RF 10-Q Quarterly Report March 31, 2014 | Alphaminr
REGIONS FINANCIAL CORP
ALPHAMINR

RF 10-Q Quarter ended March 31, 2014

Balance Sheet
Cash Flow
Income Statement
Debt
REGIONS FINANCIAL CORP
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10-Q 1 rf-2014331x10q.htm 10-Q RF-2014.03.31 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to

Commission File Number: 001-34034
Regions Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware
63-0589368
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1900 Fifth Avenue North
Birmingham, Alabama
35203
(Address of principal executive offices)
(Zip Code)
(800) 734-4667
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
The number of shares outstanding of each of the issuer’s classes of common stock was 1,379,007,243 shares of common stock, par value $.01, outstanding as of May 2, 2014.


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


2

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

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


3

•
Possible downgrades in our credit ratings or outlook.
•
The effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally.
•
The effects of the failure of any component of our business infrastructure which is provided by a third party.
•
Our ability to receive dividends from our subsidiaries.
•
Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies.
•
The effects of any damage to our reputation resulting from developments related to any of the items identified above.
You should not place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no obligation to update or revise any forward-looking statements that are made from time to time.
See also the “Forward-Looking Statements” and “Risk Factors” sections of Regions’ Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission.


4

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

$
1,661

Interest-bearing deposits in other banks
3,114

3,612

Federal funds sold and securities purchased under agreements to resell
10

—

Trading account securities
117

111

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

2,353

Securities available for sale
21,615

21,485

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

1,055

Loans, net of unearned income
75,680

74,609

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

73,268

Other interest-earning assets
86

86

Premises and equipment, net
2,194

2,216

Interest receivable
316

313

Goodwill
4,816

4,816

Mortgage servicing rights at fair value
288

297

Other identifiable intangible assets
294

295

Other assets
5,880

5,828

Total assets
$
117,933

$
117,396

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

$
30,083

Interest-bearing
62,239

62,370

Total deposits
93,393

92,453

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

2,182

Long-term borrowings
4,226

4,830

Total borrowed funds
6,207

7,012

Other liabilities
2,201

2,163

Total liabilities
101,801

101,628

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

450

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

14

Additional paid-in capital
19,179

19,216

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

15,768

Total liabilities and stockholders’ equity
$
117,933

$
117,396


See notes to consolidated financial statements.


5

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

$
743

Securities - taxable
154

156

Loans held for sale
8

9

Trading account securities
2

1

Other interest-earning assets
2

2

Total interest income
898

911

Interest expense on:
Deposits
27

42

Long-term borrowings
55

71

Total interest expense
82

113

Net interest income
816

798

Provision for loan losses
2

10

Net interest income after provision for loan losses
814

788

Non-interest income:
Service charges on deposit accounts
173

184

Card and ATM fees
79

76

Mortgage income
40

72

Securities gains (losses), net
2

15

Other
144

154

Total non-interest income
438

501

Non-interest expense:
Salaries and employee benefits
455

447

Net occupancy expense
93

90

Furniture and equipment expense
70

69

Other
199

236

Total non-interest expense
817

842

Income from continuing operations before income taxes
435

447

Income tax expense
128

114

Income from continuing operations
307

333

Discontinued operations:
Income from discontinued operations before income taxes
19

4

Income tax expense
7

2

Income from discontinued operations, net of tax
12

2

Net income
$
319

$
335

Net income from continuing operations available to common shareholders
$
299

$
325

Net income available to common shareholders
$
311

$
327

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

1,413

Diluted
1,390

1,423

Earnings per common share from continuing operations:
Basic
$
0.22

$
0.23

Diluted
0.21

0.23

Earnings per common share:
Basic
$
0.23

$
0.23

Diluted
0.22

0.23

Cash dividends declared per common share
0.03

0.01


See notes to consolidated financial statements.


6

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

$
335

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

—

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

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

—

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

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

10

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

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

1

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

9

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

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

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

9

Other comprehensive income (loss), net of tax
90

(77
)
Comprehensive income
$
409

$
258

See notes to consolidated financial statements.


7

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

$
482

1,413

$
15

$
19,652

$
(3,338
)
$
(1,377
)
$
65

$
15,499

Net income
—

—

—

—

—

335

—

—

335

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

—

—

—

—

—

—

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

—

—

—

—

—

—

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

—

—

—

—

—

—

9

9

Cash dividends declared—$0.01 per share
—

—

—

—

(14
)
—

—

—

(14
)
Series A preferred stock dividends
—

(8
)
—

—

—

—

—

—

(8
)
Common stock transactions:





Impact of stock transactions under compensation plans, net
—

—

—

—

5

—

—

—

5

BALANCE AT MARCH 31, 2013
1

$
474

1,413

$
15

$
19,643

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

BALANCE AT JANUARY 1, 2014
1

$
450

1,378

$
14

$
19,216

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

Net income
—

—

—

—

—

319

—

—

319

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

—

—

—

—

—

—

2

2

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

—

—

—

—

—

—

78

78

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

—

—

—

—

—

—

6

6

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

—

—

—

—

—

—

4

4

Cash dividends declared—$0.03 per share
—

—

—

—

(41
)
—

—

—

(41
)
Series A preferred stock dividends
—

(8
)
—

—

—

—

—

—

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

—

(1
)
—

(8
)
—

—

—

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

—

1

—

12

—

—

—

12

BALANCE AT MARCH 31, 2014
1

$
442

1,378

$
14

$
19,179

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


See notes to consolidated financial statements.


8

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

$
335

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

10

Depreciation, amortization and accretion, net
122

171

Provision for losses on other real estate, net
—

3

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

121

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

1,567

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

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

798

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

Other liabilities
36

(758
)
Other
1

(11
)
Net cash from operating activities
421

1,130

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

388

Proceeds from maturities of securities held to maturity
36

2

Proceeds from maturities of securities available for sale
711

1,765

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

48

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

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

Payments on long-term borrowings
(600
)
—

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

Net cash from financing activities
82

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

5,489

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

$
4,933


See notes to consolidated financial statements.


9

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


10

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

1

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

4

Income tax expense
7

2

Income from discontinued operations, net of tax
$
12

$
2

Earnings per common share from discontinued operations:
Basic
$
0.01

$
0.00

Diluted
$
0.01

$
0.00


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

$
—

$
—

$
1

$
—

$
—

$
1

Federal agency securities
351

—

(14
)
337

—

—

337

Mortgage-backed securities:
Residential agency
1,840

—

(79
)
1,761

—

(17
)
1,744

Commercial agency
226

—

(8
)
218

—

(6
)
212

$
2,418

$
—

$
(101
)
$
2,317

$
—

$
(23
)
$
2,294

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

$
—

$
—

$
57

$
57

Federal agency securities
81

1

—

82

82

Obligations of states and political subdivisions
4

—

—

4

4

Mortgage-backed securities:
Residential agency
15,498

209

(121
)
15,586

15,586

Residential non-agency
8

1

—

9

9

Commercial agency
1,125

6

(13
)
1,118

1,118

Commercial non-agency
1,264

13

(23
)
1,254

1,254

Corporate and other debt securities
2,838

51

(44
)
2,845

2,845

Equity securities
648

12

—

660

660

$
21,523

$
293

$
(201
)
$
21,615

$
21,615

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


11

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

$
—

$
—

$
1

$
—

$
—

$
1

Federal agency securities
351

—

(15
)
336

—

(3
)
333

Mortgage-backed securities:
Residential agency
1,878

—

(81
)
1,797

—

(37
)
1,760

Commercial agency
227

—

(8
)
219

—

(6
)
213

$
2,457

$
—

$
(104
)
$
2,353

$
—

$
(46
)
$
2,307

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

$
—

$
—

$
56

$
56

Federal agency securities
88

1

—

89

89

Obligations of states and political subdivisions
5

—

—

5

5

Mortgage-backed securities:
Residential agency
15,664

183

(170
)
15,677

15,677

Residential non-agency
8

1

—

9

9

Commercial agency
947

4

(16
)
935

935

Commercial non-agency
1,232

12

(33
)
1,211

1,211

Corporate and other debt securities
2,855

44

(72
)
2,827

2,827

Equity securities
664

12

—

676

676

$
21,519

$
257

$
(291
)
$
21,485

$
21,485

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

$
472

Federal Home Loan Bank
34

67

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


12

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

$
1

Due after one year through five years
1

1

Due after five years through ten years
350

336

Mortgage-backed securities:
Residential agency
1,840

1,744

Commercial agency
226

212

$
2,418

$
2,294

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

$
75

Due after one year through five years
1,080

1,098

Due after five years through ten years
1,440

1,421

Due after ten years
386

394

Mortgage-backed securities:
Residential agency
15,498

15,586

Residential non-agency
8

9

Commercial agency
1,125

1,118

Commercial non-agency
1,264

1,254

Equity securities
648

660

$
21,523

$
21,615

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

$
(8
)
$
144

$
(6
)
$
336

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

(50
)
801

(45
)
1,742

(95
)
Commercial agency
165

(11
)
46

(4
)
211

(15
)
$
1,298

$
(69
)
$
991

$
(55
)
$
2,289

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

$
—

$
4

$
—

$
15

$
—

Federal agency securities
—

—

10

—

10

—

Mortgage-backed securities:
Residential agency
5,825

(114
)
291

(8
)
6,116

(122
)
Commercial agency
635

(12
)
—

—

635

(12
)
Commercial non-agency
546

(17
)
146

(6
)
692

(23
)
All other securities
1,087

(30
)
262

(14
)
1,349

(44
)
$
8,104

$
(173
)
$
713

$
(28
)
$
8,817

$
(201
)



13

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

$
(9
)
$
142

$
(8
)
$
332

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

(77
)
521

(41
)
1,757

(118
)
Commercial agency
212

(15
)
—

—

212

(15
)
$
1,638

$
(101
)
$
663

$
(49
)
$
2,301

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

$
—

$
1

$
—

$
16

$
—

Federal agency securities
3

—

9

—

12

—

Mortgage-backed securities:
Residential agency
6,153

(161
)
270

(9
)
6,423

(170
)
Commercial agency
610

(17
)
—

—

610

(17
)
Commercial non-agency
711

(30
)
62

(3
)
773

(33
)
All other securities
1,422

(58
)
209

(13
)
1,631

(71
)
$
8,914

$
(266
)
$
551

$
(25
)
$
9,465

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

$
16

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

$
15



14

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

$
29,413

Commercial real estate mortgage—owner-occupied
9,257

9,495

Commercial real estate construction—owner-occupied
375

310

Total commercial
40,098

39,218

Commercial investor real estate mortgage
5,338

5,318

Commercial investor real estate construction
1,654

1,432

Total investor real estate
6,992

6,750

Residential first mortgage
12,136

12,163

Home equity
11,148

11,294

Indirect
3,253

3,075

Consumer credit card
917

948

Other consumer
1,136

1,161

Total consumer
28,590

28,641

$
75,680

$
74,609

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

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


15

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

$
236

$
394

$
1,341

Provision (credit) for loan losses
5

(27
)
24

2

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

8

17

42

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

208

361

1,261

Reserve for unfunded credit commitments,
January 1, 2014
63

12

3

78

Provision (credit) for unfunded credit losses
—

(1
)
1

—

Reserve for unfunded credit commitments,
March 31, 2014
63

11

4

78

Allowance for credit losses, March 31, 2014
$
755

$
219

$
365

$
1,339

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

$
98

$
90

$
411

Collectively evaluated for impairment
469

110

271

850

Total allowance for loan losses
$
692

$
208

$
361

$
1,261

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

$
676

$
869

$
2,551

Collectively evaluated for impairment
39,092

6,316

27,721

73,129

Total loans evaluated for impairment
$
40,098

$
6,992

$
28,590

$
75,680



16

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

$
469

$
603

$
1,919

Provision (credit) for loan losses
17

(31
)
24

10

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

9

18

44

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

424

543

1,749

Reserve for unfunded credit commitments,
January 1, 2013
69

10

4

83

Provision for unfunded credit losses
5

—

—

5

Reserve for unfunded credit commitments,
March 31, 2013
74

10

4

88

Allowance for credit losses, March 31, 2013
$
856

$
434

$
547

$
1,837

Portion of ending allowance for loan losses:



Individually evaluated for impairment*
$
189

$
185

$
185

$
559

Collectively evaluated for impairment*
593

239

358

1,190

Total allowance for loan losses
$
782

$
424

$
543

$
1,749

Portion of loan portfolio ending balance:



Individually evaluated for impairment*
$
1,001

$
1,172

$
1,642

$
3,815

Collectively evaluated for impairment*
36,738

6,150

27,233

70,121

Total loans evaluated for impairment
$
37,739

$
7,322

$
28,875

$
73,936

*As discussed above, prior period amounts have been reclassified to conform to the current period classification.
PORTFOLIO SEGMENT RISK FACTORS
The following describe the risk characteristics relevant to each of the portfolio segments.
Commercial —The commercial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial also includes owner-occupied commercial real estate loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations.
Investor Real Estate —Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment is comprised of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, these loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Loans in this portfolio segment are particularly sensitive to valuation of real estate.
Consumer —The consumer loan portfolio segment includes residential first mortgage, home equity, indirect, consumer credit card, and other consumer loans. Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is secured directly affect the amount of credit extended and, in addition, changes in these values impact the depth of potential losses. Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. Consumer credit card includes Regions branded consumer credit card accounts.


17

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

$
501

$
396

$
280

$
30,466

Commercial real estate mortgage—owner-occupied
8,356

237

357

307

9,257

Commercial real estate construction—owner-occupied
350

6

3

16

375

Total commercial
$
37,995

$
744

$
756

$
603

$
40,098

Commercial investor real estate mortgage
$
4,558

$
269

$
302

$
209

$
5,338

Commercial investor real estate construction
1,556

54

36

8

1,654

Total investor real estate
$
6,114

$
323

$
338

$
217

$
6,992

Accrual
Non-accrual
Total
(In millions)
Residential first mortgage
$
12,000

$
136

$
12,136

Home equity
11,034

114

11,148

Indirect
3,253

—

3,253

Consumer credit card
917

—

917

Other consumer
1,136

—

1,136

Total consumer
$
28,340

$
250

$
28,590

$
75,680



18

December 31, 2013
Pass
Special
Mention
Substandard
Accrual
Non-accrual
Total
(In millions)
Commercial and industrial
$
28,282

$
395

$
479

$
257

$
29,413

Commercial real estate mortgage—owner-occupied
8,593

191

408

303

9,495

Commercial real estate construction—owner-occupied
264

25

4

17

310

Total commercial
$
37,139

$
611

$
891

$
577

$
39,218

Commercial investor real estate mortgage
$
4,479

$
269

$
332

$
238

$
5,318

Commercial investor real estate construction
1,335

47

40

10

1,432

Total investor real estate
$
5,814

$
316

$
372

$
248

$
6,750

Accrual
Non-accrual
Total
(In millions)
Residential first mortgage
$
12,017

$
146

$
12,163

Home equity
11,183

111

11,294

Indirect
3,075

—

3,075

Consumer credit card
948

—

948

Other consumer
1,161

—

1,161

Total consumer
$
28,384

$
257

$
28,641

$
74,609


AGING ANALYSIS
The following tables include an aging analysis of days past due (DPD) for each portfolio segment and class as of March 31, 2014 and December 31, 2013 :
March 31, 2014
Accrual Loans
30-59 DPD
60-89 DPD
90+ DPD
Total
30+ DPD
Total
Accrual
Non-accrual
Total
(In millions)
Commercial and industrial
$
17

$
10

$
7

$
34

$
30,186

$
280

$
30,466

Commercial real estate
mortgage—owner-occupied
22

15

3

40

8,950

307

9,257

Commercial real estate construction—owner-occupied
—

—

—

—

359

16

375

Total commercial
39

25

10

74

39,495

603

40,098

Commercial investor real estate mortgage
53

22

2

77

5,129

209

5,338

Commercial investor real estate construction
2

—

—

2

1,646

8

1,654

Total investor real estate
55

22

2

79

6,775

217

6,992

Residential first mortgage
103

59

248

410

12,000

136

12,136

Home equity
78

45

71

194

11,034

114

11,148

Indirect
34

8

5

47

3,253

—

3,253

Consumer credit card
6

5

12

23

917

—

917

Other consumer
13

3

3

19

1,136

—

1,136

Total consumer
234

120

339

693

28,340

250

28,590

$
328

$
167

$
351

$
846

$
74,610

$
1,070

$
75,680



19

December 31, 2013
Accrual Loans
30-59 DPD
60-89 DPD
90+ DPD
Total
30+ DPD
Total
Accrual
Non-accrual
Total
(In millions)
Commercial and industrial
$
29

$
14

$
6

$
49

$
29,156

$
257

$
29,413

Commercial real estate
mortgage—owner-occupied
30

26

6

62

9,192

303

9,495

Commercial real estate construction—owner-occupied
—

—

—

—

293

17

310

Total commercial
59

40

12

111

38,641

577

39,218

Commercial investor real estate mortgage
29

6

6

41

5,080

238

5,318

Commercial investor real estate construction
4

1

—

5

1,422

10

1,432

Total investor real estate
33

7

6

46

6,502

248

6,750

Residential first mortgage
130

74

248

452

12,017

146

12,163

Home equity
95

51

75

221

11,183

111

11,294

Indirect
39

11

5

55

3,075

—

3,075

Consumer credit card
8

5

12

25

948

—

948

Other consumer
14

5

4

23

1,161

—

1,161

Total consumer
286

146

344

776

28,384

257

28,641

$
378

$
193

$
362

$
933

$
73,527

$
1,082

$
74,609




20

IMPAIRED LOANS
The following tables present details related to the Company’s impaired loans as of March 31, 2014 and December 31, 2013 . Loans deemed to be impaired include all non-accrual commercial and investor real estate loans (including those less than $2.5 million ), excluding leases, and all troubled debt restructurings ("TDRs"). Loans which have been fully charged-off do not appear in the tables below.
Non-accrual Impaired Loans As of March 31, 2014
Book Value (3)
Unpaid
Principal
Balance (1)
Charge-offs
and Payments
Applied (2)
Total
Impaired
Loans on
Non-accrual
Status
Impaired
Loans on
Non-accrual
Status with
No Related
Allowance
Impaired
Loans on
Non-accrual
Status with
Related
Allowance
Related
Allowance
for Loan
Losses
Coverage % (4)
(Dollars in millions)
Commercial and industrial
$
286

$
30

$
256

$
89

$
167

$
74

36.4
%
Commercial real estate mortgage—owner-occupied
346

39

307

42

265

93

38.2

Commercial real estate construction—owner-occupied
17

1

16

—

16

6

41.2

Total commercial
649

70

579

131

448

173

37.4

Commercial investor real estate mortgage
272

63

209

37

172

54

43.0

Commercial investor real estate construction
11

3

8

—

8

3

54.5

Total investor real estate
283

66

217

37

180

57

43.5

Residential first mortgage
103

34

69

—

69

11

43.7

Home equity
19

—

19

—

19

1

5.3

Total consumer
122

34

88

—

88

12

37.7

$
1,054

$
170

$
884

$
168

$
716

$
242

39.1
%


21

Accruing Impaired Loans As of March 31, 2014
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
$
203

$
3

$
200

$
27

14.8
%
Commercial real estate mortgage—owner-occupied
209

7

202

22

13.9

Commercial real estate construction—owner-occupied
25

—

25

1

4.0

Total commercial
437

10

427

50

13.7

Commercial investor real estate mortgage
394

10

384

34

11.2

Commercial investor real estate construction
75

—

75

7

9.3

Total investor real estate
469

10

459

41

10.9

Residential first mortgage
395

7

388

59

16.7

Home equity
367

—

367

19

5.2

Indirect
1

—

1

—

—

Consumer credit card
2

—

2

—

—

Other consumer
23

—

23

—

—

Total consumer
788

7

781

78

10.8

$
1,694

$
27

$
1,667

$
169

11.6
%

Total Impaired Loans As of March 31, 2014
Book Value (3)
Unpaid
Principal
Balance (1)
Charge-offs
and Payments
Applied (2)
Total
Impaired
Loans
Impaired
Loans with No
Related
Allowance
Impaired
Loans with
Related
Allowance
Related
Allowance
for Loan
Losses
Coverage % (4)
(Dollars in millions)
Commercial and industrial
$
489

$
33

$
456

$
89

$
367

$
101

27.4
%
Commercial real estate mortgage—owner-
occupied
555

46

509

42

467

115

29.0

Commercial real estate construction—owner-occupied
42

1

41

—

41

7

19.0

Total commercial
1,086

80

1,006

131

875

223

27.9

Commercial investor real estate mortgage
666

73

593

37

556

88

24.2

Commercial investor real estate construction
86

3

83

—

83

10

15.1

Total investor real estate
752

76

676

37

639

98

23.1

Residential first mortgage
498

41

457

—

457

70

22.3

Home equity
386

—

386

—

386

20

5.2

Indirect
1

—

1

—

1

—

—

Consumer credit card
2

—

2

—

2

—

—

Other consumer
23

—

23

—

23

—

—

Total consumer
910

41

869

—

869

90

14.4

$
2,748

$
197

$
2,551

$
168

$
2,383

$
411

22.1
%



22

_________
(1)
Unpaid principal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied.
(2)
Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance.
(3)
Book value represents the unpaid principal balance less charge-offs and payments applied; it is shown before any allowance for loan losses.
(4)
Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the unpaid principal balance.
Non-accrual Impaired Loans As of December 31, 2013
Book Value (3)
Unpaid
Principal
Balance (1)
Charge-offs
and Payments
Applied (2)
Total
Impaired
Loans on
Non-accrual
Status
Impaired
Loans on
Non-accrual
Status with
No Related
Allowance
Impaired
Loans on
Non-accrual
Status with
Related
Allowance
Related
Allowance
for Loan
Losses
Coverage % (4)
(Dollars in millions)
Commercial and industrial
$
280

$
48

$
232

$
45

$
187

$
72

42.9
%
Commercial real estate mortgage—owner-occupied
343

40

303

54

249

92

38.5

Commercial real estate construction—owner-occupied
17

—

17

—

17

8

47.1

Total commercial
640

88

552

99

453

172

40.6

Commercial investor real estate mortgage
306

68

238

17

221

68

44.4

Commercial investor real estate construction
15

5

10

—

10

3

53.3

Total investor real estate
321

73

248

17

231

71

44.9

Residential first mortgage
112

37

75

—

75

12

43.8

Home equity
17

—

17

—

17

1

5.9

Total consumer
129

37

92

—

92

13

38.8

$
1,090

$
198

$
892

$
116

$
776

$
256

41.7
%


23

Accruing Impaired Loans As of December 31, 2013
Unpaid
Principal
Balance (1)
Charge-offs
and Payments
Applied (2)
Book Value (3)
Related
Allowance for
Loan Losses
Coverage % (4)
(Dollars in millions)
Commercial and industrial
$
245

$
2

$
243

$
34

14.7
%
Commercial real estate mortgage—owner-occupied
209

7

202

23

14.4

Commercial real estate construction—owner-occupied
25

—

25

1

4.0

Total commercial
479

9

470

58

14.0

Commercial investor real estate mortgage
435

11

424

39

11.5

Commercial investor real estate construction
89

—

89

8

9.0

Total investor real estate
524

11

513

47

11.1

Residential first mortgage
397

8

389

60

17.1

Home equity
373

—

373

24

6.4

Indirect
1

—

1

—

—

Consumer credit card
2

—

2

—

—

Other consumer
26

—

26

1

3.8

Total consumer
799

8

791

85

11.6

$
1,802

$
28

$
1,774

$
190

12.1
%

Total Impaired Loans As of December 31, 2013
Book Value (3)
Unpaid
Principal
Balance (1)
Charge-offs
and Payments
Applied (2)
Total
Impaired
Loans
Impaired
Loans with No
Related
Allowance
Impaired
Loans with
Related
Allowance
Related
Allowance for
Loan Losses
Coverage % (4)
(Dollars in millions)
Commercial and industrial
$
525

$
50

$
475

$
45

$
430

$
106

29.7
%
Commercial real estate mortgage—owner-
occupied
552

47

505

54

451

115

29.3

Commercial real estate construction—owner-occupied
42

—

42

—

42

9

21.4

Total commercial
1,119

97

1,022

99

923

230

29.2

Commercial investor real estate mortgage
741

79

662

17

645

107

25.1

Commercial investor real estate construction
104

5

99

—

99

11

15.4

Total investor real estate
845

84

761

17

744

118

23.9

Residential first mortgage
509

45

464

—

464

72

23.0

Home equity
390

—

390

—

390

25

6.4

Indirect
1

—

1

—

1

—

—

Consumer credit card
2

—

2

—

2

—

—

Other consumer
26

—

26

—

26

1

3.8

Total consumer
928

45

883

—

883

98

15.4

$
2,892

$
226

$
2,666

$
116

$
2,550

$
446

23.2
%



24


________
(1)
Unpaid principal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied.
(2)
Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance.
(3)
Book value represents the unpaid principal balance less charge-offs and payments applied; it is shown before any allowance for loan losses.
(4)
Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the unpaid principal balance.

The following table presents the average balances of total impaired loans and interest income for the three months ended March 31, 2014 and 2013 . Interest income recognized represents interest on accruing loans modified in a TDR. TDRs are considered impaired loans.
Three Months Ended March 31
2014
2013
Average
Balance
Interest
Income
Recognized
Average
Balance
Interest
Income
Recognized
(In millions)
Commercial and industrial
$
467

$
3

$
679

$
4

Commercial real estate mortgage—owner-occupied
511

4

635

3

Commercial real estate construction—owner-occupied
41

—

31

—

Total commercial
1,019

7

1,345

7

Commercial investor real estate mortgage
620

8

1,189

8

Commercial investor real estate construction
87

1

135

2

Total investor real estate
707

9

1,324

10

Residential first mortgage
457

9

1,189

10

Home equity
387

5

422

5

Indirect
1

—

2

—

Consumer credit card
2

—

1

—

Other consumer
24

—

37

1

Total consumer
871

14

1,651

16

Total impaired loans
$
2,597

$
30

$
4,320

$
33

In addition to the impaired loans detailed in the tables above, there were approximately $40 million in non-performing loans classified as held for sale at March 31, 2014 , compared to $82 million at December 31, 2013 . The loans are carried at an amount approximating a price which is expected to be recoverable through the loan sale market. During the three months ended March 31, 2014 , approximately $15 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $8 million recorded upon transfer. During the three months ended March 31, 2013 , approximately $31 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $18 million recorded upon transfer. At March 31, 2014 and December 31, 2013 , non-accrual loans including loans held for sale totaled $1.1 billion and $1.2 billion , respectively.
TROUBLED DEBT RESTRUCTURINGS
The majority of Regions’ commercial and investor real estate TDRs are the result of renewals of classified loans at an interest rate that is not considered to be a market rate of interest. Consumer TDRs generally involve an interest rate concession. Accordingly, the financial impact of the modifications is best illustrated by the impact to the allowance calculation at the loan or pool level, as a result of the loans being considered impaired due to their status as a TDR.
None of the modified consumer loans listed in the following TDR disclosures were collateral-dependent at the time of modification. At March 31, 2014 , approximately $86 million in residential first mortgage TDRs were in excess of 180 days past due and were considered collateral-dependent. At March 31, 2014 , approximately $10 million in home equity first lien TDRs were in excess of 180 days past due and approximately $5 million in home equity second lien TDRs were in excess of 120 days past due, both of which were considered collateral-dependent.


25

Further discussion related to TDRs, including their impact on allowance for loan losses and designation of TDRs in periods subsequent to the modification is included in Note 1 in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013 .
The following tables present the end of period balance for loans modified in a TDR by portfolio segment and class, and the financial impact of those modifications, for the periods presented. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. The end of period balance of total loans first reported as new TDRs totaled approximately $121 million and $259 million for the three months ended March 31, 2014 and 2013 , respectively.
Three Months Ended March 31, 2014
Financial Impact
of Modifications
Considered TDRs
Number of
Obligors
Recorded
Investment
Increase in
Allowance at
Modification
(Dollars in millions)
Commercial and industrial
91

$
94

$
—

Commercial real estate mortgage—owner-occupied
85

70

1

Commercial real estate construction—owner-occupied
1

1

—

Total commercial
177

165

1

Commercial investor real estate mortgage
98

107

—

Commercial investor real estate construction
15

7

—

Total investor real estate
113

114

—

Residential first mortgage
125

24

4

Home equity
154

10

—

Consumer credit card
32

—

—

Indirect and other consumer
51

1

—

Total consumer
362

35

4

652

$
314

$
5

Three Months Ended March 31, 2013
Financial Impact
of Modifications
Considered TDRs
Number of
Obligors
Recorded
Investment
Increase in
Allowance at
Modification
(Dollars in millions)
Commercial and industrial
114

$
155

$
1

Commercial real estate mortgage—owner-occupied
76

99

1

Commercial real estate construction—owner-occupied
1

26

—

Total commercial
191

280

2

Commercial investor real estate mortgage
111

205

1

Commercial investor real estate construction
22

36

—

Total investor real estate
133

241

1

Residential first mortgage
333

59

7

Home equity
158

10

1

Consumer credit card
104

1

—

Indirect and other consumer
80

1

—

Total consumer
675

71

8

999

$
592

$
11




26

As described previously, the consumer modifications granted by Regions are rate concessions, and not forgiveness of principal. The majority of the commercial and investor real estate modifications are renewals where there is no reduction in interest rate or forgiveness of principal. Accordingly, Regions most often does not record a charge-off at the modification date.
Defaulted TDRs
The following table presents TDRs by portfolio segment and class which defaulted during the three months ended March 31, 2014 and 2013 , and which were modified in the previous twelve months (i.e., the twelve months prior to the default). For purposes of this disclosure, default is defined as 90 days past due and still accruing for the consumer portfolio segment, and placement on non-accrual status for the commercial and investor real estate portfolio segments. Consideration of defaults in the calculation of the allowance for loan losses is described in detail in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013 .
Three Months Ended March 31
2014
2013
(In millions)
Defaulted During the Period, Where Modified in a TDR Twelve Months Prior to Default
Commercial and industrial
$
42

$
12

Commercial real estate mortgage—owner-occupied
3

9

Total commercial
45

21

Commercial investor real estate mortgage
2

40

Commercial investor real estate construction
1

1

Total investor real estate
3

41

Residential first mortgage
9

18

Home equity
1

2

Total consumer
10

20

$
58

$
82

Commercial and investor real estate loans which were on non-accrual status at the time of the latest modification are not included in the default table above, as they are already considered to be in default at the time of the restructuring. At March 31, 2014 , approximately $89 million of commercial and investor real estate loans modified in a TDR during the three months ended March 31, 2014 were on non-accrual status. Less than $1 million of this amount was 90 days past due.
At March 31, 2014 , Regions had restructured binding unfunded commitments totaling $238 million where a concession was granted and the borrower was in financial difficulty.
NOTE 5. SERVICING OF FINANCIAL ASSETS
The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights. The Company compares fair value estimates and assumptions to observable market data where available, and also considers recent market activity and actual portfolio experience.


27

The table below presents an analysis of mortgage servicing rights under the fair value measurement method:
Three Months Ended March 31
2014
2013
(In millions)
Carrying value, beginning of period
$
297

$
191

Additions
8

44

Increase (decrease) in fair value:
Due to change in valuation inputs or assumptions
(12
)
10

Economic amortization associated with borrower repayments
(5
)
(9
)
Carrying value, end of period
$
288

$
236

On March 29, 2013, the Company completed a transaction to purchase the rights to service approximately $3 billion in residential mortgage loans. The mortgage servicing rights asset was increased by the purchase price of approximately $28 million in the first quarter of 2013.
Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to mortgage servicing rights (excluding related derivative instruments) are as follows:
March 31
2014
2013
(Dollars in millions)
Unpaid principal balance
$
27,785

$
28,739

Weighted-average prepayment speed (CPR; percentage)
9.3
%
12.9
%
Estimated impact on fair value of a 10% increase
$
(12
)
$
(12
)
Estimated impact on fair value of a 20% increase
$
(23
)
$
(23
)
Option-adjusted spread (basis points)
880

1,055

Estimated impact on fair value of a 10% increase
$
(9
)
$
(8
)
Estimated impact on fair value of a 20% increase
$
(18
)
$
(16
)
Weighted-average coupon interest rate
4.5
%
4.7
%
Weighted-average remaining maturity (months)
279

278

Weighted-average servicing fee (basis points)
27.7

27.8

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above.
The following table presents servicing related fees, which includes contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of mortgage loans:
Three Months Ended March 31
2014
2013
(In millions)
Servicing related fees and other ancillary income
$
21

$
19

Loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. Regions may be required to repurchase these loans at par, or make-whole or indemnify the purchasers for losses incurred when representations and warranties are breached.
Regions maintains a repurchase liability related to mortgage loans sold with representations and warranty provisions. This repurchase liability is reported in other liabilities on the consolidated balance sheets and reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income. The table below presents an analysis of Regions’ repurchase liability related to mortgage loans sold with representations and warranty provisions:


28

Three Months Ended March 31
2014
2013
(In millions)
Beginning balance
$
39

$
40

Additions
3

8

Losses
(3
)
(8
)
Ending balance
$
39

$
40

During the first quarter s of 2014 and 2013 , settled repurchase claims were related to one or more of the following alleged breaches: 1) eligibility or guideline violations; 2) misrepresentation or fraud by the borrower ; or 3) missing or incorrect documents per investor guidelines. These claims stem primarily from the 2006—2008 vintages.
NOTE 6. GOODWILL
Goodwill allocated to each reportable segment is presented as follows:
March 31, 2014
December 31, 2013
(In millions)
Business Services
$
2,552

$
2,552

Consumer Services
1,797

1,797

Wealth Management
467

467

$
4,816

$
4,816

Regions evaluates each reporting unit’s goodwill for impairment on an annual basis in the fourth quarter, or more often if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. A detailed description of the Company's methodology and valuation approaches used to determine the estimated fair value of each reporting unit is included in the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2013. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill.
During the first quarter of 2014, Regions assessed events and circumstances for all three reporting units as of March 31, 2014 and through the date of the filing of this Quarterly Report on Form 10-Q that could potentially indicate goodwill impairment. 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.

Results of the 2013 annual test indicated that the estimated fair value of each reporting unit exceeded its carrying amount as of the test date. Additionally, after assessing the indicators noted above, Regions determined that it was not more likely than not that the fair value of each of its reporting units had declined below their carrying values as of March 31, 2014. Therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the March 31, 2014 interim period.
NOTE 7. STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Board of Directors declared $8 million in cash dividends on Series A Preferred Stock during the first quarters of both 2014 and 2013. Because the Company was in a retained deficit position, the preferred dividends are recorded as a reduction of preferred stock, including related surplus.
On March 19, 2013, Regions' Board of Directors authorized a $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2013 through the end of the first quarter of 2014. During the first quarter of 2014, Regions repurchased approximately 1 million shares of common stock under this plan at a total cost of approximately $8 million . As of March 31, 2014 , Regions had repurchased approximately 37 million shares of common stock at a total cost of approximately $347 million . The total cost paid to repurchase common shares under this plan includes the full amount paid as part of a contractual repurchase agreement. All common shares repurchased under this plan were immediately retired and therefore are not included in treasury stock. On April 1, 2014, the remaining approximately $3 million available under this plan expired.


29

The Board of Directors declared a $0.03 per share cash dividend on common stock for the first quarter of 2014 . The Board of Directors declared a $0.01 per share cash dividend on common stock for the first quarter of 2013 .
During the first quarter of 2014, Regions received no objection to its 2014 capital plan from the Federal Reserve that was submitted as part of the Comprehensive Capital Analysis and Review ("CCAR") process. On April 24, 2014, Regions' Board of Directors approved an increase of its quarterly common stock dividend to $0.05 per share effective with the quarterly dividend to be paid in July 2014. The Board also authorized a new $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2014 through the end of the first quarter of 2015. There have been no shares repurchased under this plan through the issuance of this report.
On April 29, 2014, Regions completed the issuance of $500 million in depositary shares each representing a fractional ownership interest in a share of the Company's 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share ("Series B Preferred Stock"), with a liquidation preference of $1,000 per share of Series B Preferred Stock (equivalent to $25 per depositary share). Dividends will be paid quarterly at an annual rate equal to (i) for each period beginning prior to September 15, 2024, 6.375% , and (ii) for each period beginning on or after September 15, 2024, three-month LIBOR plus 3.536% .
Activity within the balances in accumulated other comprehensive income (loss) is shown in the following tables.
Three Months Ended March 31, 2014
Unrealized losses on securities transferred to held to maturity
Unrealized gains (losses) on securities available for sale
Unrealized
gains (losses) on
derivative
instruments
designated
as cash
flow hedges
Defined
benefit
pension
plans and
other post
employment
benefits
Accumulated
other
comprehensive
income (loss),
net of tax
(In millions)
Beginning of period
$
(64
)
$
(22
)
$
15

$
(248
)
$
(319
)
Net change
2

78

6

4

90

End of period
$
(62
)
$
56

$
21

$
(244
)
$
(229
)

Three Months Ended March 31, 2013
Unrealized gains (losses) on securities available for sale
Unrealized gains (losses) on derivative instruments designated as cash flow hedges
Defined benefit pension plans and other post employment benefits
Accumulated other comprehensive
income (loss), net of tax
(In millions)
Beginning of period
$
436

$
93

$
(464
)
$
65

Net change
(78
)
(8
)
9

(77
)
End of period
$
358

$
85

$
(455
)
$
(12
)





30


The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2014 and 2013:
Three Months Ended March 31, 2014
Three Months Ended March 31, 2013
Details about Accumulated Other Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (1)
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (1)
Affected Line Item in the Consolidated Statements of Income
(In millions)
Unrealized losses on securities transferred to held to maturity:
$
(3
)
$
—

Net interest income
1

—

Tax (expense) or benefit
$
(2
)
$
—

Net of tax
Unrealized gains and (losses) on available-for-sale securities:
$
2

$
15

Securities gains, net
(1
)
(5
)
Tax (expense) or benefit
$
1

$
10

Net of tax
Gains and (losses) on cash flow hedges:
Interest rate contracts
$
28

$
15

Net interest income
(11
)
(6
)
Tax (expense) or benefit
$
17

$
9

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

$
—

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

6

Tax (expense) or benefit
$
(4
)
$
(10
)
Net of tax
Total reclassifications for the period
$
12

$
9

Net of tax
_________
(1) Amounts in parentheses indicate reductions to net income.
(2) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost and are included in salaries and employee benefits on the consolidated statements of income (see Note 10 for additional details).


31

NOTE 8. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic earnings per common share and diluted earnings per common share:
Three Months Ended March 31
2014
2013
(In millions, except per share amounts)
Numerator:
Income from continuing operations
$
307

$
333

Preferred stock dividends
(8
)
(8
)
Income from continuing operations available to common shareholders
299

325

Income from discontinued operations, net of tax
12

2

Net income available to common shareholders
$
311

$
327

Denominator:
Weighted-average common shares outstanding—basic
1,378

1,413

Potential common shares
12

10

Weighted-average common shares outstanding—diluted
1,390

1,423

Earnings per common share from continuing operations available to common shareholders (1) :
Basic
$
0.22

$
0.23

Diluted
0.21

0.23

Earnings per common share from discontinued operations (1) :
Basic
0.01

0.00

Diluted
0.01

0.00

Earnings per common share (1) :
Basic
0.23

0.23

Diluted
0.22

0.23

________
(1)
Certain per share amounts may not appear to reconcile due to rounding.
The effect from the assumed exercise of 25 million and 26 million stock options for the three months ended March 31, 2014 and 2013 , respectively, was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share.
NOTE 9. SHARE-BASED PAYMENTS
Regions administers long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock awards, performance awards and stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by shareholders. Incentive awards usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans are typically ten years from the date of the grant.
On May 13, 2010, the shareholders of the Company approved the Regions Financial Corporation 2010 Long-Term Incentive Plan (“2010 LTIP”), which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2010 LTIP authorizes 100 million common share equivalents available for grant, where grants of options count as one share equivalent and grants of full value awards (e.g., shares of restricted stock, restricted stock units and performance stock units) count as 2.25 share equivalents. Unless otherwise determined by the Compensation Committee of the Board of Directors, grants of restricted stock, restricted stock units, and performance stock units accrue dividends as they are declared by the Board of Directors, and the dividends are paid upon vesting of the award. Upon adoption of the 2010 LTIP, Regions closed all prior long-term incentive plans to new grants, and, accordingly, prospective grants must be made under the 2010 LTIP or a successor plan. All existing grants under prior long-term incentive plans were unaffected by adoption of the 2010 LTIP. The number of remaining share equivalents available for future issuance under the 2010 LTIP was approximately 53 million at March 31, 2014 .


32

STOCK OPTIONS
The following table summarizes the activity related to stock options during the first three months of 2014 and 2013 :
Three Months Ended March 31
2014
2013
Number of
Options
Weighted-Average
Exercise
Price
Number of
Options
Weighted-Average
Exercise
Price
Outstanding at beginning of period
32,127,235

$
22.81

38,258,204

$
23.09

Granted
—

—

—

—

Exercised
(1,330,599
)
4.29

(103,902
)
6.44

Canceled/Forfeited
(4,070,485
)
30.53

(3,305,365
)
25.77

Outstanding at end of period
26,726,151

$
22.55

34,848,937

$
22.89

Exercisable at end of period
26,293,952

$
22.82

31,974,662

$
24.33

RESTRICTED STOCK AWARDS AND PERFORMANCE STOCK AWARDS
During the first three months of 2014 , Regions made restricted stock grants that vest upon service conditions and restricted stock unit and performance stock unit grants that vest based upon service conditions and performance conditions. Dividend payments during the vesting period are deferred to the end of the vesting term. The fair value of these restricted shares, restricted stock units and performance stock units was estimated based upon the fair value of the underlying shares on the date of the grant. The valuation was not adjusted for the deferral of dividends.
The following table summarizes the activity related to restricted stock awards and performance stock awards:
Three Months Ended March 31
2014
2013
Number of
Shares
Weighted-Average
Grant Date Fair
Value
Number of
Shares
Weighted-Average
Grant Date Fair
Value
Non-vested at beginning of period
16,212,198

$
6.83

11,945,179

$
6.15

Granted
21,233

9.89

—

—

Vested
(494,932
)
7.28

(516,682
)
6.87

Forfeited
(59,149
)
7.00

(107,746
)
6.13

Non-vested at end of period
15,679,350

$
6.82

11,320,751

$
6.14


NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFITS
Regions has a defined benefit pension plan qualified under the Internal Revenue Code covering only certain employees as the pension plan is closed to new entrants. The Company also sponsors a supplemental executive retirement program (the "SERP"), which is a non-qualified pension plan that provides certain senior executive officers defined benefits in relation to their compensation.
Net periodic pension cost, which is recorded in salaries and employee benefits on the consolidated statements of income, included the following components:
Qualified Plan
Non-qualified Plans
Total
Three Months Ended March 31
2014
2013
2014
2013
2014
2013
(In millions)
Service cost
$
8

$
10

$
1

$
1

$
9

$
11

Interest cost
22

21

1

1

23

22

Expected return on plan assets
(34
)
(33
)
—

—

(34
)
(33
)
Amortization of actuarial loss
5

16

1

—

6

16

Amortization of prior service cost
—

—

—

—

—

—

Net periodic pension cost
$
1

$
14

$
3

$
2

$
4

$
16



33

Regions' policy for funding the qualified pension plan is to contribute annually at least the amount required by Internal Revenue Service minimum funding standards. Regions made no contribution to the plan during the first three months of 2014 .
Regions also provides other postretirement benefits such as defined benefit health care plans and life insurance plans that cover certain retired employees. There was no material impact from other postretirement benefits on the consolidated financial statements for the three months ended March 31, 2014 or 2013 .
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The following tables present the notional amount and estimated fair value of derivative instruments on a gross basis as of March 31, 2014 and December 31, 2013 .
March 31, 2014
December 31, 2013
Notional
Amount
Estimated Fair Value
Notional
Amount
Estimated Fair Value
Gain (1)
Loss (1)
Gain (1)
Loss (1)
(In millions)
Derivatives in fair value hedging relationships:
Interest rate swaps
$
3,736

$
47

$
28

$
4,241

$
70

$
29

Derivatives in cash flow hedging relationships:
Interest rate swaps
5,800

9

63

5,800

5

80

Total derivatives designated as hedging instruments
$
9,536

$
56

$
91

$
10,041

$
75

$
109

Derivatives not designated as hedging instruments:
Interest rate swaps
$
47,413

$
982

$
1,036

$
46,591

$
1,078

$
1,142

Interest rate options
3,015

12

3

2,865

9

4

Interest rate futures and forward commitments
9,492

2

2

13,357

9

2

Other contracts
2,376

50

47

2,535

48

44

Total derivatives not designated as hedging instruments
$
62,296

$
1,046

$
1,088

$
65,348

$
1,144

$
1,192

Total derivatives
$
71,832

$
1,102

$
1,179

$
75,389

$
1,219

$
1,301

_________
(1)
Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities on the consolidated balance sheets.
HEDGING DERIVATIVES
Derivatives entered into to manage interest rate risk and facilitate asset/liability management strategies are designated as hedging derivatives. Derivative financial instruments that qualify in a hedging relationship are classified, based on the exposure being hedged, as either fair value hedges or cash flow hedges. See Note 1 "Summary of Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2013 for additional information regarding accounting policies for derivatives.
FAIR VALUE HEDGES
Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment.
Regions enters into interest rate swap agreements to manage interest rate exposure on the Company’s fixed-rate borrowings, which includes long-term debt and certificates of deposit. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreements. Regions enters into interest rate swap agreements to manage interest rate exposure on certain of the Company's fixed-rate available for sale securities. These agreements involve the payment of fixed-rate amounts in exchange for floating-rate interest receipts. Regions also enters into forward sale commitments to hedge changes in the fair value of available-for-sale securities.
CASH FLOW HEDGES
Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions.


34

Regions enters into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on LIBOR-based loans. The agreements effectively modify the Company’s exposure to interest rate risk by utilizing receive fixed/pay LIBOR interest rate swaps.
Regions issues long-term fixed-rate debt for various funding needs. Regions may enter into receive LIBOR/pay fixed forward starting swaps to hedge risks of changes in the projected quarterly interest payments attributable to changes in the benchmark interest rate ("LIBOR") during the time leading up to the probable issuance date of the new long-term fixed-rate debt.
Regions recognized an unrealized after-tax gain of $56 million and $85 million in accumulated other comprehensive income (loss) at March 31, 2014 and 2013 , respectively, related to terminated cash flow hedges of loan and debt instruments which will be amortized into earnings in conjunction with the recognition of interest payments through 2017. Regions recognized pre-tax income of $11 million and $12 million during the three months ended March 31, 2014 and 2013 , respectively related to the amortization of cash flow hedges of loan and debt instruments.
Regions expects to reclassify out of accumulated other comprehensive income (loss) and into earnings approximately $113 million in pre-tax income due to the receipt or payment of interest payments on all cash flow hedges within the next twelve months. Included in this amount is $51 million in pre-tax net gains related to the amortization of discontinued cash flow hedges. The maximum length of time over which Regions is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately seven years as of March 31, 2014 .
The following tables present the effect of hedging derivative instruments on the consolidated statements of income:
Gain or (Loss) Recognized in Income on Derivatives
Location of Amounts Recognized in Income on Derivatives and Related Hedged Item
Gain or (Loss) Recognized in Income on Related Hedged Item
Three Months Ended March 31
Three Months Ended March 31
2014
2013
2014
2013
(In millions)
(In millions)
Fair Value Hedges:
Interest rate swaps on:
Debt/CDs
$
9

$
23

Interest expense
$
2

$
3

Debt/CDs
(8
)
(21
)
Other non-interest expense
9

21

Securities available for sale
(4
)
—

Interest expense
—

—

Securities available for sale
(18
)
—

Other non-interest expense
14

—

Total
$
(21
)
$
2

$
25

$
24

Effective Portion (3)
Gain or (Loss) Recognized in AOCI (1)
Location of Amounts Reclassified from AOCI into Income
Gain or (Loss) Reclassified from AOCI into Income (2)
Three Months Ended March 31
Three Months Ended March 31
2014
2013
2014
2013
(In millions)
(In millions)
Cash Flow Hedges:
Interest rate swaps
$
4

$
(10
)
Interest income on loans
$
31

$
19

Forward starting swaps
2

2

Interest expense on debt
(3
)
(4
)
Total
$
6

$
(8
)
$
28

$
15

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


35

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
The Company maintains a derivatives trading portfolio of interest rate swaps, option contracts, and futures and forward commitments used to meet the needs of its customers. The portfolio is used to generate trading profit and to help clients manage market risk. The Company is subject to the credit risk that a counterparty will fail to perform. The Company is also subject to market risk, which is evaluated by the Company and monitored by the asset/liability management process. Separate derivative contracts are entered into to reduce overall market exposure to pre-defined limits. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through earnings and included in other assets and other liabilities.
Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. At March 31, 2014 and December 31, 2013 , Regions had $340 million and $267 million , respectively, in total notional amount of interest rate lock commitments. Regions manages market risk on interest rate lock commitments and mortgage loans held for sale with corresponding forward sale commitments, which are recorded at fair value with changes in fair value recorded in mortgage income. At March 31, 2014 and December 31, 2013 , Regions had $625 million and $636 million , respectively, in total notional amount related to these forward sale commitments.
Regions has elected to account for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the consolidated statement of income effect of changes in the fair value of its mortgage servicing rights. As of March 31, 2014 and December 31, 2013 , the total notional amount related to these contracts was $3.7 billion and $3.4 billion , respectively.
The following table presents the location and amount of gain or (loss) recognized in income on derivatives not designated as hedging instruments in the consolidated statements of income for the three months ended March 31, 2014 and 2013 :
Three Months Ended March 31
Derivatives Not Designated as Hedging Instruments
2014
2013
(In millions)
Capital markets fee income and other (1) :
Interest rate swaps
$
2

$
7

Interest rate options
—

2

Interest rate futures and forward commitments
—

—

Other contracts
2

4

Total capital markets fee income and other
4

13

Mortgage income:
Interest rate swaps
8

(5
)
Interest rate options
3

(4
)
Interest rate futures and forward commitments
(4
)
(4
)
Total mortgage income
7

(13
)
$
11

$
—

______
(1) Capital markets fee income and other is included in Other income on the consolidated statements of income.
Credit risk, defined as all positive exposures not collateralized with cash or other assets or reserved for, at March 31, 2014 and December 31, 2013 , totaled approximately $423 million and $453 million , respectively. This amount represents the net credit risk on all trading and other derivative positions held by Regions.
CREDIT DERIVATIVES
Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty when the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2014 and 2020. Credit derivatives whereby Regions has sold credit protection have maturities between 2014 and 2020. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.


36

Regions’ maximum potential amount of future payments under these contracts as of March 31, 2014 was approximately $51 million . This scenario would only occur if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at March 31, 2014 and 2013 was immaterial. In transactions where Regions has sold credit protection, recourse to collateral associated with the original swap transaction is available to offset some or all of Regions’ obligation.
CONTINGENT FEATURES
Certain of Regions’ derivative instrument contracts with broker-dealers contain credit-related termination provisions and/or credit-related provisions regarding the posting of collateral allowing those broker-dealers to terminate the contracts in the event that Regions’ and/or Regions Bank’s credit ratings falls below specified ratings from certain major credit rating agencies. The aggregate fair value of all derivative instruments with any credit-risk-related contingent features that were in a liability position on March 31, 2014 and December 31, 2013, was $361 million and $364 million , respectively, for which Regions had posted collateral of $403 million and $409 million , respectively, in the normal course of business.
OFFSETTING
Regions engages in derivatives transactions with dealers and customers. These derivatives transactions are subject to enforceable master netting agreements, which include a right of setoff by the non-defaulting or non-affected party upon early termination of the derivatives transaction. The following table presents the Company's gross derivative positions, including collateral posted or received, as of March 31, 2014 and December 31, 2013 .
Offsetting Derivative Assets
Offsetting Derivative Liabilities
March 31, 2014
December 31, 2013
March 31, 2014
December 31, 2013
(In millions)
Gross amounts subject to offsetting
$
1,059

$
1,165

$
1,140

$
1,257

Gross amounts not subject to offsetting
43

54

39

44

Gross amounts recognized
1,102

1,219

1,179

1,301

Gross amounts offset in the consolidated balance sheets (1)
670

774

1,119

1,233

Net amounts presented in the consolidated balance sheets
432

445

60

68

Gross amounts not offset in the consolidated balance sheets:
Financial instruments
9

10

5

—

Cash collateral received/posted
—

—

33

24

Net amounts
$
423

$
435

$
22

$
44

________
(1)
At March 31, 2014 , gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $35 million and cash collateral posted of $484 million . At December 31, 2013, gross amounts of derivative assets and liabilities offset in the consolidated balance sheets presented above include cash collateral received of $42 million and cash collateral posted of $501 million .
Gross amounts of derivatives not subject to offsetting are primarily comprised of derivatives cleared through central clearing houses and interest rate lock commitments to originate mortgage loans. Regions does not have a legal opinion as to whether the clearing house contracts are master netting agreements, and therefore has not offset them on its balance sheet.
NOTE 12. FAIR VALUE MEASUREMENTS
Fair value guidance establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These strata include:
•
Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),


37

•
Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and
•
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2013 for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Regions rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. There were no such transfers during the three month periods ended March 31, 2014 and 2013. Trading account securities and securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occur at the beginning of a reporting period.


38

The following tables present assets and liabilities measured at estimated fair value on a recurring basis and non-recurring basis as of March 31, 2014 and December 31, 2013 :
March 31, 2014
December 31, 2013
Level 1
Level 2
Level 3
Total
Estimated Fair Value
Level 1
Level 2
Level 3
Total
Estimated Fair Value
(In millions)
Recurring fair value measurements
Trading account securities
$
117

$
—

$
—

$
117

$
111

$
—

$
—

$
111

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

$
—

$
—

$
57

$
56

$
—

$
—

$
56

Federal agency securities
—

82

—

82

—

89

—

89

Obligations of states and political subdivisions
—

4

—

4

—

5

—

5

Mortgage-backed securities:
Residential agency
—

15,586

—

15,586

—

15,677

—

15,677

Residential non-agency
—

—

9

9

—

—

9

9

Commercial agency
—

1,118

—

1,118

—

935

—

935

Commercial non-agency
—

1,254

—

1,254

—

1,211

—

1,211

Corporate and other debt securities
—

2,842

3

2,845

—

2,825

2

2,827

Equity securities (1)
154

—

—

154

137

—

—

137

Total securities available for sale
$
211

$
20,886

$
12

$
21,109

$
193

$
20,742

$
11

$
20,946

Mortgage loans held for sale
$
—

$
344

$
—

$
344

$
—

$
429

$
—

$
429

Mortgage servicing rights
$
—

$
—

$
288

$
288

$
—

$
—

$
297

$
297

Derivative assets:
Interest rate swaps
$
—

$
1,038

$
—

$
1,038

$
—

$
1,153

$
—

$
1,153

Interest rate options
—

4

8

12

—

4

5

9

Interest rate futures and forward commitments
—

2

—

2

—

9

—

9

Other contracts
—

50

—

50

—

48

—

48

Total derivative assets
$
—

$
1,094

$
8

$
1,102

$
—

$
1,214

$
5

$
1,219

Derivative liabilities:
Interest rate swaps
$
—

$
1,127

$
—

$
1,127

$
—

$
1,251

$
—

$
1,251

Interest rate options
—

3

—

3

—

4

—

4

Interest rate futures and forward commitments
—

2

—

2

—

2

—

2

Other contracts
—

47

—

47

—

44

—

44

Total derivative liabilities
$
—

$
1,179

$
—

$
1,179

$
—

$
1,301

$
—

$
1,301

Nonrecurring fair value measurements
Loans held for sale
$
—

$
—

$
23

$
23

$
—

$
—

$
596

$
596

Foreclosed property and other real estate
—

33

19

52

—

49

18

67

_________
(1) Excludes Federal Reserve Bank and Federal Home Loan Bank Stock totaling $472 million and $34 million at March 31, 2014 and $472 million and $67 million at December 31, 2013 , respectively.
Assets and liabilities in all levels could result in volatile and material price fluctuations. Realized and unrealized gains and losses on Level 3 assets represent only a portion of the risk to market fluctuations in Regions’ consolidated balance sheets. Further, derivatives included in Levels 2 and 3 are used by the Asset and Liability Management Committee of the Company in a holistic approach to managing price fluctuation risks.


39

The following tables illustrate a rollforward for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013 . The tables do not reflect the change in fair value attributable to any related economic hedges the Company used to mitigate the interest rate risk associated with these assets and liabilities. The net changes in realized gains (losses) included in earnings related to Level 3 assets and liabilities held at March 31, 2014 and 2013 are not material.
Three Months Ended March 31, 2014
Total Realized /
Unrealized
Gains or Losses
Opening Balance January 1, 2014
Included
in
Earnings
Included
in Other
Compre-
hensive
Income
(Loss)
Purchases
Sales
Issuances
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Closing
Balance
March 31, 2014
(In millions)
Level 3 Instruments Only
Securities available for sale:
Residential non-agency MBS
$
9

—

—

—

—

—

—

—

—

$
9

Corporate and other debt securities
2

—

—

3

—

—

(2
)
—

—

3

Total securities available for sale
$
11

—

—

3

—

—

(2
)
—

—

$
12

Mortgage servicing rights
$
297

(17
)
(a)
—

8

—

—

—

—

—

$
288

Total interest rate options derivatives, net
$
5

21

(a)
—

—

—

—

(18
)
—

—

$
8

_________
(a)
Included in mortgage income.
Three Months Ended March 31, 2013
Total Realized /
Unrealized
Gains or Losses
Opening Balance January 1, 2013
Included
in
Earnings
Included
in Other
Compre-
hensive
Income
(Loss)
Purchases
Sales
Issuances
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Closing
Balance
March 31, 2013
(In millions)
Level 3 Instruments Only
Securities available for sale:
Residential non-agency MBS
$
13

—

—

—

—

—

(1
)
—

—

$
12

Corporate and other debt securities
2

—

—

—

—

—

—

—

—

2

Total securities available for sale
$
15

—

—

—

—

—

(1
)
—

—

$
14

Mortgage servicing rights
$
191

1

(a)
—

44

—

—

—

—

—

$
236

Total interest rate options derivatives, net
$
22

33

(a)
—

—

—

—

(37
)
—

—

$
18

_________
(a)
Included in mortgage income.

The following table presents the fair value adjustments related to non-recurring fair value measurements:
Three Months Ended March 31
2014
2013
(In millions)
Loans held for sale
$
(15
)
$
(19
)
Foreclosed property and other real estate
(7
)
(11
)


40

The following tables present detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2014 and December 31, 2013 . The tables include the valuation techniques and the significant unobservable inputs utilized. The range of each significant unobservable input as well as the weighted average within the range utilized at March 31, 2014 and December 31, 2013 are included. Following the tables are a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.
March 31, 2014
Level 3
Estimated Fair Value at
March 31, 2014
Valuation
Technique
Unobservable
Input(s)
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
(Dollars in millions)
Recurring fair value measurements:
Securities available for sale:
Residential non-agency MBS
$9
Discounted cash flow
Spread to LIBOR
5.4% - 49.9% (13.6%)
Weighted-average prepayment speed (CPR; percentage)
7.7% - 10.2% (9.7%)
Probability of default
1.3%
Loss severity
37.9%
Corporate and other debt securities
$3
Market comparable
Evaluated quote on same issuer/comparable bond
99.3% - 100.0% (99.7%)
Comparability adjustments
0.71%
Mortgage servicing rights (a)
$288
Discounted cash flow
Weighted-average prepayment speed (CPR; percentage)
7.2% - 25.6% (8.3%)
Option-adjusted spread (percentage)
6.6% - 23.6% (9.0%)
Derivative assets:
Interest rate options
$8
Discounted cash flow
Weighted-average prepayment speed (CPR; percentage)
7.2% - 25.6% (8.3%)
Option-adjusted spread (percentage)
6.6% - 23.6% (9.0%)
Pull-through
21.3% - 99.6% (83.1%)
Nonrecurring fair value measurements:
Loans held for sale
$15
Commercial and investor real estate loans held for sale are valued based on multiple data points, including discount to appraised value of collateral based on recent market activity for sale of similar loans
Appraisal comparability adjustment (discount)
15.6% - 98.8% (62.6%)
$8
Residential first mortgage loans held for sale not carried at fair value on a recurring basis are valued based on estimated third-party valuations utilizing recent sales data for similar transactions
Estimated third-party valuations utilizing available sales data for similar transactions (discount to par)
23.5% - 41.3% (30.0%)
Foreclosed property and other real estate
$19
Discount to appraised value of property based on recent market activity for sales of similar properties
Appraisal comparability adjustment (discount)
0.0% - 100.0% (42.1%)
_________
(a)
See Note 5 for additional disclosures related to assumptions used in the fair value calculation for mortgage servicing rights.



41

December 31, 2013
Level 3
Estimated Fair Value at
December 31, 2013
Valuation
Technique
Unobservable
Input(s)
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
(Dollars in millions)
Recurring fair value measurements:
Securities available for sale:
Residential non-agency MBS
$9
Discounted cash flow
Spread to LIBOR
5.4% - 49.9% (14.9%)
Weighted-average prepayment speed (CPR; percentage)
8.6% - 13.1% (10.0%)
Probability of default
1.3%
Loss severity
38.4%
Corporate and other debt securities
$2
Market comparable
Evaluated quote on same issuer/comparable bond
99.0% - 100.0% (99.6%)
Comparability adjustments
0.96%
Mortgage servicing rights (a)
$297
Discounted cash flow
Weighted-average prepayment speed (CPR; percentage)
6.9% - 24.8% (8.2%)
Option-adjusted spread (percentage)
7.0% - 23.6% (9.0%)
Derivative assets:
Interest rate options
$5
Discounted cash flow
Weighted-average prepayment speed (CPR; percentage)
6.9% - 24.8% (8.2%)
Option-adjusted spread (percentage)
7.0% - 23.6% (9.0%)
Pull-through
10.8% - 99.7% (32.2%)
Nonrecurring fair value measurements:
Loans held for sale
$61
Commercial and investor real estate loans held for sale are based on multiple data points, including discount to appraised value of collateral based on recent market activity for sales of similar loans
Appraisal comparability adjustment (discount)
1.0% - 99.2% (49.6%)
$535
Residential first mortgage loans held for sale not carried at fair value on a recurring basis are valued based on estimated third-party valuations utilizing recent sales data for similar transactions
Estimated third-party valuations utilizing available sales data for similar transactions (discount to par)
17.0% - 26.0% (23.5%)
Foreclosed property and other real estate
$18
Discount to appraised value of property based on recent market activity for sales of similar properties
Appraisal comparability adjustment (discount)
30.0% - 100.0% (42.3%)
_________
(a) See Note 7 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2013 for additional disclosures related to assumptions used in the fair value calculation for mortgage servicing rights.



42

RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Securities available for sale
Mortgage-backed securities: residential non-agency —The fair value reported in this category relates to retained interests in legacy securitizations. Significant unobservable inputs include the spread to LIBOR, constant prepayment rate, probability of default, and loss severity in the event of default. Significant increases in any of these inputs in isolation would result in significantly lower fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates.
Corporate and other debt securities —Significant unobservable inputs include evaluated quotes on comparable bonds for the same issuer and management-determined comparability adjustments. Changes in the evaluated quote on comparable bonds would result in a directionally similar change in the fair value of the other debt securities.
Mortgage Servicing Rights
The significant unobservable inputs used in the fair value measurement of mortgage servicing rights ("MSR") are option adjusted spreads (“OAS”) and prepayment speed. This method requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk adjusted rate. Additionally, the impact of prepayments and changes in the OAS are based on a variety of underlying inputs such as servicing costs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The net change in unrealized gains (losses) included in earnings related to MSRs held at period end are disclosed as the changes in valuation inputs or assumptions. See Note 5 for these amounts and additional disclosures related to assumptions used in the fair value calculation for MSRs.
Derivative assets
Interest rate options —These instruments are interest rate lock agreements made in the normal course of originating residential mortgage loans. Significant unobservable inputs in the fair value measurement are OAS, prepayment speeds, and pull-through. The impact of OAS and prepayment speed inputs in the valuation of these derivative instruments are consistent with the MSR discussion above. Pull-through is an estimate of the number of interest rate lock commitments that will ultimately become funded loans. Increases or decreases in the pull-through assumption will have a corresponding impact on the value of these derivative assets.
NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Loans held for sale
Commercial and investor real estate loans held for sale are valued based on multiple data points indicating the fair value for each loan. The primary data point for loans held for sale is a discount to the appraised value of the underlying collateral, which considers the return required by potential buyers of the loans. Management establishes this discount or comparability adjustment based on recent sales of loans secured by similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.
Residential first mortgage loans transferred to held for sale were valued based on estimated third-party valuations utilizing recent sales data from similar transactions. Broker opinion statements were also obtained as additional evidence to support the third-party valuations. The discounts taken were intended to represent the perspective of a market participant, considering among other things, required investor returns which include liquidity discounts reflected in similar bulk transactions.
Foreclosed property and other real estate
Foreclosed property and other real estate are valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

FAIR VALUE OPTION
Regions has elected the fair value option for all FNMA and FHLMC eligible residential mortgage loans held for sale. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets.


43

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value:
March 31, 2014
December 31, 2013
Aggregate
Fair Value
Aggregate
Unpaid
Principal
Aggregate Fair
Value Less
Aggregate
Unpaid
Principal
Aggregate
Fair Value
Aggregate
Unpaid
Principal
Aggregate Fair
Value Less
Aggregate
Unpaid
Principal
(In millions)
Mortgage loans held for sale, at fair value
$
344

$
333

$
11

$
429

$
424

$
5

Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of income. The following table details net gains resulting from changes in fair value of these loans which were recorded in mortgage income in the consolidated statements of income during the three months ended March 31, 2014 and 2013 , respectively. These changes in fair value are mostly offset by economic hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
Mortgage loans held for sale, at fair value
Three Months Ended March 31
2014
2013
(In millions)
Net gains (losses) resulting from changes in fair value
$
6

$
(18
)
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of March 31, 2014 are as follows:
March 31, 2014
Carrying
Amount
Estimated
Fair
Value (1)
Level 1
Level 2
Level 3
(In millions)
Financial assets:
Cash and cash equivalents
$
5,196

$
5,196

$
5,196

$
—

$
—

Trading account securities
117

117

117

—

—

Securities held to maturity
2,317

2,294

1

2,293

—

Securities available for sale
21,615

21,615

211

21,392

12

Loans held for sale
395

395

—

344

51

Loans (excluding leases), net of unearned income and allowance for loan losses (2)(3)
72,662

67,386

—

—

67,386

Other interest-earning assets
86

86

—

86

—

Derivative assets
1,102

1,102

—

1,094

8

Financial liabilities:
Derivative liabilities
1,179

1,179

—

1,179

—

Deposits
93,393

93,400

—

93,400

—

Short-term borrowings
1,981

1,981

—

1,981

—

Long-term borrowings
4,226

4,534

853

—

3,681

Loan commitments and letters of credit
115

598

—

—

598

Indemnification obligation
233

228

—

—

228



44

_________
(1)
Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate.
(2)
The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at March 31, 2014 was $5.3 billion or 7.3 percent.
(3)
Excluded from this table is the lease carrying amount of $1.8 billion at March 31, 2014 .

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments as of December 31, 2013 are as follows:
December 31, 2013
Carrying
Amount
Estimated
Fair
Value (1)
Level 1
Level 2
Level 3
(In millions)
Financial assets:
Cash and cash equivalents
$
5,273

$
5,273

$
5,273

$
—

$
—

Trading account securities
111

111

111

—

—

Securities held to maturity
2,353

2,307

1

2,306

—

Securities available for sale
21,485

21,485

193

21,281

11

Loans held for sale
1,055

1,055

—

429

626

Loans (excluding leases), net of unearned income and allowance for loan losses (2)(3)
71,594

66,167

—

—

66,167

Other interest-earning assets
86

86

—

86

—

Derivative assets
1,219

1,219

—

1,214

5

Financial liabilities:
Derivative liabilities
1,301

1,301

—

1,301

—

Deposits
92,453

92,460

—

92,460

—

Short-term borrowings
2,182

2,182

—

2,182

—

Long-term borrowings
4,830

5,085

—

—

5,085

Loan commitments and letters of credit
117

621

—

—

621

Indemnification obligation
260

243

—

—

243

_________
(1)
Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate.
(2)
The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at December 31, 2013 was $5.4 billion or 7.6 percent.
(3)
Excluded from this table is the lease carrying amount of $1.7 billion at December 31, 2013 .
NOTE 13. BUSINESS SEGMENT INFORMATION
Each of Regions’ reportable segments is a strategic business unit that serves specific needs of Regions’ customers based on the products and services provided. The segments are based on the manner in which management views the financial performance of the business. The Company has three reportable segments: Business Services, Consumer Services and Wealth Management, with the remainder split between Discontinued Operations and Other. The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. As these enhancements are made, financial results presented may be periodically revised.


45

The following tables present financial information for each reportable segment for the period indicated.
Three Months Ended March 31, 2014
Business
Services
Consumer
Services
Wealth
Management
Other
Continuing
Operations
Discontinued
Operations
Consolidated
(In millions)
Net interest income (loss)
$
451

$
450

$
43

$
(128
)
$
816

$
—

$
816

Provision (credit) for loan losses
26

55

1

(80
)
2

—

2

Non-interest income
111

239

92

(4
)
438

—

438

Non-interest expense
264

431

106

16

817

(19
)
798

Income (loss) before income taxes
272

203

28

(68
)
435

19

454

Income tax expense (benefit)
103

77

10

(62
)
128

7

135

Net income (loss)
$
169

$
126

$
18

$
(6
)
$
307

$
12

$
319

Average assets
$
52,634

$
28,742

$
2,959

$
33,493

$
117,828

$
—

$
117,828

Three Months Ended March 31, 2013
Business
Services
Consumer
Services
Wealth
Management
Other
Continuing
Operations
Discontinued
Operations
Consolidated
(In millions)
Net interest income (loss)
$
459

$
461

$
45

$
(167
)
$
798

$
—

$
798

Provision (credit) for loan losses
95

78

7

(170
)
10

—

10

Non-interest income
113

279

87

22

501

—

501

Non-interest expense
249

473

104

16

842

(4
)
838

Income before income taxes
228

189

21

9

447

4

451

Income tax expense (benefit)
86

72

8

(52
)
114

2

116

Net income
$
142

$
117

$
13

$
61

$
333

$
2

$
335

Average assets
$
47,177

$
29,211

$
3,067

$
39,668

$
119,123

$
—

$
119,123

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES
COMMERCIAL COMMITMENTS
Regions issues off-balance sheet financial instruments in connection with lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to Regions’ normal credit approval policies and procedures. Regions measures inherent risk associated with these instruments by recording a reserve for unfunded commitments based on an assessment of the likelihood that the guarantee will be funded and the creditworthiness of the customer or counterparty. Collateral is obtained based on management’s assessment of the creditworthiness of the customer.
Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table:
March 31, 2014
December 31, 2013
(In millions)
Unused commitments to extend credit
$
41,470

$
41,885

Standby letters of credit
1,699

1,629

Commercial letters of credit
50

36

Liabilities associated with standby letters of credit
35

37

Assets associated with standby letters of credit
35

38

Reserve for unfunded credit commitments
78

78



46

Unused commitments to extend credit —To accommodate the financial needs of its customers, Regions makes commitments under various terms to lend funds to consumers, businesses and other entities. These commitments include (among others) credit card and other revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
Standby letters of credit —Standby letters of credit are also issued to customers which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expired without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments Regions could be required to make and represents Regions’ maximum credit risk.
Commercial letters of credit —Commercial letters of credit are issued to facilitate foreign or domestic trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.
LEGAL CONTINGENCIES
Regions, its affiliates and subsidiaries, and current and former officers, directors and employees, are sometimes collectively referred to as Regions and certain Related Persons. Regions and its subsidiaries are subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel. Regions establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. Some of Regions' exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies however, Regions does not take into account the availability of insurance coverage.
In addition, as previously discussed, Regions has agreed to indemnify Raymond James for all legal matters resulting from pre-closing activities in conjunction with the sale of Morgan Keegan and recorded an indemnification obligation at fair value in the second quarter of 2012. The indemnification obligation had a carrying amount of approximately $233 million and an estimated fair value of approximately $228 million as of March 31, 2014 (see Note 12).
When it is practicable, Regions estimates possible loss contingencies, whether or not there is an accrued probable loss. When Regions is able to estimate such possible losses, and when it is reasonably possible Regions could incur losses in excess of amounts accrued, Regions is required to make a disclosure of the aggregate estimation. Regions currently estimates that it is reasonably possible that it may experience losses in excess of what Regions has accrued in an aggregate amount up to approximately $100 million as of March 31, 2014 , with it also being reasonably possible that Regions could incur no losses in excess of amounts accrued. However, as available information changes, the matters for which Regions is able to estimate, as well as the estimates themselves will be adjusted accordingly. The legal contingencies included in the reasonably possible estimate include those that are subject to the indemnification agreement with Raymond James.
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or not or discovery is not complete; whether or not meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the class is defined. There are numerous factors that result in a greater degree of complexity in class-action lawsuits as compared to other types of litigation. Due to the many intricacies involved in class-action lawsuits at the early stages of these matters, obtaining clarity on a reasonable estimate is difficult which may call into question its reliability. As a result of some of these factors, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below. The aggregated estimated amount provided above therefore may not include an estimate for every matter disclosed below.
Beginning in December 2007, Regions and certain of its affiliates were named in class-action lawsuits filed in federal and state courts on behalf of investors who purchased shares of certain Regions Morgan Keegan Select Funds (the “Funds”) and stockholders of Regions. These cases have been consolidated into class-actions and stockholder derivative actions for the open-end and closed-end Funds. The Funds were formerly managed by Regions Investment Management, Inc. (“Regions Investment Management”). Regions Investment Management no longer manages these Funds, which were transferred to Hyperion Brookfield Asset Management (“Hyperion”) in 2008. Certain of the Funds have since been terminated by Hyperion. The complaints contain various allegations, including claims that the Funds and the defendants misrepresented or failed to disclose material facts relating to the activities of the Funds. Plaintiffs have requested equitable relief and unspecified monetary damages. These cases are in various stages and no classes have been certified. Settlement discussions are ongoing in certain cases, and the Court has granted final approval of a settlement in the closed-end Funds class-action and shareholder derivative case. Certain of the shareholders in these Funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating


47

in the class actions. These lawsuits and proceedings are subject to the indemnification agreement with Raymond James discussed above.
In October 2010, a purported class-action lawsuit was filed by Regions’ stockholders in the U.S. District Court for the Northern District of Alabama against Regions and certain former officers of Regions (the "2010 Claim"). The 2010 Claim alleges violations of the federal securities laws, including allegations that statements that were materially false and misleading were included in filings made with the Securities and Exchange Commission ("SEC"). The plaintiffs have requested equitable relief and unspecified monetary damages. On June 7, 2011, the trial court denied Regions’ motion to dismiss the 2010 Claim. On June 14, 2012, the trial court granted class certification. The Eleventh Circuit Court of Appeals is reviewing the trial court’s grant of class-action certification. The case is now stayed pending that review.
In July 2006, Morgan Keegan and a former Morgan Keegan analyst were named as defendants in a lawsuit filed by a Canadian insurance and financial services company and its American subsidiary in the Circuit Court of Morris County, New Jersey. Plaintiffs made claims under a civil Racketeer Influenced and Corrupt Organizations (“RICO”) statute, for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs allege that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs to improperly drive down plaintiffs’ stock price, so that others could profit from short positions. Plaintiffs allege that defendants’ actions damaged their reputations and harmed their business relationships. Plaintiffs allege a number of categories of damages they sustained, including lost insurance business, lost financings and increased financing costs, increased audit fees and directors and officers insurance premiums and lost acquisitions, and have requested monetary damages. On September 12, 2012, the trial court dismissed the case with prejudice. Plaintiffs have filed an appeal. This matter is subject to the indemnification agreement with Raymond James.
The SEC and states of Missouri and Texas are investigating alleged securities law violations by Morgan Keegan in the underwriting and sale of certain municipal bonds. An enforcement action was brought by the Missouri Secretary of State on April 4, 2013, seeking monetary penalties and other relief that was dismissed and refiled on November 21, 2013. A civil action was brought by institutional investors of the bonds on March 19, 2012, seeking a return of their investment and unspecified compensatory and punitive damages. A class action was brought on behalf of retail purchasers of the bonds on September 4, 2012, seeking unspecified compensatory and punitive damages. Several claims by individual investors and investor groups are also pending. These actions are in the early stages. These matters are also subject to the indemnification agreement with Raymond James.
Regions is involved in information-gathering requests and investigations (both formal and informal) as well as reviews, examinations and proceedings by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding Regions’ business, business practices and policies as well as the conduct of persons with whom it does business. Additional inquiries will arise from time to time. In connection with those inquiries, Regions receives document requests, subpoenas and other requests for information. The inquiries, including those described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on Regions' consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in our business practices, and could result in additional expenses and collateral costs, including reputational damage.
During the fourth quarter of 2013, Regions recorded a non-tax deductible charge of $58 million related to previously disclosed inquiries from government authorities concerning matters from 2009. Regions is in discussions with its banking supervisors to resolve their inquiries on these matters. In addition, the Board of Directors is conducting investigations regarding certain of the matters raised in these inquiries.
In 2013, Regions received a subpoena from the Office of Inspector General of the U.S. Department of Housing and Urban Development as part of an industry-wide investigation regarding loan origination and servicing practices. Many institutions have settled these matters on terms that included large monetary penalties, including, in some cases, civil money penalties under applicable banking laws. The investigation concerning Regions' practices is in the very early stages, and the Company cannot predict the ultimate outcome, however it is possible that this investigation may result in Regions' payment of a monetary penalty which may adversely affect results of operations. Regions is cooperating with this inquiry.
While the final outcome of litigation and claims exposures or of any inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not have a material effect on Regions’ business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to Regions’ business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.


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GUARANTEES
INDEMNIFICATION OBLIGATION
As discussed in Note 2, on April 2, 2012 (“Closing Date”), Regions closed the sale of Morgan Keegan and related affiliates to Raymond James. In connection with the sale, Regions agreed to indemnify Raymond James for all legal matters related to pre-closing activities, including matters filed subsequent to the Closing Date that relate to actions that occurred prior to closing. Losses under the indemnification include legal and other expenses, such as costs for judgments, settlements and awards associated with the defense and resolution of the indemnified matters. The maximum potential amount of future payments that Regions could be required to make under the indemnification is indeterminable due to the indefinite term of some of the obligations. However, Regions expects the majority of ongoing legal matters to be resolved within approximately two years.
As of the Closing Date, the fair value of the indemnification obligation, which includes defense costs and unasserted claims, was approximately $385 million , of which approximately $256 million was recognized as a reduction to the gain on sale of Morgan Keegan. The fair value was determined through the use of a present value calculation that takes into account the future cash flows that a market participant would expect to receive from holding the indemnification liability as an asset. Regions performed a probability-weighted cash flow analysis and discounted the result at a credit-adjusted risk free rate. The fair value of the indemnification liability includes amounts that Regions had previously determined meet the definition of probable and reasonably estimable. Adjustments to the indemnification obligation are recorded within professional and legal expenses within discontinued operations (see Note 2). As of March 31, 2014 , the carrying value of the indemnification obligation was approximately $233 million .
VISA INDEMNIFICATION
As a member of the Visa USA network, Regions, along with other members, indemnified Visa USA against litigation. On October 3, 2007, Visa USA was restructured and acquired several Visa affiliates. In conjunction with this restructuring, Regions' indemnification of Visa USA was modified to cover specific litigation (“covered litigation”).
A portion of Visa's proceeds from its initial public offering ("IPO") was escrowed to fund the covered litigation. During the first quarter of 2013, Visa made a settlement payment related to the covered litigation which reduced Regions' share of the escrow account to approximately zero at March 31, 2013 . Regions made a corresponding adjustment to reduce its liability to approximately zero at March 31, 2013 . The balances related to the escrow and the corresponding liability remain approximately zero as of March 31, 2014 . To the extent that the amount available under the escrow arrangement, or subsequent fundings of the escrow account via reductions in the class B share conversion ratio, is insufficient to fully resolve the covered litigation, Visa will enforce the indemnification obligations of Visa USA's members for any excess amount. At this time, Regions has concluded that it is not probable that covered litigation exposure will exceed the class B share value.
NOTE 15. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board ("FASB") issued final guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance requires unrecognized tax benefits to be presented as a decrease in a deferred tax asset for a net operating loss carryforward, similar tax loss or tax credit carryforward if certain criteria are met. In situations in which a net operating loss carryforward, a similar tax loss or tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. This guidance became effective for fiscal years and interim periods within those years beginning after December 15, 2013 and was adopted by Regions on a prospective basis with the first quarter of 2014 financial reporting. The guidance did not have a material impact upon adoption.
In January 2014, the FASB issued new accounting guidance related to the accounting for investments in qualified affordable housing projects. The guidance allows the holder of low income housing tax credit ("LIHTC") investments to apply a proportional amortization method that would recognize the cost of the investment as a part of income tax expense, provided that the investment meets certain criteria. The guidance is silent regarding statement of financial position classification. Regions believes it would not be appropriate to classify the investment as a deferred tax asset. The decision to apply the proportional amortization method is an accounting policy election. Entities may also elect to continue to account for these investments using the equity method. The guidance will be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. Regions is in the process of reviewing the potential impact the adoption of this guidance will have to its consolidated financial statements.
In January 2014, the FASB issued new accounting guidance regarding the reclassification of residential real estate collateralized consumer mortgage loans upon foreclosures. The guidance requires reclassification of a consumer mortgage loan to other real estate owned upon obtaining legal title to the residential property, which could occur either through foreclosure or through a deed in lieu of foreclosure or similar legal agreement. The existence of a borrower redemption right will not prevent the lender from reclassifying a loan to other real estate once the lender obtains legal title to the property. In addition, entities are


49

required to disclose the amount of foreclosed residential real estate properties and the recorded investment in residential real estate mortgage loans in the process of foreclosure on both an interim and annual basis. The guidance may be applied prospectively or on a modified retrospective basis in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. Early adoption is permitted. Regions is in the process of reviewing the potential impact the adoption of this guidance will have to its consolidated financial statements.
Further information related to recent accounting pronouncements and accounting changes adopted by Regions prior to the first quarter of 2014 is included in the Annual Report on Form 10-K for the year ended December 31, 2013 .


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

INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporation’s (“Regions” or "the Company”) Quarterly Report on Form 10-Q to the Securities and Exchange Commission (“SEC”) and updates Regions’ Annual Report on Form 10-K for the year ended December 31, 2013 , which was previously filed with the SEC. This financial information is presented to aid in understanding Regions’ financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three months ended March 31, 2014 compared to the three months ended March 31, 2013 for the consolidated statements of income. For the consolidated balance sheet, the emphasis of this discussion will be the balances as of March 31, 2014 compared to December 31, 2013 .
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See pages 3 and 4 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, which operates in the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of asset management, wealth management, securities brokerage, insurance and other specialty financing.
Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At March 31, 2014 , Regions operated 1,673 total branch outlets in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions operates under three reportable business segments: Business Services, Consumer Services, and Wealth Management with the remainder split between Discontinued Operations and Other. See Note 13 “Business Segment Information” to the consolidated financial statements for more information regarding Regions’ segment reporting structure. Regions also provides full-line insurance brokerage services primarily through Regions Insurance, Inc. which is included in the Wealth Management segment.
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. (“Morgan Keegan”) and related affiliates to Raymond James Financial, Inc. (“Raymond James”). The sale closed on April 2, 2012. Regions Investment Management, Inc. and Regions Trust were not included in the sale; they are included in the Wealth Management segment. See Note 2 “Discontinued Operations” to the consolidated financial statements for further discussion.
Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and non-interest income sources. Net interest income is the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions’ net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, card and ATM fees, mortgage servicing and secondary marketing, investment management and trust activities, insurance activities, capital markets, and other customer services which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy, professional and legal expenses, deposit administrative fees, and other operating expenses, as well as income taxes.
Economic conditions, competition, new legislation and related rules impacting regulation of the financial services industry and the monetary and fiscal policies of the Federal government significantly affect most, if not all, financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions’ market areas.
Regions’ business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in convenient locations.




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FIRST QUARTER OVERVIEW
Regions reported net income available to common shareholders of $311 million , or $0.22 per diluted share, in the first quarter of 2014 compared to net income available to common shareholders of $327 million , or $0.23 per diluted share, in the first quarter of 2013 . Increased net interest income, lower non-interest expenses, and slightly lower provision for loan losses were more than offset by lower non-interest income compared to the prior year period.
For the first quarter of 2014 , net interest income (taxable-equivalent basis) from continuing operations totaled $831 million compared to $811 million in the first quarter of 2013 . The net interest margin (taxable-equivalent basis) was 3.26 percent for the first quarter of 2014 and 3.13 percent in the first quarter of 2013 . The increase in net interest income was driven by a decline in interest-bearing liabilities and total funding costs and was partially offset by a decline in loan yields. These factors drove the $20 million increase in net interest income (taxable-equivalent basis), and also drove the 13 basis point improvement in net interest margin. Total deposit costs were 12 basis points for the first quarter of 2014 , as compared to 18 basis points for the first quarter of 2013 . Total funding costs, which include deposits, short-term borrowings and long-term debt, were 33 basis points for the first quarter of 2014 , as compared to 45 basis points for the first quarter of 2013 .
The provision for loan losses totaled $2 million in the first quarter of 2014 compared to $10 million during the first quarter of 2013 . Credit metrics, including net charge-offs and non-accrual loan balances, showed continued improving trends through the first three months of 2014 compared to 2013 .
Net charge-offs totaled $82 million, or an annualized 0.44 percent of average loans, in the first quarter of 2014 , compared to $180 million, or an annualized 0.99 percent for the first quarter of 2013 . Net charge-offs were lower across most major loan categories when comparing the first quarter of 2014 period to the prior year period.
The allowance for loan losses at March 31, 2014 was 1.67 percent of total loans, net of unearned income, compared to 1.80 percent at December 31, 2013 . Total non-performing assets were $1.2 billion at March 31, 2014 , compared to $1.3 billion at December 31, 2013 .
Non-interest income from continuing operations for the first quarter of 2014 was $438 million , compared to $501 million for the first quarter of 2013 . The decline from the prior year was driven primarily by a $32 million decrease in mortgage income. Mortgage loan production fell 47 percent from the first quarter of 2013 as consumer demand for mortgage loans slowed due to rising interest rates.
Total non-interest expense from continuing operations was $817 million in the first quarter of 2014 , a $25 million decrease from the first quarter of 2013 . Decreased deposit administration fees and a net gain on the sale of certain primarily accruing residential first mortgage loans classified as troubled debt restructurings (“TDRs”) held for sale were the drivers of the decrease.
A discussion of activity within discontinued operations is included at the end of the Management’s Discussion and Analysis section of this report.

TOTAL ASSETS
Regions’ total assets at March 31, 2014 were $117.9 billion , compared to $117.4 billion at December 31, 2013 . The increase in total assets from year-end 2013 resulted mainly from a $1.1 billion increase in loans, offset by a $660 million decrease in loans held for sale as a result of the sale of certain primarily accruing residential first mortgage loans classified as TDRs. Refer to the "Loans Held For Sale" section for further information.


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SECURITIES
The following table details the carrying values of securities, including both available for sale and held to maturity:
Table 1—Securities
March 31, 2014
December 31, 2013
(In millions)
U.S. Treasury securities
$
58

$
57

Federal agency securities
419

425

Obligations of states and political subdivisions
4

5

Mortgage-backed securities:
Residential agency
17,347

17,474

Residential non-agency
9

9

Commercial agency
1,336

1,154

Commercial non-agency
1,254

1,211

Corporate and other debt securities
2,845

2,827

Equity securities
660

676

$
23,932

$
23,838

Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. Total securities at March 31, 2014 increased $94 million from year-end 2013 primarily due to market rate improvements in the fair value of the available for sale securities portfolio.
Securities available for sale, which comprise the majority of the securities portfolio, are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company. See the "Market Risk-Interest Rate Risk" and "Liquidity Risk" sections for more information.

LOANS HELD FOR SALE
Loans held for sale totaled $395 million at March 31, 2014 , consisting primarily of $352 million of residential real estate mortgage loans and $40 million of non-performing investor real estate loans. At December 31, 2013 , loans held for sale totaled $1.1 billion , consisting primarily of $963 million of residential real estate mortgage loans, including $535 million of certain primarily accruing residential first mortgage loans classified as TDRs that were transferred to loans held for sale in the fourth quarter of 2013, and $82 million of non-performing investor real estate loans. Substantially all of the TDR loans held for sale were sold in the first quarter of 2014. The level of residential real estate mortgage loans held for sale that are part of the Company's mortgage originations to be sold in the secondary market fluctuates depending on the timing of origination and sale to third parties.



53


LOANS
Loans, net of unearned income, represented approximately 73 percent of Regions’ interest-earning assets at March 31, 2014 . The following table presents the distribution of Regions’ loan portfolio by portfolio segment and class, net of unearned income:
Table 2—Loan Portfolio
March 31, 2014
December 31, 2013
(In millions, net of unearned income)
Commercial and industrial
$
30,466

$
29,413

Commercial real estate mortgage—owner-occupied
9,257

9,495

Commercial real estate construction—owner-occupied
375

310

Total commercial
40,098

39,218

Commercial investor real estate mortgage
5,338

5,318

Commercial investor real estate construction
1,654

1,432

Total investor real estate
6,992

6,750

Residential first mortgage
12,136

12,163

Home equity
11,148

11,294

Indirect
3,253

3,075

Consumer credit card
917

948

Other consumer
1,136

1,161

Total consumer
28,590

28,641

$
75,680

$
74,609

PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes in Table 2 and explain changes in balances from the 2013 year-end. See Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements for additional discussion.
Regions has a diversified loan portfolio, in terms of product type, collateral and geography. At March 31, 2014, commercial loans represented 53 percent of total loans, net of unearned income, investor real estate loans represented 9 percent, residential first mortgage loans totaled 16 percent, home equity lending totaled 15 percent, other consumer loans comprised 2 percent, indirect loans equaled 4 percent and consumer credit card loans made up the remaining 1 percent of loans. Following is a discussion of risk characteristics of each loan type.
Loans, net of unearned income, totaled $75.7 billion at March 31, 2014 , an increase of approximately $1.1 billion from year-end 2013 levels. Continued growth in commercial and industrial and indirect auto loan portfolios, along with increases in commercial investor real construction loans, more than offset declines in commercial real estate mortgage, residential first mortgage and home equity lending during the first three months of 2014 .
Commercial —The commercial portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases and other expansion projects. Commercial and industrial loans have increased $1.1 billion or 4 percent since year-end due to Regions’ integrated approach to specialized lending. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. These loans declined $238 million or 3 percent from year-end 2013 as a result of continued customer deleveraging. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. During the first quarter of 2014 , total commercial loan balances increased approximately $880 million, or 2 percent.
Investor Real Estate —Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment is comprised of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. After several years of successful emphasis on decreasing


54

Regions' exposure in this portfolio segment, total investor real estate loans increased $242 million from 2013 year-end balances. This marks the first quarter the Company has generated net growth in this portfolio in over four years.
Residential First Mortgage —Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. These loans experienced a $27 million decline from year-end 2013 , primarily due to customers continuing to pay down real estate debt. At the end of 2012, Regions began retaining 10 and 15 year fixed-rate mortgage production on its balance sheet rather than selling into the secondary market, which has slowed the pace of decline. Approximately $75 million of these 10 and 15-year fixed rate loans were retained on the balance sheet through the first three months of 2014 .
Home Equity— Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Substantially all of this portfolio was originated through Regions’ branch network. During the first quarter of 2014 , home equity balances decreased $146 million to $11.1 billion , driven by continued consumer deleveraging and refinancing.
Indirect— Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. This portfolio class increased $178 million from year-end 2013 , reflecting continued growing demand for automobile loans. Regions increased the average number of loans per dealer by 13 percent during the first quarter of 2014. Regions expects to continue to increase pull-through rates for existing dealers and further expand the dealer network.
Consumer Credit Card— Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances decreased $31 million to $917 million during the first quarter of 2014 following a seasonally high fourth quarter of 2013.
Other Consumer —Other consumer loans include direct consumer installment loans, overdrafts and other revolving loans. Other consumer loans totaled $1.1 billion at March 31, 2014 , a decrease of $25 million from prior year end.
CREDIT QUALITY
Regions believes that its loan portfolio is well diversified by product, client, and geography throughout its footprint. However, the loan portfolio may be exposed to certain concentrations of credit risk which exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country.
Commercial
The commercial portfolio segment generated the majority of the Company's loan growth in the first three months of 2014, particularly commercial and industrial loans. Over half of the Company’s total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as disclosed in "Table 11—Selected Industry Balances" in the Annual Report on Form 10-K for the year ended December 31, 2013. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry. At March 31, 2014 and December 31, 2013, no single industry exceeded 15 percent of the total commercial portfolio balance.
Indirect
Regions re-entered the indirect automotive lending market in October 2010 and has experienced steady portfolio growth. Regions is focused on prudent growth strategies by establishing mutually beneficial, prime lending relationships with a select group of franchised new car dealers. Regions' credit policy stipulates that only prime quality auto loans are originated, and purchased loans are monitored on a regular basis with performance having been consistent with the originated portfolio.
Home Equity
The home equity portfolio totaled $11.1 billion at March 31, 2014 as compared to $11.3 billion at December 31, 2013 . Substantially all of this portfolio was originated through Regions’ branch network.


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The following table presents information regarding the future maturities of the Company's home equity lines of credit as of March 31, 2014.
Table 3—Home Equity Lines of Credit - Future Maturities
First Lien
% of Total
Second Lien
% of Total
Total
(Dollars in millions)
2014
$
21

0.24
%
$
164

1.82
%
$
185

2015
24

0.27

178

1.97

202

2016
31

0.34

41

0.46

72

2017
6

0.07

12

0.13

18

2018
19

0.21

27

0.30

46

2019-2023
1,283

14.23

1,125

12.49

2,408

2024-2028
2,772

30.77

3,175

35.24

5,947

Thereafter
74

0.82

58

0.64

132

Total
$
4,230

46.95
%
$
4,780

53.05
%
$
9,010

Of the $11.1 billion home equity portfolio at March 31, 2014 , approximately $9.0 billion were home equity lines of credit and $2.1 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in May 2009, new home equity lines of credit had a 10-year draw period and a 10-year repayment period. Previously, the home equity lines of credit had a 20-year term with a balloon payment upon maturity or a 5-year draw period with a balloon payment upon maturity. The term “balloon payment” means there are no principal payments required until the balloon payment is due for interest-only lines of credit. As of March 31, 2014 , none of Regions' home equity lines of credit have converted to mandatory amortization under the contractual terms. As presented in the table above, the majority of home equity lines of credit will either mature with a balloon payment or convert to amortizing status after fiscal year 2020.
Of the $9.0 billion of home equity lines of credit as of March 31, 2014 , approximately 91 percent require monthly interest-only payments while the remaining approximately 9 percent require a payment equal to 1.5 percent of the outstanding balance, which would include some principal repayment. As of March 31, 2014 , approximately 30 percent of borrowers were only paying the minimum amount due on the home equity line. In addition, approximately 57 percent of the home equity lines of credit balances have the option to amortize either all or a portion of their balance. As of March 31, 2014 , approximately $284 million of the home equity line of credit balances have elected this option.
Regions is unable to track payment status on first liens held by another institution, including payment status related to loan modifications. When Regions’ second lien position becomes delinquent, an attempt is made to contact the first lien holder and inquire as to the payment status of the first lien. However, Regions does not continuously monitor the payment status of the first lien position. Short sale offers and settlement agreements are often received by the home equity junior lien holders well before the loan balance reaches the delinquency threshold for charge-off consideration, potentially resulting in a full balance payoff/charge-off. Regions is presently monitoring the status of all first lien position loans that the Company owns or services and has a second lien, and is taking appropriate action when delinquent. Regions services the first lien on approximately 23 percent of the entire second lien home equity portfolio as of March 31, 2014 . Regions believes that the results related to the non-Regions-serviced first liens would not be significantly different than that of the portfolio which Regions services.
Other Consumer Credit Quality Data
The Company calculates an estimate of the current value of property secured as collateral for both home equity and residential first mortgage lending products (“current LTV”). The estimate is based on home price indices compiled by a third party. The third party data indicates trends for Metropolitan Statistical Areas (“MSAs”). Regions uses the third party valuation trends from the MSAs in the Company's footprint in its estimate. The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential first mortgage and home equity classes of the consumer portfolio segment. Current LTV data for the remaining loans in the portfolio is not available, primarily because some of the loans are serviced by others. Data may also not be available due to mergers and systems integrations. The amounts in the table represent the entire loan balance. For purposes of the table below, if the loan balance exceeds the current estimated collateral, the entire balance is included in the “Above 100%” category, regardless of the amount of collateral available to partially offset the shortfall. The balances in the "Above 100%" category as a percentage of the portfolio balances remained the same in the residential first mortgage portfolio at 6 percent, while the home equity portfolio decreased from 13 percent to 11 percent, when comparing March 31, 2014 to December 31, 2013.


56

Table 4—Estimated Current Loan to Value Ranges
March 31, 2014
December 31, 2013
Residential
First Mortgage
Home Equity
Residential
First Mortgage
Home Equity
1st Lien
2nd Lien
1st Lien
2nd Lien
(In millions)
Estimated current loan to value:
Above 100%
$
694

$
285

$
896

$
733

$
416

$
1,034

80% - 100%
2,020

688

1,281

2,050

737

1,294

Below 80%
8,944

4,849

2,540

8,899

4,646

2,501

Data not available
478

186

423

481

199

467

$
12,136

$
6,008

$
5,140

$
12,163

$
5,998

$
5,296


Regions qualitatively considers factors such as periodic updates of FICO scores, unemployment, home prices, and geography as credit quality indicators for consumer loans. FICO scores are obtained at origination as part of Regions' formal underwriting process. Refreshed FICO scores are obtained by the Company quarterly for all revolving accounts and home equity lines of credit and semi-annually for all other consumer loans. Regions considers FICO scores less than 620 to be indicative of higher credit risk and obtains additional collateral in most of these instances. The following tables present estimated current FICO score data for components of classes of the consumer portfolio segment. Current FICO data is not available for the remaining loans in the portfolio for various reasons; for example, if customers do not use sufficient credit, an updated score may not be available. Residential first mortgage and home equity balances with FICO scores below 620 were 7 percent of the combined portfolios for both March 31, 2014 and December 31, 2013 .
Table 5—Estimated Current FICO Score Ranges
March 31, 2014
Residential
First Mortgage
Home
Equity
Indirect
Consumer
Credit Card
Other
Consumer
1st Lien
2nd Lien
(In millions)
Below 620
$
885

$
363

$
379

$
300

$
46

$
82

620 - 680
1,019

553

554

499

136

138

681-720
1,372

733

659

553

216

174

Above 720
7,997

4,072

3,382

1,717

518

417

Data not available
863

287

166

184

1

325

$
12,136

$
6,008

$
5,140

$
3,253

$
917

$
1,136

December 31, 2013
Residential
First Mortgage
Home
Equity
Indirect
Consumer
Credit Card
Other
Consumer
1st Lien
2nd Lien
(In millions)
Below 620
$
886

$
324

$
322

$
312

$
38

$
87

620 - 680
1,022

533

527

470

130

142

681-720
1,341

725

672

511

216

177

Above 720
8,091

4,052

3,491

1,599

563

425

Data not available
823

364

284

183

1

330

$
12,163

$
5,998

$
5,296

$
3,075

$
948

$
1,161




57

ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses ("allowance") consists of two components: the allowance for loan and lease losses and the reserve for unfunded credit commitments. The allowance represents management’s estimate of probable credit losses inherent in the loan and credit commitment portfolios as of period-end. Regions determines its allowance in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. Additional discussion of the methodology used to calculate the allowance is included in Note 1 “Summary of Significant Accounting Policies” and Note 6 “Allowance for Credit Losses” to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2013, as well as related discussion in Management’s Discussion and Analysis.
The allowance for loan losses totaled $1.3 billion at both March 31, 2014 and December 31, 2013 . The allowance for loan losses as a percentage of net loans was 1.67 percent at March 31, 2014 and 1.80 percent at December 31, 2013 . The reserve for unfunded credit commitments was $78 million at both March 31, 2014 and December 31, 2013 . Net charge-offs as a percentage of average loans (annualized) were 0.44 percent and 0.99 percent in the first three months of 2014 and 2013 , respectively. Net charge-offs were lower across most categories, period over period. The provision for loan losses totaled $2 million in the first quarter of 2014 compared to $10 million during the first quarter of 2013 . Net charge-offs exceeded the provision for loan losses for the first quarters of 2014 and 2013 , primarily resulting from continued improving credit metrics such as lower levels of non-accrual and criticized and classified loans, as well as problem loan resolutions and a continuing shift in portfolio composition out of higher risk investor real estate loans and into less risky commercial and industrial loans.
Management considers the current level of allowance appropriate to absorb losses inherent in the loan and credit commitment portfolios. Management’s determination of the appropriateness of the allowance 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 to be increased or decreased in future periods. Management expects the allowance for credit losses to total loans ratio to vary over time due to changes in portfolio balances, economic conditions, loan mix and collateral values, or variations in other factors that may affect inherent losses. In addition, bank regulatory agencies, as part of their examination process, may require changes in the level of the allowance based on their judgments and estimates.
Management expects that net loan charge-offs in 2014 will continue to improve compared to 2013 . Economic trends such as real estate valuations, interest rates and unemployment will impact the future levels of net charge-offs and provision and may result in volatility during the remainder of 2014. Additionally, changes in circumstances related to individually large credits or certain portfolios may result in volatility. Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 6 “Allowance for Credit Losses.”



58

Activity in the allowance for credit losses is summarized as follows:
Table 6—Allowance for Credit Losses
Three Months Ended March 31
2014
2013
(Dollars in millions)
Allowance for loan losses at beginning of year
$
1,341

$
1,919

Loans charged-off:


Commercial and industrial
24

71

Commercial real estate mortgage—owner-occupied
16

28

Commercial real estate construction—owner-occupied
1

—

Commercial investor real estate mortgage
8

22

Commercial investor real estate construction
1

1

Residential first mortgage
11

23

Home equity
28

45

Indirect
10

9

Consumer credit card
9

10

Other consumer
16

15

124

224

Recoveries of loans previously charged-off:

Commercial and industrial
14

13

Commercial real estate mortgage—owner-occupied
3

3

Commercial real estate construction—owner-occupied
—

1

Commercial investor real estate mortgage
7

8

Commercial investor real estate construction
1

1

Residential first mortgage
2

1

Home equity
7

8

Indirect
3

3

Consumer credit card
1

1

Other consumer
4

5

42

44

Net charge-offs:

Commercial and industrial
10

58

Commercial real estate mortgage—owner-occupied
13

25

Commercial real estate construction—owner-occupied
1

(1
)
Commercial investor real estate mortgage
1

14

Commercial investor real estate construction
—

—

Residential first mortgage
9

22

Home equity
21

37

Indirect
7

6

Consumer credit card
8

9

Other consumer
12

10

82

180

Provision for loan losses
2

10

Allowance for loan losses at March 31
$
1,261

$
1,749

Reserve for unfunded credit commitments at beginning of year
$
78

$
83

Provision for unfunded credit losses
—

5

Reserve for unfunded credit commitments at March 31
$
78

$
88

Allowance for credit losses at March 31
$
1,339

$
1,837

Loans, net of unearned income, outstanding at end of period
$
75,680

$
73,936

Average loans, net of unearned income, outstanding for the period
$
75,139

$
73,919

Ratios:

Allowance for loan losses at end of period to loans, net of unearned income
1.67
%
2.37
%
Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale
1.18x

1.10x

Net charge-offs as percentage of:

Average loans, net of unearned income (annualized)
0.44
%
0.99
%




59


TROUBLED DEBT RESTRUCTURINGS (TDRs)
Residential first mortgage, home equity, indirect, consumer credit card and other consumer TDRs are consumer loans modified under the Customer Assistance Program. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modification was offered as a workout alternative. The following table summarizes TDRs for the periods presented:
Table 7—Troubled Debt Restructurings
March 31, 2014
December 31, 2013
Loan
Balance
Allowance for
Loan Losses
Loan
Balance
Allowance for
Loan Losses
(In millions)
Accruing:
Commercial
$
426

$
50

$
468

$
58

Investor real estate
459

41

511

46

Residential first mortgage
310

47

307

48

Home equity
357

19

361

23

Indirect
1

—

1

—

Consumer credit card
2

—

2

—

Other consumer
23

—

26

—

1,578

157

1,676

175

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


Commercial
207

58

156

48

Investor real estate
145

33

157

41

Residential first mortgage
147

22

156

24

Home equity
29

2

30

2

528

115

499

115

Total TDRs - Loans
$
2,106

$
272

$
2,175

$
290

TDRs - Held For Sale
38

—

579

—

Total TDRs
$
2,144

$
272

$
2,754

$
290

_________
Note: All loans listed in the table above are considered impaired under applicable accounting literature. The majority of TDRs held for sale at December 31, 2013 were residential first mortgage loans transfered during the fourth quarter.



60

NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
Table 8—Non-Performing Assets
March 31, 2014
December 31, 2013
(Dollars in millions)
Non-performing loans:
Commercial and industrial
$
280

$
257

Commercial real estate mortgage—owner-occupied
307

303

Commercial real estate construction—owner-occupied
16

17

Total commercial
603

577

Commercial investor real estate mortgage
209

238

Commercial investor real estate construction
8

10

Total investor real estate
217

248

Residential first mortgage
136

146

Home equity
114

111

Total consumer
250

257

Total non-performing loans, excluding loans held for sale
1,070

1,082

Non-performing loans held for sale
40

82

Total non-performing loans (1)
1,110

1,164

Foreclosed properties
129

136

Total non-performing assets (1)
$
1,239

$
1,300

Accruing loans 90 days past due:
Commercial and industrial
$
7

$
6

Commercial real estate mortgage—owner-occupied
3

6

Total commercial
10

12

Commercial investor real estate mortgage
2

6

Total investor real estate
2

6

Residential first mortgage (2)
154

142

Home equity
71

75

Indirect
5

5

Consumer credit card
12

12

Other consumer
3

4

Total consumer
245

238

$
257

$
256

Restructured loans not included in the categories above
$
1,578

$
1,676

Restructured loans held for sale not included in the categories above
$
11

$
545

Non-performing loans, (1) including loans held for sale to loans
1.47
%
1.56
%
Non-performing assets (1) to loans, foreclosed properties and non-performing loans held for sale
1.63
%
1.74
%
_________
(1)
Excludes accruing loans 90 days past due.
(2)
Excludes residential first mortgage loans that are 100% guaranteed by the Federal Housing Administration (FHA) and also those 100% guaranteed by the Government National Mortgage Association (GNMA) where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $94 million at March 31, 2014 and $106 million at December 31, 2013 .
Non-performing assets totaled $1.2 billion at March 31, 2014 , compared to $1.3 billion at December 31, 2013 . Foreclosed properties, a subset of non-performing assets, totaled $129 million and $136 million at March 31, 2014 and December 31, 2013 , respectively. The decrease in non-performing assets and foreclosed properties during the first three months of 2014 was primarily due to a decline in non-performing loans held for sale.


61


Based on current expectations for the economy, management anticipates non-performing assets to continue to improve in 2014 as compared to 2013 . Economic trends such as real estate valuations, interest rates and unemployment, as well as the level of disposition activity, will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility throughout the remainder of 2014 .
Loans past due 90 days or more and still accruing, excluding government guaranteed loans, were $257 million at March 31, 2014 , essentially unchanged from December 31, 2013 .
At March 31, 2014 , Regions had approximately $150-$250 million of potential problem commercial and investor real estate loans that were not included in non-accrual loans, but for which management had concerns as to the ability of such borrowers to comply with their present loan repayment terms. This is a likely estimate of the amount of commercial and investor real estate loans that may migrate to non-accrual status in the next quarter.
In order to arrive at the estimate of potential problem loans, personnel from geographic regions forecast certain larger dollar loans that may potentially be downgraded to non-accrual at a future time, depending on the occurrence of future events. These personnel consider a variety of factors, including the borrower’s capacity and willingness to meet the contractual repayment terms, make principal curtailments or provide additional collateral when necessary, and provide current and complete financial information including global cash flows, contingent liabilities and sources of liquidity. A probability weighting is assigned to the listing of loans due to the inherent level of uncertainty related to potential actions that a borrower or guarantor may take to prevent the loan from reaching problem status. Regions assigns the probability weighting based on an assessment of the likelihood that the necessary actions required to prevent problem loan status will occur. Additionally, for other loans (for example, smaller dollar loans), a factor based on trends and experience is applied to determine the estimate of potential future downgrades. Because of the inherent uncertainty in forecasting future events, the estimate of potential problem loans ultimately represents the estimated aggregate dollar amounts of loans as opposed to an individual listing of loans.
The majority of the loans on which the potential problem loan estimate is based are considered criticized and classified. Detailed disclosures for substandard accrual loans (as well as other credit quality metrics) are included in Note 4 “Loans and the Allowance for Credit Losses” to the consolidated financial statements.
The following table provides an analysis of non-accrual loans (excluding loans held for sale) by portfolio segment:
Table 9—Analysis of Non-Accrual Loans
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2014
Commercial
Investor
Real Estate
Consumer (1)
Total
(In millions)
Balance at beginning of period
$
577

$
248

$
257

$
1,082

Additions
160

22

(5
)
177

Net payments/other activity
(57
)
(35
)
—

(92
)
Return to accrual
(22
)
(5
)
—

(27
)
Charge-offs on non-accrual loans (2)
(39
)
(8
)
(1
)
(48
)
Transfers to held for sale (3)
(10
)
(4
)
(1
)
(15
)
Transfers to foreclosed properties
(6
)
(1
)
—

(7
)
Balance at end of period
$
603

$
217

$
250

$
1,070



62


Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2013
Commercial
Investor
Real Estate
Consumer (1)
Total
(In millions)
Balance at beginning of period
$
862

$
477

$
342

$
1,681

Additions
166

116

(5
)
277

Net payments/other activity
(63
)
(74
)
—

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

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

(13
)
Sales
(3
)
(2
)
—

(5
)
Balance at end of period
$
787

$
464

$
335

$
1,586

________
(1)
All net activity within the consumer portfolio segment other than sales and transfers to held for sale (including related charge-offs) is included as a single net number within the additions line, due to the relative immateriality of consumer non-accrual loans.
(2)
Includes charge-offs on loans on non-accrual status and charge-offs taken upon sale and transfer of non-accrual loans to held for sale.
(3)
Transfers to held for sale are shown net of charge-offs of $8 million and $18 million recorded upon transfer for the three months ended March 31, 2014 and 2013 , respectively.

The following table provides an analysis of non-performing loans held for sale for the three months ended March 31, 2014 and 2013 :
Table 10—Non-Performing Loans Held For Sale
Three Months Ended March 31
2014
2013
(In millions)
Balance at beginning of period
$
82

$
89

Transfers in
34

31

Sales
(30
)
(36
)
Writedowns
(6
)
(1
)
Loans moved from held for sale/other activity
(39
)
(11
)
Transfers to foreclosed properties
(1
)
(6
)
Balance at end of period
$
40

$
66


ALL OTHER INTEREST-EARNING ASSETS
All other interest-earning assets, which are comprised of interest-bearing deposits in other banks, federal funds sold and securities purchased under agreements to resell, trading account securities, and other interest-earning assets, decreased approximately $482 million from year-end 2013 to March 31, 2014 , primarily due to a reduction in interest-bearing deposits in other banks as a result of normal day-to-day operating variations.

GOODWILL
Goodwill totaled $4.8 billion at both March 31, 2014 and December 31, 2013 and is allocated to each of Regions’ reportable segments (each a reporting unit), at which level goodwill is tested for impairment on an annual basis or more often if events and circumstances indicate the fair value of the reporting unit may have declined below the carrying value (refer to Note 1 “Summary of Significant Accounting Policies” to the 2013 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of when Regions tests goodwill for impairment and the Company's methodology and valuation approaches used to determine the estimated fair value of each reporting unit).

The result of the assessment performed for the first quarter of 2014 did not indicate that the estimated fair values of the Company’s reporting units (Business Services, Consumer Services and Wealth Management) had declined below their respective


63

carrying values; therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the March 31, 2014 interim period.

FORECLOSED PROPERTIES
Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or fair value of the property less estimated costs to sell. The following table summarizes foreclosed property activity for the three months ended March 31, 2014 and 2013 :
Table 11—Foreclosed Properties
Three Months Ended March 31
2014
2013
(In millions)
Balance at beginning of period
$
136

$
149

Transfer from loans
35

60

Valuation adjustments
(7
)
(11
)
Foreclosed property sold
(33
)
(59
)
Payments and other
(2
)
(3
)
(7
)
(13
)
Balance at end of period
$
129

$
136

_________
Note: Approximately 75 percent and 71 percent of the ending balances at March 31, 2014 and 2013 , respectively, relate to properties transferred into foreclosed properties during the previous twelve months.
Valuation adjustments are primarily recorded in other non-interest expense; adjustments are also recorded as a charge to the allowance for loan losses if incurred within 60 days after the date of transfer from loans. Valuation adjustments are primarily the cost of adjusting foreclosed properties to estimated fair value after these assets have been classified as foreclosed properties. Foreclosed property sold represents the net book value of the properties sold.

OTHER ASSETS
Other assets increased approximately $52 million from December 31, 2013 to $5.9 billion as of March 31, 2014 primarily due to additional investments in bank-owned life insurance.



64

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

The following table summarizes deposits by category:
Table 12—Deposits
March 31, 2014
December 31, 2013
(In millions)
Non-interest-bearing demand
$
31,154

$
30,083

Savings
6,463

6,050

Interest-bearing transaction
20,605

20,789

Money market—domestic
25,730

25,635

Money market—foreign
222

220

Low-cost deposits
84,174

82,777

Time deposits
9,219

9,608

Customer deposits
93,393

92,385

Corporate treasury time deposits
—

68

$
93,393

$
92,453

Total deposits at March 31, 2014 increased approximately $1.0 billion compared to year-end 2013 levels. The growth was primarily driven by increases in non-interest-bearing demand and savings which were partially offset by continued declines in time deposits. The first quarter of every year generally reflects an increase in deposits in connection with income tax refunds.

SHORT-TERM BORROWINGS
The following is a summary of short-term borrowings:
Table 13—Short-Term Borrowings
March 31, 2014
December 31, 2013
(In millions)
Company funding sources:
Federal funds purchased
$
10

$
11

Customer-related borrowings:
Securities sold under agreements to repurchase
1,971

2,171

$
1,981

$
2,182

COMPANY FUNDING SOURCES
In the near term, Regions expects the use of wholesale unsecured borrowings, such as Federal funds purchased, to remain relatively low. Short-term secured borrowings, such as securities sold under agreements to repurchase and Federal Home Loan Bank ("FHLB") advances, are a core portion of Regions funding strategy and can fluctuate significantly on a day-to-day basis, depending on funding needs and which sources of funds are used to satisfy those needs. All such arrangements are considered typical of the banking industry and are accounted for as borrowings.


65

Due to the uncertainty and inconsistency of the short-term funding markets during the recession, Regions had taken an approach to maintain higher levels of cash at the Federal Reserve Bank. These higher levels of cash negated the need to occasionally borrow short-term funds to cover normal monthly cash flow needs. As the economy continues to improve, Regions expects to reduce the amount of excess cash held at the Federal Reserve Bank and will utilize short-term secured funding markets as needed to augment its cash position. The securities financing market and short-term (FHLB) advances continue to provide reliable funding at attractive rates. There were no short-term FHLB advances outstanding at March 31, 2014 or December 31, 2013 . See the "Liquidity Risk" section for further detail of Regions' borrowing capacity with the FHLB.
Selected data for short-term borrowings used for funding purposes is presented below:
Three Months Ended March 31
2014
2013
(Dollars in millions)
Federal funds purchased:
Balance at quarter-end
$
10

$
28

Average outstanding (based on average daily balances)
9

28

Maximum amount outstanding at any month-end during the quarter
10

29

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


Balance at quarter-end
$
—

$
173

Average outstanding (based on average daily balances)
—

81

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

173

Weighted-average interest rate at quarter-end
—
%
0.1
%
Weighted-average interest rate on amounts outstanding during the quarter (based on average daily balances)
—
%
0.1
%
CUSTOMER-RELATED BORROWINGS
Repurchase agreements are also offered as short-term investment opportunities for commercial banking customers. At the end of each business day, customer balances are swept into the agreement account. In exchange for cash, Regions sells the customer securities with a commitment to repurchase them on the following business day. The repurchase agreements are collateralized to allow for market fluctuations. Securities from Regions Bank’s investment portfolio are used as collateral. From the customer’s perspective, the investment earns more than a traditional money market instrument. From Regions’ standpoint, the repurchase agreements are similar to deposit accounts, although they are not insured by the FDIC or guaranteed either directly by the United States or one of its agencies. Regions Bank does not manage the level of these investments on a daily basis as the transactions are initiated by the customers. The level of these borrowings can fluctuate significantly on a day-to-day basis.
Customer collateral reported as short-term borrowings was zero at both March 31, 2014 and December 31, 2013 . These balances represent cash collateral posted by customers related to derivative transactions. Regions began netting cash collateral, subject to enforceable master netting agreements, against the net derivative asset or liability in 2013.




66

LONG-TERM BORROWINGS
Long-term borrowings are summarized as follows:
Table 14—Long-Term Borrowings
March 31, 2014
December 31, 2013
(In millions)
Regions Financial Corporation (Parent):
7.75% senior notes due November 2014
$
349

$
349

5.75% senior notes due June 2015
499

498

2.00% senior notes due May 2018
748

748

7.75% subordinated notes due September 2024
100

100

6.75% subordinated debentures due November 2025
161

161

7.375% subordinated notes due December 2037
300

300

Valuation adjustments on hedged long-term debt
2

5

2,159

2,161

Regions Bank:
Federal Home Loan Bank advances
408

1,009

5.20% subordinated notes due April 2015
349

349

7.50% subordinated notes due May 2018
750

750

6.45% subordinated notes due June 2037
497

497

Other long-term debt
58

58

Valuation adjustments on hedged long-term debt
5

6

2,067

2,669

$
4,226

$
4,830

Long-term borrowings decreased approximately $600 million since year-end 2013 due primarily to maturities of FHLB advances. FHLB advances have a weighted-average interest rate of 1.1 percent and 1.4 percent at March 31, 2014 and December 31, 2013 , respectively, with a weighted average maturity of 0.38 years as of March 31, 2014 .
STOCKHOLDERS’ EQUITY
Stockholders’ equity was $16.1 billion at March 31, 2014 as compared to $15.8 billion at December 31, 2013 . During the first three months of 2014 , net income increased stockholders’ equity by $319 million , while cash dividends on common stock reduced equity by $41 million. Changes in accumulated other comprehensive income increased equity by $90 million, primarily due to unrealized gains on securities available for sale.
Regions’ Board of Directors declared a cash dividend for the first quarter of 2014 of $0.03 per common share compared to $0.01 per common share for the first quarter of 2013. The Board of Directors also declared $8 million in cash dividends on Series A Preferred Stock during the first quarters of both 2014 and 2013.
On March 19, 2013, Regions' Board of Directors authorized a $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2013 through the end of the first quarter of 2014. During the first quarter of 2014, Regions repurchased approximately 1 million shares of common stock under this plan at a total cost of approximately $8 million. As of March 31, 2014 , Regions had repurchased approximately 37 million shares of common stock at a total cost of approximately $347 million. The total cost paid to repurchase common shares under this plan includes the full amount paid as part of a contractual repurchase agreement. All common shares repurchased under this plan were immediately retired and therefore are not included in treasury stock. On April 1, 2014, the remaining approximately $3 million available under this plan expired.
Regions’ ratio of stockholders’ equity to total assets was 13.68 percent at March 31, 2014 and 13.43 percent at December 31, 2013 . Regions’ ratio of tangible common stockholders’ equity (stockholder's equity less preferred stock, goodwill and other identifiable intangibles and the related deferred tax liability) to total tangible assets was 9.53 percent at March 31, 2014 , compared to 9.24 percent at December 31, 2013 (see Table 17 “GAAP to Non-GAAP Reconciliation” for further discussion).
During the first quarter of 2014, Regions received no objection to its 2014 capital plan from the Federal Reserve that was submitted as part of the Comprehensive Capital Analysis and Review ("CCAR") process. On April 24, 2014, Regions' Board of Directors approved an increase of its quarterly common stock dividend to $0.05 per share effective with the quarterly dividend to be paid in July 2014. The Board also authorized a new $350 million common stock purchase plan, permitting repurchases from


67

the beginning of the second quarter of 2014 through the end of the first quarter of 2015. There have been no shares repurchased under this plan through the issuance of this report.
On April 29, 2014, Regions completed the issuance of $500 million in depositary shares each representing a fractional ownership interest in a share of the Company's 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share ("Series B Preferred Stock"), with a liquidation preference of $1,000 per share of Series B Preferred Stock (equivalent to $25 per depositary share). Dividends will be paid quarterly at an annual rate equal to (i) for each period beginning prior to September 15, 2024, 6.375%, and (ii) for each period beginning on or after September 15, 2024, three-month LIBOR plus 3.536%.
See Note 7 “Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)” for further information.

REGULATORY CAPITAL REQUIREMENTS
CURRENT CAPITAL RULES
Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies. These regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions. Currently, there are two basic measures of capital adequacy: a risk-based measure and a leverage measure. See Table 15 "Regulatory Capital Requirements" for tabular presentation of the applicable holding company and bank regulatory capital requirements.
In recent years, the Federal Reserve and banking regulators began supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. This measure has been a key component of assessments of capital adequacy under the CCAR process. While not currently prescribed in amount by federal banking regulations (under Basel I), analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity and/or the Tier 1 common equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP or prescribed in amount by federal banking regulations (under Basel I), these measures are currently considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations (see Table 17 “GAAP to Non-GAAP Reconciliation” for further details). The Board of Governors of the Federal Reserve System assesses banks' capital levels in periods of stress against a minimum Tier 1 common (non-GAAP) capital level of 5 percent.
BASEL III AND THE NEW CAPITAL RULES
In July 2013, Regions' and Regions Bank's primary federal regulator, the Federal Reserve, published final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital Rules implement the Basel Committee's December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The New Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The New Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee's 2004 “Basel II” capital accords. The New Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The New Capital Rules are effective for Regions and Regions Bank on January 1, 2015 (subject to a phase-in period).
The New Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.
Under the New Capital Rules, the initial minimum capital ratios, as applicable to Regions, as of January 1, 2015 will be as follows:
•
4.5% CET1 to risk-weighted assets.
•
6.0% Tier 1 capital to risk-weighted assets.
•
8.0% Total capital to risk-weighted assets.
The New Capital Rules also introduce a new capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. In


68

addition, the New Capital Rules provide for a countercyclical capital buffer applicable only to certain covered institutions. It is not expected that the countercyclical capital buffer will be applicable to Regions or Regions Bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
When fully phased-in on January 1, 2019, the New Capital Rules will require Regions and Regions Bank to maintain such additional capital conservation buffer of 2.5% of CET1 to risk-weighted assets, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the New Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including Regions and Regions Bank, may make a one-time permanent election to continue to exclude these items. Regions and Regions Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its securities portfolio. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. As of March 31, 2014 , Regions did not have any remaining hybrid securities subject to disallowance.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a 4-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to Regions Bank, the New Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any “prompt corrective action” category.
The New Capital Rules prescribe a standardized approach for risk weightings that expands the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to current rules impacting Regions' determination of risk-weighted assets include, among other things:

•
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.
•
Assigning a 150% risk weight to exposures (other than secured exposures including residential mortgage exposures) that are 90 days or more past due (currently set at 100%).
•
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of less than one year that is not unconditionally cancellable (currently set at 0%).
•
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction (currently set at between 20% and 100% for on balance sheet transactions).
•
Providing for a 100% risk weight for claims on securities firms (currently set at 20%).
•
Eliminating the current 50% cap on the risk weight for over-the-counter derivative exposures.
•
Replacing the existing Ratings Based Approach for certain asset-backed securities with a Simplified Supervisory Formula Approach ("SSFA") which results in risk weights ranging from 20% to 1,250%.
•
Applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets that are includible in capital (currently set at 100%).


69

In addition, the New Capital Rules also provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation. As of March 31, 2014 , the increase in Regions' Basel III risk-weighted assets versus risk-weighted assets as calculated under Basel I was due primarily to:
•
Applying a 20% conversion factor to the unused portion of commitments of less than one year.
•
Applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets that are includible in capital.
•
Applying a 150% risk weight to high volatility commercial real estate exposures.
The New Capital Rules do not address the proposed Liquidity Coverage Ratio Test and Net Stable Funding Ratio Test called for by the proposed Basel III framework. See the "Supervision and Regulation -- Capital Requirements -- Leverage Requirements" subsection of the "Business" sections of Regions' Annual Report on Form 10-K for the year ended December 31, 2013 for more information on these proposed requirements.
Regions continues to evaluate the impact of the final U.S. rules implementing Basel III as well as any potential future Systemically Important Financial Institutions ("SIFI") surcharges for regional banks. The Company’s estimated CET1 ratio as of March 31, 2014, based on Regions’ current interpretation of the final Basel III requirements was approximately 10.77% and therefore exceeded the Basel III minimum of 7 percent for CET1. Because the Basel III capital calculations will not be fully phased-in until 2019, are not formally defined by GAAP, and because the calculations currently include the Company's interpretations of the requirements including informal feedback received through the regulatory process and are therefore likely to change as clarifying guidance becomes available, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently than Regions’ disclosed calculations (see Table 17 “GAAP to Non-GAAP Reconciliation” for further details).
LIQUIDITY COVERAGE RATIO ("LCR")
In January 2013, the Basel Committee published an update that included revisions to the LCR calculation. Also included in this update were provisions concerning, among other things, lower deposit run-off assumptions and full implementation on a phased-in schedule. On October 24, 2013, the Federal Reserve released an NPR (notice of proposed rulemaking) and introduced a "modified" LCR that will apply to banks including Regions, who are not internationally active and are between $50 billion and $250 billion in assets. Based on Regions' current understanding and interpretation of the rules for the calculation of the LCR, full implementation will still be based on a phased-in schedule but in a more condensed timeframe that is 2 years shorter than the Basel committee version. Starting in 2015, institutions will be required to be at a minimum compliance ratio of 80 percent, in 2016 the minimum would increase to 90 percent, and full compliance with the 100 percent minimum requirement must be reached in 2017. Regions continues to review these proposals and their impact on the calculation of the LCR. The Company anticipates being fully compliant with the LCR requirements upon finalization and implementation. However, should Regions’ cash position or investment mix change in the future, Regions’ ability to meet the liquidity coverage ratio may be impacted. The comment period on these proposed rules ended on January 31, 2014.
See the “Supervision and Regulation—Capital Requirements” subsection of the “Business” section and the “Risk Factors” section of Regions' Annual Report on Form 10-K for the year ended December 31, 2013 for more information.


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Table 15—Regulatory Capital Requirements
March 31, 2014 Ratio
December 31, 2013
Ratio
To Be Well
Capitalized
Tier 1 common (non-GAAP):
Regions Financial Corporation
11.38
%
11.21
%
NA (2)

Tier 1 capital:
Regions Financial Corporation
11.83
%
11.68
%
6.00
%
Regions Bank
12.42

12.46

6.00

Total capital:
Regions Financial Corporation
14.86
%
14.73
%
10.00
%
Regions Bank
14.88

14.94

10.00

Leverage (1) :
Regions Financial Corporation
10.19
%
10.03
%
5.00
%
Regions Bank
10.68

10.67

5.00

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

RATINGS
Table 16 “Credit Ratings” reflects the debt ratings information of Regions Financial Corporation and Regions Bank by Standard & Poor's ("S&P"), Moody’s, Fitch and Dominion Bond Rating Service ("DBRS") as of March 31, 2014 and December 31, 2013 .

Table 16—Credit Ratings
As of March 31, 2014 and December 31, 2013
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
Senior notes
BBB-
Ba1
BBB-
BBB
Subordinated notes
BB+
Ba2
BB+
BBBL
Regions Bank
Short-term debt
A-2
P-3
F3
R-2H
Long-term bank deposits
BBB
Baa3
BBB
BBBH
Long-term debt
BBB
Baa3
BBB-
BBBH
Subordinated debt
BBB-
Ba1
BB+
BBB
Outlook
Positive
Stable
Positive
Stable

In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, acceptability of its letters of credit, and funding of variable rate demand notes ("VRDNs"), thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section in the Annual Report on Form 10-K for the year ended December 31, 2013 for more information.
A security rating is not a recommendation to buy, sell or hold securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.



71

NON-GAAP MEASURES
The table below presents computations of earnings and certain other financial measures, which exclude certain significant items that are included in the financial results presented in accordance with GAAP. These non-GAAP financial measures include “adjusted fee income ratio”, “adjusted efficiency ratio”, “return on average tangible common stockholders’ equity”, average and end of period “tangible common stockholders’ equity”, “Tier 1 common equity”, and “Basel III CET1” and related ratios. Regions believes that expressing earnings and certain other financial measures excluding these significant items provides a meaningful base for period-to-period comparisons, which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions’ business because management does not consider the activities related to the adjustments to be indications of ongoing operations. Regions believes that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management. Management and the Board of Directors utilize these non-GAAP financial measures as follows:
•
Preparation of Regions’ operating budgets
•
Monthly financial performance reporting
•
Monthly close-out reporting of consolidated results (management only)
•
Presentations to investors of Company performance
The adjusted efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as non-interest expense divided by total revenue on a taxable-equivalent basis. The adjusted fee income ratio (non-GAAP) is generally calculated as non-interest income divided by total revenue. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Non-interest expense (GAAP) is presented excluding adjustments to arrive at adjusted non-interest expense (non-GAAP), which is the numerator for the adjusted efficiency ratio. Non-interest income (GAAP) is presented excluding adjustments to arrive at adjusted non-interest income (non-GAAP), which is the numerator for the adjusted fee income ratio. Net interest income on a taxable-equivalent basis (GAAP) and non-interest income (GAAP) are added together to arrive at total revenue (GAAP). Adjustments are made to arrive at adjusted total revenue (non-GAAP), which is the denominator for the adjusted efficiency and adjusted fee income ratios.
Tangible common stockholders’ equity ratios have become a focus of some investors in analyzing the capital position of the Company absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulatory bodies have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. In connection with the Federal Reserve’s CCAR process, these regulators are supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. Analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity and/or the Tier 1 common equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity and Tier 1 common equity, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on these same bases.
Tier 1 common equity is often expressed as a percentage of risk-weighted assets. Under the current risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity (non-GAAP). Tier 1 common equity is also divided by the risk-weighted assets to determine the Tier 1 common equity ratio (non-GAAP). The amounts disclosed as risk-weighted assets are calculated consistent with banking regulatory requirements.
Regions currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulations. When fully phased-in, Basel III will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In July 2013, the Federal Reserve released final rules detailing the U.S. implementation of Basel III. Regions, as a non-advanced approaches bank, will begin transitioning to the Basel III framework in January 2015 subject to a phase-in period extending through January 2019. Regions is currently evaluating the impact of the final Basel III rules. Accordingly, the calculations provided below are estimates. Because the Basel III implementation regulations will not be fully phased-in until 2019, are not formally defined by GAAP, and because the calculations currently include the Company's interpretations of the requirements including informal feedback received through the regulatory process and are therefore likely to change as clarifying guidance becomes available, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using the Basel III framework,


72

Regions believes that it is useful to provide investors information enabling them to assess Regions’ capital adequacy on the same basis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to stockholders.
The following tables provide: 1) a reconciliation of net income (GAAP) to net income available to common shareholders (GAAP), 2) a reconciliation of non-interest expense from continuing operations (GAAP) to adjusted non-interest expense (non-GAAP), 3) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income (non-GAAP), 4) a computation of adjusted total revenue (non-GAAP), 5) a computation of the adjusted efficiency ratio (non-GAAP), 6) a computation of the adjusted fee income ratio (non-GAAP), 7) a reconciliation of average and ending stockholders’ equity (GAAP) to average and ending tangible common stockholders’ equity (non-GAAP) and calculations of related ratios (non-GAAP), 8) a reconciliation of stockholders’ equity (GAAP) to Tier 1 capital (regulatory) and to Tier 1 common equity (non-GAAP) and calculations of related ratios, and 9) a reconciliation of stockholders’ equity (GAAP) to Basel III CET1 (non-GAAP) and calculation of the related ratio based on Regions’ current understanding of the Basel III requirements. The estimate at both March 31, 2014 and December 31, 2013 are based on the final rule released in July 2013.

Table 17—GAAP to Non-GAAP Reconciliation
Three Months Ended March 31
2014
2013
(Dollars in millions, except per share data)
INCOME (LOSS)
Net income (GAAP)
$
319

$
335

Preferred dividends and accretion (GAAP)
(8
)
(8
)
Net income available to common shareholders (GAAP)
A
$
311

$
327

ADJUSTED FEE INCOME AND EFFICIENCY RATIOS
Non-interest expense from continuing operations (GAAP)
$
817

$
842

Significant items:
Branch consolidation and property and equipment charges
(6
)
—

Gain on sale of TDRs held for sale, net
35

—

Adjusted non-interest expense (non-GAAP)
B
$
846

$
842

Net interest income (GAAP)
$
816

$
798

Taxable-equivalent adjustment
15

13

Net interest income from continuing operations, taxable-equivalent basis
831

811

Non-interest income from continuing operations (GAAP)
438

501

Significant items:
Securities gains, net
(2
)
(15
)
Leveraged lease termination gains, net
(1
)
—

Adjusted non-interest income (non-GAAP)
C
435

486

Adjusted total revenue (non-GAAP)
D
$
1,266

$
1,297

Adjusted efficiency ratio (non-GAAP)
B/D
66.85
%
64.92
%
Adjusted fee income ratio (non-GAAP)
C/D
34.35
%
37.47
%
RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS’ EQUITY
Average stockholders’ equity (GAAP)
$
16,002

$
15,552

Less:  Average intangible assets (GAAP)
5,107

5,154

Average deferred tax liability related to intangibles (GAAP)
(187
)
(190
)
Average preferred stock (GAAP)
444

476

Average tangible common stockholders’ equity (non-GAAP)
E
$
10,638

$
10,112

Return on average tangible common stockholders’ equity (non-GAAP) (1)
A/E
11.84
%
13.12
%


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March 31, 2014
December 31, 2013
(Dollars in millions, except per share data)
TANGIBLE COMMON RATIOS
Ending stockholders’ equity (GAAP)
$
16,132

$
15,768

Less: Ending intangible assets (GAAP)
5,110

5,111

Ending deferred tax liability related to intangibles (GAAP)
(186
)
(188
)
Ending preferred stock (GAAP)
442

450

Ending tangible common stockholders’ equity (non-GAAP)
F
$
10,766

$
10,395

Ending total assets (GAAP)
$
117,933

$
117,396

Less: Ending intangible assets (GAAP)
5,110

5,111

Ending deferred tax liability related to intangibles (GAAP)
(186
)
(188
)
Ending tangible assets (non-GAAP)
G
$
113,009

$
112,473

End of period shares outstanding
H
1,378

1,378

Tangible common stockholders’ equity to tangible assets (non-GAAP)
F/G
9.53
%
9.24
%
Tangible common book value per share (non-GAAP)
F/H
$
7.81

$
7.54

TIER 1 COMMON RISK-BASED RATIO (2)
Stockholders’ equity (GAAP)
$
16,132

$
15,768

Accumulated other comprehensive (income) loss
229

319

Non-qualifying goodwill and intangibles
(4,804
)
(4,798
)
Disallowed servicing assets
(29
)
(31
)
Tier 1 capital (regulatory)
11,528

11,258

Preferred stock (GAAP)
(442
)
(450
)
Tier 1 common equity (non-GAAP)
I
$
11,086

$
10,808

Risk-weighted assets (regulatory)
J
$
97,418

$
96,416

Tier 1 common risk-based ratio (non-GAAP)
I/J
11.38
%
11.21
%
BASEL III COMMON EQUITY TIER 1 RATIO (2)(3)
Stockholders’ equity (GAAP)
$
16,132

$
15,768

Non-qualifying goodwill and intangibles (4)
(4,923
)
(4,922
)
Final Rules Adjustments
Adjustments, including all components of accumulated other comprehensive income, disallowed deferred tax assets, threshold deductions and other adjustments
61

130

Preferred stock (GAAP)
(442
)
(450
)
Basel III common equity Tier 1 (non-GAAP)
K
$
10,828

$
10,526

Basel III risk-weighted assets (non-GAAP) (5)
L
$
100,566

$
99,483

Basel III common equity Tier 1 ratio (non-GAAP)
K/L
10.77
%
10.58
%
_________
(1)
Income statement amounts have been annualized in calculation.
(2)
Current quarter amount and the resulting ratio are estimated.
(3)
The March 31, 2014 and December 31, 2013 estimates are based on the final rule released in July 2013.
(4)
Under Basel III, in addition to goodwill and other identified intangibles, regulatory capital must be reduced by purchased credit card relationship intangible assets. The majority of these assets are allowed in Basel I capital.
(5)
Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III. This amount is a reasonable approximation, based on our understanding of the requirements.


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NET INTEREST INCOME AND MARGIN
The following table presents an analysis of net interest income (on a taxable-equivalent basis), the net interest margin, and the net interest spread for the three months ended March 31, 2014 and 2013 :
Table 18—Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations
Three Months Ended March 31
2014
2013
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
(Dollars in millions; yields on taxable-equivalent basis)
Assets
Interest-earning assets:
Federal funds sold and securities purchased under agreements to resell
$
9

$
—

0.86
%
$
—

$
—

—
%
Trading account securities
111

2

6.31

117

1

3.20

Securities:
Taxable
23,872

154

2.62

26,893

156

2.35

Tax-exempt
4

—

—

7

—

—

Loans held for sale
854

8

3.89

1,206

9

3.17

Loans, net of unearned income (1)(2)
75,139

747

4.03

73,919

756

4.14

Other interest-earning assets
3,469

2

0.25

2,821

2

0.26

Total interest-earning assets
103,458

913

3.58

104,963

924

3.57

Allowance for loan losses
(1,321
)
(1,894
)
Cash and due from banks
1,817

1,766

Other non-earning assets
13,874

14,288

$
117,828

$
119,123

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings
$
6,234

2

0.12

$
5,929

1

0.10

Interest-bearing checking
20,791

5

0.09

20,440

6

0.11

Money market
26,213

8

0.13

25,477

9

0.14

Time deposits
9,419

12

0.53

12,904

26

0.81

Total interest-bearing deposits (3)
62,657

27

0.17

64,750

42

0.26

Federal funds purchased and securities sold under agreements to repurchase
2,097

—

0.08

1,786

—

0.10

Other short-term borrowings
—

—

—

25

—

0.01

Long-term borrowings
4,643

55

4.78

5,857

71

4.89

Total interest-bearing liabilities
69,397

82

0.48

72,418

113

0.63

Non-interest-bearing deposits (3)
30,268

—

—

29,114

—

—

Total funding sources
99,665

82
0.33

101,532

113

0.45

Net interest spread
3.10

2.94
Other liabilities
2,162

2,047

Stockholders’ equity
16,001

15,544

$
117,828

$
119,123

Net interest income/margin on a taxable-equivalent basis from continuing operations (4)
$
831

3.26
%
$
811

3.13
%


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_________
(1)
Loans, net of unearned income include non-accrual loans for all periods presented.
(2)
Interest income includes net loan fees of $21 million and $17 million for the three months ended March 31, 2014 and 2013 , respectively.
(3)
Total deposit costs may be calculated by dividing total interest expense on deposits by the sum of interest-bearing deposits and non-interest-bearing deposits. The rates for total deposit costs equal 0.12% and 0.18% for the three months ended March 31, 2014 and 2013 , respectively.
(4)
The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.
For the first quarter of 2014 , net interest income (taxable-equivalent basis) totaled $831 million compared to $811 million in the first quarter of 2013 . The net interest margin (taxable-equivalent basis) was 3.26 percent for the first quarter of 2014 and 3.13 percent for the first quarter of 2013 . Net interest margin increased primarily as a result of declines in overall deposit and long-term borrowing costs, in conjunction with a decline in average interest-earning assets.
MARKET RISK—INTEREST RATE RISK
Regions’ primary market risk is interest rate risk, including uncertainty with respect to absolute interest rate levels as well as uncertainty with respect to relative interest rate levels, which is impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income in various interest rate scenarios compared to a base case scenario. Net interest income sensitivity is a useful short-term indicator of Regions’ interest rate risk.
Sensitivity Measurement —Financial simulation models are Regions’ primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions’ balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that result from both strategic plans and from customer behavior. Among the assumptions are expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the lag time in pricing deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior.
The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain a reasonable and stable net interest income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario based on “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Regions also prepares a minus 50 basis points scenario, as minus 100 and 200 basis scenarios are of limited use in the current rate environment. Up-rate scenarios of greater magnitude are also analyzed, and are of increased importance as the current and historic low levels of interest rates increase the relative likelihood of a rapid and substantial increase in interest rates. Regions also includes simulations of gradual interest rate movements that may more realistically mimic potential interest rate movements. These gradual scenarios include curve steepening, flattening, and parallel movements of various magnitudes phased in over a six-month period, and include rate shifts of minus 50 basis points and plus 100 and 200 basis points.
Exposure to Interest Rate Movements— As of March 31, 2014 , Regions was moderately asset sensitive to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the measurement horizon ending March 2015. The estimated exposure associated with the parallel yield curve shift of minus 50 basis points in the table below reflects the combined impacts of movements in short-term and long-term rates. Long-term interest rate reductions will drive yields lower on certain fixed rate loans newly originated or renewed, prospective yields lower on certain investment portfolio purchases, as well as higher amortization of premium on existing securities in the investment portfolio. The decline in short-term interest rates (such as the Fed Funds rate and the rate of Interest on Excess Reserves) will lead to a reduction of yield on assets and liabilities contractually tied to such rates, but since rates have been at low levels for such an extended period, it is expected that declines in deposit costs will only partially offset the decline in asset yields.
Long-term interest rates have recently remained range-bound after having risen significantly in mid-year 2013, but short-term rates have remained stable. As described above, with respect to sensitivity to long-term rates, the balance sheet is estimated to be asset sensitive. The primary factors are that higher long-term rates will drive higher rates on loans and securities newly originated or renewed, as well as induce a slower pace of premium amortization on certain securities within the investment portfolio. Current simulation models estimate that, as compared to the base case, net interest income over a 12 month horizon would respond favorably by approximately $112 million if long-term rates were to immediately and on a sustained basis exceed the base scenario by 100 basis points. Conversely, if long-term rates were to immediately and on a sustained basis underperform the base case by 50 basis points, then net interest income, as compared to the base case, would decline by approximately $66 million.


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The table below summarizes Regions' positioning in various parallel yield curve shifts. The scenarios are inclusive of all interest rate risk hedging activities.
Table 19—Interest Rate Sensitivity
Estimated Annual Change
in Net Interest Income
March 31, 2014
(In millions)
Gradual Change in Interest Rates
+ 200 basis points

$267

+ 100 basis points
149

- 50 basis points
(74
)
Instantaneous Change in Interest Rates
+ 200 basis points

$329

+ 100 basis points
196

- 50 basis points
(108
)
Interest rate movements may also have an impact on the value of Regions’ securities portfolio, which can directly impact the carrying value of stockholders’ equity. Regions from time to time may hedge these price movements with derivatives (as discussed below).
Derivatives —Regions uses financial derivative instruments for management of interest rate sensitivity. The Asset and Liability Committee (“ALCO”), which consists of members of Regions’ senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks.
Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. A Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Company's customers and are used to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform.
Regions has made use of interest rate swaps to effectively convert a portion of its fixed-rate funding position to a variable-rate position and, in some cases, to effectively convert a portion of its variable-rate loan portfolio to fixed-rate. Regions also uses derivatives to manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing.
Regions manages the credit risk of these instruments in much the same way as it manages credit risk of the loan portfolios by establishing credit limits for each counterparty and through collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with and collateral received from and/or posted to that counterparty. The “Credit Risk” section in Regions’ Annual Report on Form 10-K for the year ended December 31, 2013 contains more information on the management of credit risk.
Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivatives instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income.


77

The primary objective of Regions’ hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions’ execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 11 “Derivative Financial Instruments and Hedging Activities” to the consolidated financial statements for a tabular summary of Regions’ quarter-end derivatives positions and further discussion.
Regions accounts for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative and balance sheet transactions to mitigate the impact of market value fluctuations related to mortgage servicing rights. Derivative instruments entered into in the future could be materially different from the current risk profile of Regions’ current portfolio.

MARKET RISK—PREPAYMENT RISK
Regions, like most financial institutions, is subject to changing prepayment speeds on mortgage-related assets under different interest rate environments. Prepayment risk is a significant risk to earnings and specifically to net interest income. For example, mortgage loans and other financial assets may be prepaid by a debtor, so that the debtor may refinance its obligations at lower rates. As loans and other financial assets prepay in a falling rate environment, Regions must reinvest these funds in lower-yielding assets. Prepayments of assets carrying higher rates reduce Regions’ interest income and overall asset yields. Conversely, in a rising rate environment, these assets will prepay at a slower rate, resulting in opportunity cost by not having the cash flow to reinvest at higher rates. Prepayment risk can also impact the value of securities and the carrying value of equity. Regions’ greatest exposures to prepayment risks primarily rest in its mortgage-backed securities portfolio, the mortgage fixed-rate loan portfolio and the mortgage servicing asset, all of which tend to be sensitive to interest rate movements. Each of these assets is also exposed to prepayment risk due to factors which are not necessarily the result of interest rates, but rather due to changes in policies or programs related, either directly or indirectly, to the U.S. Government's governance over certain lending and financing within the mortgage market. Such policies can work to either encourage or discourage financing dynamics and represent a risk that is extremely difficult to forecast and may be the result of non-economic factors. The Company attempts to monitor and manage such exposures within reasonable expectations while acknowledging all such risks cannot be foreseen or avoided. Further, Regions has prepayment risk that would be reflected in non-interest income in the form of servicing income on loans sold. Regions actively monitors prepayment exposure as part of its overall net interest income forecasting and interest rate risk management. In particular, because current interest rates are relatively low, Regions is actively managing exposure to declining prepayments that are expected to coincide with increasing interest rates in both the loan and securities portfolio.
LIQUIDITY RISK
Liquidity is an important factor in the financial condition of Regions and affects Regions’ ability to meet the borrowing needs and deposit withdrawal requirements of its customers. Regions intends to fund obligations primarily through cash generated from normal operations. In addition to these obligations, Regions has obligations related to potential litigation contingencies. See Note 14 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional discussion of the Company’s funding requirements.
Assets, consisting principally of loans and securities, are funded by customer deposits, purchased funds, borrowed funds and stockholders’ equity. Regions’ goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s cash flow needs. The challenges of the recent recession and the recovery in the current market environment demonstrate the importance of having and using various sources of liquidity to satisfy the Company’s funding requirements.
In order to ensure an appropriate level of liquidity is maintained, Regions performs specific procedures including scenario analyses and stress testing at the bank, holding company, and affiliate levels. Regions updated its liquidity policy related to minimum holding company cash requirements during the fourth quarter of 2013. The new policy requires the holding company to maintain cash sufficient to cover the greater of (1) 18 months of debt service and other cash needs or (2) a minimum cash balance of $500 million. Compliance with the holding company cash requirements will be reported to the Risk Committee of the Board of Directors on a quarterly basis. Regions has similar minimum liquidity requirements for the Bank and subsidiaries. The Bank's funding and contingency planning does not currently include any reliance on unsecured sources. Risk limits are established within the Company's Asset and Liability Committee ("ALCO"), which regularly reviews compliance with the established limits.
The securities portfolio is one of Regions’ primary sources of liquidity. Proceeds from maturities and principal and interest payments of securities provide a constant flow of funds available for cash needs (see Note 3 “Securities” to the consolidated financial statements). The agency guaranteed mortgage portfolio is another source of liquidity in various secured borrowing capacities.
Maturities in the loan portfolio also provide a steady flow of funds. Additional funds are provided from payments on consumer loans and one-to-four family residential first mortgage loans. In addition, liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not currently rely on unsecured wholesale market funding. Regions’ liquidity has been further enhanced by its relatively stable customer deposit base.


78

As the economy continues to improve, Regions has been able to decrease the higher levels of excess cash held with the Federal Reserve Bank due to the uncertainty and inconsistency in the funding markets during the recession. The balance with the Federal Reserve Bank is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At March 31, 2014 , Regions had approximately $3.1 billion in excess cash on deposit with the Federal Reserve. Regions’ borrowing availability with the Federal Reserve Bank as of March 31, 2014 , based on assets pledged as collateral on that date, was $22.4 billion.
Regions periodically accesses funding markets through sales of securities with agreements to repurchase. Repurchase agreements are also offered through a commercial banking sweep product as a short-term investment opportunity for customers. All such arrangements are considered typical of the banking industry and are accounted for as borrowings.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of March 31, 2014 , Regions’ borrowing availability from the FHLB totaled $9.6 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank and its subsidiaries have pledged certain residential first mortgage loans on one-to-four family dwellings and home equity lines of credit as collateral for the FHLB advances outstanding. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. Regions held $34 million in FHLB stock at March 31, 2014 . The FHLB has been and is expected to continue to be a reliable and economical source of funding.
In February 2013, Regions filed a shelf registration statement with the U.S. Securities and Exchange Commission. This shelf registration does not have a capacity limit and can be utilized by Regions to issue various debt and/or equity securities. The registration statement will expire in February 2016.
Regions’ Bank Note program allows Regions Bank to issue up to $5 billion aggregate principal amount of bank notes outstanding at any one time. No issuances have been made under this program as of March 31, 2014 . Notes issued under the program may be senior notes with maturities from 30 days to 15 years and subordinated notes with maturities from 5 years to 30 years. These notes are not deposits and they are not insured or guaranteed by the FDIC.
Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt and preferred shares in privately negotiated or open market transactions for cash or common shares. Regulatory approval would be required for retirement of some instruments.
CREDIT RISK
Regions’ objective regarding credit risk is to maintain a high-quality credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has a diversified loan portfolio in terms of product type, collateral and geography. See Table 2 for further details of each loan portfolio segment. See the “Portfolio Characteristics” and “Credit Risk” sections of the Form 10-K for the year ended December 31, 2013 for a discussion of risk characteristics of each loan type.
INFORMATION SECURITY RISK
Operational risks comprise several elements, including information security risks. Information security risks for large financial institutions such as Regions have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties. Regions spends significant resources on operational and information security. Regions is a member of the Financial Services Information Sharing and Analysis Center ("FS-ISAC"). The FS-ISAC is a nonprofit organization and is funded entirely by its member firms and sponsors. Total membership exceeds 4,400 organizations primarily focused in the U.S. financial services sector. The overall objective of FS-ISAC is to protect the financial services sector against cyber and physical threats and risk. It acts as a trusted third party that provides anonymity to allow members to submit threat, vulnerability and incident information in a non-attributable and trusted manner so information that would normally not be shared is instead provided for the good of the membership. In addition to FS-ISAC, Regions is a member of BITS, the technology arm of the Financial Services Roundtable. BITS serves the financial community and its members by providing industry best practices on a variety of security and fraud topics. Regions also maintains a close working relationship with its regulators and law enforcement partners to keep them updated on pertinent risks.
Denial of service attacks, hacking or terrorist activities could disrupt the Company's or the Company's customers' or other third parties' business operations. For example, during 2013, a group launched several denial of service attacks against a number of large financial services institutions, including Regions. These events did not result in a breach of Regions' client data, and account information remained secure; however, the attacks did adversely affect the performance of Regions Bank's website, www.regions.com , and, in some instances, temporarily prevented customers from accessing Regions Bank's secure websites. In addition, some outbound internet slowness existed. The 2013 events were all resolved during the same business day of the attack. In all cases, the attacks primarily resulted in inconvenience to employees and customers. Regions engages employees from all business groups, not just information technology, to combat these attacks. Regions did not experience any denial of service attacks in the first quarter of 2014.


79

Regions will continue to commit the resources necessary to mitigate these growing risks. In addition, Regions has contracts with vendors to provide denial of service mitigation and these vendors have also continued to commit the necessary resources to support Regions in the event of an attack.
PROVISION FOR LOAN LOSSES
The provision for loan losses is used to maintain the allowance for loan losses at a level that in management’s judgment is appropriate to absorb probable losses inherent in the portfolio at the balance sheet date. The provision for loan losses totaled $2 million in the first quarter of 2014 compared to $10 million during the first quarter of 2013 . Net charge-offs as a percentage of average loans (annualized) were 0.44 percent and 0.99 percent in the first three months of 2014 and 2013 , respectively. Net charge-offs were lower across most major loan categories when comparing the 2014 period to the prior year period. Net charge-offs exceeded provision for loan losses for the first quarter of 2014 primarily due to the continued improving credit metrics, including lower levels of non-accrual loans and criticized and classified loans (see Table 6 “Allowance for Credit Losses”), as well as problem loan resolutions, and growth of less risky commercial and industrial loans.
NON-INTEREST INCOME
The following table presents a summary of non-interest income. For expanded discussion of certain significant non-interest income items, refer to the discussion of each component following the table presented.
Table 20—Non-Interest Income from Continuing Operations
Three Months Ended March 31
2014
2013
(In millions)
Service charges on deposit accounts (1)
$
173

$
184

Card and ATM fees (1)
79

76

Mortgage income
40

72

Investment management and trust fee income
49

49

Insurance commissions and fees
30

30

Capital markets fee income and other
13

20

Bank-owned life insurance
19

22

Commercial credit fee income
15

16

Investment services fee income
10

7

Securities gains, net
2

15

Net loss from affordable housing
(18
)
(17
)
Other miscellaneous income
26

27

$
438

$
501

_______
(1)
"Card and ATM fees" line item represents the combined amounts of credit card/bank card income and debit card and ATM related revenue. Credit card/bank card income was previously reported as a separate line item. Debit card and ATM related revenue was previously included in "service charges on deposit accounts" line item. All prior periods presented have been reclassified to conform to this presentation.
Service charges on deposits accounts— Service charges on deposit accounts include non-sufficient fund fees and other customer account fees. Income from service charges on deposit accounts decreased $11 million for the first quarter of 2014 as compared to the first quarter of 2013 . The decrease during the first quarter of 2014 compared to the prior year was driven primarily by continued changes in customer behavior and sensitivities to paying fees.
Mortgage income— Mortgage income decreased $32 million for the first quarter of 2014 as compared to the first quarter of 2013 . The decrease was driven by lower mortgage production which fell 47 percent from the first quarter of 2013 as consumer demand for mortgage loans slowed due to rising interest rates.
Capital markets fee income and other— Capital markets fee income and other, which primarily relates to activities such as loan syndications, foreign exchange and derivatives, decreased $7 million for the first quarter of 2014 compared to the first quarter of 2013 . The decrease was primarily driven by a slow down in demand for loan syndications and customer derivatives, given the low interest rate environment.
Securities gains (losses), net— Net securities gains decreased $13 million for the first quarter of 2014 as compared to the first quarter of 2013. Lower net securities gains in the current quarter were due to reduced volumes of securities sales resulting from the Company's asset/liability management process.


80

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

Table 21—Non-Interest Expense from Continuing Operations
Three Months Ended March 31
2014
2013
(In millions)
Salaries and employee benefits
$
455

$
447

Net occupancy expense
93

90

Furniture and equipment expense
70

69

Professional and legal expenses
35

31

Deposit administrative fee
22

33

Outside services
27

22

Marketing
24

23

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

Other miscellaneous expenses
126

127

$
817

$
842

Salaries and employee benefits— Salaries and employee benefits increased $8 million for the first quarter of 2014 when compared to the first quarter of 2013 . The increase is primarily due to additional staffing in income producing areas, compliance and risk management as well as annual merit increases, partially offset by decreased pension costs. Headcount increased from 23,466 at March 31, 2013 to 23,687 at March 31, 2014.
Deposit administrative fee— Deposit administrative fees decreased $11 million for the first quarter of 2014 when compared to the first quarter of 2013 . The decrease is related to lower asset balances, improved performance metrics and a reduction in higher risk loans, all of which impact the fee calculation.
Gain on sale of TDRs held for sale, net— During the fourth quarter of 2013, Regions transferred approximately $535 million of certain primarily accruing residential first mortgage loans classified as TDRs to loans held for sale. This balance represented the estimated fair value at the date of transfer. During the first quarter of 2014, substantially all of these loans were sold resulting in a $35 million net gain. The gain reflects improvement in market valuations, including the benefit from a reduction in market interest rates during the first quarter of 2014.
INCOME TAXES
The Company’s income tax expense from continuing operations for the three months ended March 31, 2014 was $128 million compared to income tax expense of $114 million for the same period in 2013 , resulting in effective tax rates of 29.4 percent and 25.5 percent, respectively. The effective tax rate for the comparable prior period was favorably impacted by a combined reduction in unrecognized tax benefits and the valuation allowance of $13 million.
The Company’s effective tax rate is affected by recurring items such as affordable housing tax credits, bank-owned life insurance and tax-exempt income, which are expected to be generally consistent in the near term. The effective tax rate is also affected by items that may occur in any given period but are not consistent from period to period, such as the termination of certain leveraged leases and changes in the valuation allowance. Accordingly, the comparability of the effective tax rate from period to period may be impacted.
At March 31, 2014 , the Company reported a net deferred tax asset of $443 million, compared to $612 million at December 31, 2013 . The decrease in the net deferred asset is primarily due to the continued reduction in the allowance for loan losses, the utilization of tax credit carryforwards and a change in market valuation on securities available for sale from an unrealized loss to an unrealized gain.
DISCONTINUED OPERATIONS
Morgan Keegan was sold on April 2, 2012. Regions reported income from discontinued operations of $12 million, or $0.01 per diluted common share, for the first quarter of 2014, compared to income of $2 million, or $0.00 per diluted common share, for the first quarter of 2013 . The first quarter of 2014 income from discontinued operations was primarily the result of reductions in the indemnification liability reflecting updated assumptions.



81


Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to pages 76 through 78 included in Management’s Discussion and Analysis.
Item 4. Controls and Procedures
Based on an evaluation, as of the end of the period covered by this Form 10-Q, under the supervision and with the participation of Regions’ management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that Regions’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective. During the quarter ended March 31, 2014 , there have been no changes in Regions’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Regions’ internal control over financial reporting.



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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information required by this item is set forth in Note 14, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements (Unaudited) in Part I. Item 1. of this report, which is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Final information concerning Regions’ repurchases of its outstanding common stock during the three month period ended March 31, 2014 is set forth in the following table.
Issuer Purchases of Equity Securities
Period
Transaction Type
Total Number of
Shares Purchased
Average Price Paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Approximate Dollar Value of Shares That May
Yet Be Purchased Under Publicly Announced Plans or Programs
January 1-31, 2014
NA
—

$
—

—

$
10,927,606

February 1-28, 2014
NA
—

$
—

—

$
10,927,606

March 1-31, 2014
Open Market
737,500

$
10.83

737,500

$
2,939,301

Total 1st Quarter
737,500

$
10.83

737,500

$
2,939,301

On March 19, 2013, Regions' Board of Directors authorized a $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2013 through the end of the first quarter of 2014. As of March 31, 2014 , Regions had repurchased approximately 37 million shares of common stock at a total cost of approximately $347 million. On April 1, 2014, the remaining approximately $3 million available under this plan expired.
On April 24, 2014, Regions' Board of Directors authorized a new $350 million common stock purchase plan, permitting repurchases from the beginning of the second quarter of 2014 through the end of the first quarter of 2015. There have been no shares repurchased under this plan through the issuance of this report.
Restrictions on Dividends and Repurchase of Stock
Holders of Regions common stock are only entitled to receive such dividends as Regions’ Board of Directors may declare out of funds legally available for such payments. Furthermore, holders of Regions common stock are subject to the prior dividend rights of any holders of Regions preferred stock then outstanding.
Regions understands the importance of returning capital to shareholders. Management will continue to execute the capital planning process, including evaluation of the amount of the common dividend, with the Board of Directors and in conjunction with the regulatory supervisors, subject to the Company’s results of operations. Also, Regions is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
On November 1, 2012, Regions completed the sale of 20,000,000 depositary shares each representing a 1/40th ownership interest in a share of its 6.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (“Series A Preferred Stock”), with a liquidation preference of $1,000 per share of Series A Preferred Stock (equivalent to $25 per depositary share). The terms of the Series A Preferred Stock prohibit Regions from declaring or paying any dividends on any junior series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series A Preferred Stock for the most recently completed dividend period. The Series A Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment date on or after December 15, 2017 or in whole, but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations establishing the Series A Preferred Stock).

On April 29, 2014, Regions completed the sale of 20,000,000 depositary shares each representing a 1/40th ownership interest in a share of its 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share (“Series B Preferred Stock”), with a liquidation preference of $1,000 per share of Series B Preferred Stock (equivalent to $25 per depositary share). The terms of the Series B Preferred Stock prohibit Regions from declaring or paying any dividends on any junior


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series of its capital stock, including its common stock, or from repurchasing, redeeming or acquiring such junior stock, unless Regions has declared and paid full dividends on the Series B Preferred Stock for the most recently completed dividend period. The Series B Preferred Stock is redeemable at Regions’ option in whole or in part, from time to time, on any dividend payment date on or after September 15, 2024 or in whole but not in part, at any time following a regulatory capital treatment event (as defined in the preliminary prospectus supplement dated April 24, 2014).



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

3.1
Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q Quarterly Report filed by registrant on August 6, 2012.
3.2
Certificate of Designations, incorporated by reference to Exhibit 3.3 to Form 8-A filed by registrant on November 1, 2012.
3.3
Certificate of Designations of Regions Financial Corporation, filed with the Secretary of State of the State of Delaware and effective April 28, 2014, incorporated by reference to Exhibit 3.3 to the Form 8-A filed by registrant on April 28, 2014.
3.4
By-laws as amended and restated, incorporated by reference to Exhibit 3.2 to Form 8-K Current Report filed by registrant on May 14, 2010.

4.1
Deposit Agreement, dated as of April 29, 2014, by and among Regions Financial Corporation, Computershare Trust Company, N.A., as depositary, Computershare Inc., and the holders from time to time of the depositary receipts described therein, incorporated by reference to Exhibit 4.1 to the Form 8-K filed by registrant on April 29, 2014.
4.2
Form of certificate representing the Series B Preferred Stock, incorporated by reference to Exhibit 4.3 to the Form 8-A filed by registrant on April 28, 2014.
4.3
Form of depositary receipt representing the Depositary Shares, incorporated by reference to Exhibit 4.2 to the Form 8-K filed by registrant on April 29, 2014.
10.1
Regions Financial Corporation Supplemental 401(k) Plan (Restated as of January 1, 2014) (encompassing through Amendment No. Seven), incorporated by reference to Exhibit 10.48 to Form 10-K Annual Report filed by registrant on February 21, 2014.
10.2
Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan (Restated as of January 1, 2014) (encompassing through Amendment No. Three), incorporated by reference to Exhibit 10.49 to Form 10-K Annual Report filed by registrant on February 21, 2014.
12
Computation of Ratio of Earnings to Fixed Charges.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive Data File



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized.
DATE: May 7, 2014
Regions Financial Corporation
/ S /    H ARDIE B. K IMBROUGH , J R .
Hardie B. Kimbrough, Jr.
Executive Vice President and Controller
(Chief Accounting Officer and Authorized Officer)



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