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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
10-Q
 
 
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended
March 31, 2020
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)
 
(I.R.S. Employer
Identification No.)
 
 
1900 Fifth Avenue North
 
 
Birmingham
 
 
Alabama
 
35203
(Address of principal executive offices)
 
(Zip Code)
(800) 734-4667
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company  ☐  Emerging growth company  ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ý  No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
RF
New York Stock Exchange
Depositary Shares, each representing a 1/40th Interest in a Share of
 
 
6.375% Non-Cumulative Perpetual Preferred Stock, Series A
RF PRA
New York Stock Exchange
Depositary Shares, each representing a 1/40th Interest in a Share of
 
 
6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B
RF PRB
New York Stock Exchange
Depositary Shares, each representing a 1/40th Interest in a Share of
 
 
5.700% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C
RF PRC
New York Stock Exchange

The number of shares outstanding of each of the issuer’s classes of common stock was 959,679,611 shares of common stock, par value $.01, outstanding as of May 5, 2020.

1


REGIONS FINANCIAL CORPORATION
FORM 10-Q
INDEX
 
 
 
 
 
Page
Forward-Looking Statements
Part I. Financial Information
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
9
 
 
 
10
 
 
 
11
 
 
 
12
 
 
 
13
 
 
 
14
Item 2.
 
 
52
Item 3.
 
 
86
Item 4.
 
 
86
 
 
 
Part II. Other Information
 
 
Item 1.
 
 
87
Item 1A.
 
Risk Factors
 
87
Item 2.
 
 
88
Item 6.
 
 
89
 
 
 
 
90

2


Glossary of Defined Terms
Agencies - collectively, FNMA, FHLMC and GNMA.
ACL - Allowance for credit losses.
ALCO - Asset/Liability Management Committee.
Allowance - Allowance for credit losses.
ALLL - Allowance for loan and lease losses.
AOCI - Accumulated other comprehensive income.
ASC - Accounting Standards Codification.
ASU - Accounting Standards Update.
ATM - Automated teller machine.
Bank - Regions Bank.
Basel I - Basel Committee's 1988 Regulatory Capital Framework (First Accord).
Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord).
Basel III Rules - Final capital rules adopting the Basel III capital framework approved by U.S. federal
regulators in 2013.
Basel Committee - Basel Committee on Banking Supervision.
BHC - Bank Holding Company.
BITS - Technology policy division of the Bank Policy Institute.
Board - The Company’s Board of Directors.
CAP - Customer Assistance Program.
CARES Act - Coronavirus Aid, Relief, and Economic Security Act 
CCAR - Comprehensive Capital Analysis and Review.
CECL - Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments ("Current Expected Credit Losses")
CEO - Chief Executive Officer.
CET1 - Common Equity Tier 1.
CFPB - Consumer Financial Protection Bureau.
Company - Regions Financial Corporation and its subsidiaries.
COVID-19 - Coronavirus Disease 2019
CPI - Consumer price index.
CPR - Constant (or Conditional) Prepayment Rate.
CRA - Community Reinvestment Act of 1977.
Dodd-Frank Act - The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
DFAST- Dodd-Frank Act Stress Test.
DPD - Days Past Due.
DUS - Fannie Mae Delegated Underwriting & Servicing.
EAD - Exposure-at-default.
EGRRCPA - The Economic Growth, Regulatory Relief, and Consumer Protection Act.
ERI - Eligible Retained Income.
FASB - Financial Accounting Standards Board.

3


FDIC - The Federal Deposit Insurance Corporation.
Federal Reserve - The Board of Governors of the Federal Reserve System.
FHA - Federal Housing Administration.
FHLB - Federal Home Loan Bank.
FHLMC - Federal Home Loan Mortgage Corporation, known as Freddie Mac.
FICO - The Financing Corporation, established by the Competitive Equality Banking Act of
1987.
FICO scores - Personal credit scores based on the model introduced by the Fair Isaac Corporation.
FNMA - Federal National Mortgage Association, known as Fannie Mae.
FRB - Federal Reserve Bank.
FS-ISAC - Financial Services - Information Sharing & Analysis Center.
GAAP - Generally Accepted Accounting Principles in the United States.
GDP - Gross Domestic Product.
GNMA - Government National Mortgage Association.
G-SIB- Globally Systematically Important Bank Holding Company.
HPI- Housing price index.
HUD - U.S. Department of Housing and Urban Development.
IPO - Initial public offering.
IRS - Internal Revenue Service.
LCR - Liquidity coverage ratio.
LGD- Loss given default.
LIBOR - London InterBank Offered Rate.
LLC - Limited Liability Company.
LROC - Liquidity Risk Oversight Committee.
LTIP - Long-term incentive plan.
LTV - Loan to value.
MBS - Mortgage-backed securities.
Morgan Keegan - Morgan Keegan & Company, Inc.
MSAs - Metropolitan Statistical Areas.
MSR - Mortgage servicing right.
NM - Not meaningful.
NPR - Notice of Public Ruling.
OAS - Option-Adjusted Spread.
OCC - Office of the Comptroller of the Currency.
OCI - Other comprehensive income.
OIS - Overnight Indexed Swap.
OTTI - Other-than-temporary impairment.
PD- Probability of default.
PPP - Paycheck Protection Program.
R&S- Reasonable and supportable.

4


Raymond James - Raymond James Financial, Inc.
Regions Securities - Regions Securities LLC.
RETDR - Reasonable expectation of a troubled debt restructuring.
S&P 500- a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
SBA - Small Business Administration.
SCB - Stress Capital Buffer.
SEC - U.S. Securities and Exchange Commission.
SERP - Supplemental Executive Retirement Plan.
SLB- Stress leverage buffer.
SOFR - Secured Overnight Funding Rate.
Tax Reform - H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent
Resolution on the Budget for Fiscal Year 2018.
TDR - Troubled debt restructuring.
TTC- Through-the-cycle.
U.S. - United States.
U.S. Treasury - The United States Department of the Treasury.
UTB - Unrecognized tax benefits.
VIE - Variable interest entity.
Visa - The Visa, U.S.A. Inc. card association or its affiliates, collectively.
Volker Rule- Section 619 of the Dodd-Frank Act and regulations promulgated thereunder, as applicable.
wSTWF- Weighted short-term wholesale funding.

5


Forward-Looking Statements
This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by us or on our behalf to analysts, investors, the media and others, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
The terms “Regions,” the “Company,” “we,” “us” and “our” as used herein mean collectively Regions Financial Corporation, a Delaware corporation, together with its subsidiaries when or where appropriate. The words “future,” “anticipates,” “assumes,” “intends,” “plans,” “seeks,” “believes,” “predicts,” “potential,” “objectives,” “estimates,” “expects,” “targets,” “projects,” “outlook,” “forecast,” “would,” “will,” “may,” “might,” “could,” “should,” “can,” and similar terms and expressions often signify forward-looking statements. Further, statements about the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s current expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, and because they also relate to the future they are likewise subject to inherent uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Therefore, we caution you against relying on any of these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the risk identified in Part II Item 1A. "Risk Factors" of this Form 10-Q and those described below:
•
Current and future economic and market conditions in the United States generally or in the communities we serve (in particular the Southeastern United States), including the effects of possible declines in property values, increases in unemployment rates, financial market disruptions and potential reductions of economic growth, which may adversely affect our lending and other businesses and our financial results and conditions.
•
Possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, which could have a material adverse effect on our earnings.
•
Possible changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital and liquidity.
•
The impact of pandemics, including the COVID-19 pandemic, on our businesses and financial results and conditions.
•
Any impairment of our goodwill or other intangibles, any repricing of assets, or any adjustment of valuation allowances on our deferred tax assets due to changes in law, adverse changes in the economic environment, declining operations of the reporting unit or other factors.
•
The effect of changes in tax laws, including the effect of any future interpretations of or amendments to Tax Reform, which may impact our earnings, capital ratios and our ability to return capital to shareholders.
•
Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and leases, including operating leases.
•
Changes in the speed of loan prepayments, loan origination and sale volumes, charge-offs, loan loss provisions or actual loan losses where our allowance for loan losses may not be adequate to cover our eventual losses.
•
Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities.
•
Loss of customer checking and savings account deposits as customers pursue other, higher-yield investments, which could increase our funding costs.
•
Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits, which could adversely affect our net income.
•
Our ability to effectively compete with other traditional and non-traditional financial services companies, some of whom possess greater financial resources than we do or are subject to different regulatory standards than we are.
•
Our inability to develop and gain acceptance from current and prospective customers for new products and services and the enhancement of existing products and services to meet customers’ needs and respond to emerging technological trends in a timely manner could have a negative impact on our revenue.
•
Our inability to keep pace with technological changes could result in losing business to competitors.

6


•
Changes in laws and regulations affecting our businesses, including legislation and regulations relating to bank products and services, as well as changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies, which could require us to change certain business practices, increase compliance risk, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.
•
Our ability to obtain a regulatory non-objection (as part of the CCAR process or otherwise) to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or redeem preferred stock or other regulatory capital instruments, may impact our ability to return capital to shareholders and market perceptions of us.
•
Our ability to comply with stress testing and capital planning requirements (as part of the CCAR process or otherwise) may continue to require a significant investment of our managerial resources due to the importance of such tests and requirements.
•
Our ability to comply with applicable capital and liquidity requirements (including, among other things, the Basel III capital standards), including our ability to generate capital internally or raise capital on favorable terms, and if we fail to meet requirements, our financial condition could be negatively impacted.
•
The effects of any developments, changes or actions relating to any litigation or regulatory proceedings brought against us or any of our subsidiaries.
•
The costs, including possibly incurring fines, penalties, or other negative effects (including reputational harm) of any adverse judicial, administrative, or arbitral rulings or proceedings, regulatory enforcement actions, or other legal actions to which we or any of our subsidiaries are a party, and which may adversely affect our results.
•
Our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business.
•
Our ability to execute on our strategic and operational plans, including our ability to fully realize the financial and non-financial benefits relating to our strategic initiatives.
•
The risks and uncertainties related to our acquisition or divestiture of businesses.
•
The success of our marketing efforts in attracting and retaining customers.
•
Our ability to recruit and retain talented and experienced personnel to assist in the development, management and operation of our products and services may be affected by changes in laws and regulations in effect from time to time.
•
Fraud or misconduct by our customers, employees or business partners.
•
Any inaccurate or incomplete information provided to us by our customers or counterparties.
•
Inability of our framework to manage risks associated with our business such as credit risk and operational risk, including third-party vendors and other service providers, which could, among other things, result in a breach of operating or security systems as a result of a cyber attack or similar act or failure to deliver our services effectively.
•
Dependence on key suppliers or vendors to obtain equipment and other supplies for our business on acceptable terms.
•
The inability of our internal controls and procedures to prevent, detect or mitigate any material errors or fraudulent acts.
•
The effects of geopolitical instability, including wars, conflicts and terrorist attacks and the potential impact, directly or indirectly, on our businesses.
•
The effects of man-made and natural disasters, including fires, floods, droughts, tornadoes, hurricanes, and environmental damage (specifically in the Southeastern United States), which may negatively affect our operations and/or our loan portfolios and increase our cost of conducting business. The severity and impact of future earthquakes, fires, hurricanes, tornadoes, droughts, floods and other weather-related events are difficult to predict and may be exacerbated by global climate change.
•
Changes in commodity market prices and conditions could adversely affect the cash flows of our borrowers operating in industries that are impacted by changes in commodity prices (including businesses indirectly impacted by commodities prices such as businesses that transport commodities or manufacture equipment used in the production of commodities), which could impair their ability to service any loans outstanding to them and/or reduce demand for loans in those industries.
•
Our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, including account take-overs, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage to our systems, increased costs, losses, or adverse effects to our reputation.
•
Our ability to achieve our expense management initiatives.

7


•
Possible cessation or market replacement of LIBOR and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, derivative products, debt obligations, deposits, investments, and loans.
•
Possible downgrades in our credit ratings or outlook could increase the costs of funding from capital markets.
•
The effects of a possible downgrade in the U.S. government’s sovereign credit rating or outlook, which could result in risks to us and general economic conditions that we are not able to predict.
•
The effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally could require us to change certain business practices, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses.
•
The effects of the failure of any component of our business infrastructure provided by a third party could disrupt our businesses, result in the disclosure of and/or misuse of confidential information or proprietary information, increase our costs, negatively affect our reputation, and cause losses.
•
Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends to shareholders.
•
Changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect our financial statements and how we report those results, and expectations and preliminary analyses relating to how such changes will affect our financial results could prove incorrect.
•
Other risks identified from time to time in reports that we file with the SEC.
•
Fluctuations in the price of our common stock and inability to complete stock repurchases in the time frame and/or on the terms anticipated.
•
The effects of any damage to our reputation resulting from developments related to any of the items identified above.
You should not place undue reliance on any forward-looking statements, which speak only as of the date made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible to predict all of them. We assume no obligation and do not intend to update or revise any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.
See also the reports filed with the SEC, including the discussion under the “Risk Factors” section of Regions’ Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC and available on its website at www.sec.gov.

8


PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2020
 
December 31, 2019
 
(In millions, except share data)
Assets
 
 
 
Cash and due from banks
$
2,101

 
$
1,598

Interest-bearing deposits in other banks
3,154

 
2,516

Debt securities held to maturity (estimated fair value of $1,380 and $1,372, respectively)
1,296

 
1,332

Debt securities available for sale (amortized cost of $22,905 and $22,332, respectively)
23,775

 
22,606

Loans held for sale (includes $500 and $439 measured at fair value, respectively)
566

 
637

Loans, net of unearned income
88,098

 
82,963

Allowance for loan losses
(1,560
)
 
(869
)
Net loans
86,538

 
82,094

Other earning assets
1,722

 
1,518

Premises and equipment, net
1,935

 
1,960

Interest receivable
349

 
362

Goodwill
4,845

 
4,845

Residential mortgage servicing rights at fair value
254

 
345

Other identifiable intangible assets, net
98

 
105

Other assets
6,909

 
6,322

Total assets
$
133,542

 
$
126,240

Liabilities and Equity
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
37,133

 
$
34,113

Interest-bearing
62,897

 
63,362

Total deposits
100,030

 
97,475

Borrowed funds:
 
 
 
Short-term borrowings
3,150

 
2,050

Long-term borrowings
10,105

 
7,879

Total borrowed funds
13,255

 
9,929

Other liabilities
2,925

 
2,541

Total liabilities
116,210

 
109,945

Equity:
 
 
 
Preferred stock, authorized 10 million shares, par value $1.00 per share
 
 
 
Non-cumulative perpetual, liquidation preference $1,000.00 per share, including related surplus, net of issuance costs; issued—1,500,000 shares
1,310

 
1,310

Common stock, authorized 3 billion shares, par value $.01 per share:
 
 
 
Issued including treasury stock— 998,506,905 and 998,278,188 shares, respectively
10

 
10

Additional paid-in capital
12,695

 
12,685

Retained earnings
3,364

 
3,751

Treasury stock, at cost—41,032,676 shares at 2020 and 2019
(1,371
)
 
(1,371
)
Accumulated other comprehensive income (loss), net
1,324

 
(90
)
Total shareholders’ equity
17,332

 
16,295

Total liabilities and equity
$
133,542

 
$
126,240

See notes to consolidated financial statements.

9


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions, except per share data)
Interest income on:
 
 
 
Loans, including fees
$
903

 
$
981

Debt securities
158

 
165

Loans held for sale
5

 
3

Other earning assets
13

 
22

Total interest income
1,079

 
1,171

Interest expense on:
 
 
 
Deposits
84

 
108

Short-term borrowings
8

 
13

Long-term borrowings
59

 
102

Total interest expense
151

 
223

Net interest income
928

 
948

Provision for credit losses (1)
373

 
91

Net interest income after provision for credit losses (1)
555

 
857

Non-interest income:
 
 
 
Service charges on deposit accounts
178

 
175

Card and ATM fees
105

 
109

Investment management and trust fee income
62

 
57

Capital markets income
9

 
42

Mortgage income
68

 
27

Securities gains (losses), net
—

 
(7
)
Other
63

 
99

Total non-interest income
485

 
502

Non-interest expense:
 
 
 
Salaries and employee benefits
467

 
478

Net occupancy expense
79

 
82

Furniture and equipment expense
83

 
76

Other
207

 
224

Total non-interest expense
836

 
860

Income before income taxes
204

 
499

Income tax expense
42

 
105

Net income
$
162

 
$
394

Net income available to common shareholders
$
139

 
$
378

Weighted-average number of shares outstanding:
 
 
 
Basic
957

 
1,019

Diluted
961

 
1,028

Earnings per common share:
 
 
 
Basic
$
0.15

 
$
0.37

Diluted
$
0.14

 
$
0.37

_________
(1) Upon adoption of CECL on January 1, 2020, the provision for credit losses is the sum of the provision for loans losses and the provision for unfunded credit commitments. Prior to the adoption of CECL, the provision for unfunded commitments was included in other non-interest expense.

See notes to consolidated financial statements.

10


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Net income
$
162

 
$
394

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

 
—

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

 
1

Unrealized gains (losses) on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period (net of $151 and $77 tax effect, respectively)
446

 
240

Less: reclassification adjustments for securities gains (losses) realized in net income (net of zero and ($2) tax effect, respectively)
—

 
(5
)
Net change in unrealized gains (losses) on securities available for sale, net of tax
446

 
245

Unrealized gains (losses) on derivative instruments designated as cash flow hedges:
 
 
 
Unrealized holding gains (losses) on derivatives arising during the period (net of $325 and $36 tax effect, respectively)
966

 
107

Less: reclassification adjustments for gains (losses) on derivative instruments realized in net income (net of $2 and ($2) tax effect, respectively)
7

 
(6
)
Net change in unrealized gains (losses) on derivative instruments, net of tax
959

 
113

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)
—

 
—

Less: reclassification adjustments for amortization of actuarial loss and settlements realized in net income (net of ($3) and ($2) tax effect, respectively)
(8
)
 
(7
)
Net change from defined benefit pension plans and other post employment benefits, net of tax
8

 
7

Other comprehensive income, net of tax
1,414

 
366

Comprehensive income
$
1,576

 
$
760

See notes to consolidated financial statements.

11


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
Shareholders' Equity
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock,
At Cost
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
 
Non-
controlling
Interest
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
(In millions, except per share data)
BALANCE AT JANUARY 1, 2019
1

 
$
820

 
1,025

 
$
11

 
$
13,766

 
$
2,828

 
$
(1,371
)
 
$
(964
)
 
$
15,090

 
$
—

Cumulative effect from change in accounting guidance
—

 
—

 
—

 
—

 
—

 
2

 
—

 
—

 
2

 
—

Net income
—

 
—

 
—

 
—

 
—

 
394

 
—

 
—

 
394

 
—

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
366

 
366

 
—

Cash dividends declared
—

 
—

 
—

 
—

 
—

 
(142
)
 
—

 
—

 
(142
)
 
—

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(16
)
 
—

 
—

 
(16
)
 
—

Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of share repurchases
—

 
—

 
(12
)
 
—

 
(190
)
 
—

 
—

 
—

 
(190
)
 
—

Impact of stock transactions under compensation plans, net
—

 
—

 
—

 
—

 
8

 
—

 
—

 
—

 
8

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11

BALANCE AT MARCH 31, 2019
1

 
$
820

 
1,013

 
$
11

 
$
13,584

 
$
3,066

 
$
(1,371
)
 
$
(598
)
 
$
15,512

 
$
11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2020
2

 
$
1,310

 
957

 
$
10

 
$
12,685

 
$
3,751

 
$
(1,371
)
 
$
(90
)
 
$
16,295

 
$
—

Cumulative effect from change in accounting guidance
—

 
—

 
—

 
—

 
—

 
(377
)
 
—

 
—

 
(377
)
 
—

Net income
—

 
—

 
—

 
—

 
—

 
162

 
—

 
—

 
162

 
—

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,414

 
1,414

 
—

Cash dividends declared
—

 
—

 
—

 
—

 
—

 
(149
)
 
—

 
—

 
(149
)
 
—

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(23
)
 
—

 
—

 
(23
)
 
—

Common stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of stock transactions under compensation plans, net
—

 
—

 
—

 
—

 
10

 
—

 
—

 
—

 
10

 
—

BALANCE AT MARCH 31, 2020
2

 
$
1,310

 
957

 
$
10

 
$
12,695

 
$
3,364

 
$
(1,371
)
 
$
1,324

 
$
17,332

 
$
—



See notes to consolidated financial statements.

12


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Operating activities:
 
 
 
Net income
$
162

 
$
394

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for credit losses (1)
373

 
91

Depreciation, amortization and accretion, net
100

 
105

Securities (gains) losses, net
—

 
7

Deferred income tax (benefit) expense
(69
)
 
19

Originations and purchases of loans held for sale
(1,034
)
 
(510
)
Proceeds from sales of loans held for sale
1,140

 
515

(Gain) loss on sale of loans, net
(33
)
 
(25
)
Net change in operating assets and liabilities:
 
 
 
Other earning assets
(212
)
 
90

Interest receivable and other assets
41

 
(381
)
Other liabilities
221

 
222

Other
98

 
51

Net cash from operating activities
787

 
578

Investing activities:
 
 
 
Proceeds from maturities of debt securities held to maturity
36

 
30

Proceeds from sales of debt securities available for sale
31

 
139

Proceeds from maturities of debt securities available for sale
844

 
799

Purchases of debt securities available for sale
(1,308
)
 
(1,241
)
Net proceeds from (payments for) bank-owned life insurance
(1
)
 
(2
)
Proceeds from sales of loans
85

 
185

Purchases of loans
(447
)
 
(171
)
Purchases of mortgage servicing rights
(4
)
 
(8
)
Net change in loans
(4,473
)
 
(1,383
)
Net purchases of other assets
(43
)
 
(36
)
Net cash from investing activities
(5,280
)
 
(1,688
)
Financing activities:
 
 
 
Net change in deposits
2,555

 
1,229

Net change in short-term borrowings
1,100

 
—

Proceeds from long-term borrowings
3,950

 
12,025

Payments on long-term borrowings
(1,799
)
 
(11,525
)
Cash dividends on common stock
(149
)
 
(143
)
Cash dividends on preferred stock
(23
)
 
(16
)
Repurchases of common stock
—

 
(190
)
Other
—

 
(1
)
Net cash from financing activities
5,634

 
1,379

Net change in cash and cash equivalents
1,141

 
269

Cash and cash equivalents at beginning of year
4,114

 
3,538

Cash and cash equivalents at end of period
$
5,255

 
$
3,807

_________
(1) Upon adoption of CECL on January 1, 2020, the provision for credit losses is now the sum of the provision for loans losses and the provision for unfunded credit commitments. Prior to the adoption, the provision for unfunded commitments is included in other non-interest expense.
See notes to consolidated financial statements.

13


REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2020 and 2019
NOTE 1. BASIS OF PRESENTATION
Regions Financial Corporation (“Regions” or the "Company”) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located across the South, Midwest and Texas. The Company competes with other financial institutions located in the states in which it operates, as well as other adjoining states. Regions is subject to the regulations of certain government agencies and undergoes periodic examinations by certain regulatory authorities.
The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with GAAP and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions’ Annual Report on Form 10-K for the year ended December 31, 2019. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.
During 2020, the Company adopted new accounting guidance related to several topics, including CECL. See Note 12 and below for related disclosures.
CECL
On January 1, 2020, the Company adopted CECL, which replaces the incurred loss methodology with an expected loss methodology. The measurement of expected losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with accounting guidance on leases. In addition, CECL required changes to the accounting for debt securities available for sale. The adoption of CECL had a material impact to the allowance for credit losses (see below). The cumulative effect of the retrospective application for all items in scope was a reduction to retained earnings of $377 million, net of taxes, $375 million of which was attributable to the allowance and $2 million of which was attributable to other financial assets.
DEBT SECURITIES
The company adopted CECL using the prospective transition approach for debt securities for which OTTI had previously been recognized. As a result, the amortized cost basis remained the same before and after adoption. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.
For debt securities available for sale, CECL eliminates the concept of OTTI and instead requires entities to determine if impairment is related to credit loss or non-credit loss. In making the assessment of whether a loss is from credit or other factors, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows is less than the amortized cost basis, a credit loss exists and an allowance is created, limited by the amount that the fair value is less than the amortized cost basis.
Subsequent activity related to the credit loss component (e.g. write-offs, recoveries) is recognized as part of the allowance for credit losses on debt securities available for sale. Securities held to maturity are evaluated under the allowance for credit losses model. For securities which have an expectation of zero nonpayment of the amortized cost basis (e.g. U.S. Treasury securities or agency securities), the expected credit loss is zero.
LOANS    
Loans held for investment are carried at amortized cost (the principal amount outstanding, net of premiums, discounts, unearned income and deferred loan fees and costs). Regions elected to exclude accrued interest receivable balances from the amortized cost basis. Interest receivable is included as a separate line item on the balance sheets. Additionally, Regions elected to not estimate an allowance on interest receivable balances because the Company has non-accrual policies in place that provide for the accrual of interest to cease on a timely basis when all contractual amounts due are not expected. See more information about Regions' non-accrual policies in Note 1 of Regions' Annual Report on Form 10-K for the year ended December 31, 2019.

14


TDRs are loans in which the borrower is experiencing financial difficulty at the time of restructuring, and Regions has granted a concession to the borrower. TDRs are undertaken in order to improve the likelihood of recovery on the loan and may take the form of modifications to the stated interest rate such that it is lower than the current market rate for new debt with similar risk, other modifications to the structure of the loan that fall outside of normal underwriting policies and procedures, or in limited circumstances forgiveness of principal and/or interest. Insignificant delays in payments are not considered TDRs. Prior to the adoption of CECL on January 1, 2020, all loans with the TDR designation were considered to be impaired, even if they were accruing. With the adoption of CECL on January 1, 2020, the definition of impaired loans was removed from accounting guidance.
ALLOWANCE
Regions adopted CECL using the modified retrospective method for loans held for investment, net investment in lease assets, and off-balance sheet credit exposures. Results for reporting periods beginning January 1, 2020 are presented under CECL while prior periods' amounts continue to be reported in accordance with previously applicable GAAP. The cumulative effect of the retrospective application for loans and unfunded commitments was an increase in the allowance of $501 million and a reduction to retained earnings of $375 million, with the difference being an increase to deferred tax assets.
Upon the adoption of CECL, the allowance is intended to cover expected credit losses over the contractual life of loans measured at amortized cost, including unfunded commitments. Management’s measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and R&S forecasts that affect the collectability of the reported amount. For periods beyond which Regions makes or obtains such R&S forecasts, Regions reverts to historical credit loss information. Regions maintains an appropriate and prudent level of allowance that falls within an acceptable range of estimated losses, measured in accordance with GAAP. Management's determination of the appropriateness of the allowance is based on many factors, including, but not limited to, an evaluation and rating of the loan portfolio; historical loan loss experience; current economic conditions; collateral values securing loans; levels of problem loans; volume, growth, quality and composition of the loan portfolio; regulatory guidance; R&S economic forecasts; and other relevant factors. Changes in any of these factors, assumptions, or the availability of new information, could require that the allowance be adjusted in future periods, perhaps materially. Loss forecasting models are built on historical loss information and then applied to the current portfolio. Outputs from the loss forecasting models in combination with Regions' qualitative framework, and other analyses are used to inform management in its estimation of Regions' expected credit losses. Actual losses could vary, perhaps materially, from management’s estimates. The entire allowance is available to cover all charge-offs that arise from the loan portfolio.
Regions' allowance calculation is a significant estimate. Regions uses its best judgment to assess economic conditions and loss data in estimating the CECL allowance and these estimates are subject to periodic refinement based on changes in underlying external or internal data. Therefore, assumptions and decisions driving the estimate may change as conditions change. These assumptions and estimates are detailed below.
R & S forecast period
During the two-year R&S forecast period, Regions incorporates forward-looking information by utilizing its internally developed and approved Base economic forecast. The scenario is developed by the Chief Economist and approved through a formal governance process. The Base forecast considers market forward/consensus information and is consistent with the Company's organization-wide economic outlook. When appropriate, additional scenarios, including externally created scenarios, are considered as part of the qualitative framework.
Reversion period
Regions utilizes an exponential reversion approach that reverts to TTC rates derived from the simple average of all historical quarterly observations for PD, LGD, EAD and prepayment rates. The length of the reversion period differs by class of financing receivable.
Historical loss period
Regions does not adjust historical loss information for existing economic conditions or expectations of future economic conditions for periods that are beyond the R&S period. Regions utilizes internal historical loss information; however, there are certain loan portfolios that also benefit from the use of external or other reference data due to identified limitations with internal historical data.
Contractual life
Regions estimates expected credit losses over the contractual life of a loan. Regions defines contractual life for non-revolving loans as contractual maturity, net of estimated prepayments and excluding expected extensions, renewals and modifications unless 1) Regions has a reasonable expectation at the reporting date that it will execute a TDR with the borrower ("RETDR") or 2) extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Regions.


15


RETDR
Regions individually identifies commercial and investor real estate loans for inclusion as RETDRs. The identification criteria are based on internal risk ratings and time to maturity. Regions typically does not identify consumer loans as RETDRs due to the insignificant period between initial contact with a customer regarding a loan modification and when a TDR modification is consummated.
The RETDR status extends the life of the loan past the contractual maturity and includes the allowance impact of interest rate concessions. Loans identified as RETDRs will be treated consistently from a modeling/reserving perspective as loans identified as TDRs.
Contractual term extensions (borrower versus lender option to renew)
Regions' consumer loan contracts do not permit automatic extensions or unilateral customer extensions, and Regions retains the right to approve or deny any extension requested from the borrower. As a result, extensions and renewal options are not included in the life of consumer loans for the purposes of calculating the allowance. Similarly, Regions does not include extension and renewal options in the life of commercial loans for the purposes of calculating the allowance, unless it is a RETDR. Most commercial products do not offer borrowers a unilateral right to renew or extend.
Contractual life of credit card receivables
Regions estimates the life of credit card receivables based on the amount and timing of payments expected to be collected. Regions' credit card allowance estimate only considers the amount of debt outstanding at the reporting date (the current position) because undrawn balances are unconditionally cancellable and therefore are not considered. Regions classifies credit card accounts into one of three payment patterns: dormant, transacting or revolving. The dormant accounts are idle, carry no balance, and do not contribute to the allowance. The transacting account holders tend to pay the entire balance due every month and are, therefore, subject to practically no interest charges. For transactor accounts, the current position balance is expected to be paid off in one quarter. The revolving accounts tend to be subject to interest charges, and their current position balance liquidates over time. Regions' credit card portfolio is comprised primarily of revolvers.
Collateral-dependent loans
Regions' collateral-dependent consumer loans are loans secured by collateral (primarily real estate) that meet the partial charge-down requirements disclosed in Note 1 of Regions' Annual Report on Form 10-K for the year ended December 31, 2019. Regions evaluates significant commercial and investor loans that are in financial difficulty and secured by collateral to determine if they are collateral dependent.
For collateral-dependent loans, CECL requires an entity to measure the expected credit losses based on the fair value of the collateral at the reporting date when the entity determines that foreclosure is probable. Additionally, CECL allows a fair value of collateral practical expedient as a measurement approach for loans when the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty ("collateral dependent”). For any collateral-dependent loans that meet Regions' specific allowance criteria (see below), Regions will calculate the CECL allowance based on the fair value of collateral methodology. For collateral-dependent consumer, commercial and investor real estate loans that do not meet Regions' specific allowance criteria (as described below), Regions considers the value of the collateral through the LGD component of the loss model based on collateral type.
Credit enhancements
Regions' estimate of credit losses reflects how credit enhancements, other than those that are freestanding contracts, mitigate expected credit losses on financial assets. In the event that a credit enhancement arrangement is considered to be a freestanding contract, Regions excludes the credit enhancement from the related loan when estimating expected credit losses.
Unfunded commitments and other off-balance sheet items
CECL requires an entity to record a liability or reserve for credit losses for the unfunded portion of a loan commitment in the event that the issuer does not have the unconditional right to cancel the commitment. For an unfunded commitment to be considered unconditionally cancellable, Regions must be able to, at any time, with or without cause, refuse to extend credit. The liability is measured over the full contractual period for which Regions is exposed to credit risk through a current obligation to extend credit. In determining the liability, management considers the likelihood that funding will occur, and if funded, the related expected credit losses under the CECL model.
Regions' off-balance sheet unfunded commitments in the form of home equity lines, standby letters of credit, commercial letters of credit and commercial revolving products that are deemed to be conditionally cancellable will include unfunded balances within the allowance estimate. Future advances from certain unfunded commitments and other revolving products where Regions does have the unconditional right to cancel these agreements will not be included.


16


CALCULATION OF THE ALLOWANCE FOR CREDIT LOSSES
Pooled allowances
The allowance is measured on a collective (pool) basis when similar risk characteristics exist. Segmentation variables for Commercial and Investor Real estate segments include product, loan size, collateral type, risk rating and term. Segmentation variables considered for Consumer segments include product, FICO, LTV, age, TDR status, etc. The allowance is calculated for most portfolios and classes using econometric models (i.e., models that include macro-economic forecasts).
Specific allowances
Due to their size, complexity and individualized risk characteristics and monitoring, the allowance for significant non-accrual commercial and investor real estate loans (including TDRs) and unfunded commitments is measured on an individual basis. Loans evaluated individually are not included in the collective evaluation. Regions generally measures the allowance for these loans based on the present value of estimated cash flows, considering all facts and circumstances specific to the borrower and market and economic conditions. The allowance measurement for collateral-dependent loans that meet the individually evaluated threshold is based on the fair value of collateral methodology.
TDRs and RETDRs
Loans identified as TDRs and RETDRs are treated consistently in CECL loss models. These loans are included in their respective loan pools (if they do not qualify for specific evaluation) and losses are determined by CECL models. The effect of the interest rate concession on these loans is considered through a post-model adjustment.
Qualitative framework
While quantitative allowance methodologies strive to reflect all risk factors, any estimate involves assumptions and uncertainties resulting in some level of imprecision. Imprecision exists in the estimation process due to the inherent time lag between obtaining information, performing the calculation, as well as variations between estimates and actual outcomes. Regions adjusts the allowance considering quantitative and qualitative factors which may not be directly measured in the modeled calculations. Regions' qualitative framework provides for specific model adjustments and general imprecision adjustments. Specific model adjustments capture highly specific issues or events that Regions believes are not adequately captured in model outcomes. General imprecision adjustments address other sources of imprecision that are not specifically identifiable or quantifiable to a particular loan portfolio and have not been captured by the model or by a specific model adjustment. Regions considers general imprecision in three dimensions; economic forecast imprecision, model error imprecision, and process imprecision.

17


NOTE 2. DEBT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of debt securities held to maturity and debt securities available for sale are as follows:
 
March 31, 2020
 
 
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
701

 
$
—

 
$
(25
)
 
$
676

 
$
38

 
$
—

 
$
714

Commercial agency
623

 
—

 
(3
)
 
620

 
47

 
(1
)
 
666

 
$
1,324

 
$
—

 
$
(28
)
 
$
1,296

 
$
85

 
$
(1
)
 
$
1,380

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
176

 
$
8

 
$
—

 
$
184

 
 
 
 
 
$
184

Federal agency securities
41

 
2

 
—

 
43

 
 
 
 
 
43

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
15,893

 
567

 
(7
)
 
16,453

 
 
 
 
 
16,453

Residential non-agency
1

 
—

 
—

 
1

 
 
 
 
 
1

Commercial agency
4,814

 
282

 
(2
)
 
5,094

 
 
 
 
 
5,094

Commercial non-agency
619

 
5

 
(2
)
 
622

 
 
 
 
 
622

Corporate and other debt securities
1,361

 
29

 
(12
)
 
1,378

 
 
 
 
 
1,378

 
$
22,905

 
$
893

 
$
(23
)
 
$
23,775

 
 
 
 
 
$
23,775


 
December 31, 2019
 
 
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
736

 
$
—

 
$
(26
)
 
$
710

 
$
22

 
$
—

 
$
732

Commercial agency
625

 
—

 
(3
)
 
622

 
20

 
(2
)
 
640

 
$
1,361

 
$
—

 
$
(29
)
 
$
1,332

 
$
42

 
$
(2
)
 
$
1,372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
180

 
$
2

 
$
—

 
$
182

 
 
 
 
 
$
182

Federal agency securities
42

 
1

 
—

 
43

 
 
 
 
 
43

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
15,336

 
218

 
(38
)
 
15,516

 
 
 
 
 
15,516

Residential non-agency
1

 
—

 
—

 
1

 
 
 
 
 
1

Commercial agency
4,720

 
77

 
(31
)
 
4,766

 
 
 
 
 
4,766

Commercial non-agency
639

 
8

 
—

 
647

 
 
 
 
 
647

Corporate and other debt securities
1,414

 
38

 
(1
)
 
1,451

 
 
 
 
 
1,451

 
$
22,332

 
$
344

 
$
(70
)
 
$
22,606

 
 
 
 
 
$
22,606

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

18


Debt securities with carrying values of $8.6 billion and $8.3 billion at March 31, 2020, and December 31, 2019, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. Included within total pledged securities is approximately $25 million and $24 million of encumbered U.S. Treasury securities at March 31, 2020, and December 31, 2019, respectively.
The amortized cost and estimated fair value of debt securities held to maturity and debt securities available for sale at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Amortized
Cost
 
Estimated
Fair Value
 
(In millions)
Debt securities held to maturity:
 
 
 
Mortgage-backed securities:
 
 
 
Residential agency
$
701

 
$
714

Commercial agency
623

 
666

 
$
1,324

 
$
1,380

Debt securities available for sale:
 
 
 
Due in one year or less
$
87

 
$
87

Due after one year through five years
1,109

 
1,122

Due after five years through ten years
338

 
347

Due after ten years
44

 
49

Mortgage-backed securities:
 
 
 
Residential agency
15,893

 
16,453

Residential non-agency
1

 
1

Commercial agency
4,814

 
5,094

Commercial non-agency
619

 
622

 
$
22,905

 
$
23,775


The following tables present gross unrealized losses and the related estimated fair value of debt securities held to maturity and debt securities available for sale at March 31, 2020, and December 31, 2019. For debt securities transferred to held to maturity from available for sale, the analysis in the tables below is comparing the securities' original amortized cost to its current estimated fair value. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.
 
March 31, 2020
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial agency
$
9

 
$
—

 
$
117

 
$
(3
)
 
$
126

 
$
(3
)
 
$
9

 
$
—

 
$
117

 
$
(3
)
 
$
126

 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
204

 
$
(2
)
 
$
347

 
$
(5
)
 
$
551

 
$
(7
)
Commercial agency
69

 
(2
)
 
5

 
—

 
74

 
(2
)
Commercial non-agency
161

 
(2
)
 
—

 
—

 
161

 
(2
)
Corporate and other debt securities
537

 
(12
)
 
4

 
—

 
541

 
(12
)
 
$
971

 
$
(18
)
 
$
356

 
$
(5
)
 
$
1,327

 
$
(23
)


19


 
December 31, 2019
 
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)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
82

 
$
—

 
$
501

 
$
(5
)
 
$
583

 
$
(5
)
Commercial agency
—

 
—

 
127

 
(5
)
 
127

 
(5
)
 
$
82

 
$
—

 
$
628

 
$
(10
)
 
$
710

 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential agency
$
2,402

 
$
(11
)
 
$
2,505

 
$
(27
)
 
$
4,907

 
$
(38
)
Commercial agency
1,449

 
(31
)
 
73

 
—

 
1,522

 
(31
)
Corporate and other debt securities
19

 
—

 
32

 
(1
)
 
51

 
(1
)
 
$
3,870

 
$
(42
)
 
$
2,610

 
$
(28
)
 
$
6,480

 
$
(70
)

The number of individual debt positions in an unrealized loss position in the tables above decreased from 500 at December 31, 2019, to 243 at March 31, 2020. The decrease in the number of securities and the total amount of unrealized losses from year-end 2019 was primarily due to changes in market interest rates. In instances where an unrealized loss existed, there was no indication of an adverse change in credit on the underlying positions in the tables above. As it relates to these positions, management believes no individual unrealized loss, other than those discussed below, represented credit 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 positions before the recovery of their amortized cost basis, which may be at maturity.
Gross realized gains and gross realized losses on sales of debt securities available for sale are shown in the table below. The cost of securities sold is based on the specific identification method. As part of the Company's normal process for evaluating impairment, management did identify a limited number of positions where impairment was believed to exist in certain periods, as shown in the table below.
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Gross realized gains
$
—

 
$
—

Gross realized losses
—

 
(6
)
Impairment
—

 
(1
)
Debt securities available for sale gains (losses), net
$
—

 
$
(7
)



20


NOTE 3. 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, 2020
 
December 31, 2019
 
(In millions, net of unearned income)
Commercial and industrial
$
45,388

 
$
39,971

Commercial real estate mortgage—owner-occupied
5,550

 
5,537

Commercial real estate construction—owner-occupied
309

 
331

Total commercial
51,247

 
45,839

Commercial investor real estate mortgage
5,079

 
4,936

Commercial investor real estate construction
1,784

 
1,621

Total investor real estate
6,863

 
6,557

Residential first mortgage
14,535

 
14,485

Home equity lines
5,201

 
5,300

Home equity loans
3,000

 
3,084

Indirect—vehicles
1,557

 
1,812

Indirect—other consumer
3,202

 
3,249

Consumer credit card
1,303

 
1,387

Other consumer
1,190

 
1,250

Total consumer
29,988

 
30,567

 
$
88,098

 
$
82,963


During the three months ended March 31, 2020 and 2019, Regions purchased approximately $447 million and $171 million in indirect-other consumer and commercial and industrial loans from third parties, respectively.
In January 2019, Regions decided to discontinue its indirect auto lending business due to margin compression impacting overall returns on the portfolio. Regions ceased originating new indirect auto loans in the first quarter of 2019 and completed any in-process indirect auto loan closings at the end of the second quarter of 2019. The Company remains in the direct auto lending business.
At March 31, 2020, $21.7 billion in securities and net eligible loans held by Regions were pledged to secure current and potential borrowings from the FHLB. At March 31, 2020, an additional $21.1 billion in net eligible loans held by Regions were pledged to the FRB for potential borrowings.
Included in the commercial and industrial loan balance are sales-type and direct financing leases totaling $1.0 billion as of March 31, 2020, with related income of $8 million for the three months ended March 31, 2020.
ALLOWANCE FOR CREDIT LOSSES
On January 1, 2020, Regions adopted CECL, which replaces the incurred loss methodology with an expected loss methodology. Refer to Note 1 "Basis of Presentation" and Note 12 "Recent Accounting Pronouncements" for description of the adoption of CECL and Regions' allowance methodology. Additionally, 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, 2019, for a description of the methodology prior to the adoption of CECL on January 1, 2020.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
The cumulative effect of the adoption of CECL on January 1, 2020 for loans and unfunded commitments was an increase in the allowance of $501 million. During the first quarter of 2020, Regions increased the allowance by an additional $250 million to $1.7 billion which represents management's best estimate of expected losses over the life of the portfolio. The increase was due primarily to higher expected credit losses due to the economic uncertainty of COVID-19 since initial adoption of CECL. Macroeconomic factors utilized in the CECL loss models include, but are not limited to, unemployment rate, GDP, HPI and the S&P 500 index, with unemployment being the most significant macroeconomic factor within the CECL models. Declines in the macroeconomic environment were incorporated into the March 31, 2020 macroeconomic forecast utilized in the CECL loss models. Additionally, the risks to the March 31, 2020 economic forecast utilized in the allowance were weighted to the downside through the qualitative framework, given the high degree of uncertainty around how widely the COVID-19 pandemic could spread and

21


how long it could persist. The effectiveness of government relief programs and debt payment relief provided by the Bank as well as the potential for any offsetting future stimulus was also considered, which the Company believes could be significant mitigating factors.
The following tables present analyses of the allowance by portfolio segment for the three months ended March 31, 2020 and 2019. The total allowance for loan losses and the related loan portfolio ending balances for the three months ended March 31, 2019 are disaggregated to detail the amounts derived through individual evaluation and collective evaluation for impairment. Prior to 2020, the allowance for loan losses related to individually evaluated loans was attributable to allowances for non-accrual commercial and investor real estate loans and all TDRs ("impaired loans") and the allowance for loan losses related to collectively evaluated loans was attributable to the remainder of the portfolio. With the adoption of CECL on January 1, 2020, the impaired loan designation and disclosures related to impaired loans are no longer required.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2020
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, December 31, 2019
$
537

 
$
45

 
$
287

 
$
869

Cumulative change in accounting guidance (Note 1)
(3
)

7


434


438

Allowance for loan losses, January 1, 2020 (adjusted for change in accounting guidance)
534

 
52

 
721

 
1,307

Provision for loan losses
251

 
10

 
115

 
376

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(71
)
 
—

 
(73
)
 
(144
)
Recoveries
7

 
1

 
13

 
21

Net loan (losses) recoveries
(64
)
 
1

 
(60
)
 
(123
)
Allowance for loan losses, March 31, 2020
721

 
63

 
776

 
1,560

Reserve for unfunded credit commitments, December 31, 2019
41

 
4

 
—

 
45

Cumulative change in accounting guidance (Note 1)
36


13


14


63

Reserve for unfunded credit commitments, January 1, 2020 (adjusted for change in accounting guidance)
77

 
17

 
14

 
108

Provision (credit) for unfunded credit losses
(4
)
 
1

 
—

 
(3
)
Reserve for unfunded credit commitments, March 31, 2020
73

 
18

 
14

 
105

Allowance for credit losses, March 31, 2020
$
794

 
$
81

 
$
790

 
$
1,665



22


 
Three Months Ended March 31, 2019
 
Commercial
 
Investor Real
Estate
 
Consumer
 
Total
 
(In millions)
Allowance for loan losses, January 1, 2019
$
520

 
$
58

 
$
262

 
$
840

Provision (credit) for loan losses
38

 
(5
)
 
58

 
91

Loan losses:
 
 
 
 
 
 
 
Charge-offs
(30
)
 
—

 
(72
)
 
(102
)
Recoveries
9

 
1

 
14

 
24

Net loan (losses) recoveries
(21
)
 
1

 
(58
)
 
(78
)
Allowance for loan losses, March 31, 2019
537

 
54

 
262

 
853

Reserve for unfunded credit commitments, January 1, 2019
47

 
4

 
—

 
51

Provision (credit) for unfunded credit losses
(1
)
 
—

 
—

 
(1
)
Reserve for unfunded credit commitments, March 31, 2019
46

 
4

 
—

 
50

Allowance for credit losses, March 31, 2019
$
583

 
$
58

 
$
262

 
$
903

Portion of ending allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
119

 
$
3

 
$
29

 
$
151

Collectively evaluated for impairment
418

 
51

 
233

 
702

Total allowance for loan losses
$
537

 
$
54

 
$
262

 
$
853

Portion of loan portfolio ending balance:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
523

 
$
22

 
$
411

 
$
956

Collectively evaluated for impairment
46,418

 
6,564

 
30,492

 
83,474

Total loans evaluated for impairment
$
46,941

 
$
6,586

 
$
30,903

 
$
84,430


PORTFOLIO SEGMENT RISK FACTORS
The following describe the risk characteristics relevant to each of the portfolio segments.
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 or other expansion projects. 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. 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, and the sensitivity to market fluctuations in commodity prices.
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 consists 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 the valuation of real estate.
Consumer—The consumer portfolio segment includes residential first mortgage, home equity lines, home equity loans, indirect-vehicles, indirect-other consumer, 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-vehicles lending, which is lending initiated through third-party business partners, largely consists of loans made through automotive dealerships. Indirect-other consumer lending includes other point of sale lending through third parties. Consumer credit card lending includes Regions branded consumer credit card accounts. Other consumer loans include other revolving consumer accounts, direct consumer loans, and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

23


CREDIT QUALITY INDICATORS
The following tables present credit quality indicators for portfolio segments and classes, excluding loans held for sale, as of March 31, 2020, and December 31, 2019.
Commercial and investor real estate 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 that 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 that may, in the future, have an adverse effect on debt service ability;
•
Substandard Accrual—includes obligations that exhibit a well-defined weakness that 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.”
Regions considers factors such as periodic updates of FICO scores, unemployment rates, home prices, accrual status and geography as credit quality indicators for the consumer loan portfolio. FICO scores are obtained at origination as part of Regions' formal underwriting process. Refreshed FICO scores are obtained by the Company quarterly for all consumer loans, including residential first mortgage loans. Current FICO data is not available for certain loans in the portfolio for various reasons; for example, if customers do not use sufficient credit, an updated score may not be available. These categories are utilized to develop the associated allowance for credit losses. The higher the FICO score the less probability of default and vice versa.
With the adoption of CECL in 2020, the disclosure of credit quality indicators for loan portfolio segments and classes, excluding loans held for sale, is presented by credit quality indicator by vintage year. Regions defines the vintage date for the purposes of disclosure as the date of the most recent credit decision. In general, renewals are categorized as new credit decisions and reflect the renewal date as the vintage date. Loans that are modified as a TDR are considered to be a continuation of the original loan, therefore the origination date of the original loan is reflected as the vintage date. The following tables present applicable credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of March 31, 2020. Classes in the commercial and investor real estate portfolio segments are disclosed by risk rating. Classes in the consumer portfolio segment are disclosed by current FICO scores. Refer to Note 6 "Allowance for Credit Losses" in the Annual Report on Form 10-K for the year ended December 31, 2019, for the December 31, 2019 Credit Quality Indicator tables.
 
March 31, 2020
Term Loans
 
Revolving Loans
 
Revolving Loans Converted to Amortizing
 
Unallocated (1)
 
Total
Origination Year
2020
2019
2018
2017
2016
Prior
(In millions)
Commercial and industrial:
   Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
2,109

$
7,546

$
5,137

$
3,425

$
1,544

$
3,169

 
$
20,559

 
$
—

 
$
(77
)
 
$
43,412

   Special Mention
7

109

136

54

30

27

 
388

 
—

 
—

 
751

   Substandard Accrual
17

27

20

10

26

89

 
540

 
—

 
—

 
729

   Non-accrual
5

68

86

25

48

78

 
186

 
—

 
—

 
496

Total commercial and industrial
$
2,138

$
7,750

$
5,379

$
3,514

$
1,648

$
3,363


$
21,673


$
—


$
(77
)

$
45,388

 

24


 
March 31, 2020
Term Loans
 
Revolving Loans
 
Revolving Loans Converted to Amortizing
 
Unallocated (1)
 
Total
Origination Year
2020
2019
2018
2017
2016
Prior
(In millions)
Commercial real estate mortgage—owner-occupied:
   Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
370

$
1,034

$
1,180

$
704

$
493

$
1,239

 
$
196

 
$
—

 
$
(3
)
 
$
5,213

   Special Mention
4

24

8

23

10

29

 
3

 
—

 
—

 
101

   Substandard Accrual
4

11

48

39

12

60

 
4

 
—

 
—

 
178

   Non-accrual
—

3

13

13

8

18

 
3

 
—

 
—

 
58

Total commercial real estate mortgage—owner-occupied:
$
378

$
1,072

$
1,249

$
779

$
523

$
1,346


$
206


$
—


$
(3
)
 
$
5,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate construction—owner-occupied:
   Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
21

$
95

$
50

$
28

$
32

$
52

 
$
8

 
$
—

 
$
—

 
$
286

   Special Mention
—

—

2

2

—

—

 
—

 
—

 
—

 
4

   Substandard Accrual
—

3

—

1

4

—

 
—

 
—

 
—

 
8

   Non-accrual
—

—

—

—

2

9

 
—

 
—

 
—

 
11

Total commercial real estate construction—owner-occupied:
$
21

$
98

$
52

$
31

$
38

$
61


$
8


$
—


$
—


$
309

Total commercial
$
2,537

$
8,920

$
6,680

$
4,324

$
2,209

$
4,770


$
21,887


$
—


$
(80
)

$
51,247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial investor real estate mortgage:
   Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
339

$
1,484

$
1,435

$
763

$
89

$
400

 
$
403

 
$
—

 
$
(4
)
 
$
4,909

   Special Mention
8

77

1

2

3

2

 
71

 
—

 
—

 
164

   Substandard Accrual
—

4

1

—

—

—

 
—

 
—

 
—

 
5

   Non-accrual
—

—

—

—

—

1

 
—

 
—

 
—

 
1

Total commercial investor real estate mortgage
$
347

$
1,565

$
1,437

$
765

$
92

$
403


$
474


$
—


$
(4
)

$
5,079

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial investor real estate construction:
   Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
40

$
410

$
532

$
2

$
—

$
12

 
$
785

 
$
—

 
$
(14
)
 
$
1,767

   Special Mention
—

—

2

—

—

—

 
3

 
—

 
—

 
5

   Substandard Accrual
—

—

3

—

—

—

 
9

 
—

 
—

 
12

   Non-accrual
—

—

—

—

—

—

 
—

 
—

 
—

 
—

Total commercial investor real estate construction
$
40

$
410

$
537

$
2

$
—

$
12


$
797


$
—


$
(14
)

$
1,784

Total investor real estate
$
387

$
1,975

$
1,974

$
767

$
92

$
415


$
1,271


$
—


$
(18
)

$
6,863

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

25


 
March 31, 2020
Term Loans
 
Revolving Loans
 
Revolving Loans Converted to Amortizing
 
Unallocated (1)
 
Total
Origination Year
2020
2019
2018
2017
2016
Prior
(In millions)
Residential first mortgage:
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
579

$
2,266

$
1,461

$
1,653

$
1,793

$
3,704

 
$
—

 
$
—

 
$
—

 
$
11,456

   681-720
71

258

178

152

141

442

 
—

 
—

 
—

 
1,242

   620-680
26

113

82

77

66

362

 
—

 
—

 
—

 
726

   Below 620
2

28

38

42

61

535

 
—

 
—

 
—

 
706

   Data not available
12

32

21

30

26

165

 
10

 
—

 
109

 
405

Total residential first mortgage
$
690

$
2,697

$
1,780

$
1,954

$
2,087

$
5,208


$
10


$
—


$
109


$
14,535

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines:
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
—

$
—

$
—

$
—

$
—

$
—

 
$
3,808

 
$
22

 
$
—

 
$
3,830

   681-720
—

—

—

—

—

—

 
571

 
7

 
—

 
578

   620-680
—

—

—

—

—

—

 
392

 
4

 
—

 
396

   Below 620
—

—

—

—

—

—

 
223

 
5

 
—

 
228

   Data not available
—

—

—

—

—

—

 
131

 
2

 
36

 
169

Total home equity lines
$
—

$
—

$
—

$
—

$
—

$
—


$
5,125


$
40


$
36


$
5,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity loans
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
87

$
327

$
316

$
420

$
388

$
766

 
$
—

 
$
—

 
$
—

 
$
2,304

   681-720
17

56

50

53

50

99

 
—

 
—

 
—

 
325

   620-680
5

25

24

31

29

80

 
—

 
—

 
—

 
194

   Below 620
1

5

10

16

19

68

 
—

 
—

 
—

 
119

   Data not available
—

2

2

4

5

21

 
—

 
—

 
24

 
58

Total home equity loans
$
110

$
415

$
402

$
524

$
491

$
1,034


$
—


$
—


$
24


$
3,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect—vehicles:
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
—

$
26

$
448

$
218

$
177

$
111

 
$
—

 
$
—

 
$
—

 
$
980

   681-720
—

7

79

39

30

20

 
—

 
—

 
—

 
175

   620-680
—

6

67

36

31

22

 
—

 
—

 
—

 
162

   Below 620
—

4

56

40

43

35

 
—

 
—

 
—

 
178

   Data not available
—

—

5

10

8

7

 
—

 
—

 
32

 
62

Total indirect- vehicles
$
—

$
43

$
655

$
343

$
289

$
195


$
—


$
—


$
32


$
1,557

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect—other consumer:
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
141

$
1,150

$
549

$
182

$
83

$
45

 
$
—

 
$
—

 
$
—

 
$
2,150

   681-720
17

249

171

60

27

15

 
—

 
—

 
—

 
539

   620-680
1

100

93

39

18

10

 
—

 
—

 
—

 
261

   Below 620
—

23

33

15

8

5

 
—

 
—

 
—

 
84

   Data not available
—

4

3

2

1

1

 
—

 
—

 
157

 
168

Total indirect- other consumer
$
159

$
1,526

$
849

$
298

$
137

$
76


$
—


$
—


$
157


$
3,202

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

26


 
March 31, 2020
Term Loans
 
Revolving Loans
 
Revolving Loans Converted to Amortizing
 
Unallocated (1)
 
Total
Origination Year
2020
2019
2018
2017
2016
Prior
(In millions)
Consumer credit card:
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
—

$
—

$
—

$
—

$
—

$
—

 
$
676

 
$
—

 
$
—

 
$
676

   681-720
—

—

—

—

—

—

 
280

 
—

 
—

 
280

   620-680
—

—

—

—

—

—

 
239

 
—

 
—

 
239

   Below 620
—

—

—

—

—

—

 
112

 
—

 
—

 
112

   Data not available
—

—

—

—

—

—

 
6

 
—

 
(10
)
 
(4
)
Total consumer credit card
$
—

$
—

$
—

$
—

$
—

$
—


$
1,313


$
—


$
(10
)

$
1,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other consumer:
FICO scores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Above 720
$
78

$
257

$
143

$
61

$
20

$
7

 
$
120

 
$
—

 
$
—

 
$
686

   681-720
24

77

38

14

4

1

 
59

 
—

 
—

 
217

   620-680
12

50

26

9

3

1

 
48

 
—

 
—

 
149

   Below 620
3

18

13

6

2

1

 
25

 
—

 
—

 
68

   Data not available
58

1

1

1

—

—

 
2

 
—

 
7

 
70

Total other consumer
$
175

$
403

$
221

$
91

$
29

$
10


$
254


$
—

 
$
7


$
1,190

Total consumer loans
$
1,134

$
5,084

$
3,907

$
3,210

$
3,033

$
6,523


$
6,702


$
40


$
355


$
29,988

Total Loans
$
4,058

$
15,979

$
12,561

$
8,301

$
5,334

$
11,708


$
29,860


$
40


$
257


$
88,098

_________
(1) These amounts consist of fees that are not allocated at the loan level and loans serviced by third parties wherein Regions does not receive FICO or vintage information.
 

 


27


AGING AND NON-ACCRUAL ANALYSIS
The following tables include an aging analysis of DPD and loans on non-accrual status for each portfolio segment and class as of March 31, 2020 and December 31, 2019. Loans on non-accrual status with no related allowance included $36 million of commercial and industrial loans and $1 million of commercial real estate mortgage-owner-occupied loans as of March 31, 2020. Non–accrual loans with no related allowance typically include loans where the underlying collateral is deemed sufficient to recover all remaining principle. Prior to the adoption of CECL on January 1, 2020, all TDRs and all non-accrual commercial and investor real estate loans, excluding leases, were deemed to be impaired. The definition of impairment and the required impaired loan disclosures were removed with CECL. Refer to Note 6 "Allowance for Credit Losses" in the Annual Report on Form 10-K for the year ended December 31, 2019 for disclosure of Regions' impaired loans as of December 31, 2019. Loans that have been fully charged-off do not appear in the tables below.
 
March 31, 2020
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
43

 
$
15

 
$
9

 
$
67

 
$
44,892

 
$
496

 
$
45,388

Commercial real estate mortgage—owner-occupied
7

 
5

 
1

 
13

 
5,492

 
58

 
5,550

Commercial real estate construction—owner-occupied
—

 
—

 
—

 
—

 
298

 
11

 
309

Total commercial
50

 
20

 
10

 
80

 
50,682

 
565

 
51,247

Commercial investor real estate mortgage
2

 
—

 
—

 
2

 
5,078

 
1

 
5,079

Commercial investor real estate construction
—

 
—

 
—

 
—

 
1,784

 
—

 
1,784

Total investor real estate
2

 
—

 
—

 
2

 
6,862

 
1

 
6,863

Residential first mortgage
77

 
48

 
128

 
253

 
14,508

 
27

 
14,535

Home equity lines
29

 
14

 
26

 
69

 
5,161

 
40

 
5,201

Home equity loans
11

 
5

 
11

 
27

 
2,995

 
5

 
3,000

Indirect—vehicles
25

 
8

 
6

 
39

 
1,557

 
—

 
1,557

Indirect—other consumer
15

 
9

 
4

 
28

 
3,202

 
—

 
3,202

Consumer credit card
11

 
7

 
19

 
37

 
1,303

 
—

 
1,303

Other consumer
11

 
5

 
5

 
21

 
1,190

 
—

 
1,190

Total consumer
179

 
96

 
199

 
474

 
29,916

 
72

 
29,988

 
$
231

 
$
116

 
$
209

 
$
556

 
$
87,460

 
$
638

 
$
88,098

 

28


 
December 31, 2019
 
Accrual Loans
 
 
 
 
 
 
 
30-59 DPD
 
60-89 DPD
 
90+ DPD
 
Total
30+ DPD
 
Total
Accrual
 
Non-accrual
 
Total
 
(In millions)
Commercial and industrial
$
30

 
$
21

 
$
11

 
$
62

 
$
39,624

 
$
347

 
$
39,971

Commercial real estate mortgage—owner-occupied
11

 
3

 
1

 
15

 
5,464

 
73

 
5,537

Commercial real estate construction—owner-occupied
2

 
—

 
—

 
2

 
320

 
11

 
331

Total commercial
43

 
24

 
12

 
79

 
45,408

 
431

 
45,839

Commercial investor real estate mortgage
1

 
1

 
—

 
2

 
4,934

 
2

 
4,936

Commercial investor real estate construction
—

 
—

 
—

 
—

 
1,621

 
—

 
1,621

Total investor real estate
1

 
1

 
—

 
2

 
6,555

 
2

 
6,557

Residential first mortgage
83

 
47

 
136

 
266

 
14,458

 
27

 
14,485

Home equity lines
30

 
12

 
32

 
74

 
5,259

 
41

 
5,300

Home equity loans
12

 
6

 
10

 
28

 
3,078

 
6

 
3,084

Indirect—vehicles
31

 
10

 
7

 
48

 
1,812

 
—

 
1,812

Indirect—other consumer
16

 
9

 
3

 
28

 
3,249

 
—

 
3,249

Consumer credit card
11

 
8

 
19

 
38

 
1,387

 
—

 
1,387

Other consumer
13

 
5

 
5

 
23

 
1,250

 
—

 
1,250

Total consumer
196

 
97

 
212

 
505

 
30,493

 
74

 
30,567

 
$
240

 
$
122

 
$
224

 
$
586

 
$
82,456

 
$
507

 
$
82,963


 

TROUBLED DEBT RESTRUCTURINGS
Regions regularly modifies commercial and investor real estate loans in order to facilitate a workout strategy. Similarly, Regions works to meet the individual needs of consumer borrowers to stem foreclosure through its CAP. Refer to Note 6 "Allowance for Credit Losses" in the Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding the Company's TDRs.
Further discussion related to TDRs, including their impact on the allowance upon adoption of CECL is included in Note 1 "Basis of Presentation." Additional discussion related to TDRs, including their impact on the allowance and designation of TDRs in periods subsequent to the modification prior to the adoption of CECL is included in Note 1 "Basis of Presentation" and discussion in Note 1 "Summary of Significant Accounting Policies" in the Annual Report on Form 10-K for the year ended December 31, 2019.
The following tables present the end of period balance for loans modified in a TDR during the periods presented by portfolio segment and class, and the financial impact of those modifications. The tables include modifications made to new TDRs, as well as renewals of existing TDRs. Loans first reported as TDRs during the three months ended March 31, 2020 and 2019 totaled approximately $65 million and $85 million, respectively.

29


 
Three Months Ended March 31, 2020
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
$
26

 
$
74

 
$
—

Commercial real estate mortgage—owner-occupied
5

 
2

 
—

Commercial real estate construction—owner-occupied
1

 
1

 
—

Total commercial
32

 
77

 
—

Commercial investor real estate mortgage
4

 
1

 
—

Commercial investor real estate construction
1

 
—

 
—

Total investor real estate
5

 
1

 
—

Residential first mortgage
52

 
7

 
1

Home equity lines
—

 
—

 
—

Home equity loans
15

 
1

 
—

Consumer credit card
10

 
—

 
—

Indirect—vehicles and other consumer
10

 
—

 
—

Total consumer
87

 
8

 
1

 
$
124

 
$
86

 
$
1

 
Three Months Ended March 31, 2019
 
 
 
 
 
Financial Impact
of Modifications
Considered TDRs
 
Number of
Obligors
 
Recorded
Investment
 
Increase in
Allowance at
Modification
 
(Dollars in millions)
Commercial and industrial
$
26

 
$
78

 
$
1

Commercial real estate mortgage—owner-occupied
17

 
12

 
—

Commercial real estate construction—owner-occupied
1

 
2

 
—

Total commercial
44

 
92

 
1

Commercial investor real estate mortgage
3

 
11

 
—

Commercial investor real estate construction
2

 
—

 
—

Total investor real estate
5

 
11

 
—

Residential first mortgage
34

 
10

 
1

Home equity lines
—

 
—

 
—

Home equity loans
34

 
3

 
—

Consumer credit card
18

 
—

 
—

Indirect—vehicles and other consumer
30

 
—

 
—

Total consumer
116

 
13

 
1

 
$
165

 
$
116

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

NOTE 4. SERVICING OF FINANCIAL ASSETS
RESIDENTIAL MORTGAGE BANKING ACTIVITIES
The fair value of residential MSRs 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 residential MSRs. The Company compares fair value estimates and assumptions to observable market data where available, and also considers recent market activity and actual portfolio experience.

30


The table below presents an analysis of residential MSRs under the fair value measurement method:
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Carrying value, beginning of period
$
345

 
$
418

Additions
11

 
7

Increase (decrease) in fair value:
 
 
 
Due to change in valuation inputs or assumptions
(83
)
 
(28
)
Economic amortization associated with borrower repayments (1)
(19
)
 
(11
)
Carrying value, end of period
$
254

 
$
386

________
(1) "Economic amortization associated with borrower repayments" includes both total loan payoffs as well as partial paydowns. In the first quarter of 2020, Regions revised its MSR decay methodology from a passage of time approach to a discounted net cash flow approach. The change in methodology results in shifts between decay and hedge impacts, but does not impact the overall valuation.

On March 27, 2019, the Company sold $167 million of affordable housing residential mortgage loans and as part of the transaction kept the rights to service the loans, which resulted in the retained residential MSR of approximately $2 million.

Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to residential MSRs (excluding related derivative instruments) are as follows:
 
March 31
 
2020
 
2019
 
(Dollars in millions)
Unpaid principal balance
$
33,787

 
$
36,050

Weighted-average CPR (%)
18.1
%
 
10.4
%
Estimated impact on fair value of a 10% increase
$
(26
)
 
$
(21
)
Estimated impact on fair value of a 20% increase
$
(49
)
 
$
(38
)
Option-adjusted spread (basis points)
629

 
759

Estimated impact on fair value of a 10% increase
$
(5
)
 
$
(12
)
Estimated impact on fair value of a 20% increase
$
(10
)
 
$
(23
)
Weighted-average coupon interest rate
4.2
%
 
4.2
%
Weighted-average remaining maturity (months)
278

 
279

Weighted-average servicing fee (basis points)
27.4

 
27.1


The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the residential MSRs 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 residential mortgage loans:
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Servicing related fees and other ancillary income
$
25

 
$
26


Residential mortgage 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.

31


Regions maintains an immaterial repurchase liability related to residential 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.
COMMERCIAL MORTGAGE BANKING ACTIVITIES
Regions is an approved DUS lender. The DUS program provides liquidity to the multi-family housing market. In connection with the DUS program, Regions services commercial mortgage loans, retains commercial MSRs and intangible assets associated with the DUS license, and assumes a loss share guarantee associated with the loans. See Note 1 "Summary of Significant Accounting Policies" in the 2019 Annual Report on Form 10-K for additional information. Also see Note 12 for additional information related to the guarantee.
As of March 31, 2020 and December 31, 2019, the DUS servicing portfolio was approximately $3.9 billion. The related commercial MSRs were approximately $59 million at both March 31, 2020 and December 31, 2019, respectively. The estimated fair value of the commercial MSRs was approximately $65 million at March 31, 2020 and $64 million at December 31, 2019.
NOTE 5. SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
PREFERRED STOCK
The following table presents a summary of the non-cumulative perpetual preferred stock:    
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
December 31, 2019
 
Issuance Date
 
Earliest Redemption Date
 
Dividend Rate
 
Liquidation Amount
 
Carrying Amount
 
Carrying Amount
 
(Dollars in millions)
Series A
11/1/2012
 
12/15/2017
 
6.375
%
 
 
$
500

 
$
387

 
$
387

Series B
4/29/2014
 
9/15/2024
 
6.375
%
(1) 
 
500

 
433

 
433

Series C
4/30/2019
 
5/15/2029
 
5.700
%
(2) 
 
500

 
490

 
490

 
 
 
 
 
 
 
 
$
1,500

 
$
1,310

 
$
1,310

_________
(1) Dividends, if declared, 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%.
(2) Dividends, if declared, will be paid quarterly at an annual rate equal to (i) for each period beginning prior to August 15, 2029, 5.700%, and (ii) for each period beginning on or after August 15, 2029, three-month LIBOR plus 3.148%.
For each preferred stock issuance listed above, Regions issued depositary shares, each representing a 1/40th ownership interest in a share of the Company's preferred stock, with a liquidation preference of $1,000.00 per share of preferred stock (equivalent to $25.00 per depositary share). Dividends on the preferred stock, if declared, accrue and are payable quarterly in arrears. The preferred stock has no stated maturity and redemption is solely at Regions' option, subject to regulatory approval, in whole, or in part, after the earliest redemption date or in whole, but not in part, within 90 days following a regulatory capital treatment event for the Series A preferred stock or at any time following a regulatory capital treatment event for the Series B and Series C preferred stock.
The Board of Directors declared $8 million in cash dividends on both Series A and Series B Preferred Stock during both the first three months of 2020 and 2019. In the first three months of 2020, the Board of Directors declared $7 million in cash dividends on Series C Preferred Stock. Therefore, a total of $23 million in cash dividends on total preferred stock was declared in the first three months of 2020 compared to the total of $16 million in cash dividends on total preferred stock declared in the first three months of 2019.
In the event Series A, Series B, or Series C preferred shares are redeemed at the liquidation amounts, $113 million, $67 million, or $10 million in excess of the redemption amount over the carrying amount will be recognized, respectively. Approximately $100 million of Series A preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $13 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders. Approximately $52 million of Series B preferred dividends that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to retained earnings, and approximately $15 million of related issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders. Approximately $10 million of Series C issuance costs that were recorded as a reduction of preferred stock, including related surplus, will be recorded as a reduction to net income available to common shareholders.

32


COMMON STOCK
Regions was not required to participate in the 2019 CCAR; however, as required, the Company did submit its planned capital actions to the Federal Reserve for the third quarter of 2019 through the second quarter of 2020. As part of the Company's capital plan, the Board authorized a new $1.370 billion common stock repurchase plan, permitting repurchases from the beginning of the third quarter of 2019 through the second quarter of 2020.
The Company did not repurchase shares in the first quarter of 2020, and given the uncertainty in the overall economic environment as a result of the COVID-19 pandemic, no share repurchases are currently anticipated for 2020.
Regions declared a $0.155 per share dividend on the common stock for the first quarter 2020 as compared to $0.140 per common share for the first quarter 2019.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity within the balances in accumulated other comprehensive income (loss), net is shown in the following tables:
 
Three Months Ended March 31, 2020
 
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
$
(22
)
 
$
205

 
$
322

 
$
(595
)
 
$
(90
)
Net change
1

 
446

 
959

 
8

 
1,414

End of period
$
(21
)
 
$
651

 
$
1,281

 
$
(587
)
 
$
1,324

 
Three Months Ended March 31, 2019
 
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
$
(27
)
 
$
(397
)
 
$
(63
)
 
$
(477
)
 
$
(964
)
Net change
1

 
245

 
113

 
7

 
366

End of period
$
(26
)
 
$
(152
)
 
$
50

 
$
(470
)
 
$
(598
)

 
 
















33


The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019:
 
 
 
 
 
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
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:
 
 
 
 
 
$
(1
)
 
$
(1
)
Net interest income
 
—

 
—

Tax (expense) or benefit
 
$
(1
)
 
$
(1
)
Net of tax
Unrealized gains and (losses) on available for sale securities:
 
 
 
 
 
$
—

 
$
(7
)
Securities gains (losses), net
 
—

 
2

Tax (expense) or benefit
 
$
—

 
$
(5
)
Net of tax
 
 
 
 
 
Gains and (losses) on cash flow hedges:
 
 
 
 
Interest rate contracts
$
9

 
$
(8
)
Net interest income
 
(2
)
 
2

Tax (expense) or benefit
 
$
7

 
$
(6
)
Net of tax
 
 
 
 
 
Amortization of defined benefit pension plans and other post employment benefits:
 
 
 
 
Actuarial gains (losses) and settlements(2)
$
(11
)
 
$
(9
)
Other non-interest expense
 
3

 
2

Tax (expense) or benefit
 
$
(8
)
 
$
(7
)
Net of tax
 
 
 
 
 
Total reclassifications for the period
$
(2
)
 
$
(19
)
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 (see Note 7 for additional details).

34


NOTE 6. 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
 
2020
 
2019
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income
$
162

 
$
394

Preferred stock dividends
(23
)
 
(16
)
Net income available to common shareholders
$
139

 
$
378

Denominator:
 
 
 
Weighted-average common shares outstanding—basic
957

 
1,019

Potential common shares
4

 
9

Weighted-average common shares outstanding—diluted
961

 
1,028

Earnings per common share:
 
 
 
Basic
$
0.15

 
$
0.37

Diluted
0.14

 
0.37


The effects from the assumed exercise of 3 million and 5 million stock options, restricted stock units and awards and performance stock units for the three months ended March 31, 2020 and 2019, were 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 7. PENSION AND OTHER POSTRETIREMENT BENEFITS
Regions' defined benefit pension plans cover certain employees as the pension plans are closed to new entrants. The Company also sponsors a 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 (credit) includes the following components:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Qualified Plans
 
Non-qualified Plans
 
Total
 
Three Months Ended March 31
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
(In millions)
Service cost
$
9

 
$
8

 
$
1

 
$
1

 
$
10

 
$
9

Interest cost
16

 
19

 
1

 
1

 
17

 
20

Expected return on plan assets
(37
)
 
(34
)
 
—

 
—

 
(37
)
 
(34
)
Amortization of actuarial loss
9

 
8

 
2

 
1

 
11

 
9

Net periodic pension cost (credit)
$
(3
)
 
$
1

 
$
4

 
$
3

 
$
1

 
$
4


The service cost component of net periodic pension cost (credit) is recorded in salaries and employee benefits on the consolidated statements of income. Components other than service cost are recorded in other non-interest expense on the consolidated statements of income.
Regions' funding policy for the qualified plans is to contribute annually at least the amount required by IRS minimum funding standards. Regions made no contributions during the first three months of 2020.
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, 2020 or 2019.

35


NOTE 8. 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, 2020 and December 31, 2019.
 
March 31, 2020
 
December 31, 2019
 
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
$
2,900

 
 
 
 
 
$
2,900

 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
16,000

 
 
 
 
 
17,250

 
 
 
 
Interest rate floors (2)
6,750

 
$
533

 
 
 
6,750

 
$
208

 
 
Total derivatives designated as hedging instruments
$
25,650

 
$
533

 
 
 
$
26,900

 
$
208

 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
74,340

 
$
1,060

 
$
211

 
$
68,075

 
$
376

 
$
164

Interest rate options
13,368

 
84

 
27

 
11,347

 
27

 
9

Interest rate futures and forward commitments
12,354

 
17

 
27

 
27,324

 
10

 
11

Other contracts
10,317

 
223

 
278

 
10,276

 
48

 
58

Total derivatives not designated as hedging instruments
$
110,379

 
$
1,384

 
$
543

 
$
117,022

 
$
461

 
$
242

Total derivatives
$
136,029

 
$
1,917

 
$
543

 
$
143,922

 
$
669

 
$
242

 
 
 
 
 
 
 
 
 
 
 
 
Total gross derivative instruments, before netting
 
 
$
1,917

 
$
543

 
 
 
$
669

 
$
242

Less: Legally enforceable master netting agreements
 
 
219

 
219

 
 
 
105

 
105

Less: Cash collateral received/posted
 
 
707

 
133

 
 
 
229

 
90

Total gross derivative instruments, after netting (3)
 
 
$
991

 
$
191

 
 
 
$
335

 
$
47

_________
(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. There is no fair value presented for contracts that are characterized as settled daily.
(2)
Estimated fair value includes premium and change in fair value of the interest rate floors.
(3)
The gain amounts,which are not collateralized with cash or other assets or reserved for, represent the net credit risk on all trading and other derivative positions. As of March 31, 2020 and December 31, 2019, financial instruments posted of $25 million and $24 million, respectively, were not offset in 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, 2019, 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. 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 debt securities. These agreements involve the payment of fixed-rate amounts in exchange for floating-rate interest receipts.
CASH FLOW HEDGES
Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions.
Regions enters into interest rate swap and floor 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 and interest rate floors.
Regions recognized an unrealized after-tax gain of $52 million and $47 million in accumulated other comprehensive income (loss) at March 31, 2020 and 2019, respectively, related to discontinued cash flow hedges of loan instruments, which will be

36


amortized into earnings in conjunction with the recognition of interest payments through 2026. Regions recognized pre-tax income of $2 million and $5 million during the three months ended March 31, 2020 and 2019, respectively, related to the amortization of discontinued cash flow hedges of loan instruments.
Regions expects to reclassify into earnings approximately $289 million in pre-tax income due to the receipt or payment of interest payments and floor premium amortization on all cash flow hedges within the next twelve months. Included in this amount is $7 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, 2020, and a portion of these hedges are forward starting.
The following tables present the effect of hedging derivative instruments on the consolidated statements of income and the total amounts for the respective line items effected:

 
Three Months Ended March 31, 2020
 
Interest Income
 
Interest Expense
 
Debt securities
 
Loans, including fees
 
Long-term borrowings
 
(In millions)
Total amounts presented in the consolidated statements of income
$
158

 
$
903

 
$
59

 
 
 
 
 
 
Gains/(losses) on fair value hedging relationships:
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
   Amounts related to interest settlements on derivatives
$
—

 
$
—

 
$
4

   Recognized on derivatives
—

 
—

 
77

   Recognized on hedged items
—

 
—

 
(76
)
Net income (expense) recognized on fair value hedges
$
—

 
$
—

 
$
5

 
 
 
 
 
 
Gains/(losses) on cash flow hedging relationships: (1)
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income (2)
$
—

 
$
9

 
$
—

Income (expense) recognized on cash flow hedges
$
—

 
$
9

 
$
—



 
Three Months Ended March 31, 2019
 
Interest Income
 
Interest Expense
 
Debt securities
 
Loans, including fees
 
Long-term borrowings
 
(In millions)
Total amounts presented in the consolidated statements of income
$
165

 
$
981

 
$
102

 
 
 
 
 
 
Gains/(losses) on fair value hedging relationships:
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
Amounts related to interest settlements on derivatives
$
—

 
$
—

 
$
(6
)
Recognized on derivatives
(1
)
 
—

 
33

Recognized on hedged items
1

 
—

 
(33
)
Net income (expense) recognized on fair value hedges
$
—

 
$
—

 
$
(6
)
 
 
 
 
 
 
Gains/(losses) on cash flow hedging relationships: (1)
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income (2)
$
—

 
$
(8
)
 
$
—

Income (expense) recognized on cash flow hedges
$
—

 
$
(8
)
 
$
—

___
(1)
See Note 5 for gain or (loss) recognized for cash flow hedges in AOCI.
(2)
Pre-tax
 
 




37


The following tables present the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships.
 
March 31, 2020
 
December 31, 2019
 
Hedged Items Currently Designated
 
Hedged Items Currently Designated
 
Carrying Amount of Assets/(Liabilities)
 
Hedge Accounting Basis Adjustment
 
Carrying Amount of Assets/(Liabilities)
 
Hedge Accounting Basis Adjustment
 
(In millions)
 
(In millions)
Long-term borrowings
$
(3,033
)
 
$
(125
)
 
$
(2,954
)
 
$
(49
)

 
 
 
 
 
 
 
 

As of March 31, 2020 and December 31, 2019, the Company had terminated fair value hedges related to available for sale debt securities with carrying values of $312 million and $337 million, respectively. The remaining basis adjustments related to these terminated hedges were $2 million and $3 million, respectively.
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
The Company holds a portfolio of interest rate swaps, option contracts, and futures and forward commitments that result from transactions with its commercial customers in which they manage their risks by entering into a derivative with Regions. The Company monitors and manages the net risk in this customer portfolio and enters into separate derivative contracts in order to reduce the overall exposure to pre-defined limits. For both derivatives with its end customers and derivatives Regions enters into to mitigate the risk in this portfolio, the Company is subject to market risk and the risk that the counterparty will default. The contracts in this portfolio are not designated as accounting hedges and are marked-to market through earnings (in capital markets fee income) and included in other assets and other liabilities, as appropriate.
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, 2020 and December 31, 2019, Regions had $1.1 billion and $366 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. Residential mortgage loans held for sale are recorded at fair value with changes in fair value recorded in mortgage income. Commercial mortgage loans held for sale are recorded at either the lower of cost or market or at fair value based on management's election. At March 31, 2020 and December 31, 2019, Regions had $1.1 billion and $622 million, respectively, in total notional amounts related to these forward sale commitments. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to residential mortgage loans are included in mortgage income. Changes in mark-to-market from both interest rate lock commitments and corresponding forward sale commitments related to commercial mortgage loans are included in capital markets fee income.
Regions has elected to account for residential MSRs at fair 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 effect of changes in the fair value of its residential MSRs in its consolidated statements of income. As of March 31, 2020 and December 31, 2019, the total notional amount related to these contracts was $4.3 billion and $4.8 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 periods presented below:
 
Three Months Ended March 31
Derivatives Not Designated as Hedging Instruments
2020
 
2019
 
(In millions)
Capital markets income:
 
 
 
Interest rate swaps
$
(37
)
 
$
1

Interest rate options
16

 
2

Interest rate futures and forward commitments
5

 
2

Other contracts
(10
)
 
—

Total capital markets income
(26
)
 
5

Mortgage income:
 
 
 
Interest rate swaps
98

 
20

Interest rate options
24

 
3

Interest rate futures and forward commitments
(16
)
 
2

Total mortgage income
106

 
25

 
$
80

 
$
30



38


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. Swap participations, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2020 and 2029. Swap participations, whereby Regions has sold credit protection have maturities between 2020 and 2038. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments.
Regions’ maximum potential amount of future payments under these contracts as of March 31, 2020 was approximately $572 million. This scenario occurs if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at March 31, 2020 and 2019 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.
Regions has bought credit protection in the form of credit default indices. These indices, which meet the definition of credit derivatives, were entered into in the ordinary course of business to economically hedge credit spread risk in commercial mortgage loans held for sale whereby the fair value option has been elected. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty if losses on the underlying index exceed a certain threshold, dependent upon the tranche rating of the capital structure.
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 values of all derivative instruments with any credit-risk-related contingent features that were in a liability position on March 31, 2020 and December 31, 2019, were $75 million and $64 million, respectively, for which Regions had posted collateral of $68 million and $67 million, respectively, in the normal course of business.

39


NOTE 9. FAIR VALUE MEASUREMENTS
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, 2019 for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. Marketable equity securities and debt securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the observability of inputs used in valuing the securities. Such transfers are accounted for as if they occur at the beginning of a reporting period.
The following table presents assets and liabilities measured at estimated fair value on a recurring basis and non-recurring basis as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Estimated Fair Value
 
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Estimated Fair Value
 
(In millions)
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
184

 
$
—

 
$
—

 
$
184

 
 
$
182

 
$
—

 
$
—

 
$
182

Federal agency securities
—

 
43

 
—

 
43

 
 
—

 
43

 
—

 
43

Mortgage-backed securities (MBS):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential agency
—

 
16,453

 
—

 
16,453

 
 
—

 
15,516

 
—

 
15,516

Residential non-agency
—

 
—

 
1

 
1

 
 
—

 
—

 
1

 
1

Commercial agency
—

 
5,094

 
—

 
5,094

 
 
—

 
4,766

 
—

 
4,766

Commercial non-agency
—

 
622

 
—

 
622

 
 
—

 
647

 
—

 
647

Corporate and other debt securities
—

 
1,376

 
2

 
1,378

 
 
—

 
1,450

 
1

 
1,451

Total debt securities available for sale
$
184

 
$
23,588

 
$
3

 
$
23,775

 
 
$
182

 
$
22,422

 
$
2

 
$
22,606

Loans held for sale
$
—

 
$
480

 
$
20

 
$
500

 
 
$
—

 
$
436

 
$
3

 
$
439

Marketable equity securities
$
571

 
$
—

 
$
—

 
$
571

 
 
$
450

 
$
—

 
$
—

 
$
450

Residential mortgage servicing rights
$
—

 
$
—

 
$
254

 
$
254

 
 
$
—

 
$
—

 
$
345

 
$
345

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
1,060

 
$
—

 
$
1,060

 
 
$
—

 
$
376

 
$
—

 
$
376

Interest rate options
—

 
581

 
36

 
617

 
 
—

 
227

 
8

 
235

Interest rate futures and forward commitments
—

 
17

 
—

 
17

 
 
—

 
4

 
6

 
10

Other contracts
4

 
214

 
5

 
223

 
 
—

 
47

 
1

 
48

Total derivative assets
$
4

 
$
1,872

 
$
41

 
$
1,917

 
 
$
—

 
$
654

 
$
15

 
$
669

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
211

 
$
—

 
$
211

 
 
$
—

 
$
164

 
$
—

 
$
164

Interest rate options
—

 
27

 
—

 
27

 
 
—

 
9

 
—

 
9

Interest rate futures and forward commitments
—

 
27

 
—

 
27

 
 
—

 
11

 
—

 
11

Other contracts
3

 
253

 
22

 
278

 
 
—

 
53

 
5

 
58

Total derivative liabilities
$
3

 
$
518

 
$
22

 
$
543

 
 
$
—

 
$
237

 
$
5

 
$
242

Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
—

 
$
11

 
$
11

 
 
$
—

 
$
—

 
$
14

 
$
14

Equity investments without a readily determinable fair value
—

 
—

 
2

 
2

 
 
—

 
—

 
32

 
32

Foreclosed property and other real estate
—

 
—

 
13

 
13

 
 
—

 
—

 
42

 
42


_________
(1)
All following disclosures related to Level 3 recurring and non-recurring assets do not include those deemed to be immaterial.
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 ALCO in a holistic approach to managing price fluctuation risks.

40


The following tables illustrate rollforwards for all material assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and 2019, respectively.
 
Three Months Ended March 31, 2020
 
Opening
Balance January 1, 2020
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance March 31, 2020
 
 
Included
in
Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
345

 
(102
)
(1) 
—

 
11

 
—

 
—

 
—

 
—

 
—

 
$
254


 
Three Months Ended March 31, 2019
 
Opening
Balance January 1, 2019
 
Total Realized /
Unrealized
Gains or Losses
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Closing
Balance March 31, 2019
 
 
Included
in Earnings
 
Included
in Other
Compre-
hensive
Income
(Loss)
 
 
(In millions)
Level 3 Instruments Only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
418

 
(39
)
(1) 
7

 
—

 
—

 
—

 
—

 
—

 
—

 
$
386


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________
(1) Included in mortgage income. Amounts presented exclude offsetting impact from related derivatives.
The following table presents the fair value adjustments related to non-recurring fair value measurements:
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Loans held for sale
$
(3
)
 
$
(2
)
Equity investments without a readily determinable fair value
(3
)
 
—

Foreclosed property and other real estate
(9
)
 
(8
)

The following tables present detailed information regarding material assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2020, and December 31, 2019. 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, 2020, and December 31, 2019, are included. Following the tables are descriptions of the valuation techniques and the sensitivity of the techniques to changes in the significant unobservable inputs.
 
March 31, 2020
 
Level 3
Estimated Fair Value at
March 31, 2020
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Residential mortgage servicing rights(1)
$254
 
Discounted cash flow
 
Weighted-average CPR (%)
 
8.7% - 35.3% (18.1%)
 
 
 
 
 
OAS (%)
 
5.2% - 10.2% (6.3%)
_________
(1) See Note 4 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.

41


 
December 31, 2019
 
Level 3
Estimated Fair Value at
December 31, 2019
 
Valuation
Technique
 
Unobservable
Input(s)
 
Quantitative Range of
Unobservable Inputs and
(Weighted-Average)
 
(Dollars in millions)
Recurring fair value measurements:
 
 
 
 
 
 
 
Residential mortgage servicing rights(1)
$345
 
Discounted cash flow
 
Weighted-average CPR (%)
 
7.4% - 26.1% (12.0%)
 
 
 
 
 
OAS (%)
 
5.2% - 10.2% (6.18%)

_________
(1) See Note 7 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2019 for additional disclosures related to assumptions used in the fair value calculation for residential mortgage servicing rights.

RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
Residential mortgage servicing rights
The significant unobservable inputs used in the fair value measurement of residential MSRs are OAS and CPR. This valuation 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 including 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 included in the MSR rollforward table in Note 4.
FAIR VALUE OPTION
Regions has elected the fair value option for all eligible agency residential mortgage loans and certain commercial mortgage loans originated with the intent to sell. 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 residential mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and are recorded in loans held for sale in the consolidated balance sheets.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value:
 
March 31, 2020
 
December 31, 2019
 
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
$
498

 
$
475

 
$
23

 
$
439

 
$
425

 
$
14

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 and losses 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, 2020 and 2019. 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.
 
Three Months Ended March 31
 
2020
 
2019
 
(In millions)
Net gains (losses) resulting for the change in fair value of mortgage loans held for sale
$
10

 
$
—



42


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, 2020 are as follows:
 
March 31, 2020
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,255

 
$
5,255

 
$
5,255

 
$
—

 
$
—

Debt securities held to maturity
1,296

 
1,380

 
—

 
1,380

 
—

Debt securities available for sale
23,775

 
23,775

 
184

 
23,588

 
3

Loans held for sale
566

 
566

 
—

 
542

 
24

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
85,270

 
82,747

 
—

 
—

 
82,747

Other earning assets(4)
1,475

 
1,475

 
571

 
904

 
—

Derivative assets
1,917

 
1,917

 
4

 
1,872

 
41

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
543

 
543

 
3

 
518

 
22

Deposits
100,030

 
100,099

 
—

 
100,099

 
—

Short-term borrowings
3,150

 
3,150

 
—

 
3,150

 
—

Long-term borrowings
10,105

 
10,285

 
—

 
8,520

 
1,765

Loan commitments and letters of credit
127

 
721

 
—

 
—

 
721

_________
(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 estimated changes in interest rates, market liquidity and credit spreads in the periods they are deemed to have occurred.
(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. The fair value discount on the loan portfolio's net carrying amount at March 31, 2020 was $2.5 billion or 3.0 percent, reflecting significant widening of credit spreads as of March 31, 2020.
(3)
Excluded from this table is the capital lease carrying amount of $1.3 billion at March 31, 2020.
(4)
Excluded from this table is the operating lease carrying amount of $247 million at March 31, 2020.


43


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, 2019 are as follows:
 
December 31, 2019
 
Carrying
Amount
 
Estimated
Fair
Value(1)
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,114

 
$
4,114

 
$
4,114

 
$
—

 
$
—

Debt securities held to maturity
1,332

 
1,372

 
—

 
1,372

 
—

Debt securities available for sale
22,606

 
22,606

 
182

 
22,422

 
2

Loans held for sale
637

 
637

 
—

 
620

 
17

Loans (excluding leases), net of unearned income and allowance for loan losses(2)(3)
80,841

 
80,799

 
—

 
—

 
80,799

Other earning assets(4)
1,221

 
1,221

 
450

 
771

 
—

Derivative assets
669

 
669

 
—

 
654

 
15

Financial liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
242

 
242

 
—

 
237

 
5

Deposits
97,475

 
97,516

 
—

 
97,516

 
—

Short-term borrowings
2,050

 
2,050

 
—

 
2,050

 
—

Long-term borrowings
7,879

 
8,275

 
—

 
7,442

 
833

Loan commitments and letters of credit
67

 
471

 
—

 
—

 
471

_________
(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 estimated changes in interest rates, market liquidity and credit spreads in the periods they are deemed to have occurred.
(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. The fair value discount on the loan portfolio's net carrying amount at December 31, 2019 was $42 million or 0.1 percent.
(3)
Excluded from this table is the capital lease carrying amount of $1.3 billion at December 31, 2019.
(4)
Excluded from this table is the operating lease carrying amount of $297 million at December 31, 2019.
NOTE 10. 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: Corporate Bank, Consumer Bank, and Wealth Management, with the remainder in Other. Additional information about the Company's reportable segments is included in Regions' Annual Report on Form 10-K for the year ended December 31, 2019.
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 by each reportable segment may be periodically revised.
The following tables present financial information for each reportable segment for the period indicated.
 
Three Months Ended March 31, 2020
 
Corporate Bank
 
Consumer
Bank
 
Wealth
Management
 
Other
 
Consolidated
 
(In millions)
Net interest income (loss)
$
354

 
$
544

 
$
38

 
$
(8
)
 
$
928

Provision for credit losses (1)
53

 
88

 
4

 
228

 
373

Non-interest income
104

 
315

 
87

 
(21
)
 
485

Non-interest expense
235

 
499

 
87

 
15

 
836

Income (loss) before income taxes
170

 
272

 
34

 
(272
)
 
204

Income tax expense (benefit)
43

 
68

 
8

 
(77
)
 
42

Net income (loss)
$
127

 
$
204

 
$
26

 
$
(195
)
 
$
162

Average assets
$
55,083

 
$
34,599

 
$
2,060

 
$
33,029

 
$
124,771


44


 
Three Months Ended March 31, 2019
 
Corporate Bank
 
Consumer Bank
 
Wealth
Management
 
Other
 
Consolidated
 
(In millions)
Net interest income (loss)
$
359

 
$
579

 
$
47

 
$
(37
)
 
$
948

Provision (credit) for credit losses (1)
48

 
83

 
4

 
(44
)
 
91

Non-interest income
131

 
281

 
78

 
12

 
502

Non-interest expense
236

 
520

 
84

 
20

 
860

Income (loss) before income taxes
206

 
257

 
37

 
(1
)
 
499

Income tax expense (benefit)
52

 
65

 
9

 
(21
)
 
105

Net income (loss)
$
154

 
$
192

 
$
28

 
$
20

 
$
394

Average assets
$
53,851

 
$
35,401

 
$
2,203

 
$
34,088

 
$
125,543

_____
(1) Upon adoption of CECL on January 1, 2020, the provision for credit losses is the sum of the provision for loans losses and the provision for unfunded credit commitments. Prior to the adoption of CECL, the provision for unfunded commitments was included in other non-interest expense. See Note 23 "Business Segment Information" in the Annual Report on Form 10-K for the year ended December 31, 2019 for information on how the provision is allocated to each reportable segment.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

NOTE 11. 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, 2020
 
December 31, 2019
 
(In millions)
Unused commitments to extend credit
$
51,398

 
$
52,976

Standby letters of credit
1,434

 
1,521

Commercial letters of credit
59

 
59

Liabilities associated with standby letters of credit
22

 
22

Assets associated with standby letters of credit
22

 
23

Reserve for unfunded credit commitments
105

 
45


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. The credit risk involved in the issuance of these guarantees is essentially the same as that involved in extending loans to clients and as such, the instruments are collateralized when necessary. Historically, a large percentage of standby letters of credit expire 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.



45


LEGAL CONTINGENCIES
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. To the extent that Regions has an insurance recovery, the proceeds are recorded in the period the recovery is received.
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 discloses the aggregate estimation of such possible losses. Regions currently estimates that it is reasonably possible that it may experience losses in excess of what Regions has accrued in an aggregate amount of up to approximately $20 million as of March 31, 2020, 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 reasonably possible estimate includes a legal contingency that is subject to an indemnification agreement.
Assessments of litigation and claims exposure are difficult because they involve inherently unpredictable factors including, but not limited to, the following: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below, and the aggregated estimated amount discussed above may not include an estimate for every matter disclosed below.
Regions is involved in formal and informal information-gathering requests, investigations, reviews, examinations and proceedings by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding Regions’ business, Regions' business practices and policies, and the conduct of persons with whom Regions 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 the one 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.    
Regions is cooperating with an investigation by the United States Attorney’s Office for the Eastern District of New York pertaining to Regions' banking relationship with a former customer and accounts maintained by related entities and individuals affiliated with the customer who may be involved in criminal activity, as well as related aspects of Regions' Anti-Money Laundering and Bank Secrecy Act compliance program.
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.

46


GUARANTEES
FANNIE MAE DUS LOSS SHARE GUARANTEE
Regions is a DUS lender. The DUS program provides liquidity to the multi-family housing market. Regions services loans sold to Fannie Mae and is required to provide a loss share guarantee equal to one-third for the majority of its DUS servicing portfolio. At both March 31, 2020 and December 31, 2019, the Company's DUS servicing portfolio totaled approximately $3.9 billion. Regions' maximum quantifiable contingent liability related to its loss share guarantee was approximately $1.3 billion at both March 31, 2020 and December 31, 2019. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. Therefore, the maximum quantifiable contingent liability is not representative of the actual loss the Company would be expected to incur. The estimated fair value of the associated loss share guarantee recorded as a liability on the Company's consolidated balance sheets was approximately $4 million at both March 31, 2020 and December 31, 2019. Refer to Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2019, for additional information.

47


NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS
 
Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Adopted (or partially adopted) in 2020
ASU 2016-13, Measurement of Credit Losses on Financial Instruments

ASU 2018-19, Codification Improvements to Topic 326

ASU 2019-04, Codification Improvements to Topic 326

ASU 2019-05, Targeted Transition Relief to Topic 326

ASU 2019-11, Financial Instruments- Credit Losses

ASU 2020-02, Financial Instruments - Credit Losses

This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and R&S forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect.

The ASU also eliminates the current accounting model for purchased credit-impaired loans, but requires an allowance to be recognized for purchased-credit-deteriorated (PCD) assets (those that have experienced more-than-insignificant deterioration in credit quality since origination). Entities that had loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.

Additional quantitative and qualitative disclosures are required upon adoption.

While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities, rather than reduce the amortized cost of the securities by direct write-offs.

The ASU should be adopted on a modified retrospective basis.
January 1, 2020
The allowance increased by $501 million based on loan exposure balances and Regions' internally developed macroeconomic forecast upon adoption of CECL on January 1, 2020.

The increase in the allowance at adoption was primarily the result of significant increases within the consumer portfolio segment, specifically residential first mortgages, home equity loans, home equity lines, and indirect-other consumer. The impact to the residential first mortgage and home equity classes was mainly driven by their longer time to maturity. Additionally, a significant portion of the indirect-other consumer class is unsecured lending through third parties which yielded higher loss rates. Under CECL these higher loss rates compounded over a life of loan estimate result in a significantly larger allowance estimate.

A suite of controls including governance, data, forecast and model controls was in place at adoption.

The impact was reflected as a reduction of approximately $375 million to retained earnings and an increase of approximately $126 million to deferred tax assets. In late March 2020, the Federal Banking agencies published an interim final rule related to a revised transition of the impact of CECL on regulatory capital.  The rule allows an add-back to regulatory capital for the impacts of CECL for a two-year period.  At the end of the two years, the impact is then phased in over the following three years. The add-back is calculated as the impact of initial adoption, plus 25 percent of subsequent changes in allowance.  At March 31, 2020 this amount is approximately $438 million.  The impact on CET1 is approximately 40 basis points.  The interim final rule has been published for comment, but has an immediate effective date
   
There was no material impact to available for sale or held to maturity securities upon adoption of CECL, nor to any other financial assets in scope. Most of the held to maturity portfolio consists of agency-backed securities that inherently have an immaterial risk of loss. Additionally, Regions had no PCI assets that were converted to PCD upon adoption.

See Note 1 Basis of Presentation for additional information about Regions' CECL methodologies and assumptions.

ASU 2017-04, Simplifying the Test for Goodwill Impairment
This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.
January 1, 2020
The adoption of this guidance did not have a material impact.

48


Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Adopted (or partially adopted) in 2020
ASU 2018-15, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
This ASU amends Topic 350-40, Intangibles-Goodwill and Other-Internal-Use Software, regarding a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor, i.e. a service contract. Customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The amendments also prescribe the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and require additional quantitative and qualitative disclosures.
January 1, 2020
The adoption of this guidance did not have a material impact.
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
This ASU amends Topic 810, Consolidation, guidance on how all reporting entities evaluate indirect interests held through related parties in common control arrangements when determining whether fees paid to decision makers and service providers are variable interests.
January 1, 2020
The adoption of this guidance did not have a material impact.
ASU 2019-04, Codification Improvements to Topics 815 and 825

This ASU amends Topic 815, Derivatives and Hedging, by providing clarification on ASU 2017-12, which the Company previously adopted. The amendment provides clarity on the term used to measure the change in fair value on a partial term hedge of interest rate risk. The amendment also provides additional guidance on the amortization of the basis adjustment on partial term hedges.

This ASU also amends Topic 825, Financial Instruments, by providing clarification on ASU 2016-01, which the Company previously adopted. The amendment clarifies that an entity must remeasure a security without a readily determinable fair value at fair value in accordance with Topic 820 when an orderly transaction is identified for an identical or similar investment.

January 1, 2020
The adoption of this guidance did not have a material impact.

49


Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Adopted (or partially adopted) in 2020
ASU 2019-08 Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)

The amendments in this Update require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award measured in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award are subject to the guidance in Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer.

January 1, 2020
The adoption of this guidance did not have a material impact.


50


 
Standard
Description
Required Date of Adoption
Effect on Regions' financial statements or other significant matters
Standards Not Yet Adopted
ASU 2019-12 Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes
The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

January 1, 2021
Regions is evaluating the impact upon adoption; however, the impact is not expected to be material.
ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
The amendments clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.
January 1, 2021

Early adoption is permitted.
Regions is evaluating the impact upon adoption; however, the impact is not expected to be material.

ASU 2020-04, Reference Rate Reform - Topic 848
This Update provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications, hedge accounting, and other transactions affected that reference LIBOR or another reference rate expected to be discontinued.
The Update is effective upon issuance and can be applied through December 31, 2022.
Regions is evaluating the overall impact of this ASU. To the extent available, Regions expects to adopt optional relief expedients related to the effects of LIBOR transition.



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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 filed with the SEC and updates Regions’ Annual Report on Form 10-K for the year ended December 31, 2019, 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. See Note 1 "Basis of Presentation" and Note 12 "Recent Accounting Pronouncements" to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three months ended March 31, 2020 compared to the three months ended March 31, 2019 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of March 31, 2020 compared to December 31, 2019.
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 7 through 9 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, that 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, trust services, merger and acquisition advisory services and other specialty financing.
Regions conducts its banking operations through Regions Bank, an Alabama state-chartered commercial bank that is a member of the Federal Reserve System. At March 31, 2020, Regions operated 1,427 total branch outlets. Regions carries out its strategies and derives its profitability from three reportable business segments: Corporate Bank, Consumer Bank, and Wealth Management, with the remainder in Other. See Note 10 "Business Segment Information" to the consolidated financial statements for more information regarding Regions’ segment reporting structure.
On May 31, 2019, Regions entered into an agreement to acquire Highland Associates, Inc., an institutional investment firm based in Birmingham, Alabama. The transaction closed on August 1, 2019.
On February 27, 2020, Regions entered into an agreement to acquire Ascentium Capital LLC, an independent equipment financing company headquartered in Kingwood, Texas. The transaction closed on April 1, 2020, and includes approximately $2 billion in loans and leases to small businesses.
Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income as well as non-interest income sources. Net interest income is primarily 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, capital markets and other customer services which Regions provides. Results of operations are also affected by the provision for credit losses and non-interest expenses such as salaries and employee benefits, occupancy, professional, legal and regulatory expenses, FDIC insurance assessments, 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 is focused on providing a competitive mix of products and services, delivering quality customer service, and continuing to develop and optimize distribution channels that include a branch distribution network with offices in convenient locations, as well as electronic and mobile banking.
FIRST QUARTER OVERVIEW
Economic Environment in Regions’ Banking Markets
One of the primary factors influencing the credit performance of Regions’ loan portfolio is the overall economic environment in the U.S. and the primary markets in which it operates. The COVID-19 pandemic and the efforts to stem its spread have led to a sudden, violent contraction in economic activity. As the second quarter of 2020 began, expectations regarding the economic environment continued to develop and change. As the second quarter of 2020 unfolds, Regions currently expects a significant contraction in real GDP over the first half of 2020 followed by a recovery beginning in the third quarter. For full-year 2020, real GDP is expected to contract by 5.4 percent and to grow by 2.6 percent in 2021.

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With shelter in place orders and mandated closings of “non-essential" businesses spreading across the U.S. during March and early April, there were sharp and rapid declines in consumer spending on services, including travel, tourism, lodging, restaurants, and cultural and sporting events, with firms in consumer facing services industries quickly placing workers on furlough. As spending on services accounts for roughly 70 percent of all consumer spending, the effects on the broader economy were both rapid and severe. The industrial sector of the economy followed, with manufacturing activity largely having shut down.
Over the four week period covering the second half of March and the first half of April, over 20 million Americans filed claims for unemployment insurance, and the unemployment rate is expected to peak at over 15 percent. With shelter in place orders and shutdowns of “non-essential” businesses likely to extend into May or beyond, it is likely that economic activity will not normalize to a meaningful degree until the third quarter of 2020, though this is contingent on the degree of progress made in stemming the spread of the COVID-19 pandemic. There has been an unprecedented fiscal and monetary policy response to the sharp and sudden economic downturn. The aim of policy is to preserve as much of the basic economic infrastructure as possible, but the longer the mandated shutdowns persist, the greater the likelihood additional policy measures will be needed.
There is, however, a considerable degree of uncertainty regarding the economy, as the health outcomes cannot be predicted with any degree of certainty. At present, the most likely outcome is that the normalization of economic activity will be gradual, with differences in timing across geographies and, by extension, across industries. While the rate of real GDP growth in the initial quarter of recovery may imply a rapid recovery, GDP growth is reported in annualized terms, exaggerating quarter-to-quarter changes. It is more instructive to look at the path of the level of real GDP when assessing the speed of the recovery. For instance, the April 2020 baseline forecast anticipates that it will be 10 to 12 quarters before the level of real GDP returns to the fourth quarter 2019 level (the last actual observation available).
The effects within the Regions footprint will be broadly similar to those seen in the U.S. as a whole. Florida’s economy has an above-average exposure to leisure and hospitality services, while Texas and Louisiana have above-average exposure to energy, so these economies could be more prone to lasting effects if the recovery does prove to be more gradual.
The continued economic downturn and uncertainty, as described above, differs from the R&S forecast utilized to record the allowance for credit losses as of March 31, 2020 and is expected to impact factors used in estimating the allowance in future periods, perhaps materially. See the "Allowance" section for further information.
COVID-19 Pandemic
Regions' business operations and financial results are influenced by the economic environment in which the Company operates. The adverse economic conditions and uncertainty in the economic outlook as of March 31, 2020 driven by the COVID-19 pandemic impacted first quarter 2020 financial results in the areas as described below. Regions expects that the pandemic will continue to influence economic conditions and the Company's financial results in future quarters.
The initial impacts of the COVID-19 pandemic in mid-March 2020 were manifested in how Regions altered operations in the branches, such as limiting in-person branch activity to drive-through and converting in-office services to appointment only. As of April 30, 2020, Regions has been able keep approximately 98 percent of branches open. The safety of Regions' associates was also of utmost priority. As of April 30, 2020, approximately 90 percent of the Company's non-branch associates are working remotely.
Late in the first quarter of 2020, the Company began offering special financial assistance to support customers who were experiencing financial hardships related to the COVID-19 pandemic. This assistance included offering customer payment deferrals for existing loans. As of May 4, 2020, Regions had processed approximately 16,000 consumer payment deferral requests totaling $1.7 billion, including approximately 5,300 related to residential mortgages totaling approximately $1.4 billion. In addition, payment deferral requests for approximately 17,200 mortgage loans serviced for others have been processed totaling approximately $2.9 billion. Regions has also processed approximately 14,400 requests for business customers totaling approximately $3.7 billion. As provided in the CARES Act passed into law on March 27, 2020, certain loan modifications related to COVID-19 beginning March 1, 2020 through the earlier of 60 days after the national emergency concerning the COVID-19 outbreak ends or December 31, 2020 are eligible for relief from TDR classification. Refer to Table 10 "Troubled Debt Restructurings" for further information.
As mentioned above, the CARES Act was signed into law as a response to the economic uncertainty amid the COVID-19 pandemic. A focus of the Act is the establishment of federally guaranteed loans for small businesses under the PPP. As a certified SBA lender, Regions has experienced, and expects to continue to experience, an increase in lending activity as the Company assists customers through the loan process under the new PPP. As of May 4, 2020, Regions has received SBA authorization for over 37,200 applications totaling approximately $4.8 billion. Of the authorized SBA applications, Regions has funded over 19,600 applications from business customers totaling approximately $3.6 billion.

53


Regions continues to have strong liquidity and capital levels, which have the Company well prepared to respond to the increase in customer borrowing needs. The Company has ample sources of liquidity that include a granular and stable deposit base, cash balances held at the Federal Reserve, borrowing capacity at the Federal Home Loan Bank, unencumbered highly liquid securities, and borrowing availability at the Federal Reserve's discount window. Furthermore, additional liquidity is available through the Federal Reserve's Paycheck Protection Program Liquidity Facility. From a capital perspective, the Company's estimated capital ratios remain well above current regulatory requirements under the Basel III capital rules. Further, Regions currently has no plans to reduce the level of or eliminate cash dividends in consideration of the COVID-19 pandemic. See the "Liquidity", Shareholders' Equity, and "Regulatory Capital" sections for further information.
The Company did not repurchase shares in the first quarter of 2020, and given the uncertainty in the overall economic environment as a result of the COVID-19 pandemic, no share repurchases are currently anticipated for 2020.
The COVID-19 pandemic affected the first quarter provision for credit losses, which was $373 million and $250 million in excess of net charge-offs (see below and the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail). It also impacted ending loan and deposit levels as customers increased their line utilization in response to the current economic environment, while keeping the majority of the excess cash in their deposit accounts. See Table 2 "Loan Portfolio" and Table 14 "Deposits" for further information.
The COVID-19 pandemic also affected non-interest income. At the end of the first quarter of 2020, consumer spending activity decreased in response to COVID-19, which negatively impacted non-interest income by approximately $12 million. If current spending levels persist, the Company estimates non-interest income will be negatively impacted by $20 million to $25 million per month from pre-March 2020 levels. See Table 23 "Non-Interest Income" for more detail.
Regions assessed goodwill in light of the onset of the COVID-19 pandemic and concluded that it was not more likely than not that the fair value of each of the Company's reporting units was less than its carrying value. Refer to the "Goodwill" section for further detail.
Regions has experienced a modest increase in cyber events as a result of the COVID-19 pandemic, however the Company's layered control environment has effectively detected and prevented any material impact related to these events. Refer to the "Information Security" section for further detail.
Subsequent to March 31, 2020, Moody's and Fitch ratings agencies changed the outlook for Regions' credit ratings to stable from positive due to concerns over the negative financial and economic impacts to the bank sector from COVID-19, as well as the direct negative impact on banks' asset quality and profitability from a contracting economy in 2020. See Table 17 "Credit Ratings" for further information.
First Quarter Results
Regions reported net income available to common shareholders of $139 million, or $0.14 per diluted share, in the first quarter of 2020 compared to $378 million, or $0.37 per diluted share, in the first quarter of 2019.
For the first quarter of 2020, net interest income (taxable-equivalent basis) totaled $940 million, down $21 million compared to the first quarter of 2019. The net interest margin (taxable-equivalent basis) was 3.44 percent for the first quarter of 2020 and 3.51 percent in the first quarter of 2019. The decreases in net interest income and net interest margin were primarily driven by the impact of lower market interest rates on asset yields, partially offset by the impact of lower funding costs.
The provision for credit losses totaled $373 million in the first quarter of 2020, after the adoption of CECL at the beginning of the year, as compared to the provision for loan losses of $91 million during the first quarter of 2019. The current quarter provision covered $123 million in net charge-offs, as well as $250 million of additional provision reflecting an increase in the expected losses over the contractual lives of the loan and credit commitment portfolios. The increase in the provision for credit losses during the first quarter was driven primarily by adverse economic conditions and uncertainty in the economic outlook resulting from the COVID-19 pandemic. Also contributing to the increase were higher specific reserves associated with downgrades primarily in the energy and restaurant portfolios. Refer to the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail.
Net charge-offs totaled $123 million, or an annualized 0.59 percent of average loans, in the first quarter of 2020, compared to $78 million, or an annualized 0.38 percent for the first quarter of 2019. See Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional information.
The allowance was 1.89 percent of total loans, net of unearned income at March 31, 2020 compared to 1.10 percent at December 31, 2019. The increase was a result of the adoption of CECL and the provision as discussed above. The allowance was 261 percent of total non-performing loans at March 31, 2020 compared to 180 percent at December 31, 2019. Total non-performing loans increased to 0.72 percent of total loans, net of unearned income, at March 31, 2020, compared to 0.61 percent at December 31, 2019. The increase in non-performing loans was driven primarily by energy-related credits. Refer to the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail.

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Non-interest income was $485 million for the first quarter of 2020, a $17 million decrease from the first quarter of 2019. The decrease was primarily driven by lower capital markets income and other non-interest income, partially offset by higher mortgage income. See Table 23 "Non-Interest Income" for more detail.
Total non-interest expense was $836 million in the first quarter of 2020, a $24 million decrease from the first quarter of 2019. The decrease was primarily driven by lower salaries and employee benefits and other miscellaneous expenses, partially offset by an increase in furniture and equipment expense. See Table 24 "Non-Interest Expense" for more detail.
Income tax expense for the three months ended March 31, 2020 was $42 million compared to $105 million for the same period in 2019. See "Income Taxes" toward the end of the Management’s Discussion and Analysis section of this report for more detail.
Expectations
Due to the current economic uncertainty, the Company has rescinded previously issued financial targets for 2020, as well as the three-year targets previously announced in 2019. Regions' expectations will continue to evolve in response to the changing economic conditions presented amidst the COVID-19 pandemic, as the Company expects that the financial results of subsequent quarters will continue to be impacted.
BALANCE SHEET ANALYSIS
The following sections provide expanded discussion of significant changes in certain line items in asset, liability, and equity categories.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased approximately $1.1 billion from year-end 2019 to March 31, 2020, due primarily to an increase in cash on deposit with the FRB. In response to the economic environment and as a part of Regions' liquidity management, the Company borrowed additional advances at the FHLB which were used to increase cash at the FRB. See the "Liquidity" section for more information.
DEBT SECURITIES
The following table details the carrying values of debt securities, including both available for sale and held to maturity:
Table 1—Debt Securities
 
March 31, 2020
 
December 31, 2019
 
(In millions)
U.S. Treasury securities
$
184

 
$
182

Federal agency securities
43

 
43

Mortgage-backed securities:
 
 
 
Residential agency
17,129

 
16,226

Residential non-agency
1

 
1

Commercial agency
5,714

 
5,388

Commercial non-agency
622

 
647

Corporate and other debt securities
1,378

 
1,451

 
$
25,071

 
$
23,938

Debt securities available for sale, which constitute 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. Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. See Note 2 "Debt Securities" to the consolidated financial statements for additional information. Also see the "Market Risk-Interest Rate Risk" and "Liquidity" sections for more information.
Debt securities increased $1.1 billion from December 31, 2019 to March 31, 2020. Despite the interest rate volatility during the quarter, Regions' comprehensive securities repositioning executed in the second and third quarters of 2019 positioned the portfolio to react favorably to the current economic environment. The increase during the first quarter of 2020 was the result of improved market valuation and additional purchases of mortgage-backed securities.

55


LOANS HELD FOR SALE
Loans held for sale totaled $566 million at March 31, 2020, consisting of $478 million of residential real estate mortgage loans, $85 million of commercial mortgage and other loans, and $3 million of non-performing loans. At December 31, 2019, loans held for sale totaled $637 million, consisting of $436 million of residential real estate mortgage loans, $188 million of commercial mortgage and other loans, and $13 million of non-performing loans. The levels of residential real estate and commercial mortgage loans held for sale that are part of the Company's mortgage originations to be sold fluctuate depending on the timing of origination and sale to third parties.
LOANS
Loans, net of unearned income, represented approximately 74 percent of Regions’ interest-earning assets at March 31, 2020. 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, 2020
 
December 31, 2019
 
(In millions, net of unearned income)
Commercial and industrial
$
45,388

 
$
39,971

Commercial real estate mortgage—owner-occupied
5,550

 
5,537

Commercial real estate construction—owner-occupied
309

 
331

Total commercial
51,247

 
45,839

Commercial investor real estate mortgage
5,079

 
4,936

Commercial investor real estate construction
1,784

 
1,621

Total investor real estate
6,863

 
6,557

Residential first mortgage
14,535

 
14,485

Home equity lines
5,201

 
5,300

Home equity loans
3,000

 
3,084

Indirect—vehicles
1,557

 
1,812

Indirect—other consumer
3,202

 
3,249

Consumer credit card
1,303

 
1,387

Other consumer
1,190

 
1,250

Total consumer
29,988

 
30,567

 
$
88,098

 
$
82,963

PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2019 year-end, and highlight the related risk characteristics. 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. See Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional discussion.
Most classes within Regions' portfolio segments are experiencing the impact of the COVID-19 pandemic. In particular, Regions' energy and restaurant portfolios have experienced significant operational challenges as a result of COVID-19 and are at the highest risk. Energy credits have been stressed by the recent significant drop in oil prices. The restaurant portfolio, particularly credits in the casual dining space, have come under stress as shelter in place orders began and continue. Small business sectors of the portfolio, as well as consumer portfolios, are also impacted by shelter in place and social distancing rules created by the COVID-19 pandemic along with the fact that these types of borrowers tend to have limited liquidity or access to alternate liquidity sources. The extent to which Regions' borrowers are ultimately impacted will be a factor of the duration and severity of the economic impact as well as the effectiveness of the various government programs in place to support individuals and businesses. See Table 3 "Selected Industry Exposure" for more detail.
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 increased $5.4 billion since year-end 2019. This expansion was due primarily to an increase in line utilization late in the first quarter as customers responded to the uncertain current economic environment (see the "First Quarter Overview" section for more

56


information). The expansion was driven by increases in the real estate, retail trade, financial services, manufacturing, healthcare and utilities industry sectors.
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 flows generated by business operations. Owner-occupied commercial real estate 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.
On April 1, 2020, the Company closed a transaction to acquire Ascentium Capital LLC, an independent equipment finance leader. The acquisition included approximately $2 billion in loans and leases to small businesses.
Over half of the Company’s total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry.
The following tables provide detail of Regions' commercial lending balances in selected industries.
Table 3—Selected Industry Exposure
 
March 31, 2020
 
Loans
 
Unfunded Commitments
 
Total Exposure
 
(In millions)
Administrative, support, waste and repair
$
1,558

 
$
810

 
$
2,368

Agriculture
422

 
250

 
672

Educational services
2,801

 
778

 
3,579

Energy
2,375

 
2,262

 
4,637

Financial services
5,000

 
3,970

 
8,970

Government and public sector
2,975

 
545

 
3,520

Healthcare
4,015

 
1,587

 
5,602

Information
1,586

 
668

 
2,254

Manufacturing
4,750

 
3,690

 
8,440

Professional, scientific and technical services
2,098

 
1,233

 
3,331

Real estate
8,805

 
5,525

 
14,330

Religious, leisure, personal and non-profit services
1,842

 
712

 
2,554

Restaurant, accommodation and lodging
1,911

 
243

 
2,154

Retail trade
3,080

 
1,263

 
4,343

Transportation and warehousing
2,096

 
1,116

 
3,212

Utilities
2,255

 
2,306

 
4,561

Wholesale goods
3,667

 
2,395

 
6,062

Other (1)
11

 
2,903

 
2,914

Total commercial
$
51,247

 
$
32,256

 
$
83,503


57


 
December 31, 2019 (2)
 
Loans
 
Unfunded Commitments
 
Total Exposure
 
(In millions)
Administrative, support, waste and repair
$
1,402

 
$
888

 
$
2,290

Agriculture
456

 
225

 
681

Educational services
2,724

 
676

 
3,400

Energy
2,172

 
2,528

 
4,700

Financial services
4,588

 
4,257

 
8,845

Government and public sector
2,825

 
522

 
3,347

Healthcare
3,646

 
1,802

 
5,448

Information
1,394

 
847

 
2,241

Manufacturing
4,347

 
3,912

 
8,259

Professional, scientific and technical services
1,970

 
1,299

 
3,269

Real estate
7,067

 
7,224

 
14,291

Religious, leisure, personal and non-profit services
1,748

 
769

 
2,517

Restaurant, accommodation and lodging
1,780

 
420

 
2,200

Retail trade
2,439

 
2,039

 
4,478

Transportation and warehousing
1,885

 
1,250

 
3,135

Utilities
1,774

 
2,437

 
4,211

Wholesale goods
3,335

 
2,637

 
5,972

Other (1)
287

 
2,095

 
2,382

Total commercial
$
45,839

 
$
35,827

 
$
81,666

________
(1)
"Other" contains balances related to non-classifiable and invalid business industry codes offset by payments in process and fee accounts that are not available at the loan level.
(2)
As customers' businesses evolve (e.g. up or down the vertical manufacturing chain), Regions may need to change the assigned business industry code used to define the customer relationship. When these changes occur, Regions does not recast the customer history for prior periods into the new classification because the business industry code used in the prior period was deemed appropriate. As a result, comparable period changes may be impacted.
Investor Real Estate
Loans for real estate development are repaid through cash flows 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 consists 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. Total investor real estate loans increased $306 million in comparison to 2019 year-end balances reflecting new fundings and draws on investor real estate construction lines.
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 increased $50 million in comparison to 2019 year-end balances. Approximately $842 million in new loan originations were retained on the balance sheet through the first three months of 2020.
Home Equity Lines
Home equity lines are secured by a first or second mortgage on the borrower's residence and allow customers to borrow against the equity in their homes. Home equity lines decreased by $99 million in comparison to 2019 year-end balances. Substantially all of this portfolio was originated through Regions’ branch network.
Beginning in December 2016, new home equity lines of credit have a 10-year draw period and a 20-year repayment term. During the 10-year draw period customers do not have an interest-only payment option, except on a very limited basis. From May 2009 to December 2016, home equity lines of credit had a 10-year draw period and a 10-year repayment term. Prior to May 2009, home equity lines of credit had a 20-year repayment 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.

58


The following table presents information regarding the future principal payment reset dates for the Company's home equity lines of credit as of March 31, 2020. The balances presented are based on maturity date for lines with a balloon payment and draw period expiration date for lines that convert to a repayment period.
Table 4—Home Equity Lines of Credit - Future Principal Payment Resets
 
First Lien
 
% of Total
 
Second Lien
 
% of Total
 
Total
 
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
2020
84

 
1.61
%
 
67

 
1.28
%
 
151

2021
97
 
1.87
%
 
90
 
1.73
%
 
187
2022
111
 
2.14
%
 
106
 
2.04
%
 
217
2023
136
 
2.62
%
 
118
 
2.26
%
 
254
2024
195
 
3.74
%
 
157
 
3.03
%
 
352
2025-2029
2,073
 
39.84
%
 
1,871
 
35.99
%
 
3,944
2030-2034
57
 
1.10
%
 
35
 
0.67
%
 
92
Thereafter
2
 
0.04
%
 
2
 
0.04
%
 
4
Total
2,755

 
52.96
%
 
2,446

 
47.04
%
 
5,201

Home Equity Loans
Home equity loans are also secured by a first or second mortgage on the borrower's residence, are primarily originated as amortizing loans, and allow customers to borrow against the equity in their homes. Home equity loans decreased by $84 million in comparison to 2019 year-end balances. Substantially all of this portfolio was originated through Regions’ branch network.
Other Consumer Credit Quality Data
The Company calculates an estimate of the current value of property secured as collateral for both residential first mortgage and home equity lending products (“current LTV”). The estimate is based on home price indices compiled by a third party. The third party data indicates trends for 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, home equity lines and home equity loans classes of the consumer portfolio segment. Current LTV data for some loans in the portfolio is not 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.

59


Table 5—Estimated Current Loan to Value Ranges
 
March 31, 2020
 
Residential
First Mortgage
 
Home Equity Lines of Credit
 
Home Equity Loans
 
 
1st Lien
 
2nd Lien
 
1st Lien
 
2nd Lien
 
(In millions)
Estimated current LTV:
 
 
 
 
 
 
 
 
 
Above 100%
$
50

 
$
7

 
$
17

 
$
8

 
$
5

80% - 100%
1,775

 
80

 
195

 
41

 
26

Below 80%
12,465

 
2,626

 
2,145

 
2,658

 
244

Data not available
245

 
42

 
89

 
13

 
5

 
$
14,535

 
$
2,755

 
$
2,446

 
$
2,720

 
$
280

 
December 31, 2019
 
Residential
First Mortgage
 
Home Equity Lines of Credit
 
Home Equity Loans
 
 
1st Lien
 
2nd Lien
 
1st Lien
 
2nd Lien
 
 
Estimated current LTV:
 
 
 
 
 
 
 
 
 
Above 100%
$
32

 
$
8

 
$
18

 
$
9

 
$
5

80% - 100%
1,745

 
86

 
208

 
39

 
29

Below 80%
12,438

 
2,659

 
2,195

 
2,731

 
252

Data not available
270

 
35

 
91

 
14

 
5

 
$
14,485

 
$
2,788

 
$
2,512

 
$
2,793

 
$
291

Indirect—Vehicles
Indirect-vehicles lending, which is lending initiated through third-party business partners, largely consists of loans made through automotive dealerships. This portfolio class decreased $255 million from year-end 2019. The decrease is due to the termination of a third-party arrangement during the fourth quarter of 2016 and Regions' decision in January 2019 to discontinue its indirect auto lending business. Regions ceased originating new indirect auto loans in the first quarter of 2019 and completed any in-process indirect auto loan closings at the end of the second quarter of 2019. The Company will remain in the direct auto lending business.
Indirect—Other Consumer
Indirect-other consumer lending represents other lending initiatives through third parties, including point of sale lending. This portfolio class decreased $47 million from year-end 2019 due to exiting a third party relationship during the fourth quarter of 2019.
Consumer Credit Card
Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances decreased $84 million from year-end 2019 reflecting seasonality.
Other Consumer
Other consumer loans primarily include direct consumer loans, overdrafts and other revolving loans. Other consumer loans decreased $60 million from year-end 2019.
Regions 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 and refreshed FICO scores are obtained by the Company quarterly for all consumer loans. For more information on credit quality indicators refer to Note 3 "Loans".
ALLOWANCE
In preparing financial information, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses for the periods shown. The accounting principles followed by Regions and the methods of applying these principles conform with GAAP, regulatory guidances, where applicable, and general banking practices. The allowance is one of the most significant estimates and assumptions to Regions. The allowance consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments.

60


On January 1, 2020, Regions adopted CECL, which replaced the incurred loss allowance methodology with an expected loss allowance methodology. See Note 1 "Basis of Presentation", Note 3 "Loans and the Allowance for Credit Losses" and Note 12 "Recent Accounting Pronouncements" for information about CECL adoption, areas of judgment and methodologies used in establishing the allowance.
The allowance is sensitive to a number of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The allowance is also sensitive to external factors such as the general health of the economy, as evidenced by changes in interest rates, GDP, unemployment rates, changes in real estate demand and values, volatility in commodity prices, bankruptcy filings, health pandemics, government stimulus, and the effects of weather and natural disasters such as droughts, floods and hurricanes.
Management considers these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual credit losses that differ from the originally estimated amounts.
Since January 1, 2020, Regions increased the allowance by $250 million to $1.7 billion, which represents management's best estimate of expected losses over the life of the loan and credit commitment portfolios. Key drivers of the change in the allowance for credit losses are presented below:
Table 6— Allowance Changes
 
Three months ended March 31, 2020
 
(In millions)
Allowance for credit losses at January 1 (as adjusted for change in accounting guidance) (1)
$
1,415

    Economic uncertainty and specific model adjustments
207

    Increase in specific allowances
36

    Model parameters/other adjustments
16

    Consumer portfolio segment balance run-off
(9
)
Total changes
250

Allowance for credit losses at March 31
$
1,665

_______
(1)
Regions adopted the CECL accounting guidance on January 1, 2020 and recorded the cumulative effect of the change in accounting guidance as a reduction to retained earnings and an increase to deferred tax assets. See Note 1 for additional details.

Changes in the macroeconomic environment can be extremely impactful to the allowance estimate under CECL. When compared to January 1, 2020, which was based on a benign economic environment, Regions' economic forecast utilized in the March 31, 2020 allowance models had deteriorated as a result of the COVID-19 pandemic. Regions benchmarked its internal forecast with external forecasts and external data available. While various data points and alternative viewpoints were considered, the risks to the economic forecast utilized in the allowance were weighted to the downside through the qualitative framework, given the high degree of uncertainty around how widely the COVID-19 pandemic could spread and how long it could persist. The effectiveness of government relief programs and debt payment relief being provided by the Company as well as the potential for any future stimulus was also considered, which the Company believes could be significant mitigating factors.
Regions' quantitative allowance methodologies strive to reflect all risk factors; however, any estimate involves assumptions and uncertainties resulting in some level of imprecision. The qualitative framework has a general imprecision component which is meant to acknowledge that model and forecast errors are inherent in any modeling estimate. Given that credit deterioration from COVID-19 had not fully materialized at March 31, 2020 and that the models are not calibrated for such a pandemic, the impact of COVID-19 on the allowance was primarily captured through the economic uncertainty component of the qualitative framework.
As part of the qualitative framework, Regions ran an Updated/More Severe forecast through the allowance models for sensitivity purposes. The Updated/More Severe forecast reflects an abrupt halt to the economy. Management also benchmarked the Updated/More Severe forecast to external forecasts, noting overall alignment and comparability of results.
The tables below reflect a range of macroeconomic factors utilized in the Base (utilized in the allowance models) and Updated/More Severe (utilized in the qualitative framework) forecasts over the R&S forecast period, with unemployment being the most significant macroeconomic factor among the CECL models. First quarter 2020 forecast information is also included.

61


Table 7— Macroeconomic Factors in the Forecast
 
Pre-R&S period
 
Base R&S forecast
March 31, 2020
1Q2020
 
2Q2020
 
3Q2020
 
4Q2020
 
1Q2021
 
2Q2021
 
3Q2021
 
4Q2021
 
1Q2022
Real GDP, annualized % change
0.55
%
 
(3.08
)%
 
1.64
%
 
3.82
%
 
3.38
%
 
2.22
%
 
2.09
%
 
1.82
%
 
1.78
%
Unemployment rate
3.55
%
 
4.26
 %
 
4.07
%
 
3.78
%
 
3.70
%
 
3.70
%
 
3.70
%
 
3.71
%
 
3.73
%
HPI, cumulative % change from last actual
0.98
%
 
1.60
 %
 
1.95
%
 
2.27
%
 
2.96
%
 
3.80
%
 
4.76
%
 
5.85
%
 
7.02
%
S&P 500
3,070

 
2,482

 
2,662

 
2,879

 
3,118

 
3,185

 
3,215

 
3,244

 
3,270

 
Pre-R&S period
 
Updated/More Severe forecast
March 31, 2020
1Q2020
 
2Q2020
 
3Q2020
 
4Q2020
 
1Q2021
 
2Q2021
 
3Q2021
 
4Q2021
 
1Q2022
Real GDP, annualized % change
(4.70
)%
 
(17.55
)%
 
5.04
 %
 
6.20
 %
 
4.41
 %
 
4.61
 %
 
3.99
 %
 
2.91
 %
 
2.16
 %
Unemployment rate
3.69
 %
 
8.90
 %
 
6.51
 %
 
6.18
 %
 
5.92
 %
 
5.72
 %
 
5.57
 %
 
5.44
 %
 
5.31
 %
HPI, cumulative % change from last actual
0.96
 %
 
(1.57
)%
 
(3.25
)%
 
(4.65
)%
 
(5.00
)%
 
(4.74
)%
 
(4.30
)%
 
(3.74
)%
 
(3.07
)%
S&P 500
3,059

 
2,282

 
2,422

 
2,681

 
2,835

 
2,906

 
2,942

 
2,974

 
3,005


As noted above, the March 31, 2020 allowance includes additional qualitative amounts in addition to the modeled Base forecast to capture economic uncertainties. As such, the Base forecast factors (listed in the table above) do not specifically align with Regions' allowance.
There were several points of analysis used to inform an appropriate qualitative overlay for economic uncertainty. In addition to running the Updated/More Severe forecast, industry-level stress analyses were also performed on industries most acutely impacted by COVID-19. Refer to the "Portfolio Characteristics" section for more information about COVID-19 impacted industries. The overall range from these collective, alternative analyses resulted in potential increases of approximately $100 million to $500 million as compared to the January 1, 2020 allowance. These analytically-derived ranges however, are not able to fully take into consideration the specifics of the CARES Act and other policy accommodations, which could materially impact loss expectations. Based on the overall analysis performed, management deemed an increase in the allowance of $250 million as compared to January 1, 2020 to be appropriate to absorb expected credit losses in the loan and credit commitment portfolios as of March 31, 2020.
Subsequent to March 31, 2020, additional economic forecasts indicated continued rapid deterioration in certain macroeconomic factors, primarily real GDP and unemployment rates. The level of uncertainty related to how these forecasts will impact expected credit losses and future credit loss provisions remains high due to uncertainty concerning the length and depth of the COVID-19 pandemic and related shelter in place orders, as well as, the offsetting impacts of current and future government stimulus and lending programs. Due to the unprecedented nature of the uncertainties discussed above, an estimate of the expected increase in the allowance cannot be made at this time. However, if the current trends continue, it is likely that increases in the allowance, which could be material, will be required in future periods. As a point of reference, in 2018 the Federal Reserve disclosed their estimation of modeled credit losses for Regions as part of DFAST. This included two scenarios, an adverse and a severely adverse economic environment. Modeled losses in the scenarios were $3.0 billion in the adverse and $5.3 billion in the severely adverse scenarios. Whereas these stress tests assumed a different macroeconomic outlook, they may represent a possible range of potential credit losses assuming a longer-term, widespread pandemic with no offsetting benefits from government stimulus or lending programs, which as noted above the Company believes could be significant mitigating factors. See the "First Quarter Overview" section for further information regarding the Company's economic outlook as the second quarter of 2020 began to unfold.
As noted above, 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. In addition, bank regulatory agencies, as part of their examination process, may require changes in the level of allowance based on their judgments and estimates. Volatility in certain credit metrics is to be expected. Additionally, changes in circumstances related to individually large credits, commodity prices, or certain macroeconomic forecast assumptions may result in volatility. The scenarios discussed above, or other scenarios, have the ability to result in actual credit losses that differ, perhaps materially, from the originally estimated amounts. In addition, it is difficult to predict how changes in economic conditions, the impact of government stimulus, or other relief programs could affect borrower behavior. This analysis is not intended to estimate changes in the overall allowance, which would also be influenced by the judgment management applies to the modeled loss estimates to reflect uncertainty and imprecision based on then-current circumstances and conditions.
Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year’s totals, are included in Table 8 "Allowance for Credit Losses." As noted above, economic trends such as interest rates, unemployment,

62


volatility in commodity prices and collateral valuations as well as the length and depth of the COVID-19 pandemic and the impact of the CARES Act and other policy accommodations will impact the future levels of net charge-offs and may result in volatility of certain credit metrics during the remainder of 2020.
Table 8—Allowance for Credit Losses
 
Three Months Ended March 31
 
2020
 
2019
 
(Dollars in millions)
Allowance for loan losses at January 1
$
869

 
$
840

Cumulative change in accounting guidance (1)
438

 
—

Allowance for loan losses, January 1 (as adjusted for change in accounting guidance) (1)
$
1,307

 
$
840

 
 
 
 
Loans charged-off:
 
 
 
Commercial and industrial
68

 
27

Commercial real estate mortgage—owner-occupied
3

 
3

Residential first mortgage
1

 
1

Home equity lines
4

 
5

Home equity loans
1

 
1

Indirect—vehicles
6

 
9

Indirect—other consumer
23

 
17

Consumer credit card
16

 
17

Other consumer
22

 
22

 
144

 
102

Recoveries of loans previously charged-off:
 
 
 
Commercial and industrial
5

 
6

Commercial real estate mortgage—owner-occupied
2

 
3

Commercial investor real estate mortgage
1

 
1

Residential first mortgage
1

 
1

Home equity lines
3

 
3

Home equity loans
1

 
1

Indirect—vehicles
2

 
4

Indirect—other consumer
—

 
—

Consumer credit card
2

 
2

Other consumer
4

 
3

 
21

 
24

Net charge-offs:
 
 
 
Commercial and industrial
63

 
21

Commercial real estate mortgage—owner-occupied
1

 
—

Commercial investor real estate mortgage
(1
)
 
(1
)
Residential first mortgage
—

 
—

Home equity lines
1

 
2

Home equity loans
—

 
—

Indirect—vehicles
4

 
5

Indirect—other consumer
23

 
17

Consumer credit card
14

 
15

Other consumer
18

 
19

 
123

 
78

Provision for loan losses
376

 
91

Allowance for loan losses at March 31
$
1,560

 
$
853

Reserve for unfunded credit commitments at beginning of year
$
45

 
$
51

Cumulative change in accounting guidance (1)
63

 
—

Provision (credit) for unfunded credit losses
(3
)
 
(1
)
Reserve for unfunded credit commitments at March 31
$
105

 
$
50

Allowance for credit losses at March 31
$
1,665

 
$
903

Loans, net of unearned income, outstanding at end of period
$
88,098

 
$
84,430

Average loans, net of unearned income, outstanding for the period
$
83,249

 
$
83,725

 

63


 
Three Months Ended March 31
 
2020
 
2019
 
(Dollars in millions)
Ratios:
 
 
 
Allowance for credit losses at end of period to loans, net of unearned income
1.89
%
 
1.07
%
Allowance for loan losses at end of period to loans, net of unearned income
1.77
%
 
1.01
%
Allowance for credit losses at end of period to non-performing loans, excluding loans held for sale
261
%
 
173
%
Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale
244
%
 
163
%
Net charge-offs as percentage of average loans, net of unearned income (annualized)
0.59
%
 
0.38
%
_______
(1)
Regions adopted the CECL accounting guidance on January 1, 2020 and recorded the cumulative effect of the change in accounting guidance as a reduction to retained earnings and an increase to deferred tax assets. See Note 1 for additional details.

Allocation of the allowance for credit losses by portfolio segment and class is summarized as follows:
Table 9—Allowance Allocation
 
March 31, 2020
 
January 1, 2020
 
Loan balance
 
Allowance allocation
 
Allowance to loans %
 
Loan balance
 
Allowance allocation
 
Allowance to loans %
Commercial and industrial
$
45,388

 
$
597

 
1.32
%
 
$
39,971

 
$
443

 
1.11
%
Commercial real estate mortgage—owner-occupied
5,550

 
180

 
3.24
%
 
5,537

 
153

 
2.76
%
Commercial real estate construction—owner-occupied
309

 
17

 
5.50
%
 
331

 
14

 
4.23
%
Total commercial
51,247

 
794

 
1.55
%
 
45,839

 
610

 
1.33
%
Commercial investor real estate mortgage
5,079

 
58

 
1.14
%
 
4,936

 
54

 
1.09
%
Commercial investor real estate construction
1,784

 
23

 
1.29
%
 
1,621

 
16

 
0.99
%
Total investor real estate
6,863

 
81

 
1.18
%
 
6,557

 
70

 
1.07
%
Residential first mortgage
14,535

 
96

 
0.66
%
 
14,485

 
86

 
0.59
%
Home equity lines
5,201

 
142

 
2.73
%
 
5,300

 
144

 
2.72
%
Home equity loans
3,000

 
33

 
1.10
%
 
3,084

 
32

 
1.04
%
Indirect—vehicles
1,557

 
24

 
1.54
%
 
1,812

 
26

 
1.43
%
Indirect—other consumer
3,202

 
300

 
9.37
%
 
3,249

 
267

 
8.22
%
Consumer credit card
1,303

 
121

 
9.29
%
 
1,387

 
112

 
8.07
%
Other consumer
1,190

 
74

 
6.22
%
 
1,250

 
68

 
5.44
%
Total consumer
29,988

 
790

 
2.63
%
 
30,567

 
735

 
2.40
%
 
$
88,098

 
$
1,665

 
1.89
%
 
$
82,963

 
$
1,415

 
1.71
%

TROUBLED DEBT RESTRUCTURINGS (TDRs)
TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulty. As provided in the CARES Act passed into law on March 27, 2020, certain loan modifications related to the COVID-19 pandemic beginning March 1, 2020 are eligible for relief from TDR classification. Regions elected this provision of the CARES Act; therefore, modified loans that met the required guidelines for relief are not considered TDRs and are excluded from the disclosures below.
Residential first mortgage, home equity, consumer credit card and other consumer TDRs are consumer loans modified under the CAP. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modifications were offered as a workout alternative. Renewals of classified commercial and investor real estate loans are considered to be TDRs, even if no reduction in interest rate is offered, if the existing terms are considered to be below market. Insignificant modifications are not considered TDRs. More detailed information is included in Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements. The following table summarizes the loan balance and related allowance for accruing and non-accruing TDRs for the periods presented:

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Table 10—Troubled Debt Restructurings
 
March 31, 2020
 
December 31, 2019
 
Loan
Balance
 
Allowance for Credit Losses
 
Loan
Balance
 
Allowance for Credit Losses
 
(In millions)
Accruing:
 
 
 
 
 
 
 
Commercial
$
56

 
$
3

 
$
106

 
$
15

Investor real estate
14

 
1

 
32

 
3

Residential first mortgage
181

 
22

 
177

 
18

Home equity lines
40

 
5

 
42

 
2

Home equity loans
98

 
10

 
109

 
5

Consumer credit card
1

 
—

 
1

 
—

Other consumer
4

 
—

 
4

 
—

 
394

 
41

 
471

 
43

Non-accrual status or 90 days past due and still accruing:
 
 
 
 
 
 
 
Commercial
159

 
15

 
139

 
20

Investor real estate
1

 
—

 
1

 
—

Residential first mortgage
37

 
5

 
40

 
4

Home equity lines
2

 
—

 
2

 
—

Home equity loans
6

 
1

 
6

 
—

 
205

 
21

 
188

 
24

Total TDRs - Loans
$
599

 
$
62

 
$
659

 
$
67

 
 
 
 
 
 
 
 
TDRs - Held For Sale
—

 
—

 
1

 
—

Total TDRs
$
599

 
$
62

 
$
660

 
$
67

 
The following table provides an analysis of the changes in commercial and investor real estate TDRs. TDRs with subsequent restructurings that meet the definition of a TDR are only reported as TDR additions in the period they were first modified. Other than resolutions such as charge-offs, foreclosures, payments, sales and transfers to held for sale, Regions may remove loans from TDR classification if the following conditions are met: the borrower's financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, the loan has not been restructured as an "A" note/"B" note, the loan has been reported as a TDR over one fiscal year-end and the loan is subsequently refinanced or restructured at market terms such that it qualifies as a new loan.
For the consumer portfolio, changes in TDRs are primarily due to additions from CAP modifications and outflows from payments and charge-offs. Given the types of concessions currently being granted under the CAP as detailed in Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements, Regions does not expect that the market interest rate condition will be widely achieved. Therefore, Regions expects consumer loans modified through CAP to continue to be identified as TDRs for the remaining term of the loan.
Table 11—Analysis of Changes in Commercial and Investor Real Estate TDRs
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Commercial
 
Investor
Real Estate
 
Commercial
 
Investor
Real Estate
 
(In millions)
Balance, beginning of period
$
245

 
$
33

 
$
291

 
$
19

Additions
81

 
1

 
74

 
1

Charge-offs
(35
)
 
—

 
(8
)
 
—

Other activity, inclusive of payments and removals (1)
(76
)
 
(19
)
 
(31
)
 
(1
)
Balance, end of period
$
215

 
$
15

 
$
326

 
$
19

_________
(1) The majority of this category consists of payments and sales. It also includes normal amortization/accretion of loan basis adjustments, loans transferred to held for sale, removals and reclassifications between portfolio segments. Additionally, it includes $11 million of commercial loans

65


and $12 million of investor real estate loans refinanced or restructured as new loans and removed from TDR classification for the three months ended March 31, 2020. During the three months ended March 31, 2019, less than $1 million of both commercial loans and investor real estate loans were refinanced or restructured as new loans and removed from TDR classification.
NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:

Table 12—Non-Performing Assets
 
March 31, 2020
 
December 31, 2019
 
(Dollars in millions)
Non-performing loans:
 
 
 
Commercial and industrial
$
496

 
$
347

Commercial real estate mortgage—owner-occupied
58

 
73

Commercial real estate construction—owner-occupied
11

 
11

Total commercial
565

 
431

Commercial investor real estate mortgage
1

 
2

Total investor real estate
1

 
2

Residential first mortgage
27

 
27

Home equity lines
40

 
41

Home equity loans
5

 
6

Total consumer
72

 
74

Total non-performing loans, excluding loans held for sale
638

 
507

Non-performing loans held for sale
3

 
13

Total non-performing loans(1)
641

 
520

Foreclosed properties
54

 
53

Non-marketable investments received in foreclosure
—

 
5

Total non-performing assets(1)
$
695

 
$
578

Accruing loans 90 days past due:
 
 
 
Commercial and industrial
$
9

 
$
11

Commercial real estate mortgage—owner-occupied
1

 
1

Total commercial
10

 
12

Residential first mortgage(2)
69

 
70

Home equity lines
26

 
32

Home equity loans
11

 
10

Indirect—vehicles
6

 
7

Indirect—other consumer
4

 
3

Consumer credit card
19

 
19

Other consumer
5

 
5

Total consumer
140

 
146

 
$
150

 
$
158

Non-performing loans(1) to loans and non-performing loans held for sale
0.73
%
 
0.63
%
Non-performing assets(1) to loans, foreclosed properties, non-marketable investments, and non-performing loans held for sale
0.79
%
 
0.70
%
_________
(1)
Excludes accruing loans 90 days past due.
(2)
Excludes residential first mortgage loans that are 100% guaranteed by the FHA and all guaranteed loans sold to the GNMA where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $59 million at March 31, 2020 and $66 million at December 31, 2019.
Non-performing loans at March 31, 2020 have increased compared to year-end levels, primarily driven by energy credits that have experienced stress due to recent declines in oil prices.
Economic trends such as interest rates, unemployment, volatility in commodity prices, and collateral valuations will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility.

66



At March 31, 2020, Regions estimates that the amount of commercial and investor real estate loans that have the potential to migrate to non-accrual status in the next quarter is within the range of $225 million to $350 million.
In order to arrive at the estimated range of potential problem loans for the next quarter, credit personnel forecast certain larger dollar loans that may potentially be downgraded to non-accrual at a future time, depending upon the occurrence of future events. A variety of factors are included in the assessment of potential problem loans, including a borrower’s capacity and willingness to meet 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. For other loans (for example, smaller dollar loans), a trend analysis is also incorporated to determine an estimate of potential future downgrades. In addition, the economic environment and industry trends are evaluated in the establishment of the estimated range of potential problem loans for the next quarter. Current trends will additionally influence the size of the estimated range. Because of the inherent uncertainty in forecasting future events, the estimated range of potential problem loans ultimately represents the estimated aggregate dollar amounts of loans, as opposed to an individual listing of loans.
Many 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 3 "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 13— Analysis of Non-Accrual Loans
 
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2020
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
431

 
$
2

 
$
74

 
$
507

Additions
258

 
—

 
—

 
258

Net payments/other activity
(52
)
 
(1
)
 
(2
)
 
(55
)
Return to accrual
(2
)
 
—

 
—

 
(2
)
Charge-offs on non-accrual loans(2)
(60
)
 
—

 
—

 
(60
)
Transfers to held for sale(3)
(3
)
 
—

 
—

 
(3
)
Transfers to real estate owned
(2
)
 
—

 
—

 
(2
)
Sales
(5
)
 
—

 
—

 
(5
)
Balance at end of period
$
565

 
$
1

 
$
72

 
$
638

 
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2019
 
Commercial
 
Investor
Real Estate
 
Consumer(1)
 
Total
 
(In millions)
Balance at beginning of period
$
382

 
$
11

 
$
103

 
$
496

Additions
104

 
—

 
—

 
104

Net payments/other activity
(29
)
 
(3
)
 
(5
)
 
(37
)
Return to accrual
(1
)
 
—

 
—

 
(1
)
Charge-offs on non-accrual loans(2)
(25
)
 
—

 
—

 
(25
)
Transfers to held for sale(3)
(12
)
 
—

 
—

 
(12
)
Transfers to real estate owned
(1
)
 
—

 
—

 
(1
)
Sales
(1
)
 
—

 
—

 
(1
)
Balance at end of period
$
417

 
$
8

 
$
98

 
$
523

________
(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 net payments/other activity line.
(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 $1 million and $2 million recorded upon transfer for the three months ended March 31, 2020 and 2019, respectively.

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GOODWILL
Goodwill totaled $4.8 billion at both March 31, 2020 and December 31, 2019 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 consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019 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).
During the first quarter of 2020, Regions assessed events and circumstances for all three reporting units as of March 31, 2020, and through the date of the filing of this Form 10-Q that could potentially indicate goodwill impairment including analyzing the impacts from the onset of the COVID-19 pandemic. The indicators assessed included:
•Recent operating performance,
•Changes in market capitalization,
•Regulatory actions and assessments,
•Changes in the business climate (including legislation, legal factors, competition and impacts from COVID-19),
•Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and
•Trends in the banking industry.
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 (Corporate Bank, Consumer Bank and Wealth Management) had declined below their carrying value as of March 31, 2020. Therefore, Regions determined that a test of goodwill impairment was not required for each of Regions’ reporting units for the March 31, 2020 interim period. Regions will continue to monitor for indicators of impairment throughout 2020.
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 convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as mobile and internet banking.
The following table summarizes deposits by category:
Table 14—Deposits
 
March 31, 2020
 
December 31, 2019
 
(In millions)
Non-interest-bearing demand
$
37,133

 
$
34,113

Savings
9,199

 
8,640

Interest-bearing transaction
19,992

 
20,046

Money market—domestic
26,328

 
25,326

Time deposits
7,122

 
7,442

Customer deposits
99,774

 
95,567

Corporate treasury time deposits
256

 
108

Corporate treasury other deposits
—

 
1,800

 
$
100,030

 
$
97,475

Total deposits at March 31, 2020 increased approximately $2.6 billion compared to year-end 2019 levels, due to increases in non-interest-bearing demand, domestic money market and savings accounts. These increases were offset by decreases in corporate treasury other deposits and customer time deposits. Non-interest-bearing demand deposits increased as customers reacted to the uncertainly in the economic environment, driven by the COVID-19 pandemic, by increasing line of credit draws and keeping excess cash in deposit accounts. Domestic money market and savings accounts also increased as customers seek the safety of a regulated and insured financial institution in times of economic uncertainty. Corporate treasury other deposits decreased as these deposits were used to supplement incremental balance sheet funding at year-end 2019, but were no longer being utilized at the end of the first quarter of 2020.


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SHORT-TERM BORROWINGS
Short-term borrowings, which consist of FHLB advances, totaled $3.2 billion at March 31, 2020 as compared to $2.1 billion at December 31, 2019. The levels of these borrowings can fluctuate depending on the Company's funding needs and the sources utilized. FHLB borrowings increased from December 31, 2019 to March 31, 2020 as additional FHLB advances were used to increase cash held at the FRB, in response to the current economic environment.
Short-term secured borrowings, such as securities sold under agreements to repurchase and FHLB advances, are a core portion of Regions funding strategy. The securities financing market and specifically short-term FHLB advances continue to provide reliable funding at attractive rates. See the "Liquidity" section for further detail of Regions' borrowing capacity with the FHLB.
LONG-TERM BORROWINGS
Table 15—Long-Term Borrowings
 
March 31, 2020
 
December 31, 2019
 
(In millions)
Regions Financial Corporation (Parent):
 
 
 
3.20% senior notes due February 2021
$
359

 
$
358

2.75% senior notes due August 2022
997

 
997

3.80% senior notes due August 2023
996

 
996

7.75% subordinated notes due September 2024
100

 
100

6.75% subordinated debentures due November 2025
156

 
156

7.375% subordinated notes due December 2037
298

 
298

Valuation adjustments on hedged long-term debt
115

 
45

 
3,021

 
2,950

Regions Bank:
 
 
 
FHLB advances
4,651

 
2,501

2.75% senior notes due April 2021
549

 
549

3 month LIBOR plus 0.38% of floating rate senior notes due April 2021
350

 
350

3.374% senior notes converting to 3 month LIBOR plus 0.50%, callable August 2020, due August 2021
499

 
499

3 month LIBOR plus 0.50% of floating rate senior notes, callable August 2020, due August 2021
499

 
499

6.45% subordinated notes due June 2037
495

 
495

Other long-term debt
31

 
32

Valuation adjustments on hedged long-term debt
10

 
4

 
7,084

 
4,929

Total consolidated
$
10,105

 
$
7,879

Long-term borrowings increased by approximately $2.2 billion since year-end 2019, due primarily to an increase in FHLB advances of $2.2 billion. The increase in long-term FHLB advances was due to an anticipated increase in customer borrowing needs due to the current economic environment. As mentioned above, FHLB advances were also used to increase the balance of cash held at the FRB. See the "Liquidity" section for further detail of Regions' borrowing capacity with the FHLB.
Long-term FHLB advances have a weighted-average interest rate of 1.0 percent at March 31, 2020 and 1.9 percent at December 31, 2019, with remaining maturities ranging from less than one year to eight years and a weighted-average of approximately 1 year.
SHAREHOLDERS’ EQUITY
Shareholders’ equity was $17.3 billion at March 31, 2020 as compared to $16.3 billion at December 31, 2019. During the first three months of 2020, net income increased shareholders’ equity by $162 million, while cash dividends on common stock reduced shareholders' equity by $149 million and cash dividends on preferred stock reduced shareholder's equity by $23 million. The cumulative effect from the adoption of CECL decreased shareholders' equity by $377 million. See Note 1 "Basis of Presentation" for information about the CECL adoption. Changes in accumulated other comprehensive income increased shareholders' equity by $1.4 billion, primarily due to the net change in unrealized gains (losses) on securities available for sale and derivative instruments as a result of changes in market interest rates during the first quarter 2020.

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During the second quarter of 2019, the Board authorized the repurchase of up to $1.370 billion of the Company's common stock, permitting repurchases from the beginning of the third quarter of 2019 through the end of the second quarter of 2020. The Company did not repurchase shares in the first quarter of 2020, and given the uncertainty in the overall economic environment as a result of the COVID-19 pandemic, no share repurchases are currently anticipated for 2020.
Regions' dividend policy is set to withstand adverse conditions and as such, the Company currently has no plans to reduce the level of or eliminate cash dividends in consideration of the COVID-19 pandemic.  However, Regions will continue to exercise prudent capital management and closely monitor the implications from the evolving economic environment. Under U.S. capital rules, the Company would be subject to constraints on dividend payout restrictions if it failed to meet the effective minimum ratio requirements, which are comprised of regulatory minimum capital levels of 4.5% CET1 to risk-weighted assets, 6.0% tier 1 capital to risk-weighted assets and 8.0% total risk-based capital to risk-weighted assets, plus a static 2.5% Capital Conservation Buffer. As such, effective minimum requirements are currently 7% CET1 capital to risk-weighted assets, 8.5% tier 1 capital to risk-weighted assets and 10.5% total risk-based capital to risk-weighted assets.
In the first quarter of 2020, the Federal Reserve finalized the Stress Capital Buffer framework that will replace the Capital Conservation Buffer when implemented in October 2020. See "Regulatory Requirements" section for further information.
See Note 5 "Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)" for additional information.
REGULATORY REQUIREMENTS
Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies. These regulatory capital requirements involve quantitative measures of the Company's assets, liabilities and selected 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.
Under the Basel III Rules, Regions is designated as a standardized approach bank. Additional discussion of the Basel III Rules, their applicability to Regions, recent proposals and final rules issued by the federal banking agencies and recent laws enacted that impact regulatory requirements is included in the "Regulatory Requirements" section of Management's Discussion and Analysis in the 2019 Annual Report on Form 10-K. Additional discussion is also included in Note 13 "Regulatory Capital Requirements and Restrictions" to the consolidated financial statements in the 2019 Annual Report on Form 10-K.
In late March 2020, the federal banking agencies published an interim final rule related to revised transition of the impact of CECL on regulatory capital requirements.  The rule allows an add-back to regulatory capital for the impacts of CECL for a two-year period.  At the end of the two years, the impact is then phased-in over the following three years.  The add-back is calculated as the impact of initial adoption, adjusted for 25 percent of subsequent changes in the allowance.  At March 31, 2020, this amount was approximately $438 million.  The impact on CET1 was approximately 40 basis points.  The interim final rule has been published for comment, and has an immediate effective date.
Additionally in late March 2020, the CARES Act was signed into law.  This Act provides optional temporary relief from complying with CECL. While Regions is deferring the capital impact of CECL allowed by the interim final rule as discussed above, the Company did not elect the statutory relief related to CECL implementation provided by the CARES Act.
The following table summarizes the applicable holding company and bank regulatory requirements:
Table 16—Regulatory Capital Requirements
Transitional Basis Basel III Regulatory Capital Rules
March 31, 2020
Ratio (1)
 
December 31, 2019
Ratio
 
Minimum
Requirement
 
To Be Well
Capitalized
Basel III common equity Tier 1 capital:
 
 
 
 
 
 
 
Regions Financial Corporation
9.45
%
 
9.68
%
 
4.50
%
 
N/A

Regions Bank
11.47

 
11.58

 
4.50

 
6.50
%
Tier 1 capital:
 
 
 
 
 
 
 
Regions Financial Corporation
10.65
%
 
10.91
%
 
6.00
%
 
6.00
%
Regions Bank
11.47

 
11.58

 
6.00

 
8.00

Total capital:
 
 
 
 
 
 
 
Regions Financial Corporation
12.53
%
 
12.68
%
 
8.00
%
 
10.00
%
Regions Bank
12.94

 
12.92

 
8.00

 
10.00

Leverage capital:
 
 
 
 
 
 
 
Regions Financial Corporation
9.63
%
 
9.65
%
 
4.00
%
 
N/A

Regions Bank
10.39

 
10.24

 
4.00

 
5.00
%
_______
(1) The current quarter Basel III CET1 capital, Tier 1 capital, Total capital, and Leverage capital ratios are estimated.


70


In the first quarter of 2020, the Federal Reserve finalized the Stress Capital Buffer framework which, when implemented in October 2020, will create a firm-specific risk sensitive buffer to be applied to regulatory minimum capital levels in determining effective minimum ratio requirements. The Stress Capital Buffer will be floored at 2.5% to ensure effective minimum capital levels do not decline as a result of this rule change. When implemented, the Stress Capital Buffer will replace the current Capital Conservation Buffer, which is a static 2.5% in addition to the minimum risk-weighted asset ratios shown above.
The Federal Reserve approved its rule for tailoring enhanced prudential standards for bank holding companies with $100 billion or more in total consolidated assets.  The framework outlines tailored standards for matters related to capital and liquidity.  Regions is a "Category IV" institution under these rules.  See the “Supervision and Regulation” subsection of the “Business” section in the 2019 Annual Report on Form 10-K for more information.
       
LIQUIDITY
The federal banking agencies have adopted rules implementing Basel III’s LCR, which is designed to ensure that a covered bank or BHC maintains an adequate level of unencumbered high-quality liquid assets under an acute 30-day liquidity stress scenario. Under the tailoring rules, Regions has been designated as a Category IV institution and is no longer subject to any LCR requirement. Category IV institutions, including Regions, remain subject to liquidity risk management requirements, but these requirements are now tailored such that collateral positions are calculated only monthly, a more limited set of liquidity risk limits exists, and fewer elements of intraday liquidity risk exposures are monitored. Also, liquidity stress testing is required quarterly rather than monthly, and liquidity data on the FR 2052a is reported on a monthly basis. Regions remains subject to the liquidity buffer requirements.
Regions maintains a robust liquidity management framework designed to effectively manage liquidity risk in accordance with sound risk management principals.  The framework establishes sustainable processes and tools to effectively identify, measure, mitigate, monitor, and report liquidity risks beginning with Regions’ Liquidity Management Policy and the Liquidity Risk Appetite Statements approved by the Board.  Processes within the liquidity management framework include, but are not limited to, liquidity risk governance, cash management, liquidity stress testing, liquidity risk limits, contingency funding plans, and collateral management.  While the framework is designed to comply with liquidity regulations, the processes often go beyond minimum regulatory requirements and are commensurate with Regions’ operating model and risk profile.
    See the "Liquidity" section for more information. Also, see the “Supervision and Regulation—Liquidity Regulation” subsection of the “Business” section, the "Risk Factors" section and the "Liquidity" section in the 2019 Annual Report on Form 10-K for additional information.
RATINGS
Table 17 "Credit Ratings" reflects the debt ratings information of Regions Financial Corporation and Regions Bank by Standard and Poor's ("S&P"), Moody’s, Fitch and Dominion Bond Rating Service ("DBRS") as of March 31, 2020 and December 31, 2019.
Table 17—Credit Ratings
 
As of March 31, 2020 and December 31, 2019
 
S&P
Moody’s
Fitch
DBRS
Regions Financial Corporation
 
 
 
 
Senior unsecured debt
BBB+
Baa2
BBB+
AL
Subordinated debt
BBB
Baa2
BBB
BBBH
Regions Bank
 
 
 
 
Short-term
A-2
P-1
F1
R-IL
Long-term bank deposits
N/A
A2
A-
A
Senior unsecured debt
A-
Baa2
BBB+
A
Subordinated debt
BBB+
Baa2
BBB
AL
Outlook
Stable
Positive
Positive
Stable
 
_________
N/A - Not applicable.

On April 3, 2020 Moody's revised outlooks for Regions Bank and Regions Financial Corporation to stable from positive citing expectations for a contracting economy in 2020 which is expected to have a direct negative impact on U.S. banks' asset quality and profitability.

71


On April 9, 2020 Fitch revised the outlook for Regions Financial Corporation to stable from positive as part of an overall revision of its U.S. bank sector and rating outlook. Revision to the overall outlook was driven by concerns over the negative financial and economic impacts from the COVID-19 pandemic.
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, and acceptability of its letters of credit, 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, 2019 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.
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 average total loans”, "adjusted ending total loans", “adjusted efficiency ratio”, “adjusted fee income ratio”, “return on average tangible common shareholders' equity”, and end of period “tangible common shareholders’ equity”, 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 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
Total average and ending loans are presented excluding the indirect vehicles exit portfolio to arrive at adjusted average and ending total loans (non-GAAP). Regions believes adjusting average and ending total loans provides a meaningful calculation of loan growth rates and presents them on the same basis as that applied by management.
The adjusted efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as adjusted non-interest expense divided by adjusted total revenue on a taxable-equivalent basis. The adjusted fee income ratio (non-GAAP) is generally calculated as adjusted non-interest income divided by adjusted total revenue on a taxable-equivalent basis. 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 and non-interest income are added together to arrive at total revenue on a taxable-equivalent basis. Adjustments are made to arrive at adjusted total revenue on a taxable-equivalent basis (non-GAAP), which is the denominator for the adjusted efficiency and adjusted fee income ratios.
Tangible common shareholders’ 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 CET1, the calculation of which is codified in federal banking regulations. Analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common shareholders’ equity measure. Because tangible common shareholders’ equity is not formally defined by GAAP, this measure is considered to be a non-GAAP financial measure and other entities may calculate it differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common shareholders’ equity, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on this 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 shareholders.

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The following tables provide: 1) a reconciliation of average total loans to adjusted average total loans (non-GAAP), 2) a reconciliation of ending total loans to adjusted ending total loans (non-GAAP), 3) a reconciliation of net income (GAAP) to net income available to common shareholders (GAAP), 4) a reconciliation of non-interest expense (GAAP) to adjusted non-interest expense (non-GAAP), 5) a reconciliation of net interest income/margin, taxable equivalent basis (GAAP) to adjusted net interest income/margin, taxable equivalent basis (non-GAAP), 6) a reconciliation of non-interest income (GAAP) to adjusted non-interest income (non-GAAP), 7) a computation of adjusted total revenue (non-GAAP), 8) a computation of the adjusted efficiency ratio (non-GAAP), 9) a computation of the adjusted fee income ratio (non-GAAP), and 10) a reconciliation of average and ending shareholders’ equity (GAAP) to average and ending tangible common shareholders’ equity (non-GAAP) and calculations of related ratios (non-GAAP).
Table 18—GAAP to Non-GAAP Reconciliations
 
Three Months Ended March 31
 
2020
 
2019
 
(Dollars in millions)
ADJUSTED AVERAGE BALANCES OF LOANS
 
 
 
Average total loans
$
83,249

 
$
83,725

Less: Indirect—vehicles
1,679

 
2,924

Adjusted average total loans (non-GAAP)
$
81,570

 
$
80,801

 
March 31, 2020
 
December 31, 2019
 
(Dollars in millions)
ADJUSTED ENDING BALANCES OF LOANS
 
 
 
Ending total loans
$
88,098

 
$
84,430

Less: Indirect—vehicles
1,557

 
2,759

Adjusted ending total loans (non-GAAP)
86,541

 
81,671


73


 
 
Three Months Ended March 31
 
 
2020
 
2019
 
 
(Dollars in millions)
INCOME
 
 
 
 
Net income (GAAP)
 
$
162

 
$
394

Preferred dividends (GAAP)
 
(23
)
 
(16
)
Net income available to common shareholders (GAAP)
A
$
139

 
$
378

ADJUSTED EFFICIENCY AND FEE INCOME RATIOS
 
 
 
 
Non-interest expense (GAAP)
B
$
836

 
$
860

Significant items:
 
 
 
 
   Branch consolidation, property and equipment charges
 
(11
)
 
(6
)
Salary and employee benefits—severance charges
 
(1
)
 
(2
)
Adjusted non-interest expense (non-GAAP)
C
$
824

 
$
852

Net interest income (GAAP)
D
$
928

 
$
948

Taxable-equivalent adjustment
 
12

 
13

Net interest income, taxable-equivalent basis
E
940

 
961

Non-interest income (GAAP)
F
485

 
502

Significant items:
 
 
 
 
Securities (gains) losses, net
 
—

 
7

Leveraged lease termination gains
 
(2
)
 
—

Gain on sale of affordable housing residential mortgage loans (1)
 
—

 
(8
)
Adjusted non-interest income (non-GAAP)
G
$
483

 
$
501

Total revenue
D+F=H
$
1,413

 
$
1,450

Adjusted total revenue
D+G=I
$
1,411

 
$
1,449

Total revenue, taxable-equivalent basis
E+F=J
$
1,425

 
$
1,463

Adjusted total revenue, taxable-equivalent basis (non-GAAP)
E+G=K
$
1,423

 
$
1,462

Efficiency ratio (GAAP)
B/J
58.65
%
 
58.81
%
Adjusted efficiency ratio (non-GAAP)
C/K
57.89
%
 
58.29
%
Fee income ratio (GAAP)
F/J
34.05
%
 
34.31
%
Adjusted fee income ratio (non-GAAP)
G/K
33.95
%
 
34.26
%
RETURN ON AVERAGE TANGIBLE COMMON SHAREHOLDERS’ EQUITY
 
 
 
 
Average shareholders’ equity (GAAP)
 
$
16,460

 
$
15,192

Less: Average intangible assets (GAAP)
 
4,947

 
4,940

 Average deferred tax liability related to intangibles (GAAP)
 
(92
)
 
(94
)
 Average preferred stock (GAAP)
 
1,310

 
820

Average tangible common shareholders’ equity (non-GAAP)
L
$
10,295

 
$
9,526

Return on average tangible common shareholders’ equity (non-GAAP)(2)
A/L
5.43
%
 
16.09
%

74


 
 
March 31, 2020
 
December 31, 2019
 
 
(Dollars in millions, except per share data)
TANGIBLE COMMON RATIOS
 
 
 
 
Ending shareholders’ equity (GAAP)
 
$
17,332

 
$
16,295

Less: Ending intangible assets (GAAP)
 
4,943

 
4,950

  Ending deferred tax liability related to intangibles (GAAP)
 
(92
)
 
(92
)
  Ending preferred stock (GAAP)
 
1,310

 
1,310

Ending tangible common shareholders’ equity (non-GAAP)
M
$
11,171

 
$
10,127

Ending total assets (GAAP)
 
$
133,542

 
$
126,240

Less: Ending intangible assets (GAAP)
 
4,943

 
4,950

  Ending deferred tax liability related to intangibles (GAAP)
 
(92
)
 
(92
)
Ending tangible assets (non-GAAP)
N
$
128,691

 
$
121,382

End of period shares outstanding
O
957

 
957

Tangible common shareholders’ equity to tangible assets (non-GAAP)
M/N
8.68
%
 
8.34
%
Tangible common book value per share (non-GAAP)
M/O
$
11.67

 
$
10.58

 
 
 
 
 
________
(1) The gain on sale of affordable housing residential mortgage loans in the first quarter of 2019 was the result of the sale of approximately $167 million of loans.
(2) Income statement amounts have been annualized in calculation.
    

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OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 19—Consolidated Average Daily Balances and Yield/Rate Analysis
 
Three Months Ended March 31
 
2020
 
2019
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(Dollars in millions; yields on taxable-equivalent basis)
Assets
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
Debt securities(1)
$
23,766

 
$
158

 
2.66
%
 
$
24,695

 
$
165

 
2.67
%
Loans held for sale
514

 
5

 
3.72

 
302

 
3

 
3.63

Loans, net of unearned income (2)(3)
83,249

 
915

 
4.40

 
83,725

 
994

 
4.78

Other earning assets
2,302

 
13

 
2.37

 
2,213

 
22

 
4.16

Total earning assets
109,831

 
1,091

 
3.97

 
110,935

 
1,184

 
4.29

Unrealized gains/(losses) on securities available for sale, net
510

 
 
 
 
 
(444
)
 
 
 
 
Allowance for loan losses
(1,315
)
 
 
 
 
 
(843
)
 
 
 
 
Cash and due from banks
1,915

 
 
 
 
 
1,893

 
 
 
 
Other non-earning assets
13,830

 
 
 
 
 
14,002

 
 
 
 
 
$
124,771

 
 
 
 
 
$
125,543

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
8,822

 
4

 
0.17

 
$
8,852

 
4

 
0.17

Interest-bearing checking
19,273

 
22

 
0.47

 
19,309

 
33

 
0.69

Money market
25,151

 
28

 
0.46

 
23,989

 
40

 
0.68

Time deposits
7,302

 
26

 
1.44

 
7,471

 
27

 
1.49

Other deposits
919

 
4

 
1.57

 
653

 
4

 
2.33

Total interest-bearing deposits (4)
61,467

 
84

 
0.55

 
60,274

 
108

 
0.73

Federal funds purchased and securities sold under agreements to repurchase
151

 
1

 
1.39

 
343

 
2

 
2.41

Other short-term borrowings
1,644

 
7

 
1.69

 
1,735

 
11

 
2.55

Long-term borrowings
8,402

 
59

 
2.81

 
11,753

 
102

 
3.47

Total interest-bearing liabilities
71,664

 
151

 
0.85

 
74,105

 
223

 
1.22

Non-interest-bearing deposits (4)
34,205

 
—

 
—

 
33,896

 
—

 
—

Total funding sources
105,869

 
151

 
0.57

 
108,001

 
223

 
0.83

Net interest spread
 
 
 
 
3.12

 
 
 
 
 
3.07

Other liabilities
2,442

 
 
 
 
 
2,350

 
 
 
 
Shareholders’ equity
16,460

 
 
 
 
 
15,192

 
 
 
 
 
$
124,771

 
 
 
 
 
$
125,543

 
 
 
 
Net interest income /margin on a taxable-equivalent basis(5)
 
 
$
940

 
3.44
%
 
 
 
$
961

 
3.51
%
_____
(1)
Debt securities are included on an amortized cost basis with yield, net interest spread, and net interest margin calculated accordingly.
(2)
Loans, net of unearned income include non-accrual loans for all periods presented.
(3)
Interest income includes net loan fees of $2 million and $1 million for the three months ended March 31, 2020 and 2019, respectively.
(4)
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 0.35% and 0.46% for the three months ended March 31, 2020 and 2019, respectively.
(5)
The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 21% for both March 31, 2020 and 2019 adjusted for applicable state income taxes net of the related federal tax benefit.


 

      

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For the first quarter of 2020, net interest income (taxable-equivalent basis) totaled $940 million compared to $961 million in the first quarter of 2019. The net interest margin (taxable-equivalent basis) was 3.44 percent for the first quarter of 2020 and 3.51 percent for the first quarter of 2019. The decreases in net interest income and net interest margin for the first quarter 2020, compared to the same period in 2019, were primarily attributable to lower market interest rates. The decreases were partially offset by lower funding costs, the positive impact of loan hedges becoming active during the first quarter of 2020, and favorable loan remixing into higher yielding consumer loans. Furthermore, one additional day in the current quarter increased net interest income but reduced net interest margin, and lower average loan balances negatively impacted net interest income but positively impacted net interest margin.
MARKET RISK—INTEREST RATE RISK
Regions’ primary market risk is interest rate risk. This includes uncertainty with respect to absolute interest rate levels as well as relative interest rate levels, which are 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 to market rate movements 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 results 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 pricing of 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 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 derived using “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Given low market rates by historical standards, the Company focuses on a falling rate shock scenario with most yield curve tenors floored near zero and a reduction in mortgage indices based on historical minimums as explained in the following section. In addition to parallel curve shifts, multiple curve steepening and flattening scenarios are contemplated. Regions includes simulations of gradual interest rate movements phased in over a six-month period that may more realistically mimic the speed of potential interest rate movements.
Exposure to Interest Rate Movements—As of March 31, 2020, Regions was modestly asset sensitive to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the measurement horizon ending March 2021. The estimated exposure associated with falling rate scenarios in the table below reflects the combined impacts of movements in short-term and long-term interest rates. The decline in short-term interest rates (such as the Fed Funds rate, the rate of Interest on Excess Reserves and 1 month LIBOR) will lead to a reduction of yield on assets and liabilities contractually tied to such rates. Deposit and other funding costs are currently low when compared to historical levels. Therefore, it is expected that declines in funding costs will only partially offset the decline in asset yields. Yet, the combination of deposit cost reductions and increased balance sheet hedging income serves to mostly offset net interest income sensitivity to short-term rates. Net interest income remains exposed to longer yield curve tenors. A reduction in intermediate and long-term interest rates (such as intermediate to longer-term U.S. Treasuries, swap and mortgage rates) will drive yields lower on certain fixed rate, newly originated or renewed loans, reduce prospective yields on certain investment portfolio purchases, and increase amortization of premium expense on existing securities in the investment portfolio.
The table below summarizes Regions' positioning in various parallel yield curve shifts (i.e., including all yield curve tenors). The scenarios are inclusive of all interest rate risk hedging activities. Forward starting hedges that have been transacted are contemplated to the extent they start within the measurement horizon. Twelve-month horizon asset sensitivity levels are expected to continue to decline through 2020 as forward starting hedges move completely into the measurement window. More information regarding forward starting hedges is disclosed in Table 21 and its accompanying description.


77


Table 20—Interest Rate Sensitivity
 
Estimated Annual Change
in Net Interest Income
March 31, 2020(1)(2)
 
(In millions)
Gradual Change in Interest Rates
 
+ 200 basis points

$113

+ 100 basis points
69

- 100 basis points (floored)(3)
(44
)
 
 
Instantaneous Change in Interest Rates
 
+ 200 basis points

$127

+ 100 basis points
89

- 100 basis points (floored)(3)
(78
)
_________
(1)
Disclosed interest rate sensitivity levels represent the 12 month forward looking net interest income changes as compared to market forward rate cases and include expected balance sheet growth and remixing.
(2)
Forward starting cash flow hedges already transacted will reduce sensitivity levels through 2020 as they continue to move into the measurement horizon. See Table 22 for additional information regarding hedge start dates.
(3)
The -100 basis point (floored) scenario represents a 12 month average rate shock of -21 basis points and -80 basis points to zero for 1 month LIBOR and the 10 year U.S. Treasury yield, respectively. Mortgage yield shocks are floored at their historical minimums minus 35 basis points.
As market interest rates increased in recent years, Regions had established scenarios by which yield curve tenors will fall to a consistent level. The shock magnitude for each tenor, when compared to market forward rates, equated to the lesser of the shock scenario amount, or a rate 35 basis points lower than the historical all-time minimum. Recent market volatility and new historic lows established for longer yield curve tenors have resulted in a shock scenario where the majority of rates now fall to approximately zero. Mortgage rates, which have retained somewhat elevated levels, are still being shocked in the manner previously described. Further, the scenarios presented do not allow for negative rates. The falling rate scenarios in Table 20 above quantify the expected impact for both gradual and instantaneous shocks under this environment.
As discussed above, the interest rate sensitivity analysis presented in Table 20 is informed by a variety of assumptions and estimates regarding the progression of the balance sheet in both the baseline scenario as well as the scenarios of instantaneous and gradual shifts in the yield curve. Though there are many assumptions which affect the estimates for net interest income, those pertaining to deposit pricing, deposit mix and overall balance sheet composition are particularly impactful. Given the uncertainties associated with the prolonged period of low interest rates, management evaluates the impact to its sensitivity analysis of these key assumptions. Sensitivity calculations are hypothetical and should not be considered to be predictive of future results.
The Company’s baseline balance sheet assumptions include loan and deposit growth reflecting management's best estimate. The behavior of deposits in response to changes in interest rate levels is largely informed by analyses of prior rate cycles, but with suitable adjustments based on management’s expectations in the current rate environment. In the base case scenario and falling rate scenarios in Table 20, interest-bearing deposit rates achieve historical lows. In rising rate scenarios only, management assumes that the mix of deposits will change versus the base case balance sheet growth assumptions as informed by analyses of prior rate cycles. Management assumes that in rising rate scenarios, some shift from non-interest bearing to interest-bearing products will occur. The magnitude of the shift is rate dependent and equates to approximately $2.0 billion over 12 months in the gradual +100 basis point scenario in Table 20. While estimates should be used as a guide, differences may result driven by the pace of rate changes, and other market competitive factors.
Interest rate movements may also have an impact on the value of Regions’ securities portfolio, which can directly impact the carrying value of shareholders’ 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. 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. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks. 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.
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

78


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 by customers 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 and floors in balance sheet hedging strategies to effectively convert a portion of its fixed-rate funding position to a variable-rate position and to effectively convert a portion of its variable-rate loan portfolios to fixed-rate. Regions also uses derivatives to economically 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.
The following table presents additional information about the hedging interest rate derivatives used by Regions to manage interest rate risk:
Table 21—Hedging Derivatives by Interest Rate Risk Management Strategy
 
March 31, 2020
 
 
 
Weighted-Average
 
 
 
Notional
Amount
 
Maturity (Years)
 
Receive Rate(1)
 
Pay Rate(1)
 
Strike Price(1)(2)
 
(Dollars in millions)
Derivatives in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable swaps
$
2,900

 
2.2

 
2.2
%
 
0.9
%
 
—
%
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
     Receive fixed/pay variable swaps
16,000

 
5.0

 
1.9

 
1.0

 
—

     Interest rate floors
6,750

 
4.6

 
—

 
—

 
2.1

     Total derivatives designated as hedging instruments
$
25,650

 
4.6

 
1.9
%
 
1.0
%
 
2.1
%
_________
(1)
Variable rate indexes on swap and floor contracts reference a combination of short-term LIBOR benchmarks, primarily 1 month LIBOR.
A portion of the cash flow hedging relationships designated in Table 21 above are forward starting, including $5.25 billion notional of the outstanding cash flow swaps and $2.0 billion notional of the outstanding cash flow floors. Interest rate swaps and floors of $5.3 billion and $4.0 billion, respectively, became active during the first quarter of 2020. Forward starting swaps and floors have maturities of approximately five years from their respective start dates.
The following table presents cash flow hedge notional amounts with start dates prior to the year-end periods shown through 2026. All cash flow hedge notional amounts mature prior to the end of 2027.







79


Table 22—Schedule of Notional for Cash Flow Hedging Derivatives
 
Notional Amount
 
Years Ended
 
2020(1)(2)
 
2021(1)(2)
 
2022
 
2023
 
2024
 
2025
 
2026
 
(In millions)
Receive fixed/pay variable swaps
$
15,250

 
$
16,000

 
$
16,000

 
$
13,700

 
$
12,700

 
$
3,750

 
$
1,250

Interest rate floors
6,500

 
6,750

 
6,750

 
6,750

 
4,000

 
250

 
—

Cash flow hedges
$
21,750

 
$
22,750

 
$
22,750

 
$
20,450

 
$
16,700

 
$
4,000

 
$
1,250

_________
(1)
As forward starting cash flow hedges are transacted within the 12 month measurement horizon, they will reduce 12 month net interest income sensitivity levels as disclosed in Table 20.
(2)
As of March 31, 2020, $10.75 billion of the $16.0 billion notional of the cash flow swaps and $4.75 billion of the $6.75 billion notional of the interest rate floors are active. During the second quarter of 2020, an additional $3.0 billion notional of interest rate swaps and $1.75 billion notional of interest rate floors will become active. During the third quarter of 2020 $250 million notional of interest rate swaps become active; and during the fourth quarter of 2020 $1.25 billion notional of interest rate swaps become active. The remaining $750 million notional of interest rate swaps and $250 million notional of interest rate floors become active in the first quarter of 2021.
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. All hedging interest rate swap derivatives traded by Regions are subject to mandatory clearing. The counterparty risk for cleared trades effectively moves from the executing broker to the clearinghouse allowing Regions to benefit from the risk mitigation controls in place at the respective clearinghouse. The “Credit Risk” section in Regions’ Annual Report on Form 10-K for the year ended December 31, 2019 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 derivative instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income.
The primary objective of Regions’ hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions’ execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 8 "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 residential MSRs at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative transactions to economically mitigate the impact of market value fluctuations related to residential MSRs. Derivative instruments entered into in the future could be materially different from the current risk profile of Regions’ current portfolio.
LIBOR Transition - In 2017, the Financial Conduct Authority, which regulates LIBOR, announced that by the end of 2021 panel banks will no longer be required to submit estimates that are used to construct LIBOR, confirming that the continuation of LIBOR will not be guaranteed beyond that date.  Regions holds instruments that may be impacted by the likely discontinuance of LIBOR, including loans, investments, hedging products, floating-rate obligations and other financial instruments that use LIBOR as a benchmark rate. The Company cannot currently predict the full impact of the LIBOR discontinuation on net interest income or the related processes. However, Regions is coordinating with regulators and industry groups to identify appropriate alternative rates for contracts expiring after 2021, and preparing for this transition as it relates to both new and existing exposures. The Company has established a LIBOR Transition Program, which includes dedicated leadership and staff with all relevant business lines and support groups engaged. A LIBOR impact and risk assessment has been performed, which identified the associated risks across products, systems, models, and processes. Updated fallback language was incorporated into LIBOR-relevant contracts and customer facing communication which commenced with the launch of the regions.com/libor page. Steps to mitigate risks associated with the transition are being overseen by Regions’ Executive LIBOR Steering Committee as part of the LIBOR Transition Program. Continuing activities of the LIBOR Transition Program include facilitating the transition of all financial and strategic processes, systems and models; performing assessments of the transition impact to contracts and products; evaluating necessary operational and infrastructure enhancements upon implementation of alternative benchmark rates; and coordinating communications with customers.

80


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 residential MSR, 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 the residential MSRs. Regions actively monitors prepayment exposure as part of its overall net interest income forecasting and interest rate risk management.
LIQUIDITY
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 maintains strong liquidity levels that position the Company to respond to stressed environments. As discussed below, Regions has a variety of liquidity sources, which it continues to utilize to fund customer needs.
On March 27, 2020, the CARES Act was signed into law as a response to the economic uncertainty amid the COVID-19 pandemic. A focus of the Act is the establishment of federally guaranteed loans for small businesses under the PPP. Regions, a certified SBA lender, has and will continue to assist its customers through the process of utilizing this program. As a lending institution in this program, additional liquidity is available to the Company through the Federal Reserve's Paycheck Protection Program Liquidity Facility. Regions' use of this funding source will depend on how economic conditions develop and also on the continuing demand for PPP loans and other sources of liquidity.
Regions intends to fund its obligations primarily through cash generated from normal operations. Regions also has obligations related to potential litigation contingencies. See Note 11 "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, borrowed funds and shareholders’ 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 in normal and stressed conditions. Having and using various sources of liquidity to satisfy the Company’s funding requirements is important.
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' liquidity 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. Cash and cash equivalents at the holding company totaled $1.6 billion at March 31, 2020. Compliance with the holding company cash requirements is reported to the Risk Committee of the Board on a quarterly basis. Regions also has minimum liquidity requirements for the Bank and subsidiaries. These minimum requirements are informed by internal stress testing measures which are reflective of Regions' portfolio and business mix. The Bank's funding and contingency planning does not currently assume any reliance on short-term unsecured sources. Risk limits are established by the Board through its Risk Appetite Statement and Liquidity Policy. The Company's Board, LROC and ALCO regularly review 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 2 "Debt Securities"to the consolidated financial statements). The agency guaranteed mortgage-backed securities portfolio is another source of liquidity in various secured borrowing capacities.
Maturities in the loan portfolio also provide a steady flow of funds. Regions’ liquidity is further enhanced by its relatively stable customer deposit base. Liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not assume reliance on short-term unsecured sources of funding.
The balance with the FRB is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At March 31, 2020, Regions had approximately $3.2 billion in cash on deposit with the FRB, an increase from approximately $2.5 billion at December 31, 2019. Refer to the "Cash and Cash Equivalents" section for more information.

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Regions’ borrowing availability with the FRB as of March 31, 2020, based on assets pledged as collateral on that date, was $15.3 billion.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of March 31, 2020, Regions’ outstanding balance of FHLB borrowings was $7.8 billion and its total borrowing capacity from the FHLB totaled approximately $17.6 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank pledged certain securities, commercial and real estate mortgage loans, residential first mortgage loans on one-to-four family dwellings and home equity lines of credit as collateral for the outstanding FHLB advances. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. The FHLB has been and is expected to continue to be a reliable and economical source of funding.
Regions maintains a shelf registration statement with the SEC that can be utilized by Regions to issue various debt and/or equity securities. Additionally, Regions' Board has authorized Regions Bank to issue up to $10 billion in aggregate principal amount of bank notes outstanding at any one time. Refer to Note 12 "Borrowings" to the consolidated financial statements in the 2019 Annual Report on Form 10-K for additional information.
Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt 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 credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has various processes to manage credit risk as described below. In order to assess the risk profile of the loan portfolio, Regions considers risk factors within the loan portfolio segments and classes, the current U.S. economic environment and that of its primary banking markets, as well as counterparty risk. See the “Portfolio Characteristics” section of the Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of risk characteristics of each loan type.
INFORMATION SECURITY RISK
Regions faces a variety of operational risks, including information security risks. Information security risks, such as evolving and adaptive cyber attacks that are conducted regularly against Regions and other large financial institutions to compromise or disable information systems, have generally increased in recent years. This trend is expected to continue for a number of reasons, including the proliferation of new technologies, including technology-based products and services used by us and our customers, the increasing use of mobile devices and cloud technologies, the ability to conduct more financial transactions online, and the increasing sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties or fraud on the part of employees.
Regions devotes significant financial and non-financial resources to identify and mitigate threats to the confidentiality, availability and integrity of its information systems. Regions regularly assesses the threats and vulnerabilities to its environment so it can update and maintain its systems and controls to effectively mitigate these risks. Layered security controls are designed to complement each other to protect customer information and transactions. Regions regularly tests its control environment utilizing practices such as penetration testing and more targeted assessments to ensure its controls are working as expected. Regions will continue to commit the resources necessary to mitigate these growing cyber risks, as well as continue to develop and enhance controls, processes and technology to respond to evolving disruptive technology and to protect its systems from attacks or unauthorized access. In addition, Regions maintains a strong commitment to a comprehensive risk management program that includes due diligence and oversight of third-party relationships with vendors.
As a result of the COVID-19 pandemic, Regions has experienced a modest increase in cyber events, such as phishing attacks and malicious traffic from outside the United States.  However, the Company's layered control environment has effectively detected and prevented any material impact related to these events.
Regions’ system of internal controls also incorporates an organization-wide protocol for the appropriate reporting and escalation of information security matters to management and the Board, to ensure effective and efficient resolution and, if necessary, disclosure of any matters. The Board is actively engaged in the oversight of Regions’ continuous efforts to reinforce and enhance its operational resilience and receives education to ensure that their oversight efforts accommodate for the ever-evolving information security threat landscape. The Board monitors Regions’ information management risk policies and practices primarily through its Risk Committee, which oversees areas of operational risk such as information technology activities; risks associated with development, infrastructure, and cybersecurity; approval and oversight of internal and third-party information security risk assessments, strategies, policies and programs; and disaster recovery, business continuity, and incident response plans. Additionally, the Board’s Audit Committee regularly reviews Regions’ cybersecurity practices, mainly by receiving reports on the cybersecurity management program prepared by the Chief Information Security Officer, risk management, and Internal Audit. The Board annually reviews the information security program and, through its various committees, is briefed at least quarterly on information security matters.

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Regions participates in information sharing organizations such as FS-ISAC, to gather and share information with peer banks and other financial institutions to better prepare and protect its information systems from attack. FS-ISAC is a nonprofit organization whose objective 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 made available to other members for the greater good of the membership. In addition to FS-ISAC, Regions is a member of BITS. BITS serves the financial community and its members by providing industry best practices on a variety of security and fraud topics.
Regions has contracts with vendors to provide denial of service mitigation. These vendors have also committed the necessary resources to support Regions in the event of a cyber event. Even though Regions devotes significant resources to combat cyber security risks, there is no guarantee that these measures will provide absolute security. As an additional security measure, Regions has engaged a computer forensics firm and an industry-leading consulting firm on retainer in case of a cyber event. Regions has also developed and maintains robust business continuity and disaster recovery plans that it could implement in the event of a cyber event so as to mitigate the effects of any such event and minimize necessary recovery time. Some of Regions' financial risk exposure with respect to data breaches may be offset by applicable insurance.
Even if Regions successfully prevents cyber attacks to its own network, the Company may still incur losses that result from customers' account information being obtained through breaches of retailers' networks where customers have transacted business. The fraud losses, as well as the costs of investigations and re-issuing new customer cards, may impact Regions' financial results. In addition, Regions also relies on some vendors to provide certain components of its business infrastructure, and although Regions actively assesses and monitors the information security capabilities of these vendors, Regions' reliance on them may also increase exposure to information security risk.
In the event of a cyber-attack or other data breach, Regions may be required to incur significant expenses, including with respect to remediation costs, costs of implementing additional preventative measures, addressing any reputational harm and addressing any related regulatory inquiries or civil litigation arising from the event.
PROVISION FOR CREDIT LOSSES
The provision for credit losses is used to maintain the allowance for loan losses and the reserve for unfunded credit losses at a level that in management’s judgment is appropriate to absorb expected credit losses over the contractual life of the loan and credit commitment portfolio at the balance sheet date. Regions adopted CECL on January 1, 2020. Upon adoption, Regions classified the provision for unfunded credit losses as provision for credit losses. Prior to 2020, the provision for unfunded credit losses was included in non-interest expense. The provision for credit losses totaled $373 million in the first quarter of 2020 compared to the provision for loan losses of $91 million during the first quarter of 2019. Refer to the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail.

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NON-INTEREST INCOME
Table 23—Non-Interest Income
 
Three Months Ended March 31
 
Quarter-to-Date Change 3/31/2020 vs. 3/31/2019
 
2020
 
2019
 
Amount
 
Percent
 
(Dollars in millions)
Service charges on deposit accounts
$
178

 
175

 
$
3

 
1.7
 %
Card and ATM fees
105

 
109

 
(4
)
 
(3.7
)%
Investment management and trust fee income
62

 
57

 
5

 
8.8
 %
Capital markets income
9

 
42

 
(33
)
 
(78.6
)%
Mortgage income
68

 
27

 
41

 
151.9
 %
Investment services fee income
22

 
19

 
3

 
15.8
 %
Commercial credit fee income
18

 
18

 
—

 
—
 %
Bank-owned life insurance
17

 
23

 
(6
)
 
(26.1
)%
Securities gains (losses), net
—

 
(7
)
 
7

 
100.0
 %
Market value adjustments on employee benefit assets - defined benefit
—

 
5

 
(5
)
 
(100.0
)%
Market value adjustments on employee benefit assets - other
(25
)
 
(1
)
 
(24
)
 
NM

Other miscellaneous income
31

 
35

 
(4
)
 
(11.4
)%
 
$
485

 
$
502

 
$
(17
)
 
(3.4
)%
 
________
NM - Not Meaningful
Service charges on deposit accounts—Service charges on deposit accounts include non-sufficient fund and overdraft fees, corporate analysis service charges, overdraft protection fees and other customer transaction-related service charges. The increase during the first quarter of 2020 compared to the same period of 2019 was primarily due to an increase in corporate analysis service charges, which were partially offset by a decrease in consumer service charges. However, service charges were negatively impacted during the first quarter of 2020 by a general decrease in spending late in the quarter associated with the COVID-19 pandemic. If recent spend levels persist, service charges on deposit accounts will continue to be negatively impacted. See the "First Quarter Overview" section of Management's Discussion and Analysis for further detail.
Card and ATM fees—Card and ATM fees include the combined amounts of credit card/bank card income and debit card and ATM related revenue. The decrease in the first quarter of 2020 compared to the same period of 2019 was driven primarily by decreases in consumer credit card income as a result of decreased debit and credit card spend and transaction volumes associated with the COVID-19 pandemic. If recent spend levels persist, card and ATM fees will continue to be negatively impacted. See the "First Quarter Overview" section of Management's Discussion and Analysis for further detail.
Capital markets income—Capital markets income primarily relates to capital raising activities that include securities underwriting and placement, loan syndication and placement, as well as foreign exchange, derivatives, merger and acquisition and other advisory services. The decrease in the first quarter of 2020 compared to the same period of 2019 was primarily driven by market-related credit valuation adjustments tied to customer derivatives, as well as a decline in merger and acquisition advisory fees reflecting the economic environment in the first quarter of 2020. The decreases were partially offset by increases in customer interest rate swap income and fees generated from the placement of permanent financing for real estate customers.
Mortgage income—Mortgage income is generated through the origination and servicing of residential mortgage loans for long-term investors and sales of residential mortgage loans in the secondary market. The increase in mortgage income in the first quarter of 2020 compared to the same period of 2019 was due primarily to increases in loan production and sales income as lower interest rates during the current quarter increased loan applications and production. Additionally, MSR valuation adjustments and related hedge activity positively impacted mortgage income.
Bank-owned life insurance—Bank-owned life insurance decreased in the first quarter of 2020 compared to the same period in 2019 due primarily to a decrease in claims benefits in the first quarter of 2020 and favorable market adjustments in the first quarter of 2019.
Securities gains (losses), net—Net securities gains (losses) primarily result from the Company's asset/liability management process. See Table 1 "Debt Securities" section for additional information.

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Market value adjustments on employee benefit assets—Market value adjustments on employee benefit assets, both defined benefit and other, are the reflection of market value variations related to assets held for certain employee benefits. The adjustments reported as employee benefit assets - other are offset in salaries and benefits. The decrease in market valuation adjustments for the other employee benefits assets during the first quarter of 2020 compared to the same period of 2019 was due primarily to the decline in the equity markets. Furthermore, the Company repositioned its defined benefit employee benefits assets portfolio during the second quarter of 2019 into investments that are no longer subject to the volatility of the equity markets.
Other miscellaneous income—Other miscellaneous income includes net revenue from affordable housing, valuation adjustments to equity investments, fees from safe deposit boxes, check fees and other miscellaneous income. Net revenue from affordable housing includes actual gains and losses resulting from the sale of affordable housing investments, cash distributions from the investments and any related impairment charges. Other miscellaneous income decreased in the first quarter of 2020 compared to the same period in 2019 primarily due to an $8 million gain associated with the sale of $167 million of affordable housing residential mortgage loans that was recognized in the first quarter of 2019. This decrease was partially offset by increases in leveraged lease termination gains and commercial leasing income. If current economic conditions persist, non-marketable equity investments may be negatively impacted resulting in valuation declines or impairment.
NON-INTEREST EXPENSE
Table 24—Non-Interest Expense
 
Three Months Ended March 31
 
Quarter-to-Date Change 3/31/2020 vs. 3/31/2019
 
2020
 
2019
 
Amount
 
Percent
 
(Dollars in millions)
Salaries and employee benefits
$
467

 
$
478

 
$
(11
)
 
(2.3
)%
Net occupancy expense
79

 
82

 
(3
)
 
(3.7
)%
Furniture and equipment expense
83

 
76

 
7

 
9.2
 %
Outside services
45

 
45

 
—

 
—
 %
Professional, legal and regulatory expenses
18

 
20

 
(2
)
 
(10.0
)%
Marketing
24

 
23

 
1

 
4.3
 %
FDIC insurance assessments
11

 
13

 
(2
)
 
(15.4
)%
Credit/checkcard expenses
13

 
16

 
(3
)
 
(18.8
)%
Branch consolidation, property and equipment charges
11

 
6

 
5

 
83.3
 %
Visa class B shares expense
4

 
4

 
—

 
—
 %
Provision (credit) for unfunded credit losses (1)
—

 
(1
)
 
1

 
100.0
 %
Other miscellaneous expenses
81

 
98

 
(17
)
 
(17.3
)%
 
$
836

 
$
860

 
$
(24
)
 
(2.8
)%
 
________
NM - Not Meaningful
(1) Upon adoption of CECL on January 1, 2020, the provision for credit losses presented within net interest income after provision for credit losses is the sum of the provision for loan losses and the provision for unfunded credit commitments. Prior to the adoption of CECL, the provision for unfunded commitments was included in other non-interest expense.

Salaries and employee benefits—Salaries and employee benefits consist of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and medical, life and disability insurance, as well as, expenses from liabilities held for employee benefit purposes. Salaries and employee benefits decreased during the first quarter of 2020 compared to the same period in 2019, driven primarily by negative market value adjustments on employee benefit assets. Full-time equivalent headcount decreased to 19,743 at March 31, 2020 from 20,056 at March 31, 2019, reflecting the impact of the Company's continued efficiency initiatives implemented as part of its strategic priorities.
Furniture and equipment expense—Furniture and equipment expense includes depreciation, maintenance and repairs, rent, taxes, and other expenses of equipment utilized by Regions and its affiliates. Furniture and equipment expense increased during the first quarter of 2020 compared to the same period in 2019 primarily due to increases in rental expenses, maintenance and repairs, and continued investments in technology.
Branch consolidation, property and equipment charges—Branch consolidation, property and equipment charges include valuation adjustments related to owned branches when the decision to close them is made. Accelerated depreciation and lease write-off charges are recorded for leased branches through and at the actual branch close date. Branch consolidation, property and equipment charges also include costs related to occupancy optimization initiatives.

85


Other miscellaneous expenses—Other miscellaneous expenses include expenses related to communications, postage, supplies, certain credit-related costs, foreclosed property expenses, mortgage repurchase costs, operational losses and other costs (benefits) related to employee benefit plans. Other miscellaneous expenses decreased during the first quarter of 2020 compared to the same period in 2019 primarily due to lower operational losses and declines in expenses related to non-service related pension costs.
INCOME TAXES
The Company’s income tax expense for the three months ended March 31, 2020 was $42 million and $105 million for the three months ended March 31, 2019, resulting in effective taxes rates of 20.6 percent and 21.0 percent, respectively.
Many factors impact the effective tax rate including, but not limited to, the level of pre-tax income, the mix of income between various tax jurisdictions with differing tax rates, net tax benefits related to affordable housing investments, bank-owned life insurance, tax-exempt interest, and nondeductible expenses. In addition, the effective tax rate is 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, share-based payments, valuation allowance changes and changes to unrecognized tax benefits. Accordingly, the comparability of the effective tax rate between periods may be impacted.
On January 1, 2020, the Company adopted CECL and recorded an adjustment to the opening balance of the allowance. The tax impact of this adjustment increased deferred tax assets by approximately $126 million. See Note 1 "Basis of Presentation" to the consolidated financial statements for further information.
At March 31, 2020, the Company reported a net deferred tax liability of $608 million compared to a net deferred tax liability of $328 million at December 31, 2019. The increase in the net deferred tax liability was primarily due to an increase in unrealized gains on derivative instruments and available for sale securities, partially offset by an increase in the deferred tax asset related to the allowance due to the adoption of CECL and the first quarter 2020 increase in the allowance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to pages 78 through 82 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, 2020, 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 11, "Commitments, Contingencies and Guarantees" in the Notes to the Consolidated Financial Statements (Unaudited) in Part I. Item 1. of this report, which is incorporated by reference.
Item 1A. Risk Factors
An investment in the Company involves risk, some of which, including market, liquidity, credit, operational, legal, compliance, reputational and strategic risks, could be substantial and is inherent in our business. This risk also includes the possibility that the value of the investment could decrease considerably, and dividends or other distributions concerning the investment could be reduced or eliminated. Discussed below is a risk factor that could adversely affect Regions' financial results and condition, as well as the value of, and return on investment in the Company, that was not included in Part II, Item 1A of the 2019 Annual Report on Form 10-K as it arose after the filing.
Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. We cannot predict at this time the extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity, capital and results of operations. The extent of any continued or future adverse effects of the COVID-19 pandemic will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, clients, customers, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.
The COVID-19 pandemic has contributed to (i) increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures; (ii) sudden and significant declines, and significant increases in volatility, in financial markets; (iii) ratings downgrades, credit deterioration and defaults in many industries, including transportation, natural resources (in particular oil and gas), hospitality and commercial real estate; (iv) significant draws on credit lines as customers seek to increase liquidity; (v) significant reductions in the targeted federal funds rate (which was reduced to a target rate of between zero and 0.25% in the first quarter and may be reduced to below zero if the Federal Reserve determines economic conditions warrant); (vi) increased spending on our business continuity efforts, which may in turn require that we further cut costs and investments in other areas; and (vii) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements. In addition, we also face an increased risk of client disputes, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic on market and economic conditions and actions governmental authorities take in response to those conditions.
We are prioritizing the safety of our customers and employees, and have temporarily closed a small number of branches and have limited branch activity to drive-through services or in-office appointments. Additionally, almost 50% of associates are working remotely. If these measures are not effective in serving our customers or affect the productivity of our associates, they may lead to significant disruptions in our business operations.
Many of our counterparties and third-party service providers have also been, and may further be, affected by “stay-at-home” orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.
We have experienced an increase in cyber events, such as phishing attacks and malicious traffic from outside the United States.  Our layered control environment has effectively detected and prevented any material impact related to these events to date. Our information security risks are generally expected to increase until the pandemic subsides.
We are offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic, including waivers of certain withdrawal fees from time deposits and savings and money market accounts, loan payment deferrals and extensions, credit card payment extensions, consumer mortgage payment forbearance and payment deferment, suspending initiation of new repossessions of automobiles and other vehicles and suspending new residential property foreclosures on consumer real estate loans. Additionally, we are a certified and qualified SBA lender and are assisting our customers with their applications for the PPP. These assistance efforts may adversely affect our revenue and results of operations. These government programs are complex and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation. In addition, if such measures are not effective in mitigating the effects of the COVID-19 pandemic on borrowers, we may experience higher rates of default and increased credit losses in future periods.
Certain industries where Regions has credit exposure, including restaurants (in particular, casual dining restaurants), hotels, agriculture, commercial retail, and transportation, have experienced significant operational challenges as a result of the COVID-19 pandemic. These negative effects have resulted in a number of corporate lending clients making higher than usual draws on

87


outstanding lines of credit, which may negatively affect our liquidity if current economic conditions persist. The effects of the COVID-19 pandemic may also cause our commercial customers to be unable to pay their loans as they come due or decrease the value of collateral, which we expect would cause significant increases in our credit losses.
Our earnings and cash flows are dependent to a large degree on net interest income (the difference between interest income from loans and investments and interest expense on deposits and borrowings). Net interest income is significantly affected by market rates of interest. The significant reductions to the federal funds rate has led to a decrease in the rates and yields on U.S. Treasury securities. If interest rates are reduced further in response to the COVID-19 pandemic, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to the COVID-19 pandemic, and resulting economic conditions.
The effects of the COVID-19 pandemic on economic and market conditions have increased demands on our liquidity as we meet our customers’ and clients’ needs. We have suspended stock repurchases through the second quarter of 2020 to preserve capital and liquidity in order to support our customers, clients and employees and although we have no current plans to reduce or suspend our common stock dividend, we will continue to exercise prudent capital management and monitor the business environment.
The COVID-19 pandemic may impact our assessment of our goodwill. During the first quarter of 2020, Regions assessed goodwill in light of the onset of the COVID-19 pandemic and concluded that it was not more likely than not that the fair value of each of our reporting units was less than its carrying value. Risks to our goodwill assessment are generally expected to increase until the pandemic subsides.
Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of the COVID-19 pandemic or avert severe and prolonged reductions in economic activity.
Other negative effects of the COVID-19 pandemic that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that our business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides and the U.S. economy begins to recover. Further, the COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q. Until the pandemic subsides, we expect continued draws on lines of credit, reduced revenues from our lending businesses, increased credit losses in our lending portfolios and decreased fee income. Even after the pandemic subsides, it is possible that the U.S. and other major economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 27, 2019, Regions announced the Board authorization of the repurchase of up to $1.370 billion of the Company's common stock, permitting repurchases from the beginning of the third quarter of 2019 through the end of the second quarter of 2020. Regions did not repurchase any outstanding common stock during the three month period ended March 31, 2020, and given the uncertainty in the overall economic environment as a result of the COVID-19 pandemic, no share repurchases are currently anticipated for 2020.



88


Item 6. Exhibits
The following is a list of exhibits including items incorporated by reference
3.1
 
 
 
3.2
 
 
 
 
3.3
 
 
 
3.4
 
 
 
 
3.5
 
 
 
 
31.1
 
 
 
31.2
 
 
 
32
 
 
 
101
 
The following materials from Regions' Form 10-Q Report for the quarterly period ended March 31, 2020, formatted in Inline XBRL: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Shareholders' Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.
 
 
 
104
 
The cover page of Regions' Form 10-Q Report for the quarter ended March 31, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).



89


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 the undersigned thereunto duly authorized.
 
 
 
 
DATE: May 6, 2020
 
Regions Financial Corporation
 
 
 
 
/S/    HARDIE B. KIMBROUGH, JR.        
 
 
Hardie B. Kimbrough, Jr.
Executive Vice President and Controller
(Chief Accounting Officer and Authorized Officer)


90

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