 2011  
     Commercial     Investor Real
Estate
    Consumer     Total  
           (In millions)        

Allowance for loan losses, January 1, 2011

   $ 1,055      $ 1,370      $ 760      $ 3,185   

Allowance allocated to purchased loans

     10        —          74        84   

Provision for loan losses

     297        260        323        880   

Loan losses:

        

Charge-offs

     (258     (487     (346     (1,091

Recoveries

     23        10        29        62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan losses

     (235     (477     (317     (1,029
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Allowance for loan losses, June 30, 2011

     1,127        1,153        840        3,120   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Reserve for unfunded credit commitments, January 1, 2011

     32        16        23        71   

Provision for unfunded credit commitments

     —          12        1        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for unfunded credit commitments, June 30, 2011

     32        28        24        84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for credit losses, June 30, 2011

   $ 1,159      $ 1,181      $ 864      $ 3,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Portion of allowance ending balance:

        

Individually evaluated for impairment

   $ 128      $ 163      $ 4      $ 295   

Collectively evaluated for impairment

     1,031        1,018        860        2,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance evaluated for impairment

   $ 1,159      $ 1,181      $ 864      $ 3,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Portion of loan portfolio ending balance:

        

Individually evaluated for impairment

   $ 599      $ 989      $ 18      $ 1,606   

Collectively evaluated for impairment

     35,219        12,442        31,909        79,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans evaluated for impairment

   $ 35,818      $ 13,431      $ 31,927      $ 81,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following describe the risk characteristics relevant to each of the portfolio segments.

Commercial—The commercial loan portfolio segment includes commercial and industrial, representing 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

 

15


Table of Contents

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 approximately 500,000 Regions branded consumer credit card accounts purchased late in the second quarter of 2011 from FIA Card Services. Other consumer loans include direct consumer installment loans, overdrafts and educational loans. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of June 30, 2011, December 31, 2010 and June 30, 2010. Commercial and investor real estate loan classes are detailed by categories related to underlying credit quality and probability of default. 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 affect 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. The associated allowance for credit losses is generally based on historical losses of the various classes adjusted for current economic conditions.

 

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Table of Contents
     June 30, 2011  
     Pass      Special Mention      Substandard
Accrual
     Non-accrual      Total  
     (In millions)  

Commercial and industrial

   $ 21,990       $ 445       $ 684       $ 525       $ 23,644   

Commercial real estate mortgage—owner occupied

     10,235         257         618         687         11,797   

Commercial real estate construction—owner occupied

     322         17         10         28         377   
                                            

Total commercial

   $ 32,547       $ 719       $ 1,312       $ 1,240       $ 35,818   
                                            

Commercial investor real estate mortgage

     8,143         1,162         1,711         820         11,836   

Commercial investor real estate construction

     660         194         370         371         1,595   
                                            

Total investor real estate

   $ 8,803       $ 1,356       $ 2,081       $ 1,191       $ 13,431   
                                            
                   Accrual      Non-accrual      Total  
                   (In millions)  

Residential first mortgage

         $ 14,018       $ 288       $ 14,306   

Home equity

           13,528         65         13,593   

Indirect

           1,704         —           1,704   

Consumer credit card

           1,134         —           1,134   

Other consumer

           1,190         —           1,190   
                                

Total consumer

         $ 31,574       $ 353       $ 31,927   
                                
               $ 81,176   
                    
     December 31, 2010  
     Pass      Special Mention      Substandard
Accrual
     Non-accrual      Total  
     (In millions)  

Commercial and industrial

   $ 20,764       $ 517       $ 792       $ 467       $ 22,540   

Commercial real estate mortgage—owner occupied

     10,344         283         813         606         12,046   

Commercial real estate construction—owner occupied

     393         25         23         29         470   
                                            

Total commercial

   $ 31,501       $ 825       $ 1,628       $ 1,102       $ 35,056   
                                            

Commercial investor real estate mortgage

     8,755         1,300         2,301         1,265         13,621   

Commercial investor real estate construction

     904         342         589         452         2,287   
                                            

Total investor real estate

   $ 9,659       $ 1,642       $ 2,890       $ 1,717       $ 15,908   
                                            
                   Accrual      Non-accrual      Total  
                          (In millions)         

Residential first mortgage

         $ 14,613       $ 285       $ 14,898   

Home equity

           14,170         56         14,226   

Indirect

           1,592         —           1,592   

Other consumer

           1,184         —           1,184   
                                

Total consumer

         $ 31,559       $ 341       $ 31,900   
                                
               $ 82,864   
                    

 

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Table of Contents
     June 30, 2010  
     Pass      Special Mention      Substandard
Accrual
     Non-accrual      Total  
     (In millions)  

Commercial and industrial

   $ 19,224       $ 497       $ 896       $ 479       $ 21,096   

Commercial real estate mortgage—owner occupied

     10,259         323         705         680         11,967   

Commercial real estate construction—owner occupied

     456         28         26         37         547   
                                            

Total commercial

   $ 29,939       $ 848       $ 1,627       $ 1,196       $ 33,610   
                                            

Commercial investor real estate mortgage

     9,607         1,723         2,536         1,286         15,152   

Commercial investor real estate construction

     1,605         570         849         754         3,778   
                                            

Total investor real estate

   $ 11,212       $ 2,293       $ 3,385       $ 2,040       $ 18,930   
                                            
                   Accrual      Non-accrual      Total  
                   (In millions)  

Residential first mortgage

         $ 15,355       $ 212       $ 15,567   

Home equity

           14,777         25         14,802   

Indirect

           1,900         —           1,900   

Other consumer

           1,136         —           1,136   
                                

Total consumer

         $ 33,168       $ 237       $ 33,405   
                                
               $ 85,945   
                    

The following tables include an aging analysis of days past due (DPD) for each portfolio class as of June 30, 2011, December 31, 2010 and June 30, 2010:

 

     June 30, 2011  
     Accrual Loans                
     30-59 DPD      60-89 DPD      90+ DPD      Total
30+ DPD
     Total
Accrual
     Non-accrual      Total  
     (In millions)  

Commercial and industrial

   $ 80       $ 38       $ 7       $ 125       $ 23,119       $ 525       $ 23,644   

Commercial real estate mortgage—owner occupied

     49         22         11         82         11,110         687         11,797   

Commercial real estate construction—owner occupied

     2         —           —           2         349         28         377   
                                                              

Total commercial

     131         60         18         209         34,578         1,240         35,818   
                                                              

Commercial investor real estate mortgage

     99         47         5         151         11,016         820         11,836   

Commercial investor real estate construction

     22         3         —           25         1,224         371         1,595   
                                                              

Total investor real estate

     121         50         5         176         12,240         1,191         13,431   
                                                              

Residential first mortgage

     172         93         296         561         14,018         288         14,306   

Home equity

     97         71         158         326         13,528         65         13,593   

Indirect

     20         5         2         27         1,704         —           1,704   

Consumer credit card

     7         4         —           11         1,134         —           1,134   

Other consumer

     18         4         4         26         1,190         —           1,190   
                                                              

Total consumer

     314         177         460         951         31,574         353         31,927   
                                                              
   $ 566       $ 287       $ 483       $ 1,336       $ 78,392       $ 2,784       $ 81,176   
                                                              

 

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Table of Contents
     December 31, 2010  
     Accrual Loans                       
     30-59 DPD      60-89 DPD      90+ DPD      Total
30+ DPD
     Total
Accrual
     Non-accrual      Total  
                          (In millions)                

Commercial and industrial

   $ 60       $ 43       $ 9       $ 112       $ 22,073       $ 467       $ 22,540   

Commercial real estate mortgage—owner occupied

     47         54         6         107         11,440         606         12,046   

Commercial real estate construction—owner occupied

     3         —           1         4         441         29         470   
                                                              

Total commercial

     110         97         16         223         33,954         1,102         35,056   
                                                              

Commercial investor real estate mortgage

     120         91         5         216         12,356         1,265         13,621   

Commercial investor real estate construction

     30         12         1         43         1,835         452         2,287   
                                                              

Total investor real estate

     150         103         6         259         14,191         1,717         15,908   
                                                              

Residential first mortgage

     185         118         359         662         14,613         285         14,898   

Home equity

     146         78         198         422         14,170         56         14,226   

Indirect

     29         8         2         39         1,592         —           1,592   

Other consumer

     22         6         4         32         1,184         —           1,184   
                                                              

Total consumer

     382         210         563         1,155         31,559         341         31,900   
                                                              
   $ 642       $ 410       $ 585       $ 1,637       $ 79,704       $ 3,160       $ 82,864   
                                                              

 

     June 30, 2010  
     Accrual Loans                       
     30-59 DPD      60-89 DPD      90+ DPD      Total
30+ DPD
     Total
Accrual
     Non-accrual      Total  
                          (In millions)                

Commercial and industrial

   $ 80       $ 46       $ 7       $ 133       $ 20,617       $ 479       $ 21,096   

Commercial real estate mortgage—owner occupied

     67         36         4         107         11,287         680         11,967   

Commercial real estate construction—owner occupied

     3         3         —           6         510         37         547   
                                                              

Total commercial

     150         85         11         246         32,414         1,196         33,610   
                                                              

Commercial investor real estate mortgage

     215         109         26         350         13,866         1,286         15,152   

Commercial investor real estate construction

     50         21         4         75         3,024         754         3,778   
                                                              

Total investor real estate

     265         130         30         425         16,890         2,040         18,930   
                                                              

Residential first mortgage

     195         117         349         661         15,355         212         15,567   

Home equity

     124         76         215         415         14,777         25         14,802   

Indirect

     26         7         3         36         1,900         —           1,900   

Other consumer

     20         4         4         28         1,136         —           1,136   
                                                              

Total consumer

     365         204         571         1,140         33,168         237         33,405   
                                                              
   $ 780       $ 419       $ 612       $ 1,811       $ 82,472       $ 3,473       $ 85,945   
                                                              

 

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The following tables present details related to the Company’s impaired loans as of June 30, 2011 and December 31, 2010. Loans deemed to be impaired include non-accrual commercial and investor real estate loans, excluding leasing, and all TDRs (including accruing commercial, investor real estate, and consumer TDRs). Loans which have been fully charged-off do not appear in the tables below. The related allowance represents the following components which correspond to impaired loans:

 

   

Individually evaluated impaired loans (non-accrual commercial and investor real estate loans equal to or greater than $2.5 million),

 

   

Collectively evaluated impaired loans (non-accrual commercial and investor real estate loans less than $2.5 million, which are evaluated based on pools of loans with similar risk characteristics),

 

   

Accruing and non-accruing TDRs equal to or greater than $2.5 million, which are individually evaluated like any other impaired loan over the quantitative scope. Accruing and non-accruing TDRs less than $2.5 million are included with pools of loans with similar risk characteristics and evaluated collectively.

 

    Impaired Loans  
    As of June 30, 2011     Three Months Ended
June 30, 2011
    Six Months Ended
June 30, 2011
 
                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)     Average
Balance
    Interest
Income
Recognized (5)
    Average
Balance
    Interest
Income
Recognized (5)
 
    (Dollars in millions)  

Commercial and industrial

  $

 

 

585

  

  

  $ 86      $ 499      $ 43      $ 456      $ 183        46.0   $ 452        —        $

 

 

444

  

  

    —     

Commercial real estate mortgage—owner occupied

    841        121        720        21        699        194        37.4        690        1        697        2   

Commercial real estate construction—owner occupied

    44        15        29        —          29        9        54.2        30        —          31        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    1,470        222        1,248        64        1,184        386        41.3        1,172        1        1,172        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial investor real estate mortgage

    1,280        221        1,059        217        842        237        35.8        1,234        3        1,301        5   

Commercial investor real estate construction

    531        126        405        103        302        105        43.6        442        —          469        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investor real estate

    1,811        347        1,464        320        1,144        342        38.1        1,676        3        1,770        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential first mortgage

    1,146        63        1,083        —          1,083        153        18.8        1,083        11        1,072        20   

Home equity

    426        14        412        —          412        53        15.9        401        5        390        10   

Indirect

    2        —          2        —          2        —          1.0        2        —          2        —     

Other consumer

    61        —          61        —          61        1        1.4        62        1        63        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    1,635        77        1,558        —          1,558        207        17.4        1,548        17        1,527        32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 4,916      $ 646      $ 4,270      $ 384      $ 3,886      $ 935        32.2   $ 4,396      $ 21      $ 4,469      $ 39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.
(5) Represents interest income on loans modified in a TDR, and are therefore considered impaired, which are on accruing status.

 

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Table of Contents
     Impaired Loans As of December 31, 2010  
     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

   $ 545       $ 124       $ 421       $ 102         41.5

Commercial real estate mortgage—owner occupied

     746         96         650         167         35.3   

Commercial real estate construction—owner occupied

     47         16         31         10         55.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     1,338         236         1,102         279         38.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial investor real estate mortgage

     1,693         273         1,420         319         35.0   

Commercial investor real estate construction

     638         150         488         154         47.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investor real estate

     2,331         423         1,908         473         38.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Residential first mortgage

     1,113         60         1,053         126         16.7   

Home equity

     378         13         365         46         15.6   

Indirect

     2         —           2         —           —     

Other consumer

     65         —           65         1         1.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     1,558         73         1,485         173         15.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 5,227       $ 732       $ 4,495       $ 925         31.7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

A significant majority of residential first mortgage, home equity, and indirect and other consumer loans in the table above are considered impaired due to their status as a TDR. Approximately 94 percent of consumer TDRs were accruing at June 30, 2011.

In addition to the impaired loans detailed in the tables above, there were approximately $381 million in non-performing loans classified as held for sale at June 30, 2011, compared to $304 million at December 31, 2010. The loans are larger balance credits, primarily investor real estate, where management does not have the intent to hold these 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 June 30, 2011, approximately $176 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $114 million recorded upon transfer. During the six months ended June 30, 2011, approximately $364 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $219 million recorded upon transfer. At June 30, 2011 and December 31, 2010, non-accrual loans including loans held for sale totaled $3.2 billion and $3.5 billion, respectively.

 

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Table of Contents

In June 2011, Regions completed the purchase of approximately $1.2 billion of Regions-branded credit card accounts from FIA Card Services. The purchase included approximately $1.1 billion in consumer credit card accounts and approximately $0.1 billion in small business credit card accounts, which are included in the commercial and industrial portfolio class. Approximately $86 million of the purchase price was allocated to purchase credit card relationship intangibles and approximately $84 million was allocated to the allowance for loan losses.

During the three and six months ended June 30, 2011, Regions purchased approximately $174 million and $336 million, respectively, in indirect loans from a third party.

NOTE 4—Loan Servicing

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 tables below present an analysis of mortgage servicing rights for the three and six months ended June 30, 2011 and 2010, under the fair value measurement method:

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
         2011             2010             2011             2010      
     (In millions)  

Carrying value, beginning of period

   $ 282      $ 270      $ 267      $ 247   

Additions

     19        13        35        30   

Increase (decrease) in fair value:

        

Due to change in valuation inputs or assumptions

     (28     (57     (23     (46

Other changes (1)

     (5     (6     (11     (11
                                

Carrying value, end of period

   $ 268      $ 220      $ 268      $ 220   
                                

 

(1)

Represents economic amortization associated with borrower repayments.

Data and assumptions used in the fair value calculation related to mortgage servicing rights (excluding related derivative instruments) as of June 30, 2011 and 2010 are as follows (dollars in millions):

 

     June 30  
     2011     2010  

Unpaid principal balance

   $ 26,421      $ 23,502   

Weighted-average prepayment speed (CPR; percentage)

     13.6     17.8

Estimated impact on fair value of a 10% increase

   $ (15   $ (15

Estimated impact on fair value of a 20% increase

   $ (29   $ (28

Option-adjusted spread (basis points)

     714.4        580.2   

Estimated impact on fair value of a 10% increase

   $ (7   $ (4

Estimated impact on fair value of a 20% increase

   $ (14   $ (9

Weighted-average coupon interest rate

     5.33     5.69

Weighted-average remaining maturity (months)

     283        289   

Weighted-average servicing fee (basis points)

     28.6        29.1   

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

 

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Table of Contents

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.

Regions uses various derivative instruments and/or trading securities to mitigate the effect of changes in the fair value of its mortgage servicing rights in the statements of operations. The table below presents the impact on the statements of operations associated with changes in mortgage servicing rights and related derivative and/or trading securities for the three and six months ended June 30, 2011 and 2010.

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
       2011         2010          2011         2010    
     (In millions)  

Net interest income

   $ —        $ —         $ —        $ 3   

Brokerage, investment banking and capital markets income

     —          —           —          4   

Mortgage income

     (2     12         (13     28   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (2   $ 12       $ (13   $ 35   
  

 

 

   

 

 

    

 

 

   

 

 

 

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 for the three and six months ended June 30, 2011 and 2010.

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2011      2010      2011      2010  
     (In millions)  

Servicing related fees

   $ 21       $ 20       $ 42       $ 40   

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 on 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 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. The table below presents an analysis of Regions’ repurchase liability, related to mortgage loans sold with representations and warranty provisions, for the three and six months ended June 30, 2011 and 2010:

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2011     2010     2011     2010  
     (In millions)  

Balance, beginning of period

   $ 32      $ 28      $ 32      $ 29   

Additions/(Reductions), Net

     5        6        13        9   

Losses

     (5     (4     (13     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

     32      $ 30      $ 32      $ 30   
  

 

 

   

 

 

   

 

 

   

 

 

 

During 2011, settled repurchase claims were related to one of the following alleged breaches: 1) underwriting guideline violations; 2) misrepresentation of income, assets or employment; or 3) property evaluation not supported. These claims stem primarily from the 2006—2008 vintages.

 

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Table of Contents

NOTE 5—Goodwill

Goodwill allocated to each reportable segment is presented as follows:

 

     June 30
2011
     December 31
2010
     June 30
2010
 
     (In millions)  

Banking/Treasury

   $ 4,691       $ 4,691       $ 4,691   

Investment Banking/Brokerage/Trust

     745         745         745   

Insurance

     125         125         125   
                          
   $ 5,561       $ 5,561       $ 5,561   
                          

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 second quarter of 2011, Regions assessed the indicators of goodwill impairment as of May 31, 2011, and through the date of the filing of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2011. 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.

Based on the assessment of the indicators above, quantitative testing of goodwill was required for all of Regions’ reporting units for the June 30, 2011 interim period.

For purposes of performing Step One of the goodwill impairment test, Regions uses both the income and market approaches to value its reporting units. The income approach, which is the primary valuation approach, consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the respective reporting units. The significant inputs to the income approach include expected future cash flows, the long-term target tangible equity to tangible assets ratio, and the discount rate.

Regions uses the public company method and the transaction method as the two market approaches. The public company method applies a value multiplier derived from each reporting unit’s peer group to a financial metric of the reporting unit (e.g. last twelve months of earnings before interest, taxes and deprecation, tangible book value, etc.) and an implied control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions. 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).

 

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Table of Contents

Regions uses the output from these approaches to determine the estimated fair value of each reporting unit. Listed below are tables of assumptions used in estimating the fair value of each reporting unit for the June 30, 2011, December 31, 2010 and June 30, 2010 interim periods. The tables include the discount rate used in the income approach, the market multiplier used in the market approaches, and the public company method control premium applied to all reporting units.

 

As of Second Quarter 2011

   Banking/
Treasury
    Investment
Banking/
Brokerage/Trust
    Insurance  

Discount rate used in income approach

     15     14     12

Public company method market multiplier (1)

     1.0     2.1     16.9

Transaction method market multiplier (2)

     1.2     2.1     n/a   

 

(1)

For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 30 percent control premium is assumed for each reporting unit.

(2)

For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value.

 

As of Fourth Quarter 2010

   Banking/
Treasury
    Investment
Banking/
Brokerage/Trust
    Insurance  

Discount rate used in income approach

     15     14     11

Public company method market multiplier (1)

     1.0     1.6     17.3

Transaction method market multiplier (2)

     1.3     2.1     n/a   

 

(1)

For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 30 percent control premium is assumed for each reporting unit.

(2)

For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value.

 

As of Second Quarter 2010

   Banking/
Treasury
    Investment
Banking/
Brokerage/Trust
    Insurance  

Discount rate used in income approach

     16     13     12

Public company method market multiplier (1)

     0.9     1.6     19.8

Transaction method market multiplier (2)